UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): September 11, 2004
Cardinal Health, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio
(State or Other Jurisdiction of Incorporation)
1-11373 31-0958666
(Commission File Number) (IRS Employer Identification Number)
7000 Cardinal Place, Dublin, Ohio 43017
(Address of Principal Executive Offices, Including Zip Code)
(614) 757-5000
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition.
On September 13, 2004, the Company issued the press release attached to
this Form 8-K as Exhibit 99.01, referring to the filing of this Form 8-K and
describing certain disclosures made in Item 4.02(a) as well as providing
information regarding the delay in the filing of the Company's Form 10-K and
certain earnings guidance.
Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
(a)
As previously reported, in October 2003, the Securities and Exchange
Commission (the "SEC") initiated an informal inquiry regarding Cardinal Health,
Inc. (the "Company"). The SEC's request sought historical financial and related
information including but not limited to the accounting treatment of certain
recoveries from vitamin manufacturers. The SEC's request sought a variety of
documentation, including the Company's accounting records for fiscal 2001
through fiscal 2003, as well as notes, memoranda, presentations, e-mail and
other correspondence, budgets, forecasts and estimates. In connection with the
SEC's informal inquiry, the Audit Committee of the Board of Directors of the
Company commenced its own internal review in April 2004, assisted by independent
counsel, which review has been ongoing. On May 6, 2004, the Company was notified
that the SEC had converted the informal inquiry into a formal investigation. On
June 21, 2004, as part of the SEC's formal investigation, the Company received
an additional SEC subpoena that included a request for the production of
documents relating to revenue classification, and the methods used for such
classification, in the Company's Pharmaceutical Distribution business as either
"Operating Revenues" or "Bulk Deliveries to Customer Warehouses and Other." In
addition, the Company learned that the U.S. Attorney for the Southern District
of New York had also commenced an inquiry with respect to the Company that the
Company understands relates to the revenue classification issue. The Company
continues to respond to the SEC's investigation and the Audit Committee's
internal review and provide all information required.
In September 2004, the Audit Committee reached initial preliminary
conclusions with respect to findings to date from its internal review. These
preliminary conclusions regarding certain items that impact revenues and
earnings relate to three primary areas of focus: (1) classification of sales to
customer warehouses between "Operating Revenues" and "Bulk Deliveries to
Customer Warehouses and Other" within the Company's Pharmaceutical Distribution
and Provider Services segment; (2) disclosure of cash discounts earned from
suppliers for prompt payment; and (3) balance sheet reserve and accrual
adjustments. The Audit Committee review with respect to these and other matters
is continuing. In connection with these preliminary conclusions, the Audit
Committee determined on September 11, 2004, that the financial statements of the
Company with respect to fiscal 2001, 2002 and 2003 as well as the first three
quarters of fiscal 2004 should be restated to reflect the preliminary
conclusions from its internal review to date, and as such, that the financial
statements of the Company for such periods should no longer be relied upon. The
Audit Committee has discussed with the Company's independent accountants the
matters disclosed in this Form 8-K filing pursuant to this Item 4.02(a). Since
the Audit Committee's internal review is not complete, there can be no assurance
that the restatements described in this Form 8-K will not change upon completion
of the Audit Committee's internal review. In addition, as the Audit Committee's
internal review continues, new issues may surface that impact the Company's
financial statements and the scope of the restatements described in this Form
8-K. The impact of the restatements described below, as well as additional
restatements, if any, then determined to be appropriate, will be included in the
Company's Form 10-K for the fiscal year ended June 30, 2004 when it is filed
with the SEC.
The initial preliminary conclusions of the Audit Committee from its
internal review to date are as follows:
1. Revenue Impact: Classification of Sales To Customer Warehouses Between
"Operating Revenues" and "Bulk Deliveries to Customer Warehouses and
Other" Within the Company's Pharmaceutical Distribution and Provider
Services Segment
As presented historically, the Pharmaceutical Distribution and
Provider Services segment's
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revenue was classified into two categories ("Operating Revenues" and
"Bulk Deliveries to Customer Warehouses and Other"). "Bulk Deliveries
to Customer Warehouses and Other" have historically included revenues
arising from sales where the Company ordered pharmaceutical product in
bulk on behalf of a specific warehousing customer and either the
manufacturer ships the product directly to the customer's warehouse or
the product is shipped to the customer's warehouse shortly after it is
received by the Company and is not put into the Company's inventory (in
either case, "Bulk Revenues"). For all Bulk Revenues, the product is
shipped to the customer in the same bulk containers in which it is
received by the Company from the manufacturers. The Company previously
followed an internal policy for distinguishing between Operating
Revenues and Bulk Revenues based on how long the product was in the
Company's possession prior to being shipped to customers. If the
product was in the possession of the Company for more than 24 hours
prior to being shipped to customers, then, regardless of other
characteristics of the transaction or the reason for the product being
held more than 24 hours, the sale of that product was deemed to be
Operating Revenues. The Company's internal policy also provided that
customer orders for bulk shipments filled from inventory within the
Company's warehouse were deemed to be Operating Revenues if the order
for the product had been placed with the manufacturer prior to the
Company receiving the bulk order from its customer. Based on results of
the internal review conducted by the Audit Committee, the Company has
concluded that certain bulk shipments ordered by customers were
intentionally held beyond 24 hours so that, pursuant to the internal
policy, such shipments were classified as Operating Revenues in four
quarters within fiscal 2003 and 2002. The impact of this practice was
not previously quantified and disclosed as part of the Company's
reported Operating Revenues. The improper classification between Bulk
Revenues and Operating Revenues had no impact on the Company's total
revenues or reported net earnings for these periods.
The following table shows the amount of Bulk Revenues that
were improperly classified as "Operating Revenues" in the manner
described above, and shows the impact from adjusting each of Bulk
Revenues and Operating Revenues for the periods in which these
improper classifications occurred:
--------------------------------------------------------------------------------
Bulk Revenues Operating Revenues
------------- ------------------
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
(in millions) 2003 2002 2003 2002
--------------------------------------------------------------------------------
First Quarter $ -- $ -- $ -- $ --
Second Quarter 673.0 82.0 (673.0) (82.0)
Third Quarter 140.0 -- (140.0) --
Fourth Quarter -- 332.0 -- (332.0)
--------------------------------------------------------------------------------
Total Year $ 813.0 $ 414.0 $(813.0) $(414.0)
================================================================================
Beginning with fiscal 2004, total revenues and total cost of
products sold will be presented as single amounts in the consolidated
statements of earnings.
2. Undisclosed Earnings Impact: Disclosure of Cash Discounts Earned From
Suppliers
Historically, the Company has recognized cash discounts as a
reduction of cost of products sold primarily upon payment of vendor
invoices. Cash discounts are the discounts the Company receives from
some vendors for timely payment of invoices. The Company had a practice
of accelerating payment of vendor invoices at the end of certain
reporting periods in order to earn cash discounts, which had the effect
of increasing operating results. Although the effect of these
accelerated payments were included in the Company's reported earnings,
the impact of this acceleration practice was not separately quantified
and had not been previously disclosed in the periods in which the
Company benefited from this practice. The net increase (decrease) in
net earnings as a
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result of this practice for each quarter of the nine months ended March
31, 2004, fiscal 2003 and 2002 is as follows:
-------------------------------------------------------------------------------------------
Nine Months Ended
March 31, Fiscal Fiscal
(in millions) 2004 2003 2002
-------------------------------------------------------------------------------------------
First Quarter $ (0.2) $ - $ (3.3)
Second Quarter 3.0 2.0 -
Third Quarter (0.3) 5.5 -
Fourth Quarter N.A. 1.3 -
-------------------------------------------------------------------------------------------
Total $ N.A. $ 8.8 $ (3.3)
===========================================================================================
Additional information on the accounting for cash discounts
will be included in the Company's Form 10-K.
3. Restated Earnings: Balance Sheet Reserve and Accrual Adjustments
The Audit Committee's internal review included a review to
determine if period-end adjustments to balance sheet reserve accounts
and other accruals recorded in fiscal 2001, 2002 and 2003 were properly
recorded in accordance with generally accepted accounting principles
("GAAP"). Based upon the Audit Committee's internal review, the Company
determined there were various situations where (a) amount of reserve,
(b) timing of reserve recognition, or (c) timing of reserve adjustments
could not be substantiated or was in error. As a result, the financial
statements for certain prior fiscal quarters and years will be restated
by the Company.
The balance sheet reserves and accrual adjustments to be
restated consist of the following:
1. Errors arising from misapplication of GAAP. These errors
primarily include (a) reductions in reserve accounts made in
periods subsequent to the period in which the excess had
been identified by the Company, and (b) a LIFO inventory
adjustment.
2. Errors made in previous periods which were identified and
appropriately corrected in a subsequent period when
discovered. These items were not reported as prior period
corrections at the time of their discovery because they were
deemed immaterial. At this time, however, the Company plans
to restate its prior financial statements to correct for
such items identified during the internal review. This
category also includes an item related to merchandising
and buying margin that was determined in the fourth quarter
of fiscal 2004.
3. As a result of discussions with the SEC staff, the Company
has decided to reverse its previous recognition of estimated
recoveries from vitamin manufacturers for amounts
overcharged in prior years and to recognize the income from
such recoveries as a special item in the period cash was
received from the manufacturers. The Company recognized
$10.0 million of operating earnings ($6.5 million net of
taxes) in the second quarter of fiscal 2001 and $12.0
million of operating earnings ($7.9 million net of taxes) in
the first quarter of fiscal 2002 based on its estimate of
amounts that would subsequently be received. The initial
actual cash payments received from manufacturers of $35.3
million ($21.5 million net of taxes) in the fourth quarter
of fiscal 2002 exceeded the $22.0 million ($13.4 million net
of taxes) previously accrued. The SEC staff has
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previously advised the Company that, in its view, the
Company did not have an appropriate basis for recognizing
the income in advance of receiving the cash.
The following table summarizes the restatement impact on
previously reported net earnings as defined above for fiscal 2004, 2003
and 2002:
----------------------------------------------------------------------
Total
Misapplication
of GAAP and Vitamin Total
(in millions) Errors Litigation Restatement
----------------------------------------------------------------------
Fiscal 2004:
First Quarter $ (4.2) $ - $ (4.2)
Second Quarter (4.3) - (4.3)
Third Quarter (3.9) - (3.9)
----------------------------------------------------------------------
Total Year-to-Date $ (12.4) $ - $ (12.4)
======================================================================
Fiscal 2003:
First Quarter $ (5.8) $ - $ (5.8)
Second Quarter 1.7 - 1.7
Third Quarter (12.3) - (12.3)
Fourth Quarter (10.4) - (10.4)
----------------------------------------------------------------------
Total Year $ (26.8) $ - $ (26.8)
======================================================================
Fiscal 2002:
First Quarter $ (4.1) $ (7.9) $ (12.0)
Second Quarter (3.6) - (3.6)
Third Quarter 1.1 - 1.1
Fourth Quarter 11.9 13.4 25.3
----------------------------------------------------------------------
Total Year $ 5.3 $ 5.5 $ 10.8
======================================================================
The SEC investigation, the Audit Committee's internal review and the
U.S. Attorney inquiry remain ongoing. While the information in this Form 8-K
describes all of the items for which the Audit Committee has determined a
restatement is appropriate at this time, there can be no assurance that the
ongoing investigation, review and inquiry will not identify any additional
items. In addition, as the Audit Committee's internal review continues, new
issues may surface that impact the Company's financial statements and the scope
of the restatement described in this Form 8-K. The impact of the restatements
described above, as well as additional restatements, if any, then determined to
be appropriate, will be included in the Company's Form 10-K for the fiscal year
ended June 30, 2004 when it is filed with the SEC. While the Company is
continuing in its efforts to respond to the SEC's investigation and the Audit
Committee's internal review and provide all information required, the Company
cannot predict their outcome. The outcome of the SEC investigation, the U.S.
Attorney inquiry and any related legal and administrative proceedings could
include the institution of administrative, civil injunctive or criminal
proceedings as well as the imposition of fines and other penalties, remedies and
sanctions.
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Item 9.01. Financial Statements and Exhibits.
(c) Exhibits
The following is furnished as an exhibit hereto:
99.01 Press Release issued by the Company on September 13, 2004. (1)
(1) Exhibit 99.01 is intended to be furnished and shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Cardinal Health, Inc.
(Registrant)
Date: September 13, 2004 By: /s/ J. Michael Losh
--------------------
Name: J. Michael Losh
Title: Chief Financial Officer
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EXHIBIT INDEX
99.01 Press Release issued by the Company on September 13, 2004.
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