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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-11373
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
(614) 757-5000
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 17, 2001 was approximately $32,241,458,796.
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The number of Registrant's Common Shares outstanding as of August 17,
2001, was as follows: Common shares, without par value: 449,444,140.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
2001 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
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Important Information Regarding Forward-Looking Statements................. 3
PART I
1. Business................................................................... 3
2. Properties................................................................. 7
3. Legal Proceedings.......................................................... 8
4. Submission of Matters to a Vote of Security Holders........................ 8
PART II
5. Market for the Registrant's Common Shares and Related Shareholder Matters.. 9
6. Selected Financial Data.................................................... 9
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 11
7a. Quantitative and Qualitative Disclosures About Market Risk................. 17
8. Financial Statements and Supplementary Data................................ 17
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 51
PART III
10. Directors and Executive Officers of the Registrant......................... 51
11. Executive Compensation..................................................... 53
12. Security Ownership of Certain Beneficial Owners and Management............. 53
13. Certain Relationships and Related Transactions............................. 53
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 53
Signatures................................................................. 58
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IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. Except to the limited extent required by
applicable law, the Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is a holding
company conducting business through a number of separate operating subsidiaries.
The Company is a leading provider of products and services to healthcare
providers and manufacturers, helping them improve the efficiency and quality of
healthcare. As used in this report, the terms the "Registrant" and the "Company"
refer to Cardinal Health, Inc. and its subsidiaries, unless the context requires
otherwise. Except as otherwise specified, information in this report is provided
as of June 30, 2001.
BUSINESS SEGMENTS
The Company has four reporting segments. They are: Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products and Services,
Pharmaceutical Technologies and Services, and Automation and Information
Services.
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES
Through its Pharmaceutical Distribution and Provider Services segment, the
Company distributes a broad line of pharmaceutical and other healthcare products
and provides pharmacy management and related consulting services to hospital,
retail and alternate-site pharmacies. Cardinal Distribution, the Company's
pharmaceutical distribution business, is one of the country's leading wholesale
distributors of pharmaceutical and related healthcare products to independent
and chain drugstores, hospitals, alternate care centers and the pharmacy
departments of supermarkets and mass merchandisers located throughout the
continental United States. As a full-service wholesale distributor, Cardinal
Distribution complements its distribution activities by offering a broad range
of value-added support services to assist the Company's customers and suppliers
in maintaining and improving their sales volumes. These support services include
online procurement, fulfillment and information provided through cardinal.com,
computerized order entry and order confirmation systems, generic sourcing
programs, product movement and management reports, consultation on store
operations and merchandising, and customer training. The Company's proprietary
software systems feature customized databases specially designed to help its
distribution customers order more efficiently, contain costs, and monitor their
purchases.
The Company also operates several specialty healthcare distribution
businesses which offer value-added services to the Company's customers and
suppliers while providing the Company with additional opportunities for growth
and profitability. For example, the Company operates through its subsidiary
National PharmPak Services, Inc. ("NPPS"), a pharmaceutical repackaging and
distribution program for both independent and chain drugstore customers. In
addition, the Company through National Specialty Services, Inc. ("NSS"), serves
as a distributor of therapeutic plasma products, oncology products and other
specialty pharmaceuticals to hospitals, clinics and other managed-care
facilities on a nationwide basis through the utilization of telemarketing and
direct mail programs. The Company also operates, through CORD Logistics, Inc.
("CORD"), a third party logistics company that distributes and tracks products
for pharmaceutical and biotechnology manufacturers.
Also within this segment, the Company, through various operating companies
provides services to healthcare providers through integrated pharmacy
management, consulting, temporary staffing and related services, and operates
Medicine Shoppe International, Inc. ("Medicine Shoppe"), a franchisor of
apothecary-style retail pharmacies. The Company, through Central Pharmacy
Services, Inc. ("Central Pharmacy"), operates centralized nuclear pharmacies
that prepare and deliver radiopharmaceuticals for use in nuclear imaging
procedures in hospitals and clinics.
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MEDICAL-SURGICAL PRODUCTS AND SERVICES
Allegiance Corporation ("Allegiance"), a subsidiary, is a provider of
non-pharmaceutical healthcare products and cost-saving services for hospitals
and other healthcare providers. Allegiance offers a broad range of medical and
laboratory products, representing more than 2,700 suppliers in addition to its
own line of surgical and respiratory therapy products. It also manufactures
sterile and non-sterile procedure kits, single-use surgical drapes, gowns and
apparel, medical and surgical gloves, fluid suction and collection systems,
respiratory therapy products, surgical instruments, instrument reprocessing
products, special procedure products and other products. Allegiance assists its
customers in reducing costs while improving the quality of patient care in a
variety of ways, including online procurement, fulfillment and information
provided through cardinal.com, supply-chain management, instrument repair and
other professional consulting services.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES
Through its Pharmaceutical Technologies and Services segment, the Company
provides services to the pharmaceutical manufacturing industry through a broad
spectrum of complementary services. The Company's R.P. Scherer Corporation
("Scherer") subsidiary provides manufacturers with unique drug delivery systems
and related manufacturing capabilities. The Company's PCI Services, Inc. ("PCI")
subsidiary is a leading provider of diversified custom packaging services both
in the United States and Europe. The Company's Automatic Liquid Packaging, Inc.
("ALP") subsidiary is a leading provider of contract manufacturing and packaging
of sterile liquid pharmaceuticals and other healthcare products in topical,
oral, inhaled and ophthalmic formulations. The Company also operates a separate
contract sales organization, which assists healthcare companies in launching and
marketing products by providing strategic planning, product management, vendor
evaluation and related services.
AUTOMATION AND INFORMATION SERVICES
The Company, through its Automation and Information Services segment,
operates businesses focusing on meeting customer needs through unique and
proprietary automation and information products and services, including Pyxis
Corporation ("Pyxis"), which develops, manufactures, leases, sells and services
point-of-use systems which automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities and
Vistant Corporation ("Vistant"), which markets point of use supply systems in
the non-healthcare market. This segment also includes a subsidiary which
provides information systems that analyze clinical outcomes and clinical
pharmaceutical utilization information.
ACQUISITIONS
Over the last five years, the Company has completed the following business
combinations. On May 7, 1996, the Company completed a merger transaction with
Pyxis, a San Diego, California-based developer, manufacturer, marketer and
servicer of unique point-of-use systems which automate the distribution,
management and control of medications and supplies in hospitals and other
healthcare facilities. The Company issued approximately 50.9 million Common
Shares(1) to Pyxis shareholders and Pyxis' outstanding stock options were
converted into options to purchase approximately 5.2 million Common Shares. On
October 11, 1996, the Company completed a merger transaction with PCI, a
Philadelphia, Pennsylvania-based provider of diversified packaging services to
the pharmaceutical industry in the United States and abroad. The Company issued
approximately 7.0 million Common Shares to PCI shareholders and PCI's
outstanding stock options were converted into options to purchase approximately
0.5 million Common Shares. On March 18, 1997, the Company completed a merger
transaction with Owen, a Houston, Texas-based provider of pharmacy management
and information services to hospitals. The Company issued approximately 17.4
million Common Shares to Owen shareholders and Owen's outstanding stock options
were converted into options to purchase approximately 1.6 million Common Shares.
On February 18, 1998, the Company completed a merger transaction with MediQual
Systems, Inc. ("MediQual"), a Westborough, Massachusetts-based supplier of
clinical information management systems and services to the healthcare industry.
The Company issued approximately 1.3 million Common Shares to MediQual
shareholders and MediQual's outstanding stock options were converted into
options to purchase approximately 0.1 million Common Shares of the Company. On
August 7, 1998, the Company completed a merger transaction with Scherer, a New
Jersey-based international developer and manufacturer of drug delivery systems.
The Company issued approximately 51.3 million Common Shares to Scherer
stockholders and Scherer's outstanding stock options were converted into options
to purchase approximately 5.3 million Common Shares. On February 3, 1999, the
Company completed a merger transaction with Allegiance, a McGaw Park,
Illinois-based distributor and manufacturer of medical, surgical and laboratory
products and a provider of cost-saving services. The Company issued
approximately 106.1 million Common Shares to Allegiance stockholders and
Allegiance's outstanding stock options were
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(1) All share references in this paragraph are adjusted to reflect all stock
splits and stock dividends effected since the time of the applicable
acquisition.
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converted into options to purchase approximately 15.5 million Common Shares. On
September 10, 1999 the Company completed a merger transaction with ALP, a
Woodstock, Illinois-based custom manufacturer of sterile liquid pharmaceuticals
and other healthcare products. The Company issued approximately 8.7 million
Common Shares to ALP stockholders. On August 16, 2000, the Company completed the
purchase of Bergen Brunswig Medical Corporation ("BBMC") for approximately $180
million, subject to post-closing adjustments. BBMC distributes medical, surgical
and laboratory supplies to doctors' offices, long-term care and nursing centers,
hospitals and other providers of care. On February 14, 2001, the Company
completed a merger transaction with Bindley Western Industries, Inc.
("Bindley"), an Indianapolis, Indiana-based wholesale distributor of
pharmaceuticals and provider of nuclear pharmacy services. The Company issued
approximately 23.1 million Common Shares to Bindley stockholders and Bindley's
outstanding stock options were converted into options to purchase approximately
5.1 million Common Shares. The Company has also completed a number of smaller
acquisition transactions (asset purchases, stock purchases and mergers) during
the last five years, including transactions involving MedSurg Industries, Inc.;
Rexam Cartons Inc.; International Processing Corporation; American Threshold
Industries, Inc., and SP Pharmaceuticals, L.L.C.
The Company continually evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
healthcare operations and services across all reporting industry segments. For
additional information concerning the transactions described above, see Notes 1
and 2 of "Notes to Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS AND SUPPLIERS
The Company's largest retail distribution customer in its Pharmaceutical
Distribution and Provider Services segment accounted for approximately 12% of
the Company's operating revenues (by dollar volume) for fiscal year 2001. This
segment could be adversely affected if the business of this customer was lost.
The two largest retail bulk distribution customers in the Pharmaceutical
Distribution and Provider Services segment accounted for approximately 46% and
22% of all bulk deliveries. Due to the lack of margin generated through bulk
deliveries, fluctuations in their purchases would have no significant impact on
the segment's earnings. The members of the two largest group purchasing
organizations (each, a "GPO") having business arrangements with the Company
accounted for approximately 10.0% and 9.7%, respectively, of the Company's
operating revenues (by dollar volume) in fiscal 2001 through the Company's
Pharmaceutical Distribution and Provider Services and Medical-Surgical Products
and Services segments. Each of these two segments could be adversely affected if
the business arrangements with either of such GPO customers were lost, although
the loss of the business arrangement with either such GPO would not necessarily
mean the loss of sales from all members of the GPO.
During fiscal year 2001, the Company renewed and expanded its
pharmaceutical distribution relationship with CVS, one of the largest retail
pharmacy chains in the United States, by executing a five-year wholesale supply
agreement with CVS. The agreement represents a significant expansion of the
Company's bulk deliveries and direct-to-store distribution business with CVS.
The Company obtains its products from many different suppliers, the largest
of which accounted for approximately 5.1% (by dollar volume) of its operating
revenue in fiscal 2001. The Company's five largest suppliers accounted for
approximately 22% (by dollar volume) of its operating revenue during fiscal 2001
and the Company's relationships with its suppliers are generally very good. The
Company's arrangements with its pharmaceutical suppliers typically may be
canceled by either the Company or the supplier upon 30 to 90 days prior notice,
although many of these arrangements are not governed by formal agreements. The
loss of certain suppliers could adversely affect the Company's business if
alternative sources of supply were unavailable.
While certain of the Company's operations may show quarterly fluctuations,
the Company does not consider its business to be seasonal in nature on a
consolidated basis.
COMPETITION
The markets in which the Company operates are highly competitive. In the
pharmaceutical wholesale distribution business, the Company competes directly
with numerous other national and regional wholesale distributors, direct selling
manufacturers, self-warehousing chains, and specialty distributors on the basis
of price, breadth of product lines, marketing programs, and support services.
The Company's pharmaceutical wholesale distribution operations have narrow
profit margins and, accordingly, the Company's earnings depend significantly on
its ability to distribute a large volume and variety of products efficiently and
to provide quality support services. Several smaller franchisors compete with
Medicine Shoppe in the franchising of pharmacies, with competition being based
primarily upon price, benefits offered to both the pharmacist and the customer,
access to third party programs, and the reputation of the franchise. Medicine
Shoppe also needs to be competitive with a pharmacist's ongoing option to remain
self-employed at his or her current position rather than becoming a franchisee.
Medicine Shoppe's Managed Pharmacy Benefits subsidiary also faces competition
from other pharmacy benefit management companies. With its Owen subsidiary, the
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Company competes with both national and regional hospital pharmacy management
firms, and self-managed hospitals and hospital systems on the basis of price and
services offered, its established base of business, the effective use of
information systems, the development of clinical programs, and the quality of
the services it provides to its customers. Through Scherer, the Company's drug
delivery technologies compete with a growing number of new drug delivery
technologies and with continued refinements to existing delivery technologies of
both pharmaceutical companies and companies formed to develop new technologies.
Through PCI and ALP, the Company competes with companies that provide many types
of packaging services and those that provide one or a few types of packaging
services, based primarily upon quality, variety of available packaging services,
customer service, responsiveness and price. As a marketer of automated
pharmaceutical dispensing and supply systems through Pyxis, the Company competes
based upon price, its installed base of systems, relationships with customers,
customer service and support capabilities, patents and other intellectual
property, and its ability to interface with customer information systems. Actual
and potential competitors to the Pyxis system include both existing domestic and
foreign companies, as well as emerging companies that supply products for
specialized markets and other outside service providers. Through Allegiance, the
Company has substantial competition in all of its non-pharmaceutical healthcare
product and service markets, with competition focusing primarily on product
performance, service levels and price. Through Central Pharmacy, the Company
competes with other nuclear pharmacy service companies and distributors engaged
in the preparation and delivery of radiopharmaceuticals for use in nuclear
imaging procedures in hospitals and clinics. Such competitors include national
and regional operators of radiopharmacies, numerous independent radiopharmacies,
and manufacturers and universities that have established their own
radiopharmacies.
EMPLOYEES
As of August 17, 2001, the Company had approximately 48,900 employees in
the U.S. and abroad, of which approximately 1,350 are subject to collective
bargaining agreements. Overall, the Company considers its employee relations to
be generally very good.
INTELLECTUAL PROPERTY
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, certain of which
have been registered, and also holds common law rights in various trademarks and
service marks. There can be no assurance that the Company will obtain the
registrations for trademarks and service marks for which it has applied.
The Company holds patents relating to certain aspects of its automated
pharmaceutical dispensing systems, automated medication management systems,
medication packaging, medical devices, processes, products, drug delivery
systems and sterile liquid packaging. The Company has a number of pending patent
applications in the United States and certain foreign countries, and intends to
pursue additional patents as appropriate.
The Company also owns certain software, including software used for
pharmaceutical purchasing and inventory control, which is copyrighted and
subject to the protection of applicable copyright laws.
The Company does not consider any particular patent, trademark, license,
franchise or concession to be material to its business. No assurances can be
given that any intellectual property rights of the Company will provide
meaningful protection against competitive products or otherwise be commercially
valuable or that the Company will be successful in obtaining additional patents
or enforcing its proprietary rights against others.
REGULATORY MATTERS
The Company's subsidiaries which distribute prescription pharmaceuticals
(including certain controlled substances) or medical devices, manage or own
pharmacy operations, engage in or operate retail pharmacies, purchase
pharmaceuticals, manage pharmaceuticals, engage in logistics and/or manufacture
drug delivery systems or surgical and respiratory care products, are required to
register for permits and/or licenses with, and comply with operating and
security standards of, the United States Drug Enforcement Administration, the
Food and Drug Administration (the "FDA") and various state boards of pharmacy
and/or comparable state agencies as well as foreign agencies, depending upon the
type of operations and location of product distribution and sale. In addition,
certain of the Company's subsidiaries are subject to requirements of the
Controlled Substances Act and the Prescription Drug Marketing Act of 1987 and
similar state laws, which regulate the marketing, purchase, storage and
distribution of prescription drugs under prescribed minimum standards. Laws
regulating the manufacture and distribution of products also exist in most other
countries wherein certain of the Company's subsidiaries conduct business. In
addition, the Company's packaging and manufacturing subsidiary operations in the
United Kingdom, France, Italy and Germany are subject to local certification
requirements, including compliance with good manufacturing practices adopted by
the European Community. The Company's Pyxis subsidiary is not currently required
to register or submit pre-market notifications to the FDA for its automated
pharmaceutical
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dispensing systems. There can be no assurance, however, that FDA policy in this
regard will not change.
The Company's franchising operations, through Medicine Shoppe, are subject
to Federal Trade Commission regulations, and rules and regulations adopted by
certain states, which require franchisors to make certain disclosures to
prospective franchisees prior to the sale of franchises. In addition, certain
states have adopted laws which regulate the franchisor-franchisee relationship.
The most common provisions of such laws establish restrictions on the ability of
franchisors to terminate or to refuse to renew franchise agreements. From time
to time similar legislation has been proposed or is pending in additional
states.
Central Pharmacy operates nuclear pharmacies in a regulated industry which
requires licenses or permits from the Federal Nuclear Regulatory Commission, the
radiologic health agency and/or department of health of each state in which it
operates, and the applicable state board of pharmacy.
Certain of the Company's subsidiaries are subject to federal and state
healthcare fraud and abuse, referral and reimbursement laws and regulations with
respect to their operations. Certain of the Company's subsidiaries also maintain
contracts with the federal government and are subject to certain regulatory
requirements relative to government contractors.
Services and products provided by certain of the Company's subsidiaries
include access to healthcare data and other drug-related information gathered
and assessed for the benefit of healthcare clients. Greater scrutiny is being
placed on a federal and state level regarding how such information should be
handled and in identifying the appropriate parties to do so. Future changes in
regulations and/or legislation such as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") may affect how some of these information
services or products are provided.
The Company is also subject to various federal, state and local laws,
regulations and recommendations, both in the United States and abroad, relating
to safe working conditions, laboratory and manufacturing practices, and the use,
transportation and disposal of hazardous or potentially hazardous substances.
The Company's environmental policies mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection for
each of its subsidiaries. In addition, U.S. and international import and export
laws and regulations require that the Company abide by certain standards
relating to the importation and exportation of finished goods, raw materials and
supplies.
RESEARCH AND DEVELOPMENT
For information on Company-sponsored research and development costs in the
last three fiscal years, see Note 1 of "Notes to Consolidated Financial
Statements".
REVENUE AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA
For information on revenue and long-lived assets by geographic area, see
Note 12 of "Notes to Consolidated Financial Statements".
ITEM 2: PROPERTIES
In the United States, the Company has 50 principal pharmaceutical
distribution facilities and four specialty distribution facilities utilized by
the Pharmaceutical Distribution and Provider Services segment. The Company also
has 12 PCI packaging facilities (five of which are located in Puerto Rico), nine
Scherer manufacturing facilities and one ALP manufacturing facility utilized by
its Pharmaceutical Technologies and Services segment. In addition, the Company
has one Pyxis assembly operation in its Automation and Information Services
segment. The Company also has 78 medical-surgical distribution facilities and 24
medical-surgical manufacturing facilities utilized by the Medical-Surgical
Products and Services segment. The Company's domestic facilities are located in
a total of 41 states and Puerto Rico.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Technologies and Services segment, 17 Scherer manufacturing
facilities which are located in the United Kingdom, France, Germany, Italy,
Australia, Japan, Argentina, Brazil and Canada. Within this segment, the Company
also has four PCI packaging facilities which are located in the United Kingdom
and Germany. The Company owns, leases or operates through its Medical-Surgical
Products and Services segment 13 medical-surgical distribution facilities
located in Canada and the Netherlands, and 20 medical-surgical manufacturing
facilities located in the Netherlands, Malaysia, Thailand, Malta, Mexico, the
Dominican Republic, Germany and France. The Company's international facilities
are located in a total of 19 countries.
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The Company owns 113 of the domestic and international facilities described
above, and the balance are leased. The Company's principal executive offices are
located in a leased four-story building located at 7000 Cardinal Place in
Dublin, Ohio.
The Company considers its operating properties to be in satisfactory
condition and adequate to meet its present needs. However, the Company
continuously evaluates its operating properties and may make further additions,
improvements, and consolidations as it continues to seek opportunities to expand
its role as a provider of services to the healthcare industry.
For certain financial information regarding the Company's facilities,
see Notes 3 and 8 of "Notes to Consolidated Financial Statements".
ITEM 3: LEGAL PROCEEDINGS
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 Baxter Healthcare
Corporation ("BHC") from certain claims related to the Allegiance Business,
including certain claims of alleged personal injuries as a result of exposure to
natural rubber latex gloves. Allegiance will be defending and indemnifying BHC,
as contemplated by the agreements between Baxter and Allegiance, for all
expenses and potential liabilities associated with claims pertaining to the
litigation assumed by Allegiance. As of June 30, 2001, there were approximately
610 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 resolution of cases
involving natural rubber latex gloves. 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 does not currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's consolidated
financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 2001.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." The following table reflects the range of the reported high and
low last sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared thereon for the
fiscal years ended June 30, 2001 and 2000. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
HIGH LOW DIVIDENDS
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Fiscal 2000:
Quarter Ended
September 30, 1999 $ 46.63 $ 34.67 $ 0.0167
December 31, 1999 37.58 25.00 0.0167
March 31, 2000 39.58 24.79 0.0167
June 30, 2000 49.33 30.58 0.0200
Fiscal 2001:
Quarter Ended
September 30, 2000 $ 63.38 $ 45.27 $ 0.0200
December 31, 2000 69.25 59.04 0.0200
March 31, 2001 68.35 58.67 0.0200
June 30, 2001 77.00 61.78 0.0250
Through August 17, 2001 $ 74.93 $ 67.28 $ 0.0250
As of August 17, 2001, there were approximately 22,000 shareholders of
record of the Common Shares.
The Company anticipates that it will continue to pay quarterly cash
dividends in the future. However, the payment and amount of future dividends
remain within the discretion of the Company's Board of Directors and will depend
upon the Company's future earnings, financial condition, capital requirements
and other factors.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company were
prepared giving retroactive effect to the business combinations with PCI on
October 11, 1996; Owen on March 18, 1997; MediQual on February 18, 1998; Scherer
on August 7, 1998; Allegiance on February 3, 1999; Pacific Surgical Innovations,
Inc. ("PSI") on May 21, 1999; ALP on September 10, 1999, and Bindley on February
14, 2001, all of which were accounted for as pooling-of-interests transactions.
Additional disclosure related to these transactions is included in 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, 1997, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results 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 fiscal 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's
financial results for the fiscal year ended June 30, 1998 with Scherer's
financial results for the fiscal year ended March 31, 1998, PSI's financial
results for the fiscal year ended September 30, 1998 and Bindley's financial
results for the fiscal year ended December 31, 1997.
For the fiscal year ended June 30,1999, the information presented is
derived from the consolidated financial statements which
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combine Cardinal's financial results for the fiscal year ended June 30, 1999
with Bindley's financial results for the fiscal year ended December 31, 1998.
For the fiscal year ended June 30, 2000, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results for the fiscal year ended June 30, 2000 with Bindley's
financial results for the fiscal year ended December 31, 1999.
The selected consolidated financial data below should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
At or For the Fiscal Year Ended
June 30, (1)
-------------------------------------------------------------------------------------
2001 2000 1999 (2) 1998 (2) 1997
-------------------------------------------------------------------------------------
EARNINGS DATA:
Revenue:
Operating revenue $ 38,660.1 $ 30,257.8 $ 25,682.5 $ 20,844.8 $ 18,123.2
Bulk deliveries to
Customer warehouses 9,287.5 8,092.1 7,050.4 7,541.1 5,659.3
-------------------------------------------------------------------------------------
Total revenue $ 47,947.6 $ 38,349.9 $ 32,732.9 $ 28,385.9 $ 23,782.5
Net earnings $ 857.4 $ 717.8 $ 499.3 $ 474.3 $ 369.0
Earnings per
Common Share: (3)
Basic $ 1.93 $ 1.64 $ 1.14 $ 1.10 $ 0.87
Diluted $ 1.88 $ 1.60 $ 1.12 $ 1.07 $ 0.85
Cash dividends declared
Per Common Share (3) (4) $ 0.085 $ 0.070 $ 0.067 $ 0.049 $ 0.042
BALANCE SHEET DATA:
Total assets $ 14,642.4 $ 12,024.1 $ 9,682.7 $ 8,876.8 $ 7,578.1
Long-term obligations,
less current portion $ 1,871.0 $ 1,524.5 $ 1,224.5 $ 1,362.2 $ 1,420.7
Shareholders' equity $ 5,437.1 $ 4,400.4 $ 3,894.6 $ 3,389.9 $ 2,940.0
(1) Amounts reflect business combinations and the impact of merger-related
costs and other special charges in all periods presented. See Note 2 of
"Notes to Consolidated Financial Statements" for a further discussion of
merger-related costs and other special charges affecting fiscal 2001, 2000,
and 1999. Fiscal 1998 amounts reflect the impact of merger-related charges
and other special charges of $57.8 million ($19.5 million, net of tax).
Fiscal 1997 amounts reflect the impact of merger-related charges of $50.9
million ($36.6 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 June 30,
2001.
(4) Cash dividends per Common Share exclude dividends paid by all entities with
which the Company has merged.
10
11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis has been prepared giving
retroactive effect to the pooling-of-interests business combinations with
Scherer on August 7, 1998, Allegiance on February 3, 1999, PSI on May 21, 1999,
ALP on September 10, 1999 and Bindley on February 14, 2001.
The discussion and analysis presented below refer to and should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K. Portions of this management's discussion
and analysis presented below include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward-looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. Except to the limited extent required by
applicable law, the Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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.
RESULTS OF OPERATIONS
---------------------
OPERATING REVENUE
Percent of Total
Growth (1) Operating Revenues
Years ended June 30 2001 2000 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 31% 22% 81% 79% 76%
Medical-Surgical Products and Services 19% 5% 15% 16% 18%
Pharmaceutical Technologies and Services 9% 15% 3% 4% 4%
Automation and Information Services 17% (2)% 1% 1% 2%
Total Company 28% 18% 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the respective fiscal year as compared to
the prior fiscal year.
Total operating revenue increased 28% during fiscal 2001 as compared to
fiscal 2000. The increase in operating revenue resulted from a higher sales
volume to existing customers; pharmaceutical price increases; acquisitions; and
addition of new customers, some of which was a result of cross-selling
opportunities among the various businesses. For further discussion of
acquisitions, see Note 2 of "Notes to Consolidated Financial Statements".
The increase in operating revenue of 18% for fiscal 2000 over fiscal 1999
resulted from a higher sales volume to existing customers; pharmaceutical price
increases; and 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 fiscal 2001 resulted from strong sales to all customer
segments, especially chain pharmacies; an increase in sales volume to existing
customers; and the addition of new contracts. The increase in this segment's
operating revenue in fiscal 2000 resulted from strong sales to chain pharmacies;
strong sales within the segment's specialty distribution businesses; and the
addition of several new contracts involving multiple operating business
segments. Offsetting the growth in fiscal 2000 was the impact of pharmacy
management business continuing to exit unprofitable accounts, an initiative that
began in late fiscal 1999.
The Medical-Surgical Products and Services segment's operating revenue
growth in fiscal 2001 primarily reflects an increase in sales of distributed
products. The Company acquired Bergen Brunswig Medical Corporation ("BBMC") in
the first quarter of fiscal 2001 and accounted for the acquisition as a purchase
transaction. As prior year revenues for this segment were not restated, the
inclusion of BBMC revenues for fiscal 2001 significantly increased revenues over
the prior year for distributed products. The increase in this segment's
operating revenue in fiscal 2000 resulted from an increase in sales across
virtually all product lines and an increase in international demand over fiscal
1999.
11
12
The Pharmaceutical Technologies and Services segment's growth in fiscal
2001 resulted from higher sales volume particularly involving the Zydis(R)
rapid-dissolving drug-delivery technology and the sterile-liquid pharmaceutical
products. Slowing sales in the protease inhibitor and health and nutritional
product lines partially offset the growth in this segment. The increase in this
segment's operating revenue in fiscal 2000 was primarily the result of strong
sales volume in the pharmaceutical-packaging business, liquid-fill contract
manufacturing business, drug delivery system business in North America, and
within the health and nutrition market. Cross selling opportunities among the
businesses within this segment contributed to the overall growth.
The Automation and Information Services segment's operating revenue growth
in fiscal 2001 primarily reflects sales of new products, such as the
MedSTATION(R) SN, which was introduced in late fiscal 2000 and further
penetration of the market with existing automation products. The slight decrease
in this segment's operating revenue growth in fiscal 2000 was primarily due to
timing of customers' purchases related to the Year 2000 date change.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports bulk deliveries made
to customers' warehouses as revenue. These sales involve the Company acting as
an intermediary in the ordering and subsequent delivery of pharmaceutical
products. Fluctuations in bulk deliveries result largely from circumstances that
the Company cannot control, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, 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 2001 2000 1999
----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.2% 5.5% 5.7%
Medical-Surgical Products and Services 22.1% 23.2% 23.4%
Pharmaceutical Technologies and Services 33.3% 33.1% 33.0%
Automation and Information Services 68.6% 69.2% 68.5%
Total Company 9.3% 10.2% 11.0%
----------------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased in
fiscal 2001 and fiscal 2000. This decrease resulted from a greater mix of lower
margin pharmaceutical distribution operating revenues in fiscal 2001 and fiscal
2000 as compared to the prior years. The Pharmaceutical Distribution and
Provider Services segment represented 81% of operating revenues in fiscal 2001,
up from 79% and 76% of operating revenues in fiscal 2000 and fiscal 1999,
respectively. The decline in the margins in the Medical-Surgical Products and
Services and Automation and Information Services segments also contributed to
the overall decline in the Company's gross margin in fiscal 2001.
The gross margin as a percentage of operating revenue in the Pharmaceutical
Distribution and Provider Services segment decreased in fiscal 2001 and fiscal
2000, primarily due to the impact of lower selling margins. The decline in
selling margins is attributed to a highly competitive market and greater mix of
high volume customers where a lower cost of distribution and better asset
management enabled the Company to offer lower selling margins to its customers.
This decrease was partially offset by higher vendor margins from favorable price
increases and manufacturer marketing programs.
The gross margin as a percentage of operating revenue in the
Medical-Surgical Products and Services segment decreased in fiscal 2001,
primarily due to the acquisition of BBMC. This acquisition shifted product mix
toward lower margin distributed products. In fiscal 2000, 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 contributed to the decrease in gross margin in this
segment.
The gross margin as a percentage of operating revenue in the
Pharmaceutical Technologies and Services segment increased in fiscal 2001 and
fiscal 2000 due to an increase in sales volume in the higher margin liquid fill
contract manufacturing and drug delivery system businesses. The drug delivery
system business' shift to higher margin pharmaceutical products from lower
margin health and nutrition products also contributed to the improvement in
gross margin.
The gross margin as a percentage of operating revenue in the Automation and
Information Services segment decreased in fiscal 2001, primarily due to changes
in its product mix. Price increases during the year and changes in its product
mix increased this segment's gross margin as a percentage of revenue in fiscal
2000.
12
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of operating revenue)
Years ended June 30 2001 2000 1999
----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.4% 2.7% 3.0%
Medical-Surgical Products and Services 14.6% 15.8% 16.9%
Pharmaceutical Technologies and Services 14.7% 14.5% 15.9%
Automation and Information Services 32.9% 34.9% 34.2%
Total Company 5.2% 5.8% 6.6%
----------------------------------------------------------------------------------------------------
Selling, general and administrative expenses as a percentage of operating
revenue declined in fiscal years 2001 and 2000. This decline reflects economies
associated with the Company's revenue growth. Significant productivity gains
resulting from continued cost control efforts in all segments and the
continuation of consolidation and selective automation of operating facilities
contributed to the improvement. In addition, the Company is continuing to take
advantage of synergies from recent acquisitions to decrease selling, general and
administrative expenses as a percentage of operating revenue. Partially
offsetting the improvement in fiscal 2001 was an increase in selling, general
and administrative expenses as a percentage of operating revenue for the
Pharmaceutical Technologies and Services segment. This change was primarily a
result of surplus capacity in the health and nutritional manufacturing
facilities for this segment (see discussion in the operating revenue section).
Partially offsetting the improvements in fiscal 2000 was an increase in selling,
general and administrative expenses as a percentage of operating revenue for the
Automation and Information Services segment. This change was primarily a result
of a slight decrease in this segment's operating revenue from fiscal 1999 to
fiscal 2000.
The selling, general and administrative expenses grew 14% and 3% in fiscal
years 2001 and 2000, respectively. The increases are primarily attributed to
increases in personnel costs and depreciation expense. The overall increase
compares favorably to the 28% and 18% 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, 2001, 2000 and 1999.
Fiscal Year Ended June 30,
---------------------------------------
(in millions, except per share amounts) 2001 2000 1999
---------------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ (20.8) $ 1.2 $ (56.6)
Employee-related costs (38.3) (5.0) (38.8)
ALP transaction bonus -- (20.3) --
Exit costs - distribution center consolidation (15.8) -- --
Other exit costs (1.6) (11.7) (9.4)
Scherer restructuring costs (1.6) (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 (40.0) (19.3) (13.7)
---------------------------------------------------------------------------------------------
Total merger-related costs $(118.1) $ (64.7) $(146.6)
---------------------------------------------------------------------------------------------
Other special charges:
Distribution center closures $ (4.4) $ -- $ --
Manufacturing facility closures (2.2) -- --
Employee-related costs (5.2) -- --
Litigation settlement 5.0 -- --
Priority spin-off -- -- (18.8)
---------------------------------------------------------------------------------------------
Total other special charges $ (6.8) $ -- $ (18.8)
---------------------------------------------------------------------------------------------
Total special charges $(124.9) $ (64.7) $(165.4)
Tax effect of special charges
39.6 14.9 33.8
Pro forma ALP taxes
-- -- 9.3
---------------------------------------------------------------------------------------------
Net effect of special charges $ (85.3) $ (49.8) $(122.3)
=============================================================================================
Net effect on diluted earnings per share $ (0.19) $ (0.11) $ (0.27)
=============================================================================================
13
14
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 Bindley, ALP, Allegiance and Scherer.
During the fiscal years presented in the preceding table, 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 Bindley, 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 billing and employee-related costs were less than the
amounts originally anticipated, resulting in a reduction of the merger-related
costs.
The Company recorded a charge of $15.8 million during fiscal 2001
associated with the Company's plans to consolidate distribution centers as a
result of the Company's merger transaction with Bindley. In connection with such
consolidations, the Company has incurred employee-related costs and exit costs
related to termination of contracts and lease agreements during the year.
Other 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.
The Company recorded charges of $1.6 million, $9.6 million and $26.7
million during fiscal years 2001, 2000 and 1999, respectively. These charges
were business restructuring costs relating to the Company's merger transaction
with Scherer. As part of the business restructuring, the Company has closed
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.
The Company recorded charges of $4.0 million in fiscal 1999. This charge
related to the write-down of impaired inventory associated with the merger
transaction with Owen. Also, during fiscal 1999, the Company recorded charges of
$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. Also, the actual amount billed for services
provided by third parties engaged by the Company was less than the estimate,
resulting in a reduction of the merger-related costs.
Other integration costs include charges related to integration of the
operations of previous merger transactions, primarily the merger transactions
with Bindley, ALP, and Allegiance.
Other Special Charges. During fiscal 2001, the Company recorded a special charge
of $5.0 million related to rationalization of certain pharmaceutical
distribution centers. Approximately, $4.4 million related to asset impairments,
lease exit costs and duplicate facility costs resulting from the Company's
decision to consolidate certain distribution centers and relocate to a more
modern distribution center. The remaining amount related to employee severance
costs.
In addition, during fiscal 2001, the Company recorded a special charge of
$6.8 million related to the rationalization of certain health and nutritional
manufacturing facilities. Approximately, $2.2 million related to lease exit
costs and the remaining amount related to employee severance costs.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
During fiscal 1999, Bindley recorded a special charge of $18.8 million.
Approximately $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 the "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.
14
15
Pro Forma Impact. Since April 1998, ALP was 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 fiscal 1999, net earnings
would have been reduced by $9.3 million if ALP had been subject to federal
income taxes.
Summary. In fiscal 2001, the net effect of various special charges reduced
reported net earnings by $85.3 million to $857.4 million and reduced reported
diluted earnings per Common Share by $0.19 per share to $1.88 per share. In
fiscal 2000, the net effect of various special charges reduced reported net
earnings by $49.8 million to $717.8 million and reduced reported diluted
earnings per Common Share by $0.11 per share to $1.60 per share. The net of tax
effect of the various special charges 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.
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 completed to date totaling
approximately $142.3 million ($91.6 million net of tax) in future periods.
Additional discussion related to the Company's merger transactions is included
in Note 2 of "Notes to Consolidated Financial Statements". The Company believes
that it will incur these costs in order to properly integrate operations - a
portion of which represents facility rationalizations and implementing
efficiencies with regard to, among other things, information systems, customer
systems, marketing programs and administrative functions. Such amounts will be
charged to expense when incurred.
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted in
expansion into service areas which (a) complement the Company's 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 role as a provider of
services to the healthcare industry through all its reporting segments. There
can be no assurance that it will be able to successfully pursue any such
opportunity or consummate any such transaction, if pursued. If additional
transactions are entered into or consummated, the Company would incur additional
merger-related costs.
INTEREST EXPENSE AND OTHER. The increase in interest expense and other of $16.2
million during fiscal 2001 compared to fiscal 2000 was a result of higher
average levels of borrowing during the year. The increase in interest expense
and other of $5.8 million during fiscal 2000 compared to fiscal 1999 was a
result of 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").
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to pretax
earnings were 35.6% of pretax earnings in fiscal 2001 compared with 37.1% in
fiscal 2000 and 39.2% for fiscal 1999. The fluctuation in the tax is primarily
due to the impact of recording certain non-deductible merger-related costs
during various periods as well as fluctuating state and foreign effective tax
rates as a result of the Company's business mix for all three fiscal years. The
provisions for income taxes excluding the impact of merger-related charges were
35.3%, 36.4%, and 37.0% for fiscal years 2001, 2000, and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $4.1 billion at June 30, 2001 from $2.9
billion at June 30, 2000. This increase resulted from additional investments in
inventories and effective asset management during fiscal 2001. Inventories
increased by $1.6 billion from year to year, which reflects the higher level of
business volume in Pharmaceutical Distribution and Provider Services'
activities. The timing of inventory purchases primarily accounts for the change
in accounts payable of $1.4 billion. In addition, as a result of effective asset
management, the Company reduced the number of days sales outstanding in trade
receivables resulting in an increase in cash and equivalents of $394.6 million.
Also, during the fiscal year, the Company repaid approximately $350.0 million of
short-term borrowings related to Bindley's securitization facility contributing
to the reduction of other short-term borrowings of $405.8 million (see further
discussion in Note 4 of "Notes to Consolidated Financial Statements.")
15
16
Property and equipment, at cost, increased by $280.4 million from June 30,
2000 to June 30, 2001. The increase was primarily due to ongoing plant expansion
and manufacturing equipment purchases in certain manufacturing businesses, as
well as additional investments made for management information systems and
upgrades to distribution facilities. The Company has several operating lease
agreements for the construction of new facilities (see further discussion in
Note 8 of "Notes to Consolidated Financial Statements.")
Shareholders' equity increased to $5.4 billion at June 30, 2001 from $4.4
billion at June 30, 2000. The increase was primarily due to net earnings of
$857.4 million and the investment of $370.5 million by employees of the Company
through various stock incentive plans. This increase was offset by dividends
paid of $35.4 million and by an increase in treasury stock due to the settlement
of the accelerated share repurchase program in the amount of $137.4 million (see
further discussion in Note 9 of "Notes to the Consolidated Financial
Statements"). In February 2001, the Company issued approximately 0.8 million
Common Shares and received aggregate proceeds of $47.7 million, which were used
for general corporate purposes.
The Company operates a commercial paper program. At June 30, 2001, the
commercial paper program provided for the issuance of up to $1.5 billion in
aggregate maturity value of commercial paper. The Company did not have any
borrowings outstanding under its commercial paper program at June 30, 2001. The
Company also has uncommitted short-term credit facilities with various bank
sources aggregating $121.0 million. At June 30, 2001, $26.3 million was
outstanding related to these short-term credit facilities. The Company has an
unsecured bank credit facility providing for up to an aggregate of $1.5 billion
in borrowings of which $750 million expires on March 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, 2001. At June 30, 2001,
the borrowings under the short-term credit facility of $26.3 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
$23.1 million, of which $8.3 million was outstanding at June 30, 2001 (see Note
4 of "Notes to Consolidated Financial Statements").
Bindley had a receivables securitization facility through which all Bindley
receivables from the sale of goods or rendering of services were sold to Bindley
Western Funding Corporation ("BWFC") (see Notes 1 and 4 of "Notes to
Consolidated Financial Statements"). BWFC entered into a third party agreement
to sell interests in receivables of up to $350 million. During fiscal 2001, the
Company repaid all outstanding borrowings and terminated this facility.
During fiscal 2001, the Company entered into an agreement to sell trade
receivables to a special purpose accounts receivable and financing entity
("SPE"). The SPE exclusively engages in purchasing trade receivables from, and
making loans to, the Company. The SPE, which is consolidated by the Company,
issued $400 million in preferred debt securities to parties not affiliated with
the Company. Those preferred debt securities must be retired or redeemed before
the Company can have access to the SPE's receivables.
During fiscal 2001, the Company issued approximately 0.8 million Common
Shares and received aggregate proceeds of $47.7 million, which were used for
general corporate purposes. In addition, the Company issued $500 million of
6.75% Notes due 2011. The proceeds of the debt issuance were used for early
redemption of Bindley debt and for repayment of a portion of the Company's
commercial paper and general corporate purposes, including working capital,
capital expenditures, repayment or refinancing of indebtedness, acquisitions and
investments. After such issuance, the Company has the capacity to issue
approximately $1.0 billion of additional equity or debt securities pursuant to
the shelf registration statements filed with the Securities and Exchange
Commission.
During the fiscal quarter ended June 30, 2001, the Company filed a shelf
registration statement on Form S-4 increasing the number of shares available for
issuance in connection with future business combinations to 15.0 million Common
Shares.
The Company currently believes that it has adequate capital resources at
its disposal to fund currently anticipated capital expenditures, business growth
and expansion, and current and projected debt service requirements, including
those related to business combinations.
See Notes 1 and 5 of 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.
16
17
OTHER
-----
RECENT FINANCIAL ACCOUNTING STANDARDS. In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. The Company
does not believe that the prospective adoption of this standard will have a
material impact on its consolidated financial statements. SFAS No. 142 changes
the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. Due to the adoption of SFAS
No. 142, the Company will not amortize goodwill beginning in fiscal 2002. The
goodwill amortization expense during fiscal 2001 was approximately $48.9
million. The Company will complete its initial impairment assessment as required
by SFAS No. 142 by December 31, 2001. The Company does not anticipate this
assessment will result in a material write down during fiscal 2002.
In September 2000, the FASB issued the SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which is effective for any activities occurring after March 31, 2001. SFAS No.
140 replaces SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities", therefore revising the disclosure for
securitizations and other transfers of financial assets or collateral. Adoption
of SFAS No. 140 did not have a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by SFAS No. 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. The
provisions of SFAS No. 133 were effective at the beginning of the Company's
fiscal year ended June 30, 2001. Adoption of this standard 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 required adoption
during the fourth quarter of fiscal 2001. Adoption of SAB 101 did not have a
material impact on the consolidated financial statements.
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" addressing
the classification of shipping and handling revenue. The amount of revenue
received for shipping and handling is immaterial for all periods presented.
Additional disclosure related to the costs of shipping and handling is provided
in Note 1 of "Notes to Consolidated Financial Statements".
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 5 of the "Notes to Consolidated Financial Statements."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Consolidated Financial Statements and Schedule
Consolidated Statements of Earnings for the Fiscal Years Ended June
30, 2001, 2000 and 1999
Consolidated Balance Sheets at June 30, 2001 and 2000
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
17
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of Cardinal Health,
Inc. (an Ohio corporation) and subsidiaries as of June 30, 2001 and 2000 and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the two years in the period ended June 30, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the historical consolidated
financial statements of Bindley Western Industries, Inc. (Bindley), a wholly
owned subsidiary of Cardinal Health, Inc., as of December 31, 1999 and for the
year then ended. The historical consolidated financial statements of Bindley
represent approximately 15% of consolidated total assets at June 30, 2000, and
represent total revenues and net income of approximately 22% and 5%,
respectively, of consolidated amounts for the year then ended. These
consolidated financial statements were audited by another auditor whose report,
presented herein, and our opinion, insofar as it relates to the amounts included
for Bindley, is based solely on the report of such auditor.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditor
provides a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cardinal Health, Inc.
and subsidiaries as of June 30, 2001 and 2000 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States.
The consolidated financial statements of Cardinal Health, Inc. and subsidiaries
for the year ended June 30, 1999, prior to restatement for pooling of
interests, and the separate financial statements of Bindley for the year ended
December 31, 1998 that have been included in the June 30, 1999 restated
consolidated financial statements of Cardinal Health, Inc., were audited and
reported on separately by other auditors and whose reports, presented herein a)
dated August 10, 1999, except for the first sentence of the third paragraph of
Note 2 as to which the date is May 26, 2000 and the fiscal 1999 amounts in Note
12 as to which the date is September 5, 2000 and b) dated March 21, 2000,
except as to Note 3 and Note 20, which are as of December 15, 2000,
respectively expressed unqualified opinions on those statements. We audited the
combination of the accompanying consolidated statements of earnings,
shareholders' equity and cash flows for the year ended June 30, 1999, after
restatement for the fiscal 2001 pooling of interests. In our opinion, such
consolidated statements have been properly combined on the basis described in
Note 1 of the notes to consolidated financial statements.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio,
July 27, 2001.
18
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Directors of Cardinal Health, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated July 27, 2001 appearing on page 18 of this Form 10-K also included an
audit of the information as of and for the two-year period ended June 30, 2001
in the Financial Statement Schedule - Valuation and Qualifying Accounts. We did
not audit the historical Financial Statement Schedule of Bindley Western
Industries, Inc. (Bindley), a wholly owned subsidiary of Cardinal Health, Inc.,
as of December 31, 1999 and for the year then ended. This Financial Statement
Schedule was audited by another auditor whose report, presented herein, and our
opinion, insofar as it relates to the amounts included for Bindley, is based
solely on the report of such auditor.
The Financial Statement Schedule of Cardinal Health, Inc. for the year ended
June 30, 1999, prior to the restatement for pooling of interests, and the
separate Financial Statement Schedule of Bindley for the years ended December
31, 1998, that have been included in the June 30, 1999 restated consolidated
Financial Statement Schedule, were audited and reported on separately by other
auditors whose reports, presented herein a) dated August 10, 1999, except for
the first sentence of the third paragraph of Note 2 as to which the date is May
26, 2000 and the fiscal 1999 amounts in Note 12 as to which the date is
September 5, 2000 and b) dated March 21, 2000, except as to Note 3 and Note 20,
which are as of December 15, 2000, respectively expressed unqualified opinions
on that schedule. We audited the combination of the information for the year
ended June 30, 1999, after restatement for the 2001 pooling of interests.
In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein as of and for the two-year
period ended June 30, 2001 when read in conjunction with the related
consolidated financial statements, and, in our opinion, the information for the
year ended June 30, 1999, has been properly combined on the basis described in
Note 1 of the Notes to Consolidated Financial Statements.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation allowances is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements (not presented
separately herein). This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio,
July 27, 2001.
19
20
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the consolidated statements of earnings, shareholders' equity,
and cash flows of Cardinal Health, Inc. and subsidiaries for the year ended June
30, 1999. Our audit also included the consolidated financial statement schedule,
as it relates to the year ended June 30, 1999, listed in the Index at Item 14.
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 to 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 audit. We did not audit the financial statements of Allegiance
Corporation ("Allegiance"), a wholly owned subsidiary of Cardinal Health, Inc.,
for the year ended June 30, 1999. We also did not audit the financial statements
of R.P. Scherer Corporation ("Scherer"), a wholly owned subsidiary of Cardinal
Health, Inc., for the year ended June 30, 1999. The combined financial
statements of Allegiance and Scherer represent combined revenues and net income
of approximately 25% and 35% of consolidated amounts for the year 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 audit 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
audit and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Cardinal Health,
Inc. and subsidiaries, for the year 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 year ended June 30, 1999, when considered in relation to the basic fiscal
1999 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 third paragraph of Note 2
as to which the date is May 26, 2000 and the fiscal 1999 amounts in Note 12 as
to which the date is September 5, 2000.
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To R.P. Scherer Corporation:
We have audited the consolidated statements of income, comprehensive income,
cash flows and shareholders' equity for the year ended June 30, 1999 (not
presented separately herein) of R.P. SCHERER CORPORATION (a Delaware corporation
and a wholly-owned subsidiary of Cardinal Health, Inc.) and subsidiaries. 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 schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of R.P. Scherer Corporation's and
subsidiaries operations and their cash flows for the year ended June 30, 1999,
in conformity with accounting principles generally accepted in the United
States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation allowances is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements (not presented
separately herein). This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey,
August 9, 1999.
21
22
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders of Allegiance Corporation
In our opinion, the 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 results of their
operations and their cash flows for the year ended June 30, 1999 in conformity
with accounting principles generally accepted in the United States of America.
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 audit. We conducted our audit 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
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Allegiance Corporation for any
period subsequent to June 30, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 29, 1999
22
23
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Stockholders of Allegiance Corporation
Our audit of the consolidated financial statements of Allegiance Corporation and
its subsidiaries referred to in our report dated July 29, 1999 appearing in the
Cardinal Health, Inc. Annual Report on Form 10-K for the year ended June 30,
2001 also included an audit of the Financial Statement Schedule II - Valuation
and Qualifying Accounts ("financial statement schedule") of Allegiance
Corporation and its subsidiaries for the year ended June 30, 1999 (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 Allegiance Corporation for any period subsequent to June 30, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 29, 1999
23
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 1999 and the
related consolidated statements of earnings, of shareholders' equity and of
cash flows for each of the two years in the period ended December 31, 1999 of
Bindley Western Industries, Inc. and its subsidiaries (the "Company") (not
presented separately herein) present fairly, in all material respects, their
financial position, results of operations and cash flows at December 31, 1999,
and for each of the two 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 Note 3 and Note 20, which are
as of December 15, 2000
24
25
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 Note 3 and Note 20, which are as of December
15, 2000, appearing in the Cardinal Health, Inc. Annual Report on Form 10-K
for the year ended June 30, 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 for the
year ended December 31, 1999 (not presented separately herein). In our opinion,
this financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. We have not audited the consolidated
financial statements and financial statement schedule of Bindley Western
Industries, Inc. for any period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 21, 2000, except as to Note 3 and Note 20,
which are as of December 15, 2000
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
2001 2000 1999
----------------------------------------------------
Revenue:
Operating revenue $ 38,660.1 $ 30,257.8 $ 25,682.5
Bulk deliveries to customer warehouses 9,287.5 8,092.1 7,050.4
------------ ------------ ------------
Total revenue 47,947.6 38,349.9 32,732.9
Cost of products sold:
Operating cost of products sold 35,050.2 27,163.8 22,867.6
Cost of products sold - bulk deliveries 9,285.8 8,089.9 7,048.1
Special charges -- -- 4.0
------------ ------------ ------------
Total cost of products sold 44,336.0 35,253.7 29,919.7
------------ ------------ ------------
Gross margin 3,611.6 3,096.2 2,813.2
Selling, general and administrative expenses 1,999.6 1,751.0 1,697.2
Special charges 124.9 64.7 161.4
------------ ------------ ------------
Operating earnings 1,487.1 1,280.5 954.6
Interest expense and other 154.9 138.7 132.9
------------ ------------ ------------
Earnings before income tax 1,332.2 1,141.8 821.7
Provision for income taxes 474.8 424.0 322.4
------------ ------------ ------------
Net earnings $ 857.4 $ 717.8 $ 499.3
============ ============ ============
Net earnings per Common Share:
Basic $ 1.93 $ 1.64 $ 1.14
Diluted $ 1.88 $ 1.60 $ 1.12
Weighted average number of Common Shares outstanding:
Basic 443.2 438.8 434.9
Diluted 455.5 448.7 447.2
-----------------------------------------------------------------------------------------------------------
Net earnings $ 857.4 $ 717.8 $ 499.3
Pro forma adjustment for income taxes (See Note 2) -- -- (9.3)
------------ ------------ ------------
Pro forma net earnings $ 857.4 $ 717.8 $ 490.0
============ ============ ============
Pro forma net earnings per Common Share:
Basic $ 1.93 $ 1.64 $ 1.13
Diluted $ 1.88 $ 1.60 $ 1.10
The accompanying notes are an integral part of these consolidated statements.
26
27
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2001 2000
------------------ ------------------
ASSETS
Current assets:
Cash and equivalents $ 934.1 $ 539.5
Trade receivables, net 2,408.7 2,398.8
Current portion of net investment in sales-type leases 236.3 187.7
Inventories 6,286.1 4,657.0
Prepaid expenses and other 851.1 663.4
------------ ------------
Total current assets 10,716.3 8,446.4
------------ ------------
Property and equipment, at cost:
Land, buildings and improvements 978.0 806.1
Machinery and equipment 2,167.5 2,115.4
Furniture and fixtures 200.4 144.0
------------ ------------
Total 3,345.9 3,065.5
Accumulated depreciation and amortization (1,507.6) (1,337.2)
------------ ------------
Property and equipment, net 1,838.3 1,728.3
Other assets:
Net investment in sales-type leases, less current portion 671.7 578.6
Goodwill and other intangibles, net 1,175.4 1,043.7
Other 240.7 227.1
------------ ------------
Total $ 14,642.4 $ 12,024.1
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable & other short term borrowings $ 8.3 $ 414.1
Current portion of long-term obligations 5.9 9.3
Accounts payable 5,319.9 3,895.1
Other accrued liabilities 1,240.7 1,228.2
------------ ------------
Total current liabilities 6,574.8 5,546.7
------------ ------------
Long-term obligations, less current portion 1,871.0 1,524.5
Deferred income taxes and other liabilities 759.5 552.5
Shareholders' equity:
Common Shares, without par value 1,893.1 1,509.6
Retained earnings 4,146.0 3,331.6
Common Shares in treasury, at cost (457.2) (346.6)
Other comprehensive income (140.3) (81.9)
Other (4.5) (12.3)
------------ ------------
Total shareholders' equity 5,437.1 4,400.4
------------ ------------
Total $ 14,642.4 $ 12,024.1
============ ============
The accompanying notes are an integral part of these consolidated statements.
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES
------------------------- TREASURY SHARES OTHER
SHARES RETAINED -------------------- COMPREHENSIVE
ISSUED AMOUNT EARNINGS SHARES AMOUNT INCOME
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1998 183.0 $1,266.7 $2,246.0 (1.6) $ (86.2) $ (27.9)
Comprehensive income:
Net earnings 499.3
Foreign currency translation adjustments (17.0)
Total comprehensive income
Employee stock plans activity,
including tax benefits of $65.4 million 3.4 139.6 (0.7) 34.8
Treasury shares acquired and shares retired (1.9) (73.8) (2.9) 1.7 23.5
Dividends paid (49.1)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 105.6 (0.3) (0.1) --
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 0.1 0.5 8.6 0.9
Stock issued for acquisitions and other 0.2 (0.1) (1.0)
Distribution of Priority Healthcare Corporation (24.4) (34.5)
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1999 290.4 $1,308.5 $2,666.1 (0.7) $ (27.9) $ (44.0)
Comprehensive income:
Net earnings 717.8
Foreign currency translation adjustments (37.9)
Total comprehensive income
Employee stock plans activity,
including tax benefits of $46.9 million 4.4 147.8 -- (0.2)
Treasury shares acquired (22.2) (7.3) (318.5)
Dividends paid (30.0)
Stock issued for acquisitions and other 4.6 53.3 (0.1) (0.1) --
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2000 299.4 $1,509.6 $3,331.6 (8.1) $ (346.6) $ (81.9)
Comprehensive income:
Net earnings 857.4
Foreign currency translation adjustments (46.4)
Unrealized loss on derivatives (6.7)
Unrealized loss on investment (5.3)
Total comprehensive income
Employee stock plans activity,
including tax benefits of $159.2 million 7.2 332.7 0.6 28.1
Treasury shares acquired -- (139.0)
Dividends paid (35.4)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 148.5 (1.2)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 0.3 4.5 (4.1) -- 0.3
Stock issued for acquisitions and other 0.8 47.5 (3.5)
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2001 456.2 $1,893.1 $4,146.0 (7.5) $ (457.2) $ (140.3)
======== ======== ======== ======== ======== ========
TOTAL
SHAREHOLDERS'
OTHER EQUITY
-------- --------
BALANCE, JUNE 30, 1998 $ (8.7) $3,389.9
Comprehensive income:
Net earnings 499.3
Foreign currency translation adjustments (17.0)
--------
Total comprehensive income 482.3
Employee stock plans activity,
including tax benefits of $65.4 million (2.9) 171.5
Treasury shares acquired and shares retired 3.5 (49.7)
Dividends paid (49.1)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares (0.3)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 10.0
Stock issued for acquisitions and other (1.1)
Distribution of Priority Healthcare Corporation (58.9)
-------- --------
BALANCE, JUNE 30, 1999 $ (8.1) $3,894.6
Comprehensive income:
Net earnings 717.8
Foreign currency translation adjustments (37.9)
--------
Total comprehensive income 679.9
Employee stock plans activity,
including tax benefits of $46.9 million (4.2) 143.4
Treasury shares acquired (340.7)
Dividends paid (30.0)
Stock issued for acquisitions and other 53.2
-------- --------
BALANCE, JUNE 30, 2000 $ (12.3) $4,400.4
Comprehensive income:
Net earnings 857.4
Foreign currency translation adjustments (46.4)
Unrealized loss on derivatives (6.7)
Unrealized loss on investment (5.3)
--------
Total comprehensive income 799.0
Employee stock plans activity,
including tax benefits of $159.2 million 4.7 365.5
Treasury shares acquired (139.0)
Dividends paid (35.4)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares (1.2)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) (0.1) 0.6
Stock issued for acquisitions and other 3.2 47.2
-------- --------
BALANCE, JUNE 30, 2001 $ (4.5) $5,437.1
======== ========
The accompanying notes are an integral part of these consolidated statements.
28
29
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 857.4 $ 717.8 $ 499.3
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 280.6 257.0 248.2
Provision for deferred income taxes 149.1 128.5 128.3
Provision for bad debts 41.4 37.5 33.1
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (31.4) (377.3) (122.5)
Increase in inventories (1,517.8) (1,071.6) (479.6)
Increase in net investment in sales-type leases (141.8) (159.5) (282.3)
Increase in accounts payable 1,313.8 899.4 169.5
Other operating items, net (79.6) 72.2 102.4
------------ ------------ ------------
Net cash provided by operating activities 871.7 504.0 296.4
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/divestiture of subsidiaries, net of cash acquired (364.3) (69.6) (147.5)
Proceeds from sale of property and equipment 72.1 60.2 58.0
Additions to property and equipment (341.2) (331.1) (359.5)
Purchase of marketable securities available for sale -- (7.7) (15.6)
Proceeds from sale of marketable securities available for sale -- 56.1 13.5
------------ ------------ ------------
Net cash used in investing activities (633.4) (292.1) (451.1)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt (824.9) 426.2 (334.9)
Reduction of long-term obligations (53.8) (179.8) (118.8)
Proceeds from long-term obligations, net of issuance costs 911.3 0.5 223.7
Proceeds from securitized borrowings -- 125.8 224.2
Proceeds from issuance of Common Shares 252.1 97.5 88.9
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (36.6) (30.0) (77.3)
Purchase of treasury shares (139.4) (341.4) (49.8)
Other -- 0.4 (4.8)
------------ ------------ ------------
Net cash provided by/(used in) financing activities 108.7 99.2 (48.8)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 347.0 311.1 (203.5)
CHANGE IN FISCAL YEAR (SEE NOTE 1) 47.6 -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 539.5 228.4 431.9
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 934.1 $ 539.5 $ 228.4
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
29
30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company currently conducts its business within four business
segments: Pharmaceutical Distribution and Provider Services; Medical-Surgical
Products and Services; Pharmaceutical Technologies and Services; and Automation
and Information Services. See Note 12 for information 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 merger
transactions with 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.
Scherer's fiscal year end was March 31. In order 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.
The Company's fiscal year end is June 30 and Bindley's fiscal year end was
December 31. 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.
As a result of changing Bindley's fiscal year end from December 31 to June
30, Bindley's results of operations for the six months ended June 30, 2000 are
not included in the combined results of operations but are reflected as an
adjustment in the Consolidated 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 2001, 2000 and 1999, the Company completed several
acquisitions, which were accounted for under the purchase method of accounting.
The consolidated financial statements include the results of operations from
each of these business combinations as of the date of acquisition. Additional
disclosure related to the Company's acquisitions is provided in Note 2.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual amounts may differ from these
estimated amounts.
CASH EQUIVALENTS. The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these cash equivalents approximates their fair value. Cash payments for interest
were $144.8 million, $133.8 million, and $125.1 million and cash payments for
income taxes were $213.6 million, $125.5 million and $94.9 million for fiscal
2001, 2000, and 1999, respectively. See Notes 2 and 4 for additional information
regarding non-cash investing and financing activities.
RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the
Company through its pharmaceutical and other healthcare distribution activities
and are presented net of an allowance for doubtful accounts of $106.8 million
and $71.1 million at June 30, 2001 and 2000, 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
$27.8 million and $24.0 million at June 30, 2001 and 2000, respectively (the
current portions are $13.3 million and $9.3 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $4.8 million and $4.6 million at June 30, 2001 and 2000,
respectively.
30
31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has formed Medicine Shoppe Capital Corporation ("MSCC") and
Cardinal Health Funding LLC ("CHF") as wholly owned subsidiaries of Medicine
Shoppe and Griffin Capital Corporation ("Griffin"), respectively. MSCC 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 and CHF are separate legal entities from the Company, Medicine Shoppe 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. See Note 4 for additional information on BWFC.
During fiscal 2001, 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 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. See Note 4 for additional
information.
INVENTORIES. A majority of inventories (approximately 66% in 2001 and 69% in
2000) 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, 2001 and 2000
by $52.8 million and $57.3 million, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
and amortization for financial reporting purposes are primarily computed using
the straight-line method over the estimated useful lives of the assets which
range from one to fifty years, including capital lease assets which are
amortized over the terms of their respective leases. 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 $680.5 million and $646.2 million at June 30, 2001 and 2000,
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 segment.
REVENUE RECOGNITION. The Company records distribution revenue when merchandise
is shipped to its customers and the Company has no further obligation to provide
services related to such merchandise. The Company also acts as an intermediary
in the ordering and subsequent delivery of bulk shipments of pharmaceutical
products, which are classified as bulk deliveries to customer warehouses and are
included in total revenue.
The Company earns franchise and origination fees from its apothecary-style
pharmacy franchisees. Franchise fees represent monthly fees based upon
franchisees' sales and are recognized as revenue when they are earned.
Origination fees from signing new franchise agreements are recognized as revenue
when the new franchise store is opened.
Pharmacy management and other service revenues are recognized as the
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.
31
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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.
SHIPPING AND HANDLING. The Company records shipping and handling costs as part
of selling, general and administrative expenses. Shipping and handling revenue
received was immaterial for all periods presented.
TRANSLATION OF FOREIGN CURRENCIES. Financial statements of the Company's
subsidiaries outside the U.S. generally are measured using the local currency as
the functional currency. Adjustments to translate those statements into U.S.
dollars are accumulated in a separate component of shareholders' equity.
Transactional exchange gains and losses are reflected in earnings.
INTEREST RATE AND CURRENCY RISK MANAGEMENT. At the beginning of fiscal 2001, the
Company adopted Financial Accounting Standard ("SFAS") No. 133, as amended,
"Accounting for Derivatives and Hedging Activity". Under this standard, all
derivative instruments are recorded at fair value on the balance sheet and all
changes in fair value are recorded to earnings or to shareholders' equity
through other comprehensive income. The adoption of this standard did not have a
material impact on the Company's consolidated financial statements taken as a
whole.
The Company uses forward currency exchange contracts, currency options and
interest rate swaps to manage its exposures to the variability of cash flows
primarily related to the foreign exchange rate changes of future foreign
currency transaction costs and to the interest rate changes on borrowing costs.
These contracts are designated as cash flow hedges.
The Company also uses interest rate swaps to hedge the changes in the value
of fixed rate debt due to variations in interest rates and forward foreign
currency exchange contracts to protect the value of existing foreign currency
assets and liabilities. These contracts are designated as fair value hedges.
The Company does not use derivative instruments for trading or speculative
purposes.
All of the Company's derivative contracts are adjusted to current market
values each period and qualify for hedge accounting under SFAS 133. The periodic
gains and losses of the contracts designated as cash flow hedges are deferred in
other comprehensive income until the underlying transactions are recognized.
Upon recognition, such gains and losses are recorded in operations as an
adjustment to the carrying amounts of the underlying transactions in the period
in which these transactions are recognized. For those contracts designated as
fair value hedges, the resulting gains or losses are recognized in earnings
offsetting the exposures of the underlying transactions. The carrying values of
all contracts are included in other assets or liabilities.
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in earnings immediately. If a fair value or cash flow
hedge ceases to qualify for hedge accounting or is terminated, the contract
would continue to be carried on the balance sheet at fair value until settled
and future adjustments to the contract's fair value would be recognized in
earnings immediately. If a forecasted transaction were no longer probable to
occur, amounts previously deferred in other comprehensive income would be
recognized immediately in earnings. Additional disclosure related to the
Company's hedging contracts is provided in Note 5.
32
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with the
development of new products and manufacturing methods are charged to expense as
incurred. Research and development expenses were $53.8 million, $48.5 million,
and $49.7 million in fiscal 2001, 2000, and 1999, 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. As of April 1998, ALP had elected
S-Corporation status for income tax purposes. As a result of the merger, ALP
terminated its S-Corporation election. The pro forma adjustment for income taxes
presents the pro forma tax expense of ALP as if ALP had been subject to federal
income taxes during the periods presented (see Note 2).
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options, computed using
the treasury stock method.
DIVIDENDS. Excluding dividends paid by all entities with which the Company has
merged, the Company paid cash dividends per Common Share of $0.080, $0.067, and
$0.063, for the fiscal years ended June 30, 2001, 2000, and 1999, 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.
RECLASSIFICATIONS. Certain reclassifications have been made to conform prior
periods' amounts to the current presentation.
RECENT FINANCIAL ACCOUNTING STANDARDS. In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. The Company
does not believe that the prospective adoption of this standard will have a
material impact on its consolidated financial statements. SFAS No. 142 changes
the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. Due to the adoption of SFAS
No. 142, the Company will not amortize goodwill beginning in fiscal 2002. The
goodwill amortization expense during fiscal 2001 was approximately $48.9
million. The Company will complete its initial impairment assessment as required
by SFAS No. 142 by December 31, 2001. The Company does not anticipate this
assessment will result in a material write down during fiscal 2002.
In September 2000, the FASB issued the SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which is effective for any activities occurring after March 31, 2001. SFAS No.
140 replaces SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities", therefore revising the disclosure for
securitizations and other transfers of financial assets or collateral. Adoption
of SFAS No. 140 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 required adoption
during the fourth quarter of fiscal 2001. Adoption of SAB 101 did not have a
material impact on the consolidated financial statements.
33
34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
BUSINESS COMBINATIONS.
Fiscal 2001. On February 14, 2001, the Company completed a merger transaction
with Bindley, which was accounted for as a pooling-of-interests. In the merger
transaction with Bindley, the Company issued approximately 23.1 million Common
Shares to Bindley stockholders and Bindley's outstanding stock options were
converted into options to purchase approximately 5.1 million Common Shares. In
fiscal 2001, the Company recorded a merger-related charge to reflect transaction
and other costs incurred as a result of the merger transaction with Bindley.
On August 16, 2000, the Company completed the purchase of Bergen Brunswig
Medical Corporation ("BBMC") for approximately $180 million, subject to
post-closing adjustments. BBMC distributes medical, surgical and laboratory
supplies to doctors' offices, long-term care and nursing centers, hospitals and
other providers of care. In addition, the Company also completed several other
individually immaterial acquisitions during fiscal 2001 for approximately $193.9
million, including future contingent payments. Liabilities of the operations
assumed were approximately $147.8 million, including debt of $25.0 million.
These transactions were accounted for under the purchase method of accounting.
The consolidated financial statements include the results of operations from
each of these business combinations as of the date of acquisition. Had the
transactions occurred on July 1, 2000, results of operations would not have
differed materially from reported results.
Fiscal 2000. On September 10, 1999, the Company completed a merger transaction
with ALP, which was accounted for as a pooling-of-interests. The Company issued
approximately 8.7 million Common Shares to ALP stockholders. During fiscal 2000,
the Company recorded a merger-related charge to reflect transaction and other
costs incurred as a result of the merger transaction with ALP.
On August 31, 1999, Bindley completed a merger transaction with Central
Pharmacy Services, Inc. ("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 on July 1, 1999, consolidated results
would not have been materially different from reported results.
Fiscal 1999. 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.
On February 3, 1999, the Company completed a merger transaction with
Allegiance that was accounted for as a pooling-of-interests. 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.
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.
34
35
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional merger-related costs associated with integrating the various
acquired companies and instituting efficiencies relating to them will be charged
to expense in subsequent periods when incurred.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2001, 2000 and 1999.
Fiscal Year Ended June 30,
-----------------------------------------
(in millions, except per share amounts) 2001 2000 1999
-----------------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ (20.8) $ 1.2 $ (56.6)
Employee-related costs (38.3) (5.0) (38.8)
ALP transaction bonus -- (20.3) --
Exit costs - distribution center consolidation (15.8) -- --
Other exit costs (1.6) (11.7) (9.4)
Scherer restructuring costs (1.6) (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 (40.0) (19.3) (13.7)
---------------------------------------------------------------------------------------------
Total merger-related costs $ (118.1) $ (64.7) $ (146.6)
---------------------------------------------------------------------------------------------
Other special charges:
Distribution center closures $ (4.4) $ -- $ --
Manufacturing facility closures (2.2) -- --
Employee-related costs (5.2) -- --
Litigation settlement 5.0 -- --
Priority spin-off -- -- (18.8)
---------------------------------------------------------------------------------------------
Total other special charges $ (6.8) $ -- $ (18.8)
---------------------------------------------------------------------------------------------
Total special charges $ (124.9) $ (64.7) $ (165.4)
Tax effect of special charges 39.6 14.9 33.8
Pro forma ALP taxes -- -- 9.3
---------------------------------------------------------------------------------------------
Net effect of special charges $ (85.3) $ (49.8) $ (122.3)
=============================================================================================
Net effect on diluted earnings per share $ (0.19) $ (0.11) $ (0.27)
=============================================================================================
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 Bindley, ALP, Allegiance and Scherer.
During the fiscal years presented in the table above, 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 Bindley, 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 billing and employee-related costs were less than the amounts originally
anticipated, resulting in a reduction of the merger-related costs.
The Company recorded a charge of $15.8 million during fiscal 2001
associated with the Company's plans to consolidate distribution centers as a
result of the Company's merger transaction with Bindley. In connection with such
consolidations, the Company has incurred employee-related costs and exit costs
related to termination of contracts and lease agreements during the year.
35
36
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other 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.
The Company recorded charges of $1.6 million, $9.6 million and $26.7
million during fiscal years 2001, 2000 and 1999, respectively. These charges
were business restructuring costs relating to the Company's merger transaction
with Scherer. As part of the business restructuring, the Company has closed
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.
The Company recorded charges of $4.0 million in fiscal 1999. This charge
related to the write-down of impaired inventory associated with the merger
transaction with Owen Healthcare, Inc. ("Owen"). Also, during fiscal 1999, the
Company recorded charges of $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. Also, the actual
amount billed for services provided by third parties engaged by the Company was
less than the estimate, resulting in a reduction of the merger-related costs.
Other integration costs include charges related to integration of the
operations of previous merger transactions.
Other Special Charges. During fiscal 2001, the Company recorded a special charge
of $5.0 million related to rationalization of certain pharmaceutical
distribution centers. Approximately, $4.4 million related to asset impairments,
lease exit costs and duplicate facility costs resulting from the Company's
decision to consolidate certain distribution centers and relocate to a more
modern distribution center. The remaining amount related to employee severance
costs.
In addition, during fiscal 2001, the Company recorded a special charge of
$6.8 million related to the rationalization of certain health and nutritional
manufacturing facilities. Approximately, $2.2 million related to lease exit
costs and the remaining amount related to employee severance costs.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
During fiscal 1999, Bindley recorded a special charge of $18.8 million.
Approximately $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 the "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.
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 fiscal 1999, net
earnings would have been reduced by $9.3 million if ALP had been subject to
federal income taxes.
Summary. In fiscal 2001, the net effect of various special charges reduced
reported net earnings by $85.3 million to $857.4 million and reduced reported
diluted earnings per Common Share by $0.19 per share to $1.88 per share. In
fiscal 2000, the net effect of various special charges reduced reported net
earnings by $49.8 million to $717.8 million and reduced reported diluted
earnings per Common Share by $0.11 per share to $1.60 per share. The net of tax
effect of the various special charges 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.
Certain merger-related costs are based upon estimates. Actual amounts paid
may ultimately differ from these estimates. If additional costs are incurred,
such items will be expensed as incurred.
36
37
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,
2001 2000
----------- -----------
Future minimum lease payments receivable $1,066.3 $ 890.3
Unguaranteed residual values 13.1 11.1
Unearned income (155.3) (120.1)
Allowance for uncollectible minimum lease payments
receivable (16.1) (15.0)
-------- --------
Net investment in sales-type leases 908.0 766.3
Less: current portion 236.3 187.7
-------- --------
Net investment in sales-type leases, less current portion $ 671.7 $ 578.6
======== ========
Future minimum lease payments to be received pursuant to sales-type leases
during the next five fiscal years and thereafter are: 2002 - $259.6 million;
2003 - $265.6 million; 2004 - $237.1 million; 2005 - $186.8 million; 2006 -
$103.7 million and 2007 and thereafter - $13.5 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, 2001, $5.4 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
each revision. The future minimum payments for these notes at June 30, 2001 are:
fiscal 2002 - $23.8 million and fiscal 2003 - $6.6 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 $23.1
million at June 30, 2001, at various money market rates. At June 30, 2001, $8.3
million, at a weighted average interest rate of 6.50%, was outstanding under
such arrangements and $64.1 million, at a weighted average interest rate of
6.20%, was outstanding at June 30, 2000. The total available but unused lines of
credit at June 30, 2001 was $14.8 million.
OTHER SHORT-TERM BORROWINGS. Bindley had a receivables securitization facility
(the "Receivables Facility") pursuant to which Bindley sold 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). At fiscal year end 2000, there were $350.0 million of
receivables interests outstanding bearing a Discount Rate of 6.10% per annum.
During fiscal 2001, the Company repaid all outstanding borrowings and terminated
this facility.
37
38
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,
2001 2000
------------ -------------
6.00% Notes due 2006 $ 150.0 $ 150.0
6.25% Notes due 2008 150.0 150.0
6.50% Notes due 2004 100.0 100.0
6.75% Notes due 2011 494.3 --
6.75% Notes due 2004 99.8 99.7
7.93% Notes due 2004 -- 25.0
7.30% Notes due 2006 127.9 127.9
7.80% Debentures due 2016 75.7 75.7
7.00% Debentures due 2026 (7 year put option in 2003) 192.0 192.0
Preferred debt securities 400.0 --
Commercial paper -- 509.2
Short-term borrowings, reclassified 26.3 54.2
Other obligations; interest averaging 4.45% in 2001 and
4.60% in 2000, due in varying installments
through 2015 60.9 50.1
-------------- --------------
Total 1,876.9 1,533.8
Less: current portion 5.9 9.3
-------------- --------------
Long-term obligations, less current portion $ 1,871.0 $ 1,524.5
============== ==============
The 6.00%, 6.25% and 6.50% Notes and the 6.75% Notes due 2011 represent
unsecured obligations of the Company, and the 6.75% Notes due 2004 represent
unsecured obligations of Scherer, which are guaranteed by the Company. The 7.93%
Notes represent a private placement of unsecured obligations of Bindley, which
was paid off in fiscal 2001. The 7.30% Notes and the 7.80% and 7.00% Debentures
represent unsecured obligations of Allegiance, which are guaranteed by the
Company. These obligations are not redeemable prior to maturity and are not
subject to a sinking fund.
During fiscal 2001, 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. These preferred debt securities must be retired or
redeemed before the Company can have access to the SPE's receivables. At June
30, 2001, the SPE owned approximately $497.2 million of receivables that are
included in the Company's consolidated balance sheet.
The Company has a commercial paper program, providing on June 30, 2001 for
the issuance of up to $1.5 billion in aggregate maturity value of commercial
paper. The Company did not have any borrowing outstanding under this program at
June 30, 2001. At June 30, 2000, the Company had $509.2 million outstanding
under this program with a market interest rate based upon LIBOR.
The Company also maintains other short-term credit facilities that allow
for borrowings up to $121.0 million. At June 30, 2001 and 2000, $26.3 million
and $54.2 million were outstanding under these uncommitted facilities. The
effective interest rate as of June 30, 2001 and 2000 was 4.30% and 6.30%,
respectively.
The Company also has an unsecured bank credit facility, which provides for
up to an aggregate of $1.5 billion in borrowings of which $750 million expires
on March 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, 2001. At June 30, 2001 and 2000, the commercial paper and other
short-term borrowings totaling $26.3 million and $563.4 million, respectively,
were reclassified as long-term, reflecting the Company's intent and ability,
through the existence of the unused credit facility, to refinance these
borrowings.
During fiscal 2001, the Company issued $500 million of 6.75% notes due
2011. The proceeds of this debt issuance were used for early redemption of
Bindley debt and for repayment of a portion of the Company's commercial paper
and general corporate
38
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purposes, including working capital, capital expenditures, repayment or
refinancing of indebtedness, acquisitions and investments. After such issuance,
the Company has the capacity to issue approximately $1.0 billion of additional
equity or debt securities pursuant to the shelf registration statements filed
with the Securities and Exchange Commission.
Certain long-term obligations are collateralized with property and
equipment of the Company with an aggregate book value of approximately $12.8
million at June 30, 2001. Maturities of long-term obligations for future fiscal
years are: 2002 - $5.9 million; 2003 - $32.0 million; 2004 - $218.9 million;
2005 - $3.4 million; 2006 - $153.2 million and 2007 and thereafter - $1,463.5
million.
5. FINANCIAL INSTRUMENTS
INTEREST RATE RISK MANAGEMENT. The Company is exposed to the impact of interest
rate changes. The Company's objective is to manage the impact of interest rate
changes on earnings and cash flows and on the market value of its borrowings.
The Company maintains a fixed rate debt as a percentage of its net debt within a
certain range.
The Company utilizes a mix of debt maturities along with both fixed-rate
and variable-rate debt to manage its changes in interest rates. In addition, the
Company enters into interest rate swaps to further manage its exposure to
interest rate variations related to its borrowings and to lower its overall
borrowing costs.
At June 30, 2001, the Company held pay-fixed interest rate swaps to hedge
the variability of cash flows related to changes in interest rates on borrowing
costs of variable rate debt. These contracts are classified as cash flow hedges
and mature through January 2004. The Company adjusts the pay-fixed interest rate
swaps to current market values through other comprehensive income, as the
contracts are effective in offsetting the interest rate exposure of the
forecasted interest rate payments hedged. The Company anticipates that these
contracts will continue to be effective. The gain/(loss) deferred in other
comprehensive income will be recognized immediately in earnings if the contracts
are no longer effective or the forecasted transactions are not expected to
occur.
The Company also held pay-floating interest rate swaps to hedge the change
in fair value of the fixed rate debt related to fluctuations in interest rates.
These contracts are classified as fair value hedges and mature through February
2011. The hedged fixed rate debt and the pay-floating interest rate swaps are
adjusted to current market values through other income/expense. During fiscal
2001, the market value adjustments for the debt hedged and pay-floating interest
rate swaps directly offset one another.
The following represents the notional amount hedged, fair value of the
interest rate swaps outstanding at June 30, 2001 included in other liabilities
and the amount of loss either deferred through other comprehensive income or
recognized through other income/expense during fiscal 2001.
(in millions) Notional Amount Liabilities Loss Classification of Loss
------------------------------------ -------------------- ------------ -------- --------------------------
Pay-fixed interest rate swaps $270.0 $6.9 $6.9 Other Comprehensive Income
Pay-floating interest rate swaps $250.0 $5.7 $5.7 Other Income/expense
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
CURRENCY RISK MANAGEMENT. The Company conducts business in several major
international currencies and is subject to risks associated with changing
foreign exchange rates. The Company's objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes to allow
management to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into various contracts that change in value as
foreign exchange rates change to protect the value of existing foreign currency
assets and liabilities, commitments and anticipated foreign currency revenues
and expenses. The gains and losses on these contracts offset changes in the
value of the underlying transactions as they occur.
At June 30, 2001, the Company held forward contracts expiring through June
2002 to hedge probable, but not firmly committed, revenues and expenses. These
hedging contracts are classified as cash flow hedges and accordingly, are
adjusted to current market values through other comprehensive income until the
underlying transactions are recognized. Upon recognition, such gains and losses
are recorded in operations as an adjustment to the carrying amounts of the
underlying transactions in the period in which these transactions are
recognized. The principal currencies hedged are the European euro, Japanese yen,
British pound, Canadian dollar and the Thai bhat.
39
40
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also held forward contracts expiring in July 2001 to hedge the
value of foreign currency assets and liabilities. These forward contracts are
classified as fair value hedges and are adjusted to current market values
through other income/expense directly offsetting the adjustment of the foreign
currency asset or liability.
The following represents the notional amount hedged, value of the forward
contracts outstanding at June 30, 2001 included in other assets or liabilities
and the amount of net gain/loss either deferred through other comprehensive
income or recognized through other income/expense during fiscal 2001.
Notional
(in millions) Amount Assets Liabilities Net Gain/(Loss) Classification of Gain/(Loss)
-------------------------- ------------ --------- ------------- ------------------ ---------------------------------
Forward Contracts -
Cash Flow Hedge $16.7 $0.7 $0.5 $ 0.2 Other Comprehensive Income
Forward Contracts -
Fair Value Hedge $44.1 $0.1 $0.2 $(0.1) Other Income/expense
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and
equivalents, trade receivables, accounts payable, notes payable-banks, other
short-term borrowings and other accrued liabilities at June 30, 2001 and 2000,
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
$1,905.9 million and $1,494.6 million as compared to the carrying amounts of
$1,876.9 million and $1,533.8 million at June 30, 2001 and 2000, respectively.
The fair value of the Company's long-term obligations is estimated based on
either the quoted market prices for the same or similar issues and the current
interest rates offered for debt of the same remaining maturities or estimated
discounted cash flows.
The following is a summary of the fair value gain/(loss) of the Company's
derivative instruments, based upon the estimated amount that the Company would
receive (or pay) to terminate the contracts as of June 30. The fair values are
based on quoted market prices for the same or similar instruments.
(in millions) 2001 2000
---------------------------- -------------------------- ---------------------------
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
----------- -------------- ------------ --------------
Foreign currency forward
contracts $ 60.8 $ 0.1 $17.2 $0.1
Interest Rate Swaps $520.0 $(12.6) $20.0 $ -
6. INCOME TAXES
Consolidated earnings before income taxes (in millions):
Fiscal Year Ended June 30,
-----------------------------------------
2001 2000 1999
------------- ------------ ------------
U.S. Based Operations $ 1,125.6 $ 1,016.3 $ 747.3
Non-U.S. Based Operations 206.6 125.5 74.4
------------- ------------ ------------
$ 1,332.2 $ 1,141.8 $ 821.7
============= ============ ============
40
41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes consists of the following (in millions):
Fiscal Year Ended June 30,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Current:
Federal $ 268.9 $ 242.0 $ 143.0
State 26.8 25.2 29.4
Foreign 30.0 28.3 21.7
-------------- -------------- --------------
Total $ 325.7 $ 295.5 $ 194.1
Deferred 149.1 128.5 128.3
-------------- -------------- --------------
Total provision $ 474.8 $ 424.0 $ 322.4
============== ============== ==============
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,
------------------------------------------------
2001 2000 1999
--------------- ------------- -------------
Provision at Federal
Statutory rate 35.0 % 35.0 % 35.0 %
State income taxes, net of
Federal benefit 3.0 3.1 4.0
Foreign tax rates (3.9) (2.1) (2.9)
Nondeductible expenses 1.7 1.3 4.6
Other (0.2) (0.2) (1.5)
--------------- --------------- ---------------
Effective income tax rate 35.6 % 37.1% 39.2 %
=============== =============== ===============
Provision has not been made for U.S. or additional foreign taxes on $410.4
million of undistributed earnings of foreign subsidiaries because those earnings
are considered permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in millions):
June 30, June 30,
2001 2000
------------- ------------
Deferred income tax assets:
Receivable basis difference $ 66.1 $ 45.1
Accrued liabilities 59.3 39.0
Net operating loss carryforwards 13.7 8.6
Foreign tax and other credit carryforwards -- 10.5
Other 18.6 9.5
---------- ----------
Total deferred income tax assets $ 157.7 $ 112.7
Valuation allowance for deferred income tax assets (8.3) (2.7)
---------- ----------
Net deferred income tax assets $ 149.4 $ 110.0
---------- ----------
Deferred income tax liabilities:
Inventory basis differences (234.7) (175.1)
Property-related (231.2) (207.1)
Revenues on lease contracts (185.3) (178.7)
Other (112.1) (13.9)
---------- ----------
Total deferred income tax liabilities $ (763.3) $ (574.8)
---------- ----------
Net deferred income tax liabilities $ (613.9) $ (464.8)
========== ==========
41
42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above amounts are classified in the consolidated balance sheets as follows
(in millions):
June 30, June 30,
2001 2000
--------------- ---------------
Other current liabilities $ (8.5) $ (106.7)
Deferred income taxes and other liabilities (605.4) (358.1)
--------------- ---------------
Net deferred income tax liabilities $ (613.9) $ (464.8)
=============== ===============
The Company had state net operating loss carryforwards of $274.3 million at
June 30, 2001. A valuation allowance of $8.3 million at June 30, 2001 has been
provided for the state net operating loss, as utilization of such carryforwards
within the applicable statutory periods is uncertain. The state net operating
loss carryforward expires through 2021. Expiring state net operating loss
carryforwards and the required valuation allowances are adjusted annually. At
June 30, 2001, the Company did not have any foreign tax credit carryforwards.
After application of the valuation allowance described above, the Company
anticipates no limitations will apply with respect to utilization of the net
deferred income tax assets described above.
Under a tax-sharing agreement with Baxter International, Inc. ("Baxter"),
Allegiance will pay for increases and be reimbursed for decreases to the net
deferred tax assets transferred on the date of the Baxter spin-off of
Allegiance. Such increases or decreases may result from audit adjustments to
Baxter's prior period tax returns.
7. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including defined
benefit and defined contribution plans. Substantially all of the Company's
domestic non-union employees are eligible to be enrolled in Company-sponsored
contributory profit sharing and retirement savings plans, which include features
under Section 401(k) of the Internal Revenue Code, and provide for Company
matching and profit sharing contributions. The Company's contributions to the
plans are determined by the Board of Directors subject to certain minimum
requirements as specified in the plans.
The total expense for employee retirement benefit plans (excluding defined
benefit plans (see below) was $47.8 million, $47.2 million and $46.6 million as
of June 30, 2001, 2000 and 1999, respectively.
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,
----------------------------------------
2001 2000
------------------- --------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 100.0 $ 98.7
Service cost 4.0 4.6
Interest cost 6.3 5.7
Plan participant contributions 0.7 0.5
Actuarial loss 0.6 6.1
Benefits paid (1.7) (2.8)
Translation (5.4) (12.5)
Curtailments -- (0.3)
------------- --------------
Benefit obligation at end of year $ 104.5 $ 100.0
------------- --------------
42
43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
----------------------------------------
2001 2000
------------------- --------------------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 64.9 $ 55.7
Actual return on plan assets (7.5) 6.3
Employer contributions 5.2 3.5
Plan participant contributions 0.7 0.5
Benefits paid (1.8) (2.3)
Translation (3.5) 1.2
---------- ----------
Fair value of plan assets
at end of year $ 58.0 $ 64.9
========== ==========
June 30,
----------------------------------------
2001 2000
------------------- --------------------
Funded status $ (46.5) $ (35.1)
Unrecognized net actuarial loss 20.6 8.0
Unrecognized net transition
asset (0.4) (0.4)
Unrecognized prior service cost 0.2 0.2
Translation 0.1 0.5
---------- ----------
Net amount recognized $ (26.0) $ (26.8)
========== ==========
Amounts recognized in the
Consolidated Balance Sheets:
Accrued benefit liability $ (26.0) $ (26.8)
---------- ----------
Net amount recognized $ (26.0) $ (26.8)
========== ==========
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 $103.4 million, $95.6 million and $56.8 million,
respectively, as of June 30, 2001 and $98.7 million, $91.9 million, and $63.5
million, respectively, as of June 30, 2000.
43
44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the Company's net periodic benefit costs are as follows (in
millions):
For the Fiscal Year Ended June 30,
-----------------------------------------------
2001 2000 1999
----------- ----------- ---------
Components of net periodic
Benefit cost:
Service cost $ 4.0 $ 4.6 $ 6.5
Interest cost 6.3 5.7 6.7
Expected return on plan assets 5.4 (6.2) (6.9)
Net amortization(1) (9.6) 2.0 2.2
-------- -------- --------
Net periodic benefit expense $ 6.1 $ 6.1 $ 8.5
======== ======== ========
(1) Amount represents primarily the amortization of unrecognized actuarial
losses, as well as the amortization of the transition obligation and prior
service costs.
For fiscal 2001 and 2000, the weighted-average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.4% and 6.5%, expected return on plan assets
of 7.3% and 7.4% and rate of compensation increase of 3.9% and 4.0%,
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, 2001
are: fiscal 2002 - $47.9 million; fiscal 2003 - $40.2 million; fiscal 2004 -
$31.4 million; fiscal 2005 - $23.0 million; fiscal 2006 - $15.7 million and
fiscal 2007 and thereafter - $28.6 million.
In addition, the Company has entered into operating lease agreements with
several banks for the construction of various new facilities and equipment. The
initial terms of the lease agreements extend through September 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 any unrecovered property cost. The instruments
provide for maximum fundings of $501.2 million, which is the total estimated
cost of the construction projects. As of June 30, 2001, the amount expended was
$368.0 million. As of June 30 2001, the Company's minimum annual lease payments
under the agreements are approximately $19.1 million. Neither the facility's
cost nor the minimum annual lease payments are included in the future minimum
rental payments disclosed above.
Rental expense relating to operating leases was approximately $78.4
million, $76.1 million, and $71.9 million in fiscal 2001, 2000 and 1999,
respectively. Sublease rental income was not material for any period presented
herein.
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries 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 Baxter Healthcare
Corporation ("BHC") from certain claims related to the Allegiance Business,
including certain claims of alleged personal injuries as a result of exposure to
natural rubber latex gloves. Allegiance will be defending and indemnifying BHC,
as contemplated by the agreements between Baxter and Allegiance, for all
expenses and potential liabilities associated with claims pertaining to the
litigation assumed by Allegiance. As of June 30, 2001, there were approximately
610 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 resolution of cases
involving natural rubber latex gloves. 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.
44
45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
clean-up costs. Although the ultimate resolution of the litigation referenced
herein cannot be forecast with certainty, the Company intends to vigorously
defend itself and does not currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's consolidated
financial statements.
9. SHAREHOLDERS' EQUITY
At June 30, 2001, the Company's authorized capital shares consisted of (a)
750,000,000 Class A common shares, without par value; (b) 5,000,000 Class B
common shares, without par value; and (c) 500,000 non-voting preferred shares
without par value. At June 30, 2000, 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, 2001 and 2000.
In March 2000, the Company's Board of Directors authorized the repurchase
of Common Shares up to an aggregate amount of $750.0 million. Approximately 7.0
million Common Shares, having an aggregate cost of approximately $440.2 million
had been repurchased via an accelerated share repurchase program and placed into
treasury shares. In November 2000, the Company's Board of Directors rescinded
the remainder of this repurchase program.
During fiscal 2001, the Company issued approximately 0.8 million Common
Shares for which it received aggregate proceeds of $47.7 million, which were
used for general corporate purposes.
During the fiscal quarter ended June 30, 2001, the Company filed a shelf
registration statement on Form S-4 increasing the number of common shares
available for issuance in connection with future business combinations to 15.0
million Common Shares.
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 hospital
and acute care sectors of the healthcare industry. However, such credit risk is
limited due to supporting collateral and the diversity of the customer base,
including its wide geographic dispersion. The Company performs ongoing credit
evaluations of its customers' financial conditions and maintains reserves for
credit losses. Such losses historically have been within the Company's
expectations.
During fiscal 2001, the Company's two largest customers individually
accounted for 12% and 10% of operating revenue, respectively. During fiscal 2000
and 1999, the Company's two largest customers individually accounted for 10% and
11% of operating revenue, respectively. These customers are serviced primarily
through the Pharmaceutical Distribution and Provider Services and Medical-
Surgical Products and Services segments. During fiscal 2001, two customers
individually accounted for 46% and 22% of bulk deliveries. These same two
customers accounted for 42% and 30% of bulk deliveries, respectively, during
fiscal 2000 and 19% and 29% of bulk deliveries, respectively, during fiscal
1999. Additionally, a third customer accounted for 16% and 18% of bulk
deliveries during fiscal 2000 and 1999.
45
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $80.3 million and $0.17 per share, respectively, for fiscal 2001,
$24.7 million and $0.06 per share, respectively, for fiscal 2000, and $86.4
million and $0.19 per share, respectively, for fiscal 1999.
During fiscal 2001, stock option grants under the previous Bindley plans
vested immediately on the merger date. These accelerated grants increased the
fiscal 2001 pro forma effect on net income and diluted earnings per Common Share
by $31.9 million and $0.07 per share, respectively. 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.
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1998 through June 30, 2001, 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, 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
Granted 7.0 64.76
Exercised (10.3) 17.35
Canceled (1.3) 41.99
Change in Fiscal Year 0.5 34.12
---------------------------------------------------------------------
Balance at June 30, 2001 33.3 $ 34.83
=====================================================================
Giving retroactive effect to conversion of stock options related to
mergers and stock splits, the weighted average fair value of options granted
during fiscal 2001, 2000, and 1999 was $23.42, $11.68, and $15.03, 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,
----------------------------------------------
2001 2000 1999
-------------- ------------- ----------------
Risk-free interest rate 4.66% 6.25% 5.72%
Expected life 4 years 4 years 4 years
Expected volatility 38% 37% 30%
Dividend yield 0.15% 0.18% 0.18%
46
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information relative to stock options outstanding as of June 30, 2001:
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
------------------- ----------------- ----------------- ----------------- -------------- ----------------
$ 0.92 - $14.59 6.3 4.9 $10.65 6.3 $10.65
$14.67 - $30.34 6.3 6.2 23.86 6.3 23.82
$30.41 - $31.17 8.2 8.4 31.17 0.5 31.17
$31.59 - $47.33 5.7 7.1 43.31 1.7 37.64
$48.42 - $65.06 1.1 9.3 57.85 0.7 58.14
$66.08 - $72.10 5.7 9.4 66.10 0.0 66.08
----------------- ----------------- ----------------- -------------- ----------------
$ 0.92 - $72.10 33.3 7.3 $34.83 15.5 $21.93
================= ================= ================= ============== ================
As of June 30, 2001, there remained approximately 16.3 million additional
shares available to be issued pursuant to the Plans.
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying consolidated
balance sheets. The compensation awards are amortized to expense over the period
in which participants perform services, generally one to seven years. As of June
30, 2001, approximately 0.5 million shares remained restricted and subject to
forfeiture.
The Company has employee stock purchase plans under which the sale of 12.0
million of the Company's Common Shares has been authorized. 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, 2001, subscriptions of 0.3 million were
outstanding. Through June 30, 2001, 0.5 million shares had been issued to
employees under the plans.
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.
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.
47
48
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, 2001, 2000 and 1999 for each segment and reconciling items
necessary to total to amounts reported in the consolidated financial statements:
(in millions) Revenue
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Operating revenue:
Pharmaceutical Distribution and Provider Services $ 31,185.8 $ 23,849.6 $ 19,606.2
Medical-Surgical Products and Services 5,902.6 4,960.2 4,726.3
Pharmaceutical Technologies and Services 1,177.8 1,079.8 938.0
Automation and Information Services 472.2 402.4 411.6
Other (78.3) (34.2) 0.4
--------------------------------------------------
Total operating revenue $ 38,660.1 $ 30,257.8 $ 25,682.5
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 9,287.5 8,092.1 7,050.4
--------------------------------------------------
Total revenue $ 47,947.6 $ 38,349.9 $ 32,732.9
==================================================
Operating Earnings
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 883.7 $ 674.6 $ 540.7
Medical-Surgical Products and Services 442.4 368.0 303.7
Pharmaceutical Technologies and Services 219.0 200.6 160.4
Automation and Information Services 168.4 138.0 141.0
Corporate (1) (226.4) (100.7) (191.2)
--------------------------------------------------
Total operating earnings $ 1,487.1 $ 1,280.5 $ 954.6
==================================================
The following tables include depreciation and amortization expense as well
as capital expenditures for the fiscal years ended June 30, 2001, 2000 and 1999
and assets as of June 30, 2001, 2000 and 1999 for each segment and reconciling
items necessary to total to amounts reported in the consolidated financial
statements:
Depreciation and Amortization Expense
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 63.3 $ 53.0 $ 47.9
Medical-Surgical Products and Services 120.4 120.5 119.9
Pharmaceutical Technologies and Services 60.6 48.9 57.6
Automation and Information Services 11.2 15.8 9.1
Corporate (1) 25.1 18.8 13.7
--------------------------------------------------
Total depreciation and amortization expense $ 280.6 $ 257.0 $ 248.2
==================================================
Capital Expenditures
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 87.2 $ 99.2 $ 110.2
Medical-Surgical Products and Services 89.7 109.8 108.3
Pharmaceutical Technologies and Services 157.2 105.1 126.2
Automation and Information Services 7.1 17.0 14.8
--------------------------------------------------
Total capital expenditures $ 341.2 $ 331.1 $ 359.5
==================================================
48
49
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 7,699.5 $ 6,273.3 $ 4,735.8
Medical-Surgical Products and Services 3,208.3 2,899.5 2,823.7
Pharmaceutical Technologies and Services 1,496.1 1,291.7 1,230.4
Automation and Information Services 1,212.5 1,044.5 827.3
Corporate (2) 1,026.0 515.1 65.5
--------------------------------------------------
Total assets $ 14,642.4 $ 12,024.1 $ 9,682.7
==================================================
(1) Corporate-operating earnings primarily consist of special charges of $124.9
million, $64.7 million, and $165.4 million for the fiscal years ended June
30, 2001, 2000 and 1999, respectively, and unallocated corporate
administrative expenses and investment spending.
(2) Corporate-assets include primarily corporate cash and cash equivalents,
corporate property and equipment, net and unallocated deferred taxes.
The following table presents revenue and long-lived assets by geographic area
(in millions):
Revenue Long-Lived Assets
--------------------------------------------- ------------------------------
For The Fiscal Year Ended June 30, As of June 30,
--------------------------------------------- ------------------------------
2001 2000 1999 2001 2000
--------------------------------------------- ------------------------------
United States $ 46,957.2 $ 37,368.4 $ 31,820.9 $ 1,387.0 $ 1,308.2
International 990.4 981.5 912.0 451.3 420.1
--------------------------------------------- ------------------------------
Total $ 47,947.6 $ 38,349.9 $ 32,732.9 $ 1,838.3 $ 1,728.3
============================================= ==============================
Long-lived assets include property 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 2001 and 2000 have been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- ------------
Fiscal 2001
Revenue:
Operating revenue $ 8,510.9 $ 9,560.7 $ 10,334.2 $ 10,254.3
Bulk deliveries to customer warehouses 2,529.0 2,365.9 2,245.9 2,146.7
------------- ------------- ------------- ------------
Total revenue $ 11,039.9 $ 11,926.6 $ 12,580.1 $ 12,401.0
Gross margin $ 804.2 $ 885.4 $ 946.1 $ 975.9
Selling, general and administrative
expenses $ 467.4 $ 491.7 $ 509.9 $ 530.6
Net $ 190.0 $ 221.2 $ 192.9 $ 253.3
earnings
Net earnings per Common Share:
Basic $ 0.43 $ 0.50 $ 0.43 $ 0.57
Diluted $ 0.42 $ 0.49 $ 0.42 $ 0.55
-------------------------------------------------------------------------------------------------------
49
50
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
-------------------------------------------------------------------------------------------------------
As discussed in Note 2, merger-related costs and other special charges were
recorded in various quarters in fiscal 2001 and 2000. The following table
summarizes the impact of such costs on net earnings and diluted earnings per
share in the quarters in which they were recorded (in millions, except per share
amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- -----------
Fiscal 2001
Net earnings $ (6.0) $ (6.0) $ (61.8) $ (11.5)
Diluted net earnings per Common Share $ (0.01) $ (0.01) $ (0.14) $ (0.03)
-----------------------------------------------------------------------------------------------------------------
Fiscal 2000
Net earnings $ (29.7) $ (3.4) $ (9.1) $ (7.6)
Diluted net earnings per Common Share $ (0.07) $ - $ (0.02) $ (0.02)
-----------------------------------------------------------------------------------------------------------------
50
51
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years and any subsequent
interim period preceding the dismissal of its former accountants on August 30,
1999, there have been no disagreements with such former accountants on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure, which disagreements if not resolved to the
satisfaction of such former accountants would have caused them to make reference
thereto in their reports on the financial statements for such periods. In
addition, there were no reportable events (as defined in SEC Regulation S-K,
Item 304 (a) (1) (v)) during such periods.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G (3) to Form 10-K, the information
called for in this Item 10 relating to Directors is incorporated herein by
reference to the Company's Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission (the "SEC"), pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to the Company's 2001 Annual Meeting of
Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS."
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the executive officers of the Company (information
provided as of August 17, 2001):
NAME AGE POSITION
---------------------- --- ----------------------------------------------------
Robert D. Walter 56 Chairman and Chief Executive Officer
George L. Fotiades 47 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Technologies and Services
James F. Millar 53 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Distribution and Medical Products
Stephen S. Thomas 46 Executive Vice President; Group President -
Automation and Information Services
Ronald K. Labrum 45 Executive Vice President; Group President -
Medical-Surgical Products & Services
Gordon A. Troup 45 Executive Vice President; Group President -
Pharmaceutical Distribution
Brendan A. Ford 43 Executive Vice President - Corporate Development
Richard J. Miller 44 Executive Vice President, Chief Financial Officer &
Principal Accounting Officer
Anthony J. Rucci 50 Executive Vice President and Chief Administrative
Officer
Kathy Brittain White 52 Executive Vice President and Chief Information Officer
Carole S. Watkins 41 Executive Vice President - Human Resources
Paul S. Williams 41 Executive Vice President, Chief Legal Officer and
Secretary
51
52
Unless indicated to the contrary, the business experience summaries
provided below for the Company's executive officers describe positions held by
the named individuals during the last five years but exclude other positions
held with subsidiaries of the Company.
ROBERT D. WALTER has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979. Mr. Walter also
serves as a director of Bank One Corporation and Viacom Inc.
GEORGE L. FOTIADES has been an Executive Vice President, President and
Chief Operating Officer - Pharmaceutical Technologies and Services of the
Company since November 2000. Prior to that he was an Executive Vice President
and Group President - Pharmaceutical Technologies and Services since September
2000, an Executive Vice President and Group President - R.P. Scherer Corporation
since August 1998 and President of Scherer since January 1998. Previously, Mr.
Fotiades served as Group President, Americas and Asia Pacific, of Scherer from
June 1996 to January 1998.
JAMES F. MILLAR has been an Executive Vice President of the Company since
February 1994. He was named Executive Vice President, President and Chief
Operating Officer - Pharmaceutical Distribution and Medical Products in November
2000. He was named as Group President of the Company's Cardinal Distribution
business in June 1996, and was named as Group President - Pharmaceutical
Distribution and Provider Services in February 2000.
STEPHEN S. THOMAS has been an Executive Vice President and Group President
- Automation and Information Services since September 2000. Prior to that he was
an Executive Vice President and Group President - Pharmacy Automation,
Information Systems and International Operations of the Company since July 1999.
Mr. Thomas joined the Company in October 1997, as an Executive Vice President
and President of Pyxis. Prior to that, Mr. Thomas served as President of Datapro
Information Services Group, a provider of global information services, and a
division of McGraw-Hill Companies.
RONALD K. LABRUM is Executive Vice President; Group President - Medical-
Surgical Products & Services. He assumed his current responsibilities in
November 2000. Prior to that, Mr. Labrum served as President, Manufacturing &
Distribution of Allegiance since October 2000. From January 1997 through October
2000, Mr. Labrum served as Corporate Vice President, Regional Companies/Health
Systems of Allegiance, From October 1996 through January 1997, he served as
Corporate Vice President, Supply Chain Economics at Allegiance; From December
1993 through October 1996, he served as a Regional President of Allegiance.
GORDON A. TROUP has been Executive Vice President; Group President -
Pharmaceutical Distribution since July 2001. Prior to that, Mr. Troup served as
President, Cardinal Distribution since September 1999. From September 1999
through February 2000, he served as Executive Vice President, Operations -
Distribution. From January 1996 through September 1999, Mr. Troup served in
various positions of increasing responsibility within the Company's
pharmaceutical distribution business.
BRENDAN A. FORD has been the Company's Executive Vice President - Corporate
Development since November 1999. Previously, Mr. Ford served as Senior Vice
President - Corporate Development from February 1996 to November 1999.
RICHARD J. MILLER has been an Executive Vice President of the Company since
November 1999. He was named the Chief Financial Officer in March 1999. Mr.
Miller served as the Company's Acting Chief Financial Officer from August 1998
to March 1999. Prior to that, he held the title of Corporate Vice President
since April 1999. From August 1995 through March 1999, Mr. Miller served as the
Company's Vice President and Controller.
ANTHONY J. RUCCI joined the Company in November 1999, as Executive Vice
President - Human Resources. In January 2000, Mr. Rucci was named Executive Vice
President and Chief Administrative Officer of the Company. Prior to joining the
Company, Mr. Rucci served as Dean of the University of Illinois at Chicago's
College of Business Administration, since 1998. From 1993 to 1998, Mr. Rucci was
Executive Vice President for Administration of Sears, Roebuck & Co., a
multi-line retailer of merchandise, and Chairman of the Board of Sears de Mexico
from 1995 to 1997.
KATHY BRITTAIN WHITE has been the Company's Executive Vice President and
Chief Information Officer since February 1999. Previously, Ms. White served as
Executive Vice President and Chief Information Officer for Allegiance
Corporation from 1996 until Allegiance merged with the Company in February 1999.
52
53
CAROLE S. WATKINS is Executive Vice President - Human Resources of the
Company. She assumed her current responsibilities in August 2000. From February
2000 until August 2000, Ms. Watkins served as the Company's Senior Vice
President, Human Resources - Pharmaceutical Distribution and Provider Services.
Ms. Watkins was Vice President - Human Resources - Cardinal Distribution, from
November 1996 to February 2000.
PAUL S. WILLIAMS is Executive Vice President, the Chief Legal Officer and
Secretary. He assumed his current responsibilities in April 2001. Prior to that,
Mr. Williams served as Senior Vice President, Deputy General Counsel and
Assistant Secretary since January 2001. From July 1999 through January 2001, Mr.
Williams served as Vice President, Deputy General Counsel and Assistant
Secretary. From June 1998 through July 1999, Mr. Williams served as Vice
President, Assistant General Counsel and Assistant Secretary. Upon joining the
Company in June 1995, and until June 1998, he served as Assistant General
Counsel.
ITEM 11: EXECUTIVE COMPENSATION
In accordance with General Instruction G (3) to Form 10-K, the
information called for by this Item 11 is incorporated herein by reference to
the Company's Definitive Proxy Statement, to be filed with the SEC pursuant to
Regulation 14A of the Exchange Act, relating to the Company's Annual Meeting
under the caption "EXECUTIVE COMPENSATION" (other than information set forth
under the captions "Human Resources and Compensation Committee Report" and
"Shareholder Performance Graph").
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G (3) to Form 10-K, the information
called for by this Item 12 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G (3) to Form 10-K, the information
called for by this Item 13 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a)(1) The following financial statements are included in Item 8 of this report:
PAGE
----
Independent Auditors' Reports........................................................... 17
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 2001, 2000 and 1999.......................................................... 26
Consolidated Balance Sheets at June 30, 2001 and 2000................................... 27
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 2001, 2000 and 1999.............................................. 28
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2001, 2000 and 1999.......................................................... 29
Notes to Consolidated Financial Statements.............................................. 30
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts......................................... 59
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in notes thereto.
53
54
(a)(3) Exhibits required by Item 601 of Regulation S-K:
Exhibit Exhibit Description
-------
Number
------
3.01 Amended and Restated Articles of Incorporation of the Registrant,
as amended (1) and (20)
3.02 Restated Code of Regulations, as amended (1)
4.01 Specimen Certificate for the Registrant's Class A common shares
4.02 Indenture dated as of May 1, 1993 between the Registrant and Bank
One, Indianapolis, NA, Trustee, relating to the Registrant's
6 1/2% Notes Due 2004 and 6% Notes Due 2006 (2)
4.03 Indenture dated as of April 18, 1997 between the Registrant and
Bank One, Columbus, NA, Trustee, relating to the Registrant's
6 1/4 % Notes Due 2008 and 6.75% Notes Due 2011 (3)
4.04 Indenture dated as of October 1, 1996 between Allegiance
Corporation and PNC Bank, Kentucky, Inc. ("PNC"), Trustee; and
First Supplemental Indenture dated as of February 3, 1999 by and
among Allegiance Corporation, the Company and Chase Manhattan
Trust Company National Association (as successor in interest to
PNC), Trustee (4)
4.05 Indenture dated January 1, 1994 between R.P. Scherer International
Corporation and Comerica Bank; First Supplemental Indenture by and
among R.P. Scherer International Corporation, R.P. Scherer
Corporation and Comerica Bank dated February 28, 1995; and Second
Supplemental Indenture by and among R.P. Scherer Corporation, the
Registrant and Comerica Bank dated as of August 7, 1998 (5)
4.06 Form of Warrant Certificate to Purchase Company Common Shares (6)
10.01 Stock Incentive Plan of the Registrant, as amended (7)*
10.02 Outside Directors Equity Incentive Plan (21)*
10.03 Directors' Stock Option Plan of the Registrant, as amended and
restated (7)*
10.04 Amended and Restated Equity Incentive Plan of the Registrant, as
amended ((16), except for the First Amendment which is included as
an exhibit to this Annual Report on Form 10-K)*
10.05 Form of Nonqualified Stock Option Agreement, as amended (16)*
10.06 Form of Restricted Shares Agreement, as amended (16)*
10.07 Form of Directors' Stock Option Agreement, as amended (16)*
10.08 Cardinal Health, Inc. Directors Deferred Compensation Plan (17)*
10.09 Allegiance Corporation 1996 Incentive Compensation Program (8)*
10.10 Allegiance Corporation 1998 Incentive Compensation Program (8)*
10.11 Allegiance Corporation 1996 Outside Director Incentive Corporation
Plan (8)*
10.12 R.P. Scherer Corporation 1997 Stock Option Plan (9)*
10.13 R.P. Scherer Corporation 1990 Nonqualified Performance Stock
Option Plans (9)*
10.14 Cardinal Health, Inc. Performance-Based Incentive Compensation
Plan, as amended (10) and (28)*
54
55
Exhibit EXHIBIT DESCRIPTION
------
Number
------
10.15 Cardinal Health, Inc. Incentive Deferred Compensation Plan, as
amended (11)*
10.16 Form of Agreement, dated February 9, 2000, between the Registrant
and each of Messrs. Ford, Miller and Rucci (23)*
10.17 Agreement, dated February 9, 2000, between the Registrant and
George L. Fotiades (23)*
10.19 Agreement, dated February 9, 2000, between the Registrant and James
F. Millar (23)*
10.20 Agreement, dated July 1, 1999, between the Registrant and Stephen
S. Thomas, as amended (19) and (23)*
10.21 Form of Indemnification Agreement between the Registrant and
individual Directors (12)*
10.22 Form of Indemnification Agreement between the Registrant and
individual Officers. (12)*
10.23 Split Dollar Agreement dated April 16, 1993, among the Registrant,
Robert D. Walter, and Bank One Ohio Trust Company, NA, Trustee U/A
dated April 16, 1993 FBO Robert D. Walter (7)*
10.24 Agreement dated as of March 16, 2000 between the Registrant and
Credit Suisse Financial Products (23)
10.25 364-Day Credit Agreement dated as of March 30, 2000 among the
Registrant, certain subsidiaries of the Registrant, certain
lenders, and Bank One, NA, as Administrative Agent, Bank of America
NT, as Syndication Agent, Citibank USA, Inc., as Co-Documentation
Agent, and Credit Suisse First Boston, as Co-Documentation Agent
(18)
10.26 Master Agreement and related documents, dated as of July 19, 1996
among the Registrant and/or its subsidiaries, SunTrust Banks, Inc.,
PNC Leasing Corp. and SunTrust Bank, Atlanta, as amended (13) and
(16)
10.27 Participation Agreement and related documents, dated as of June 23,
1997, among the Registrant and certain of its subsidiaries, Bank of
Montreal and BMO Leasing (U.S.), Inc., as amended (14) and (16)
10.28 Vendor Program Agreement dated as of October 10, 1991 by and
between General Electric Capital Corporation and Pyxis Corporation,
as amended on December 13, 1991, January 15, 1993, March 10, 1994,
June 23, 1997 and June 1, 1998 (5), (13) and (14)
10.29 Pharmaceutical Services Agreement, dated as of August 1, 1996, as
amended, between Kmart Corporation and Cardinal Distribution (15)
and (16)
10.30 Wholesale Supply Agreement dated as of August 10, 2000 between the
Registrant and CVS Meridian, Inc. (23)
10.31 Form of Commercial Paper Dealer Agreement 4(2) Program between the
Company, as Issuer, and certain entities, each as Dealer,
concerning notes to be issued pursuant to Issuing and Paying Agency
Agreement between the Issuer and The First National Bank of
Chicago, as Issuing and Paying Agent (16)
10.32 Partnership Agreement of R.P. Scherer GMBH & Co. KG (5)
10.33 Five-year Credit Agreement dated as of March 31, 1999 among the
Registrant, certain subsidiaries of the Registrant, certain
lenders, The First National Bank of Chicago, as Administrative
Agent, Bank of America NT &SA, as Syndication Agent, Citibank,
N.A., as Co-Documentation Agent, and Credit Suisse First Boston, as
Co-Documentation Agent (16)
10.34 Bindley Western Industries, Inc. 1993 Stock Option and Incentive
Plan (22) *
55
56
Exhibit EXHIBIT DESCRIPTION
-------
Number
------
10.35 Bindley Western Industries, Inc. 2000 Stock Option and Incentive
Plan (22) *
10.36 Executive Agreement among William E. Bindley, Bindley Western
Industries, Inc. and the Company dated as of December 2, 2000
(25) *
10.37 Form of Termination Benefits Agreement between William E. Bindley
and Bindley Western Industries, Inc. dated April 1, 1996 (24) *
10.38 Change in Control Severance Agreement between Allegiance
Corporation and Kathy Brittain White (and Agreement between the
Company and Kathy Brittain White dated as of February 9, 2000 (26)
and (27)) *
10.39 Agreement, dated February 9, 2000, between the Company and John C.
Kane (23) *
16.01 Letter of Deloitte & Touche LLP required by Item 304 of Regulation
S-K (16)
16.02 Letter of PricewaterhouseCoopers LLP required by Item 304 of
Regulation S-K (16)
21.01 List of subsidiaries of the Registrant
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
------------------
(1) Included as an exhibit to the Registrant's Current Report on Form
8-K filed November 24, 1998 (File No. 1-11373) and incorporated
herein by reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (File No. 1-11373)
and incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Current Report on Form
8-K filed April 21, 1997 (File No. 1-11373) and incorporated
herein by reference.
(4) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-74761) and incorporated herein by reference.
(5) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 1-11373)
and incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-30889) and incorporated herein by reference.
(7) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (File No. 1-11373)
and incorporated herein by reference.
(8) Included as an exhibit to the Registrant's Post-Effective
Amendment No. 1 on Form S-8 to Form S-4 Registration Statement
(No. 333-68819) and incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Post-effective
Amendment No. 1 on Form S-8 to Form S-4 Registration Statement
(No. 333-56655) and incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 (File No. 1-11373)
and incorporated herein by reference.
56
57
(11) Included as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-90423) and incorporated herein by reference.
(12) Included as an exhibit to the Company's Amendment No. 1 to Annual
Report on Form 10-K/A for the fiscal year ended June 30, 1997
(File No. 1-11373) and incorporated herein by reference.
(13) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal ended June 30, 1996 (File No. 1-11373) and
incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997 (File No. 1-11373)
and incorporated herein by reference.
(15) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 (File No.
1-11373) and incorporated herein by reference.
(16) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1999 (File No. 1-11373)
and incorporated herein by reference.
(17) Included as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-90415) and incorporated herein by reference.
(18) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 (File No. 1-11373)
and incorporated herein by reference.
(19) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999 (File No.
1-11373) and incorporated herein by reference.
(20) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-53394) and incorporated herein by reference.
(21) Included as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-38192) and incorporated herein by reference.
(22) Included as an exhibit to the Company's Post-Effective Amendment
No. 1 of Form S-8 to Form S-4 Registration Statement
(No. 333-53394) and incorporated herein by reference.
(23) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2000 (File No. 1-11373)
and incorporated herein by reference.
(24) Included as an exhibit to Bindley Western Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
(File No. 0-11355) and incorporated herein by reference.
(25) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001 (File No. 1-11373)
and incorporated herein by reference.
(26) Included as an exhibit to Allegiance Corporation's Form S-1/A
filed with the Commission on September 30, 1996 (File No.
333-12525) and incorporated herein by reference.
(27) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 2000 (File No.
1-11373) and incorporated herein by reference.
(28) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998 (File No.
1-11373) and incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On June 7, 2001, the Registrant filed a Current Report on Form 8-K/A under Item
5, which included restated consolidated financial statements of the Company
giving effect to the merger with Bindley, which was accounted for as a
pooling-of-interests business combination.
57
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 24, 2001.
CARDINAL HEALTH, INC.
By: /s/ Robert D. Walter
------------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the Registrant and in the capacities indicated on August 24, 2001.
SIGNATURE TITLE
--------------------------------------- ------------------------------------------
/s/ Robert D. Walter Chairman, Chief Executive Officer and
--------------------------------------- Director (principal executive officer)
Robert D. Walter
/s/ Richard J. Miller Executive Vice President, Chief Financial
--------------------------------------- Officer (principal financial officer) and
Richard J. Miller Principal Accounting Officer
/s/ William E. Bindley Director
---------------------------------------
William E. Bindley
/s/ Dave Bing Director
---------------------------------------
Dave Bing
/s/ George H. Conrades Director
---------------------------------------
George H. Conrades
/s/ John F. Finn Director
---------------------------------------
John F. Finn
/s/ Robert L. Gerbig Director
---------------------------------------
Robert L. Gerbig
/s/ John F. Havens Director
---------------------------------------
John F. Havens
/s/ Regina E. Herzlinger Director
---------------------------------------
Regina E. Herzlinger
/s/ J. Michael Losh Director
---------------------------------------
J. Michael Losh
/s/ John B. McCoy Director
---------------------------------------
John B. McCoy
/s/ Richard C. Notebaert Director
---------------------------------------
Richard C. Notebaert
/s/ Michael D. O'Halleran Director
---------------------------------------
Michael D. O'Halleran
/s/ Melburn G. Whitmire Director
---------------------------------------
Melburn G. Whitmire
58
59
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) (2) DEDUCTIONS (3) OF PERIOD
---------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Fiscal Year 2001:
Accounts receivable $ 71.1 $ 38.1 $ 14.8 $ (17.2) $ 106.8
Finance notes receivable 4.6 1.3 0.2 (1.3) 4.8
Net investment in sales-type leases 15.0 2.0 -- (0.9) 16.1
---------------- ---------------- ---------------- ---------------- ----------------
$ 90.7 $ 41.4 $ 15.0 $ (19.4) $ 127.7
================ ================ ================ ================ ================
Fiscal Year 2000:
Accounts receivable $ 61.5 $ 33.8 $ 1.9 $ (26.1) $ 71.1
Finance notes receivable 4.9 0.5 (0.1) (0.7) 4.6
Net investment in sales-type leases 11.8 3.2 -- -- 15.0
---------------- ---------------- ---------------- ---------------- ----------------
$ 78.2 $ 37.5 $ 1.8 $ (26.8) $ 90.7
================ ================ ================ ================ ================
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
================ ================ ================ ================ ================
(1) During fiscal 2001, 2000 and 1999 recoveries of amounts provided for or
written off in prior years were $1.0 million, $1.5 million and $4.0
million, respectively.
(2) In fiscal 2001, $11.4 million relates to the beginning balance for
acquisitions accounted for as a purchase transaction.
(3) Write-off of uncollectible accounts.
59