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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11373
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
(614) 757-5000
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of September 9, 2002 was approximately $28,197,042,547.
The number of Registrant's Common Shares outstanding as of September 9,
2002, was as follows: Common shares, without par value: 444,638,825.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
2002 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
Important Information Regarding Forward-Looking Statements........... 3
PART I
1. Business............................................................. 3
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of Security Holders.................. 12
PART II
5. Market for the Registrant's Common Shares and Related
Shareholder Matters.................................................. 14
6. Selected Financial Data.............................................. 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 17
7a. Quantitative and Qualitative Disclosures About Market Risk........... 26
8. Financial Statements and Supplementary Data.......................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 65
PART III
10. Directors and Executive Officers of the Registrant................... 65
11. Executive Compensation............................................... 65
12. Security Ownership of Certain Beneficial Owners and Management....... 65
13. Certain Relationships and Related Transactions....................... 65
PART IV
14. Exhibits, Financial Statement Schedules, Reports on Form 8-K and
Controls and Procedures.............................................. 66
Signatures........................................................... 71
2
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 as amended. The
words "believe," "expect," "anticipate," "project" and similar expressions,
among others, identify "forward looking statements," which speak only as of the
date the statement was made. Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those projected, anticipated or implied. The most significant of
these risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. Except to the limited extent required by
applicable law, the Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is a holding
company conducting business through a number of separate operating subsidiaries.
The Company is a leading provider of products and services to healthcare
providers and manufacturers, helping them improve the efficiency and quality of
healthcare. As used in this report, the terms the "Registrant" and the "Company"
refer to Cardinal Health, Inc. and its subsidiaries, unless the context requires
otherwise. Except as otherwise specified, information in this report is provided
as of June 30, 2002 (the end of the Company's fiscal year).
This description of the Company's business should be read in conjunction
with the financial statements and supplementary data included in this Form 10-K.
BUSINESS SEGMENTS
The Company has four reporting segments. They are: Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products and Services,
Pharmaceutical Technologies and Services, and Automation and Information
Services.
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES
Through its Pharmaceutical Distribution and Provider Services segment, the
Company distributes a broad line of pharmaceutical and other healthcare products
and provides pharmacy management and related consulting services to hospital,
retail and alternate-site pharmacies. Cardinal Distribution, the Company's
pharmaceutical distribution business, is one of the country's leading wholesale
distributors of pharmaceutical and related healthcare products to independent
and chain drugstores, hospitals, alternate care centers and the pharmacy
departments of supermarkets and mass merchandisers located throughout the
continental United States. As a full-service wholesale distributor, Cardinal
Distribution complements its distribution activities by offering a broad range
of value-added support services to assist the Company's customers and suppliers
in maintaining and improving their sales volumes. These support services
include: online procurement, fulfillment and information provided through
cardinal.com; computerized order entry and order confirmation systems; generic
sourcing programs; product movement and management reports; consultation on
store operations and merchandising; and customer training. The Company's
proprietary software systems feature customized databases specially designed to
help its distribution customers order more efficiently, contain costs, and
monitor their purchases.
The Company also operates several specialty healthcare distribution
businesses which offer value-added services to the Company's customers and
suppliers while providing the Company with additional opportunities for growth
and profitability. For example, the Company operates, through its subsidiary
National PharmPak Services, Inc. ("NPPS"), a pharmaceutical repackaging and
distribution program for both independent and chain drugstore customers. In
addition, the Company, through National Specialty Services, Inc. ("NSS"), serves
as a distributor of oncology products and other specialty pharmaceuticals to
hospitals, clinics and other managed-care facilities on a nationwide basis
through the utilization of telemarketing and direct mail programs. The Company
also operates, through CORD Logistics, Inc. ("CORD"), a third party logistics
company that distributes and tracks products for pharmaceutical and
biotechnology manufacturers.
Also within this segment, the Company, through Cardinal Health Provider
Pharmacy Services, Inc. ("CHPPS"), provides services that enhance performance in
hospital pharmacies through integrated pharmacy management, consulting,
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temporary staffing and related services. In addition, the Company operates
Medicine Shoppe International, Inc. ("Medicine Shoppe"), a franchisor of
apothecary-style retail pharmacies. The Company, through Central Pharmacy
Services, Inc. ("Central Pharmacy"), operates centralized nuclear pharmacies
that prepare and deliver radiopharmaceuticals for use in nuclear imaging
procedures in hospitals and clinics.
MEDICAL-SURGICAL PRODUCTS AND SERVICES
Through its Medical-Surgical Products and Services segment, the Company
provides medical products and services and cost-saving services to hospitals and
other healthcare providers. The Company's Allegiance Corporation ("Allegiance")
subsidiary offers a broad range of medical and laboratory products, representing
approximately 2,200 suppliers in addition to its own line of surgical and
respiratory therapy products to hospitals and other healthcare providers. It
also manufactures sterile and non-sterile procedure kits, single-use surgical
drapes, gowns and apparel, medical and surgical gloves, fluid suction and
collection systems, respiratory therapy products, surgical instruments,
instrument reprocessing products, special procedure products and other products.
Allegiance assists its customers in reducing costs while improving the quality
of patient care in a variety of ways, including online procurement, fulfillment
and information provided through cardinal.com, supply-chain management,
instrument repair and other professional consulting services.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES
Through its Pharmaceutical Technologies and Services segment, the Company
provides a broad range of technologies and services to the pharmaceutical,
biotechnology and consumer health industry. This segment's Oral Technologies
group provides proprietary drug delivery technologies, including softgel
capsules, controlled release forms, and Zydis(R) fast dissolving wafers, and
manufacturing for nearly all traditional oral dose forms. This segment's Sterile
Technologies group provides advanced aseptic blow-fill-seal technology, drug
lyophilization and advanced sterile delivery technologies, and manufacturing for
nearly all traditional sterile dose forms. This segment's Packaging Services
group provides pharmaceutical packaging services, including clinical and
commercial packaging, folding cartons and inserts and labels, with proprietary
expertise in child-resistant and unit dose/compliance package design. This
segment's Pharmaceutical Development group provides drug discovery, development,
and analytical science expertise, and supplies clinical manufacturing and
packaging. Finally, this segment's Sales and Marketing Services group provides
medical education, marketing and contract sales services to accelerate product
launches, along with other services to maximize the sales of approved products.
AUTOMATION AND INFORMATION SERVICES
The Company, through its Automation and Information Services segment,
operates businesses focusing on meeting customer needs through unique and
proprietary automation and information products and services. This segment
includes Pyxis Corporation ("Pyxis"), which develops, manufactures, leases,
sells and services bedside clinical and patient entertainment systems as well as
point-of-use systems that automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities and
Vistant Corporation ("Vistant"), which markets point-of-use supply systems in
the non-healthcare market. This segment also provides information systems that
analyze clinical outcomes and clinical pharmaceutical utilization information.
ACQUISITIONS(1)
Over the last five years, the Company has completed the following business
combinations. On February 18, 1998, the Company completed a merger transaction
with MediQual Systems, Inc. ("MediQual"), a Westborough, Massachusetts-based
supplier of clinical information management systems and services to the
healthcare industry. The Company issued approximately 1.3 million common shares,
without par value ("Common Shares"), to MediQual shareholders and MediQual's
outstanding stock options were converted into options to purchase a total of
approximately 0.1 million Common Shares of the Company. On August 7, 1998, the
Company completed a merger transaction with R.P. Scherer Corporation
("Scherer"), a New Jersey-based international developer and manufacturer of drug
delivery systems. The Company issued approximately 51.3 million Common Shares to
Scherer stockholders and Scherer's outstanding stock options were converted into
options to purchase a total of approximately 5.3 million Common Shares. On
February 3, 1999, the Company completed a merger transaction with Allegiance, a
McGaw Park, Illinois-based distributor and manufacturer of medical, surgical and
laboratory products and a provider of cost-saving services. The Company issued
approximately 106.1 million Common Shares to Allegiance stockholders and
Allegiance's outstanding stock options were converted into options to purchase a
total of approximately 15.5 million Common Shares. On September 10, 1999 the
Company completed a merger transaction with Automatic Liquid Packaging, Inc.
("ALP"), a Woodstock, Illinois-based custom manufacturer of sterile liquid
pharmaceuticals and other healthcare products. The Company issued approximately
8.7 million Common Shares to ALP stockholders. On August 16, 2000, the Company
completed the purchase of Bergen Brunswig Medical
- --------
(1) All share references in this paragraph are adjusted to reflect all stock
splits and stock dividends since the time of the applicable acquisitions.
4
Corporation ("BBMC") for approximately $181 million. BBMC distributes medical,
surgical and laboratory supplies to doctors' offices, long-term care and nursing
centers, hospitals and other providers of care. On February 14, 2001, the
Company completed a merger transaction with Bindley Western Industries, Inc.
("Bindley"), an Indianapolis, Indiana-based wholesale distributor of
pharmaceuticals and provider of nuclear pharmacy services. The Company issued
approximately 23.1 million Common Shares to Bindley stockholders and Bindley's
outstanding stock options were converted into options to purchase a total of
approximately 5.1 million Common Shares. On April 15, 2002, the Company
completed a merger transaction with Magellan Laboratories Incorporated
("Magellan"), a Research Triangle Park, North Carolina-based pharmaceutical
contract development organization that provides a wide range of analytical and
development services to pharmaceutical and biotechnological industries. The
aggregate consideration for the transaction was approximately $221 million
before consideration of any tax benefits associated with the transaction. On
June 26, 2002, the Company completed the acquisition of Boron, LePore &
Associates, Inc. ("BLP"), a Wayne, New Jersey-based full-service provider of
strategic medical education solutions to the healthcare industry. The Company
paid approximately $189 million and converted BLP's outstanding stock options
into options to purchase a total of approximately 1.0 million Common Shares. On
June 14, 2002, the Company announced it had entered into a definitive agreement
to acquire Syncor International Corporation ("Syncor"), a Woodland Hills,
California-based company which is a leading provider of nuclear pharmacy
services. The acquisition of Syncor is a stock-for-stock merger transaction and
is expected to be completed by the end of 2002 subject to customary conditions,
including Syncor stockholder approval. At the completion of the acquisition,
each Syncor share will be converted to 0.52 of a Common Share. Based on the
closing sale price of a Common Share as of September 27, 2002, the value of the
Common Shares to be received by all of the Syncor stockholders in connection
with the merger is approximately $900 million. The Company has also completed a
number of smaller acquisition transactions (asset purchases, stock purchases and
mergers) during the last five years, including transactions involving Pacific
Surgical Innovations, Inc. ("PSI"); Rexam Cartons Inc.; International Processing
Corporation; Med Surg Industries, Inc; American Threshold Industries, Inc., and
SP Pharmaceuticals, L.L.C. ("SP Pharmaceuticals").
The Company regularly evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
healthcare operations and services across all reporting industry segments. For
additional information concerning the transactions described above, see Notes 1
and 2 of "Notes to Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS AND SUPPLIERS
The Company's largest retail distribution customer in its Pharmaceutical
Distribution and Provider Services segment, CVS Meridian, Inc. ("CVS"),
accounted for approximately 13% of the Company's operating revenues (by dollar
volume) for fiscal year 2002. This segment could be adversely affected if the
business of this customer were lost. The two largest retail bulk distribution
customers in the Pharmaceutical Distribution and Provider Services segment are
CVS and Walgreens Co. ("Walgreens"), accounting for approximately 60% and 20%,
respectively, of all bulk deliveries. Due to the lack of margin generated
through bulk deliveries, fluctuations in their purchases would have no
significant impact on the segment's earnings. Novation, LLC ("Novation") and
Premier Purchasing Partners, L.P ("Premier") are the two largest group
purchasing organizations (each, a "GPO") having business arrangements with the
Company that account for approximately 11% and 9%, respectively, of the
Company's operating revenues (by dollar volume) in fiscal 2002 through the
Company's Pharmaceutical Distribution and Provider Services and Medical-Surgical
Products and Services segments. Each of these two segments could be adversely
affected if the business arrangements with either GPO customer were lost,
although the loss of the business arrangement with either GPO would not mean the
loss of sales from all members of the GPO.
The Company obtains its products from many different suppliers, the largest
of which, Pfizer, Inc., accounted for approximately 8% (by dollar volume) of the
Company's total revenue in fiscal 2002. The Company's five largest suppliers
combined accounted for approximately 31% (by dollar volume) of the Company's
total revenue during fiscal 2002 and the Company's relationships with its
suppliers are generally very good. The Company's arrangements with its
pharmaceutical suppliers typically may be canceled by either the Company or the
supplier upon 30 to 90 days prior notice, although many of these arrangements
are not governed by formal agreements. The loss of certain suppliers could
adversely affect the Company's business if alternative sources of supply were
unavailable.
Cardinal Distribution generates operating margin in many ways from its
vendors, including inventory investment buying opportunities, rebates, vendor
program arrangements, agreements, and offerings. In the future, vendors may not
continue to offer such programs in the same form or at the current levels.
While certain of the Company's operations may show quarterly fluctuations,
the Company does not consider its business to be seasonal in nature on a
consolidated basis.
5
COMPETITION
The markets in which the Company operates are highly competitive. In the
pharmaceutical wholesale distribution business, the Company competes directly
with numerous other national and regional wholesale distributors, direct selling
manufacturers, self-warehousing chains, and specialty distributors on the basis
of a value proposition that includes breadth of product lines, marketing
programs, support services and pricing. The Company's pharmaceutical wholesale
distribution operations have narrow profit margins and, accordingly, the
Company's earnings depend significantly on its ability to distribute a large
volume and variety of products efficiently and to provide quality support
services. With respect to pharmacy franchising operations, several smaller
franchisors compete with Medicine Shoppe in the franchising of pharmacies, with
competition being based primarily upon benefits offered to both the pharmacist
and the customer, access to third party programs, the reputation of the
franchise and pricing. Medicine Shoppe also needs to be competitive with a
pharmacist's ongoing option to remain self-employed at his or her current
position rather than becoming a franchisee. Through Central Pharmacy, the
Company competes with other nuclear pharmacy service companies and distributors
engaged in the preparation and delivery of radiopharmaceuticals for use in
nuclear imaging procedures in hospitals and clinics. Such competitors include
national and regional operators of radiopharmacies, numerous independent
radiopharmacies, and manufacturers and universities that have established their
own radiopharmacies. With its CHPPS subsidiary, the Company competes with both
national and regional hospital pharmacy management firms, and self-managed
hospitals and hospital systems on the basis of services offered, its established
base of business, the effective use of information systems, the development of
clinical programs, the quality of the services it provides to its customers and
price. The Company's Allegiance subsidiary faces substantial competition in all
of its product and service markets, with competition focusing primarily on
product performance, service levels and price.
In the Pharmaceutical Technologies and Services segment, the Company
competes on several fronts: the Oral Technologies group competes with a
growing number of new drug delivery technologies and continued refinement to
existing delivery technologies; the Sterile Technologies group competes with
other companies that provide sterile manufacturing in glass or plastic, liquid
or lyophilization; the Pharmaceutical Development group competes with other
companies that provide contract laboratory services, analytical and development
for specialty delivery techniques; the Packaging Services group competes with
companies that provide packaging services and clinical and analytical packaging
services; and the Sales and Marketing group competes with other companies, as
well as pharmaceutical companies, that provide medical education,
marketing/product launch services, and contract sales services. All of the
foregoing groups compete on quality, responsiveness, proprietary offerings,
customer service, and price.
As a marketer of automated pharmaceutical dispensing and supply systems
through Pyxis, the Company competes based upon quality, its installed base of
systems, relationships with customers, customer service and support
capabilities, patents and other intellectual property, its ability to interface
with customer information systems and price. Actual and potential competitors to
the Pyxis system include both existing domestic and foreign companies, as well
as emerging companies that supply products for specialized markets and other
outside service providers.
EMPLOYEES
As of September 9, 2002, the Company had approximately 50,000 employees in
the U.S. and abroad, of which approximately 1,500 are subject to collective
bargaining agreements. Overall, the Company considers its employee relations to
be generally very good.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights to its services and products. These
proprietary rights are important to the Company's ongoing operations.
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, some of which have
been registered, and also holds common law rights in various trademarks and
service marks. It is possible that in some cases the Company may be unable to
obtain the registrations for trademarks and service marks for which it has
applied.
The Company holds patents relating to certain aspects of its automated
pharmaceutical dispensing systems, automated medication management systems,
medication packaging, medical devices, processes, products, formulations, drug
delivery systems and sterile manufacturing. The Company has a number of pending
patent applications in the United States and certain foreign countries, and
intends to pursue additional patents as appropriate. Although the Company
believes that its patents do not infringe upon the proprietary rights of third
parties, from time to time, third parties have asserted infringement claims
against the Company and it is possible that third parties will assert
infringement claims against the Company in the future. In addition, it may
become necessary for the Company to pursue litigation to protect trade secrets
and other proprietary rights, to enforce patent, copyright and trademark rights,
and to determine the scope and validity of the proprietary rights of others.
The Company also owns certain software, including software used for
pharmaceutical purchasing and inventory control, which is copyrighted and
subject to the protection of applicable copyright laws.
The Company does not consider any particular patent, trademark, license,
franchise or concession to be material to its business. No assurances can be
given that any intellectual property rights of the Company will provide
meaningful protection against competitive products or otherwise be commercially
valuable or that the Company will be successful in obtaining additional
intellectual property or enforcing its intellectual property rights against
unauthorized users.
6
REGULATORY MATTERS
The Company's subsidiaries that: distribute prescription pharmaceuticals
(including certain controlled substances) and/or medical devices; manage or own
pharmacy operations; engage in or operate retail pharmacies or nuclear
pharmacies; purchase pharmaceuticals; manage pharmaceuticals; engage in
logistics and/or manufacture drug delivery systems or surgical and respiratory
care products; package pharmaceutical products and devices; provide analytical
development services; or, develop, create, present or distribute accredited and
unaccredited educational or promotional programs or materials, may be required
to register for permits and/or licenses with, and comply with operating and
security standards of, the United States Drug Enforcement Administration, the
Food and Drug Administration (the "FDA"), the United States Nuclear Regulatory
Commission (the "NRC") and various state boards of pharmacy, state health
departments and/or comparable state agencies as well as foreign agencies, and
certain accrediting bodies depending upon the type of operations and location of
product distribution and sale. In addition, certain of the Company's
subsidiaries are subject to requirements of the Controlled Substances Act and
the Prescription Drug Marketing Act of 1987 and similar state laws, which
regulate the marketing, purchase, storage and distribution of prescription drugs
and prescription drug samples under prescribed minimum standards. Laws
regulating the manufacture and distribution of products also exist in most other
countries where certain of the Company's subsidiaries conduct business. In
addition, the Company's packaging and manufacturing subsidiary operations in the
United Kingdom, France, Italy and Germany are subject to local certification
requirements, including compliance with good manufacturing practices adopted by
the European Community. The Company's Pyxis subsidiary is not currently required
to register or submit pre-market notifications to the FDA for its automated
pharmaceutical dispensing systems. There can be no assurance, however, that FDA
policy in this regard will not change.
The Company's franchising operations, through Medicine Shoppe, are subject
to Federal Trade Commission regulations, and rules and regulations adopted by
certain states, which require franchisors to make certain disclosures to
prospective franchisees prior to the sale of franchises. In addition, certain
states have adopted laws which regulate the franchisor-franchisee relationship.
The most common provisions of such laws establish restrictions on the ability of
franchisors to terminate or to refuse to renew franchise agreements. From time
to time similar legislation has been proposed or is pending in additional
states.
Central Pharmacy and its related entities operate nuclear pharmacies in a
regulated industry which requires licenses or permits from the NRC, the
radiologic health agency and/or department of health of each state in which it
operates, and the applicable state board of pharmacy.
Certain of the Company's subsidiaries are subject to federal and state
healthcare fraud and abuse, referral and reimbursement laws and regulations with
respect to their operations. Certain of the Company's subsidiaries also maintain
contracts with the federal government and are subject to certain regulatory
requirements relative to government contractors.
Services and products provided by certain of the Company's subsidiaries
include access to healthcare information gathered and assessed for the benefit
of healthcare clients. Greater scrutiny on a federal and state level is being
placed on how patient identifiable healthcare information should be handled and
in identifying the appropriate parties and means to do so. Future changes in
regulations and/or legislation such as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") and its accompanying federal regulations,
such as those pertaining to privacy, may affect how some of these information
services or products are provided. In addition, certain of the Company's
operations, depending upon their location, may be subject to additional state or
foreign regulations affecting how information services or products are provided.
Failure to comply with HIPAA and other such laws may subject the Company to
civil and/or criminal penalties, which could be significant. The costs
associated with complying with HIPAA, its accompanying federal regulations, and
similar state and foreign regulations could be significant and the failure to
comply with all such legal requirements could have a significant impact on the
Company's results of operations and financial condition.
The Company is also subject to various federal, state and local laws,
regulations and recommendations, both in the United States and abroad, relating
to safe working conditions, laboratory and manufacturing practices, and the use,
transportation and disposal of hazardous or potentially hazardous substances.
The Company's environmental policies mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection for
each of its subsidiaries. In addition, U.S. and international import and export
laws and regulations require that the Company abide by certain standards
relating to the importation and exportation of finished goods, raw materials and
supplies and the handling of information.
WORKING CAPITAL
The Company maintains a high level of inventory in order to be able to take
advantage of price changes and to be able to satisfy daily delivery
requirements, but is not generally required by its customers to maintain
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particular inventory levels. Certain supply contracts with U.S. Government
entities require the Company to maintain sufficient inventory to meet emergency
demands. The Company does not believe that the requirements contained in these
U.S. Government supply contracts materially impact inventory levels. The Company
generally permits customers to return products only where the products can be
resold at full value or returned to vendors for credit. The Company is not aware
of any material differences between its inventory policies and those of other
industry participants. The Company's practice is to offer market payment terms
to its customers. The Company is not aware of any material differences between
its practice and those of other industry participants.
RESEARCH AND DEVELOPMENT
For information on Company-sponsored research and development costs in the
last three fiscal years, see Note 1 of "Notes to Consolidated Financial
Statements."
REVENUE AND LONG-LIVED ASSETS BY GEOGRAPHIC AREA
For information on revenue and long-lived assets by geographic area, see
Note 16 of "Notes to Consolidated Financial Statements."
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
CHANGING UNITED STATES HEALTHCARE ENVIRONMENT MAY ADVERSELY AFFECT THE COMPANY'S
OPERATING RESULTS. In recent years, the healthcare industry has undergone
significant changes driven by various efforts to reduce costs. These efforts
include, but are not limited to, potential national healthcare reform, trends
toward managed care, cuts in Medicare, consolidation of competitors, suppliers
and customers, and the development of large, sophisticated purchasing groups.
This industry is expected to continue to undergo significant changes for the
foreseeable future. Other factors related to the healthcare industry that could
negatively impact the Company's results of operations include, but are not
limited to:
- - changes in governmental support of, and reimbursement for, healthcare
services;
- - changes in the method by which healthcare services are delivered;
- - changes in the prices for healthcare services;
- - other legislation or regulations governing healthcare services or
mandated benefits; and
- - changes in pharmaceutical and medical-surgical manufacturers' pricing
or distribution policies.
ADDITIONAL REGULATORY RISKS MAY ADVERSELY AFFECT THE COMPANY'S OPERATING
RESULTS. The healthcare industry is highly regulated. Consequently, the Company
is subject to the risk of changes in various local, state, federal and foreign
laws, which include the operating and security standards of the United States
Drug Enforcement Administration, the FDA, various state boards of pharmacy and
comparable agencies. If changes were to occur, they could affect many of the
Company's regulated operations, which include distributing prescription
pharmaceuticals (including certain controlled substances), operating pharmacy
operations (including nuclear pharmacies), manufacturing medical/surgical
products, manufacturing pharmaceuticals using proprietary drug delivery systems,
and packaging pharmaceuticals. Also, the healthcare regulatory environment may
change in a manner that could restrict the Company's existing operations, limit
the expansion of the Company's business or otherwise affect the Company
adversely.
RISKS GENERALLY ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY AND INTERNAL
GROWTH MAY ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS. An important
element of the Company's growth strategy has been and is expected to continue to
be the pursuit of acquisitions of other businesses which either expand or
complement the Company's existing businesses. Over the past several years, the
Company has expanded beyond its core pharmaceutical distribution business into
areas such as medical-surgical manufacturing and distribution and drug delivery
systems. Integrating businesses, however, involves a number of special risks,
including the possibility that management may be distracted from regular
business concerns by the need to integrate operations, unforeseen difficulties
in integrating operations and systems, problems assimilating and retaining the
employees of the Company or the acquired company, accounting issues that could
arise in connection with, or as a result of, the acquisition of the acquired
company, challenges in retaining customers of the acquired company or of the
Company following the acquisition, and potential adverse short term effects on
operating results through increased costs or otherwise. While the Company has
not experienced any material integration problems in recent years, the
possibility of integration issues increases when the Company ventures outside
its normal core businesses. In addition, the Company may incur debt to finance
future acquisitions and/or may issue securities in connection with future
acquisitions which may dilute the holdings of current and future shareholders of
the Company. In addition to the risks associated with acquisition related
growth, the Company's business has grown in size and complexity over the past
few years as a result of internal growth. This has placed significant demands on
the Company's management, systems, internal controls, and financial and physical
resources. To meet such demands, the Company intends to continue to hire new
employees, invest in new technology, and make other capital expenditures. If the
Company is unable to successfully and timely complete and integrate strategic
acquisitions or fails to efficiently manage operations in a way that
accommodates continued internal growth, the Company's business, financial
conditions, and results of operations could be adversely impacted.
8
ITEM 2: PROPERTIES
In the United States, the Company has 26 principal pharmaceutical
distribution facilities and three specialty distribution facilities utilized by
the Pharmaceutical Distribution and Provider Services segment. The Company also
has 15 Packaging Services packaging and printed components facilities (three of
which are located in Puerto Rico), 16 Oral Technologies manufacturing
facilities, three Pharmaceutical Development facilities, and four Sterile
Technologies manufacturing facilities (one of which is located in Puerto Rico)
each of which is utilized in its Pharmaceutical Technologies and Services
segment. In addition, the Company has one Pyxis assembly operation in its
Automation and Information Services segment. The Company also has 55
medical-surgical distribution facilities and 15 medical-surgical manufacturing
facilities (one of which is located in Puerto Rico) utilized by the
Medical-Surgical Products and Services segment. The Company's domestic
facilities are located in a total of 43 states and Puerto Rico.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Technologies and Services segment, 11 Oral Technologies
manufacturing facilities which are located in the United Kingdom, France,
Germany, Italy, Australia, Japan, Argentina, Brazil and Canada. Within this
segment, the Company also has four Packaging Services facilities which are
located in the United Kingdom and Germany. The Company owns, leases or operates
through its Medical-Surgical Products and Services segment 12 medical-surgical
distribution facilities located in Canada, and 16 medical-surgical manufacturing
facilities located in the Netherlands, Malaysia, Thailand, Malta, Mexico, the
Dominican Republic and France. The Company's international facilities are
located in a total of 18 countries.
The Company owns 91 of the domestic and international facilities described
above, and the balance are leased. The Company's principal executive offices are
located in a leased four-story building located at 7000 Cardinal Place in
Dublin, Ohio.
The Company considers its operating properties to be in satisfactory
condition and adequate to meet its present needs. However, the Company regularly
evaluates its operating properties and may make further additions, improvements,
and consolidations as it continues to seek opportunities to expand its role as a
provider of services to the healthcare industry.
For certain financial information regarding the Company's facilities, see
Notes 8 and 9 of "Notes to Consolidated Financial Statements."
ITEM 3: LEGAL PROCEEDINGS
In addition to the legal proceedings disclosed below, the Company also
becomes involved from time-to-time in other litigation incidental to its
business, including, without limitation, inclusion of certain of its
subsidiaries as a potentially responsible party for environmental clean-up
costs. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the Company intends to vigorously defend
itself and does not currently believe that the outcome of any pending litigation
will have a material adverse effect on the Company's consolidated financial
statements.
9
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off,
Allegiance, which merged with a subsidiary of the Company on February 3, 1999,
agreed to indemnify Baxter, and will defend and indemnify Baxter Healthcare
Corporation ("BHC"), as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
arising from the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves. The
Company is not a party to any of the lawsuits and has not agreed to pay any
settlements to the plaintiffs.
As of June 30, 2002, there were approximately 380 lawsuits against BHC
and/or Allegiance involving allegations of sensitization to natural rubber latex
products. Some of the cases are now proceeding to trial. The total dollar amount
of potential damages cannot be reasonably quantified. Some plaintiffs plead
damages in extreme excess of what they reasonably can expect to recover, some
plead a modest amount, and some do not include a request for any specific dollar
amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds twenty-five. Based on the significant differences
in the range of damages sought and based on the multiple number of defendants in
these lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in approximately eight hundred cases. As of June 30, 2002, fewer
than half of those lawsuits remain pending. Nearly half of the lawsuits that
have been resolved were concluded without any liability to Baxter/Allegiance.
During the fiscal year ended June 30, 2002, Allegiance began settling some of
these lawsuits with greater frequency. No individual claim has been settled for
a material amount, nor have all the settled claims, in the aggregate, comprised
a material amount. Due to the number of claims filed and the ongoing defense
costs that will be incurred, Allegiance believes it is probable that it will
incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity and results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the top end of the
range reflecting virtually no insurance coverage, which the Company believes is
an unlikely scenario given the insurance coverage in place). The Company
believes a substantial portion of any liability will be covered by insurance
policies Allegiance has with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency. The Company and Allegiance continue to believe that
insurance recovery is probable.
Vitamins Litigation
On May 17, 2000, Scherer, which was acquired by the Company in August 1998,
filed a civil antitrust lawsuit in the United States District Court for the
District of Illinois against certain of its raw material suppliers and other
alleged co-conspirators alleging that the defendants unlawfully conspired to fix
vitamin prices and allocate vitamin production volume and vitamin customers in
violation of U.S. antitrust laws. The complaint seeks monetary damages and
injunctive relief. After the lawsuit was filed, it was consolidated for
pre-trial purposes with other similar cases. The case is scheduled for trial in
the United States District Court for the District of Columbia (where it was
transferred) in March 2003. Scherer has entered into settlement agreements with
certain defendants. To date, Scherer has received settlement payments of
approximately $35.3 million, net of attorney fees and expenses that were
withheld prior to the disbursement of the funds to Scherer. At the present time,
management cannot predict the outcome of this lawsuit, nor the estimated damages
and potential recovery, if any.
Environmental Claims
Pennsauken Environmental Claim
In 1985, PCI Services, Inc. ("PCI"), purchased Burgess & Why Folding Carton
Company ("Burgess"), located in Pennsauken, New Jersey. The Company acquired PCI
in 1996. In 1993, the New Jersey Department of Environmental Protection Agency
("NJ DEP") sued various waste transporters and other parties, in New Jersey
State court, alleging contamination of the Pennsauken landfill. One of the waste
haulers sued by the NJ DEP was Quick Way, Inc. ("Quick Way"), a waste hauling
company used by Burgess from 1970 to 1982. Quick Way, in turn, joined several
companies that it serviced, including Burgess. There are approximately 600
parties in the litigation. PCI reasonably believes its exposure, if any, would
be no greater than $100,000. The Company reasonably believes that the impact of
this claim upon PCI, if any, will be immaterial to the Company's financial
position, liquidity and results of operation.
10
Environmental Claims Relating to Allegiance
On September 30, 1996, Baxter and its subsidiaries transferred to
Allegiance and its subsidiaries the Allegiance Business in connection with the
Baxter-Allegiance Spin-Off. As a result of the Baxter-Allegiance Spin-Off,
Allegiance agreed to defend and indemnify Baxter from the following
environmental claims.
San Gabriel Environmental Claim
Allegiance, through Baxter and its predecessors-in-interest, owned a
facility located in Irwindale, California (the "Irwindale Property"), from
approximately 1961 to approximately 1999, where, among other things, plastics
were manufactured, a chemical laboratory was operated, and certain research and
development activity was carried out. San Gabriel is a Superfund site in the Los
Angeles area that concerns ground water contamination of a local drinking water
aquifer. The U.S. Environmental Protection Agency (the "U.S. EPA") is the lead
government agency in charge of the San Gabriel Valley Groundwater Basin
Superfund Sites, Areas 1-4, Baldwin Park Operable Unit (the "BPOU"). According
to the U.S. EPA, the groundwater within the BPOU is contaminated. The Irwindale
Property is located approximately one-mile away from the BPOU plume. The U.S.
EPA named Allegiance as a potentially responsible party ("PRP") for the
groundwater contamination in the BPOU, along with a number of other PRPs. In
June 2000, the U.S. EPA issued a unilateral administrative order ("UAO") against
a number of companies, including Allegiance. The UAO requires, among other
things, the design and implementation of the interim groundwater remedy selected
by U.S. EPA. This interim remedy generally requires pumping contaminated
groundwater from the aquifer and treating it in accordance with federal and
state government standards in order to remove or reduce contaminants of concern
and to stop the further migration of contaminants. Allegiance has maintained
that the Irwindale Property did not contribute to the alleged ground water
contamination. The levels of contaminants detected on the Irwindale Property are
well below any state or federal standard requiring remediation or monitoring.
The U.S. EPA is engaged in settlement discussions with Allegiance, and has not
sued Allegiance in connection with the UAO or the BPOU. Previously, the U.S. EPA
made a cash buy-out demand to Allegiance of $600,000. Allegiance responded with
questions as to the calculations and data utilized by the U.S. EPA to reach the
$600,000 amount. By using the U.S. EPA's own equation and Allegiance's
reasonable understanding of the facts, Allegiance reasonably believes that its
potential liability would be less than the cash buy out demand amount.
Allegiance has recorded environmental accruals, based upon the information
available, that it reasonably believes are adequate to satisfy known costs. The
Company reasonably believes that the impact of this claim upon Allegiance will
be immaterial to the Company's financial position, liquidity and results of
operation.
A-1 Plainwell and A-1 Sunrise Environmental Claims
The Michigan Department of Environmental Quality brought suit against
Baxter as a PRP along with a number of other PRPs, in 1994, in the Circuit Court
of the State of Michigan for Ingham County, alleging contamination of the A-1
disposal site in Plainwell, Michigan ("A-1 Plainwell"). Among the contaminants
at the site were solvent wastes generated by Burdick & Jackson of Muskegon,
Michigan. Baxter became a PRP through its acquisition of Burdick & Jackson in
1986. Allegiance agreed to defend and indemnify Baxter, in this claim, as part
of the Baxter-Allegiance Spin-Off. The principal relief sought was for the PRPs
to clean up the site to applicable standards and to reimburse the government for
its oversight and other costs at the site. In a related action, Allegiance,
through its association with Baxter, and Burdick & Jackson, was named a PRP to
reimburse the State of Michigan for reimbursement costs associated with the
construction of a landfill cap and continued operation, maintenance and
monitoring of the A-1 Sunrise site in Michigan ("A-1 Sunrise"). Allegiance has
paid approximately $95,000 for past remediation costs at the A-1 Plainwell site
and approximately $175,000 at the A-1 Sunrise site. Remediation of the A-1
Plainwell site is substantially complete, subject to minimal operation,
maintenance, and monitoring of the site. Allegiance's share of future
remediation at the A-1 Sunrise site is approximately 1.8%. Allegiance has
recorded environmental accruals, based upon the information available, that it
reasonably believes are adequate to satisfy known costs. The Company reasonably
believes that the impact of these claims upon Allegiance will be immaterial to
the Company's financial position, liquidity and results of operation.
Thermochem Environmental Claim
Baxter acquired Burdick & Jackson of Muskegon, Michigan, in 1986. As a
result of this acquisition, Baxter was identified, by the U.S. EPA, as a PRP for
clean up costs related to the Thermochem waste processing site in Muskegon,
Michigan. Allegiance agreed to defend and indemnify Baxter, in this claim, as
part of the Baxter-Allegiance Spin-Off. Based upon the information available,
Allegiance reasonably believes the total clean-up cost of this site to be
between approximately $16 million and $23 million. A well-funded PRP group, of
which Baxter is a member, has spent approximately $10 million in clean-up costs.
Allegiance reasonably believes that current available funding of the PRP, along
with Allegiance's additional recorded environmental accruals, are adequate to
satisfy known costs. The Company reasonably believes that the impact of this
claim upon Allegiance will be immaterial to the Company's financial position,
liquidity and results of operation.
11
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 2002.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the executive officers of the Company (information
provided as of September 9, 2002):
NAME AGE POSITION
---- --- --------
Robert D. Walter 57 Chairman and Chief Executive Officer
George L. Fotiades 48 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Technologies and Services
James F. Millar 54 Executive Vice President; President and
Chief Operating Officer -
Pharmaceutical Distribution and Medical Products
Stephen S. Thomas 47 Executive Vice President; Group President -
Automation and Information Services
Ronald K. Labrum 46 Executive Vice President; Group President -
Medical-Surgical Products and Services
Gordon A. Troup 46 Executive Vice President; Group President -
Pharmaceutical Distribution
Brendan A. Ford 44 Executive Vice President - Corporate Development
Richard J. Miller 45 Executive Vice President, Chief Financial Officer and
Principal Accounting Officer
Anthony J. Rucci 51 Executive Vice President and Chief Administrative
Officer
Carole S. Watkins 42 Executive Vice President - Human Resources
Kathy Brittain White 53 Executive Vice President and Chief Information Officer
Paul S. Williams 42 Executive Vice President, Chief Legal Officer and
Secretary
Unless indicated to the contrary, the business experience summaries
provided below for the Company's executive officers describe positions held by
the named individuals during the last five years but exclude other positions
held with subsidiaries of the Company.
ROBERT D. WALTER has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979. Mr. Walter also
serves as a director of Viacom Inc. and American Express Company.
GEORGE L. FOTIADES Executive Vice President, President and Chief Operating
Officer -- Pharmaceutical Technologies and Services of the Company since
November 2000; Executive Vice President and Group President -- R.P. Scherer
Corporation, August 1998 to October 2000 and President of R.P. Scherer
Corporation, January 1998 to August 1998; Group President, Americas and Asia
Pacific, of R.P. Scherer Corporation, June 1996 to January 1998. Mr. Fotiades
serves as a director of Prologis.
JAMES F. MILLAR Executive Vice President, President and Chief Operating
Officer -- Pharmaceutical Distribution and Medical Products since November 2000;
Executive Vice President and Group President -- Pharmaceutical Distribution and
Provider Services, February 2000 to November 2000; Executive Vice President and
Group President of the Company's distribution
12
business, June 1996 to February 2000. Mr. Millar serves as a director of Wendy's
International.
STEPHEN S. THOMAS Executive Vice President and Group President --
Automation and Information Services since September 2000; Executive Vice
President and Group President -- Pharmacy Automation, Information Systems and
International Operations of the Company, July 1999 to September 2000; Executive
Vice President and President of Pyxis, October 1997 to July 1999. Mr. Thomas
serves as a director of Visual Med Clinical Systems, Inc.
RONALD K. LABRUM Executive Vice President and Group President --
Medical-Surgical Products and Services since November 2000; President,
Manufacturing and Distribution of Allegiance, October 2000 to November 2000;
Corporate Vice President, Regional Companies/Health Systems of Allegiance,
January 1997 to October 2000.
GORDON A. TROUP Executive Vice President and Group President --
Pharmaceutical Distribution since July 2001; President, Cardinal Distribution,
September 1999 to July 2001; Executive Vice President, Operations --
Distribution, September 1999 to February 2000; various positions of increasing
responsibility within the Company's pharmaceutical distribution business,
January 1996 to September 1999.
BRENDAN A. FORD Executive Vice President -- Corporate Development of the
Company since November 1999; Senior Vice President -- Corporate Development,
February 1996 to November 1999.
RICHARD J. MILLER Executive Vice President of the Company since November
1999; Chief Financial Officer since March 1999; Acting Chief Financial Officer,
August 1998 to March 1999; Corporate Vice President, April 1999 to November
1999; Vice President and Controller, August 1995 to March 1999.
ANTHONY J. RUCCI Executive Vice President and Chief Administrative Officer
of the Company since January 2000; Executive Vice President -- Human Resources
of Cardinal, November 1999 to January 2000; Dean of the University of Illinois
at Chicago's College of Business Administration, 1998 to November 1999;
Executive Vice President for Administration of Sears, Roebuck and Co., 1993 to
1998.
CAROLE S. WATKINS Executive Vice President -- Human Resources of the
Company since August 2000; Senior Vice President, Human Resources --
Pharmaceutical Distribution and Provider Services, February 2000 to August 2000;
Vice President -- Human Resources -- Cardinal Distribution, November 1996 to
February 2000.
KATHY BRITTAIN WHITE Executive Vice President and Chief Information Officer
of the Company since February 1999; Executive Vice President and Chief
Information Officer of Allegiance Corporation, 1996 until Allegiance was
acquired by the Company in February 1999. Ms. White serves as a director of
Certegy and Mattel, Inc.
PAUL S. WILLIAMS Executive Vice President, Chief Legal Officer and
Secretary of the Company since April 2001; Senior Vice President, Deputy General
Counsel and Assistant Secretary, January 2001 to March 2001; Vice President,
Deputy General Counsel and Assistant Secretary, July 1999 to January 2001; Vice
President, Assistant General Counsel and Assistant Secretary, June 1998 to July
1999; Assistant General Counsel, June 1995 to June 1998.
13
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." The following table reflects the range of the reported high and
low last sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared thereon for the
fiscal years ended June 30, 2002 and 2001. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
HIGH LOW DIVIDENDS
---- --- ---------
Fiscal 2001:
Quarter Ended
September 30, 2000 $63.38 $45.27 $0.020
December 31, 2000 69.25 59.04 0.020
March 31, 2001 68.35 58.67 0.020
June 30, 2001 77.00 61.78 0.025
Fiscal 2002:
Quarter Ended
September 30, 2001 $75.30 $67.28 $ 0.025
December 31, 2001 76.60 61.50 0.025
March 31, 2002 70.89 60.80 0.025
June 30, 2002 73.00 61.41 0.025
Through September 9, 2002 $68.19 $49.08 $ 0.025
As of September 9, 2002, there were approximately 21,000 shareholders of
record of the Common Shares.
The Company anticipates that it will continue to pay quarterly cash
dividends in the future. However, the payment and amount of future dividends
remain within the discretion of the Company's Board of Directors and will depend
upon the Company's future earnings, financial condition, capital requirements
and other factors.
The Company maintains several stock incentive plans (the "Plans") for the
benefit of certain officers, directors and employees. Options granted generally
vest over three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
Certain plans are subject to shareholder approval while other plans have been
authorized solely by the Board of Directors. The following table summarizes
information relating to the Plans at June 30, 2002:
Outstanding
---------------------------------
Weighted Shares Available
Average for Future
Options Exercise Price Issuance
(in millions) per Share (in millions)
- --------------------------------------------------------------------------------
Plans approved by
shareholders 13.5 $44.15 20.9
Plans not approved by
shareholders 14.3 $55.86 23.2
Plans acquired through
acquisition 9.3 $24.15 -
- --------------------------------------------------------------------------------
Balance at June 30, 2002 37.1 $43.64 44.1
================================================================================
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company were
prepared giving retroactive effect to the business combinations with MediQual on
February 18, 1998; Scherer on August 7, 1998; Allegiance on February 3, 1999;
PSI on May 21, 1999; ALP on September 10, 1999, and Bindley on February 14,
2001, all of which were accounted for as pooling-of-interests transactions.
Additional disclosure related to the ALP and Bindley transactions is included in
Note 2 of "Notes to Consolidated Financial Statements." The consolidated
financial data includes all purchase transactions as of the date of acquisition
that occurred during these periods.
14
For the fiscal year ended June 30, 1998, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results for the fiscal year ended June 30, 1998 with Scherer's
financial results for the fiscal year ended March 31, 1998, PSI's financial
results for the fiscal year ended September 30, 1998 and Bindley's financial
results for the fiscal year ended December 31, 1997.
For the fiscal year ended June 30, 1999, the information presented is
derived from the consolidated financial statements which combine Cardinal's
financial results for the fiscal year ended June 30, 1999 with Bindley's
financial results for the fiscal year ended December 31, 1998. For the fiscal
year ended June 30, 2000, the information presented is derived from the
consolidated financial statements which combine Cardinal's financial results for
the fiscal year ended June 30, 2000 with Bindley's financial results for the
fiscal year ended December 31, 1999.
The selected consolidated financial data below should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
At or For the Fiscal Year Ended
June 30, (1)
--------------------------------------------------------------
2002 2001 2000 1999(2) 1998(2)
--------------------------------------------------------------
EARNINGS DATA:
Operating revenue $44,394.3 $38,660.1 $30,257.8 $25,682.5 $20,844.8
Bulk deliveries to customer warehouses 6,741.4 9,287.5 8,092.1 7,050.4 7,541.1
--------------------------------------------------------------
Total revenue $51,135.7 $47,947.6 $38,349.9 $32,732.9 $28,385.9
Earnings before cumulative effect
of change in accounting $ 1,126.3 $ 857.4 $ 717.8 $ 499.3 $ 474.3
Cumulative effect of change
in accounting (5) 70.1 -- -- -- --
--------------------------------------------------------------
Net earnings $ 1,056.2 $ 857.4 $ 717.8 $ 499.3 $ 474.3
Basic earnings per Common Share (3)
Before cumulative effect of change
in accounting $ 2.50 $ 1.93 $ 1.64 $ 1.14 $ 1.10
Cumulative effect of change
in accounting (5) (0.16) -- -- -- --
--------------------------------------------------------------
Net basic earnings per Common Share $ 2.34 $ 1.93 $ 1.64 $ 1.14 $ 1.10
Diluted earnings per Common Share (3)
Before cumulative effect of change
in accounting $ 2.45 $ 1.88 $ 1.60 $ 1.12 $ 1.07
Cumulative effect of change
in accounting (5) (0.15) -- -- -- --
--------------------------------------------------------------
Net diluted earnings per Common Share $ 2.30 $ 1.88 $ 1.60 $ 1.12 $ 1.07
Cash dividends declared
per Common Share (3)(4) $ 0.100 $ 0.085 $ 0.070 $ 0.067 $ 0.049
BALANCE SHEET DATA:
Total assets $16,438.0 $14,642.4 $12,024.1 $ 9,682.7 $ 8,876.8
Long-term obligations,
less current portion $ 2,207.0 $ 1,871.0 $ 1,524.5 $ 1,224.5 $ 1,362.2
Shareholders' equity $ 6,393.0 $ 5,437.1 $ 4,400.4 $ 3,894.6 $ 3,389.9
15
(1) Amounts reflect business combinations and the impact of merger-related
costs and other special charges in all periods presented. See Note 2 of
"Notes to Consolidated Financial Statements" for a further discussion of
merger-related costs and other special charges affecting fiscal 2002, 2001,
and 2000. Fiscal 1999 amounts reflect the impact of merger-related charges
and other special charges of $165.4 million ($122.3 million, net of tax).
Fiscal 1998 amounts reflect the impact of merger-related charges of $57.8
million ($19.5 million, net of tax).
(2) In April 1998, ALP had elected S-Corporation status for income tax
purposes. As a result of the merger, ALP terminated its S-Corporation
election. Amounts above do not reflect the impact of pro forma adjustments
related to ALP taxes, as if ALP had been subject to federal income taxes
during the periods presented. For the fiscal years ended June 30, 1999 and
1998, the pro forma adjustment for ALP taxes would have reduced net
earnings by $9.3 million and $4.6 million, respectively. The pro forma
adjustment would have decreased diluted earnings per Common Share by $0.02
to $1.10 for fiscal 1999 and by $0.01 to $1.06 for fiscal 1998.
(3) Net basic earnings, net diluted earnings and cash dividends per Common
Share have been adjusted to retroactively reflect all stock dividends and
stock splits through June 30, 2002.
(4) Cash dividends per Common Share exclude dividends paid by all entities with
which the Company has merged.
(5) In the first quarter of fiscal 2002, the method of recognizing revenue for
pharmacy automation equipment was changed from recognizing revenue when the
units were delivered to the customer to recognizing revenue when the units
are installed at the customer site. For more information regarding the
change in accounting see Note 14 of "Notes to Consolidated Financial
Statements."
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis has been prepared giving
retroactive effect to the pooling-of-interests business combinations with ALP on
September 10, 1999 and Bindley on February 14, 2001.
The discussion and analysis presented below refers to and should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K. Portions of this management's discussion
and analysis presented below include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward-looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are discussed in Item 1 of this Form
10-K under the heading "Risk Factors That May Affect Future Results" and are
described in Exhibit 99.01 to this Form 10-K. Except to the limited extent
required by applicable law, the Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
GENERAL
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services, and Automation and
Information Services. See Note 16 of "Notes to Consolidated Financial
Statements" for a description of these segments.
RESULTS OF OPERATIONS
OPERATING REVENUE
Percent of Total
Growth (1) Operating Revenues
Years ended June 30 2002 2001 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 17% 31% 82% 81% 79%
Medical-Surgical Products and Services 6% 19% 14% 15% 16%
Pharmaceutical Technologies and Services 11% 9% 3% 3% 4%
Automation and Information Services 19% 17% 1% 1% 1%
Total Company 15% 28% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the
operating revenue for a given year as a percentage of the operating
revenue in the immediately preceding year.
Total operating revenue increased 15% during fiscal 2002 as compared to
fiscal 2001. This increase is a result of a higher sales volume across various
customer segments; strong sales of self-manufactured products; pharmaceutical
price increases averaging approximately 5%; addition of new products; and the
addition of new customers, some of which was a result of new corporate
agreements with healthcare providers.
Total operating revenue increased 28% during fiscal 2001 as compared to
fiscal 2000. The increase in operating revenue resulted from a higher sales
volume to existing customers; pharmaceutical price increases averaging
approximately 4%; acquisitions; and addition of new customers, some of which was
a result of cross-selling opportunities among the various businesses. For
further discussion of acquisitions, see Note 2 of "Notes to Consolidated
Financial Statements."
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth in fiscal 2002 is a result of strong sales to all customer
segments, especially retail pharmacy and grocery chains and alternate site
customers, each of which yielded 20% growth, as well as strong growth in mail
order and government customers. A portion of the fiscal 2002 growth is
attributable to pharmaceutical price increases and the addition of new
contracts. The increase in this segment's operating revenue in fiscal 2001
resulted from strong sales to all customer segments, especially chain
pharmacies, which provided 44% growth; an increase in sales volume to existing
customers; pharmaceutical price increases; and the addition of new contracts.
The Medical-Surgical Products and Services segment's operating revenue
growth in fiscal 2002 is a result of strong sales of self-manufactured products,
particularly sales of surgical instruments and custom kits for surgical
procedures, as well as price increases and increases in sales of distributed
products. Several new long-term contracts were signed within the segment's
distribution business. The increase in this segment's operating revenue in
fiscal 2001 primarily reflected an increase in sales of
17
distributed products. The Company acquired Bergen Brunswig Medical Corporation
("BBMC") in the first quarter of fiscal 2001 and accounted for the acquisition
as a purchase transaction. As this transaction was accounted for under the
purchase method of accounting, prior year revenues for this segment do not
include BBMC revenues prior to acquisition. Excluding BBMC revenues in 2001, the
total operating revenues grew approximately 4% over fiscal 2000.
The Pharmaceutical Technologies and Services segment's operating revenue
growth in fiscal 2002 resulted from higher sales volume particularly involving
development and analytical services, pharmaceutical technologies, and its
proprietary packaging offerings. Products that showed particular strength were
Abbott's Kaletra(R), an AIDS product; Lilly's Zyprexa(R) Zydis(R), an
anti-psychotic; and Pharmacia's Detrol(R) LA, an incontinence medication.
Accelerating demand for sterile-liquid and controlled-release technologies in
addition to the acquisition of SP Pharmaceuticals, was a significant contributor
to the growth within the pharmaceutical technologies business. The completion of
the Magellan acquisition during the fourth quarter of fiscal 2002 contributed to
the growth in the analytical services business. Excluding the revenues of SP
Pharmaceuticals and Magellan, operating revenues grew approximately 6% over
fiscal 2001. Additionally, the segment experienced growth in its pharmaceutical
packaging business which was attributable to the addition of several new
customers and increased volume from existing customers. The increase in this
segment's operating revenue in fiscal 2001 resulted from higher sales volume
particularly involving the Zydis(R) rapid-dissolving drug-delivery technology
and the sterile-liquid pharmaceutical products. Slowing sales in the protease
inhibitor and health and nutritional product lines partially offset the growth
in this segment in both fiscal years.
The Automation and Information Services segment's operating revenue growth
in fiscal 2002 primarily resulted from strong sales in the patient safety and
supply management product lines, such as MEDSTATION SN(R) and SUPPLYSTATION(R)
System 30. Significant sales of new products including Anesthesia System and
products within the SupplyStation line also contributed to this segment's
growth. The increase in this segment's operating revenue in fiscal 2001
primarily reflected sales of new products, such as the MEDSTATION(R) SN, which
was introduced in late fiscal 2000, and further penetration of the market with
existing automation products.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports bulk deliveries made
to customers' warehouses as revenue. These sales involve the Company acting as
an intermediary in the ordering and subsequent delivery of pharmaceutical
products. Fluctuations in bulk deliveries result largely from circumstances that
the Company cannot control, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, changes in policies by manufacturers related to selling directly to
customers, and the addition or loss of customers. Due to the lack of margin
generated through bulk deliveries, fluctuations in their amount have no
significant impact on the Company's net earnings.
GROSS MARGIN
(as a percentage of operating revenue)
Years ended June 30 2002 2001 2000
- -------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.1% 5.2% 5.5%
Medical-Surgical Products and Services 21.9% 22.1% 23.2%
Pharmaceutical Technologies and Services 33.4% 33.3% 33.1%
Automation and Information Services 68.5% 68.6% 69.2%
Total Company 9.1% 9.3% 10.2%
- -------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased in
fiscal 2002 and fiscal 2001. This decrease resulted from a greater mix of lower
margin pharmaceutical distribution operating revenues in fiscal 2002 and fiscal
2001 as compared to the prior years. The Pharmaceutical Distribution and
Provider Services segment represented 82% of operating revenues in fiscal 2002,
up from 81% and 79% of operating revenues in fiscal 2001 and fiscal 2000,
respectively. The decline in the margins in the Medical-Surgical Products and
Services and Automation and Information Services segments also contributed to
the overall decline in the Company's gross margin.
The gross margin as a percentage of operating revenue in the Pharmaceutical
Distribution and Provider Services segment decreased in fiscal 2002. This
decrease was primarily due to the highly competitive market within the
pharmaceutical distribution industry and a greater mix of high volume customers
where a lower cost of distribution and better asset management enabled the
Company to offer lower selling margins to its customers. In addition, this
segment's gross margin was negatively impacted by several non-recurring items,
primarily related to the Bindley integration. The Company incurred a one-time
inventory adjustment related to the process of closing and rationalizing
facilities in addition to the integration of the operations of Bindley and
Cardinal. These decreases were partially offset by higher vendor margins from
favorable price increases and manufacturer marketing programs. Gross margin as a
percentage of operating revenue declined in fiscal 2001 primarily due to the
impact of lower selling
18
margins. The decline in selling margins was attributed to a highly competitive
market and greater mix of high volume customers where a lower cost of
distribution and better asset management enabled the Company to offer lower
selling margins to its customers. This decrease was partially offset by higher
vendor margins from favorable price increases and manufacturer marketing
programs.
The gross margin as a percentage of operating revenue in the
Medical-Surgical Products and Services segment decreased in fiscal 2002
primarily due to competitive pricing pressures on distributed products. This
decline was partially offset by manufacturing productivity improvements and a
higher sales volume of self-manufactured products which carry significantly
higher gross margins than other portions of this segment's business. In fiscal
2001, the decline in gross margin as a percentage of operating revenue was
primarily due to the acquisition of BBMC. This acquisition shifted product mix
toward lower margin distributed products.
The Pharmaceutical Technologies and Services segment's gross margin as a
percentage of operating revenue increased during fiscal 2002. This increase was
primarily due to a larger mix of higher margin pharmaceutical products versus
health and nutritional products, as well as cost efficiencies due to recent
infrastructure investments at manufacturing facilities. This increase was
partially offset by the impact of certain items that occurred in fiscal 2001
which did not recur in fiscal 2002, namely revenues related to the use of
certain of the Company's proprietary technology. This segment's gross margin as
a percentage of operating revenue increased in fiscal 2001 versus fiscal 2000
due to an increase in sales volume in the higher margin liquid fill contract
manufacturing and drug delivery system businesses. The drug delivery system
business' shift to higher margin pharmaceutical products from lower margin
health and nutrition products also contributed to the improvement in gross
margin. In addition, during both fiscal 2002 and 2001, the Company recognized
pricing adjustments related to the minimum recovery expected to be received for
claims against vitamin manufacturers for amounts overcharged in prior years (see
Note 2 of "Notes to Consolidated Financial Statements"). These pricing
adjustments were recorded as a reduction of cost of goods sold, consistent with
the classification of the original overcharge, and were based on the minimum
amounts estimated to be recoverable based on the facts and circumstances
available at the time they were recorded. The amounts recorded for these pricing
adjustments were $12.0 million in the first quarter of fiscal 2002 and $10.0
million in the second quarter of fiscal 2001.
The gross margin as a percentage of operating revenue in the Automation and
Information Services segment decreased in fiscal 2002 and fiscal 2001, primarily
due to changes in its product mix as a result of increased sales of
SupplyStation which generates a lower gross margin than the medication line of
products due to the relatively less complex nature of the product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of operating revenue)
Years ended June 30 2002 2001(1) 2000(1)
- ----------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.1% 2.4% 2.7%
Medical-Surgical Products and Services 13.3% 14.6% 15.8%
Pharmaceutical Technologies and Services 13.5% 14.7% 14.5%
Automation and Information Services 31.2% 32.9% 34.9%
Total Company 4.7% 5.2% 5.8%
- ----------------------------------------------------------------------------------------------
(1) In fiscal 2001 and fiscal 2000, selling, general and administrative
expenses as a percentage of operating revenue include goodwill
amortization.
Selling, general and administrative expenses as a percentage of operating
revenue declined in fiscal 2002 and fiscal 2001. This decline reflects economies
of scale associated with the Company's revenue growth. Significant productivity
gains resulting from continued cost control efforts in all segments and the
continuation of consolidation and selective automation of operating facilities
contributed to the improvement. In addition, the Company is continuing to take
advantage of synergies from recent acquisitions to decrease selling, general and
administrative expenses as a percentage of operating revenue. In fiscal 2002,
the Company ceased amortizing goodwill due to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets" (see Notes 1 and 15 of "Notes to Consolidated Financial Statements" for
further discussion) which also contributed to the improvement. Goodwill
amortization expense in fiscal 2001 was approximately $48.9 million. In
addition, the Company realized productivity and operating efficiencies as a
result of implementing changes at Pyxis to better service its customers.
Partially offsetting the improvement in selling, general and administrative
expenses in fiscal 2001 was an increase in these expenses as a percentage of
operating revenue for the Pharmaceutical Technologies and Services segment. This
change was primarily a result of surplus capacity in the health and nutritional
manufacturing facilities for this segment.
The selling, general and administrative expenses, excluding goodwill
amortization, grew 6% and 14% in fiscal years 2002 and 2001, respectively. The
increase in fiscal 2002 and 2001 is attributed primarily to an increase in
personnel costs, which accounted
19
for approximately 4% and 12%, respectively, of the overall increase. The overall
increase compares favorably to the 15% and 28% growth in operating revenue for
the same periods.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2002, 2001 and 2000.
Fiscal Year Ended June 30,
-------------------------------
(in millions, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Merger-related costs:
Direct transaction costs $ -- $ (20.8) $ 1.2
Employee-related costs (23.7) (44.6) (7.7)
ALP transaction bonus -- -- (20.3)
Pharmaceutical - distribution center consolidation (52.4) (10.3) --
Other exit costs (9.0) (8.5) (12.5)
Scherer restructuring costs -- (1.6) (9.6)
Other integration costs (46.8) (32.3) (15.8)
- ------------------------------------------------------------------------------------------
Total merger-related costs $(131.9) $(118.1) $(64.7)
==========================================================================================
Other special charges:
Distribution center closures $ -- $ (5.0) $ --
Manufacturing facility closures (2.8) (6.8) --
Employee-related costs (15.2) -- --
Litigation settlements 11.3 5.0 --
- ------------------------------------------------------------------------------------------
Total other special charges $ (6.7) $ (6.8) $ --
==========================================================================================
Total special charges $(138.6) $(124.9) $(64.7)
Tax effect of special charges 51.5 39.6 14.9
- ------------------------------------------------------------------------------------------
Net effect of special charges $ (87.1) $ (85.3) $(49.8)
==========================================================================================
Net effect on diluted earnings per share $ (0.19) $ (0.19) $(0.11)
==========================================================================================
Merger-Related Charges. Costs of effecting mergers and subsequently integrating
the operations of the various merged companies are recorded as merger-related
costs when incurred. The merger-related costs are primarily a result of the
merger or acquisition transactions with Bindley, BBMC, ALP, Allegiance and
Scherer.
During fiscal 2001 and 2000, the Company incurred direct transaction costs
related to its merger transactions accounted for as a pooling-of-interests.
These expenses primarily include investment banking, legal, accounting and other
professional fees associated with the respective merger transactions. In
addition, during the periods shown above, the Company incurred employee-related
costs, which consist primarily of severance, non-compete agreements and
transaction/stay bonuses as a result of certain acquisitions. Partially
offsetting the transaction and employee-related costs recorded during the fiscal
year ended June 30, 2000 was a $10.3 million credit to adjust the estimated
transaction and employee-related costs previously recorded in connection with
the Allegiance merger transaction. Actual billing and employee-related costs
were less than the amounts originally anticipated, resulting in a reduction of
the merger-related costs.
During fiscal 2002 and 2001, the Company recorded charges of $52.4 million
and $10.3 million, respectively, primarily associated with the Company's plans
to consolidate distribution centers and corporate offices as a result of the
Company's merger transaction with Bindley. In connection with such
consolidations, the Company incurred employee-related costs of $7.5 million and
$0.5 million, in fiscal 2002 and 2001, respectively, arising from the
termination of approximately 950 employees primarily related to the closure of
14 Bindley distribution centers. In addition, exit costs related to termination
of contracts and lease agreements were incurred during fiscal 2002 and 2001 of
$3.6 million and $9.8 million. Also, asset impairment charges of $27.2 million
were incurred during fiscal 2002. The remaining $14.1 million incurred during
fiscal 2002 is primarily related to costs associated with moving inventory and
other assets during the consolidation of distribution centers and corporate
offices. As of June 30, 2002, the majority of the 950 employees had been
terminated. The Company anticipates completing the distribution center
consolidations by June 30, 2003. As part of the restructuring, the Company plans
on closing a total of 16 Bindley distribution centers.
20
Other exit costs relate primarily to costs associated with lease
terminations and moving expenses as a direct result of the merger or acquisition
transactions with BBMC, ALP, Allegiance and Scherer.
During fiscal 2001 and 2000, the Company recorded charges of $1.6 million
and $9.6 million, respectively, for business restructuring costs relating to the
Company's merger transaction with Scherer. As part of the business
restructuring, the Company closed certain facilities. In connection with such
closings, the Company incurred employee-related costs of $1.6 million and $1.5
million in fiscal 2001 and 2000, respectively, arising from the termination of
approximately 400 manufacturing and office employees, all of whom had been
terminated as of June 30, 2001. In addition, asset impairment charges of $3.9
million were recorded in fiscal 2000. The remaining costs relate to exit costs
for the termination of contracts and lease agreements. As of June 30, 2001, the
restructuring plan had been completed.
Other integration costs include charges directly related to integration of
the operations of previous merger transactions, such as consulting costs related
to information systems and employee benefit integration, as well as relocation
and travel costs directly associated with the integrations.
Other Special Charges. During fiscal 2002, the Company incurred employee-related
costs of $15.2 million primarily associated with a restructuring of the
distribution and custom kitting operations in the Medical-Surgical Products and
Services segment. A significant portion of the charges recorded represent
severance accrued upon communication of severance terms to employees during the
fourth quarter of fiscal 2002. The restructuring plan is expected to be
completed by December 31, 2002, and will result in the termination of
approximately 600 employees.
During the fourth quarter of fiscal 2002, the Company recorded income from
net litigation settlements of $11.3 million. These settlements included a $13.3
million special item resulting from the recovery of antitrust claims against
certain vitamin manufacturers for amounts overcharged in prior years. The
recovery totaled $35.3 million, of which $22.0 million had previously been
recorded ($10.0 million in the second quarter of fiscal 2001 and $12.0 million
in the first quarter of fiscal 2002). The amounts previously recorded were
reflected as a reduction of cost of goods sold, which is consistent with the
classification of the original overcharge, and were based on the minimum amounts
estimated to be recoverable based on the facts and circumstances available at
the time they were recorded. While the Company still has pending claims against
other manufacturers, the amount of any future recovery is not currently
estimable. Any future recoveries will be recorded as a special item in the
period when a settlement is reached. The vitamin litigation income was offset by
other items totaling $2.0 million, the majority of which involved a litigation
settlement reached during fiscal 2002 related to Bindley.
During fiscal 2001, the Company recorded a special charge of $5.0 million
related to rationalization of certain pharmaceutical distribution centers.
Approximately, $4.4 million related to asset impairments, lease exit costs and
duplicate facility costs resulting from the Company's decision to consolidate
certain distribution centers and relocate to a more modern distribution center.
The remaining amount of $0.6 million arose in connection with employee-related
costs associated with the termination of approximately 100 employees primarily
related to the closure of the distribution centers. As of June 30, 2001, the
restructuring plan had been completed.
In addition, during fiscal 2002 and 2001, the Company recorded special
charges of $2.8 million and $6.8 million, respectively, related to the
restructuring of certain health and nutritional manufacturing facilities. During
the fourth quarter of fiscal 2002, the Company incurred asset impairment costs
of $1.8 million primarily due to a writeoff of obsolete inventory created by the
rationalization of certain health and nutritional manufacturing facilities.
Approximately $0.9 million and $2.2 million related to lease exit costs during
fiscal 2002 and 2001, respectively. The remaining $0.1 million and $4.6 million
during these periods related to employee-related costs associated with the
termination of approximately 185 employees primarily consisting of manufacturing
employees and certain management positions. As of June 30, 2002, the majority of
these positions had been eliminated. The restructuring plan is expected to be
completed by June 30, 2003.
During fiscal 2001, Bindley recorded a benefit of approximately $5.0
million related to a reduction in a litigation settlement accrual, which was
previously recorded. The amount of the final settlement was lower than
originally anticipated.
Summary. In fiscal 2002, the net effect of various special charges reduced
reported earnings before cumulative effect of change in accounting by $87.1
million to $1,126.3 million (see Note 14 of "Notes to Consolidated Financial
Statements" for discussion on cumulative effect of change in accounting) and
reduced reported diluted earnings per Common Share before cumulative effect of
change in accounting by $0.19 per share to $2.45 per share. In fiscal 2001, the
net effect of various special charges reduced reported net earnings by $85.3
million to $857.4 million and reduced reported diluted earnings per Common Share
by $0.19 per share to $1.88 per share. In fiscal 2000, the net effect of various
special charges reduced reported net earnings by $49.8 million to $717.8 million
and reduced reported diluted earnings per Common Share by $0.11 per share to
$1.60 per share.
21
Certain merger-related and restructuring costs are based upon estimates.
Actual amounts paid may ultimately differ from these estimates. If additional
costs are incurred or recorded amounts exceed costs, such changes in estimates
will be recorded in special charges when incurred.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions completed to date totaling
approximately $75.9 million ($48.9 million net of tax) in future periods.
Additional discussion related to the Company's merger transactions is included
in Note 2 of "Notes to Consolidated Financial Statements." The Company believes
that it will incur these costs in order to properly integrate operations - a
portion of which represents facility rationalizations and implementing
efficiencies with regard to, among other things, information systems, customer
systems, marketing programs and administrative functions. Such amounts will be
charged to expense when incurred.
The Company's trend with regard to acquisitions has been to expand its
role as a provider of services to the healthcare industry. This trend has
resulted in expansion into service areas which (a) complement the Company's
existing operations and (b) provide opportunities for the Company to develop
synergies with, and thus strengthen, the acquired business. As the healthcare
industry continues to change, the Company continually evaluates possible
candidates for merger or acquisition and intends to continue to seek
opportunities to expand its role as a provider of services to the healthcare
industry through all its reporting segments. There can be no assurance that it
will be able to successfully pursue any such opportunity or consummate any such
transaction, if pursued. If additional transactions are entered into or
consummated, the Company would incur additional merger-related costs.
INTEREST EXPENSE AND OTHER. The decrease in interest expense and other of $22.4
million during fiscal 2002 compared to fiscal 2001 was a result of lower
interest rates on borrowings throughout the year and effective asset management.
In addition, the Company recognized a one-time gain on an equity investment,
contributing to the overall decline. The increase in interest expense and other
of $16.2 million during fiscal 2001 was a result of higher average levels of
borrowing during fiscal 2001.
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to pretax
earnings were 33.8% of pretax earnings in fiscal 2002 compared with 35.6% in
fiscal 2001 and 37.1% for fiscal 2000. The fluctuation in the tax rate is
primarily due to the impact of recording certain non-deductible merger-related
costs during various periods as well as fluctuating state and foreign effective
tax rates as a result of the Company's business mix for all three fiscal years.
In addition, effective July 1, 2001, the Company ceased amortizing goodwill and
intangible assets with indefinite lives. This contributed to the decrease in the
tax rate in fiscal 2002 as compared to fiscal 2001 and fiscal 2000. The
provisions for income taxes excluding the impact of merger-related charges and
of goodwill were 34.1%, 34.4% and 35.5% for the fiscal years 2002, 2001, and
2000, respectively.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that can have a
significant impact on the presentation of the Company's financial condition and
results of operations, and that require the use of complex and subjective
estimates based upon past experience and management's judgment. Because of the
uncertainty inherent in such estimates, actual results may differ from these
estimates. Below are those policies applied in preparing the Company's financial
statements that management believes are the most dependent on the application of
estimates and assumptions. For additional accounting policies, see Note 1 of
"Notes to Consolidated Financial Statements."
- - ALLOWANCE FOR DOUBTFUL ACCOUNTS. Trade receivables are primarily comprised
of amounts owed to the Company through its pharmaceutical and other
healthcare distribution activities and are presented net of an allowance of
doubtful accounts. The Company also provides financing to various
customers. Such financing arrangements range from one year to ten years, at
interest rates that generally fluctuate with the prime rate. The financings
may be collateralized, guaranteed by third parties or unsecured. Finance
notes and accrued interest receivable are recorded net of an allowance for
doubtful accounts and are included in other assets. Extending credit terms
and calculating the required allowance involve the use of a substantial
amount of judgment by the Company's management. In determining the
appropriate allowance, the Company reviews the industry trends and the
customer's financial strength, credit standing, and payment history to
assess the probability of collection.
- - INVENTORIES. A majority of inventories (approximately 67% in 2002 and 66%
in 2001) are stated at lower of cost, using the last-in, first-out ("LIFO")
method, or market, and are primarily merchandise inventories. The remaining
inventory is primarily stated at the lower of cost, using the first-in,
first-out ("FIFO") method, or market. If the Company had used the FIFO
method of inventory valuation, which approximates current replacement cost,
inventories would have been higher. Below is a reconciliation of FIFO
inventory to LIFO inventory:
22
June 30,
--------------------------------
2002 2001 2000
--------------------------------
FIFO inventory $7,411.4 $6,338.9 $4,714.3
LIFO reserve valuation (50.4) (52.8) (57.3)
--------------------------------
Total inventory $7,361.0 $6,286.1 $4,657.0
================================
- - GOODWILL. The Company elected to adopt SFAS No. 142 "Goodwill and Other
Intangible Assets" beginning with the first quarter of fiscal 2002. Under
SFAS No. 142, purchased goodwill and intangible assets with indefinite
lives are no longer amortized, but instead tested for impairment at least
annually. Accordingly, the Company has ceased amortization of all goodwill
and intangible assets with indefinite lives as of July 1, 2001. Intangible
assets with finite lives, primarily patents and trademarks, will continue
to be amortized over their useful lives.
SFAS No. 142 requires a two-step impairment test for goodwill. The
first step is to compare the carrying amount of the reporting unit's assets
to the fair value of the reporting unit. If the carrying amount exceeds the
fair value then the second step is required to be completed, which involves
allocating the fair value of the reporting unit to each asset and
liability, with the excess being implied goodwill. An impairment loss
occurs if the amount of the recorded goodwill exceeds the implied goodwill.
The Company is required to complete an impairment test for goodwill and
record any resulting impairment losses annually. Changes in market
conditions, among other factors, may have an impact on these estimates. The
Company completed the required impairment testing in fiscal 2002 and did
not incur any impairment charges.
- - SPECIAL CHARGES. The Company primarily records costs that relate to the
integration of previously acquired companies or costs of restructuring
operations to improve productivity as special charges. These costs are
recorded in accordance with Emerging Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring) and
Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
Certain costs, such as employee and lease terminations and other facility
exit costs, are recognized at the date the integration or restructuring
plan is formalized and adopted by management. Certain other integration
costs that do not meet the criteria for accrual at the commitment date are
expensed as the integration plan is implemented. Employee costs include
severance and termination benefits. Lease termination costs include lease
cancellation fees, forfeited deposits and remaining payments due under
existing lease agreements less estimated sublease income. Other facility
exit costs are estimated based on historical experience of the total costs
incurred in exiting a facility. Other integration costs primarily include
charges directly related to the integration plan such as consulting costs
related to information systems and employee benefit plans as well as
relocation and travel costs directly associated with the integration plan.
Actual costs could differ from management's estimates. If actual results
are different from original estimates, the Company will record additional
expense or reverse previously recorded expenses. These adjustments will be
recorded as special charges.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $5.1 billion at June 30, 2002 from $4.1
billion at June 30, 2001. This increase primarily resulted from additional
investments in inventories during fiscal 2002. Inventories increased by $1.1
billion from year to year, which reflects the higher level of business volume in
Pharmaceutical Distribution and Provider Services' activities.
Property and equipment, at cost, increased by $163.4 million from June 30,
2001 to June 30, 2002. The increase was primarily due to ongoing plant expansion
and manufacturing equipment purchases in certain manufacturing businesses, as
well as additional investments made for management information systems and
upgrades to distribution facilities. The Company has several operating lease
financing arrangements that are expected to be used for the construction of new
facilities as well as for equipment (see further discussion in Note 8 of "Notes
to Consolidated Financial Statements.")
Shareholders' equity increased to $6.4 billion at June 30, 2002 from $5.4
billion at June 30, 2001. The increase was primarily due to net earnings of $1.1
billion and the investment of $213.7 million by employees of the Company through
various stock incentive plans. This increase was offset by dividends paid of
$45.0 million and by an increase in treasury stock of 308.3 million, primarily
due to the Company's repurchase of shares (see further discussion in Note 10 of
"Notes to the Consolidated Financial Statements.)
The Company operates a commercial paper program. At June 30, 2002, the
commercial paper program provided for the issuance of up to $1.5 billion in
aggregate maturity value of commercial paper. The Company did not have any
borrowings outstanding under its commercial paper program at June 30, 2002.
The Company has an unsecured bank credit facility providing for up to an
aggregate of $1.5 billion in borrowings of which $750 million expires on March
27, 2003 and $750 million expires on March 31, 2004. The facility expiring on
March 27, 2003, allows the Company, at its option, to extend the maturity of any
moneys borrowed for up to one year. At expiration, these facilities
23
can be extended upon mutual consent of the Company and the lending institutions.
This credit facility exists largely to support issuances of commercial paper as
well as other short-term borrowings and remained unused at June 30, 2002.
The Company also has uncommitted short-term credit facilities with various
bank sources aggregating $131.9 million. At June 30, 2002, the Company had
borrowings outstanding related to these short-term credit facilities of $22.4
million. The Company also has line-of-credit agreements with various bank
sources aggregating $38.1 million, of which $0.8 million was outstanding at June
30, 2002 (see Note 4 of "Notes to Consolidated Financial Statements").
The following table summarizes the maturities for the Company's significant
financial obligations:
(in millions) 2003 2004 2005 2006 2007 Thereafter Total
- ------------------------------------------------------------------------------------------------------
Long-term debt $17.4 $247.6 $313.8 $157.4 $135.3 $1,352.9 $2,224.4
Operating leases 52.9 44.5 35.7 26.0 18.4 34.6 212.1
- ------------------------------------------------------------------------------------------------------
Total financial obligations $70.3 $292.1 $349.5 $183.4 $153.7 $1,387.5 $2,436.5
======================================================================================================
As of June 30, 2002, the Company's senior debt credit ratings from Moody's,
S&P and Fitch are currently A2, A and A, respectively, and the commercial paper
ratings are currently A-1, P-1 and F-1, respectively. The Company's ratings
outlook is stable. The Company's various borrowing facilities and long-term
debt, except for the preferred debt securities discussed below, are free of any
financial covenants other than minimum net worth which cannot fall below $4.1
billion at any time. As of June 30, 2002, the Company was in compliance with
this covenant.
During fiscal 2002, the Company issued $300 million of 4.45% Notes, due
2005. The proceeds of the debt issuance were used toward repayment of a portion
of the Company's indebtedness and general corporate purposes, including working
capital, capital expenditures, acquisitions and investments. After this
issuance, the Company has the capacity to issue approximately $700 million of
additional equity or debt securities pursuant to effective shelf registration
statements that have previously been filed with the Securities and Exchange
Commission.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "SPE"). The SPE exclusively engages in purchasing trade receivables
from, and making loans to, the Company. The SPE, which is consolidated by the
Company, issued $400 million in preferred debt securities to parties not
affiliated with the Company during fiscal 2001. These preferred debt securities
are classified as long term debt in the Company's consolidated balance sheet.
These preferred debt securities must be retired or redeemed by the SPE before
the Company, or its creditors, can have access to the SPE's receivables.
The Company's preferred debt securities contain a minimum net worth and
certain financial ratio covenants. As of June 30, 2002, the Company was in
compliance with these covenants. A breach of any of these covenants would be
followed by a grace period during which the Company may discuss remedies with
the security holders, or extinguish the securities, without causing an event of
default.
The Company currently believes that it has adequate capital resources at
its disposal to fund currently anticipated capital expenditures, business growth
and expansion, and current and projected debt service requirements, including
those related to business combinations.
See Notes 1 and 5 of "Notes to Consolidated Financial Statements" for
information regarding the use of financial instruments and derivatives,
including foreign currency hedging instruments. As a matter of policy, the
Company does not engage in "speculative" transactions involving derivative
financial instruments.
OFF BALANCE SHEET RISK
The Company formed Pyxis Funding LLC ("Pyxis Funding") for the sole purpose
of acquiring a pool of sales-type leases and the related leased equipment from
Pyxis and selling the lease receivables to Pyxis Funding LLC II ("Pyxis Funding
II"). Pyxis Funding is a wholly owned, special purpose, bankruptcy-remote
subsidiary of Pyxis. Pyxis Funding II was formed for the sole purposes of
acquiring lease receivables under sales-type leases from Pyxis Funding and
issuing Pyxis Funding II's notes secured by its assets to a multi-seller conduit
administered by a third-party bank. Pyxis Funding II is a wholly owned, special
purpose, bankruptcy-remote subsidiary of Pyxis Funding. The transaction
qualifies for sale treatment under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," and,
accordingly, the related receivables are not included in the Company's
consolidated financial statements. As required by U.S. generally accepted
accounting principles, the Company consolidates Pyxis Funding and does not
consolidate Pyxis Funding II, as Pyxis Funding II is a qualified special purpose
entity, as defined under SFAS 140. Both Pyxis Funding and Pyxis Funding II are
separate legal entities that maintain separate financial statements. The assets
of Pyxis Funding and Pyxis Funding II are available first and foremost to
satisfy the claims of their creditors. The investor in Pyxis Funding II's notes
had a principal balance of $95.4 million on August 31, 2002, and is provided
24
with credit protection in the form of 20% ($23.8 million)
over-collateralization.
At June 30, 2002, the Company had $280.0 million in committed receivables
sales facility programs through Medicine Shoppe Capital Corporation ("MSCC") and
Cardinal Health Funding LLC ("CHF"). (see Note 1 of "Notes to Consolidated
Financial Statements" for additional information regarding the structure of
these entities.) MSCC and CHF were organized for the sole purpose of buying
receivables and selling those receivables to multi-seller conduits administered
by third party banks or to other third party investors. MSCC and CHF were
designed to be special purpose, bankruptcy-remote entities. Although
consolidated in accordance with generally accepted accounting principles, MSCC
and CHF are separate legal entities from the Company, Medicine Shoppe, and
Griffin Capital LLC ("Griffin"). The sale of receivables by MSCC and CHF
qualifies for sale treatment under SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" and accordingly
the related receivables are not included in the Company's con