1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 14, 2001
------------------------------
Cardinal Health, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 0-12591 31-0958666
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
7000 Cardinal Place, Dublin, Ohio 43017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 757-5000
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Item 5. Other Events
On February 14, 2001, Cardinal Health, Inc., an Ohio corporation (the
"Registrant"), completed its merger (the "Bindley Merger") of a wholly owned
subsidiary of the Registrant ("Sub") with and into Bindley Western Industries,
Inc. ("Bindley"). Bindley was the surviving corporation of the Bindley Merger
and is now a wholly owned subsidiary of the Registrant. Pursuant to the
Agreement and Plan of Merger dated as of December 2, 2000, by and among the
Registrant, Sub and Bindley (the "Bindley Merger Agreement"), each outstanding
share of Bindley common stock was converted into 0.6413 of a common share of the
Registrant (the "Bindley Exchange Ratio"). Pursuant to the terms of the Bindley
Merger Agreement, approximately 23.1 million common shares of the Registrant
("Common Shares") were issued in exchange for Bindley common stock and Bindley's
outstanding stock options were converted into options to purchase approximately
5.1 million common shares.
. The restated consolidated financial statements of the Registrant, filed in
connection with this report, give effect to the Bindley Merger which was
accounted for as a pooling-of-interests business combination.
Item 7. Financial Statements and Exhibits
---------------------------------
(a) Consolidated financial statements of the Registrant and
Bindley prepared under the pooling-of-interests method of
accounting:
- INDEPENDENT AUDITORS' REPORTS
- FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 2000, June 30, 1999 and June 30, 1998
Consolidated Balance Sheets at June 30, 2000 and June 30, 1999
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 2000, June 30, 1999 and June 30,
1998
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 2000, June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
- MANAGEMENT'S DISCUSSION AND ANALYSIS
- SELECTED CONSOLIDATED FINANCIAL DATA
The foregoing are included in Annex A to this Form 8-K.
(c) Exhibits
2.01 Agreement and Plan of Merger, dated as of December 2,
2000, among the Registrant, Brick Merger Corp., and
Bindley Western Industries, Inc. ("Bindley") (1)
23.01 Consent of Arthur Andersen LLP
23.02 Consent of Deloitte & Touche LLP
23.03 Consent of Arthur Andersen LLP
23.04 Consent of PricewaterhouseCoopers LLP
23.05 Consent of PricewaterhouseCoopers LLP
99.01 Statement Regarding Forward-Looking Information. (2)
-----------------------
(1) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-53394) and incorporated herein by reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q of the
Registrant (File No. 0-12591) for the quarter ended December 31,
2000, and incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
CARDINAL HEALTH, INC.
June 6, 2001 By: /s/ Richard J. Miller
----------------------
Richard J. Miller
Executive Vice President and
Chief Financial Officer
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4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheet of Cardinal Health,
Inc. and subsidiaries as of June 30, 2000 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We did not audit the
historical consolidated financial statements of Bindley Western Industries, Inc.
(Bindley), a wholly owned subsidiary of Cardinal Health, Inc., as of December
31, 1999 and for the year then ended. The historical consolidated financial
statements of Bindley represent approximately 15% of consolidated total assets
at June 30, 2000, and represent total revenues and net income of approximately
22% and 5%, respectively, of consolidated amounts for the year then ended. These
consolidated financial statements were audited by another auditor whose report,
presented herein, and our opinion, insofar as it relates to the amounts included
for Bindley, is based solely on the report of such auditor.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of the other auditor
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cardinal Health, Inc. and subsidiaries as of June 30, 2000 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The consolidated financial statements of Cardinal Health, Inc. and subsidiaries
for the years ended June 30, 1999 and 1998, prior to restatement for pooling of
interests, and the separate financial statements of Bindley for the years ended
December 31, 1998 and 1997 that have been included in the June 30, 1999 and
1998 restated consolidated financial statements of Cardinal Health, Inc., were
audited and reported on separately by other auditors and whose reports,
presented herein a) dated August 10, 1999, except for the first sentence of the
fourth paragraph of Note 2 as to which the date is May 26, 2000 and the fiscal
1999 and 1998 amounts in Note 12 as to which the date is September 5, 2000 and
b) dated March 21, 2000, except as to the revision to the financial statements
to account for the business combination with Central Pharmacy Services, Inc. as
a purchase rather than a pooling of interests and the second paragraph of Note
16 to the consolidated financial statements of Cardinal Health, Inc., which are
as of December 15, 2000, respectively expressed unqualified opinions on those
statements. We audited the combination of the accompanying consolidated balance
sheet as of June 30, 1999 and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the two-year
period then ended, after restatement for the fiscal 2001 pooling of interests.
In our opinion, such consolidated statements have been properly combined on the
basis described in Note 1 of the notes to consolidated financial statements.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio
June 6, 2001
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Directors of Cardinal Health, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated June 6, 2001 appearing on page 4 of this Form 8-K/A also included an
audit of the information as of and for the year ended June 30, 2000 in the
Financial Statement Schedule - Valuation and Qualifying Accounts. We did not
audit the historical Financial Statement Schedule of Bindley Western Industries,
Inc. (Bindley), a wholly owned subsidiary of Cardinal Health, Inc., as of
December 31, 1999 and for the year then ended. This Financial Statement Schedule
was audited by another auditor whose report, presented herein, and our opinion,
insofar as it relates to the amounts included for Bindley, is based solely on
the report of such auditor.
The Financial Statement Schedule of Cardinal Health, Inc. for the years ended
June 30, 1999 and 1998, prior to the restatement for pooling of interests, and
the separate Financial Statement Schedule of Bindley for the years ended
December 31, 1998 and 1997, that have been included in the June 30, 1999 and
1998 restated consolidated Financial Statement Schedule, were audited and
reported on separately by other auditors whose reports, presented herein a)
dated August 10, 1999, except for the first paragraph of Note 2 as to which the
date is May 26, 2000 and the fiscal 1999 and 1998 amounts in Note 12 as to
which the date is September 5, 2000 and b) dated March 21, 2000, except as to
the revision to the financial statements to account for the business
combination with Central Pharmacy Services, Inc. as a purchase rather than a
pooling of interests and the second paragraph of Note 16 to the consolidated
financial statements of Cardinal Health, Inc., which are as of December 15,
2000, respectively expressed unqualified opinions on that schedule. We audited
the combination of the information for each of the two years in the period
ended June 30, 1999, after restatement for the 2001 pooling of interests.
In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein as of and for the year
ended June 30, 2000 when read in conjunction with the related consolidated
financial statements, and, in our opinion, the information for each of the two
years in the period ended June 30, 1999, has been properly combined on the basis
described in Note 1 of the Notes to Consolidated Financial Statements.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio
June 6, 2001
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the consolidated balance sheet of Cardinal Health, Inc. and
subsidiaries as of June 30, 1999, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the two years in the
period ended June 30, 1999. Our audits also included the consolidated financial
statement schedule, as it relates to the years ended June 30, 1999 and 1998,
listed in the Index at Item 7. The consolidated financial statements and
financial statement schedule audited by us were prior to the restatement for the
2001 pooling of interests with Bindley Western Industries, Inc. (Bindley) as
described in Note 2 of the consolidated financial statements. These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated financial
statement schedule based on our audits. We did not audit the financial
statements of Allegiance Corporation ("Allegiance"), a wholly owned subsidiary
of Cardinal Health, Inc., as of June 30, 1999, and for the years ended June 30,
1999 and 1998. We also did not audit the financial statements of R.P. Scherer
Corporation ("Scherer"), a wholly owned subsidiary of Cardinal Health, Inc., as
of June 30, 1999, and for years ended June 30, 1999 and March 31, 1998. The
combined financial statements of Allegiance and Scherer represent approximately
44% of consolidated total assets at June 30, 1999, and represent combined
revenues and net income of approximately 25% and 28% and 35% and 39%,
respectively, of consolidated amounts for each of the two years in the period
ended June 30, 1999. These statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for Allegiance and Scherer, is based solely on the reports of
such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1999, and the results of their operations and their
cash flows for each of the two years in the period ended June 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedule,
as it relates to the years ended June 30, 1999 and 1998, when considered in
relation to the basic fiscal 1999 and 1998 consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 10, 1999, except for the first sentence of the fourth paragraph of Note 2
as to which the date is May 26, 2000 and the fiscal 1999 and 1998 amounts in
Note 12 as to which the date is September 5, 2000.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position of
R.P. SCHERER CORPORATION (a Delaware corporation and a wholly-owned subsidiary
of Cardinal Health, Inc.) and subsidiaries as of June 30, 1999 and the related
consolidated statements of income, comprehensive income, cash flows and
shareholders' equity for the year ended June 30, 1999 and the year ended March
31, 1998 (not presented separately herein). These financial statements and the
schedule referred to below are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
this schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of June 30, 1999, and the results of their operations and their
cash flows for the year ended June 30, 1999 and for the year ended March 31,
1998, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation allowances is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements
(not presented separately herein). This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Roseland, New Jersey
August 9, 1999
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REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders of Allegiance Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of cash flows and of equity of Allegiance Corporation
and its subsidiaries (not presented separately herein) present fairly, in all
material respects, the financial position of Allegiance Corporation, a
wholly-owned subsidiary of Cardinal Health Inc., and its subsidiaries at June
30, 1999, and the results of their operations and their cash flows for the years
ended June 30, 1999 and 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Allegiance
Corporation's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
July 29, 1999
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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 8 of the Cardinal Health, Inc. Current Report on Form 8-K/A dated February
14, 2001 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
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
In our opinion, the consolidated balance sheets and the related consolidated
statements of earnings, shareholders' equity and cash flows of Bindley Western
Industries, Inc. and its subsidiaries (the "Company"), (not presented separately
herein) present fairly, in all material respects, their financial position at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, prior
to adjustments related to the 2001 pooling of interests with Cardinal Health,
Inc., in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Bindley Western Industries,
Inc. for any period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 21, 2000, except as to the revision to the financial statements to account
for the business combination with Central Pharmacy Services, Inc. as a purchase
rather than a pooling of interests and the second paragraph of Note 16 to the
consolidated financial statements of Cardinal Health, Inc., which are as of
December 15, 2000
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 21, 2000, except as to the revision to the financial statements to
account for the business combination with Central Pharmacy Services, Inc. as a
purchase rather than a pooling of interests and the second paragraph of Note 16
to the consolidated financial statements of Cardinal Health, Inc., which are as
of December 15, 2000, appearing in the Cardinal Health, Inc. Form 8-K/A dated
February 14, 2001 also included an audit of the Financial Statement Schedule II
- Valuation and Qualifying Accounts ("Financial Statement Schedule") of Bindley
Western, Industries, Inc. 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. We have not
audited the consolidated financial statements and Financial Statement Schedule
of Bindley Western Industries, Inc. for any period subsequent to December 31,
1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 21, 2000, except as to the revision to the financial statements to account
for the business combination with Central Pharmacy Services, Inc. as a purchase
rather than a pooling of interests and the second paragraph of Note 16 to the
consolidated financial statements of Cardinal Health, Inc., which are as of
December 15, 2000
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------
2000 1999 1998
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Revenue:
Operating revenue $ 30,257.8 $ 25,682.5 $ 20,844.8
Bulk deliveries to customer warehouses 8,092.1 7,050.4 7,541.1
------------ ------------ ------------
Total revenue 38,349.9 32,732.9 28,385.9
Cost of products sold:
Operating cost of products sold 27,163.8 22,867.6 18,439.5
Cost of products sold - bulk deliveries 8,089.9 7,048.1 7,539.3
Merger-related costs -- 4.0 --
------------ ------------ ------------
Total cost of products sold 35,253.7 29,919.7 25,978.8
------------ ------------ ------------
Gross margin 3,096.2 2,813.2 2,407.1
Selling, general and administrative expenses 1,751.0 1,697.2 1,491.5
Special charges 64.7 161.4 57.8
------------ ------------ ------------
Operating earnings 1,280.5 954.6 857.8
Interest expense and other 138.7 132.9 123.5
------------ ------------ ------------
Earnings before income tax 1,141.8 821.7 734.3
Provision for income taxes 424.0 322.4 260.0
------------ ------------ ------------
Net earnings $ 717.8 $ 499.3 $ 474.3
============ ============ ============
Net earnings per Common Share:
Basic $ 1.64 $ 1.14 $ 1.10
Diluted $ 1.60 $ 1.12 $ 1.07
Weighted average number of Common Shares outstanding:
Basic 438.8 434.9 431.5
Diluted 448.7 447.2 445.3
--------------------------------------------------------------------------------------------------------------
Net earnings $ 717.8 $ 499.3 $ 474.3
Pro forma adjustment for income taxes (See Note 2) -- (9.3) (4.6)
------------ ------------ ------------
Pro forma net earnings $ 717.8 $ 490.0 $ 469.7
============ ============ ============
Pro forma net earnings per Common Share:
Basic $ 1.64 $ 1.13 $ 1.09
Diluted $ 1.60 $ 1.10 $ 1.06
The accompanying notes are an integral part of these consolidated statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and equivalents $ 539.5 $ 228.4
Trade receivables, net 2,398.8 2,055.6
Current portion of net investment in sales-type leases 187.7 152.5
Inventories 4,657.0 3,585.8
Prepaid expenses and other 663.4 383.8
------------ ------------
Total current assets 8,446.4 6,406.1
------------ ------------
Property and equipment, at cost:
Land, buildings and improvements 806.1 779.5
Machinery and equipment 2,115.4 2,035.8
Furniture and fixtures 144.0 102.8
------------ ------------
Total 3,065.5 2,918.1
Accumulated depreciation and amortization (1,337.2) (1,263.8)
------------ ------------
Property and equipment, net 1,728.3 1,654.3
Other assets:
Net investment in sales-type leases, less current portion 578.6 454.3
Goodwill and other intangibles, net 1,043.7 960.1
Other 227.1 207.9
------------ ------------
Total $ 12,024.1 $ 9,682.7
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable & other short term borrowings $ 414.1 $ 272.3
Current portion of long-term obligations 9.3 41.6
Accounts payable 3,895.1 3,004.4
Other accrued liabilities 1,228.2 596.4
------------ ------------
Total current liabilities 5,546.7 3,914.7
------------ ------------
Long-term obligations, less current portion 1,524.5 1,224.5
Deferred income taxes and other liabilities 552.5 648.9
Shareholders' equity:
Common Shares, without par value 1,509.6 1,308.5
Retained earnings 3,331.6 2,666.1
Common Shares in treasury, at cost (346.6) (27.9)
Cumulative foreign currency adjustment (81.9) (44.0)
Other (12.3) (8.1)
------------ ------------
Total shareholders' equity 4,400.4 3,894.6
------------ ------------
Total $ 12,024.1 $ 9,682.7
============ ============
The accompanying notes are an integral part of these consolidated statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES
------------------ CUMULATIVE
TREASURY SHARES FOREIGN TOTAL
SHARES RETAINED ----------------- CURRENCY SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT ADJUSTMENT OTHER EQUITY
------ -------- -------- ------ ------- ---------- ------ ------------
BALANCE, JUNE 30, 1997 180.5 $1,121.5 $1,871.1 (0.8) $(34.8) $(12.5) $(5.3) $2,940.0
Comprehensive income:
Net earnings 474.3 474.3
Foreign currency translation adjustments (16.0) (16.0)
--------
Total comprehensive income 458.3
Employee stock plans activity,
including tax benefits of $38.5 million 2.4 79.5 (0.3) 29.0 (0.5) 108.0
Treasury shares acquired and shares retired (1.3) (25.7) (12.7) (0.9) (105.6) (144.0)
Dividends paid (36.8) (36.8)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) (0.1) (0.8) (35.0) 0.4 25.2 0.6 0.8 (9.2)
IPO of subsidiary and related option grant 24.7 (5.2) 19.5
Shares issued upon conversion of debt 1.5 67.5 67.5
Conforming Adjustment (See Note 2) (9.7) (9.7)
Other (3.7) (3.7)
------ -------- -------- ------ ------- ------- ------- --------
BALANCE, JUNE 30, 1998 183.0 $1,266.7 $2,246.0 (1.6) $(86.2) $(27.9) $(8.7) $3,389.9
Comprehensive income:
Net earnings 499.3 499.3
Foreign currency translation adjustments (17.0) (17.0)
--------
Total comprehensive income 482.3
Employee stock plans activity,
including tax benefits of $65.4 million 3.4 139.6 (0.7) 34.8 (2.9) 171.5
Treasury shares acquired and shares retired (1.9) (73.8) (2.9) 1.7 23.5 3.5 (49.7)
Dividends paid (49.1) (49.1)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 105.6 (0.3) (0.1) (0.3)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 0.1 0.5 8.6 0.9 10.0
Stock issued for acquisitions and other 0.2 (0.1) (1.0) (1.1)
Distribution of Priority Healthcare Corporation (24.4) (34.5) (58.9)
------ -------- -------- ------ ------- ------- ------- --------
BALANCE, JUNE 30, 1999 290.4 $1,308.5 $2,666.1 (0.7) $(27.9) $(44.0) $(8.1) $3,894.6
Comprehensive income:
Net earnings 717.8 717.8
Foreign currency translation adjustments (37.9) (37.9)
--------
Total comprehensive income 679.9
Employee stock plans activity,
including tax benefits of $46.9 million 4.4 147.8 (0.2) (4.2) 143.4
Treasury shares acquired and shares retired (22.2) (7.3) (318.5) (340.7)
Dividends paid (30.0) (30.0)
Stock issued for acquisitions and other 4.6 53.3 (0.1) (0.1) 53.2
------ -------- -------- ------ ------- ------- ------- --------
BALANCE, JUNE 30, 2000 299.4 $1,509.6 $3,331.6 (8.1) $(346.6) $(81.9) $(12.3) $4,400.4
====== ======== ======== ====== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated statements.
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CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 717.8 $ 499.3 $ 474.3
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 257.0 248.2 225.8
Provision for deferred income taxes 127.5 128.9 86.2
Provision for bad debts 37.5 33.1 27.5
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (377.3) (122.5) (445.3)
Increase in inventories (1,071.6) (479.6) (541.1)
Increase in net investment in sales-type leases (159.5) (282.3) (103.3)
Increase in accounts payable 899.4 169.5 672.2
Other operating items, net 73.2 101.8 68.5
------------ ------------ ------------
Net cash provided by operating activities 504.0 296.4 464.8
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/divestiture of subsidiaries, net of cash acquired (69.6) (147.5) (73.1)
Proceeds from sale of property and equipment 60.2 58.0 12.9
Additions to property and equipment (331.1) (359.5) (308.9)
Purchase of marketable securities available for sale (7.7) (15.6) (14.3)
Proceeds from sale of marketable securities available for sale 56.1 13.5 10.6
Other -- -- (4.7)
------------ ------------ ------------
Net cash used in investing activities (292.1) (451.1) (377.5)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 426.2 (334.9) 5.8
Reduction of long-term obligations (179.8) (118.8) (49.4)
Proceeds from long-term obligations, net of issuance costs 0.5 223.7 111.4
Proceeds from securitized borrowings 125.8 224.2 --
Proceeds from issuance of Common Shares 97.5 88.9 103.8
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (30.0) (77.3) (53.4)
Purchase of treasury shares (341.4) (49.8) (144.9)
Other 0.4 (4.8) (14.0)
------------ ------------ ------------
Net cash provided by/(used in) financing activities 99.2 (48.8) (40.7)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 311.1 (203.5) 46.6
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 228.4 431.9 385.3
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 539.5 $ 228.4 $ 431.9
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
15
16
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company currently conducts its business within four business
segments: Pharmaceutical Distribution and Provider Services; Medical-Surgical
Products and Services; Pharmaceutical Technologies and Services; and Automation
and Information Services. See Note 12 for discussion related to the Company's
operating segments.
BASIS OF PRESENTATION. The consolidated financial statements of the Company
include the accounts of all majority-owned subsidiaries and all significant
intercompany accounts and transactions have been eliminated. In addition, the
consolidated financial statements give retroactive effect to the mergers with
MediQual Systems, Inc. ("MediQual") on February 18, 1998; R.P. Scherer
Corporation ("Scherer") on August 7, 1998; Allegiance Corporation ("Allegiance")
on February 3, 1999; Pacific Surgical Innovations, Inc. ("PSI") on May 21, 1999;
Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999 and Bindley
Western Industries, Inc. ("Bindley") on February 14, 2001 (see Note 2). Such
business combinations were accounted for under the pooling-of-interests method.
The Company's fiscal year end is June 30 and Scherer's, PSI's, and
Bindley's fiscal year ends were March 31, September 30, and December 31,
respectively. For the fiscal year ended June 30, 1998, the consolidated
financial statements combine the Company's fiscal year ended June 30, 1998 with
Scherer's fiscal year ended March 31, 1998, PSI's fiscal year ended September
30, 1998, and Bindley's fiscal year ended December 31, 1997. For the fiscal
years ended June 30, 1999 and 2000, the consolidated financial statements
combine the Company's fiscal years ended June 30, 1999 and 2000, with Bindley's
fiscal years ended December 31, 1998 and 1999, 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 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. Additionally, as a result of changing
Bindley's fiscal year end from December 31 to June 30, Bindley's results of
operations for the six months ended June 30, 2000 are not included in the
combined results of operations but will be reflected as an adjustment in the
Consolidated Statements of Shareholders' Equity. Bindley's net revenue and net
earnings excluding special charges were $4.9 billion and $22.9 million,
respectively. Including special charges for the same period, Bindley's net loss
was $2.8 million. Cash flows from operating activities were $166.7 million,
while cash flows used in investing and financing activities were $5.7 million
and $113.4 million, respectively.
During fiscal 2000, Bindley completed a merger transaction with Central
Pharmacy Services, Inc. ("Central Pharmacy") that was accounted for under the
purchase method of accounting. In addition, the Company completed several
individually immaterial acquisitions during fiscal 2000, 1999 and 1998, which
were accounted for under the purchase method of accounting. The consolidated
financial statements include the results of operations from each of these
business combinations as of the date of acquisition.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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
$133.8 million, $125.1 million and $111.5 million and cash payments for income
taxes were $125.5 million, $94.9 million and $174.8 million for fiscal 2000,
1999, and 1998, respectively. See Notes 2 and 4 for additional information
regarding non-cash investing and financing activities.
16
17
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $71.1 million and
$61.5 million at June 30, 2000 and 1999, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates that generally
fluctuate with the prime rate. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivable are
$24.0 million and $19.8 million at June 30, 2000 and 1999, respectively (the
current portions are $9.3 million and $9.2 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $4.6 million and $4.9 million at June 30, 2000 and 1999,
respectively.
The Company has formed Medicine Shoppe Capital Corporation ("MSCC"), Pyxis
Capital Corporation ("PCC") and Cardinal Health Funding LLC ("CHF") as wholly
owned subsidiaries of Medicine Shoppe, Pyxis and Griffin Capital Corporation
("Griffin"), respectively. MSCC, PCC and CHF were organized for the sole purpose
of buying receivables and selling those receivables to certain financial
institutions or to other investors. They are designed to be special purpose,
bankruptcy remote entities. Although consolidated to the extent required by
generally accepted accounting principles, MSCC, PCC and CHF are separate legal
entities from the Company, Medicine Shoppe, Pyxis and Griffin; they each
maintain separate financial statements; and their assets will be available first
and foremost to satisfy the claims of their creditors.
The Company has formed Bindley Western Funding Corporation ("BWFC") as a
wholly owned subsidiary of Bindley. BWFC was organized for the sole purpose of
buying receivables and selling those receivables to certain financial
institutions or to other investors. Although consolidated to the extent required
by generally accepted accounting principles, BWFC is a separate legal entity
from the Company and Bindley; it maintains separate financial statements; and
its assets will be available first and foremost to satisfy the claims of its
creditors.
INVENTORIES. A majority of inventories (approximately 69% in 2000 and 66% in
1999) are stated at lower of cost, using the last-in, first-out ("LIFO") method,
or market and are primarily merchandise inventories. The remaining inventory is
primarily stated at the lower of cost using the first-in, first-out ("FIFO")
method or market. If the Company had used the FIFO method of inventory
valuation, which approximates current replacement cost, inventories would have
been higher than the LIFO method reported at June 30, 2000 and 1999 by $57.3
million and $64.1 million, respectively. Bindley accounted for inventory under
the FIFO method prior to the merger transaction with the Company. See Note 2 for
discussion of the adjustment to conform Bindley to the LIFO method.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
and amortization for financial reporting purposes are primarily computed using
the straight-line method over the estimated useful lives of the assets which
range from one to fifty years, including capital lease assets which are
amortized over the terms of their respective leases. Amortization of capital
lease assets is included in depreciation and amortization expense. At each
balance sheet date, the Company assesses the recoverability of its long-lived
property, based on a review of projected undiscounted cash flows associated with
these assets.
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles primarily
represent intangible assets related to the excess of cost over net assets of
subsidiaries acquired. Intangible assets are being amortized using the
straight-line method over lives that range from five to forty years. Accumulated
amortization was $646.2 million and $607.1 million at June 30, 2000 and 1999,
respectively. At each balance sheet date, a determination is made by management
to ascertain whether there is an indication that the intangible assets may have
been impaired based primarily on a review of projected undiscounted operating
cash flows for each subsidiary.
REVENUE RECOGNITION. The Company records distribution revenue when merchandise
is shipped to its customers and the Company has no further obligation to provide
services related to such merchandise. The Company also acts as an intermediary
in the ordering and subsequent delivery of bulk shipments of pharmaceutical
products, which are classified as bulk deliveries to customer warehouses and are
included in total revenue.
17
18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company earns franchise and origination fees from its
apothecary-style pharmacy franchisees. Franchise fees represent monthly fees
based upon franchisees' sales and are recognized as revenue when they are
earned. Origination fees from signing new franchise agreements are recognized as
revenue when the new franchise store is opened.
Pharmacy management and other service revenues are recognized as the
related services are rendered according to the contracts established. A fee is
charged under such contracts through a capitated fee, a dispensing fee, a
monthly management fee, or an actual costs-incurred arrangement. Under certain
contracts, fees for services are guaranteed by the Company not to exceed
stipulated amounts or have other risk-sharing provisions. Revenue is adjusted to
reflect the estimated effects of such contractual guarantees and risk-sharing
provisions.
Packaging and liquid fill contract manufacturing revenues are recognized
from services provided upon the completion of such services.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenue related to option, milestone and exclusivity fees
are recognized when earned and all obligations of performance have been
completed.
Revenue is recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, the customer accepts the system, and the
lease becomes noncancellable. Unearned income on sales-type leases is recognized
using the interest method. Sales of point-of-use pharmacy systems are recognized
upon delivery and customer acceptance. Revenue for systems installed under
operating lease arrangements is recognized over the lease term as such amounts
become receivable according to the provisions of the lease.
Clinical information system license revenue is recognized upon delivery
of the software to the customer and the completion of implementation/set up
training necessary to operate the software. The portion of the license fee
related to system support is deferred and recognized over the annual license
period.
TRANSLATION OF FOREIGN CURRENCIES. The financial position and the results of
operations of the Company's foreign operations, excluding the Company's
Malaysian and Mexican manufacturing operations which are denominated in U.S.
dollars, are measured using the local currencies of the countries in which they
operate and are translated into U.S. dollars. Although the effects of foreign
currency fluctuations are mitigated by the fact that expenses of foreign
subsidiaries are generally incurred in the same currencies in which sales are
generated, the reported results of operations of the Company's foreign
subsidiaries are affected by changes in foreign currency exchange rates and, as
compared to prior periods, will be higher or lower depending upon a weakening or
strengthening of the U.S. dollar. In addition, the net assets of foreign
subsidiaries are translated into U.S. dollars at the foreign currency exchange
rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the relative
strengthening or weakening of the U.S. dollar versus relevant foreign
currencies.
DERIVATIVE FINANCIAL INSTRUMENT RISK. The Company uses derivative financial
instruments to minimize the impact of foreign exchange rate changes on earnings
and cash flows. The Company also periodically enters into foreign currency
exchange contracts to hedge certain exposures related to selected transactions
that are relatively certain as to both timing and amount. The Company does not
use derivative financial instruments for trading or speculative purposes (see
Note 5 for further discussion).
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with the
development of new products and manufacturing methods are charged to expense as
incurred. Research and development expenses, net of customer reimbursements,
were $48.5 million, $49.7 million, and $45.7 million in fiscal 2000, 1999, and
1998, respectively. Customer reimbursements in the amount of $10.4 million,
$11.8 million, and $13.0 million were received for the fiscal years ended June
30, 2000, 1999, and 1998, respectively.
INCOME TAXES. No provision is made for U.S. income taxes on earnings of foreign
subsidiary companies which the Company controls but does not include in the
consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings.
PRO FORMA ADJUSTMENT FOR INCOME TAXES. On September 10, 1999, the Company
completed a merger transaction with ALP (the "ALP Merger"). As of April 1998,
ALP had elected S-Corporation status for income tax purposes. As a result of
18
19
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the merger, ALP terminated its S-Corporation election. The pro forma adjustment
for income taxes presents the pro forma tax expense of ALP as if ALP had been
subject to federal income taxes during the periods presented (see Note 2).
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options, computed using
the treasury stock method and in fiscal 1998 by the dilutive effect of Bindley's
convertible debentures ($1.9 million impact on diluted net earnings and an
increase of 2.2 million diluted shares). See Note 6 for further discussion of
the convertible debentures.
Excluding dividends paid by all entities with which the Company has merged,
the Company paid cash dividends per Common Share of $0.667, $0.0633, and $0.0467
for the fiscal years ended June 30, 2000, 1999, and 1998, respectively.
STOCK SPLITS. On August 12, 1998, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on October 30, 1998
to shareholders of record on October 9, 1998. In addition, on February 27, 2001,
the Company declared a three-for-two stock split which was effected as a stock
dividend and distributed on April 20, 2001 to shareholders of record on April 5,
2001. All share and per share amounts included in the consolidated financial
statements, except the Consolidated Statements of Shareholders' Equity, have
been adjusted to retroactively reflect these stock splits.
DISTRIBUTION OF PRIORITY HEALTHCARE CORPORATION. On December 31, 1998, Bindley
distributed to the holders of its common stock all of the 10.2 million shares of
Priority Healthcare Corporation ("Priority") owned by Bindley. As a result of
the distribution, Priority ceased to be a subsidiary of Bindley at the end of
fiscal 1999. The dividend distribution of $58.9 million represents Bindley's
ownership interest in the net assets of Priority. The spin-off resulted in the
removal of $107.5 million of assets and $37.2 million of liabilities from the
consolidated balance sheet at the end of fiscal 1999.
NEW ACCOUNTING PRONOUNCEMENT. As of July 1, 1999, the Company adopted the
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for costs of computer software developed or obtained for internal
use. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements.
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
BUSINESS COMBINATIONS. On February 14, 2001 the Company completed a merger
transaction with Bindley ("Bindley Merger"), which was accounted for as a
pooling-of-interests. In the Bindley Merger, the Company issued approximately
23.1 million Common Shares to Bindley stockholders and Bindley's outstanding
stock options were converted into options to purchase approximately 5.1 million
Common Shares. The Company recorded a merger-related charge to reflect
transaction and other costs incurred as a result of the Bindley Merger in the
third quarter of fiscal 2001. Additional merger-related costs associated with
integrating the separate companies and instituting efficiencies will be charged
to expense in subsequent periods when incurred.
The table below presents a reconciliation of total revenue and net earnings
available for Common Shares as reported in the accompanying financial statements
with those previously reported by the Company. The term "Cardinal Health" as
used herein refers to Cardinal Health, Inc. and its subsidiaries prior to the
Bindley merger transaction.
(in millions) Cardinal Conforming
Health Bindley Adjustment Combined
------------ ----------- ----------- -----------
Fiscal year ended June 30, 1998
Total revenue $ 21,076.0 $ 7,309.9 $ -- $ 28,385.9
Net earnings $ 448.5 $ 23.7 $ 2.1 $ 474.3
Fiscal year ended June 30, 1999
Total revenue $ 25,111.5 $ 7,621.4 $ -- $ 32,732.9
Net earnings $ 481.0 $ 19.1 $ (0.8) $ 499.3
Fiscal year ended June 30, 2000
Total revenue $ 29,870.6 $ 8,479.3 $ -- $ 38,349.9
Net earnings $ 679.7 $ 36.7 $ 1.4 $ 717.8
19
20
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjustments affecting net earnings and shareholders' equity resulting from
the Bindley Merger to adopt the same accounting practices as Cardinal Health
related solely to the impact of accounting for Bindley's inventory under the
LIFO method, which was previously accounted for under the FIFO method. The
beginning balance sheet cumulative adjustment of $9.7 million is reflected in
the Consolidated Statement of Shareholders Equity. There were no material
intercompany transactions.
On September 10, 1999, the Company completed the ALP Merger, which was
accounted for as a pooling-of-interests. In the ALP Merger, the Company issued
approximately 8.7 million Common Shares to ALP stockholders. The Company
recorded a merger-related charge to reflect transaction and other costs incurred
as a result of the merger transaction during fiscal year 2000.
On August 31, 1999, Bindley completed a merger transaction with Central
Pharmacy that was accounted for under the purchase method of accounting. The
aggregate purchase price was approximately $56.7 million, including fees and
expenses, which was primarily paid in Bindley common stock. Liabilities assumed
were approximately $16.1 million. Had the acquisition taken place on July 1,
1999, consolidated results would not have been materially different from
reported results.
In addition to the merger transactions described above, during fiscal
2000, the Company completed several individually immaterial acquisitions, which
were accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's medical-surgical
distribution, point-of-use pharmacy systems and pharmaceutical-packaging
services. The aggregate purchase price, which was paid primarily in cash,
including fees and expenses, was approximately $63.5 million. Liabilities of the
operations assumed were approximately $7.0 million, including debt of $4.0
million. Had the acquisitions taken place July 1, 1999, consolidated results
would not have been materially different from reported results.
On May 21, 1999, the Company completed a merger transaction with PSI. The
Company issued approximately 0.3 million Common Shares to PSI shareholders and
has accounted for the merger transaction as a pooling-of-interests in the
accompanying financial statements.
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 106.1 million Common Shares to Allegiance
stockholders and Allegiance's outstanding stock options were converted into
options to purchase approximately 15.5 million Common Shares. In addition, on
August 7, 1998, the Company completed a merger transaction with Scherer that was
accounted for as a pooling-of-interests. The Company issued approximately 51.3
million Common Shares to Scherer stockholders and Scherer's outstanding stock
options were converted into options to purchase approximately 5.3 million Common
Shares. The Company recorded a merger-related charge to reflect transaction and
other costs incurred as a result of these merger transactions in fiscal 1999.
Additional merger-related costs associated with integrating the separate
companies and instituting efficiencies are charged to expense in subsequent
periods when incurred.
In addition to the merger transactions described above, during fiscal
1999, the Company completed several individually immaterial acquisitions, which
were accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's medical-surgical
distribution, point-of-use pharmacy systems and pharmaceutical-packaging
services. The aggregate purchase price, which was paid primarily in cash,
including fees and expenses, was approximately $160.8 million. Liabilities of
the operations assumed were approximately $18.9 million, including debt of $3.2
million. Had the acquisitions taken place on July 1, 1998, consolidated results
would not have been materially different from reported results.
On February 18, 1998, the Company completed a merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 1.3 million Common Shares
to MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 0.1 million Common Shares of the Company.
During fiscal 1998, the Company made a number of individually immaterial
acquisitions for an aggregate purchase price of $83.8 million and exchanged
non-monetary assets with a value of approximately $10.5 million to acquire an
interest in Source Medical Corporation, a new venture in Canada. All of these
acquisitions were accounted for as purchase
20
21
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions. Had the acquisitions taken place on July 1, 1997, consolidated
results would not have been materially different from reported results.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2000, 1999 and 1998.
Fiscal Year Ended
June 30,
------------------------------------------
(in millions, except per share amounts) 2000 1999 1998
------------------------------------------------------------------------------------------------
Transaction and employee-related costs $ (3.8) $ (95.4) $ (35.7)
ALP transaction bonus (20.3) -- --
Exit costs (11.7) (9.4) (3.8)
Scherer restructuring costs (9.6) (26.7) --
Inventory write-offs -- (4.0) --
Owen Healthcare, Inc. employee-related costs -- (1.1) --
Canceled merger transaction -- 3.7 --
Other integration costs (19.3) (13.7) (9.7)
------------------------------------------------------------------------------------------------
Total merger-related costs $ (64.7) $ (146.6) $ (49.2)
------------------------------------------------------------------------------------------------
Other special charges:
Facilities closures $ -- $ -- $ (6.1)
Employee severance -- -- (2.5)
Priority Spin-off -- (18.8) --
------------------------------------------------------------------------------------------------
Total other special charges $ -- $ (18.8) $ (8.6)
------------------------------------------------------------------------------------------------
Total special charges $ (64.7) $ (165.4) $ (57.8)
Tax effect of special charges 14.9 33.8 22.0
Tax benefit for change in tax status -- -- 11.7
Pro forma ALP taxes -- 9.3 4.6
------------------------------------------------------------------------------------------------
Net effect of special charges $ (49.8) $ (122.3) $ (19.5)
===============================================================================================
Net effect on diluted earnings per share $ (0.11) $ (0.27) $ (0.04)
===============================================================================================
Merger-Related Charges. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs are primarily a
result of the merger transactions with ALP, Allegiance and Scherer.
During the fiscal years presented in the table herein, the Company incurred
direct transaction costs related to its merger transactions. These expenses
primarily include investment banking, legal, accounting and other professional
fees associated with the respective merger transactions. In addition, the
Company incurred employee-related costs, which consist primarily of severance
and transaction/stay bonuses as a result of the ALP, Allegiance and Scherer
merger transactions. Partially offsetting the transaction and employee-related
costs recorded during the fiscal year ended June 30, 2000 was a $10.3 million
credit to adjust the estimated transaction and employee-related costs previously
recorded in connection with the Allegiance merger transaction. Actual billings
and employee-related costs were less than the amounts originally anticipated,
resulting in a reduction of the merger-related costs. Exit costs relate
primarily to costs associated with lease terminations and moving expenses as a
direct result of the merger transactions with ALP, Allegiance and Scherer. Other
integration costs include charges related to integrating the operations of
previous merger transactions.
The Company recorded charges of $9.6 million and $26.7 million during the
fiscal years ended June 30, 2000 and 1999, respectively, associated with the
business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the
21
22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company has incurred employee-related costs, asset impairment charges and exit
costs related to the termination of contracts and lease agreements.
Charges of $4.0 million related to the write-down of impaired inventory
associated with the merger transaction with Owen Healthcare, Inc. ("Owen") were
recorded during the fiscal year ended June 30, 1999. Also, during fiscal 1999,
the Company recorded $1.1 million related to severance costs for a restructuring
associated with the change in management that resulted from the merger
transaction with Owen. Partially offsetting the total merger-related charges for
fiscal 1999 was a credit recorded to adjust the estimated transaction and
termination costs previously recorded in connection with the canceled merger
transaction with Bergen Brunswig Corporation ("Bergen") (see Note 15). The
actual billings for services provided by third parties engaged by the Company
were less than the estimate, resulting in a reduction of the merger-related
costs.
Other Special Items. During fiscal 1999, Bindley recorded a special charge
of $18.8 million ($14.0 million net of tax), of which $11.0 million related to a
non-cash charge for the acceleration of the amortization of compensation related
to restricted stock grants in connection with the spin-off of Priority (See Note
1). Approximately $7.0 million related to write-off of goodwill from an
acquisition prior to 1996 and the remaining $0.8 million represented a legal
settlement.
During fiscal 1998, the Company recorded a special charge of $8.6 million
($5.2 million net of tax) related to the rationalization of its pharmaceutical
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs, including approximately $2.0 million
incurred in connection with the final settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
Pro Forma Impact. Since April 1998, ALP had been organized as an
S-Corporation for tax purposes. Accordingly, ALP was not subject to federal
income tax from April 1998 up to the date of the merger transaction. For the
fiscal years ended 1999 and 1998, net earnings would have been reduced by $9.3
million and $4.6 million, respectively, if ALP had been subject to federal
income taxes.
In fiscal 2000, the net effect of various merger-related charges reduced
reported net earnings by $49.8 million to $717.8 million and reduced reported
diluted earnings per Common Share by $0.11 per share to $1.60 per share. The net
of tax effect of the various merger-related costs recorded and pro forma
adjustments related to ALP taxes during fiscal 1999 was to reduce reported net
earnings by $122.3 million to $499.3 million and to reduce reported diluted
earnings per Common Share by $0.27 per share to $1.12 per share. The effect of
various merger-related charges and other special items recorded and pro forma
adjustments related to ALP taxes during fiscal 1998 was to reduce reported net
earnings by $19.5 million to $474.3 million and to reduce reported diluted
earnings per Common Share by $0.04 per share to $1.07 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.
22
23
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LEASES
SALES-TYPE LEASES. The Company's sales-type leases are for terms generally
ranging up to five years. Lease receivables are generally collateralized by the
underlying equipment. The components of the Company's net investment in
sales-type leases are as follows (in millions):
June 30, June 30,
2000 1999
------------- ------------
Future minimum lease payments receivable $ 890.3 $ 717.7
Unguaranteed residual values 11.1 1.0
Unearned income (120.1) (100.1)
Allowance for uncollectible minimum lease payments
receivable (15.0) (11.8)
------------ ------------
Net investment in sales-type leases 766.3 606.8
Less: current portion 187.7 152.5
------------ ------------
Net investment in sales-type leases, less current portion $ 578.6 $ 454.3
============ ============
Future minimum lease payments to be received pursuant to sales-type leases
during the next five fiscal years and thereafter are: 2001 - $219.9 million;
2002 - $214.4 million; 2003 - $200.6 million; 2004 - $157.9 million; 2005 -
$85.6 million and 2006 and thereafter - $11.9 million.
LEASE RELATED FINANCING ARRANGEMENTS. Pyxis has previously financed its working
capital needs through the sale of certain lease receivables to a non-bank
financing company. As of June 30, 2000, $22.5 million of lease receivables were
owned by the financing company. The agreement with the financing company was
amended to terminate Pyxis' obligation to sell lease receivables to the
financing company. Due to Pyxis customers upgrading the Pyxis machines or
expanding the number of units being leased under the original lease agreements
that have been sold to the financing company, Pyxis has been converting the
original lease agreements with customers to updated lease agreements. Pyxis has
been maintaining these revised leases and not selling them to the financing
company to replace the original lease receivables. As a result, Pyxis entered
into an agreement with the financing company to pay the financing company the
remaining portion of the original lease receivables outstanding at the time of
revision over the original terms. The future minimum payments for these notes at
June 30, 2000 are: fiscal 2001 - $36.2 million; fiscal 2002 - $20.1 million and
fiscal 2003 - $5.4 million, which are classified as part of other liabilities.
4. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
NOTES PAYABLE, BANKS. The Company has entered into various unsecured,
uncommitted line-of-credit arrangements that allow for borrowings up to $202.8
million at June 30, 2000, at various money market rates. At June 30, 2000, $64.1
million, at a weighted average interest rate of 6.2%, was outstanding under such
arrangements and $48.1 million, at a weighted average interest rate of 6.0%, was
outstanding at June 30, 1999. The total available but unused lines of credit at
June 30, 2000 was $138.7 million.
SECURITIZED BORROWINGS. Bindley has a receivables securitization facility (the
"Receivables Facility") pursuant to which Bindley sells substantially all of its
receivables arising in connection with the sale of goods or the rendering of
services ("Receivables") to BWFC, a wholly owned special purpose corporation
subsidiary (See Note 1). The Receivables are sold to BWFC on a continuous basis,
and the cash generated by sales of interests in the Receivables or by
collections on the Receivables retained is used by BWFC to, among other things,
purchase additional Receivables originated by Bindley. In connection with the
Receivables Facility, BWFC entered into an agreement to sell, from time to time,
interests in the Receivables ("Receivables Interest") to a third party. Each
Receivables Interest has an associated Discount Rate and Tranche Period
applicable to it, as selected by BWFC. The Discount Rate is variable based upon
corporate prime or LIBOR. At fiscal year end 2000 and 1999, there were $350.0
million and $224.2 million of Receivables Interests outstanding bearing a
Discount Rate of 6.1% and 5.5% per annum, respectively. The maximum amount of
borrowings under this agreement is $350.0 million. Subsequent to fiscal 2000,
this facility has been terminated and all outstanding borrowings have been
repaid.
23
24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM OBLIGATIONS. Long-term obligations consist of the following
(in millions):
June 30, June 30,
2000 1999
------------ ------------
6.0% Notes due 2006 $ 150.0 $ 150.0
6.25% Notes due 2008 150.0 150.0
6.5% Notes due 2004 100.0 100.0
6.75% Notes due 2004 99.7 99.7
7.25% Notes due 1999 -- 30.0
7.3% Notes due 2006 127.9 183.2
7.93% Notes due 2004 25.0 --
7.8% Debentures due 2016 75.7 125.2
7.0% Debentures due 2026 (7 year put option in 2003) 192.0 199.9
Commercial paper 509.2 49.2
Short-term borrowings, reclassified 54.2 35.3
Borrowings under credit agreement; interest averaging
6.8% in 1999 -- 96.9
Other obligations; interest averaging 4.6% in 2000 and
6.7% in 1999, due in varying installments
through 2020 50.1 46.7
------------ ------------
Total 1,533.8 1,266.1
Less: current portion 9.3 41.6
------------ ------------
Long-term obligations, less current portion $ 1,524.5 $ 1,224.5
============ ============
The 6.0%, 6.25% and 6.5% Notes represent unsecured obligations of the
Company, and the 6.75% Notes represent unsecured obligations of Scherer, which
are guaranteed by the Company. The 7.93% and 7.25% Notes represent private
placements of unsecured obligations of Bindley. The 7.3% Notes and the 7.8% and
7.0% Debentures represent unsecured obligations of Allegiance, which are
guaranteed by the Company. These obligations are not redeemable prior to
maturity and are not subject to a sinking fund.
The Company has a commercial paper program, providing on June 30, 2000 for
the issuance of up to $1.0 billion in aggregate maturity value of commercial
paper. The Company had $509.2 million outstanding under this program at June 30,
2000 with a market interest rate based upon LIBOR. The Company also maintains
other short-term credit facilities that allow for borrowings up to $250.0
million. At June 30, 2000 and 1999, $54.2 million and $35.3 million were
outstanding under these uncommitted facilities. The effective interest rate as
of June 30, 2000 and 1999 was 6.3% and 6.0%, respectively. The Company also has
an unsecured bank credit facility, which provides for up to an aggregate of $1.5
billion in borrowings of which $750 million expires on March 28, 2002 and $750
million expires on March 31, 2004. At expiration, these facilities can be
extended upon mutual consent of the Company and the lending institutions. This
credit facility exists largely to support issuances of commercial paper as well
as other short-term borrowings and remained unused at June 30, 2000. At June 30,
2000 and 1999, the commercial paper and other short-term borrowings totaling
$563.4 million and $84.5 million, respectively, were reclassified as long-term,
reflecting the Company's intent and ability, through the existence of the unused
credit facility, to refinance these borrowings. Subsequent to June 30, 2000, the
Company increased the capacity under its commercial paper program from $1.0
billion to $1.5 billion in aggregate maturity value.
During fiscal 1999, the Company issued $150 million of 6.25% Notes due
2008, the proceeds of which were used for working capital needs due to growth in
the Company's business. At June 30, 2000, the Company had the capacity to issue
$250 million of additional debt securities pursuant to a shelf registration
statement filed with the Securities and Exchange Commission.
During fiscal 1998, holders of $65.6 million convertible subordinated
debentures, originally issued by Bindley, converted the notes into the
equivalent of approximately 2.2 million Common Shares. If the previously
mentioned conversion had occurred at the beginning of all periods presented, the
changes in diluted earnings per share would not have been material.
24
25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $40.9 million at
June 30, 2000. Maturities of long-term obligations for future fiscal years are:
2001 - $9.3 million; 2002 - $569.9 million; 2003 - $4.1 million; 2004 - $227.4
million; 2005 - $2.9 million and 2006 and thereafter - $720.2 million.
Subsequent to June 30, 2000 the Company entered into an agreement to sell
trade receivables to a special purpose accounts receivable and financing entity
("SPE"), which is exclusively engaged in purchasing trade receivables from, and
making loans to, the Company. The SPE, which is consolidated by the Company,
issued $400 million in preferred variable debt securities to parties not
affiliated with the Company. Those preferred debt securities must be retired or
redeemed before the Company can have access to the SPE's receivables.
In addition subsequent to June 30, 2000, the Company issued $500 million of
6.75% notes due 2011, the proceeds of which were used primarily for early
redemption of Bindley debt. After such issuance, the Company has the capacity to
issue approximately $450 million of additional equity or debt securities
pursuant to a shelf registration statement filed with the Securities and
Exchange Commission.
5. FINANCIAL INSTRUMENTS
INTEREST RATE MANAGEMENT. The Company has entered into an interest rate swap
agreement with a notional amount of $20.0 million that matures in 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.
Subsequent to June 30, 2000, the Company entered into several interest
rate swap agreements with a total notional amount of $500 million that mature
through February 2011 to hedge interest rate exposures related to the $400
million in preferred debt securities and to hedge the change in fair value of
the 6.75% Notes issued subsequent to June 30, 2000.
FOREIGN EXCHANGE RISK MANAGEMENT. In the normal course of business, operations
of the Company are exposed to fluctuations in foreign exchange rates. In order
to reduce the uncertainty of the impact of foreign exchange rate movements on
operations, the Company periodically enters into foreign currency options and
forward contracts (principally European currencies and Japanese yen) to hedge
certain anticipated sales and firm commitments denominated in foreign
currencies. These option and forward contracts typically mature within one year.
The Company's forward contracts do not subject it to material risks due to the
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged. The
risk of loss associated with the foreign currency option contracts is limited to
the premium paid for the option contracts. Gains and losses on the forward and
option contracts are recognized concurrently with the gains and losses from the
underlying transactions. Premiums paid on the option contract are amortized in
other income/expense over the life of the underlying hedged transactions.
The Company also uses commodity contracts to hedge raw material costs
expected to be denominated in foreign currency. These contracts generally cover
a one-year period and all gains and losses are deferred and recognized in cost
of goods sold with the underlying product costs. The contracts qualify as hedges
for accounting purposes in accordance with the criteria established in SFAS No.
80 "Accounting for Futures Contracts." Cash flows resulting from these commodity
contracts are classified in the same category as the items being hedged.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and
equivalents, trade receivables, accounts payable, notes payable-banks,
securitized borrowings and other accrued liabilities at June 30, 2000 and 1999,
approximate their fair value because of the short-term maturities of these
items.
The estimated fair value of the Company's long-term obligations was
$1,494.6 million and $1,263.9 million as compared to the carrying amounts of
$1,533.8 million and $1,266.1 million at June 30, 2000 and 1999, respectively.
The fair value of the Company's long-term obligations is estimated based on
either the quoted market prices for the same or similar issues and the current
interest rates offered for debt of the same remaining maturities or estimated
discounted cash flows.
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the fair value gain/(loss) of the Company's
derivative instruments, based upon the estimated amount that the Company would
receive (or pay) to terminate the contracts as of June 30. The fair values are
based on quoted market prices for the same or similar instruments.
(in millions)
2000 1999
-------------------------- --------------------------
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
------------ ------------- ---------- ------------
Foreign currency forward contracts $ 17.2 $ 0.1 $ - $ -
Commodity contracts $ 3.9 $ 0.1 $ 9.6 $ (0.3)
Interest Rate Swaps $ 20.0 $ - $ 20.0 $ (0.7)
6. INCOME TAXES
Consolidated earnings before income taxes (in millions)
Fiscal Year Ended June 30,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
U.S. Based Operations $ 1,016.3 $ 747.3 $ 625.2
Non-U.S. Based Operations 125.5 74.4 109.1
------------- ------------ ------------
$ 1,141.8 $ 821.7 $ 734.3
============= ============ ============
The provision for income taxes consists of the following (in millions):
Fiscal Year Ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ 242.0 $ 143.0 $ 130.9
State 25.2 29.4 25.8
Foreign 28.3 21.7 15.8
-------------- -------------- --------------
Total $ 295.5 $ 194.1 $ 172.5
Deferred 128.5 128.3 87.5
-------------- -------------- --------------
Total provision $ 424.0 $ 322.4 $ 260.0
============== ============== ==============
A reconciliation of the provision based on the Federal statutory income tax rate
to the Company's effective income tax rate is as follows:
Fiscal Year Ended June 30,
--------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Provision at Federal
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 3.1 4.0 4.1
Foreign tax rates (2.1) (2.9) (4.5)
Nondeductible expenses 1.3 4.6 1.4
Other (0.2) (1.5) (0.6)
--------------- --------------- ---------------
Effective income tax rate 37.1% 39.2% 35.4%
=============== =============== ===============
Provision has not been made for U.S. or additional foreign taxes on $303.2
million of undistributed earnings of foreign subsidiaries because those earnings
are considered permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
26
27
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,
2000 1999
--------------- ---------------
Deferred income tax assets:
Receivable basis difference $ 45.1 $ 34.4
Accrued liabilities 39.0 103.4
Net operating loss carryforwards 8.6 9.5
Foreign tax and other credit carryforwards 10.5 16.5
Other 9.5 38.5
--------------- ---------------
Total deferred income tax assets $ 112.7 $ 202.3
Valuation allowance for deferred income tax assets (2.7) (7.0)
--------------- ---------------
Net deferred income tax assets $ 110.0 $ 195.3
--------------- ---------------
Deferred income tax liabilities:
Inventory basis differences (175.1) (132.3)
Property-related (207.1) (224.8)
Revenues on lease contracts (178.7) (165.9)
Other (13.9) 2.7
--------------- ---------------
Total deferred income tax liabilities $ (574.8) $ (520.3)
--------------- ---------------
Net deferred income tax liabilities $ (464.8) $ (325.0)
=============== ===============
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
2000 1999
--------------- ---------------
Other current assets/(liabilities) $ (106.7) $ 99.2
Deferred income taxes and other liabilities (358.1) (424.2)
--------------- ---------------
Net deferred income tax liabilities $ (464.8) $ (325.0)
=============== ===============
The Company had Federal net operating loss carryforwards of $3.4 million
and state net operating loss carryforwards of $166.9 million at June 30, 2000. A
valuation allowance of $2.7 million at June 30, 2000 has been provided for the
state net operating loss, as utilization of such carryforwards within the
applicable statutory periods is uncertain. The Company's Federal net operating
loss carryforwards and a portion of the state net operating loss carryforwards
are subject to a change in ownership limitation calculation under Internal
Revenue Code Section 382. After application of the valuation allowance described
above, the Company anticipates no limitations will apply with respect to
utilization of these assets. The Federal net operating loss carryforward begins
expiring in 2005 and the state net operating loss carryforward expires through
2020. Expiring state net operating loss carryforwards and the required valuation
allowances have been adjusted annually. At June 30, 2000, the Company did not
have any foreign tax credit carryforwards.
Under a tax-sharing agreement with Baxter International, Inc. ("Baxter"),
Allegiance will pay for increases and be reimbursed for decreases to the net
deferred tax assets transferred on the date of the Baxter spin-off of
Allegiance. Such increases or decreases may result from audit adjustments to
Baxter's prior period tax returns.
7. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including defined
benefit and defined contribution plans. Substantially all of the Company's
domestic non-union employees are eligible to be enrolled in Company-sponsored
contributory profit sharing and retirement savings plans, which include features
under Section 401(k) of the InternalRevenue 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.
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Qualified domestic union employees are covered by multi-employer defined
benefit pension plans under the provisions of collective bargaining agreements.
Benefits under these plans are generally based on the employee's years of
service and average compensation at retirement.
The total expense for employee retirement benefit plans (excluding defined
benefit plans (see below)) was as follows (in millions):
Fiscal Year Ended June 30,
-------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Defined contribution plans $ 42.8 $ 46.1 $ 39.5
Multi-employer plans 0.4 0.5 0.5
--------------- --------------- ---------------
Total $ 43.2 $ 46.6 $ 40.0
=============== =============== ===============
DEFINED BENEFIT PLANS. The Company has several defined benefit plans covering
substantially all salaried and hourly Scherer employees. The Company's domestic
defined benefit plans provide defined benefits based on years of service and
level of compensation. Foreign subsidiaries provide for pension benefits in
accordance with local customs or law. The Company funds its pension plans at
amounts required by the applicable regulations.
The following tables provide a reconciliation of the change in benefit
obligation, the change in plan assets and the net amount recognized in the
consolidated balance sheets (based on a measurement date of March 31, in
millions):
June 30,
-----------------------------
2000 1999
------------ ------------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 98.7 $ 86.7
Service cost 4.6 6.5
Interest cost 5.7 6.7
Plan participant contributions 0.5 0.7
Amendments -- 0.2
Actuarial loss 6.1 4.6
Benefits paid (2.8) (3.7)
Translation and other adjustments (12.5) (3.0)
Curtailments (0.3) --
------------ ------------
Benefit obligation at end of year $ 100.0 $ 98.7
------------ ------------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 55.7 $ 42.2
Actual return on plan assets 6.3 12.2
Employer contributions 3.5 4.9
Plan participant contributions 0.5 0.7
Benefits paid (2.3) (2.6)
Translation and other adjustment 1.2 (1.7)
------------ ------------
Fair value of plan assets
at end of year $ 64.9 $ 55.7
============ ============
28
29
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
----------------------------------
2000 1999
-------------- ---------------
Funded status $ (35.1) $ (43.0)
Unrecognized net actuarial loss 8.0 7.5
Unrecognized net transition
asset (0.4) (2.0)
Unrecognized prior service cost 0.2 0.2
Translation and other adjustment 0.5 --
------------ ------------
Net amount recognized $ (26.8) $ (37.3)
============ ============
Amounts recognized in the
Consolidated Balance Sheets:
Prepaid benefit cost $ -- $ 1.6
Accrued benefit liability (26.8) (38.9)
------------ ------------
Net amount recognized $ (26.8) $ (37.3)
============ ============
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $98.7 million, $94.9 million, and $63.5 million,
respectively, as of June 30, 2000 and $89.4 million, $85.1 million and $47.8
million, respectively, as of June 30, 1999.
Components of the Company's net periodic benefit costs are as follows (in
millions):
For the Fiscal Year Ended June 30,
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Components of net periodic
benefit cost:
Service cost $ 4.6 $ 6.5 $ 4.9
Interest cost 5.7 6.7 5.4
Expected return on plan assets (6.2) (6.9) (5.1)
Amortization of actuarial loss 0.1 1.9 1.0
Amortization of transition obligation 1.9 -- 0.1
Amortization of prior service cost -- 0.3 --
------------ ------------ ------------
Net amount recognized $ 6.1 $ 8.5 $ 6.3
============ ============ ============
For fiscal 2000 and 1999, the weighted-average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.5% and 6.4%, expected return on plan assets
of 7.4% and 6.2% and rate of compensation increase of 4.0% and 3.7%,
respectively.
8. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms in excess of one year at June 30, 2000 are:
fiscal 2001 - $50.0 million; fiscal 2002 - $36.9 million; fiscal 2003 - $29.7
million; fiscal 2004 - $24.9 million; fiscal 2005 - $19.7 million and fiscal
2006 and thereafter - $36.2 million.
In addition, the Company has entered into operating lease agreements with
several banks for the construction of various new facilities. The initial terms
of the lease agreements extend through May 2005, with optional five-year renewal
periods. In the event of termination, the Company is required to either purchase
the facility or vacate the property and make reimbursement for a portion of
unrecovered property cost. The instruments provide for maximum fundings of
$406.2 million, which is the total estimated cost of the construction projects.
As of June 30, 2000, the amount expended was $279.9 million. As of June 30, the
Company's minimum annual lease payments under the agreements are approximately
29
30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$18.8 million. Neither the facilities' cost or the minimum annual lease payments
are included in the future minimum rental payments disclosed above.
Rental expense relating to operating leases was approximately $76.1
million, $71.9 million, and $66.9 million in fiscal 2000, 1999 and 1998,
respectively. Sublease rental income was not material for any period presented
herein.
As of June 30, 2000, the Company has capital expenditure commitments
related primarily to plant expansions and facility acquisitions of approximately
$21.8 million.
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, agreed to indemnify certain claims related to
the Allegiance Business from Baxter Healthcare Corporation ("BHC"), including
certain claims of alleged personal injuries as a result of exposure to natural
rubber latex gloves. Allegiance will be defending and indemnifying BHC, as
contemplated by the agreements between Baxter and Allegiance, for all expenses
and potential liabilities associated with claims pertaining to the litigation
assumed by Allegiance. As of March 31, 2001, there were approximately 600
lawsuits involving BHC and/or Allegiance containing allegations of sensitization
to natural rubber latex products. Some of the cases are now proceeding to trial.
Because of the increase in claims filed and the ongoing defense costs that will
be incurred, the Company believes it is probable that it will continue to incur
significant expenses related to the defense of cases involving natural rubber
latex gloves. At this time, the Company is unable to evaluate the extent of any
potential liability, and unable to estimate any potential loss. AEIA, one of the
insurers for the latex glove litigation, has advised the Company of its intent
to resolve through arbitration the extent of its obligation to reimburse the
Company for certain defense costs and loss expenses incurred in connection with
the litigation. The Company believes a substantial portion of any liability will
be covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of certain of
its subsidiaries as a potentially responsible party for environmental clean-up
costs. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the Company intends to vigorously defend
itself and currently does not believe that the outcome of any pending litigation
will have a material adverse effect on the Company's consolidated financial
statements.
9. SHAREHOLDERS' EQUITY
At June 30, 2000 and 1999, the Company's authorized capital shares
consisted of (a) 500,000,000 Class A common shares, without par value; (b)
5,000,000 Class B common shares, without par value; and (c) 500,000 non-voting
preferred shares without par value. The Class A common shares and Class B common
shares are collectively referred to as Common Shares. Holders of Class A and
Class B common shares are entitled to share equally in any dividends declared by
the Company's Board of Directors and to participate equally in all distributions
of assets upon liquidation. Generally, the holders of Class A common shares are
entitled to one vote per share and the holders of Class B common shares are
entitled to one-fifth of one vote per share on proposals presented to
shareholders for vote. Under certain circumstances, the holders of Class B
common shares are entitled to vote as a separate class. Only Class A common
shares were outstanding as of June 30, 2000 and 1999.
On November 1, 2000 , the shareholders of the Company approved, and the
Company's articles of incorporation were amended to effect, an increase in the
number of authorized Class A common shares, without par value from 500 million
to 750 million.
On March 16, 2000, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $750 million of Common
Shares. Through June 30, 2000, approximately 7 million Common Shares, having an
aggregate cost of $302.8, had been repurchased under an accelerated share
repurchase program and placed into treasury shares. As of June 30 2000 all
shares repurchased under the program were subject to a future contingent
purchase price adjustment to be settled based upon the difference in the market
price of the Company's common stock at the time of settlement compared to the
market price as of March 16, 2000. Subsequent to June 30, 2000, the transaction
was settled for an additional $137.4 million, which was charged to common shares
in treasury. The Company's Board of Directors rescinded the remainder of this
repurchase program in November 2000.
30
31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to June 30, 2000, the Company issued 750,000 Common Shares for
which it received aggregate proceeds of $47.7 million, which were used for
general corporate purposes. The Common Shares were issued in order for the
Company to be able to satisfy all of the conditions to consummation of the
Bindley Merger (see Note 2).
10. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company invests cash in deposits with major banks throughout the world
and in high quality short-term liquid instruments. Such investments are made
only in instruments issued or enhanced by high quality institutions. These
investments mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be affected
by changes in reimbursement and other economic pressures impacting the acute
care portion of the healthcare industry. However, such credit risk is limited
due to supporting collateral and the diversity of the customer base, including
its wide geographic dispersion. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains reserves for credit losses.
Such losses historically have been within the Company's expectations.
During fiscal 2000, 1999 and 1998, the Company's two largest customers
individually accounted for 10% and 11% of operating revenue, respectively. These
two customers are serviced primarily through the Pharmaceutical Distribution and
Provider Services and Medical-Surgical Products and Services segments. During
fiscal 2000, three customers individually accounted for 42%, 30%, and 16% of
bulk deliveries, respectively. These three customers accounted for 19%, 29% and
18% of bulk deliveries during fiscal 1999, respectively. During fiscal 1998,
four customers accounted for 24%, 22%, 18%, and 15% of bulk deliveries,
respectively.
11. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. Options granted generally vest
over two or three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
Company's net income and diluted earnings per Common Share would have been
reduced by $24.7 million and $0.06 per share, respectively, for fiscal 2000,
$86.4 million and $0.19 per share, respectively, for fiscal 1999, and $36.1
million and $0.08 per share, respectively, for fiscal 1998. During fiscal 1999,
stock option grants under the previous Allegiance and Scherer plans vested
immediately on the merger date. These accelerated grants increased the fiscal
1999 pro forma effect on net income and diluted earnings per Common Share by
$32.9 million and by $0.07 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.
31
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1997 through June 30, 2000, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per share amounts):
Options Weighted Average
Outstanding Exercise Price
-------------------------------------------------------------------------
Balance at June 30, 1997 33.9 $ 12.85
Granted 10.4 28.93
Exercised (6.6) 9.98
Canceled (1.4) 14.34
Change in fiscal year (1.0) 18.84
----------------------------------------------------------------------
Balance at June 30, 1998 35.3 16.07
Granted 5.1 46.33
Exercised (6.6) 11.67
Canceled (1.1) 28.85
Spin-off of Priority 2.1 -
----------------------------------------------------------------------
Balance at June 30, 1999 34.8 21.37
Granted 10.4 31.24
Exercised (6.5) 14.49
Canceled (1.5) 36.30
Other 0.2 3.55
----------------------------------------------------------------------
Balance at June 30, 2000 37.4 $ 24.53
======================================================================
Giving retroactive effect to conversion of stock options related to
mergers and stock splits, the weighted average fair value of options granted
during fiscal 2000, 1999, and 1998 was $11.68, $15.03, and $10.03, 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,
----------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Risk-free interest rate 6.25% 5.72% 5.53%
Expected life 4 years 4 years 3 years
Expected volatility 37% 30% 27%
Dividend yield 0.18% 0.18% 0.16%
Information relative to stock options outstanding as of June 30, 2000:
Outstanding Exercisable
----------------------------------------------------- -------------------------------
Weighted
average
remaining Weighted Weighted
Range of exercise Options contractual average Options average
prices (in millions) life in years exercise price (in millions) exercise price
------------------- ----------------- ----------------- ----------------- -------------- ----------------
$ 0.03 - $11.43 7.7 5.3 $9.03 8.1 $8.83
$11.48 - $25.19 8.0 5.9 16.35 7.2 16.09
$25.50 - $27.98 5.3 7.3 26.35 4.7 26.24
$28.28 - $31.16 9.6 9.3 31.10 0.2 30.01
$31.58 - $53.04 6.8 8.0 43.03 0.1 40.23
----------------- ----------------- ----------------- -------------- ----------------
$ 0.03 - $53.04 37.4 7.2 $24.53 20.3 $15.80
================= ================= ================= ============== ================
As of June 30, 2000, there remained approximately 7.2 million additional
shares available to be issued pursuant to the Plans.
32
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying consolidated
balance sheets. The compensation awards are amortized to expense over the period
in which participants perform services, generally one to seven years. As of June
30, 2000, approximately 0.5 million shares remained restricted and subject to
forfeiture.
The Company has an employee stock purchase plan under which the sale of 7.5
million of Cardinal's Common Shares have been authorized. The purchase price is
determined by the lower of 85 percent of the closing market price on the date of
subscription or 85 percent of the closing market price on the last day of the
offering period. At June 30, 2000, subscriptions of 0.5 million were
outstanding, however no shares had been issued to employees under the plan.
12. SEGMENT INFORMATION
The Company's operations are principally managed on a products and services
basis and are comprised of four reportable business segments: Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products and Services,
Pharmaceutical Technologies and Services and Automation and Information
Services.
In the prior year, the Company was comprised of three reportable segments:
Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical
Products. In September 2000, the Company expanded its management reporting
structure from three to four reportable segments by separating the
Pharmaceutical Services segment primarily into two segments: Pharmaceutical
Technologies and Services and Automation and Information Services. Prior period
amounts have been restated for this change.
The Pharmaceutical Distribution and Provider Services segment involves the
distribution of a broad line of pharmaceuticals, healthcare and beautycare
products, radiopharmaceuticals, therapeutic plasma and other specialty
pharmaceutical products and other items typically sold by hospitals, retail drug
stores and other healthcare providers. In addition, this segment provides
services to the healthcare industry through integrated pharmacy management,
temporary pharmacy staffing, as well as franchising of apothecary-style retail
pharmacies.
The Medical-Surgical Products and Services segment involves the manufacture
of medical, surgical and laboratory products and the distribution of these
products to hospitals, physician offices, surgery centers and other healthcare
providers.
The Pharmaceutical Technologies and Services segment provides services to
the healthcare manufacturing industry through the design of unique drug delivery
systems, liquid fill contract manufacturing, comprehensive packaging services,
and reimbursement services.
The Automation and Information Services segment provides services to
hospitals and other healthcare providers through pharmacy automation equipment
and clinical information system services.
The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Information
about interest income and expense, and income taxes is not provided on a segment
level. In addition, special charges are not allocated to the segments. The
accounting policies of the segments are the same as described in the summary of
significant accounting policies.
33
34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables include revenue and operating earnings for the fiscal
years ended June 30, 2000, 1999 and 1998 for each segment and reconciling items
necessary to total to amounts reported in the consolidated financial statements:
(in millions) Revenue
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Operating revenue:
Pharmaceutical Distribution and Provider Services $ 23,849.6 $ 19,606.2 $ 15,228.8
Medical-Surgical Products and Services 4,960.2 4,726.3 4,456.1
Pharmaceutical Technologies and Services 1,079.8 938.0 889.0
Automation and Information Services 402.4 411.6 270.6
Other (34.2) 0.4 0.3
--------------------------------------------------
Total operating revenue $ 30,257.8 $ 25,682.5 $ 20,844.8
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 8,092.1 7,050.4 7,541.1
--------------------------------------------------
Total revenue $ 38,349.9 $ 32,732.9 $ 28,385.9
==================================================
Operating Earnings
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 674.6 $ 540.7 $ 446.7
Medical-Surgical Products and Services 368.0 303.7 247.0
Pharmaceutical Technologies and Services 200.6 160.4 160.8
Automation and Information Services 138.0 141.0 79.5
Corporate (1) (100.7) (191.2) (76.2)
--------------------------------------------------
Total operating earnings $ 1,280.5 $ 954.6 $ 857.8
==================================================
The following tables include depreciation and amortization expense as
well as capital expenditures for the fiscal years ended June 30, 2000, 1999 and
1998 and assets as of June 30, 2000, 1999 and 1998 for each segment and
reconciling items necessary to total to amounts reported in the consolidated
financial statements:
Depreciation and Amortization Expense
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 53.0 $ 47.9 $ 40.0
Medical-Surgical Products and Services 120.5 119.9 122.8
Pharmaceutical Technologies and Services 48.9 57.6 42.5
Automation and Information Services 15.8 9.1 7.4
Corporate (1) 18.8 13.7 13.1
--------------------------------------------------
Total depreciation and amortization expense $ 257.0 $ 248.2 $ 225.8
==================================================
Capital Expenditures
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 99.2 $ 110.2 $ 92.7
Medical-Surgical Products and Services 109.8 108.3 80.2
Pharmaceutical Technologies and Services 105.1 126.2 127.3
Automation and Information Services 17.0 14.8 8.7
--------------------------------------------------
Total capital expenditures $ 331.1 $ 359.5 $ 308.9
==================================================
34
35
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 6,273.3 $ 4,735.8 $ 4,199.9
Medical-Surgical Products and Services 2,899.5 2,823.7 2,731.0
Pharmaceutical Technologies and Services 1,291.7 1,230.4 1,101.5
Automation and Information Services 1,044.5 827.3 444.3
Corporate (2) 515.1 65.5 400.1
--------------------------------------------------
Total assets $ 12,024.1 $ 9,682.7 $ 8,876.8
==================================================
(1) Corporate-operating earnings primarily consist of special charges of $64.7
million, $165.4 million, and $57.8 million for the fiscal years ended June
30, 2000, 1999, and 1998, respectively, and unallocated corporate
depreciation and amortization and administrative expenses.
(2) Corporate-assets include primarily corporate cash and cash equivalents,
corporate property, plant and equipment, net, unallocated deferred taxes
and the elimination of investment in subsidiaries.
The following table presents revenue and long-lived assets by geographic area
(in millions):
Revenue Long-Lived Assets
------------------------------------------------ -------------------------------
For The Fiscal Year Ended June 30, As of June 30,
------------------------------------------------ -------------------------------
2000 1999 1998 2000 1999
------------------------------------------------ -------------------------------
United States $ 37,368.4 $ 31,820.9 $ 27,646.2 $ 1,214.3 $ 1,194.5
International 981.5 912.0 739.7 514.0 459.8
----------------------------------------------- -------------------------------
Total $ 38,349.9 $ 32,732.9 $ 28,385.9 $ 1,728.3 $ 1,654.3
=============================================== ===============================
Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 2000 and 1999 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Fiscal 2000
Revenue:
Operating revenue $ 7,045.9 $ 7,460.3 $ 7,665.9 $ 8,085.7
Bulk deliveries to customer warehouses 1,712.8 1,984.4 1,945.6 2,449.4
------------ ------------ ------------ ------------
Total revenue $ 8,758.6 $ 9,444.7 $ 9,611.5 $ 10,535.1
Gross margin $ 702.0 $ 770.6 $ 791.5 $ 832.1
Selling, general and administrative
expenses $ 418.6 $ 444.5 $ 425.9 $ 462.0
Net Earnings $ 131.0 $ 182.4 $ 198.4 $ 206.0
Net earnings per Common Share:
Basic $ 0.30 $ 0.41 $ 0.45 $ 0.47
Diluted $ 0.29 $ 0.41 $ 0.44 $ 0.46
-----------------------------------------------------------------------------------------------------------------
35
36
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Fiscal 1999
Revenue:
Operating revenue $ 5,914.8 $ 6,265.8 $ 6,707.8 $ 6,794.1
Bulk deliveries to customer warehouses 1,846.0 1,871.6 1,559.6 1,773.2
------------ ------------ ------------ ------------
Total revenue $ 7,760.8 $ 8,137.4 $ 8,267.4 $ 8,567.3
Gross margin $ 634.6 $ 701.8 $ 725.9 $ 750.9
Selling, general and administrative
expenses $ 400.5 $ 430.2 $ 425.8 $ 440.7
Net Earnings $ 102.3 $ 149.6 $ 97.2 $ 150.2
Net earnings per Common Share:
Basic $ 0.24 $ 0.34 $ 0.22 $ 0.34
Diluted $ 0.23 $ 0.34 $ 0.22 $ 0.33
-------------------------------------------------------------------------------------------------------------------
As more fully discussed in Note 2, merger-related costs and other special
charges were recorded in various quarters in fiscal 2000 and 1999. The following
table summarizes the impact of such costs, as well as the impact of the pro
forma adjustments related to ALP taxes on net earnings and diluted earnings per
share in the quarters in which they were recorded (in millions, except per share
amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Fiscal 2000
Net earnings $ (29.7) $ (3.4) $ (9.1) $ (7.6)
Diluted net earnings per Common Share $ (0.07) $ -- $ (0.02) $ (0.02)
-------------------------------------------------------------------------------------------------------------------
Fiscal 1999
Net earnings $ (26.3) $ 0.9 $ (71.5) $ (25.4)
Diluted net earnings per Common Share $ (0.06) $ 0.01 $ (0.16) $ (0.06)
-------------------------------------------------------------------------------------------------------------------
The above selected quarterly financial data for fiscal 2000 and 1999 differs
from amounts previously reported by the Company due to the Bindley merger
transaction (See Note 2). Fiscal 2000 and 1999 amounts reported by the Company
prior to the merger transaction with Bindley are presented below and differ from
the above selected quarterly financial data solely due to the addition of
Bindley amounts pursuant to the pooling-of-interests accounting method for
business combinations (in millions, except per share amounts).
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Fiscal 2000
Revenue:
Operating revenue $ 5,829.3 $ 6,254.3 $ 6,400.6 $ 6,762.7
Bulk deliveries to customer warehouses 954.4 1,145.2 1,072.5 1,451.6
------------ ------------ ------------ ------------
Total revenue $ 6,783.7 $ 7,399.5 $ 7,473.1 $ 8,214.3
Gross margin $ 654.8 $ 721.9 $ 739.5 $ 770.9
Selling, general and administrative
expenses $ 391.3 $ 415.3 $ 394.7 $ 426.1
Net earnings $ 122.0 $ 173.5 $ 189.5 $ 194.7
Net earnings per Common Share:
Basic $ 0.29 $ 0.41 $ 0.45 $ 0.47
Diluted $ 0.29 $ 0.41 $ 0.45 $ 0.46
-------------------------------------------------------------------------------------------------------------------
36
37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Fiscal 1999
Revenue:
Operating revenue $ 5,017.4 $ 5,289.5 $ 5,579.5 $ 5,672.1
Bulk deliveries to customer warehouses 781.7 999.8 874.7 896.8
------------ ------------ ------------ ------------
Total revenue $ 5,799.1 $ 6,289.3 $ 6,454.2 $ 6,568.9
Gross margin $ 591.4 $ 654.6 $ 677.7 $ 699.3
Selling, general and administrative
expenses $ 373.9 $ 401.4 $ 397.1 $ 408.5
Net earnings $ 94.7 $ 141.5 $ 89.2 $ 155.6
Net earnings per Common Share:
Basic $ 0.23 $ 0.34 $ 0.21 $ 0.37
Diluted $ 0.22 $ 0.33 $ 0.21 $ 0.36
---------------------------------------------------------------------------------------------------------------
14. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. As amended by Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
the provisions of SFAS 133 will require adoption no later than the beginning of
the Company's fiscal year ending June 30, 2001. Adoption of SFAS 133 in July
2000, as amended by SFAS 138, did not have a material impact on the Company's
consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" which requires adoption
during the fourth quarter of fiscal 2001. The Company does not anticipate that
the adoption of SAB 101 will have a material impact on the Company's
consolidated financial statements.
15. TERMINATED MERGER AGREEMENT
On August 24, 1997, the Company and Bergen announced that they had entered
into a definitive merger agreement (as subsequently amended by the parties on
March 16, 1998), pursuant to which a wholly owned subsidiary of the Company
would be merged with and into Bergen (the "Bergen Merger Agreement"). On March
9, 1998, the FTC filed a complaint in the United States District Court for the
District of Columbia seeking a preliminary injunction to halt the proposed
merger. On July 31, 1998, the District Court granted the FTC's request for an
injunction to halt the proposed merger. On August 7, 1998, the Company and
Bergen jointly terminated the Bergen Merger Agreement. In accordance with the
terms of the Bergen Merger Agreement, the Company was required to reimburse
Bergen for $7.0 million of transaction costs upon termination of the Bergen
Merger Agreement. Additionally, the termination of the Bergen Merger Agreement
caused the costs incurred by the Company (that would not have been deductible
had the merger been consummated) to become tax deductible, resulting in a tax
benefit of $12.2 million. The obligation to reimburse Bergen and the additional
tax benefit are reflected in the consolidated financial statements in the fourth
quarter of the fiscal year ended June 30, 1998.
37
38
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS
On August 16, 2000, the Company completed the purchase of Bergen Brunswig
Medical Corporation for approximately $176.1 million, subject to post-closing
adjustments. On July 26, 2000, the Company completed the purchase of a
manufacturing facility and the rights to two proprietary, topical drug delivery
technologies from Advanced Polymer Systems, Inc. for $25.0 million at closing
and contingent future payments totaling potentially an additional $26.5 million.
On July 19, 2000, the Company completed the purchase of Rexam Healthcare
Packaging's folding-carton manufacturing operations in Guaynabo, Puerto Rico for
$32.5 million, subject to post-closing adjustments. In addition, the Company
also completed several other acquisitions subsequent to June 30, 2000 for a
total aggregate purchase price of approximately $89.6 million plus approximately
$20.0 million in liabilities assumed. These transactions were accounted for
under the purchase method of accounting for financial reporting purposes.
Prior to the Bindley Merger, Bindley was advised that it was a potential
defendant in a grand jury investigation being conducted by the U.S. Attorney's
office in Las Vegas, Nevada. Bindley understood the focus of the government's
inquiry to be principally on whether pharmaceutical manufacturers had been
defrauded by institutional or closed-door pharmacies which allegedly resold
discount-priced pharmaceuticals at a profit in violation of agreements with
pharmaceutical manufacturers to purchase the product solely for their own use.
On August 29, 2000, Bindley agreed to accept vicarious liability for the acts of
two former vice presidents of a division of Bindley. Both former employees
entered into plea agreements with the government regarding their conduct which
occurred between 1995 and 1997. The government has agreed that all of the
alleged criminal conduct was attributable to these two former employees and that
the employees' improper activities occurred without the knowledge of corporate
officers in Bindley's Indianapolis headquarters. The settlement required
Bindley to plead guilty to one charge of conspiracy to commit interstate
transportation of property obtained by fraud, and to pay a fine of $20 million.
The agreement imposes no probation and the government agreed that no further
criminal charges will be brought against Bindley, including its subsidiaries or
affiliates, or any current or former director, officer, or employee arising out
of any matters associated with the government's investigation. The agreement
specifies that the alleged conduct did not involve harm to public health or
safety; that there were no allegations of fraud against the United States or
federal or state healthcare systems; and, that the offense occurred despite
Bindley's effective program to prevent violations of the law. The government
also confirmed that Bindley committed no violations of the Prescription Drug
Marketing Act, a federal law applying to sales and purchases of pharmaceutical
products. The $20 million fine was paid on August 29, 2000.
38
39
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE AT CHARGED TO CHARGED TO CHANGE BALANCE AT
BEGINNING COSTS AND OTHER IN FISCAL END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) YEAR (3) OF PERIOD
-------------------------------------------- ------------ ------------ ------------- -------------- ----------- -----------
Fiscal Year 2000:
Accounts receivable $ 61.5 $ 33.8 $ 1.9 $ (26.1) $ -- $ 71.1
Finance notes receivable 4.9 0.5 (0.1) (0.7) -- 4.6
Net investment in sales-type leases 11.8 3.2 -- -- -- 15.0
------------ ------------ ------------ ----------- ---------- ----------
$ 78.2 $ 37.5 $ 1.8 $ (26.8) $ -- $ 90.7
============ ============ ============ =========== ========== ==========
Fiscal Year 1999:
Accounts receivable $ 70.4 $ 32.6 $ 1.3 $ (42.8) $ -- $ 61.5
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
------------ ------------ ------------ ----------- ---------- ----------
$ 85.6 $ 33.1 $ 4.0 $ (44.5) $ -- $ 78.2
============ ============ ============ =========== ========== ==========
Fiscal Year 1998:
Accounts receivable $ 67.8 $ 23.2 $ 3.3 $ (23.9) $ -- $ 70.4
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
------------ ------------ ------------ ----------- ---------- ----------
$ 80.7 $ 27.5 $ 3.4 $ (29.6) $ 3.6 $ 85.6
============ ============ ============ =========== ========== ==========
(1) During fiscal 2000, 1999, and 1998 recoveries of amounts provided for or
written off in prior years were $1.5 million, $4.0 million, and $3.4
million, respectively.
(2) Write-off of uncollectible accounts.
(3) Change in fiscal year of acquired subsidiary.
39
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis has been prepared giving retroactive
effect to the pooling-of-interests business combinations with MediQual Systems,
Inc. ("MediQual") on February 18, 1998, R.P. Scherer Corporation ("Scherer") on
August 7, 1998, Allegiance Corporation ("Allegiance") on February 3, 1999,
Pacific Surgical Innovations, Inc. ("PSI") on May 21, 1999, Automatic Liquid
Packaging, Inc. ("ALP") on September 10, 1999, and Bindley Western Industries,
Inc. ("Bindley") on February 14, 2001.
The discussion and analysis presented below should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 8-K. Portions of management's discussion and analysis presented
below include "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "believe", "expect",
"anticipate", "project", and similar expressions, among others, identify
"forward-looking statements", which speak only as of the date the statement was
made. Such forward-looking statements are subject to risks, uncertainties and
other factors, which could cause actual results to materially differ from those
made, projected or implied. The most significant of such risks, uncertainties
and other factors are described in Exhibit 99.01 to this Form 8-K and are
incorporated herein by reference. The Company disclaims any obligation to update
any forward-looking statement.
GENERAL
-------
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services. See Note 12 of "Notes to Consolidated Financial
Statements" for a description of these segments and a discussion of the
Company's change in operating segments.
RESULTS OF OPERATIONS
---------------------
OPERATING REVENUE
Percent of Total
Growth (1) Operating Revenues
Years ended June 30 2000 1999 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 22% 29% 79% 76% 73%
Medical-Surgical Products and Services 5% 6% 16% 18% 22%
Pharmaceutical Technologies and Services 15% 6% 4% 4% 4%
Automation and Information Services (2)% 52% 1% 2% 1%
Total Company 18% 23% 100% 100% 100%
-----------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the respective fiscal year as compared to the
prior fiscal year.
The majority of the Company's overall operating revenue increase of 18%
came from existing customers in the form of increased volume and pharmaceutical
price increases. The remainder of the growth came from the addition of new
customers, some of which was a result of cross-selling opportunities among the
various businesses.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth in 2000 and 1999 was primarily due to strong sales to pharmacy
chain stores and through the Company's specialty distribution businesses. In
addition, several new contracts involving multiple operating segments have
boosted revenues. Offsetting the growth in 2000 was the impact of the pharmacy
management business continuing to exit unprofitable accounts, an initiative that
began in late fiscal 1999.
The increase in the Medical-Surgical Products and Services segment's
operating revenue in 2000 was due to an increase in sales across virtually all
product lines. In addition, revenue growth was further enhanced by an increase
in international demand over fiscal 1999. The increase in operating revenues for
this segment in 1999 was due to strong sales of self-manufactured products and
higher margin distributed products.
The growth in the Pharmaceutical Technologies and Services segment in 2000
and in 1999 was primarily the result of strong sales volume in the
pharmaceutical-packaging and liquid fill contract manufacturing businesses
within this segment. The pharmaceutical packaging business' growth was
attributable to a mix of new customers and increased volume from existing
customers. The liquid fill contract manufacturing business' revenue growth was a
result of increased volume. An
40
41
increase in the drug delivery system business' sales volume in North
America and the health and nutrition market also contributed to the revenue
growth for fiscal 2000. In addition, cross-selling opportunities amongst the
businesses within this segment has contributed to an increase in operating
revenues.
The slight decrease in the operating revenues for the Automation and
Information Services segment in fiscal 2000 as compared to 1999 was primarily
due to timing of customers' purchases related to the Year 2000. Fiscal 1999
operating revenue growth was a result of general increases in customer demand as
well as customers purchasing products early in anticipation of the Year 2000.
This segment continues to have strong demand for its new pharmacy automation
products from the domestic hospital sector and non-acute care customers.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
earnings.
GROSS MARGIN
( as a percentage of operating revenue)
Years ended June 30 2000 1999 1998
----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.5% 5.7% 6.2%
Medical-Surgical Products and Services 23.2% 23.4% 21.7%
Pharmaceutical Technologies and Services 33.1% 33.0% 34.0%
Automation and Information Services 69.2% 68.5% 69.6%
Total Company 10.2% 11.0% 11.5%
----------------------------------------------------------------------------------------------------
The overall decrease in gross margin in 2000 and 1999 was due primarily to
a greater mix of lower margin pharmaceutical distribution in 2000 and 1999 as
compared to the prior years. The Pharmaceutical Distribution and Provider
Services segment represented 79% of 2000 operating revenues, up from 76% and 73%
of 1999 and 1998 operating revenues, respectively.
The decrease in the gross margin of the Pharmaceutical Distribution and
Provider Services segment in 2000 and 1999 was primarily due to the impact of
lower selling margins, as a result of a highly competitive market and greater
mix of high volume customers where a lower cost of distribution and better asset
management enabled the Company to offer lower selling margins to its customers.
Offsetting this decrease was an increase in vendor incentives and a positive
impact related to the rationalization program for the pharmacy management
business (see discussion in "Operating Revenues").
The decrease in the Medical-Surgical Products and Services segment's gross
margin in 2000 was due to increased pricing pressures in certain
self-manufactured product lines, including the exam glove business, as well as a
slight shift in revenue growth towards lower margin distributed products. In
1999, the improvement in this segment's gross margin was primarily the result of
improvements in the segment's product mix, including the growth of
self-manufactured products sales in both domestic and international markets, as
well as the impact of manufacturing and other cost efficiencies.
The Pharmaceutical Technologies and Services segment's gross margin
increase in 2000 was a result of revenue growth in the higher margin liquid fill
contract manufacturing and drug delivery system businesses. The drug delivery
system business' shift to higher margin pharmaceutical products from lower
margin health and nutrition products has also contributed to the improvement in
gross margin. The decrease in gross margin in 1999 was a result of the business
mix within this segment.
The Automation and Information Services segment's gross margin increase in
2000 was mainly a result of price increases during the year and product mix. In
1999, the Automation and Information Services segment experienced a slight
decrease in gross margin mainly due to product mix.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
( as a percentage of operating revenue)
Years ended June 30 2000 1999 1998
----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.7% 3.0% 3.3%
Medical-Surgical Products and Services 15.8% 16.9% 16.2%
Pharmaceutical Technologies and Services 14.5% 15.9% 15.9%
Automation and Information Services 34.9% 34.2% 39.2%
Total Company 5.8% 6.6% 7.2%
----------------------------------------------------------------------------------------------------
The decline in selling, general and administrative expenses as a percentage
of operating revenue for fiscal years 2000 and 1999 reflects economies
associated with the Company's revenue growth, in addition to significant
productivity gains resulting from continued cost control efforts in all segments
and the continuation of consolidation and selective automation of operating
facilities in the Pharmaceutical Distribution and Provider Services and the
Pharmaceutical Technologies and Services segments. Offsetting the improvements
noted was an increase in selling, general and administrative expenses as a
percentage of operating revenue for the Automation and Information Services
segment for fiscal year 2000, primarily resulting from a slight decrease in
operating revenue from fiscal 1999 to fiscal 2000. In addition, the
Medical-Surgical Products and Services segment's selling, general and
administrative expenses as a percentage of operating revenues increased in
fiscal year 1999 as compared to fiscal year 1998. This increase was primarily
due to the acquisition of businesses during fiscal 1999, which were accounted
for under the purchase method of accounting. As such, the historical financial
statements have not been restated for these acquisitions. These acquired
businesses have a higher selling, general and administrative expense rate than
the Medical-Surgical Products and Services segment's normal rate, resulting in
an increase during fiscal 1999 compared to 1998.
The 3% and 14% overall growth in selling, general and administrative
expenses experienced in fiscal years 2000 and 1999, respectively, was due
primarily to increases in personnel costs and depreciation expense, and compares
favorably to the 18% and 23% growth in operating revenue for the same periods.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2000, 1999 and 1998.
Fiscal Year Ended
June 30,
-------------------------------------
(in millions, except per share amounts) 2000 1999 1998
-------------------------------------------------------------------------------------------
Transaction and employee-related costs $ (3.8) $ (95.4) $ (35.7)
ALP transaction bonus (20.3) -- --
Exit costs (11.7) (9.4) (3.8)
Scherer restructuring costs (9.6) (26.7) --
Inventory write-offs -- (4.0) --
Owen Healthcare, Inc. employee-related costs -- (1.1) --
Canceled merger transaction -- 3.7 --
Other integration costs (19.3) (13.7) (9.7)
-------------------------------------------------------------------------------------------
Total merger-related costs $ (64.7) $ (146.6) $ (49.2)
-------------------------------------------------------------------------------------------
Other special charges:
Facilities closures $ -- $ -- $ (6.1)
Employee severance -- -- (2.5)
Priority Healthcare Spin-off $ (18.8)
-------------------------------------------------------------------------------------------
Total other special charges $ -- $ (18.8) $ (8.6)
-------------------------------------------------------------------------------------------
Total special charges $ (64.7) $ (165.4) $ (57.8)
Tax effect of special charges 14.9 33.8 22.0
Tax benefit for change in tax status -- -- 11.7
Pro forma ALP taxes -- 9.3 4.6
-------------------------------------------------------------------------------------------
Net effect of special charges $ (49.8) $ (122.3) $ (19.5)
===========================================================================================
Net effect on diluted earnings per share $ (0.11) $ (0.27) $ (0.04)
===========================================================================================
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Merger-Related Charges. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs are primarily a
result of the merger transactions with ALP, Allegiance and Scherer.
During the fiscal years presented in the table herein, the Company
incurred direct transaction costs related to its merger transactions. These
expenses primarily include investment banking, legal, accounting and other
professional fees associated with the respective merger transactions. In
addition, the Company incurred employee-related costs, which consist primarily
of severance and transaction/stay bonuses as a result of the ALP, Allegiance and
Scherer merger transactions. Partially offsetting the transaction and
employee-related costs recorded during the fiscal year ended June 30, 2000 was a
$10.3 million credit to adjust the estimated transaction and employee-related
costs previously recorded in connection with the Allegiance merger transaction.
Actual billings and employee-related costs were less than the amounts originally
anticipated, resulting in a reduction of the merger-related costs. Exit costs
relate primarily to costs associated with lease terminations and moving expenses
as a direct result of the merger transactions with ALP, Allegiance and Scherer.
Other integration costs include charges related to integrating the operations of
previous merger transactions.
The Company recorded charges of $9.6 million and $26.7 million during the
fiscal years ended June 30, 2000 and 1999, respectively, associated with the
business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements.
Charges of $4.0 million related to the write-down of impaired inventory
associated with the merger transaction with Owen Healthcare, Inc. ("Owen") were
recorded during the fiscal year ended June 30, 1999. Also, during fiscal 1999,
the Company recorded $1.1 million related to severance costs for a restructuring
associated with the change in management that resulted from the merger
transaction with Owen. Partially offsetting the total merger-related charges for
fiscal 1999 was a credit recorded to adjust the estimated transaction and
termination costs previously recorded in connection with the canceled merger
transaction with Bergen Brunswig Corporation ("Bergen") (see Note 15 of Notes to
Consolidated Financial Statements). The actual billings for services provided by
third parties engaged by the Company were less than the estimate, resulting in a
reduction of the merger-related costs.
Other Special Items. During fiscal 1999, Bindley recorded a special charge
of $18.8 million ($14.0 million net of tax), of which $11.0 million related to a
non-cash charge for the acceleration of the amortization of compensation related
to restricted stock grants in connection with the spin-off of Priority
Healthcare Corporation ("Priority") (see Note 1 of "Notes to Consolidated
Financial Statements"). Approximately $7.0 million related to write-off of
goodwill from an acquisition prior to 1996 and the remaining $0.8 million
represented a legal settlement.
During fiscal 1998, the Company recorded a special charge of $8.6 million
($5.2 million, net of tax) related to the rationalization of its pharmaceutical
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs, including approximately $2.0 million
incurred in connection with the final settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
Pro Forma Impact. Since April 1998, ALP had been organized as an S-Corporation
for tax purposes. Accordingly, ALP was not subject to federal income tax from
April 1998 up to the date of the merger transaction. For the fiscal years ended
1999 and 1998, net earnings would have been reduced by $9.3 million and $4.6
million, respectively, if ALP had been subject to federal income taxes.
In fiscal 2000, the net effect of various merger-related charges reduced
reported net earnings by $49.8 million to $717.8 million and reduced reported
diluted earnings per Common Share by $0.11 per share to $1.60 per share. The net
of tax effect of the various merger-related costs recorded and pro forma
adjustments related to ALP taxes during fiscal 1999 was
43
44
to reduce reported net earnings by $122.3 million to $499.3 million and to
reduce reported diluted earnings per Common Share by $0.27 per share to $1.12
per share. The fiscal 1998 effect of various merger-related charges and other
special items recorded and pro forma adjustments related to ALP taxes during
fiscal 1998 was to reduce reported net earnings by $19.5 million to $474.3
million and to reduce reported diluted earnings per Common Share by $0.04 per
share to $1.07 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.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions it has competed to date totaling
approximately $69.4 million ($45.1 million net of tax) in future periods
(excluding the Bindley merger transaction and other acquisitions which have
occurred subsequent to June 30, 2000) (see Note 2 of "Notes to Consolidated
Financial Statements") in order to properly integrate operations, of which a
portion represents facility rationalizations, and in order to implement
efficiencies with regard to, among other things, information systems, customer
systems, marketing programs and administrative functions. Such amounts will be
charged to expense when incurred.
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted in
expansion into service areas which (a) complement the Company's core
pharmaceutical distribution business; (b) provide opportunities for the Company
to develop synergies with, and thus strengthen, the acquired business; and (c)
generally generate higher margins as a percentage of operating revenue than
pharmaceutical distribution. As the healthcare industry continues to change, the
Company continually evaluates possible candidates for merger or acquisition and
intends to continue to seek opportunities to expand its healthcare operations
and services in all reporting segments. There can be no assurance that it will
be able to successfully pursue any such opportunity or consummate any such
transaction, if pursued. If additional transactions are entered into or
consummated, the Company would incur additional merger-related costs.
INTEREST EXPENSE AND OTHER. The increase in interest expense and other of $5.8
million during fiscal 2000 compared to fiscal 1999 is attributable to the
combination of higher average interest rates on debt and higher average levels
of borrowing during fiscal 2000. Additional borrowings were used to fund working
capital needs as well as the Company's stock repurchase program during fiscal
2000 (see Note 9 of the "Notes to Consolidated Financial Statements"). The
increase in interest expense and other of $9.4 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").
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to pretax
earnings were 37.1% of pretax earnings in fiscal 2000 compared with 39.2% in
fiscal 1999 and 35.4% for fiscal 1998. The fluctuation in the tax rate is
primarily due to the impact of recording certain non-deductible merger-related
costs during various periods and the change in ALP tax status, as well as
fluctuating state and foreign effective tax rates as a result of the Company's
business mix for all three fiscal years. In addition, a change in tax status of
a 51% owned German subsidiary resulted in a lower tax provision during fiscal
1998. The provisions for income taxes excluding the impact of merger-related
charges, the tax status of the German subsidiary and including the pro forma
impact of the change in ALP tax status were 36.4%, 37.0%, and 37.7% for fiscal
years 2000, 1999, and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $2.9 billion at June 30, 2000 from $2.5
billion at June 30, 1999. This increase resulted from additional investments in
inventories, trade receivables, and cash and equivalents of $1.1 billion, $343.2
million and $311.1 million, respectively. Offsetting the increases in current
assets was an increase in accounts payable and other accrued liabilities of
$890.7 million and $631.8 million, respectively. Increases in inventories
reflect the higher level of business volume in Pharmaceutical Distribution and
Provider Services' activities, especially in the fourth quarter of fiscal 2000
when operating revenue for this segment grew 23% over the same period in the
prior year. The increase in trade receivables is slightly lower than the
Company's revenue growth (see "Operating Revenue" above) due to effective asset
management resulting in the increase in cash and equivalents. The change in
accounts payable is due primarily to the timing of inventory purchases.
Property and equipment, at cost, increased by $147.4 million from June 30,
1999 to June 30, 2000. The increase was primarily due to ongoing plant expansion
and manufacturing equipment purchases in certain manufacturing businesses, as
well as additional investments made for management information systems and
upgrades to distribution facilities. The Company has several operating lease
agreements for the construction of new facilities. See further discussion in
Note 8 of "Notes to Consolidated Financial Statements."
44
45
Shareholders' equity increased to $4.4 billion from $3.9 billion at June
30, 1999, primarily due to net earnings of $717.8 million and the investment of
$143.4 million by employees of the Company through various stock incentive
plans, offset by treasury share repurchases of $333.9 million and dividends paid
of $30.0 million. In February 2001, the Company issued 750,000 Common Shares for
which it received aggregate proceeds of $47.7 million which were used for
general corporate purposes.
The Company has a commercial paper program, providing on June 30, 2000 for
the issuance of up to $1.0 billion in aggregate maturity value of commercial
paper. The Company had $509.2 million outstanding under this program at June 30,
2000. The Company also has uncommitted short-term credit facilities with various
bank sources aggregating $250.0 million. At June 30, 2000, $54.2 million was
outstanding related to these short-term credit facilities. The Company has an
unsecured bank credit facility which provides for up to an aggregate of $1.5
billion in borrowings of which $750 million expires on March 28, 2002 and $750
million expires on March 31, 2004. At expiration, these facilities can be
extended upon mutual consent of the Company and the lending institutions. This
credit facility exists largely to support issuances of commercial paper as well
as other short-term borrowings and remained unused at June 30, 2000. At June 30,
2000, the commercial paper and other short-term borrowings of $563.4 million
were reclassified as long-term, reflecting the Company's intent and ability,
through the existence of the unused credit facility, to refinance these
borrowings. The Company also has line-of-credit agreements with various bank
sources aggregating $202.8 million, of which $64.1 million was outstanding as of
June 30, 2000 (see Note 4 of "Notes to Consolidated Financial Statements").
Subsequent to June 30, 2000, the Company increased the capacity under its
commercial paper program from $1.0 billion to $1.5 billion in aggregate maturity
value.
Bindley has a receivables securitization facility pursuant to which all
Bindley receivables arising in connection with the sale of goods or rendering of
services can be sold to Bindley Western Funding Corporation ("BWFC") (see Notes
1 and 4 of "Notes to Consolidated Financial Statements"). BWFC has entered into
a third party agreement to sell interests in receivables of up to $350 million.
At the end of fiscal 2000, $350 million was outstanding under this agreement. In
February 2001, this agreement was terminated and repaid.
During fiscal 1999, the Company issued $150 million of 6.25% Notes due
2008, the proceeds of which were used for working capital needs due to growth in
the Company's business.
Subsequent to June 30, 2000, the Company entered into an agreement to sell
trade receivables to a special purpose accounts receivable and financing entity
("SPE"), which is exclusively engaged in purchasing trade receivables from, and
making loans to, the Company. The SPE, which is consolidated by the Company,
issued $400 million in preferred debt securities to parties not affiliated with
the Company. Those preferred debt securities must be retired or redeemed before
the Company can have access to the SPE's receivables.
The Company filed a combination shelf debt and equity registration
statement on Form S-3 with the Securities and Exchange Commission, which was
declared effective on September 29, 2000. Subsequent to June 30,2000, the
Company issued 750,000 Common Shares for which it received aggregate proceeds of
$47.7 million, which were used for general corporate purposes. The Common Shares
were issued in order for the Company to be able to satisfy all the conditions to
consummation of the merger transaction with Bindley (See Note 2 of the "Notes to
Condensed Consolidated Financial Statements"). In addition, the Company issued
$500 million of 6.75% Notes due 2011, the proceeds of which were used for early
redemption of Bindley debt and for repayment of a portion of the Company's
commercial paper and general corporate purposes, which include working capital,
capital expenditures, repayment or refinancing of indebtedness, acquisitions and
investments. After such issuances, the Company has the capacity to issue
approximately $450 million of additional equity or debt securities pursuant to
the shelf registration statement.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to business combinations.
See Notes 1 and 5 of the "Notes to Consolidated Financial Statements" for
information regarding the use of financial instruments and derivatives thereof,
including foreign currency hedging instruments. As a matter of policy, the
Company does not engage in "speculative" transactions involving derivative
financial instruments.
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46
OTHER
-----
SUBSEQUENT BUSINESS COMBINATIONS. On August 16, 2000, the Company completed the
purchase of Bergen Brunswig Medical Corporation for approximately $176.1
million, subject to post-closing adjustments. On July 26, 2000, the Company
completed the purchase of a manufacturing facility and the rights to two
proprietary, topical drug delivery technologies from Advanced Polymer Systems,
Inc. for $25.0 million at closing and contingent future payments totaling
potentially an additional $26.5 million. On July 19, 2000, the Company completed
the purchase of Rexam Healthcare Packaging's folding-carton manufacturing
operations in Guaynabo, Puerto Rico for $32.5 million, subject to post-closing
adjustments. In addition, the Company also completed several other acquisitions
subsequent to June 30, 2000 for a total aggregate purchase price of
approximately $89.6 million plus approximately $20.0 million in liabilities
assumed. These transactions were accounted for under the purchase method of
accounting for financial reporting purposes.
TERMINATION AGREEMENT. On August 24, 1997, the Company and Bergen announced that
they had entered into a definitive merger agreement, as amended, pursuant to
which a wholly owned subsidiary of the Company would be merged with and into
Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United States
District Court for the District of Columbia granted the Federal Trade
Commission's request for a preliminary injunction to halt the proposed merger.
On August 7, 1998, the Company and Bergen jointly terminated the Bergen Merger
Agreement and, in accordance with the terms of the Bergen Merger Agreement, the
Company reimbursed Bergen for $7.0 million of transaction costs. Additionally,
the termination of the Bergen Merger Agreement caused the costs incurred by the
Company (that would not have been deductible had the merger been consummated) to
become tax deductible for federal income tax purposes, resulting in a tax
benefit of $12.2 million. The obligation to reimburse Bergen and the additional
tax benefit were recorded in the fourth quarter of the fiscal year ended June
30, 1998.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS. As of July 1, 1999, the Company
adopted the Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for costs of computer software developed or obtained for
internal use. The adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
requires companies to recognize all derivatives as either assets or liabilities
on the balance sheet and measure such instruments at fair value. As amended by
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," the provisions of SFAS 133 will require
adoption no later than the beginning of the Company's fiscal year ending June
30, 2001. Adoption of SFAS 133, as amended by SFAS 138 in July 2000, did not
have a material impact on the Company's consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" which requires adoption
during the fourth quarter of fiscal 2001. The Company does not anticipate that
the adoption of SAB 101 will have a material impact on the consolidated
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S.
interest rates, changes in foreign currency exchange rates as measured against
the U.S. dollar and changes in commodity prices.
INTEREST RATES. The Company utilizes a mix of debt maturities along with both
fixed-rate and variable-rate debt to manage its exposures to changes in interest
rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 2001, although there can be no
assurances that interest rates will not significantly change.
As of June 30, 2000, the Company had total long-term obligations
outstanding of $1,533.8 million of which $920.3 million represented Notes and
Debentures with fixed interest rates and maturity dates beginning in fiscal
2004. As of June 30, 1999, the Company had total long-term obligations
outstanding of $1,266.1 million of which $1,038.0 million represented Notes and
Debentures with fixed interest rates and maturity dates beginning in fiscal
2000. The average interest rate related to these obligations was 6.8% as of June
30, 2000 and 1999. The majority of the remaining outstanding long-term
obligations and credit facilities have variable interest rates that fluctuate
with the LIBOR or prime rates. As of June 30, 2000 and 1999, the fair value of
the total long-term obligations was $1,494.6 million and $1,263.9 million,
respectively. Maturities of long-term obligations for future fiscal years are:
2001 - $9.3 million; 2002 - $569.9 million; 2003 - $4.1 million; 2004 - $227.4
million; 2005 - $2.9 million and 2006 and thereafter - $720.2 million.
46
47
The Company periodically enters into interest rate swap agreements when
existing conditions and market situations dictate. The Company does not enter
into interest rate swap agreements for trading or speculative purposes. The
impact of interest rate swaps is not significant. See Note 5 of "Notes to
Consolidated Financial Statements".
FOREIGN EXCHANGE. The Company conducts business in several major international
currencies. The Company periodically uses financial instruments, principally
foreign currency options, to attempt to manage the impact of foreign exchange
rate changes on anticipated sales. In addition, the Company periodically enters
into forward foreign currency exchange contracts to hedge certain exposures
related to selected transactions that are relatively certain as to both timing
and amount. The purpose of entering into these hedge transactions is to minimize
the impact of foreign currency fluctuations on the results of operations and
cash flows. Gains and losses on the hedging activities are recognized
concurrently with the gains and losses from the underlying transactions. The
Company does not enter into forward exchange contracts or foreign currency
options for trading or speculative purposes.
In addition, the Company uses commodity contracts to hedge raw material
costs expected to be denominated in foreign currency. These contracts generally
cover a one-year period and all gains and losses are deferred and recognized in
cost of goods sold with the underlying product costs.
As of June 30, 2000, the notional amount of the forward exchange contracts
outstanding was $17.2 million and the related fair value gain on these contracts
was $0.1 million. As of June 30, 1999, the Company did not have any material
foreign currency options or forward exchange contracts outstanding. As of June
30, 2000 and 1999, the notional amounts of the commodity hedge contracts were
$3.9 million and $9.6 million and the fair value gain/(loss) on these contracts
were $0.1 million and $(0.3) million, respectively. The unrealized gains or
losses on these options or contracts represent hedges of foreign exchange gains
and losses on a portion of the Company's foreign earnings, cash flows and
selected transactions. As a result, the Company does not expect future gains and
losses on these contracts to have a material impact on the Company's
consolidated financial statements.
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48
SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company was
prepared giving retroactive effect to the business combinations with Medicine
Shoppe International, Inc. on November 13, 1995; Pyxis Corporation on May 7,
1996; PCI Services, Inc. ("PCI") on October 11, 1996; Owen Healthcare, Inc.
("Owen") on March 18, 1997; MediQual Systems, Inc. ("MediQual") on February 18,
1998; R.P. Scherer Corporation ("Scherer") on August 7, 1998; Allegiance
Corporation ("Allegiance") on February 3, 1999; Pacific Surgical Innovations,
Inc. ("PSI") on May 21, 1999; Automatic Liquid Packaging, Inc. ("ALP") on
September 10, 1999, and Bindley Western Industries, Inc. ("Bindley") on February
14, 2001, all of which were accounted for as pooling-of-interests transactions
(see Note 2 of "Notes to Consolidated Financial Statements"). The consolidated
financial data includes all purchase transactions that occurred during these
periods.
For the fiscal year ended June 30, 1996, the information presented is
derived from consolidated financial statements which combine data from Cardinal
for the fiscal year ended June 30, 1996 with data from PCI for the fiscal year
ended September 30, 1996, Owen for the fiscal year ended November 30, 1995,
MediQual for the fiscal year ended December 31, 1995, Scherer for the fiscal
year ended March 31, 1996, Allegiance for the fiscal year ended December 31,
1996, PSI for the fiscal year ended September 30, 1996, ALP for the fiscal year
ended March 31, 1996, and Bindley for the fiscal year ended December 31, 1995.
For the fiscal year ended June 30, 1997, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1997 with PCI's financial results for the nine
months ended June 30, 1997, Owen's financial results for the period of June 1,
1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in
order to change Owen's November 30 fiscal year end to June 30), MediQual's
financial results for the fiscal year ended December 31, 1996, Scherer's
financial results for the fiscal year ended March 31, 1997, Allegiance's
financial results for the fiscal year ended December 31, 1997, PSI's financial
results for the fiscal year ended September 30, 1997, and Bindley's financial
results for the year ended December 31, 1996.
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, PSI's financial results for the fiscal year
ended September 30, 1998 and Bindley's financial results for the year ended
December 31, 1997.
For the fiscal year ended June 30,1999, the information presented is derived
from the consolidated financial statements which combine Cardinal for the fiscal
year ended June 30, 1999 with Bindley's financial results for the year ended
December 31, 1998.
For the fiscal year ended June 30, 2000, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 2000 with Bindley's financial results for the
year ended December 31, 1999.
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49
The selected consolidated financial data below should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
At or For the Fiscal Year Ended
June 30, (1)
--------------------------------------------------------------------------------------
2000 1999 (2) 1998 (2) 1997 1996
--------------------------------------------------------------------------------------
EARNINGS DATA:
Revenue:
Operating revenue $ 30,257.8 $ 25,682.5 $ 20,844.8 $ 18,123.2 $ 16,378.3
Bulk deliveries to
Customer warehouses 8,092.1 7,050.4 7,541.1 5,659.3 4,920.0
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Total revenue $ 38,349.9 $ 32,732.9 $ 28,385.9 $ 23,782.5 $ 21,298.3
Net earnings (loss) $ 717.8 $ 499.3 $ 474.3 $ 369.0 $ (293.8)
Earnings (loss) per
Common Share: (3)
Basic $ 1.64 $ 1.14 $ 1.10 $ 0.87 $ (0.72)
Diluted $ 1.60 $ 1.12 $ 1.07 $ 0.85 $ (0.72)
Cash dividends declared
Per Common Share (3)(4) $ 0.07 $ 0.067 $ 0.049 $ 0.042 $ 0.035
BALANCE SHEET DATA:
Total assets $ 12,024.1 $ 9,682.7 $ 8,876.8 $ 7,578.1 $ 7,404.4
Long-term obligations,
Less current portion $ 1,524.5 $ 1,224.5 $ 1,362.2 $ 1,420.7 $ 1,662.8
Shareholders' equity $ 4,400.4 $ 3,894.6 $ 3,389.9 $ 2,940.0 $ 2,495.0
(1) Amounts reflect business combinations in all periods presented. Fiscal
2000, 1999, 1998, 1997 and 1996 amounts reflect the impact of
merger-related costs and other special charges. See Note 2 of "Notes to
Consolidated Financial Statements" for a further discussion of
merger-related costs and other special charges affecting fiscal 2000, 1999,
and 1998. Fiscal 1997 amounts reflect the impact of merger-related charges
of $50.9 million ($36.6 million, net of tax). Fiscal 1996 amounts reflect
the impact of the write-down of goodwill of $550.0 million ($550.0 million,
net of tax) due to the change by Allegiance in its method of assessing
goodwill. In addition, fiscal 1996 amounts reflect the impact of
merger-related charges and facility rationalizations of $178.5 million
($122.8 million, net of tax).
(2) Amounts above do not reflect the impact of pro forma adjustments related to
ALP taxes (see Notes 1 and 2 of "Notes to Consolidated Financial
Statements"). For the fiscal years ended June 30, 1999 and 1998, the pro
forma adjustment for ALP taxes would have reduced net earnings by $9.3
million and $4.6 million, respectively. The pro forma adjustment would have
decreased diluted earnings per Common Share by $0.02 to $1.10 for fiscal
year 1999 and by $0.01 to $1.06 for fiscal year 1998.
(3) Net earnings and cash dividends per Common Share have been adjusted to
retroactively reflect all stock dividends and stock splits through April
30, 2001.
(4) Cash dividends per Common Share exclude dividends paid by all entities with
which the Company has merged.
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