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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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12591
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
(614) 757-5000
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 23, 1999 was approximately $16,623,130,558.
The number of Registrant's Common Shares outstanding as of August 23, 1999,
was as follows: Common shares, without par value: 274,190,381.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
1999 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
Information Regarding Forward-Looking Statements.............................................................. 3
PART I
1. Business...................................................................................................... 3
2. Properties.................................................................................................... 7
3. Legal Proceedings............................................................................................. 7
4. Submission of Matters to a Vote of Security Holders........................................................... 8
Executive Officers of the Company............................................................................. 8
PART II
5. Market for the Registrant's Common Shares and Related Shareholder Matters..................................... 10
6. Selected Financial Data....................................................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12
7a. Quantitative and Qualitative Disclosures About Market Risk.................................................... 18
8. Financial Statements and Supplementary Data................................................................... 19
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 48
PART III
10. Directors and Executive Officers of the Registrant............................................................ 48
11. Executive Compensation........................................................................................ 48
12. Security Ownership of Certain Beneficial Owners and Management................................................ 48
13. Certain Relationships and Related Transactions................................................................ 48
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 49
Signatures.................................................................................................... 53
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is structured as
a holding company conducting business through a number of separate operating
subsidiaries. These operating subsidiaries are sometimes collectively referred
to as the "Cardinal Health" companies. As used in this report, the "Registrant"
and the "Company" refer to Cardinal Health, Inc. and its subsidiaries, unless
the context requires otherwise. Except as otherwise specified, information in
this report is provided as of June 30, 1999. The Company is a leading
health-care service provider which offers a broad array of complementary
products and health-care services to health-care providers and manufacturers to
help them improve the efficiency and quality of health-care. These services and
products include pharmaceutical distribution, pharmaceutical services, and
medical-surgical products.
BUSINESS SEGMENTS
A description of the Company's three reporting industry segments is as
follows(1):
1. PHARMACEUTICAL DISTRIBUTION
Cardinal Distribution, 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 drugstores, hospitals,
alternate care centers and the pharmacy departments of supermarkets and mass
merchandisers located throughout the continental United States. As a
full-service wholesale distributor, Cardinal Distribution complements its
distribution activities by offering a broad range of value-added support
services to assist the Company's customers and suppliers in maintaining and
improving their sales volumes. These support services include computerized order
entry and order confirmation systems, generic sourcing programs, product
movement and management reports, consultation on store operation and
merchandising, and customer training. The Company's proprietary software systems
feature customized databases specially designed to help its customers order more
efficiently, contain costs, and monitor their purchases.
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 drugstore
customers and serves as a distributor of therapeutic plasma products, oncology
products and other specialty pharmaceuticals to hospitals, clinics and other
managed care facilities on a nationwide basis through the utilization of
telemarketing and direct mail programs. These specialty distribution activities
are part of the Company's strategy to develop diversified products and services
to enhance the profitability of its business and that of its customers and
suppliers.
2. PHARMACEUTICAL SERVICES
The Company, within the Pharmaceutical Services segment, operates a variety
of related health-care service businesses, including Pyxis Corporation ("Pyxis")
(which develops, manufactures, leases, sells and services point-of-use pharmacy
systems which automate the distribution and management of medications and
supplies in hospitals and other health-care facilities); Medicine Shoppe
International, Inc. ("Medicine Shoppe") (a franchisor of apothecary-style retail
pharmacies); PCI
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1 For additional information concerning the Company's industry segments, see
Note 13 of "Notes to Consolidated Financial Statements."
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Services, Inc. ("PCI") (an international provider of integrated packaging
services to pharmaceutical manufacturers); Owen Healthcare, Inc. ("Owen") (a
provider of pharmacy management and information services to hospitals); the
Cardinal Information group of companies ("CIC") (which develop and provide
clinical information systems and customer transaction systems); R.P. Scherer
Corporation ("Scherer") (an international developer and manufacturer of drug
delivery systems); and Cardinal OneSource(SM) (a group established to market
Cardinal businesses together to assist pharmaceutical companies manufacture,
develop, package, launch and market products). The Company also provides
reimbursement-consulting services to pharmaceutical, biotechnology and medical
products companies through its Comprehensive Reimbursement Consultants, Inc.
("CRC") subsidiary.
3. MEDICAL-SURGICAL PRODUCTS
The Company's subsidiary, Allegiance Corporation ("Allegiance"), is a
provider of non-pharmaceutical health-care products and cost-saving services for
hospitals and other health-care providers. Allegiance offers a broad range of
medical and laboratory products, representing more than 2,800 suppliers in
addition to its own line of surgical and respiratory therapy products. It also
manufactures sterile and non-sterile procedure kits, single-use surgical drapes,
gowns and apparel, medical and surgical gloves, fluid suction and collection
systems, respiratory therapy products, surgical instruments, instrument
reprocessing products, special procedure products and other products. Allegiance
assists its customers in reducing costs while improving the quality of patient
care in a variety of ways, including supply-chain management, instrument repair
and other professional consulting services.
ACQUISITIONS
Over the last five years, the Company has completed the following business
combinations. On July 1, 1994, the Company purchased Humiston-Keeling, Inc., a
Calumet City, Illinois-based pharmaceutical wholesaler serving customers located
primarily in the upper Midwest region of the United States. On July 18, 1994,
the Company completed a merger transaction with Behrens Inc., a Waco,
Texas-based pharmaceutical wholesaler servicing customers located primarily in
Texas and adjoining states. On November 13, 1995, the Company completed a merger
transaction with Medicine Shoppe, a St. Louis, Missouri-based franchisor of
independent, apothecary-style retail pharmacies in the United States and abroad.
On May 7, 1996, the Company completed a merger transaction with Pyxis, a San
Diego, California-based designer, manufacturer, marketer and servicer of unique
point-of-use systems which automate the distribution, management and control of
medications and supplies in hospitals and other health-care facilities. On
October 11, 1996, the Company completed a merger transaction with PCI, a
Philadelphia, Pennsylvania-based provider of diversified packaging services to
the pharmaceutical industry in the United States and abroad. On March 18, 1997,
the Company completed a merger transaction with Owen, a Houston, Texas-based
provider of pharmacy management and information services to hospitals. On
February 18, 1998, the Company completed a merger transaction with MediQual
Systems, Inc., a Westborough, Massachusetts-based supplier of clinical
information management systems and services to the health-care industry. On
August 7, 1998, the Company completed a merger transaction with Scherer, a
Basking Ridge, New Jersey-based international developer and manufacturer of drug
delivery systems. On February 3, 1999, the Company completed a merger
transaction with Allegiance, a McGaw Park, Illinois-based distributor and
manufacturer of medical and laboratory products and a provider of cost-saving
services. On August 5, 1999, the Company announced that it signed a definitive
merger agreement with privately-owned Automatic Liquid Packaging, Inc., a
Woodstock, Illinois-based custom manufacturer of sterile liquid pharmaceuticals
and other health-care products. The Company has also completed a number of
smaller acquisition transactions during the last five years, including the
acquisition of Comprehensive Reimbursement Consultants, Inc., Pharmacists: prn,
Inc., The Enright Group, Inc., Pharmaceutical Packaging Specialties, Inc., and
Pacific Surgical Innovations, Inc.
The Company continually evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
health-care operations and services in all three reporting industry segments.
For additional information concerning the transactions described above, see
Notes 1, 2, and 18 of "Notes to Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMERS AND SUPPLIERS
The Company distributes pharmaceuticals, health- and beauty-care products,
and related products and services to hospitals, independent and chain
drugstores, alternate care centers, and pharmacy departments of supermarkets and
mass merchandisers located throughout the United States. In addition, the
Company markets Pyxis' automated dispensing systems to hospitals and alternate
care centers in the United States and abroad. Through Medicine Shoppe, the
Company franchises retail pharmacies in the United States and abroad. Owen
provides pharmacy management and information services to hospitals throughout
the United States. PCI provides integrated packaging services to pharmaceutical
manufacturers located in the United States and abroad. Scherer develops drug
delivery systems for pharmaceutical manufacturers located in the United States
and abroad. Allegiance distributes non-pharmaceutical health-care products and
provides cost-saving services to hospitals and other health-care providers in
the United States and abroad. The Company's largest retail distribution customer
in its Pharmaceutical Distribution segment accounted for approximately 8.3% of
the Company's operating revenues (by dollar volume) for fiscal year 1999, and
its largest retail bulk distribution customer accounted for approximately 57% of
all bulk orders in the
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Pharmaceutical Distribution segment. The Pharmaceutical Distribution segment
could be adversely affected if the business of either of such customers were
lost. The members of the two largest group purchasing organizations (each, a
"GPO") having business arrangements with the Company, VHA, Inc. and Premier,
Inc., accounted for approximately 11.4%, and 12.8%, respectively, of the
Company's operating revenues (by dollar volume) in fiscal 1999 through the
Company's Pharmaceutical Distribution and Medical-Surgical Products segments.
Each of these two segments could be adversely affected if the business
arrangements with either of such GPO customers were lost, although the loss of
the business arrangement with either such GPO would not necessarily mean the
loss of sales from all members of the GPO.
The Company obtains its products from many different suppliers, the largest
of which accounted for approximately 3.3% (by dollar volume) of its operating
revenue in fiscal 1999. The Company's five largest suppliers accounted for
approximately 15.9% (by dollar volume) of its operating revenue during fiscal
1999 and the Company's relationships with its suppliers are generally very good.
The Company's arrangements with its pharmaceutical suppliers typically may be
canceled by either the Company or the supplier upon 30 to 90 days prior notice,
although many of these arrangements are not governed by formal agreements. The
loss of certain suppliers could adversely affect the Company's business if
alternative sources of supply were unavailable.
While the Company's operations may show quarterly fluctuations, the Company
does not consider its business to be seasonal in nature on a consolidated basis.
COMPETITION
The Company's markets are highly competitive. As a pharmaceutical
wholesaler, the Company competes directly with numerous other national and
regional wholesalers, direct selling manufacturers, self-warehousing chains, and
specialty distributors on the basis of price, breadth of product lines,
marketing programs, and support services. The Company's pharmaceutical
wholesaling operations have narrow profit margins and, accordingly, the
Company's earnings depend significantly on its ability to distribute a large
volume and variety of products efficiently and to provide quality support
services. As a marketer of automated pharmaceutical dispensing systems through
Pyxis, the Company competes based upon price, its installed base of systems,
relationships with customers, customer service and support capabilities, patents
and other intellectual property, and its ability to interface with customer
information systems. Actual and potential competitors to the Pyxis system
include both existing domestic and foreign companies, as well as emerging
companies that supply products for specialized markets and other outside service
providers. With its Owen subsidiary, the Company competes with both national and
regional hospital pharmacy management firms, and self-managed hospitals and
hospital systems on the basis of price, its established base of business, the
effective use of information systems, the development of clinical programs, and
the quality of the services it provides to its customers. Several smaller
franchisors compete with Medicine Shoppe in the franchising of pharmacies, with
competition being based primarily upon price, benefits offered to both the
pharmacist and the customer, access to third party programs, and the reputation
of the franchise; Medicine Shoppe also needs to be competitive with a
pharmacist's ongoing option to remain self-employed at his or her current
position rather than becoming a franchisee. Through PCI, the Company competes
with companies that provide many types of packaging services and those that
provide one or a few types of packaging services, based primarily upon quality,
variety of available packaging services, customer service, responsiveness and
price. Through Scherer, the Company's drug delivery technologies compete with a
growing number of new drug delivery technologies and with continued refinements
to existing delivery technologies of both pharmaceutical companies and companies
formed to develop new technologies. Through Allegiance, the Company has
substantial competition in all of its non-pharmaceutical health-care product and
service markets, with competition focusing primarily on price, service and
product performance.
EMPLOYEES
As of August 23, 1999, the Company had approximately 36,000 employees, of
which approximately 1,400 are subject to collective bargaining agreements.
Overall, the Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, certain of which
have been registered, and also holds common law rights in various trademarks and
service marks. There can be no assurance that the Company will obtain the
registrations for trademarks and service marks for which it has applied.
The Company holds patents relating to certain aspects of its automated
pharmaceutical dispensing systems, automated medication management systems,
medication packaging, medical devices, processes, products and drug delivery
systems.
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The Company has a number of pending patent applications in the United States and
certain foreign countries, and intends to pursue additional patents as
appropriate.
The Company also owns certain software, including software used for
pharmaceutical purchasing and inventory control, which is copyrighted and
subject to the protection of applicable copyright laws.
No assurances can be given that any intellectual property rights of the
Company will provide meaningful protection against competitive products or
otherwise be commercially valuable or that the Company will be successful in
obtaining additional patents or enforcing its proprietary rights against others.
REGULATORY MATTERS
The Company, as a distributor of prescription pharmaceuticals (including
certain controlled substances), an operator of pharmacy operations, a
pharmaceutical packager and a manufacturer of drug delivery systems and surgical
and respiratory care products, is required to register for permits and/or
licenses with, and comply with operating and security standards of, the United
States Drug Enforcement Administration, the Food and Drug Administration (the
"FDA") and various state boards of pharmacy or comparable agencies. In addition,
the Company is subject to requirements of the Controlled Substances Act and the
Prescription Drug Marketing Act of 1987, which requires each state to regulate
the purchase and distribution of prescription drugs under prescribed minimum
standards. The Company is not currently required to register or submit
pre-market notifications to the FDA for its automated pharmaceutical dispensing
systems. There can be no assurance, however, that FDA policy in this regard will
not change. In its capacity as a distributor of prescription pharmaceuticals,
the Company is also subject to Medicare, Medicaid and state health care fraud
and abuse and anti-kickback laws and regulations.
Through its Medicine Shoppe subsidiary, the Company is subject to laws
adopted by certain states which regulate franchise operations and the
franchisor-franchisee relationship, and similar legislation is proposed or
pending in additional states. The most common provisions of such laws establish
restrictions on the ability of franchisors to terminate or to refuse to renew
franchise agreements. Federal Trade Commission rules also require franchisors to
make certain disclosures to prospective franchisees prior to the offer or sale
of franchises.
Owen's pharmacy operations and its pharmacies are subject to comprehensive
regulation by state and federal authorities, including state boards of pharmacy
and federal authorities with responsibility for monitoring the storage,
handling, and dispensing of narcotics and other controlled substances. Owen's
contractual arrangements with pharmaceutical manufacturers and health-care
providers also subject it to certain provisions of the federal Social Security
Act which (a) prohibit financial arrangements between providers of health-care
services to government health-care program (including Medicare and Medicaid)
beneficiaries and potential referral sources that are designed to induce patient
referrals or the purchasing, leasing, ordering or arranging for any good,
service or item paid for by such government programs, and (b) impose a number of
restrictions upon referring physicians and providers of designated health
services under Medicare and Medicaid programs.
Services and products provided by the Company's information businesses
include health-care data and other drug-related information gathered and
assessed for the benefit of health-care clients. Greater scrutiny is being
placed on a federal and state level regarding how such information should be
handled and identifying the appropriate parties to do so. Future changes in
regulations and/or legislation may affect how some of these information services
or products are provided.
The Company's PCI operations in the United Kingdom and Germany are subject
to state and local certification requirements, including compliance with the
Good Manufacturing Practices adopted by the European Community. Products
manufactured or sold by the Company's Allegiance and Scherer operations are
subject to regulation by the FDA, as well as by other federal and state
agencies, including those governing Medicare and Medicaid issues. The FDA
regulates the introduction and advertising of new medical products and related
manufacturing procedures, labeling, and record keeping. Product regulatory laws
also exist in most other countries where PCI, Allegiance and Scherer conduct
business.
The Company is also subject to various federal, state and local laws,
regulations and recommendations, both in the United States and abroad, relating
to safe working conditions, laboratory and manufacturing practices, and the use
and disposal of hazardous or potentially hazardous substances. The Company's
environmental policies mandate compliance with all applicable regulatory
requirements concerning environmental quality and contemplate, among other
things, appropriate capital expenditures for environmental protection for each
of its businesses.
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ITEM 2: PROPERTIES
In the United States, the Company has 23 principal pharmaceutical
distribution facilities and three specialty distribution facilities utilized by
the Pharmaceutical Distribution segment. In the U.S., the Company also has one
Pyxis assembly operation, two PCI packaging facilities, two PCI printing
facilities, one Scherer pharmaceutical manufacturing facility, one Scherer
health and nutritional products manufacturing facility, and one paintball
manufacturing facility in the Pharmaceutical Services segment. Domestically, the
Company also has 48 medical-surgical distribution facilities and 11
medical-surgical manufacturing facilities utilized by the Medical-Surgical
Products segment. The Company's domestic facilities are located in a total of 33
states.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Services segment, 14 Scherer manufacturing facilities which are
located in the United Kingdom, France, Germany, Italy, Australia, Japan,
Argentina, Brazil and Canada. The Company also has three PCI packaging
facilities which are located in the United Kingdom and Germany, and two PCI
printing facilities which are located in Puerto Rico. The Company owns, leases
or operates through its Medical-Surgical Products segment, 13 medical-surgical
distribution facilities located in Canada and the Netherlands, and 16
medical-surgical manufacturing facilities located in the Netherlands, Malaysia,
Mexico, the Dominican Republic, Germany and France. The Company's international
facilities are located in a total of 14 countries.
The Company owns 77 of the domestic and international facilities described
above, and the balance are leased. The Company's principal executive offices are
located in a leased four-story building located at 7000 Cardinal Place in
Dublin, Ohio.
The Company considers its operating properties to be in satisfactory
condition and adequate to meet its present needs. However, the Company expects
to make further additions, improvements and consolidations of its properties as
the Company's business continues to expand.
For certain financial information regarding the Company's facilities, see
Notes 5 and 9 of "Notes to Consolidated Financial Statements".
ITEM 3: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action lawsuits which were later consolidated and transferred by the
Judicial Panel for Multi-District Litigation to the United States District Court
for the Northern District of Illinois. Subsequent to the consolidation, a new
consolidated complaint was filed which included allegations that the wholesaler
defendants, including the Company and Whitmire, conspired with manufacturers to
inflate prices using a chargeback pricing system. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
$1,000,000 or 1% of any judgment against the wholesalers and the manufacturers,
whichever is less, and provided for a reimbursement mechanism for legal fees and
expenses. The trial of the class action lawsuit began on September 23, 1998. On
November 19, 1998, after the close of plaintiffs' case-in-chief, both the
wholesaler defendants and the manufacturer defendants moved for judgment as a
matter of law in their favor. On November 30, 1998, the Court granted both of
these motions and ordered judgment as a matter of law in favor of both the
wholesaler defendants and the manufacturer defendants. On January 25, 1999, the
class plaintiffs filed a notice of appeal of the District Court's decision with
the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of
Appeals for the Seventh Circuit issued its decision, which, in part, affirmed
the dismissal of the wholesaler defendants, including the Company and Whitmire.
On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the
Court of Appeals for the Seventh Circuit. In addition to the federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of related antitrust lawsuits brought by chain drug stores and
independent pharmacies who opted out of the federal class action lawsuits, and
in a series of state court cases alleging similar claims under various state
laws regarding the sale of brand name prescription drugs. The Judgment Sharing
Agreement mentioned above also covers these litigation matters.
On September 30, 1996, Baxter International, Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their 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. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, assumed the defense of litigation involving
claims related to the Allegiance Business from Baxter Healthcare Corporation
("BHC"), including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves described below. Allegiance will be
defending and indemnifying BHC, as contemplated by the agreements between Baxter
and Allegiance, for all expenses and potential liabilities associated with
claims pertaining to the litigation assumed by Allegiance. As of June 30, 1999,
there were approximately 430 lawsuits involving BHC and/or Allegiance containing
allegations of sensitization to natural rubber latex products. Since none of
these cases has proceeded to a hearing on the merits, the Company is unable to
evaluate the extent of any potential liability, and unable to estimate any
potential loss. Because of the increase in claims filed and the ongoing defense
costs that will be incurred, the Company believes it is probable that it will
continue to incur significant expenses related to the defense of cases involving
natural rubber latex gloves.
The Company also becomes involved from time-to-time in other litigation
(including environmental matters) incidental to its business. Although the
ultimate resolution of the litigation referenced in this Item 3 cannot be
forecast with certainty,
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the Company does not believe that the outcome of these lawsuits will have a
material adverse effect on the Company's consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows (information provided as of
August 23, 1999):
NAME AGE POSITION
- ---------------- --- --------------------------------------------
Robert D. Walter 54 Chairman and Chief Executive Officer
John C. Kane 59 President and Chief Operating Officer
Joseph F. Damico 45 Executive Vice President; Group President -
Allegiance Corporation
George L. Fotiades 45 Executive Vice President; Group President -
R.P. Scherer Corporation
James F. Millar 51 Executive Vice President; Group President -
Cardinal Distribution
Carl A. Spalding 54 Executive Vice President; Group President -
Healthcare Product Services
Stephen S. Thomas 44 Executive Vice President; Group President -
Pharmacy Automation and Information
Systems and International Operations
Steven Alan Bennett 46 Executive Vice President, General Counsel and
Secretary
Richard J. Miller 42 Corporate Vice President and Chief Financial
Officer
Michael E. Beaulieu 41 Corporate Vice President, Controller and
Principal Accounting Officer
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 Bank One Corporation, CBS, Inc. and Infinity
Broadcasting Corporation.
JOHN C. KANE has been a Director of the Company since August 1993 and has
been the Company's President and Chief Operating Officer since joining the
Company in February 1993. Mr. Kane also serves as a director of Connetics
Corporation.
JOSEPH F. DAMICO has been an Executive Vice President and Group
President-Allegiance Corporation, of the Company since February 1999, and
President of Allegiance since June 1996. From 1992 to September 1996, he was a
Corporate Vice President of Baxter.
GEORGE L. FOTIADES has been an Executive Vice President and Group
President-R.P. Scherer Corporation, of the Company since August 1998, and
President of Scherer since January 1998. Previously, Mr. Fotiades served as
Group President, Americas and Asia Pacific, of
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Scherer from June 1996 to January 1998. Prior to that, Mr. Fotiades was employed
by Warner-Lambert Company (a pharmaceutical and consumer health products
manufacturer), where he served most recently as President, Warner Wellcome
Consumer Healthcare division.
JAMES F. MILLAR has been an Executive Vice President of the Company since
February 1994, and was named as Group President of the Company's Cardinal
Distribution pharmaceutical wholesaling business in June 1996.
CARL A. SPALDING joined the Company in June 1998, as an Executive Vice
President and Group President - Healthcare Product Services. Prior to that, Mr.
Spalding served as a corporate officer of Abbott Laboratories (a pharmaceutical
and health-care manufacturer), where he served most recently as Vice President
of Pediatric Products of the Ross Laboratories Division.
STEPHEN S. THOMAS was named Executive Vice President and Group President -
Pharmacy Automation and Information Systems and International Operations of the
Company on July 1, 1999. Mr. Thomas joined the Company in October 1997, as an
Executive Vice President and President of Pyxis. Prior to that, Mr. Thomas
served as President of Datapro Information Services Group, a division of
McGraw-Hill Companies.
STEVEN ALAN BENNETT joined the Company in January 1999, as Executive Vice
President, General Counsel and Secretary. Previously, Mr. Bennett served as
Senior Vice President and General Counsel of Bank One Corporation, since August
1994.
RICHARD J. MILLER has been the Company's Corporate Vice President and Chief
Financial Officer since March 1999 and served as the Company's Acting Chief
Financial Officer since August 1998. From August 1995 through March 1999, Mr.
Miller served as the Company's Controller. Upon joining the Company in July
1994, and until August 1995, he served as Vice President, Auditing.
MICHAEL E. BEAULIEU has been the Company's Corporate Vice President and
Controller since April 1999. From August 1996 through April 1999 Mr. Beaulieu
served as Senior Vice President - Finance of Cardinal Distribution. Prior to
that, Mr. Beaulieu served as Vice President - Accounting of Cardinal
Distribution, since August 1994.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." The following table reflects the range of the reported high and
low last sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared thereon for the
fiscal years ended June 30, 1999 and 1998. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
HIGH LOW DIVIDENDS
Fiscal 1998:
Quarter Ended
September 30, 1997 $47.38 $36.42 $0.0167
December 31, 1997 51.88 45.75 0.0167
March 31, 1998 58.80 46.67 0.0200
June 30, 1998 64.17 57.08 0.0200
Fiscal 1999:
Quarter Ended
September 30, 1998 $71.00 $55.67 $0.0250
December 31, 1998 75.88 54.83 0.0250
March 31, 1999 80.50 66.00 0.0250
June 30, 1999 71.88 56.88 0.0250
Through August 23, 1999 $69.94 $60.88 $0.0250
As of August 23, 1999, there were approximately 26,000 shareholders of
record of the Company's Common Shares.
The Company anticipates that it will continue to pay quarterly cash
dividends in the future. However, the payment and amount of future dividends
remain within the discretion of the Company's Board of Directors and will depend
upon the Company's future earnings, financial condition, capital requirements
and other factors.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company was
prepared giving retroactive effect to the business combinations with Medicine
Shoppe on November 13, 1995; Pyxis on May 7, 1996; PCI on October 11, 1996; Owen
on March 18, 1997; MediQual on February 18, 1998; Scherer on August 7, 1998; and
Allegiance on February 3, 1999, all of which were accounted for as
pooling-of-interests transactions (see Note 2 of "Notes to Consolidated
Financial Statements"). On May 21, 1999 the Company completed a merger
transaction with Pacific Surgical Innovations, Inc. ("PSI"). The impact of the
merger transaction with PSI, on a historical basis, was not significant.
Accordingly, prior period financial statements have not been restated. The
consolidated financial data includes all purchase transactions that occurred
during these periods.
For the fiscal years ended June 30, 1996 and 1995, the information
presented is derived from consolidated financial statements which combine data
from Cardinal for the fiscal years ended June 30, 1996 and 1995 with data from
PCI for the fiscal years ended September 30, 1996 and 1995, respectively, Owen
for the fiscal years ended November 30, 1995 and 1994, respectively, MediQual
for the fiscal years ended December 31, 1995 and 1994, respectively, Scherer for
the fiscal years ended March 31, 1996 and 1995, respectively, and Allegiance for
the fiscal years ended December 31, 1996 and 1995, respectively.
For the fiscal year ended June 30, 1997, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1997 with PCI's financial results for the nine
months ended June 30, 1997, Owen's financial results for the period of June 1,
1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in
order to change Owen's November 30 fiscal year end to June 30), MediQual's
financial results for the fiscal year ended December 31, 1996, Scherer's
financial results for the fiscal year ended March 31, 1997, and Allegiance's
financial results for the fiscal year ended December 31, 1997.
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For the fiscal year ended June 30, 1998, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1998 with Scherer's financial results for the
fiscal year ended March 31, 1998.
The selected consolidated financial data below should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
At or for the Fiscal Year Ended June 30, (1)
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
EARNINGS DATA:
Revenue:
Operating revenue $21,480.6 $18,004.0 $15,924.8 $14,383.9 $13,943.0
Bulk deliveries to
customer warehouses 3,553.0 2,991.4 2,469.1 2,178.5 1,779.5
--------- --------- --------- --------- ---------
Total revenue $25,033.6 $20,995.4 $18,393.9 $16,562.4 $15,722.5
Net earnings (loss) $ 456.3 $ 425.1 $ 334.8 $ (321.2) $ 464.3
Earnings (loss) per
Common Share: (2)
Basic $ 1.68 $ 1.57 $ 1.26 $ (1.24) $ 1.84
Diluted $ 1.64 $ 1.53 $ 1.23 $ (1.24) $ 1.78
Cash dividends declared
per Common Share (2) $ 0.10 $ 0.07 $ 0.06 $ 0.05 $ 0.05
BALANCE SHEET DATA:
Total assets $ 8,289.0 $ 7,478.0 $ 6,521.8 $ 6,469.8 $ 6,517.3
Long-term obligations,
less current portion $ 1,223.9 $ 1,330.0 $ 1,320.9 $ 1,592.8 $ 451.5
Shareholders' equity $ 3,463.0 $ 2,954.9 $ 2,627.0 $ 2,222.5 $ 3,718.1
(1) Amounts reflect business combinations in all periods presented. Fiscal
1999, 1998, 1997 and 1996 amounts reflect the impact of merger-related
costs and other special charges. Fiscal 1996 amounts reflect the impact of
the write-down of goodwill of $550.0 million ($550.0 million, net of tax)
due to the change by Allegiance in its method of assessing goodwill. In
addition, fiscal 1996 amounts reflect the impact of merger-related charges
and facility rationalizations of $178.5 million ($122.8 million, net of
tax). See Note 2 of "Notes to Consolidated Financial Statements" for a
further discussion of merger-related costs and other special charges
affecting fiscal 1999, 1998 and 1997.
(2) Net earnings and cash dividends per Common Share have been adjusted to
retroactively reflect all stock dividends and stock splits through June 30,
1999.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis has been prepared giving retroactive
effect to the pooling-of-interests business combinations with PCI Services, Inc.
("PCI") on October 11, 1996, Owen Healthcare, Inc. ("Owen") on March 18, 1997,
MediQual Systems, Inc. ("MediQual") on February 18, 1998, R.P. Scherer
Corporation ("Scherer") on August 7, 1998 and Allegiance Corporation
("Allegiance") on February 3, 1999. On May 21, 1999 the Company completed a
merger transaction with Pacific Surgical Innovations, Inc. ("PSI"). The impact
of the merger transaction with PSI, on a historical basis, was not significant.
Accordingly, prior period financial statements have not been restated for the
merger transaction with PSI.
The discussion and analysis presented below should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 10-K. See "Information Regarding Forward-Looking Statements".
GENERAL
- -------
The Company operates within three operating business segments:
Pharmaceutical Distribution, Pharmaceutical Services, and Medical-Surgical
Products. See Note 13 of "Notes to Consolidated Financial Statements" for
a description of these segments.
RESULTS OF OPERATIONS
- ---------------------
OPERATING REVENUE. Operating revenue for fiscal 1999 increased 19% as compared
to the prior year due to strong operating revenue growth in all three of the
Company's business segments. The majority of the overall operating revenue
increase (approximately 82% for the year ended June 30, 1999) came from existing
customers in the form of increased volume and pharmaceutical price increases.
The remainder of the growth came from the addition of new customers.
The Pharmaceutical Distribution segment's operating revenue (representing
69% of total 1999 operating revenue, including approximately $297.4 million sold
to Owen, eliminated in consolidation) grew at a rate of 25% during the fiscal
year ended June 30, 1999 primarily due to strong sales to pharmacy chain stores
and through the Company's specialty distribution businesses.
The Pharmaceutical Services segment's operating revenue (representing 10%
of total 1999 operating revenue) grew at a rate of 15% during fiscal 1999,
primarily on the strength of the Company's pharmacy automation and
pharmaceutical-packaging businesses. The Company's pharmacy automation business
continued to see solid growth in the U.S. hospital sector and increased demand
from non-acute care customers. The pharmaceutical-packaging business' growth in
fiscal 1999 was attributable to a mix of new customers and an increase in volume
from existing customers.
The Medical-Surgical Products segment's operating revenue (representing 21%
of total 1999 operating revenue) for fiscal year 1999 grew 6% over the prior
year primarily due to strong sales of self-manufactured surgical products and
"best value" distributed supplies.
Operating revenue for fiscal 1998 increased 13% as compared to the prior
year primarily due to the strength of the Pharmaceutical Distribution and
Services segments. Pharmaceutical Distribution segment's (representing 66% of
total 1998 operating revenue) operating revenue (including approximately $196
million sold to Owen, eliminated in consolidation) grew at a rate of 19% during
the fiscal year ended June 30, 1998. Pharmaceutical Services segment's
(representing 10% of total 1998 operating revenue) operating revenue grew at
a rate of 16% during the fiscal year ended June 30, 1998, primarily on the
strength of the Company's pharmacy automation and pharmacy management
businesses. The Medical-Surgical Products segment's operating revenue
(representing 24% of total 1998 operating revenue) for fiscal year 1998 grew
2% over the prior year. The majority of the overall operating revenue increase
(approximately 80% for the year ended June 30, 1998) came from existing
customers in the form of increased volume and pharmaceutical prices. The
remainder of the growth came from the addition of new customers.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
earnings.
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13
GROSS MARGIN. For fiscal 1999 and 1998, overall gross margin as a percentage of
operating revenue was 12.03% and 12.33%, respectively.
The Pharmaceutical Distribution segment's gross margin as a percentage of
operating revenue decreased from 5.58% in fiscal 1998 to 5.29% in fiscal 1999.
The decrease is primarily due to the impact of lower selling margins, as a
result of a highly competitive market and a greater mix of high volume
customers, where a lower cost of distribution and better asset management enable
the Company to offer lower selling margins to its customers.
The Pharmaceutical Services segment's gross margin as a percentage of
operating revenue was 33.50% and 32.70% in fiscal 1999 and 1998, respectively.
Operating revenue growth in the Pharmaceutical Services segment has been greater
in the relatively higher margin pharmacy automation and pharmaceutical-packaging
businesses than it has been in the lower margin pharmacy management business.
The Medical-Surgical Products segment's gross margin as a percentage of
operating revenue was 23.29% in fiscal 1999 compared to 21.62% in fiscal 1998.
The increase is primarily the result of improvements in the Company's product
mix, including the growth of self-manufactured product sales in both domestic
and international markets as well as the impact of manufacturing and other
cost efficiencies.
For fiscal 1998 and 1997, gross margin as a percentage of operating revenue
was 12.33% and 12.68%, respectively.
The Pharmaceutical Distribution segment's gross margin as a percentage of
operating revenue decreased from 5.82% in fiscal 1997 to 5.58% in fiscal 1998.
The decrease was primarily due to the impact of lower selling margins, as a
result of a highly competitive market 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.
The Pharmaceutical Services segment's gross margin as a percentage of
operating revenue was 32.70% and 32.88% in fiscal 1998 and 1997, respectively.
Operating revenue growth was greater in the relatively lower margin pharmacy
management and pharmaceutical-packaging businesses than it was in the higher
margin pharmacy franchising business.
The Medical-Surgical Products segment's gross margin as a percentage of
operating revenue was 21.62% in fiscal 1998 compared to 20.99% in fiscal 1997.
The increase was primarily the result of improvements in the Company's product
mix, including the growth of manufactured product sales in both domestic and
international markets as well as the impact of manufacturing and other cost
efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of operating revenue declined to 7.28%
for fiscal 1999 compared to 7.72% in fiscal 1998. The improvements during fiscal
1999 reflect economies associated with the Company's revenue growth, in addition
to significant productivity gains resulting from continued cost control efforts
in all three segments and the continuation of consolidation and selective
automation of operating facilities in the Pharmaceutical Distribution and
Pharmaceutical Services segments. Pharmaceutical Distribution and Pharmaceutical
Services segments' selling, general and administrative expenses as a percentage
of operating revenue were 2.63% and 16.80% in fiscal 1999, respectively,
compared to 2.94% and 16.90% in fiscal 1998, respectively. Offsetting these
improvements was an increase in the selling, general and administrative expenses
as a percentage of operating revenue in the Medical-Surgical Products segment
which increased from 16.07% in fiscal 1998 to 16.86% in fiscal 1999. This
increase is primarily due to the acquisitions of businesses having a higher
selling, general and administrative rate than the Medical-Surgical Products
segment's normal rate during fiscal 1999. These acquisitions were accounted for
under the purchase method of accounting. As such, historical financial
statements have not been restated. The 13% growth in selling, general and
administrative expenses experienced in fiscal year 1999, compared to fiscal 1998
was due primarily to increases in personnel costs and depreciation expense, and
compares favorably to the 19% growth in operating revenue during fiscal 1999.
Selling, general and administrative expenses as a percentage of operating
revenue improved to 7.72% in fiscal 1998 compared to 8.19% in fiscal 1997. The
improvements in fiscal 1998 reflect the economies associated with the Company's
revenue growth, as well as significant productivity gains resulting from
continued cost control efforts and the consolidation and selective automation of
operating facilities. The 7% growth in selling, general and administrative
expenses experienced in the fiscal year 1998, compared to fiscal 1997 was due
primarily to increases in personnel costs and depreciation expense, and compares
favorably to the 13% growth in operating revenues during fiscal 1998.
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SPECIAL CHARGES
Merger-Related Charges. Costs of effecting mergers and subsequently integrating
the operations of the various merged companies are recorded as merger-related
costs when incurred. During fiscal 1999, merger-related costs totaling $146.6
million ($117.6 million, net of tax) were recorded. Of this amount,
approximately $95.4 million related to transaction and employee-related costs,
and $36.1 million related to business restructuring and asset impairment costs
associated with the Company's merger transactions with Scherer and Allegiance.
As part of the business restructuring, the Company is currently closing certain
facilities. As such, the Company has incurred employee-related and asset
impairment costs, as well as, exit costs, related to the termination of
contracts and lease agreements. In addition, the Company recorded costs of $4.0
million related to the write down of impaired inventory related to a previous
merger and of $1.1 million related to severance costs for restructuring
associated with the change in management that resulted from the merger
transaction with Owen. The Company also recorded costs of $13.7 million related
to integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.7 million credit, to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 17 of "Notes to Consolidated
Financial Statements"). This adjustment relates primarily to services provided
by third parties engaged by the Company in connection with the terminated Bergen
transaction. The cost of such services was estimated and recorded in the prior
periods when the services were performed. Actual billings were less than the
estimate originally recorded, resulting in a reduction of the current period
merger-related costs.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual merger
transaction ($2.3 million) and in connection with the proposed merger
transaction with Bergen ($33.4 million) which was terminated subsequent to
year-end (see Note 17 of "Notes to Consolidated Financial Statements").
Additional costs related to asset impairments ($3.8 million) and integrating the
operations of companies that previously merged with the Company ($9.6 million)
were incurred and recorded during fiscal 1998. During fiscal 1997, the Company
recorded merger-related charges associated with the PCI and Owen merger
transactions ($46.2 million) and additional integration costs related to the
Pyxis and Medicine Shoppe mergers ($4.7 million). See further discussion in Note
2 of "Notes to Consolidated Financial Statements." The Company classifies costs
associated with a merger transaction as "merger-related costs." It should be
noted that the amounts presented may not be comparable to similarly titled
amounts reported by other companies.
Other Special Charges. During fiscal 1998, the Company recorded a special charge
of $8.6 million related to the rationalization of its pharmaceutical
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs, including approximately $2.0 million
incurred in connection with the settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer, along with its joint venture partner,
converted the legal ownership structure of Scherer's 51% owned subsidiary in
Germany from a corporation to a partnership. As a result of this change in tax
status, the Company's tax basis in the German subsidiary was adjusted, resulting
in a one-time tax refund of approximately $4.6 million, as well as a reduction
in the cash taxes to be paid in the current and future years. Combined, these
factors reduced fiscal 1998 income tax expense by $11.7 million.
The following is a summary of the special charges incurred by the Company
in the last three fiscal years:
Fiscal Year Ended
June 30,
----------------------------
1999 1998 1997
------ ------ ------
(in millions, except per share amounts)
MERGER-RELATED COSTS:
- ---------------------
Transaction and employee-related costs:
Transaction costs $(52.9) $(35.7) $(14.5)
PCI vested retirement benefits and
incentive fee -- -- (7.6)
Employee severance/termination (39.5) -- (4.4)
Other (0.4) -- (0.6)
------ ------ ------
Total transaction and employee-related costs (92.8) (35.7) (27.1)
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Fiscal Year Ended
June 30,
-------------------------------
1999 1998 1997
------- ------ ------
Other merger-related costs:
Asset impairments (16.8) (3.8) (13.2)
Exit and restructuring costs (23.3) -- (2.2)
Duplicate facilities elimination -- -- (1.7)
Integration and efficiency implementation (13.7) (9.7) (6.7)
------- ------ ------
Total other merger-related costs (53.8) (13.5) (23.8)
------- ------ ------
Total merger-related costs $(146.6) $(49.2) $(50.9)
------- ------ ------
OTHER SPECIAL CHARGES:
- ----------------------
Facilities closures $ -- $ (6.1) $ --
Employee severance -- (2.5) --
------- ------ ------
Total other special charges -- (8.6) --
------- ------ ------
TOTAL SPECIAL CHARGES (146.6) (57.8) (50.9)
- ---------------------
Tax effect of special charges 29.0 22.0 14.3
Tax benefit for change in tax status -- 11.7 --
------- ------ ------
Effect on net earnings $(117.6) $(24.1) $(36.6)
======= ====== ======
Effect on diluted earnings per share $ (0.42) $(0.09) $(0.13)
======= ====== ======
The effects of the merger-related costs and other special charges are
included in the reported net earnings of $456.3 million in fiscal 1999, $425.1
million in fiscal 1998 and $334.8 million in fiscal 1997 and in the reported
diluted earnings per Common Share of $1.64 in fiscal 1999, $1.53 in fiscal 1998
and $1.23 in fiscal 1997.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions it has completed to date
totaling approximately $100.0 million ($61.2 million, net of tax) in future
periods in order to properly integrate operations, of which a portion represents
facility rationalizations, and implement efficiencies with regard to, among
other things, information systems, customer systems, marketing programs and
administrative functions. Such amounts will be charged to expense when incurred.
Asset impairments in fiscal 1997 include the write-off of a patent ($7.4
million) and the write-down of certain operating assets ($3.2 million) related
to MediTROL, Inc. ("MediTROL," a subsidiary acquired by the Company in the Owen
merger transaction) as a result of management's decision to merge the operations
of MediTROL into Pyxis and phase-out production of the separate MediTROL product
line.
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted
in expansion into service areas which (a) complement the Company's core
pharmaceutical distribution business; (b) provide opportunities for the Company
to develop synergies with, and thus strengthen, the acquired business; and (c)
generally generate higher margins as a percentage of operating revenue than
pharmaceutical distribution. As the healthcare industry continues to change,
the Company is constantly evaluating merger or acquisition candidates in
pharmaceutical distribution, as well as related sectors of the healthcare
industry that would expand its role as a service provider; however, there can be
no assurance that it will be able to successfully pursue any such opportunity or
consummate any such transaction, if pursued. If additional transactions are
entered into or consummated, the Company would incur additional merger-related
costs.
INTEREST EXPENSE. The increase in interest expense of $4.9 million during
fiscal 1999 compared to fiscal 1998 is primarily due to the Company's issuance
of $150 million of 6.25% Notes due 2008, in a public offering in July 1998 (see
"Liquidity and Capital Resources"). The effect of the issuance of the 6.25%
Notes during fiscal 1999 has been partially offset by a decrease in other debt
instruments with higher interest rates.
The $12.7 million decrease in interest expense in fiscal 1998 compared to
fiscal 1997 is primarily due to the paydown of the Company's $100 million of 8%
Notes on March 1, 1997 and a reduction in the overall interest rate on total
debt outstanding during fiscal 1998 compared to fiscal 1997.
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PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 39.9%, 35.6% and 38.0% for fiscal years 1999,
1998 and 1997, respectively. The fluctuation in the tax rate is primarily due to
the impact of recording certain non-deductible merger-related costs during
various periods as well as fluctuating state and foreign effective tax rates as
a result of the Company's business mix for all three fiscal years. Also, a
change in tax status of a 51% owned German subsidiary resulted in a lower tax
provision during fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $2.2 billion at June 30, 1999 from $2.1
billion at June 30, 1998. This increase resulted from additional investments in
inventories and trade receivables of $323.3 million and $154.0 million,
respectively. Offsetting the increases in working capital was an increase in
accounts payable of $218.1 million and a decrease in cash of $208.1 million.
Increases in inventories reflect the higher level of business volume in
pharmaceutical distribution activities, especially in the fourth quarter of
fiscal 1999 when distribution revenue grew 21% over the same period in the prior
year. The increase in trade receivables is consistent with the Company's revenue
growth (see "Operating Revenue" above). The change in accounts payable and cash
is due primarily to the timing of inventory purchases and related payments.
On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008,
the proceeds of which were used for working capital needs due to growth in the
Company's business. The Company currently has the capacity to issue $250 million
of additional debt securities pursuant to a shelf registration statement filed
with the Securities and Exchange Commission (see Note 5 of "Notes to
Consolidated Financial Statements").
Property and equipment, at cost, increased by $146.6 million at June 30,
1999 compared to June 30, 1998. The increase was primarily due to ongoing plant
expansion and manufacturing equipment purchases and additional investments made
for management information systems and upgrades to distribution facilities.
The Company has several operating lease agreements for the construction of
new facilities. See further discussion in Note 9 of "Notes to Consolidated
Financial Statements."
Shareholders' equity increased to $3.5 billion at June 30, 1999 from $3.0
billion at June 30, 1998, primarily due to net earnings of $456.3 million and
the investment of $131.6 million by employees of the Company through various
stock incentive plans, offset by the retirement of $40.1 million of Allegiance
treasury shares.
The Company has line-of-credit agreements with various bank sources
aggregating $175.8 million. The Company had $28.6 million outstanding under
these lines at June 30, 1999. In addition, the Company has a commercial paper
program, providing for the issuance of up to $750 million in aggregate maturity
value of commercial paper. The Company had $49.2 million outstanding under this
program at June 30, 1999. The Company has an unsecured bank credit facility,
which provides for up to an aggregate of $1.0 billion in borrowings of which
$150.0 million is part of a multi-currency allocation and $250.0 million
represents a 364-day facility. As of June 30, 1999, $80.7 million of borrowings
were outstanding under the multi-currency allocation portion of the facility.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to business combinations.
See Notes 1 and 6 to the consolidated financial statements for information
regarding the use of financial instruments and derivatives thereof, including
foreign currency hedging instruments. As a matter of policy, the Company does
not engage in "speculative" transactions involving derivative financial
instruments.
OTHER
- -----
PENDING BUSINESS COMBINATIONS. On August 5, 1999, the Company announced
that it had entered into a definitive merger agreement with Automatic Liquid
Packaging, Inc. ("ALP"), pursuant to which ALP will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be accounted
for as a pooling-of-interests for financial reporting purposes. The merger is
expected to be completed in the first quarter of fiscal 2000, subject to
satisfaction of certain conditions, including regulatory clearances.
On July 12, 1999, the Company completed the purchase of MedSurg Industries,
Inc., for $31.8 million. The acquisition was accounted for as a purchase.
TERMINATION AGREEMENT. On August 24, 1997, the Company and Bergen announced
that they had entered into a definitive merger agreement, as amended, pursuant
to which a wholly owned subsidiary of the Company would be merged with and into
Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United States
District Court for the
16
17
District of Columbia granted the Federal Trade Commission's request for a
preliminary injunction to halt the proposed merger. On August 7, 1998, the
Company and Bergen jointly terminated the Bergen Merger Agreement and, in
accordance with the terms of the Bergen Merger Agreement, the Company reimbursed
Bergen for $7.0 million of transaction costs. Additionally, the termination of
the Bergen Merger Agreement caused the costs incurred by the Company (that would
not have been deductible had the merger been consummated) to become tax
deductible for federal income tax purposes, resulting in a tax benefit of $12.2
million. The obligation to reimburse Bergen and the additional tax benefit were
recorded in the fourth quarter of the fiscal year ended June 30, 1998. (See Note
17 of "Notes to Consolidated Financial Statements").
YEAR 2000 PROJECT. The Company utilizes computer technologies in each of
its businesses to effectively carry out its day-to-day operations. Computer
technologies include both information technology in the form of hardware and
software, as well as embedded technology in the Company's facilities and
equipment. Similar to most companies, the Company must determine whether its
systems are capable of recognizing and processing date sensitive information
properly in the year 2000. The Company is utilizing a multi-phased concurrent
approach to address this issue.
The first of two project segments, "Mitigation and Validation", included
specific awareness, assessment, remediation, validation and implementation
phases. The Company has substantially completed all of these phases of this
project segment. The Company has corrected, replaced, mitigated, or retired the
vast majority of those business critical systems which were not year 2000 ready
in order to ensure the Company's ability to continue to meet its internal needs
and those of its suppliers and customers. The Company expects that all-remaining
Mitigation and Validation issues will be fully completed on or before September
30, 1999. This process includes the multiple testing of critical systems to
ensure that year 2000 readiness has been accomplished.
The second project segment, "Business Protection", also includes several
phases - business dependency and risk assessment, contingency planning, and
situation management planning. The Company has made significant and substantial
progress with this segment and expects to substantially complete the business
dependency and risk assessment phase by August 31, 1999 and the remaining two
phases by September 30, 1999.
The Company currently believes it will be able to modify, replace, or
mitigate its affected systems in time to avoid any material detrimental impact
on its operations. If the Company determines that it is unable to remediate and
properly test affected systems on a timely basis, the Company intends to develop
appropriate contingency plans for any such mission-critical systems at the time
such determination is made. While the Company is not presently aware of any
significant probability that its systems will not be properly remediated on a
timely basis, there can be no assurances that all year 2000 remediation
processes will be completed and properly tested before the year 2000, or that
contingency plans will sufficiently mitigate the risk of a year 2000 readiness
problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $27.0 million, including costs incurred to date.
Significant portions of these costs were not incremental costs, but rather
represented the redeployment of existing resources. This reallocation of
resources is not expected to have a significant impact on the day-to-day
operations of the Company. Since the initiation of the year 2000 project, the
Company estimates that it has incurred costs of approximately $20.0 million of
which approximately $6.2 million represented incremental costs. The anticipated
impact and costs of the project, as well as the date, on which the Company
expects to complete the project, are based on management's best estimates using
information currently available and numerous assumptions about future events.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Based on its current
estimates and information currently available, the Company does not anticipate
that the costs associated with this project will have a material adverse effect
on the Company's consolidated financial statements.
The Company has formally communicated with its significant suppliers,
customers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces
as the year 2000 approaches. The Company is in the process of developing
appropriate contingency plans in the event that a significant exposure is
identified relative to the dependencies on third-party systems. Although the
Company is not presently aware of any such significant exposure, there can be no
guarantee that the systems of third parties on which the Company relies or with
which the Company interfaces will be converted in a timely manner, or that a
failure to properly convert by a third party would not have a material adverse
effect on the Company.
The potential risks associated with the year 2000 issues include, but are
not limited to: temporary disruption of the Company's operations, loss of
communication services and loss of other utility services. The Company believes
that the most reasonably likely worst-case year 2000 scenario would be a loss of
communication services which could result in
17
18
problems with receiving, processing, tracking and billing customer orders;
problems receiving, processing and tracking orders placed with suppliers; and
problems with banks and other financial institutions. Currently, as part of the
Company's normal business contingency planning, a plan has been developed for
business disruptions due to natural disasters and power failures. The Company is
in the process of enhancing these contingency plans to include provisions for
year 2000 issues, although it will not be possible to develop contingency plans
for all potential disruption. Although the Company anticipates that minimal
business disruption will occur as a result of the year 2000 issues, based upon
currently available information, incomplete or untimely resolution of year 2000
issues by either the Company or significant suppliers, customers and critical
business partners could have a material adverse impact on the Company's
consolidated financial statements.
THE EURO CONVERSION. On January 1, 1999, certain member countries of the
European Union irrevocably fixed the conversion rates between their national
currencies and a common currency, the "Euro", which became their legal currency
on that date. The participating countries' former national currencies will
continue to exist as denominations of the Euro until January 1, 2002. The
Company has addressed the business implications of conversion to the Euro,
including the need to adapt internal systems to accommodate Euro-denominated
transactions, the competitive implications of cross-border price transparency,
and other strategic implications. The Company does not expect the conversion to
the Euro to have a material impact on its consolidated financial statements.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS. As of September 30, 1998,
the Company adopted, on a retroactive basis, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires the presentation of comprehensive income and its components in a full
set of general-purpose financial statements. The Company's comprehensive income
consists of net earnings and foreign currency translation adjustments.
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 requires companies to define and report financial
and descriptive information about its operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers (See Note 13 of "Notes to Consolidated Financial
Statements").
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises employers' disclosures about pension
and other postretirement benefit plans. The new statement does not change the
existing method of expense recognition. There was no effect on financial
position or net income as a result of adopting SFAS 132. (See Note 8 of "Notes
to Consolidated Financial Statements").
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." This new
statement requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair value. As
amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," the provisions of SFAS 133 will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2001.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S.
interest rates, changes in foreign currency exchange rates as measured against
the U.S. dollar and changes in commodity prices.
Interest Rates. The Company utilizes a mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposures to changes in
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 2000, although there can be no
assurances that interest rates will not significantly change.
18
19
As of June 30, 1999, the Company had total long-term obligations outstanding of
$1,235.5 million of which $1,008.0 million represented Notes and Debentures with
fixed interest rates and maturity dates beginning in fiscal 2004. As of June 30,
1998, the Company had total long-term obligations outstanding of $1,337.3
million of which $898.9 million represented Notes and Debentures with fixed
interest rates and maturity dates beginning in fiscal 2004. The average interest
rate related to these obligations was 6.8% and 7.0% as of June 30, 1999 and
1998, respectively. The majority of the remaining outstanding long-term
obligations and credit facilities have variable interest rates that fluctuate
with the LIBOR or prime rates. As of June 30, 1999 and 1998, the fair value of
the total long-term obligations was $1,233.3 million and $1,365.3 million,
respectively. Maturities of long-term obligations for future fiscal years are:
2000 - $11.6 million; 2001 - $117.6 million; 2002 - $3.1 million; 2003 - $ 2.1
million; 2004 - $273.9 million and 2005 and thereafter - $827.2 million.
The Company periodically enters into interest rate swap agreements when
existing conditions and market situations dictate. The Company does not
enter into interest rate swap agreements for trading or speculative purposes.
The impact of interest rate swaps is not significant. See Note 6 of "Notes to
Consolidated Financial Statements".
Foreign Exchange. The Company conducts business in several major
international currencies. The Company periodically uses financial instruments,
principally foreign currency options to attempt to manage the impact of foreign
exchange rate changes on earnings. In addition, the Company periodically enters
into forward foreign currency exchange contracts to hedge certain exposures
related to selected transactions that are relatively certain as to both timing
and amount and to hedge a portion of the production costs expected to be
denominated in foreign currency. The purpose of entering into these hedge
transactions is to minimize the impact of foreign currency fluctuations on the
results of operations and cash flows. Gains and losses on the hedging activities
are recognized concurrently with the gains and losses from the underlying
transactions. The Company does not enter into forward exchange contracts or
foreign currency options for trading purposes.
In addition, the Company uses commodity contracts to hedge raw material
costs expected to be denominated in foreign currency. These contracts generally
cover a one-year period and all gains and losses are deferred and recognized in
cost of goods sold with the underlying product costs.
As of June 30, 1999, the Company did not have any material foreign currency
options or forward exchange contracts outstanding. As of June 30, 1998, the
Company's foreign currency options consisted of the option to exchange German
marks at a fixed exchange rate of 1.722 German marks per U.S. dollar and British
pound sterling at a fixed exchanged rate of $1.6242 per pound sterling. The
notional principal amount under these foreign currency option contracts was
approximately $3 million and its related fair value was $0.1 million at June 30,
1998. In addition, as of June 30, 1998, the Company's forward exchange contracts
consisted of forward contracts to sell German marks and U.S. dollars for British
pound sterling at a fixed exchange rate of 3.05679 German mark per British pound
sterling and $1.67 per pound sterling. The notional principal amount under these
foreign exchange contracts was approximately $35.6 million and its related fair
value was $(0.4) million at June 30, 1998. As of June 30, 1998, the notional
amount of the commodity hedge contracts was $14.2 million and the related fair
market value of these contracts was $(1.7) million. As of June 30, 1999, the
notional amount of the commodity hedge contracts was $9.6 million and the
related fair market value of these contracts was $(0.3) million. The unrealized
gains or losses on these options or contracts represent hedges of foreign
exchange gains and losses on a portion of the Company's foreign earnings, cash
flows and selected transactions. As a result, the Company does not expect future
gains and losses on these contracts to have a material impact on the Company's
consolidated financial statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1999, 1998 and 1997
Consolidated Balance Sheets at June 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Fiscal Years Ended June
30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
19
20
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc:
We have audited the accompanying consolidated balance sheets of Cardinal Health,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Allegiance Corporation ("Allegiance"), a wholly owned subsidiary
of Cardinal Health, Inc., as of June 30, 1999 and 1998, and for the years ended
June 30, 1999 and 1998 and December 31, 1997. We also did not audit the
financial statements of R.P. Scherer Corporation ("Scherer"), a wholly owned
subsidiary of Cardinal Health, Inc., as of June 30, 1999 and March 31, 1998, and
for the years ended June 30, 1999 and March 31, 1998 and 1997. The combined
financial statements of Allegiance and Scherer represent approximately 45% and
47% of consolidated total assets at June 30, 1999 and 1998, respectively, and
represent combined revenues and net income of approximately 25%, 28%, and 31%
and 37%, 42% and 44%, respectively, of consolidated amounts for each of the
three years in the period ended June 30, 1999. These statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for Allegiance and Scherer, is
based solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999
in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 10, 1999
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statements of financial position
of R.P. SCHERER CORPORATION (a Delaware corporation and a wholly-owned
subsidiary of Cardinal Health, Inc.) and subsidiaries as of June 30, 1999 and
March 31, 1998 and the related consolidated statements of income, comprehensive
income, cash flows and shareholders' equity for the year ended June 30, 1999 and
the years ended March 31, 1998 and 1997 (not presented separately herein). These
financial statements and the schedule referred to below are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of June 30, 1999 and March 31, 1998, and the results of their
operations and their cash flows for the year ended June 30, 1999 and for the
years ended March 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation allowances is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements
(not presented separately herein). This schedule has been subjected to the
auditing procedures applied in our 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
Detroit, Michigan,
August 9, 1999
21
22
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders of Allegiance Corporation
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of equity of Allegiance Corporation,
a wholly-owned subsidiary of Cardinal Health Inc., and its subsidiaries (not
presented separately herein) present fairly, in all material respects, the
financial position of Allegiance Corporation and its subsidiaries at June 30,
1999 and 1998, and the results of their operations and their cash flows for the
years ended June 30, 1999 and 1998 and for the year ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allegiance Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
July 29, 1999
22
23
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Stockholders of Allegiance Corporation
Our audits of the consolidated financial statements of Allegiance Corporation
and its subsidiaries referred to in our report dated July 29, 1999 appearing on
page 22 of the Cardinal Health, Inc. 1999 Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule II - Valuation and
Qualifying Accounts ("Financial Statement Schedule") of Allegiance Corporation
and its subsidiaries (not presented separately herein). In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 29, 1999
23
24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Revenue:
Operating revenue $21,480.6 $18,004.0 $15,924.8
Bulk deliveries to customer warehouses 3,553.0 2,991.4 2,469.1
--------- --------- ---------
Total revenue 25,033.6 20,995.4 18,393.9
Cost of products sold:
Operating cost of products sold 18,892.2 15,783.4 13,904.8
Cost of products sold - bulk deliveries 3,553.0 2,991.4 2,469.1
Merger-related costs 4.0 -- --
--------- --------- ---------
Total cost of products sold 22,449.2 18,774.8 16,373.9
Gross margin 2,584.4 2,220.6 2,020.0
Selling, general and administrative expenses 1,564.8 1,390.3 1,304.3
Special charges:
Merger-related costs (142.6) (49.2) (50.9)
Other special charges -- (8.6) --
--------- --------- ---------
Total special charges (142.6) (57.8) (50.9)
Operating earnings 877.0 772.5 664.8
Other income (expense):
Interest expense (99.4) (94.5) (107.2)
Other, net (includes minority interests) (18.4) (18.3) (17.9)
--------- --------- ---------
Earnings before income taxes 759.2 659.7 539.7
Provision for income taxes 302.9 234.6 204.9
--------- --------- ---------
Net earnings $ 456.3 $ 425.1 $ 334.8
========= ========= =========
Net earnings per Common Share:
Basic $ 1.68 $ 1.57 $ 1.26
Diluted $ 1.64 $ 1.53 $ 1.23
Weighted average number of
Common Shares outstanding:
Basic 271.6 271.2 265.8
Diluted 279.0 277.9 272.0
The accompanying notes are an integral part of these statements.
24
25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 165.2 $ 373.3
Trade receivables, net 1,590.3 1,436.3
Current portion of net investment in sales-type leases 152.5 91.4
Inventories 2,931.4 2,608.1
Prepaid expenses and other 307.2 277.0
-------- --------
Total current assets 5,146.6 4,786.1
-------- --------
Property and equipment, at cost:
Land, buildings and improvements 700.3 761.6
Machinery and equipment 1,970.3 1,735.7
Furniture and fixtures 77.7 104.4
-------- --------
Total 2,748.3 2,601.7
Accumulated depreciation and amortization (1,207.8) (1,134.0)
-------- --------
Property and equipment, net 1,540.5 1,467.7
Other assets:
Net investment in sales-type leases, less current portion 454.3 233.1
Goodwill and other intangibles, net 942.1 850.5
Other 205.5 140.6
-------- --------
Total $8,289.0 $7,478.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 28.6 $ 24.7
Current portion of long-term obligations 11.6 7.3
Accounts payable 2,360.8 2,142.7
Other accrued liabilities 558.0 550.7
-------- --------
Total current liabilities 2,959.0 2,725.4
-------- --------
Long-term obligations, less current portion 1,223.9 1,330.0
Deferred income taxes and other liabilities 643.1 467.7
Shareholders' equity:
Common Shares, without par value 1,090.0 1,063.6
Retained earnings 2,439.1 2,006.9
Common Shares in treasury, at cost (17.2) (82.3)
Cumulative foreign currency adjustment (44.0) (27.9)
Other (4.9) (5.4)
-------- --------
Total shareholders' equity 3,463.0 2,954.9
-------- --------
Total $8,289.0 $7,478.0
======== ========
The accompanying notes are an integral part of these statements.
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES CUMULATIVE
------------------ TREASURY SHARES FOREIGN TOTAL
SHARES RETAINED ------------------ CURRENCY SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT ADJUSTMENT OTHER EQUITY
------ -------- -------- ------ -------- ---------- ----- --------
BALANCE, JUNE 30, 1996 132.1 $ 897.8 $1,343.1 (1.1) $ (11.6) $ (3.8) $(3.0) $2,222.5
Comprehensive income:
Net earnings 334.8 334.8
Foreign currency translation adjustments (8.7) (8.7)
--------
Total comprehensive income 326.1
Employee stock plans activity,
including tax benefits of $21.0 3.5 123.4 (0.6) 10.6 (1.1) 132.9
Treasury shares acquired and shares retired (0.7) (7.1) 0.9 (30.7) (37.8)
Dividends paid (32.0) (32.0)
Stock split effected as a stock dividend
and cash paid in lieu of fractional shares 33.4
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) 0.2 5.7 0.1 0.1 6.0
Stock issued for acquisitions and other 0.1 10.5 (1.2) 9.3
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1997 168.4 $1,024.8 $1,651.6 (0.7) $ (31.6) $(12.5) $(5.3) $2,627.0
Comprehensive income:
Net earnings 425.1 425.1
Foreign currency translation adjustments (16.0) (16.0)
--------
Total comprehensive income 409.1
Employee stock plans activity,
including tax benefits of $35.2 2.0 65.0 (0.3) 29.0 (0.4) 93.6
Treasury shares acquired and shares retired (0.4) (25.4) (0.8) (104.9) (130.3)
Dividends paid (34.8) (34.8)
Other adjustments (0.5) (0.5)
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) (0.1) (0.8) (35.0) 0.4 25.2 0.6 0.8 (9.2)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1998 169.9 $1,063.6 $2,006.9 (1.4) $ (82.3) $(27.9) $(5.4) $2,954.9
Comprehensive income:
Net earnings 456.3 456.3
Foreign currency translation adjustments (17.0) (17.0)
--------
Total comprehensive income 439.3
Employee stock plans activity,
including tax benefits of $55.8 2.7 99.7 (0.7) 34.8 (2.9) 131.6
Treasury shares acquired and shares retired (1.7) (73.8) 1.7 30.3 3.4 (40.1)
Dividends paid (31.9) (31.9)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 103.1 (0.3) (0.3)
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) 0.1 0.5 8.6 0.9 10.0
Stock issued for acquisitions and other 0.2 (0.5) (0.5)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1999 274.3 $1,090.0 $2,439.1 (0.4) $ (17.2) $(44.0) $(4.9) $3,463.0
===== ======== ======== ==== ======= ====== ===== ========
The accompanying notes are an integral part of these statements.
26
27
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 456.3 $ 425.1 $ 334.8
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 233.5 214.5 209.1
Provision for deferred income taxes 132.4 90.1 32.9
Provision for bad debts 29.5 15.5 8.6
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (214.1) (204.9) (15.3)
Increase in inventories (318.5) (473.7) (106.6)
Increase in net investment in sales-type leases (282.3) (103.3) (5.1)
Increase (decrease) in accounts payable 230.5 523.3 (33.2)
Other operating items, net 78.4 65.5 63.8
------- ------- -------
Net cash provided by operating activities 345.7 552.1 489.0
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (147.5) (45.8) (43.7)
Proceeds from asset dispositions 57.8 10.7 21.0
Additions to property and equipment (319.9) (278.8) (227.9)
Purchase of marketable securities available for sale -- -- (3.4)
Proceeds from sale of marketable securities available for sale -- -- 57.7
Other -- (4.7) 2.5
------- ------- -------
Net cash used in investing activities (409.6) (318.6) (193.8)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity (207.4) (89.2) (185.4)
Reduction of long-term obligations (118.5) (49.1) (277.8)
Proceeds from long-term obligations, net of issuance costs 223.7 111.4 94.7
Proceeds from issuance of Common Shares 62.0 59.1 108.2
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (56.7) (51.4) (40.0)
Purchase of treasury shares (40.1) (130.7) (37.7)
Other (4.8) (10.8) (10.8)
------- ------- -------
Net cash used in financing activities (141.8) (160.7) (348.8)
------- ------- -------
EFFECT OF CURRENCY TRANSLATION
ON CASH AND EQUIVALENTS (2.4) (1.6) (1.2)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (208.1) 71.2 (54.8)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 373.3 302.1 356.9
------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 165.2 $ 373.3 $ 302.1
======= ======= =======
The accompanying notes are an integral part of these statements.
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company currently conducts its business within three business
segments; Pharmaceutical Distribution, Pharmaceutical Services and
Medical-Surgical Products.
The Pharmaceutical Distribution segment distributes a broad line of
pharmaceuticals, therapeutic plasma and other specialty pharmaceutical products,
health and beauty care products, and other items typically sold by hospitals,
retail drug stores, and other healthcare providers.
The Company, within the Pharmaceutical Services segment, operates a variety of
related healthcare service and manufacturing businesses, including Pyxis
Corporation ("Pyxis") (which develops, manufactures, leases, sells and services
point-of-use pharmacy systems which automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities); Medicine
Shoppe International, Inc. ("Medicine Shoppe") (a franchisor of apothecary-style
retail pharmacies); PCI Services, Inc. ("PCI") (an international provider of
integrated packaging services to pharmaceutical manufacturers); Owen Healthcare,
Inc. ("Owen") (a provider of pharmacy management and information services to
hospitals); the Cardinal Information group of companies ("CIC") (a developer and
provider of clinical information systems); and R.P. Scherer Corporation
("Scherer") (an international developer and manufacturer of drug delivery
systems).
The Medical-Surgical Products segment primarily encompasses Allegiance
Corporation ("Allegiance"). Allegiance is a distributor and manufacturer of
medical, surgical and respiratory therapy products, and a provider of
distribution and cost-saving services. See "Basis of Presentation" below.
BASIS OF PRESENTATION. The consolidated financial statements of the Company
include the accounts of all majority-owned subsidiaries and all significant
intercompany accounts and transactions have been eliminated. In addition, the
consolidated financial statements give retroactive effect to the mergers with
PCI on October 11, 1996; Owen on March 18, 1997; MediQual Systems, Inc.
("MediQual") on February 18, 1998; Scherer on August 7, 1998; and Allegiance on
February 3, 1999 (see Note 2). Such business combinations were accounted for
under the pooling-of-interests method.
The Company's fiscal year end is June 30 and Owen's, MediQual's, Scherer's
and Allegiance's fiscal year ends were November 30, December 31, March 31, and
December 31, respectively. For the fiscal year ended June 30, 1997, the
consolidated financial statements combine the Company's fiscal year ended June
30, 1997 with Owen's financial results for the period of June 1, 1996 to June
30, 1997 (excluding Owen's financial results for December 1996 in order to
change Owen's November 30 fiscal year end to June 30) and with the financial
results for MediQual's fiscal year ended December 31, 1996, Scherer's fiscal
year ended March 31, 1997, and Allegiance's fiscal year ended December 31, 1997.
For the fiscal year ended June 30, 1998, the consolidated financial statements
combine the Company's fiscal year ended June 30, 1998 with Scherer's fiscal year
ended March 31, 1998.
Due to the change in Owen's fiscal year from November 30 to conform with
the Company's June 30 fiscal year end, Owen's results of operations for the
month of December 1996 are not included in the combined results of operations
but are reflected as an adjustment in the Consolidated Statements of
Shareholders' Equity. As a result of changing MediQual's fiscal year end from
December 31 to June 30, the results of operations for the six months ended June
30, 1997 are not included in the combined results of operations but are
reflected as an adjustment in the Consolidated Statements of Shareholders'
Equity. MediQual's total revenue and net earnings for this period were $6.0
million and $1.7 million, respectively. MediQual's cash flows from operating
activities for this period were $1.2 million, while cash flows used in investing
and financing activities were $0.3 million and $0.1 million, respectively. Due
to the change in Scherer's fiscal year end from March 31 to conform with the
Company's June 30 fiscal year end, Scherer's results of operations for the three
months ended June 30, 1998 are not included in the combined results of
operations but are reflected as an adjustment in the Consolidated Statements of
Shareholders' Equity. Scherer's net revenue and net earnings for this period
were $161.6 million and $8.6 million, respectively. Scherer's cash flows from
operating and financing activities for this period were $12.6 million and $32.6
million, respectively, while cash flows used in investing activities were $12.2
million. As a result of changing Allegiance's fiscal year end from December 31
to June 30, the results of operations for the six months ended December 31, 1997
are included in the combined results of operations for both the fiscal years
ended June 30, 1997 and 1998 and are reflected as an adjustment in the
Consolidated Statements of Shareholders' Equity. Allegiance's total revenue and
net earnings for this period were $2.2 billion and $47.9 million, respectively.
Allegiance's cash flows from operating
28
29
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
activities for this period were $147.2 million, while cash flows used in
investing and financing activities were $63.7 million and $83.8 million,
respectively.
On May 21, 1999, the Company completed a merger with Pacific Surgical
Innovations, Inc. ("PSI"). The merger transaction with PSI was accounted for as
a pooling-of-interests. Because the impact of the merger transaction with PSI
was not significant on a historical basis, prior period financial statements
have not been restated. PSI's financial information for all periods, beginning
with May 21, 1999, has been included in the Company's consolidated financial
results for fiscal 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
CASH EQUIVALENTS. The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
cash equivalents approximates their fair value. Cash payments for interest were
$105.5 million, $97.4 million and $111.4 million and cash payments for income
taxes were $79.5 million, $146.9 million and $116.8 million for fiscal 1999,
1998 and 1997, respectively. See Notes 2 and 5 for additional information
regarding non-cash investing and financing activities.
RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the
Company through its pharmaceutical and other healthcare distribution activities
and are presented net of an allowance for doubtful accounts of $53.6 million and
$64.6 million at June 30, 1999 and 1998, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates, which
generally fluctuate with the prime rate. The financings may be collateralized,
guaranteed by third parties or unsecured. Finance notes and accrued interest
receivable are $19.8 million and $66.6 million at June 30, 1999 and 1998,
respectively (the current portions are $9.2 million and $29.4 million,
respectively), and are included in other assets. These amounts are reported net
of an allowance for doubtful accounts of $4.9 million and $6.4 million at June
30, 1999 and 1998, respectively.
During fiscal 1999, the Company formed Medicine Shoppe Capital Corporation
("MSCC") and Pyxis Capital Corporation ("PCC"), as wholly owned subsidiaries of
Medicine Shoppe and Pyxis, respectively. MSCC and PCC were incorporated for the
sole purpose of buying receivables and selling those receivables to certain
financial institutions or to other investors. They are designed to be special
purpose, bankruptcy remote entities. Although consolidated to the extent
required by generally accepted accounting principles, MSCC and PCC are separate
corporations from the Company, Medicine Shoppe and Pyxis, they each maintain
separate financial statements, and their assets will be available first and
foremost to satisfy the claims of their creditors.
INVENTORIES. A majority of inventories (approximately 60% in 1999 and 1998) are
stated at lower of cost, using the last-in, first-out ("LIFO") method, or market
and are primarily merchandise inventories. The remaining inventory is primarily
stated at the lower of cost using the first-in, first-out ("FIFO") method or
market. If the Company had used the FIFO method of inventory valuation, which
approximates current replacement cost, inventories would have been higher than
the LIFO method reported at June 30, 1999 and 1998 by $50.4 million and $54.4
million, respectively.
The Company continues to consolidate locations, automate selected
distribution facilities and invest in management information systems to achieve
efficiencies in inventory management processes. As a result of the facility and
related inventory consolidations, and the operational efficiencies achieved in
fiscal 1999 and 1998, the Company had partial inventory liquidations in certain
LIFO pools which reduced the LIFO provision by approximately $0.1 million and
$2.3 million, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
and amortization for financial reporting purposes are computed using the
straight-line method over the estimated useful lives of the assets which range
from one to fifty years, including capital lease assets which are amortized over
the terms of their respective leases. Amortization of capital lease assets is
included in depreciation and amortization expense. At each balance sheet date,
the Company assesses the recoverability of its long-lived property, based on a
review of projected undiscounted cash flows associated with these assets.
29
30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles primarily
represent intangible assets related to the excess of cost over net assets of
subsidiaries acquired. Intangible assets are being amortized using the
straight-line method over lives that range from ten to forty years. Accumulated
amortization was $599.9 million and $529.8 million at June 30, 1999 and 1998,
respectively. At each balance sheet date, a determination is made by management
to ascertain whether there is an indication that the intangible assets may have
been impaired based on a review of projected undiscounted operating cash flows
for each subsidiary, except Allegiance. Allegiance assesses goodwill impairment
based upon a fair value approach.
REVENUE RECOGNITION. The Company records distribution revenue when merchandise
is shipped to its customers and the Company has no further obligation to provide
services related to such merchandise. Along with other companies in the drug
distribution industry, the Company reports as revenue bulk deliveries made to
customers' warehouses, whereby the Company acts as an intermediary in the
ordering and subsequent delivery of pharmaceutical products. Fluctuations in
bulk deliveries result largely from circumstances that are beyond the control of
the Company, including consolidation within the customers' industry, decisions
by customers to either begin or discontinue warehousing activities, and changes
in policy by manufacturers related to selling directly to the customers. Due to
the insignificant margins generated through bulk deliveries, fluctuations in
their amount do not have a significant impact on earnings.
Revenue is recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, the customer accepts the system, and the
lease becomes noncancellable. Unearned income on sales-type leases is recognized
using the interest method. Sales of point-of-use pharmacy systems are recognized
upon delivery and customer acceptance. Revenue for systems installed under
operating lease arrangements is recognized over the lease term as such amounts
become receivable according to the provisions of the lease.
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 revenue are recognized as the related
services are rendered according to the contracts established. A fee is charged
under such contracts through a monthly management fee arrangement, a capitated
fee arrangement or a portion of the hospital charges to patients. Under certain
contracts, fees for management services are guaranteed by the Company not to
exceed stipulated amounts or have other risk-sharing provisions. Revenue is
adjusted to reflect the estimated effects of such contractual guarantees and
risk-sharing provisions.
Packaging revenue is recognized from services provided upon the completion
of such services.
Clinical information system license revenue is recognized upon shipment of
the system to the customer. The portion of the license fee related to system
maintenance is deferred and recognized over the annual maintenance period.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenue related to option, milestone and exclusivity fees
are recognized when earned and all obligations of performance have been
completed.
TRANSLATION OF FOREIGN CURRENCIES. The financial position and the results of
operations of the Company's foreign operations, excluding the Company's
Malaysian and Mexican manufacturing operations which are denominated in U.S.
dollars, are measured using the local currencies of the countries in which they
operate and are translated into U.S. dollars. Although the effects of foreign
currency fluctuations are mitigated by the fact that expenses of foreign
subsidiaries are generally incurred in the same currencies in which sales are
generated, the reported results of operations of the Company's foreign
subsidiaries are affected by changes in foreign currency exchange rates and, as
compared to prior periods, will be higher or lower depending upon a weakening or
strengthening of the U.S. dollar. In addition, the net assets of foreign
subsidiaries are translated into U.S. dollars at the foreign currency exchange
rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the relative
strengthening or weakening of the U.S. dollar versus relevant foreign
currencies.
DERIVATIVE FINANCIAL INSTRUMENT RISK. The Company uses derivative financial
instruments to minimize the impact of foreign exchange rate changes on earnings
and cash flows. The Company also periodically enters into foreign currency
exchange contracts to hedge certain exposures related to selected transactions
that are relatively certain as to both timing and amount. The Company does not
use derivative financial instruments for trading or speculative purposes (see
Note 6 for further discussion).
30
31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with the
development of new products and manufacturing methods are charged to expense as
incurred. Research and development expenses, net of customer reimbursements,
were $49.7 million, $45.7 million and $35.4 million in fiscal 1999, 1998 and
1997, respectively. Customer reimbursements in the amount of $11.8 million,
$13.0 million and $8.0 million were received for the fiscal years ended June 30,
1999, 1998 and 1997, respectively.
INCOME TAXES. No provision is made for U.S. income taxes on earnings of foreign
subsidiary companies which the Company controls but does not include in the
consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings.
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options outstanding,
computed using the treasury stock method.
Excluding dividends paid by all entities with which the Company has merged,
the Company paid cash dividends per Common Share of $0.095, $0.070 and $0.060
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
STOCK SPLITS. On August 12, 1998, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on October 30, 1998
to shareholders of record on October 9, 1998. All share and per share amounts
included in the consolidated financial statements, except the Consolidated
Statements of Shareholders' Equity, have been adjusted to retroactively reflect
these stock splits.
ALLEGIANCE SPIN-OFF. On September 30, 1996 (the "Distribution Date"), Baxter
International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and
its subsidiaries their U.S. healthcare distribution business, surgical and
respiratory therapy business and healthcare cost-saving business, as well as
certain foreign operations (the "Allegiance Business") in connection with a
spin-off of the Allegiance Business by Baxter. The spin-off occurred on the
Distribution Date through a distribution of Allegiance common stock to Baxter
stockholders (the "Distribution") based on a distribution ratio of one
Allegiance share for each five Baxter shares held. The Distribution of
approximately 68.4 million equivalent Company Common Shares of Allegiance common
stock was made to Baxter stockholders of record on September 26, 1996.
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
Business Combinations and Merger-Related Costs. On February 3, 1999, the Company
completed a merger transaction with Allegiance that was accounted for as a
pooling-of-interests transaction. The Company issued approximately 70.7 million
Common Shares to Allegiance stockholders and Allegiance's outstanding stock
options were converted into options to purchase approximately 10.3 million
Company Common Shares. In addition, on August 7, 1998, the Company completed a
merger transaction with Scherer that was accounted for as a
pooling-of-interests. The Company issued approximately 34.2 million Common
Shares to Scherer stockholders and Scherer's outstanding stock options were
converted into options to purchase approximately 3.5 million Common Shares. The
Company recorded a merger-related charge to reflect transaction and other costs
incurred as a result of these merger transactions in fiscal 1999. Additional
merger-related costs associated with integrating the separate companies and
instituting efficiencies are charged to expense in subsequent periods when
incurred.
On May 21, 1999, the Company completed a merger transaction with PSI. The
Company issued approximately 233,000 Common Shares to PSI shareholders. The
historical cost of PSI's assets combined was approximately $3.9 million and the
total liabilities assumed were approximately $3.0 million. The impact of the
merger transaction with PSI, on a historical basis, is not significant.
Accordingly, prior period historical financial statements have not been restated
for the PSI Merger. PSI's financial results have been included in the
consolidated financial results of the Company since May 21, 1999.
During the fiscal 1999, merger-related costs totaling $146.6 million
($117.6 million, net of tax) were recorded. Of this amount, approximately $95.4
million related to transaction and employee-related costs, and $36.1 million
related to business restructuring and asset impairment costs associated with the
Company's merger transactions with Scherer and Allegiance. As part of the
business restructuring, the Company is currently closing certain facilities. As
such, the Company has incurred employee-related costs associated with the
elimination of approximately 360 positions, asset impairment costs and exit
costs
31
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to the termination of contracts and lease agreements. In addition, the
Company recorded costs of $4.0 million related to the write down of impaired
inventory related to a previous merger and of $1.1 million related to severance
costs for a restructuring associated with the change in management that resulted
from the merger with Owen. The Company recorded costs of $13.7 million related
to integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.7 million credit to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 17). This adjustment relates
primarily to services provided by third parties engaged by the Company in
connection with the terminated Bergen transaction. The cost of such services was
estimated and recorded in the prior periods when the services were performed.
Actual billings were less than the estimate originally recorded, resulting in a
reduction of the current period merger-related costs.
On February 18, 1998, the Company completed a merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 860,000 Common Shares to
MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 36,000 Common Shares of the Company.
The table below presents a reconciliation of total revenue and net earnings
available for Common Shares as reported in the accompanying consolidated
financial statements with those previously reported by the Company. The term
"Cardinal Health" as used herein refers to Cardinal Health, Inc. and
subsidiaries prior to the MediQual, Scherer and Allegiance mergers. See Note 1
for periods combined.
(in millions) Cardinal
Health Scherer MediQual Allegiance Combined
--------- ------- -------- ---------- ---------
Fiscal year ended June 30, 1997
Total revenue $13,437.2 $588.7 $11.0 $4,357.0 $18,393.9
Net earnings $ 184.6 $ 57.0 $ 2.3 $ 90.9 $ 334.8
Fiscal year ended June 30, 1998
Total revenue $15,918.1 $620.8 $ 7.9 $4,448.6 $20,995.4
Net earnings $ 247.1 $ 69.7 $ 1.4 $ 106.9 $ 425.1
Adjustments affecting net earnings and shareholders' equity resulting from
the MediQual, Scherer and Allegiance mergers to adopt the same accounting
practices were not material for any periods presented herein. There were no
material intercompany transactions.
In addition to the merger transactions described above, during fiscal 1999,
the Company completed several individually immaterial acquisitions, which were
accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's med/surg distribution,
point-of-use pharmacy systems and pharmaceutical-packaging services. The
aggregate purchase price, which was paid primarily in cash, including fees and
expenses, was approximately $160.8 million. Liabilities of the operations
assumed were approximately $18.9 million, consisting of debt of $3.2 million.
Had the acquisitions taken place July 1, 1998, consolidated results would not
have been materially different from reported results.
During fiscal 1998, the Company made a number of individually immaterial
acquisitions for an aggregate purchase price of $47.8 million and exchanged
nonmonetary assets with a value of approximately $10.5 million to acquire an
interest in Source Medical Corporation, a new venture in Canada. All of these
acquisitions were accounted for as purchase transactions. Had the acquisitions
taken place July 1, 1997, consolidated results would not have been materially
different from reported results.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual Merger ($2.3
million) and transaction costs incurred in connection with the proposed merger
transaction with Bergen ($33.4 million) which was terminated subsequent to June
30, 1998 (see Note 17). In accordance with the terms of the Agreement and Plan
of Merger between the Company, a wholly owned subsidiary of the Company, and
Bergen, as amended, its termination required the Company to reimburse Bergen for
$7.0 million of transaction costs upon termination of such Agreement (See Note
17). Additional merger-related costs, related to asset impairments ($3.8
million)
32
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and integrating the operations of companies that previously merged with the
Company ($9.6 million), were incurred and recorded during fiscal 1998.
On March 18, 1997, the Company completed a merger transaction with Owen
(the "Owen Merger"). The Owen Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 11.6 million Common
Shares to Owen shareholders and Owen's outstanding stock options were converted
into options to purchase approximately 1.0 million Common Shares. During fiscal
1997, the Company recorded costs of approximately $31.1 million ($22.4 million,
net of tax) related to the Owen Merger. These costs include $13.1 million for
transaction and employee-related costs associated with the merger, $13.2 million
for asset impairments ($10.6 million of which related to MediTROL, as discussed
below), and $4.8 million related to other integration activities, including the
elimination of duplicate facilities and certain exit and restructuring costs. At
the time of the Owen Merger, Owen had a wholly owned subsidiary, MediTROL, that
manufactured, marketed, sold and serviced point-of-use medication distribution
systems similar to Pyxis. Upon consummation of the Owen Merger, management
committed to merge the operations of MediTROL into Pyxis, and phase-out
production of the separate MediTROL product line. As a result of this decision,
a MediTROL patent ($7.4 million) and certain other operating assets ($3.2
million) were written off as impaired.
On October 11, 1996, the Company completed a merger transaction with PCI
(the "PCI Merger"). The PCI Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 4.7 million Common
Shares to PCI shareholders and PCI's outstanding stock options were converted
into options to purchase approximately 0.3 million Common Shares. During fiscal
1997, the Company recorded costs totaling approximately $15.1 million ($11.4
million, net of tax) related to the PCI Merger. These costs include $13.8
million for transaction and employee-related costs associated with the PCI
Merger (including $7.6 million for retirement benefits and incentive fees to two
executives of PCI, which vested and became payable upon consummation of the
merger) and $1.3 million related to other integration activities, including exit
costs.
During fiscal 1997, the Company made individually immaterial acquisitions,
accounted for under the purchase method of accounting, totaling $71.4 million.
Had these acquisitions taken place July 1, 1996, consolidated results would not
have been materially different from reported results.
In addition to the merger-related costs recorded in fiscal 1997 for the
Owen Merger and the PCI Merger (as discussed above), the Company recorded $4.7
million ($2.8 million, net of tax) related to integrating the operations of
companies that previously merged with the Company.
Other Special Items. During fiscal 1998, the Company recorded a special charge
of $8.6 million ($5.2 million, net of tax) related to the rationalization of its
pharmaceutical distribution operations. Approximately $6.1 million related to
asset impairments and lease exit costs resulting primarily from the Company's
decision to accelerate the consolidation of a number of distribution facilities
and the relocation to more modern facilities for certain others. The remaining
amount related to employee severance costs, including approximately $2.0 million
incurred in connection with the final settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
The net effect of the various merger-related costs and other special items
recorded during fiscal 1999 was to reduce reported net earnings by $117.6
million to $456.3 million and to reduce reported diluted earnings per Common
Share by $0.42 per share to $1.64 per share. The fiscal 1998 effect of various
merger-related charges and other special items was to reduce reported net
earnings by $24.1 million to $425.1 million and to reduce reported diluted
earnings per Common Share by $0.09 per share to $1.53 per share. The effect of
the various merger-related costs recorded in fiscal 1997 was to reduce reported
net earnings by $36.6 million to $334.8 million and to reduce reported diluted
earnings per Common Share by $0.13 per share to $1.23 per share.
Certain merger-related costs are based upon estimates, and actual amounts
paid may ultimately differ from these estimates. If additional costs are
incurred, such items will be expensed as incurred.
33
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring Program. In fiscal 1993, Baxter (see Note 1) announced a
restructuring plan designed in part to make Allegiance more efficient and
responsive in addressing the changes in the U.S. healthcare system. Charges
totaling $560.0 million were recorded to cover costs associated with these
restructuring initiatives. During fiscal 1999, 1998 and 1997, the Company had
cash outflows related to the restructuring program of $6.6 million, $15.8
million and $15.6 million, respectively, and noncash charges against the
restructuring program of $7.4 million, $9.1 million and $0.9 million,
respectively. Prior to fiscal 1997, the total cash outflows and noncash charges
related to the restructuring program were $242.4 million and $251.5 million,
respectively. During the fiscal year ended June 30, 1999, $7.9 million of
unnecessary restructuring reserves were reversed. The reversal of unnecessary
reserves was principally the result of facility closures and consolidations
being finalized at costs lower than originally anticipated.
The cash outflows pertain primarily to employee-related costs for
severance, outplacement assistance, relocation, implementation teams and
facility consolidations. Since the inception of the restructuring program,
approximately 2,500 positions have been eliminated. As of June 30, 1999 and
1998, the remaining restructuring reserve balance was $2.8 million and $24.7
million, respectively, both of which are classified as current liabilities. The
remaining expenditures to be charged against the restructuring program are
expected to occur in fiscal 2000, as implementation projects are completed as
planned.
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,
1999 1998
-------- --------
Future minimum lease payments receivable $ 717.7 $387.5
Unguaranteed residual values 1.0 1.3
Unearned income (100.1) (55.5)
Allowance for uncollectible minimum lease
payments receivable (11.8) (8.8)
------- ------
Net investment in sales-type leases 606.8 324.5
Less: current portion 152.5 91.4
------- ------
Net investment in sales-type leases, less
current portion $ 454.3 $233.1
======= ======
Future minimum lease payments to be received pursuant to sales-type leases
during the next five years are: 2000 -$169.5 million, 2001 - $166.0 million,
2002 - $151.5 million, 2003 - $132.1 million, 2004 - $83.7 million and 2005 and
thereafter - $14.9 million.
Lease Related Financing Arrangements. Pyxis has previously financed its working
capital needs through the sale of certain lease receivables to a non-bank
financing company. As of June 30, 1999, $68.9 million of lease receivables were
owned by the financing company. In June 1998, the agreement with the financing
company was amended to terminate Pyxis' obligation to sell lease receivables to
the financing company. Due to Pyxis customers upgrading the Pyxis machines or
expanding the number of units being leased under the original lease agreements
that have been sold to the financing company, Pyxis has been converting the
original lease agreements with customers to an updated lease agreement. Pyxis
has been maintaining these revised leases and not selling them to the financing
company to replace the original lease receivables. As such, during fiscal 1999,
Pyxis has entered into an agreement with the financing company to pay the
financing company the remaining portion of the original lease receivables
outstanding at the time of revision over the original terms. The future minimum
payments for these notes at June 30, 1999 are 2000 - $39.5 million; 2001 - $26.9
million; 2002 - $14.0 million; and 2003 - $3.1 million.
4. NOTES PAYABLE, BANKS
The Company has entered into various unsecured, uncommitted line-of-credit
arrangements that allow for borrowings up to $177.8 million at June 30, 1999, at
various money market rates. At June 30, 1999, $28.6 million, at a weighted
average interest rate of 6.4%, was outstanding under such arrangements and $24.7
million, at a weighted average interest rate of 7.2% was outstanding at June 30,
1998. The total available but unused lines of credit at June 30, 1999 was $149.2
million.
34
35
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
Long-term obligations consist of the following (in millions):
June 30, June 30,
1999 1998
-------- --------
6.0% Notes due 2006 $ 150.0 $ 150.0
6.25% Notes due 2008 150.0 --
6.5% Notes due 2004 100.0 100.0
6.75% Notes due 2004 99.7 100.0
7.3% Notes due 2006 183.2 199.6
7.8% Debentures due 2016 125.2 149.4
7.0% Debentures due 2026 (7 year put option in 2003) 199.9 199.9
Borrowings under credit facilities 132.2 248.8
Commercial paper 49.2 142.0
Other obligations; interest averaging 6.7% in
1999 and 6.1% in 1998, due in varying
installments through 2020 46.1 47.6
-------- --------
Total 1,235.5 1,337.3
Less: current portion 11.6 7.3
-------- --------
Long-term obligations, less current portion $1,223.9 $1,330.0
======== ========
The 6%, 6.25% and 6.5% Notes represent unsecured obligations of the
Company, and the 6.75% Notes represent unsecured obligations of Scherer which
are guaranteed by the Company. The 7.3% Notes and the 7.8% and 7.0% Debentures
represent unsecured obligations of Allegiance which are guaranteed by the
Company. These obligations are not redeemable prior to maturity and are not
subject to a sinking fund.
During fiscal 1999, the Company established an unsecured bank credit
facility, which expires in March 2004. The credit facility provides for up to an
aggregate of $1.0 billion in borrowings of which $150.0 million is part of a
multi-currency allocation and $250.0 million represents a 364-day facility.
Interest rates on outstanding borrowings are at LIBOR plus 0.25%. As of June 30,
1999, $80.7 million of borrowings were outstanding under the multi-currency
allocation portion of the facility. The amounts outstanding under the short-term
portion of the credit facility will be classified as long-term debt, as amounts
are supported by a long-term credit facility, and will be refinanced. The
agreement requires the Company to maintain a minimum net worth of $2.55 billion.
The Company has a commercial paper program, providing for the issuance of
up to $750.0 million in aggregate maturity value of commercial paper. Commercial
paper with an aggregate maturity value of $49.2 million and $142.0 million was
outstanding as of June 30, 1999 and 1998, respectively with an effective
interest rate of 4.82%.
During fiscal 1999, the Company terminated its unsecured revolving credit
agreement (originally expiring 2001) and its unsecured bank credit facility
(originally expiring 2002) which provided up to an aggregate of $900.0 million
and $175.0 million in borrowings, respectively. As of June 30, 1998, $51.3
million was outstanding under the $175.0 million facility and no amounts were
outstanding under the $900.0 million facility.
The Company maintains other short-term credit facilities. At June 30, 1999
and 1998, $51.5 million and $197.5 million, respectively, was outstanding under
these uncommitted facilities. The effective interest rate as of June 30, 1999
was 6.00%. The amounts outstanding under the commercial paper program and
short-term credit facilities have been classified as long-term debt, as amounts
are supported by a long-term credit facility and will continue to be refinanced.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $28.7 million at
June 30, 1999. Maturities of long-term obligations for future fiscal years are
2000 -$11.6 million; 2001 - $111.7 million; 2002 - $3.1 million; 2003- $2.2
million; 2004 - $278.8 million and 2005 and thereafter - $828.1 million.
At June 30, 1999, the Company has the capacity to issue $250 million of
additional long-term debt pursuant to a shelf debt registration statement filed
with the Securities and Exchange Commission.
35
36
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
Interest Rate Management. The Company has entered into an interest rate
swap agreement that matures November 2002 to hedge against variable interest
rates. The Company exchanged its variable rate position related to a lease
agreement for a fixed rate of 7.08%. The Company recognizes in income the
periodic net cash settlements under the swap agreement as it accrues.
Foreign Exchange Risk Management. The Company in fiscal 1998 purchased
various foreign currency options which expired as of June 30, 1999 to partially
protect the Company from the risk that fluctuations in the foreign currency
rates that could have an adverse effect on foreign subsidiaries' earnings. In
addition during fiscal 1998, the Company had foreign currency forward and option
contracts that hedged a portion of anticipated production costs expected to be
denominated in foreign currency. When the dollar strengthens against foreign
currencies, the decline in the value of the foreign currency cash flows is
partially offset by the recognition of gains in value of purchased currency
options. Conversely, when the dollar weakens against foreign currencies, the
increase in the value of foreign currency cash flows is reduced only by the
recognition of the premium paid to acquire the options. Market value gains,
losses and premiums on these contracts are recognized as income upon occurrence.
The fair value is based upon the estimated amount the Company would receive to
terminate the options. Net expense during fiscal 1999 was not material. Net
expense during fiscal 1998 was $11.6 million related to these foreign currency
forward contracts and options.
In addition, the Company periodically enters into forward foreign currency
exchange contracts to hedge certain exposures related to identifiable foreign
currency transactions that are relatively certain as to both timing and amount.
Gains and losses on the forward contracts are recognized concurrently with the
gains and losses from the underlying transactions.
The Company also uses commodity contracts to hedge raw material costs
expected to be denominated in foreign currency. These contracts generally cover
a one-year period and all gains and losses are deferred and recognized in cost
of goods sold with the underlying product costs. The contracts qualify as hedges
for accounting purposes in accordance with the criteria established in SFAS No.
80 "Accounting for Futures Contracts." Cash flows resulting from these commodity
contracts are classified in the same category as the items being hedged.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
Fair Value of Financial Instruments. The carrying amounts of cash and
equivalents, trade receivables, accounts payables, notes payable-banks and other
accrued liabilities at June 30, 1999 and 1998, approximate their fair value
because of the short-term maturities of these items.
The estimated fair value of the Company's long-term obligations was
$1,240.0 million and $1,365.3 million as compared to the carrying amounts of
$1,235.5 million and $1,337.3 million at June 30, 1999 and 1998, respectively.
The fair value of long-term insurance receivables and long-term litigation
liabilities at June 30, 1999 were $52.2 million and $31.7 million compared to
the carrying amounts of $57.3 million and $34.1 million, respectively. At June
30, 1998, the Company did not have balances related to these long-term
receivables and long-term liabilities. The fair value of the Company's long-term
obligations and other items 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 of the Company's derivative
instruments, based upon the estimated amount that the Company would receive or
(pay) to terminate the contracts at the reporting date. The fair values are
based on quoted market prices for the same or similar instruments.
(in millions) Fiscal Year ended June 30,
1999 1998
------------------------ -----------------------
Notional Fair Notional Fair
Amount Value (Loss) Amount Value (Loss)
-------- ------------ -------- ------------
Foreign currency exchange contract $ -- $ -- $35.6 $(0.4)
Foreign currency options -- -- 3.0 0.1
Commodity contracts 9.6 (0.3) 14.2 (1.7)
Interest Rate Swaps 20.0 (0.7) 8.3 (1.0)
36
37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
Consolidated income before taxes (in millions):
Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
------ ------ ------
U.S. Based Operations $684.8 $550.6 $437.4
Non-U.S. Based Operations 74.4 109.1 102.3
------ ------ ------
$759.2 $659.7 $539.7
====== ====== ======
The provision for income taxes consists of the following (in millions):
Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
------ ------ ------
Current:
Federal $122.5 $106.1 $131.9
State 26.3 22.6 21.3
Foreign 21.7 15.8 18.8
------ ------ ------
Total 170.5 144.5 172.0
Deferred 132.4 90.1 32.9
------ ------ ------
Total provision $302.9 $234.6 $204.9
====== ====== ======
A reconciliation of the provision based on the Federal statutory income tax
rate to the Company's effective income tax rate is as follows:
Fiscal Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 3.9 4.1 3.9
Foreign tax rates (3.0) (4.8) (3.8)
Nondeductible expenses 4.5 1.5 2.5
Other (0.5) (0.2) 0.4
---- ---- ----
Effective income tax rate 39.9% 35.6% 38.0%
==== ==== ====
Provision has not been made for U.S. or additional foreign taxes on $343.2
million of undistributed earnings of foreign subsidiaries because those earnings
are considered to be permanently reinvested in the operations of those
subsidiaries. It is not practical to estimate the amount of tax that might be
payable on the eventual remittance of such earnings.
37
38
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,
1999 1998
-------- --------
Deferred income tax assets:
Receivable basis difference $ 27.8 $ 21.6
Accrued liabilities 101.0 156.7
Net operating loss carryforwards 9.1 48.7
Foreign tax and other credit carryforwards 16.5 --
Other 35.0 26.5
------- -------
Total deferred income tax assets 189.4 253.5
Valuation allowance for deferred income tax assets (7.0) (21.7)
------- -------
Net deferred income tax assets 182.4 231.8
------- -------
Deferred income tax liabilities:
Inventory basis differences (138.9) (90.0)
Property-related (218.9) (237.0)
Revenues on lease contracts (165.9) (111.0)
Other 2.7 --
------- -------
Total deferred income tax liabilities (521.0) (438.0)
------- -------
Net deferred income tax liabilities $(338.6) $(206.2)
======= =======
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
1999 1998
-------- --------
Other current assets $ 82.5 $ 133.3
Deferred income taxes and other liabilities (421.1) (339.5)
------- -------
Net deferred income tax liabilities $(338.6) $(206.2)
======= =======
The Company had Federal net operating loss carryforwards of $3.3 million
and state net operating loss carryforwards of $186.3 million as of June 30,
1999. At June 30, 1999, the Company did not have any foreign tax credit and
capital loss carryforwards. A valuation allowance of $7.0 million at June 30,
1999 has been provided for the state net operating loss, foreign tax credit and
capital loss carryforwards, as utilization of such carryforwards within the
applicable statutory periods is uncertain. The Company's Federal tax operating
loss carryforwards and a portion of the state net operating loss carryforwards
are subject to a change in ownership limitation calculation under Internal
Revenue Code Section 382. After application of the valuation allowance described
above, the Company anticipates no limitations will apply with respect to
utilization of these assets. The Federal net operating loss carryforward begins
expiring in 2000 and the state net operating loss carryforward expires through
2013. Expiring state net operating loss carryforwards and the required valuation
allowances have been adjusted annually.
Under a tax-sharing agreement with Baxter, Allegiance will pay for
increases and be reimbursed for decreases to the net deferred tax assets
transferred on the Distribution Date. Such increases or decreases may result
from audit adjustments to Baxter's prior period tax returns.
38
39
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including
defined benefit and defined contribution plans. Substantially all of the
Company's domestic non-union employees are eligible to be enrolled in
Company-sponsored contributory profit sharing and retirement savings plans which
include features under Section 401(k) of the Internal Revenue Code, and provide
for Company matching and profit sharing contributions. The Company's
contributions to the plans are determined by the Board of Directors subject to
certain minimum requirements as specified in the plans.
Qualified domestic union employees are covered by multi-employer defined
benefit pension plans under the provisions of collective bargaining agreements.
Benefits under these plans are generally based on the employee's years of
service and average compensation at retirement. Certain Allegiance employees who
participated in Baxter-sponsored defined benefit plans prior to the Distribution
(see Note 1) are eligible to receive a contribution to their qualified 401(k)
account in an amount ranging from 2 to 8 percent of their annual compensation,
depending on years of service. This transitional benefit will be provided to
eligible employees through 2003.
The total expense for employee retirement benefit plans (excluding defined
benefit plans (see below)) was as follows (in millions):
Fiscal Year Ended June 30,
-------------------------------
1999 1998 1997
----- ----- -----
Defined contribution plans $44.3 $37.9 $34.4
Multi-employer plans 0.5 0.5 0.9
----- ----- -----
Total $44.8 $38.4 $35.3
===== ===== =====
Defined Benefit Plans. The Company has several defined benefit plans
covering substantially all salaried and hourly Scherer employees. The Company's
domestic defined benefit plans provide defined benefits based on years of
service and level of compensation. Foreign subsidiaries provide for pension
benefits in accordance with local customs or law. The Company funds its pension
plans at amounts required by the applicable regulations.
Effective July 1, 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits". In accordance
with SFAS 132, the following tables provide a reconciliation of the change in
benefit obligation, the change in plan assets and the net amount recognized in
the consolidated balance sheets (based on measurement date of March 31, in
millions):
Pension Benefits
-------------------
June 30,
1999 1998
----- -----
Change in benefit obligation:
Benefit obligation at
beginning of year $86.7 $73.0
Service cost 6.5 4.9
Interest cost 6.7 5.4
Plan participant contributions 0.7 --
Amendments 0.2 --
Actuarial loss 4.6 7.7
Benefits paid (3.7) (2.1)
Translation adjustment (3.0) (2.2)
----- -----
Benefit obligation at end of year $98.7 $86.7
----- -----
39
40
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
1999 1998
------ ------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 42.2 $ 34.5
Actual return on plan assets 12.2 4.4
Employer contributions 4.9 4.3
Plan participant contributions 0.7 --
Benefits paid (2.6) (1.3)
Translation adjustment (1.7) 0.3
------ ------
Fair value of plan assets
at end of year $ 55.7 $ 42.2
====== ======
Funded status $(43.0) $(44.5)
Unrecognized net actuarial loss 7.5 12.7
Unrecognized net transition
(asset) obligation (2.0) 0.3
Unrecognized prior service cost 0.2 (0.1)
------ ------
Net amount recognized $(37.3) $(31.6)
====== ======
Amounts recognized in the
Consolidated Balance Sheet:
Prepaid benefit cost $ 1.6 $ 1.8
Accrued benefit liability (38.9) (33.4)
------ ------
Net amount recognized $(37.3) $(31.6)
====== ======
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 $89.4 million, $85.1 million and $47.8 million,
respectively, as of June 30, 1999 and $85.4 million, $75.8 million and $40.6
million, respectively, as of June 30, 1998.
Components of the Company's net periodic benefit costs are as follows (in
millions):
Pension Benefits
----------------------------------
For the Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
----- ----- -----
Components of net periodic
Benefit cost:
Service cost $ 6.5 $ 4.9 $ 4.5
Interest cost 6.7 5.4 5.2
Expected return on plan assets (6.9) (5.1) (4.1)
Amortization of actuarial loss 1.9 1.0 1.2
Amortization of transition
(asset)/obligation -- 0.1 (0.2)
Amortization of prior service cost 0.3 -- --
----- ----- -----
Net amount recognized $ 8.5 $ 6.3 $ 6.6
===== ===== =====
For fiscal 1999 and 1998, the weighted - average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.4% and 7.5%, expected return on plan assets
of 6.2% and 10.1% and rate of compensation increase of 3.7% and 4.6%,
respectively.
40
41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms in excess of one year at June 30, 1999 are:
2000 - $42.8 million; 2001 - $27.3 million; 2002 - $18.5 million; 2003 - $15.3
million; 2004 - $13.0 million and 2005 and thereafter - $32.8 million. Rental
expense relating to operating leases was approximately $69.6 million, $64.8
million and $68.2 million in fiscal 1999, 1998, and 1997, respectively. Sublease
rental income was not material for any period presented herein.
The Company has entered into operating lease agreements with several banks
for the construction of various new facilities. The initial terms of the lease
agreements extend through May 2004, with optional five-year renewal periods.
In the event of termination, the Company is required to either purchase the
facility or vacate the property and make reimbursement for a portion of the
uncompensated price of the property cost. The instruments provide for maximum
fundings of $286.2 million, which is the total estimated cost of the
construction projects. As of June 30, 1999, the amount expended was $176.8
million. Currently, the Company's minimum annual lease payments under the
agreements are approximately $11.5 million.
As of June 30, 1999, the Company has capital expenditure commitments
related primarily to plant expansions and facility acquisitions of approximately
$119.3 million.
As of June 30, 1999, amounts outstanding on customer notes receivable sold
with full recourse to a commercial bank totaled approximately $9.6 million. The
Company also has outstanding guarantees of indebtedness and financial assistance
commitments that totaled approximately $3.0 million at June 30, 1999.
The Company becomes involved from time-to-time in litigation incidental to
its business. In November 1993, Cardinal, five other pharmaceutical wholesalers,
and twenty-four pharmaceutical manufacturers were named as defendants in a
series of purported class action antitrust lawsuits alleging violations of
various antitrust laws associated with the chargeback pricing system. The trial
of this matter began on September 23, 1998. On November 19, 1998, after the
close of plaintiffs' case-in-chief, both the wholesaler defendants and the
manufacturer defendants moved for a judgment as a matter of law in their favor.
On November 30, 1998, the Court granted both of these motions and ordered
judgment as a matter of law in favor of both the wholesaler and the manufacturer
defendants. On January 25, 1999, the class plaintiffs filed a notice of appeal
of the District Court's decision with the Court of Appeals for the Seventh
Circuit. On July 13, 1999, the Court of Appeals for the Seventh Circuit issued
its decision, which, in part, affirmed the dismissal of the wholesaler
defendants, including the Company. On July 27, 1999, the class plaintiffs filed
a Petition for Rehearing with the Court of Appeals for the Seventh Circuit. The
Company believes that the allegations set forth against Cardinal in these
lawsuits are without merit.
Allegiance assumed the defense of litigation involving claims related to
the Allegiance Business from Baxter (see Note 1), including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex
gloves. Since none of the cases involving natural rubber latex gloves has
proceeded to a hearing on merits, the Company is unable to evaluate the extent
of any potential liability, and unable to estimate any potential loss. The
Company believes a substantial portion of any potential liability and defense
costs, excluding defense costs already reserved, related to natural latex gloves
cases and claims will be covered by insurance, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency.
Although the ultimate resolution of litigation cannot be forecast with
certainty, the Company does not believe that the outcome of any pending
litigation would have a material adverse effect on the Company's consolidated
financial statements.
10. SHAREHOLDERS' EQUITY
At June 30, 1999, the Company's authorized capital shares consisted of (a)
500,000,000 Class A common shares, without par value; (b) 5,000,000 Class B
common shares, without par value; and (c) 500,000 non-voting preferred shares
without par value. At June 30, 1998, the Company's authorized capital shares
consisted of (a) 300,000,000 Class A common shares, without par value; (b)
5,000,000 B common shares, without par value; and (c) 500,000 non-voting
preferred shares without par value. The Class A common shares and Class B common
shares are collectively referred to as Common Shares. Holders of Class A and
Class B common shares are entitled to share equally in any dividends declared by
the Company's Board of Directors and to participate equally in all distributions
of assets upon liquidation. Generally, the holders of Class A common shares are
entitled to one vote per share and the holders of Class B common shares are
entitled to one-fifth of one
41
42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999
and 1998.
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
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be affected
by changes in reimbursement and other economic pressures impacting the acute
care portion of the healthcare industry. However, such credit risk is limited
due to supporting collateral and the diversity of the customer base, including
its wide geographic dispersion. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains reserves for credit losses.
Such losses historically have been within the Company's expectations.
During fiscal 1999, the Company's two largest customers individually
accounted for 11% and 13% of operating revenue, respectively. During fiscal
1998, the same two customers individually accounted for 14% and 11% of operating
revenue, respectively. During fiscal 1997, the same two customers individually
accounted for 13% and 10% of operating revenue, respectively. These two
customers are serviced primarily through the Pharmaceutical Distribution and
Medical-Surgical Products segments. During fiscal 1999, one customer accounted
for 57% of bulk deliveries. During fiscal years 1998 and 1997, one customer
accounted for 62% of bulk deliveries.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. Options granted generally vest
over two or three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
Company's net income and diluted earnings per Common Share would have been
reduced by $83.1 million and $0.30 per share, respectively, for fiscal 1999,
$33.6 million and $0.12 per share, respectively, for fiscal 1998, and $19.2
million and $0.07 per share, respectively, for fiscal 1997. During fiscal 1999,
stock option grants under the previous Allegiance and Scherer plans vested
immediately on the merger date. These accelerated grants increased the fiscal
1999 pro forma effect on net income and diluted earnings per Common Share by
$32.9 million and $0.12 per share, respectively. Because the SFAS 123 method of
accounting has not been applied to options granted prior to July 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1996 through June 30, 1999, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per share amounts):
Fiscal 1999 Fiscal 1998 Fiscal 1997
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
------- -------------- ------- -------------- ------- --------------
Outstanding, beginning of year 21.1 $23.96 20.1 $19.25 21.7 $16.50
Granted 3.4 69.61 6.3 43.70 6.2 24.84
Exercised (3.6) 16.80 (3.7) 14.62 (6.7) 15.81
Canceled (0.6) 45.60 (0.9) 21.46 (1.1) 17.07
Change in fiscal year -- -- (0.7) 28.26 -- --
------------------- ------------------- -------------------
Outstanding, end of year 20.3 $34.51 21.1 $23.96 20.1 $19.25
=================== =================== ===================
Exercisable, end of year 14.3 $23.84 6.6 $15.45 8.7 $13.98
------------------- ------------------- -------------------
42
43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Giving retroactive effect to conversion of stock options related to mergers
and stock splits, the weighted average fair value of options granted during
fiscal 1999, 1998 and 1997 was $22.55, $14.19 and $9.57, respectively.
The fair values of the options granted to Company employees and directors
were estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants in the respective periods:
As of June 30,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Risk-free interest rate 5.72% 5.53% 6.23%
Expected Life 4 years 3 years 3 years
Expected Volatility 30% 27% 25%
Dividend Yield 0.18% 0.16% 0.17%
Information relative to stock options outstanding as of June 30, 1999:
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Weighted
average
remaining Weighted Weighted
Range of Options contractual life average Options average
exercise prices (in millions) in years exercise price (in millions) exercise price
- --------------------------------------------------------------- ------------------------------
$ 0.05-$17.15 5.6 6.21 $14.20 5.5 $14.21
$17.22-$37.79 5.5 6.31 24.18 5.3 23.71
$38.06-$54.46 5.2 8.18 41.98 3.5 39.13
$55.67-$79.56 4.0 8.98 67.68 -- --
---------------------------------------------- ------------------------------
20.3 7.28 $34.51 14.3 $23.84
============================================== ==============================
As of June 30, 1999, there remained approximately 0.8 million additional
shares available to be issued pursuant to the Plans.
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying consolidated
balance sheets. The compensation awards are amortized to expense over the period
in which participants perform services, generally one to seven years. As of June
30, 1999, approximately 0.3 million shares remained restricted and subject to
forfeiture.
Prior to the Allegiance Merger, Allegiance had an employee stock purchase
plan under which the sale of 4.0 million of Allegiance's common stock had been
authorized. The purchase price was the lower of 85 percent of the closing market
price on the date of subscription or 85 percent of the closing market price on
the date of purchase. Under this plan, Allegiance sold to its employees 0.6
million shares at an average price per share of $23.33 in fiscal 1999 and 1.2
million shares at an average price per share of $10.88 in fiscal 1998. At June
30, 1998, subscriptions of 0.7 million were outstanding. The weighted average
fair value of the purchase rights was $3.32. Subsequent to the Allegiance
Merger, all outstanding subscriptions were canceled.
On May 2, 1997, Allegiance received $54.8 million in cash from 141 members
of its management who purchased approximately 3.0 million equivalent Cardinal
Common Shares. Allegiance granted one-day options for the shares, which were
immediately exercised. This Shared Investment Plan was designed to align
management and stockholders interests.
13. SEGMENT INFORMATION
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires companies to define and report financial
and descriptive information about its operating segments. The Company is
organized based on the products and services it offers. Under this
organizational structure, the Company operates in three business segments:
Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical
Products.
43
44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Pharmaceutical Distribution segment involves the distribution of a
broad line of pharmaceuticals, health and beauty care products, therapeutic
plasma and other specialty pharmaceutical products and other items typically
sold by hospitals, retail drug stores and other healthcare providers.
The Pharmaceutical Services segment provides services to the healthcare
industry through the design of unique drug delivery systems, comprehensive
packaging services, integrated pharmacy management, reimbursement services,
clinical information system services and pharmacy automation equipment.
The Medical-Surgical Products segment involves the manufacture of medical,
surgical and laboratory products and the distribution of these products to
hospitals, physician offices, surgery centers and other healthcare providers.
The 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 table includes revenue, operating
earnings, capital expenditures, and depreciation and amortization expense for
the fiscal years ended June 30, 1999, 1998 and 1997 and assets as of June 30,
1999, 1998 and 1997 for each segment and reconciling items necessary to total to
amounts reported in the consolidated financial statements:
(in millions) Net Revenue
---------------------------------------
1999 1998 1997
---------------------------------------
Operating revenue:
Pharmaceutical Distribution $14,977.0 $11,938.7 $10,019.2
Pharmaceutical Services 2,081.5 1,812.4 1,558.7
Medical-Surgical Products 4,719.5 4,448.7 4,357.1
Inter-segment (1) (297.4) (195.8) (10.2)
---------------------------------------
Total operating revenue $21,480.6 $18,004.0 $15,924.8
Bulk Deliveries to Customer Warehouses:
Pharmaceutical Distribution 3,553.0 2,991.4 2,469.1
---------------------------------------
Total Net Revenue $25,033.6 $20,995.4 $18,393.9
- -----------------------------------------------------------------------------------
Operating Earnings
---------------------------------------
1999 1998 1997
---------------------------------------
Pharmaceutical Distribution $ 398.4 $ 315.5 $ 252.5
Pharmaceutical Services 347.7 286.4 236.1
Medical-Surgical Products 303.4 246.8 224.5
Corporate (2) (172.5) (76.2) (48.3)
---------------------------------------
Total operating earnings $ 877.0 $ 772.5 $ 664.8
- -----------------------------------------------------------------------------------
Depreciation and Amortization
---------------------------------------
1999 1998 1997
---------------------------------------
Pharmaceutical Distribution $ 28.0 $ 23.2 $ 20.5
Pharmaceutical Services 71.9 55.4 56.3
Medical-Surgical Products 119.9 122.8 126.0
Corporate (2) 13.7 13.1 6.3
---------------------------------------
Total depreciation and amortization $ 233.5 $ 214.5 $ 209.1
- -----------------------------------------------------------------------------------
44
45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Expenditures
----------------------------------
1999 1998 1997
----------------------------------
Pharmaceutical Distribution $ 61.9 $ 54.7 $ 44.8
Pharmaceutical Services 150.0 143.9 98.8
Medical-Surgical Products 108.0 80.2 84.3
----------------------------------
Total capital expenditures $ 319.9 $ 278.8 $ 227.9
- --------------------------------------------------------------------
Assets
----------------------------------
1999 1998 1997
----------------------------------
Pharmaceutical Distribution $3,223.6 $2,698.3 $2,172.5
Pharmaceutical Services 2,176.2 1,684.7 1,358.1
Medical-Surgical Products 2,823.7 2,694.9 2,696.6
Corporate (3) 65.5 400.1 294.6
----------------------------------
Total assets $8,289.0 $7,478.0 $6,521.8
- --------------------------------------------------------------------
(1) Inter-segment - revenue consists primarily of the elimination of
inter-segment activity - primarily sales from Pharmaceutical Distribution
to Pharmaceutical Services. Sales from one segment to another are priced at
the equivalent external customer selling prices.
(2) Corporate - operating earnings primarily consists of special charges of
$146.6 million, $57.8 million and $50.9 million for fiscal 1999, 1998 and
1997 and unallocated corporate depreciation and amortization and
administrative expenses.
(3) Corporate - assets include primarily corporate cash and cash equivalents,
corporate property, plant and equipment, net, unallocated deferred taxes
and the elimination of investment in subsidiaries.
The following table presents revenue and long-lived assets by geographic area
(in millions):
Revenue Long-Lived Assets
------------------------------------- ---------------------
For The Fiscal Year Ended June 30, As of June 30,
------------------------------------- ---------------------
1999 1998 1997 1999 1998
--------- --------- --------- -------- --------
United States $24,121.6 $20,255.7 $17,646.1 $1,080.7 $1,010.3
International 912.0 739.7 747.8 459.8 457.4
--------- --------- --------- -------- --------
Total $25,033.6 $20,995.4 $18,393.9 $1,540.5 $1,467.7
========= ========= ========= ======== ========
Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
45
46
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 1999 and 1998 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Fiscal 1999
Revenue:
Operating revenue $4,999.2 $5,269.4 $5,558.7 $5,653.3
Bulk deliveries to customer warehouses 781.7 999.8 874.7 896.8
-------- -------- -------- --------
Total revenue $5,780.9 $6,269.2 $6,433.4 $6,550.1
Gross margin $ 583.0 $ 644.1 $ 667.3 $ 690.0
Selling, general and administrative
expenses $ 368.6 $ 398.0 $ 393.2 $ 405.0
Net earnings $ 90.8 $ 134.1 $ 81.9 $ 149.5
Comprehensive income $ 89.0 $ 138.2 $ 62.1 $ 150.0
Net earnings per Common Share:
Basic $ 0.34 $ 0.50 $ 0.30 $ 0.54
Diluted $ 0.33 $ 0.48 $ 0.29 $ 0.53
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Fiscal 1998
Revenue:
Operating revenue $4,107.3 $4,416.0 $4,643.6 $4,837.1
Bulk deliveries to customer warehouses $ 681.2 750.6 720.1 839.5
-------- -------- -------- --------
Total revenue $4,788.5 $5,166.6 $5,363.7 $5,676.6
Gross margin $ 505.7 $ 539.2 $ 572.7 $ 603.0
Selling, general and administrative
expenses $ 331.4 $ 341.4 $ 348.2 $ 369.3
Net earnings $ 92.3 $ 105.3 $ 109.2 $ 118.3
Comprehensive income $ 90.7 $ 99.7 $ 102.7 $ 116.0
Net earnings per Common Share:
Basic $ 0.34 $ 0.39 $ 0.40 $ 0.44
Diluted $ 0.33 $ 0.38 $ 0.39 $ 0.43
- ---------------------------------------------------------------------------------------------------
As more fully discussed in Note 2, merger-related costs and other special
charges were recorded in various quarters in fiscal 1999 and 1998. The following
table summarizes the impact of such costs on net earnings and diluted earnings
per share in the quarters in which they were recorded (in millions, except per
share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1999:
Net earnings $(27.8) $ (1.9) $(74.2) $(13.7)
Diluted net
earnings per Common Share $(0.10) $(0.01) $(0.27) $(0.05)
- ------------------------------------------------------------------------------
Fiscal 1998:
Net earnings $ (1.3) $ (1.9) $(12.0) $ (8.9)
Diluted net
earnings per Common Share $(0.01) $(0.01) $(0.05) $(0.03)
- ------------------------------------------------------------------------------
15. RELATED PARTY TRANSACTIONS
Certain foreign subsidiaries purchase gelatin materials and the Company's
German subsidiary leases plant facilities, purchases other services and receives
loans from time-to-time from a German company which is also the minority partner
of the Company's German and certain other European subsidiaries. Gelatin
purchases, at prices comparable to estimated market
46
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prices, amounted to $28.0 million, $25.0 million and $24.6 million for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively. Rental payments
amounted to $8.4 million, $4.8 million and $5.4 million and purchased services
amounted to $9.4 million, $5.2 million and $5.5 million for each of the
respective fiscal years.
16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This new statement requires companies to recognize all derivatives
as either assets or liabilities in the balance sheet and measure such
instruments at fair value. As amended by Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
the provisions of SFAS 133 will require adoption no later than the beginning of
the Company's fiscal year ending June 30, 2001.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
17. TERMINATED MERGER AGREEMENT
On August 24, 1997, the Company and Bergen announced that they had entered
into a definitive merger agreement (as subsequently amended by the parties on
March 16, 1998), pursuant to which a wholly owned subsidiary of the Company
would be merged with and into Bergen (the "Bergen Merger Agreement"). On March
9, 1998, the FTC filed a complaint in the United States District Court for the
District of Columbia seeking a preliminary injunction to halt the proposed
merger. On July 31, 1998, the District Court granted the FTC's request for an
injunction to halt the proposed merger. On August 7, 1998, the Company and
Bergen jointly terminated the Bergen Merger Agreement. In accordance with the
terms of the Bergen Merger Agreement, the Company was required to reimburse
Bergen for $7.0 million of transaction costs upon termination of the Bergen
Merger Agreement. Additionally, the termination of the Bergen Merger Agreement
will cause the costs incurred by the Company (that would not have been
deductible had the merger been consummated) to become tax deductible, resulting
in a tax benefit of $12.2 million. The obligation to reimburse Bergen and the
additional tax benefit are reflected in the consolidated financial statements in
the fourth quarter of the fiscal year ended June 30, 1998.
18. SUBSEQUENT EVENTS
On August 5, 1999, the Company announced that it had entered into a
definitive merger agreement with Automatic Liquid Packaging, Inc. ("ALP"),
pursuant to which ALP will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. Upon consummation of the merger, the Company
will record a merger-related charge to reflect transaction and other costs
incurred as a result of the merger. The merger is expected to be completed in
the first quarter of fiscal 2000, subject to satisfaction of certain conditions,
including regulatory clearances.
On July 12, 1999, the Company completed the purchase of MedSurg Industries,
Inc., for $31.8 million. The acquisition was accounted for as a purchase.
47
48
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Cardinal Health, Inc. ("Cardinal") and R. P. Scherer Corporation
("Scherer") completed a merger on August 7, 1998. Cardinal and Allegiance
Corporation ("Allegiance") completed a merger on February 3, 1999. Cardinal has
historically engaged Deloitte & Touche LLP ("D&T") as its certifying accountant
while Scherer has historically engaged Arthur Andersen LLP ("AA") and Allegiance
has historically engaged PricewaterhouseCoopers LLP ("PWC") as their certifying
accountants.
For Cardinal's fiscal year ended June 30, 1999, these certifying accountant
relationships were left intact, with D&T serving as the principal certifying
accountant, with reference in its audit opinion to work performed on Scherer by
AA and Allegiance by PWC. This was done to provide management with sufficient
time to conduct a diligent process to select one firm as the certifying
accountant for the merged entity.
Selection of AA as the certifying accountant was recommended to and
approved by the Cardinal Health, Inc. Audit Committee on August 30, 1999.
The reports of D&T on the financial statements of Cardinal and PWC on the
financial statements of Allegiance for the past two fiscal years contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
In connection with their audits for the two most recent fiscal years and
through August 30, 1999, there have been no disagreements with D&T or PWC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of D&T or PWC would have caused them to make reference thereto in
their reports on the financial statements for such years. In addition, there
were no reportable events (as defined in SEC Regulation S-K, Item 304(a)(1)(v))
during the two most recent fiscal years and through August 30, 1999.
Cardinal has requested that D&T and PWC each furnish it with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of D&T's letter dated September 2, 1999 is filed as Exhibit
16.01 to this Form 10-K. A copy of PWC's letter dated September 1, 1999 is filed
as Exhibit 16.02 to this Form 10-K.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3) to Form 10-K, the information
called for in this Item 10 relating to Directors is incorporated herein by
reference to the Company's Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission (the "SEC"), pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to the Company's Annual Meeting of
Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS."
Certain information relating to Executive Officers of the Company appears at
pages 8 and 9 of this Form 10-K, which is hereby incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 11 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"EXECUTIVE COMPENSATION" (other than information set forth under the caption
"Compensation Committee Report").
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 12 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 13 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
48
49
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8 of this report:
PAGE
----
Independent Auditors' Reports......................................... 20
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1999, 1998 and 1997........................................ 24
Consolidated Balance Sheets at June 30, 1999 and 1998................. 25
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1999, 1998 and 1997............................ 26
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 1999, 1998 and 1997........................................ 27
Notes to Consolidated Financial Statements............................ 28
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts....................... 54
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.
49
50
(a)(3) Exhibits required by Item 601 of Regulation S-K:
Exhibit Exhibit Description
------- -------------------
Number
------
2.01 Agreement and Plan of Merger, dated as of August 4, 1999, among the
Registrant, Flower Merger Corp., Automatic Liquid Packaging, Inc.
("ALP") and the Stockholders of ALP (the "Stockholders"), including
form of Escrow Agreement by and among the Registrant, ALP, Gerhard
H. Weiler, Bank One Trust Company, NA, as escrow agent, and the
Stockholders.
3.01 Amended and Restated Articles of Incorporation of the Registrant,
as amended (1)
3.02 Restated Code of Regulations, as amended (1)
4.01 Specimen Certificate for the Registrant's Class A common shares (4)
4.02 Indenture dated as of May 1, 1993 between the Registrant and Bank
One, Indianapolis, NA, Trustee, relating to the Registrant's 6 1/2%
Notes Due 2004 and 6% Notes Due 2006 (2)
4.03 Indenture dated as of April 18, 1997 between the Registrant and Bank
One, Columbus, NA, Trustee, relating to the Registrant's 6 1/4 %
Notes due 2008 (3)
4.04 Indenture dated as of October 1, 1996 between Allegiance Corporation
and PNC Bank, Kentucky, Inc. ("PNC"), Trustee; and First
Supplemental Indenture dated as of February 3, 1999 by and among
Allegiance Corporation, the Company and Chase Manhattan Trust
Company National Association (as successor in interest to PNC),
Trustee (4)
4.05 Indenture dated January 1, 1994 between R.P. Scherer International
Corporation and Comerica Bank; First Supplemental Indenture by and
among R.P. Scherer International Corporation, R.P. Scherer
Corporation and Comerica Bank dated February 28, 1995; and Second
Supplemental Indenture by and among R.P. Scherer Corporation, the
Registrant and Comerica Bank dated as of August 7, 1998 (5)
4.06 Form of Warrant Certificate to Purchase Company Common Shares (6)
10.01 Stock Incentive Plan of the Registrant, as amended (7)*
10.02 Directors' Stock Option Plan of the Registrant, as amended and
restated (7)*
10.03 Amended and Restated Equity Incentive Plan of the Registrant*
10.04 Form of Nonqualified Stock Option Agreement, as amended*
10.05 Form of Restricted Shares Agreement, as amended*
10.06 Form of Directors' Stock Option Agreement, as amended*
10.07 Allegiance Corporation 1996 Incentive Compensation Program (8)*
10.08 Allegiance Corporation 1998 Incentive Compensation Program (8)*
10.09 Allegiance Corporation 1996 Outside Director Incentive Corporation
Plan (8)*
10.10 R.P. Scherer Corporation 1997 Stock Option Plan (9)*
10.11 R.P. Scherer Corporation 1990 Nonqualified Performance Stock
Option Plans (9)*
51
10.12 Cardinal Health, Inc. Performance-Based Incentive Compensation
Plan (10)*
10.13 Cardinal Health, Inc. Incentive Deferred Compensation Plan,
Amended and Restated Effective July 1, 1997 (11)*
10.14 Employment Agreement dated October 11, 1993, among Whitmire, Melburn
G. Whitmire and the Registrant, as amended effective November 14,
1995 (16)*
10.15 Amendment to Change in Control Agreement, dated as of October 8,
1998, by and among the Company, Allegiance Corporation and Joseph F.
Damico (12)*
10.16 Employment Agreement dated May 12, 1998, between the Registrant
and James F. Millar (5)*
10.17 Amended and Restated Employment Agreement dated May 17, 1998, among
Scherer, George L. Fotiades and the Registrant (5)*
10.18 Resignation and Release Agreement, dated as of June 30, 1999, by and
between the Registrant, Allegiance and Lester B. Knight*
10.19 Form of Indemnification Agreement between the Registrant and
individual Directors (13)*
10.20 Form of Indemnification Agreement between the Registrant and
individual Officers (13)*
10.21 Split Dollar Agreement dated April 16, 1993, among the Registrant,
Robert D. Walter, and Bank One Ohio Trust Company, NA, Trustee U/A
dated April 16, 1993 FBO Robert D. Walter (7)*
10.22 364-Day Credit Agreement dated as of March 31, 1999 among the
Registrant, certain subsidiaries of the Registrant, certain lenders,
The First National Bank of Chicago, as Administrative Agent, Bank of
America NT & SA, as Syndication Agent, Citibank, N.A., as
Co-Documentation Agent, and Credit Suisse First Boston, as
Co-Documentation Agent
10.23 Master Agreement and related documents, dated as of July 16, 1996
among the Registrant and/or its subsidiaries, SunTrust Banks, Inc.,
PNC Leasing Corp. and SunTrust Bank, Atlanta, as amended (14, except
for the Omnibus Amendment which is included in this Annual Report on
Form 10-K)
10.24 Participation Agreement and related documents, dated as of June 23,
1997, among the Registrant and certain of its subsidiaries, Bank of
Montreal and BMO Leasing (U.S.), Inc. (15, except for Amendments No.
1 and 2, which are included in this Annual Report on Form 10-K)
10.25 Vendor Program Agreement dated as of October 10, 1991 by and between
General Electric Capital Corporation and Pyxis Corporation, as
amended on December 13, 1991, January 15, 1993, March 10, 1994, June
23, 1997 and June 1, 1998 (5), (14) and (15)
10.26 Pharmaceutical Services Agreement, dated as of August 1, 1996, as
amended, between Kmart Corporation and Cardinal Distribution (17,
except for Amendment No. 1, which is included in this Annual Report
on Form 10-K)
10.27 Form of Commercial Paper Dealer Agreement 4(2) Program between The
Company, as Issuer, and certain entities, each as Dealer, concerning
notes to be issued pursuant to Issuing and Paying Agency Agreement
between the Issuer and The First National Bank of Chicago, as
Issuing and Paying Agent
10.28 Partnership Agreement of R.P. Scherer GMBH & Co. KG (5)
10.29 Five-year Credit Agreement dated as of March 31, 1999 among the
Registrant, certain
52
subsidiaries of the Registrant, certain lenders, The First National
Bank of Chicago, as Administrative Agent, Bank of America NT &SA, as
Syndication Agent, Citibank, N.A., as Co-Documentation Agent, and
Credit Suisse First Boston, as Co-Documentation Agent
16.01 Letter of Deloitte & Touche LLP required by Item 304 of Regulation
S-K
16.02 Letter of PricewaterhouseCoopers LLP required by Item 304 of
Regulation S-K
21.01 List of subsidiaries of the Registrant
23.01 Consent of Deloitte & Touche LLP
23.02 Consent of Arthur Andersen LLP
23.03 Consent of PricewaterhouseCoopers LLP
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information
- ------------------
(1) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed November 24, 1998 (File No. 0-12591) and incorporated herein by
reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (File No. 0-12591) and incorporated
herein by reference.
(3) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed April 21, 1997 (File No. 0-12591) and incorporated herein by
reference.
(4) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-74761) and incorporated herein by reference.
(5) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (File No. 0-12591) and
incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-30889) and incorporated herein by reference.
(7) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 (File No. 0-12591) and
incorporated herein by reference.
(8) Included as an exhibit to the Registrant's Post-Effective Amendment No.
1 on Form S-8 to Form S-4 Registration Statement (No. 333-68819-01) and
incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Post-effective Amendment No.
1 on Form S-8 to Form S-4 Registration Statement (No. 333-56655) and
incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 0-12591) and incorporated
herein by reference.
53
(11) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No. 0-12591) and
incorporated herein by reference.
(12) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-68819) and incorporated herein by reference.
(13) Included as an exhibit to the Company's Amendment No. 1 to Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1997 (File No.
0-12591) and incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal ended June 30, 1996 (File No. 0-12591) and incorporated
herein by reference.
(15) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (File No. 0-12591) and
incorporated herein by reference.
(16) Included as exhibits to the Registrant's Quarterly Reports on Form 10-Q
for the quarters ended December 31, 1993 and December 31, 1995 (File No.
0-12591) and incorporated herein by reference.
(17) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (File No. 0-124\591) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K
None
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDINAL HEALTH, INC.
September 2, 1999 By: /s/ Robert D. Walter
-----------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
- --------------------------- ------------------------------- ---------------
/s/ Robert D. Walter Chairman, Chief Executive September 2, 1999
- --------------------------- Officer and Director (principal
Robert D. Walter executive officer)
/s/ Richard J. Miller Corporate Vice President and September 2, 1999
- --------------------------- Chief Financial Officer
Richard J. Miller (principal financial officer)
/s/ Michael E. Beaulieu Corporate Vice President, September 2, 1999
- --------------------------- Controller and Principal
Michael E. Beaulieu Accounting Officer
/s/ John C. Kane President, Chief Operating September 2, 1999
- --------------------------- Officer and Director
John C. Kane
/s/ Silas S. Cathcart Director September 2, 1999
- ---------------------------
Silas S. Cathcart
/s/ John F. Finn Director September 2, 1999
- ---------------------------
John F. Finn
/s/ Robert L. Gerbig Director September 2, 1999
- ---------------------------
Robert L. Gerbig
/s/ John F. Havens Director September 2, 1999
- ---------------------------
John F. Havens
/s/ Regina E. Herzlinger Director September 2, 1999
- ---------------------------
Regina E. Herzlinger
/s/ J. Michael Losh Director September 2, 1999
- ---------------------------
J. Michael Losh
/s/ George R. Manser Director September 2, 1999
- ---------------------------
George R. Manser
/s/ John B. McCoy Director September 2, 1999
- ---------------------------
John B. McCoy
/s/ Michael D. O'Halleran Director September 2, 1999
- ---------------------------
Michael D. O'Halleran
/s/ Jerry E. Robertson Director September 2, 1999
- ---------------------------
Jerry E. Robertson
/s/ Melburn G. Whitmire Director September 2, 1999
- ---------------------------
Melburn G. Whitmire
52
55
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE AT CHARGED TO CHARGED TO CHANGE BALANCE AT
BEGINNING COSTS AND OTHER IN FISCAL END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS (2) YEAR (3) OF YEAR
- ---------------------------------------- ---------- ---------- ------------ -------------- --------- ----------
Fiscal Year 1999:
Accounts receivable $64.6 $29.0 $1.3 $(41.3) $ -- $53.6
Finance notes receivable 6.4 -- -- (1.5) -- 4.9
Net investment in sales-type leases 8.8 0.5 2.7 (0.2) -- 11.8
----- ----- ---- ------ ---- -----
$79.8 $29.5 $4.0 $(43.0) $ -- $70.3
===== ===== ==== ====== ==== =====
Fiscal Year 1998:
Accounts receivable $62.8 $19.0 $3.3 $(20.5) $ -- $64.6
Finance notes receivable 8.2 0.1 0.1 (2.0) -- 6.4
Net investment in sales-type leases 4.7 4.2 -- (3.7) 3.6 8.8
----- ----- ---- ------ ---- -----
$75.7 $23.3 $3.4 $(26.2) $3.6 $79.8
===== ===== ==== ====== ==== =====
Fiscal Year 1997:
Accounts receivable $68.2 $10.0 $0.4 $(15.8) -- $62.8
Finance notes receivable 9.1 -- -- (0.9) -- 8.2
Net investment in sales-type leases 8.7 -- -- (4.0) -- 4.7
----- ----- ---- ------ ---- -----
$86.0 $10.0 $0.4 $(20.7) $ -- $75.7
===== ===== ==== ====== ==== =====
(1) During fiscal 1999, 1998 and 1997 recoveries of amounts provided for or
written off in prior years were $4.0 million, $3.4 million, and $0.4
million, respectively.
(2) Write-off of uncollectible accounts.
(3) Change in fiscal year of acquired subsidiary.
54