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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
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 Identification No.)
incorporation or organization)
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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant on December 31, 2002, based on the closing price on December 31,
2002, was approximately $25,560,031,018.
The number of Registrant's Common Shares outstanding as of September
26, 2003, was as follows: Common Shares, without par value: 432,528,115.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for
its 2003 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........................................................................................ 11
3. Legal Proceedings................................................................................. 11
4. Submission of Matters to a Vote of Security Holders............................................... 15
PART II
5. Market for the Registrant's Common Shares and Related Shareholder Matters......................... 18
6. Selected Financial Data........................................................................... 18
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................... 20
7a. Quantitative and Qualitative Disclosures About Market Risk........................................ 33
8. Financial Statements and Supplementary Data....................................................... 34
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................................. 76
9a. Controls and Procedures........................................................................... 76
PART III
10. Directors and Executive Officers of the Registrant................................................ 76
11. Executive Compensation............................................................................ 76
12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters............................................................................... 77
13. Certain Relationships and Related Transactions.................................................... 77
PART IV
14. Principal Accounting Fees and Services............................................................ 77
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 77
Signatures........................................................................................ 83
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. This
includes, in particular, Part II, Item 7 of this Form 10-K. 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
(including in the section titled "Risk Factors That May Affect Future Results"
on page 8) 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 encompassing a number of operating subsidiaries that do business as
Cardinal Health. The Company is a leading provider of products and services
supporting the health care industry, and helping health care providers and
manufacturers improve the efficiency and quality of health care. 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, 2003
(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 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 health care
products and provides pharmacy management and related consulting services to
hospital, retail and alternate-site pharmacies. The Company's Pharmaceutical
Distribution business is one of the country's leading wholesale distributors of
pharmaceutical and related health care products to independent and chain drug
stores, hospitals, alternate care centers and the pharmacy departments of
supermarkets and mass merchandisers located throughout the United States. As a
full-service wholesale distributor, the Company's Pharmaceutical Distribution
business 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 the efficiency and quality of their services. 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.
Through this segment, the Company also operates several specialty
health care distribution businesses which offer value-added services to the
Company's customers and suppliers while providing the Company with additional
opportunities for growth and profitability. For example, the Company operates a
pharmaceutical repackaging and distribution program for both independent and
chain drug store customers. In addition, the Company 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.
Also through this segment, the Company provides services that help
enhance performance in hospital pharmacies through integrated pharmacy
management, consulting and temporary staffing and related services. In addition,
the Company operates Medicine Shoppe International, Inc. ("Medicine Shoppe"), a
franchisor of apothecary-style retail pharmacies. Additionally,
3
through this segment, the Company also operates a non-core
wholesale-to-wholesale pharmaceutical trading business that sells excess
inventory.
MEDICAL PRODUCTS AND SERVICES
Through its Medical Products and Services segment, the Company provides
medical products and services and cost-saving services to hospitals and other
health care providers. For example, the Company offers a broad range of medical
and laboratory products, representing approximately 2,000 suppliers in addition
to its own line of surgical and respiratory therapy products to hospitals and
other health care providers. It also manufactures sterile and non-sterile
procedure kits, single-use surgical drapes, gowns and apparel, exam and surgical
gloves, fluid suction and collection systems, respiratory therapy products,
surgical instruments, instrument processing products, special procedure products
and other products. Additionally, the Company also assists its customers in
reducing costs while helping improve 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, life sciences and consumer health industry. This segment's Oral
Technologies business provides proprietary drug delivery technologies, including
softgel capsules, controlled release forms and Zydis(R) fast dissolving wafers,
and manufacturing for nearly all traditional oral dosage forms. The
Biotechnology and Sterile Life Sciences business provides advanced aseptic
blow/fill/seal technology, drug lyophilization and manufacturing for nearly all
sterile dose forms, such as vials and prefilled syringes. The Packaging Services
business provides pharmaceutical packaging services, folding cartons, inserts
and labels, with proprietary expertise in child-resistant and unit
dose/compliance package design. The Pharmaceutical Development business provides
drug discovery, development and analytical science expertise and clinical
supplies manufacturing and packaging. The Healthcare Marketing Services business
provides medical education, marketing and contract sales services, along with
product logistics management. Additionally, the Nuclear Pharmacy Services
business operates centralized nuclear pharmacies that prepare and deliver
radiopharmaceuticals for use in nuclear imaging procedures in hospitals and
clinics.
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. For example, this
segment 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
health care facilities. In addition, this segment markets point-of-use supply
systems in the non-health care market. This segment also provides information
systems that analyze clinical outcomes and clinical pharmaceutical utilization
information.
CARDINAL.COM
This Annual Report on Form 10-K as well as Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), are made available on our website
(cardinal.com under the "Investor Relations-- SEC filings" captions) as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission ("SEC"). Required filings
by our officers, directors and third parties with respect to the Company
furnished in electronic form are also made available on our website as are the
Company's proxy statements for its meetings of shareholders. These filings also
may be read and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
also maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC.
ACQUISITIONS(1)
Over the last five years, the Company has completed a number of
business combinations including the following. On August 7, 1998, the Company
completed a merger transaction with R.P. Scherer Corporation (which has been
given the legal designation
- ---------
(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
of Cardinal Health 409, Inc., and is referred to throughout this Form 10-K as
"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
Corporation ("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. (recently given the legal designation of
Cardinal Health 400, Inc. and referred to in this Form 10-K as "ALP"), a
Woodstock, Illinois-based custom manufacturer of sterile liquid pharmaceuticals
and other health care products. The Company issued approximately 8.7 million
Common Shares to ALP stockholders. On August 16, 2000, the Company completed the
acquisition of Bergen Brunswig Medical Corporation ("BBMC"), a distributor of
medical, surgical and laboratory supplies to doctors' offices, long-term care
and nursing centers, hospitals and other providers of care, for approximately
$181 million in cash. On February 14, 2001, the Company completed a merger
transaction with Bindley Western Industries, Inc. (recently given the legal
designation of Cardinal Health 100, Inc. and referred to in this Form 10-K as
"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 the acquisition of Magellan Laboratories Incorporated (recently given
the legal designation of Cardinal Health 405, Inc., and referred to in this Form
10-K as "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. (recently given the legal designation of Cardinal
Health 401, Inc. and referred to in this Form 10-K as "BLP"), a Wayne, New
Jersey-based full-service provider of strategic medical education solutions to
the health care 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 January 1, 2003, the Company
completed a merger transaction with Syncor International Corporation (recently
given the legal designation of Cardinal Health 414, Inc. and referred to in this
Form 10-K as "Syncor"), a Woodland Hills, California-based company which is a
leading provider of nuclear pharmacy services. The Company issued approximately
12.5 million Common Shares to Syncor stockholders and Syncor's outstanding stock
options were converted into options to purchase a total of approximately 3.0
million Common Shares. The Company has also completed a number of smaller
acquisition transactions (asset purchases, stock purchases and mergers) during
the last five years, including acquisitions of Pacific Surgical Innovations,
Inc. ("PSI"); Med Surg Industries, Inc.; Rexam Cartons Inc.; International
Processing Corporation; 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 health
care 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 2003. The Company 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
61% and 23%, respectively, of all bulk deliveries in fiscal 2003. 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"), a group purchasing organization (a "GPO"), has business
arrangements with the Company that accounted for approximately 11% of the
Company's operating revenues (by dollar volume) in fiscal 2003 through the
Company's Pharmaceutical Distribution and Provider Services, Medical Products
and Services and Automation and Information Services segments. The Company could
be adversely affected if the business arrangement with this GPO were lost,
although the loss of the business arrangement with the GPO would not mean the
loss of sales to all members of the GPO.
The Company obtains its products from many different suppliers, the
largest of which, Pfizer, Inc., accounted for approximately 11% (by dollar
volume) of the Company's total revenue in fiscal 2003. The Company's five
largest suppliers combined accounted for approximately 37% (by dollar volume) of
the Company's total revenue during fiscal 2003 and, overall, the Company's
relationships with its suppliers are good. The Company's arrangements with its
pharmaceutical suppliers typically may
5
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 at reasonable rates.
The Company's Pharmaceutical Distribution business generates operating
margin in many ways from its vendors, including inventory investment buying
opportunities, rebates, vendor program arrangements, agreements and offerings.
The Company has seen changes in supply chain management policies of certain
vendors related to product availability, including the use of inventory
management agreements. Under these types of agreements, the Company is generally
compensated on a negotiated basis to help manufacturers better match their
shipments with market demand. These types of agreements and policies limit the
ability of the Company to invest capital in pharmaceutical inventories in
advance of price increases and also decrease the availability of excess
inventory for sale through the Company's non-core wholesale-to-wholesale
pharmaceutical trading business. In the future, vendors may continue with
similar arrangements that could limit the availability of excess inventory and,
correspondingly, have a negative impact on the Company's investment inventory
margins.
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.
COMPETITION
The markets in which the Company operates generally are highly
competitive.
In the Pharmaceutical Distribution and Provider Services segment, the
Company's pharmaceutical wholesale distribution business competes directly with
two other national wholesale distributors (McKesson Corporation and
AmerisourceBergen Corporation) and smaller 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 options to operate or work for an independent or chain
pharmacy. With respect to services that enhance performance in hospital
pharmacies, 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 Medical Products and Services segment faces competition
from many sources in all of its product and service markets, with competition
focusing primarily on product performance, service levels, support services and
price.
In the Pharmaceutical Technologies and Services segment, the Company
competes on several fronts including competition with other companies providing
outsourcing services to pharmaceutical manufacturers as well as those
manufacturers who choose to handle these services in-house. Specifically, in
this segment, the Company competes as follows: the Oral Technologies business
competes with providers of both new drug delivery technologies and existing
delivery technologies; the Biotechnology and Sterile Life Sciences business
competes with other providers of sterile fill/finish manufacturing and
lyophilization services; the Pharmaceutical Development business competes with
providers of contract discovery, development and analytical laboratory services
and manufacture and packaging of clinical supplies; the Packaging Services
business competes with companies that provide packaging components and packaging
services; and the Healthcare Marketing Services business competes with other
providers of medical education, marketing/product launch services, contract
sales and product logistics services. Through Nuclear Pharmacy Services, the
Company competes with other nuclear pharmacy companies and distributors engaged
in the preparation and delivery of radiopharmaceuticals for use in nuclear
imaging procedures in hospitals and clinics. Such competitors include numerous
operators of radiopharmacies, numerous independent radiopharmacies and
manufacturers and universities that have established their own radiopharmacies.
All of the foregoing groups compete based upon a variety of factors, principally
including quality, responsiveness, proprietary technologies or capabilities,
customer service and price.
In the Automation and Information Services segment, the Company
competes based upon quality, 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 include both existing domestic and foreign companies, as well as
emerging companies that supply products for specialized markets and other
outside service providers.
6
EMPLOYEES
As of September 26, 2003, the Company had more than 50,000 employees in
the U.S. and abroad, of which approximately 1,250 are subject to collective
bargaining agreements. Overall, the Company considers its employee relations to
be 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 products, services and intangible assets. 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.
The Company does not consider any particular patent, trademark,
license, franchise or concession to be material to its business.
REGULATORY MATTERS
Certain of the Company's subsidiaries 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 "DEA"), the Food and
Drug Administration (the "FDA"), the United States Nuclear Regulatory Commission
(the "NRC"), the Department of Health and Human Services (the "HHS"), 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. These subsidiaries include those 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; 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. 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 Medical Products and Services
segment's international manufacturing operations and the Pharmaceutical
Technologies and Services segment's international operations are subject to
local certification requirements, including compliance with good manufacturing
practices established by those applicable foreign jurisdictions. The Automation
and Information Services segment's automated pharmaceutical dispensing systems
are not currently required to be registered or be submitted for pre-market
notifications to the FDA. 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.
The Company's Nuclear Pharmacy Services business operates nuclear
pharmacies, imaging centers and related businesses such as cyclotron facilities
used to produce positron emission tomography ("PET") products used in medical
imaging. This group operates 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.
In addition, the FDA is also involved in the regulation of cyclotron facilities
where PET products are produced.
7
Certain of the Company's businesses are subject to federal and state
health care 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 businesses
include access to health care information gathered and assessed for the benefit
of health care clients. Greater scrutiny on a federal and state level is being
placed on how patient identifiable health care 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 and security, 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 and/or its subsidiaries to civil and/or criminal penalties,
which could be significant.
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. The Company is also subject to certain
laws and regulations concerning the conduct of its foreign operations, including
anti-bribery laws and laws pertaining to the accuracy of the Company's internal
books and records.
The costs associated with complying with the various applicable federal
regulations, as well as 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.
INVENTORIES
The Company maintains a high level of inventory in its Pharmaceutical
Distribution business 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 particular inventory levels. Certain supply
contracts with U.S. Government entities require the Company's Pharmaceutical
Distribution and Medical Products Distribution businesses 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's practice is to offer market payment terms to
its customers. The Company is not aware of any material differences between its
practices 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
CHANGES IN THE UNITED STATES HEALTH CARE ENVIRONMENT MAY ADVERSELY AFFECT THE
COMPANY'S OPERATING RESULTS. In recent years, the health care industry has
undergone significant changes driven by various efforts to reduce costs. These
efforts include, but are not limited to, potential national health care reform,
trends toward managed care, cuts in Medicare, consolidation of competitors,
suppliers and customers and the development of large, sophisticated purchasing
groups, including the efforts in several states to establish pharmaceutical
purchasing programs on behalf of their residents. This industry is expected to
continue to undergo significant changes for the foreseeable future, which could
have an adverse effect on the Company's business, financial
8
condition or results of operations. Other factors related to the health care
industry that could negatively impact the Company's business, financial
condition, or results of operations include, but are not limited to:
- - changes in governmental support of, and reimbursement for, health care
services;
- - changes in the method by which health care services are delivered;
- - changes in the prices for health care services;
- - other legislation or regulations governing health care services or
mandated benefits; and
- - changes in pharmaceutical and medical-surgical manufacturers' pricing,
selling, inventory, distribution or supply policies or procedures.
Changes in the Company's customer mix could also significantly impact its
business, financial condition, or results of operations. Due to the diverse
range of health care supply management and health care information technology
products and services that the Company offers, such changes may adversely impact
certain of the Company's businesses, while not affecting some of its competitors
who offer a narrower range of products and services.
FAILURE TO COMPLY WITH EXISTING AND FUTURE REGULATORY REQUIREMENTS MAY ADVERSELY
AFFECT THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The health
care industry is highly regulated. The Company is subject to various local,
state, federal, foreign and transnational laws and regulations, which include
the operating and security standards of the DEA, the FDA, various state boards
of pharmacy, state health departments, the NRC, the HHS and other comparable
agencies. Certain of the Company's subsidiaries may be required to register for
permits and/or licenses with, and comply with operating and security standards
of, the DEA, the FDA, the NRC, the HHS 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. Although the Company believes
that it is in compliance, in all material respects, with applicable laws and
regulations, there can be no assurance that a regulatory agency or tribunal
would not reach a different conclusion concerning the compliance of the
Company's operations with applicable laws and regulations. In addition, there
can be no assurance that the Company will be able to maintain or renew existing
permits and licenses or obtain without significant delay future permits and
licenses needed for the operation of the Company's businesses. The noncompliance
by the Company with applicable laws and regulations or the failure to maintain,
renew or obtain necessary permits and licenses could have an adverse effect on
the Company's results of operations and financial condition. In addition, if
changes were to occur to the laws and regulations applicable to the Company's
businesses, such changes could adversely affect many of the Company's regulated
operations, which include distributing prescription pharmaceuticals (including
certain controlled substances), operating pharmacy businesses (including nuclear
pharmacies), manufacturing medical/surgical products, manufacturing
pharmaceuticals using proprietary drug delivery systems, packaging
pharmaceuticals and the sales and marketing of pharmaceuticals. Also, the health
care regulatory environment may change in a manner that could restrict the
Company's existing operations, limit the expansion of the Company's businesses,
apply regulations to previously unregulated businesses 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 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 product manufacturing and distribution,
development and manufacturing of drug delivery systems, development and
manufacturing of automation and information products and compounding and
distribution of nuclear pharmaceutical products. 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 Company's employees or the
employees of the acquired company, accounting issues that could arise in
connection with, or as a result of, the acquisition of the acquired company,
regulatory or compliance issues that could exist at an acquired company,
challenges in retaining the Company's customers or of the acquired 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 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 its current and future shareholders. 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 growth and increase in complexity have placed significant
demands on 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 if the Company fails to efficiently manage operations in a way
that accommodates continued internal growth, its business, financial condition
or results of operations could be adversely impacted.
9
PROPRIETARY TECHNOLOGY PROTECTIONS MAY NOT BE ADEQUATE AND PROPRIETARY RIGHTS
MAY INFRINGE ON THE RIGHTS OF THIRD PARTIES. The Company relies on a combination
of trade secret, patent, copyright and trademark laws, nondisclosure and other
contractual provisions and technical measures to protect a number of its
products, services and intangible assets. There can be no assurance that these
protections will provide meaningful protection against competitive products or
services 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. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. From time to time, third parties have asserted infringement claims
against the Company and there can be no assurance that third parties will not
assert infringement claims against the Company in the future. While the Company
believes that the products it currently manufactures using its proprietary
technology do not infringe upon proprietary rights of other parties or that
meritorious defenses would exist with respect to any assertions to the contrary,
there can be no assurance that the Company would not be found to infringe on the
proprietary rights of others. Additionally, the Company may find it necessary to
initiate litigation to protect its trade secrets, to enforce its patent,
copyright and trademark rights and to determine the scope and validity of the
proprietary rights of others. This type of litigation can be costly and time
consuming and could generate significant expenses, damage payments or
restrictions or prohibitions on the Company's use of its technology, all of
which could adversely impact the Company's results of operations. In addition,
if the Company were found to be infringing on proprietary rights of others, the
Company may be required to develop non-infringing technology, obtain a license
or cease making, using and/or selling the infringing products.
RISKS GENERALLY ASSOCIATED WITH THE COMPANY'S SOPHISTICATED INFORMATION SYSTEMS
MAY ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS. The Company relies on
sophisticated information systems in its business to obtain, rapidly process,
analyze and manage data to: facilitate the purchase and distribution of
thousands of inventory items from numerous distribution centers; receive,
process and ship orders on a timely basis; manage the accurate billing and
collections for thousands of customers; and process payments to suppliers. The
Company's business and results of operations may be adversely affected if these
systems are interrupted, damaged by unforeseen events or fail for any extended
period of time, including due to the actions of third parties.
THE COMPANY COULD BECOME SUBJECT TO LIABILITY CLAIMS THAT ARE NOT ADEQUATELY
COVERED BY INSURANCE, AND MAY HAVE TO PAY DAMAGES AND OTHER EXPENSES WHICH MAY
HAVE AN ADVERSE IMPACT ON THE COMPANY'S OPERATING RESULTS. The Company's
businesses expose it to risks that are inherent in the distribution and
dispensing of pharmaceuticals and nuclear pharmaceuticals, the provision of
ancillary services (such as pharmacy management and pharmacy staffing services),
the development and manufacture of drug delivery systems and of pharmaceutical
products for the Company's customers, the development, presentation and
distribution of medical education and marketing programs and materials, and the
manufacture and distribution of medical/surgical products and automated drug
dispensing units. A successful product or professional liability claim not fully
covered by the Company's insurance or any applicable contractual indemnity could
have a material adverse effect on the Company's results of operations.
THE LOSS OF THIRD PARTY LICENSES USED BY THE COMPANY'S AUTOMATION AND
INFORMATION SERVICES SEGMENT MAY ADVERSELY AFFECT THE COMPANY'S OPERATING
RESULTS. The Company licenses the rights to use certain technologies from
third-party vendors to incorporate in or complement its Automation and
Information Services segment's products and services. These licenses are
generally nonexclusive, must be renewed periodically by mutual consent and may
be terminated if the Company breaches the terms of the license. As a result, the
Company may have to discontinue, delay or reduce product shipments until it
obtains equivalent technology, which could adversely impact the Company's
business. The Company's competitors may obtain the right to use any of the
technology covered by these licenses and use the technology to compete directly
with the Company. In addition, if the Company's vendors choose to discontinue
support of the licensed technology in the future, the Company may not be able to
modify or adapt certain of its own products.
TAX LEGISLATION INITIATIVES COULD ADVERSELY IMPACT THE COMPANY'S RESULTS OF
OPERATIONS. The Company is a large multinational corporation with operations in
the United States and international jurisdictions. As such, the Company is
subject to the tax laws and regulations of the United States federal, state and
local governments and of many international jurisdictions. From time to time,
various legislative initiatives may be proposed that could adversely affect the
Company's tax positions. There can be no assurance that the Company's effective
tax rate will not be adversely impacted by these initiatives. In addition,
United States federal, state and local, as well as international, tax laws and
regulations are extremely complex and subject to varying interpretations.
Although the Company believes that its historical tax positions are sound and
consistent with applicable laws, regulations and existing precedent, there can
be no assurance that the Company's tax positions will not be challenged by
relevant tax authorities or that the Company would be successful in any such
challenge.
CHANGES IN VENDOR SUPPLY CHAIN MANAGEMENT POLICIES AND THE USE OF INVENTORY
MANAGEMENT AGREEMENTS IN THE PHARMACEUTICAL DISTRIBUTION INDUSTRY COULD
ADVERSELY IMPACT THE COMPANY'S RESULTS OF OPERATIONS. The Company is a purchaser
of a considerable volume of pharmaceutical products. The Company has
historically invested capital in pharmaceutical
10
inventory to take advantage of relevant market dynamics, including anticipated
manufacturer price increases. The Company recently has seen changes in vendor
supply chain management policies related to product availability, including the
use of inventory management agreements. Inventory management agreements
generally provide for the distributor to be compensated on a negotiated basis to
help manufacturers better match their shipments to meet market demand, thereby
resulting in less surplus inventory available to the distributor. Continued
changes in vendor policies related to product availability may limit the
Company's ability to leverage its resources and could adversely impact the
Company's business and results of operations.
ITEM 2: PROPERTIES
In the United States, the Company has 26 principal pharmaceutical
distribution facilities and five specialty distribution facilities utilized by
the Pharmaceutical Distribution and Provider Services segment. In its
Pharmaceutical Technologies and Services segment, the Company has 192 Nuclear
Pharmacy Services laboratory, manufacturing and distribution facilities, nine
Packaging Services packaging and printed components facilities (three of which
are located in Puerto Rico), five Oral Technologies manufacturing and R&D
facilities, five Pharmaceutical Development facilities and five Sterile
Technologies manufacturing facilities (one of which is located in Puerto Rico).
In addition, the Company has one Pyxis assembly operation in its Automation and
Information Services segment. The Company also has 61 medical/surgical
distribution facilities and 16 medical/surgical manufacturing facilities (one of
which is located in Puerto Rico) utilized by the Medical Products and Services
segment. The Company's domestic facilities are located in 45 states and Puerto
Rico.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Technologies and Services segment, 10 Oral Technologies
manufacturing, lab and distribution facilities which are located in the United
Kingdom, Spain, France, Germany, Italy, Australia, Japan, Argentina, Brazil and
Canada. Within this segment, the Company also has two Packaging Services
facilities and two Pharmaceutical Development facilities which are located in
the United Kingdom and Germany. The Company owns, leases or operates through its
Medical Products and Services segment 11 medical/surgical distribution
facilities located in Canada, and 21 medical/surgical manufacturing facilities
located in the Netherlands, Malaysia, Thailand, Malta, Mexico, the Dominican
Republic, Germany and France. The Company's international facilities are located
in a total of 20 countries.
The Company owns 97 of the domestic and international facilities, and
the balance are leased. The Company's principal executive offices are
headquartered 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 products and services to the health care 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
as well as in connection with future and prior acquisitions. 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.
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. health
care distribution business, surgical and respiratory therapy business and health
care 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 to 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.
11
As of June 30, 2003, there were 233 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products and some of these cases were 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 833 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
June 30, 2003, Allegiance had resolved more than seventy percent of these cases.
About twenty percent of the lawsuits that have been resolved were concluded
without any liability to Baxter/Allegiance. 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 or results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the range reflecting
the Company's reasonable estimation of potential insurance coverage, and defense
and indemnity costs). 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 pending in the United
States District Court for the District of Columbia (where it was transferred).
As of June 30, 2003, Scherer has entered into settlement agreements with the
majority of the defendants in consideration of payments of approximately $138.2
million, net of attorney fees, payments due to other interested parties and
expenses withheld prior to the disbursement of the funds to Scherer. While the
Company still has pending claims with smaller vitamin manufacturers and cannot
predict the outcome of the claims against those defendants, the total amount of
any future recovery will not likely represent a material amount.
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 1991, the Pennsauken Solid Waste Management Authority
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 Pennsauken Solid Waste Management Authority 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. The Company reasonably believes
that PCI's liability, if any, will be less than $100,000, and the impact of this
claim upon PCI, if any, will be immaterial to the Company's financial position,
liquidity and results of operations.
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.
12
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
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 $550,000. Allegiance responded with
questions as to the calculations and data utilized by the U.S. EPA to reach the
$550,000 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
operations.
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 ("Burdick") 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,
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 $230,000 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 operations.
Thermochem Environmental Claim
As a result of the Burdick 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 $17 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 operations.
Shareholder Litigation against Cardinal Health
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. Doris Staehr v. Robert D.
Walter, et al., No. 02-CVG-11-639. On or about March 21, 2003, after the Company
filed a Motion to Dismiss the complaint, an amended complaint was filed
13
alleging breach of fiduciary duties and corporate waste in connection with the
alleged failure by the Board of Directors of the Company to (a) renegotiate or
terminate the Company's proposed acquisition of Syncor and (b) determine the
propriety of indemnifying Monty Fu, the former Chairman of Syncor. The Company
filed a Motion to Dismiss the amended complaint and the plaintiffs subsequently
filed a second amended complaint which added three new individual defendants and
includes new allegations that the Company improperly recognized revenue in
December 2000 and September 2001 related to settlements with certain vitamins
manufacturers. The Company has filed a Motion to Dismiss the second amended
complaint. The Company believes the allegations made in the second amended
complaint are without merit and intends to vigorously defend this action. The
Company currently does not believe that the impact of this lawsuit, if any, will
have a material adverse effect on the Company's financial position, liquidity or
results of operations. The Company currently believes that there will be some
insurance coverage available under the Company's directors' and officers'
liability insurance policies in effect at the time this action was filed.
Shareholder Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor
and certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "federal securities actions").
All of these actions were filed in the United States District Court for the
Central District of California. These cases include Richard Bowe v. Syncor Int'l
Corp., et al., No. CV 02-8560 LGB (RCx) (C.D. Cal.), Alan Kaplan v. Syncor Int'l
Corp., et al., No. CV 02-8575 CBM (MANx) (C.D. Cal), Franklin Embon, Jr. v.
Syncor Int'l Corp., et al., No. CV 02-8687 DDP (AJWx) (C.D. Cal), Jonathan Alk
v. Syncor Int'l Corp., et al., No. CV 02-8841 GHK (RZx) (C.D. Cal), Joyce Oldham
v. Syncor Int'l Corp., et al., CV 02-8972 FMC (RCx) (C.D. Cal), West Virginia
Laborers Pension Trust Fund v. Syncor Int'l Corp., et al., No. CV 02-9076 NM
(RNBx) (C.D. Cal), Brad Lookingbill v. Syncor Int'l Corp., et al., CV 02-9248
RSWL (Ex) (C.D. Cal), Them Luu v. Syncor Int'l Corp., et al., CV 02-9583 RGK
(JwJx) (C.D. Cal), David Hall v. Syncor Int'l Corp., et al., CV 02-9621 CAS
(CWx) (C.D. Cal), Phyllis Walzer v. Syncor Int'l Corp., et al., CV 02-9640 RMT
(AJWx) (C.D. Cal) and Larry Hahn v. Syncor Int'l Corp., et al., CV 03-52 LGB
(RCx) (C.D. Cal.).
The federal securities actions purport to be brought on behalf of all
purchasers of Syncor shares during various periods, beginning as early as March
30, 2000, and ending as late as November 5, 2002 and allege, among other things,
that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange Act, by issuing a
series of press releases and public filings disclosing significant sales growth
in Syncor's international business, but omitting mention of certain allegedly
improper payments to Syncor's foreign customers, thereby artificially inflating
the price of Syncor shares. A lead plaintiff has been appointed by the court in
the federal securities actions and a consolidated amended complaint was filed
May 19, 2003, naming Syncor and 12 individuals, all former Syncor officers,
directors and employees. Syncor filed a Motion to Dismiss the consolidated
amended complaint on August 1, 2003.
On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the federal securities actions described above), and a single purported class
action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corporation and the
remaining two Syncor directors, who are hereafter included in the term "director
defendants." These cases include Alan Kaplan v. Monty Fu, et al., Case No.
20026-NC (Del. Ch.), and Richard Harman v. Monty Fu, et al., Case No. 20027-NC
(Del. Ch). These cases have been consolidated under the caption "In re: Syncor
International Corp. Shareholders Litigation" (the "consolidated Delaware
action"). On August 14, 2003, the Company filed a Motion to Dismiss the
operative complaint in the consolidated Delaware action.
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. These cases include Joseph Famularo v. Monty Fu, et al, Case
No. BC285478 (Cal. Sup. Ct., Los Angeles Cty.), and Mark Stroup v. Robert G.
Funari, et al., Case No. BC285480 (Cal. Sup. Ct., Los Angeles Cty.). An amended
complaint was filed on December 6, 2002 in the Famularo action, purporting to
allege direct claims on behalf of a class of shareholders. The defendants'
motion for a stay of the California actions pending the resolution of the
Delaware actions (discussed above) was granted on April 30, 2003.
14
A proposed class action complaint, captioned Pilkington v. Cardinal
Health, et al, was filed on April 8, 2003, against the Company, Syncor and
certain officers and employees of the Company by a purported participant in the
Syncor Employees' Savings and Stock Ownership Plan (the "Syncor ESSOP"). A
related proposed class action complaint, captioned Donna Brown, et al. v. Syncor
International Corp, et al, was filed on September 11, 2003, against the Company,
Syncor and certain individual defendants. The related suits allege that the
defendants breached certain fiduciary duties owed under the Employee Retirement
Income Security Act ("ERISA"). It is expected that these related suits will be
consolidated. In addition, the United States Department of Labor is conducting
an investigation of the Syncor ESSOP with respect to its compliance with ERISA
requirements. The Company has responded to a subpoena received from the
Department of Labor and intends to fully cooperate in its investigation.
Each of the actions described under the heading "Shareholder Litigation
against Syncor" is in its early stages and it is impossible to predict the
outcome of these proceedings or their impact on Syncor or the Company. However,
the Company currently does not believe that the impact of these actions will
have a material adverse effect on the Company's financial position, liquidity or
results of operations. The Company and Syncor believe the allegations made in
the complaints described above are without merit and intend to vigorously defend
such actions and have been informed that the individual director and officer
defendants deny liability for the claims asserted in these actions, believe they
have meritorious defenses and intend to vigorously defend such actions. The
Company and Syncor currently believe that a portion of any liability will be
covered by insurance policies that the Company and Syncor have with financially
viable insurance companies, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency.
DuPont Litigation
On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont")
filed a lawsuit against the Company and others in the United States District
Court for the Middle District of Tennessee. E.I. Du Pont De Nemours and Company
v. Cardinal Health, Inc., BBA Materials Technology and BBA Nonwovens
Simpsonville, Inc., No. 3-03-0848. The complaint alleges various causes of
action against the Company relating to the production and sale of surgical
drapes and gowns by the Company's Medical Products and Services segment.
DuPont's claims generally fall into the categories of breach of contract, false
advertising and patent infringement. The complaint does not request a specific
amount of damages. The Company believes that the claims made in the complaint
are without merit and it intends to vigorously defend this action. The Company
believes that it is owed a defense and indemnity from its codefendants with
respect to DuPont's claim for patent infringement. The Company currently does
not believe that the impact of this lawsuit, if any, will have a material
adverse effect on the Company's financial position, liquidity or results of
operation.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 2003.
15
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the executive officers of the Company
(information provided as of September 26, 2003):
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------------
Robert D. Walter 58 Chairman and Chief Executive Officer
George L. Fotiades 50 President and Chief Executive Officer -
Life Sciences Products and Services
James F. Millar 55 President and Chief Executive Officer -
Healthcare Products and Services
Ronald K. Labrum 47 Executive Vice President; Group President -
Medical Products and Services
Mark W. Parrish 48 Executive Vice President; Group President -
Pharmaceutical Distribution
Stephen S. Thomas 48 Executive Vice President; Group President -
Automation and Information Services
Jody R. Davids 47 Executive Vice President and Chief
Information Officer
Gary D. Dolch 56 Executive Vice President - Quality and
Regulatory Affairs
Brendan A. Ford 45 Executive Vice President - Corporate
Development
Richard J. Miller 46 Executive Vice President and Chief Financial
Officer
Anthony J. Rucci 53 Executive Vice President and Chief Administrative
Officer
Carole S. Watkins 43 Executive Vice President - Human Resources
Paul S. Williams 43 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 President and Chief Executive Officer - Life
Sciences Products and Services since December 2002; Executive Vice President,
President and Chief Operating Officer - Pharmaceutical Technologies and Services
of the Company, November 2000 to December 2002; Executive Vice President and
Group President - R.P. Scherer Corporation, August 1998 to October 2000;
President of R.P. Scherer Corporation, January 1998 to August 1998. Mr. Fotiades
serves as a director of ProLogis.
JAMES F. MILLAR President and Chief Executive Officer - Healthcare
Products and Services since December 2002; Executive Vice President, President
and Chief Operating Officer - Pharmaceutical Distribution and Medical Products,
November 2000 to December 2002; 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
business, June 1996 to February 2000. Mr. Millar serves as a director of Wendy's
International, Inc.
16
RONALD K. LABRUM Executive Vice President and Group President - Medical
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.
MARK W. PARRISH Executive Vice President and Group President -
Pharmaceutical Distribution since January 2003; President, Medicine Shoppe
International, July 2001 to January 2003; Executive Vice President - Retail
Sales and Marketing, June 1999 to July 2001; Executive Vice President - Sales
and Marketing, June 1997 to June 1999.
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, July 1999 to September 2000; Executive Vice President
and President of Pyxis, October 1997 to July 1999.
JODY R. DAVIDS Executive Vice President and Chief Information Officer
of the Company since March 2003; Senior Vice President - Information Technology
- - Pharmaceutical Distribution, January 2000 to March 2003; Director of
Technology Services of NIKE, Inc., April 1997 to January 2000.
GARY D. DOLCH Executive Vice President - Quality and Regulatory Affairs
since December 2002; Senior Vice President of Quality and Regulatory Affairs of
the American Red Cross, May 2001 to December 2002; Vice President, Quality
Assurance for BASF's pharmaceutical operations under the Knoll name, April 1995
to May 2001.
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, 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.
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. Mr. Williams serves as
a director of State Auto Financial Corporation.
17
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 closing sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared for the fiscal
years ended June 30, 2003 and 2002, and through the period ended on September
26, 2003, the last full trading day prior to the filing of this Form 10-K.
HIGH LOW DIVIDENDS
----------- ---------- ----------
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
Fiscal 2003:
Quarter Ended
September 30, 2002 $ 68.19 $ 49.08 $ 0.025
December 31, 2002 71.16 57.99 0.025
March 31, 2003 63.48 50.31 0.025
June 30, 2003 66.19 52.17 0.030
Through September 26, 2003 $ 67.96 $ 54.75 $ 0.030
As of September 26, 2003, there were approximately 20,200 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 as of June 30, 2003:
Outstanding
--------------------------------------
Number of Common Weighted
Shares to be Issued Average Common Shares
Upon Exercise of Exercise Price Available for
Outstanding Options per Common Future Issuance
(in millions) Share (in millions)
- --------------------------------------------------------------------------------------
Plans approved by
shareholders 13.6 $49.97 25.1
Plans not approved by
shareholders 18.3 $61.04 18.0
Plans acquired through
acquisition 9.0 $31.91 -
- --------------------------------------------------------------------------------------
Balance at June 30, 2003 40.9 $50.92 43.1
======================================================================================
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company was
prepared giving retroactive effect to the business combinations with Scherer on
August 7, 1998; Allegiance on February 3, 1999; PSI on May 21, 1999; ALP on
September 10,
18
1999, and Bindley on February 14, 2001, all of which were accounted for as
pooling-of-interests transactions. Additional disclosure related to the Bindley
transaction is included in Note 2 of "Notes to Consolidated Financial
Statements." The consolidated financial data include all purchase transactions
as of the date of acquisition that occurred during these periods.
For the fiscal year ended June 30, 1999, the information presented is
derived from the consolidated financial statements which combine the Company'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 the Company'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 COMMON SHARE AMOUNTS)
At or For the Fiscal Year Ended
June 30, (1)
------------------------------------------------------------------
2003 2002 2001 2000 1999 (2)
------------------------------------------------------------------
EARNINGS DATA:
Operating revenue $ 50,466.6 $ 44,394.3 $ 38,660.1 $ 30,257.8 $ 25,682.5
Bulk deliveries to customer warehouses
and other 6,270.4 6,741.4 9,287.5 8,092.1 7,050.4
------------------------------------------------------------------
Total revenue $ 56,737.0 $ 51,135.7 $ 47,947.6 $ 38,349.9 $ 32,732.9
Earnings from continuing operations
before cumulative effect of change
in accounting $ 1,411.9 $ 1,126.3 $ 857.4 $ 717.8 $ 499.3
Loss from discontinued operations (3) (6.1) - - - -
Cumulative effect of change
in accounting (4) - (70.1) - - -
------------------------------------------------------------------
Net earnings $ 1,405.8 $ 1,056.2 $ 857.4 $ 717.8 $ 499.3
Basic earnings per Common Share (5)
Continuing operations $ 3.17 $ 2.50 $ 1.93 $ 1.64 $ 1.14
Discontinued operations (3) (0.02) - - - -
Cumulative effect of change
in accounting (4) - (0.16) - - -
------------------------------------------------------------------
Net basic earnings per Common Share $ 3.15 $ 2.34 $ 1.93 $ 1.64 $ 1.14
Diluted earnings per Common Share (5)
Continuing operations $ 3.12 $ 2.45 $ 1.88 $ 1.60 $ 1.12
Discontinued operations (3) (0.02) - - - -
Cumulative effect of change
in accounting (4) - (0.15) - - -
------------------------------------------------------------------
Net diluted earnings per Common Share $ 3.10 $ 2.30 $ 1.88 $ 1.60 $ 1.12
Cash dividends declared
per Common Share (5) (6) $ 0.105 $ 0.100 $ 0.085 $ 0.070 $ 0.067
BALANCE SHEET DATA:
Total assets $ 18,521.4 $ 16,438.0 $ 14,642.4 $ 12,024.1 $ 9,682.7
Long-term obligations,
less current portion $ 2,471.9 $ 2,207.0 $ 1,871.0 $ 1,524.5 $ 1,224.5
Shareholders' equity $ 7,758.1 $ 6,393.0 $ 5,437.1 $ 4,400.4 $ 3,894.6
19
(1) Amounts reflect business combinations and the impact of merger-related
costs and other special items in all periods presented. See Note 2 of
"Notes to Consolidated Financial Statements" for a further discussion
of merger-related costs and other special items affecting fiscal 2003,
2002, and 2001. Fiscal 2000 amounts reflect the impact of
merger-related charges and other special items of $64.7 million ($49.8
million, net of tax). Fiscal 1999 amounts reflect the impact of
merger-related charges and other special items of $165.4 million
($131.6 million, net of tax).
(2) In April 1998, ALP 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 year ended
June 30, 1999, the pro forma adjustment for ALP taxes would have
reduced net earnings by $9.3 million. The pro forma adjustment would
have decreased diluted earnings per Common Share by $0.02 to $1.10 for
fiscal 1999.
(3) On January 1, 2003, the Company acquired Syncor. Prior to the
acquisition, Syncor had announced the discontinuation of certain
operations including the medical imaging business and certain overseas
operations. The Company is continuing with the discontinuation of these
operations and has included additional international and non-core
domestic businesses to the discontinued operations. For additional
information regarding discontinued operations, see Note 19 of "Notes to
Consolidated Financial Statements."
(4) In the first quarter of fiscal 2002, the method of recognizing revenue
for pharmacy automation equipment was changed from recognizing revenue
when the units are 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."
(5) Basic earnings, diluted earnings and cash dividends per Common Share
have been adjusted to retroactively reflect all stock dividends and
stock splits through June 30, 2003.
(6) Cash dividends per Common Share exclude dividends paid by all entities
with which subsidiaries of the Company have merged.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis presented below has been prepared giving
retroactive effect to the pooling-of-interests business combination with 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.
GENERAL
The Company has four operating business segments: Pharmaceutical
Distribution and Provider Services, Medical Products and Services,
Pharmaceutical Technologies and Services and Automation and Information
Services. See Part I, Item 1, "Business," and Note 16 in "Notes to Consolidated
Financial Statements" for a description of these segments.
RESULTS OF OPERATIONS
OPERATING REVENUE
Percent of Company
Growth (1) Operating Revenues
Years ended June 30, 2003 2002 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 14% 17% 82% 82% 81%
Medical Products and Services 6% 6% 13% 14% 15%
Pharmaceutical Technologies and Services 44% 12% 4% 3% 3%
Automation and Information Services 19% 19% 1% 1% 1%
Total Company 14% 15% 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 14% and 15% during fiscal 2003 and
2002, respectively. The increase in fiscal 2003 resulted from a higher sales
volume across each of the Company's segments; strong sales of self-manufactured
products; the addition of new products; the addition of new customers, some of
which was a result of new corporate agreements with health care
20
providers; and pharmaceutical price increases averaging approximately 5%. In
addition, the Syncor acquisition within the Pharmaceutical Technologies and
Services segment accounted for approximately 1% of the overall growth of the
Company during fiscal 2003. The overall growth was partially offset by a decline
within the Company's non-core wholesaler-to-wholesaler pharmaceutical trading
business, as further discussed below. The increase in fiscal 2002 resulted from
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 health care
providers.
The Pharmaceutical Distribution and Provider Services segment's
operating revenue growth in fiscal 2003 resulted from strong sales to customers
within this segment's core pharmaceutical distribution business, some of which
were generated from the addition of new contracts. The most significant growth
was in the alternate site and chain pharmacy businesses, which yielded growth of
approximately 28% and 15%, respectively. The chain pharmacy growth rate would
have been stronger had it not experienced a reduction in business with Kmart due
to Kmart's closure of various stores in connection with Kmart's bankruptcy. The
overall growth rate in this segment was also negatively impacted by the lack of
availability of certain pharmaceutical products from manufacturers, particularly
in the second half of the fiscal year, which impacted non-core
wholesaler-to-wholesaler revenue. This lack of availability was, in part,
brought about by changes in inventory supply chain management policies of
certain vendors, leading to the use of inventory management agreements.
Inventory management agreements generally provide for the Company to be
compensated on a negotiated basis to help manufacturers better match their
shipments to meet market demand, thereby resulting in less surplus inventory for
the Company's trading business. It is not anticipated that fluctuations in
trading activity will have a significant impact on operating revenue growth
rates in future years. The increase in this segment's operating revenue in
fiscal 2002 resulted from 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 was attributable to
pharmaceutical price increases and the addition of new contracts.
The Medical Products and Services segment's operating revenue growth in
fiscal 2003 resulted from increased sales of both distributed and
self-manufactured products. The addition of several new contracts with hospitals
and health care networks, as well as increased market share in the growing
surgery center market contributed to increased sales of distributed and
self-manufactured products. Increased demand for certain existing
self-manufactured products, including medical gloves, Medi-vac(R) suction
canisters, Procedure Based Delivery System(R) kits and other minor procedure
trays, accounted for a portion of this segment's revenue growth. The addition of
new, self-manufactured products also contributed to the overall revenue growth
in this segment. Some examples of these new, self-manufactured products include
the Esteem(R) surgeon gloves and the Tiburon(TM) and Astound(TM) fabrics within
the Converters(R) business. The increase in this segment's operating revenue in
fiscal 2002 resulted from 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 in fiscal 2002.
The Pharmaceutical Technologies and Services segment's operating
revenue growth in fiscal 2003 resulted from increased demand within the Oral
Technologies, Biotechnology and Sterile Life Sciences, and Packaging Services
businesses, and from acquisitions, primarily Syncor. Product sales that showed
particular strength within these businesses included Lilly's Zyprexa(R)
Zydis(R), an anti-psychotic; Mylan's Amnesteem(TM), a generic drug for the
treatment of acne; and Sepracor's Xoponex(R), a respiratory drug. The growth
within the Biotechnology and Sterile Life Sciences business was negatively
impacted by the planned shutdown for twelve weeks of a domestic sterile
manufacturing facility to expand capacity. The acquisition of Syncor, effective
January 1, 2003, contributed to the growth in this segment. Excluding Syncor,
this segment experienced revenue growth in the high teens during fiscal 2003.
The increase in this segment's operating revenue 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); 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 in fiscal 2002 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% in fiscal 2002 over fiscal 2001.
Additionally, the segment experienced growth in fiscal 2002 in its
pharmaceutical packaging business, which was attributable to the addition of
several new customers and increased volume from existing customers. Slowing
sales in the protease inhibitor and health and nutritional product lines
partially offset the growth in this segment during fiscal 2002.
The Automation and Information Services segment's operating revenue
growth in fiscal 2003 resulted from strong sales of new and existing patient
safety and supply management product lines, including Pyxis MedStation(R), Pyxis
Anesthesia System(TM), Pyxis Connect(TM) and Pyxis SupplyStation(R). The
increase in this segment's operating revenue in fiscal 2002 primarily resulted
from strong sales in the patient safety and supply management product lines,
such as Pyxis MedStation(R) SN and Pyxis SupplyStation 30.
21
Significant sales of new products including Pyxis Anesthesia System and products
within the Pyxis SupplyStation line also contributed to this segment's growth.
BULK DELIVERIES TO CUSTOMER WAREHOUSES AND OTHER
The Pharmaceutical Distribution and Provider Services segment 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 and changes in policies by manufacturers related to
selling directly to customers. Due to the lack of margin generated through bulk
deliveries, fluctuations in their amount have no significant impact on the
Company's net earnings.
The Pharmaceutical Technologies and Services segment records
out-of-pocket reimbursements received through its sales and marketing services
business as revenue. These out-of-pocket expenses, which generally include
travel expenses and other incidental costs, are incurred to fulfill the services
required by the contract. Within these contracts, the customer agrees to
reimburse the Company for the expenses. Due to the Company not generating any
margin from these reimbursements, fluctuations in their amount have no impact on
the Company's net earnings.
GROSS MARGIN
(as a percentage of operating revenue)
Years ended June 30, 2003 2002 2001
- -----------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 4.6% 5.0% 5.1%
Medical Products and Services 21.9% 21.9% 22.1%
Pharmaceutical Technologies and Services 33.1% 34.1% 33.6%
Automation and Information Services 70.3% 68.5% 68.6%
Total Company 8.9% 9.1% 9.3%
- -----------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased
in fiscal 2003 and 2002 due to the mix of businesses contributing to the
consolidated gross margin. The decrease in gross margin as a percentage of
operating revenue within the Pharmaceutical Distribution and Provider Services
segment in fiscal 2003 resulted primarily from the following: (1) an increase in
sales to lower-margin customers (which have a lower cost of distribution) that
reduced gross margins; (2) competitive pricing; and (3) a moderation in vendor
margins due to manufacturers attempting to better match their shipments to meet
market demand, resulting in less surplus inventory (see additional discussion of
these factors below). A decrease in gross margin as a percentage of operating
revenue within Pharmaceutical Technologies and Services also contributed to the
overall decrease. The decrease in the overall gross margin as a percentage of
operating revenue in fiscal 2002 resulted from a greater mix of lower margin
pharmaceutical distribution operating revenues as compared to the prior year.
The Pharmaceutical Distribution and Provider Services segment represented 82% of
operating revenues in fiscal 2002, up from 81% in fiscal 2001. The decline in
the gross margins in the Medical Products and Services and Automation and
Information Services segments also contributed to the overall decline in the
Company's gross margin in fiscal 2002.
The gross margin as a percentage of operating revenue in the
Pharmaceutical Distribution and Provider Services segment decreased in fiscal
2003. This decrease in gross margin as a percentage of operating revenue
primarily resulted from an increase in sales to lower-margin customers (which
include chain pharmacy and alternate site) which have a lower cost of
distribution. The table below shows the percentage breakdown of operating
revenue by customer class within Pharmaceutical Distribution, the largest
business within this segment, for fiscal years 2003, 2002 and 2001.
Customer Class 2003 2002 2001
- --------------------------------------------------------------------------
Chain Pharmacy 47% 47% 46%
Alternate Site 22% 20% 19%
Health System 18% 19% 20%
Independent 13% 14% 15%
----------------------------------
Total 100% 100% 100%
==================================
This segment's selling margins were negatively impacted by competitive pricing,
which was another primary cause of the decrease in gross margin as a percentage
of operating revenue. A moderation in vendor margin programs also contributed to
the decline in this segment's gross margin as a percentage of operating revenue.
The Company has seen changes in vendor supply chain
22
management policies related to product availability, including the use of
inventory management agreements. Under these types of agreements, the Company is
generally compensated on a negotiated basis to help manufacturers better match
their shipments with market demand, therefore adversely affecting the Company's
investment margin opportunities. Generally, the Company is compensated under its
inventory management agreements based on the timing of inventory price increases
and the volume of inventory purchases during the agreed upon period. The Company
recognizes the amounts received from such agreements within gross margin based
upon related inventory sales.
The gross margins in the Pharmaceutical Distribution and Provider
Services segment may be affected in future years by changes occurring in the
industry, such as changes in vendor supply chain management policies, including
the use of inventory management agreements. These changes provide fewer
opportunities for the pharmaceutical distribution business within the
Pharmaceutical Distribution and Provider Services segment to make large
purchases of product with related vendor margin incentives. With fewer
opportunities to make attractive inventory investments, the Company expects to
deploy less capital in this segment.
The decline in gross margin as a percentage of operating revenue in the
Pharmaceutical Distribution and Provider Services segment in fiscal 2002
resulted primarily from 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 (see table above). In addition, this
segment's gross margin in fiscal 2002 was negatively impacted by several
non-recurring items, primarily related to the Bindley integration. In fiscal
2002, 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 into this segment. These decreases in fiscal 2002
were 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
Products and Services segment remained unchanged in fiscal 2003. This segment's
gross margin was positively impacted by increased sales of existing and new
higher-margin, self-manufactured products, manufacturing efficiencies achieved
during the fiscal year and outsourcing of some product manufacturing to more
cost efficient areas. The impact of new distribution agreements which increased
sales of lower-margin distributed products offset the gains noted above. The
decline in gross margin as a percentage of operating revenue in this segment in
fiscal 2002 resulted primarily from 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.
The gross margin as a percentage of operating revenue in the
Pharmaceutical Technologies and Services segment decreased during fiscal 2003.
This decrease was primarily driven by the addition of Syncor's nuclear pharmacy
services business. Syncor has a slightly lower gross margin ratio than the other
businesses within this segment. Also, the gross margin was negatively impacted
by certain items that occurred in fiscal 2002 that did not recur in fiscal 2003,
including the recording of pricing adjustments related to the minimum recovery
expected to be received for claims against vitamin manufacturers for amounts
overcharged in prior years (also, 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 Company recorded
$12.0 million in the first quarter of fiscal 2002 and $10.0 million in the
second quarter of fiscal 2001 for these pricing adjustments. This 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 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.
The gross margin as a percentage of operating revenue in the Automation
and Information Services segment increased in fiscal 2003, primarily from the
mix of products sold as well as productivity gains realized from the operational
improvements implemented in the prior fiscal year. This segment's gross margin
as a percentage of operating revenue decreased in fiscal 2002, primarily due to
changes in its product mix.
23
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of operating revenue)
Years ended June 30, 2003 2002 2001 (1)
- ----------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 1.7% 2.1% 2.3%
Medical Products and Services 12.8% 13.3% 14.6%
Pharmaceutical Technologies and Services 15.1% 14.5% 15.4%
Automation and Information Services 30.4% 31.2% 32.9%
Total Company 4.4% 4.7% 5.2%
- ----------------------------------------------------------------------------------------------
(1) In fiscal 2001, 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 2003 and fiscal 2002. This decline reflects
ongoing productivity programs and 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. The improvement in
fiscal 2003 was partially offset by an increase in selling, general and
administrative expenses as a percentage of operating revenue in the
Pharmaceutical Technologies and Services segment, primarily the result of
changes within the business mix in this segment. This business mix change was
largely driven by the acquisition of Syncor, which has a higher expense ratio as
compared to other businesses in this segment. In the first quarter of 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, during fiscal 2002, the Company realized productivity and operating
efficiencies as a result of implementing changes within the Automation and
Information Services segment to better service its customers.
The selling, general and administrative expenses grew 7% and 6% in
fiscal years 2003 and 2002, respectively. Expenses from the operations of newly
acquired companies accounted for approximately 6% of the overall increase in
fiscal 2003, with expenses relating to the operations of Syncor giving rise to
the largest part of the increase. The increase in fiscal 2002 was primarily due
to an increase in personnel costs, which accounted for approximately 4% of the
overall increase. The overall increase in fiscal 2003 and fiscal 2002 compares
favorably to the 14% and 15% growth in operating revenue for the same periods.
24
SPECIAL ITEMS & MERGER-RELATED COSTS
The following is a summary of the merger-related costs and other
special items for the fiscal years ended June 30, 2003, 2002 and 2001.
Fiscal Year Ended June 30,
-------------------------------
(in millions, except per Common Share amounts) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ - $ - $ (20.8)
Employee-related costs (18.7) (23.7) (46.2)
Pharmaceutical distribution center consolidation (22.7) (52.4) (10.3)
Asset impairments & other exit costs (5.4) (9.0) (8.5)
Other integration costs (27.6) (46.8) (32.3)
- ---------------------------------------------------------------------------------------
Total merger-related costs $ (74.4) $(131.9) $ (118.1)
- ---------------------------------------------------------------------------------------
Other special items:
Distribution center closures $ - $ - $ (5.0)
Manufacturing facility closures & restructurings (40.2) (2.8) (6.8)
Employee-related costs (6.9) (15.2) -
Asset impairments and other (19.9) - -
Litigation settlements, net 101.5 11.3 5.0
- ---------------------------------------------------------------------------------------
Total other special items $ 34.5 $ (6.7) $ (6.8)
- ---------------------------------------------------------------------------------------
Total special items $ (39.9) $(138.6) $ (124.9)
Tax effect of special items 6.7 51.5 39.6
- ---------------------------------------------------------------------------------------
Net effect of special items $ (33.2) $ (87.1) $ (85.3)
=======================================================================================
Net effect on diluted earnings per Common Share $ (0.07) $ (0.19) $ (0.19)
=======================================================================================
MERGER-RELATED COSTS
Costs of integrating the operations of various merged companies are
recorded as merger-related costs when incurred. The merger-related costs
recognized for the fiscal years shown above were primarily a result of the
merger or acquisition transactions involving Syncor, BLP, Magellan, Bindley,
BBMC, Allegiance and Scherer.
DIRECT TRANSACTION COSTS. During fiscal 2001, the Company incurred
direct transaction costs related to its merger transaction with Bindley, which
was accounted for as a pooling-of-interests. These expenses of $20.8 million
primarily included investment banking, legal, accounting and other professional
fees associated with the merger.
EMPLOYEE-RELATED COSTS. During fiscal 2003, 2002 and 2001, the Company
incurred employee-related costs associated with certain merger and acquisition
transactions of $18.7 million, $23.7 million and $46.2 million, respectively.
These costs primarily consist of severance, non-compete agreements and
transaction/stay bonuses as a direct result of the mergers or acquisitions. In
addition to these types of costs, during fiscal 2003, the Company incurred a
charge of $8.8 million related to an approved plan to curtail certain defined
benefit pension plans within the Pharmaceutical Technologies and Services
segment. This curtailment resulted from the plan to conform Scherer's employee
benefit plans to the Company's benefit plan structure at the time of the Scherer
merger.
PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During fiscal 2003,
2002 and 2001, the Company recorded charges of $22.7 million, $52.4 million and
$10.3 million, respectively, primarily associated with the Company's plans to
close and consolidate a total of 16 Bindley distribution centers, Bindley's
corporate office, and one of the Company's data centers as a result of the
merger transaction with Bindley. In connection with the Bindley related
consolidations and closures, the Company incurred employee-related costs of $3.2
million, $7.5 million and $0.5 million in fiscal 2003, 2002 and 2001,
respectively, arising primarily from the termination of approximately 1,250
employees. In addition, exit costs related to termination of contracts and lease
agreements were incurred during fiscal 2003, 2002 and 2001 of $8.2 million, $3.6
million and $9.8 million, respectively. Also, asset impairment charges of $8.2
million and $27.2 million, respectively, were incurred during fiscal 2003 and
2002. The remaining $3.1 million and $14.1 million incurred during fiscal 2003
and 2002, respectively, was primarily related to costs associated with moving
inventory and other assets during the consolidation of distribution centers,
Bindley's corporate office and one of the Company's data centers. As of June 30,
2003, the Company had completed the closures and consolidations noted above and
the
25
employees noted above had been terminated.
ASSET IMPAIRMENTS & OTHER EXIT COSTS. The asset impairments and other
exit costs during fiscal 2003, 2002 and 2001 of $5.4 million, $9.0 million and
$8.5 million, respectively, are primarily related to costs associated with lease
terminations, moving expenses and asset impairments as a direct result of the
merger or acquisition transactions with BBMC, Allegiance and Scherer.
OTHER INTEGRATION COSTS. Other integration costs during fiscal 2003,
2002 and 2001 of $27.6 million, $46.8 million and $32.3 million, respectively,
included charges directly related to the integration of operations of previous
merger and acquisition transactions. These operations include, but are not
limited to, information systems, employee benefits and compensation,
accounting/finance, tax, treasury, internal audit, risk management, compliance,
administrative services, sales and marketing and others. The costs included in
this category generally relate to expenses incurred to integrate the merged or
acquired company's operations and systems into the Company's pre-existing
operations and systems.
OTHER SPECIAL ITEMS
DISTRIBUTION CENTER CLOSURES. 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.
MANUFACTURING FACILITY CLOSURES & RESTRUCTURINGS. During fiscal 2003,
2002 and 2001, the Company recorded a total of $40.2 million, $2.8 million and
$6.8 million, respectively, as special charges related to the closure,
consolidation and restructuring of certain manufacturing facilities. These
closures, consolidations and restructurings occurred within the Medical Products
and Services segment and the Pharmaceutical Technologies and Services segment.
Within the Medical Products and Services segment, three manufacturing
facility closures were completed during fiscal 2003. Also, certain operations
within three other facilities were identified for consolidation or
rationalization. A total of $23.6 million was recorded related to these
closures, consolidations and rationalizations, of which $10.3 million related to
severance costs due to the termination of approximately 1,475 employees.
Approximately 600 of the employees were terminated prior to June 30, 2003. The
remaining employees are expected to be terminated during fiscal 2004. Asset
impairment charges of $9.4 million were incurred. Also, exit costs of $3.9
million were incurred, primarily related to dismantling and moving machinery and
equipment. The plans to consolidate or rationalize the three facilities
discussed above are expected to be completed during fiscal 2004.
The Company incurred special charges of $13.7 million related to the
restructuring, consolidation or closure of three manufacturing facilities within
the Pharmaceutical Technologies and Services segment during fiscal 2003. One
restructuring was completed during fiscal 2003. The other two
consolidations/closures are expected to be completed by September 30, 2003.
Asset impairment charges of $5.7 million were incurred related to these
closures. Also, exit costs of $3.2 million were incurred primarily related to
dismantling machinery and equipment and transferring certain technologies to
other facilities as part of the restructuring plan. The remaining $4.8 million
represents employee-related costs, primarily severance related to the
termination of approximately 400 employees. As of June 30, 2003, the majority of
these employees have been terminated.
In addition, during fiscal 2003, 2002 and 2001, the Company recorded
special charges of $2.9 million, $2.8 million and $6.8 million, respectively,
related to the restructuring of certain health and nutritional manufacturing
facilities. During fiscal 2003, the $2.9 million primarily represents costs
associated with transferring and validating the health and nutrition operations
as the processes are rationalized. Asset impairment costs of $1.8 million were
incurred during fiscal 2002 primarily due to a writeoff of obsolete inventory
created by this rationalization of 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 fiscal 2002 and
2001, respectively, related to employee-related costs associated with the
termination of approximately 185 employees, primarily manufacturing and certain
management positions. As of June 30, 2003, these employees had been terminated.
The restructuring plan is expected to be completed during the first quarter of
fiscal 2004.
EMPLOYEE-RELATED COSTS. During fiscal 2003, the Company incurred
employee-related costs of $6.9 million primarily due to the integration and
reorganization of certain operations within the Pharmaceutical Technologies and
Services segment. The Company recorded charges of $5.0 million related to this
restructuring, the majority of which represents severance accrued upon
communication of severance terms to employees. This restructuring plan was
completed by June 30, 2003, and resulted in the termination of approximately 185
employees. The remaining $1.9 million was primarily due to the restructuring of
certain operations within the Pharmaceutical Distribution and Provider Services
segment. A significant portion of the charges represent
26
severance accrued at the time severance terms were communicated to employees.
This restructuring plan was completed by June 30, 2003 and resulted in the
termination of approximately 30 employees.
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 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. This restructuring plan was completed during fiscal 2003, and
resulted in the termination of approximately 600 employees.
ASSET IMPAIRMENTS AND OTHER. During fiscal 2003, the Company incurred
asset impairment and other charges of $19.9 million, of which $10.1 million
related to asset impairment charges, primarily goodwill, resulting from the
Company's decision to exit certain North American commodity operations in its
Pharmaceutical Technologies and Services segment. An additional $7.8 million
related to a writeoff of design and tooling costs. The remaining $2.0 million
primarily includes non-employee related costs associated with certain
restructuring activities initiated by the Company outside of its manufacturing
facilities.
LITIGATION SETTLEMENTS, NET. During fiscal 2003 and 2002, the Company
recorded income from net litigation settlements of $101.5 million and $11.3
million, respectively. The settlements resulted primarily from the recovery of
antitrust claims against certain vitamin manufacturers for amounts overcharged
in prior years. The total recovery through June 30, 2003 was $138.2 million (net
of attorneys fees, payments due to other interested parties and expenses
withheld). Of this total recovery, $102.9 million and $13.3 million were
recorded as special items during fiscal 2003 and 2002, respectively. The
remaining $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) and reflected 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. While the Company still has pending claims with
smaller vitamin manufacturers, the total amount of future recovery is not
currently estimable, but the Company believes it is not likely to be a material
amount. Any future recoveries will be recorded as a special item in the period
in which a settlement is reached.
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 2003, the net effect of various special items reduced
reported earnings from continuing operations by $33.2 million to $1,411.9
million and reduced reported diluted earnings per Common Share from continuing
operations by $0.07 per share to $3.12 per share. In fiscal 2002, the net effect
of various special items 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.
Certain merger and acquisition 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 items when incurred.
The Company estimates that it will incur additional costs associated
with the various merger, acquisition and restructuring activities entered into
to date totaling approximately $90 million (approximately $60 million net of
tax) in future periods. This estimate is subject to adjustment pending
resolution of Syncor acquisition related litigation contingencies. 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 and rationalize 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 health care 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 health care
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 health care
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
27
and acquisition related costs, and there can be no assurance that the
integration efforts associated with any such transaction would be successful.
INTEREST EXPENSE AND OTHER. The decrease in interest expense and other of $17.2
million during fiscal 2003 compared to fiscal 2002 resulted from lower interest
rates and effective asset management, resulting in lower average borrowings
outstanding. 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, resulting in
lower average borrowings outstanding. In addition, in fiscal 2002, the Company
recognized a one-time gain on an equity investment, which contributed to the
overall decline. The Company manages its exposure to changing interest rates
using various hedging strategies (see Notes 1 and 5 in "Notes to Consolidated
Financial Statements").
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to earnings
before income taxes, discontinued operations and cumulative effect of change in
accounting were 33.6% of pretax earnings in fiscal 2003 compared with 33.8% in
fiscal 2002 and 35.6% for fiscal 2001. The fluctuation in the tax rate is
primarily due to changes within state and foreign effective tax rates resulting
from the Company's business mix and changes in the tax impact of special items,
which may have unique tax implications. 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.
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 operating
activities and are presented net of an allowance for 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. See Schedule
II included in this Form 10-K which includes a rollforward of activity
for these allowance reserves.
- - INVENTORIES. A majority of inventories (approximately 68% in 2003 and
67% in 2002) are stated at the 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:
June 30,
---------------------------------
(in millions) 2003 2002 2001
--------------------------------------------------------------
FIFO inventory $7,679.5 $7,411.4 $ 6,338.9
LIFO reserve valuation (56.2) (50.4) (52.8)
---------------------------------
Total inventory $7,623.3 $7,361.0 $ 6,286.1
=================================
- - 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 ceased
amortization of all goodwill and intangible assets with indefinite
lives as of July 1, 2001. Intangible assets with finite lives,
primarily customer relationships and patents and trademarks, continue
to be amortized over their useful lives. The Company completed the
required impairment testing in fiscal 2003 and 2002 and did not incur
any impairment charges.
28
- - 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. Integration
costs from acquisitions accounted for under the pooling of interests
method have been recorded in accordance with EITF 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 related to these acquisitions,
such as employee and lease terminations and other facility exit costs,
were recognized at the date the integration plan was adopted by
management. Certain other integration costs that did not meet the
criteria for accrual at the commitment date have been expensed as the
integration plan has been implemented.
The costs associated with integrating acquired companies under
the purchase method are recorded in accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination." Certain costs to be incurred by the Company, as the
acquirer, such as employee and lease terminations and other facility
exit costs, are recognized at the date the integration 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.
At the beginning of the third quarter of fiscal 2003, the
Company implemented SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" to account for costs incurred in
restructuring activities. Under this standard, a liability for an exit
cost is recognized as incurred. As discussed above, the Company
previously accounted for costs associated with restructuring activities
under EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" which required the Company
to recognize a liability for restructuring costs on the date of the
commitment to an exit plan.
The majority of the special items incurred can be classified
in one of the following categories: employee-related costs, exit costs
(including lease termination costs), asset impairments and other
integration costs. 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
include costs to move equipment or inventory out of a facility as well
as other costs incurred to shut down a facility. Asset impairment costs
include the remaining net book value of assets no longer used as a
result of the integration or restructuring activities. 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 $5.9 billion at June 30, 2003 from $5.1
billion at June 30, 2002. This increase in working capital primarily resulted
from increases in trade receivables and inventories of $489.0 million and $262.3
million, respectively. The increase in trade receivables was driven by the
Company's revenue growth as well as the addition of Syncor. The increase in
inventories resulted primarily from increased sales across each of the Company's
segments. The increase in inventories noted above is less than in prior years
due to the impact of branded to generic product conversions, vendor inventory
policies, and the use of inventory management agreements, which lowered the
Company's inventory investment. Synergies realized from the Bindley integration
have also lowered the Company's investment in inventory.
Net investment in sales-type leases decreased $107.8 million at June
30, 2003, as compared to June 30, 2002. This decrease resulted primarily from
the sale of sales-type leases for amounts approximating their fair value,
partially offset by new leases entered into during the fiscal year. The net book
value of the leases sold was approximately $356.0 million (see Note 8 in "Notes
to Consolidated Financial Statements" for further discussion).
Shareholders' equity increased to $7.8 billion at June 30, 2003 from
$6.4 billion at June 30, 2002. The increase was primarily due to net earnings of
$1,405.8 million, the issuance of shares held in treasury for the Syncor
acquisition totaling approximately $780.8 million, the valuation of Syncor
vested options acquired of $47.2 million and the investment of $265.9 million by
employees of the Company through various stock incentive plans. This increase in
fiscal 2003 was partially offset by the repurchase of Common Shares of $1,191.7
million and dividends paid of $44.8 million.
In January 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.6 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in February 2003, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
29
In August 2002, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 7.8 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in January 2003, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.3 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in August 2002, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
At June 30, 2003, the Company had a commercial paper program providing
for the issuance of up to $1.5 billion in aggregate maturity value of commercial
paper. The Company also had an extendible commercial notes program providing for
the issuance of up to $150.0 million of extendible commercial notes. The Company
did not have any borrowings outstanding under these programs at June 30, 2003.
The Company has an unsecured bank credit facility providing for up to
an aggregate of $1.5 billion in borrowings of which $750.0 million expires on
March 26, 2004 and $750.0 million expires on March 27, 2008. The facility
expiring on March 26, 2004, allows the Company, at its option, to extend the
maturity of any moneys 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, 2003, except for $23.7 million of standby letters of credit issued on
behalf of the Company.
The Company also has uncommitted short-term credit facilities with
various bank sources aggregating $100.0 million. At June 30, 2003, the Company
had borrowings outstanding related to these short-term credit facilities of
$21.0 million. The Company also has line-of-credit agreements with various bank
sources aggregating $122.1 million, of which nothing was outstanding at June 30,
2003 (see Note 4 of "Notes to Consolidated Financial Statements").
At June 30, 2003, the Company had an asset securitization facility
available which allows the Company to sell receivables generated from its
radiopharmaceutical operations to a wholly-owned subsidiary, which in turn sells
the receivables to a multi-seller conduit administered by a third party bank.
This securitization program allows the Company to borrow up to $65.0 million.
The Company did not have any borrowings outstanding under this facility at June
30, 2003.
The following table summarizes the maturities for the Company's
significant financial obligations:
(in millions) 2004 2005 2006 2007 2008 Thereafter Total
- -------------------------------------------------------------------------------------------------------------
Long-term debt $ 228.7 $ 368.2 $ 163.3 $ 139.6 $ 3.2 $ 1,797.6 $ 2,700.6
Operating leases 69.8 56.8 46.3 38.4 23.4 50.1 284.8
----------------------------------------------------------------------------
Total financial obligations $ 298.5 $ 425.0 $ 209.6 $ 178.0 $ 26.6 $ 1,847.7 $ 2,985.4
============================================================================
As of June 30, 2003, the Company's senior debt credit ratings from
Moody's, S&P and Fitch were A2, A and A, respectively, the commercial paper
ratings were P-1, A-1 and F-1, respectively, and the ratings outlooks were
negative, stable and stable, respectively. Since June 30, 2003, these ratings
and outlooks have remained unchanged. 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, 2003, the Company was in
compliance with this covenant.
During fiscal 2003, the Company issued $500 million of 4.00% Notes, due
2015. The proceeds of the debt issuance were used for general corporate
purposes, including working capital, capital expenditures, acquisitions,
investments and repurchases of our debt and equity securities. After this
issuance, the Company has the capacity to issue approximately $500 million of
additional equity or debt securities pursuant to effective shelf registration
statements that have previously been filed with the Securities and Exchange
Commission. Pursuant to authorization by the Board of Directors, the Company
intends to file a shelf registration statement to increase the capacity
available for issuance to $1 billion of equity and debt securities.
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
30
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 adjusted
tangible net worth and certain financial ratio covenants. As of June 30, 2003,
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 generally does not engage in "speculative" transactions involving
derivative financial instruments. During fiscal 2003, the Company entered into
one speculative interest rate swap transaction resulting in an immaterial gain.
OFF BALANCE SHEET TRANSACTIONS
The Company periodically enters into certain off-balance sheet
arrangements, primarily asset sales and operating leases, in order to maximize
diversification of funding and return on assets. The asset sales, as described
below, also provide for the transfer of credit risk to third parties. See Note 8
in "Notes to Consolidated Financial Statements" for further information
regarding impacts on cash flow and expense related to these transactions.
During fiscal 2003, the Company entered into two separate agreements to
transfer ownership of certain equipment lease receivables, plus security
interests in the related equipment, to the leasing subsidiary of a bank in the
amounts of $156.0 million and $200.0 million. An immaterial gain was recognized
from each of these transactions, which was classified as operating revenue
within the Company's results of operations. In order to qualify for sale
treatment under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company formed
two-wholly owned, special purpose, bankruptcy-remote entities (the "SPEs") of
Pyxis Corporation (which has been given the legal designation of Cardinal Health
301, Inc. and is referred to in this Form 10-K as "Pyxis"), and the SPEs formed
two wholly-owned, qualified special purpose entities (the "QSPEs") to effectuate
the removal of the lease receivables from the Company's consolidated financial
statements. In accordance with SFAS No. 140, the Company consolidates the SPEs
and does not consolidate the QSPEs. Both the SPEs and QSPEs are separate legal
entities that maintain separate financial statements from the Company and Pyxis.
The assets of the SPEs and QSPEs are available first and foremost to satisfy the
claims of their respective creditors.
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 ultimately selling the lease receivables to a
multi-seller conduit administered by a third-party bank. Pyxis Funding is a
wholly-owned, special purpose, bankruptcy-remote subsidiary of Pyxis. Pyxis
Funding II LLC ("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,
qualified special purpose 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
No. 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 notes held by the investor had a principal balance of $51.5
million on June 30, 2003, and the investor is provided with credit protection in
the form of 20% ($12.9 million) over-collateralization. As of August 31, 2002,
the notes held by the investor had a principal balance of $95.4 million, and the
investor was provided with credit protection of $23.8 million.
At June 30, 2003, the Company had $280.0 million in committed
receivables sales facility programs through Medicine Shoppe Capital Corporation
("MSCC") and Cardinal Health Funding ("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 the Financial Shared Services business (formerly Griffin). The sale
of receivables by MSCC and CHF qualifies for sale treatment under SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," and
31
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 $5.4 million and $8.8 million at June 30,
2003 and 2002, respectively. There were no outstanding sold receivables under
the CHF program as of June 30, 2003 and 2002. Recourse is provided under the
MSCC program by the requirement that MSCC retain a 20% subordinated interest in
the sold receivables. Subordinated interests were $1.3 million and $2.2 million
at June 30, 2003 and 2002, respectively. Subsequent to June 30, 2003, the
Company elected to terminate and liquidate MSCC. As a result, the Company
incurred an immaterial loss. 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, 2003, 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 May 2004
through June 2013, 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,
2003, the amount expended to acquire and/or construct the facilities was $501.3
million. The agreements provide for maximum fundings of $596.4 million, which is
currently 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, 2003, the
weighted average interest rate on the agreements approximated 1.84%. The
Company's minimum annual lease payments under the agreements at June 30, 2003
were approximately $9.2 million.
OTHER
RECENT FINANCIAL ACCOUNTING STANDARDS. In May 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
clarifies the definition of a liability, as currently defined under FASB
Concepts Statement No. 6 "Elements of Financial Statements," as well as other
items. The statement requires that financial instruments that embody an
obligation of an issuer be classified as a liability. Furthermore, the standard
provides guidance for the initial and subsequent measurement as well as
disclosure requirements of these financial instruments. SFAS No. 150 is
effective for financial instruments entered into after May 31, 2003. The
adoption of this statement did not have a material effect on the Company's
financial position or results from operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends and
clarifies the financial accounting and reporting requirements, as were
originally established in FASB Statement No. 133, for derivative instruments and
hedging activities. FASB Statement No. 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar
characteristics will be accounted for consistently. This statement is effective
for contracts entered into or modified after June 30, 2003, as well as for
hedging relationships designated after June 30, 2003, excluding certain
implementation issues that have been effective prior to this date under FASB
Statement No. 133. The adoption of this statement is not anticipated to have a
material effect on the Company's financial position or results of operations.
In January 2003, the EITF finalized a consensus on Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor." This issue requires that cash consideration received by
a customer from a vendor be recorded as a reduction of cost of sales within a
company's results of operations, excluding payments received when a customer
sells products and services to the vendor as well as reimbursement of costs
incurred by the customer in selling the vendor's product. This issue also
requires rebates or refunds provided to a customer as the result of achieving
certain purchase levels or other defined measures to be recorded as a reduction
of cost of sales. If the rebate or refund is probable and reasonably estimable,
it can be allocated over the time period in which it is earned. The adoption of
this consensus did not have a material effect on the Company's financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that was
acquired before February 1, 2003. The adoption of this interpretation did not
have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the
32
fair value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123. The transition guidance and
annual disclosure provisions are effective for fiscal years ending after
December 15, 2002 (see Note 1 of "Notes to Consolidated Financial Statements").
The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances a
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the enhanced disclosure requirements in the second
quarter of fiscal 2003. The adoption of the recognition and initial measurement
provisions during the third quarter of fiscal 2003 did not have a material
effect on the Company's financial position or results of operations.
In November 2002, the EITF finalized a consensus on Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables," effective for
arrangements entered into after June 15, 2003. This issue defines units of
accounting for arrangements with multiple deliverables resulting in revenue
being allocated over the units of accounting for revenue recognition purposes.
The adoption of this consensus is not anticipated to have a material effect on
the Company's financial position or results of operations.
In June 2002, the 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
EITF 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 did not 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 did not 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 No. 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 did not 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 did not have a material
effect on the Company's financial position or results of operations.
RECENT DEVELOPMENTS. On August 1, 2003, the Company's Board of Directors
authorized the repurchase of Common Shares of up to an aggregate amount of $1.0
billion. Pursuant to this authorization, the Company repurchased approximately
17.0 million Common Shares having an aggregate cost of approximately $1.0
billion. This repurchase was completed during the first quarter of fiscal 2004,
and the repurchased shares were placed into treasury shares to be used for
general corporate purposes.
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 2003 and 2002, the Company's net transactional
exposure was approximately $260.3 million and $203.5 million, respectively. As
of June 30, 2003 and 2002, a hypothetical 10% aggregate increase or decrease in
the currencies to which the Company has exposure would result in a gain or
33
loss of approximately $26.0 million and $20.4 million, respectively, 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
contracts. For fiscal 2003 and 2002, the Company hedged approximately 54% and
40%, respectively, 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 for fiscal 2003 and 2002 would decrease by
approximately $14.1 million and $8.1 million, respectively. Therefore, as a
result of the Company's hedging activity as of June 30, 2003 and 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 $11.9
million and $12.3 million, respectively ($26.0 million less $14.1 million
mitigated by hedges in fiscal 2003, $20.4 million less $8.1 million mitigated by
hedges in fiscal 2002). 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 2003 and 2002, this translational exposure totaled approximately $108.8
million and $67.2 million, respectively. The potential gain or loss due to
foreign currency translation, assuming a 10% aggregate increase or decrease in
the respective currencies, would be approximately $10.9 million and $6.7
million, respectively, for fiscal 2003 and 2002. The Company typically does not
hedge any of its translational exposure. There were no translational hedges
outstanding at June 30, 2003 and 2002.
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.
As of June 30, 2003 and 2002, the potential gain or loss due to a
hypothetical 10% change in interest rates would be approximately $1.3 million
and $2.3 million, respectively. 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 2003 and 2002, the total commodity exposure was approximately $33.3
million and $32.0 million, respectively. The impact of a hypothetical 10%
fluctuation in commodity prices would be approximately $3.3 million and $3.2
million, respectively, for fiscal 2003 and 2002.
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, 2003, 2002 and 2001
Consolidated Balance Sheets at June 30, 2003 and 2002
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended June 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Fiscal
Years Ended June 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Schedule II
34
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the
Board of Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of
Cardinal Health, Inc. and subsidiaries (the "Company") as of June 30, 2003 and
2002, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for the fiscal years 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 the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule based on our audits. The
consolidated financial statements and financial statement schedule of the
Company for the fiscal year ended June 30, 2001 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 audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the fiscal 2003 and 2002 consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of June 30, 2003 and 2002, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related fiscal 2003 and 2002 financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present 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, the Company changed its method of recognizing
revenue for pharmacy automation equipment. In addition, as discussed in Note 1
to the consolidated financial statements, the Company changed its method of
accounting for purchased goodwill and other intangible assets in accordance with
Statement of Financial Standards ("Statement") No. 142 during the first quarter
of fiscal 2002.
As discussed above, the financial statements of the Company as of June
30, 2001, and for the year 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 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 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 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 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 financial statements taken as a whole.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Columbus, Ohio
July 30, 2003, except for Note 20, as to which the date is September 11, 2003
35
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 SEC 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, 2003. 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.
36
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 SEC 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, 2003. 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.
37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
2003 2002 2001
------------------------------------------
Operating revenue $ 50,466.6 $ 44,394.3 $ 38,660.1
Operating cost of products sold 45,956.6 40,348.1 35,050.2
------------ ------------ ------------
Operating gross margin 4,510.0 4,046.2 3,609.9
Bulk deliveries to customer warehouses and other 6,270.4 6,741.4 9,287.5
Cost of products sold - bulk deliveries and other 6,270.4 6,741.4 9,285.8
------------ ------------ ------------
Bulk gross margin - - 1.7
Selling, general and administrative expenses 2,228.2 2,073.8 1,950.7
Goodwill amortization - - 48.9
Special items - merger charges 74.4 131.9 118.1
- other (34.5) 6.7 6.8
------------ ------------ ------------
Operating earnings 2,241.9 1,833.8 1,487.1
Interest expense and other 115.3 132.5 154.9
------------ ------------ ------------
Earnings before income taxes, discontinued
operations, and cumulative effect of change
in accounting 2,126.6 1,701.3 1,332.2
Provision for income taxes 714.7 575.0 474.8
------------ ------------ ------------
Earnings from continuing operations before
cumulative effect of change in accounting 1,411.9 1,126.3 857.4
Loss from discontinued operations
(net of tax of $2.5) (6.1) - -
Cumulative effect of change in accounting - (70.1) -
------------ ------------ ------------
Net earnings $ 1,405.8 $ 1,056.2 $ 857.4
============ ============ ============
Basic earnings per Common Share:
Continuing operations $ 3.17 $ 2.50 $ 1.93
Discontinued operations (0.02) - -
Cumulative effect of change in accounting - (0.16) -
------------ ------------ ------------
Net basic earnings per Common Share $ 3.15 $ 2.34 $ 1.93
============ ============ ============
Diluted earnings per Common Share:
Continuing operations $ 3.12 $ 2.45 $ 1.88
Discontinued operations (0.02) - -
Cumulative effect of change in accounting - (0.15) -
------------ ------------ ------------
Net diluted earnings per Common Share $ 3.10 $ 2.30 $ 1.88
============ ============ ============
Weighted average number of shares outstanding:
Basic 446.0 450.1 443.2
Diluted 453.6 459.9 455.5
The accompanying notes are an integral part of these consolidated statements.
38
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and equivalents $ 1,724.0 $ 1,382.0
Trade receivables, net 2,784.4 2,295.4
Current portion of net investment in sales-type leases 171.8 218.3
Inventories 7,623.3 7,361.0
Prepaid expenses and other 776.0 649.9
Assets held for sale from discontinued operations 170.1 -
---------- ----------
Total current assets 13,249.6 11,906.6
---------- ----------
Property and equipment, at cost:
Land, buildings and improvements 1,218.8 1,002.7
Machinery and equipment 2,401.4 2,321.5
Furniture and fixtures 135.1 185.1
---------- ----------
Total 3,755.3 3,509.3
Accumulated depreciation and amortization (1,665.8) (1,614.9)
---------- ----------
Property and equipment, net 2,089.5 1,894.4
Other assets:
Net investment in sales-type leases, less current portion 557.3 618.6
Goodwill and other intangibles, net 2,332.3 1,544.1
Other 292.7 474.3
---------- ----------
Total $ 18,521.4 $ 16,438.0
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and other short term borrowings $ - $ 0.8
Current portion of long-term obligations 228.7 17.4
Accounts payable 5,288.4 5,504.5
Other accrued liabilities 1,733.0 1,287.7
Liabilities from discontinued operations 64.3 -
---------- ----------
Total current liabilities 7,314.4 6,810.4
---------- ----------
Long-term obligations, less current portion 2,471.9 2,207.0
Deferred income taxes and other liabilities 977.0 1,027.6
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 - 467.2 million shares
and 461.0 million shares at June 30, 2003 and 2002, respectively 2,403.7 2,105.2
Retained earnings 6,517.3 5,156.1
Common Shares in treasury, at cost, 18.8 million shares
and 12.2 million shares at June 30, 2003 and 2002, respectively (1,135.8) (737.0)
Other comprehensive loss (19.2) (120.9)
Other (7.9) (10.4)
---------- ----------
Total shareholders' equity 7,758.1 6,393.0
---------- ----------
Total $ 18,521.4 $ 16,438.0
========== ==========
The accompanying notes are an integral part of these consolidated statements.
39
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, 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
Comprehensive income:
Net earnings 1,405.8 1,405.8
Foreign currency translation adjustments 99.7 99.7
Unrealized gain on derivatives 2.0 2.0
-------------
Total comprehensive income 1,507.5
Employee stock plans activity,
including tax benefits of $65.5 million 6.2 227.8 0.5 35.6 2.5 265.9
Treasury shares acquired (19.6) (1,191.7) (1,191.7)
Dividends paid (44.8) (44.8)
Stock issued for acquisitions and other 70.7 0.2 12.5 757.3 828.2
------ -------- -------- ----- --------- ------------- ------ -------------
BALANCE, JUNE 30, 2003 467.2 $2,403.7 $6,517.3 (18.8) $(1,135.8) $ (19.2) $ (7.9) $ 7,758.1
====== ======== ======== ===== ========= ============= ====== =============
The accompanying notes are an integral part of these consolidated statements.
40
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations before cumulative effect
of change in accounting $ 1,411.9 $ 1,126.3 $ 857.4
Adjustments to reconcile earnings from continuing operations before
cumulative effect of change in accounting to net cash from
operations:
Depreciation and amortization 265.8 243.5 280.6
Provision for deferred income taxes 215.2 239.7 149.1
Provision for bad debts 17.2 42.6 41.4
Change in operating assets and liabilities,
net of effects from acquisitions:
Decrease/(increase) in trade receivables (414.8) 145.4 (31.4)
Increase in inventories (234.4) (1,071.1) (1,517.8)
Decrease/(increase) in net investment in sales-type leases 107.8 71.2 (141.8)
Increase/(decrease) in accounts payable (281.2) 179.2 1,313.8
Other accrued liabilities and operating items, net 310.5 7.1 (79.6)
---------- ---------- ----------
Net cash provided by operating activities 1,398.0 983.9 871.7
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (26.8) (383.8) (364.3)
Proceeds from sale of property and equipment 57.7 18.3 72.1
Additions to property and equipment (423.2) (285.4) (341.2)
Proceeds from sale of discontinued operations 48.6 - -
---------- ---------- ----------
Net cash used in investing activities (343.7) (650.9) (633.4)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 8.5 (9.7) (824.9)
Reduction of long-term obligations (191.0) (19.6) (53.8)
Proceeds from long-term obligations, net of issuance costs 509.4 362.3 911.3
Proceeds from issuance of Common Shares 197.3 140.0 252.1
Dividends on Common Shares, minority interests and
cash paid in lieu of fractional shares (44.8) (45.0) (36.6)
Purchase of treasury shares (1,191.7) (308.3) (139.4)
Other - (4.8) -
---------- ---------- ----------
Net cash provided by/(used in) financing activities (712.3) 114.9 108.7
---------- ---------- ----------
NET INCREASE IN CASH AND EQUIVALENTS 342.0 447.9 347.0
CHANGE IN FISCAL YEAR OF ACQUIRED SUBSIDIARY (SEE NOTE 1) - - 47.6
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 1,382.0 934.1 539.5
---------- ---------- ----------
CASH AND EQUIVALENTS AT END OF YEAR $ 1,724.0 $ 1,382.0 $ 934.1
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
41
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 leading provider of products and services supporting the health
care industry, and helping health care providers and manufacturers improve the
efficiency and quality of health care. The Company currently conducts its
business within four business segments: Pharmaceutical Distribution and Provider
Services; Medical 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
transaction with Bindley Western Industries, Inc. ("Bindley") on February 14,
2001 (see Note 2). This business combination was accounted for under the
pooling-of-interests method.
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 loss were
$4.9 billion and $2.8 million, respectively. 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 2003, 2002 and 2001, 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 $115.3 million, $116.5 million and $144.8 million and cash payments for
income taxes were $256.8 million, $246.0 million and $213.6 million for fiscal
2003, 2002 and 2001, 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 health care distribution activities
and are presented net of an allowance for doubtful accounts of $91.7 million and
$94.8 million at June 30, 2003 and 2002, respectively. An account is considered
past due on the first day after its due date. In accordance with contract terms,
the Company generally has the ability to charge a customer service charges or
higher prices if an account is considered past due. The Company continuously
monitors past due accounts and establishes appropriate reserves to cover
potential losses. The Company will write off any amounts deemed uncollectible
against an established bad debt reserve.
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. Interest income on these accounts is recognized
by the Company as it is earned. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivable
were $30.8 million at both June 30, 2003 and 2002 (the current portions are
$14.9 million and $14.3 million, respectively), and are included in other
assets. These amounts are reported net of an allowance for doubtful accounts of
$4.5 million and $4.7 million at June 30, 2003 and 2002, respectively.
The Company has formed special purpose entities with the sole purpose
of buying receivables or sales type leases from various legal entities of the
Company and selling those receivables or sales type leases to certain
multi-seller conduits administered by third-party banks or to other third party
investors. See Note 8 for additional disclosure regarding off balance sheet
financing.
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.
42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES. A majority of inventories (approximately 68% in 2003 and 67% in
2002) are stated at the 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, 2003, 2002 and 2001 by
$56.2 million, $50.4 million and $52.8 million, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
expense for financial reporting purposes is 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 depreciated
over the terms of their respective leases. Depreciation expense was $249.0
million, $231.2 million and $222.6 million for fiscal 2003, 2002 and 2001,
respectively. The Company expenses repairs and maintenance expenditures as
incurred. The Company capitalizes interest on long-term fixed asset projects
using the Company's weighted average interest rate on long-term debt of 5.8%.
The amount of repairs and maintenance expense and capitalized interest was
immaterial for all fiscal years presented.
OTHER ACCRUED LIABILITIES. Other accrued liabilities represent various
obligations of the Company including certain accrued operating expenses and
taxes payable. For the fiscal year ended June 30, 2003, the largest component of
other accrued liabilities was deferred tax liabilities of approximately $566.1
million.
REVENUE RECOGNITION. The Company records distribution revenue and
self-manufactured medical 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. Radiopharmaceutical
revenue is recognized upon delivery of the product to the customer. 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.
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
43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $213.8 million for fiscal 2003, $211.9 million for fiscal 2002 and
$206.6 million for fiscal 2001. 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 the assets and liabilities of
these foreign subsidiaries into U.S. dollars are accumulated in a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are included in the consolidated statements of earnings and were immaterial for
the fiscal years ended June 30, 2003, 2002 and 2001.
INTEREST RATE AND CURRENCY RISK MANAGEMENT. The Company accounts for derivative
instruments in accordance with Statement of Financial Accounting Standards
("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 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 generally does not use derivative instruments for trading
or speculative purposes. During fiscal 2003, the Company entered into one
speculative interest rate swap transaction resulting in an immaterial gain.
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 $56.9 million, $65.1 million
and $53.8 million in fiscal 2003, 2002 and 2001, respectively.
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
44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, $0.100 and
$0.080 for the fiscal years ended June 30, 2003, 2002 and 2001, 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.
RECLASSIFICATIONS. Certain reclassifications have been made to conform prior
period amounts to the current presentation.
RECENT FINANCIAL ACCOUNTING STANDARDS. In May 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
clarifies the definition of a liability, as currently defined under FASB
Concepts Statement No. 6 "Elements of Financial Statements," as well as other
items. The statement requires that financial instruments that embody an
obligation of an issuer be classified as a liability. Furthermore, the standard
provides guidance for the initial and subsequent measurement as well as
disclosure requirements of these financial instruments. SFAS No. 150 is
effective for financial instruments entered into after May 31, 2003. The
adoption of this statement did not have a material effect on the Company's
financial position or results from operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends and
clarifies the financial accounting and reporting requirements, as were
originally established in FASB Statement No. 133, for derivative instruments and
hedging activities. FASB Statement No. 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar
characteristics will be accounted for consistently. This statement is effective
for contracts entered into or modified after June 30, 2003, as well as for
hedging relationships designated after June 30, 2003, excluding certain
implementation issues that have been effective prior to this date under FASB
Statement No. 133. The adoption of this statement is not anticipated to have a
material effect on the Company's financial position or results of operations.
In January 2003, the Emerging Issues Task Force ("EITF") finalized a
consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor." This issue requires that cash
consideration received by a customer from a vendor be recorded as a reduction of
cost of sales within a company's results of operations, excluding payments
received when a customer sells products and services to the vendor as well as
reimbursement of costs incurred by the customer in selling the vendor's product.
This issue also requires rebates or refunds provided to a customer as the result
of achieving certain purchase levels or other defined measures to be recorded as
a reduction of cost of sales. If the rebate or refund is probable and reasonably
estimable, it can be allocated over the time period in which it is earned. The
adoption of this consensus did not have a material effect on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that was
acquired before February 1, 2003. The adoption of this interpretation did not
have a material effect on the Company's financial position or results of
operations as the Company did not have any material unconsolidated variable
interest entities as of June 30, 2003. See Note 4 for discussion of the
Company's special purpose accounts receivable and financing entity which is
included in the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation and amends the disclosure requirements of SFAS No. 123. The
transition guidance and annual disclosure provisions (shown below) are effective
for fiscal years ending after
45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 15, 2002. The adoption of this statement did not have a material effect
on the Company's financial position or results of operations.
At June 30, 2003, the Company maintained several stock incentive plans
for the benefit of certain employees, which are more fully described in Note 12.
The Company accounts for these plans in accordance with APB 25, and related
interpretations. Except for costs related to restricted stock and restricted
stock units, no compensation expense has been recognized in net earnings, as all
options granted had an exercise price equal to the market value of the
underlying stock on the date of grant. The following tables illustrate the
effect on net earnings and earnings per share after adjusting for anticipated
plan changes if the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation:"
(in millions, except per Common Share amounts) Fiscal Year Ended June 30,
------------------------------------
2003 2002 2001
------------------------------------
Net Earnings, as reported $ 1,405.8 $ 1,056.2 $ 857.4
Restricted stock amortization included in net
earnings, net of related tax effects 1.8 2.7 2.9
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (85.4) (74.3) (83.2)
------------------------------------
Pro Forma net earnings $ 1,322.2 $ 984.6 $ 777.1
====================================
Fiscal Year Ended June 30,
------------------------------------
2003 2002 2001
------------------------------------
Basic earnings per Common Share:
As reported $ 3.15 $ 2.34 $ 1.93
Pro Forma basic earnings per Common Share $ 2.96 $ 2.19 $ 1.75
Diluted earnings per Common Share
As reported $ 3.10 $ 2.30 $ 1.88
Pro Forma diluted earnings per Common Share $ 2.91 $ 2.14 $ 1.70
During fiscal 2001, stock options outstanding under the previous
Bindley plans vested upon the consummation of the merger transaction. 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 Common
Share, respectively.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances a
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the enhanced disclosure requirements in the second
quarter of fiscal 2003. The adoption of the recognition and initial measurement
provisions during the third quarter of fiscal 2003 did not have a material
effect on the Company's financial position or results of operations.
In November 2002, the EITF finalized a consensus on Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables," effective for
arrangements entered into after June 15, 2003. This issue defines units of
accounting for arrangements with multiple deliverables resulting in revenue
being allocated over the units of accounting for revenue recognition purposes.
The adoption of this consensus is not anticipated to have a material effect on
the Company's financial position or results of operations.
In June 2002, the 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
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a
46
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 did not 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 did not 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 No. 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 did not 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 did not have a material
effect on the Company's financial position or results of operations.
In the first quarter of fiscal 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" which revises the accounting for
purchased goodwill and other intangible assets. 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
ceased amortization of all goodwill and intangible assets with indefinite lives
as of July 1, 2001. Intangible assets with finite lives, primarily customer
relationships and patents and trademarks, continue to be amortized over their
useful lives. The Company performed its annual impairment test in fiscal 2003
which did not result in the recognition of any impairment charges.
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the Company's earnings from continuing
operations before the cumulative effect of change in accounting and the related
per share amounts to earnings from continuing operations before the cumulative
effect of change in accounting and the related per share amounts to reflect a
proforma adjustment for the amortization of intangible assets and goodwill.
(in millions, except per Common Share amounts) Fiscal Year Ended June 30,
------------------------------------
2003 2002 2001
------------------------------------
Earnings from continuing operations
before cumulative effect of change
in accounting $ 1,411.9 $ 1,126.3 $ 857.4
Goodwill amortization, net of tax - - 44.6
------------------------------------
Adjusted earnings from continuing
operations before cumulative
effect of change in accounting $ 1,411.9 $ 1,126.3 $ 902.0
====================================
Basic earnings per Common Share from
continuing operations before cumulative
effect of change in accounting $ 3.17 $ 2.50 $ 1.93
Goodwill amortization, net of tax - - 0.10
------------------------------------
Adjusted basic earnings per Common Share from
continuing operations before
cumulative effect of change in
accounting $ 3.17 $ 2.50 $ 2.03
====================================
Diluted earnings per Common Share from
continuing operations before
cumulative effect of change in
accounting $ 3.12 $ 2.45 $ 1.88
Goodwill amortization, net of tax - - 0.10
------------------------------------
Adjusted diluted earnings per Common Share
from continuing operations before
cumulative effect of change in
accounting $ 3.12 $ 2.45 $ 1.98
====================================
2. BUSINESS COMBINATIONS, SPECIAL ITEMS & MERGER-RELATED COSTS
POLICY
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. Integration costs from acquisitions accounted
for under the pooling of interests method have been recorded in accordance with
Emerging Issues Task Force ("EITF") 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 related to these
acquisitions, such as employee and lease terminations and other facility exit
costs, were recognized at the date the integration plan was adopted by
management. Certain other integration costs that did not meet the criteria for
accrual at the commitment date have been expensed as the integration plan has
been implemented.
The costs associated with integrating acquired companies under the
purchase method are recorded in accordance with EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." Certain costs
to be incurred by the Company, as the acquirer, such as employee and lease
terminations and other facility exit costs, are recognized at the date the
integration 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.
At the beginning of the third quarter of fiscal 2003, the Company
implemented SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" to account for costs incurred in restructuring activities. Under
this standard, a liability
48
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for an exit cost is recognized as incurred. As discussed above, the Company
previously accounted for costs associated with restructuring activities under
EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" which required the Company to recognize a liability for
restructuring costs on the date of the commitment to an exit plan.
BUSINESS COMBINATIONS
Fiscal 2003. On January 1, 2003, the Company completed the acquisition of
Syncor, a Woodland Hills, California-based company which is a leading provider
of nuclear pharmacy services. This acquisition was accounted for under the
purchase method of accounting. The Company issued approximately 12.5 million
Common Shares, valued at approximately $780 million, to Syncor stockholders and
Syncor's outstanding stock options were converted into options to purchase
approximately 3.0 million Common Shares. The Company also assumed approximately
$120 million in debt due to this acquisition. In connection with this
acquisition certain operations of Syncor have been or will be sold, see Note 19,
and other operations will be integrated with the Company's existing Nuclear
Pharmacy Services business, a component of the Pharmaceutical Technologies and
Services segment. As part of these restructuring and integration plans, the
Company accrued as part of its acquisition adjustments a liability of $12.1
million related to employee termination and relocation costs and $7.7 million
related to closing of duplicate facilities. As of June 30, 2003, the Company
paid $6.5 million of employee related costs and no payments had been made
associated with the facility closures. The allocation of the purchase price is
not yet finalized and is subject to adjustment as the Company is still assessing
the value of the acquired discontinued operations, pre-acquisition
contingencies, finalizing the evaluation of plans to close and relocate certain
facilities and certain other matters.
The preliminary allocation of the Syncor purchase price resulted in an
allocation to goodwill of $687.5 million and an allocation to identifiable
intangible assets of $38.7 million. The Company valued intangible assets related
to customer relationships, vendor agreements, patents, trademarks, trade names
and software. The breakdown by category is as follows:
Amount Average
Category (in millions) Life (Years)
- ------------------------------------------------------------------------------------
Trademarks, trade names and patents $ 10.1 11
Customer relationships and other 28.6 5
-------------
Total intangible assets acquired $ 38.7 6
=============
Supplemental pro forma results of operations are not required to be disclosed as
the impact to the Company from the Syncor acquisition was not material.
In addition, during fiscal 2003, the Company also completed other
acquisitions that individually were not material which were accounted for under
the purchase method of accounting. The aggregate purchase price of these
individually immaterial acquisitions, which was paid in cash, was approximately
$14.4 million. Assumed liabilities of the acquired businesses, including those
of Syncor, were approximately $340.1 million. The consolidated financial
statements include the results of operations from each of these business
combinations as of the date of acquisition. Had the transactions, including
Syncor, occurred on July 1, 2000, results of operations would not have differed
materially from reported results.
Fiscal 2002. During fiscal 2002, the Company completed several acquisitions that
individually were not material 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. Assumed
liabilities of the acquired businesses 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 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 2003, 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.
49
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, during fiscal 2001, the Company also completed several
other acquisitions that individually were not material for approximately $374.9
million. Assumed liabilities of the acquired businesses 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, 2000, results of operations would not have differed
materially from reported results.
SPECIAL ITEMS & MERGER-RELATED COSTS.
The following is a summary of the merger-related costs and other
special items for the fiscal years ended June 30, 2003, 2002 and 2001.
Fiscal Year Ended June 30,
------------------------------------
(in millions, except per Common Share amounts) 2003 2002 2001
- -------------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ - $ - $ (20.8)
Employee-related costs (18.7) (23.7) (46.2)
Pharmaceutical distribution center consolidation (22.7) (52.4) (10.3)
Asset impairments & other exit costs (5.4) (9.0) (8.5)
Other integration costs (27.6) (46.8) (32.3)
- -------------------------------------------------------------------------------------------
Total merger-related costs $ (74.4) $ (131.9) $ (118.1)
- -------------------------------------------------------------------------------------------
Other special items:
Distribution center closures $ - $ - $ (5.0)
Manufacturing facility closures & restructurings (40.2) (2.8) (6.8)
Employee-related costs (6.9) (15.2) -
Asset impairments and other (19.9) - -
Litigation settlements, net 101.5 11.3 5.0
- -------------------------------------------------------------------------------------------
Total other special items $ 34.5 $ (6.7) $ (6.8)
- -------------------------------------------------------------------------------------------
Total special items $ (39.9) $ (138.6) $ (124.9)
Tax effect of special items 6.7 51.5 39.6
- -------------------------------------------------------------------------------------------
Net effect of special items $ (33.2) $ (87.1) $ (85.3)
===========================================================================================
Net effect on diluted earnings per Common Share $ (0.07) $ (0.19) $ (0.19)
===========================================================================================
MERGER-RELATED COSTS
Costs of integrating the operations of various merged companies are
recorded as merger-related costs when incurred. The merger-related costs
recognized for the fiscal years shown above were primarily a result of the
merger or acquisition transactions involving Syncor, BLP, Magellan, Bindley,
BBMC, Allegiance and Scherer.
DIRECT TRANSACTION COSTS. During fiscal 2001, the Company incurred
direct transaction costs related to its merger transaction with Bindley, which
was accounted for as a pooling-of-interests. These expenses of $20.8 million
primarily included investment banking, legal, accounting and other professional
fees associated with the merger.
EMPLOYEE-RELATED COSTS. During fiscal 2003, 2002 and 2001, the Company
incurred employee-related costs associated with certain merger and acquisition
transactions of $18.7 million, $23.7 million and $46.2 million, respectively.
These costs primarily consist of severance, non-compete agreements and
transaction/stay bonuses as a direct result of the mergers or acquisitions. In
addition to these types of costs, during fiscal 2003, the Company incurred a
charge of $8.8 million related to an approved plan to curtail certain defined
benefit pension plans within the Pharmaceutical Technologies and Services
segment. This curtailment resulted from the plan to conform Scherer's employee
benefit plans to the Company's benefit plan structure at the time of the Scherer
merger.
PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During fiscal 2003,
2002 and 2001, the Company recorded charges of $22.7 million, $52.4 million and
$10.3 million, respectively, primarily associated with the Company's plans to
close and consolidate a total of 16 Bindley distribution centers, Bindley's
corporate office and one of the Company's data centers as a result of the merger
transaction with Bindley. In connection with the Bindley related consolidations
and closures, the Company incurred
50
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employee-related costs of $3.2 million, $7.5 million and $0.5 million in fiscal
2003, 2002 and 2001, respectively, arising primarily from the termination of
approximately 1,250 employees. In addition, exit costs related to termination of
contracts and lease agreements were incurred during fiscal 2003, 2002 and 2001
of $8.2 million, $3.6 million and $9.8 million, respectively. Also, asset
impairment charges of $8.2 million and $27.2 million, respectively, were
incurred during fiscal 2003 and 2002. The remaining $3.1 million and $14.1
million incurred during fiscal 2003 and 2002, respectively, was primarily
related to costs associated with moving inventory and other assets during the
consolidation of distribution centers, Bindley's corporate office and one of the
Company's data centers. As of June 30, 2003, the Company had completed the
closures and consolidations noted above and the employees noted above had been
terminated.
ASSET IMPAIRMENTS & OTHER EXIT COSTS. The asset impairments and other
exit costs during fiscal 2003, 2002 and 2001 of $5.4 million, $9.0 million and
$8.5 million, respectively, are primarily related to costs associated with lease
terminations, moving expenses, and asset impairments as a direct result of the
merger or acquisition transactions with BBMC, Allegiance and Scherer.
OTHER INTEGRATION COSTS. Other integration costs during fiscal 2003,
2002 and 2001 of $27.6 million, $46.8 million and $32.3 million, respectively,
included charges directly related to the integration of operations of previous
merger and acquisition transactions. These operations include, but are not
limited to, information systems, employee benefits and compensation,
accounting/finance, tax, treasury, internal audit, risk management, compliance,
administrative services, sales and marketing and others. The costs included in
this category generally relate to expenses incurred to integrate the merged or
acquired company's operations and systems into the Company's pre-existing
operations and systems.
OTHER SPECIAL ITEMS
DISTRIBUTION CENTER CLOSURES. 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.
MANUFACTURING FACILITY CLOSURES & RESTRUCTURINGS. During fiscal 2003,
2002 and 2001, the Company recorded a total of $40.2 million, $2.8 million and
$6.8 million, respectively, as special charges related to the closure,
consolidation and restructuring of certain manufacturing facilities. These
closures, consolidations and restructurings occurred within the Medical Products
and Services segment and the Pharmaceutical Technologies and Services segment.
Within the Medical Products and Services segment, three manufacturing
facility closures were completed during fiscal 2003. Also, certain operations
within three other facilities were identified for consolidation or
rationalization. A total of $23.6 million was recorded related to these
closures, consolidations and rationalizations, of which $10.3 million related to
severance costs due to the termination of approximately 1,475 employees.
Approximately 600 of the employees were terminated prior to June 30, 2003. The
remaining employees are expected to be terminated during fiscal 2004. Asset
impairment charges of $9.4 million were incurred. Also, exit costs of $3.9
million were incurred, primarily related to dismantling and moving machinery and
equipment. The plans to consolidate or rationalize the three facilities
discussed above are expected to be completed during fiscal 2004.
The Company incurred special charges of $13.7 million related to the
restructuring, consolidation or closure of three manufacturing facilities within
the Pharmaceutical Technologies and Services segment during fiscal 2003. One
restructuring was completed during fiscal 2003. The other two
consolidations/closures are expected to be completed by September 30, 2003.
Asset impairment charges of $5.7 million were incurred related to these
closures. Also, exit costs of $3.2 million were incurred primarily related to
dismantling machinery and equipment and transferring certain technologies to
other facilities as part of the restructuring plan. The remaining $4.8 million
represents employee-related costs, primarily severance related to the
termination of approximately 400 employees. As of June 30, 2003, the majority of
these employees have been terminated.
In addition, during fiscal 2003, 2002 and 2001, the Company recorded
special charges of $2.9 million, $2.8 million and $6.8 million, respectively,
related to the restructuring of certain health and nutritional manufacturing
facilities. During fiscal 2003, the $2.9 million primarily represents costs
associated with transferring and validating the health and nutrition operations
as the processes are rationalized. Asset impairment costs of $1.8 million were
incurred during fiscal 2002 primarily due to a writeoff of obsolete inventory
created by this rationalization of 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 fiscal 2002 and
2001, respectively, related to employee-related costs associated with the
termination of approximately 185 employees, primarily
51
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
manufacturing and certain management positions. As of June 30, 2003, these
employees had been terminated. The restructuring plan is expected to be
completed during the first quarter of fiscal 2004.
EMPLOYEE-RELATED COSTS. During fiscal 2003, the Company incurred
employee-related costs of $6.9 million primarily due to the integration and
reorganization of certain operations within the Pharmaceutical Technologies and
Services segment. The Company recorded charges of $5.0 million related to this
restructuring, the majority of which represents severance accrued upon
communication of severance terms to employees. This restructuring plan was
completed by June 30, 2003, and resulted in the termination of approximately 185
employees. The remaining $1.9 million was primarily due to the restructuring of
certain operations within the Pharmaceutical Distribution and Provider Services
segment. A significant portion of the charges represent severance accrued at the
time severance terms were communicated to employees. This restructuring plan was
completed by June 30, 2003 and resulted in the termination of approximately 30
employees.
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 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. This restructuring plan was completed during fiscal 2003, and
resulted in the termination of approximately 600 employees.
ASSET IMPAIRMENTS AND OTHER. During fiscal 2003, the Company incurred
asset impairment and other charges of $19.9 million, of which $10.1 million
related to asset impairment charges, primarily goodwill, resulting from the
Company's decision to exit certain North American commodity operations in its
Pharmaceutical Technologies and Services segment. An additional $7.8 million
related to a writeoff of design and tooling costs. The remaining $2.0 million
primarily includes non-employee related costs associated with certain
restructuring activities initiated by the Company outside of its manufacturing
facilities.
LITIGATION SETTLEMENTS, NET. During fiscal 2003 and 2002, the Company
recorded income from net litigation settlements of $101.5 million and $11.3
million, respectively. The settlements resulted primarily from the recovery of
antitrust claims against certain vitamin manufacturers for amounts overcharged
in prior years. The total recovery through June 30, 2003 was $138.2 million (net
of attorneys fees, payments due to other interested parties and expenses
withheld). Of this total recovery, $102.9 million and $13.3 million were
recorded as special items during fiscal 2003 and 2002, respectively. The
remaining $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) and reflected 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. While the Company still has pending claims with
smaller vitamin manufacturers, the total amount of future recovery is not
currently estimable, but the Company believes it is not likely to be a material
amount. Any future recoveries will be recorded as a special item in the period
in which a settlement is reached.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
ACCRUAL ROLLFORWARD
The following table summarizes the activity related to the liabilities
associated with the Company's special items:
Fiscal Year Ended June 30,
--------------------------
($ in millions) 2003 2002 2001
--------------------------
Balance at beginning of year $ 64.7 $ 34.7 $ 10.9
Additions (1) 142.8 151.9 129.9
Payments (161.8) (121.9) (127.4)
Reversals - - (5.0)
Bindley change in fiscal year (2) - - 26.3
-------------------------
Balance at end of year $ 45.7 $ 64.7 $ 34.7
=========================
(1) Amounts represent items that have been either expensed as incurred or
accrued according to generally accepted accounting principles. These
amounts do not include net litigation settlement income recorded during
fiscal 2003 and 2002 of $102.9 million and $13.3 million, respectively,
which were recorded as special items.
52
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) As a result of changing Bindley's fiscal year end from calendar year end
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 2003, the net effect of various special items reduced
reported earnings from continuing operations by $33.2 million to $1,411.9
million and reduced reported diluted earnings per Common Share from continuing
operations by $0.07 per share to $3.12 per share. In fiscal 2002, the net effect
of various special items 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.
Certain merger and acquisition 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 items when incurred.
The Company estimates that it will incur additional costs associated
with the various merger, acquisition and restructuring activities entered into
to date totaling approximately $90 million (approximately $60 million net of
tax) in future periods. This estimate is subject to adjustment pending
resolution of Syncor acquisition related litigation contingencies. The Company
believes that it will incur these costs in order to properly integrate and
rationalize 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.
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,
2003 2002
-------- --------
Future minimum lease payments receivable $ 840.5 $ 975.3
Unguaranteed residual values 18.6 15.3
Unearned income (112.2) (137.7)
Allowance for uncollectible minimum lease payments
receivable (17.8) (16.0)
-------- --------
Net investment in sales-type leases 729.1 836.9
Less: current portion 171.8 218.3
-------- --------
Net investment in sales-type leases, less current portion $ 557.3 $ 618.6
======== ========
Future minimum lease payments to be received pursuant to sales-type
leases during the next five fiscal years and thereafter are:
(in millions) 2004 2005 2006 2007 2008 Thereafter Total
- -----------------------------------------------------------------------------------------------------
Minimum lease payments $ 215.6 $ 208.5 $ 187.5 $ 140.9 $ 80.4 $ 7.6 $ 840.5
During fiscal 2003, the Company entered into two separate agreements to
transfer ownership of certain lease receivables along with a security interest
in the related leased equipment to the leasing subsidiary of a third-party bank.
The net book value of the leases sold was $356.0 million (see Note 8 for
additional information).
During fiscal 2002, 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 $150.0 million (see Note 8 for additional
information).
53
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 $122.1
million at June 30, 2003, at various money market rates. At June 30, 2003,
nothing was outstanding under such arrangements and $0.8 million, at a weighted
average interest rate of 3.3%, was outstanding at June 30, 2002. The total
available but unused lines of credit at June 30, 2003 was $122.1 million.
LONG-TERM OBLIGATIONS. Long-term obligations consist of the following (in
millions):
June 30, June 30,
2003 2002
------------- -------------
4.00% Notes due 2015 $ 475.7 $ -
4.45% Notes due 2005 317.8 304.6
6.00% Notes due 2006 158.0 148.5
6.25% Notes due 2008 150.0 150.0
6.50% Notes due 2004 100.0 100.0
6.75% Notes due 2011 495.4 494.8
6.75% Notes due 2004 100.0 100.0
7.30% Notes due 2006 135.2 126.4
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 21.0 22.4
Other obligations; interest averaging 5.29% in 2003 and
2.89% in 2002, due in varying installments
through 2015 79.8 110.0
------------- -------------
Total 2,700.6 2,224.4
Less: current portion 228.7 17.4
------------- -------------
Long-term obligations, less current portion $ 2,471.9 $ 2,207.0
============= =============
The 4.00%, 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 subject to a sinking fund and are not redeemable prior to
maturity, except for the 7.00% Debentures which included put options that
expired on September 15, 2003, without any put options being exercised. Interest
is paid pursuant to the terms of the notes. These notes are structurally
subordinated to the liabilities of the Company's subsidiaries, including trade
payables of $5.3 billion and $400.0 million of preferred debt securities.
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, 2003 and 2002, the SPE owned approximately $463.6
million and $534.7 million, respectively, of receivables that are included in
the Company's consolidated balance sheet. The effective interest rate as of June
30, 2003 and 2002, was 2.81% and 3.41%, 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.
At June 30, 2003, the Company had a commercial paper program providing
for the issuance of up to $1.5 billion in aggregate maturity value of commercial
paper. The Company also had an extendible commercial notes program providing for
the issuance of up to $150.0 million of extendible commercial notes. The Company
did not have any borrowings outstanding under these programs at June 30, 2003
and 2002.
The Company also maintains other short-term credit facilities that
allow for borrowings up to $100.0 million. At June 30,
54
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 and 2002, $21.0 million and $22.4 million were outstanding under these
uncommitted facilities. The effective interest rate as of June 30, 2003 and 2002
was 2.28% and 2.05%, 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 $750.0 million
expires on March 26, 2004 and $750.0 million expires on March 27, 2008. The
facility expiring on March 26, 2004, 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, 2003, except for $23.7 million of standby letters of credit issued
on behalf of the Company. At June 30, 2003 and 2002, the commercial paper and
other short-term borrowings totaling $21.0 million and $22.4 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.
At June 30, 2003, the Company had an asset securitization facility
available which allows the Company to sell receivables generated from its
radiopharmaceutical operations to a wholly-owned subsidiary, which in turn sells
the receivables to a multi-seller conduit administered by a third party bank.
This securitization program allows the Company to borrow up to $65.0 million.
The Company did not have any borrowings outstanding under this facility at June
30, 2003.
During fiscal 2003, the Company issued $500 million of 4.00% Notes due
2015. The proceeds of the debt issuance were used for general corporate
purposes, including working capital, capital expenditures, acquisitions,
investments and repurchases of our debt and equity securities. After such
issuance, the Company has the capacity to issue approximately $500 million of
additional equity or debt securities pursuant to effective shelf registration
statements filed with the Securities and Exchange Commission.
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.
Certain long-term obligations are collateralized with property and
equipment of the Company with an aggregate book value of approximately $1.0
million at June 30, 2003. Maturities of long-term obligations for future fiscal
years are:
(in millions) 2004 2005 2006 2007 2008 Thereafter Total
- --------------------------------------------------------------------------------------------------------------
Maturities of long-term obligations $ 228.7 $ 368.2 $ 163.3 $ 139.6 $ 3.2 $ 1,797.6 $ 2,700.6
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 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, 2003 and 2002, 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 did not recognize any material
gains/(losses) related to contracts that were not effective or forecasted
transactions that did not occur during fiscal 2003 and 2002.
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
June 2015. The gain/(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 gain/(loss) recorded in other
income/expense.
55
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the notional amount hedged, fair value
of the interest rate swaps outstanding at June 30, 2003 and 2002 included in
other assets/liabilities and the amount of net gain/(loss) for pay-floating
interest rate swaps recognized through other income/expense during fiscal 2003
and 2002.
(in millions) 2003 2002 Classification of net gain/loss
-------- -------- -------------------------------
Pay-fixed interest rate swaps:
Notional amount $ 125.0 $ 670.0
Liabilities 3.5 9.8
Pay-floating interest rate swaps:
Notional amount $1,077.8 $ 577.8
Assets 33.2 4.6
Liabilities 24.4 3.0
Gain/(loss) 27.1 7.3 Other income/expense
At June 30, 2003 and 2002, the Company had net deferred losses on
pay-fixed interest rate swaps of $3.5 million and $9.8 million, respectively,
recorded in other comprehensive income. During fiscal 2003 and 2002, the Company
recognized losses of $11.9 million and $2.9 million, respectively, within other
income/expense related to these interest rate swaps.
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, 2003 and 2002, the Company held forward contracts expiring
through June 2005 and June 2003, 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, 2003 and 2002, the Company also held forward contracts
expiring in September 2003 and July 2002, 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.
56
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the notional amount hedged, the value of
the forward contracts outstanding at June 30, 2003 and 2002 included in other
assets or liabilities and the amount of net gain/(loss) related to fair value
forward contracts recognized through other income/expense during fiscal 2003 and
2002.
(in millions) 2003 2002 Classification of net gain/loss
-------- -------- -------------------------------
Forward contracts - cash flow hedge:
Notional amount $ 240.5 $ 262.3
Assets 4.7 7.6
Liabilities 14.2 15.0
Forward contracts - fair value hedge:
Notional amount $ 114.0 $ 38.5
Assets 0.3 0.2
Liabilities 1.1 0.4
Gain/(loss) (8.1) (0.1) Other income/expense
At June 30, 2003 and 2002, the Company had net deferred gains related
to forward contract cash flow hedges of $14.2 million and $15.0 million,
respectively, recorded in other comprehensive income. During fiscal 2003 and
2002, the Company recognized losses of $12.2 million and $7.6 million,
respectively, within net earnings related to these forward contracts.
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 Company did not
recognize any material gains/(losses) related to contracts that were not
effective or forecasted transactions that did not occur during fiscal 2003 and
2002.
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, 2003 and 2002,
approximate their fair value because of the short-term maturities of these
items.
Cash balances are invested in accordance with the Company's investment
policy. These investments are exposed to market risk from interest rate
fluctuations and credit risk from the underlying issuers, although this is
mitigated through diversification.
The estimated fair value of the Company's long-term obligations was
$2,926.1 million and $2,317.2 million as compared to the carrying amounts of
$2,700.6 million and $2,224.4 million at June 30, 2003 and 2002, 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) 2003 2002
---------------------------------------------
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
---------------------------------------------
Foreign currency
forward contracts $ 354.5 $ (10.3) $ 300.8 $ (7.7)
Interest rate swaps $1,202.8 $ 5.3 $1,247.8 $ 4.4
57
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
Consolidated U.S. income from continuing operations before income taxes
and cumulative effect of change in accounting (in millions):
Fiscal Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
U.S. Based Operations $ 1,779.7 $ 1,463.2 $ 1,125.6
Non-U.S. Based Operations 346.9 238.1 206.6
---------- ---------- ----------
$ 2,126.6 $ 1,701.3 $ 1,332.2
========== ========== ==========
The provision for income taxes from continuing operations before
cumulative effect of change in accounting consists of the following (in
millions):
Fiscal Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Current:
Federal $ 441.7 $ 287.1 $ 268.9
State 29.5 23.8 26.8
Foreign 28.3 24.4 30.0
---------- ---------- ----------
Total 499.5 335.3 325.7
Deferred:
Federal 191.0 208.5 126.9
State 27.1 29.8 17.9
Foreign (2.9) 1.4 4.3
---------- ---------- ----------
Total 215.2 239.7 149.1
---------- ---------- ----------
Total provision $ 714.7 $ 575.0 $ 474.8
========== ========== ==========
A reconciliation of the provision based on the Federal statutory income
tax rate to the Company's effective income tax rate from continuing operations
before cumulative effect of change in accounting is as follows:
Fiscal Year Ended June 30,
--------------------------
2003 2002 2001
---- ---- ----
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 1.7 2.6 3.0
Foreign tax rates (3.2) (3.2) (3.9)
Nondeductible expenses 0.5 0.2 1.7
Other (0.4) (0.8) (0.2)
---- ---- ----
Effective income tax rate 33.6% 33.8% 35.6%
==== ==== ====
Provision has not been made for U.S. or additional foreign taxes on
$750.9 million of undistributed earnings of foreign subsidiaries because those
earnings are considered permanently reinvested in the operations of those
subsidiaries. It is not practicable to estimate the amount of tax that might be
payable on the eventual remittance of such earnings.
58
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences between
financial reporting and tax reporting bases of assets and liabilities, and
operating loss and tax credit carryforwards for tax purposes. The components of
the deferred income tax assets and liabilities are as follows (in millions):
June 30, June 30,
2003 2002
-------- --------
Deferred income tax assets:
Receivable basis difference $ 55.6 $ 80.1
Accrued liabilities 86.3 85.3
Net operating loss carryforwards 35.3 29.7
--------- --------
Total deferred income tax assets 177.2 195.1
Valuation allowance for deferred income tax assets (20.7) (17.6)
--------- --------
Net deferred income tax assets 156.5 177.5
--------- --------
Deferred income tax liabilities:
Inventory basis differences (521.1) (385.9)
Property-related (359.4) (275.1)
Revenues on lease contracts (207.8) (177.9)
Other (112.2) (192.2)
--------- --------
Total deferred income tax liabilities (1,200.5) (1,031.1)
--------- --------
Net deferred income tax liabilities $(1,044.0) $ (853.6)
========= ========
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
2003 2002
------------ ------------
Other current assets and current liabilities $ (204.3) $ (139.8)
Deferred income taxes and other liabilities (839.7) (713.8)
------------ ------------
Net deferred income tax liabilities $ (1,044.0) $ (853.6)
============ ============
The Company had state net operating loss carryforwards of $705.8
million at June 30, 2003. A valuation allowance of $20.7 million at June 30,
2003 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 2023. Expiring state net
operating loss carryforwards and the required valuation allowances have been
adjusted annually. At June 30, 2003, the Company had foreign tax credit
carryforwards of $6.5 million which will expire in 2007. After application of
the valuation allowance described above, the Company anticipates no limitations
will apply with respect to utilization of the foreign tax credits, nor any of
the other 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 $64.2 million, $59.0 million and $57.7
million for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.
59
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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,
-------------------
2003 2002
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at
beginning of year $ 128.8 $ 104.5
Service cost 4.6 4.1
Interest cost 8.4 7.2
Plan participant contributions 1.2 1.3
Actuarial loss 14.1 6.1
Benefits paid (4.5) (5.5)
Translation 14.6 12.0
Curtailments (4.8) (0.3)
Settlements (1.4) -
Plan amendments - (0.6)
-------- --------
Projected benefit obligation at end of
year $ 161.0 $ 128.8
======== ========
June 30,
-------------------
2003 2002
-------- --------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 68.4 $ 58.0
Actual return on plan assets (2.9) (0.1)
Employer contributions 5.4 5.3
Plan participant contributions 1.2 1.3
Benefits paid (3.9) (4.9)
Settlements (1.4) -
Translation 7.2 8.8
-------- --------
Fair value of plan assets
at end of year $ 74.0 $ 68.4
======== ========
60
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
------------------
2003 2002
------ -------
Funded status $(87.0) $(60.4)
Unrecognized net actuarial loss 49.8 31.0
Unrecognized net transition
asset (0.3) (0.3)
Unrecognized prior service cost 0.1 (0.5)
Other 0.5 0.1
------ ------
Net amount recognized $(36.9) $(30.1)
====== ======
Amounts recognized in the
Consolidated Balance Sheets:
Accrued benefit liability $(36.9) $(30.1)
------ ------
Net amount recognized $(36.9) $(30.1)
====== ======
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 $161.0 million, $151.2 million and
$74.0 million, respectively, as of June 30, 2003 and $123.5 million, $111.4
million and $63.2 million, respectively, as of June 30, 2002.
Components of the Company's net periodic benefit costs are as follows
(in millions):
For the Fiscal Year Ended June 30,
----------------------------------
2003 2002 2001
---- ---- ----
Components of net periodic benefit cost:
Service cost $ 4.6 $ 4.1 $ 4.0
Interest cost 8.4 7.2 6.3
Expected return on plan assets (5.4) (4.8) (4.9)
Net amortization and other(1) 1.2 0.7 0.7
----- ----- -----
Net amount recognized $ 8.8 $ 7.2 $ 6.1
===== ===== =====
(1) Amount primarily represents the amortization of unrecognized actuarial
losses, as well as the amortization of the transition obligation and
prior service costs.
For fiscal 2003 and 2002, the weighted average actuarial assumptions
used in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.0% and 6.3%, expected return on plan assets
of 6.9% and 7.2% and rate of compensation increase of 3.8% and 4.0%,
respectively.
8. OFF BALANCE SHEET TRANSACTIONS
During fiscal 2003, the Company entered into two separate agreements to
transfer ownership of certain equipment lease receivables, plus security
interests in the related equipment, to the leasing subsidiary of a bank in the
amounts of $156.0 million and $200.0 million. An immaterial gain was recognized
from each of these transactions, which was classified as operating revenue
within the Company's results of operations. In order to qualify for sale
treatment under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company formed two
wholly-owned, special purpose, bankruptcy-remote entities (the "SPEs") of Pyxis,
and the SPEs formed two wholly-owned, qualified special purpose entities (the
"QSPEs") to effectuate the removal of the lease receivables from the Company's
consolidated financial statements. In accordance with SFAS No. 140, the Company
consolidates the SPEs and does not consolidate the QSPEs. Both the SPEs and
QSPEs are separate legal entities that maintain separate financial statements
from the Company and Pyxis. The assets of the SPEs and QSPEs are available first
and foremost to satisfy the claims of their respective creditors.
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 ultimately selling the lease receivables to a
multi-seller conduit administered by a
61
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
third-party bank. Pyxis Funding is a wholly-owned, special purpose,
bankruptcy-remote subsidiary of Pyxis. Pyxis Funding II LLC ("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, qualified special purpose 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 No. 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 notes held by the
investor had a principal balance of $51.5 million on June 30, 2003, and the
investor is provided with credit protection in the form of 20% ($12.9 million)
over-collateralization. As of August 31, 2002, the notes held by the investor
had a principal balance of $95.4 million, and the investor was provided with
credit protection of $23.8 million.
At June 30, 2003, the Company had $280.0 million in committed
receivables sales facility programs through Medicine Shoppe Capital Corporation
("MSCC") and Cardinal Health Funding ("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 the Financial Shared Services business (formerly Griffin). The sale
of receivables by MSCC and CHF qualifies for sale treatment under SFAS No. 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 $5.4 million and $8.8 million at
June 30, 2003 and 2002, respectively. There were no outstanding sold receivables
under the CHF program as of June 30, 2003 and 2002. Recourse is provided under
the MSCC program by the requirement that MSCC retain a 20% subordinated interest
in the sold receivables. Subordinated interests were $1.3 million and $2.2
million at June 30, 2003 and 2002, respectively. Subsequent to June 30, 2003,
the Company elected to terminate and liquidate MSCC. As a result, the Company
incurred an immaterial loss. 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, 2003, no receivables had been sold under this
program and as a result no subordinated interest was outstanding.
The Company's aggregate cash flows related to these receivable
transfers were as follows during fiscal 2003, 2002 and 2001:
(in millions) 2003 2002 2001
---- ---- ----
Proceeds received on transfer of receivables $375.8 $295.4 $ 90.6
Cash collected in servicing of related receivables 2.2 1.2 -
Proceeds received on subordinated interests 18.3 58.4 47.6
------ ------ ------
Cash inflow to the Company 396.3 355.0 138.2
Cash collection remitted to the bank 131.0 257.2 135.6
Cash collection remitted to QSPE 17.7 - -
------ ------ ------
Net benefit to the Company's Cash Flow $247.6 $ 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 May 2004
through June 2013, 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,
2003, the amount expended to acquire and/or construct the facilities was $501.3
million. The agreements provide for maximum fundings of $596.4 million, which is
currently greater than the estimated cost to complete the construction projects.
The required lease payments equal the interest expense for the period on the
amounts
62
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
drawn. Lease payments under the agreements are based primarily upon LIBOR and
are subject to interest rate fluctuations. As of June 30, 2003, the weighted
average interest rate on the agreements approximated 1.84%. The Company's
minimum annual lease payments under the agreements at June 30, 2003 were
approximately $9.2 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, 2003 are:
(in millions) 2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Minimum rental payments $ 69.8 $ 56.8 $ 46.3 $ 38.4 $ 23.4 $ 50.1 $284.8
Rental expense relating to operating leases (including those referenced
in Note 8) was approximately $102.8 million, $77.6 million and $78.4 million in
fiscal 2003, 2002 and 2001, respectively. Sublease rental income was not
material for any period presented herein.
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. health
care distribution business, surgical and respiratory therapy business and health
care 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 to 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, 2003, there were 233 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products and some of these cases were 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 833 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
June 30, 2003, Allegiance had resolved more than seventy percent of these cases.
About twenty percent of the lawsuits that have been resolved were concluded
without any liability to Baxter/Allegiance. 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 or results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the range reflecting
the Company's reasonable estimation of potential insurance coverage, and defense
and indemnity costs). 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.
Shareholder Litigation against Cardinal Health
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. On or about March 21, 2003,
after the Company filed a Motion to Dismiss the complaint, an amended complaint
was filed alleging breach of fiduciary duties and corporate waste in connection
with the alleged failure by the Board of Directors of the Company to (a)
renegotiate or terminate the Company's
63
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proposed acquisition of Syncor and (b) determine the propriety of indemnifying
Monty Fu, the former Chairman of Syncor. The Company filed a Motion to Dismiss
the amended complaint and the plaintiffs subsequently filed a second amended
complaint which added three new individual defendants and includes new
allegations that the Company improperly recognized revenue in December 2000 and
September 2001 related to settlements with certain vitamins manufacturers. The
Company has filed a Motion to Dismiss the second amended complaint. The Company
believes the allegations made in the second amended complaint are without merit
and intends to vigorously defend this action. The Company currently does not
believe that the impact of this lawsuit, if any, will have a material adverse
effect on the Company's financial position, liquidity or results of operations.
The Company currently believes that there will be some insurance coverage
available under the Company's directors' and officers' liability insurance
policies in effect at the time this action was filed.
Shareholder Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor
and certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "federal securities actions").
All of these actions were filed in the United States District Court for the
Central District of California. The federal securities actions purport to be
brought on behalf of all purchasers of Syncor shares during various periods,
beginning as early as March 30, 2000, and ending as late as November 5, 2002 and
allege, among other things, that the defendants violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the
Exchange Act, by issuing a series of press releases and public filings
disclosing significant sales growth in Syncor's international business, but
omitting mention of certain allegedly improper payments to Syncor's foreign
customers, thereby artificially inflating the price of Syncor shares. A lead
plaintiff has been appointed by the court in the federal securities actions and
a consolidated amended complaint was filed May 19, 2003, naming Syncor and 12
individuals, all former Syncor officers, directors and employees. Syncor filed a
Motion to Dismiss the consolidated amended complaint on August 1, 2003.
On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the federal securities actions described above), and a single purported class
action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corporation and the
remaining two Syncor directors, who are hereafter included in the term "director
defendants."
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. An amended complaint was filed on December 6, 2002 in one of
the cases, purporting to allege direct claims on behalf of a class of
shareholders. The defendants' motion for a stay of the California actions
pending the resolution of the Delaware actions (discussed above) was granted on
April 30, 2003.
A proposed class action complaint was filed on April 8, 2003, against
the Company, Syncor, and certain officers and employees of the Company by a
purported participant in the Syncor Employees' Savings and Stock Ownership Plan.
The suit alleges that the defendants breached certain fiduciary duties owed
under the Employee Retirement Income Security Act ("ERISA").
Each of the actions described under the heading "Shareholder Litigation
against Syncor" is in its early stages and it is impossible to predict the
outcome of these proceedings or their impact on Syncor or the Company. However,
the Company currently does not believe that the impact of these actions will
have a material adverse effect on the Company's financial position, liquidity or
results of operations. The Company and Syncor believe the allegations made in
the complaints described above are without merit and intend to vigorously defend
such actions and have been informed that the individual director and officer
defendants deny liability for the claims asserted in these actions, believe they
have meritorious defenses and intend to vigorously defend such actions. The
Company and Syncor currently believe that a portion of any liability will be
covered by insurance
64
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
policies that the Company and Syncor have with financially viable insurance
companies, subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including, without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
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, 2003 and 2002, 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, 2003 and 2002.
In January 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.6 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in February 2003, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
In August 2002, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 7.8 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in January 2003, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.3 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in August 2002, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
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 mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivables, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and health care sectors. Credit risk can be
affected by changes in reimbursement and other economic pressures impacting the
hospital and acute care sectors of the health care 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.
The following table summarizes all of the Company's customers which
individually account for at least 10% of the Company's operating revenue. These
customers are serviced primarily through the Pharmaceutical Distribution and
Provider Services and Medical Products and Services segments.
Percent of Operating Revenues
----------------------------------
2003 2002 2001
----------------------------------
CVS 13% 13% 12%
Novation 11% 11% 10%
Premier 9% 9% 10%
65
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all of the Company's customers which
individually account for at least 10% of the Company's bulk deliveries. These
customers are serviced primarily through the Pharmaceutical Distribution and
Provider Services segment.
Percent of Bulk Deliveries
----------------------------------
2003 2002 2001
----------------------------------
CVS 61% 60% 46%
Walgreens 23% 20% 22%
At both June 30, 2003 and 2002, CVS and Walgreens accounted for 18% and
8%, respectively, of the Company's gross trade receivable balance. Novation and
Premier are group purchasing organizations (each a "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 Common 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.
The following table summarizes Plans at June 30, 2003:
Outstanding
---------------------------------------
Number of Common Weighted
Shares to be Issued Average Common Shares
Upon Exercise of Exercise Price Available for
Outstanding Options per Common Future Issuance
(in millions) Share (in millions)
- ---------------------------------------------------------------------------------------
Plans approved by
shareholders 13.6 $49.97 25.1
Plans not approved by
shareholders 18.3 $61.04 18.0
Plans acquired through
acquisition 9.0 $31.91 -
- ---------------------------------------------------------------------------------------
Balance at June 30, 2003 40.9 $50.92 43.1
=======================================================================================
66
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes all stock option transactions for the Company
under the Plans from July 1, 2000 through June 30, 2003, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per Common Share amounts):
Weighted Average
Options Exercise Price
Outstanding per Common Share
- --------------------------------------------------------------------------------
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
Granted 9.5 67.49
Exercised (6.2) 27.04
Canceled (2.5) 63.29
Other 3.0 49.23
- --------------------------------------------------------------------------------
Balance at June 30, 2003 40.9 $50.92
================================================================================
Additional information concerning stock options outstanding as of June
30, 2003 is presented below:
Outstanding Exercisable
-------------------------------------------------- -----------------------------
Range of Weighted Weighted Weighted
exercise average average average
prices remaining exercise price exercise price
per Common Options contractual life per Common Options per Common
Share (in millions) in years Share (in millions) Share
- ------------------------------------------------------------------------ -----------------------------
$ 0.92 - $ 27.88 6.8 6.3 $17.84 6.8 $17.84
$28.04 - $ 36.97 7.3 6.2 $31.57 7.3 $31.57
$37.11 - $ 66.08 9.7 7.0 $57.82 4.0 $47.99
$66.09 - $ 67.90 8.8 9.4 $67.89 0.1 $67.05
$67.98 - $132.72 8.3 8.3 $69.29 1.1 $74.83
- ------------------------------------------------------------------------------------------------------------
$ 0.92 - $132.72 40.9 7.5 $50.92 19.3 $32.71
- ------------------------------------------------------------------------------------------------------------
The Company accounts for the Plans in accordance with APB Opinion No.
25, under which no compensation cost has been recognized. See Note 1 for table
illustrating the effect on net income and earnings per share if the Company
adopted the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock Based Compensation."
The weighted average fair value of options granted during fiscal 2003
and 2002 are $21.96 and $25.95, respectively. For fiscal 2001, the weighted
average fair value of options granted gives retroactive effect to the conversion
of stock options related to stock splits and mergers accounted for as pooling of
interests. The weighted average fair value of options granted for fiscal 2001 is
$23.42.
67
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the options granted to Company employees and
directors were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in the respective
periods:
As of June 30,
------------------------------------
2003 2002 2001
------------------------------------
Risk-free interest rate 2.32% 3.84% 4.66%
Expected life 4 years 5 years 4 years
Expected volatility 38% 36% 38%
Dividend yield 0.18% 0.15% 0.15%
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, 2003, approximately 0.3 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 has been authorized. All employees
who have been employed by the Company for at least thirty days are eligible to
contribute from 1% to 15% of eligible compensation. The purchase price is
determined by the lower of 85 percent of the closing market price on the first
day of the offering period or 85 percent of the closing market price on the last
day of the offering period. During any given calendar year, there are two
offering periods: January 1 - June 30; and July 1 - December 31. At June 30,
2003, subscriptions of 0.4 million shares were outstanding. Through June 30,
2003, 2.2 million shares had been issued to employees under the plans.
13. EARNINGS PER SHARE
The following table reconciles the number of Common Shares used to
compute basic and diluted earnings per Common Share for the three years ending
June 30, 2003:
(in millions) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Weighted-average shares-basic 446.0 450.1 443.2
Effect of dilutive securities:
Employee stock options 7.6 9.8 12.3
- -----------------------------------------------------------------------------------------------------------
Weighted-average shares-diluted 453.6 459.9 455.5
===========================================================================================================
The potentially dilutive employee stock options that were antidilutive
for fiscal 2003, 2002 and 2001 were 22.5 million, 0.9 million and 5.7 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.
68
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2003, in total and by reporting
segment:
Pharmaceutical
Distribution Medical Pharmaceutical Automation and
and Provider Products Technologies and Information
(in millions) Services and Services Services Services Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 91.0 $ 628.9 $ 261.8 $ 44.2 $1,025.9
Goodwill acquired, net of purchase price
adjustments and other (0.2) 74.0 107.8 - 181.6
Amortization (3.9) (31.2) (11.3) (2.5) (48.9)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 86.9 $ 671.7 $ 358.3 $ 41.7 $1,158.6
- ----------------------------------------------------------------------------------------------------------------------------
Goodwill acquired, net of purchase price
adjustments and other 3.6 3.7 350.4 9.0 366.7
- ----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 90.5 $ 675.4 $ 708.7 $ 50.7 $1,525.3
- ----------------------------------------------------------------------------------------------------------------------------
Goodwill acquired, net of purchase price
adjustments and other 5.6 19.3 723.6 - 748.5
Goodwill write-off - - (9.1) - (9.1)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 96.1 $ 694.7 $1,423.2 $ 50.7 $2,264.7
============================================================================================================================
See Note 2 for discussion of fiscal 2003 goodwill write-off. Primarily
all goodwill additions for fiscal 2003 related to the Syncor acquisition (see
Note 2).
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, 2003 is as
follows:
Gross Accumulated Net
(in millions) Intangible Amortization Intangible
- ---------------------------------------------------------------------
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
- ---------------------------------------------------------------------
June 30, 2003
Trademarks and patents $ 48.1 $ 20.8 $ 27.3
Non-compete agreements 27.3 21.9 5.4
Other 49.6 14.7 34.9
- ---------------------------------------------------------------------
Total $125.0 $ 57.4 $ 67.6
=====================================================================
Additions of intangible assets for fiscal 2003 primarily relate to the
Syncor acquisition (see Note 2).
Amortization expense for the years ended June 30, 2003, 2002 and 2001
(including goodwill amortization in fiscal 2001) was $6.7 million, $3.0 million
and $50.6 million, respectively. Amortization expense is estimated to be (in
millions):
---------------------------------------
2004 2005 2006 2007 2008
---------------------------------------
Amortization expense $9.4 $8.9 $8.6 $7.8 $4.7
69
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services.
During fiscal 2003, the Company reclassified Central Pharmacy Services,
Inc. and Cord Logistics, Inc. from the Pharmaceutical Distribution and Provider
Services segment to the Pharmaceutical Technologies and Services segment and
therefore restated these segments' financial results. All prior period financial
results presented in this Form 10-K have also been restated to reflect this
reclassification. In addition, with the completion of the Syncor acquisition on
January 1, 2003, Syncor is included within the Pharmaceutical Technologies and
Services segment.
The Pharmaceutical Distribution and Provider Services segment involves
the distribution of a broad line of pharmaceuticals, health care, and other
specialty pharmaceutical products and other items typically sold by hospitals,
retail drug stores and other health care providers. In addition, this segment
provides services to the health care industry through integrated pharmacy
management, temporary pharmacy staffing, as well as franchising of
apothecary-style retail pharmacies.
The Medical 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 health care providers.
The Pharmaceutical Technologies and Services segment provides services
to the health care industry through the design and manufacture of proprietary
drug delivery systems including softgel capsules, controlled release forms,
Zydis(R) fast dissolving wafers and advanced sterile delivery technologies. It
also provides comprehensive packaging, radiopharmaceutical manufacturing,
pharmaceutical development and analytical science expertise, as well as medical
education, marketing and contract sales services.
The Automation and Information Services segment provides services, to
hospitals and other health care providers, focusing on meeting customer needs
through unique and proprietary automation and information products and services.
In addition, this segment markets point-of-use supply systems in the non-health
care market. This segment also provides information systems that analyze
clinical outcomes and clinical pharmaceutical utilization information.
The Company evaluates the performance of the segments based on
operating earnings after the corporate allocation of administrative expenses.
Information about interest income and expense and income taxes is not provided
on a segment level. In addition, special charges are not allocated to the
segments. The accounting policies of the segments are the same as described in
the summary of significant accounting policies.
The following tables include revenue and operating earnings for each
business segment and reconciling items necessary to agree to amounts reported in
the consolidated financial statements for the fiscal years ended June 30, 2003,
2002 and 2001:
(in millions) Revenue
---------------------------------------------
2003 2002 2001
---------------------------------------------
Operating revenue:
Pharmaceutical Distribution and Provider Services (1) $41,194.2 $36,247.8 $31,101.3
Medical Products and Services 6,616.2 6,255.5 5,902.6
Pharmaceutical Technologies and Services (2) 2,049.5 1,418.6 1,262.3
Automation and Information Services 666.7 560.2 472.2
Corporate (3) (60.0) (87.8) (78.3)
---------------------------------------------
Total operating revenue $50,466.6 $44,394.3 $38,660.1
=============================================
Bulk deliveries to customer warehouses and other:
Pharmaceutical Distribution and Provider Services $ 6,069.9 $ 6,741.4 $ 9,287.5
Pharmaceutical Technologies and Services (4) 200.5 - -
---------------------------------------------
Total bulk deliveries to customer warehouses and other $ 6,270.4 $ 6,741.4 $ 9,287.5
=============================================
70
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions) Operating Earnings
------------------------------------------
2003 2002 2001
------------------------------------------
Pharmaceutical Distribution and Provider Services $1,220.1 $1,069.4 $ 872.7
Medical Products and Services 603.9 539.8 442.4
Pharmaceutical Technologies and Services 368.4 278.2 230.0
Automation and Information Services 266.0 209.2 168.4
Corporate (5) (216.5) (262.8) (226.4)
------------------------------------------
Total operating earnings $2,241.9 $1,833.8 $1,487.1
==========================================
The following tables include depreciation and amortization expense,
capital expenditures and total assets for the fiscal years ended June 30, 2003,
2002 and 2001 for each segment as well as reconciling items necessary to total
the amounts reported in the consolidated financial statements:
(in millions) Depreciation and Amortization Expense
-------------------------------------
2003 2002 2001
-------------------------------------
Pharmaceutical Distribution and Provider Services $ 62.3 $ 61.2 $ 61.8
Medical Products and Services 87.7 87.7 120.4
Pharmaceutical Technologies and Services 82.7 65.2 62.1
Automation and Information Services 16.9 14.3 11.2
Corporate 16.2 15.1 25.1
----------------------------------
Total depreciation and amortization expense (6) $265.8 $243.5 $280.6
==================================
(in millions) Capital Expenditures
----------------------------------
2003 2002 2001
----------------------------------
Pharmaceutical Distribution and Provider Services $ 67.3 $ 60.4 $ 62.3
Medical Products and Services 85.4 88.0 89.7
Pharmaceutical Technologies and Services 182.9 104.4 158.3
Automation and Information Services 10.9 15.1 7.1
Corporate 76.7 17.5 23.8
----------------------------------
Total capital expenditures $423.2 $285.4 $341.2
==================================
(in millions) Assets
-------------------------------------------
2003 2002 2001
-------------------------------------------
Pharmaceutical Distribution and Provider Services $ 8,782.3 $ 8,399.0 $ 7,607.6
Medical Products and Services 3,349.8 3,236.9 3,208.3
Pharmaceutical Technologies and Services 3,116.7 2,212.8 1,588.0
Automation and Information Services 1,203.2 1,211.3 1,212.5
Corporate (7) 2,069.4 1,378.0 1,026.0
-------------------------------------------
Total assets $18,521.4 $16,438.0 $14,642.4
===========================================
(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 2003 2002 2001
-------------------------------------------------------------------
Pharmaceuticals and Health Care Products 95% 95% 94%
Specialty Pharmaceutical Products 3% 3% 4%
Other Products & Services 2% 2% 2%
-------------------------
Total 100% 100% 100%
=========================
71
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 2003 2002 2001
-------------------------------------------------------------
Manufactured Products and
Radiopharmaceuticals 69% 68% 71%
Packaged Products 19% 27% 26%
Other Products & Services 12% 5% 3%
----------------------------
Total 100% 100% 100%
============================
(3) Corporate operating revenue primarily consists of foreign currency
translation adjustments.
(4) At the beginning of fiscal 2003, the Company began classifying
out-of-pocket expenses received through its recently acquired sales and
marketing services' business within the "Bulk deliveries to customer
warehouses and other" line item. The customer is contractually required
to reimburse the Company for those expenses. The Company does not
generate any margin from these reimbursements.
(5) Corporate operating earnings primarily consist of special items of
$39.9 million, $138.6 million and $124.9 million for the fiscal years
ended June 30, 2003, 2002 and 2001, respectively, and unallocated
corporate administrative expenses and investment spending (see Note 2
for discussion of special items). In addition, at the beginning of
fiscal 2003, the Company began expanding the use of its shared service
center, which previously supported the Medical Products and Services
segment, to benefit and support company-wide initiatives and other
business segments. Accordingly, the cost of the shared service center,
which was previously reported within the Medical Products and Services
segment, has been classified within Corporate operating earnings for
fiscal 2003 to be consistent with internal segment reporting. The cost
of these services for fiscal 2003 was approximately $19.0 million.
These costs are included within Corporate operating earnings, a portion
of which are included in the general corporate cost allocation to each
segment.
(6) 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.
(7) Corporate assets include primarily corporate cash and cash equivalents,
corporate property and equipment, net, and unallocated deferred taxes.
The following table presents revenue (operating and bulk) and long-lived assets
by geographic area (in millions):
Revenue Long-Lived Assets
------------------------------------------- -------------------------
For The Fiscal Year Ended June 30, As of June 30,
------------------------------------------- -------------------------
2003 2002 2001 2003 2002
------------------------------------------- -------------------------
United States $55,678.6 $50,185.0 $46,957.2 $ 1,693.5 $ 1,416.6
International 1,058.4 950.7 990.4 396.0 477.8
------------------------------------------- -------------------------
Total $56,737.0 $51,135.7 $47,947.6 $ 2,089.5 $ 1,894.4
=========================================== =========================
Long-lived assets include property and equipment, net of accumulated
depreciation.
72
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is selected quarterly financial data (in millions, except
per Common Share amounts) for fiscal 2003 and 2002.
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Fiscal 2003
Revenue:
Operating revenue $ 11,416.6 $ 12,706.3 $ 12,837.3 $ 13,506.4
Bulk deliveries to customer warehouses and other 1,669.5 1,384.7 1,534.0 1,682.2
---------- ---------- ---------- ----------
Total revenue 13,086.1 14,091.0 14,371.3 15,188.6
Gross margin 1,006.9 1,079.5 1,194.1 1,229.5
Selling, general and administrative expenses 520.7 526.2 576.1 605.2
Earnings from continuing operations 288.3 367.5 384.9 371.2
Loss from discontinued operations - - (1.8) (4.3)
---------- ---------- ---------- ----------
Net earnings $ 288.3 $ 367.5 $ 383.1 $ 366.9
Earnings from continuing operations per Common Share:
Basic $ 0.65 $ 0.83 $ 0.86 $ 0.83
Diluted $ 0.64 $ 0.82 $ 0.85 $ 0.82
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
73
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 2, merger-related costs and other special items
were recognized in various quarters in fiscal 2003 and 2002. The following table
summarizes the impact of such costs on net earnings and diluted earnings per
Common Share in the quarters in which they were recorded (in millions, except
per Common Share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2003
Net earnings $(15.6) $ 22.1 $ (6.4) $(33.3)
Diluted net earnings per Common Share $(0.03) $ 0.05 $(0.01) $(0.07)
- ----------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------
18. GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (see Note 1). This interpretation enhances
a guarantor's disclosure requirements in its interim and annual financial
statements regarding obligations under certain guarantees. The Company adopted
the enhanced disclosure requirements in the second quarter of fiscal 2003. The
initial recognition and measurement provisions of the interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
The Company has contingent commitments related to certain operating
lease agreements (see Note 8). These operating leases consist of certain real
estate and equipment used in the operations of the Company. In the event of
termination of these operating leases, which range in length from one to ten
years, the Company guarantees reimbursement for a portion of any unrecovered
property cost. At June 30, 2003, the maximum amount the Company could be
required to reimburse was $377.1 million. Based upon current information, the
Company believes that the proceeds from the sale of properties under these
operating lease agreements would exceed this contingent obligation. In
accordance with FASB Interpretation No. 45, the Company has recorded $4.8
million related to these guarantees.
In the ordinary course of business, the Company, from time to time,
agrees to indemnify certain other parties under agreements with the Company,
including under acquisition agreements, customer agreements, and intellectual
property licensing agreements. Such indemnification obligations vary in scope
and, when defined, in duration. In many cases, a maximum obligation is not
explicitly stated and, therefore, the overall maximum amount of the liability
under such indemnification obligations cannot be reasonably estimated. Where
appropriate, such indemnification obligations are recorded as a liability.
Historically, the Company has not, individually or in the aggregate, made
payments under these indemnification obligations in any material amounts. In
certain circumstances, the Company believes that its existing insurance
arrangements, subject to the general deduction and exclusion provisions, would
cover portions of the liability that may arise from these indemnification
obligations. In addition, the Company believes that the likelihood of material
liability being triggered under these indemnification obligations is not
significant.
In the ordinary course of business, the Company, from time to time,
enters into agreements that obligate the Company to make fixed payments upon the
occurrence of certain events. Such obligations primarily relate to obligations
arising under acquisition transactions, where the Company has agreed to make
payments based upon the achievement of certain financial performance measures by
the acquired business. Generally, the obligation is capped at an explicit
amount. The Company's aggregate exposure for these obligations, assuming the
achievement of all financial performance measures, is not material. Any
potential payment for these obligations would be treated as an adjustment to the
purchase price of the related entity and would have no impact on the Company's
results of operations.
19. DISCONTINUED OPERATIONS
In connection with the merger transaction involving Syncor, the Company
acquired certain operations of Syncor that were or will be discontinued. Prior
to the acquisition, Syncor announced the discontinuation of certain operations
including the medical imaging business ("CMI") and certain overseas operations.
The Company is continuing with the discontinuation of these operations and has
added additional international and non-core domestic businesses to the
discontinued operations. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the net assets and results of
operations of these businesses are presented as discontinued operations. The
Company is currently overseeing the planned sale of the discontinued operations
and is actively marketing these businesses. The Company expects to sell the
remaining discontinued operations by January 1, 2004. The net assets for the
discontinued operations are included within the Pharmaceutical Technologies
74
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and Services segment.
The results of discontinued operations for the fiscal year ended June
30, 2003 are summarized as follows:
Fiscal Year
Ended June 30,
(in millions) 2003
- ----------------------------------------------------
Revenue $92.5
Loss before income taxes (8.6)
Gain/(Loss) on sale of business -
Income tax benefit 2.5
-----
Loss from discontinued operations $(6.1)
=====
Interest expense allocated to discontinued operations for the fiscal
year ended June 30, 2003, was $0.5 million. Interest expense was allocated to
the discontinued operations based upon a ratio of the net assets of discontinued
operations versus the overall net assets of Syncor.
At June 30, 2003, the major components of assets and liabilities of the
discontinued operations were as follows:
June 30,
(in millions) 2003
- --------------------------------------
Current Assets $ 49.9
Property and Equipment 63.2
Other Assets 57.0
------
Total Assets $170.1
======
Current Liabilities $ 35.6
Long Term Debt 28.7
Other Liabilities -
------
Total Liabilities $ 64.3
======
Cash flows generated from the discontinued operations are immaterial to
the Company and, therefore, are not disclosed separately.
20. SUBSEQUENT EVENTS
On August 1, 2003, the Company's Board of Directors authorized the
repurchase of Common Shares of up to an aggregate amount of $1.0 billion.
Pursuant to this authorization, the Company repurchased approximately 17.0
million Common Shares having an aggregate cost of approximately $1.0 billion.
This repurchase was completed during the first quarter of fiscal 2004, and the
repurchased shares were placed into treasury shares to be used for general
corporate purposes.
On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont")
filed a lawsuit against the Company and others in the United States District
Court for the Middle District of Tennessee. The complaint alleges various causes
of action against the Company relating to the production and sale of surgical
drapes and gowns by the Company's Medical Products and Services segment.
DuPont's claims generally fall into the categories of breach of contract, false
advertising and patent infringement. The complaint does not request a specific
amount of damages. The Company believes that the claims made in the complaint
are without merit and it intends to vigorously defend this action. The Company
believes that it is owed a defense and indemnity from its codefendants with
respect to DuPont's claim for patent infringement. The Company currently does
not believe that the impact of this lawsuit, if any, will have a material
adverse effect on the Company's financial position, liquidity or results of
operation.
75
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item 9 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 "SELECTION OF INDEPENDENT AUDITORS."
ITEM 9a: CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Exchange Act Rule
13a-15(b), under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer, and Executive Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, as of the end of
the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the Executive Vice President and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
The Company's management, including the Company's Chief Executive
Officer and the Executive Vice President and Chief Financial Officer, does not
expect that the Company's disclosure controls and procedures and its internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. The
Company monitors its disclosure controls and procedures and internal controls
and makes modifications as necessary; the Company's intent in this regard is
that the disclosure controls and procedures and the internal controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
During the last quarter of the Company's fiscal year ended June 30,
2003, there have been no changes to our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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, including the information relating to
Directors, is incorporated herein by reference to the Company's Definitive Proxy
Statement, to be filed with the SEC, pursuant to Regulation 14A of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the Company's 2003 Annual Meeting of Shareholders
(the "Annual Meeting") under the captions "ELECTION OF DIRECTORS," "SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and "CORPORATE GOVERNANCE -
Policies on Business Ethics."
Information with respect to Executive Officers of the Company appears
in Part I of this report and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
In accordance with General Instruction G (3) to Form 10-K, the
information called for by this Item 11 is incorporated herein by reference to
the Company's Definitive Proxy Statement, to be filed with the SEC pursuant to
Regulation 14A of the Exchange Act, relating to the Company's Annual Meeting
under the captions "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
and "EXECUTIVE COMPENSATION" (other than information set
76
forth under the captions "Human Resources and Compensation Committee Report" and
"Shareholder Performance Graph").
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
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."
Information with respect to equity compensation plans appears in Part
II of this Form 10-K and is incorporated herein by reference.
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 captions "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION."
PART IV
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
In accordance with General Instruction G (3) to Form 10-K, the
information called for by this Item 14 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 "SELECTION OF INDEPENDENT AUDITORS."
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8 of this report:
PAGE
----
Independent Auditors' Reports........................................... 35
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 2003, 2002 and 2001.......................................... 38
Consolidated Balance Sheets at June 30, 2003 and 2002................... 39
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 2003, 2002 and 2001.............................. 40
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2003, 2002 and 2001.......................................... 41
Notes to Consolidated Financial Statements.............................. 42
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts......................... 85
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.
77
(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 (14)
3.02 Restated Code of Regulations of the Registrant, as amended (19)
4.01 Specimen Certificate for the Registrant's Class A Common Shares (24)
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, 6 3/4% Notes Due 2011, 4.45% Notes Due 2005 and
4.00% Notes Due 2015 (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 Registrant and Chase Manhattan Trust
Company, National Association (as successor in interest to PNC),
Trustee (4)
4.05 Indenture, dated as of January 1, 1994, between R.P. Scherer
International Corporation and Comerica Bank, Trustee; First
Supplemental Indenture, dated as of February 28, 1995, by and among
R.P. Scherer International Corporation, R.P. Scherer Corporation and
Comerica Bank, Trustee; and Second Supplemental Indenture, dated as
of August 7, 1998, by and among R.P. Scherer Corporation, the
Registrant and NBD Bank (5)
4.06 Form of Warrant Certificate to Purchase the Registrant's Common
Shares (6)
4.07 Form of Debt Securities of the Registrant (21)
10.01 Stock Incentive Plan of the Registrant, as amended (7)*
10.02 Outside Directors Equity Incentive Plan (15)*
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 (20) and (22)*
10.05 Form of Nonqualified Stock Option Agreement, as amended (12)*
10.06 Form of Restricted Shares Agreement (20)*
10.07 Form of Directors' Stock Option Agreement, as amended (12)*
10.08 Cardinal Health, Inc. Directors Deferred Compensation Plan (13)*
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, as amended (9)*
10.14 Cardinal Health, Inc. Performance-Based Incentive Compensation Plan,
as amended (18)*
78
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.15 Employment Agreement, dated and effective as of November 13, 2002,
between the Registrant and George L. Fotiades (25)*
10.16 Employment Agreement, dated and effective as of November 13, 2002,
between the Registrant and James F. Millar (25)*
10.17 Employment Agreement, dated and effective as of February 5, 2003,
between the Registrant and Stephen S. Thomas (26)*
10.18 Form of Indemnification Agreement between the Registrant and
individual Directors (10)*
10.19 Form of Indemnification Agreement between the Registrant and
individual Officers (10)*
10.20 364-Day Credit Agreement, dated as of March 27, 2003, 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, Wachovia Bank, National Association, as
Syndication Agent, Barclays Bank PLC, as Documentation Agent, Credit
Suisse First Boston, as Documentation Agent, Deutsche Bank
Securities, Inc., as Documentation Agent, and Banc One Capital
Markets, Inc., as Lead Arranger and Book Manager (27)
10.21 Pharmaceutical Services Agreement, dated as of August 1, 1996,
between the Registrant and Kmart Corporation, as amended (11), (20)
and (26)
10.22 Wholesale Supply Agreement, dated as of August 10, 2000, between the
Registrant and CVS Meridian, Inc. (17)
10.23 Form of Commercial Paper Dealer Agreement 4(2) Program, dated as of
August 26, 1999, between the Registrant, as Issuer, and certain
entities, each as Dealer, concerning notes to be issued pursuant to
Issuing and Paying Agency Agreement, dated as of June 28, 1999,
between the Issuer and The First National Bank of Chicago, as
Issuing and Paying Agent (20)
10.24 Partnership Agreement of R.P. Scherer GmbH & Co. KG (5)
10.25 Five-year Credit Agreement, dated as of March 27, 2003, among the
Registrant, certain subsidiaries of the Registrant, certain lenders,
Bank One, NA, as Administrative Agent, Bank of America N.A., as
Syndication Agent, Wachovia Bank, National Association, as
Syndication Agent, Barclays Bank PLC, as Documentation Agent, Credit
Suisse First Boston, as Documentation Agent, Deutsche Bank
Securities, Inc., as Documentation Agent, and Banc One Capital
Markets, Inc., as Lead Arranger and Book Manager (27)
10.26 Bindley Western Industries, Inc. 1993 Stock Option and Incentive
Plan, as amended (16)*
10.27 Bindley Western Industries, Inc. 2000 Stock Option and Incentive
Plan (16)*
10.28 Form of Outside Directors' Stock Option Agreement, as amended (12)*
10.29 Nonqualified Stock Option Agreement, dated November 19, 2001,
between the Registrant and Robert D. Walter (12)*
10.30 Cardinal Health Deferred Compensation Plan, amended and restated
effective January 1, 2002 (12)*
10.31 Form of Restricted Share Units Agreement, dated December 31, 2001,
between the Registrant and each of Messrs. Ford, Miller and Rucci
(12)*
10.32 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and George L. Fotiades (12)*
10.33 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and James F. Millar (12)*
10.34 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and Stephen S. Thomas (12)*
79
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.35 Employment Agreement, dated November 20, 2001, between the
Registrant and Robert D. Walter (12)*
10.36 Restricted Share Units Agreement, dated November 20, 2001, between
the Registrant and Robert D. Walter (12)*
10.37 Restricted Share Units Agreement, dated October 15, 2001, between
the Registrant and Robert D. Walter (24)*
10.38 Restricted Share Units Agreement, dated December 31, 2001, between
the Registrant and Robert D. Walter (24)*
10.39 Restricted Share Units Agreement, dated February 1, 2002, between
the Registrant and Robert D. Walter (24)*
10.40 Restricted Share Units Agreement, dated February 1, 2002, between
the Registrant and Robert D. Walter (24)*
10.41 Broadly-based Equity Incentive Plan of the Registrant, as amended
(24)
10.42 Restricted Share Units Agreement, dated May 10, 2002, between the
Registrant and Paul S. Williams (24)*
10.43 Restricted Share Units Agreement, dated April 2002, between the
Registrant and Stephen S. Thomas (24)*
10.44 Prime Vendor Agreement, dated as of July 1, 2001, between the
Registrant and Express Scripts, Inc., as amended on January 15, 2003
(27)
16.01 Letter of Arthur Andersen required by Item 304 of Regulation S-K
(23)
18.01 Letter Regarding Change in Accounting Principle (19)
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
31.01 Certification of Chairman and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.02 Certification of Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01 Certification of Chairman and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.02 Certification of Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.01 Statement Regarding Forward-Looking Information
99.02 Cardinal Health Profit Sharing, Retirement and Savings Plan,
Amended and Restated, effective as of July 1, 2002
99.03 First Amendment, effective as of January 1, 2001, to the Allegiance
Retirement Plan for Union Employees of Hayward, California
99.04 Second Amendment, effective as of July 1, 2002, to the Allegiance
Retirement Plan for Union Employees of Hayward, California
99.05 Special Amendment to the Profit Sharing Plan of Bindley Western
Industries, Inc. & Subsidiaries, effective as of December 31, 2002
99.06 Special Amendment to the Boron, Lepore & Associates, Inc. Profit
Sharing Plan effective as of December 31, 2002
80
(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.
(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 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.
(11) 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.
(12) 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.
(13) Included as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-90415) and incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-53394) and incorporated herein by reference.
(15) Included as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-38192) and incorporated herein by reference.
(16) 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.
(17) 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.
(18) 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.
(19) 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.
81
(20) Included as an exhibit to the Registrant's Quarterly Report on Form
10-K for the fiscal year ended June 30, 1999 (File No. 1-11373) and
incorporated herein by reference.
(21) Included as an exhibit to the Registrant's Registration Statement on
Form S-3 (No. 333-62944) and incorporated herein by reference.
(22) 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.
(23) Included as an exhibit to the Registrant's Current Report on Form
8-K filed May 9, 2002 (File No. 1-11373) and incorporated herein by
reference.
(24) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002 (File No. 1-11373) and
incorporated herein by reference.
(25) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (File No. 1-11373) and
incorporated herein by reference.
(26) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 2002 (File No. 1-11373) and
incorporated herein by reference.
(27) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 (File No. 1-11373) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On June 13, 2003, the Company filed a Current Report on Form 8-K under
Item 7 which filed as exhibits a Form of Underwriting Agreement between the
Company and certain underwriters relating to the proposed issuance of debt
securities by the Company and a statement regarding computation of ratios of
earnings to fixed charges.
82
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 29, 2003.
CARDINAL HEALTH, INC.
By: /s/ Robert D. Walter
------------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
83
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 29, 2003.
SIGNATURE TITLE
--------- -----
/s/ Robert D. Walter Chairman, Chief Executive Officer and
- ---------------------------- Director (principal executive officer)
Robert D. Walter
/s/ Richard J. Miller Executive Vice President, Chief Financial
- ---------------------------- Officer (principal financial officer)
Richard J. Miller
/s/ Gary S. Jensen Senior Vice President - Corporate
- ---------------------------- Controller and Principal Accounting
Gary S. Jensen Officer
/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
84
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 2003:
Accounts receivable $ 94.8 $ 14.1 $ 9.4 $ (26.6) $ 91.7
Finance notes receivable 4.7 0.6 0.6 (1.4) 4.5
Net investment in sales-type leases 16.0 2.5 - (0.7) 17.8
-------- -------- ------- --------- --------
$ 115.5 $ 17.2 $ 10.0 $ (28.7) $ 114.0
======== ======== ======= ========= ========
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
======== ======== ======= ========= ========
(1) During fiscal 2003, 2002 and 2001 recoveries of amounts provided for or
written off in prior years were $2.4 million, $1.5 million and $1.0
million, respectively.
(2) In fiscal 2003 and 2001, $7.1 million and $11.4 million, respectively,
relate to the beginning balance for acquisitions accounted for as purchase
transactions.
(3) Write-off of uncollectible accounts.
85