Back to GetFilings.com
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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11373
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 ____
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. [x]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of September 9, 2002 was approximately $28,197,042,547.
The number of Registrant's Common Shares outstanding as of September 9,
2002, was as follows: Common shares, without par value: 444,638,825.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
2002 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
Important Information Regarding Forward-Looking Statements........... 3
PART I
1. Business............................................................. 3
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of Security Holders.................. 12
PART II
5. Market for the Registrant's Common Shares and Related
Shareholder Matters.................................................. 14
6. Selected Financial Data.............................................. 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 17
7a. Quantitative and Qualitative Disclosures About Market Risk........... 26
8. Financial Statements and Supplementary Data.......................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 65
PART III
10. Directors and Executive Officers of the Registrant................... 65
11. Executive Compensation............................................... 65
12. Security Ownership of Certain Beneficial Owners and Management....... 65
13. Certain Relationships and Related Transactions....................... 65
PART IV
14. Exhibits, Financial Statement Schedules, Reports on Form 8-K and
Controls and Procedures.............................................. 66
Signatures........................................................... 71
2
IMPORTANT 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 as amended. 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. Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those projected, anticipated or implied. The most significant of
these risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. Except to the limited extent required by
applicable law, 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 a holding
company conducting business through a number of separate operating subsidiaries.
The Company is a leading provider of products and services to healthcare
providers and manufacturers, helping them improve the efficiency and quality of
healthcare. As used in this report, the terms 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, 2002 (the end of the Company's fiscal year).
This description of the Company's business should be read in conjunction
with the financial statements and supplementary data included in this Form 10-K.
BUSINESS SEGMENTS
The Company has four reporting segments. They are: Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products and Services,
Pharmaceutical Technologies and Services, and Automation and Information
Services.
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 provided through
cardinal.com; computerized order entry and order confirmation systems; generic
sourcing programs; product movement and management reports; consultation on
store operations 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, through its subsidiary
National PharmPak Services, Inc. ("NPPS"), a pharmaceutical repackaging and
distribution program for both independent and chain drugstore customers. In
addition, the Company, through National Specialty Services, Inc. ("NSS"), serves
as a distributor of 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, through CORD Logistics, Inc. ("CORD"), a third party logistics
company that distributes and tracks products for pharmaceutical and
biotechnology manufacturers.
Also within this segment, the Company, through Cardinal Health Provider
Pharmacy Services, Inc. ("CHPPS"), provides services that enhance performance in
hospital pharmacies through integrated pharmacy management, consulting,
3
temporary staffing and related services. In addition, the Company operates
Medicine Shoppe International, Inc. ("Medicine Shoppe"), a franchisor of
apothecary-style retail pharmacies. The Company, through Central Pharmacy
Services, Inc. ("Central Pharmacy"), operates centralized nuclear pharmacies
that prepare and deliver radiopharmaceuticals for use in nuclear imaging
procedures in hospitals and clinics.
MEDICAL-SURGICAL PRODUCTS AND SERVICES
Through its Medical-Surgical Products and Services segment, the Company
provides medical products and services and cost-saving services to hospitals and
other healthcare providers. The Company's Allegiance Corporation ("Allegiance")
subsidiary offers a broad range of medical and laboratory products, representing
approximately 2,200 suppliers in addition to its own line of surgical and
respiratory therapy products to hospitals and other healthcare providers. 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 provided 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 a broad range of technologies and services to the pharmaceutical,
biotechnology and consumer health industry. This segment's Oral Technologies
group provides proprietary drug delivery technologies, including softgel
capsules, controlled release forms, and Zydis(R) fast dissolving wafers, and
manufacturing for nearly all traditional oral dose forms. This segment's Sterile
Technologies group provides advanced aseptic blow-fill-seal technology, drug
lyophilization and advanced sterile delivery technologies, and manufacturing for
nearly all traditional sterile dose forms. This segment's Packaging Services
group provides pharmaceutical packaging services, including clinical and
commercial packaging, folding cartons and inserts and labels, with proprietary
expertise in child-resistant and unit dose/compliance package design. This
segment's Pharmaceutical Development group provides drug discovery, development,
and analytical science expertise, and supplies clinical manufacturing and
packaging. Finally, this segment's Sales and Marketing Services group provides
medical education, marketing and contract sales services to accelerate product
launches, along with other services to maximize the sales of approved products.
AUTOMATION AND INFORMATION SERVICES
The Company, through its Automation and Information Services segment,
operates businesses focusing on meeting customer needs through unique and
proprietary automation and information products and services. This segment
includes Pyxis Corporation ("Pyxis"), which develops, manufactures, leases,
sells and services bedside clinical and patient entertainment systems as well as
point-of-use systems that automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities and
Vistant Corporation ("Vistant"), which markets point-of-use supply systems in
the non-healthcare market. This segment also provides information systems that
analyze clinical outcomes and clinical pharmaceutical utilization information.
ACQUISITIONS(1)
Over the last five years, the Company has completed the following business
combinations. 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. The Company issued approximately 1.3 million common shares,
without par value ("Common Shares"), to MediQual shareholders and MediQual's
outstanding stock options were converted into options to purchase a total of
approximately 0.1 million Common Shares of the Company. On August 7, 1998, the
Company completed a merger transaction with R.P. Scherer Corporation
("Scherer"), a New Jersey-based international developer and manufacturer of drug
delivery systems. The Company issued approximately 51.3 million Common Shares to
Scherer stockholders and Scherer's outstanding stock options were converted into
options to purchase a total of approximately 5.3 million Common Shares. 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. The Company issued
approximately 106.1 million Common Shares to Allegiance stockholders and
Allegiance's outstanding stock options were converted into options to purchase a
total of approximately 15.5 million Common Shares. 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 issued approximately
8.7 million Common Shares to ALP stockholders. On August 16, 2000, the Company
completed the purchase of Bergen Brunswig Medical
- --------
(1) All share references in this paragraph are adjusted to reflect all stock
splits and stock dividends since the time of the applicable acquisitions.
4
Corporation ("BBMC") for approximately $181 million. BBMC distributes medical,
surgical and laboratory supplies to doctors' offices, long-term care and nursing
centers, hospitals and other providers of care. On February 14, 2001, the
Company completed a merger transaction with Bindley Western Industries, Inc.
("Bindley"), an Indianapolis, Indiana-based wholesale distributor of
pharmaceuticals and provider of nuclear pharmacy services. The Company issued
approximately 23.1 million Common Shares to Bindley stockholders and Bindley's
outstanding stock options were converted into options to purchase a total of
approximately 5.1 million Common Shares. On April 15, 2002, the Company
completed a merger transaction with Magellan Laboratories Incorporated
("Magellan"), a Research Triangle Park, North Carolina-based pharmaceutical
contract development organization that provides a wide range of analytical and
development services to pharmaceutical and biotechnological industries. The
aggregate consideration for the transaction was approximately $221 million
before consideration of any tax benefits associated with the transaction. On
June 26, 2002, the Company completed the acquisition of Boron, LePore &
Associates, Inc. ("BLP"), a Wayne, New Jersey-based full-service provider of
strategic medical education solutions to the healthcare industry. The Company
paid approximately $189 million and converted BLP's outstanding stock options
into options to purchase a total of approximately 1.0 million Common Shares. On
June 14, 2002, the Company announced it had entered into a definitive agreement
to acquire Syncor International Corporation ("Syncor"), a Woodland Hills,
California-based company which is a leading provider of nuclear pharmacy
services. The acquisition of Syncor is a stock-for-stock merger transaction and
is expected to be completed by the end of 2002 subject to customary conditions,
including Syncor stockholder approval. At the completion of the acquisition,
each Syncor share will be converted to 0.52 of a Common Share. Based on the
closing sale price of a Common Share as of September 27, 2002, the value of the
Common Shares to be received by all of the Syncor stockholders in connection
with the merger is approximately $900 million. The Company has also completed a
number of smaller acquisition transactions (asset purchases, stock purchases and
mergers) during the last five years, including transactions involving Pacific
Surgical Innovations, Inc. ("PSI"); Rexam Cartons Inc.; International Processing
Corporation; Med Surg Industries, Inc; American Threshold Industries, Inc., and
SP Pharmaceuticals, L.L.C. ("SP Pharmaceuticals").
The Company regularly evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
healthcare operations and services across all reporting industry segments. For
additional information concerning the transactions described above, see Notes 1
and 2 of "Notes to Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS AND SUPPLIERS
The Company's largest retail distribution customer in its Pharmaceutical
Distribution and Provider Services segment, CVS Meridian, Inc. ("CVS"),
accounted for approximately 13% of the Company's operating revenues (by dollar
volume) for fiscal year 2002. This segment could be adversely affected if the
business of this customer were lost. The two largest retail bulk distribution
customers in the Pharmaceutical Distribution and Provider Services segment are
CVS and Walgreens Co. ("Walgreens"), accounting for approximately 60% and 20%,
respectively, of all bulk deliveries. Due to the lack of margin generated
through bulk deliveries, fluctuations in their purchases would have no
significant impact on the segment's earnings. Novation, LLC ("Novation") and
Premier Purchasing Partners, L.P ("Premier") are the two largest group
purchasing organizations (each, a "GPO") having business arrangements with the
Company that account for approximately 11% and 9%, respectively, of the
Company's operating revenues (by dollar volume) in fiscal 2002 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 GPO customer were lost,
although the loss of the business arrangement with either GPO would not mean the
loss of sales from all members of the GPO.
The Company obtains its products from many different suppliers, the largest
of which, Pfizer, Inc., accounted for approximately 8% (by dollar volume) of the
Company's total revenue in fiscal 2002. The Company's five largest suppliers
combined accounted for approximately 31% (by dollar volume) of the Company's
total revenue during fiscal 2002 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.
Cardinal Distribution generates operating margin in many ways from its
vendors, including inventory investment buying opportunities, rebates, vendor
program arrangements, agreements, and offerings. In the future, vendors may not
continue to offer such programs in the same form or at the current levels.
While certain of the Company's operations may show quarterly fluctuations,
the Company does not consider its business to be seasonal in nature on a
consolidated basis.
5
COMPETITION
The markets in which the Company operates are highly competitive. In the
pharmaceutical wholesale distribution business, 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 a value proposition that includes breadth of product lines, marketing
programs, support services and pricing. 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. With respect to pharmacy franchising operations, several smaller
franchisors compete with Medicine Shoppe in the franchising of pharmacies, with
competition being based primarily upon benefits offered to both the pharmacist
and the customer, access to third party programs, the reputation of the
franchise and pricing. 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. Through Central Pharmacy, the
Company competes with other nuclear pharmacy service companies and distributors
engaged in the preparation and delivery of radiopharmaceuticals for use in
nuclear imaging procedures in hospitals and clinics. Such competitors include
national and regional operators of radiopharmacies, numerous independent
radiopharmacies, and manufacturers and universities that have established their
own radiopharmacies. With its CHPPS subsidiary, the Company competes with both
national and regional hospital pharmacy management firms, and self-managed
hospitals and hospital systems on the basis of services offered, its established
base of business, the effective use of information systems, the development of
clinical programs, the quality of the services it provides to its customers and
price. The Company's Allegiance subsidiary faces substantial competition in all
of its product and service markets, with competition focusing primarily on
product performance, service levels and price.
In the Pharmaceutical Technologies and Services segment, the Company
competes on several fronts: the Oral Technologies group competes with a
growing number of new drug delivery technologies and continued refinement to
existing delivery technologies; the Sterile Technologies group competes with
other companies that provide sterile manufacturing in glass or plastic, liquid
or lyophilization; the Pharmaceutical Development group competes with other
companies that provide contract laboratory services, analytical and development
for specialty delivery techniques; the Packaging Services group competes with
companies that provide packaging services and clinical and analytical packaging
services; and the Sales and Marketing group competes with other companies, as
well as pharmaceutical companies, that provide medical education,
marketing/product launch services, and contract sales services. All of the
foregoing groups compete on quality, responsiveness, proprietary offerings,
customer service, and price.
As a marketer of automated pharmaceutical dispensing and supply systems
through Pyxis, the Company competes based upon quality, its installed base of
systems, relationships with customers, customer service and support
capabilities, patents and other intellectual property, its ability to interface
with customer information systems and price. 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.
EMPLOYEES
As of September 9, 2002, the Company had approximately 50,000 employees in
the U.S. and abroad, of which approximately 1,500 are subject to collective
bargaining agreements. Overall, the Company considers its employee relations to
be generally very good.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights to its services and products. These
proprietary rights are important to the Company's ongoing operations.
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, some of which have
been registered, and also holds common law rights in various trademarks and
service marks. It is possible that in some cases the Company may be unable to
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, formulations, drug
delivery systems and sterile manufacturing. 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. Although the Company
believes that its patents do not infringe upon the proprietary rights of third
parties, from time to time, third parties have asserted infringement claims
against the Company and it is possible that third parties will assert
infringement claims against the Company in the future. In addition, it may
become necessary for the Company to pursue litigation to protect trade secrets
and other proprietary rights, to enforce patent, copyright and trademark rights,
and to determine the scope and validity of the proprietary rights of others.
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.
The Company does not consider any particular patent, trademark, license,
franchise or concession to be material to its business. 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
intellectual property or enforcing its intellectual property rights against
unauthorized users.
6
REGULATORY MATTERS
The Company's subsidiaries that: distribute prescription pharmaceuticals
(including certain controlled substances) and/or medical devices; manage or own
pharmacy operations; engage in or operate retail pharmacies or nuclear
pharmacies; purchase pharmaceuticals; manage pharmaceuticals; engage in
logistics and/or manufacture drug delivery systems or surgical and respiratory
care products; package pharmaceutical products and devices; provide analytical
development services; or, develop, create, present or distribute accredited and
unaccredited educational or promotional programs or materials, may be 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"), the United States Nuclear Regulatory
Commission (the "NRC") and various state boards of pharmacy, state health
departments and/or comparable state agencies as well as foreign agencies, and
certain accrediting bodies depending upon the type of operations and location of
product distribution and sale. In addition, certain of the Company's
subsidiaries are subject to requirements of the Controlled Substances Act and
the Prescription Drug Marketing Act of 1987 and similar state laws, which
regulate the marketing, purchase, storage and distribution of prescription drugs
and prescription drug samples under prescribed minimum standards. Laws
regulating the manufacture and distribution of products also exist in most other
countries where certain of the Company's subsidiaries conduct business. In
addition, the Company's packaging and manufacturing subsidiary operations in the
United Kingdom, France, Italy and Germany are subject to local certification
requirements, including compliance with good manufacturing practices adopted by
the European Community. The Company's Pyxis subsidiary 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.
The Company's franchising operations, through Medicine Shoppe, are subject
to Federal Trade Commission regulations, and rules and regulations adopted by
certain states, which require franchisors to make certain disclosures to
prospective franchisees prior to the sale of franchises. In addition, certain
states have adopted laws which regulate the franchisor-franchisee relationship.
The most common provisions of such laws establish restrictions on the ability of
franchisors to terminate or to refuse to renew franchise agreements. From time
to time similar legislation has been proposed or is pending in additional
states.
Central Pharmacy and its related entities operate nuclear pharmacies in a
regulated industry which requires licenses or permits from the NRC, the
radiologic health agency and/or department of health of each state in which it
operates, and the applicable state board of pharmacy.
Certain of the Company's subsidiaries are subject to federal and state
healthcare fraud and abuse, referral and reimbursement laws and regulations with
respect to their operations. Certain of the Company's subsidiaries also maintain
contracts with the federal government and are subject to certain regulatory
requirements relative to government contractors.
Services and products provided by certain of the Company's subsidiaries
include access to healthcare information gathered and assessed for the benefit
of healthcare clients. Greater scrutiny on a federal and state level is being
placed on how patient identifiable healthcare information should be handled and
in identifying the appropriate parties and means to do so. Future changes in
regulations and/or legislation such as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") and its accompanying federal regulations,
such as those pertaining to privacy, may affect how some of these information
services or products are provided. In addition, certain of the Company's
operations, depending upon their location, may be subject to additional state or
foreign regulations affecting how information services or products are provided.
Failure to comply with HIPAA and other such laws may subject the Company to
civil and/or criminal penalties, which could be significant. The costs
associated with complying with HIPAA, its accompanying federal regulations, and
similar state and foreign regulations could be significant and the failure to
comply with all such legal requirements could have a significant impact on the
Company's results of operations and financial condition.
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,
transportation 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 subsidiaries. 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 and the handling of information.
WORKING CAPITAL
The Company maintains a high level of inventory in order to be able to take
advantage of price changes and to be able to satisfy daily delivery
requirements, but is not generally required by its customers to maintain
7
particular inventory levels. Certain supply contracts with U.S. Government
entities require the Company to maintain sufficient inventory to meet emergency
demands. The Company does not believe that the requirements contained in these
U.S. Government supply contracts materially impact inventory levels. The Company
generally permits customers to return products only where the products can be
resold at full value or returned to vendors for credit. The Company is not aware
of any material differences between its inventory policies and those of other
industry participants. The Company's practice is to offer market payment terms
to its customers. The Company is not aware of any material differences between
its practice and those of other industry participants.
RESEARCH AND DEVELOPMENT
For information on Company-sponsored research and development costs in the
last three fiscal years, see Note 1 of "Notes to Consolidated Financial
Statements."
REVENUE AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA
For information on revenue and long-lived assets by geographic area, see
Note 16 of "Notes to Consolidated Financial Statements."
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
CHANGING UNITED STATES HEALTHCARE ENVIRONMENT MAY ADVERSELY AFFECT THE COMPANY'S
OPERATING RESULTS. In recent years, the healthcare industry has undergone
significant changes driven by various efforts to reduce costs. These efforts
include, but are not limited to, potential national healthcare reform, trends
toward managed care, cuts in Medicare, consolidation of competitors, suppliers
and customers, and the development of large, sophisticated purchasing groups.
This industry is expected to continue to undergo significant changes for the
foreseeable future. Other factors related to the healthcare industry that could
negatively impact the Company's results of operations include, but are not
limited to:
- - changes in governmental support of, and reimbursement for, healthcare
services;
- - changes in the method by which healthcare services are delivered;
- - changes in the prices for healthcare services;
- - other legislation or regulations governing healthcare services or
mandated benefits; and
- - changes in pharmaceutical and medical-surgical manufacturers' pricing
or distribution policies.
ADDITIONAL REGULATORY RISKS MAY ADVERSELY AFFECT THE COMPANY'S OPERATING
RESULTS. The healthcare industry is highly regulated. Consequently, the Company
is subject to the risk of changes in various local, state, federal and foreign
laws, which include the operating and security standards of the United States
Drug Enforcement Administration, the FDA, various state boards of pharmacy and
comparable agencies. If changes were to occur, they could affect many of the
Company's regulated operations, which include distributing prescription
pharmaceuticals (including certain controlled substances), operating pharmacy
operations (including nuclear pharmacies), manufacturing medical/surgical
products, manufacturing pharmaceuticals using proprietary drug delivery systems,
and packaging pharmaceuticals. Also, the healthcare regulatory environment may
change in a manner that could restrict the Company's existing operations, limit
the expansion of the Company's business or otherwise affect the Company
adversely.
RISKS GENERALLY ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY AND INTERNAL
GROWTH MAY ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS. An important
element of the Company's growth strategy has been and is expected to continue to
be the pursuit of acquisitions of other businesses which either expand or
complement the Company's existing businesses. Over the past several years, the
Company has expanded beyond its core pharmaceutical distribution business into
areas such as medical-surgical manufacturing and distribution and drug delivery
systems. Integrating businesses, however, involves a number of special risks,
including the possibility that management may be distracted from regular
business concerns by the need to integrate operations, unforeseen difficulties
in integrating operations and systems, problems assimilating and retaining the
employees of the Company or the acquired company, accounting issues that could
arise in connection with, or as a result of, the acquisition of the acquired
company, challenges in retaining customers of the acquired company or of the
Company following the acquisition, and potential adverse short term effects on
operating results through increased costs or otherwise. While the Company has
not experienced any material integration problems in recent years, the
possibility of integration issues increases when the Company ventures outside
its normal core businesses. In addition, the Company may incur debt to finance
future acquisitions and/or may issue securities in connection with future
acquisitions which may dilute the holdings of current and future shareholders of
the Company. In addition to the risks associated with acquisition related
growth, the Company's business has grown in size and complexity over the past
few years as a result of internal growth. This has placed significant demands on
the Company's management, systems, internal controls, and financial and physical
resources. To meet such demands, the Company intends to continue to hire new
employees, invest in new technology, and make other capital expenditures. If the
Company is unable to successfully and timely complete and integrate strategic
acquisitions or fails to efficiently manage operations in a way that
accommodates continued internal growth, the Company's business, financial
conditions, and results of operations could be adversely impacted.
8
ITEM 2: PROPERTIES
In the United States, the Company has 26 principal pharmaceutical
distribution facilities and three specialty distribution facilities utilized by
the Pharmaceutical Distribution and Provider Services segment. The Company also
has 15 Packaging Services packaging and printed components facilities (three of
which are located in Puerto Rico), 16 Oral Technologies manufacturing
facilities, three Pharmaceutical Development facilities, and four Sterile
Technologies manufacturing facilities (one of which is located in Puerto Rico)
each of which is utilized in its Pharmaceutical Technologies and Services
segment. In addition, the Company has one Pyxis assembly operation in its
Automation and Information Services segment. The Company also has 55
medical-surgical distribution facilities and 15 medical-surgical manufacturing
facilities (one of which is located in Puerto Rico) utilized by the
Medical-Surgical Products and Services segment. The Company's domestic
facilities are located in a total of 43 states and Puerto Rico.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Technologies and Services segment, 11 Oral Technologies
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 four Packaging Services facilities which are
located in the United Kingdom and Germany. The Company owns, leases or operates
through its Medical-Surgical Products and Services segment 12 medical-surgical
distribution facilities located in Canada, and 16 medical-surgical manufacturing
facilities located in the Netherlands, Malaysia, Thailand, Malta, Mexico, the
Dominican Republic and France. The Company's international facilities are
located in a total of 18 countries.
The Company owns 91 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 regularly
evaluates its operating properties and may make further additions, improvements,
and consolidations as it continues to seek opportunities to expand its role as a
provider of services to the healthcare industry.
For certain financial information regarding the Company's facilities, see
Notes 8 and 9 of "Notes to Consolidated Financial Statements."
ITEM 3: LEGAL PROCEEDINGS
In addition to the legal proceedings disclosed below, 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 clean-up
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 currently believe that the outcome of any pending litigation
will have a material adverse effect on the Company's consolidated financial
statements.
9
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's 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 (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off,
Allegiance, which merged with a subsidiary of the Company on February 3, 1999,
agreed to indemnify Baxter, and will defend and indemnify Baxter Healthcare
Corporation ("BHC"), as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
arising from the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves. The
Company is not a party to any of the lawsuits and has not agreed to pay any
settlements to the plaintiffs.
As of June 30, 2002, there were approximately 380 lawsuits against BHC
and/or Allegiance involving allegations of sensitization to natural rubber latex
products. Some of the cases are now proceeding to trial. The total dollar amount
of potential damages cannot be reasonably quantified. Some plaintiffs plead
damages in extreme excess of what they reasonably can expect to recover, some
plead a modest amount, and some do not include a request for any specific dollar
amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds twenty-five. Based on the significant differences
in the range of damages sought and based on the multiple number of defendants in
these lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in approximately eight hundred cases. As of June 30, 2002, fewer
than half of those lawsuits remain pending. Nearly half of the lawsuits that
have been resolved were concluded without any liability to Baxter/Allegiance.
During the fiscal year ended June 30, 2002, Allegiance began settling some of
these lawsuits with greater frequency. No individual claim has been settled for
a material amount, nor have all the settled claims, in the aggregate, comprised
a material amount. Due to the number of claims filed and the ongoing defense
costs that will be incurred, Allegiance believes it is probable that it will
incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity and results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the top end of the
range reflecting virtually no insurance coverage, which the Company believes is
an unlikely scenario given the insurance coverage in place). The Company
believes a substantial portion of any liability will be covered by insurance
policies Allegiance has with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency. The Company and Allegiance continue to believe that
insurance recovery is probable.
Vitamins Litigation
On May 17, 2000, Scherer, which was acquired by the Company in August 1998,
filed a civil antitrust lawsuit in the United States District Court for the
District of Illinois against certain of its raw material suppliers and other
alleged co-conspirators alleging that the defendants unlawfully conspired to fix
vitamin prices and allocate vitamin production volume and vitamin customers in
violation of U.S. antitrust laws. The complaint seeks monetary damages and
injunctive relief. After the lawsuit was filed, it was consolidated for
pre-trial purposes with other similar cases. The case is scheduled for trial in
the United States District Court for the District of Columbia (where it was
transferred) in March 2003. Scherer has entered into settlement agreements with
certain defendants. To date, Scherer has received settlement payments of
approximately $35.3 million, net of attorney fees and expenses that were
withheld prior to the disbursement of the funds to Scherer. At the present time,
management cannot predict the outcome of this lawsuit, nor the estimated damages
and potential recovery, if any.
Environmental Claims
Pennsauken Environmental Claim
In 1985, PCI Services, Inc. ("PCI"), purchased Burgess & Why Folding Carton
Company ("Burgess"), located in Pennsauken, New Jersey. The Company acquired PCI
in 1996. In 1993, the New Jersey Department of Environmental Protection Agency
("NJ DEP") sued various waste transporters and other parties, in New Jersey
State court, alleging contamination of the Pennsauken landfill. One of the waste
haulers sued by the NJ DEP was Quick Way, Inc. ("Quick Way"), a waste hauling
company used by Burgess from 1970 to 1982. Quick Way, in turn, joined several
companies that it serviced, including Burgess. There are approximately 600
parties in the litigation. PCI reasonably believes its exposure, if any, would
be no greater than $100,000. The Company reasonably believes that the impact of
this claim upon PCI, if any, will be immaterial to the Company's financial
position, liquidity and results of operation.
10
Environmental Claims Relating to Allegiance
On September 30, 1996, Baxter and its subsidiaries transferred to
Allegiance and its subsidiaries the Allegiance Business in connection with the
Baxter-Allegiance Spin-Off. As a result of the Baxter-Allegiance Spin-Off,
Allegiance agreed to defend and indemnify Baxter from the following
environmental claims.
San Gabriel Environmental Claim
Allegiance, through Baxter and its predecessors-in-interest, owned a
facility located in Irwindale, California (the "Irwindale Property"), from
approximately 1961 to approximately 1999, where, among other things, plastics
were manufactured, a chemical laboratory was operated, and certain research and
development activity was carried out. San Gabriel is a Superfund site in the Los
Angeles area that concerns ground water contamination of a local drinking water
aquifer. The U.S. Environmental Protection Agency (the "U.S. EPA") is the lead
government agency in charge of the San Gabriel Valley Groundwater Basin
Superfund Sites, Areas 1-4, Baldwin Park Operable Unit (the "BPOU"). According
to the U.S. EPA, the groundwater within the BPOU is contaminated. The Irwindale
Property is located approximately one-mile away from the BPOU plume. The U.S.
EPA named Allegiance as a potentially responsible party ("PRP") for the
groundwater contamination in the BPOU, along with a number of other PRPs. In
June 2000, the U.S. EPA issued a unilateral administrative order ("UAO") against
a number of companies, including Allegiance. The UAO requires, among other
things, the design and implementation of the interim groundwater remedy selected
by U.S. EPA. This interim remedy generally requires pumping contaminated
groundwater from the aquifer and treating it in accordance with federal and
state government standards in order to remove or reduce contaminants of concern
and to stop the further migration of contaminants. Allegiance has maintained
that the Irwindale Property did not contribute to the alleged ground water
contamination. The levels of contaminants detected on the Irwindale Property are
well below any state or federal standard requiring remediation or monitoring.
The U.S. EPA is engaged in settlement discussions with Allegiance, and has not
sued Allegiance in connection with the UAO or the BPOU. Previously, the U.S. EPA
made a cash buy-out demand to Allegiance of $600,000. Allegiance responded with
questions as to the calculations and data utilized by the U.S. EPA to reach the
$600,000 amount. By using the U.S. EPA's own equation and Allegiance's
reasonable understanding of the facts, Allegiance reasonably believes that its
potential liability would be less than the cash buy out demand amount.
Allegiance has recorded environmental accruals, based upon the information
available, that it reasonably believes are adequate to satisfy known costs. The
Company reasonably believes that the impact of this claim upon Allegiance will
be immaterial to the Company's financial position, liquidity and results of
operation.
A-1 Plainwell and A-1 Sunrise Environmental Claims
The Michigan Department of Environmental Quality brought suit against
Baxter as a PRP along with a number of other PRPs, in 1994, in the Circuit Court
of the State of Michigan for Ingham County, alleging contamination of the A-1
disposal site in Plainwell, Michigan ("A-1 Plainwell"). Among the contaminants
at the site were solvent wastes generated by Burdick & Jackson of Muskegon,
Michigan. Baxter became a PRP through its acquisition of Burdick & Jackson in
1986. Allegiance agreed to defend and indemnify Baxter, in this claim, as part
of the Baxter-Allegiance Spin-Off. The principal relief sought was for the PRPs
to clean up the site to applicable standards and to reimburse the government for
its oversight and other costs at the site. In a related action, Allegiance,
through its association with Baxter, and Burdick & Jackson, was named a PRP to
reimburse the State of Michigan for reimbursement costs associated with the
construction of a landfill cap and continued operation, maintenance and
monitoring of the A-1 Sunrise site in Michigan ("A-1 Sunrise"). Allegiance has
paid approximately $95,000 for past remediation costs at the A-1 Plainwell site
and approximately $175,000 at the A-1 Sunrise site. Remediation of the A-1
Plainwell site is substantially complete, subject to minimal operation,
maintenance, and monitoring of the site. Allegiance's share of future
remediation at the A-1 Sunrise site is approximately 1.8%. Allegiance has
recorded environmental accruals, based upon the information available, that it
reasonably believes are adequate to satisfy known costs. The Company reasonably
believes that the impact of these claims upon Allegiance will be immaterial to
the Company's financial position, liquidity and results of operation.
Thermochem Environmental Claim
Baxter acquired Burdick & Jackson of Muskegon, Michigan, in 1986. As a
result of this acquisition, Baxter was identified, by the U.S. EPA, as a PRP for
clean up costs related to the Thermochem waste processing site in Muskegon,
Michigan. Allegiance agreed to defend and indemnify Baxter, in this claim, as
part of the Baxter-Allegiance Spin-Off. Based upon the information available,
Allegiance reasonably believes the total clean-up cost of this site to be
between approximately $16 million and $23 million. A well-funded PRP group, of
which Baxter is a member, has spent approximately $10 million in clean-up costs.
Allegiance reasonably believes that current available funding of the PRP, along
with Allegiance's additional recorded environmental accruals, are adequate to
satisfy known costs. The Company reasonably believes that the impact of this
claim upon Allegiance will be immaterial to the Company's financial position,
liquidity and results of operation.
11
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 2002.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the executive officers of the Company (information
provided as of September 9, 2002):
NAME AGE POSITION
---- --- --------
Robert D. Walter 57 Chairman and Chief Executive Officer
George L. Fotiades 48 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Technologies and Services
James F. Millar 54 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Distribution and Medical Products
Stephen S. Thomas 47 Executive Vice President; Group President -
Automation and Information Services
Ronald K. Labrum 46 Executive Vice President; Group President -
Medical-Surgical Products and Services
Gordon A. Troup 46 Executive Vice President; Group President -
Pharmaceutical Distribution
Brendan A. Ford 44 Executive Vice President - Corporate Development
Richard J. Miller 45 Executive Vice President, Chief Financial Officer and
Principal Accounting Officer
Anthony J. Rucci 51 Executive Vice President and Chief Administrative
Officer
Carole S. Watkins 42 Executive Vice President - Human Resources
Kathy Brittain White 53 Executive Vice President and Chief Information Officer
Paul S. Williams 42 Executive Vice President, Chief Legal Officer and
Secretary
Unless indicated to the contrary, the business experience summaries
provided below for the Company's executive officers describe positions held by
the named individuals during the last five years but exclude other positions
held with subsidiaries of the Company.
ROBERT D. WALTER has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979. Mr. Walter also
serves as a director of Viacom Inc. and American Express Company.
GEORGE L. FOTIADES Executive Vice President, President and Chief Operating
Officer -- Pharmaceutical Technologies and Services of the Company since
November 2000; Executive Vice President and Group President -- R.P. Scherer
Corporation, August 1998 to October 2000 and President of R.P. Scherer
Corporation, January 1998 to August 1998; Group President, Americas and Asia
Pacific, of R.P. Scherer Corporation, June 1996 to January 1998. Mr. Fotiades
serves as a director of Prologis.
JAMES F. MILLAR Executive Vice President, President and Chief Operating
Officer -- Pharmaceutical Distribution and Medical Products since November 2000;
Executive Vice President and Group President -- Pharmaceutical Distribution and
Provider Services, February 2000 to November 2000; Executive Vice President and
Group President of the Company's distribution
12
business, June 1996 to February 2000. Mr. Millar serves as a director of Wendy's
International.
STEPHEN S. THOMAS Executive Vice President and Group President --
Automation and Information Services since September 2000; Executive Vice
President and Group President -- Pharmacy Automation, Information Systems and
International Operations of the Company, July 1999 to September 2000; Executive
Vice President and President of Pyxis, October 1997 to July 1999. Mr. Thomas
serves as a director of Visual Med Clinical Systems, Inc.
RONALD K. LABRUM Executive Vice President and Group President --
Medical-Surgical Products and Services since November 2000; President,
Manufacturing and Distribution of Allegiance, October 2000 to November 2000;
Corporate Vice President, Regional Companies/Health Systems of Allegiance,
January 1997 to October 2000.
GORDON A. TROUP Executive Vice President and Group President --
Pharmaceutical Distribution since July 2001; President, Cardinal Distribution,
September 1999 to July 2001; Executive Vice President, Operations --
Distribution, September 1999 to February 2000; various positions of increasing
responsibility within the Company's pharmaceutical distribution business,
January 1996 to September 1999.
BRENDAN A. FORD Executive Vice President -- Corporate Development of the
Company since November 1999; Senior Vice President -- Corporate Development,
February 1996 to November 1999.
RICHARD J. MILLER Executive Vice President of the Company since November
1999; Chief Financial Officer since March 1999; Acting Chief Financial Officer,
August 1998 to March 1999; Corporate Vice President, April 1999 to November
1999; Vice President and Controller, August 1995 to March 1999.
ANTHONY J. RUCCI Executive Vice President and Chief Administrative Officer
of the Company since January 2000; Executive Vice President -- Human Resources
of Cardinal, November 1999 to January 2000; Dean of the University of Illinois
at Chicago's College of Business Administration, 1998 to November 1999;
Executive Vice President for Administration of Sears, Roebuck and Co., 1993 to
1998.
CAROLE S. WATKINS Executive Vice President -- Human Resources of the
Company since August 2000; Senior Vice President, Human Resources --
Pharmaceutical Distribution and Provider Services, February 2000 to August 2000;
Vice President -- Human Resources -- Cardinal Distribution, November 1996 to
February 2000.
KATHY BRITTAIN WHITE Executive Vice President and Chief Information Officer
of the Company since February 1999; Executive Vice President and Chief
Information Officer of Allegiance Corporation, 1996 until Allegiance was
acquired by the Company in February 1999. Ms. White serves as a director of
Certegy and Mattel, Inc.
PAUL S. WILLIAMS Executive Vice President, Chief Legal Officer and
Secretary of the Company since April 2001; Senior Vice President, Deputy General
Counsel and Assistant Secretary, January 2001 to March 2001; Vice President,
Deputy General Counsel and Assistant Secretary, July 1999 to January 2001; Vice
President, Assistant General Counsel and Assistant Secretary, June 1998 to July
1999; Assistant General Counsel, June 1995 to June 1998.
13
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, 2002 and 2001. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
HIGH LOW DIVIDENDS
---- --- ---------
Fiscal 2001:
Quarter Ended
September 30, 2000 $63.38 $45.27 $0.020
December 31, 2000 69.25 59.04 0.020
March 31, 2001 68.35 58.67 0.020
June 30, 2001 77.00 61.78 0.025
Fiscal 2002:
Quarter Ended
September 30, 2001 $75.30 $67.28 $ 0.025
December 31, 2001 76.60 61.50 0.025
March 31, 2002 70.89 60.80 0.025
June 30, 2002 73.00 61.41 0.025
Through September 9, 2002 $68.19 $49.08 $ 0.025
As of September 9, 2002, there were approximately 21,000 shareholders of
record of the 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.
The Company maintains several stock incentive plans (the "Plans") for the
benefit of certain officers, directors and employees. Options granted generally
vest over 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.
Certain plans are subject to shareholder approval while other plans have been
authorized solely by the Board of Directors. The following table summarizes
information relating to the Plans at June 30, 2002:
Outstanding
---------------------------------
Weighted Shares Available
Average for Future
Options Exercise Price Issuance
(in millions) per Share (in millions)
- --------------------------------------------------------------------------------
Plans approved by
shareholders 13.5 $44.15 20.9
Plans not approved by
shareholders 14.3 $55.86 23.2
Plans acquired through
acquisition 9.3 $24.15 -
- --------------------------------------------------------------------------------
Balance at June 30, 2002 37.1 $43.64 44.1
================================================================================
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company were
prepared giving retroactive effect to the business combinations with MediQual on
February 18, 1998; Scherer on August 7, 1998; Allegiance on February 3, 1999;
PSI on May 21, 1999; ALP on September 10, 1999, and Bindley on February 14,
2001, all of which were accounted for as pooling-of-interests transactions.
Additional disclosure related to the ALP and Bindley transactions is included in
Note 2 of "Notes to Consolidated Financial Statements." The consolidated
financial data includes all purchase transactions as of the date of acquisition
that occurred during these periods.
14
For the fiscal year ended June 30, 1998, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results for the fiscal year ended June 30, 1998 with Scherer's
financial results for the fiscal year ended March 31, 1998, PSI's financial
results for the fiscal year ended September 30, 1998 and Bindley's financial
results for the fiscal year ended December 31, 1997.
For the fiscal year ended June 30, 1999, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results for the fiscal year ended June 30, 1999 with Bindley's
financial results for the fiscal year ended December 31, 1998. For the fiscal
year ended June 30, 2000, the information presented is derived from the
consolidated financial statements which combine Cardinal's financial results for
the fiscal year ended June 30, 2000 with Bindley's financial results for the
fiscal year ended December 31, 1999.
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)
--------------------------------------------------------------
2002 2001 2000 1999(2) 1998(2)
--------------------------------------------------------------
EARNINGS DATA:
Operating revenue $44,394.3 $38,660.1 $30,257.8 $25,682.5 $20,844.8
Bulk deliveries to customer warehouses 6,741.4 9,287.5 8,092.1 7,050.4 7,541.1
--------------------------------------------------------------
Total revenue $51,135.7 $47,947.6 $38,349.9 $32,732.9 $28,385.9
Earnings before cumulative effect
of change in accounting $ 1,126.3 $ 857.4 $ 717.8 $ 499.3 $ 474.3
Cumulative effect of change
in accounting (5) 70.1 -- -- -- --
--------------------------------------------------------------
Net earnings $ 1,056.2 $ 857.4 $ 717.8 $ 499.3 $ 474.3
Basic earnings per Common Share (3)
Before cumulative effect of change
in accounting $ 2.50 $ 1.93 $ 1.64 $ 1.14 $ 1.10
Cumulative effect of change
in accounting (5) (0.16) -- -- -- --
--------------------------------------------------------------
Net basic earnings per Common Share $ 2.34 $ 1.93 $ 1.64 $ 1.14 $ 1.10
Diluted earnings per Common Share (3)
Before cumulative effect of change
in accounting $ 2.45 $ 1.88 $ 1.60 $ 1.12 $ 1.07
Cumulative effect of change
in accounting (5) (0.15) -- -- -- --
--------------------------------------------------------------
Net diluted earnings per Common Share $ 2.30 $ 1.88 $ 1.60 $ 1.12 $ 1.07
Cash dividends declared
per Common Share (3)(4) $ 0.100 $ 0.085 $ 0.070 $ 0.067 $ 0.049
BALANCE SHEET DATA:
Total assets $16,438.0 $14,642.4 $12,024.1 $ 9,682.7 $ 8,876.8
Long-term obligations,
less current portion $ 2,207.0 $ 1,871.0 $ 1,524.5 $ 1,224.5 $ 1,362.2
Shareholders' equity $ 6,393.0 $ 5,437.1 $ 4,400.4 $ 3,894.6 $ 3,389.9
15
(1) Amounts reflect business combinations and the impact of merger-related
costs and other special charges in all periods presented. See Note 2 of
"Notes to Consolidated Financial Statements" for a further discussion of
merger-related costs and other special charges affecting fiscal 2002, 2001,
and 2000. Fiscal 1999 amounts reflect the impact of merger-related charges
and other special charges of $165.4 million ($122.3 million, net of tax).
Fiscal 1998 amounts reflect the impact of merger-related charges of $57.8
million ($19.5 million, net of tax).
(2) In April 1998, ALP had elected S-Corporation status for income tax
purposes. As a result of the merger, ALP terminated its S-Corporation
election. Amounts above do not reflect the impact of pro forma adjustments
related to ALP taxes, as if ALP had been subject to federal income taxes
during the periods presented. 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 $0.02
to $1.10 for fiscal 1999 and by $0.01 to $1.06 for fiscal 1998.
(3) Net basic earnings, net diluted earnings and cash dividends per Common
Share have been adjusted to retroactively reflect all stock dividends and
stock splits through June 30, 2002.
(4) Cash dividends per Common Share exclude dividends paid by all entities with
which the Company has merged.
(5) In the first quarter of fiscal 2002, the method of recognizing revenue for
pharmacy automation equipment was changed from recognizing revenue when the
units were delivered to the customer to recognizing revenue when the units
are installed at the customer site. For more information regarding the
change in accounting see Note 14 of "Notes to Consolidated Financial
Statements."
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis has been prepared giving
retroactive effect to the pooling-of-interests business combinations with ALP on
September 10, 1999 and Bindley on February 14, 2001.
The discussion and analysis presented below refers to and should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K. Portions of this management's discussion
and analysis presented below include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward-looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are discussed in Item 1 of this Form
10-K under the heading "Risk Factors That May Affect Future Results" and are
described in Exhibit 99.01 to this Form 10-K. Except to the limited extent
required by applicable law, the Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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
Information Services. See Note 16 of "Notes to Consolidated Financial
Statements" for a description of these segments.
RESULTS OF OPERATIONS
OPERATING REVENUE
Percent of Total
Growth (1) Operating Revenues
Years ended June 30 2002 2001 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 17% 31% 82% 81% 79%
Medical-Surgical Products and Services 6% 19% 14% 15% 16%
Pharmaceutical Technologies and Services 11% 9% 3% 3% 4%
Automation and Information Services 19% 17% 1% 1% 1%
Total Company 15% 28% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the
operating revenue for a given year as a percentage of the operating
revenue in the immediately preceding year.
Total operating revenue increased 15% during fiscal 2002 as compared to
fiscal 2001. This increase is a result of a higher sales volume across various
customer segments; strong sales of self-manufactured products; pharmaceutical
price increases averaging approximately 5%; addition of new products; and the
addition of new customers, some of which was a result of new corporate
agreements with healthcare providers.
Total operating revenue increased 28% during fiscal 2001 as compared to
fiscal 2000. The increase in operating revenue resulted from a higher sales
volume to existing customers; pharmaceutical price increases averaging
approximately 4%; acquisitions; and addition of new customers, some of which was
a result of cross-selling opportunities among the various businesses. For
further discussion of acquisitions, see Note 2 of "Notes to Consolidated
Financial Statements."
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth in fiscal 2002 is a result of strong sales to all customer
segments, especially retail pharmacy and grocery chains and alternate site
customers, each of which yielded 20% growth, as well as strong growth in mail
order and government customers. A portion of the fiscal 2002 growth is
attributable to pharmaceutical price increases and the addition of new
contracts. The increase in this segment's operating revenue in fiscal 2001
resulted from strong sales to all customer segments, especially chain
pharmacies, which provided 44% growth; an increase in sales volume to existing
customers; pharmaceutical price increases; and the addition of new contracts.
The Medical-Surgical Products and Services segment's operating revenue
growth in fiscal 2002 is a result of strong sales of self-manufactured products,
particularly sales of surgical instruments and custom kits for surgical
procedures, as well as price increases and increases in sales of distributed
products. Several new long-term contracts were signed within the segment's
distribution business. The increase in this segment's operating revenue in
fiscal 2001 primarily reflected an increase in sales of
17
distributed products. The Company acquired Bergen Brunswig Medical Corporation
("BBMC") in the first quarter of fiscal 2001 and accounted for the acquisition
as a purchase transaction. As this transaction was accounted for under the
purchase method of accounting, prior year revenues for this segment do not
include BBMC revenues prior to acquisition. Excluding BBMC revenues in 2001, the
total operating revenues grew approximately 4% over fiscal 2000.
The Pharmaceutical Technologies and Services segment's operating revenue
growth in fiscal 2002 resulted from higher sales volume particularly involving
development and analytical services, pharmaceutical technologies, and its
proprietary packaging offerings. Products that showed particular strength were
Abbott's Kaletra(R), an AIDS product; Lilly's Zyprexa(R) Zydis(R), an
anti-psychotic; and Pharmacia's Detrol(R) LA, an incontinence medication.
Accelerating demand for sterile-liquid and controlled-release technologies in
addition to the acquisition of SP Pharmaceuticals, was a significant contributor
to the growth within the pharmaceutical technologies business. The completion of
the Magellan acquisition during the fourth quarter of fiscal 2002 contributed to
the growth in the analytical services business. Excluding the revenues of SP
Pharmaceuticals and Magellan, operating revenues grew approximately 6% over
fiscal 2001. Additionally, the segment experienced growth in its pharmaceutical
packaging business which was attributable to the addition of several new
customers and increased volume from existing customers. The increase in this
segment's operating revenue in fiscal 2001 resulted from higher sales volume
particularly involving the Zydis(R) rapid-dissolving drug-delivery technology
and the sterile-liquid pharmaceutical products. Slowing sales in the protease
inhibitor and health and nutritional product lines partially offset the growth
in this segment in both fiscal years.
The Automation and Information Services segment's operating revenue growth
in fiscal 2002 primarily resulted from strong sales in the patient safety and
supply management product lines, such as MEDSTATION SN(R) and SUPPLYSTATION(R)
System 30. Significant sales of new products including Anesthesia System and
products within the SupplyStation line also contributed to this segment's
growth. The increase in this segment's operating revenue in fiscal 2001
primarily reflected sales of new products, such as the MEDSTATION(R) SN, which
was introduced in late fiscal 2000, and further penetration of the market with
existing automation products.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports bulk deliveries made
to customers' warehouses as revenue. These sales involve the Company acting as
an intermediary in the ordering and subsequent delivery of pharmaceutical
products. Fluctuations in bulk deliveries result largely from circumstances that
the Company cannot control, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, changes in policies by manufacturers related to selling directly to
customers, and the addition or loss of customers. Due to the lack of margin
generated through bulk deliveries, fluctuations in their amount have no
significant impact on the Company's net earnings.
GROSS MARGIN
(as a percentage of operating revenue)
Years ended June 30 2002 2001 2000
- -------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.1% 5.2% 5.5%
Medical-Surgical Products and Services 21.9% 22.1% 23.2%
Pharmaceutical Technologies and Services 33.4% 33.3% 33.1%
Automation and Information Services 68.5% 68.6% 69.2%
Total Company 9.1% 9.3% 10.2%
- -------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased in
fiscal 2002 and fiscal 2001. This decrease resulted from a greater mix of lower
margin pharmaceutical distribution operating revenues in fiscal 2002 and fiscal
2001 as compared to the prior years. The Pharmaceutical Distribution and
Provider Services segment represented 82% of operating revenues in fiscal 2002,
up from 81% and 79% of operating revenues in fiscal 2001 and fiscal 2000,
respectively. The decline in the margins in the Medical-Surgical Products and
Services and Automation and Information Services segments also contributed to
the overall decline in the Company's gross margin.
The gross margin as a percentage of operating revenue in the Pharmaceutical
Distribution and Provider Services segment decreased in fiscal 2002. This
decrease was primarily due to the highly competitive market within the
pharmaceutical distribution industry and a 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. In addition, this
segment's gross margin was negatively impacted by several non-recurring items,
primarily related to the Bindley integration. The Company incurred a one-time
inventory adjustment related to the process of closing and rationalizing
facilities in addition to the integration of the operations of Bindley and
Cardinal. These decreases were partially offset by higher vendor margins from
favorable price increases and manufacturer marketing programs. Gross margin as a
percentage of operating revenue declined in fiscal 2001 primarily due to the
impact of lower selling
18
margins. The decline in selling margins was attributed to 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. This decrease was partially offset by higher
vendor margins from favorable price increases and manufacturer marketing
programs.
The gross margin as a percentage of operating revenue in the
Medical-Surgical Products and Services segment decreased in fiscal 2002
primarily due to competitive pricing pressures on distributed products. This
decline was partially offset by manufacturing productivity improvements and a
higher sales volume of self-manufactured products which carry significantly
higher gross margins than other portions of this segment's business. In fiscal
2001, the decline in gross margin as a percentage of operating revenue was
primarily due to the acquisition of BBMC. This acquisition shifted product mix
toward lower margin distributed products.
The Pharmaceutical Technologies and Services segment's gross margin as a
percentage of operating revenue increased during fiscal 2002. This increase was
primarily due to a larger mix of higher margin pharmaceutical products versus
health and nutritional products, as well as cost efficiencies due to recent
infrastructure investments at manufacturing facilities. This increase was
partially offset by the impact of certain items that occurred in fiscal 2001
which did not recur in fiscal 2002, namely revenues related to the use of
certain of the Company's proprietary technology. This segment's gross margin as
a percentage of operating revenue increased in fiscal 2001 versus fiscal 2000
due to an increase in sales volume 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 also contributed to the improvement in gross
margin. In addition, during both fiscal 2002 and 2001, the Company recognized
pricing adjustments related to the minimum recovery expected to be received for
claims against vitamin manufacturers for amounts overcharged in prior years (see
Note 2 of "Notes to Consolidated Financial Statements"). These pricing
adjustments were recorded as a reduction of cost of goods sold, consistent with
the classification of the original overcharge, and were based on the minimum
amounts estimated to be recoverable based on the facts and circumstances
available at the time they were recorded. The amounts recorded for these pricing
adjustments were $12.0 million in the first quarter of fiscal 2002 and $10.0
million in the second quarter of fiscal 2001.
The gross margin as a percentage of operating revenue in the Automation and
Information Services segment decreased in fiscal 2002 and fiscal 2001, primarily
due to changes in its product mix as a result of increased sales of
SupplyStation which generates a lower gross margin than the medication line of
products due to the relatively less complex nature of the product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of operating revenue)
Years ended June 30 2002 2001(1) 2000(1)
- ----------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.1% 2.4% 2.7%
Medical-Surgical Products and Services 13.3% 14.6% 15.8%
Pharmaceutical Technologies and Services 13.5% 14.7% 14.5%
Automation and Information Services 31.2% 32.9% 34.9%
Total Company 4.7% 5.2% 5.8%
- ----------------------------------------------------------------------------------------------
(1) In fiscal 2001 and fiscal 2000, selling, general and administrative
expenses as a percentage of operating revenue include goodwill
amortization.
Selling, general and administrative expenses as a percentage of operating
revenue declined in fiscal 2002 and fiscal 2001. This decline reflects economies
of scale associated with the Company's revenue growth. Significant productivity
gains resulting from continued cost control efforts in all segments and the
continuation of consolidation and selective automation of operating facilities
contributed to the improvement. In addition, the Company is continuing to take
advantage of synergies from recent acquisitions to decrease selling, general and
administrative expenses as a percentage of operating revenue. In fiscal 2002,
the Company ceased amortizing goodwill due to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets" (see Notes 1 and 15 of "Notes to Consolidated Financial Statements" for
further discussion) which also contributed to the improvement. Goodwill
amortization expense in fiscal 2001 was approximately $48.9 million. In
addition, the Company realized productivity and operating efficiencies as a
result of implementing changes at Pyxis to better service its customers.
Partially offsetting the improvement in selling, general and administrative
expenses in fiscal 2001 was an increase in these expenses as a percentage of
operating revenue for the Pharmaceutical Technologies and Services segment. This
change was primarily a result of surplus capacity in the health and nutritional
manufacturing facilities for this segment.
The selling, general and administrative expenses, excluding goodwill
amortization, grew 6% and 14% in fiscal years 2002 and 2001, respectively. The
increase in fiscal 2002 and 2001 is attributed primarily to an increase in
personnel costs, which accounted
19
for approximately 4% and 12%, respectively, of the overall increase. The overall
increase compares favorably to the 15% and 28% 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, 2002, 2001 and 2000.
Fiscal Year Ended June 30,
-------------------------------
(in millions, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ -- $ (20.8) $ 1.2
Employee-related costs (23.7) (44.6) (7.7)
ALP transaction bonus -- -- (20.3)
Pharmaceutical - distribution center consolidation (52.4) (10.3) --
Other exit costs (9.0) (8.5) (12.5)
Scherer restructuring costs -- (1.6) (9.6)
Other integration costs (46.8) (32.3) (15.8)
- ------------------------------------------------------------------------------------------
Total merger-related costs $(131.9) $(118.1) $(64.7)
==========================================================================================
Other special charges:
Distribution center closures $ -- $ (5.0) $ --
Manufacturing facility closures (2.8) (6.8) --
Employee-related costs (15.2) -- --
Litigation settlements 11.3 5.0 --
- ------------------------------------------------------------------------------------------
Total other special charges $ (6.7) $ (6.8) $ --
==========================================================================================
Total special charges $(138.6) $(124.9) $(64.7)
Tax effect of special charges 51.5 39.6 14.9
- ------------------------------------------------------------------------------------------
Net effect of special charges $ (87.1) $ (85.3) $(49.8)
==========================================================================================
Net effect on diluted earnings per share $ (0.19) $ (0.19) $(0.11)
==========================================================================================
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 or acquisition transactions with Bindley, BBMC, ALP, Allegiance and
Scherer.
During fiscal 2001 and 2000, the Company incurred direct transaction costs
related to its merger transactions accounted for as a pooling-of-interests.
These expenses primarily include investment banking, legal, accounting and other
professional fees associated with the respective merger transactions. In
addition, during the periods shown above, the Company incurred employee-related
costs, which consist primarily of severance, non-compete agreements and
transaction/stay bonuses as a result of certain acquisitions. 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 billing and employee-related costs
were less than the amounts originally anticipated, resulting in a reduction of
the merger-related costs.
During fiscal 2002 and 2001, the Company recorded charges of $52.4 million
and $10.3 million, respectively, primarily associated with the Company's plans
to consolidate distribution centers and corporate offices as a result of the
Company's merger transaction with Bindley. In connection with such
consolidations, the Company incurred employee-related costs of $7.5 million and
$0.5 million, in fiscal 2002 and 2001, respectively, arising from the
termination of approximately 950 employees primarily related to the closure of
14 Bindley distribution centers. In addition, exit costs related to termination
of contracts and lease agreements were incurred during fiscal 2002 and 2001 of
$3.6 million and $9.8 million. Also, asset impairment charges of $27.2 million
were incurred during fiscal 2002. The remaining $14.1 million incurred during
fiscal 2002 is primarily related to costs associated with moving inventory and
other assets during the consolidation of distribution centers and corporate
offices. As of June 30, 2002, the majority of the 950 employees had been
terminated. The Company anticipates completing the distribution center
consolidations by June 30, 2003. As part of the restructuring, the Company plans
on closing a total of 16 Bindley distribution centers.
20
Other exit costs relate primarily to costs associated with lease
terminations and moving expenses as a direct result of the merger or acquisition
transactions with BBMC, ALP, Allegiance and Scherer.
During fiscal 2001 and 2000, the Company recorded charges of $1.6 million
and $9.6 million, respectively, for business restructuring costs relating to the
Company's merger transaction with Scherer. As part of the business
restructuring, the Company closed certain facilities. In connection with such
closings, the Company incurred employee-related costs of $1.6 million and $1.5
million in fiscal 2001 and 2000, respectively, arising from the termination of
approximately 400 manufacturing and office employees, all of whom had been
terminated as of June 30, 2001. In addition, asset impairment charges of $3.9
million were recorded in fiscal 2000. The remaining costs relate to exit costs
for the termination of contracts and lease agreements. As of June 30, 2001, the
restructuring plan had been completed.
Other integration costs include charges directly related to integration of
the operations of previous merger transactions, such as consulting costs related
to information systems and employee benefit integration, as well as relocation
and travel costs directly associated with the integrations.
Other Special Charges. During fiscal 2002, the Company incurred employee-related
costs of $15.2 million primarily associated with a restructuring of the
distribution and custom kitting operations in the Medical-Surgical Products and
Services segment. A significant portion of the charges recorded represent
severance accrued upon communication of severance terms to employees during the
fourth quarter of fiscal 2002. The restructuring plan is expected to be
completed by December 31, 2002, and will result in the termination of
approximately 600 employees.
During the fourth quarter of fiscal 2002, the Company recorded income from
net litigation settlements of $11.3 million. These settlements included a $13.3
million special item resulting from the recovery of antitrust claims against
certain vitamin manufacturers for amounts overcharged in prior years. The
recovery totaled $35.3 million, of which $22.0 million had previously been
recorded ($10.0 million in the second quarter of fiscal 2001 and $12.0 million
in the first quarter of fiscal 2002). The amounts previously recorded were
reflected as a reduction of cost of goods sold, which is consistent with the
classification of the original overcharge, and were based on the minimum amounts
estimated to be recoverable based on the facts and circumstances available at
the time they were recorded. While the Company still has pending claims against
other manufacturers, the amount of any future recovery is not currently
estimable. Any future recoveries will be recorded as a special item in the
period when a settlement is reached. The vitamin litigation income was offset by
other items totaling $2.0 million, the majority of which involved a litigation
settlement reached during fiscal 2002 related to Bindley.
During fiscal 2001, the Company recorded a special charge of $5.0 million
related to rationalization of certain pharmaceutical distribution centers.
Approximately, $4.4 million related to asset impairments, lease exit costs and
duplicate facility costs resulting from the Company's decision to consolidate
certain distribution centers and relocate to a more modern distribution center.
The remaining amount of $0.6 million arose in connection with employee-related
costs associated with the termination of approximately 100 employees primarily
related to the closure of the distribution centers. As of June 30, 2001, the
restructuring plan had been completed.
In addition, during fiscal 2002 and 2001, the Company recorded special
charges of $2.8 million and $6.8 million, respectively, related to the
restructuring of certain health and nutritional manufacturing facilities. During
the fourth quarter of fiscal 2002, the Company incurred asset impairment costs
of $1.8 million primarily due to a writeoff of obsolete inventory created by the
rationalization of certain health and nutritional manufacturing facilities.
Approximately $0.9 million and $2.2 million related to lease exit costs during
fiscal 2002 and 2001, respectively. The remaining $0.1 million and $4.6 million
during these periods related to employee-related costs associated with the
termination of approximately 185 employees primarily consisting of manufacturing
employees and certain management positions. As of June 30, 2002, the majority of
these positions had been eliminated. The restructuring plan is expected to be
completed by June 30, 2003.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
Summary. In fiscal 2002, the net effect of various special charges reduced
reported earnings before cumulative effect of change in accounting by $87.1
million to $1,126.3 million (see Note 14 of "Notes to Consolidated Financial
Statements" for discussion on cumulative effect of change in accounting) and
reduced reported diluted earnings per Common Share before cumulative effect of
change in accounting by $0.19 per share to $2.45 per share. In fiscal 2001, the
net effect of various special charges reduced reported net earnings by $85.3
million to $857.4 million and reduced reported diluted earnings per Common Share
by $0.19 per share to $1.88 per share. In fiscal 2000, the net effect of various
special charges reduced reported net earnings by $49.8 million to $717.8 million
and reduced reported diluted earnings per Common Share by $0.11 per share to
$1.60 per share.
21
Certain merger-related and restructuring costs are based upon estimates.
Actual amounts paid may ultimately differ from these estimates. If additional
costs are incurred or recorded amounts exceed costs, such changes in estimates
will be recorded in special charges when incurred.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions completed to date totaling
approximately $75.9 million ($48.9 million net of tax) in future periods.
Additional discussion related to the Company's merger transactions is included
in Note 2 of "Notes to Consolidated Financial Statements." The Company believes
that it will incur these costs in order to properly integrate operations - a
portion of which represents facility rationalizations and implementing
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
existing operations and (b) provide opportunities for the Company to develop
synergies with, and thus strengthen, the acquired business. 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 role as a provider of services to the healthcare
industry through all its 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 decrease in interest expense and other of $22.4
million during fiscal 2002 compared to fiscal 2001 was a result of lower
interest rates on borrowings throughout the year and effective asset management.
In addition, the Company recognized a one-time gain on an equity investment,
contributing to the overall decline. The increase in interest expense and other
of $16.2 million during fiscal 2001 was a result of higher average levels of
borrowing during fiscal 2001.
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to pretax
earnings were 33.8% of pretax earnings in fiscal 2002 compared with 35.6% in
fiscal 2001 and 37.1% for fiscal 2000. The fluctuation in the tax rate is
primarily due to the impact of recording certain non-deductible merger-related
costs during various periods 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, effective July 1, 2001, the Company ceased amortizing goodwill and
intangible assets with indefinite lives. This contributed to the decrease in the
tax rate in fiscal 2002 as compared to fiscal 2001 and fiscal 2000. The
provisions for income taxes excluding the impact of merger-related charges and
of goodwill were 34.1%, 34.4% and 35.5% for the fiscal years 2002, 2001, and
2000, respectively.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that can have a
significant impact on the presentation of the Company's financial condition and
results of operations, and that require the use of complex and subjective
estimates based upon past experience and management's judgment. Because of the
uncertainty inherent in such estimates, actual results may differ from these
estimates. Below are those policies applied in preparing the Company's financial
statements that management believes are the most dependent on the application of
estimates and assumptions. For additional accounting policies, see Note 1 of
"Notes to Consolidated Financial Statements."
- - ALLOWANCE FOR DOUBTFUL ACCOUNTS. 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 of
doubtful accounts. The Company also 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 recorded net of an allowance for
doubtful accounts and are included in other assets. Extending credit terms
and calculating the required allowance involve the use of a substantial
amount of judgment by the Company's management. In determining the
appropriate allowance, the Company reviews the industry trends and the
customer's financial strength, credit standing, and payment history to
assess the probability of collection.
- - INVENTORIES. A majority of inventories (approximately 67% in 2002 and 66%
in 2001) 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. Below is a reconciliation of FIFO
inventory to LIFO inventory:
22
June 30,
--------------------------------
2002 2001 2000
--------------------------------
FIFO inventory $7,411.4 $6,338.9 $4,714.3
LIFO reserve valuation (50.4) (52.8) (57.3)
--------------------------------
Total inventory $7,361.0 $6,286.1 $4,657.0
================================
- - GOODWILL. The Company elected to adopt SFAS No. 142 "Goodwill and Other
Intangible Assets" beginning with the first quarter of fiscal 2002. Under
SFAS No. 142, purchased goodwill and intangible assets with indefinite
lives are no longer amortized, but instead tested for impairment at least
annually. Accordingly, the Company has ceased amortization of all goodwill
and intangible assets with indefinite lives as of July 1, 2001. Intangible
assets with finite lives, primarily patents and trademarks, will continue
to be amortized over their useful lives.
SFAS No. 142 requires a two-step impairment test for goodwill. The
first step is to compare the carrying amount of the reporting unit's assets
to the fair value of the reporting unit. If the carrying amount exceeds the
fair value then the second step is required to be completed, which involves
allocating the fair value of the reporting unit to each asset and
liability, with the excess being implied goodwill. An impairment loss
occurs if the amount of the recorded goodwill exceeds the implied goodwill.
The Company is required to complete an impairment test for goodwill and
record any resulting impairment losses annually. Changes in market
conditions, among other factors, may have an impact on these estimates. The
Company completed the required impairment testing in fiscal 2002 and did
not incur any impairment charges.
- - SPECIAL CHARGES. The Company primarily records costs that relate to the
integration of previously acquired companies or costs of restructuring
operations to improve productivity as special charges. These costs are
recorded in accordance with Emerging Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring) and
Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
Certain costs, such as employee and lease terminations and other facility
exit costs, are recognized at the date the integration or restructuring
plan is formalized and adopted by management. Certain other integration
costs that do not meet the criteria for accrual at the commitment date are
expensed as the integration plan is implemented. Employee costs include
severance and termination benefits. Lease termination costs include lease
cancellation fees, forfeited deposits and remaining payments due under
existing lease agreements less estimated sublease income. Other facility
exit costs are estimated based on historical experience of the total costs
incurred in exiting a facility. Other integration costs primarily include
charges directly related to the integration plan such as consulting costs
related to information systems and employee benefit plans as well as
relocation and travel costs directly associated with the integration plan.
Actual costs could differ from management's estimates. If actual results
are different from original estimates, the Company will record additional
expense or reverse previously recorded expenses. These adjustments will be
recorded as special charges.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $5.1 billion at June 30, 2002 from $4.1
billion at June 30, 2001. This increase primarily resulted from additional
investments in inventories during fiscal 2002. Inventories increased by $1.1
billion from year to year, which reflects the higher level of business volume in
Pharmaceutical Distribution and Provider Services' activities.
Property and equipment, at cost, increased by $163.4 million from June 30,
2001 to June 30, 2002. 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
financing arrangements that are expected to be used for the construction of new
facilities as well as for equipment (see further discussion in Note 8 of "Notes
to Consolidated Financial Statements.")
Shareholders' equity increased to $6.4 billion at June 30, 2002 from $5.4
billion at June 30, 2001. The increase was primarily due to net earnings of $1.1
billion and the investment of $213.7 million by employees of the Company through
various stock incentive plans. This increase was offset by dividends paid of
$45.0 million and by an increase in treasury stock of 308.3 million, primarily
due to the Company's repurchase of shares (see further discussion in Note 10 of
"Notes to the Consolidated Financial Statements.)
The Company operates a commercial paper program. At June 30, 2002, the
commercial paper program provided for the issuance of up to $1.5 billion in
aggregate maturity value of commercial paper. The Company did not have any
borrowings outstanding under its commercial paper program at June 30, 2002.
The Company has an unsecured bank credit facility providing for up to an
aggregate of $1.5 billion in borrowings of which $750 million expires on March
27, 2003 and $750 million expires on March 31, 2004. The facility expiring on
March 27, 2003, allows the Company, at its option, to extend the maturity of any
moneys borrowed for up to one year. At expiration, these facilities
23
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 remained unused at June 30, 2002.
The Company also has uncommitted short-term credit facilities with various
bank sources aggregating $131.9 million. At June 30, 2002, the Company had
borrowings outstanding related to these short-term credit facilities of $22.4
million. The Company also has line-of-credit agreements with various bank
sources aggregating $38.1 million, of which $0.8 million was outstanding at June
30, 2002 (see Note 4 of "Notes to Consolidated Financial Statements").
The following table summarizes the maturities for the Company's significant
financial obligations:
(in millions) 2003 2004 2005 2006 2007 Thereafter Total
- ------------------------------------------------------------------------------------------------------
Long-term debt $17.4 $247.6 $313.8 $157.4 $135.3 $1,352.9 $2,224.4
Operating leases 52.9 44.5 35.7 26.0 18.4 34.6 212.1
- ------------------------------------------------------------------------------------------------------
Total financial obligations $70.3 $292.1 $349.5 $183.4 $153.7 $1,387.5 $2,436.5
======================================================================================================
As of June 30, 2002, the Company's senior debt credit ratings from Moody's,
S&P and Fitch are currently A2, A and A, respectively, and the commercial paper
ratings are currently A-1, P-1 and F-1, respectively. The Company's ratings
outlook is stable. The Company's various borrowing facilities and long-term
debt, except for the preferred debt securities discussed below, are free of any
financial covenants other than minimum net worth which cannot fall below $4.1
billion at any time. As of June 30, 2002, the Company was in compliance with
this covenant.
During fiscal 2002, the Company issued $300 million of 4.45% Notes, due
2005. The proceeds of the debt issuance were used toward repayment of a portion
of the Company's indebtedness and general corporate purposes, including working
capital, capital expenditures, acquisitions and investments. After this
issuance, the Company has the capacity to issue approximately $700 million of
additional equity or debt securities pursuant to effective shelf registration
statements that have previously been filed with the Securities and Exchange
Commission.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "SPE"). The SPE exclusively engages in purchasing trade receivables
from, and making loans to, the Company. The SPE, which is consolidated by the
Company, issued $400 million in preferred debt securities to parties not
affiliated with the Company during fiscal 2001. These preferred debt securities
are classified as long term debt in the Company's consolidated balance sheet.
These preferred debt securities must be retired or redeemed by the SPE before
the Company, or its creditors, can have access to the SPE's receivables.
The Company's preferred debt securities contain a minimum net worth and
certain financial ratio covenants. As of June 30, 2002, the Company was in
compliance with these covenants. A breach of any of these covenants would be
followed by a grace period during which the Company may discuss remedies with
the security holders, or extinguish the securities, without causing an event of
default.
The Company currently 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 "Notes to Consolidated Financial Statements" for
information regarding the use of financial instruments and derivatives,
including foreign currency hedging instruments. As a matter of policy, the
Company does not engage in "speculative" transactions involving derivative
financial instruments.
OFF BALANCE SHEET RISK
The Company formed Pyxis Funding LLC ("Pyxis Funding") for the sole purpose
of acquiring a pool of sales-type leases and the related leased equipment from
Pyxis and selling the lease receivables to Pyxis Funding LLC II ("Pyxis Funding
II"). Pyxis Funding is a wholly owned, special purpose, bankruptcy-remote
subsidiary of Pyxis. Pyxis Funding II was formed for the sole purposes of
acquiring lease receivables under sales-type leases from Pyxis Funding and
issuing Pyxis Funding II's notes secured by its assets to a multi-seller conduit
administered by a third-party bank. Pyxis Funding II is a wholly owned, special
purpose, bankruptcy-remote subsidiary of Pyxis Funding. The transaction
qualifies for sale treatment under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," and,
accordingly, the related receivables are not included in the Company's
consolidated financial statements. As required by U.S. generally accepted
accounting principles, the Company consolidates Pyxis Funding and does not
consolidate Pyxis Funding II, as Pyxis Funding II is a qualified special purpose
entity, as defined under SFAS 140. Both Pyxis Funding and Pyxis Funding II are
separate legal entities that maintain separate financial statements. The assets
of Pyxis Funding and Pyxis Funding II are available first and foremost to
satisfy the claims of their creditors. The investor in Pyxis Funding II's notes
had a principal balance of $95.4 million on August 31, 2002, and is provided
24
with credit protection in the form of 20% ($23.8 million)
over-collateralization.
At June 30, 2002, the Company had $280.0 million in committed receivables
sales facility programs through Medicine Shoppe Capital Corporation ("MSCC") and
Cardinal Health Funding LLC ("CHF"). (see Note 1 of "Notes to Consolidated
Financial Statements" for additional information regarding the structure of
these entities.) MSCC and CHF were organized for the sole purpose of buying
receivables and selling those receivables to multi-seller conduits administered
by third party banks or to other third party investors. MSCC and CHF were
designed to be special purpose, bankruptcy-remote entities. Although
consolidated in accordance with generally accepted accounting principles, MSCC
and CHF are separate legal entities from the Company, Medicine Shoppe, and
Griffin Capital LLC ("Griffin"). The sale of receivables by MSCC and CHF
qualifies for sale treatment under SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" and accordingly
the related receivables are not included in the Company's consolidated financial
statements. The total amount of receivables that have been sold under the MSCC
program was $8.8 million and $13.5 million at June 30, 2002 and 2001,
respectively. There were no outstanding sold receivables under the CHF program
as of June 30, 2002 and 2001. Recourse is provided under the MSCC program by the
requirement that MSCC retain 20% subordinated interest in the sold receivables.
Subordinated interest at June 30, 2002 was $2.2 million. Recourse is provided
under the CHF program by the requirement that CHF retain a percentage
subordinated interest in the sold receivables. The percentage is determined
based upon the composition of the receivables sold. At June 30, 2002, no
receivables had been sold under this program and as a result no subordinated
interest was outstanding.
The Company has entered into operating lease agreements with several banks
for the construction of various new facilities and equipment. The initial terms
of the lease agreements have varied maturity dates ranging from November 2003
through October 2008, with optional renewal periods, generally five years. In
the event of termination, the Company is required (at its election) to either
purchase the facility or vacate the property and make reimbursement for a
portion of any unrecovered property cost. The maximum portion of unrecovered
property costs that the Company could be required to reimburse does not exceed
the amount expended to acquire and/or construct the facilities. As of June 30,
2002, the amount expended to acquire and/or construct the facilities was $479.7
million. The agreements provide for maximum fundings of $604.1 million, which is
greater than the estimated cost to complete the construction projects. The
required lease payments equal the interest expense for the period on the amounts
drawn. Lease payments under the agreements are based primarily upon LIBOR and
are subject to interest rate fluctuations. As of June 30, 2002, the weighted
average interest rate on the agreements approximated 2.6%. The Company's minimum
annual lease payments under the agreements at June 30, 2002 were approximately
$13.2 million.
OTHER
RECENT FINANCIAL ACCOUNTING STANDARDS. In June 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
that are initiated after December 31, 2002. This statement nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement generally requires that a
liability for a cost associated with an exit or disposal activity other than
those associated with a business combination, be recognized when the liability
is incurred instead of recognizing the liability at the date of an entity's
commitment to an exit plan as was required in Issue 94-3. The adoption of this
statement is not anticipated to have a material effect on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning or transactions occurring
after May 15, 2002. This statement clarifies several accounting issues including
the classification of gains and losses from the early extinguishment of debt and
lease modifications that should be accounted for in a manner similar to a
sales-leaseback transaction. The adoption of this statement is not anticipated
to have a material effect on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provides a single accounting model for the disposal of long-lived
assets from continuing and discontinued operations. The adoption of this
statement is not anticipated to have a material effect on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement is not anticipated to
have a material effect on the Company's financial position or results of
operations.
25
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Adoption of this standard did not have a material
impact on the Company's consolidated financial statements. SFAS No. 142 changes
the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. Due to the adoption of SFAS
No. 142, the Company did not amortize goodwill beginning in fiscal 2002. The
Company completed its impairment assessment as required by SFAS No. 142 and did
not incur any impairment losses (see Note 1 of "Notes to the Consolidated
Financial Statements.")
RECENT DEVELOPMENTS. On August 7, 2002, the Company's Board of Directors
authorized the repurchase of Common Shares up to an aggregate of $500.0 million.
As of August 31, 2002, 1.1 million Common Shares having an aggregate cost of
approximately $73.1 million had been repurchased through this plan. The
repurchased shares will be held as treasury shares and used for general
corporate purposes.
On June 14, 2002, the Company announced that it had entered into a
definitive agreement to acquire Syncor International Corporation ("Syncor"), a
Woodland Hills, California-based company which is a leading provider of nuclear
pharmacy services. The acquisition of Syncor is a stock-for-stock merger
transaction and is expected to be completed by the end of the second quarter of
fiscal 2003, subject to customary conditions, including Syncor stockholder
approval. At the completion of the acquisition, each Syncor share will be
converted to 0.52 of a Common Share. Based on the closing sale price of a Common
Share as of September 27, 2002, the value of the Common Shares to be received by
all of the Syncor stockholders in connection with the merger is approximately
$900 million.
On January 22, 2002, Kmart Corporation ("Kmart") filed for Chapter 11
bankruptcy court protection. Cardinal Distribution, the most significant
business within the Pharmaceutical Distribution and Provider Services segment,
has serviced Kmart for more than ten years and has continued to service
approximately 1,400 of its stores nationwide since the inception of the
bankruptcy case. Sales to Kmart represent approximately 5% of the Company's
total operating revenue, but earnings from these sales are an even smaller
percentage of the Company's total operating earnings. Due to a unique
consignment arrangement in which the Company still owns the related
pharmaceutical inventories, it has significantly limited its credit exposure to
Kmart. The Company is monitoring this Chapter 11 proceeding closely, and does
not anticipate any material impact on its consolidated financial position and
results of operations due to this bankruptcy filing.
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RATE SENSITIVITY. The Company is exposed to cash flow and
earnings fluctuations due to exchange rate variation. Foreign currency risk
exists by nature of the Company's global operations. Because the Company
manufactures and sells its products throughout the world, its foreign currency
risk is diversified. For fiscal 2002, the Company's net transactional exposure
was approximately $203.5 million. As of June 30, 2002, a hypothetical 10%
aggregate increase or decrease in the currencies to which the Company has
exposure would result in a gain or loss of approximately $20.4 million,
principally driven by exposures to the Euro and the Mexican Peso. In order to
mitigate its transactional exposure to foreign currency risk, the Company enters
into hedging instruments. For fiscal 2002, the Company hedged approximately 40%
of its exposure to transactions denominated in different foreign currencies. In
the event of a hypothetical 10% aggregate increase or decrease in the currencies
to which the Company has exposure, the resulting gain or loss previously noted
would decrease by approximately $8.1 million. Therefore, as a result of the
Company's hedging activity as of June 30, 2002, a hypothetical 10% aggregate
increase or decrease in the currencies to which the Company has exposure would
result in a net gain or loss of approximately $12.3 million ($20.4 million less
$8.1 million mitigated via hedges). See Notes 1 and 5 of "Notes to Consolidated
Financial Statements" for further discussion.
The Company also has exposure related to the translation of financial
statements from the local currency of its foreign divisions back to U.S.
dollars, the functional and reporting currency of the parent company. During
fiscal 2002, this translational exposure totaled approximately $67.2 million.
The potential gain or loss due to foreign currency translation, assuming a 10%
aggregate increase or decrease in the respective currencies, would be
approximately $6.7 million. The Company does not hedge any of its translational
exposure.
INTEREST RATE SENSITIVITY. The Company is exposed to changes in interest rates
primarily as a result of its borrowing and investing activities used to maintain
liquidity and fund business operations. The nature and amount of the Company's
long-term and short-term debt can be expected to fluctuate as a result of
business requirements, market conditions, and other factors. The Company
utilizes interest rate swap instruments to mitigate its exposure to interest
rate movements.
26
As of June 30, 2002, the potential gain or loss due to a hypothetical 10%
change in interest rates would be approximately $2.3 million. See Notes 1 and 5
of "Notes to Consolidated Financial Statements" for further discussion.
COMMODITY PRICE SENSITIVITY. The Company purchases certain commodities for use
in its manufacturing processes, which include rubber, heating oil, diesel fuel,
and polystyrene. The Company typically purchases these commodities at market
prices, and, as such, is affected by fluctuations in the market prices. For
fiscal 2002, the total commodity exposure was approximately $32.0 million. The
impact of a hypothetical 10% fluctuation in commodity prices would be
approximately $3.2 million.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Consolidated Financial Statements and Schedule
Consolidated Statements of Earnings for the Fiscal Years Ended June
30, 2002, 2001 and 2000
Consolidated Balance Sheets at June 30, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the
Board of Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheet of Cardinal
Health, Inc. and subsidiaries as of June 30, 2002, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the fiscal year
then ended. Our audit also included the financial statement schedule listed in
the Index at Item 14(a)(2). These consolidated financial statements and schedule
are the responsibility of Cardinal Health, Inc.'s management. Our responsibility
is to express an opinion on these consolidated financial statements and the
schedule based on our audit. The consolidated financial statements and financial
statement schedule of Cardinal Health, Inc. for the fiscal years ended June 30,
2001 and 2000, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those statements in their report
dated July 27, 2001.
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 fiscal 2002 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, 2002, 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. Also, in our opinion, the related fiscal 2002 financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 14 to the consolidated financial statements, in the
first quarter of fiscal 2002 Cardinal Health, Inc. changed its method of
recognizing revenue for pharmacy automation equipment. In addition, as discussed
in Note 1 to the consolidated financial statements, Cardinal Health, Inc.
changed its method of accounting for purchased goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards
("Statement") No. 142 during the first quarter of fiscal 2002.
As discussed above, the financial statements of Cardinal Health, Inc. ("the
Company") as of June 30, 2001 and 2000, and for the years then ended were
audited by other auditors who have ceased operations. As described in Note 1,
these financial statements have been updated to include the transitional
disclosures required by Statement No. 142, "Goodwill and Other Intangible
Assets," which was adopted by the Company as of July 1, 2002. Our audit
procedures with respect to the disclosures in Note 1 for fiscal 2001 and 2000
included (i) agreeing the previously reported earnings before cumulative effect
of change in accounting ("earnings") to the previously issued financial
statements and the adjustments to reported earnings representing amortization
expense (including any related tax effects) recognized in those periods related
to goodwill that are no longer being amortized to the Company's underlying
records obtained from management, and (ii) testing the mathematical accuracy of
the reconciliation of adjusted earnings to reported earnings, and the related
earnings-per-share amounts. Our audit procedures with respect to the disclosures
in Note 15 for fiscal 2001 and 2000 included (i) agreeing the goodwill and
amortization amounts by segment and the gross intangible and accumulated
amortization amounts to the Company's underlying records obtained from
management, and (ii) testing the mathematical accuracy of the tables. In our
opinion, the disclosures for fiscal 2001 and 2000 in Notes 1 and 15 related to
the transitional disclosures of Statement 142 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the Company's financial
statements for fiscal 2001 and 2000 other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance on
the Company's fiscal 2001 and 2000 financial statements taken as a whole.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Columbus, Ohio
August 6, 2002
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of Cardinal Health,
Inc. (an Ohio corporation) and subsidiaries as of June 30, 2001 and 2000 and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the two years in the period ended June 30, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the historical consolidated
financial statements of Bindley Western Industries, Inc. (Bindley), a wholly
owned subsidiary of Cardinal Health, Inc., as of December 31, 1999 and for the
year then ended. The historical consolidated financial statements of Bindley
represent approximately 15% of consolidated total assets at June 30, 2000, and
represent total revenues and net income of approximately 22% and 5%,
respectively, of consolidated amounts for the year then ended. These
consolidated financial statements were audited by another auditor whose report,
presented herein, and our opinion, insofar as it relates to the amounts included
for Bindley, is based solely on the report of such auditor.
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 and the report of the other auditor
provides a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditor, 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, 2001 and 2000 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States.
The consolidated financial statements of Cardinal Health, Inc. and subsidiaries
for the year ended June 30, 1999, prior to restatement for pooling of interests,
and the separate financial statements of Bindley for the year ended December 31,
1998 that have been included in the June 30, 1999 restated consolidated
financial statements of Cardinal Health, Inc., were audited and reported on
separately by other auditors and whose reports, presented herein a) dated August
10, 1999, except for the first sentence of the third paragraph of Note 2 as to
which the date is May 26, 2000 and the fiscal 1999 amounts in Note 12 as to
which the date is September 5, 2000 and b) dated March 21, 2000, except as to
Note 3 and Note 20 which are as of December 15, 2000, respectively expressed
unqualified opinions on those statements. We audited the combination of the
accompanying consolidated statements of earnings, shareholders' equity and cash
flows for the year ended June 30, 1999, after restatement for the fiscal 2001
pooling of interests. In our opinion, such consolidated statements have been
properly combined on the basis described in Note 1 of the notes to consolidated
financial statements.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio,
July 27, 2001.
NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP ("ANDERSEN") IN CONNECTION WITH CARDINAL HEALTH, INC.'S FORM 10-K FILING FOR
THE FISCAL YEAR ENDED JUNE 30, 2001. THE INCLUSION OF THIS PREVIOUSLY ISSUED
ANDERSEN REPORT IS PURSUANT TO THE "TEMPORARY FINAL RULE AND FINAL RULE
REQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLY
ISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARE
NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2002. THIS AUDIT REPORT HAS
NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.02 FOR FURTHER DISCUSSION.
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Directors of Cardinal Health, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated July 27, 2001 appearing on page 18 of this Form 10-K also included an
audit of the information as of and for the two-year period ended June 30, 2001
in the Financial Statement Schedule - Valuation and Qualifying Accounts. We did
not audit the historical Financial Statement Schedule of Bindley Western
Industries, Inc. (Bindley), a wholly owned subsidiary of Cardinal Health, Inc.,
as of December 31, 1999 and for the year then ended. This Financial Statement
Schedule was audited by another auditor whose report, presented herein, and our
opinion, insofar as it relates to the amounts included for Bindley, is based
solely on the report of such auditor.
The Financial Statement Schedule of Cardinal Health, Inc. for the year ended
June 30, 1999, prior to the restatement for pooling of interests, and the
separate Financial Statement Schedule of Bindley for the years ended December
31, 1998, that have been included in the June 30, 1999 restated consolidated
Financial Statement Schedule, were audited and reported on separately by other
auditors whose reports, presented herein a) dated August 10, 1999, except for
the first sentence of the third paragraph of Note 2 as to which the date is May
26, 2000 and the fiscal 1999 amounts in Note 12 as to which the date is
September 5, 2000 and b) dated March 21, 2000, except as to Note 3 and Note 20
which are as of December 15, 2000, respectively expressed unqualified opinions
on that schedule. We audited the combination of the information for the year
ended June 30, 1999, after restatement for the 2001 pooling of interests.
In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein as of and for the two-year
period ended June 30, 2001 when read in conjunction with the related
consolidated financial statements, and, in our opinion, the information for the
year ended June 30, 1999, has been properly combined on the basis described in
Note 1 of the Notes to Consolidated Financial Statements.
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 (not presented
separately herein). 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 27, 2001.
NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP ("ANDERSEN") IN CONNECTION WITH CARDINAL HEALTH, INC.'S FORM 10-K FILING FOR
THE FISCAL YEAR ENDED JUNE 30, 2001. THE INCLUSION OF THIS PREVIOUSLY ISSUED
ANDERSEN REPORT IS PURSUANT TO THE "TEMPORARY FINAL RULE AND FINAL RULE
REQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLY
ISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARE
NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2002. THIS AUDIT REPORT HAS
NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.02 FOR FURTHER DISCUSSION.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 1999 and the
related consolidated statements of earnings, of shareholders' equity and of cash
flows for the year then ended of Bindley Western Industries, Inc. and its
subsidiaries (the "Company") (not presented separately herein) present fairly,
in all material respects, their financial position, results of operations and
cash flows at December 31, 1999 and for the period then ended, prior to
adjustments related to the 2001 pooling of interests with Cardinal Health, Inc.,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion. We have not audited the
consolidated financial statements of Bindley Western Industries, Inc. for any
period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 21, 2000, except as to Note 3 and
Note 20, which are as of December 15, 2000
31
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
Our audits of the consolidated financial statements of Bindley Western
Industries, Inc. and its subsidiaries for the year ended December 31, 1999 (not
presented separately herein) referred to in our report dated March 21, 2000,
except as to Note 3 and Note 20, which are as of December 15, 2000, appearing in
the Cardinal Health, Inc. Annual Report on Form 10-K for the year ended June 30,
2002 also included an audit of the Financial Statement Schedule II - Valuation
and Qualifying Accounts ("financial statement schedule") (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. We have not
audited the consolidated financial statements and financial statement schedule
of Bindley Western Industries, Inc. for any period subsequent to December 31,
1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 21, 2000, except as to Note 3 and
Note 20, which are as of December 15, 2000
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
2002 2001 2000
---------------------------------------------
Operating revenue $ 44,394.3 $ 38,660.1 $ 30,257.8
Operating cost of products sold 40,348.1 35,050.2 27,163.8
------------ ------------ ------------
Operating gross margin 4,046.2 3,609.9 3,094.0
Bulk deliveries to customer warehouses 6,741.4 9,287.5 8,092.1
Cost of products sold - bulk deliveries 6,741.4 9,285.8 8,089.9
------------ ------------ ------------
Bulk gross margin -- 1.7 2.2
Selling, general and administrative expenses 2,073.8 1,950.7 1,709.5
Goodwill amortization -- 48.9 41.5
Special charges 138.6 124.9 64.7
------------ ------------ ------------
Operating earnings 1,833.8 1,487.1 1,280.5
Interest expense and other 132.5 154.9 138.7
------------ ------------ ------------
Earnings before income taxes 1,701.3 1,332.2 1,141.8
Provision for income taxes 575.0 474.8 424.0
------------ ------------ ------------
Earnings before cumulative effect of
change in accounting 1,126.3 857.4 717.8
Cumulative effect of change in
accounting 70.1 -- --
------------ ------------ ------------
Net earnings $ 1,056.2 $ 857.4 $ 717.8
============ ============ ============
Basic earnings per Common Share:
Before cumulative effect of change in
accounting $ 2.50 $ 1.93 $ 1.64
Cumulative effect of change in
accounting (0.16) -- --
------------ ------------ ------------
Net basic earnings per Common Share $ 2.34 $ 1.93 $ 1.64
============ ============ ============
Diluted earnings per Common Share:
Before cumulative effect of change in
accounting $ 2.45 $ 1.88 $ 1.60
Cumulative effect of change in
accounting (0.15) -- --
------------ ------------ ------------
Net diluted earnings per Common Share $ 2.30 $ 1.88 $ 1.60
============ ============ ============
Weighted average number of shares outstanding:
Basic 450.1 443.2 438.8
Diluted 459.9 455.5 448.7
The accompanying notes are an integral part of these consolidated statements.
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 1,382.0 $ 934.1
Trade receivables, net 2,295.4 2,408.7
Current portion of net investment in sales-type leases 218.3 236.3
Inventories 7,361.0 6,286.1
Prepaid expenses and other 649.9 851.1
----------- -----------
Total current assets 11,906.6 10,716.3
----------- -----------
Property and equipment, at cost:
Land, buildings and improvements 1,002.7 978.0
Machinery and equipment 2,321.5 2,167.5
Furniture and fixtures 185.1 200.4
----------- -----------
Total 3,509.3 3,345.9
Accumulated depreciation and amortization (1,614.9) (1,507.6)
----------- -----------
Property and equipment, net 1,894.4 1,838.3
Other assets:
Net investment in sales-type leases, less current portion 618.6 671.7
Goodwill and other intangibles, net 1,544.1 1,175.4
Other 474.3 240.7
----------- -----------
Total $ 16,438.0 $ 14,642.4
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and other short term borrowings $ 0.8 $ 8.3
Current portion of long-term obligations 17.4 5.9
Accounts payable 5,504.5 5,319.9
Other accrued liabilities 1,287.7 1,240.7
----------- -----------
Total current liabilities 6,810.4 6,574.8
----------- -----------
Long-term obligations, less current portion 2,207.0 1,871.0
Deferred income taxes and other liabilities 1,027.6 759.5
Shareholders' equity:
Preferred Stock, without par value
Authorized - 0.5 million shares, Issued - none -- --
Common Shares, without par value
Authorized - 755.0 million shares, Issued - 461.0 million shares
and 456.2 million shares at June 30, 2002 and 2001, respectively 2,105.2 1,893.1
Retained earnings 5,156.1 4,146.0
Common Shares in treasury, at cost, 12.2 million shares
and 7.5 million shares at June 30, 2002 and 2001, respectively (737.0) (457.2)
Other comprehensive loss (120.9) (140.3)
Other (10.4) (4.5)
----------- -----------
Total shareholders' equity 6,393.0 5,437.1
----------- -----------
Total $ 16,438.0 $ 14,642.4
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES
----------------- TREASURY SHARES OTHER TOTAL
SHARES RETAINED ---------------- COMPREHENSIVE SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT INCOME/(LOSS) OTHER EQUITY
------ --------- --------- ------ -------- -------------- ------- -------------
BALANCE, JUNE 30, 1999 290.4 $1,308.5 $2,666.1 (0.7) $ (27.9) $ (44.0) $ (8.1) $ 3,894.6
Comprehensive income:
Net earnings 717.8 717.8
Foreign currency translation adjustments (37.9) (37.9)
-----------
Total comprehensive income 679.9
Employee stock plans activity,
including tax benefits of $46.9 million 4.4 147.8 - (0.2) (4.2) 143.4
Treasury shares acquired (22.2) (7.3) (318.5) (340.7)
Dividends paid (30.0) (30.0)
Stock issued for acquisitions and other 4.6 53.3 (0.1) (0.1) - 53.2
------ --------- --------- ------ -------- -------------- ------- -----------
BALANCE, JUNE 30, 2000 299.4 $1,509.6 $3,331.6 (8.1) $(346.6) $ (81.9) $(12.3) $ 4,400.4
Comprehensive income:
Net earnings 857.4 857.4
Foreign currency translation adjustments (46.4) (46.4)
Unrealized loss on derivatives (6.7) (6.7)
Unrealized loss on investment (5.3) (5.3)
-----------
Total comprehensive income 799.0
Employee stock plans activity,
including tax benefits of $159.2 million 7.2 332.7 0.6 28.1 4.7 365.5
Treasury shares acquired - (139.0) (139.0)
Dividends paid (35.4) (35.4)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 148.5 (1.2) (1.2)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 0.3 4.5 (4.1) - 0.3 (0.1) 0.6
Stock issued for acquisitions and other 0.8 47.5 (3.5) 3.2 47.2
------ --------- --------- ------ -------- -------------- ------- -----------
BALANCE, JUNE 30, 2001 456.2 $1,893.1 $4,146.0 (7.5) $(457.2) $ (140.3) $ (4.5) $ 5,437.1
Comprehensive income:
Net earnings 1,056.2 1,056.2
Foreign currency translation adjustments 24.0 24.0
Unrealized loss on derivatives (10.4) (10.4)
Unrealized gain on investments 2.6 2.6
Reclassification adjustment for investment
losses included in net earnings 3.2 3.2
-----------
Total comprehensive income 1,075.6
Employee stock plans activity,
including tax benefits of $73.6 million 4.5 191.6 0.5 28.1 (6.0) 213.7
Treasury shares acquired (5.1) (308.3) (308.3)
Dividends paid (45.0) (45.0)
Stock issued for acquisitions and other 0.3 20.5 (1.1) (0.1) 0.4 0.1 19.9
------ --------- --------- ------ -------- -------------- ------- -----------
BALANCE, JUNE 30, 2002 461.0 $2,105.2 $5,156.1 (12.2) $(737.0) $ (120.9) $(10.4) $ 6,393.0
====== ========= ========= ====== ======== ============== ======= ===========
The accompanying notes are an integral part of these consolidated statements.
35
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
--------------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before cumulative effect of change in
accounting $1,126.3 $ 857.4 $ 717.8
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 243.5 280.6 257.0
Provision for deferred income taxes 239.7 149.1 128.5
Provision for bad debts 42.6 41.4 37.5
Change in operating assets and liabilities,
net of effects from acquisitions:
Decrease/(increase) in trade receivables 145.4 (31.4) (377.3)
Increase in inventories (1,071.1) (1,517.8) (1,071.6)
Decrease/(increase) in net investment in sales-type leases 71.2 (141.8) (159.5)
Increase in accounts payable 179.2 1,313.8 899.4
Other operating items, net 7.1 (79.6) 72.2
-------- -------- --------
Net cash provided by operating activities 983.9 871.7 504.0
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (383.8) (364.3) (69.6)
Proceeds from sale of property and equipment 18.3 72.1 60.2
Additions to property and equipment (285.4) (341.2) (331.1)
Purchase of marketable securities available for sale -- -- (7.7)
Proceeds from sale of marketable securities available for sale -- -- 56.1
-------- -------- --------
Net cash used in investing activities (650.9) (633.4) (292.1)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt (9.7) (824.9) 426.2
Reduction of long-term obligations (19.6) (53.8) (179.8)
Proceeds from long-term obligations, net of issuance costs 362.3 911.3 0.5
Proceeds from securitized borrowings -- -- 125.8
Proceeds from issuance of Common Shares 140.0 252.1 97.5
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (45.0) (36.6) (30.0)
Purchase of treasury shares (308.3) (139.4) (341.4)
Other (4.8) -- 0.4
-------- -------- --------
Net cash provided by financing activities 114.9 108.7 99.2
-------- -------- --------
NET INCREASE IN CASH AND EQUIVALENTS 447.9 347.0 311.1
CHANGE IN FISCAL YEAR OF ACQUIRED SUBSIDIARY (SEE NOTE 1) -- 47.6 --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 934.1 539.5 228.4
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $1,382.0 $ 934.1 $ 539.5
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
36
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 16 for information related to the Company's
business 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 merger
transactions with Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999
and Bindley Western Industries, Inc. ("Bindley") on February 14, 2001 (see Note
2). These business combinations were accounted for under the
pooling-of-interests method.
The Company's fiscal year end is June 30 and Bindley's fiscal year end was
December 31. For the fiscal year ended June 30, 2000, the consolidated financial
statements combine the Company's fiscal year ended June 30, 2000, with Bindley's
fiscal year ended December 31, 1999.
As a result of changing Bindley's fiscal year end from December 31 to June
30, Bindley's results of operations for the six months ended June 30, 2000 are
not included in the combined results of operations but are reflected as an
adjustment in the Consolidated Statement of Shareholders' Equity. For the
six-month period ending June 30, 2000, Bindley's net revenue and net earnings
excluding special charges were $4.9 billion and $22.9 million, respectively.
Including special charges for the same period, Bindley's net loss was $2.8
million. Cash flows from operating activities were $166.7 million, while cash
flows used in investing and financing activities were $5.7 million and $113.4
million, respectively.
During fiscal 2002, 2001 and 2000, the Company completed several
acquisitions, 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. Additional
disclosure related to the Company's acquisitions is provided in Note 2.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Such estimates include but are not limited to
inventory valuation, allowance for doubtful accounts, goodwill and intangible
asset impairment, and restructuring charge reserves. 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
these cash equivalents approximates their fair value. Cash payments for interest
were $116.5 million, $144.8 million, and $133.8 million and cash payments for
income taxes were $246.0 million, $213.6 million and $125.5 million for fiscal
2002, 2001, and 2000, 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 $94.8 million and
$106.8 million at June 30, 2002 and 2001, respectively. The decrease in the
allowance for doubtful accounts in fiscal 2002 is a result of the write-off of
fully reserved accounts offset by the additional provision recorded.
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
were $30.8 million and $27.8 million at June 30, 2002 and 2001, respectively,
(the current portions are $14.3 million and $13.3 million, respectively), and
are included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $4.7 million and $4.8 million at June 30, 2002 and 2001,
respectively.
The Company has formed Medicine Shoppe Capital Corporation ("MSCC"),
Cardinal Health Funding ("CHF"), Pyxis Funding LLC ("Pyxis Funding") and Pyxis
Funding LLC II ("Pyxis Funding II") as wholly owned subsidiaries of Medicine
Shoppe, Griffin Capital LLC ("Griffin"), Pyxis, and Pyxis Funding, respectively.
MSCC and CHF were organized for the sole purpose of buying receivables and
selling those receivables to certain multi-seller conduits administered by
third-party banks or to other third-party investors. Pyxis Funding was organized
for the sole purpose of acquiring a pool of sales-type leases and the related
equipment from Pyxis and selling the lease receivables to Pyxis Funding II.
Pyxis Funding II was organized for the sole purpose of acquiring lease
receivables under capital leases from Pyxis Funding, and issuing notes secured
by its assets to a multi-seller conduit administered by a third-party bank. All
of these entities were designed to be special purpose, bankruptcy-remote
entities. Although consolidated by the Company in accordance with generally
accepted accounting principles, MSCC, CHF and Pyxis Funding are separate legal
entities from the Company, Medicine Shoppe, Griffin and Pyxis. Pyxis Funding II,
which is also a separate legal entity, is not consolidated by the Company as it
is a qualified special purpose entity, as defined under SFAS No. 140,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." MSCC, CHF, Pyxis Funding and Pyxis Funding II all maintain
separate financial statements and their assets will be available first and
foremost to satisfy the claims of their creditors. Additional disclosure
regarding off balance sheet financing is provided in Note 8.
37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "SPE"), which is exclusively engaged in purchasing trade receivables
from, and making loans to, the Company. The SPE, which is consolidated by the
Company, issued $400 million in preferred variable debt securities to parties
not affiliated with the Company during fiscal 2001. These preferred debt
securities must be retired or redeemed by the SPE before the Company, or its
creditors, can have access to the SPE's receivables. See Note 4 for additional
information.
INVENTORIES. A majority of inventories (approximately 67% in 2002 and 66% in
2001) 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, 2002, 2001, and 2000 by
$50.4 million, $52.8 million, and $57.3 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.
REVENUE RECOGNITION. The Company records distribution revenue and
self-manufactured medical surgical product revenue when merchandise is shipped
to its customers and the Company has no further obligation to provide services
related to such merchandise. These revenues are recorded net of sales returns
and allowances. The Company recognizes sales returns as a reduction of revenue
and cost of sales for the sales price and cost, respectively, when products are
returned. The Company's customer return policy allows customers to return
products only if the products have the ability to be added back to inventory
and resold at full value or can be returned to vendors for credit. 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
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.
Manufacturing and packaging revenues are recognized either upon shipment or
delivery of the product, in accordance with the terms of the contract which
specify when transfer of title occurs. Other revenues from services provided,
such as development or sales and marketing services, are recognized upon the
completion of such services.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenues include annual exclusivity fees, option fees to
extend exclusivity agreements, and milestone payments for attaining certain
regulatory approvals. The Company receives exclusivity payments from certain
manufacturers in return for its commitment not to enter into agreements to
manufacture competing products. The revenues related to these agreements are
recognized over the term of the exclusivity or the term of the option agreement
unless a particular milestone is designated, in which case revenues are
recognized when all obligations of performance have been completed.
Analytical science revenues from fixed contracts are recorded as projects
are completed and billed. Projects are primarily for a short-term duration.
Certain contracts contain provisions for price redetermination for cost
overruns. Such amounts are included in service revenue when realization is
assured and the amounts are reasonably determined.
38
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue is recognized from sales-type leases of point-of-use systems when
the systems are installed at the customer site and the lease becomes
noncancellable (see Note 14 for additional information). Unearned income on
sales-type leases is recognized using the interest method. Sales of point-of-use
systems are recognized upon installation at the customer site. 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.
SHIPPING AND HANDLING. Shipping and handling costs are included in selling,
general and administrative expenses in the Consolidated Statement of Earnings.
Shipping and handling costs include all delivery expenses as well as all costs
to prepare the product for shipment to the end customer. Shipping and handling
costs totaled $211.9 million for fiscal 2002, $206.6 million for fiscal 2001 and
$176.3 million for fiscal 2000. Shipping and handling revenue received was
immaterial for all periods presented.
TRANSLATION OF FOREIGN CURRENCIES. Financial statements of the Company's
subsidiaries outside the U.S. generally are measured using the local currency as
the functional currency. Adjustments to translate those statements into U.S.
dollars are accumulated in a separate component of shareholders' equity.
Transactional exchange gains and losses are reflected in earnings.
INTEREST RATE AND CURRENCY RISK MANAGEMENT. At the beginning of fiscal 2001, the
Company adopted Financial Accounting Standard ("SFAS") No. 133, as amended,
"Accounting for Derivatives and Hedging Activity." Under this standard, all
derivative instruments are recorded at fair value on the balance sheet and all
changes in fair value are recorded to earnings or to shareholders' equity
through other comprehensive income. The adoption of this standard did not have a
material impact on the Company's consolidated financial statements.
The Company uses forward currency exchange contracts, currency options and
interest rate swaps to manage its exposures to the variability of cash flows
primarily related to the foreign exchange rate changes of future foreign
currency transaction costs and to the interest rate changes on borrowing costs.
These contracts are designated as cash flow hedges.
The Company also uses interest rate swaps to hedge the changes in the value
of fixed rate debt due to variations in interest rates. Both the derivative
instruments and the underlying debt are adjusted to market value through other
income/expense at the end of each period. The Company uses foreign currency
forward contracts to protect the value of existing foreign currency assets and
liabilities. The remeasurement adjustments for any foreign currency denominated
assets or liabilities are included in other income/expense. The remeasurement
adjustment is offset by the foreign currency forward contract settlements which
are also classified in other income/expense. Both the interest rate swaps and
the foreign currency forward contracts are designated as fair value hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market
values each period and qualify for hedge accounting under SFAS No.133. The
periodic gains and losses of the contracts designated as cash flow hedges are
deferred in other comprehensive income until the underlying transactions are
recognized. Upon recognition, such gains and losses are recorded in operations
as an adjustment to the carrying amounts of the underlying transactions in the
period in which these transactions are recognized. For those contracts
designated as fair value hedges, the resulting gains or losses are recognized in
earnings offsetting the exposures of the underlying transactions. The carrying
values of all contracts are included in other assets or liabilities.
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is adjusted to
market value and recognized in earnings immediately. If a fair value or cash
flow hedge ceases to qualify for hedge accounting or is terminated, the contract
would continue to be carried on the balance sheet at fair value until settled
and future adjustments to the contract's fair value would be recognized in
earnings immediately. If a forecasted transaction were no longer probable to
occur, amounts previously deferred in other comprehensive income would be
recognized immediately in earnings. Additional disclosure related to the
Company's hedging contracts is provided in Note 5.
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 were $65.1 million, $53.8 million,
and $48.5 million in fiscal 2002, 2001, and 2000, respectively.
39
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES. In accordance with the provisions of SFAS No. 109 "Accounting for
Income Taxes," the Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for expected future tax consequences of
temporary differences that currently exist between the tax bases and financial
reporting bases of the Company's assets and liabilities. No provision is made
for U.S. income taxes on undistributed earnings of foreign subsidiaries because
those earnings are considered permanently reinvested in the operations of those
subsidiaries.
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, computed using
the treasury stock method.
DIVIDENDS. Excluding dividends paid by all entities with which the Company has
merged, the Company paid cash dividends per Common Share of $0.100, $0.080, and
$0.067, for the fiscal years ended June 30, 2002, 2001, and 2000, respectively.
STOCK SPLITS. On February 27, 2001, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on April 20, 2001
to shareholders of record on April 5, 2001. 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
the stock split.
RECENT FINANCIAL ACCOUNTING STANDARDS. In June 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
that are initiated after December 31, 2002. This statement nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity other than those
associated with a business combination, be recognized when the liability is
incurred instead of recognizing the liability at the date of an entity's
commitment to an exit plan as was required in Issue 94-3. The adoption of this
statement is not anticipated to have a material effect on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning or transactions occurring
after May 15, 2002. This statement clarifies several accounting issues including
the classification of gains and losses from the early extinguishment of debt and
lease modifications that should be accounted for in a manner similar to a
sales-leaseback transaction. The adoption of this statement is not anticipated
to have a material effect on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provides a single accounting model for the disposal of long-lived
assets from continuing and discontinued operations. The adoption of this
statement is not anticipated to have a material effect on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement is not anticipated to
have a material effect on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Adoption of this standard did not have a material
impact on the Company's consolidated financial statements. SFAS No. 142 revises
the accounting for purchased goodwill and other intangible assets. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001, with earlier
adoption permitted. The Company elected to adopt SFAS No. 142 beginning with the
first quarter of fiscal 2002. Under SFAS No. 142, purchased goodwill and
intangible assets with indefinite lives are no longer amortized, but instead
tested for impairment at least annually. Accordingly, the Company has ceased
amortization of all goodwill and intangible assets with indefinite lives as of
July 1, 2001. Intangible assets with finite lives, primarily patents and
trademarks,
40
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
will continue to be amortized over their useful lives.
SFAS 142 requires a two step impairment test for goodwill. The first step
is to compare the carrying amount of the reporting unit's assets to the fair
value of the reporting unit. If the carrying amount exceeds the fair value then
the second step is required to be completed, which involves allocating the fair
value of the reporting unit to each asset and liability, with the excess being
implied goodwill. The impairment loss is the amount by which the recorded
goodwill exceeds the implied goodwill. The Company was required to complete a
"transitional" impairment test for goodwill as of the beginning of the fiscal
year in which the statement was adopted. This transitional impairment test
required that the Company complete step one of the goodwill impairment test
within six months from the date of initial adoption, or December 31, 2001. The
Company completed the transitional impairment test and did not incur any
impairment charges.
The following table reconciles the Company's net earnings and per share
amounts before the cumulative effect of change in accounting to net earnings and
per share amounts adjusted for the amortization of intangible assets and
goodwill.
(in millions, except per share amounts) June 30,
--------
2002 2001 2000
---- ---- ----
Earnings before cumulative effect
of change in accounting $ 1,126.3 $ 857.4 $ 717.8
Goodwill amortization, net of tax -- 44.6 37.6
--------- --------- ---------
Adjusted earnings before cumulative
effect of change in accounting $ 1,126.3 $ 902.0 $ 755.4
========= ========= =========
Basic earnings per share before
cumulative effect of change in
accounting $ 2.50 $ 1.93 $ 1.64
Goodwill amortization, net of tax -- 0.10 0.08
--------- --------- ---------
Adjusted basic earnings per share
before cumulative effect of
change in accounting $ 2.50 $ 2.03 $ 1.72
========= ========= =========
Diluted earnings per share before
cumulative effect of change in
accounting $ 2.45 $ 1.88 $ 1.60
Goodwill amortization, net of tax -- 0.10 0.08
--------- --------- ---------
Adjusted diluted earnings per share
before cumulative effect of
change in accounting $ 2.45 $ 1.98 $ 1.68
========= ========= =========
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
BUSINESS COMBINATIONS.
Fiscal 2002. The Company completed several individually immaterial acquisitions
during fiscal 2002 which were accounted for under the purchase method of
accounting. These business combinations primarily focused on expanding the
service offerings within the Pharmaceutical Technologies and Services segment to
include contract pharmaceutical development and integrated medical education.
The aggregate purchase price, which was paid primarily in cash, was
approximately $418.0 million. The Company issued approximately 0.3 million
Common Shares to stockholders and outstanding stock options were converted into
options to purchase a total of approximately 1.0 million Common Shares.
Liabilities of the operations assumed were approximately $93.5 million,
including debt of $11.1 million. The consolidated financial statements include
the results of operations from each of these business combinations subsequent to
the date of acquisition. Had these transactions occurred on July 1, 2000,
results of operations would not have differed materially from reported results.
Fiscal 2001. On February 14, 2001, the Company completed a merger transaction
with Bindley, which was accounted for as a
41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pooling-of-interests. In the merger transaction with Bindley, the Company issued
approximately 23.1 million Common Shares to Bindley stockholders and Bindley's
outstanding stock options were converted into options to purchase approximately
5.1 million Common Shares. In fiscal 2002 and 2001, the Company recorded
merger-related charges to reflect transaction and other costs incurred as a
result of the merger transaction with Bindley.
In addition, the Company also completed several other individually
immaterial acquisitions during fiscal 2001 for approximately $374.9 million.
Liabilities of the operations assumed were approximately $147.8 million,
including debt of $25.0 million. These transactions 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. Had the transactions occurred on July 1, 1999, results of
operations would not have differed materially from reported results.
Fiscal 2000. On September 10, 1999, the Company completed a merger transaction
with ALP, which was accounted for as a pooling-of-interests. The Company issued
approximately 8.7 million Common Shares to ALP stockholders. During fiscal 2000
and subsequent years, the Company recorded merger-related charges to reflect
transaction and other costs incurred as a result of the merger transaction with
ALP.
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 centralized nuclear
pharmacies, 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 $120.2
million. Liabilities of the operations assumed were approximately $23.1 million,
including debt of $4.0 million. Had the acquisitions taken place on July 1,
1998, consolidated results would not have been materially different from
reported results.
Additional merger-related costs associated with integrating the various
acquired companies and instituting efficiencies relating to them will be charged
to expense in subsequent periods when incurred.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2002, 2001 and 2000.
Fiscal Year Ended June 30,
--------------------------
(in millions, except per share amounts) 2002 2001 2000
- --------------------------------------- ---- ---- ----
Merger-related costs:
Direct transaction costs $ -- $ (20.8) $ 1.2
Employee-related costs (23.7) (44.6) (7.7)
ALP transaction bonus -- -- (20.3)
Pharmaceutical distribution center consolidation (52.4) (10.3) --
Other exit costs (9.0) (8.5) (12.5)
Scherer restructuring costs -- (1.6) (9.6)
Other integration costs (46.8) (32.3) (15.8)
-------- -------- --------
Total merger-related costs $ (131.9) $ (118.1) $ (64.7)
-------- -------- --------
Other special charges:
Distribution center closures $ -- $ (5.0) $ --
Manufacturing facility closures (2.8) (6.8) --
Employee-related costs (15.2) -- --
Litigation settlement 11.3 5.0 --
-------- -------- --------
Total other special charges $ (6.7) $ (6.8) $ --
-------- -------- --------
Total special charges $ (138.6) $ (124.9) $ (64.7)
Tax effect of special charges 51.5 39.6 14.9
-------- -------- --------
Net effect of special charges $ (87.1) $ (85.3) $ (49.8)
======== ======== ========
Net effect on diluted earnings per share $ (0.19) $ (0.19) $ (0.11)
======== ======== ========
42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or acquisition transactions with Bindley, Bergen Brunswig Medical
Corporation ("BBMC") on August 16, 2000, ALP, Allegiance Corporation
("Allegiance") on February 3, 1999, and R.P. Scherer Corporation ("Scherer")
on August 7, 1998.
During fiscal 2001 and 2000, the Company incurred direct transaction
costs related to its merger transactions accounted for as a
pooling-of-interests. These expenses primarily include investment banking,
legal, accounting and other professional fees associated with the respective
merger transactions. In addition, during the periods shown above, the Company
incurred employee-related costs, which consist primarily of severance,
non-compete agreements and transaction/stay bonuses as a result of certain
acquisitions. 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 billing
and employee-related costs were less than the amounts originally anticipated,
resulting in a reduction of the merger-related costs.
During fiscal 2002 and 2001, the Company recorded charges of $52.4 million
and $10.3 million, respectively, primarily associated with the Company's plans
to consolidate distribution centers and corporate offices as a result of the
Company's merger transaction with Bindley. In connection with such
consolidations, the Company incurred employee-related costs of $7.5 million and
$0.5 million, in fiscal 2002 and 2001, respectively, arising from the
termination of approximately 950 employees primarily related to the closure of
14 Bindley distribution centers. In addition, exit costs related to termination
of contracts and lease agreements were incurred during fiscal 2002 and 2001 of
$3.6 million and $9.8 million. Also, asset impairment charges of $27.2 million
were incurred during fiscal 2002. The remaining $14.1 million incurred during
fiscal 2002 is primarily related to costs associated with moving inventory and
other assets during the consolidation of distribution centers and corporate
offices. As of June 30, 2002, the majority of the 950 employees had been
terminated. The Company anticipates completing the distribution center
consolidations by June 30, 2003. As part of the restructuring, the Company plans
on closing a total of 16 Bindley distribution centers.
Other exit costs relate primarily to costs associated with lease
terminations and moving expenses as a direct result of the merger or acquisition
transactions with BBMC, ALP, Allegiance and Scherer.
During fiscal 2001 and 2000, the Company recorded charges of $1.6
million and $9.6 million, respectively, for business restructuring costs
relating to the Company's merger transaction with Scherer. As part of the
business restructuring, the Company closed certain facilities. In connection
with such closings, the Company incurred employee-related costs of $1.6 million
and $1.5 million in fiscal 2001 and 2000, respectively, arising from the
termination of approximately 400 manufacturing and office employees, all of whom
had been terminated as of June 30, 2001. In addition, asset impairment charges
of $3.9 million were recorded in fiscal 2000. The remaining costs relate to exit
costs for the termination of contracts and lease agreements. As of June 30,
2001, the restructuring plan had been completed.
Other integration costs include charges directly related to integration of
the operations of previous merger transactions, such as consulting costs related
to information systems and employee benefit integration, as well as relocation
and travel costs directly associated with the integrations.
Other Special Charges. During fiscal 2002, the Company incurred
employee-related costs of $15.2 million primarily associated with a
restructuring of the distribution and custom kitting operations in the
Medical-Surgical Products and Services segment. A significant portion of the
charges recorded represent severance accrued upon communication of severance
terms to employees during the fourth quarter of fiscal 2002. The restructuring
plan is expected to be completed by December 31, 2002, and will result in the
termination of approximately 600 employees.
During the fourth quarter of fiscal 2002, the Company recorded income from
net litigation settlements of $11.3 million. These settlements included a $13.3
million special item resulting from the recovery of antitrust claims against
certain vitamin manufacturers for amounts overcharged in prior years. The
recovery totaled $35.3 million, of which $22.0 million had previously been
recorded ($10.0 million in the second quarter of fiscal 2001 and $12.0 million
in the first quarter of fiscal 2002). The amounts previously recorded were
reflected as a reduction of cost of goods sold, which is consistent with the
classification of the original overcharge, and were based on the minimum amounts
estimated to be recoverable based on the facts and circumstances available at
the time they were recorded. While the Company still has pending claims against
other manufacturers, the amount of any future recovery is not currently
estimable. Any future recoveries will be recorded as a special item in the
period when a settlement is reached. The vitamin litigation income was offset by
other items totaling $2.0 million, the majority of which involved a litigation
settlement reached during fiscal 2002 related to Bindley.
43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2001, the Company recorded a special charge of $5.0 million
related to rationalization of certain pharmaceutical distribution centers.
Approximately, $4.4 million related to asset impairments, lease exit costs and
duplicate facility costs resulting from the Company's decision to consolidate
certain distribution centers and relocate to a more modern distribution center.
The remaining amount of $0.6 million arose in connection with employee-related
costs associated with the termination of approximately 100 employees primarily
related to the closure of the distribution centers. As of June 30, 2001, the
restructuring plan had been completed.
In addition, during fiscal 2002 and 2001, the Company recorded
special charges of $2.8 million and $6.8 million, respectively, related to the
restructuring of certain health and nutritional manufacturing facilities. During
the fourth quarter of fiscal 2002, the Company incurred asset impairment costs
of $1.8 million primarily due to a writeoff of obsolete inventory created by the
rationalization of certain health and nutritional manufacturing facilities.
Approximately $0.9 million and $2.2 million related to lease exit costs during
fiscal 2002 and 2001, respectively. The remaining $0.1 million and $4.6
million during these periods related to employee-related costs associated with
the termination of approximately 185 employees primarily consisting of
manufacturing employees and certain management positions. As of June 30, 2002,
the majority of these positions had been eliminated. The restructuring plan is
expected to be completed by June 30, 2003.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
Accrual Rollforward. The following table summarizes the activity related to the
liabilities associated with the Company's special charges during the fiscal
years ended June 30, 2002, 2001 and 2000:
($ in millions) 2002 2001 2000
- --------------- ---- ---- ----
Balance at beginning of year $ 34.7 $ 10.9 $ 36.6
Additions(1) 138.6 129.9 75.0
Payments (108.6) (127.4) (90.4)
Reversals -- (5.0) (10.3)
Bindley change in fiscal year(2) -- 26.3 --
-------- -------- --------
Balance at end of year $ 64.7 $ 34.7 $ 10.9
======== ======== ========
(1) Amounts represent items that have been either expensed as incurred or
accrued according to generally accepted accounting principles.
(2) As a result of changing Bindley's fiscal year end from calendar to
June 30, Bindley's results of operations for the six months ended June
30, 2000 are not included in the combined results of operation, but
are reflected as an adjustment in the Consolidated Statements of
Shareholder's Equity. See Note 1 for further discussion. During
Bindley's six months ended June 30, 2000, Bindley recorded a special
charge of $26.3 million ($25.7 million, net of tax) related to a
litigation accrual settlement.
Summary. In fiscal 2002, the net effect of various special charges reduced
reported earnings before cumulative effect of change in accounting by $87.1
million to $1,126.3 million (see Note 14 for discussion on cumulative effect of
change in accounting) and reduced reported diluted earnings per Common Share
before cumulative effect of change in accounting by $0.19 per share to $2.45 per
share. In fiscal 2001, the net effect of various special charges reduced
reported net earnings by $85.3 million to $857.4 million and reduced reported
diluted earnings per Common Share by $0.19 per share to $1.88 per share. In
fiscal 2000, the net effect of various special charges reduced reported net
earnings by $49.8 million to $717.8 million and reduced reported diluted
earnings per Common Share by $0.11 per share to $1.60 per share.
Certain merger-related and restructuring costs are based upon estimates.
Actual amounts paid may ultimately differ from these
44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimates. If additional costs are incurred or recorded amounts exceed costs,
such changes in estimates will be recorded in special charges when 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,
2002 2001
---- ----
Future minimum lease payments receivable $ 975.3 $1,066.3
Unguaranteed residual values 15.3 13.1
Unearned income (137.7) (155.3)
Allowance for uncollectible minimum lease payments
receivable (16.0) (16.1)
-------- --------
Net investment in sales-type leases 836.9 908.0
Less: current portion 218.3 236.3
-------- --------
Net investment in sales-type leases, less current
portion $ 618.6 $ 671.7
======== ========
Future minimum lease payments to be received pursuant to sales-type leases
during the next five fiscal years and thereafter are:
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Minimum lease payments $ 268.1 $ 246.0 $ 216.7 $ 166.0 $ 72.3 $ 6.2
Pyxis Funding II acquired a pool of sales-type leases from Pyxis Funding,
and sold an undivided interest in those leases to a third party investor for
approximately $150 million (see Notes 1 and 8 for additional information).
45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $36.5
million at June 30, 2002, at various money market rates. At June 30, 2002, $0.8
million, at a weighted average interest rate of 3.3%, was outstanding under such
arrangements and $8.3 million, at a weighted average interest rate of 6.50%, was
outstanding at June 30, 2001. The total available but unused lines of credit at
June 30, 2002 was $35.7 million.
LONG-TERM OBLIGATIONS. Long-term obligations consist of the following (in
millions):
June 30, June 30,
2002 2001
---- ----
4.45% Notes due 2005 $ 304.6 $ --
6.00% Notes due 2006 148.5 150.0
6.25% Notes due 2008 150.0 150.0
6.50% Notes due 2004 100.0 100.0
6.75% Notes due 2011 494.8 494.3
6.75% Notes due 2004 100.0 99.8
7.30% Notes due 2006 126.4 127.9
7.80% Debentures due 2016 75.7 75.7
7.00% Debentures due 2026 (7 year put option in 2003) 192.0 192.0
Preferred debt securities 400.0 400.0
Short-term borrowings, reclassified 22.4 26.3
Other obligations; interest averaging 2.89% in 2002 and
4.45% in 2001, due in varying installments
through 2016 110.0 60.9
--------- ---------
Total 2,224.4 1,876.9
Less: current portion 17.4 5.9
--------- ---------
Long-term obligations, less current portion $ 2,207.0 $ 1,871.0
========= =========
The 4.45%, 6.00%, 6.25% and 6.50% Notes and the 6.75% Notes due 2011
represent unsecured obligations of the Company, and the 6.75% Notes due 2004
represent unsecured obligations of Scherer, which are guaranteed by the Company.
The 7.30% Notes and the 7.80% and 7.00% 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. Interest is paid pursuant to the terms of the notes.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "SPE"), which is exclusively engaged in purchasing trade receivables
from, and making loans to, the Company. The SPE, which is consolidated by the
Company, issued $400 million in preferred variable debt securities to parties
not affiliated with the Company during fiscal 2001. These preferred debt
securities are classified as long-term debt in the Company's consolidated
balance sheet. These preferred debt securities must be retired or redeemed by
the SPE before the Company, or its creditors, can have access to the SPE's
receivables. At June 30, 2002 and 2001, the SPE owned approximately $534.7
million and $497.2 million, respectively, of receivables that are included in
the Company's consolidated balance sheet. The effective interest rate as of June
30, 2002 and 2001, was 3.41% and 6.47%, respectively. Other than for loans made
to the Company or for breaches of certain representations, warranties or
covenants, the SPE does not have any recourse against the general credit of the
Company.
The Company has a commercial paper program, providing on June 30, 2002 for
the issuance of up to $1.5 billion in aggregate maturity value of commercial
paper. The Company did not have any borrowings outstanding under this program at
June 30, 2002 and 2001.
The Company also maintains other short-term credit facilities that allow
for borrowings up to $131.9 million. At June 30,
46
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 and 2001, $22.4 million and $26.3 million were outstanding under these
uncommitted facilities. The effective interest rate as of June 30, 2002 and 2001
was 2.05% and 4.30%, 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 27, 2003 and $750 million expires on March 31, 2004. The facility
expiring on March 27, 2003, allows for the Company at its option, to extend the
maturity of any monies borrowed for up to one year. 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 remained unused at
June 30, 2002. At June 30, 2002 and 2001, the commercial paper and other
short-term borrowings totaling $22.4 million and $26.3 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 2002, the Company issued $300 million of 4.45% Notes due
2005. The proceeds of the debt issuance were used toward repayment of a portion
of the Company's indebtedness and general corporate purposes, including working
capital, capital expenditures, acquisitions and investments. After such
issuance, the Company has the capacity to issue approximately $700 million of
additional equity or debt securities pursuant to the shelf registration
statements filed with the Securities and Exchange Commission.
During fiscal 2001, the Company issued $500 million of 6.75% notes due
2011. The proceeds of this debt issuance were used for early redemption of
Bindley debt and for repayment of a portion of the Company's commercial paper
and general corporate purposes, including working capital, capital expenditures,
repayment or refinancing of indebtedness, acquisitions and investments.
Certain long-term obligations are collateralized with property and
equipment of the Company with an aggregate book value of approximately $4.7
million at June 30, 2002. Maturities of long-term obligations for future fiscal
years are:
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Maturities of long-term obligations $ 17.4 $ 247.6 $ 313.8 $ 157.4 $ 135.3 $1,352.9 $2,224.4
5. FINANCIAL INSTRUMENTS
INTEREST RATE RISK MANAGEMENT. The Company is exposed to the impact of interest
rate changes. The Company's objective is to manage the impact of interest rate
changes on earnings and cash flows and on the market value of its borrowings.
The Company maintains fixed rate debt as a percentage of its net debt within a
certain range.
The Company utilizes a mix of debt maturities along with both fixed-rate
and variable-rate debt to manage its changes in interest rates. In addition, the
Company enters into interest rate swaps to further manage its exposure to
interest rate variations related to its borrowings and to lower its overall
borrowing costs.
At June 30, 2002 and 2001, the Company held pay-fixed interest rate swaps
to hedge the variability of cash flows related to changes in interest rates on
borrowing costs of variable rate debt. These contracts are classified as cash
flow hedges and mature through January 2004. The Company adjusts the pay-fixed
interest rate swaps to current market values through other comprehensive income,
as the contracts are effective in offsetting the interest rate exposure of the
forecasted interest rate payments hedged. The Company anticipates that these
contracts will continue to be effective. The gain/(loss) deferred in other
comprehensive income will be recognized immediately in earnings if the contracts
are no longer effective or the forecasted transactions are not expected to
occur.
The Company also held pay-floating interest rate swaps to hedge the change
in fair value of the fixed rate debt related to fluctuations in interest rates.
These contracts are classified as fair value hedges and mature through October
2006. The hedged fixed rate debt and the pay-floating interest rate swaps are
adjusted to current market values through other income/expense. During fiscal
2002 and 2001, the market value adjustments for the debt hedged and pay-floating
interest rate swaps directly offset one another in other income/expense.
The following table represents the notional amount hedged, fair value of
the interest rate swaps outstanding at June 30, 2002 and 2001 included in other
assets/liabilities and the amount of net gain/loss either deferred through other
comprehensive income or
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized through other income/expense during fiscal 2002 and 2001.
(in millions) 2002 2001 Classification of net gain/loss
- ------------- ---- ---- -------------------------------
Pay-fixed interest rate swaps:
Notional amount $ 670.0 $ 270.0
Liabilities 9.8 6.9
Gain/(loss) (2.9) (6.9) Other comprehensive income
Pay-floating interest rate swaps:
Notional amount $ 577.8 $ 250.0
Assets 4.6 -
Liabilities 3.0 5.7
Gain/(loss) 7.3 (5.7) Other income/expense
The income/loss recorded on the pay-floating interest rate swaps is
directly offset by the change in fair value of the underlying debt. Both the
derivative instrument and the underlying debt are adjusted to market value at
the end of each period with any resulting income/loss recorded in other
income/expense.
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.
CURRENCY RISK MANAGEMENT. The Company conducts business in several major
international currencies and is subject to risks associated with changing
foreign exchange rates. The Company's objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes to allow
management to focus its attention on its business operations. Accordingly, the
Company enters into various contracts that change in value as foreign exchange
rates change to protect the value of existing foreign currency assets and
liabilities, commitments and anticipated foreign currency revenues and expenses.
The gains and losses on these contracts offset changes in the value of the
underlying transactions as they occur.
At June 30, 2002 and 2001, the Company held forward contracts expiring
through June 2003 and June 2002, respectively to hedge probable, but not firmly
committed, revenues and expenses. These hedging contracts are classified as cash
flow hedges and, accordingly, are adjusted to current market values through
other comprehensive income until the underlying transactions are recognized.
Upon recognition, such gains and losses are recorded in operations as an
adjustment to the recorded amounts of the underlying transactions in the period
in which these transactions are recognized. The principal currencies hedged are
the European euro, British pound, Swiss franc, Mexican peso, and the Thai bhat.
At June 30, 2002 and 2001, the Company also held forward contracts expiring
in July 2002 and July 2001, respectively to hedge the value of foreign currency
assets and liabilities. These forward contracts are classified as fair value
hedges and are adjusted to current market values through other income/expense,
directly offsetting the adjustment of the foreign currency asset or liability.
The following table represents the notional amount hedged, the value of the
forward contracts outstanding at June 30, 2002 and 2001 included in other assets
or liabilities and the amount of net gain/(loss) either deferred through other
comprehensive income or recognized through other income/expense during fiscal
2002 and 2001.
48
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions) 2002 2001 Classification of net gain/loss
- ------------- ---- ---- -------------------------------
Forward contracts - cash flow hedge:
Notional amount $ 262.3 $ 16.7
Assets 7.6 0.7
Liabilities 15.0 0.5
Gain/(loss) (7.6) 0.2 Other comprehensive income
Forward contracts - fair value hedge:
Notional amount $ 38.5 $ 44.1
Assets 0.2 0.1
Liabilities 0.4 0.2
Gain/(loss) (0.1) (0.1) Other income/expense
The income/loss recorded on the forward contract fair value hedge is offset
by the remeasurement adjustment on the foreign currency denominated asset or
liability. The settlement of the derivative instrument and the remeasurement
adjustment on the foreign currency denominated asset or liability are both
recorded in other income/expense at the end of each period.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and
equivalents, trade receivables, accounts payable, notes payable-banks, other
short-term borrowings and other accrued liabilities at June 30, 2002 and 2001,
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
$2,317.2 million and $1,905.9 million as compared to the carrying amounts of
$2,224.4 million and $1,876.9 million at June 30, 2002 and 2001, 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 as of June 30. The fair values are
based on quoted market prices for the same or similar instruments.
(in millions) 2002 2001
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
------ ----------- ------ -----------
Foreign currency
forward contracts $ 300.8 $ (7.7) $ 60.8 $ 0.1
Interest rate swaps $ 1,247.8 $ 4.4 $ 520.0 $ (12.6)
49
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
Consolidated U.S. income before income taxes and change in accounting (in
millions):
Fiscal Year Ended June 30,
--------------------------
2002 2001 2000
---- ---- ----
U.S. Based Operations $1,463.2 $1,125.6 $1,016.3
Non-U.S. Based Operations 238.1 206.6 125.5
-------- -------- --------
$1,701.3 $1,332.2 $1,141.8
======== ======== ========
The provision for income taxes before change in accounting consists of the
following (in millions):
Fiscal Year Ended June 30,
--------------------------
2002 2001 2000
---- ---- ----
Current:
Federal $ 287.1 $ 268.9 $ 242.0
State 23.8 26.8 25.2
Foreign 24.4 30.0 28.3
------- ------- -------
Total $ 335.3 $ 325.7 $ 295.5
Deferred:
Federal 208.5 126.9 108.3
State 29.8 17.9 15.4
Foreign 1.4 4.3 4.8
------- ------- -------
Total 239.7 149.1 128.5
------- ------- -------
Total provision $ 575.0 $ 474.8 $ 424.0
======= ======= =======
A reconciliation of the provision based on the Federal statutory income tax
rate to the Company's effective income tax rate before change in accounting is
as follows:
Fiscal Year Ended June 30,
--------------------------
2002 2001 2000
---- ---- ----
Provision at Federal
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 2.6 3.0 3.1
Foreign tax rates (3.2) (3.9) (2.1)
Nondeductible expenses 0.2 1.7 1.3
Other (0.8) (0.2) (0.2)
---- ---- ----
Effective income tax rate 33.8% 35.6% 37.1%
==== ==== ====
Provision has not been made for U.S. or additional foreign taxes on $453.8
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 in the
unlikely event of 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):
50
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, June 30,
2002 2001
---- ----
Deferred income tax assets:
Receivable basis difference $ 80.1 $ 66.1
Accrued liabilities 85.3 59.3
Net operating loss carryforwards 29.7 13.7
Other -- 18.6
---------- --------
Total deferred income tax assets $ 195.1 $ 157.7
Valuation allowance for deferred income tax assets (17.6) (8.3)
---------- --------
Net deferred income tax assets $ 177.5 $ 149.4
---------- --------
Deferred income tax liabilities:
Inventory basis differences (385.9) (234.7)
Property-related (275.1) (231.2)
Revenues on lease contracts (177.9) (185.3)
Other (192.2) (112.1)
---------- --------
Total deferred income tax liabilities $ (1,031.1) $ (763.3)
---------- --------
Net deferred income tax liabilities $ (853.6) $ (613.9)
========== ========
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
2002 2001
---- ----
Other current liabilities $(139.8) $ (8.5)
Deferred income taxes and other liabilities (713.8) (605.4)
------- -------
Net deferred income tax liabilities $(853.6) $(613.9)
======= =======
The Company had state net operating loss carryforwards of $595.0 million at
June 30, 2002. A valuation allowance of $17.6 million at June 30, 2002 has been
provided for the state net operating loss, as utilization of such carryforwards
within the applicable statutory periods is uncertain. The state net operating
loss carryforwards expire through 2022. Expiring state net operating loss
carryforwards and the required valuation allowances have been adjusted annually.
At June 30, 2002, the Company did not have any foreign tax credit carryforwards.
After application of the valuation allowance described above, the Company
anticipates no limitations will apply with respect to utilization of the net
deferred income tax assets described above.
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.
The total expense for employee retirement benefit plans (excluding defined
benefit plans, see below) was $59.0 million, $57.7 million and $47.2 million as
of June 30, 2002, 2001 and 2000, respectively.
DEFINED BENEFIT PLANS. The Company has several defined benefit plans covering
substantially all Scherer salaried and hourly employees. The Company's domestic
defined benefit plans provide defined benefits based on years of service and
level of
51
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 projected
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,
--------
2002 2001
---- ----
Change in projected benefit obligation:
Projected benefit obligation at
beginning of year $ 104.5 $ 100.0
Service cost 4.1 4.0
Interest cost 7.2 6.3
Plan participant contributions 1.3 0.7
Actuarial loss 6.1 0.6
Benefits paid (5.5) (1.7)
Translation 12.0 (5.4)
Curtailments (0.3) --
Plan amendments (0.6) --
------- -------
Projected benefit obligation at end
of year $ 128.8 $ 104.5
------- -------
June 30,
--------
2002 2001
---- ----
Change in plan assets:
Fair value of plan assets at
beginning of year $ 58.0 $ 64.9
Actual return on plan assets (0.1) (7.5)
Employer contributions 5.3 5.2
Plan participant contributions 1.3 0.7
Benefits paid (4.9) (1.8)
Translation 8.8 (3.5)
------- -------
Fair value of plan assets
at end of year $ 68.4 $ 58.0
======= =======
June 30,
--------
2002 2001
---- ----
Funded status $ (60.4) $ (46.5)
Unrecognized net actuarial loss 31.0 20.6
Unrecognized net transition
asset (0.3) (0.4)
Unrecognized prior service cost (0.5) 0.2
Other 0.1 0.1
------- -------
Net amount recognized $ (30.1) $ (26.0)
======= =======
Amounts recognized in the
Consolidated Balance Sheets:
Accrued benefit liability $ (30.1) $ (26.0)
------- -------
Net amount recognized $ (30.1) $ (26.0)
======= =======
52
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $123.5 million, $111.4 million and $63.2 million,
respectively, as of June 30, 2002 and $103.4 million, $95.6 million, and $56.8
million, respectively, as of June 30, 2001.
Components of the Company's net periodic benefit costs are as follows (in
millions):
For the Fiscal Year Ended June 30,
----------------------------------
2002 2001 2000
---- ---- ----
Components of net periodic benefit cost:
Service cost $ 4.1 $ 4.0 $ 4.6
Interest cost 7.2 6.3 5.7
Expected return on plan assets (4.8) (4.9) (6.2)
Net amortization and other(1) 0.7 0.7 2.0
------- ------- -------
Net amount recognized $ 7.2 $ 6.1 $ 6.1
======= ======= =======
(1) Amount represents primarily the amortization of unrecognized actuarial
losses, as well as the amortization of the transition obligation and prior
service costs.
For fiscal 2002 and 2001, the weighted average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.3% and 6.4%, expected return on plan assets
of 7.2% and 7.3% and rate of compensation increase of 4.0% and 3.9%,
respectively.
8. OFF BALANCE SHEET RISK
The Company formed Pyxis Funding for the sole purpose of acquiring a pool
of sales-type leases and the related leased equipment from Pyxis and selling the
lease receivables to Pyxis Funding II. Pyxis Funding is a wholly owned, special
purpose, bankruptcy-remote subsidiary of Pyxis. Pyxis Funding II was formed for
the sole purposes of acquiring lease receivables under sales-type leases from
Pyxis Funding and issuing Pyxis Funding II's notes secured by its assets to a
multi-seller conduit administered by a third-party bank. Pyxis Funding II is a
wholly owned, special purpose, bankruptcy-remote subsidiary of Pyxis Funding.
The transaction qualifies for sale treatment under SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
and, accordingly, the related receivables are not included in the Company's
consolidated financial statements. As required by U.S. generally accepted
accounting principles, the Company consolidates Pyxis Funding and does not
consolidate Pyxis Funding II, as Pyxis Funding II is a qualified special purpose
entity, as defined under SFAS 140. Both Pyxis Funding and Pyxis Funding II are
separate legal entities that maintain separate financial statements. The assets
of Pyxis Funding and Pyxis Funding II are available first and foremost to
satisfy the claims of their creditors. The investor in Pyxis Funding II's notes
had a principal balance of $95.4 million on August 31, 2002, and is provided
with credit protection in the form of 20% ($23.8 million)
over-collateralization.
At June 30, 2002, the Company had $280.0 million in committed receivables
sales facility programs through MSCC and CHF. MSCC and CHF were organized for
the sole purpose of buying receivables and selling those receivables to
multi-seller conduits administered by third party banks or to other third party
investors. MSCC and CHF were designed to be special purpose, bankruptcy-remote
entities. Although consolidated in accordance with generally accepted accounting
principles, MSCC and CHF are separate legal entities from the Company, Medicine
Shoppe, and Griffin. The sale of receivables by MSCC and CHF qualifies for sale
treatment under SFAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" and accordingly the related
receivables are not included in the Company's consolidated financial statements.
The total amount of receivables that have been sold under the MSCC program was
$8.8 million and $13.5 million at June 30, 2002 and 2001, respectively. There
were no outstanding sold receivables under the CHF program as of June 30, 2002
and 2001. Recourse is provided under the MSCC program by the requirement that
MSCC retain 20% subordinated interest in the sold receivables. Subordinated
interest at June 30, 2002 was $2.2 million. Recourse is provided under the CHF
program by the requirement that CHF retain a percentage subordinated interest in
the sold receivables. The percentage is determined based upon the composition of
the receivables sold. At June 30, 2002, no receivables had been sold under this
program and as a result no subordinated interest was outstanding.
53
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's aggregate cash flows related to these receivable transfers
were as follows during fiscal 2002 and 2001:
2002 2001
---- ----
Proceeds received upon transfer of receivables $ 295.4 $ 90.6
Cash collected in servicing the related
receivables 1.2 --
Proceeds received on subordinated interests 58.4 47.6
--------- ---------
Cash inflow to the consolidated Company $ 355.0 $ 138.2
Cash collections remitted to third-party
investor (257.2) (135.6)
--------- ---------
Net benefit to the Company's cash flow $ 97.8 $ 2.6
========= =========
Pyxis, MSCC and CHF are required to repurchase any receivables sold only if
it is determined that the representations and warranties with regard to the
related receivables were not accurate on the date sold.
The Company has entered into operating lease agreements with several banks
for the construction of various new facilities and equipment. The initial terms
of the lease agreements have varied maturity dates ranging from November 2003
through October 2008, with optional renewal periods, generally five years. In
the event of termination, the Company is required (at its election) to either
purchase the facility or vacate the property and make reimbursement for a
portion of any unrecovered property cost. The maximum portion of unrecovered
property costs that the Company could be required to reimburse does not exceed
the amount expended to acquire and/or construct the facilities. As of June 30,
2002, the amount expended to acquire and/or construct the facilities was $479.7
million. The agreements provide for maximum fundings of $604.1 million, which
is greater than the estimated cost to complete the construction projects. The
required lease payments equal the interest expense for the period on the amounts
drawn. Lease payments under the agreements are based primarily upon LIBOR and
are subject to interest rate fluctuations. As of June 30, 2002, the weighted
average interest rate on the agreements approximated 2.6%. The Company's minimum
annual lease payments under the agreements at June 30, 2002 were approximately
$13.2 million.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases (excluding those
referenced in Note 8) having initial or remaining non-cancelable lease terms in
excess of one year at June 30, 2002 are:
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Minimum rental payments $ 52.9 $ 44.5 $ 35.7 $ 26.0 $ 18.4 $ 34.6
Rental expense relating to operating leases (including those referenced in
Note 8) was approximately $77.6 million, $78.4 million, and $76.1 million in
fiscal 2002, 2001 and 2000, respectively. Sublease rental income was not
material for any period presented herein.
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's 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 merged with a
subsidiary of the Company on February 3, 1999, agreed to indemnify Baxter, and
will defend and indemnify Baxter Healthcare Corporation ("BHC"), as contemplated
by the agreements between Baxter and Allegiance, for all expenses and potential
liabilities associated with claims arising from the Allegiance Business,
including certain claims of alleged personal injuries as a result of exposure to
natural rubber latex gloves. The Company is not a party to any of the lawsuits
and has not agreed to pay any settlements to the plaintiffs.
As of June 30, 2002, there were approximately 380 lawsuits against BHC
and/or Allegiance involving allegations of sensitization to natural rubber latex
products. Some of the cases are now proceeding to trial. The total dollar amount
of potential damages cannot be reasonably quantified. Some plaintiffs plead
damages in extreme excess of what they reasonably can expect to recover, some
plead a modest amount, and some do not include a request for any specific dollar
amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds twenty-five. Based on
54
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the significant differences in the range of damages sought and based on the
multiple number of defendants in these lawsuits, Allegiance cannot reasonably
quantify the total amount of possible/potential damages; therefore Allegiance
and the Company do not believe that these numbers should be considered as an
indication of either reasonably possible or probable liability.
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in approximately eight hundred cases. As of June 30, 2002, fewer
than half of those lawsuits remain pending. Nearly half of the lawsuits that
have been resolved were concluded without any liability to Baxter/Allegiance.
During the fiscal year ended June 30, 2002, Allegiance began settling some of
these lawsuits with greater frequency. No individual claim has been settled for
a material amount, nor have all the settled claims, in the aggregate, comprised
a material amount. Due to the number of claims filed and the ongoing defense
costs that will be incurred, Allegiance believes it is probable that it will
incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity and results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the top end of the
range reflecting virtually no insurance coverage, which the Company believes is
an unlikely scenario given the insurance coverage in place). The Company
believes a substantial portion of any liability will be covered by insurance
policies Allegiance has with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency. The Company and Allegiance continue to believe that
insurance recovery is probable.
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
clean-up 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 currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's consolidated
financial statements.
10. SHAREHOLDERS' EQUITY
At June 30, 2002 and 2001, the Company's authorized capital shares
consisted of (a) 750 million Class A common shares, without par value; (b) 5
million Class B common shares, without par value; and (c) 0.5 million 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, 2002 and 2001.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. As of
June 30, 2002, 5.1 million Common Shares having an aggregate cost of
approximately $308.3 million had been repurchased through this plan. Subsequent
to the end of fiscal 2002, 3.2 million Common Shares having an aggregated cost
of approximately $191.7 million had been repurchased through this plan. The
Company completed this program in August 2002. The repurchased shares will be
held as treasury shares and used for general corporate purposes.
In March 2000, the Company's Board of Directors authorized the repurchase
of Common Shares up to an aggregate amount of $750.0 million. Approximately 7.0
million Common Shares, having an aggregate cost of approximately $440.2 million
had been repurchased via an accelerated share repurchase program and placed into
treasury shares. In November 2000, the Company's Board of Directors rescinded
the remainder of this repurchase program.
During fiscal 2001, the Company issued approximately 0.8 million Common
Shares for which it received aggregate proceeds of $47.5 million, which were
used for general corporate purposes.
During the fiscal quarter ended June 30, 2001, the Company filed a shelf
registration statement on Form S-4 increasing the number of common shares
available for issuance in connection with future business combinations to 15.0
million Common Shares.
11. 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
55
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 hospital
and acute care sectors 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 2002, the Company's two largest customers, CVS and Novation,
individually accounted for 13% and 11% of operating revenue, respectively. These
same two customers individually accounted for 12% and 10% of operating revenue,
respectively, during fiscal 2001. Additionally, a third customer, Premier,
accounted for 10% of operating revenue during fiscal 2001. During fiscal 2000,
the Company's two largest customers, Premier and Novation, individually
accounted for 11% and 10% of operating revenue, respectively. These customers
are serviced primarily through the Pharmaceutical Distribution and Provider
Services and Medical-Surgical Products and Services segments. During fiscal
2002, two customers, CVS and Walgreens, individually accounted for 60% and 20%,
respectively, of bulk deliveries. These same two customers accounted for 46% and
22% of bulk deliveries, respectively, during fiscal 2001 and 42% and 30% of bulk
deliveries, respectively, during fiscal 2000. Additionally, Eckerd accounted for
16% of bulk deliveries during fiscal 2000.
At June 30, 2002, CVS and Walgreens accounted for 18% and 8%, respectively,
of the Company's gross trade receivable balance. At June 30, 2001, these same
two customers accounted for 21% and 5%, respectively of the Company's total
trade receivable balance. Premier and Novation are group purchasing
organizations ("GPO"). The Company's trade receivable balances are with
individual members of the GPO and therefore no significant concentration of
credit risk exists with these organizations.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains several stock incentive plans (the "Plans") for the
benefit of certain officers, directors and employees. Options granted generally
vest over 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.
Certain plans are subject to shareholder approval while other plans have been
authorized solely by the Board of Directors (the "Board"). The following is a
description of plans that have not been authorized by shareholders:
Broadly-based Equity Incentive Plan, as amended
The Broadly-based Equity Incentive Plan was adopted by the Board effective
November 15, 1999 and further amended pursuant to resolutions of the Board
adopted on August 8, 2001. The plan provides for grants in the form of
Nonqualified Stock Options, Restricted Shares, and Restricted Share Units to
employees of the Company. The aggregate number of Common Shares authorized for
issuance pursuant to the plan is 36.0 million shares with generally no more than
10% of the authorized amount issuable in the form of Restricted Shares and
Restricted Share Units having a restriction period of less than three years.
The Broadly-based Equity Incentive Plan is not qualified under Section
401(a) of the Internal Revenue Code and is not subject to any of the provisions
of the Employee Retirement Income Security Act of 1974 ("ERISA").
Outside Directors Equity Incentive Plan
The Outside Directors Equity Incentive Plan was adopted by the Board
effective May 10, 2000. The plan reserves and makes available for distribution
an aggregate of 1.5 million shares for grants in the form of Nonqualified Stock
Options and Restricted Shares to members of the Board who do not serve as
employees of the Company. The plan is not qualified under Section 401(a) of the
Internal Revenue Code and is not subject to any of the provisions of ERISA.
56
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes plans at June 30, 2002:
Outstanding
-------------------------------
Shares Available
Weighted Average for Future
Options Exercise Price Issuance
in millions) per Share (in millions)
------------ ---------------- ----------------
Plans approved by
shareholders 13.5 $ 44.15 20.9
Plans not approved by
shareholders 14.3 $ 55.86 23.2
Plans acquired through
acquisition 9.3 $ 24.15 --
---- --------- ----
Balance at June 30, 2002 37.1 $ 43.64 44.1
==== ========= ====
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1999 through June 30, 2002, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per share amounts):
Weighted Average
Options Exercise Price
Outstanding per Share
----------- ---------
Balance at June 30, 1999 34.8 $21.37
Granted 10.4 31.24
Exercised (6.5) 14.49
Canceled (1.5) 36.30
Other 0.2 3.55
------ ------
Balance at June 30, 2000 37.4 $24.53
Granted 7.0 64.76
Exercised (10.3) 17.35
Canceled (1.3) 41.99
Other 0.5 34.12
------ ------
Balance at June 30, 2001 33.3 $34.83
Granted 8.7 68.02
Exercised (4.5) 23.40
Canceled (1.4) 51.75
Other 1.0 47.32
------ ------
Balance at June 30, 2002 37.1 $43.64
====== ======
57
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information concerning stock options outstanding as of June 30,
2002 is presented below:
Outstanding Exercisable
------------------------------------------------ --------------------------------
Weighted
average Weighted Weighted
Range of exercise remaining average average
prices Options contractual exercise price Options exercise price
per Share (in millions) life in years per share (in millions) per share
--------- ------------- ------------- -------------- ------------- --------------
$ 0.92 - $ 25.84 7.9 4.4 $16.07 7.9 $16.07
$26.12 - $ 30.34 1.6 6.0 28.12 1.5 28.11
$30.67 - $ 31.17 7.7 7.4 31.17 1.0 31.17
$31.46 - $ 66.08 11.9 7.6 55.43 5.7 45.87
$66.09 - $132.72 8.0 9.4 68.57 -- --
- ---------------- ---- --- ------ ---- ------
$ 0.92 - $132.72 37.1 7.2 $43.64 16.1 $29.03
---- --- ------ ---- ------
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 earnings and diluted earnings per Common Share would have been
reduced as follows:
2002 2001 2000
---- ---- ----
Net earnings $ (71.6) $ (80.3) $ (24.7)
Diluted earnings per
share $ (0.16) $ (0.18) $ (0.06)
During fiscal 2001, stock options outstanding under the previous Bindley
plans vested immediately on the merger date. These accelerated grants increased
the fiscal 2001 pro forma effect on net earnings and diluted earnings per Common
Share by $31.9 million and $0.07 per share, respectively.
Giving retroactive effect to conversion of stock options related to
mergers and stock splits, the weighted average fair value of options granted
during fiscal 2002, 2001, and 2000 was $25.95, $23.42, and $11.68, respectively.
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,
--------------
2002 2001 2000
---- ---- ----
Risk-free interest rate 3.84% 4.66% 6.25%
Expected life 5 years 4 years 4 years
Expected volatility 36% 38% 37%
Dividend yield 0.15% 0.15% 0.18%
The market values of restricted shares and restricted share units awarded
by the Company are recorded in the "Other" component of shareholders' equity in
the accompanying consolidated balance sheets. The restricted shares are
amortized to expense over the period in which participants perform services,
generally one to seven years. The restricted share units are generally amortized
over a five-year vesting period. As of June 30, 2002, approximately 0.6 million
shares and units remained restricted and subject to forfeiture.
The Company has employee stock purchase plans under which the sale of 12.0
million of the Company's Common Shares 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, 2002, subscriptions of $0.4 million were
outstanding. Through June 30, 2002, 1.4 million shares had been issued to
employees under the plans.
13. EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
and diluted earnings per share for the three years ending June 30, 2002:
58
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
Weighted-average shares-basic 450.1 443.2 438.8
Effect of dilutive securities:
Employee stock options 9.8 12.3 9.9
----- ----- -----
Weighted-average shares-diluted 459.9 455.5 448.7
===== ===== =====
The potentially dilutive employee stock options that were antidilutive for
fiscal 2002, 2001 and 2000 were 0.9 million, 5.7 million and 5.6 million,
respectively.
14. CHANGE IN ACCOUNTING
In the first quarter of fiscal 2002, the method of recognizing revenue for
pharmacy automation equipment was changed from recognizing revenue when the
units were delivered to the customer to recognizing revenue when the units are
installed at the customer site. Management believes that the change in
accounting method will provide for a more objectively determinable method of
revenue recognition. In addition, the Company has implemented other changes to
better service its customers and leverage operational efficiencies. The Company
recorded a cumulative effect of change in accounting of $70.1 million (net of
tax of $44.6 million) in the consolidated statement of earnings during the first
quarter of fiscal 2002. The after tax dilutive impact of the cumulative effect
is $0.15 per diluted share. The effect of the change for the fiscal year ended
June 30, 2002 was to reduce net earnings before the cumulative effect by
approximately $18.6 million. This change reduced diluted earnings per share by
$0.04 for the fiscal year ended June 30, 2002. The pro-forma effect of this
accounting change on prior periods has not been presented as the required
information is not available.
15. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill
for the three years ended June 30, 2002, in total and by reporting segment:
Pharmaceutical Medical-
Distribution Surgical Pharmaceutical Automation and
And Provider Products Technologies and Information
(in millions) Services and Services Services Services Total
------------- -------- ------------ -------- -------- -----
Balance at June 30, 1999 $ 90.5 $ 648.1 $ 184.0 $ 35.2 $ 957.8
Goodwill acquired, net of purchase price
adjustments and other 72.1 9.6 16.6 11.3 109.6
Amortization (4.5) (28.8) (5.9) (2.3) (41.5)
-------- -------- -------- -------- --------
Balance at June 30, 2000 $ 158.1 $ 628.9 $ 194.7 $ 44.2 $1,025.9
======== ======== ======== ======== ========
Goodwill acquired, net of purchase price
adjustments and other 1.0 74.0 106.6 -- 181.6
Amortization (6.8) (31.2) (8.4) (2.5) (48.9)
-------- -------- -------- -------- --------
Balance at June 30, 2001 $ 152.3 $ 671.7 $ 292.9 $ 41.7 $1,158.6
======== ======== ======== ======== ========
Goodwill acquired, net of purchase price
adjustments and other 7.5 3.7 346.5 9.0 366.7
-------- -------- -------- -------- --------
Balance at June 30, 2002 $ 159.8 $ 675.4 $ 639.4 $ 50.7 $1,525.3
======== ======== ======== ======== ========
All intangible assets for the periods presented are subject to
amortization. Intangible assets are being amortized using the straight-line
method over periods that range from five to forty years. The detail of other
intangible assets by class for the three years ended June 30, 2002 is as
follows:
59
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Accumulated Net
(in millions) Intangible Amortization Intangible
------------- ---------- ------------ ----------
June 30, 2000
Trademarks and patents $ 32.5 $ 20.1 $ 12.4
Non-compete agreements 21.5 17.8 3.7
Other 7.5 5.8 1.7
------- ------- -------
Total $ 61.5 $ 43.7 $ 17.8
------- ------- -------
June 30, 2001
Trademarks and patents $ 29.0 $ 19.2 $ 9.8
Non-compete agreements 20.2 17.8 2.4
Other 13.0 8.4 4.6
------- ------- -------
Total $ 62.2 $ 45.4 $ 16.8
------- ------- -------
June 30, 2002
Trademarks and patents $ 30.0 $ 20.4 $ 9.6
Non-compete agreements 20.4 19.1 1.3
Other 16.8 8.9 7.9
------- ------- -------
Total $ 67.2 $ 48.4 $ 18.8
------- ------- -------
There were no significant acquisitions of other intangible assets for the
periods presented. Amortization expense for the years ended June 30, 2002, 2001
and 2000 (including goodwill amortization in fiscal 2001 and 2000) was $3.0
million, $50.6 million and $46.1 million, respectively. Amortization expense is
estimated to be:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Amortization expense $ 2.4 $ 1.9 $ 1.4 $ 1.2 $ 1.1
16. SEGMENT INFORMATION
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,
radiopharmaceuticals, 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.
The Medical-Surgical Products and Services segment involves the manufacture
of medical, surgical and laboratory products and the distribution of these
products as well as products not manufactured internally to hospitals, physician
offices, surgery centers and other healthcare providers.
The Pharmaceutical Technologies and Services segment provides services to
the healthcare industry through the design of unique drug delivery systems,
liquid fill capsule contract manufacturing, comprehensive packaging,
pharmaceutical development and commercialization 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.
60
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables include revenue and operating earnings for each
business segment and reconciling items necessary to agree to amounts reported in
the consolidated financial statements for the fiscal years ended June 30, 2002,
2001 and 2000:
(in millions) Revenue
-------
2002 2001 2000
---- ---- ----
Operating revenue:
Pharmaceutical Distribution and Provider Services(1) $36,359.8 $31,185.8 $23,849.6
Medical-Surgical Products and Services 6,255.5 5,902.6 4,960.2
Pharmaceutical Technologies and Services(2) 1,306.6 1,177.8 1,079.8
Automation and Information Services 560.2 472.2 402.4
Other (87.8) (78.3) (34.2)
--------- --------- ---------
Total operating revenue $44,394.3 $38,660.1 $30,257.8
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 6,741.4 9,287.5 8,092.1
--------- --------- ---------
Total revenue $51,135.7 $47,947.6 $38,349.9
========= ========= =========
Operating Earnings
------------------
2002 2001 2000
---- ---- ----
Pharmaceutical Distribution and Provider Services $1,087.8 $ 883.7 $ 674.6
Medical-Surgical Products and Services 539.8 442.4 368.0
Pharmaceutical Technologies and Services 259.8 219.0 200.6
Automation and Information Services 209.2 168.4 138.0
Corporate(3) (262.8) (226.4) (100.7)
-------- -------- --------
Total operating earnings $1,833.8 $1,487.1 $1,280.5
======== ======== ========
The following tables include depreciation and amortization expense as well
as capital expenditures for the fiscal years ended June 30, 2002, 2001 and 2000
and assets as of June 30, 2002, 2001 and 2000 for each segment and reconciling
items necessary to total to amounts reported in the consolidated financial
statements:
61
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization Expense
-------------------------------------
2002 2001 2000
---- ---- ----
Pharmaceutical Distribution and Provider Services $ 63.2 $ 63.3 $ 53.0
Medical-Surgical Products and Services 87.7 120.4 120.5
Pharmaceutical Technologies and Services 63.2 60.6 48.9
Automation and Information Services 14.3 11.2 15.8
Corporate 15.1 25.1 18.8
--------- --------- ---------
Total depreciation and amortization expense(4) $ 243.5 $ 280.6 $ 257.0
========= ========= =========
Capital Expenditures
--------------------
2002 2001 2000
---- ---- ----
Pharmaceutical Distribution and Provider Services $ 80.5 $ 87.2 $ 99.2
Medical-Surgical Products and Services 88.0 89.7 109.8
Pharmaceutical Technologies and Services 101.8 157.2 105.1
Automation and Information Services 15.1 7.1 17.0
--------- --------- ---------
Total capital expenditures $ 285.4 $ 341.2 $ 331.1
========= ========= =========
Assets
------
2002 2001 2000
---- ---- ----
Pharmaceutical Distribution and Provider Services $ 8,490.9 $ 7,699.5 $ 6,273.3
Medical-Surgical Products and Services 3,236.9 3,208.3 2,899.5
Pharmaceutical Technologies and Services 2,120.9 1,496.1 1,291.7
Automation and Information Services 1,211.3 1,212.5 1,044.5
Corporate(5) 1,378.0 1,026.0 515.1
--------- --------- ---------
Total assets $16,438.0 $14,642.4 $12,024.1
========= ========= =========
(1) The Pharmaceutical Distribution and Provider Services segment's
operating revenues are derived from three main product categories.
These product categories and their respective contributions to
operating revenue are as follows:
Product Category 2002 2001 2000
---------------- ---- ---- ----
Pharmaceuticals and Healthcare Products 93% 93% 93%
Specialty Pharmaceutical Products 3% 4% 4%
Other Products & Services 4% 3% 3%
--- --- ---
Total 100% 100% 100%
=== === ===
(2) The Pharmaceutical Technologies and Services segment's operating
revenues are derived from three main product categories. These product
categories and their respective contributions to operating revenue are
as follows:
Product Category 2002 2001 2000
----------------- ---- ---- ----
Manufactured Products 67% 70% 68%
Packaged Products 29% 28% 30%
Other Products & Services 4% 2% 2%
--- --- ---
Total 100% 100% 100%
=== === ===
(3) Corporate-operating earnings primarily consist of special charges of
$138.6 million, $124.9 million, and $64.7 million for the fiscal years
ended June 30, 2002, 2001 and 2000, respectively, and unallocated
corporate administrative expenses and investment spending.
(4) Total depreciation and amortization expense declined in fiscal 2002 as
compared to fiscal 2001 as a result of the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets" as of July 1, 2001. Under SFAS
No. 142, purchased goodwill and intangible assets with indefinite
lives are no longer amortized. See additional information in Notes 1
and 15.
(5) Corporate-assets include primarily corporate cash and cash
equivalents, corporate property and equipment, net, and unallocated
deferred taxes.
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,
---------------------------------- --------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
United States $50,185.0 $46,957.2 $37,368.4 $ 1,416.6 $ 1,387.0
International 950.7 990.4 981.5 477.8 451.3
--------- --------- --------- --------- ---------
Total $51,135.7 $47,947.6 $38,349.9 $ 1,894.4 $ 1,838.3
========= ========= ========= ========= =========
Long-lived assets include property and equipment, net of accumulated
depreciation.
62
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 2002 and 2001 have been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2002
Revenue:
Operating revenue $ 9,865.4 $11,221.7 $11,541.3 $11,765.9
Bulk deliveries to customer warehouses 1,908.0 1,870.4 1,700.7 1,262.3
--------- --------- --------- ---------
Total revenue $11,773.4 $13,092.1 $13,242.0 $13,028.2
Gross margin $ 914.7 $ 1,000.5 $ 1,068.5 $ 1,062.5
Selling, general and administrative
expenses $ 502.4 $ 514.0 $ 536.0 $ 521.4
Earnings before cumulative effect of
change in accounting $ 246.4 $ 283.3 $ 300.3 $ 296.3
Cumulative effect of change
in accounting (70.1) -- -- --
--------- --------- --------- ---------
Net earnings $ 176.3 $ 283.3 $ 300.3 $ 296.3
Earnings before cumulative effect
of change in accounting per
Common Share:
Basic $ 0.55 $ 0.63 $ 0.67 $ 0.66
Diluted $ 0.53 $ 0.62 $ 0.66 $ 0.64
--------- --------- --------- ---------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2001
Revenue:
Operating revenue $ 8,510.9 $ 9,560.7 $10,334.2 $10,254.3
Bulk deliveries to customer warehouses 2,529.0 2,365.9 2,245.9 2,146.7
--------- --------- --------- ---------
Total revenue $11,039.9 $11,926.6 $12,580.1 $12,401.0
Gross margin $ 804.2 $ 885.4 $ 946.1 $ 975.9
Selling, general and administrative
expenses $ 455.3 $ 479.3 $ 497.3 $ 518.8
Goodwill amortization $ 12.1 $ 12.4 $ 12.6 $ 11.8
Net earnings $ 190.0 $ 221.2 $ 192.9 $ 253.3
Net earnings per Common Share:
Basic $ 0.43 $ 0.50 $ 0.43 $ 0.57
Diluted $ 0.42 $ 0.49 $ 0.42 $ 0.55
63
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 2, merger-related costs and other special charges were
recognized in various quarters in fiscal 2002 and 2001. The following table
summarizes the impact of such costs 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 2002
Net earnings $ (7.6) $(10.3) $(24.7) $(44.5)
Diluted net earnings per Common Share $(0.02) $(0.02) $(0.05) $(0.10)
------ ------ ------ ------
Fiscal 2001
Net earnings $ (6.0) $ (6.0) $(61.8) $(11.5)
Diluted net earnings per Common Share $(0.01) $(0.01) $(0.14) $(0.03)
------ ------ ------ ------
18. SUBSEQUENT EVENT / PENDING TRANSACTIONS
On June 14, 2002, the Company announced that it had entered into a
definitive agreement to acquire Syncor International Corporation ("Syncor"), a
Woodland Hills, California-based company which is a leading provider of nuclear
pharmacy services. The acquisition of Syncor is a stock-for-stock merger
transaction and is expected to be completed by the end of the second quarter of
fiscal 2003, subject to customary conditions, including Syncor stockholder
approval. At the completion of the acquisition, each Syncor share will be
converted to 0.52 of a Common Share. Based on the closing sale price of a Common
Share as of September 27, 2002, the value of the Common Shares to be received by
all of the Syncor stockholders in connection with the merger is approximately
$900 million.
On August 7, 2002, the Company's Board of Directors authorized the
repurchase of Common Shares of up to an aggregate $500 million. As of August 31,
2002, 1.1 million Common Shares having an aggregate cost of approximately $73.1
million had been repurchased through this plan. The repurchased shares will be
held as treasury shares and used for general corporate purposes.
64
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 8, 2002, the Board of Directors of the Company, upon the
recommendation of its Audit Committee, dismissed Arthur Andersen LLP ("Arthur
Andersen" or "AA") as the Company's independent public accountants and engaged
Ernst and Young LLP ("E&Y") to serve as the Company's independent public
accountants for the fiscal year ending June 30, 2002.
Arthur Andersen's reports on the Company's consolidated financial
statements for each of the years ended June 30, 2001 and 2000 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
In connection with its audits for the Company's fiscal years ended June 30,
2001 and 2000 and through May 8, 2002, there were no disagreements between the
Company and Arthur Andersen on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to AA's satisfaction, would have caused AA to make reference to the
subject matter in connection with AA's report on the Company's consolidated
financial statements for such years; and there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Arthur Andersen with a copy of the foregoing
disclosures. Attached as Exhibit 16.01 is a copy of AA's letter, dated May 9,
2002, stating its agreement with such statements.
During the fiscal years ended June 30, 2001 and 2000 and through May 8,
2002, the Company did not consult E&Y with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matters or reportable events
listed in Items 304(a)(2)(i) and (ii) of Regulation S-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 2002 Annual Meeting of
Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS."
Information with respect to Executive Officers of the Company appears in
Part I of this report.
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."
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."
65
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K, AND
CONTROLS AND PROCEDURES
(a)(1) The following financial statements are included in Item 8 of this report:
PAGE
----
Independent Auditors' Reports ................................... 28
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 2002, 2001 and 2000 .................................. 33
Consolidated Balance Sheets at June 30, 2002 and 2001 ........... 34
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 2002, 2001 and 2000 ...................... 35
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2002, 2001 and 2000 .................................. 36
Notes to Consolidated Financial Statements ...................... 37
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts.................. 73
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in notes thereto.
(a)(3) Exhibits required by Item 601 of Regulation S-K:
Exhibit
Number Exhibit Description
- ------ -------------------
3.01 Amended and Restated Articles of Incorporation of the Registrant, as
amended (1) and (20)
3.02 Amended and Restated Code of Regulations, as amended(1) and (29)
4.01 Specimen Certificate for the Registrant's Class A common shares (33)
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 and 6.75% Notes Due 2011(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)
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)
4.07 Form of Debt Securities of the Registrant (32)
10.01 Stock Incentive Plan of the Registrant, as amended(7)*
66
Exhibit
Number Exhibit Description
- ------ -------------------
10.02 Outside Directors Equity Incentive Plan(21)*
10.03 Directors' Stock Option Plan of the Registrant, as amended and
restated(7)*
10.04 Amended and Restated Equity Incentive Plan of the Registrant, as
amended ((16), except for the First Amendment which is included as an
exhibit to this Annual Report on Form 10-K)(33)*
10.05 Form of Nonqualified Stock Option Agreement, as amended(16)*
10.06 Form of Restricted Shares Agreement, as amended(16)*
10.07 Form of Directors' Stock Option Agreement, as amended(16)*
10.08 Cardinal Health, Inc. Directors Deferred Compensation Plan(17)*
10.09 Allegiance Corporation 1996 Incentive Compensation Program(8)*
10.10 Allegiance Corporation 1998 Incentive Compensation Program(8)*
10.11 Allegiance Corporation 1996 Outside Director Incentive Corporation
Plan(8)*
10.12 R.P. Scherer Corporation 1997 Stock Option Plan(9)*
10.13 R.P. Scherer Corporation 1990 Nonqualified Performance Stock Option
Plans(9)*
10.14 Cardinal Health, Inc. Performance-Based Incentive Compensation Plan,
as amended(10) and (28)*
10.15 Cardinal Health, Inc. Incentive Deferred Compensation Plan, as
amended(11)*
10.16 Form of Agreement, dated February 9, 2000, between the Registrant and
each of Messrs. Ford, Miller and Rucci(23)*
10.17 Agreement, dated February 9, 2000, between the Registrant and George
L. Fotiades(23)*
10.18 Agreement, dated February 9, 2000, between the Registrant and James
F. Millar(23)*
10.19 Agreement, dated July 1, 1999, between the Registrant and Stephen S.
Thomas, as amended(19) and (23)*
10.20 Form of Indemnification Agreement between the Registrant and
individual Directors(12)*
10.21 Form of Indemnification Agreement between the Registrant and
individual Officers(12)*
10.22 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)*
10.23 Agreement dated as of March 16, 2000 between the Registrant and
Credit Suisse Financial Products(23)
10.24 364-Day Credit Agreement dated as of March 28, 2002 among the
Registrant, certain subsidiaries of the Registrant, certain lenders,
and Bank One, NA, as Administrative Agent, Bank of America N.A., as
Syndication Agent, Credit Suisse First Boston, as Documentation
Agent, Duetsche Banc Alex. Brown Inc., as Documentation Agent, First
Union National Bank, as Documentation Agent and Banc One Capital
Markets, Inc., as Lead Arranger and Book Manager(31)
10.25 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(13) and
(16)
67
Exhibit
Number Exhibit Description
- ------ -------------------
10.26 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., as amended(14) and (16)
10.27 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),(13) and (14)
10.28 Pharmaceutical Services Agreement, dated as of August 1, 1996, as
amended, between Kmart Corporation and Cardinal Distribution(15) and
(16)
10.29 Wholesale Supply Agreement dated as of August 10, 2000 between the
Registrant and CVS Meridian, Inc.(23)
10.30 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(16)
10.31 Partnership Agreement of R.P. Scherer GMBH and Co. KG(5)
10.32 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 and SA, as Syndication Agent, Citibank, N.A., as
Co-Documentation Agent, and Credit Suisse First Boston, as
Co-Documentation Agent(16)
10.33 Bindley Western Industries, Inc. 1993 Stock Option and Incentive Plan
(22)*
10.34 Bindley Western Industries, Inc. 2000 Stock Option and Incentive Plan
(22)*
10.35 Executive Agreement among William E. Bindley, Bindley Western
Industries, Inc. and the Company dated as of December 2, 2000(25)*
10.36 Form of Termination Benefits Agreement between William E. Bindley and
Bindley Western Industries, Inc. dated April 1, 1996(24)*
10.37 Change in Control Severance Agreement between Allegiance Corporation
and Kathy Brittain White(26) (and the Agreement between the Company
and Kathy Brittain White dated as of February 9, 2000(27)) *
10.38 Form of Outside Directors' Stock Option Agreement, as amended(30)*
10.39 Nonqualified Stock Option Agreement, dated November 19, 2001, between
the Registrant and Robert D. Walter(30)*
10.40 Cardinal Health Deferred Compensation Plan, amended and restated
effective January 1, 2002(30)*
10.41 Form of Restricted Share Units Agreement, dated December 31, 2001
between the Registrant and each of Messrs. Ford, Miller and
Rucci(30)*
10.42 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and George L. Fotiades(30)*
10.43 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and James F. Millar(30)*
10.44 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and Stephen S. Thomas(30)*
10.45 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and Kathy Brittain White(30)*
10.46 Employment Agreement, dated November 20, 2001, between the Registrant
and Robert D. Walter(30)*
10.47 Restricted Share Units Agreement, dated November 20, 2001, between
the Registrant and Robert D. Walter(30)*
10.48 Restricted Share Units Agreement, dated October 15, 2001, between the
Registrant and Robert D. Walter*
10.49 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and Robert D. Walter*
10.50 Restricted Share Units Agreement, dated February 1, 2002, between the
Registrant and Robert D. Walter*
10.51 Restricted Share Units Agreement, dated February 1, 2002, between the
Registrant and Robert D. Walter*
10.52 Broadly-based Equity Incentive Plan of the Registrant, as amended
10.53 Restricted Share Units Agreement, dated May 10, 2002, between the
Registrant and Paul S. Williams*
10.54 Restricted Share Units Agreement, dated April 2002, between the
Registrant and Stephen Thomas*
16.01 Letter of Arthur Andersen LLP required by Item 304 of Regulation S-K
(29)
18.01 Letter Regarding Change in Accounting Principle(29)
21.01 List of subsidiaries of the Registrant
23.01 Consent of Ernst and Young LLP
23.02 Solely due to the closure of Arthur Andersen LLP's Columbus, Ohio
office, after reasonable efforts, the Registrant was unable to obtain
the written consent of Arthur Andersen LLP to incorporate by
reference its report dated July 27, 2001
23.03 Consent of PricewaterhouseCoopers LLP
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. 1-11373) and incorporated herein by reference.
68
(2) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (File No. 1-11373) 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. 1-11373) 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. 1-11373) 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. 1-11373) 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) 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. 1-11373) and incorporated
herein by reference.
(11) Included as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 333-90423) and incorporated herein by reference.
(12) 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. 1-11373) and
incorporated herein by reference.
(13) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996 (File No. 1-11373) and incorporated
herein by reference.
(14) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 (File No. 1-11373) and incorporated
herein by reference.
(15) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (File No. 1-11373) and
incorporated herein by reference.
(16) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001 (File No. 1-11373) and incorporated
herein by reference.
(17) Included as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 333-90415) and incorporated herein by reference.
(18) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 (File No. 1-11373) and incorporated
herein by reference.
(19) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 (File No. 1-11373) and incorporated
herein by reference.
(20) Included as an exhibit to the Registrant's Registration Statement on Form
S-4 (No. 333-53394) and incorporated herein by reference.
69
(21) Included as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 333-38192) and incorporated herein by reference.
(22) Included as an exhibit to the Company's Post-Effective Amendment No. 1 of
Form S-8 to Form S-4 Registration Statement (No. 333-53394) and
incorporated herein by reference.
(23) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000 (File No. 1-11373) and incorporated
herein by reference.
(24) Included as an exhibit to Bindley Western Industries, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 (File No. 0-11355)
and incorporated herein by reference.
(25) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 (File No. 1-11373) and incorporated
herein by reference.
(26) Included as an exhibit to Allegiance Corporation's Form S-1/A filed with
the Commission on September 30, 1996 (File No. 333-12525) and incorporated
herein by reference.
(27) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2000 (File No. 1-11373) and incorporated
herein by reference.
(28) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 (File No. 1-11373) and incorporated
herein by reference.
(29) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 (File No. 1-11373) and
incorporated herein by reference.
(30) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001 (File No. 1-11373) and
incorporated herein by reference.
(31) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 (File No. 1-11373) and
incorporated herein by reference.
(32) Included as an exhibit to the Registrant's Registration Statement on Form
S-4 (No. 333-30889) and incorporated herein by reference.
(33) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001 (file No. 1-11373) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On May 9, 2002, the Registrant filed a Current Report on Form 8-K under Item 4
and Item 7. Under Item 4, the Registrant disclosed that the Board of Directors
of the Registrant, on May 8, 2002, upon the recommendation of its Audit
Committee, dismissed Arthur Andersen LLP as the Registrant's independent public
accountants and engaged Ernst and Young LLP to serve as the Registrant's
independent public accountants for the fiscal year ending June 30, 2002. Under
Item 7, the Registrant included the letter from Arthur Andersen LLP to the
Securities and Exchange Commission dated May 9, 2002.
(c) Controls and Procedures
Not applicable.
70
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, on September 30, 2002.
CARDINAL HEALTH, INC.
By: /s/ Robert D. Walter
----------------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
I, Richard J. Miller, Executive Vice President and Chief Financial Officer,
of Cardinal Health, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, that:
1. I have reviewed this annual report on Form 10-K of Cardinal Health, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Dated: September 30, 2002 /s/ Richard J. Miller
------------------- -----------------------
Richard J. Miller
Executive Vice President, and
Chief Financial Officer
I, Robert D. Walter, Chairman and Chief Executive Officer of Cardinal
Health, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, that:
1. I have reviewed this annual report on Form 10-K of Cardinal Health, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Dated: September 30, 2002 /s/ Robert D. Walter
------------------- -----------------------
Robert D. Walter
Chairman and Chief Executive Officer
71
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 indicated on September 30, 2002.
SIGNATURE TITLE
--------- -----
/s/ Robert D. Walter Chairman, Chief Executive Officer and
- ----------------------------------
Robert D. Walter Director (principal executive officer)
/s/ Richard J. Miller Executive Vice President, Chief Financial
- ----------------------------------
Richard J. Miller Officer (principal financial officer) and
Principal Accounting Officer
/s/ William E. Bindley Director
- ----------------------------------
William E. Bindley
/s/ Dave Bing Director
- ----------------------------------
Dave Bing
/s/ George H. Conrades Director
- ----------------------------------
George H. Conrades
/s/ John F. Finn Director
- ----------------------------------
John F. Finn
/s/ Robert L. Gerbig Director
- ----------------------------------
Robert L. Gerbig
/s/ John F. Havens Director
- ----------------------------------
John F. Havens
/s/ J. Michael Losh Director
- ----------------------------------
J. Michael Losh
/s/ John B. McCoy Director
- ----------------------------------
John B. McCoy
/s/ Richard C. Notebaert Director
- ----------------------------------
Richard C. Notebaert
/s/ Michael D. O'Halleran Director
- ----------------------------------
Michael D. O'Halleran
/s/ David Raisbeck Director
- ----------------------------------
David Raisbeck
/s/ Jean G. Spaulding Director
- ----------------------------------
Jean G. Spaulding
/s/ Matthew D. Walter Director
- ----------------------------------
Matthew D. Walter
72
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1)(2) DEDUCTIONS(3) OF PERIOD
----------- --------- -------- -------------- ------------- ---------
Fiscal Year 2002:
Accounts receivable $ 106.8 $ 37.6 $ 2.0 $ (51.6) $ 94.8
Finance notes receivable 4.8 1.7 0.3 (2.1) 4.7
Net investment in sales-type leases 16.1 3.3 -- (3.4) 16.0
--------- --------- --------- --------- ---------
$ 127.7 $ 42.6 $ 2.3 $ (57.1) $ 115.5
========= ========= ========= ========= =========
Fiscal Year 2001:
Accounts receivable $ 71.1 $ 38.1 $ 14.8 $ (17.2) $ 106.8
Finance notes receivable 4.6 1.3 0.2 (1.3) 4.8
Net investment in sales-type leases 15.0 2.0 -- (0.9) 16.1
--------- --------- --------- --------- ---------
$ 90.7 $ 41.4 $ 15.0 $ (19.4) $ 127.7
========= ========= ========= ========= =========
Fiscal Year 2000:
Accounts receivable $ 61.5 $ 33.8 $ 1.9 $ (26.1) $ 71.1
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
--------- --------- --------- --------- ---------
$ 78.2 $ 37.5 $ 1.8 $ (26.8) $ 90.7
========= ========= ========= ========= =========
(1) During fiscal 2002, 2001 and 2000 recoveries of amounts provided for or
written off in prior years were $1.5 million, $1.0 million and $1.5
million, respectively.
(2) In fiscal 2001, $11.4 million relates to the beginning balance for
acquisitions accounted for as a purchase transaction.
(3) Write-off of uncollectible accounts.
73