nanitem 14 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report page independent auditors reports13 financial statements consolidated statements earnings fiscal years ended june 30 1996 1995 1994 15 consolidated balance sheets june 30 1996 1995 16 consolidated statements shareholders equity fiscal years ended june 30 1996 1995 1994 17 consolidated statements cash flows fiscal years ended june 30 1996 1995 1994 18 notes consolidated financial statements 19 a2 following supplemental schedule included report page schedule ii valuation qualifying accounts 39 schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit number exhibit description 201 agreement plan merger dated august 26 1995 among registrant arch merger corp medicine shoppe international inc 1 202 agreement plan merger dated february 7 1996 among registrant aztec merger corp pyxis corporation 2 203 agreement plan merger dated july 23 1996 among registrant panther merger corp pci services inc mediq incorporated 3 301 amended restated articles incorporation registrant amended 4 302 restated code regulations registrant amended 5 401 specimen certificate registrants class common shares 4 402 indenture registrant bank one indianapolis na relating registrants 8 notes due 1997 6 403 indenture registrant bank one indianapolis na relating registrants 6 12 notes due 2004 6 notes due 2006 5 longterm debt agreements registrant filed pursuant item 601b4iiia regulation sk registrant agrees furnish copies agreements sec upon request exhibit number exhibit description 1001 stock incentive plan registrant amended 12 1002 directors stock option plan registrant amended restated 12 1003 equity incentive plan registrant 4 1004 amended restated 1991 stock plan pyxis corporation 13 1005 1990 stock option plan medicine shoppe international inc 14 1006 employee incentive stock option plan medicine shoppe international inc 14 1007 executive choice plan medicine shoppe international inc 14 1008 employment agreement dated october 11 1993 among whitmire melburn g whitmire registrant amended 7 1009 employment agreement dated august 26 1995 among medicine shoppe david abrahamson registrant 1010 form indemnification agreement registrant individual directors 8 1011 form indemnification agreement registrant individual officers 9 1012 form indemnification agreement whitmire directors officers whitmire 12 1013 split dollar agreement dated april 16 1993 among registrant robert walter bank one ohio trust company na trustee ua dated april 16 1993 fbo robert walter 12 1014 lease portions registrants columbus investment property dated july 7 1958 amended 10 1015 cardinal health inc incentive deferred compensation plan amended restated effective november 13 1995 1016 shareholders agreement dated july 13 1984 amended 11 1017 master agreement related documents dated july 19 1996 among registrant andor subsidiaries suntrust banks inc pnc leasing corp suntrust bank atlanta 1018 vendor program agreement dated october 10 1991 general electric capital corporation pyxis corporation amended december 13 1991 january 15 1993 march 10 1994 1101 statement concerning computation per share earnings 2101 list subsidiaries registrant 2301 consent deloitte touche llp 2302 consent ernst young llp 2701 financial data table 1 included exhibit registrants annual report form 10k fiscal year ended june 30 1995 012591 incorporated herein reference 2 included exhibit registrants schedule 13d reporting registrants beneficial ownership shares pyxis corporation 543690 incorporated herein reference 3 included exhibit registrants schedule 13d reporting registrants beneficial ownership shares pci services inc 542666 incorporated herein reference 4 included exhibit registrants quarterly report form 10q quarter ended december 31 1995 012591 incorporated herein reference 5 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 012591 incorporated herein reference 6 included exhibit registrants annual report form 10k fiscal year ended march 31 1992 012591 incorporated herein reference 7 included exhibit registrants quarterly report form 10q quarter ended december 31 1993 012591 exhibit registrants quarterly report form 10q quarter ended december 31 1995 012591 incorporated herein reference 8 included exhibit registrants annual report form 10k fiscal year ended march 29 1986 012591 incorporated herein reference 9 included exhibit registrants annual report form 10k fiscal year ended march 28 1987 012591 incorporated herein reference 10 included exhibit registrants registration statement form s1 284444 incorporated herein reference 11 included exhibit registrants annual report form 10k fiscal year ended march 31 1993 012592 incorporated herein reference 12 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 012591 incorporated herein reference 13 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 3330192701 14 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 336328301 management contract compensation plan arrangement b reports form 8k april 23 1996 company filed report form 8k item 5 set forth results fiscal quarter ended march 31 1996 contained companys press release dated april 22 1996 may 8 1996 company filed report form 8k item 2 reported completed merger wholly owned subsidiary pyxis corporation pyxis may 7 1996 pursuant item 7 form 8k included required audited financial statements pyxis required combined unaudited pro forma financial information company pyxis signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc august 26 1996 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cardinal health inc subsidiaries schedule ii valuation qualifying accounts thousands 1 fiscal 1996 1995 1994 recoveries amounts provided written prior years 324000 177000 308000 respectively increases acquisitions subsidiaries 1120000 1828000 648000 respectively 2 writeoff uncollectible accountsitem 14 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report page independent auditors reports 14 financial statements consolidated statements earnings fiscal years ended june 30 1997 1996 1995 17 consolidated balance sheets june 30 1997 1996 18 consolidated statements shareholders equity fiscal years ended june 30 1997 1996 1995 19 consolidated statements cash flows fiscal years ended june 30 1997 1996 1995 20 notes consolidated financial statements 21 a2 following supplemental schedule included report page schedule ii valuation qualifying accounts 41 schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit number exhibit description 201 amended restated agreement plan merger dated july 7 1997 among mediqual systems inc hub merger corp registrant 1 202 agreement plan merger dated august 23 1997 among registrant bruin merger corp bergen brunswig corporation 14 301 amended restated articles incorporation registrant amended 2 302 restated code regulations registrant amended 3 401 specimen certificate registrants class common shares 402 indenture registrant bank one indianapolis na relating registrants 612 notes due 2004 6 notes due 2006 3 403 indenture registrant bank one columbus na trustee dated april 18 1997 date hereof securities issued pursuant indenture 4 longterm debt agreements registrant filed pursuant item 601b4iiia regulation sk registrant agrees furnish copies agreements sec upon request 1001 stock incentive plan registrant amended 10 1002 directors stock option plan registrant amended restated 10 1003 equity incentive plan registrant 5 1004 1990 stock option plan medicine shoppe international inc 12 1005 employee incentive stock option plan medicine shoppe international inc 12 1006 executive choice plan medicine shoppe international inc 12 1007 pci services inc stock option plan amended 11 1008 employment agreement dated august 26 1995 among medicine shoppe david abrahamson registrant 13 1009 employment agreement dated july 23 1996 among pci services inc daniel f gerner registrant 15 1010 form indemnification agreement registrant individual directors 6 1011 form indemnification agreement registrant individual officers 7 1012 split dollar agreement dated april 16 1993 among registrant robert walter bank one ohio trust company na trustee ua dated april 16 1993 fbo robert walter 10 1013 lease portions registrants columbus investment property dated july 7 1958 amended 8 1014 cardinal health inc incentive deferred compensation plan amended restated effective november 13 1995 13 1015 cardinal health inc performancebased incentive compensation plan 16 1016 shareholders agreement dated july 13 1984 amended 9 1017 master agreement related documents dated july 16 1996 among registrant andor subsidiaries suntrust banks inc pnc leasing corp suntrust bank atlanta 13 1018 vendor program agreement dated october 10 1991 general electric capital corporation pyxis corporation amended december 13 1991 january 15 1993 march 10 1994 june 23 1997 13 except rider 5 included annual report form 10k 1019 participation agreement related documents dated june 23 1997 among registrant certain subsidiaries bank montreal bmo leasing us inc 1020 pharmaceutical services agreement dated august 1 1996 kmart coporation cardinal health 15 1101 statement concerning computation per share earnings 2101 list subsidiaries registrant 2301 consent deloitte touche llp 2302 consent ernst young llp 2303 consent price waterhouse llp 2701 financial data table 9901 statement regarding forwardlooking information 1 filed annex registrants registration statement form s4 33330889 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended december 31 1996 012591 incorporated herein reference 3 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 012591 incorporated herein reference 4 included exhibit registrants current report form 8k filed sec april 21 1997 incorporated herein reference 5 included exhibit registrants quarterly report form 10q quarter ended december 31 1995 012591 incorporated herein reference 6 included exhibit registrants annual report form 10k fiscal year ended march 29 1986 012591 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended march 28 1987 012591 incorporated herein reference 8 included exhibit registrants registration statement form s1 284444 incorporated herein reference 9 included exhibit registrants annual report form 10k fiscal year ended march 31 1993 012592 incorporated herein reference 10 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 012591 incorporated herein reference 11 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 3331180301 incorporated herein reference 12 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 336328301 incorporated herein reference 13 included exhibit registrants annual report form 10k fiscal year ended june 30 1996 012591 incorporated herein reference 14 included exhibit registrants current report form 8ka filed sec august 27 1997 incorporated herein reference 15 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 012591 incorporated herein reference 16 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 012591 incorporated herein reference management contract compensation plan arrangement b reports form 8k april 21 1997 company filed report form 8k item 7 filed exhibit indenture dated april 18 1997 company bank one columbus na trustee june 10 1997 company filed report form 8k item 5 announcing filing item 7 restated consolidated financial statements company giving effect merger owen august 26 27 1997 company filed report form 8k 8ka respectively items 5 7 reported signed agreement plan merger dated august 23 1997 among company bruin merger corporation bergen brunswig corporation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc september 29 1997 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cardinal health inc subsidiaries schedule ii valuation qualifying accounts thousands 1 fiscal 1997 1996 1995 recoveries amounts provided written prior years 410000 332000 197000 respectively increases acquisitions 628000 1120000 1828000 respectively 2 writeoff uncollectible accountsitem 14 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk 1 included exhibit registrants registration statement form s4 33356655 incorporated herein reference 2 included exhibit registrants current report form 8k 012591 filed commission march 17 1998 incorporated herein reference 3 included exhibit registrants quarterly report form 10q quarter ended march 31 1998 012591 incorporated herein reference 4 included exhibit registrants annual report form 10k fiscal year ended june 30 1997 012591 incorporated herein reference 5 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 012591 incorporated herein reference 6 included exhibit registrants current report form 8k filed sec april 21 1997 incorporated herein reference 7 included exhibit registrants amendment 2 form s4 registration statement 33330889 incorporated herein reference 8 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 012591 incorporated herein reference 9 included exhibit registrants quarterly report form 10q quarter ended december 31 1995 012591 incorporated herein reference 10 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 336328301 incorporated herein reference 11 included exhibit registrants annual report form 10k fiscal year ended june 30 1996 012591 incorporated herein reference 12 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 012591 incorporated herein reference 13 included exhibit registrants annual report form 10k fiscal year ended march 29 1986 012591 incorporated herein reference 14 included exhibit registrants annual report form 10k fiscal year ended march 28 1987 012591 incorporated herein reference 15 included exhibit registrants registration statement form s1 284444 incorporated herein reference 16 included exhibit registrants annual report form 10k fiscal year ended march 31 1993 012592 incorporated herein reference 17 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 3335665501 exhibit registrants quarterly report form 10q quarter ended december 31 1995 012591 incorporated herein reference 18 included exhibit registrants quarterly report form 10q quarter ended december 31 1993 012591 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 012591 incorporated herein reference 20 included exhibit registrants quarterly report form 10q quarter ended september 30 1997 012591 incorporated herein reference management contract compensation plan arrangement b reports form 8k may 20 1998 registrant filed current report form 8k item 5 reported entered agreement plan merger among registrant gel acquisition corp rp scherer corporation june 29 1998 registrant filed current report form 8k item 7 filed exhibit 12 computation ratio earnings fixed charges signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc september 1 1998 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cardinal health inc subsidiaries schedule ii valuation qualifying accounts thousands 1 fiscal 1998 1997 1996 recoveries amounts provided written prior years 3444000 410000 332000 respectively increases reserves result acquisitions accounted purchases 254000 1120000 fiscal 1998 1996 2 writeoff uncollectible accountsitem 14 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit description number 201 agreement plan merger dated august 4 1999 among registrant flower merger corp automatic liquid packaging inc alp stockholders alp stockholders including form escrow agreement among registrant alp gerhard h weiler bank one trust company na escrow agent stockholders 301 amended restated articles incorporation registrant amended 1 302 restated code regulations amended 1 401 specimen certificate registrants class common shares 4 402 indenture dated may 1 1993 registrant bank one indianapolis na trustee relating registrants 6 12 notes due 2004 6 notes due 2006 2 403 indenture dated april 18 1997 registrant bank one columbus na trustee relating registrants 6 14 notes due 2008 3 404 indenture dated october 1 1996 allegiance corporation pnc bank kentucky inc pnc trustee first supplemental indenture dated february 3 1999 among allegiance corporation company chase manhattan trust company national association successor interest pnc trustee 4 405 indenture dated january 1 1994 rp scherer international corporation comerica bank first supplemental indenture among rp scherer international corporation rp scherer corporation comerica bank dated february 28 1995 second supplemental indenture among rp scherer corporation registrant comerica bank dated august 7 1998 5 406 form warrant certificate purchase company common shares 6 1001 stock incentive plan registrant amended 7 1002 directors stock option plan registrant amended restated 7 1003 amended restated equity incentive plan registrant 1004 form nonqualified stock option agreement amended 1005 form restricted shares agreement amended 1006 form directors stock option agreement amended 1007 allegiance corporation 1996 incentive compensation program 8 1008 allegiance corporation 1998 incentive compensation program 8 1009 allegiance corporation 1996 outside director incentive corporation plan 8 1010 rp scherer corporation 1997 stock option plan 9 1011 rp scherer corporation 1990 nonqualified performance stock option plans 9 1012 cardinal health inc performancebased incentive compensation plan 10 1013 cardinal health inc incentive deferred compensation plan amended restated effective july 1 1997 11 1014 employment agreement dated october 11 1993 among whitmire melburn g whitmire registrant amended effective november 14 1995 16 1015 amendment change control agreement dated october 8 1998 among company allegiance corporation joseph f damico 12 1016 employment agreement dated may 12 1998 registrant james f millar 5 1017 amended restated employment agreement dated may 17 1998 among scherer george l fotiades registrant 5 1018 resignation release agreement dated june 30 1999 registrant allegiance lester b knight 1019 form indemnification agreement registrant individual directors 13 1020 form indemnification agreement registrant individual officers 13 1021 split dollar agreement dated april 16 1993 among registrant robert walter bank one ohio trust company na trustee ua dated april 16 1993 fbo robert walter 7 1022 364day credit agreement dated march 31 1999 among registrant certain subsidiaries registrant certain lenders first national bank chicago administrative agent bank america nt sa syndication agent citibank na codocumentation agent credit suisse first boston codocumentation agent 1023 master agreement related documents dated july 16 1996 among registrant andor subsidiaries suntrust banks inc pnc leasing corp suntrust bank atlanta amended 14 except omnibus amendment included annual report form 10k 1024 participation agreement related documents dated june 23 1997 among registrant certain subsidiaries bank montreal bmo leasing us inc 15 except amendments 1 2 included annual report form 10k 1025 vendor program agreement dated october 10 1991 general electric capital corporation pyxis corporation amended december 13 1991 january 15 1993 march 10 1994 june 23 1997 june 1 1998 5 14 15 1026 pharmaceutical services agreement dated august 1 1996 amended kmart corporation cardinal distribution 17 except amendment 1 included annual report form 10k 1027 form commercial paper dealer agreement 42 program company issuer certain entities dealer concerning notes issued pursuant issuing paying agency agreement issuer first national bank chicago issuing paying agent 1028 partnership agreement rp scherer gmbh co kg 5 1029 fiveyear credit agreement dated march 31 1999 among registrant certain subsidiaries registrant certain lenders first national bank chicago administrative agent bank america nt sa syndication agent citibank na codocumentation agent credit suisse first boston codocumentation agent 1601 letter deloitte touche llp required item 304 regulation sk 1602 letter pricewaterhousecoopers llp required item 304 regulation sk 2101 list subsidiaries registrant 2301 consent deloitte touche llp 2302 consent arthur andersen llp 2303 consent pricewaterhousecoopers llp 2701 financial data schedule 9901 statement regarding forwardlooking information 1 included exhibit registrants current report form 8k filed november 24 1998 file 012591 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 012591 incorporated herein reference 3 included exhibit registrants current report form 8k filed april 21 1997 file 012591 incorporated herein reference 4 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 012591 incorporated herein reference 6 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 012591 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 3336881901 incorporated herein reference 9 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 10 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 file 012591 incorporated herein reference 11 included exhibit registrants quarterly report form 10q quarter ended september 30 1997 file 012591 incorporated herein reference 12 included exhibit registrants registration statement form s4 33368819 incorporated herein reference 13 included exhibit companys amendment 1 annual report form 10ka fiscal year ended june 30 1997 file 012591 incorporated herein reference 14 included exhibit registrants annual report form 10k fiscal ended june 30 1996 file 012591 incorporated herein reference 15 included exhibit registrants annual report form 10k fiscal year ended june 30 1997 file 012591 incorporated herein reference 16 included exhibits registrants quarterly reports form 10q quarters ended december 31 1993 december 31 1995 file 012591 incorporated herein reference 17 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 0124591 incorporated herein reference management contract compensation plan arrangement b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc september 2 1999 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 1 fiscal 1999 1998 1997 recoveries amounts provided written prior years 40 million 34 million 04 million respectively 2 writeoff uncollectible accounts 3 change fiscal year acquired subsidiaryitem 14 exhibits financial statement schedules reports form 10k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit description number 301 amended restated articles incorporation registrant amended 1 302 restated code regulations amended 1 401 specimen certificate registrants class common shares 4 402 indenture dated may 1 1993 registrant bank one indianapolis na trustee relating registrants 6 12 notes due 2004 6 notes due 2006 2 403 indenture dated april 18 1997 registrant bank one columbus na trustee relating registrants 6 14 notes due 2008 3 404 indenture dated october 1 1996 allegiance corporation pnc bank kentucky inc pnc trustee first supplemental indenture dated february 3 1999 among allegiance corporation company chase manhattan trust company national association successor interest pnc trustee 4 405 indenture dated january 1 1994 rp scherer international corporation comerica bank first supplemental indenture among rp scherer international corporation rp scherer corporation comerica bank dated february 28 1995 second supplemental indenture among rp scherer corporation registrant comerica bank dated august 7 1998 5 406 form warrant certificate purchase company common shares 6 1001 stock incentive plan registrant amended 7 1002 directors stock option plan registrant amended restated 7 1003 amended restated equity incentive plan registrant amended 17 1004 form nonqualified stock option agreement amended 17 1005 form restricted shares agreement amended 17 1006 form directors stock option agreement amended 17 1007 cardinal health inc directors deferred compensation plan 18 1008 allegiance corporation 1996 incentive compensation program 8 1009 allegiance corporation 1998 incentive compensation program 8 1010 allegiance corporation 1996 outside director incentive corporation plan 8 1011 rp scherer corporation 1997 stock option plan 9 1012 rp scherer corporation 1990 nonqualified performance stock option plans 9 1013 cardinal health inc performancebased incentive compensation plan 10 1014 cardinal health inc incentive deferred compensation plan amended 11 1015 form agreement dated february 9 2000 registrant messrs bennett ford miller rucci 1016 agreement dated february 9 2000 registrant george l fotiades 1017 agreement dated february 9 2000 registrant john c kane 1018 agreement dated february 9 2000 registrant james f millar 1019 agreement dated july 1 1999 registrant stephen thomas amended 21 except amendment thereto included exhibit annual report form 10k 1020 change control severance agreement among company allegiance corporation joseph f damico amended 12 20 except second amendment thereto included exhibit annual report form 10k 1021 form indemnification agreement registrant individual directors 13 1022 form indemnification agreement registrant individual officers 13 exhibit description number 1023 split dollar agreement dated april 16 1993 among registrant robert walter bank one ohio trust company na trustee ua dated april 16 1993 fbo robert walter 7 1024 agreement dated march 16 2000 registrant credit suisse financial products amended 1025 364day credit agreement dated march 30 2000 among registrant certain subsidiaries registrant certain lenders bank one na administrative agent bank america nt syndication agent citibank usa inc codocumentation agent credit suisse first boston codocumentation agent 19 1026 master agreement related documents dated july 19 1996 among registrant andor subsidiaries suntrust banks inc pnc leasing corp suntrust bank atlanta amended 14 17 1027 participation agreement related documents dated june 23 1997 among registrant certain subsidiaries bank montreal bmo leasing us inc 15 17 1028 vendor program agreement dated october 10 1991 general electric capital corporation pyxis corporation amended december 13 1991 january 15 1993 march 10 1994 june 23 1997 june 1 1998 5 14 15 1029 pharmaceutical services agreement dated august 1 1996 amended kmart corporation cardinal distribution 16 17 1030 wholesale supply agreement dated august 10 2000 registrant cvs meridian inc 1031 form commercial paper dealer agreement 42 program company issuer certain entities dealer concerning notes issued pursuant issuing paying agency agreement issuer first national bank chicago issuing paying agent 17 1032 partnership agreement rp scherer gmbh co kg 5 1033 fiveyear credit agreement dated march 31 1999 among registrant certain subsidiaries registrant certain lenders first national bank chicago administrative agent bank america nt sa syndication agent citibank na codocumentation agent credit suisse first boston codocumentation agent 17 1601 letter deloitte touche llp required item 304 regulation sk 17 1602 letter pricewaterhousecoopers llp required item 304 regulation sk 17 2101 list subsidiaries registrant exhibit description number 2301 consent arthur andersen llp 2302 consent deloitte touche llp 2303 consent arthur andersen llp 2304 consent pricewaterhousecoopers llp 2701 financial data schedule 9901 statement regarding forwardlooking information 1 included exhibit registrants current report form 8k filed november 24 1998 file 012591 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 012591 incorporated herein reference 3 included exhibit registrants current report form 8k filed april 21 1997 file 012591 incorporated herein reference 4 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 012591 incorporated herein reference 6 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 012591 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 3336881901 incorporated herein reference 9 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 10 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 file 012591 incorporated herein reference 11 included exhibit registrants registration statement form s8 3390423 incorporated herein reference 12 included exhibit registrants registration statement form s4 33368819 incorporated herein reference 13 included exhibit companys amendment 1 annual report form 10ka fiscal year ended june 30 1997 file 012591 incorporated herein reference 14 included exhibit registrants annual report form 10k fiscal ended june 30 1996 file 012591 incorporated herein reference 15 included exhibit registrants annual report form 10k fiscal year ended june 30 1997 file 012591 incorporated herein reference 16 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 012591 incorporated herein reference 17 included exhibit registrants annual report form 10k fiscal year ended june 30 1999 file 012591 incorporated herein reference 18 included exhibit registrants registration statement form s8 33390415 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended march 31 2000 file 012591 incorporated herein reference 20 included exhibit allegiance corporations form s1a filed commission september 30 1996 33312525 incorporated herein reference 21 included exhibit registrants quarterly report form 10q quarter ended december 31 1999 file 012591 incorporated herein reference management contract compensation plan arrangement b reports form 8k may 26 2000 registrant filed current report form 8k item 5 included supplemental consolidated financial statements company give retroactive effect merger alp accounted poolingofinterests business combination signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc subsidiaries schedule ii valuation qualifying accounts millions 1 fiscal 2000 1999 1998 recoveries amounts provided written prior years 15 million 40 million 34 million respectively 2 writeoff uncollectible accounts 3 change fiscal year acquired subsidiaryitem 14 exhibits financial statement schedules reports form 10k a1 following financial statements included item 8 report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit description number 301 amended restated articles incorporation registrant amended 1 20 302 restated code regulations amended 1 401 specimen certificate registrants class common shares 402 indenture dated may 1 1993 registrant bank one indianapolis na trustee relating registrants 6 12 notes due 2004 6 notes due 2006 2 403 indenture dated april 18 1997 registrant bank one columbus na trustee relating registrants 6 14 notes due 2008 675 notes due 2011 3 404 indenture dated october 1 1996 allegiance corporation pnc bank kentucky inc pnc trustee first supplemental indenture dated february 3 1999 among allegiance corporation company chase manhattan trust company national association successor interest pnc trustee 4 405 indenture dated january 1 1994 rp scherer international corporation comerica bank first supplemental indenture among rp scherer international corporation rp scherer corporation comerica bank dated february 28 1995 second supplemental indenture among rp scherer corporation registrant comerica bank dated august 7 1998 5 406 form warrant certificate purchase company common shares 6 1001 stock incentive plan registrant amended 7 1002 outside directors equity incentive plan 21 1003 directors stock option plan registrant amended restated 7 1004 amended restated equity incentive plan registrant amended 16 except first amendment included exhibit annual report form 10k 1005 form nonqualified stock option agreement amended 16 1006 form restricted shares agreement amended 16 1007 form directors stock option agreement amended 16 1008 cardinal health inc directors deferred compensation plan 17 1009 allegiance corporation 1996 incentive compensation program 8 1010 allegiance corporation 1998 incentive compensation program 8 1011 allegiance corporation 1996 outside director incentive corporation plan 8 1012 rp scherer corporation 1997 stock option plan 9 1013 rp scherer corporation 1990 nonqualified performance stock option plans 9 1014 cardinal health inc performancebased incentive compensation plan amended 10 28 exhibit description number 1015 cardinal health inc incentive deferred compensation plan amended 11 1016 form agreement dated february 9 2000 registrant messrs ford miller rucci 23 1017 agreement dated february 9 2000 registrant george l fotiades 23 1019 agreement dated february 9 2000 registrant james f millar 23 1020 agreement dated july 1 1999 registrant stephen thomas amended 19 23 1021 form indemnification agreement registrant individual directors 12 1022 form indemnification agreement registrant individual officers 12 1023 split dollar agreement dated april 16 1993 among registrant robert walter bank one ohio trust company na trustee ua dated april 16 1993 fbo robert walter 7 1024 agreement dated march 16 2000 registrant credit suisse financial products 23 1025 364day credit agreement dated march 30 2000 among registrant certain subsidiaries registrant certain lenders bank one na administrative agent bank america nt syndication agent citibank usa inc codocumentation agent credit suisse first boston codocumentation agent 18 1026 master agreement related documents dated july 19 1996 among registrant andor subsidiaries suntrust banks inc pnc leasing corp suntrust bank atlanta amended 13 16 1027 participation agreement related documents dated june 23 1997 among registrant certain subsidiaries bank montreal bmo leasing us inc amended 14 16 1028 vendor program agreement dated october 10 1991 general electric capital corporation pyxis corporation amended december 13 1991 january 15 1993 march 10 1994 june 23 1997 june 1 1998 5 13 14 1029 pharmaceutical services agreement dated august 1 1996 amended kmart corporation cardinal distribution 15 16 1030 wholesale supply agreement dated august 10 2000 registrant cvs meridian inc 23 1031 form commercial paper dealer agreement 42 program company issuer certain entities dealer concerning notes issued pursuant issuing paying agency agreement issuer first national bank chicago issuing paying agent 16 1032 partnership agreement rp scherer gmbh co kg 5 1033 fiveyear credit agreement dated march 31 1999 among registrant certain subsidiaries registrant certain lenders first national bank chicago administrative agent bank america nt sa syndication agent citibank na codocumentation agent credit suisse first boston codocumentation agent 16 1034 bindley western industries inc 1993 stock option incentive plan 22 exhibit description number 1035 bindley western industries inc 2000 stock option incentive plan 22 1036 executive agreement among william e bindley western industries inc company dated december 2 2000 25 1037 form termination benefits agreement william e bindley western industries inc dated april 1 1996 24 1038 change control severance agreement allegiance corporation kathy brittain white agreement company kathy brittain white dated february 9 2000 26 27 1039 agreement dated february 9 2000 company john c kane 23 1601 letter deloitte touche llp required item 304 regulation sk 16 1602 letter pricewaterhousecoopers llp required item 304 regulation sk 16 2101 list subsidiaries registrant 2301 consent arthur andersen llp 2302 consent deloitte touche llp 2303 consent arthur andersen llp 2304 consent pricewaterhousecoopers llp 2305 consent pricewaterhousecoopers llp 9901 statement regarding forwardlooking information 1 included exhibit registrants current report form 8k filed november 24 1998 file 111373 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 111373 incorporated herein reference 3 included exhibit registrants current report form 8k filed april 21 1997 file 111373 incorporated herein reference 4 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 111373 incorporated herein reference 6 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 111373 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33368819 incorporated herein reference 9 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 10 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 file 111373 incorporated herein reference 11 included exhibit registrants registration statement form s8 33390423 incorporated herein reference 12 included exhibit companys amendment 1 annual report form 10ka fiscal year ended june 30 1997 file 111373 incorporated herein reference 13 included exhibit registrants annual report form 10k fiscal ended june 30 1996 file 111373 incorporated herein reference 14 included exhibit registrants annual report form 10k fiscal year ended june 30 1997 file 111373 incorporated herein reference 15 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 111373 incorporated herein reference 16 included exhibit registrants annual report form 10k fiscal year ended june 30 1999 file 111373 incorporated herein reference 17 included exhibit registrants registration statement form s8 33390415 incorporated herein reference 18 included exhibit registrants quarterly report form 10q quarter ended march 31 2000 file 111373 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended december 31 1999 file 111373 incorporated herein reference 20 included exhibit registrants registration statement form s4 33353394 incorporated herein reference 21 included exhibit registrants registration statement form s8 33338192 incorporated herein reference 22 included exhibit companys posteffective amendment 1 form s8 form s4 registration statement 33353394 incorporated herein reference 23 included exhibit registrants annual report form 10k fiscal year ended june 30 2000 file 111373 incorporated herein reference 24 included exhibit bindley western industries incs quarterly report form 10q quarter ended march 31 1996 file 011355 incorporated herein reference 25 included exhibit registrants quarterly report form 10q quarter ended march 31 2001 file 111373 incorporated herein reference 26 included exhibit allegiance corporations form s1a filed commission september 30 1996 file 33312525 incorporated herein reference 27 included exhibit registrants quarterly report form 10q quarter ended december 31 2000 file 111373 incorporated herein reference 28 included exhibit registrants quarterly report form 10q quarter ended december 31 1998 file 111373 incorporated herein reference management contract compensation plan arrangement b reports form 8k june 7 2001 registrant filed current report form 8ka item 5 included restated consolidated financial statements company giving effect merger bindley accounted poolingofinterests business combination signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 24 2001 cardinal health inc subsidiaries schedule ii valuation qualifying accounts millions 1 fiscal 2001 2000 1999 recoveries amounts provided written prior years 10 million 15 million 40 million respectively 2 fiscal 2001 114 million relates beginning balance acquisitions accounted purchase transaction 3 writeoff uncollectible accountsitem 14 exhibits financial statement schedules reports form 8k controls procedures a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk 1 included exhibit registrants current report form 8k filed november 24 1998 file 111373 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 111373 incorporated herein reference 3 included exhibit registrants current report form 8k filed april 21 1997 file 111373 incorporated herein reference 4 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 111373 incorporated herein reference 6 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 111373 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33368819 incorporated herein reference 9 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 10 included exhibit registrants quarterly report form 10q quarter ended march 31 1997 file 111373 incorporated herein reference 11 included exhibit registrants registration statement form s8 33390423 incorporated herein reference 12 included exhibit companys amendment 1 annual report form 10ka fiscal year ended june 30 1997 file 111373 incorporated herein reference 13 included exhibit registrants annual report form 10k fiscal year ended june 30 1996 file 111373 incorporated herein reference 14 included exhibit registrants annual report form 10k fiscal year ended june 30 1997 file 111373 incorporated herein reference 15 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 111373 incorporated herein reference 16 included exhibit registrants quarterly report form 10q quarter ended december 31 2001 file 111373 incorporated herein reference 17 included exhibit registrants registration statement form s8 33390415 incorporated herein reference 18 included exhibit registrants quarterly report form 10q quarter ended march 31 2002 file 111373 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended december 31 1999 file 111373 incorporated herein reference 20 included exhibit registrants registration statement form s4 33353394 incorporated herein reference 21 included exhibit registrants registration statement form s8 33338192 incorporated herein reference 22 included exhibit companys posteffective amendment 1 form s8 form s4 registration statement 33353394 incorporated herein reference 23 included exhibit registrants annual report form 10k fiscal year ended june 30 2000 file 111373 incorporated herein reference 24 included exhibit bindley western industries incs quarterly report form 10q quarter ended march 31 1996 file 011355 incorporated herein reference 25 included exhibit registrants quarterly report form 10q quarter ended march 31 2001 file 111373 incorporated herein reference 26 included exhibit allegiance corporations form s1a filed commission september 30 1996 file 33312525 incorporated herein reference 27 included exhibit registrants quarterly report form 10q quarter ended december 31 2000 file 111373 incorporated herein reference 28 included exhibit registrants quarterly report form 10q quarter ended december 31 1998 file 111373 incorporated herein reference 29 included exhibit registrants quarterly report form 10q quarter ended september 30 2001 file 111373 incorporated herein reference 30 included exhibit registrants quarterly report form 10q quarter ended december 31 2001 file 111373 incorporated herein reference 31 included exhibit registrants quarterly report form 10q quarter ended march 31 2002 file 111373 incorporated herein reference 32 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 33 included exhibit registrants annual report form 10k fiscal year ended june 30 2001 file 111373 incorporated herein reference management contract compensation plan arrangement b reports form 8k may 9 2002 registrant filed current report form 8k item 4 item 7 item 4 registrant disclosed board directors registrant may 8 2002 upon recommendation audit committee dismissed arthur andersen llp registrants independent public accountants engaged ernst young llp serve registrants independent public accountants fiscal year ending june 30 2002 item 7 registrant included letter arthur andersen llp securities exchange commission dated may 9 2002 c controls procedures applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized september 30 2002 cardinal health inc robert walter robert walter chairman chief executive officer richard j miller executive vice president chief financial officer cardinal health inc certify pursuant section 302 sarbanesoxley act 2002 1 reviewed annual report form 10k cardinal health inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report dated september 30 2002 richard j miller richard j miller executive vice president chief financial officer robert walter chairman chief executive officer cardinal health inc certify pursuant section 302 sarbanesoxley act 2002 1 reviewed annual report form 10k cardinal health inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report dated september 30 2002 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated september 30 2002 cardinal health inc subsidiaries schedule ii valuation qualifying accounts millions 1 fiscal 2002 2001 2000 recoveries amounts provided written prior years 15 million 10 million 15 million respectively 2 fiscal 2001 114 million relates beginning balance acquisitions accounted purchase transaction 3 writeoff uncollectible accountsitem 14 principal accounting fees services accordance general instruction g 3 form 10k information called item 14 incorporated herein reference companys definitive proxy statement filed sec pursuant regulation 14a exchange act relating companys annual meeting caption selection independent auditors item 15item 14 principal accounting fees services audit fees audit fees include fees paid company ernst young related annual audit companys consolidated financial statements review financial statements included companys quarterly reports form 10q statutory audits various international subsidiaries additional procedures implemented result audit committees internal review commenced april 2004 ongoing audit fees also include fees services performed ernst young closely related audit many cases could provided companys independent accountant comfort letters consents related sec registration statements aggregate fees billed company ernst young audit services rendered company subsidiaries fiscal 2003 2004 totaled 3797895 8015584 respectively auditrelated fees auditrelated services include due diligence services related mergers acquisitions auditrelated research assistance document production employee benefit plan audits aggregate fees billed company ernst young auditrelated services rendered company subsidiaries fiscal 2003 2004 totaled 3193960 2927687 respectively tax fees tax fees include tax compliance taxrelated services aggregate fees billed company ernst young tax services rendered company subsidiaries fiscal 2003 2004 totaled 1916880 2053411 respectively fees aggregate fees billed company ernst young services rendered company subsidiaries matters litigation assistance internal audit services fiscal 2003 2004 totaled 14500 289986 respectively audit committee audit nonaudit services preapproval policy sarbanesoxley act 2002 act audit committee responsible appointment compensation oversight work independent accountants part responsibility audit committee required preapprove audit permissible nonaudit services performed independent accountants order assure services impair accountants independence company implement provisions act sec issued rules specifying types services independent accountants may provide audit client well audit committees administration engagement independent accountants accordingly audit committee adopted audit nonaudit services preapproval policy sets forth procedures conditions services proposed performed independent accountants must preapproved pursuant policy certain proposed services may preapproved periodic basis long services exceed certain predetermined cost levels preapproved periodic basis proposed services must otherwise separately preapproved prior performed independent accountants addition proposed services preapproved periodic basis later exceed predetermined cost level would require separate preapproval incremental amounts audit committee audit committee delegated preapproval authority chairman audit committee proposed services performed independent accountants 500000 pursuant policy event chairman preapproves services chairman required report decisions full audit committee next regularlyscheduled meeting proposed services equal exceeding 500000 require full audit committee approval item 15item 14 principal accounting fees services accordance general instruction g3 form 10k information called item 14 incorporated herein reference company’s definitive proxy statement filed sec pursuant regulation 14a exchange act relating company’s annual meeting caption “selection independent accountants” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference company’s definitive proxy statement relating 2006 annual meeting caption “independent accountants” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference company’s definitive proxy statement filed sec pursuant regulation 14a exchange act relating 2007 annual meeting caption “independent accountants” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference company’s definitive proxy statement filed sec pursuant regulation 14a exchange act relating 2008 annual meeting captions “independent accountants” “board directors committees boardcommittees board” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference definitive proxy statement filed sec pursuant regulation 14a exchange act relating 2010 annual meeting captions “independent accountants” “board directors committees boardcommittees board directors” part iv item 15item 14 principal accounting fees services information called item 14 incorporated reference 2011 proxy statement captions “independent accountants” “board directors committees board” part iv item 15item 14 principal accounting fees services information called item 14 incorporated reference 2012 proxy statement captions “independent accountants” part iv item 15item 14 principal accounting fees services information called item 14 incorporated reference 2013 proxy statement captions “independent accountants” cardinal health inc subsidiaries part iv item 15item 14 principal accounting fees services information called item 14 incorporated reference 2014 proxy statement caption “audit committee report audit matters” cardinal health inc subsidiaries part iv item 15nannannannannanitem 14 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required sk item 601 longterm debt agreements registrant filed pursuant item 601b4iiia regulation sk registrant agrees furnish copies agreements securities exchange commission upon request 1 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 012591 incorporated herein reference 2 included exhibit registrants annual report form 10k fiscal year ended march 31 1992 012591 incorporated herein reference 3 included exhibit registrants statement form s8 3352535 incorporated herein reference 4 included exhibit registrants quarterly report form 10q quarter ended december 31 1993 012591 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended march 29 1986 012591 incorporated herein reference 6 included exhibit registrants annual report form 10k fiscal year ended march 28 1987 012591 incorporated herein reference 7 included exhibit registrants registration statement form s1 284444 incorporated herein reference 8 included exhibit registrants annual report form 10k fiscal year ended march 31 1993 012592 incorporated herein reference 9 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 012591 incorporated herein reference 10 included exhibit registrants schedule 13d reporting registrants beneficial ownership shares medicine shoppe international inc 013008 incorporated herein reference management contract compensation plan arrangement b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cardinal health inc september 19 1995 robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cardinal health inc subsidiaries schedule ii valuation qualifying accounts fiscal years ended june 30 1995 june 30 1994 three months ended june 30 1993 fiscal year ended march 31 1993 thousands 1 recovery amounts provided written prior years 2 current year writeoff uncollectible accounts 3 amount arises acquisition subsidiary 4 see note 1 notes consolidated financial statements regarding basis presentationitem 14 principal accounting fees services information called item 14 incorporated herein reference company’s definitive proxy statement filed sec pursuant regulation 14a exchange act relating 2009 annual meeting captions “independent accountants” “board directors committees boardcommittees board” part iv item 15 item 7 managements discussion analysis financial condition results operations managements discussion analysis presented prepared giving retroactive effect poolingofinterests business combination whitmire february 7 1994 see note 3 notes consolidated financial statements term cardinal used herein refers cardinal health inc subsidiaries prior whitmire merger cardinals fiscal year historically ended march 31 whitmires fiscal year ended saturday closest end june march 1 1994 company changed fiscal year end march 31 june 30 accordingly companys consolidated financial statements fiscal year ended june 30 1994 twelve months ended june 30 1993 combine information cardinal whitmire june 30 1994 two years ended companys consolidated financial statements earlier fiscal years combine information cardinals march year end whitmires subsequent fiscal june year end discussion analysis presented read conjunction consolidated financial statements related notes appearing report net sales net sales fiscal 1994 increased 25 compared fiscal 1993 due internal business growth 20 merger prn services inc december 1993 acquisition solomons company may 1993 see note 3 notes consolidated financial statements 26 increase net sales fiscal 1993 compared fiscal 1992 due internal business growth 22 sales resulting acquisition chapman drug company october 1991 see note 3 notes consolidated financial statements full consolidation companys repackaging operation internal business growth fiscal 1994 fiscal 1993 resulted primarily addition new customers partially result expanded sales territories increased sales existing customers price increases gross margin percentage net sales gross margin declined 613 fiscal 1994 642 fiscal 1993 698 fiscal 1992 decreases gross margin percentages due lower selling margin rates reflecting competitive market greater mix higher volume customers lower cost distribution better asset management cash flow enabled company offer lower selling margins b reduced purchasing gains associated lower drug price inflation reduced purchasing gains partially offset lower lifo charge company expects decline gross margin rates continue moderate rate selling general administrative expenses selling general administrative expenses percentage net sales improved consistently 501 fiscal 1992 440 fiscal 1993 403 fiscal 1994 improvements due primarily economies associated companys significant sales growth particularly major customers support costs generally lower productivity improvements unusual items february 1994 company recorded nonrecurring charge reflect estimated whitmire merger costs approximately 359 million 282 million net tax including fees transaction costs related combination b nonrecurring costs expected incurred connection integration cardinals whitmires business operations estimated costs include approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate restructuring distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement estimated costs approximately 7 million pertain revaluation certain operating assets 2 million pertain employee relocation retraining termination costs certain amounts based preliminary estimate costs incurred company actual costs may differ estimate june 30 1994 company incurred actual costs aggregating approximately 117 million relative whitmire merger current estimates merger costs ultimately incurred materially different amounts originally recorded fiscal 1993 company received termination fee approximately 135 million resulting termination durrfillauer medical inc agreement merge company also fiscal 1993 company recorded nonrecurring charges totaling approximately 137 million primarily related closing certain noncore operations rationalization standardization improvement selected distribution operations information systems support functions charges included writedown certain assets moving costs associated affected operations modification costs necessary centralize standardize certain information systems support functions june 30 1994 company incurred actual costs aggregating approximately 91 million related charges expects remaining amounts incurred fiscal 1995 modification terms certain whitmire stock options fiscal 1993 also resulted onetime stock option compensation charge approximately 52 million see note 11 notes consolidated financial statements fiscal 1992 completion whitmire certain equity transactions resulted recording unusual expense approximately 20 million see note 11 notes consolidated financial statements interest expense decrease interest expense fiscal 1994 compared fiscal 1993 due primarily following conversion debt equity following call redemption effective july 2 1993 companys 75 million face amount 725 convertible debentures due 2015 subordinated debentures see note 5 notes consolidated financial statements b reduced borrowings whitmires revolving credit agreements reductions interest expense discussed partially offset increased interest expense resulting sale company 100 million 65 notes due 2004 new notes february 23 1994 see note 5 notes consolidated financial statements b increased average shortterm borrowings see note 4 notes consolidated financial statements increased average shortterm borrowings result increased working capital requirements b repayment amounts outstanding whitmires revolving credit agreements time whitmire merger see note 5 notes consolidated financial statements c redemption whitmires preferred stock see note 10 notes consolidated financial statements additional interest expense recognized fiscal 1993 compared fiscal 1992 relating issuance companys 100 million 8 notes due 1997 notes march 11 1992 primarily offset use proceeds notes reduce shortterm borrowings b lower average interest rates amounts borrowed whitmires revolving credit agreements fiscal 1992 interest expense also includes charge approximately 18 million associated replacement whitmire credit agreement see note 5 notes consolidated financial statements company entered various interest rate swap agreements serve hedge notes see note 5 notes consolidated financial statements net effect swap agreements company exchanged 8 fixed rate position notes fixed rate 51 period july 15 1992 march 1 1993 fixed rate 65 period march 2 1993 march 1 1994 thereafter fixed rate 81 march 1 1997 maturity date notes may 1993 two offsetting swap agreements canceled gain loss company provision income taxes companys provision income taxes relative pretax earnings increased significantly fiscal 1994 compared fiscal 1993 due primarily certain nondeductible costs associated whitmire merger recorded third quarter fiscal 1994 see note 2 notes consolidated financial statements b reduction income taxadvantaged investments c 1993 omnibus budget reconciliation acts 1 tax rate increase enacted august 11 1993 retroactive january 1 1993 cumulative effect change accounting principle effective beginning fiscal 1993 cardinal adopted statement financial accounting standards 109 accounting income taxes sfas 109 cumulative effect adopting sfas 109 10 million cardinal reported change accounting principle retroactive beginning fiscal 1993 10 million cumulative effect recorded cardinal resulted primarily fact sfas 109 modifies accounting business combinations recorded using purchase method cumulative effect adopting sfas 109 whitmire material included fiscal 1992 provision income taxes presented separately consolidated statement earnings liquidity capital resources net working capital increased 4711 million june 30 1994 4407 million march 31 1993 included increased investments merchandise inventories trade receivables 2331 million 925 million respectively offset primarily increase accounts payable 2197 million b reduction cash equivalents marketable securities 491 million c increase notes payablebanks 250 million increases merchandise inventories accounts payable primarily reflect timing seasonal purchases related payments increase trade receivables due primarily increased sales see net sales decrease cash marketable securities increase notes payablebanks resulted primarily increased investments merchandise inventories trade receivables net increase accounts payable described b repayment amounts outstanding whitmires revolving credit arrangements time whitmire merger approximately 120 million including prepayment penalty approximately 12 million c redemption whitmires preferred stock approximately 204 million longterm obligations decreased 2758 million march 31 1993 2101 million june 30 1994 due primarily issuance company additional class common shares upon conversion 749 million subordinated debentures b repayment amounts outstanding whitmires revolving credit arrangements offset primarily sale 100 million new notes described shareholders equity increased 3685 million june 30 1994 2479 million march 31 1993 due primarily issuance additional class common shares upon conversion 749 million subordinated debentures offset approximately 18 million unamortized debenture offering costs charged shareholders equity b net earnings company approximately 351 million fiscal 1994 net earnings approximately 78 million cardinal exclusive whitmire three months ended june 30 1993 see note 1 notes consolidated financial statements c issuance approximately 1062000 class common shares acquire outstanding stock solomons company see note 3 notes consolidated financial statements offset primarily repurchase approximately 725000 class common shares owned subsidiaries north american national corporation see note 15 notes consolidated financial statements ii dividends paid company approximately 39 million fiscal 1994 company lineofcredit agreements various bank sources aggregating 321 million 100 million represented committed lineofcredit agreements balance uncommitted company drawn upon 25 million available linesofcredit june 30 1994 leaving 296 million available companys existing lineofcredit agreements may 6 1993 company filed securities exchange commission registration statement public offering timetotime debt securities debt securities issuable one series aggregate principal amount exceed 150 million february 23 1994 company sold 100 million new notes see note 5 notes consolidated financial statements net proceeds used general corporate purposes including repayment bank lines credit incurred part whitmire merger june 30 1994 50 million debt securities remain issuable august 17 1994 company filed securities exchange commission registration statement underwritten public offering 5250000 class common shares 5250000 shares 1600000 sold company 3650000 sold certain shareholders company underwriters granted option purchase 787500 additional class common shares cover overallotments including 266949 shares company believes adequate capital resources disposal exclusive anticipated proceeds proposed public offering class common shares described meet currently anticipated capital expenditures routine business growth expansion current projected debt service including additional liquidity capital requirements associated recent prospective business combinations see notes 3 16 notes consolidated financial statements item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations medicine shoppe completed november 13 1995 pyxis completed may 7 1996 see note 2 notes consolidated financial statements discussion analysis presented read conjunction consolidated financial statements related notes appearing elsewhere report results operations net revenues net revenues fiscal 1996 increased 10 compared fiscal 1995 primarily due internal revenue growth pharmaceutical wholesaling activities including addition new customers increased sales existing customers price increases 35 increase net revenues fiscal 1995 compared fiscal 1994 due internal business growth 25 primarily pharmaceutical wholesaling activities acquisition humistonkeeling inc july 1994 merger transaction behrens inc july 1994 see note 2 notes consolidated financial statements internal business growth fiscal 1995 resulted primarily addition new customers partially result expanded sales territories increased sales existing customers price increases gross margin percentage net revenues gross margin increased 807 fiscal 1996 779 fiscal 1995 increase primarily due gross margin generated acquisition pharmacy management operations fiscal 1996 see notes 1 2 notes consolidated financial statements pharmacy management operations generally provide higher gross margin pharmaceutical wholesaling activities gross margin ratio fiscal 1995 decreased 817 fiscal 1994 primarily due decreases pharmaceutical selling margin rates reflecting competitive market greater mix high volume customers offset slight increase purchasing gains associated pharmaceutical price inflation selling general administrative expenses selling general administrative expenses percentage net revenues increased 489 fiscal 1996 compared 472 fiscal 1995 increase selling general administrative expenses percentage net revenues fiscal 1996 due inclusion pharmacy management services current year operations see gross margin increase partially offset economies associated companys revenue growth pharmaceutical wholesaling activities well productivity gains resulting part warehouse consolidations management information system enhancements decrease selling general administrative expenses percentage net revenues fiscal 1995 490 fiscal 1994 due economies associated companys revenue growth well consolidating distribution centers administrative functions selectively automating facilities unusual items fiscal 1996 company recorded costs totaling 673 million 478 million net tax related primarily mergers medicine shoppe pyxis see note 2 notes consolidated financial statements costs included approximately 224 million investment advisor legal accounting internal personnel transaction fees associated business combinations 147 million related costs exit restructure certain activities including operating lease terminations asset impairment charges 78 million related employee retention employee severance personnel costs 29 million activities related integrating operations implementing efficiencies merged companies certain amounts based upon estimates actual amounts paid may ultimately differ estimates june 30 1996 company paid approximately 221 million related charges additional costs incurred items expensed subsequent periods fiscal 1994 company recorded charge reflect whitmire merger costs approximately 359 million 282 million net tax costs included approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate integration distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement june 30 1996 company disbursed amounts related liabilities actual amounts paid approximating original amounts recorded items considered unusual nature costs would generally incurred absence business combinations interest expense increase interest expense 45 million fiscal 1996 compared fiscal 1995 due companys issuance 150 million 6 notes due 2006 public offering january 1996 increase interest expense 11 million fiscal 1995 compared fiscal 1994 due higher average shortterm borrowings resulting increased working capital requirements associated companys growth company entered various interest rate swap agreements see note 5 notes consolidated financial statements provision income taxes companys provision income taxes relative pretax earnings 446 411 448 fiscal years 1996 1995 1994 respectively fluctuation tax rate primarily due certain nondeductible costs associated business combinations fiscal 1996 1994 see note 7 notes consolidated financial statements liquidity capital resources working capital increased 884 million 8541 million june 30 1996 7657 million june 30 1995 included increased investments merchandise inventories trade receivables 1514 million 427 million respectively increased holdings cash equivalents marketable securities 1768 million increase offset primarily increase accounts payable current portion longterm debt 1700 million 1028 million respectively increase accrued liabilities 298 million increases inventories accounts payable due companys revenue growth procurement pharmaceutical inventory relative anticipated increase business large mass merchandising customer pharmaceutical price increases increase cash equivalents marketable securities availableforsale reflect timing inventory purchases payments noted partial use proceeds companys 150 million 6 note offering see interest expense increase trade receivables due primarily increased sales see net revenues increase current portion longterm debt due companys 100 million 8 notes due march 1997 liabilities incurred connection fiscal 1996 business combinations primary cause increase accrued liabilities property equipment cost increased 697 million fiscal 1996 property acquired included increased investment management information systems customer support systems well construction automation distribution facilities goodwill intangibles increased approximately 317 million 924 million due purchase business combinations completed current year primarily related companys pointofuse pharmacy systems pharmacy management services see note 2 notes consolidated financial statements shareholders equity increased 9307 million june 30 1996 7996 million june 30 1995 due primarily net earnings company approximately 1119 million proceeds tax benefits exercise options employee stock plans 276 million offset primarily dividends paid company approximately 76 million fiscal 1996 company lineofcredit agreements various bank sources aggregating 345 million 95 million represented committed lineofcredit agreements balance uncommitted company amounts outstanding lines june 30 1996 company believes adequate capital resources disposal meet currently anticipated capital expenditures routine business growth expansion current projected debt service requirements pending business combination july 24 1996 company announced entered definitive merger agreement pci services inc pci pursuant pci become wholly owned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes connection merger company estimates issue approximately 21 million common shares terms merger agreement shareholders pci receive 0336 common shares share pci time transaction consummated subject adjustment specified circumstances addition pursuant terms merger agreement options pci common stock converted equivalent options approximately 158000 common shares based upon exchange ratio upon consummation merger company record onetime charge reflect transaction costs incurred result merger expected completed fall 1996 subject satisfaction certain conditions including approval shareholders pci companys trend regard acquisitions fiscal 1996 continuing pending pci transaction described expand role health care service provider trend resulted diversification health care services complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher gross margins percentage net revenues pharmaceutical distribution health care industry continues consolidate company expects continually evaluate acquisition candidates pharmaceutical distribution well opportunities would expand role health care service provider however assurance able successfully pursue opportunity consummate transaction recently issued financial accounting standards october 1995 financial accounting standards board issued statement financial accounting standards 123 accounting stockbased compensation requires adoption later companys fiscal 1997 new standard defines fair value method accounting stock options similar equity instruments compensation cost measured grant date based fair value award recognized service period usually vesting period pursuant new standard companies encouraged required adopt fair value method accounting employee stockbased transactions companies also permitted continue account transactions accounting principles board opinion 25 accounting stock issued employees would required disclose financial statements pro forma net income earnings per share new method accounting applied accounting requirements new method effective employee awards granted beginning fiscal year adoption company yet determined elect change fair value method determined effect new standard net income earnings per share elect make change adoption new standard effect companys cash flows addition march 1995 financial accounting standards board issued statement financial accounting standards 121 sfas 121 accounting impairment longlived assets longlived assets disposed requires adoption later companys fiscal 1997 sfas 121 requires impairment losses recorded longlived assets used operations indication impairment present undiscounted cash flows estimated generated assets less assets carrying amount sfas 121 also addresses accounting longlived assets expected disposed company believe based current circumstances adoption sfas 121 material effect financial condition results operations item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations medicine shoppe november 13 1995 pyxis may 7 1996 owen march 18 1997 see note 2 notes consolidated financial statements october 11 1996 company completed merger pci also accounted poolingofinterests impact pci merger historical basis significant accordingly prior period financial statements restated pci merger see note 2 notes consolidated financial statements discussion analysis presented read conjunction consolidated financial statements related notes appearing elsewhere report results operations net revenues net revenues fiscal 1997 increased 19 compared prior year primarily due growth companys pharmaceutical distribution pharmacy management service businesses increase resulted mostly internal growth generated primarily addition new customers lesser extent increased volume existing customers price increases expansion companys relationship kmart corporation kmart opportunities created deterioration financial condition major pharmaceutical distribution competitor also contributed increases fiscal 1997 net revenues fiscal 1996 increased 11 compared fiscal 1995 primarily due internal growth pharmaceutical wholesaling activities mostly due addition new customers lesser extent increased sales existing customers price increases gross margin fiscal 1997 1996 gross margin percentage net revenues 825 836 respectively change gross margin year primarily due shift net revenue mix caused significant increases relatively lower margin pharmaceutical distribution activities impact shift partially offset increased merchandising marketing programs customers suppliers companys gross margin continues affected combination highly competitive environment greater mix high volume customers lower cost service better asset management enable company offer lower selling margins still achieve higher operating margins relative customer business gross margin ratio increased 836 fiscal 1996 802 fiscal 1995 increase primarily due gross margin generated acquisition pharmacy management operation fiscal 1996 see note 2 notes consolidated financial statements pharmacy management operations generally provide higher gross margin pharmaceutical wholesaling activities selling general administrative expenses selling general administrative expenses percentage net revenues improved 468 fiscal 1997 compared 519 fiscal 1996 improvements fiscal 1997 reflect economies associated companys revenue growth well significant productivity gains resulting continued cost control efforts consolidation selective automation operating facilities selling general administrative expenses percentage net revenues increased 519 fiscal 1996 compared 496 fiscal 1995 due inclusion pharmacy management services fiscal 1996 operations see gross margin increase partially offset economies associated companys revenue growth pharmaceutical wholesaling activities well productivity gains resulting part warehouse consolidations management information system enhancements merger related costs company recorded charges reflect estimated pci owen merger related costs fiscal 1997 fiscal 1996 company recorded charges reflect estimated medicine shoppe pyxis merger related costs see discussion note 2 notes consolidated financial statements company classifies incremental costs associated merger transaction merger related costs would incurred absence business combination noted amounts presented may comparable similarly titled amounts reported companies following summary merger related costs effects merger related costs included reported net earnings 1811 million fiscal 1997 1176 million fiscal 1996 reported fully diluted earnings per common share 166 fiscal 1997 114 fiscal 1996 asset impairments fiscal 1997 include write patent 74 million write certain operating assets 32 million related meditrol wholly owned subsidiary owen result managements decision merge operations meditrol pyxis phaseout production separate meditrol product line exit restructuring costs fiscal 1996 include 172 million related managements commitment exit long term contract financing company time pyxis merger see discussion note 3 notes consolidated financial statements additionally fiscal 1996 74 million unconditional commitments made company medicine shoppe franchisees result medicine shoppe merger included integration efficiency implementation category companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion pharmaceutical distribution business diversification related service areas complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher margins percentage net revenues pharmaceutical distribution healthcare industry continues change company constantly evaluating acquisition candidates pharmaceutical distribution well related sectors healthcare industry would expand role service provider however assurance able successfully pursue opportunity consummate transaction consummated additional merger related costs would incurred company interest expense growth companys business resultant need additional working capital led companys issuance 150 million 6 notes due 2006 public offering january 1996 caused increase interest expense 11 million fiscal 1997 compared fiscal 1996 increase interest expense 48 million fiscal 1996 compared fiscal 1995 see liquidity capital resources partially offsetting increase fiscal 1997 impact extinguishment companys 100 million 8 notes march 1 1997 provision income taxes companys provision income taxes relative pretax earnings 42 445 411 fiscal years 1997 1996 1995 respectively fluctuation tax rate primarily due certain nondeductible costs associated business combinations fiscal 1997 1996 see note 7 notes consolidated financial statements liquidity capital resources working capital increased 1095 million june 30 1997 9244 million june 30 1996 increase included additional investments merchandise inventories trade receivables 1801 million 599 million respectively decrease accounts payable 24 million offsetting increases working capital decreases cash equivalents marketable securities availableforsale 612 million 543 million respectively increases merchandise inventories reflect higher level business volume pharmaceutical distribution activities including higher inventories required companys new pharmaceutical services agreement kmart increase trade receivables consistent companys revenue growth see net revenues change cash equivalents marketable securities availableforsale accounts payable due timing inventory purchases related payments company fully redeemed 100 million longterm debt fiscal 1997 currently capacity issue 400 million additional longterm debt pursuant shelf debt registration statements filed securities exchange commission see note 5 notes consolidated financial statements company currently specific plans issue additional debt facilities property equipment cost increased 1762 million fiscal 1997 amount 1115 million attributable merger pci remaining increase property equipment included additional investments management information systems customer support systems well upgrades distribution facilities company several operating lease agreements construction new facilities see discussion note 9 notes consolidated financial statements shareholders equity increased 13322 million june 30 1997 10358 million june 30 1996 primarily due net earnings 1811 million investment 614 million employees company various stock ownership plans company lineofcredit agreements various bank sources aggregating 374 million 95 million represented committed lineofcredit agreements balance uncommitted company 222 million outstanding lines june 30 1997 company believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements pending business combinations may 27 1997 company announced entered definitive merger agreement mediqual systems inc mediqual pursuant mediqual become whollyowned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes connection merger company estimates issue approximately 06 million common shares merger expected completed first half fiscal 1998 subject satisfaction certain conditions including approval shareholders mediqual august 23 1997 company signed definitive merger agreement bergen brunswig corporation bergen distributor pharmaceuticals medicalsurgical supplies terms transaction shareholders bergen receive fixed exchange ratio 775 companys common shares exchange common share bergen company issue approximately 40 million common shares transaction also assume approximately 386 million longterm debt merger expected completed end third quarter fiscal 1998 subject certain conditions including approval shareholders receipt certain regulatory approvals transaction expected accounted poolingofinterests recently issued financial accounting standards february 1997 financial accounting standards board fasb issued statement financial accounting standards 128 sfas 128 earnings per share require retroactive adoption companys fiscal quarter ending december 31 1997 new standard simplifies computation earnings per share requires presentation basic diluted earnings per share light present capital structure impact adopting sfas 128 significant june 1997 fasb issued statement financial accounting standards 130 sfas 130 reporting comprehensive income require adoption later companys fiscal quarter ending september 30 1998 new statement defines comprehensive income changes equity period exception stock issuances dividends new pronouncement establishes standards reporting display comprehensive income components financial statements june 1997 fasb also issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information require adoption later fiscal 1999 sfas 131 requires companies define report financial descriptive information operating segments also establishes standards related disclosures products services geographic areas major customers company presently evaluating applicability sfas 130 131 operations item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations medicine shoppe november 13 1995 pyxis may 7 1996 pci october 11 1996 owen march 18 1997 february 18 1998 company completed merger mediqual accounted poolingofinterests impact mediqual merger historical basis significant accordingly prior period financial statements restated mediqual merger see note 2 notes consolidated financial statements although restated first quarter fiscal 1999 result companys august 7 1998 acquisition scherer discussion analysis presented read conjunction consolidated financial statements related notes appearing elsewhere form 10k results operations operating revenue operating revenue fiscal 1998 increased 18 compared prior year distribution businesses whose primary operations involve wholesale distribution pharmaceuticals representing 91 total operating revenue operating revenue including approximately 196 million sold owen eliminated consolidation grew rate 19 fiscal year ended june 30 1998 service businesses provide services healthcare industry primarily pharmacy franchising pharmacy automation equipment pharmacy management pharmaceutical packaging operating revenue grew rate 22 fiscal year ended june 30 1998 primarily strength companys pharmacy automation pharmacy management businesses majority operating revenue increase approximately 80 year ended june 30 1998 came existing customers form increased volume pharmaceutical price increases remainder growth came addition new customers operating revenue fiscal 1997 increased 17 compared prior year distribution businesses operating revenue including approximately 22 million sold owen eliminated consolidation grew rate 17 fiscal year ended june 30 1997 service businesses grew rate 13 primarily strength companys pharmacy management business increase resulted internal growth generated primarily addition new customers lesser extent increased volume existing customers price increases expansion companys relationship kmart corporation kmart opportunities created deterioration financial condition major pharmaceutical distribution competitor also contributed increases fiscal 1997 bulk deliveries customer warehouses along companies industry company begun reporting revenue bulk deliveries made customers warehouses whereby company acts intermediary ordering subsequent delivery pharmaceutical products years presented restated include bulk deliveries revenue previously service fees related bulk deliveries reported revenue although service fees significant period presented fluctuations bulk deliveries result largely circumstances beyond control company including consolidation within chain drugstore industry decisions chains either begin discontinue warehousing activities changes policy manufacturers related selling directly chain drugstore customers due insignificant margins generated bulk deliveries fluctuations amount significant impact operating earnings gross margin fiscal 1998 1997 gross margin percentage operating revenue 806 820 respectively fiscal 1998 decrease gross margin percentage operating revenue due declines distribution businesses gross margin lesser extent declines service businesses gross margin distribution businesses gross margin percentage operating revenue decreased 582 fiscal 1997 557 fiscal 1998 decrease primarily due impact lower selling margins result highly competitive market greater mix high volume customers lower cost distribution better asset management enable company offer lower selling margins customers service businesses gross margin percentage operating revenue 3147 3252 fiscal 1998 1997 respectively slight decline gross margin rates experienced service businesses primarily function mix various businesses revenue growth greater relatively lower margin pharmacy management pharmaceutical packaging businesses higher margin pharmacy franchising business fiscal 1997 1996 gross margin percentage operating revenue 820 861 respectively change gross margin year primarily due shift revenue mix caused significant increases relatively lower margin pharmaceutical distribution activities impact shift partially offset increased merchandising marketing programs customers suppliers companys gross margin continues affected combination highly competitive environment greater mix high volume customers lower cost service better asset management enable company offer lower selling margins still achieve higher operating margins relative customer business selling general administrative expenses selling general administrative expenses percentage operating revenue improved 439 fiscal 1998 compared 470 fiscal 1997 improvements reflect economies associated companys revenue growth well significant productivity gains resulting continued cost control efforts consolidation selective automation operating facilities 10 growth selling general administrative expenses experienced fiscal 1998 due primarily increases personnel costs depreciation expense compares favorably 18 growth operating revenue period selling general administrative expenses percentage operating revenue improved 470 fiscal 1997 compared 547 fiscal 1996 improvements fiscal 1997 reflect economies associated companys revenue growth well significant productivity gains resulting continued cost control efforts consolidation selective automation operating facilities additionally certain expenses employee severance asset impairments lease exit costs recorded fiscal 1996 recur fiscal 1997 special charges fiscal 1998 company recorded mergersrelated charges associated transaction costs incurred connection mediqual merger 23 million transaction costs incurred connection proposed merger transaction bergen 334 million terminated subsequent yearend see note 17 notes consolidated financial statements additional costs related asset impairments 38 million integrating operations companies previously merged company 96 million incurred recorded fiscal 1998 fiscal 1997 company recorded mergersrelated charges associated pci owen mergers 462 million additional integration costs related pyxis medicine shoppe mergers 47 million fiscal 1996 company recorded charges 492 million reflect estimated medicine shoppe pyxis mergersrelated costs see discussion note 2 notes consolidated financial statements company classifies costs associated merger transaction mergersrelated costs noted amounts presented may comparable similarly titled amounts reported companies fiscal 1998 company recorded special charge 86 million related rationalization distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection settlement labor dispute former employees companys boston distribution facility resulting termination union relationship following summary special charges incurred company last three fiscal years effects mergersrelated costs special charges included reported net earnings 2471 million fiscal 1998 1846 million fiscal 1997 1272 million fiscal 1996 reported diluted earnings per common share 222 fiscal 1998 169 fiscal 1997 119 fiscal 1996 company estimates incur additional mergersrelated costs associated various mergers completed date totaling approximately 37 million future periods excluding scherer mergersee note 16 notes consolidated financial statements order properly integrate operations implement efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred asset impairments fiscal 1997 include writeoff patent 74 million writedown certain operating assets 32 million related meditrol inc meditrol subsidiary acquired company owen merger transaction result managements decision merge operations meditrol pyxis phaseout production separate meditrol product line exit restructuring costs fiscal 1996 include 156 million related cancellation longterm contract financing company related servicing financing accounts receivable pyxis customers time pyxis merger see note 3 notes consolidated financial statements companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion pharmaceutical distribution business diversification related service areas complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher margins percentage operating revenue pharmaceutical distribution healthcare industry continues change company constantly evaluating merger acquisition candidates pharmaceutical distribution well related sectors healthcare industry would expand role service provider however assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated additional mergersrelated costs would incurred company interest expense decrease interest expense 5 million fiscal 1998 compared fiscal 1997 primarily due extinguishment companys 100 million 8 notes march 1 1997 increase income fiscal 1998 compared fiscal 1997 36 million primarily due higher investment income part due better asset management fiscal 1998 619 million cash generated including 1431 million operations compared use 690 million cash fiscal 1997 interest expense fiscal 1997 decreased 26 million compared prior year decrease attributable extinguishment companys 100 million 8 notes march 1 1997 lower interest rates fiscal 1997 compared fiscal 1996 addition various outstanding debt instruments utilized pci prior merger extinguished merger consummated partially offsetting decrease fiscal 1997 impact issuance 150 million 6 notes due 2006 public offering january 1996 discussed liquidity capital resources company issued 150 million 625 notes july 1998 assumed additional debt part acquisition scherer august 7 1998 provision income taxes companys provision income taxes relative pretax earnings 39 41 44 fiscal years 1998 1997 1996 respectively fluctuation tax rate primarily due impact recording certain nondeductible mergersrelated costs various periods addition reduction state effective tax rate result change companys business mix impacted tax rate fiscal year 1997 liquidity capital resources working capital increased 13845 million june 30 1998 10977 million june 30 1997 increase included 619 million cash generated fiscal 1998 well additional investments merchandise inventories trade receivables 4593 million 1540 million respectively offsetting increases working capital increase accounts payable 4864 million increases merchandise inventories reflect higher level business volume pharmaceutical distribution activities especially fourth quarter fiscal 1998 distribution revenue grew 31 period prior year increase trade receivables consistent companys revenue growth see operating revenue change accounts payable due timing inventory purchases related payments july 13 1998 company issued 150 million 625 notes due 2008 proceeds used working capital needs due growth companys business part acquisition scherer august 7 1998 company assumed approximately 212 million longterm debt company currently capacity issue 250 million additional longterm debt pursuant shelf debt registration statement filed securities exchange commission see note 5 notes consolidated financial statements company extinguished 100 million longterm debt fiscal 1997 property equipment cost increased 71 million fiscal 1998 increase property equipment included additional investments management information systems customer support systems company several operating lease agreements construction new facilities see discussion note 9 notes consolidated financial statements shareholders equity increased 16252 million june 30 1998 13347 million june 30 1997 primarily due net earnings 2471 million investment 500 million employees company various stock incentive plans company lineofcredit agreements various bank sources aggregating 503 million 95 million represented committed lineofcredit agreements balance uncommitted company 239 million outstanding lines june 30 1998 company believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see subsequent business combinations may 17 1998 company announced entered definitive merger agreement scherer merger transaction completed august 7 1998 accounted poolingofinterests financial reporting purposes merger company issued approximately 228 million common shares scherer stockholders scherers outstanding stock options converted options purchase approximately 24 million common shares company assumed approximately 212 million longterm debt part acquisition scherer company expects record mergerrelated charge reflect transaction costs incurred result scherer merger first quarter fiscal 1999 additional mergerrelated costs associated integrating separate companies instituting efficiencies charged expense subsequent periods incurred total amount mergerrelated charges recognized connection scherer merger estimated 35 40 million tax see note 16 notes consolidated financial statements terminated merger august 24 1997 company bergen announced entered definitive merger agreement subsequently amended parties march 16 1998 pursuant wholly owned subsidiary company would merged bergen merger agreement subsequently approved companies shareholders february 20 1998 march 9 1998 ftc filed complaint united states district court district columbia seeking preliminary injunction halt proposed merger july 31 1998 district court granted ftcs request injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement termination gave rise obligation company reimburse bergen 7 million transaction costs additionally termination bergen merger agreement cause costs incurred company would deductible proposed merger consummated become tax deductible resulting tax benefit 122 million obligation reimburse bergen additional tax benefit reflected consolidated financial statements fourth quarter fiscal year ended june 30 1998 see notes 2 17 notes consolidated financial statements year 2000 project company utilizes computer technologies throughout business effectively carry daytoday operations computer technologies include information technology form hardware software well embedded technology companys facilities equipment similar companies company must determine whether systems capable recognizing processing date sensitive information properly year 2000 approaches company utilizing multiphased concurrent approach address issue phases included companys approach awareness assessment remediation validation implementation phases company completed awareness phase project furthermore company nearly completed assessment phase well remediation phase company actively correcting replacing systems year 2000 ready order ensure companys ability continue meet internal needs suppliers customers company currently intends substantially complete remediation validation implementation phases year 2000 project prior june 30 1999 process includes testing critical systems ensure year 2000 readiness accomplished company currently believes able modify replace mitigate affected systems time avoid material detrimental impact operations company determines may unable remediate properly test affected systems timely basis company intends develop appropriate contingency plans missioncritical systems time determination made company presently aware significant exposure systems properly remediated timely basis assurances year 2000 remediation processes completed properly tested year 2000 contingency plans sufficiently mitigate risk year 2000 readiness problem interruption companys ability conduct business due year 2000 readiness problem could material adverse effect company estimates aggregate costs year 2000 project approximately 20 million including costs already incurred significant portion costs likely incremental costs rather represent redeployment existing resources reallocation resources expected significant impact daytoday operations company total costs approximately 5 million incurred company project fiscal 1998 approximately 14 million represented incremental expense anticipated impact costs project well date company expects complete project based managements best estimates using information currently available numerous assumptions future events however guarantee estimates achieved actual results could differ materially plans based current estimates information currently available company anticipate costs associated project material adverse effect companys consolidated financial position results operations cash flows future periods company initiated formal communications significant suppliers customers critical business partners determine extent company may vulnerable event parties fail properly remediate year 2000 issues company taken steps monitor progress made parties intends test critical system interfaces year 2000 approaches company develop appropriate contingency plans event significant exposure identified relative dependencies thirdparty systems company presently aware significant exposure guarantee systems thirdparties company relies converted timely manner failure properly convert another company would material adverse effect company currently evaluating year 2000 readiness scherer companys newest subsidiary acquired august 7 1998 discussion reflect impact scherer recently issued financial accounting standards june 1997 financial accounting standards board fasb issued statement financial accounting standards 130 sfas 130 reporting comprehensive income require adoption later companys fiscal quarter ending september 30 1998 new statement defines comprehensive income changes equity period exception stock issuances dividends new pronouncement establishes standards reporting display comprehensive income components financial statements june 1997 fasb also issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information require adoption later fiscal 1999 sfas 131 requires companies define report financial descriptive information operating segments also establishes standards related disclosures products services geographic areas major customers june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities require adoption later companys fiscal quarter ending september 30 1999 new statement requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value march 1998 american institute certified public accountants aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use require adoption later beginning companys fiscal year ending june 30 1999 new statement provides guidance accounting costs computer software developed obtained internal use adoption statements expected material impact companys consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations pci services inc pci october 11 1996 owen healthcare inc owen march 18 1997 mediqual systems inc mediqual february 18 1998 rp scherer corporation scherer august 7 1998 allegiance corporation allegiance february 3 1999 may 21 1999 company completed merger transaction pacific surgical innovations inc psi impact merger transaction psi historical basis significant accordingly prior period financial statements restated merger transaction psi discussion analysis presented read conjunction consolidated financial statements related notes appearing elsewhere form 10k see information regarding forwardlooking statements general company operates within three operating business segments pharmaceutical distribution pharmaceutical services medicalsurgical products see note 13 notes consolidated financial statements description segments results operations operating revenue operating revenue fiscal 1999 increased 19 compared prior year due strong operating revenue growth three companys business segments majority overall operating revenue increase approximately 82 year ended june 30 1999 came existing customers form increased volume pharmaceutical price increases remainder growth came addition new customers pharmaceutical distribution segments operating revenue representing 69 total 1999 operating revenue including approximately 2974 million sold owen eliminated consolidation grew rate 25 fiscal year ended june 30 1999 primarily due strong sales pharmacy chain stores companys specialty distribution businesses pharmaceutical services segments operating revenue representing 10 total 1999 operating revenue grew rate 15 fiscal 1999 primarily strength companys pharmacy automation pharmaceuticalpackaging businesses companys pharmacy automation business continued see solid growth us hospital sector increased demand nonacute care customers pharmaceuticalpackaging business growth fiscal 1999 attributable mix new customers increase volume existing customers medicalsurgical products segments operating revenue representing 21 total 1999 operating revenue fiscal year 1999 grew 6 prior year primarily due strong sales selfmanufactured surgical products best value distributed supplies operating revenue fiscal 1998 increased 13 compared prior year primarily due strength pharmaceutical distribution services segments pharmaceutical distribution segments representing 66 total 1998 operating revenue operating revenue including approximately 196 million sold owen eliminated consolidation grew rate 19 fiscal year ended june 30 1998 pharmaceutical services segments representing 10 total 1998 operating revenue operating revenue grew rate 16 fiscal year ended june 30 1998 primarily strength companys pharmacy automation pharmacy management businesses medicalsurgical products segments operating revenue representing 24 total 1998 operating revenue fiscal year 1998 grew 2 prior year majority overall operating revenue increase approximately 80 year ended june 30 1998 came existing customers form increased volume pharmaceutical prices remainder growth came addition new customers bulk deliveries customer warehouses company reports revenue bulk deliveries made customers warehouses whereby company acts intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances beyond control company including consolidation within customers industries decisions customers either begin discontinue warehousing activities changes policies manufacturers related selling directly customers due lack margin generated bulk deliveries fluctuations amount significant impact companys earnings gross margin fiscal 1999 1998 overall gross margin percentage operating revenue 1203 1233 respectively pharmaceutical distribution segments gross margin percentage operating revenue decreased 558 fiscal 1998 529 fiscal 1999 decrease primarily due impact lower selling margins result highly competitive market greater mix high volume customers lower cost distribution better asset management enable company offer lower selling margins customers pharmaceutical services segments gross margin percentage operating revenue 3350 3270 fiscal 1999 1998 respectively operating revenue growth pharmaceutical services segment greater relatively higher margin pharmacy automation pharmaceuticalpackaging businesses lower margin pharmacy management business medicalsurgical products segments gross margin percentage operating revenue 2329 fiscal 1999 compared 2162 fiscal 1998 increase primarily result improvements companys product mix including growth selfmanufactured product sales domestic international markets well impact manufacturing cost efficiencies fiscal 1998 1997 gross margin percentage operating revenue 1233 1268 respectively pharmaceutical distribution segments gross margin percentage operating revenue decreased 582 fiscal 1997 558 fiscal 1998 decrease primarily due impact lower selling margins result highly competitive market greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers pharmaceutical services segments gross margin percentage operating revenue 3270 3288 fiscal 1998 1997 respectively operating revenue growth greater relatively lower margin pharmacy management pharmaceuticalpackaging businesses higher margin pharmacy franchising business medicalsurgical products segments gross margin percentage operating revenue 2162 fiscal 1998 compared 2099 fiscal 1997 increase primarily result improvements companys product mix including growth manufactured product sales domestic international markets well impact manufacturing cost efficiencies selling general administrative expenses selling general administrative expenses percentage operating revenue declined 728 fiscal 1999 compared 772 fiscal 1998 improvements fiscal 1999 reflect economies associated companys revenue growth addition significant productivity gains resulting continued cost control efforts three segments continuation consolidation selective automation operating facilities pharmaceutical distribution pharmaceutical services segments pharmaceutical distribution pharmaceutical services segments selling general administrative expenses percentage operating revenue 263 1680 fiscal 1999 respectively compared 294 1690 fiscal 1998 respectively offsetting improvements increase selling general administrative expenses percentage operating revenue medicalsurgical products segment increased 1607 fiscal 1998 1686 fiscal 1999 increase primarily due acquisitions businesses higher selling general administrative rate medicalsurgical products segments normal rate fiscal 1999 acquisitions accounted purchase method accounting historical financial statements restated 13 growth selling general administrative expenses experienced fiscal year 1999 compared fiscal 1998 due primarily increases personnel costs depreciation expense compares favorably 19 growth operating revenue fiscal 1999 selling general administrative expenses percentage operating revenue improved 772 fiscal 1998 compared 819 fiscal 1997 improvements fiscal 1998 reflect economies associated companys revenue growth well significant productivity gains resulting continued cost control efforts consolidation selective automation operating facilities 7 growth selling general administrative expenses experienced fiscal year 1998 compared fiscal 1997 due primarily increases personnel costs depreciation expense compares favorably 13 growth operating revenues fiscal 1998 special charges mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred fiscal 1999 mergerrelated costs totaling 1466 million 1176 million net tax recorded amount approximately 954 million related transaction employeerelated costs 361 million related business restructuring asset impairment costs associated companys merger transactions scherer allegiance part business restructuring company currently closing certain facilities company incurred employeerelated asset impairment costs well exit costs related termination contracts lease agreements addition company recorded costs 40 million related write impaired inventory related previous merger 11 million related severance costs restructuring associated change management resulted merger transaction owen company also recorded costs 137 million related integrating operations companies previously engaged merger transactions company partially offsetting charge recorded 37 million credit adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation bergen see note 17 notes consolidated financial statements adjustment relates primarily services provided third parties engaged company connection terminated bergen transaction cost services estimated recorded prior periods services performed actual billings less estimate originally recorded resulting reduction current period mergerrelated costs fiscal 1998 company recorded mergerrelated charges associated transaction costs incurred connection mediqual merger transaction 23 million connection proposed merger transaction bergen 334 million terminated subsequent yearend see note 17 notes consolidated financial statements additional costs related asset impairments 38 million integrating operations companies previously merged company 96 million incurred recorded fiscal 1998 fiscal 1997 company recorded mergerrelated charges associated pci owen merger transactions 462 million additional integration costs related pyxis medicine shoppe mergers 47 million see discussion note 2 notes consolidated financial statements company classifies costs associated merger transaction mergerrelated costs noted amounts presented may comparable similarly titled amounts reported companies special charges fiscal 1998 company recorded special charge 86 million related rationalization pharmaceutical distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection settlement labor dispute former employees companys boston pharmaceutical distribution facility resulting termination union relationship fiscal 1998 scherer along joint venture partner converted legal ownership structure scherers 51 owned subsidiary germany corporation partnership result change tax status companys tax basis german subsidiary adjusted resulting onetime tax refund approximately 46 million well reduction cash taxes paid current future years combined factors reduced fiscal 1998 income tax expense 117 million following summary special charges incurred company last three fiscal years effects mergerrelated costs special charges included reported net earnings 4563 million fiscal 1999 4251 million fiscal 1998 3348 million fiscal 1997 reported diluted earnings per common share 164 fiscal 1999 153 fiscal 1998 123 fiscal 1997 company estimates incur additional mergerrelated costs associated various merger transactions completed date totaling approximately 1000 million 612 million net tax future periods order properly integrate operations portion represents facility rationalizations implement efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred asset impairments fiscal 1997 include writeoff patent 74 million writedown certain operating assets 32 million related meditrol inc meditrol subsidiary acquired company owen merger transaction result managements decision merge operations meditrol pyxis phaseout production separate meditrol product line companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion service areas complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher margins percentage operating revenue pharmaceutical distribution healthcare industry continues change company constantly evaluating merger acquisition candidates pharmaceutical distribution well related sectors healthcare industry would expand role service provider however assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated company would incur additional mergerrelated costs interest expense increase interest expense 49 million fiscal 1999 compared fiscal 1998 primarily due companys issuance 150 million 625 notes due 2008 public offering july 1998 see liquidity capital resources effect issuance 625 notes fiscal 1999 partially offset decrease debt instruments higher interest rates 127 million decrease interest expense fiscal 1998 compared fiscal 1997 primarily due paydown companys 100 million 8 notes march 1 1997 reduction overall interest rate total debt outstanding fiscal 1998 compared fiscal 1997 provision income taxes companys provision income taxes relative pretax earnings 399 356 380 fiscal years 1999 1998 1997 respectively fluctuation tax rate primarily due impact recording certain nondeductible mergerrelated costs various periods well fluctuating state foreign effective tax rates result companys business mix three fiscal years also change tax status 51 owned german subsidiary resulted lower tax provision fiscal 1998 liquidity capital resources working capital increased 22 billion june 30 1999 21 billion june 30 1998 increase resulted additional investments inventories trade receivables 3233 million 1540 million respectively offsetting increases working capital increase accounts payable 2181 million decrease cash 2081 million increases inventories reflect higher level business volume pharmaceutical distribution activities especially fourth quarter fiscal 1999 distribution revenue grew 21 period prior year increase trade receivables consistent companys revenue growth see operating revenue change accounts payable cash due primarily timing inventory purchases related payments july 13 1998 company issued 150 million 625 notes due 2008 proceeds used working capital needs due growth companys business company currently capacity issue 250 million additional debt securities pursuant shelf registration statement filed securities exchange commission see note 5 notes consolidated financial statements property equipment cost increased 1466 million june 30 1999 compared june 30 1998 increase primarily due ongoing plant expansion manufacturing equipment purchases additional investments made management information systems upgrades distribution facilities company several operating lease agreements construction new facilities see discussion note 9 notes consolidated financial statements shareholders equity increased 35 billion june 30 1999 30 billion june 30 1998 primarily due net earnings 4563 million investment 1316 million employees company various stock incentive plans offset retirement 401 million allegiance treasury shares company lineofcredit agreements various bank sources aggregating 1758 million company 286 million outstanding lines june 30 1999 addition company commercial paper program providing issuance 750 million aggregate maturity value commercial paper company 492 million outstanding program june 30 1999 company unsecured bank credit facility provides aggregate 10 billion borrowings 1500 million part multicurrency allocation 2500 million represents 364day facility june 30 1999 807 million borrowings outstanding multicurrency allocation portion facility company believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see notes 1 6 consolidated financial statements information regarding use financial instruments derivatives thereof including foreign currency hedging instruments matter policy company engage speculative transactions involving derivative financial instruments pending business combinations august 5 1999 company announced entered definitive merger agreement automatic liquid packaging inc alp pursuant alp become wholly owned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes merger expected completed first quarter fiscal 2000 subject satisfaction certain conditions including regulatory clearances july 12 1999 company completed purchase medsurg industries inc 318 million acquisition accounted purchase termination agreement august 24 1997 company bergen announced entered definitive merger agreement amended pursuant wholly owned subsidiary company would merged bergen merger agreement july 31 1998 united states district court district columbia granted federal trade commissions request preliminary injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement company reimbursed bergen 70 million transaction costs additionally termination bergen merger agreement caused costs incurred company would deductible merger consummated become tax deductible federal income tax purposes resulting tax benefit 122 million obligation reimburse bergen additional tax benefit recorded fourth quarter fiscal year ended june 30 1998 see note 17 notes consolidated financial statements year 2000 project company utilizes computer technologies businesses effectively carry daytoday operations computer technologies include information technology form hardware software well embedded technology companys facilities equipment similar companies company must determine whether systems capable recognizing processing date sensitive information properly year 2000 company utilizing multiphased concurrent approach address issue first two project segments mitigation validation included specific awareness assessment remediation validation implementation phases company substantially completed phases project segment company corrected replaced mitigated retired vast majority business critical systems year 2000 ready order ensure companys ability continue meet internal needs suppliers customers company expects allremaining mitigation validation issues fully completed september 30 1999 process includes multiple testing critical systems ensure year 2000 readiness accomplished second project segment business protection also includes several phases business dependency risk assessment contingency planning situation management planning company made significant substantial progress segment expects substantially complete business dependency risk assessment phase august 31 1999 remaining two phases september 30 1999 company currently believes able modify replace mitigate affected systems time avoid material detrimental impact operations company determines unable remediate properly test affected systems timely basis company intends develop appropriate contingency plans missioncritical systems time determination made company presently aware significant probability systems properly remediated timely basis assurances year 2000 remediation processes completed properly tested year 2000 contingency plans sufficiently mitigate risk year 2000 readiness problem company estimates aggregate costs year 2000 project approximately 270 million including costs incurred date significant portions costs incremental costs rather represented redeployment existing resources reallocation resources expected significant impact daytoday operations company since initiation year 2000 project company estimates incurred costs approximately 200 million approximately 62 million represented incremental costs anticipated impact costs project well date company expects complete project based managements best estimates using information currently available numerous assumptions future events however guarantee estimates achieved actual results could differ materially plans based current estimates information currently available company anticipate costs associated project material adverse effect companys consolidated financial statements company formally communicated significant suppliers customers critical business partners determine extent company may vulnerable event parties fail properly remediate year 2000 issues company taken steps monitor progress made parties intends test critical system interfaces year 2000 approaches company process developing appropriate contingency plans event significant exposure identified relative dependencies thirdparty systems although company presently aware significant exposure guarantee systems third parties company relies company interfaces converted timely manner failure properly convert third party would material adverse effect company potential risks associated year 2000 issues include limited temporary disruption companys operations loss communication services loss utility services company believes reasonably likely worstcase year 2000 scenario would loss communication services could result problems receiving processing tracking billing customer orders problems receiving processing tracking orders placed suppliers problems banks financial institutions currently part companys normal business contingency planning plan developed business disruptions due natural disasters power failures company process enhancing contingency plans include provisions year 2000 issues although possible develop contingency plans potential disruption although company anticipates minimal business disruption occur result year 2000 issues based upon currently available information incomplete untimely resolution year 2000 issues either company significant suppliers customers critical business partners could material adverse impact companys consolidated financial statements euro conversion january 1 1999 certain member countries european union irrevocably fixed conversion rates national currencies common currency euro became legal currency date participating countries former national currencies continue exist denominations euro january 1 2002 company addressed business implications conversion euro including need adapt internal systems accommodate eurodenominated transactions competitive implications crossborder price transparency strategic implications company expect conversion euro material impact consolidated financial statements recently adopted financial accounting standards september 30 1998 company adopted retroactive basis statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 requires presentation comprehensive income components full set generalpurpose financial statements companys comprehensive income consists net earnings foreign currency translation adjustments june 30 1999 company adopted statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information sfas 131 requires companies define report financial descriptive information operating segments also establishes standards related disclosures products services geographic areas major customers see note 13 notes consolidated financial statements june 30 1999 company adopted statement financial accounting standards 132 sfas 132 employers disclosures pensions postretirement benefits sfas 132 revises employers disclosures pension postretirement benefit plans new statement change existing method expense recognition effect financial position net income result adopting sfas 132 see note 8 notes consolidated financial statements recently issued financial accounting standards june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities new statement requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value amended statement financial accounting standards 137 sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 provisions sfas 133 require adoption later beginning companys fiscal year ending june 30 2001 march 1998 american institute certified public accountants aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use require adoption later beginning companys fiscal year ending june 30 2000 new statement provides guidance accounting costs computer software developed obtained internal use adoption statements expected material impact companys consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations mediqual systems inc mediqual february 18 1998 rp scherer corporation scherer august 7 1998 allegiance corporation allegiance february 3 1999 pacific surgical innovations inc psi may 21 1999 automatic liquid packaging inc alp september 10 1999 discussion analysis presented read conjunction consolidated financial statements related notes appearing elsewhere form 10k see information regarding forwardlooking statements general company operates within four operating business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation informa tion services see note 12 notes consolidated financial statements description segments discussion companys change operating segments results operations operating revenue 1 growth rate applies respective fiscal year compared prior fiscal year majority companys overall operating revenue increase 17 came existing customers form increased volume pharmaceutical price increases remainder growth came addition new customers result cross selling opportunities amongst various businesses pharmaceutical distribution provider services segments operating revenue growth 2000 1999 primarily due strong sales pharmacy chain stores companys specialty distribution businesses operating revenue growth segment internal addition several new contracts involving multiple operating segments boosted revenues offsetting growth 2000 impact pharmacy management business continuing exit unprofitable accounts initiative began late fiscal 1999 increase medicalsurgical products services segments operating revenue 2000 due increase sales across virtually product lines addition revenue growth enhanced increase international demand fiscal 1999 increase operating revenues segment 1999 due strong sales selfmanufactured products higher margin distributed products growth pharmaceutical technologies services segment 2000 1999 primarily result strong sales volume pharmaceuticalpackaging liquid fill contract manufacturing businesses within segment pharmaceutical packaging business growth attributable mix new customers increased volume existing customers liquid fill contract manufacturing business revenue growth result increased volume increase drug delivery system business sales volume north america health nutrition market also contributed revenue growth fiscal 2000 addition crossselling opportunities amongst businesses within segment contributed increase operating revenues slight decrease operating revenues automation information services segment fiscal 2000 compared 1999 primarily due timing customers purchases related year 2000 fiscal 1999 operating revenue growth result general increases customer demand well customers purchasing products early anticipation year 2000 segment continues strong demand new pharmacy automation products domestic hospital sector nonacute care customers bulk deliveries customer warehouses company reports revenue bulk deliveries made customers warehouses whereby company acts intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances beyond control company including consolidation within customers industries decisions customers either begin discontinue warehousing activities changes policies manufacturers related selling directly customers due lack margin generated bulk deliveries fluctuations amount significant impact companys earnings gross margin overall decrease gross margin 2000 1999 due primarily greater mix lower margin pharmaceutical distribution 2000 1999 compared prior years pharmaceutical distribution provider services segment represented 75 2000 operating revenues 72 69 1999 1998 operating revenues respectively decrease gross margin pharmaceutical distribution provider services segment 2000 1999 primarily due impact lower selling margins result highly competitive market greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers offsetting decrease increase vendor incentives positive impact related rationalization program pharmacy management business see discussion operating revenues decrease medicalsurgical products services segments gross margin 2000 due increased pricing pressures certain selfmanufactured product lines including exam glove business well slight shift revenue growth towards lower margin distributed products 1999 improvement segments gross margin primarily result improvements segments product mix including growth selfmanufactured products sales domestic international markets well impact manufacturing cost efficiencies pharmaceutical technologies services segments gross margin increase 2000 result revenue growth higher margin liquid fill contract manufacturing drug delivery system businesses drug delivery system business shift higher margin pharmaceutical products lower margin health nutrition products also contributed improvement gross margin decrease gross margin 1999 result business mix within segment automation information services segments gross margin increase 2000 mainly result price increases year product mix 1999 automation information services segment experienced slight decrease gross margin mainly due product mix selling general administrative expenses decline selling general administrative expenses percentage operating revenue fiscal years 2000 1999 reflects economies associated companys revenue growth addition significant productivity gains resulting continued cost control efforts segments continuation consolidation selective automation operating facilities pharmaceutical distribution provider services pharmaceutical technologies services segments offsetting improvements noted increase selling general administrative expenses percentage operating revenue automation information services segment fiscal year 2000 primarily resulting slight decrease operating revenue fiscal 1999 fiscal 2000 addition medicalsurgical products services segments selling general administrative expenses percentage operating revenues increased fiscal year 1999 compared fiscal year 1998 increase primarily due acquisition businesses fiscal 1999 accounted purchase method accounting historical financial statements restated acquisitions acquired businesses higher selling general administrative expense rate medicalsurgical products services segments normal rate resulting increase fiscal 1999 compared 1998 3 13 overall growth selling general administrative expenses experienced fiscal years 2000 1999 respectively due primarily increases personnel costs depreciation expense compares favorably 17 19 growth operating revenue periods special charges following summary special charges fiscal years ended june 30 2000 1999 1998 mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger transactions alp allegiance scherer fiscal years presented table herein company incurred direct transaction costs related merger transactions expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition company incurred employeerelated costs consist primarily severance transactionstay bonuses result alp allegiance scherer merger transactions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billings employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs exit costs relate primarily costs associated lease terminations moving expenses direct result merger transactions alp allegiance scherer integration costs include charges related integrating operations previous merger transactions company recorded charges 96 million 267 million fiscal years ended june 30 2000 1999 respectively associated business restructuring result companys merger transaction scherer part business restructuring company closing certain facilities connection closings company incurred employeerelated costs asset impairment charges exit costs related termination contracts lease agreements charges 40 million related writedown impaired inventory associated merger transaction owen healthcare inc owen recorded fiscal year ended june 30 1999 also fiscal 1999 company recorded 11 million related severance costs restructuring associated change management resulted merger transaction owen partially offsetting total mergerrelated charges fiscal 1999 credit recorded adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation bergen see note 15 notes consolidated financial statements actual billings services provided third parties engaged company less estimate resulting reduction mergerrelated costs special charges fiscal 1998 company recorded special charge 86 million related rationalization pharmaceutical distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection settlement labor dispute former employees companys boston pharmaceutical distribution facility resulting termination union relationship fiscal 1998 scherer along joint venture partner converted legal ownership structure scherers 51 owned subsidiary germany corporation partnership result change tax status companys tax basis german subsidiary adjusted resulting onetime tax refund approximately 46 million well reduction cash taxes paid current future years combined factors reduced fiscal 1998 income tax expense 117 million pro forma impact since april 1998 alp organized scorporation tax purposes accordingly alp subject federal income tax april 1998 date merger transaction fiscal years ended 1999 1998 net earnings would reduced 93 million 46 million respectively alp subject federal income taxes effects mergerrelated costs special charges recorded well pro forma adjustments related alp tax treatment reduce net earnings 498 million 6797 million fiscal 2000 1083 million 4810 million fiscal 1999 195 million 4485 million fiscal 1998 effect charges reduced reported diluted earnings per common share 018 239 fiscal 2000 038 168 fiscal 1999 006 158 fiscal 1998 company estimates incur additional mergerrelated costs associated various merger transactions completed date totaling approximately 694 million 451 million net tax future periods order properly integrate operations portion represents facility rationalizations implement efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion service areas complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher margins percentage operating revenue pharmaceutical distribution healthcare industry continues change company continually evaluates possible candidates merger acquisition intends continue seek opportunities expand healthcare operations services reporting segments assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated company would incur additional mergerrelated costs interest expense increase interest expense 30 million fiscal 2000 compared fiscal 1999 attributable combination higher average interest rates debt higher average levels borrowing fiscal 2000 additional borrowings used fund working capital needs well companys stock buyback program fiscal 2000 see note 9 notes consolidated financial statements increase interest expense 53 million fiscal 1999 compared fiscal 1998 primarily due companys issuance 150 million 625 notes due 2008 public offering july 1998 see liquidity capital resources effect issuance 625 notes fiscal 1999 partially offset decrease debt instruments higher interest rates provision income taxes provisions income taxes relative pretax earnings 37 pretax earnings fiscal 2000 compared 39 fiscal 1999 35 fiscal 1998 fluctuation tax rate primarily due impact recording certain nondeductible mergerrelated costs various periods change alp tax status well fluctuating state foreign effective tax rates result companys business mix three fiscal years addition change tax status 51 owned german subsidiary resulted lower tax provision fiscal 1998 provisions income taxes excluding impact mergerrelated charges tax status german subsidiary including pro forma impact change alp tax status 36 37 38 fiscal years 2000 1999 1998 respectively liquidity capital resources working capital increased 26 billion june 30 2000 23 billion june 30 1999 increase resulted additional investments inventories trade receivables cash equivalents 9253 million 749 million 3192 million respectively offsetting increases current assets increase accounts payable accrued liabilities 6670 million 6410 million respectively increases inventories reflect higher level business volume pharmaceutical distribution provider services activities especially fourth quarter fiscal 2000 operating revenue segment grew 24 period prior year increase trade receivables slightly lower companys revenue growth see operating revenue due effective asset management resulting increase cash equivalents change accounts payable due primarily timing inventory purchases property equipment cost increased 1389 million june 30 1999 june 30 2000 increase primarily due ongoing plant expansion manufacturing equipment purchases certain manufacturing businesses well additional investments made management information systems upgrades distribution facilities company several operating lease agreements construction new facilities see discussion note 8 notes consolidated financial statements shareholders equity increased 40 billion 36 billion june 30 1999 primarily due net earnings 6797 million investment 1331 million employees company various stock incentive plans offset treasury share repurchases 3339 million dividends paid 280 million company commercial paper program providing issuance 10 billion aggregate maturity value commercial paper company 5092 million outstanding program june 30 2000 company also uncommitted shortterm credit facilities various bank sources aggregating 2500 million june 30 2000 542 million outstanding related shortterm credit facilities company unsecured bank credit facility provides aggregate 15 billion borrowings 750 million expires march 31 2001 750 million expires march 31 2004 expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remains unused june 30 2000 june 30 2000 commercial paper shortterm borrowings 5634 million reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings company also lineofcredit agreements various bank sources aggregating 493 million 191 million outstanding june 30 2000 see note 4 notes consolidated financial statements fiscal 1999 company issued 150 million 625 notes due 2008 proceeds used working capital needs due growth companys business company currently capacity issue 250 million additional debt securities pursuant shelf registration statement filed securities exchange commission company believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see notes 1 5 notes consolidated financial statements information regarding use financial instruments derivatives thereof including foreign currency hedging instruments matter policy company engage speculative transactions involving derivative financial instruments subsequent business combinations august 16 2000 company completed purchase bergen brunswig medical corporation approximately 180 million subject postclosing adjustments july 26 2000 company completed purchase manufacturing facility rights two proprietary topical drug delivery technologies advanced polymer systems inc 250 million closing contingent future payments totaling potentially additional 265 million july 19 2000 company completed purchase rexam healthcare packagings foldingcarton manufacturing operations guaynabo puerto rico 325 million subject postclosing adjustments three acquisitions accounted purchase transactions financial reporting purposes termination agreement august 24 1997 company bergen announced entered definitive merger agreement amended pursuant wholly owned subsidiary company would merged bergen merger agreement july 31 1998 united states district court district columbia granted federal trade commissions request preliminary injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement company reimbursed bergen 70 million transaction costs additionally termination bergen merger agreement caused costs incurred company would deductible merger consummated become tax deductible federal income tax purposes resulting tax benefit 122 million obligation reimburse bergen additional tax benefit recorded fourth quarter fiscal year ended june 30 1998 recently adopted financial accounting standards july 1 1999 company adopted statement position 981 sop 981 accounting costs computer software developed obtained internal use sop 981 provides guidance accounting costs computer software developed obtained internal use adoption statement material impact companys consolidated financial statements recently issued financial accounting standards june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities amended june 2000 statement financial accounting standards 138 sfas 138 accounting certain derivative instruments certain hedging activities requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value amended statement financial accounting standards 137 sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 provisions sfas 133 require adoption later beginning companys fiscal year ending june 30 2001 adoption sfas 133 amended sfas 138 expected material impact companys consolidated financial statements december 3 1999 sec issued staff accounting bulletin 101 sab 101 revenue recognition financial statements requires adoption fourth quarter fiscal 2001 time company anticipate adoption sab 101 material impact consolidated financial statements company continue analyze impact sab 101 including amendments interpretation based upon relevant facts circumstances time adoption item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations scherer august 7 1998 allegiance february 3 1999 psi may 21 1999 alp september 10 1999 bindley february 14 2001 discussion analysis presented refer read conjunction consolidated financial statements related notes appearing elsewhere form 10k portions managements discussion analysis presented include forwardlooking statements within meaning private securities litigation reform act 1995 words believe expect anticipate project similar expressions among others identify forwardlooking statements speak date statement made forwardlooking statements subject risks uncertainties factors could cause actual results materially differ projected anticipated implied significant risks uncertainties factors described form 10k exhibit 9901 form 10k except limited extent required applicable law company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise general company operates within four operating business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services see note 12 notes consolidated financial statements description segments results operations operating revenue 1 growth rate applies respective fiscal year compared prior fiscal year total operating revenue increased 28 fiscal 2001 compared fiscal 2000 increase operating revenue resulted higher sales volume existing customers pharmaceutical price increases acquisitions addition new customers result crossselling opportunities among various businesses discussion acquisitions see note 2 notes consolidated financial statements increase operating revenue 18 fiscal 2000 fiscal 1999 resulted higher sales volume existing customers pharmaceutical price increases addition new customers result crossselling opportunities among various businesses pharmaceutical distribution provider services segments operating revenue growth fiscal 2001 resulted strong sales customer segments especially chain pharmacies increase sales volume existing customers addition new contracts increase segments operating revenue fiscal 2000 resulted strong sales chain pharmacies strong sales within segments specialty distribution businesses addition several new contracts involving multiple operating business segments offsetting growth fiscal 2000 impact pharmacy management business continuing exit unprofitable accounts initiative began late fiscal 1999 medicalsurgical products services segments operating revenue growth fiscal 2001 primarily reflects increase sales distributed products company acquired bergen brunswig medical corporation bbmc first quarter fiscal 2001 accounted acquisition purchase transaction prior year revenues segment restated inclusion bbmc revenues fiscal 2001 significantly increased revenues prior year distributed products increase segments operating revenue fiscal 2000 resulted increase sales across virtually product lines increase international demand fiscal 1999 pharmaceutical technologies services segments growth fiscal 2001 resulted higher sales volume particularly involving zydisr rapiddissolving drugdelivery technology sterileliquid pharmaceutical products slowing sales protease inhibitor health nutritional product lines partially offset growth segment increase segments operating revenue fiscal 2000 primarily result strong sales volume pharmaceuticalpackaging business liquidfill contract manufacturing business drug delivery system business north america within health nutrition market cross selling opportunities among businesses within segment contributed overall growth automation information services segments operating revenue growth fiscal 2001 primarily reflects sales new products medstationr sn introduced late fiscal 2000 penetration market existing automation products slight decrease segments operating revenue growth fiscal 2000 primarily due timing customers purchases related year 2000 date change bulk deliveries customer warehouses company reports bulk deliveries made customers warehouses revenue sales involve company acting intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances company cannot control including consolidation within customers industries decisions customers either begin discontinue warehousing activities changes policies manufacturers related selling directly customers due lack margin generated bulk deliveries fluctuations amount significant impact companys earnings overall gross margin percentage operating revenue decreased fiscal 2001 fiscal 2000 decrease resulted greater mix lower margin pharmaceutical distribution operating revenues fiscal 2001 fiscal 2000 compared prior years pharmaceutical distribution provider services segment represented 81 operating revenues fiscal 2001 79 76 operating revenues fiscal 2000 fiscal 1999 respectively decline margins medicalsurgical products services automation information services segments also contributed overall decline companys gross margin fiscal 2001 gross margin percentage operating revenue pharmaceutical distribution provider services segment decreased fiscal 2001 fiscal 2000 primarily due impact lower selling margins decline selling margins attributed highly competitive market greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers decrease partially offset higher vendor margins favorable price increases manufacturer marketing programs gross margin percentage operating revenue medicalsurgical products services segment decreased fiscal 2001 primarily due acquisition bbmc acquisition shifted product mix toward lower margin distributed products fiscal 2000 increased pricing pressures certain selfmanufactured product lines including exam glove business well slight shift revenue growth towards lower margin distributed products contributed decrease gross margin segment gross margin percentage operating revenue pharmaceutical technologies services segment increased fiscal 2001 fiscal 2000 due increase sales volume higher margin liquid fill contract manufacturing drug delivery system businesses drug delivery system business shift higher margin pharmaceutical products lower margin health nutrition products also contributed improvement gross margin gross margin percentage operating revenue automation information services segment decreased fiscal 2001 primarily due changes product mix price increases year changes product mix increased segments gross margin percentage revenue fiscal 2000 selling general administrative expenses percentage operating revenue declined fiscal years 2001 2000 decline reflects economies associated companys revenue growth significant productivity gains resulting continued cost control efforts segments continuation consolidation selective automation operating facilities contributed improvement addition company continuing take advantage synergies recent acquisitions decrease selling general administrative expenses percentage operating revenue partially offsetting improvement fiscal 2001 increase selling general administrative expenses percentage operating revenue pharmaceutical technologies services segment change primarily result surplus capacity health nutritional manufacturing facilities segment see discussion operating revenue section partially offsetting improvements fiscal 2000 increase selling general administrative expenses percentage operating revenue automation information services segment change primarily result slight decrease segments operating revenue fiscal 1999 fiscal 2000 selling general administrative expenses grew 14 3 fiscal years 2001 2000 respectively increases primarily attributed increases personnel costs depreciation expense overall increase compares favorably 28 18 growth operating revenue periods special charges following summary special charges fiscal years ended june 30 2001 2000 1999 mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger transactions bindley alp allegiance scherer fiscal years presented preceding table company incurred direct transaction costs related merger transactions expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition company incurred employeerelated costs consist primarily severance transactionstay bonuses result bindley alp allegiance scherer merger transactions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billing employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs company recorded charge 158 million fiscal 2001 associated companys plans consolidate distribution centers result companys merger transaction bindley connection consolidations company incurred employeerelated costs exit costs related termination contracts lease agreements year exit costs relate primarily costs associated lease terminations moving expenses direct result merger transactions alp allegiance scherer company recorded charges 16 million 96 million 267 million fiscal years 2001 2000 1999 respectively charges business restructuring costs relating companys merger transaction scherer part business restructuring company closed certain facilities connection closings company incurred employeerelated costs asset impairment charges exit costs related termination contracts lease agreements company recorded charges 40 million fiscal 1999 charge related writedown impaired inventory associated merger transaction owen also fiscal 1999 company recorded charges 11 million related severance costs restructuring associated change management resulted merger transaction owen partially offsetting total mergerrelated charges fiscal 1999 credit recorded adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation also actual amount billed services provided third parties engaged company less estimate resulting reduction mergerrelated costs integration costs include charges related integration operations previous merger transactions primarily merger transactions bindley alp allegiance special charges fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount related employee severance costs addition fiscal 2001 company recorded special charge 68 million related rationalization certain health nutritional manufacturing facilities approximately 22 million related lease exit costs remaining amount related employee severance costs fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated fiscal 1999 bindley recorded special charge 188 million approximately 110 million related noncash charge acceleration amortization compensation related restricted stock grants connection spinoff priority healthcare corporation priority see note 1 notes consolidated financial statements approximately 70 million related writeoff goodwill acquisition prior 1996 remaining 08 million represented legal settlement pro forma impact since april 1998 alp organized scorporation tax purposes accordingly alp subject federal income tax april 1998 date merger transaction fiscal 1999 net earnings would reduced 93 million alp subject federal income taxes summary fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share fiscal 2000 net effect various special charges reduced reported net earnings 498 million 7178 million reduced reported diluted earnings per common share 011 per share 160 per share net tax effect various special charges recorded pro forma adjustments related alp taxes fiscal 1999 reduce reported net earnings 1223 million 4993 million reduce reported diluted earnings per common share 027 per share 112 per share certain mergerrelated costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed incurred company estimates incur additional mergerrelated costs associated various merger transactions completed date totaling approximately 1423 million 916 million net tax future periods additional discussion related companys merger transactions included note 2 notes consolidated financial statements company believes incur costs order properly integrate operations portion represents facility rationalizations implementing efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion service areas complement companys core pharmaceutical distribution business b provide opportunities company develop synergies thus strengthen acquired business c generally generate higher margins percentage operating revenue pharmaceutical distribution healthcare industry continues change company continually evaluates possible candidates merger acquisition intends continue seek opportunities expand role provider services healthcare industry reporting segments assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated company would incur additional mergerrelated costs interest expense increase interest expense 162 million fiscal 2001 compared fiscal 2000 result higher average levels borrowing year increase interest expense 58 million fiscal 2000 compared fiscal 1999 result combination higher average interest rates debt higher average levels borrowing fiscal 2000 additional borrowings used fund working capital needs well companys stock repurchase program fiscal 2000 see note 9 notes consolidated financial statements provision income taxes provisions income taxes relative pretax earnings 356 pretax earnings fiscal 2001 compared 371 fiscal 2000 392 fiscal 1999 fluctuation tax primarily due impact recording certain nondeductible mergerrelated costs various periods well fluctuating state foreign effective tax rates result companys business mix three fiscal years provisions income taxes excluding impact mergerrelated charges 353 364 370 fiscal years 2001 2000 1999 respectively liquidity capital resources working capital increased 41 billion june 30 2001 29 billion june 30 2000 increase resulted additional investments inventories effective asset management fiscal 2001 inventories increased 16 billion year reflects higher level business volume pharmaceutical distribution provider services activities timing inventory purchases primarily accounts change accounts payable 14 billion addition result effective asset management company reduced number days sales outstanding trade receivables resulting increase cash equivalents 3946 million also fiscal year company repaid approximately 3500 million shortterm borrowings related bindleys securitization facility contributing reduction shortterm borrowings 4058 million see discussion note 4 notes consolidated financial statements property equipment cost increased 2804 million june 30 2000 june 30 2001 increase primarily due ongoing plant expansion manufacturing equipment purchases certain manufacturing businesses well additional investments made management information systems upgrades distribution facilities company several operating lease agreements construction new facilities see discussion note 8 notes consolidated financial statements shareholders equity increased 54 billion june 30 2001 44 billion june 30 2000 increase primarily due net earnings 8574 million investment 3705 million employees company various stock incentive plans increase offset dividends paid 354 million increase treasury stock due settlement accelerated share repurchase program amount 1374 million see discussion note 9 notes consolidated financial statements february 2001 company issued approximately 08 million common shares received aggregate proceeds 477 million used general corporate purposes company operates commercial paper program june 30 2001 commercial paper program provided issuance 15 billion aggregate maturity value commercial paper company borrowings outstanding commercial paper program june 30 2001 company also uncommitted shortterm credit facilities various bank sources aggregating 1210 million june 30 2001 263 million outstanding related shortterm credit facilities company unsecured bank credit facility providing aggregate 15 billion borrowings 750 million expires march 28 2002 750 million expires march 31 2004 expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2001 june 30 2001 borrowings shortterm credit facility 263 million reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings company also lineofcredit agreements various bank sources aggregating 231 million 83 million outstanding june 30 2001 see note 4 notes consolidated financial statements bindley receivables securitization facility bindley receivables sale goods rendering services sold bindley western funding corporation bwfc see notes 1 4 notes consolidated financial statements bwfc entered third party agreement sell interests receivables 350 million fiscal 2001 company repaid outstanding borrowings terminated facility fiscal 2001 company entered agreement sell trade receivables special purpose accounts receivable financing entity spe exclusively engages purchasing trade receivables making loans company spe consolidated company issued 400 million preferred debt securities parties affiliated company preferred debt securities must retired redeemed company access spes receivables fiscal 2001 company issued approximately 08 million common shares received aggregate proceeds 477 million used general corporate purposes addition company issued 500 million 675 notes due 2011 proceeds debt issuance used early redemption bindley debt repayment portion companys commercial paper general corporate purposes including working capital expenditures repayment refinancing indebtedness acquisitions investments issuance company capacity issue approximately 10 billion additional equity debt securities pursuant shelf registration statements filed securities exchange commission fiscal quarter ended june 30 2001 company filed shelf registration statement form s4 increasing number shares available issuance connection future business combinations 150 million common shares company currently believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see notes 1 5 notes consolidated financial statements information regarding use financial instruments derivatives thereof including foreign currency hedging instruments matter policy company engage speculative transactions involving derivative financial instruments recent financial accounting standards june 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 company believe prospective adoption standard material impact consolidated financial statements sfas 142 changes accounting goodwill certain intangible assets amortization method impairment approach due adoption sfas 142 company amortize goodwill beginning fiscal 2002 goodwill amortization expense fiscal 2001 approximately 489 million company complete initial impairment assessment required sfas 142 december 31 2001 company anticipate assessment result material write fiscal 2002 september 2000 fasb issued sfas 140 accounting transfers servicing financial assets extinguishments liabilities effective activities occurring march 31 2001 sfas 140 replaces sfas 125 accounting transfers servicing financial assets extinguishment liabilities therefore revising disclosure securitizations transfers financial assets collateral adoption sfas 140 material impact companys consolidated financial statements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities amended june 2000 sfas 138 accounting certain derivative instruments certain hedging activities requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value provisions sfas 133 effective beginning companys fiscal year ended june 30 2001 adoption standard july 2000 material impact companys consolidated financial statements december 3 1999 sec issued staff accounting bulletin 101 sab 101 revenue recognition financial statements required adoption fourth quarter fiscal 2001 adoption sab 101 material impact consolidated financial statements july 2000 emerging issues task force eitf reached consensus issue 0010 accounting shipping handling fees costs addressing classification shipping handling revenue amount revenue received shipping handling immaterial periods presented additional disclosure related costs shipping handling provided note 1 notes consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combinations alp september 10 1999 bindley february 14 2001 discussion analysis presented refers read conjunction consolidated financial statements related notes appearing elsewhere form 10k portions managements discussion analysis presented include forwardlooking statements within meaning private securities litigation reform act 1995 words believe expect anticipate project similar expressions among others identify forwardlooking statements speak date statement made forwardlooking statements subject risks uncertainties factors could cause actual results materially differ projected anticipated implied significant risks uncertainties factors discussed item 1 form 10k heading risk factors may affect future results described exhibit 9901 form 10k except limited extent required applicable law company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise general company operates within four operating business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services see note 16 notes consolidated financial statements description segments results operations operating revenue 1 growth calculated change increase decrease operating revenue given year percentage operating revenue immediately preceding year total operating revenue increased 15 fiscal 2002 compared fiscal 2001 increase result higher sales volume across various customer segments strong sales selfmanufactured products pharmaceutical price increases averaging approximately 5 addition new products addition new customers result new corporate agreements healthcare providers total operating revenue increased 28 fiscal 2001 compared fiscal 2000 increase operating revenue resulted higher sales volume existing customers pharmaceutical price increases averaging approximately 4 acquisitions addition new customers result crossselling opportunities among various businesses discussion acquisitions see note 2 notes consolidated financial statements pharmaceutical distribution provider services segments operating revenue growth fiscal 2002 result strong sales customer segments especially retail pharmacy grocery chains alternate site customers yielded 20 growth well strong growth mail order government customers portion fiscal 2002 growth attributable pharmaceutical price increases addition new contracts increase segments operating revenue fiscal 2001 resulted strong sales customer segments especially chain pharmacies provided 44 growth increase sales volume existing customers pharmaceutical price increases addition new contracts medicalsurgical products services segments operating revenue growth fiscal 2002 result strong sales selfmanufactured products particularly sales surgical instruments custom kits surgical procedures well price increases sales distributed products several new longterm contracts signed within segments distribution business increase segments operating revenue fiscal 2001 primarily reflected increase sales distributed products company acquired bergen brunswig medical corporation bbmc first quarter fiscal 2001 accounted acquisition purchase transaction accounted purchase method accounting prior year revenues segment include bbmc revenues prior acquisition excluding bbmc revenues 2001 total operating revenues grew approximately 4 fiscal 2000 pharmaceutical technologies services segments operating revenue growth fiscal 2002 resulted higher sales volume particularly involving development analytical services pharmaceutical technologies proprietary packaging offerings products showed particular strength abbotts kaletrar aids product lillys zyprexar zydisr antipsychotic pharmacias detrolr la incontinence medication accelerating demand sterileliquid controlledrelease technologies addition acquisition sp pharmaceuticals significant contributor growth within pharmaceutical technologies business completion magellan acquisition fourth quarter fiscal 2002 contributed growth analytical services business excluding revenues sp pharmaceuticals magellan operating revenues grew approximately 6 fiscal 2001 additionally segment experienced growth pharmaceutical packaging business attributable addition several new customers increased volume existing customers increase segments operating revenue fiscal 2001 resulted higher sales volume particularly involving zydisr rapiddissolving drugdelivery technology sterileliquid pharmaceutical products slowing sales protease inhibitor health nutritional product lines partially offset growth segment fiscal years automation information services segments operating revenue growth fiscal 2002 primarily resulted strong sales patient safety supply management product lines medstation snr supplystationr system 30 significant sales new products including anesthesia system products within supplystation line also contributed segments growth increase segments operating revenue fiscal 2001 primarily reflected sales new products medstationr sn introduced late fiscal 2000 penetration market existing automation products bulk deliveries customer warehouses company reports bulk deliveries made customers warehouses revenue sales involve company acting intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances company cannot control including consolidation within customers industries decisions customers either begin discontinue warehousing activities changes policies manufacturers related selling directly customers addition loss customers due lack margin generated bulk deliveries fluctuations amount significant impact companys net earnings gross margin overall gross margin percentage operating revenue decreased fiscal 2002 fiscal 2001 decrease resulted greater mix lower margin pharmaceutical distribution operating revenues fiscal 2002 fiscal 2001 compared prior years pharmaceutical distribution provider services segment represented 82 operating revenues fiscal 2002 81 79 operating revenues fiscal 2001 fiscal 2000 respectively decline margins medicalsurgical products services automation information services segments also contributed overall decline companys gross margin gross margin percentage operating revenue pharmaceutical distribution provider services segment decreased fiscal 2002 decrease primarily due highly competitive market within pharmaceutical distribution industry greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers addition segments gross margin negatively impacted several nonrecurring items primarily related bindley integration company incurred onetime inventory adjustment related process closing rationalizing facilities addition integration operations bindley cardinal decreases partially offset higher vendor margins favorable price increases manufacturer marketing programs gross margin percentage operating revenue declined fiscal 2001 primarily due impact lower selling margins decline selling margins attributed highly competitive market greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers decrease partially offset higher vendor margins favorable price increases manufacturer marketing programs gross margin percentage operating revenue medicalsurgical products services segment decreased fiscal 2002 primarily due competitive pricing pressures distributed products decline partially offset manufacturing productivity improvements higher sales volume selfmanufactured products carry significantly higher gross margins portions segments business fiscal 2001 decline gross margin percentage operating revenue primarily due acquisition bbmc acquisition shifted product mix toward lower margin distributed products pharmaceutical technologies services segments gross margin percentage operating revenue increased fiscal 2002 increase primarily due larger mix higher margin pharmaceutical products versus health nutritional products well cost efficiencies due recent infrastructure investments manufacturing facilities increase partially offset impact certain items occurred fiscal 2001 recur fiscal 2002 namely revenues related use certain companys proprietary technology segments gross margin percentage operating revenue increased fiscal 2001 versus fiscal 2000 due increase sales volume higher margin liquid fill contract manufacturing drug delivery system businesses drug delivery system business shift higher margin pharmaceutical products lower margin health nutrition products also contributed improvement gross margin addition fiscal 2002 2001 company recognized pricing adjustments related minimum recovery expected received claims vitamin manufacturers amounts overcharged prior years see note 2 notes consolidated financial statements pricing adjustments recorded reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded amounts recorded pricing adjustments 120 million first quarter fiscal 2002 100 million second quarter fiscal 2001 gross margin percentage operating revenue automation information services segment decreased fiscal 2002 fiscal 2001 primarily due changes product mix result increased sales supplystation generates lower gross margin medication line products due relatively less complex nature product selling general administrative expenses 1 fiscal 2001 fiscal 2000 selling general administrative expenses percentage operating revenue include goodwill amortization selling general administrative expenses percentage operating revenue declined fiscal 2002 fiscal 2001 decline reflects economies scale associated companys revenue growth significant productivity gains resulting continued cost control efforts segments continuation consolidation selective automation operating facilities contributed improvement addition company continuing take advantage synergies recent acquisitions decrease selling general administrative expenses percentage operating revenue fiscal 2002 company ceased amortizing goodwill due adoption statement financial accounting standards sfas 142 goodwill intangible assets see notes 1 15 notes consolidated financial statements discussion also contributed improvement goodwill amortization expense fiscal 2001 approximately 489 million addition company realized productivity operating efficiencies result implementing changes pyxis better service customers partially offsetting improvement selling general administrative expenses fiscal 2001 increase expenses percentage operating revenue pharmaceutical technologies services segment change primarily result surplus capacity health nutritional manufacturing facilities segment selling general administrative expenses excluding goodwill amortization grew 6 14 fiscal years 2002 2001 respectively increase fiscal 2002 2001 attributed primarily increase personnel costs accounted approximately 4 12 respectively overall increase overall increase compares favorably 15 28 growth operating revenue periods special charges following summary special charges fiscal years ended june 30 2002 2001 2000 mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger acquisition transactions bindley bbmc alp allegiance scherer fiscal 2001 2000 company incurred direct transaction costs related merger transactions accounted poolingofinterests expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition periods shown company incurred employeerelated costs consist primarily severance noncompete agreements transactionstay bonuses result certain acquisitions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billing employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs fiscal 2002 2001 company recorded charges 524 million 103 million respectively primarily associated companys plans consolidate distribution centers corporate offices result companys merger transaction bindley connection consolidations company incurred employeerelated costs 75 million 05 million fiscal 2002 2001 respectively arising termination approximately 950 employees primarily related closure 14 bindley distribution centers addition exit costs related termination contracts lease agreements incurred fiscal 2002 2001 36 million 98 million also asset impairment charges 272 million incurred fiscal 2002 remaining 141 million incurred fiscal 2002 primarily related costs associated moving inventory assets consolidation distribution centers corporate offices june 30 2002 majority 950 employees terminated company anticipates completing distribution center consolidations june 30 2003 part restructuring company plans closing total 16 bindley distribution centers exit costs relate primarily costs associated lease terminations moving expenses direct result merger acquisition transactions bbmc alp allegiance scherer fiscal 2001 2000 company recorded charges 16 million 96 million respectively business restructuring costs relating companys merger transaction scherer part business restructuring company closed certain facilities connection closings company incurred employeerelated costs 16 million 15 million fiscal 2001 2000 respectively arising termination approximately 400 manufacturing office employees terminated june 30 2001 addition asset impairment charges 39 million recorded fiscal 2000 remaining costs relate exit costs termination contracts lease agreements june 30 2001 restructuring plan completed integration costs include charges directly related integration operations previous merger transactions consulting costs related information systems employee benefit integration well relocation travel costs directly associated integrations special charges fiscal 2002 company incurred employeerelated costs 152 million primarily associated restructuring distribution custom kitting operations medicalsurgical products services segment significant portion charges recorded represent severance accrued upon communication severance terms employees fourth quarter fiscal 2002 restructuring plan expected completed december 31 2002 result termination approximately 600 employees fourth quarter fiscal 2002 company recorded income net litigation settlements 113 million settlements included 133 million special item resulting recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years recovery totaled 353 million 220 million previously recorded 100 million second quarter fiscal 2001 120 million first quarter fiscal 2002 amounts previously recorded reflected reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded company still pending claims manufacturers amount future recovery currently estimable future recoveries recorded special item period settlement reached vitamin litigation income offset items totaling 20 million majority involved litigation settlement reached fiscal 2002 related bindley fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount 06 million arose connection employeerelated costs associated termination approximately 100 employees primarily related closure distribution centers june 30 2001 restructuring plan completed addition fiscal 2002 2001 company recorded special charges 28 million 68 million respectively related restructuring certain health nutritional manufacturing facilities fourth quarter fiscal 2002 company incurred asset impairment costs 18 million primarily due writeoff obsolete inventory created rationalization certain health nutritional manufacturing facilities approximately 09 million 22 million related lease exit costs fiscal 2002 2001 respectively remaining 01 million 46 million periods related employeerelated costs associated termination approximately 185 employees primarily consisting manufacturing employees certain management positions june 30 2002 majority positions eliminated restructuring plan expected completed june 30 2003 fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated summary fiscal 2002 net effect various special charges reduced reported earnings cumulative effect change accounting 871 million 11263 million see note 14 notes consolidated financial statements discussion cumulative effect change accounting reduced reported diluted earnings per common share cumulative effect change accounting 019 per share 245 per share fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share fiscal 2000 net effect various special charges reduced reported net earnings 498 million 7178 million reduced reported diluted earnings per common share 011 per share 160 per share certain mergerrelated restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special charges incurred company estimates incur additional mergerrelated costs associated various merger transactions completed date totaling approximately 759 million 489 million net tax future periods additional discussion related companys merger transactions included note 2 notes consolidated financial statements company believes incur costs order properly integrate operations portion represents facility rationalizations implementing efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred companys trend regard acquisitions expand role provider services healthcare industry trend resulted expansion service areas complement companys existing operations b provide opportunities company develop synergies thus strengthen acquired business healthcare industry continues change company continually evaluates possible candidates merger acquisition intends continue seek opportunities expand role provider services healthcare industry reporting segments assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated company would incur additional mergerrelated costs interest expense decrease interest expense 224 million fiscal 2002 compared fiscal 2001 result lower interest rates borrowings throughout year effective asset management addition company recognized onetime gain equity investment contributing overall decline increase interest expense 162 million fiscal 2001 result higher average levels borrowing fiscal 2001 provision income taxes provisions income taxes relative pretax earnings 338 pretax earnings fiscal 2002 compared 356 fiscal 2001 371 fiscal 2000 fluctuation tax rate primarily due impact recording certain nondeductible mergerrelated costs various periods well fluctuating state foreign effective tax rates result companys business mix three fiscal years addition effective july 1 2001 company ceased amortizing goodwill intangible assets indefinite lives contributed decrease tax rate fiscal 2002 compared fiscal 2001 fiscal 2000 provisions income taxes excluding impact mergerrelated charges goodwill 341 344 355 fiscal years 2002 2001 2000 respectively critical accounting policies critical accounting policies accounting policies significant impact presentation companys financial condition results operations require use complex subjective estimates based upon past experience managements judgment uncertainty inherent estimates actual results may differ estimates policies applied preparing companys financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 notes consolidated financial statements allowance doubtful accounts trade receivables primarily comprised amounts owed company pharmaceutical healthcare distribution activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance involve use substantial amount judgment companys management determining appropriate allowance company reviews industry trends customers financial strength credit standing payment history assess probability collection inventories majority inventories approximately 67 2002 66 2001 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher reconciliation fifo inventory lifo inventory goodwill company elected adopt sfas 142 goodwill intangible assets beginning first quarter fiscal 2002 sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually accordingly company ceased amortization goodwill intangible assets indefinite lives july 1 2001 intangible assets finite lives primarily patents trademarks continue amortized useful lives sfas 142 requires twostep impairment test goodwill first step compare carrying amount reporting units assets fair value reporting unit carrying amount exceeds fair value second step required completed involves allocating fair value reporting unit asset liability excess implied goodwill impairment loss occurs amount recorded goodwill exceeds implied goodwill company required complete impairment test goodwill record resulting impairment losses annually changes market conditions among factors may impact estimates company completed required impairment testing fiscal 2002 incur impairment charges special charges company primarily records costs relate integration previously acquired companies costs restructuring operations improve productivity special charges costs recorded accordance emerging issues task force 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring staff accounting bulletin 100 restructuring impairment charges certain costs employee lease terminations facility exit costs recognized date integration restructuring plan formalized adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs estimated based historical experience total costs incurred exiting facility integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan actual costs could differ managements estimates actual results different original estimates company record additional expense reverse previously recorded expenses adjustments recorded special charges liquidity capital resources working capital increased 51 billion june 30 2002 41 billion june 30 2001 increase primarily resulted additional investments inventories fiscal 2002 inventories increased 11 billion year reflects higher level business volume pharmaceutical distribution provider services activities property equipment cost increased 1634 million june 30 2001 june 30 2002 increase primarily due ongoing plant expansion manufacturing equipment purchases certain manufacturing businesses well additional investments made management information systems upgrades distribution facilities company several operating lease financing arrangements expected used construction new facilities well equipment see discussion note 8 notes consolidated financial statements shareholders equity increased 64 billion june 30 2002 54 billion june 30 2001 increase primarily due net earnings 11 billion investment 2137 million employees company various stock incentive plans increase offset dividends paid 450 million increase treasury stock 3083 million primarily due companys repurchase shares see discussion note 10 notes consolidated financial statements company operates commercial paper program june 30 2002 commercial paper program provided issuance 15 billion aggregate maturity value commercial paper company borrowings outstanding commercial paper program june 30 2002 company unsecured bank credit facility providing aggregate 15 billion borrowings 750 million expires march 27 2003 750 million expires march 31 2004 facility expiring march 27 2003 allows company option extend maturity moneys borrowed one year expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2002 company also uncommitted shortterm credit facilities various bank sources aggregating 1319 million june 30 2002 company borrowings outstanding related shortterm credit facilities 224 million company also lineofcredit agreements various bank sources aggregating 381 million 08 million outstanding june 30 2002 see note 4 notes consolidated financial statements following table summarizes maturities companys significant financial obligations june 30 2002 companys senior debt credit ratings moodys sp fitch currently a2 respectively commercial paper ratings currently a1 p1 respectively companys ratings outlook stable companys various borrowing facilities longterm debt except preferred debt securities discussed free financial covenants minimum net worth cannot fall 41 billion time june 30 2002 company compliance covenant fiscal 2002 company issued 300 million 445 notes due 2005 proceeds debt issuance used toward repayment portion companys indebtedness general corporate purposes including working capital expenditures acquisitions investments issuance company capacity issue approximately 700 million additional equity debt securities pursuant effective shelf registration statements previously filed securities exchange commission fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engages purchasing trade receivables making loans company spe consolidated company issued 400 million preferred debt securities parties affiliated company fiscal 2001 preferred debt securities classified long term debt companys consolidated balance sheet preferred debt securities must retired redeemed spe company creditors access spes receivables companys preferred debt securities contain minimum net worth certain financial ratio covenants june 30 2002 company compliance covenants breach covenants would followed grace period company may discuss remedies security holders extinguish securities without causing event default company currently believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see notes 1 5 notes consolidated financial statements information regarding use financial instruments derivatives including foreign currency hedging instruments matter policy company engage speculative transactions involving derivative financial instruments balance sheet risk company formed pyxis funding llc pyxis funding sole purpose acquiring pool salestype leases related leased equipment pyxis selling lease receivables pyxis funding llc ii pyxis funding ii pyxis funding wholly owned special purpose bankruptcyremote subsidiary pyxis funding ii formed sole purposes acquiring lease receivables salestype leases pyxis funding issuing pyxis funding iis notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii wholly owned special purpose bankruptcyremote subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities accordingly related receivables included companys consolidated financial statements required us generally accepted accounting principles company consolidates pyxis funding consolidate pyxis funding ii pyxis funding ii qualified special purpose entity defined sfas 140 pyxis funding pyxis funding ii separate legal entities maintain separate financial statements assets pyxis funding pyxis funding ii available first foremost satisfy claims creditors investor pyxis funding iis notes principal balance 954 million august 31 2002 provided credit protection form 20 238 million overcollateralization june 30 2002 company 2800 million committed receivables sales facility programs medicine shoppe capital corporation mscc cardinal health funding llc chf see note 1 notes consolidated financial statements additional information regarding structure entities mscc chf organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance generally accepted accounting principles mscc chf separate legal entities company medicine shoppe griffin capital llc griffin sale receivables mscc chf qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishment liabilities accordingly related receivables included companys consolidated financial statements total amount receivables sold mscc program 88 million 135 million june 30 2002 2001 respectively outstanding sold receivables chf program june 30 2002 2001 recourse provided mscc program requirement mscc retain 20 subordinated interest sold receivables subordinated interest june 30 2002 22 million recourse provided chf program requirement chf retain percentage subordinated interest sold receivables percentage determined based upon composition receivables sold june 30 2002 receivables sold program result subordinated interest outstanding company entered operating lease agreements several banks construction various new facilities equipment initial terms lease agreements varied maturity dates ranging november 2003 october 2008 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2002 amount expended acquire andor construct facilities 4797 million agreements provide maximum fundings 6041 million greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2002 weighted average interest rate agreements approximated 26 companys minimum annual lease payments agreements june 30 2002 approximately 132 million recent financial accounting standards june 2002 financial accounting standards board fasb issued sfas 146 accounting costs associated exit disposal activities effective exit disposal activities initiated december 31 2002 statement nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring statement generally requires liability cost associated exit disposal activity associated business combination recognized liability incurred instead recognizing liability date entitys commitment exit plan required issue 943 adoption statement anticipated material effect companys financial position results operations april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections effective fiscal years beginning transactions occurring may 15 2002 statement clarifies several accounting issues including classification gains losses early extinguishment debt lease modifications accounted manner similar salesleaseback transaction adoption statement anticipated material effect companys financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed provides single accounting model disposal longlived assets continuing discontinued operations adoption statement anticipated material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations effective fiscal years beginning june 15 2002 statement addresses diverse accounting practices obligations associated retirement tangible longlived assets associated asset retirement costs adoption statement anticipated material effect companys financial position results operations june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 adoption standard material impact companys consolidated financial statements sfas 142 changes accounting goodwill certain intangible assets amortization method impairment approach due adoption sfas 142 company amortize goodwill beginning fiscal 2002 company completed impairment assessment required sfas 142 incur impairment losses see note 1 notes consolidated financial statements recent developments august 7 2002 companys board directors authorized repurchase common shares aggregate 5000 million august 31 2002 11 million common shares aggregate cost approximately 731 million repurchased plan repurchased shares held treasury shares used general corporate purposes june 14 2002 company announced entered definitive agreement acquire syncor international corporation syncor woodland hills californiabased company leading provider nuclear pharmacy services acquisition syncor stockforstock merger transaction expected completed end second quarter fiscal 2003 subject customary conditions including syncor stockholder approval completion acquisition syncor share converted 052 common share based closing sale price common share september 27 2002 value common shares received syncor stockholders connection merger approximately 900 million january 22 2002 kmart corporation kmart filed chapter 11 bankruptcy court protection cardinal distribution significant business within pharmaceutical distribution provider services segment serviced kmart ten years continued service approximately 1400 stores nationwide since inception bankruptcy case sales kmart represent approximately 5 companys total operating revenue earnings sales even smaller percentage companys total operating earnings due unique consignment arrangement company still owns related pharmaceutical inventories significantly limited credit exposure kmart company monitoring chapter 11 proceeding closely anticipate material impact consolidated financial position results operations due bankruptcy filing item 7aitem 7 managements discussion analysis financial condition results operations discussion analysis presented prepared giving retroactive effect poolingofinterests business combination bindley february 14 2001 discussion analysis presented refers read conjunction consolidated financial statements related notes appearing elsewhere form 10k general company four operating business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services see part item 1 business note 16 notes consolidated financial statements description segments results operations operating revenue 1 growth calculated change increase decrease operating revenue given year percentage operating revenue immediately preceding year total operating revenue increased 14 15 fiscal 2003 2002 respectively increase fiscal 2003 resulted higher sales volume across companys segments strong sales selfmanufactured products addition new products addition new customers result new corporate agreements health care providers pharmaceutical price increases averaging approximately 5 addition syncor acquisition within pharmaceutical technologies services segment accounted approximately 1 overall growth company fiscal 2003 overall growth partially offset decline within companys noncore wholesalertowholesaler pharmaceutical trading business discussed increase fiscal 2002 resulted higher sales volume across various customer segments strong sales selfmanufactured products pharmaceutical price increases averaging approximately 5 addition new products addition new customers result new corporate agreements health care providers pharmaceutical distribution provider services segments operating revenue growth fiscal 2003 resulted strong sales customers within segments core pharmaceutical distribution business generated addition new contracts significant growth alternate site chain pharmacy businesses yielded growth approximately 28 15 respectively chain pharmacy growth rate would stronger experienced reduction business kmart due kmarts closure various stores connection kmarts bankruptcy overall growth rate segment also negatively impacted lack availability certain pharmaceutical products manufacturers particularly second half fiscal year impacted noncore wholesalertowholesaler revenue lack availability part brought changes inventory supply chain management policies certain vendors leading use inventory management agreements inventory management agreements generally provide company compensated negotiated basis help manufacturers better match shipments meet market demand thereby resulting less surplus inventory companys trading business anticipated fluctuations trading activity significant impact operating revenue growth rates future years increase segments operating revenue fiscal 2002 resulted strong sales customer segments especially retail pharmacy grocery chains alternate site customers yielded 20 growth well strong growth mail order government customers portion fiscal 2002 growth attributable pharmaceutical price increases addition new contracts medical products services segments operating revenue growth fiscal 2003 resulted increased sales distributed selfmanufactured products addition several new contracts hospitals health care networks well increased market share growing surgery center market contributed increased sales distributed selfmanufactured products increased demand certain existing selfmanufactured products including medical gloves medivacr suction canisters procedure based delivery systemr kits minor procedure trays accounted portion segments revenue growth addition new selfmanufactured products also contributed overall revenue growth segment examples new selfmanufactured products include esteemr surgeon gloves tiburontm astoundtm fabrics within convertersr business increase segments operating revenue fiscal 2002 resulted strong sales selfmanufactured products particularly sales surgical instruments custom kits surgical procedures well price increases sales distributed products several new longterm contracts signed within segments distribution business fiscal 2002 pharmaceutical technologies services segments operating revenue growth fiscal 2003 resulted increased demand within oral technologies biotechnology sterile life sciences packaging services businesses acquisitions primarily syncor product sales showed particular strength within businesses included lillys zyprexar zydisr antipsychotic mylans amnesteemtm generic drug treatment acne sepracors xoponexr respiratory drug growth within biotechnology sterile life sciences business negatively impacted planned shutdown twelve weeks domestic sterile manufacturing facility expand capacity acquisition syncor effective january 1 2003 contributed growth segment excluding syncor segment experienced revenue growth high teens fiscal 2003 increase segments operating revenue fiscal 2002 resulted higher sales volume particularly involving development analytical services pharmaceutical technologies proprietary packaging offerings products showed particular strength abbotts kaletrar aids product lillys zyprexar zydisr pharmacias detrolr la incontinence medication accelerating demand sterileliquid controlledrelease technologies addition acquisition sp pharmaceuticals significant contributor growth fiscal 2002 within pharmaceutical technologies business completion magellan acquisition fourth quarter fiscal 2002 contributed growth analytical services business excluding revenues sp pharmaceuticals magellan operating revenues grew approximately 6 fiscal 2002 fiscal 2001 additionally segment experienced growth fiscal 2002 pharmaceutical packaging business attributable addition several new customers increased volume existing customers slowing sales protease inhibitor health nutritional product lines partially offset growth segment fiscal 2002 automation information services segments operating revenue growth fiscal 2003 resulted strong sales new existing patient safety supply management product lines including pyxis medstationr pyxis anesthesia systemtm pyxis connecttm pyxis supplystationr increase segments operating revenue fiscal 2002 primarily resulted strong sales patient safety supply management product lines pyxis medstationr sn pyxis supplystation 30 significant sales new products including pyxis anesthesia system products within pyxis supplystation line also contributed segments growth bulk deliveries customer warehouses pharmaceutical distribution provider services segment reports bulk deliveries made customers warehouses revenue sales involve company acting intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances company cannot control including consolidation within customers industries decisions customers either begin discontinue warehousing activities changes policies manufacturers related selling directly customers due lack margin generated bulk deliveries fluctuations amount significant impact companys net earnings pharmaceutical technologies services segment records outofpocket reimbursements received sales marketing services business revenue outofpocket expenses generally include travel expenses incidental costs incurred fulfill services required contract within contracts customer agrees reimburse company expenses due company generating margin reimbursements fluctuations amount impact companys net earnings gross margin overall gross margin percentage operating revenue decreased fiscal 2003 2002 due mix businesses contributing consolidated gross margin decrease gross margin percentage operating revenue within pharmaceutical distribution provider services segment fiscal 2003 resulted primarily following 1 increase sales lowermargin customers lower cost distribution reduced gross margins 2 competitive pricing 3 moderation vendor margins due manufacturers attempting better match shipments meet market demand resulting less surplus inventory see additional discussion factors decrease gross margin percentage operating revenue within pharmaceutical technologies services also contributed overall decrease overall gross margin percentage operating revenue fiscal 2002 resulted greater mix lower margin pharmaceutical distribution operating revenues compared prior year pharmaceutical distribution provider services segment represented 82 operating revenues fiscal 2002 81 fiscal 2001 decline gross margins medical products services automation information services segments also contributed overall decline companys gross margin fiscal 2002 gross margin percentage operating revenue pharmaceutical distribution provider services segment decreased fiscal 2003 decrease gross margin percentage operating revenue primarily resulted increase sales lowermargin customers include chain pharmacy alternate site lower cost distribution table shows percentage breakdown operating revenue customer class within pharmaceutical distribution largest business within segment fiscal years 2003 2002 2001 segments selling margins negatively impacted competitive pricing another primary cause decrease gross margin percentage operating revenue moderation vendor margin programs also contributed decline segments gross margin percentage operating revenue company seen changes vendor supply chain management policies related product availability including use inventory management agreements types agreements company generally compensated negotiated basis help manufacturers better match shipments market demand therefore adversely affecting companys investment margin opportunities generally company compensated inventory management agreements based timing inventory price increases volume inventory purchases agreed upon period company recognizes amounts received agreements within gross margin based upon related inventory sales gross margins pharmaceutical distribution provider services segment may affected future years changes occurring industry changes vendor supply chain management policies including use inventory management agreements changes provide fewer opportunities pharmaceutical distribution business within pharmaceutical distribution provider services segment make large purchases product related vendor margin incentives fewer opportunities make attractive inventory investments company expects deploy less capital segment decline gross margin percentage operating revenue pharmaceutical distribution provider services segment fiscal 2002 resulted primarily highly competitive market within pharmaceutical distribution industry greater mix high volume customers lower cost distribution better asset management enabled company offer lower selling margins customers see table addition segments gross margin fiscal 2002 negatively impacted several nonrecurring items primarily related bindley integration fiscal 2002 company incurred onetime inventory adjustment related process closing rationalizing facilities addition integration operations bindley segment decreases fiscal 2002 partially offset higher vendor margins favorable price increases manufacturer marketing programs gross margin percentage operating revenue medical products services segment remained unchanged fiscal 2003 segments gross margin positively impacted increased sales existing new highermargin selfmanufactured products manufacturing efficiencies achieved fiscal year outsourcing product manufacturing cost efficient areas impact new distribution agreements increased sales lowermargin distributed products offset gains noted decline gross margin percentage operating revenue segment fiscal 2002 resulted primarily competitive pricing pressures distributed products decline partially offset manufacturing productivity improvements higher sales volume selfmanufactured products carry significantly higher gross margins portions segments business gross margin percentage operating revenue pharmaceutical technologies services segment decreased fiscal 2003 decrease primarily driven addition syncors nuclear pharmacy services business syncor slightly lower gross margin ratio businesses within segment also gross margin negatively impacted certain items occurred fiscal 2002 recur fiscal 2003 including recording pricing adjustments related minimum recovery expected received claims vitamin manufacturers amounts overcharged prior years also see note 2 notes consolidated financial statements pricing adjustments recorded reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded company recorded 120 million first quarter fiscal 2002 100 million second quarter fiscal 2001 pricing adjustments segments gross margin percentage operating revenue increased fiscal 2002 increase primarily due larger mix higher margin pharmaceutical products versus health nutritional products well cost efficiencies due infrastructure investments manufacturing facilities increase partially offset impact certain items occurred fiscal 2001 recur fiscal 2002 namely revenues related use certain companys proprietary technology gross margin percentage operating revenue automation information services segment increased fiscal 2003 primarily mix products sold well productivity gains realized operational improvements implemented prior fiscal year segments gross margin percentage operating revenue decreased fiscal 2002 primarily due changes product mix selling general administrative expenses 1 fiscal 2001 selling general administrative expenses percentage operating revenue include goodwill amortization selling general administrative expenses percentage operating revenue declined fiscal 2003 fiscal 2002 decline reflects ongoing productivity programs economies scale associated companys revenue growth significant productivity gains resulting continued cost control efforts segments continuation consolidation selective automation operating facilities contributed improvement addition company continuing take advantage synergies recent acquisitions decrease selling general administrative expenses percentage operating revenue improvement fiscal 2003 partially offset increase selling general administrative expenses percentage operating revenue pharmaceutical technologies services segment primarily result changes within business mix segment business mix change largely driven acquisition syncor higher expense ratio compared businesses segment first quarter fiscal 2002 company ceased amortizing goodwill due adoption statement financial accounting standards sfas 142 goodwill intangible assets see notes 1 15 notes consolidated financial statements discussion also contributed improvement goodwill amortization expense fiscal 2001 approximately 489 million addition fiscal 2002 company realized productivity operating efficiencies result implementing changes within automation information services segment better service customers selling general administrative expenses grew 7 6 fiscal years 2003 2002 respectively expenses operations newly acquired companies accounted approximately 6 overall increase fiscal 2003 expenses relating operations syncor giving rise largest part increase fiscal 2002 primarily due increase personnel costs accounted approximately 4 overall increase overall increase fiscal 2003 fiscal 2002 compares favorably 14 15 growth operating revenue periods special items mergerrelated costs following summary mergerrelated costs special items fiscal years ended june 30 2003 2002 2001 mergerrelated costs integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs recognized fiscal years shown primarily result merger acquisition transactions involving syncor blp magellan bindley bbmc allegiance scherer direct transaction costs fiscal 2001 company incurred direct transaction costs related merger transaction bindley accounted poolingofinterests expenses 208 million primarily included investment banking legal accounting professional fees associated merger employeerelated costs fiscal 2003 2002 2001 company incurred employeerelated costs associated certain merger acquisition transactions 187 million 237 million 462 million respectively costs primarily consist severance noncompete agreements transactionstay bonuses direct result mergers acquisitions addition types costs fiscal 2003 company incurred charge 88 million related approved plan curtail certain defined benefit pension plans within pharmaceutical technologies services segment curtailment resulted plan conform scherers employee benefit plans companys benefit plan structure time scherer merger pharmaceutical distribution center consolidation fiscal 2003 2002 2001 company recorded charges 227 million 524 million 103 million respectively primarily associated companys plans close consolidate total 16 bindley distribution centers bindleys corporate office one companys data centers result merger transaction bindley connection bindley related consolidations closures company incurred employeerelated costs 32 million 75 million 05 million fiscal 2003 2002 2001 respectively arising primarily termination approximately 1250 employees addition exit costs related termination contracts lease agreements incurred fiscal 2003 2002 2001 82 million 36 million 98 million respectively also asset impairment charges 82 million 272 million respectively incurred fiscal 2003 2002 remaining 31 million 141 million incurred fiscal 2003 2002 respectively primarily related costs associated moving inventory assets consolidation distribution centers bindleys corporate office one companys data centers june 30 2003 company completed closures consolidations noted employees noted terminated asset impairments exit costs asset impairments exit costs fiscal 2003 2002 2001 54 million 90 million 85 million respectively primarily related costs associated lease terminations moving expenses asset impairments direct result merger acquisition transactions bbmc allegiance scherer integration costs integration costs fiscal 2003 2002 2001 276 million 468 million 323 million respectively included charges directly related integration operations previous merger acquisition transactions operations include limited information systems employee benefits compensation accountingfinance tax treasury internal audit risk management compliance administrative services sales marketing others costs included category generally relate expenses incurred integrate merged acquired companys operations systems companys preexisting operations systems special items distribution center closures fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount 06 million arose connection employeerelated costs associated termination approximately 100 employees primarily related closure distribution centers june 30 2001 restructuring plan completed manufacturing facility closures restructurings fiscal 2003 2002 2001 company recorded total 402 million 28 million 68 million respectively special charges related closure consolidation restructuring certain manufacturing facilities closures consolidations restructurings occurred within medical products services segment pharmaceutical technologies services segment within medical products services segment three manufacturing facility closures completed fiscal 2003 also certain operations within three facilities identified consolidation rationalization total 236 million recorded related closures consolidations rationalizations 103 million related severance costs due termination approximately 1475 employees approximately 600 employees terminated prior june 30 2003 remaining employees expected terminated fiscal 2004 asset impairment charges 94 million incurred also exit costs 39 million incurred primarily related dismantling moving machinery equipment plans consolidate rationalize three facilities discussed expected completed fiscal 2004 company incurred special charges 137 million related restructuring consolidation closure three manufacturing facilities within pharmaceutical technologies services segment fiscal 2003 one restructuring completed fiscal 2003 two consolidationsclosures expected completed september 30 2003 asset impairment charges 57 million incurred related closures also exit costs 32 million incurred primarily related dismantling machinery equipment transferring certain technologies facilities part restructuring plan remaining 48 million represents employeerelated costs primarily severance related termination approximately 400 employees june 30 2003 majority employees terminated addition fiscal 2003 2002 2001 company recorded special charges 29 million 28 million 68 million respectively related restructuring certain health nutritional manufacturing facilities fiscal 2003 29 million primarily represents costs associated transferring validating health nutrition operations processes rationalized asset impairment costs 18 million incurred fiscal 2002 primarily due writeoff obsolete inventory created rationalization facilities approximately 09 million 22 million related lease exit costs fiscal 2002 2001 respectively remaining 01 million 46 million fiscal 2002 2001 respectively related employeerelated costs associated termination approximately 185 employees primarily manufacturing certain management positions june 30 2003 employees terminated restructuring plan expected completed first quarter fiscal 2004 employeerelated costs fiscal 2003 company incurred employeerelated costs 69 million primarily due integration reorganization certain operations within pharmaceutical technologies services segment company recorded charges 50 million related restructuring majority represents severance accrued upon communication severance terms employees restructuring plan completed june 30 2003 resulted termination approximately 185 employees remaining 19 million primarily due restructuring certain operations within pharmaceutical distribution provider services segment significant portion charges represent severance accrued time severance terms communicated employees restructuring plan completed june 30 2003 resulted termination approximately 30 employees fiscal 2002 company incurred employeerelated costs 152 million primarily associated restructuring distribution custom kitting operations medical products services segment significant portion charges recorded represent severance accrued upon communication severance terms employees fourth quarter fiscal 2002 restructuring plan completed fiscal 2003 resulted termination approximately 600 employees asset impairments fiscal 2003 company incurred asset impairment charges 199 million 101 million related asset impairment charges primarily goodwill resulting companys decision exit certain north american commodity operations pharmaceutical technologies services segment additional 78 million related writeoff design tooling costs remaining 20 million primarily includes nonemployee related costs associated certain restructuring activities initiated company outside manufacturing facilities litigation settlements net fiscal 2003 2002 company recorded income net litigation settlements 1015 million 113 million respectively settlements resulted primarily recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years total recovery june 30 2003 1382 million net attorneys fees payments due interested parties expenses withheld total recovery 1029 million 133 million recorded special items fiscal 2003 2002 respectively remaining 220 million previously recorded 100 million second quarter fiscal 2001 120 million first quarter fiscal 2002 reflected reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded company still pending claims smaller vitamin manufacturers total amount future recovery currently estimable company believes likely material amount future recoveries recorded special item period settlement reached fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated summary fiscal 2003 net effect various special items reduced reported earnings continuing operations 332 million 14119 million reduced reported diluted earnings per common share continuing operations 007 per share 312 per share fiscal 2002 net effect various special items reduced reported earnings cumulative effect change accounting 871 million 11263 million see note 14 notes consolidated financial statements discussion cumulative effect change accounting reduced reported diluted earnings per common share cumulative effect change accounting 019 per share 245 per share fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share certain merger acquisition related restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred company estimates incur additional costs associated various merger acquisition restructuring activities entered date totaling approximately 90 million approximately 60 million net tax future periods estimate subject adjustment pending resolution syncor acquisition related litigation contingencies additional discussion related companys merger transactions included note 2 notes consolidated financial statements company believes incur costs order properly integrate rationalize operations portion represents facility rationalizations implementing efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred companys trend regard acquisitions expand role provider services health care industry trend resulted expansion service areas complement companys existing operations b provide opportunities company develop synergies thus strengthen acquired business health care industry continues change company continually evaluates possible candidates merger acquisition intends continue seek opportunities expand role provider services health care industry reporting segments assurance able successfully pursue opportunity consummate transaction pursued additional transactions entered consummated company would incur additional merger acquisition related costs assurance integration efforts associated transaction would successful interest expense decrease interest expense 172 million fiscal 2003 compared fiscal 2002 resulted lower interest rates effective asset management resulting lower average borrowings outstanding decrease interest expense 224 million fiscal 2002 compared fiscal 2001 result lower interest rates borrowings throughout year effective asset management resulting lower average borrowings outstanding addition fiscal 2002 company recognized onetime gain equity investment contributed overall decline company manages exposure changing interest rates using various hedging strategies see notes 1 5 notes consolidated financial statements provision income taxes provisions income taxes relative earnings income taxes discontinued operations cumulative effect change accounting 336 pretax earnings fiscal 2003 compared 338 fiscal 2002 356 fiscal 2001 fluctuation tax rate primarily due changes within state foreign effective tax rates resulting companys business mix changes tax impact special items may unique tax implications addition effective july 1 2001 company ceased amortizing goodwill intangible assets indefinite lives contributed decrease tax rate fiscal 2002 compared fiscal 2001 critical accounting policies critical accounting policies accounting policies significant impact presentation companys financial condition results operations require use complex subjective estimates based upon past experience managements judgment uncertainty inherent estimates actual results may differ estimates policies applied preparing companys financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 notes consolidated financial statements allowance doubtful accounts trade receivables primarily comprised amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance involve use substantial amount judgment companys management determining appropriate allowance company reviews industry trends customers financial strength credit standing payment history assess probability collection see schedule ii included form 10k includes rollforward activity allowance reserves inventories majority inventories approximately 68 2003 67 2002 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher reconciliation fifo inventory lifo inventory june 30 millions 2003 2002 2001 fifo inventory 76795 74114 63389 lifo reserve valuation 562 504 528 total inventory 76233 73610 62861 goodwill company elected adopt sfas 142 goodwill intangible assets beginning first quarter fiscal 2002 sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually accordingly company ceased amortization goodwill intangible assets indefinite lives july 1 2001 intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company completed required impairment testing fiscal 2003 2002 incur impairment charges special charges company primarily records costs relate integration previously acquired companies costs restructuring operations improve productivity special charges integration costs acquisitions accounted pooling interests method recorded accordance eitf 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring staff accounting bulletin 100 restructuring impairment charges certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf 953 recognition liabilities connection purchase business combination certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan formalized adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 accounting costs associated exit disposal activities account costs incurred restructuring activities standard liability exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring required company recognize liability restructuring costs date commitment exit plan majority special items incurred classified one following categories employeerelated costs exit costs including lease termination costs asset impairments integration costs employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include remaining net book value assets longer used result integration restructuring activities integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan actual costs could differ managements estimates actual results different original estimates company record additional expense reverse previously recorded expenses adjustments recorded special charges liquidity capital resources working capital increased 59 billion june 30 2003 51 billion june 30 2002 increase working capital primarily resulted increases trade receivables inventories 4890 million 2623 million respectively increase trade receivables driven companys revenue growth well addition syncor increase inventories resulted primarily increased sales across companys segments increase inventories noted less prior years due impact branded generic product conversions vendor inventory policies use inventory management agreements lowered companys inventory investment synergies realized bindley integration also lowered companys investment inventory net investment salestype leases decreased 1078 million june 30 2003 compared june 30 2002 decrease resulted primarily sale salestype leases amounts approximating fair value partially offset new leases entered fiscal year net book value leases sold approximately 3560 million see note 8 notes consolidated financial statements discussion shareholders equity increased 78 billion june 30 2003 64 billion june 30 2002 increase primarily due net earnings 14058 million issuance shares held treasury syncor acquisition totaling approximately 7808 million valuation syncor vested options acquired 472 million investment 2659 million employees company various stock incentive plans increase fiscal 2003 partially offset repurchase common shares 11917 million dividends paid 448 million january 2003 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 86 million common shares aggregate cost approximately 500 million repurchase completed february 2003 repurchased shares placed treasury shares used general corporate purposes august 2002 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 78 million common shares aggregate cost approximately 500 million repurchase completed january 2003 repurchased shares placed treasury shares used general corporate purposes september 2001 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 83 million common shares aggregate cost approximately 500 million repurchase completed august 2002 repurchased shares placed treasury shares used general corporate purposes june 30 2003 company commercial paper program providing issuance 15 billion aggregate maturity value commercial paper company also extendible commercial notes program providing issuance 1500 million extendible commercial notes company borrowings outstanding programs june 30 2003 company unsecured bank credit facility providing aggregate 15 billion borrowings 7500 million expires march 26 2004 7500 million expires march 27 2008 facility expiring march 26 2004 allows company option extend maturity moneys borrowed one year expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2003 except 237 million standby letters credit issued behalf company also uncommitted shortterm credit facilities various bank sources aggregating 1000 million june 30 2003 company borrowings outstanding related shortterm credit facilities 210 million company also lineofcredit agreements various bank sources aggregating 1221 million nothing outstanding june 30 2003 see note 4 notes consolidated financial statements june 30 2003 company asset securitization facility available allows company sell receivables generated radiopharmaceutical operations whollyowned subsidiary turn sells receivables multiseller conduit administered third party bank securitization program allows company borrow 650 million company borrowings outstanding facility june 30 2003 following table summarizes maturities companys significant financial obligations june 30 2003 companys senior debt credit ratings moodys sp fitch a2 respectively commercial paper ratings p1 a1 respectively ratings outlooks negative stable respectively since june 30 2003 ratings outlooks remained unchanged companys various borrowing facilities longterm debt except preferred debt securities discussed free financial covenants minimum net worth cannot fall 41 billion time june 30 2003 company compliance covenant fiscal 2003 company issued 500 million 400 notes due 2015 proceeds debt issuance used general corporate purposes including working capital expenditures acquisitions investments repurchases debt equity securities issuance company capacity issue approximately 500 million additional equity debt securities pursuant effective shelf registration statements previously filed securities exchange commission pursuant authorization board directors company intends file shelf registration statement increase capacity available issuance 1 billion equity debt securities fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engages purchasing trade receivables making loans company spe consolidated company issued 400 million preferred debt securities parties affiliated company fiscal 2001 preferred debt securities classified long term debt companys consolidated balance sheet preferred debt securities must retired redeemed spe company creditors access spes receivables companys preferred debt securities contain minimum adjusted tangible net worth certain financial ratio covenants june 30 2003 company compliance covenants breach covenants would followed grace period company may discuss remedies security holders extinguish securities without causing event default company currently believes adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion current projected debt service requirements including related business combinations see notes 1 5 notes consolidated financial statements information regarding use financial instruments derivatives including foreign currency hedging instruments matter policy company generally engage speculative transactions involving derivative financial instruments fiscal 2003 company entered one speculative interest rate swap transaction resulting immaterial gain balance sheet transactions company periodically enters certain offbalance sheet arrangements primarily asset sales operating leases order maximize diversification funding return assets asset sales described also provide transfer credit risk third parties see note 8 notes consolidated financial statements information regarding impacts cash flow expense related transactions fiscal 2003 company entered two separate agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank amounts 1560 million 2000 million immaterial gain recognized transactions classified operating revenue within companys results operations order qualify sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities company formed twowholly owned special purpose bankruptcyremote entities spes pyxis corporation given legal designation cardinal health 301 inc referred form 10k pyxis spes formed two whollyowned qualified special purpose entities qspes effectuate removal lease receivables companys consolidated financial statements accordance sfas 140 company consolidates spes consolidate qspes spes qspes separate legal entities maintain separate financial statements company pyxis assets spes qspes available first foremost satisfy claims respective creditors company formed pyxis funding llc pyxis funding sole purpose acquiring pool salestype leases related leased equipment pyxis ultimately selling lease receivables multiseller conduit administered thirdparty bank pyxis funding whollyowned special purpose bankruptcyremote subsidiary pyxis funding ii llc pyxis funding ii formed sole purposes acquiring lease receivables salestype leases pyxis funding issuing pyxis funding iis notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii whollyowned qualified special purpose subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities accordingly related receivables included companys consolidated financial statements required us generally accepted accounting principles company consolidates pyxis funding consolidate pyxis funding ii pyxis funding ii qualified special purpose entity defined sfas 140 pyxis funding pyxis funding ii separate legal entities maintain separate financial statements assets pyxis funding pyxis funding ii available first foremost satisfy claims creditors notes held investor principal balance 515 million june 30 2003 investor provided credit protection form 20 129 million overcollateralization august 31 2002 notes held investor principal balance 954 million investor provided credit protection 238 million june 30 2003 company 2800 million committed receivables sales facility programs medicine shoppe capital corporation mscc cardinal health funding chf mscc chf organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance generally accepted accounting principles mscc chf separate legal entities company medicine shoppe financial shared services business formerly griffin sale receivables mscc chf qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishment liabilities accordingly related receivables included companys consolidated financial statements total amount receivables sold mscc program 54 million 88 million june 30 2003 2002 respectively outstanding sold receivables chf program june 30 2003 2002 recourse provided mscc program requirement mscc retain 20 subordinated interest sold receivables subordinated interests 13 million 22 million june 30 2003 2002 respectively subsequent june 30 2003 company elected terminate liquidate mscc result company incurred immaterial loss recourse provided chf program requirement chf retain percentage subordinated interest sold receivables percentage determined based upon composition receivables sold june 30 2003 receivables sold program result subordinated interest outstanding company entered operating lease agreements several banks construction various new facilities equipment initial terms lease agreements varied maturity dates ranging may 2004 june 2013 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2003 amount expended acquire andor construct facilities 5013 million agreements provide maximum fundings 5964 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2003 weighted average interest rate agreements approximated 184 companys minimum annual lease payments agreements june 30 2003 approximately 92 million recent financial accounting standards may 2003 financial accounting standards board fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity statement clarifies definition liability currently defined fasb concepts statement 6 elements financial statements well items statement requires financial instruments embody obligation issuer classified liability furthermore standard provides guidance initial subsequent measurement well disclosure requirements financial instruments sfas 150 effective financial instruments entered may 31 2003 adoption statement material effect companys financial position results operations april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities statement amends clarifies financial accounting reporting requirements originally established fasb statement 133 derivative instruments hedging activities fasb statement 149 provides greater clarification characteristics derivative instrument contracts similar characteristics accounted consistently statement effective contracts entered modified june 30 2003 well hedging relationships designated june 30 2003 excluding certain implementation issues effective prior date fasb statement 133 adoption statement anticipated material effect companys financial position results operations january 2003 eitf finalized consensus issue 0216 accounting customer including reseller certain consideration received vendor issue requires cash consideration received customer vendor recorded reduction cost sales within companys results operations excluding payments received customer sells products services vendor well reimbursement costs incurred customer selling vendors product issue also requires rebates refunds provided customer result achieving certain purchase levels defined measures recorded reduction cost sales rebate refund probable reasonably estimable allocated time period earned adoption consensus material effect companys financial position results operations january 2003 fasb issued interpretation 46 consolidation variable interest entities interpretation defines business enterprise must consolidate variable interest entity interpretation applies immediately variable interest entities created january 31 2003 applies first fiscal year interim period beginning june 15 2003 entities enterprise holds variable interest acquired february 1 2003 adoption interpretation material effect companys financial position results operations december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amends sfas 123 statement provides alternative methods transition voluntary change fair valuebased method accounting stockbased employee compensation amends disclosure requirements sfas 123 transition guidance annual disclosure provisions effective fiscal years ending december 15 2002 see note 1 notes consolidated financial statements interim disclosure provisions effective financial reports containing financial statements interim periods beginning december 15 2002 adoption statement material effect companys financial position results operations november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee also enhances guarantors disclosure requirements made interim annual financial statements obligations certain guarantees issued initial recognition initial measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements interim annual periods ending december 15 2002 company adopted enhanced disclosure requirements second quarter fiscal 2003 adoption recognition initial measurement provisions third quarter fiscal 2003 material effect companys financial position results operations november 2002 eitf finalized consensus issue 0021 accounting revenue arrangements multiple deliverables effective arrangements entered june 15 2003 issue defines units accounting arrangements multiple deliverables resulting revenue allocated units accounting revenue recognition purposes adoption consensus anticipated material effect companys financial position results operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities effective exit disposal activities initiated december 31 2002 statement nullifies eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring statement requires liability cost associated exit disposal activity associated business combination recognized liability incurred instead recognizing liability date entitys commitment exit plan required issue 943 adoption statement material effect companys financial position results operations april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections effective fiscal years beginning transactions occurring may 15 2002 statement clarifies several accounting issues including classification gains losses early extinguishment debt lease modifications accounted manner similar salesleaseback transaction adoption statement material effect companys financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed provides single accounting model disposal longlived assets continuing discontinued operations adoption statement material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations effective fiscal years beginning june 15 2002 statement addresses diverse accounting practices obligations associated retirement tangible longlived assets associated asset retirement costs adoption statement material effect companys financial position results operations recent developments august 1 2003 companys board directors authorized repurchase common shares aggregate amount 10 billion pursuant authorization company repurchased approximately 170 million common shares aggregate cost approximately 10 billion repurchase completed first quarter fiscal 2004 repurchased shares placed treasury shares used general corporate purposes item 7aitem 7 managements discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes appearing elsewhere form 10k connection certain conclusions made audit committee september october 2004 part internal review date company made certain reclassification restatement adjustments fiscal 2004 prior historical financial statements fully described notes 1 2 notes consolidated financial statements revenue previously disclosed separately bulk deliveries customer warehouses others aggregated operating revenue resulting combined revenue reported financial statements addition company changed accounting method recognizing income cash discounts company also reduced fourth quarter fiscal 2004 results operations premature revenue recognition within automation information services segment assessing impact segments sales practice companys results operations three year period ended june 30 2004 lastly company restated financial statements fiscal 2000 2001 2002 2003 first three quarters fiscal 2004 result various misapplications gaap errors relating primarily balance sheet reserve accrual adjustments recorded prior periods result company supplemented historical disclosures within managements discussion analysis financial condition results operations reflect reclassification restatement adjustments previously reported company business segment operating earnings performance prior period disclosures presented managements discussion analysis financial condition results operations adjusted reflect changes overview cardinal health leading provider products services supporting health care industry company helps health care providers manufacturers improve efficiency quality health care information regarding companys business please see part item 1 business within form 10k results operations following summarizes companys results operations fiscal years ended june 30 2004 2003 2002 1 growth calculated change increase decrease given year compared immediately preceding year fiscal years noted table results operations reflect breadth products services company offers increasing demand companys diverse portfolio products services led revenue growth every segment company continues experience strong demand integrated solutions health care providers integrated solutions include products services multiple lines businesses within company arrangements currently represent nearly 7 billion annual sales june 30 2004 companys operations organized four operating business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services see note 18 notes consolidated financial statements discussion changes business segments resulting alaris acquisition impact fiscal 2005 results operations also reflect increasing operating earnings contribution segment outside pharmaceutical distribution provider services making three segments outside pharmaceutical distribution provider services gradually increased amount operating earnings contributed company currently represent onehalf companys operating earnings company expects trend continue previously reported companys pharmaceutical distribution business midst business model transition respect compensated logistical capital administrative services provides pharmaceutical manufacturers historically compensation received pharmaceutical distribution business pharmaceutical manufacturers based manufacturers unique sales practices eg volume product available sale eligibility purchase product cash discounts prompt payment rebates etc pharmaceutical pricing practices eg timing frequency magnitude product price increases specifically significant portion compensation pharmaceutical distribution business received manufacturers derived companys ability purchase pharmaceutical inventory advance pharmaceutical price increases hold inventory manufacturers increased pharmaceutical prices generate higher operating margin subsequent sale inventory compensation system dependent large degree upon sales practices pharmaceutical manufacturer including established policies concerning volume product available purchase advance price increase stable predictable pharmaceutical pricing practices beginning fiscal 2003 pharmaceutical manufacturers began seek greater control amount pharmaceutical product available supply chain result began change sales practices restricting volume product available purchase pharmaceutical wholesalers addition manufacturers increasingly sought services company including provision data concerning product sales distribution patterns company believes changes made provide greater visibility pharmaceutical manufacturers product demand movement market increase product safety integrity reducing risks associated product available distributed secondary market nevertheless impact changes significantly reduced compensation received company pharmaceutical manufacturers addition since fourth quarter fiscal 2004 pharmaceutical manufacturers product pricing practices become less predictable frequency product price increases generally slowed versus historical levels result actions pharmaceutical manufacturers company longer adequately consistently compensated reliable consistent logistical capital administrative services provided company manufacturers response developments discussed company working establish compensation system longer dependent manufacturers sales pricing practices rather based services provided company meet unique distribution requirements manufacturers products end company working individual pharmaceutical manufacturers define feeforservice terms adequately compensate company light products unique distribution requirements logistical capital administrative services provided company accelerate process august 2004 company communicated pharmaceutical manufacturing vendors new policy sets april 1 2005 manufacturers existing agreement company next anniversary date agreement deadline manufacturers must entered mutually satisfactory distribution services agreement company providing reliable predictable adequate compensation companys services manufacturer company unable enter mutually satisfactory agreement company plans assist manufacturer transitioning another method distribution assurance business model transition successful timing successful transition revenue operating earnings growth within companys automation information services segment fiscal 2004 lower historical growth rates growth rates adversely affected softening demand attributable capital spending pressures experienced hospitals increased competition within industry company believes trend may continue shortterm however company remains confident longterm prospects segment patient safety concerns combined innovative new products continue lead future demand government investigations audit committee internal review company currently subject formal investigation sec relating certain accounting matters company also learned us attorney southern district new york commenced inquiry respect company also companys audit committee commenced internal review assisted independent counsel information regarding matters see part item 3 legal proceedings note 1 notes consolidated financial statements form 10k product safety leading provider products services supporting health care industry including distribution pharmaceuticals health care products company monitoring issues regarding importation pharmaceuticals health care products company sensitive issue pharmaceutical prices pricing disparity domestic international markets however company believes importation united states successful additional controls protections would need implemented ensure patients consumers receive safe effective pharmaceutical products company continue work proactively participants regulators pharmaceutical supply chain help ensure solution safe efficient company continues work suppliers help minimize risks associated counterfeit products supply chain acquisitions june 28 2004 company acquired approximately 987 outstanding common stock alaris leading provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction value transaction including assumption alaris debt totaled nearly 21 billion information regarding alaris acquisition valuation acquisitions intangibles impact segment reporting see notes 4 17 18 notes consolidated financial statements prior completion alaris acquisition june 16 2004 icu medical inc filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsiter family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief preventing alaris selling smartsiter products july 30 2004 court denied icus application preliminary injunction finding among things icu failed show substantial likelihood success merits company intends vigorously defend action december 2003 company completed acquisition intercare leading european pharmaceutical products services company acquisition increased companys scale proprietary sterile manufacturing broadened participation fastgrowing european generic including manufacturing capabilities injectible product market cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt see note 18 notes consolidated financial statements information regarding impact acquisition companys segment reporting fiscal 2004 2003 2002 company completed numerous acquisitions including limited alaris intercare syncor companys trend regard acquisitions expand role provider services health care industry trend resulted expansion areas complement companys existing operations b provide opportunities company develop synergies thus strengthen acquired business health care industry continues change company evaluates possible candidates merger acquisition intends continue seek opportunities expand role provider services health care industry reporting segments assurance company able successfully pursue opportunity consummate transaction pursued extent company continues pursue acquisitions ability complete transactions may adversely affected government investigations described part item 3 legal proceedings note 1 notes consolidated financial statements form 10k additional transactions pursued consummated company would incur additional merger acquisitionrelated costs may need enter funding arrangements mergers acquisitions assurance integration efforts associated transaction would successful results operations following sections provide additional detail regarding results operations company applicable results operations companys reportable segments revenue company reportable segments follows 1 see discussion bulk deliveries customer warehouses companys definition bulk revenue 2 corporate revenue primarily consists foreign currency translation adjustments elimination intersegment revenue following table summarizes revenue growth rates company reportable segments well percent company revenue excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year total company revenue increased 15 11 fiscal 2004 2003 respectively revenue growth fiscal years resulted higher sales volume across companys segments revenue growth existing customers addition new customers resulted new corporate arrangements health care providers integrate companys diverse offerings addition new products pharmaceutical price increases averaging approximately 6 5 respectively fiscal 2004 2003 addition acquisitions completed company fiscal 2004 2003 accounted approximately 1 overall growth fiscal 2004 2003 increases fiscal 2004 partially offset slower sales growth within pharmaceutical technologies services automation information services segments pharmaceutical distribution provider services segments revenue growth 15 fiscal 2004 resulted primarily strong sales existing customers sales new customers pharmaceutical price increases sales growth existing customers within retail chain alternate site categories segments pharmaceutical distribution business showed particular strength segment also benefited 1 contract wins fiscal 2004 2 pharmaceutical price increases averaging approximately 6 fiscal 2004 3 extra business day revenue gains partially dampened continued reduction business kmart holding corp kmart due kmarts closure various stores certain contract losses fiscal 2004 segments pharmaceutical distribution business segments revenue growth 10 fiscal 2003 resulted strong sales customers within segments core pharmaceutical distribution business generated addition new contracts pharmaceutical price increases averaging approximately 5 significant growth alternate site chain pharmacy businesses chain pharmacy growth rate would stronger experienced reduction business kmart due kmarts closure various stores connection reorganization segments overall revenue growth partially dampened loss certain customers medical products services segments revenue growth 11 fiscal 2004 resulted increased sales momentum new existing contracts within distribution business well increased sales volume segments international businesses new contracts drove increased sales distributed selfmanufactured products sales distribution business particularly strong fiscal 2004 international businesses also generated strong revenue growth increasing nearly 19 prior fiscal year approximately 14 international business revenue growth however related changes foreign currency rates sales new selfmanufactured products particularly enhancements within surgeon glove products also contributed overall revenue growth segments revenue growth industry averages fiscal 2004 segments revenue growth 6 fiscal 2003 resulted increased sales distributed selfmanufactured products addition several new contracts hospitals health care networks well increased market share growing surgery center market contributed increased sales distributed selfmanufactured products increased demand certain existing selfmanufactured products including medical gloves medivacr suction canisters procedure based delivery systemr kits minor procedure trays accounted portion segments revenue growth addition new selfmanufactured products also contributed overall revenue growth segment examples new selfmanufactured products include esteemr surgeon gloves tiburontm astoundtm fabrics within convertorsr business pharmaceutical technologies services segments revenue growth 25 fiscal 2004 resulted acquisitions sales momentum within pharmaceutical development nuclear pharmacy services packaging services businesses approximately 5 segments revenue growth due inclusion intercare acquisition completed december 2003 intercares results operations included prior period amounts intercares operations shown considerable sales momentum since acquisition completed particularly fourth quarter fiscal 2004 also segments revenue growth benefited inclusion syncor acquisition completed january 1 2003 syncors results operations included amounts first half fiscal 2003 excluding impact acquisitions within segment revenue growth would approximately 2 fiscal 2004 segments revenue growth partially dampened delay startup commercial manufacturing key sterile products signed contracts certain regulatory inspections product approvals delayed biotechnology sterile life sciences business segments revenue growth impacted foreign exchange fluctuations company applies constant exchange rates translate foreign operations revenue us dollars impact actual foreign exchange rate changes translation purposes retained within corporate segment see footnote 6 table note 18 notes consolidated financial statements segments revenue growth 59 fiscal 2003 resulted acquisitions increased demand within oral technologies biotechnology sterile life sciences packaging services businesses acquisitions syncor effective january 1 2003 boron lepore associates inc given legal designation cardinal health 401 inc referred form 10k blp effective june 2002 resulted significant revenue growth fiscal 2003 blps revenue includes customer reimbursements outofpocket expenses generally comprise travel expenses incidental costs incurred fulfill services required various contracts recorded gross revenue excluding impact acquisitions within segment revenue growth would approximately 7 fiscal 2003 product sales segments businesses showed particular strength included lillys zyprexar zydisr antipsychotic mylans amnesteemtm generic drug treatment acne sepracors xoponexr respiratory drug growth within biotechnology sterile life sciences business negatively impacted planned shutdown twelve weeks domestic sterile manufacturing facility expand capacity automation information services segments revenue growth 2 fiscal 2004 reflective premature revenue recognition adjustment resulting audit committees internal review fully described note 1 notes consolidated financial statements operationally segments revenue growth fiscal 2004 included sales growth within medication product lines pyxis medstationr system addition new products segment adversely affected softening demand hospital level company believes softening primarily attributable capital spending pressures experienced hospitals increasingly competitive market factors also seen weakening segments committed contract backlog company believes trend may continue shortterm however company remains confident longterm prospects segment patient safety concerns combine innovative new products drive future demand order aid comparability segments operating results fiscal 2004 company recorded corporate allocation adjustment segments revenue 21 million representing estimate interest income segment would earned company completed sales lease receivables allocation recorded within revenue consistent recording interest income received salestype leases allocation recorded comparative purposes reflect segments growth rate excluding impact corporateinitiated lease sales excluding impact allocation entry segments revenue growth would negative 1 fiscal 2004 information see footnote 6 table note 18 notes consolidated financial statements segments revenue growth 19 fiscal 2003 resulted strong sales new existing patient safety supply management product lines including pyxis medstationr pyxis anesthesia systemtm pyxis connecttm pyxis supplystationr systems addition segments revenue benefited fiscal 2003 gains approximately 10 million realized upon sales salestype lease receivables bulk deliveries customer warehouses presented historically pharmaceutical distribution provider services segments revenue classified two categories operating revenue bulk deliveries customer warehouses bulk deliveries customer warehouses historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer ships product directly customers warehouse product shipped customers warehouse shortly received company put companys inventory either case bulk revenue bulk revenue product shipped customer bulk form received company manufacturers company previously since fiscal 2002 followed internal policy distinguishing operating revenue bulk revenue based long product companys possession prior shipped customers product possession company 24 hours prior shipped customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue companys internal policy also provided customer orders bulk shipments filled inventory within companys warehouse deemed operating revenue order product placed manufacturer prior company receiving bulk order one customers justintime operating revenue bulk shipments product possession company 24 hours prior shipped customers respect certain bulk shipments intentionally held 24 hours described text following table justintime bulk shipments quarter three year period ended june 30 2004 approximately follows based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held 24 hours pursuant internal policy shipments classified operating revenue four quarters within fiscal 2003 2002 company estimates approximately 813 million 414 million improperly classified operating revenue fiscal 2003 2002 respectively impact practice previously quantified disclosed part companys reported operating revenue improper classification bulk revenue operating revenue impact companys previously reported total revenue operating net earnings periods following table shows estimated amount bulk revenue improperly classified operating revenue manner described shows estimated impact adjusting bulk revenue operating revenue periods improper classifications occurred response internal review conducted companys audit committee see part item 3 legal proceedings note 1 notes consolidated financial statements review company policies company changed definition bulk revenue transactions following characteristics defined bulk revenue deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products b delivery products customer bulk form products received manufacturer c warehouse customer warehouse process center deliveries customers large high volume full case quantities bulk revenue new definition 180 billion fiscal 2004 154 billion fiscal 2003 137 billion fiscal 2002 increase bulk revenue fiscal 2004 primarily relates additional volume existing customers increase bulk revenue fiscal 2003 primarily relates new customers additional volume existing customers fiscal 2004 company decided aggregate revenue classes within form 10k operating revenue bulk deliveries customer warehouses combined periods presented revenue cost products sold presented single amounts consolidated statements earnings reclassifications effect previously reported total revenue related cost products sold net earnings per share however reclassifications impact previously reported growth rates focused solely operating revenue beginning form 10k information concerning portion companys revenue arises bulk revenue discussed companys managements discussion analysis financial condition results operations past bulk deliveries customer warehouses also included certain revenue relating pharmaceutical technologies services segment pharmaceutical technologies services segments revenue classified bulk deliveries customer warehouses represented reimbursement customers certain outofpocket expenses incurred company behalf customers totaled 2005 million fiscal 2003 customer reimbursements included within companys definition bulk revenue going forward operating earnings operating earnings company reportable segments follows 1 see note 18 notes consolidated financial statements description corporate operating earnings following table summarizes operating earnings growth rates company reportable segments well percent company operating earnings excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year 2 companys overall operating earnings growth 6 18 respectively fiscal 2004 2003 includes effect special items special items allocated segments see note 4 notes consolidated financial statements information regarding companys special items total company total operating earnings increased 6 18 fiscal 2004 2003 respectively following paragraphs provide description varying dynamics affecting total companys operating earnings fiscal 2004 2003 fiscal 2004 operating earnings increased 6 fiscal 2004 primarily result companys revenue growth 15 time period yielded gross margin increase 6 gross margins grew slower rate revenue primarily result 1 continued dampening effect reduced vendor margins competitive pricing within pharmaceutical distribution business driven changes business model see overview section discussion 2 increased mix lowermargin distribution business within medical products services segment 3 increased mix lower margin business primarily nuclear pharmacy services within pharmaceutical technologies services segment 4 competitive product pricing actions within automation information services segment overall increase gross margin reflects increased contributions companys operating segments outside pharmaceutical distribution provider services segment generate higher gross margins operating earnings percentage revenue segments currently account onehalf companys operating earnings company expects trend continue acquisitions completed company accounted approximately 3 operating earnings growth increases revenue gross margin partially offset 4 increase selling general administrative expenses fiscal 2004 well increase 175 million companys special items overall increase operating expenses primarily result additional expenses resulting acquisitions higher personnel costs associated overall business growth increase depreciation amortization costs additionally company continues invest research development strategic initiatives benefit future periods investments approximately 115 million fiscal 2004 charged current operating earnings incurred increases selling general administrative expenses offset partially 1 reduction versus prior fiscal year incentive compensation expenses approximately 64 million due performance companys consolidated operations relative managements expectations established financial performance metrics reductions affecting companys business segments 2 adjustments certain trade receivable reserves lower bad debt expenses combined impact approximately 10 million due changes customerspecific credit exposures well improvements customer credit billing collection processes yielding significant reductions past due uncollectible accounts fiscal 2003 company attributes operating earnings increase 18 fiscal 2003 revenue growth 11 time period yielded gross margin increase 11 selling general administrative expenses grew 8 period primarily due additional expenses resulting acquisitions higher personnel costs associated overall business growth increase depreciation amortization costs however selling general administrative expenses grew slower rate gross margin contributed overall percentage increase operating earnings addition significant contributor overall operating earnings increase decrease 767 million companys special items due recognition special item income 1015 million related net litigation settlements received company fiscal 2003 compared 338 million received fiscal 2002 pharmaceutical distribution provider services segments operating earnings declined 1 fiscal 2004 primarily due reduced vendor margins caused changing business model within pharmaceutical distribution business described overview section impact competitive pricing adjustments negatively impacted segment fiscal 2004 included following items within pharmaceutical distribution business increase inventory valuation vendor dispute reserves fourth quarter 117 million b adverse adjustment third quarter 92 million vendor margins addition one several aspects business model transition adversely impacting pharmaceutical distributions year operating earnings change estimation vendor margin generic health beauty products pharmaceutical manufacturers approximately 153 million declines partially offset following segment revenue growth 15 coupled expense control change accounting cash discounts resulting additional gross margin 200 million fiscal 2004 see additional discussion accounting change notes 16 19 notes consolidated financial statements favorable year impact 147 million changes lastin firstout lifo reserve favorable year impact lower incentive compensation expense favorable year impact certain nonrecurring expenses recorded fiscal 2003 relating operations bindley acquisition favorable year impact 34 million charge recorded fiscal 2003 relating segments vendor margins generic suppliers segments operating earnings increase 10 fiscal 2003 resulted primarily following segment revenue growth 10 change timing income recognition pharmaceutical manufacturers payments existing inventory management agreements modified cash basis accrual basis resulting favorable gross margin impact approximately 13 million recorded third quarter expense controls resulted decrease 6 selling general administrative expenses favorable year impact 124 million relating changes corporate expenses allocated segment also contributing improvement fiscal 2003 year performance certain nonrecurring expenses approximately 40 million recorded fiscal 2002 associated operations acquired part bindley acquisition nonrecurring expenses fiscal 2002 partially offset 23 million benefit recognized period result changes companys lifo calculation respect generic products order accurately reflect inflationary indices segments operating earnings fiscal 2003 negatively impacted 52 million year impact within pharmaceutical distribution business model transition impacting vendor margins generic health beauty products pharmaceutical vendors medical products services segments operating earnings growth 13 fiscal 2004 resulted primarily segments revenue growth 11 time period led sales momentum distribution contracts gains within international markets segment also realized manufacturing productivity improvements resulting gross margin gains addition operating earnings benefited lower incentive compensation expense versus prior year segments operating earnings growth partially dampened increased mix lower margin distributed products competitive pricing within industry increase approximately 9 million raw material prices segments operating earnings growth 9 fiscal 2003 resulted segments revenue growth 6 time period ability leverage revenue growth additional gross margin gains segments gross margin positively impacted increased sales existing new highermargin selfmanufactured products manufacturing efficiencies achieved fiscal year outsourcing product manufacturing cost efficient areas addition operating earnings benefited various required balance sheet reserve adjustments approximately 82 million recorded year relating historical customer vendor disputes operating earnings growth rate negatively affected 1 impact new distribution agreements increased sales lowermargin distributed products fiscal 2003 2 increased corporate expenses 25 million allocated segment 3 onetime adjustment recorded fiscal 2002 transfer segments incentive compensation expenses approximately 15 million corporate segment adjustment recorded corporate segment business segments standalone incentive compensation program effect time would resulted incentive compensation expense year however corporate management decision made include segments employees companys overall incentive compensation program advance integrating various employee benefit programs pharmaceutical technologies services segments operating earnings growth 26 fiscal 2004 resulted primarily segments revenue growth 25 time period sales momentum pharmaceutical development nuclear pharmacy services packaging services businesses showing particular strength segment also benefited acquisitions completed company specifically intercare syncor acquisition intercare completed second quarter fiscal 2004 therefore results operations included prior period also syncors results operations included first half fiscal 2003 since acquisition completed january 1 2003 excluding impact acquisitions within segment operating earnings growth would approximately 8 fiscal 2004 segments gross margin percentage revenue negatively impacted increase services provided nuclear pharmacy services business lower gross margin ratio compared businesses within segment segments operating earnings also benefited year reduced incentive compensation expenses operating earnings growth dampened delay startup commercial manufacturing certain sterile products discussed segments revenue discussion addition segments operating earnings growth impacted foreign exchange fluctuations company applies constant exchange rates translate foreign operations operating earnings us dollars impact actual foreign exchange rate changes translation purposes retained within corporate segment see footnote 6 table note 18 notes consolidated financial statements segments operating earnings growth 39 fiscal 2003 resulted primarily segments revenue growth 59 time period discussed revenue section excluding impact acquisitions within segment operating earnings growth would approximately 13 fiscal 2003 deleveraging effect gross margin revenue within segment primarily driven addition syncors nuclear pharmacy services business addition blps customer reimbursements outofpocket expenses incurred fulfill services required various contracts syncor lower gross margin ratio businesses within segment blp records customer reimbursements gross within revenue cost products sold generates margin automation information services segments operating earnings growth 2 fiscal 2004 impacted premature revenue recognition adjustment resulting audit committees internal review fully described note 1 notes consolidated financial statements segments operating earnings growth fiscal 2004 resulted part segments revenue growth 2 time period conjunction operational improvements favorable product mix addition segment benefited reduction receivable reserves lower bad debt expenses combined impact approximately 82 million due improvements customerspecific credit matters well general improvements customer credit billing collection procedures resulting significant reductions past due uncollectible accounts segments operating earnings also benefited year reduced incentive compensation expenses b corporate expense allocation 15 million mentioned segments revenue discussion company recorded comparative purposes corporate allocation 21 million segment representing estimated interest income segment would earned company initiated sale lease receivables excluding impact allocation segments operating earnings growth would negative 6 fiscal 2004 see segments discussion revenue additional information regarding allocation entry segments operating earnings growth 27 fiscal 2003 resulted primarily segments revenue growth 19 time period conjunction improved mix highermargin products sold productivity gains realized operational improvements addition operating earnings fiscal 2003 included gains approximately 10 million sales salestype leases special items following summary companys special items see note 4 notes consolidated financial statements detail companys special items fiscal 2004 2003 2002 interest expense decrease interest expense 164 million fiscal 2004 172 million fiscal 2003 resulted lower interest rates borrowing levels due companys strong operating cash flow company manages exposure interest rates using various hedging strategies see notes 3 7 notes consolidated financial statements also included within interest expense gains losses recognized transactions outside companys ordinary course business eg sales lines businesses individual facilities well adjustments equity investments following summarizes significant transactions occurred fiscal 2004 2003 2002 fiscal 2004 company recorded net gains approximately 119 million 63 million related sale nonstrategic businesses within pharmaceutical technologies services medical products services segments company also recorded 68 million gain related sale land within medical products services segment addition company recorded 42 million asset impairment charge relating domestic intellectual property rights within automation information services segment fiscal 2003 company recorded net gain approximately 176 million related sale nonstrategic business within pharmaceutical distribution provider services segment gain 80 million result payment company received exchange amending contract within automation information services segment releasing companys exclusivity rights designated territory also within fiscal 2003 company recorded loss 79 million related writeoff certain obsolete assets result system implementation within pharmaceutical technologies services segment fiscal 2002 company recorded net gain approximately 224 million related sale nonstrategic business partially offset losses related asset abandonments within pharmaceutical technologies services segment 115 million medical products services segment 46 million provision income taxes provisions income taxes relative earnings income taxes discontinued operations cumulative effect changes accounting 319 pretax earnings fiscal 2004 336 fiscal 2003 338 fiscal 2002 fluctuations effective tax rate primarily due changes within state foreign effective tax rates resulting companys business mix changes tax impact special items may unique tax implications depending nature item taxing jurisdiction companys effective tax rate reflects tax benefits derived increasing operations outside united states generally taxed rates lower us statutory rate 35 percent fiscal 2004 companys provision income taxes benefited increased profits production lower tax international countries eg thailand dominican republic company subsidiaries operating puerto rico tax incentive agreement expiring 2019 well tax agreement place thailand expires 2013 loss discontinued operations see note 21 notes consolidated financial statements information companys discontinued operations critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation companys financial condition results operations require use complex subjective estimates based upon past experience managements judgment uncertainty inherent estimates actual results may differ estimates policies applied preparing companys financial statements management believes dependent application estimates assumptions additional accounting policies see note 3 notes consolidated financial statements allowance doubtful accounts trade receivables comprise amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment companys management determining appropriate allowance doubtful accounts includes general specific reserves company reviews accounts receivable agings industry trends customer financial strength credit standing payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults increases due changes customers financial condition general economic conditions companys allowance uncollectible accounts may require adjustment allowance doubtful accounts percentage customer receivables 33 41 june 30 2004 2003 respectively decrease result adjustments certain trade receivable reserves due changes customerspecific credit exposures well improvements customer credit billing collections processes hypothetical 01 increase decrease reserve percentage trade receivables fiscal 2004 reserve would result increase decrease bad debt expense approximately 42 million company believes reserve maintained expenses recorded fiscal year 2004 appropriate consistent historical methodologies employed favorable net effect results improvements companys credit collection practices actual experiences total reserve june 30 2004 2003 exceeds total company receivable balance greater 60 days past due dates see schedule ii included form 10k includes rollforward activity allowance reserves inventories majority inventories approximately 66 2004 68 2003 stated lower cost using lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would increased 578 million 614 million fiscal 2004 2003 respectively reconciliation fifo inventory lifo inventory inventories recorded companys consolidated balance sheets net reserves excess obsolete inventory company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable companys assumptions additional inventory reserves may required however would expected material adverse impact companys financial statements goodwill company accounts goodwill accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment annually indicators impairment exist accordingly company amortize goodwill intangible assets indefinite lives intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test fair value companys reporting units compared carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment companys impairment analysis based review priceearnings ratio companies similar nature scope size use alternative estimates peer groups changes industry could affect estimated fair value assets potentially result impairment identified impairment would result adjustment companys results operations company completed required impairment testing fiscal 2004 2003 incur impairment charges business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many companys acquisitions assigned intangible assets require management use significant judgment determining fair value company typically utilizes thirdparty valuation experts valuation experts process addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction valuation experts assess status acquired companys research development projects determine existence inprocess research development iprd company historically recorded significant costs related iprd however conjunction recent acquisition alaris company required estimate fair value acquired iprd required selecting appropriate discount rate estimating future cash flows project management also assessed current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established immediately writtenoff special item companys consolidated statement earnings company recorded 127 million special item fiscal 2004 representing estimate alaris iprd see note 4 notes consolidated financial statements special items companys special items consist primarily costs relate integration previously acquired companies costs restructuring operations improve productivity integration costs acquisitions accounted pooling interests method recorded accordance emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sec staff accounting bulletin 100 restructuring impairment charges certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 recognition liabilities connection purchase business combination certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan formalized adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 accounting costs associated exit disposal activities account costs incurred restructuring activities standard liability exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 required company recognize liability restructuring costs date commitment exit plan majority special items related acquisitions restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments integration costs employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include remaining net book value assets longer used result integration restructuring activities integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan actual costs could differ managements estimates actual results different original estimates company record additional expense reverse previously recorded expenses adjustments recorded special items company also records settlements significant lawsuits infrequent nonrecurring unusual nature special items see note 4 notes consolidated financial statement additional information vendor reserves determining appropriate vendor reserve company assesses historical experience current outstanding claims company researches resolves contested transactions based discussions vendors company policy findings research performed given time outstanding items various stages research resolution ultimate outcome certain claims may different companys original estimate may require adjustment however company believes reserves recorded disputes adequate based upon current facts circumstances income tax reserves company established estimated liability federal state foreign income tax exposures arise meet criteria accrual sfas 5 accounting contingencies liability addresses number issues company may pay additional taxes interest examinations taxing authorities concluded company developed methodology estimating tax liability related matters consistently followed methodology period liability amounts matters based evaluation underlying facts circumstances thorough research technical merits companys arguments assessment chances company prevailing arguments cases company considers previous irs findings company generally consults external tax advisers researching conclusions amounts accrued particular period adjusted upward downward unless significant change facts circumstances occurred formally documented loss contingencies company accrues contingencies related litigation accordance sfas 5 accounting contingencies requires company assess contingencies determine degree probability range possible settlement estimated loss contingency accrued companys consolidated financial statements probable liability incurred amount settlement reasonably estimated assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate settlement may differ estimates self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 230 million 128 million estimated costs related outstanding claims june 30 2004 2003 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based companys assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period adjusted period equal half month impact earnings would 47 million however company believes liabilities recorded adequate based upon current facts circumstances company also selfinsured various general liability workers compensation claims company recorded liabilities totaling 480 million 392 million anticipated costs related general liability workers compensation june 30 2004 2003 respectively costs include estimate expected settlements pending claims defense costs estimate claims incurred reported estimates based companys assessment outstanding claims historical analysis actuarial information current payment trends amount ultimate liability respect matters may differ estimates liquidity capital resources sources uses cash following table summarizes companys consolidated statements cash flows fiscal 2004 2003 2002 operating activities cash provided operating activities nearly doubled fiscal 2004 compared fiscal 2003 primarily due increase accounts payable increased earnings continuing operations primary driver increase accounts payable due timing payments fiscal yearend well inventory buys executed shortly fiscal yearend within companys pharmaceutical distribution business addition result certain nonrecurring end year arrangements payments vendors fiscal 2004 reduced 258 million due acceleration payments june 30 2003 selected pharmaceutical vendors arrangements resulted changes original payment terms vendors economic consideration exchanged parties companys overall investment inventories declined fiscal 2004 compared fiscal 2003 due primarily changing business model pharmaceutical distribution business see overview section earlier within managements discussion analysis financial condition results operations business model change continue positive impact companys operating cash flows nearterm reducing companys inventory onhand moderating historical seasonal fluctuations working capital discussion changes within companys earnings continuing operations see results operations section additionally companys operating cash flow benefited approximately 993 million fiscal 2004 due sales lease receivables companys automation information services segment see note 10 notes consolidated financial statements information regarding sales lease receivables cash provided operating activities fiscal 2003 increased 4141 million compared fiscal 2002 primarily due increased earnings continuing operations b sales lease receivables benefited companys operating cash flow 2476 million fiscal 2003 compared 978 million fiscal 2002 positive factors partially offset year impact end year payments selected pharmaceutical vendors approximately 370 million economic consideration exchanged parties ii accelerated end year customer receipts approximately 152 million economic consideration exchanged parties positive factors also partially offset increases trade receivables inventories increase trade receivables driven companys revenue growth increase inventories resulted primarily increased sales across companys segments rate increase inventories less prior years due impact branded generic product conversions vendor inventory policies inventory management agreements synergies realized bindley integration also lowered companys investment inventory investing activities cash used investing activities fiscal 2004 2003 2002 primarily represents companys use cash complete acquisitions expand role provider services health care industry see acquisitions divestitures within part item 1 business information regarding companys acquisitions develop enhance companys infrastructure including facilities information systems machinery equipment fiscal years company focused developing infrastructure within pharmaceutical technologies services segment uses cash noted partially offset proceeds received sale property equipment assets well proceeds sale discontinued operations fiscal 2004 2003 financing activities companys financing activities utilized cash 8157 million 7123 million fiscal 2004 2003 respectively provided cash 1149 million fiscal 2002 cash used financing activities fiscal 2004 2003 primarily reflects companys decision repurchase shares authorized board directors see share repurchases additional information cash outflows fiscal 2004 2003 partially offset net proceeds received companys debt facilities see capital resources additional information proceeds received shares issued various employee stock plans cash provided financing activities fiscal 2002 primarily reflects issuance 300 million notes partially offset repurchase companys shares international cash companys cash balance approximately 11 billion june 30 2004 includes 2993 million cash held subsidiaries outside united states although vast majority cash held outside united states available repatriation could subject united states federal income tax share repurchases fiscal 2004 2003 2002 companys board directors approved management completed several share repurchase programs share repurchase programs aggregate allowed company repurchase 30 billion companys shares fiscal 2004 company repurchased approximately 242 million shares average price paid per share 6203 fiscal 2003 company repurchased approximately 196 million shares average price paid per share 6077 fiscal 2002 company repurchased approximately 51 million shares average price paid per share 6024 repurchased shares placed treasury used general corporate purposes see issuer purchases equity securities within part item 5 market registrants common shares related shareholder matters issuer purchases equity securities information regarding companys recent share repurchase program capital resources addition cash companys sources liquidity include 15 billion commercial paper program backed 15 billion bank revolving credit facilities 150 million extendible commercial note program committed receivables sales facility program capacity sell 500 million receivables subsequent june 30 2004 capacity committed receivables sales facility program increased 800 million company sold aggregate 800 million receivables program information regarding committed receivables sales facility program see note 10 notes consolidated financial statements also subsequent june 30 2004 company received commitment letter 500 million committed borrowing facility used general corporate purposes facility process negotiated june 30 2004 6342 million commercial paper backed 15 billion bank revolving credit facilities remaining facilities unused company also lines credit approximately 1837 million 684 million outstanding june 30 2004 company maintains two 750 million bank revolving credit facilities available general corporate purposes however primarily used backstop liquidity companys commercial paper program third quarter fiscal 2004 company refinanced maturing 364day 750 million revolving credit facility new fiveyear 750 million revolving credit facility management believes extension fiveyear facility enhanced companys liquidity profile reducing refinancing risk nominal marginal cost connection adding new fiveyear revolving credit facility company also amended existing fiveyear 750 million revolving credit facility third quarter fiscal 2004 administratively conform new fiveyear revolving credit facility subsequent june 30 2004 company borrowed 125 billion aggregate revolving credit facilities proceeds companys revolving credit facilities utilized repay significant portion companys commercial paper program none remained outstanding filing date form 10k general corporate purposes including establishment pharmaceutical inventory pharmaceutical distribution business national logistics center groveport ohio company asset securitization facility allowed company sell receivables generated radiopharmaceutical operations whollyowned subsidiary turn sold receivables multiseller conduit administered third party bank facility allowed borrowings 65 million securitization facility terminated fiscal 2004 fiscal 2004 company retired two series 100 million notes matured 2004 fiscal 2003 2002 company issued 500 million 400 notes due 2015 300 million 445 notes due 2005 respectively proceeds debt issuances used repayment portion companys indebtedness general corporate purposes including working capital expenditures acquisitions investments june 30 2004 company pursuant shelf registration statement filed sec capacity available issuance 500 million equity debt securities fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified longterm debt companys consolidated balance sheet preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entitys receivables time company considers engages acquisition transactions order expand role leading provider services health care industry company evaluates possible candidates merger acquisition intends continue seek opportunities expand role provider services health care industry reporting segments additional transactions entered consummated company may need enter funding arrangements mergers acquisitions company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements including related business combinations debt ratingscovenants companys senior debt credit ratings sp moodys fitch bbb baa3 bbb respectively commercial paper ratings a3 p3 respectively ratings outlooks negative review possible downgrade negative respectively reductions companys credit ratings could negatively impact ability access capital well ability issue additional debt securities currently available interest rates companys various borrowing facilities longterm debt except preferred debt securities discussed free financial covenants minimum net worth cannot fall 41 billion time june 30 2004 company compliance covenant companys preferred debt securities contain minimum adjusted tangible net worth covenant adjusted tangible net worth cannot fall 30 billion certain financial ratio covenants june 30 2004 company compliance covenants breach covenants would followed grace period company may discuss remedies security holders extinguish securities without causing event default interest rate currency risk management company uses forward currency exchange contracts currency options interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 3 7 notes consolidated financial statements information regarding use financial instruments derivatives including foreign currency hedging instruments matter policy company rarely engages speculative transactions involving derivative financial instruments fiscal 2003 company entered one speculative interest rate swap transaction resulting gain approximately 67 million gain recorded interest expense per consolidated statement earnings contractual obligations june 30 2004 companys contractual obligations including estimated payments due period follows 1 represents maturities companys longterm debt obligations shown balance sheet see note 6 notes consolidated financial statements information 2 represents maturities companys capital lease obligations included within longterm debt companys balance sheet 3 represents cash outflows period certain companys longterm liabilities cash outflows could reasonably estimated primary items included estimates companys pension postretirement benefit obligations well accrued marketing fees longterm liabilities certain longterm liabilities deferred taxes excluded table cash outflows associated liabilities timing cash outflows cannot reasonably estimated 4 represents minimum rental payments operating leases initial remaining noncancelable lease terms described note 11 notes consolidated financial statements company also required lease payments based upon libor included amounts due variability related payments see description leases note 10 notes consolidated financial statements 5 purchase obligations defined agreement purchase goods services enforceable legally binding specifying significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded companys total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period significant amount disclosed within fiscal 2005 compared periods primarily represents obligations purchase inventories within pharmaceutical distribution provider services segment 6 company certain obligations repurchase franchisee pharmacies medicine shoppe medicap businesses end term franchise renewal agreement obligations determined thirdparty appraisals periods beyond fiscal 2009 time company cannot estimate amount obligations therefore included presentation offbalance sheet arrangements see note 10 notes consolidated financial statements discussion offbalance sheet arrangements recent financial accounting standards see note 3 notes consolidated financial statements discussion recent financial accounting standards recent developments see notes 1 2 notes consolidated financial statements discussion sec investigation us attorney inquiry audit committee internal review certain reclassification restatement adjustments company made fiscal 2004 prior historical financial statements connection certain conclusions made audit committee september october 2004 part internal review date see also note 22 notes consolidated financial statements discussion subsequent events june 30 2004 item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes appearing elsewhere form 10k connection certain conclusions made audit committee september october 2004 part ongoing internal review prior filing 2004 form 10k company made certain reclassification restatement adjustments fiscal 2004 prior historical consolidated financial statements reflected 2004 form 10k result company supplemented historical disclosures within “management’s discussion analysis financial condition results operations” reflect reclassification restatement adjustments previously reported company business segment operating earnings performance prior period disclosures presented “management’s discussion analysis financial condition results operations” adjusted reflect changes overview cardinal health leading provider products services supporting health care industry company helps health care providers manufacturers improve efficiency quality health care information regarding company’s business please see “part item 1 business” within form 10k results operations following summarizes company’s results operations fiscal years ended june 30 2005 2004 2003 1 growth calculated change increase decrease given year compared immediately preceding year results operations fiscal years noted table reflect breadth products services company offers increasing demand company’s diverse portfolio products services led revenue growth every segment company continues experience strong demand health care providers company provide integrated solutions integrated solutions include products services multiple lines businesses within company currently represent approximately 7 billion annual sales company’s operations organized four reportable segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services see note 18 “notes consolidated financial statements” discussion changes business segments fiscal 2005 company’s pharmaceutical distribution business model transition respect compensated logistical capital administrative services provides branded pharmaceutical manufacturers historically compensation received pharmaceutical distribution business branded pharmaceutical manufacturers based manufacturer’s unique sales practices eg volume product available sale eligibility purchase product cash discounts prompt payment rebates etc pharmaceutical pricing practices eg timing frequency magnitude product price increases specifically significant portion compensation pharmaceutical distribution business received manufacturers derived company’s ability purchase pharmaceutical inventory advance pharmaceutical price increases hold inventory manufacturers increased pharmaceutical prices generate higher operating margin subsequent sale inventory compensation system dependent large degree upon sales practices branded pharmaceutical manufacturer including established policies concerning volume product available purchase advance price increase predictable pharmaceutical pricing practices beginning fiscal 2003 branded pharmaceutical manufacturers began seek greater control amount pharmaceutical product available supply chain result began change sales practices restricting volume product available purchase pharmaceutical wholesalers addition manufacturers increasingly sought services company including providing data concerning product sales distribution patterns company believes manufacturers sought changes provide greater visibility product demand movement market increase product safety integrity reducing risks associated product available distributed secondary market changes significantly reduced compensation received company branded pharmaceutical manufacturers result actions branded pharmaceutical manufacturers company concluded longer adequately consistently compensated reliable consistent logistical capital administrative services provided company manufacturers response developments discussed company established compensation system significantly less dependent manufacturers’ sales pricing practices based services provided company meet unique distribution requirements manufacturer’s products fiscal 2005 company worked individual branded pharmaceutical manufacturers define feeforservice terms adequately compensate company based services provided manufacturers initial feeforservice transition essentially complete help reduce earnings volatility segment part transition feeforservice terms certain new distribution service agreements entered branded pharmaceutical manufacturers continue inflationbased compensation component arrangements certain branded manufacturers still continue solely inflationbased branded pharmaceutical price inflation lower company anticipated operating results could adversely affected respect current exposure contingent feebased compensation pharmaceutical distribution business addition certain key distribution service agreements renegotiated latter half fiscal 2006 fiscal 2007 initial terms expire terms renegotiated agreements unfavorable company could adversely affect company’s operating results revenue operating earnings within pyxis products business clinical technologies services segment declined significantly fiscal 2005 decline result following • lengthened sales installation cycle • delayed introduction pyxis medstation® 3000 next generation pyxis’ medication management system • increased competition within industry • impact audit committee’s internal review fully described note 1 “notes consolidated financial statements” created execution issues efforts attention certain sales installation teams diverted ordinary business operations company believes adverse conditions impacted pyxis products business shortterm remains confident longterm prospects business due expected efficiencies formation clinical technologies services segment greater efficiency realized new installation processes continuing customer demand products services focusing patient safety fourth quarter fiscal 2005 pyxis products business established momentum fiscal 2006 evidenced increased committed contracts primarily new product pyxis medstation 3000 operating earnings within company’s pharmaceutical technologies services segment declined fiscal 2005 decline due part continued delays opening new facilities existing facilities operating planned capacity within biotechnology sterile life sciences business including humacao puerto rico facility company decided close sterile manufacturing facility humacao puerto rico part global restructuring program associated one cardinal health initiative operations underperformed relative company expectations due part continued regulatory issues facility decision affect company’s operations puerto rico locations worldwide addition operating earnings decline within segment also result lower demand medical communication services within healthcare marketing services business adverse conditions experienced segment partially offset strength certain softgel controlled release products well yearoveryear impact acquisitions global restructuring program previously reported fiscal 2005 company launched global restructuring program connection one cardinal health initiative goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation company expects program substantially complete end fiscal 2008 improve operating earnings position company future growth actual operating earnings improvements fiscal 2005 estimated company excess expected improvement 125 million program expected improve operating earnings approximately 190 million fiscal 2006 company expects program implemented two phases first phase program focuses business consolidations process improvements including rationalizing facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines see form 8k filed company december 14 2004 description costs company expects incur connection first phase program second phase program focus longer term integration activities enhance service customers improved integration across company’s segments continue streamline internal operations see form 8k filed company august 5 2005 description costs company expects incur connection second phase program see notes 4 21 “notes consolidated financial statements” discussion restructuring costs incurred company fiscal 2005 related phases global restructuring program government investigations board committee internal reviews company currently subject formal investigation sec relating certain accounting matters us attorney southern district new york conducting inquiry respect company’s audit committee also conducting internal review assisted independent counsel internal review ongoing addition board committee assistance independent counsel separately conducting internal review assign responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers internal review also ongoing settlement discussions recently commenced sec regarding resolution investigation respect company recorded reserve 25 million fiscal 2005 respect sec investigation information regarding matters see “part item 3 legal proceedings” note 1 “notes consolidated financial statements” form 10k product safety leading provider products services supporting health care industry including distribution pharmaceuticals health care products company monitoring issues regarding safety supply chain pharmaceuticals health care products company continue work proactively participants regulators pharmaceutical supply chain help ensure safe efficient company continues work suppliers help minimize risks associated counterfeit products supply chain acquisitions june 28 2004 company acquired approximately 987 outstanding common stock alaris provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction value transaction including assumption alaris’ debt totaled approximately 21 billion information regarding alaris acquisition valuation acquisition’s intangibles impact segment reporting see notes 4 17 18 “notes consolidated financial statements” prior completion alaris acquisition june 16 2004 icu medical inc filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsite® family needlefree values systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief preventing alaris selling smartsite® products july 30 2004 court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits company intends vigorously defend action december 2003 company completed acquisition intercare european pharmaceutical products services company cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt see note 18 “notes consolidated financial statements” information regarding impact acquisition company’s segment reporting fiscal 2005 2004 2003 company completed numerous acquisitions including alaris intercare syncor company’s trend regard acquisitions expand role provider services health care industry trend resulted expansion areas complement company’s existing operations provide opportunities company develop synergies strengthen acquired business health care industry continues change company evaluates possible candidates merger acquisition intends take advantage opportunities expand role provider services health care industry reporting segments assurance company able successfully take advantage opportunity consummate transaction pursued extent company continues pursue acquisitions ability complete transactions may adversely affected government investigations described “part item 3 legal proceedings” note 1 “notes consolidated financial statements” form 10k additional transactions pursued consummated company would incur additional merger acquisitionrelated costs may need enter funding arrangements mergers acquisitions assurance integration efforts associated transaction would successful results operations following sections provide additional detail regarding results operations company applicable results operations company’s reportable segments revenue company reportable segments follows 1 see note 18 “notes consolidated financial statements” discussion changes business segments fiscal 2005 2 see discussion within pharmaceutical distribution provider services section company’s definition bulk revenue 3 corporate revenue primarily consists elimination intersegment revenue periods presented foreign currency translation adjustments fiscal 2004 2003 see footnote 6 note 18 “notes consolidated financial statements” additional information regarding foreign currency translation adjustments following table summarizes revenue growth rates company reportable segments well percent company revenue excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year total company total company revenue increased 15 fiscal 2005 2004 revenue growth fiscal years resulted following • higher sales volume across company’s segments • revenue growth existing customers • addition new customers resulted new corporate arrangements health care providers integrate company’s diverse offerings • addition new products • pharmaceutical price increases within pharmaceutical distribution business averaging approximately 49 62 respectively fiscal 2005 2004 • yearoveryear impact acquisitions increases fiscal 2005 partially offset slower revenue growth within pharmaceutical technologies services segment decline revenue pyxis products within clinical technologies services segment pharmaceutical distribution provider services pharmaceutical distribution provider services revenue growth 16 fiscal 2005 resulted strong sales customers within segment’s core pharmaceutical distribution business significant growth “bulk revenue” defined increased approximately 34 see bulk revenue discussion details addition annualized pharmaceutical price increases approximately 49 contributed growth segment however rate price increases lower rate experienced prior fiscal year discussed note 2 “notes consolidated financial statements” form 10k fiscal 2004 company decided aggregate revenue classes “operating revenue” “bulk deliveries customer warehouses other” combined periods presented total revenue total cost products sold presented single amounts consolidated statements earnings beginning 2004 form 10k information concerning portion company’s revenue arises bulk revenue discussed company’s “management’s discussion analysis financial condition results operations” information regarding reclassification see note 2 “notes consolidated financial statements” pharmaceutical distribution provider services segment reports transactions following characteristics “bulk revenue” • deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products • delivery products customer bulk form products received manufacturer • warehouse customer warehouse process center deliveries • deliveries customers large high volume full case quantities bulk revenue fiscal 2005 241 billion compared 180 billion fiscal 2004 increase bulk revenue primarily relates additional volume existing new customers well market growth within mail order business increase existing customers primarily due certain customers purchasing company rather directly manufacturer company continues provide disclosure concerning bulk sales due differences nature character business activities associated bulk nonbulk revenues nonbulk activities tend complex company receives inventory large full case sizes manufacturer breaks smaller sizes warehouses product picks products specific customer’s order delivers order customer locations retail pharmacies individual hospitals generally justintime basis small sizes certain activities occur bulk transactions bulk typically involves much larger sizes generally unopened cases full pallets shipped either directly manufacturer company customers’ warehousing facilities company’s classification sales bulk nonbulk also corresponds four business operations within pharmaceutical distribution applying definition set forth revenue brokerage trading operations classified bulk revenue repackaging operation classified nonbulk within core facilities operation revenue classified bulk nonbulk customerbycustomer basis based solely upon type customer involved shipments warehouses processing centers primarily retail chain mail order customers classified bulk revenue core facilities revenue classified nonbulk revenue segment’s revenue growth 14 fiscal 2004 resulted primarily strong sales existing customers sales new customers pharmaceutical price increases sales growth existing customers within retail chain alternate site categories segment’s pharmaceutical distribution business showed particular strength segment also benefited contract wins fiscal 2004 pharmaceutical price increases averaging approximately 62 fiscal 2004 extra business day revenue gains partially dampened continued reduction business kmart holding corp “kmart” due kmart’s closure various stores certain contract losses fiscal 2004 segment’s pharmaceutical distribution business medical products services medical products services revenue growth 7 fiscal 2005 resulted primarily increased volume existing customers new contracts signed fiscal 2004 within medicalsurgical distribution business strong international growth especially canada europe favorable foreign exchange translation increased revenue specialty distribution business 6 growth medicalsurgical distribution business primarily increased sales hospital supply ambulatory care customers 11 growth within specialty distribution business resulted increased revenue business’ largest customer growth existing customer base segment’s revenue growth adversely affected slower growth sale selfmanufactured products loss certain business customers within gpo specialty distribution business’ largest customer notified company begin self distribution january 1 2006 significantly impact revenue operating earnings business second half fiscal 2006 customer represented approximately 15 billion 16 segment’s fiscal 2005 revenue company plans partially mitigate loss addition large new customer agreement signed april 2005 cost cutting measures segment’s revenue growth 14 fiscal 2004 resulted primarily increased sales momentum new existing contracts within distribution business well increased sales volume segment’s international businesses new contracts drove increased sales distributed selfmanufactured products sales distribution business particularly strong fiscal 2004 international businesses also generated strong revenue growth increasing nearly 19 prior fiscal year approximately 14 international business revenue growth related changes foreign currency rates sales new selfmanufactured products particularly enhancements within surgeon glove products also contributed overall revenue growth segment’s revenue growth industry averages fiscal 2004 pharmaceutical technologies services pharmaceutical technologies services segment’s revenue growth 6 fiscal 2005 resulted primarily strong demand certain softgel products impact acquisitions primarily intercare acquisition geodax within nuclear pharmacy services business impact foreign exchange rates revenue growth offset certain regulatory issues noted net impact acquisitions divestitures within segment accounted approximately 5 revenue growth fiscal 2005 revenue fiscal 2005 increased approximately 2 result impact foreign exchange rates impact takes consideration fiscal 2005 rate fluctuations due weakening us dollar fiscal 2004 constant rate adjustment see footnote 6 table note 18 “notes consolidated financial statements” additional discussion relates fiscal 2004 constant rate adjustment segment’s growth adversely affected continued delays opening new facilities existing facilities operating planned capacity within company’s biotechnology sterile life sciences business including underperformance humacao puerto rico facility segment’s growth also adversely affected lower demand medical communication services within healthcare marketing services business segment’s revenue growth 25 fiscal 2004 resulted acquisitions sales momentum within pharmaceutical development nuclear pharmacy services packaging services businesses approximately 5 segment’s revenue growth due inclusion intercare acquisition completed december 2003 intercare’s results operations included prior period amounts intercare’s operations considerable sales momentum acquisition completed particularly fourth quarter fiscal 2004 also segment’s revenue growth benefited inclusion syncor acquisition completed january 1 2003 syncor’s results operations included amounts first half fiscal 2003 acquisitions within segment accounted approximately 23 revenue growth fiscal 2004 segment’s fiscal 2004 revenue growth partially dampened delay startup commercial manufacturing key sterile products signed contracts certain regulatory inspections product approvals delayed biotechnology sterile life sciences business revenue growth impacted foreign exchange fluctuations company applied constant exchange rates translate foreign operations’ revenue us dollars impact actual foreign exchange rate changes translation purposes retained within corporate segment see footnote 6 table note 18 “notes consolidated financial statements” clinical technologies services clinical technologies services revenue growth 41 fiscal 2005 resulted primarily impact acquisition alaris strong revenue growth within clinical services consulting business offset significant revenue declines within pyxis products business alaris acquisition accounted approximately 41 segment’s total revenue growth fiscal 2005 alaris’ results operations included prior period amounts pyxis products business experienced revenue decline approximately 17 fiscal 2005 due following • lengthened sales installation cycle • delayed introduction pyxis medstation® 3000 next generation pyxis’ medication management system • increased competition within industry • impact audit committee’s internal review fully described note 1 “notes consolidated financial statements” created execution issues efforts attention certain sales installation teams diverted ordinary business operations company believes adverse conditions impacted pyxis products business’ shortterm remains confident longterm prospects business due expected efficiencies formation clinical technologies services segment greater efficiency realized new installation processes continuing customer demand products services focusing patient safety fourth quarter fiscal 2005 pyxis products business established momentum fiscal 2006 evidenced increased committed contracts primarily new product pyxis medstation 3000 fiscal 2004 pyxis products business sold portions leased asset portfolio direction corporate proceeds transferred corporate pyxis products business subsequently received 210 million allocation corporate related estimated interest income would earned associated lease portfolios sold allocation recorded within revenue consistent recording interest income received salestype leases effective first quarter fiscal 2005 pyxis products business receive corporate allocation see footnote 6 table note 18 “notes consolidated financial statements” details clinical technologies services segment’s revenue growth 10 fiscal 2004 reflective premature revenue recognition adjustment resulting audit committee’s internal review fully described note 1 “notes consolidated financial statements” operationally segment’s revenue growth fiscal 2004 included sales growth within medication product lines pyxis medstation® system addition new products 12 growth within clinical services consulting business segment adversely affected softening demand hospital level pyxis products discussed order aid comparability segment’s operating results fiscal 2004 company recorded corporate allocation adjustment segment’s revenue 210 million representing estimate interest income segment would earned company completed sales lease receivables operating earnings operating earnings company reportable segments follows 1 see note 18 “notes consolidated financial statements” discussion changes business segments fiscal 2005 2 cost company’s shared service center albuquerque new mexico previously reported within corporate segment classified within medical products services operating earnings fiscal 2004 2003 accurately reflect costs within segment received benefits shared service center cost services approximately 182 million 184 million 190 million respectively fiscal 2005 2004 2003 3 corporate operating earnings primarily include special items impairment charges investment spending unallocated corporate administrative expenses see note 18 “notes consolidated financial statements” description corporate operating earnings 4 first quarter fiscal 2006 company modify way corporate costs allocated business segments better align corporate spending business segments based benefits received presentation first quarter fiscal 2006 results include reallocation historical segment amounts comparative purposes following table summarizes operating earnings growth rates company reportable segments well percent company operating earnings excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year 2 company’s overall operating earnings growth 25 7 respectively fiscal 2005 2004 includes effect special items impairment charges special items impairment charges allocated segments see notes 4 21 “notes consolidated financial statements” information regarding company’s special items impairment charges total company operating earnings decreased 25 increased 7 fiscal 2005 2004 respectively following paragraphs provide description varying dynamics affecting total company’s operating earnings fiscal 2005 2004 total company total company operating earnings decreased 25 fiscal 2005 result declining operating earnings company’s reportable segments company’s gross margins dampened primarily following • reduced vendor margins within pharmaceutical distribution business driven primarily changes branded pharmaceutical manufacturers’ sales pricing practices see “overview” section discussion competitive pricing • increased mix lowermargin distribution business competitive pricing increased raw material fuel costs within medical products services segment • continued regulatory issues adversely affecting manufacturing efficiencies within pharmaceutical technologies services segment • lengthened sales installation cycle new product launch delays increased competition within pyxis products business clinical technologies services segment total company operating earnings also adversely affected unfavorable impact related special items 2642 million fiscal 2005 increased costs related company’s global restructuring program associated one cardinal health initiative sec investigation audit committee internal review related matters integration certain acquisitions partially offset settlements received antitrust vitamin litigation see note 4 “notes consolidated financial statements” additional information addition company recorded 1180 million asset impairments fiscal 2005 compared gains 115 million fiscal 2004 see note 21 “notes consolidated financial statements” additional information total company operating earnings fiscal 2005 also impacted following • favorable impact approximately 317 million changes lifo reserve primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories • increase profit sharing expense approximately 389 million compared fiscal 2004 • increase incentive compensation expense approximately 363 million compared fiscal 2004 • expenses approximately 282 million within medical products services segment related estimated remaining liabilities settlement insurance proceeds due outstanding latex litigation • purchase accounting adjustments related alaris acquisition included inventory valuation adjustment “fair value” adjusted higher cost inventory sold adversely affecting gross margins approximately 236 million • product line rationalization inventory accounts receivable reserve adjustments within pyxis products business approximately 303 million • increase inventory reserves within pharmaceutical distribution provider services segment approximately 147 million related generic manufacturer’s bankruptcy 100 million related slow moving inventory • increase audit auditrelated fees approximately 75 million compared fiscal 2004 due increased costs associated complying sarbanesoxley act 2002 expanded audit procedures revision allocation audit auditrelated fees fiscal periods total company operating earnings increased 7 fiscal 2004 primarily result company’s revenue growth 15 time period yielded gross margin increase 6 gross margins grew slower rate revenue primarily result following • continued dampening effect reduced vendor margins competitive pricing within pharmaceutical distribution business driven changes business model see “overview” section discussion • increased mix lowermargin distribution business within medical products services segment • increased mix lower margin business primarily nuclear pharmacy services business within pharmaceutical technologies services segment • competitive product pricing actions within clinical technologies services segment overall increase gross margin fiscal 2004 reflects increased contributions company’s operating segments outside pharmaceutical distribution provider services segment generate higher gross margins operating earnings percentage revenue segments accounted onehalf company’s operating earnings acquisitions completed company accounted approximately 3 operating earnings growth increases revenue gross margin partially offset 4 increase selling general administrative expenses fiscal 2004 well increase 175 million company’s special items overall increase operating expenses primarily result additional expenses resulting acquisitions higher personnel costs associated overall business growth increase depreciation amortization costs additionally company continued invest research development strategic initiatives benefit future periods investments approximately 115 million fiscal 2004 charged current operating earnings incurred increases selling general administrative expenses offset partially reduction versus prior fiscal year incentive compensation expenses approximately 64 million due performance company’s consolidated operations relative management’s expectations established financial performance metrics reduction affected company’s business segments expense increases also offset adjustments certain trade receivable reserves lower bad debt expenses combined impact approximately 10 million due changes customerspecific credit exposures improvements customer credit billing collection processes yielding significant reductions past due uncollectible accounts addition operating earnings included 115 million net gains sale certain businesses assets recorded “impairment charges other” pharmaceutical distribution provider services pharmaceutical distribution provider services operating earnings decreased 2 fiscal 2005 primarily result reduced vendor margins resulting changes branded pharmaceutical manufacturers’ sales pricing practices discussed “overview” section competitive pricing pressures discussed branded pharmaceutical manufacturers changed sales practices restricting product available purchase pharmaceutical wholesalers addition branded pharmaceutical manufacturers’ product pricing practices become less predictable frequency price increases slowed amounts decreased versus historical levels fiscal 2005 annualized pharmaceutical price increases approximately 49 compared 62 fiscal 2004 fiscal 2005 company worked individual branded pharmaceutical manufacturers define feeforservice terms adequately compensate company based services provided manufacturers initial feeforservice transition essentially complete help reduce earnings volatility segment’s operating earnings also favorably impacted 317 million changes lifo reserve primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories operating earnings also impacted improved margins generic products expense control within pharmaceutical distribution business resulted lowering selling general administrative expenses percentage sales addition operating earnings fiscal 2005 adversely impacted approximately 147 million inventory reserves related generic manufacturer’s bankruptcy approximately 100 million related slow moving inventory reserves approximately 78 million result inventory rationalization certain health beauty care products segment’s operating earnings decreased 2 fiscal 2004 primarily due reduced vendor margins caused changing business model within pharmaceutical distribution business described “overview” section impact competitive pricing adjustments within pharmaceutical distribution business negatively impacted segment fiscal 2004 included increase inventory valuation vendor dispute reserves fourth quarter approximately 117 million adverse adjustment third quarter approximately 92 million vendor margins addition one several aspects business model transition adversely impacting pharmaceutical distribution’s yearoveryear operating earnings change estimation vendor margin generic health beauty products pharmaceutical manufacturers impact approximately 153 million declines partially offset following • segment revenue growth 14 coupled expense control • change accounting cash discounts resulting additional gross margin 200 million fiscal 2004 see additional discussion accounting change note 16 “notes consolidated financial statements” • favorable yearoveryear impact 147 million changes lifo reserve • favorable yearoveryear impact lower incentive compensation expense • favorable yearoveryear impact certain nonrecurring expenses recorded fiscal 2003 relating operations bindley acquisition • favorable yearoveryear impact 34 million charge recorded fiscal 2003 relating segment’s vendor margins generic suppliers medical products services medical products services segment’s operating earnings decreased 3 fiscal 2005 primarily result pricing pressures related selfmanufactured products increased raw material fuel costs increased mix lower margin distributed products competitive pricing large gpo contract operating earnings also adversely impacted 282 million charge latex litigation fully described within note 11 “notes consolidated financial statements” selling general administrative expenses grew 10 fiscal 2005 primarily due charge latex litigation described higher personnel costs associated overall business growth items partially offset revenue growth 7 manufacturing efficiencies expense control related company’s global restructuring program incremental operating earnings new customers segment’s operating earnings growth 11 fiscal 2004 resulted primarily revenue growth 14 time period led sales momentum distribution contracts gains within international markets segment also realized manufacturing productivity improvements resulting gross margin gains addition operating earnings benefited lower incentive compensation expense versus prior year segment’s operating earnings growth partially dampened increased mix lower margin distributed products competitive pricing within industry increase approximately 9 million raw material prices pharmaceutical technologies services pharmaceutical technologies services segment’s operating earnings decreased 28 fiscal 2005 primarily due continued delays opening new facilities existing facilities operating planned capacity within company’s biotechnology sterile life sciences business including underperformance humacao puerto rico facility fourth quarter fiscal 2005 company decided close sterile manufacturing facility humacao puerto rico part global restructuring program operations underperformed relative company expectations due part continued regulatory issues facility decision affect company’s operations puerto rico locations worldwide addition operating earnings segment’s healthcare marketing services business adversely affected lower demand medical communication services operating earnings also adversely impacted approximately 80 million related write inventory within biotechnology sterile life sciences business operating earnings declines partially offset strength certain softgel controlled release products yearoveryear impact acquisitions approximately 6 impact foreign exchange rates operating earnings significantly affect fiscal 2005 growth rates takes consideration fiscal 2005 rate fluctuations due weakening us dollar fiscal 2004 constant rate adjustment see footnote 6 table note 18 “notes consolidated financial statements” additional discussion relates fiscal 2004 constant rate adjustment change made fiscal 2005 segment’s operating earnings growth 26 fiscal 2004 resulted primarily revenue growth 25 time period sales momentum pharmaceutical development nuclear pharmacy services packaging services businesses showing particular strength segment also benefited acquisitions completed company specifically intercare syncor acquisition intercare completed second quarter fiscal 2004 therefore results operations included prior period also syncor’s results operations included first half fiscal 2003 acquisition completed january 1 2003 acquisitions within segment accounted approximately 18 operating earnings growth fiscal 2004 segment’s gross margin percentage revenue negatively impacted increase services provided nuclear pharmacy services business lower gross margin ratio compared businesses within segment’s operating earnings also benefited yearoveryear reduced incentive compensation expenses operating earnings growth dampened delay startup commercial manufacturing certain sterile products discussed segment’s revenue discussion addition segment’s fiscal 2004 operating earnings growth impacted foreign exchange fluctuations company applied constant exchange rates translate foreign operations’ operating earnings us dollars impact actual foreign exchange rate changes translation purposes retained within corporate segment fiscal 2004 see footnote 6 table note 18 “notes consolidated financial statements” additional discussion relates fiscal 2004 constant rate adjustment change made fiscal 2005 clinical technologies services clinical technologies services segment’s operating earnings decreased 19 fiscal 2005 primarily decreased operating earnings within pyxis products business completely offset acquisition benefit alaris transaction pyxis products business performance impacted • decreased revenue 17 fiscal 2005 • lower unit margins due adverse yearoveryear sales mix • aggressive price discounting market place • product line rationalization inventory accounts receivable reserve adjustments approximately 303 million • positive segment allocation adjustments recorded fiscal 2004 21 million estimated interest income business would earned assets sold part leased asset portfolio sales proceeds sales returned corporate general corporate requirements alaris acquisition improved operating earnings approximately 26 fiscal 2005 results operations acquisition included prior period amounts operating results alaris incremental segment’s results yearoveryear adversely impacted effect purchase accounting adjustments recorded first two quarters fiscal 2005 adjustments included inventory valuation adjustment “fair value” adjusted higher cost inventory sold adversely affected gross margins approximately 236 million segment’s operating earnings growth 6 fiscal 2004 impacted premature revenue recognition adjustment resulting audit committee’s internal review fully described note 1 “notes consolidated financial statements” segment’s operating earnings growth fiscal 2004 resulted part segment’s revenue growth 10 time period conjunction operational improvements within pyxis products business expense control within clinical services consulting business addition segment benefited reduction receivable reserves lower bad debt expenses combined impact approximately 82 million due improvements customerspecific credit matters general improvements customer credit billing collection procedures resulting significant reductions past due uncollectible accounts segment’s fiscal 2004 operating earnings also benefited yearoveryear reduced incentive compensation expenses corporate expense allocation 15 million mentioned segment’s revenue discussion company recorded comparative purposes corporate allocation 210 million segment representing estimated interest income segment would earned company initiated sale lease receivables see segment’s discussion “revenue” additional information regarding allocation entry fiscal 2004 impairment charges see note 21 “notes consolidated financial statements” additional information regarding “impairment charges other” special items following summary company’s special items see note 4 “notes consolidated financial statements” detail company’s special items fiscal 2005 2004 2003 interest expense “interest expense other” increased 231 million fiscal 2005 primarily increased interest expense 548 million due increased borrowing levels rates company manages exposure interest rates using various hedging strategies see notes 3 7 “notes consolidated financial statements” 548 million increase interest expense fiscal 2005 partially offset company recording minority interest impact approximately 194 million certain impairment charges within pharmaceutical technologies services segment’s oral technologies business impairment charges recorded within “impairment charges other” consolidated statements earnings fiscal 2005 see note 21 “notes consolidated financial statements” additional information regarding “impairment charges other” increase “interest expense other” 41 million fiscal 2004 resulted primarily adverse yearover year impact foreign exchange rates impact gain recognized fiscal 2003 related speculative interest rate swap transaction partially offset decreased interest expense provision income taxes provisions income taxes relative earnings income taxes discontinued operations cumulative effect changes accounting 358 pretax earnings fiscal 2005 319 fiscal 2004 336 fiscal 2003 effective tax rate fiscal year 2005 includes tax expense related planned repatriation foreign earnings provided american jobs creation act 2004 “ajca” see following paragraph generally fluctuations effective tax rate due changes within state foreign effective tax rates resulting company’s business mix changes tax impact special items may unique tax implications depending nature item taxing jurisdiction company’s effective tax rate reflects tax benefits derived increasing operations outside united states generally taxed rates lower us statutory rate 35 company subsidiaries operating puerto rico tax incentive agreement expiring 2019 well tax agreement place thailand expires 2013 october 22 2004 ajca signed law provision ajca creates temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends controlled foreign corporations fourth quarter fiscal 2005 company determined repatriate 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions ajca accordingly recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca see note 8 “notes consolidated financial statements” additional information earningsloss discontinued operations see note 22 “notes consolidated financial statements” information company’s discontinued operations critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation company’s financial condition results operations require use complex subjective estimates based upon past experience management’s judgment uncertainty inherent estimates actual results may differ estimates policies applied preparing company’s consolidated financial statements management believes dependent application estimates assumptions additional accounting policies see note 3 “notes consolidated financial statements” allowance doubtful accounts trade receivables amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range one ten years interest rates generally subject fluctuation financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment company’s management determining appropriate allowance doubtful accounts includes general specific reserves company reviews accounts receivable agings industry trends customer financial strength credit standing historical writeoff trends payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults increases due changes customers’ financial condition general economic conditions company’s allowance uncollectible accounts may require adjustment allowance doubtful accounts percentage customer receivables 29 33 june 30 2005 2004 respectively decrease result adjustments certain trade receivable reserves due changes customerspecific credit exposures historical writeoff trends improvements customer credit billing collections processes hypothetical 01 increase decrease reserve percentage trade receivables fiscal 2005 reserve would result increase decrease bad debt expense approximately 44 million company believes reserve maintained expenses recorded fiscal year 2005 appropriate consistent historical methodologies employed total reserve june 30 2005 2004 exceeds total company receivable balance greater 60 days past due dates see schedule ii included form 10k includes rollforward activity allowance reserves inventories substantial portion inventories approximately 67 2005 66 2004 stated lower cost using lifo method market inventories included within core distribution facilities within company’s pharmaceutical distribution business primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout “fifo” method market company used fifo method inventory valuation approximates current replacement cost inventories would increased 260 million 578 million fiscal 2005 2004 respectively reconciliation fifo inventory lifo inventory inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable company’s assumptions additional inventory reserves may required however would expected material adverse impact company’s consolidated financial statements goodwill company accounts goodwill accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist accordingly company amortize goodwill intangible assets indefinite lives intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test fair value company’s reporting units compared carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s impairment analysis based review priceearnings ratio publicly traded companies similar nature scope size discounted cash flow analysis use alternative estimates peer groups changes industry could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment tests fiscal 2005 2004 neither resulted recognition impairment charges see note 17 “notes consolidated financial statements” additional information regarding goodwill business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many company’s acquisitions assigned intangible assets require management use significant judgment determining fair value company typically utilizes thirdparty valuation experts “valuation experts” process addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction valuation experts assess status acquired company’s research development projects determine existence inprocess research development “iprd” company historically recorded significant costs related iprd however conjunction acquisition alaris company required estimate fair value acquired iprd required selecting appropriate discount rate estimating future cash flows project management also assessed current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established required gaap immediately writtenoff special item company’s consolidated statement earnings company recorded 127 million special item fiscal 2004 representing estimate alaris’ iprd see note 4 “notes consolidated financial statements” special items company’s special items consist primarily costs relate integration previously acquired companies costs restructuring operations improve productivity integration costs acquisitions accounted pooling interests method recorded accordance emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sec staff accounting bulletin 100 “restructuring impairment charges” certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 “recognition liabilities connection purchase business combination” certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan committed adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 “accounting costs associated exit disposal activities” account costs incurred restructuring activities standard liability types exit costs recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 required company recognize liability restructuring costs date commitment exit plan majority special items related acquisitions restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments integration costs employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include reduction value company’s assets result integration restructuring activities integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan company also records settlements significant lawsuits infrequent nonrecurring unusual nature special items addition costs related legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters also classified special items see note 4 “notes consolidated financial statements” additional information vendor reserves determining appropriate vendor reserve company assesses historical experience current outstanding claims company researches resolves contested transactions based discussions vendors company policy findings research performed given time outstanding items various stages research resolution ultimate outcome certain claims may different company’s original estimate may require adjustment however company believes reserves recorded disputes adequate based upon current facts circumstances income tax reserves company established estimated liability federal state foreign income tax exposures arise meet criteria accrual sfas 5 “accounting contingencies” liability addresses number issues company may pay additional taxes interest examinations taxing authorities concluded company developed methodology estimating tax liability related matters consistently followed methodology period liability amounts matters based evaluation underlying facts circumstances thorough research technical merits company’s arguments assessment probability company prevailing arguments cases company considers previous findings internal revenue service taxing authorities company generally consults external tax advisers reaching conclusions amounts accrued particular period adjusted upward downward unless significant change facts circumstances occurred formally documented loss contingencies company accrues contingencies related litigation accordance sfas 5 requires company assess contingencies determine degree probability range possible settlement estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount settlement reasonably estimated assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate settlement may differ estimates self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 260 million 230 million estimated costs related outstanding claims june 30 2005 2004 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period hypothetically adjusted period equal half month impact earnings would 55 million however company believes liabilities recorded adequate based upon current facts circumstances company certain deductibles selfinsured various claims including general liability product pharmacist professional auto workers’ compensation company recorded liabilities totaling 664 million 480 million anticipated costs related general liability workers’ compensation june 30 2005 2004 respectively costs include estimate expected settlements pending claims defense costs estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis actuarial information current payment trends amount ultimate liability respect matters may differ estimates liquidity capital resources sources uses cash following table summarizes company’s consolidated statements cash flows fiscal 2005 2004 2003 operating activities net cash provided operating activities fiscal 2005 totaled approximately 29 billion increase 2255 million compared fiscal 2004 increase primarily result net proceeds 550 million year company’s committed receivables sales facility program see note 10 “notes consolidated financial statements” information regarding program overall operating cash flow benefits adversely affected 4780 million decrease earnings continuing operations cumulative effect change accounting significant portion earnings decrease due noncash asset impairments approximately 2239 million discussion changes company’s earnings continuing operations see “results operations” section june 27 2005 company announced board directors authorized purchase 10 billion common shares management deems appropriate dividend increase 006 per share effective fourth quarter fiscal 2005 based rate company expects fiscal 2006 dividends total 024 per share doubling company’s previous annual dividend policy 012 per share however future dividends subject approval company’s board directors cash provided operating activities nearly doubled fiscal 2004 compared fiscal 2003 primarily due increase accounts payable increased earnings continuing operations primary driver increase accounts payable timing payments fiscal yearend well inventory buys executed shortly fiscal yearend within company’s pharmaceutical distribution business addition result certain nonrecurring end year arrangements payments vendors fiscal 2004 reduced 258 million due acceleration payments june 30 2003 selected pharmaceutical vendors arrangements resulted changes original payment terms vendors economic consideration exchanged parties company’s overall investment inventories declined fiscal 2004 compared fiscal 2003 due primarily changing business model pharmaceutical distribution business see “overview” section earlier within “management’s discussion analysis financial condition results operations” discussion changes company’s earnings continuing operations see “results operations” section additionally company’s operating cash flow benefited approximately 993 million fiscal 2004 due sales lease receivables company’s clinical technologies services segment see note 10 “notes consolidated financial statements” information regarding sales lease receivables investing activities cash used investing activities fiscal 2005 2004 2003 primarily represents company’s use cash complete acquisitions expand role provider services health care industry see “acquisitions divestitures” within “part item 1 business” information regarding company’s acquisitions capital spending develop enhance company’s infrastructure including facilities information systems machinery equipment fiscal 2005 majority cash used investing activities related capital spending costs associated acquisition alaris geodax majority cash used investing activities fiscal 2004 related costs associated acquisitions alaris intercare medicap fiscal 2005 cash used investing activities included approximately 998 million related purchase investment securities available sale see note 23 “notes consolidated financial statements” information company’s investments cash used investing activities fiscal 2005 also includes cash proceeds approximately 474 million company received related sale discontinued operations see note 22 “notes consolidated financial statements” information company’s discontinued operations financing activities company’s financing activities utilized cash 16571 million 8157 million 7123 million fiscal 2005 2004 2003 respectively cash used financing activities fiscal 2005 primarily reflects company’s decisions retire commercial paper certain debt assumed alaris acquisition repurchase common shares authorized board directors see “share repurchases” additional information fiscal 2005 company utilized 5003 million repurchase common shares cash used financing activities fiscal 2004 2003 primarily reflects company’s decision repurchase shares authorized board directors cash outflows fiscal 2004 2003 partially offset net proceeds received company’s debt facilities proceeds received shares issued various employee stock plans international cash company’s cash balance approximately 14 billion june 30 2005 includes 5118 million cash held subsidiaries outside united states although vast majority cash held outside united states available repatriation subjects united states federal income tax fourth quarter fiscal 2005 company determined repatriate 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions ajca accordingly recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca see note 8 “notes consolidated financial statements” additional information share repurchases fiscal 2005 2004 2003 company’s board directors approved management completed several share repurchase programs company repurchased approximately 32 billion company’s shares aggregate share repurchase programs fiscal 2005 company repurchased approximately 88 million shares average price paid per share 5676 fiscal 2004 company repurchased approximately 242 million shares average price paid per share 6203 fiscal 2003 company repurchased approximately 196 million shares average price paid per share 6077 repurchased shares placed treasury used general corporate purposes see “issuer purchases equity securities” within “part item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” information regarding company’s recent share repurchase program capital resources addition cash company’s sources liquidity include 15 billion commercial paper program backed 15 billion bank revolving credit facilities 150 million extendible commercial note program committed receivables sales facility program capacity sell 800 million receivables june 30 2005 company outstanding borrowings commercial paper program company also shortterm credit facilities approximately 3227 million 1360 million outstanding june 30 2005 information regarding committed receivables sales facility program see note 10 “notes consolidated financial statements” company maintains two 750 million bank revolving credit facilities available general corporate purposes however primarily used backstop liquidity company’s commercial paper program first quarter fiscal 2005 company borrowed 500 million revolving credit facilities proceeds borrowing utilized repay portion company’s commercial paper general corporate purposes including establishment pharmaceutical inventory pharmaceutical distribution business’ national logistics center groveport ohio second quarter fiscal 2005 company borrowed additional 750 million revolving credit facilities proceeds utilized primarily establishment inventory national logistics center company fully repaid 125 billion outstanding balances bank revolving credit facilities second quarter fiscal 2005 due stabilization shortterm liquidity requirements light among things company substantially completed initial establishment inventory national logistics center fiscal 2005 company retired 300 million 445 notes matured 2005 also fiscal 2005 company paid 1836 million 1953 million senior subordinated notes due 2011 assumed part company’s acquisition alaris fiscal 2004 company also amended bond indenture remove restrictive covenants remaining balance june 30 2005 116 million callable time july 1 2007 also related alaris acquisition company acquired bank credit facility consisting sixyear 245 million term loan fiveyear 30 million revolving credit facility june 30 2004 1626 million outstanding term loan fiscal 2005 company paid 1626 million balance term loan terminated credit facility fiscal 2004 company retired two series 100 million notes matured 2004 fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified longterm debt company’s consolidated balance sheet preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entity’s receivables time company considers engages acquisition transactions order expand role leading provider services health care industry company evaluates possible candidates merger acquisition intends take advantage opportunities expand role provider services health care industry reporting segments additional transactions entered consummated company may need enter funding arrangements mergers acquisitions company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements including related business combinations debt ratingscovenants company’s senior debt credit ratings sp moody’s fitch bbb baa3 bbb respectively commercial paper ratings a3 p3 respectively ratings outlooks “negative” “stable” “negative” respectively although ratings downgrade rating agencies trigger acceleration company’s indebtedness reductions company’s credit ratings could negatively impact ability access capital well ability issue additional debt securities currently available interest rates company’s various borrowing facilities longterm debt except preferred debt securities discussed free financial covenants minimum net worth cannot fall 41 billion time june 30 2005 company compliance covenant company’s preferred debt securities contain minimum adjusted tangible net worth covenant adjusted tangible net worth cannot fall 30 billion certain financial ratio covenants june 30 2005 company compliance covenants breach covenants would followed grace period company may discuss remedies security holders extinguish securities without causing event default interest rate currency risk management company uses forward currency exchange contracts currency options interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 3 7 “notes consolidated financial statements” information regarding use financial instruments derivatives including foreign currency hedging instruments matter policy company rarely engages “speculative” transactions involving derivative financial instruments fiscal 2003 company entered one speculative interest rate swap transaction resulting gain approximately 67 million gain recorded interest expense consolidated statement earnings contractual obligations june 30 2005 company’s contractual obligations including estimated payments due period follows 1 represents maturities company’s longterm debt obligations excluding capital lease obligations described see note 6 “notes consolidated financial statements” information 2 represents maturities company’s capital lease obligations included within longterm debt company’s balance sheet related estimated future interest payments 3 represents cash outflows period certain company’s longterm liabilities cash outflows could reasonably estimated primary items included estimates company’s pension postretirement benefit obligations well accrued marketing fees longterm liabilities certain longterm liabilities deferred taxes excluded table cash outflows associated liabilities timing cash outflows cannot reasonably estimated 4 represents minimum rental payments related estimated future interest payments operating leases initial remaining noncancelable lease terms described note 11 “notes consolidated financial statements” 5 purchase obligations defined agreement purchase goods services enforceable legally binding specifying significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded company’s total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period significant amount disclosed within fiscal 2006 compared periods primarily represents obligations purchase inventories within pharmaceutical distribution provider services segment offbalance sheet arrangements see note 10 “notes consolidated financial statements” discussion offbalance sheet arrangements recent financial accounting standards see note 3 “notes consolidated financial statements” discussion recent financial accounting standards recent developments late august 2005 hurricane katrina devastated parts louisiana mississippi gulf coast united states company sustained limited damage facilities region time filing form 10k major facilities region operational damage sustained company’s facilities materially impact financial condition results operations company made monetary product donations hurricane relief efforts material impact financial condition results operations see note 24 “notes consolidated financial statements” discussion additional subsequent events june 30 2005 item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k overview cardinal health leading provider products services supporting healthcare industry company helps healthcare providers manufacturers improve productivity safety healthcare information regarding company’s business see “item 1 business” within form 10k results operations following summarizes company’s results operations fiscal years ended june 30 2006 2005 2004 1 growth calculated change increase decrease given year compared immediately preceding year growing demand company’s diversified products services fiscal 2006 led record revenue approximately 814 billion 10 increase fiscal 2005 company’s operating earnings increased 8 nearly 20 billion diluted earnings per common share continuing operations increased 14 290 company placed significant emphasis improving operating margins increased reportable segment first half second half fiscal year reportable segments company’s operations organized four reportable segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services see note 17 “notes consolidated financial statements” discussion changes business segments fiscal 2006 effective first quarter fiscal year ending june 30 2007 company report financial information following five reportable segments supply chain services pharmaceutical supply chain services medical products manufacturing pharmaceutical technologies services clinical technologies services pharmaceutical distribution provider services performance fiscal 2006 pharmaceutical distribution provider services segment revenue increased 11 primarily revenue bulk customers operating earnings within segment flat due positive impact signed distribution service agreements earnings generic products offset decreased selling margins resulting competitive pressures charge 318 million first quarter fiscal 2006 reflecting credits owed certain vendors fiscal 2006 segment completed transition feeforservice business model described “pharmaceutical distribution business model transition” transition feeforservice business model completed segment’s operating earnings evenly distributed throughout fiscal year moderating historical earnings seasonality going forward transition continue result less earnings volatility within segment medical products services performance revenue operating earnings within medical products services segment increased 2 4 respectively fiscal 2006 however growth rates adversely impacted loss specialty distribution business’ largest customer beginning third quarter fiscal 2006 revenue operating earnings growth rates lowered approximately 2 percentage points 1 percentage point respectively fiscal 2006 due loss customer ultimate sale significant portion business fourth quarter fiscal 2006 segment’s operating earnings growth resulted primarily favorable yearoveryear comparison prior year latex litigation charge favorable product mix manufacturing cost reductions pharmaceutical technologies services performance fiscal 2006 pharmaceutical technologies services segment revenue increased 4 due increased demand certain proprietary oral drug delivery formulations improved terms existing customers increased volume certain sterile products significant onetime payment ongoing customer operating earnings decreased 3 within segment due impact competitive pressures pricing within nuclear pharmacy services business stronger us dollar fiscal 2006 clinical technologies services performance fiscal 2006 clinical technologies services segment revenue increased 11 due increased demand segment’s core products within alaris pyxis businesses introduction new products addition strong revenue growth noted segment’s operating earnings increased 56 due favorable product mix manufacturing efficiencies integration synergies acquisition alaris pharmaceutical distribution business model transition company’s pharmaceutical distribution business began business model transition fiscal 2003 regarding manner compensated services provides branded pharmaceutical manufacturers historically pharmaceutical distribution compensated branded pharmaceutical manufacturers form price inflation specifically significant portion compensation pharmaceutical distribution received manufacturers derived company’s ability purchase pharmaceutical inventory advance price increases hold inventory manufacturers increased prices generate higher gross margin subsequent sale inventory beginning fiscal 2003 branded pharmaceutical manufacturers began seek greater control amount product available supply chain result began change sales practices restricting volume product available purchase wholesalers addition manufacturers sought additional services company including providing data concerning product sales distribution patterns company believes manufacturers sought changes provide greater visibility product demand movement market increase product safety integrity reducing risks associated product available distributed secondary market changes significantly reduced compensation percentage revenue received company branded pharmaceutical manufacturers response developments company established compensation system branded pharmaceutical manufacturers significantly less dependent manufacturers’ pricing practices based services provided company meet unique distribution requirements manufacturer’s products fiscal 2005 company worked individual branded pharmaceutical manufacturers define feeforservice terms compensate company based services provided manufacturers transition completed fiscal 2006 new arrangements moderated seasonality earnings historically reflected pattern manufacturers’ price increases feeforservice arrangements reflected written distribution service agreements company’s compensation services may fee plus inflationbased compensation component certain instances company must achieve certain performance criteria receive maximum fees agreement fee typically fixed percentage company’s purchases company’s sales manufacturer’s products customers apart feeforservice arrangements reflected distribution service agreements company also continues compensated branded manufacturers based solely price inflation frequency rate branded pharmaceutical price inflation slows company’s results operations financial condition could adversely affected distribution service agreements company certain branded pharmaceutical manufacturers generally range oneyear term automatic renewal feature fiveyear term agreements generally cannot terminated unless mutually agreed parties breach agreement occurs cured event bankruptcy filing similar insolvency event agreements allow manufacturer terminate without cause within defined notice period adoption sfas 123r equitybased compensation expense first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method sfas 123r requires equitybased payments employees including grants employee options recognized consolidated statement earnings based grant date fair value award prior adoption sfas 123r company accounted equitybased awards intrinsic value method followed recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations equitybased compensation included pro forma disclosure within notes financial statements anticipation adoption sfas 123r company modify terms previouslygranted options company made significant changes equity compensation program annual equity grant first quarter fiscal 2006 including reducing overall number options granted utilizing mix restricted share option awards company also moved threeyear cliff vesting installment vesting four years annual employee option awards shortened option term ten seven years total company operating earnings fiscal 2006 adversely affected impact equitybased compensation due implementation sfas 123r impact stock appreciation rights granted company’s chairman chief executive officer first quarter fiscal 2006 company recorded 2373 million equitybased compensation fiscal 2006 compared 101 million fiscal 2005 beyond current fiscal year company expects equitybased compensation expense decline yearoveryear due primarily significant changes made company’s equity compensation program including reduction overall number options granted see note 13 “notes consolidated financial statements” additional information global restructuring program previously reported fiscal 2005 company launched global restructuring program connection one cardinal health initiative goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation company expects program substantially completed end fiscal 2008 improve operating earnings position company future growth global restructuring program implemented two phases first phase program announced december 2004 focuses business consolidations process improvements including rationalizing company’s facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines second phase program announced august 2005 focuses longer term integration activities enhance service customers improved integration across company’s segments continue streamline internal operations see note 2 “notes consolidated financial statements” discussion restructuring costs incurred company fiscal 2006 2005 related phases global restructuring program acquisitions fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 364 million assumed liabilities acquired businesses approximately 149 million consolidated financial statements include results operations business combinations date acquisition june 28 2004 company acquired approximately 987 outstanding common stock alaris provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction value transaction including assumption alaris’ debt totaled approximately 21 billion information regarding alaris acquisition valuation acquisition’s intangibles see notes 2 16 “notes consolidated financial statements” december 2003 company completed acquisition intercare european pharmaceutical products services company cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt fiscal 2006 united kingdombased intercare pharmaceutical distribution business classified discontinued operations see note 21 “notes consolidated financial statements” additional information fiscal 2006 2005 2004 addition acquisitions alaris intercare company completed several acquisitions including geodax parmed denver biomedical dohmen well acquisition remaining shares source medical joint venture company’s trend regard acquisitions expand role provider services healthcare industry trend resulted expansion areas complement company’s existing operations provide opportunities company develop synergies strengthen acquired business healthcare industry continues change company evaluates possible candidates merger acquisition considers opportunities expand role provider services healthcare industry reportable segments assurance however company able successfully take advantage opportunity arise consummate transaction pursued additional transactions pursued consummated company would incur additional mergerrelated costs may need enter funding arrangements mergers acquisitions assurance integration efforts associated transaction would successful government investigations company currently subject formal investigation sec relating certain accounting financial reporting matters us attorney’s office southern district new york conducting inquiry respect company continues engage settlement discussions staff sec reached agreementinprinciple basic terms potential settlement involving company sec staff indicated prepared recommend commission proposed settlement subject completion definitive documentation well acceptance authorization commission would among things require company pay 35 million penalty company accordingly recorded reserve 10 million fiscal year ended june 30 2006 addition 25 million reserve recorded fiscal year ended june 30 2005 assurance company’s efforts resolve sec’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement information regarding matters see “item 3 legal proceedings” notes 9 10 “notes consolidated financial statements” shareholder litigation company subject several class action lawsuits brought company certain former present officers directors since july 2004 company currently unable predict determine outcome resolution proceedings estimate amounts potential range loss respect proceedings range possible resolutions proceedings could include judgments company settlements could require substantial payments company payments could material adverse effect company’s results operations financial condition liquidity cash flows company discusses cases litigation party greater detail “item 3 legal proceedings” note 10 “notes consolidated financial statements” results operations following sections discuss results operations company reportable segments revenue company reportable segments follows 1 see note 17 “notes consolidated financial statements” discussion changes business segments fiscal 2006 2 pharmaceutical distribution provider services segment amounts adjusted reflect classification united kingdombased intercare pharmaceutical distribution business discontinued operations prior period amounts adjusted reflect changes classification see note 21 “notes consolidated financial statements” additional information regarding discontinued operations 3 bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses nonbulk customers include retail stores hospitals alternate care sites customers specifically classified bulk customers deliveries bulk customers consist product shipped form received manufacturer see discussion within pharmaceutical distribution provider services section company’s description revenue bulk customers 4 pharmaceutical technologies services segment amounts adjusted reflect classification sterile pharmaceutical manufacturing business humacao puerto rico significant portion healthcare marketing services business discontinued operations prior period amounts adjusted reflect changes classification see note 21 “notes consolidated financial statements” additional information regarding discontinued operations 5 corporate revenue consists elimination intersegment revenue periods presented foreign currency translation adjustments fiscal 2004 following table summarizes revenue growth rates company reportable segments well percent company revenue excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year total company total company revenue increased 10 15 respectively fiscal 2006 2005 revenue growth fiscal 2006 resulted following • increased revenue within company’s four reportable segments including revenue growth 11 within pharmaceutical distribution provider services segment driven primarily growth revenue bulk customers 11 within clinical technologies services segment driven primarily revenue growth within pyxis alaris products businesses • pharmaceutical price increases within pharmaceutical distribution business averaging approximately 56 fiscal 2006 • addition new customers • addition new products increases partially offset slower revenue growth within medical products services segment due loss specialty distribution business’ largest customer beginning third quarter fiscal 2006 ultimate sale significant portion business fourth quarter fiscal 2006 addition pharmaceutical technologies services segment adversely impacted competitive pressures pricing within nuclear pharmacy services business revenue growth fiscal 2005 resulted following • revenue growth existing customers • addition new customers • addition new products • pharmaceutical price increases within pharmaceutical distribution business averaging approximately 49 fiscal 2005 • yearoveryear impact acquisitions increases fiscal 2005 partially offset slower revenue growth within medical products services pharmaceutical technologies services segments decline revenue pyxis products within clinical technologies services segment pharmaceutical distribution provider services pharmaceutical distribution provider services segment’s revenue increased 11 fiscal 2006 significant growth revenue bulk customers described increased approximately 24 fiscal 2006 addition pharmaceutical price increases trailing twelve month period approximately 56 contributed revenue growth segment pharmaceutical distribution provider services segment differentiates bulk nonbulk customers bulk customers generate lower margins nonbulk customers bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses nonbulk customers include retail stores hospitals alternate care sites customers specifically classified bulk customers deliveries bulk customers consist product shipped form product received manufacturer bulk customers ability process large quantities products central locations self distribute products individual retail stores customers nonbulk customers hand require complex servicing services include receiving inventory large full case quantities breaking smaller quantities warehousing product longer period time picking individual products specific customer’s order delivering smaller order customer location bulk customers generate lower margins nonbulk customers lower customer pricing lower vendor margins bulk nonbulk customers generate vendor margins bulk customers lower due impact product mix lower customer pricing vendor margins bulk customers however partially offset lower cost servicing bulk customers noted deliveries bulk customers lower servicing costs related warehousing handling deliveries nonbulk customers see pharmaceutical distribution provider services segment’s “operating earnings” discussion significant items impacting margin within segment revenue bulk customers fiscal 2006 299 billion compared 241 billion fiscal 2005 increase revenue bulk customers primarily relates additional volume existing large retail chain customers market growth customers mail order business increase existing customers primarily due certain customers deciding purchase company rather directly manufacturer pharmaceutical distribution provider services segment’s revenue growth 16 fiscal 2005 resulted strong sales customers within segment’s core pharmaceutical distribution business significant growth revenue bulk customers increased approximately 34 increase revenue bulk customers primarily relates additional volume existing new customers well market growth within mail order business increase existing customers primarily due certain customers purchasing company rather directly manufacturer addition pharmaceutical price increases trailing twelve month period approximately 49 contributed revenue growth segment however rate price increases lower rate experienced prior fiscal year medical products services medical products services segment’s revenue growth 2 fiscal 2006 resulted primarily following • revenue growth within segment’s manufactured gloves respiratory product lines primarily due new customer accounts new products • revenue growth within segment’s distribution business primarily due new customer accounts increased volume existing customers • international revenue growth due new customers primarily canada specialty distribution business’ largest customer began self distribution january 1 2006 significantly impacted revenue growth second half fiscal 2006 revenue growth lowered approximately 2 percentage points fiscal 2006 within segment primarily due loss customer fourth quarter fiscal 2006 company completed sale significant portion specialty distribution business oncology therapeutics network wholly owned subsidiary oncology holdings inc oncology therapeutics network specialty pharmaceutical services company acquired company’s oncology distribution capabilities company maintain minority ownership oncology holdings inc addition revenue growth adversely impacted foreign exchange rates due stronger us dollar medical products services revenue growth 7 fiscal 2005 resulted primarily following • increased volume existing customer accounts • new contracts signed fiscal 2004 within medicalsurgical distribution business • strong international growth especially canada europe • favorable foreign exchange rates • increased revenue approximately 11 within specialty distribution business due increased revenue business’ largest customer growth existing customer base • growth 6 medicalsurgical distribution business primarily increased sales hospital supply ambulatory care customers segment’s revenue growth fiscal 2005 adversely affected slower growth sale selfmanufactured products loss certain business customers within gpo pharmaceutical technologies services pharmaceutical technologies services segment’s revenue growth 4 fiscal 2006 resulted primarily following • increased demand certain proprietary oral drug delivery formulations • improved terms existing customers increased volume certain sterile products • payment approximately 140 million ongoing customer within biotechnology sterile life sciences business commitments december 31 2005 cancellation future commitment segment’s revenue growth adversely affected competitive pressures pricing within nuclear pharmacy services business stronger us dollar adversely impacting revenue growth approximately 1 percentage point pharmaceutical technologies services segment’s revenue growth 11 fiscal 2005 resulted primarily strong demand certain softgel products impact acquisitions primarily intercare acquisition geodax within nuclear pharmacy services business impact foreign exchange rates revenue growth offset certain operational issues noted net impact acquisitions divestitures within segment accounted approximately 5 revenue growth fiscal 2005 revenue fiscal 2005 increased approximately 2 result impact foreign exchange rates impact takes consideration fiscal 2005 rate fluctuations due weakening us dollar fiscal 2004 constant rate adjustment see footnote 6 table note 17 “notes consolidated financial statements” additional discussion relates fiscal 2004 constant rate adjustment segment’s growth adversely affected delays opening new facilities existing facilities operating planned capacity within company’s biotechnology sterile life sciences business clinical technologies services clinical technologies services segment’s revenue growth 11 fiscal 2006 resulted primarily revenue growth within pyxis alaris products businesses pyxis products revenue increased approximately 15 due higher unit sales resulting increased demand medstation® 3000 product improvements within sales installation cycles alaris products revenue increased approximately 19 fiscal 2006 due competitive displacements driven technological advantages sales obtained company’s relationships addition alaris revenue increased due continued demand core products introduction new products market strong revenue increases tempered revenue growth 5 fiscal 2006 within clinical services consulting businesses clinical technologies services revenue growth 41 fiscal 2005 resulted impact acquisition alaris’ results operations included prior period amounts strong revenue growth within clinical services consulting businesses offset significant revenue declines within pyxis products business pyxis products business experienced revenue decline approximately 17 fiscal 2005 due following • lengthened sales installation cycle • delayed introduction pyxis medstation® 3000 • increased competition within industry • impact audit committee’s internal review fully described note 9 “notes consolidated financial statements” created execution issues efforts attention certain sales installation teams diverted ordinary business operations operating earnings operating earnings company reportable segments follows 1 see note 17 “notes consolidated financial statements” discussion changes business segments fiscal 2006 2 three months ended september 30 2005 company changed methodology allocating corporate costs reportable segments better align corporate spending segments receive related benefits prior period results adjusted reflect change methodology 3 pharmaceutical distribution provider services segment amounts adjusted reflect classification united kingdombased intercare pharmaceutical distribution business discontinued operations prior period amounts adjusted reflect change classification see note 21 “notes consolidated financial statements” additional information regarding discontinued operations 4 pharmaceutical technologies services segment amounts adjusted reflect classification sterile pharmaceutical manufacturing business humacao puerto rico significant portion healthcare marketing services business discontinued operations prior period amounts adjusted reflect change classification see note 21 “notes consolidated financial statements” additional information regarding discontinued operations 5 first quarter fiscal 2006 company adopted sfas 123r applying modified prospective method prior adoption sfas 123r company accounted equitybased awards intrinsic value method followed recognition measurement principles apb opinion 25 related interpretations equitybased compensation included pro forma disclosure within notes financial statements see note 13 “notes consolidated financial statements” additional information 6 corporate operating earnings primarily include special items equitybased compensation impairment charges investment spending unallocated corporate expenses see footnote 6 table note 17 “notes consolidated financial statements” description corporate operating earnings following table summarizes operating earnings growth rates company reportable segments well percent company operating earnings excluding corporate segment represents 1 growth calculated change increase decrease given year compared immediately preceding year 2 company’s overall operating earnings growth 8 22 respectively fiscal 2006 2005 includes effect special items equitybased compensation impairment charges special items equitybased compensation impairment charges allocated segments see notes 2 13 20 “notes consolidated financial statements” information regarding company’s special items equitybased compensation impairment charges total company total company operating earnings increased 8 fiscal 2006 due operating earnings growth clinical technologies services medical products services segments favorable yearoveryear impact special items impairment charges partially offset increased selling general administrative expenses discussed see notes 2 20 “notes consolidated financial statements” additional information regarding special items impairment charges total company operating earnings increased 8 fiscal 2006 result following factors affecting company’s reportable segments • clinical technologies services segment operating earnings increased 56 due strong revenue growth favorable product mix manufacturing efficiencies integration synergies alaris acquisition • medical products services segment operating earnings impacted favorable yearoveryear impact latex litigation charge favorable product mix cost reductions partially offset loss specialty distribution business’ largest customer beginning third quarter fiscal 2006 • pharmaceutical distribution provider services segment operating earnings flat due positive impact signed distribution service agreements earnings generic products offset competitive pressures impacting selling margin charge 318 million first quarter fiscal 2006 reflecting credits owed certain vendors • pharmaceutical technologies services segment operating earnings adversely impacted competitive pressures pricing within nuclear pharmacy services business stronger us dollar fiscal 2006 • increased selling general administrative expenses allocated reportable segments total company selling general administrative expenses increased 15 fiscal 2006 due part impact equitybased compensation represented 8 percentage points total increase company recorded 2373 million equitybased compensation fiscal 2006 compared 101 million comparable prior year periods see “overview” section note 13 “notes consolidated financial statements” additional information regarding equitybased compensation addition operating earnings fiscal 2006 adversely impacted following • increased incentive compensation expense approximately 382 million due improved operating performance • incremental selling general administrative expenses associated one cardinal health initiative streamline company’s operations develop new capabilities shared services expected favorably impact costs across company future • increased legal expenses company expects selling general administrative expenses grow slower rate fiscal 2007 due part significant changes made company’s equity compensation program resulting reductions equitybased compensation benefits received upfront investments related one cardinal health initiative disciplined expense control total company operating earnings decreased 22 fiscal 2005 result declining operating earnings company’s reportable segments company’s gross margins dampened primarily following • pharmaceutical distribution business impacted reduced branded vendor margins driven primarily changes branded pharmaceutical manufacturers’ sales pricing practices see “overview” section discussion competitive pricing • medical products services segment impacted increased mix lowermargin distribution business competitive pricing increased raw material fuel costs • pharmaceutical technologies services segment impacted continued operational issues adversely affecting manufacturing efficiencies within • clinical technologies services segment impacted lengthened sales installation cycle new product launch delays increased competition within pyxis products business total company operating earnings also adversely affected unfavorable impact related special items 2180 million fiscal 2005 increased costs related company’s global restructuring program associated one cardinal health initiative sec investigation audit committee internal review related matters integration certain acquisitions partially offset settlements received antitrust vitamin litigation see note 2 “notes consolidated financial statements” additional information addition company recorded 1137 million asset impairments fiscal 2005 see note 20 “notes consolidated financial statements” additional information total company operating earnings fiscal 2005 impacted favorable impact approximately 317 million reductions lifo reserve primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories total company operating earnings fiscal 2005 also impacted unfavorable impact following • increase profit sharing expense approximately 388 million compared fiscal 2004 • increase incentive compensation expense approximately 370 million compared fiscal 2004 • expenses approximately 282 million within medical products services segment related estimated costs defending settling outstanding claims well pursuing insurance recoveries related latex litigation • purchase accounting adjustments related alaris acquisition included inventory valuation adjustment “fair value” adjusted higher cost inventory sold adversely affecting gross margins approximately 236 million • product line rationalization inventory accounts receivable reserve adjustments within pyxis products business approximately 303 million • increase inventory reserves within pharmaceutical distribution provider services segment approximately 147 million related generic manufacturer’s bankruptcy 100 million related slow moving inventory • increase audit auditrelated fees approximately 75 million compared fiscal 2004 due increased costs associated complying sarbanesoxley act 2002 expanded audit procedures revision allocation audit auditrelated fees fiscal periods pharmaceutical distribution provider services pharmaceutical distribution provider services segment’s operating earnings flat fiscal 2006 operating earnings fiscal 2006 include lifo reserve reduction approximately 260 million primarily due price deflation within generic pharmaceutical inventories operating earnings fiscal 2006 benefited following • segment’s revenue growth 11 fiscal 2006 • yearoveryear positive impact signed distribution service agreements • strong earnings generic products • strong branded inflation within portion segment’s business remains contingent price increases • addition new vendors segment’s national logistics center benefits offset competitive pressures impacting selling margin correction error described detail reserve 100 million related excess inventory particular pharmaceutical manufacturer first quarter fiscal 2006 company discovered inadvertently erroneously failed process credits owed vendor prior years thorough review company determined failed process similar credits limited number additional vendors processing failures specific limited area vendor credits resulted system programming interface data entry errors relating vendor credits occurred period years result company recorded charge 318 million first quarter fiscal 2006 reflecting credits owed vendors charge approximately 142 million related fiscal 2005 approximately 113 million related fiscal 2004 approximately 63 million related fiscal 2003 prior connection matter company implemented action plan addressed issues related error pharmaceutical distribution provider services operating earnings decreased 5 fiscal 2005 primarily result reduced branded vendor margins resulting changes branded pharmaceutical manufacturers’ sales pricing practices discussed “overview” section competitive pricing pressures branded pharmaceutical manufacturers changed sales practices restricting product available purchase pharmaceutical wholesalers addition branded manufacturers’ product pricing practices less predictable frequency price increases slowed amounts decreased versus historical levels fiscal 2005 pharmaceutical price increases trailing twelve month period approximately 49 compared 62 fiscal 2004 addition operating earnings fiscal 2005 adversely impacted approximately 147 million inventory reserves related generic manufacturer’s bankruptcy approximately 100 million related slow moving inventory reserves approximately 78 million result inventory rationalization certain health beauty care products decrease segment’s operating earnings partially offset 317 million reductions lifo reserve primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories operating earnings also impacted improved margins generic products expense control within pharmaceutical distribution business resulted lowering selling general administrative expenses percentage sales medical products services medical products services segment’s operating earnings increased 4 fiscal 2006 primarily due following • favorable yearoveryear comparison resulting 282 million latex litigation charge taken fiscal 2005 • revenue growth 2 fiscal 2006 • favorable product mix within distribution business privatelabel branded products • manufacturing cost reductions • expense control partially related company’s global restructuring program • strong international earnings growth canada medical products services segment’s operating earnings adversely impacted increased selling general administrative expenses allocated segment addition specialty distribution business’ largest customer began self distribution january 1 2006 impacted operating earnings growth second half fiscal 2006 operating earnings negatively impacted approximately 1 percentage point fiscal 2006 within segment primarily due loss customer medical products services segment’s operating earnings decreased 6 fiscal 2005 primarily due following • pricing pressures related selfmanufactured products • increased raw material fuel costs • increased mix lower margin distributed products • competitive pricing large gpo contract convertors products • adjustments approximately 282 million estimated costs defending settling outstanding claims well pursuing insurance recoveries related latex litigation selling general administrative expenses grew 11 fiscal 2005 primarily due charge latex litigation described higher personnel costs associated overall business growth items partially offset revenue growth 7 manufacturing efficiencies expense control related company’s global restructuring program incremental operating earnings new customers pharmaceutical technologies services pharmaceutical technologies services segment’s operating earnings decreased 3 fiscal 2006 primarily due following • impact competitive pressures pricing within nuclear pharmacy services business • increased selling general administrative expenses allocated segment • stronger us dollar adversely impacting operating earnings growth approximately 2 percentage points • sterile manufacturing business operating optimum capacity offset improved customer terms services 140 million payment ongoing customer commitments december 31 2005 cancellation future commitment pharmaceutical technologies services segment’s operating earnings decreased 25 fiscal 2005 primarily due continued delays opening new facilities existing facilities operating optimum capacity within company’s biotechnology sterile life sciences business operating earnings also adversely impacted approximately 80 million related write inventory within biotechnology sterile life sciences business operating earnings declines partially offset strength certain softgel controlled release products yearoveryear impact acquisitions approximately 6 impact foreign exchange rates operating earnings significantly affect fiscal 2005 growth rates takes consideration fiscal 2005 rate fluctuations due weakening us dollar fiscal 2004 constant rate adjustment see footnote 6 table note 17 “notes consolidated financial statements” additional discussion relates fiscal 2004 constant rate adjustment change made fiscal 2005 clinical technologies services clinical technologies services segment’s operating earnings increased 56 fiscal 2006 primarily due following • revenue growth 11 fiscal 2006 • higher margins due favorable yearoveryear sales mix • favorable manufacturing efficiencies • improvements sales installation cycles • integration synergies alaris acquisition • favorable accounts receivable reserve adjustments 80 million recorded third quarter fiscal 2006 due improved credit collection processes historical writeoff trends charges 236 million fiscal 2005 related purchase accounting adjustments alaris transaction also contributed favorable yearoveryear comparison 236 million charge represented 14 percentage points fiscal 2006 operating earnings increase purchase accounting adjustments fiscal 2005 included inventory valuation adjustment “fair value” adjusted higher cost inventory sold first two quarters clinical technologies services segment’s operating earnings decreased 24 fiscal 2005 primarily decreased operating earnings within pyxis products business impacted • decreased revenue 17 fiscal 2005 • lower unit margins due yearoveryear sales mix • aggressive price discounting market place • product line rationalization inventory accounts receivable reserve adjustments approximately 303 million • positive segment allocation adjustments recorded fiscal 2004 21 million estimated interest income business would earned assets sold part leased asset portfolio sales proceeds sales returned corporate general corporate requirements see footnote 6 table note 17 “notes consolidated financial statements” additional discussion relates fiscal 2004 interest income allocation change made fiscal 2005 alaris acquisition improved operating earnings segment approximately 23 fiscal 2005 results operations acquisition included prior period amounts operating results alaris incremental segment’s results yearoveryear adversely impacted effect purchase accounting adjustments recorded first two quarters fiscal 2005 adjustments included inventory valuation adjustment noted adversely affected gross margins approximately 236 million impairment charges see note 20 “notes consolidated financial statements” additional information regarding “impairment charges other” special items following summary company’s special items see note 2 “notes consolidated financial statements” detail company’s special items fiscal 2006 2005 2004 interest expense “interest expense other” increased 17 million fiscal 2006 interest expense relatively constant fiscal 2006 compared prior year “interest expense other” increased 232 million fiscal 2005 primarily increased interest expense 550 million due increased borrowing levels interest rates company manages exposure interest rates using various hedging strategies see notes 1 5 “notes consolidated financial statements” 550 million increase interest expense fiscal 2005 partially offset company recording minority interest impact approximately 194 million certain impairment charges within pharmaceutical technologies services segment’s oral technologies business impairment charges recorded within “impairment charges other” consolidated statements earnings fiscal 2005 see note 20 “notes consolidated financial statements” additional information regarding “impairment charges other” provision income taxes provisions income taxes relative earnings income taxes discontinued operations cumulative effect change accounting 322 346 318 pretax earnings fiscal 2006 2005 2004 respectively generally fluctuations effective tax rate due changes within foreign state effective tax rates resulting company’s business mix changes tax impact special items may unique tax implications depending nature item taxing jurisdiction company’s effective tax rate reflects tax benefits derived increasing operations outside united states generally taxed rates lower us statutory rate 35 company tax incentive agreements several nonus tax jurisdictions expire fiscal years 2009 2024 renewed company believe potential changes existing tax incentive agreements material adverse effect company’s financial position results operations company’s fiscal 2006 provision income taxes relative earnings income taxes discontinued operations 5903 million effective tax rate 322 fiscal 2006 effective tax rate benefited 03 percentage points equitybased compensation expense deductible tax rate higher average tax rate fiscal 2006 effective tax rate adversely impacted 01 percentage points due nondeductibility certain special items company’s fiscal 2005 provision income taxes relative earnings income taxes discontinued operations 5860 million effective tax rate 346 fiscal 2005 effective tax rate adversely impacted 16 percentage points due expenses related repatriation american jobs creation act 2004 “ajca” 06 percentage points due nondeductibility certain special items tax rate fiscal 2005 significantly impacted equitybased compensation company implemented fas 123r applying modified prospective method first quarter fiscal 2006 provision ajca created temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends nonus subsidiaries fourth quarter fiscal 2005 company determined would repatriate 500 million accumulated nonus earnings fiscal 2006 pursuant repatriation provisions ajca company recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca fiscal 2006 company repatriated 500 million accumulated foreign earnings accordance plan adopted fiscal 2005 additional tax liability 04 million recorded fiscal 2006 due new state legislation respect ajca bringing company’s tax liability related repatriation recorded june 30 2006 267 million uses repatriated funds include domestic expenditures related nonexecutive salaries capital asset investments permitted activities see note 6 “notes consolidated financial statements” additional information loss discontinued operations see note 21 “notes consolidated financial statements” information company’s discontinued operations critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation company’s financial condition results operations require use complex subjective estimates based upon past experience management’s judgment uncertainty inherent estimates actual results may differ estimates policies applied preparing company’s consolidated financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 “notes consolidated financial statements” allowance doubtful accounts trade receivables amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range one ten years interest rates generally subject fluctuation financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment company’s management determining appropriate allowance doubtful accounts includes general specific reserves company reviews accounts receivable aging industry trends customer financial strength credit standing historical writeoff trends payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults changes due changes customers’ financial condition general economic conditions company’s allowance uncollectible accounts may require adjustment allowance doubtful accounts 1348 million 1224 million june 30 2006 2005 respectively allowance represented 26 30 customer receivables june 30 2006 2005 respectively allowance doubtful accounts percentage revenue 017 016 020 june 30 2006 2005 2004 respectively allowance doubtful accounts reduced 248 million 225 million 218 million fiscal 2006 2005 2004 respectively customer deductions writeoffs increaseddecreased additional provisions 287 million 87 million 01 million fiscal 2006 2005 2004 respectively hypothetical 01 increase decrease reserve percentage trade receivables fiscal 2006 reserve would result increase decrease bad debt expense approximately 52 million reserve methodologies validated annually based historical losses economic business market trends addition reserves reviewed quarterly updated unusual circumstances trends present company believes reserve maintained expenses recorded fiscal 2006 appropriate consistent historical methodologies employed time company aware internal process customer issues might lead significant future increase company’s allowance doubtful accounts percentage net revenue total company receivable balance greater 60 days past due exceeded total reserve balance 24 million 2 june 30 2006 total reserve june 30 2005 exceeded total company receivable balance greater 60 days past due date see schedule ii included form 10k includes rollforward activity allowance reserves inventories substantial portion inventories approximately 73 2006 67 2005 stated lower cost using lifo method market inventories included within core distribution facilities national logistics center within company’s pharmaceutical distribution business primarily merchandise inventories lifo impact consolidated statement earnings given year dependent pharmaceutical price inflation level inventory prices branded pharmaceuticals consumer products primarily inflationary results increase cost products sold whereas prices generic pharmaceuticals deflationary results decrease cost products sold lifo method assumed recent inventory purchases first items sold company uses lifo better match costs revenues therefore reductions overall inventory levels resulting declining brand pharmaceutical consumer product inventory levels generally result decrease future cost goods sold remaining inventory held lower cost due inflationary environment conversely reductions overall inventory levels created declining generic pharmaceutical inventory levels would generally increase future cost goods sold remaining inventory held higher cost due deflationary environment fiscal 2006 lifo credit 260 million primarily due price deflation generic pharmaceutical inventories lifo credit fiscal 2005 317 million primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories remaining inventory primarily stated lower cost using firstin firstout “fifo” method market company used fifo method inventory valuation inventory approximates current replacement cost inventories would changed fiscal 2006 would increased 260 million 2005 due continued deflation generic pharmaceutical inventories lifo approximately 10 million higher fifo value june 30 2006 however company’s policy record inventories excess current market value reconciliation fifo inventory lifo inventory inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 1312 million 1277 million respectively june 30 2006 june 30 2005 company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable company’s assumptions additional inventory reserves may required however would expected material adverse impact company’s consolidated financial statements goodwill intangibles company accounts goodwill accordance sfas 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist accordingly company amortize goodwill intangible assets indefinite lives intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test fair value company’s reporting units compared carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s impairment analysis based review priceearnings ratio publicly traded companies similar nature scope size discounted cash flow analysis methods assumptions used test impairment consistently applied periods presented discount rate used impairment testing based riskfree rate plus adjustment risk factors use alternative estimates peer groups changes industry adjusting discount rate used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment tests fiscal 2006 2005 neither resulted recognition impairment charges decreasing priceearnings ratio competitors used impairment testing one point increasing discount rate discounted cash flow analysis used impairment testing 1 would indicated impairment company’s reporting units fiscal 2006 2005 increase priceearnings ratio competitors used impairment testing decrease discount rate discounted cash flow analysis would adversely affect computed fair value reporting units see note 16 “notes consolidated financial statements” additional information regarding goodwill business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many company’s acquisitions assigned intangible assets require management use significant judgment determining fair value company typically utilizes thirdparty valuation experts process addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction valuation experts assess status acquired company’s research development projects determine existence inprocess research development “iprd” company historically recorded significant costs related iprd however conjunction acquisition alaris company required estimate fair value acquired iprd required selecting appropriate discount rate estimating future cash flows project management also assessed current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established required us gaap immediately writtenoff special item company’s consolidated statement earnings company recorded 127 million special item fiscal 2004 representing estimate alaris’ iprd see note 2 “notes consolidated financial statements” special items company’s special items consist primarily costs relate integration previously acquired companies costs restructuring operations improve productivity integration costs acquisitions accounted pooling interests method recorded accordance eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sec staff accounting bulletin 100 “restructuring impairment charges” certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 “recognition liabilities connection purchase business combination” certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan committed adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 “accounting costs associated exit disposal activities” account costs incurred restructuring activities standard liability types exit costs recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 required company recognize liability restructuring costs date commitment exit plan majority special items related acquisitions restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments integration costs employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include reduction value company’s assets result integration restructuring activities integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan company also records settlements significant lawsuits infrequent nonrecurring unusual nature special items addition costs related legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters also classified special items see note 2 “notes consolidated financial statements” additional information vendor reserves company maintains reserves cover areas exposure vendors determining appropriate vendor reserves company assesses historical experience current outstanding claims company established various levels reserves based type claim status review company researches resolves various types contested transactions based discussions vendors company policy findings research performed though transaction types relatively consistent company periodically refined estimate methodology past years updating reserve estimate percentages based upon historical experiences changes estimate percentages resulted financial impact company’s cost products sold period change made june 30 2006 june 30 2005 vendor reserves 993 million 1031 million respectively approximately 69 vendor reserve june 30 2006 june 30 2005 pertained pharmaceutical distribution provider services segment fluctuations reserve balance also caused variations outstanding claims period timing settlements specific vendor issues bankruptcies significant events would described operating earnings discussion “management’s discussion analysis financial condition results operations” though vendor transactions remain relatively consistent period unforeseen events deterioration financial condition large vendor settlement numerous outstanding claims could cause reserve fluctuate thus financial impact period’s financial results given time outstanding items various stages research resolution ultimate outcome certain claims may different company’s original estimate may require adjustment however company believes reserves recorded disputes adequate based upon current facts circumstances equitybased compensation first quarter fiscal 2006 company adopted sfas 123r applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates entered within option valuation model include limited stock price volatility expected option life expected dividend yield option forfeiture rates effective options granted fiscal 2006 company estimates future stock price volatility based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years company analyzed historical data estimate option exercise behaviors employee terminations estimate expected option life forfeiture rates company calculated separate option valuations three separate groups employees similar historical exercise behaviors employee stock option values determined current accounting practices permit changed even estimates used valuation model different actual results however sfas 123r requires company compare estimated option forfeiture rates actual forfeiture rates record adjustments necessary see note 13 “notes consolidated financial statements” additional information regarding equitybased compensation income taxes company’s income tax expense deferred tax assets liabilities income tax reserves reflect management’s assessment estimated future taxes paid items financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities well net operating loss tax credit carryforwards tax purposes company net deferred income tax assets 4611 million 3004 million june 30 2006 2005 respectively company also net deferred income tax liabilities 16791 million 15363 million june 30 2006 2005 respectively included net deferred income tax assets net federal state local international loss credit carryforwards june 30 2006 2005 849 million 826 million respectively company established net valuation allowance 344 million june 30 2006 certain deferred tax assets primarily relates state international loss credit carryforwards ultimate realization future benefits uncertain expiring carryforwards required valuation allowances adjusted annually application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described addition company established estimated liability federal state nonus income tax exposures arise meet criteria accrual sfas 5 “accounting contingencies” company prepares files tax returns based interpretation tax laws regulations records estimates based judgments interpretations normal course business company’s tax returns subject examination various taxing authorities examinations may result future tax interest assessments taxing authorities inherent uncertainties exist estimates tax contingencies due changes tax law resulting legislation regulation andor concluded various jurisdictions tax court systems company developed methodology estimating tax liability related matters consistently followed methodology period liability amounts matters based evaluation underlying facts circumstances thorough research technical merits company’s arguments assessment probability company prevailing arguments cases company considers previous findings internal revenue service taxing authorities company generally consults external tax advisers reaching conclusions amounts accrued particular period adjusted significant change facts circumstances occurred company believes estimates valuation allowances deferred tax assets tax contingency reserves appropriate based current facts circumstances however people applying reasonable judgment facts circumstances could develop different estimate amount ultimately paid upon resolution issues raised may differ amounts accrued addition income mix geographical regions significant assumptions estimates described preceding paragraphs important contributors ultimate effective tax rate year although material effective tax rate three fiscal years ended june 30 2006 company’s assumptions estimates change increasedecrease company’s effective tax rate 1 earnings income taxes discontinued operations cumulative effect change accounting would caused income tax expense increasedecrease 184 million fiscal year ended june 30 2006 loss contingencies company accrues contingencies related litigation accordance sfas 5 requires company assess contingencies determine degree probability range possible settlement estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount settlement reasonably estimated assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate settlement may differ estimates self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 241 million 260 million estimated costs related outstanding claims june 30 2006 2005 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period hypothetically adjusted period equal half month impact earnings would 55 million amount claims medical dental costs increase beyond estimated reserve might sufficient additional expense could required however company believes liabilities recorded adequate based upon current facts circumstances medical dental insurance expense 1648 million 1625 million 1408 million fiscal 2006 2005 2004 respectively wholly owned insurance subsidiary company certain deductibles selfinsured various risks including general liability product liability pharmacist professional liability auto liability property workers’ compensation however claims excess certain limits insured commercial insurers company recorded liabilities totaling 763 million 664 million anticipated costs related liability property workers’ compensation june 30 2006 2005 respectively costs include estimate expected settlements pending claims defense costs claims adjustment costs estimate claims incurred reported certain types exposures company uses third parties assist developing estimate expected ultimate costs settle claim based specific information related claim claims incurred reported liabilities calculated outside actuaries derived accordance generally accepted actuarial practices amount ultimate liability respect matters dependent future contingent events cannot predicted certainty may differ estimates although company believes liability estimates appropriate based information available june 30 2006 possible based generally accepted actuarial analysis adverse conditions ultimate liability could exceed recorded expected liabilities june 30 2006 much 42 million insurance expense general liability product liability pharmacist professional liability auto liability property workers’ compensation 779 million 750 million 598 million fiscal 2006 2005 2004 respectively liquidity capital resources sources uses cash following table summarizes company’s consolidated statements cash flows fiscal 2006 2005 2004 operating activities net cash provided operating activities fiscal 2006 totaled approximately 21 billion decrease 7025 million compared fiscal 2005 yearoveryear decrease primarily result net proceeds received fiscal 2005 550 million company’s committed receivables sales facility program see note 8 “notes consolidated financial statements” information regarding program fiscal 2006 accounts payable increased approximately 15 billion partially offset increased inventories 3682 million increased accounts receivable approximately 9293 million period accounts payable related receivable inventory increases due new sales volume existing large retail chain customer timing inventory purchases vendors pharmaceutical distribution provider services segment net cash provided operating activities fiscal 2005 totaled approximately 28 billion increase 2191 million compared fiscal 2004 yearoveryear increase primarily result net proceeds received fiscal 2005 550 million company’s committed receivables sales facility program overall operating cash flow benefits adversely affected 4089 million decrease earnings continuing operations cumulative effect change accounting significant portion earnings decrease due noncash asset impairments approximately 1854 million discussion changes company’s earnings continuing operations see “results operations” section investing activities cash used investing activities fiscal 2006 primarily represents company’s purchase 3986 million shortterm investments classified available sale capital spending approximately 4432 million develop enhance company’s infrastructure addition fiscal 2006 company used cash approximately 3622 million complete acquisitions expand role provider services healthcare industry primarily associated acquisitions dohmen parmed within pharmaceutical distribution provider services segment denver biomedical remaining minority interest source medical within medical products services segment see “acquisitions divestitures” within “item 1 business” 10k information regarding company’s acquisitions cash used investing activities fiscal 2005 2004 primarily represents company’s use cash complete acquisitions capital spending develop enhance company’s infrastructure including facilities information systems machinery equipment fiscal 2005 majority cash used investing activities related capital spending costs associated acquisitions alaris geodax fiscal 2005 cash used investing activities also included approximately 998 million related purchase investment securities available sale see note 22 “notes consolidated financial statements” information company’s investments majority cash used investing activities fiscal 2004 related costs associated acquisitions alaris intercare medicap financing activities company’s financing activities utilized cash 10322 million 16573 million 8157 million fiscal 2006 2005 2004 respectively company’s financing activities used cash 10322 million fiscal 2006 primarily due 14999 million utilized repurchase company’s common shares authorized board directors see “share repurchase program” additional information addition company utilized cash purchase certain buildings equipment capital lease agreements reflected reduction longterm obligations 3061 million pay dividends common shares approximately 1018 million uses cash partially offset 500 million received issuance notes december 2005 net proceeds 4967 million proceeds received shares issued various employee stock plans approximately 2408 million cash used financing activities fiscal 2005 primarily reflects company’s decisions retire commercial paper certain debt assumed alaris acquisition repurchase common shares authorized board directors fiscal 2005 company utilized 5003 million repurchase common shares cash used financing activities fiscal 2004 primarily reflects company’s decision repurchase approximately 15 billion shares authorized board directors cash outflows fiscal 2004 partially offset net proceeds approximately 5128 million received company’s debt facilities proceeds approximately 2167 million received shares issued various employee stock plans international cash company’s cash balance approximately 13 billion june 30 2006 includes 3629 million cash held subsidiaries outside united states although vast majority cash held outside united states available repatriation subjects united states federal income tax share repurchases fiscal 2006 2005 2004 company’s board directors approved management completed several share repurchase programs company repurchased approximately 35 billion shares aggregate share repurchase programs period time fiscal 2006 company repurchased approximately 219 million shares average price paid per share 6839 fiscal 2005 company repurchased approximately 88 million shares average price paid per share 5676 fiscal 2004 company repurchased approximately 242 million shares average price paid per share 6203 repurchased shares placed treasury used general corporate purposes see “issuer purchases equity securities” within “item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” within form 10k information regarding company’s recent share repurchase program capital resources addition cash company’s sources liquidity include 1 billion commercial paper program backed 1 billion revolving credit facility 150 million extendible commercial note program committed receivable sales facility program capacity sell 800 million receivables see note 8 “notes consolidated financial statements” information company’s committed receivables sales facility program company initiated 1 billion commercial paper program august 2006 replaced former 15 billion commercial paper program june 30 2006 company outstanding borrowings commercial paper program company entered 1 billion revolving credit agreement november 2005 replaced two 750 million revolving credit facilities new facility available general corporate purposes company also shortterm credit facilities approximately 3236 million 1635 million outstanding june 30 2006 december 15 2005 company issued 500 million 585 notes due 2017 proceeds debt issuance used general corporate purposes included working capital expenditures acquisitions investments repayment indebtedness repurchases equity securities fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified “longterm obligations less current portion shortterm obligations” company’s consolidated balance sheet time company considers engages acquisition transactions order expand role leading provider services healthcare industry company evaluates possible candidates merger acquisition considers opportunities expand role provider products services healthcare industry reportable segments additional transactions entered consummated company may need enter funding arrangements mergers acquisitions company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements including related business combinations debt ratingscovenants company’s senior debt credit ratings sp moody’s fitch bbb baa2 bbb respectively commercial paper ratings a2 p2 respectively ratings outlooks “stable” company’s various borrowing facilities longterm debt except preferred debt securities discussed free financial covenants minimum net worth cannot fall 50 billion time june 30 2006 company compliance covenant company’s preferred debt securities contain minimum adjusted tangible net worth covenant adjusted tangible net worth cannot fall 25 billion certain financial ratio covenants june 30 2006 company compliance covenants breach covenants would followed grace period company may discuss remedies security holders extinguish securities without causing event default interest rate currency risk management company uses foreign currency forward contracts currency options interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 1 5 “notes consolidated financial statements” information regarding use financial instruments derivatives including foreign currency hedging instruments contractual obligations june 30 2006 company’s contractual obligations including estimated payments due period follows 1 represents maturities company’s longterm debt obligations excluding capital lease obligations described see note 4 “notes consolidated financial statements” information 2 represents maturities company’s capital lease obligations included within longterm debt company’s balance sheet related estimated future interest payments 3 represents cash outflows period certain company’s longterm liabilities cash outflows could reasonably estimated primary items included estimates company’s pension postretirement benefit obligations well accrued marketing fees longterm liabilities certain longterm liabilities deferred taxes excluded table cash outflows associated liabilities timing cash outflows cannot reasonably estimated 4 represents minimum rental payments related estimated future interest payments operating leases initial remaining noncancelable lease terms described note 10 “notes consolidated financial statements” 5 purchase obligations defined agreement purchase goods services enforceable legally binding specifying significant terms including following fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded company’s total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period significant amount disclosed within fiscal 2007 compared periods primarily represents obligations purchase inventories within pharmaceutical distribution provider services segment offbalance sheet arrangements see note 8 “notes consolidated financial statements” discussion offbalance sheet arrangements recent financial accounting standards see note 1 “notes consolidated financial statements” discussion recent financial accounting standards recent developments august 28 2006 company announced suspended production sales repairs installation alaris® se infusion pump approximately 1300 units seized fda august 15 2006 company initiated voluntary field corrective action product result information indicating sensitive keypad posed risk “key bounce” could lead overinfusion patients part field corrective action company sent letters warning labels customers currently testing modification reduces sensitivity keypad modification need validated product approved fda actions require return products currently use customers company currently plans recalling products company stopped manufacturing distribution alaris se infusion pumps pending resolution issue fda approximately 140000 alaris se infusion pumps distributed worldwide past 12 years product line currently represents less 1 annual revenue clinical technologies services segment company believe implementation modification currently tested materially affect company’s results operations financial condition however company completed testing received approval fda additional remedial actions deemed necessary company fda effect could become material company’s results operations financial condition see note 23 “notes consolidated financial statements” discussion additional subsequent events june 30 2006 item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations discussion matters company’s consolidated financial statements refers continuing operations company’s discussion results operations presented four parts company overview consolidated results operations segment results operations matters company overview strategic overview cardinal health leading provider products services improve safety productivity healthcare company one largest distributors pharmaceuticals medical supplies focusing making supply chains efficient company distributes approximately onethird pharmaceuticals prescribed united states also distributes manufactures products used approximately 50 surgeries united states company develops marketleading technologies including alaris infusion pumps pyxis automated dispensing systems medminedtm electronic infection surveillance viasys respiratory care products care fusiontm patient identification system company’s pyxis alaris systems distribute approximately 85 million doses medication every day customers include hospitals clinics largest drug store chains united states many healthcare providers retail outlets company believes depth breadth products unique industry gives competitive advantage cardinal health’s mission make practice delivery healthcare safer productive healthcare providers last fiscal year company made three major changes better pursue mission • company reorganized businesses reportable segments • company divested pts business focus healthcare provider retail hospital settings • company made strategic acquisitions broaden enhance product offerings first company reorganized reportable segments effective first quarter fiscal 2007 began reporting financial information within following five reportable segments healthcare supply chain services pharmaceutical healthcare supply chain services medical clinical technologies services pharmaceutical technologies services medical products manufacturing change segment reporting resulted realignment individual businesses better correlate operations company needs customers change effect company’s reported net earnings net earnings per common share second fourth quarter fiscal 2007 company completed sale pts business approximately 32 billion cash company used aftertax net proceeds approximately 31 billion repurchase common shares company recognized aftertax book gain approximately 11 billion transaction assets liabilities pts business classified held sale prior periods operating results classified within discontinued operations periods presented see note 8 “notes consolidated financial statements” additional information company’s discontinued operations company’s remaining four segments sale pts business align within two sectors healthcare supply chain services sector includes healthcare supply chain services pharmaceutical healthcare supply chain services medical segments clinical medical products sector includes clinical technologies services medical products manufacturing segments healthcare supply chain services sector focuses delivering bestinclass distribution logistics services customers sector generates 95 total segment revenue approximately threequarters total segment profit defined “segment results operations” section consistent reliable cash flow clinical medical products sector focuses largely developing innovative products hospitals providers care sector higher margin products services faster growing segment profit grown contribute approximately onefourth total segment profit third fiscal 2007 company acquired viasys medmined care fusion along acquisitions viasys leader respiratory care development marketing systems critical care diagnostic use offers products services directed critical care ventilation respiratory diagnostics clinical services neurological vascular audio homecare orthopedics sleep diagnostics medical surgical products markets value transaction including assumption viasys’s debt totaled approximately 15 billion viasys integrated medical products manufacturing segment company also acquired medmined leader tracking predicting infection management opportunities within major hospitals care fusion focuses bedside bar code utilization tracking hospital samples businesses integrated clinical technologies services segment information regarding company’s acquisitions see “item 1 business acquisitions divestitures” “other matters acquisitions” note 2 “notes consolidated financial statements” information regarding company’s business see “item 1 business” within form 10k financial overview continued demand company’s products services fiscal 2007 led revenue 869 billion 9 fiscal 2006 operating earnings negatively impacted special items 772 million decreased 26 approximately 14 billion significant increase special items related reserves litigation settlements 655 million inprocess research development “iprd” expenses primarily connection viasys acquisition 85 million yearoveryear operating earnings comparison favorably impacted increased gross margin 431 million partially offset increases selling general administrative expenses 200 million net earnings included gain sale pts business 11 billion 19 billion net diluted earnings per common share 477 fiscal 2007 cash operating activities decreased 898 million 12 billion primarily due payment litigation settlement reserves government fines 690 million discussed “special items” section cash provided investing activities 15 billion due primarily net proceeds pts business divesture 31 billion offset cash paid acquisitions 16 billion cash used financing activities 26 billion due company’s cash payments treasury shares 37 billion offset net proceeds borrowings 631 million issuance shares 553 million fiscal 2007 company repurchased approximately 38 billion common shares 45 billion repurchase authorization 37 billion settled prior yearend august 8 2007 company announced new 20 billion share repurchase program expires august 31 2009 see table “item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” information regarding share repurchases also fiscal 2007 company paid 144 million dividends 036 per share fourth quarter fiscal 2007 board directors raised quarterly dividend 33 012 per share repurchase activity apart use net proceeds pts business divestiture increased dividend payments support company’s previously stated longterm goal return 50 net cash provided operating activities continuing operations shareholders increase dividend payout 20 earnings per share consolidated results operations following table summarizes company’s consolidated results operations fiscal years ended june 30 2007 2006 2005 millions except per common share amounts 1 change calculated percentage increase decrease given year compared immediately preceding year 2 second quarter fiscal 2007 company changed classification certain immaterial implementation costs associated sale medication supply storage devices clinical technologies services segment selling general administrative expenses cost products sold prior period amounts reclassified conform new presentation 3 equitybased compensation expense 138 million 208 million 9 million respectively fiscal years ended june 30 2007 2006 2005 revenue increased 72 billion 9 fiscal 2007 due growth company’s four reportable segments including revenue growth 65 billion within healthcare supply chain services pharmaceutical segment due primarily growth revenue bulk customers 40 billion increase revenue bulk customers due certain existing customers deciding purchase greater volume product company rather directly manufacturer pharmaceutical price appreciation company uses internal metric “pharmaceutical price appreciation index” evaluate impact pharmaceutical consumer product price appreciation revenue pharmaceutical supply chain business metric calculated using change manufacturer’s published price beginning period compared end period weighted units sold pharmaceutical supply chain business period pharmaceutical price appreciation index 63 fiscal 2007 healthcare supply chain services pharmaceutical segment represents approximately 86 total segment revenue refer “segment results operations” discussion specific factors affecting revenue company’s reportable segments revenue increased 70 billion 10 fiscal 2006 due increased revenue within company’s four reportable segments including revenue growth 64 billion within healthcare supply chain services pharmaceutical segment due primarily growth revenue bulk customers 58 billion increase revenue bulk customers due overall market growth certain existing customers deciding purchase greater volume product company rather directly manufacturer pharmaceutical price appreciation index 56 fiscal 2006 cost products sold cost products sold increased 68 billion 9 66 billion 10 respectively fiscal years ended june 30 2007 2006 increases cost products sold mainly due respective 9 10 growth revenue fiscal 2007 2006 see “gross margin” discussion additional factors impacting cost products sold gross margin gross margin increased 431 million 9 fiscal year ended june 30 2007 prior fiscal year increase gross margin primarily due revenue growth 72 billion factors favorably impacting gross margin included increased sales clinical medical products related services 204 million increased manufacturer cash discounts 193 million generic pharmaceutical margin 192 million distribution service agreement fees pharmaceutical price appreciation combined impact 171 million gross margin negatively impacted increase customer discounts within healthcare supply chain services pharmaceutical healthcare supply chain services medical segments 324 million due increased sales competitive pricing pressures refer “segment results operations” discussion specific factors affecting gross margin company’s reportable segments due competitive markets company’s businesses operate company expects competitive pricing pressures continue however company expects margin impact pricing pressures mitigated sales growth higher margin manufactured products effective product sourcing realization synergies integration acquired businesses continued focus cost controls gross margin increased 354 million 8 fiscal year ended june 30 2006 increase gross margin primarily due revenue growth 70 billion gross margin favorably impacted increased gross margin clinical manufactured products related services 211 million manufacturer cash discounts 139 million distribution service agreement fees pharmaceutical price appreciation combined impact 134 million pharmaceutical supply chain business within healthcare supply chain services pharmaceutical segment gross margin negatively impacted increased customer discounts 232 million pharmaceutical supply chain business selling general administrative “sga” expenses sga expenses increased 200 million 7 fiscal 2007 primarily support revenue growth additional items impacting sga expenses included increases due acquisitions 72 million company’s charitable contribution cardinal health foundation 30 million sga expenses favorably impacted yearoveryear reduction equitybased compensation expense 70 million reduction equitybased compensation expense due part changes made company’s equity compensation program grant stock appreciation rights prior year refer “segment results operations” discussion specific factors affecting sga expenses company’s reportable segments company expects sga expenses grow fiscal 2008 support sales growth new product service offerings result impact acquisitions continued investment research development projects international expansion however company expect generate expense efficiencies integration acquired companies cost controls sga expenses increased 385 million 15 fiscal 2006 primarily support 70 billion revenue growth result increased equitybased compensation expense 199 million primarily due adoption sfas 123r see “other matters adoption sfas 123r” note 18 “notes consolidated financial statements” additional information regarding equitybased compensation additional items impacting sga expenses included increased incentive compensation expense 36 million due improved operating performance incremental expenses associated company’s global restructuring program 38 million increased legal expenses 15 million due thenoutstanding litigation impairment charges company recognized impairment charges 17 million 6 million 38 million respectively fiscal years ended june 30 2007 2006 2005 see note 3 “notes consolidated financial statements” additional information regarding impairment charges special items following summary company’s special items fiscal years ended june 30 2007 2006 2005 millions fiscal 2007 special items charges primarily related reserves litigation settlements 655 million iprd expenses 85 million primarily connection viasys acquisition company recorded litigation charges made payment 655 million fiscal 2007 related settlement cardinal health federal securities litigation 600 million cardinal health erisa litigation 40 million matters charges offset 29 million income related pharmaceutical manufacturer antitrust litigation addition company settled made payment penalty associated sec investigation 35 million reserved fiscal 2006 2005 settlements resolve company’s significant outstanding litigation well sec investigation fiscal 2008 company expects recognize approximately 58 million proceeds income insurance policies upon final settlement claims shareholder derivative actions see note 12 “notes consolidated financial statements” discussion matters outstanding legal proceedings regulatory matters fiscal 2007 company recorded 85 million iprd charges primarily associated viasys acquisition iprd charges determined independent thirdparty appraisal represent estimated fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately charged operating expense acquisition date fiscal 2006 2005 special items charges primarily related company’s restructuring programs sec investigation audit committee internal review integration costs certain acquisitions settlements received vitamin antitrust litigation see note 3 “notes consolidated financial statements” details company’s special items operating earnings operating earnings decreased 471 million 26 fiscal 2007 includes increased special items charges 692 million impairment charges 12 million operating earnings favorably impacted gross margin growth 431 million negatively impacted increased sga expenses 200 million operating earnings increased 63 million 4 fiscal 2006 operating earnings favorably impacted gross margin growth 354 million yearoveryear decrease special items charges 61 million impairment charges 33 million fiscal 2006 operating earnings negatively impacted increased sga expenses 385 million interest expense interest expense increased 17 million 16 fiscal 2007 primarily due increased borrowing levels interest rates interest expense decreased 13 million fiscal 2006 primarily due increase investment income 7 million foreign exchange gains 4 million provision income taxes provisions income taxes relative earnings income taxes discontinued operations 329 332 359 pretax earnings fiscal 2007 2006 2005 respectively generally fluctuations effective tax rate due changes within international us state effective tax rates resulting company’s business mix changes tax impact special items may unique tax implications depending nature item taxing jurisdiction company’s effective tax rate reflects tax benefits derived increasing operations outside united states generally taxed rates lower us statutory rate 35 company tax incentive agreements several nonus tax jurisdictions expire fiscal years 2009 2024 renewed company believe potential changes existing tax incentive agreements material adverse effect company’s financial position results operations company’s fiscal 2007 provision income taxes relative earnings income taxes discontinued operations 4126 million effective tax rate 329 fiscal 2007 effective tax rate benefited 02 percentage points equitybased compensation expense deductible tax rate higher average tax rate fiscal 2007 effective tax rate adversely impacted 075 percentage points due nondeductibility certain special items impairments principally iprd charge related viasys acquisition exceptions company longer subject us federal nonus income tax audits tax authorities fiscal years ending june 30 2001 years subsequent fiscal 2000 contain matters could subject differing interpretations applicable tax laws regulations relates amount andor timing income deductions tax credits internal revenue service “irs” currently ongoing examinations open years 2001 2005 although outcome tax audits always uncertain company believes adequate amounts tax interest provided adjustments expected result years currently possible predict impact settlements irs audit activity income tax expense cash flows next 12 months company expect significant impact financial position first quarter fiscal 2007 effective tax rate continuing operations favorably impacted 99 million adjustment tax reserves primarily due issuance final irs revenue agent report related fiscal years 2001 2002 second quarter fiscal 2007 effective tax rate continuing operations negatively impacted 73 million adjustment tax reserves related ongoing international tax audit third quarter fiscal 2007 company entered agreement irs close fiscal years 1996 2000 federal audits result company reversed tax reserves approximately 89 million company’s fiscal 2006 provision income taxes relative earnings income taxes discontinued operations 5771 million effective tax rate 332 fiscal 2006 effective tax rate adversely impacted 02 percentage points due nondeductibility certain special items provision american jobs creation act 2004 “ajca” created temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends nonus subsidiaries fourth quarter fiscal 2005 company determined would repatriate 500 million accumulated nonus earnings fiscal 2006 pursuant repatriation provisions ajca accordingly company recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca fiscal 2006 company repatriated 494 million qualifying accumulated foreign earnings accordance plan adopted fiscal 2005 additional tax liability 04 million recorded fiscal 2006 due new state legislation respect ajca bringing company’s total tax liability related repatriation recorded june 30 2006 267 million uses repatriated funds included domestic expenditures related nonexecutive salaries capital asset investments permitted activities see note 11 “notes consolidated financial statements” additional information discontinued operations earnings discontinued operations net tax increased 13 billion fiscal 2007 primarily due aftertax gain sale pts business 11 billion impairment charges prior year 185 million see note 8 “notes consolidated financial statements” information company’s discontinued operations segment results operations reportable segments company’s operations organized four reportable segments healthcare supply chain services pharmaceutical healthcare supply chain services medical clinical technologies services medical products manufacturing company evaluates performance individual segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expense includes equity compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition special items impairment charges investment spending allocated segments see note 17 “notes consolidated financial statements” additional information company’s reportable segments revenue increased company’s four reportable segments fiscal 2007 including doubledigit growth medical products manufacturing 12 clinical technologies services 11 segments segment profit increased company’s four reportable segments including doubledigit growth medical products manufacturing 20 clinical technologies services 20 healthcare supply chain services pharmaceutical 14 segments following table summarizes segment revenue fiscal years ended june 30 2007 2006 2005 millions 1 growth calculated percentage change increase decrease given year compared immediately preceding year 2 bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses nonbulk customers include retail stores hospitals alternate care sites customers specifically classified bulk customers deliveries bulk customers consist product shipped form received manufacturer see discussion within healthcare supply chain services pharmaceutical section company’s description revenue bulk customers 3 corporate revenue consists elimination intersegment revenue periods presented following table summarizes segment profit fiscal years ended june 30 2007 2006 2005 millions 1 growth calculated percentage change increase decrease given year compared immediately preceding year 2 portion corporate costs previously allocated former pharmaceutical technologies services segment reclassified remaining four segments based upon segment’s respective proportion allocated corporate expenses addition equitybased compensation allocated segments based upon forecasted equitybased compensation expense respective segment plus onefourth forecasted corporate equitybased compensation expense prior period information adjusted reflect changes methodology 3 equitybased compensation expense 138 million 208 million 9 million respectively fiscal years ended june 30 2007 2006 2005 4 first quarter fiscal 2006 healthcare supply chain services pharmaceutical segment recorded charge reflecting credits owed certain vendors 32 million prior periods fourth quarter fiscal 2007 adjustment 4 million recorded reduce portion reserve based upon revised estimate 5 third quarter fiscal 2007 company revised method used allocate certain shared costs healthcare supply chain services medical segment medical products manufacturing segment better align costs segment receives related benefits prior period information adjusted reflect change methodology 6 fiscal 2007 2006 2005 corporate operating earnings include special items impairment charges certain corporate investment spending described • special items corporate operating earnings include special items 772 million 81 million 142 million fiscal years ended june 30 2007 2006 2005 respectively see note 3 “notes consolidated financial statements” discussion special items • impairment charges see note 3 “notes consolidated financial statements” discussion impairment charges • investment spending company encouraged business units identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon corporate management expenses projects retained corporate segment investment spending fiscal years 2007 2006 2005 22 million 19 million 18 million respectively healthcare supply chain services pharmaceutical performance fiscal 2007 healthcare supply chain services pharmaceutical segment revenue increased 65 billion 9 primarily revenue bulk customers segment profit increased 157 million due revenue growth increased generic pharmaceutical margin increased distribution service agreement fees pharmaceutical price appreciation offset increased customer discounts increased sga expenses pharmaceutical distribution market remains highly competitive company expects customer discounts continue increase however company expects increased manufacturer cash discounts distribution service agreement fees increase revenue growth combined increased generic margin continued pharmaceutical price appreciation enable company offset increased customer discounts company’s results could adversely affected sales pharmaceutical products decline frequency new generic pharmaceutical launches decreases pharmaceutical price appreciation decreases historical rate alternatively company’s results could benefit sales pharmaceutical products increase frequency new generic pharmaceutical launches increases pharmaceutical price appreciation exceeds historical rate revenue bulk customers described increased 40 billion fiscal 2007 additional volume existing customers 27 billion new customers 13 billion revenue nonbulk customers increased 25 billion growth revenue nonbulk customers driven additional sales volume existing customers pharmaceutical price appreciation 40 billion pharmaceutical price appreciation index 63 fiscal 2007 acquisitions 12 billion mainly dohmen parmed also favorable impact yearoveryear revenue comparison negatively impacting growth revenue nonbulk customers loss existing customers due competition 10 billion sale significant part specialty distribution business 17 billion fourth quarter fiscal 2006 healthcare supply chain services pharmaceutical segment profit increased 157 million 14 fiscal 2007 gross margin increased segment profit 202 million primarily due segment’s revenue growth increased generic pharmaceutical margin 192 million due new product launches competitive vendor pricing gross margin also favorably impacted increased manufacturer cash discounts due sales volume growth 187 million distribution service agreement fees pharmaceutical price appreciation combined impact 171 million gross margin negatively impacted increased customer discounts 319 million due increased sales volume competitive pressures company expects continued customer discounting due competitive market operates increases segment sga expenses negatively impacted segment profit approximately 45 million fiscal 2007 increases sga expenses support increased sales volume due impact acquisitions 37 million favorably impacting sga expenses reduction equitybased compensation expense 14 million segment profit negatively impacted prior year sale significant portion specialty distribution business 43 million company estimates branded pharmaceuticals industrywide sales volume domestically 218 billion 44 billion came patent protection fiscal 2007 2006 respectively allowed generic pharmaceutical competition company’s estimate industrywide branded pharmaceutical sales volume internally developed using industry sales data significant branded pharmaceuticals adapted company’s fiscal period generic pharmaceuticals negatively impact revenue offered lower prices branded pharmaceuticals however generic pharmaceuticals positively impact gross margin operating earnings due competitive vendor pricing company generally earns highest margins generic pharmaceuticals period immediately following initial launch generic product marketplace generic pharmaceutical selling prices generally deflationary company expects similar level branded pharmaceuticals come patent protection fiscal 2008 compared fiscal 2007 fiscal 2006 healthcare supply chain services pharmaceutical segment revenue increased 64 billion 10 revenue bulk customers increased 58 billion centralized warehouse mail order customers contributed 50 billion 08 billion respectively bulk customer revenue growth additional sales volume due significant part certain existing warehouse customers deciding purchase company rather directly manufacturer revenue nonbulk customers increased 604 million based upon pharmaceutical price appreciation additional sales volume new existing customers revenue growth negatively impacted result decision specialty distribution business’s largest customer begin self distribution january 1 2006 sale significant portion specialty distribution business fourth quarter 190 million pharmaceutical price appreciation index 56 fiscal 2006 healthcare supply chain services pharmaceutical segment profit decreased 81 million 7 fiscal 2006 gross margin increased segment profit 70 million due primarily segment’s revenue growth increased manufacturer cash discounts 139 million due increased sales within pharmaceutical supply chain business addition gross margin favorably impacted distribution service agreement fees pharmaceutical price appreciation combined impact 134 million factors favorably impacting gross margin included generic pharmaceuticals 32 million due sales growth competitive vendor pricing introduction new generic pharmaceuticals within pharmaceutical supply chain business addition new vendors segment’s national logistics center 27 million lastin firstout “lifo” reserve reduction 26 million primarily due price deflation within generic pharmaceutical inventories increased customer discounts within pharmaceutical supply chain business negatively impacted segment profit 232 million due increased sales volume competitive pressures segment profit also negatively impacted adjustment 32 million described detail increases segment sga expenses negatively impacted segment profit approximately 151 million fiscal 2006 compared fiscal 2005 increases expenses support increased sales volume increased equitybased compensation expense 67 million due primarily adoption sfas 123r noted healthcare supply chain services pharmaceutical segment profit negatively impacted adjustment recorded first quarter fiscal 2006 company discovered inadvertently erroneously failed process credits owed vendor prior years thorough review company determined failed process similar credits limited number additional vendors processing failures specific limited area vendor credits resulted system programming interface data entry errors relating vendor credits occurred period years result company recorded charge 32 million first quarter fiscal 2006 reflecting estimate credits owed vendors bulk nonbulk customers healthcare supply chain services pharmaceutical segment differentiates bulk nonbulk customers bulk customers generate significantly lower segment profit percentage revenue nonbulk customers bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses customers classified nonbulk customers example retail stores pharmacies hospitals alternate care sites bulk customers include warehouse operations retail chains whose retail stores classified nonbulk customers example single retail chain pharmacy customer may bulk customer respect warehouse operations nonbulk customer respect retail stores bulk customers ability process large quantities products central locations selfdistribute products individual retail stores customers substantially deliveries bulk customers consist product shipped form product received manufacturer small portion deliveries bulk customers broken smaller units prior shipping nonbulk customers hand require complex servicing company services performed company include receiving inventory large full case quantities breaking smaller quantities warehousing product longer period time picking individual products specific customer’s order delivering smaller order customer location company tracks revenue bulk nonbulk customers financial systems assist company managing business internal analysis prepared allocate segment expenses total segment cost products sold segment selling general administrative expenses separately bulk nonbulk customers following table shows allocation segment expenses segment profit segment profit percentage revenue bulk nonbulk customers fiscal 2007 2006 2005 millions 1 amounts shown estimates based upon internal analysis described preparation internal analysis required use complex subjective estimates allocations based upon assumptions past experience judgment company believes reasonable core pharmaceutical distribution operation “distribution” within healthcare supply chain services pharmaceutical segment services bulk nonbulk customers therefore expenses associated operation allocated bulk nonbulk customers described brokerage operation “brokerage” within healthcare supply chain services pharmaceutical segment services bulk customers therefore expenses associated brokerage allocated bulk customers remaining operations ie excluding distribution brokerage within healthcare supply chain services pharmaceutical segment service nonbulk customers therefore expenses associated operations allocated nonbulk customers following describes allocation major components cost products sold distribution bulk nonbulk customers • cost products sold pharmaceutical products determined specifically tracking manufacturer’s designated price products time products sold bulk nonbulk customers manufacturer’s designated price reduced components impacting cost products sold including distribution service agreement fees pharmaceutical price appreciation manufacturer cash discounts manufacturer rebates incentives addition inventory charges credits added subtracted appropriate arrive cost products sold company used following methods believes provide reasonable correlation allocate remaining components cost products sold bulk nonbulk customers • distribution service agreement fees pharmaceutical price appreciation tracked manufacturer therefore company allocated distribution service agreement fees pharmaceutical price appreciation associated manufacturer among products proportion sales product bulk nonbulk customers • manufacturer cash discounts recognized reduction cost products sold related inventory sold allocated proportion manufacturer’s published price product sold bulk nonbulk customers • manufacturers’ rebates incentives based individual agreements entered manufacturers related specific products rebates incentives grouped contract terms allocated proportion sales bulk nonbulk customers • inventory charges credits include charges outdated returned inventory items fluctuation inventory reserves company estimated portion inventory charges credits attributable product allocated bulk nonbulk customers proportion sales products company used methods believes provide reasonable correlation allocate selling general administrative expenses distribution bulk nonbulk customers follows • warehouse expense includes laborrelated expenses associated receiving shipping handling inventory well warehouse storage costs including insurance taxes supplies facility costs warehouse expense allocated proportion number invoice line items filled bulk nonbulk customer company believes correlation number different products ordered reflected invoice lines level effort associated receiving shipping handling order bulk customers typically order larger quantities products invoice line • delivery expense includes transportation costs associated physically moving product warehouse customer’s designated location delivery expense allocated proportion number invoices generated bulk nonbulk customer assumption invoice generates delivery • sales expense includes personnelrelated costs associated sales customer service activities bulk nonbulk customers sales expense allocated proportion number invoices generated bulk nonbulk customer invoices reasonable estimate amount customer service calls sales effort • general administrative expenses allocated proportion units products sold bulk nonbulk customers expenses allocated assumption general administrative expenses increase decrease direct relation volume sales 2 amounts exclude lifo credit provisions 0 26 million 32 million fiscal 2007 2006 2005 respectively internal analysis indicated segment expenses percentage revenue higher bulk customers nonbulk customers higher segment cost products sold partially offset lower segment sga expenses bulk customers receive lower pricing sales products nonbulk customers due volume pricing competitive market lower costs related services provided company addition sales bulk customers aggregate generate higher segment cost products sold percentage revenue sales nonbulk customers bulk customers’ orders consist almost entirely higher cost branded products higher segment cost products sold percentage revenue bulk customers also driven lower manufacturer distribution service agreement fees branded pharmaceutical price appreciation lower manufacturer cash discounts manufacturer distribution service agreement fees manufacturer cash discounts recognized reduction segment cost products sold lower percentage revenue due mix products sold pharmaceutical price appreciation increases customer pricing turn results higher segment gross margin sales inventory onhand time manufacturer’s price increase since products sold bulk customers generally held inventory shorter time products sold nonbulk customers less opportunity realize benefit pharmaceutical price appreciation consequently segment cost products sold percentage revenue bulk customers higher nonbulk customers segment gross margin percentage revenue substantially lower bulk customers nonbulk customers deliveries bulk customers require substantially less services company deliveries nonbulk customers segment sga expenses percentage revenue bulk customers substantially lower nonbulk customers factors result segment profit percentage revenue significantly lower bulk customers nonbulk customers company defines bulk customers based way company operates business services performs customers company aware industry standard regarding definition bulk customers based solely review annual reports form 10k national pharmaceutical wholesalers company notes companies comparable businesses may use different definition bulk customers fiscal 2007 segment profit bulk customers increased 35 million 01 revenue bulk customers due increased sales volume described yearoveryear increase distribution service agreement fees pharmaceutical price appreciation segment profit nonbulk customers increased 148 million 02 revenue nonbulk customers compared fiscal 2006 increase segment profit nonbulk customers due primarily increase sales volume described impact generic products greater impact profitability nonbulk customers due mix pharmaceuticals distributed nonbulk customers fiscal 2006 segment profit bulk customers increased 60 million 01 revenue bulk customers due increased sales volume described yearoveryear impact new distribution service agreements pharmaceutical price appreciation favorable impact distribution service agreements pharmaceutical price appreciation greater impact profitability bulk customers nonbulk customers fiscal 2006 due mix branded pharmaceuticals distributed bulk customers positive factors partially offset increase allocated equitybased compensation expense 10 million due adoption sfas 123r fiscal 2006 segment profit nonbulk customers declined 136 million 04 revenue nonbulk customers compared fiscal 2005 increase segment profit nonbulk customers due increased sales new distribution service agreements offset increased customer discounts increase segment sga expenses largely due sales growth increase allocated equitybased compensation expense 57 million due adoption sfas 123r 32 million charge first quarter fiscal 2006 reflecting credits owed vendors healthcare supply chain services medical performance fiscal 2007 healthcare supply chain services medical segment revenue increased 315 million segment profit remained relatively flat company remains focused improving operating performance within segment continued investment customer service restructuring business fourth quarter fiscal 2007 company announced plan combine headquarters healthcare supply chain services pharmaceutical medical segments order promote sharing best practices support functions provide better service customers refer “other matters global restructuring program” discussion company’s healthcare supply chain services medical restructuring program healthcare supply chain services medical segment revenue growth 315 million 4 fiscal 2007 resulted primarily increased volume existing customers 215 million new customer accounts 100 million healthcare supply chain services medical segment profit increased 4 million 1 fiscal 2007 gross margin increased segment profit 27 million primarily result revenue growth impact increased manufacturer cash discounts 6 million negatively impacting gross margin increased customer discounts 5 million trade receivable reserves 7 million related segment’s customer service shared service transition increases sga expenses decreased segment profit 23 million primarily support revenue growth increased transportation costs 5 million favorably impacting sga expenses reduction equitybased compensation expense 14 million fiscal 2006 healthcare supply chain services medical segment revenue growth 376 million 6 resulted primarily increased volume existing customers 244 million new customer accounts 115 million healthcare supply chain services medical segment profit decreased 53 million 14 fiscal 2006 gross margin increased segment profit 53 million result revenue growth favorable impact mix privatelabel branded products 9 million due emphasis placed selling company branded products focused product categories new products higher margins 4 million increases sga expenses decreased segment profit 106 million support revenue growth increase equitybased compensation expense 45 million due primarily adoption sfas 123r clinical technologies services performance fiscal 2007 clinical technologies services segment revenue grew 257 million 11 revenue growth favorably impacted new products 119 million increased sales volumes existing customers 90 million due renewals expansion product lines new customers 35 million acquisitions also favorably impacted yearoveryear comparison 18 million clinical technologies services segment profit increased 65 million 20 gross margin increased segment profit 132 million primarily result revenue growth gross margin negatively impacted estimated costs alaris se pump corrective action plan related consulting expenses 18 million due product recall increases sga expenses decreased segment profit 67 million support revenue growth result impact acquisitions 22 million increased investment product quality research development costs 11 million favorably impacting sga expenses reduction equitybased compensation expense 14 million fiscal 2006 clinical technologies services segment revenue growth 241 million 11 resulted primarily revenue growth within pyxis alaris product lines pyxis products revenue increased 83 million due higher unit sales resulting increased demand medstation® 3000 product improvements within sales installation cycles alaris products revenue increased 125 million due competitive displacements driven technological advantages sales obtained company’s relationships revenue increases tempered slower revenue growth clinical consulting services 52 million clinical technologies services segment profit increased 82 million 35 fiscal 2006 gross margin increased segment profit 180 million primarily result revenue growth factors favorably impacting gross margin included sales mix 49 million manufacturing efficiencies 12 million driven higher sales volume also favorably impacting yearoveryear comparison inventory valuation adjustments fair value alaris acquisition 24 million adjusted higher value inventory sold first two quarters fiscal 2005 increases sga expenses decreased segment profit 97 million due primarily increase equitybased compensation expense 55 million due primarily adoption sfas 123r support revenue growth estimated integration synergies alaris acquisition 54 million favorably impacted gross margin sga expenses medical products manufacturing performance fiscal 2007 medical products manufacturing segment revenue grew 203 million 12 revenue growth favorably impacted increased sales volume 74 million existing customers new customers new gpo contracts competitor exits revenue growth also favorably impacted new product launches 50 million including innovations gloves respiratory products surgical instruments software international revenue growth 62 million includes impact foreign exchange 18 million acquisitions including denver biomedical viasys favorably impacted yearoveryear comparison 37 million due acquisition viasys company expects significant growth medical products manufacturing segment medical products manufacturing segment profit increased 33 million 20 fiscal 2007 gross margin increased segment profit 72 million primarily result revenue growth factors favorably impacting gross margin included manufacturing cost reductions 20 million driven strategic sourcing expense control related company’s restructuring program integration acquisitions 21 million primarily denver biomedical increases sga expenses negatively impacted segment profit 39 million primarily support segment’s revenue growth impact acquisitions 13 million favorably impacting sga expenses reduction equitybased compensation expense 12 million fiscal 2006 medical products manufacturing segment revenue grew 96 million 6 resulting revenue growth manufactured gloves respiratory product lines 45 million due new customer accounts 14 million new products 31 million international revenue growth 16 million new customers medical products manufacturing segment profit decreased 11 million 6 fiscal 2006 gross margin increased segment profit 31 million primarily result revenue growth factors favorably impacting gross margin included manufacturing cost reductions driven cost controls 30 million expense control partially related company’s global restructuring program 12 million increased raw materials costs 25 million negatively impacted gross margin increases sga expenses negatively impacted segment profit 42 million primarily due increase equitybased compensation 41 million support segment’s revenue growth latex litigation charge 28 million recorded fiscal 2005 also favorably impacted yearoveryear comparison matters acquisitions fourth quarter fiscal 2007 company acquired viasys offered products services directed critical care ventilation respiratory diagnostics clinical services neurological vascular audio homecare orthopedics sleep diagnostics medical surgical products markets value transaction including assumption viasys’s debt totaled approximately 15 billion addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 165 million assumed liabilities acquired businesses approximately 22 million consolidated financial statements include results operations business combinations date acquisition transactions including viasys occurred beginning fiscal 2006 consolidated results operations would differed materially reported results information regarding company’s acquisitions see “item 1 business acquisitions divestitures” note 2 “notes consolidated financial statements” fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 364 million assumed liabilities acquired businesses approximately 149 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2005 consolidated results operations would differed materially fiscal 2005 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 107 million assumed liabilities acquired businesses approximately 27 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2004 consolidated results operations would differed materially company’s trend regard acquisitions expand role provider services innovative products healthcare industry trend resulted expansion areas complement company’s existing operations provide opportunities company develop synergies strengthen acquired business healthcare industry continues change company evaluates possible candidates acquisition considers opportunities expand role provider services healthcare industry reportable segments assurance however company able successfully take advantage opportunity arises consummate transaction pursued additional transactions pursued consummated company would incur additional acquisition integration charges may need enter funding arrangements acquisitions assurance integration efforts associated transaction would successful sale pts business april 10 2007 company completed sale pts business phoenix charter llc “phoenix” affiliate blackstone group pursuant purchase sale agreement company phoenix dated january 25 2007 amended “purchase agreement” closing sale company received approximately 32 billion cash phoenix purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement working capital cash indebtedness earnings interest taxes depreciation amortization pts business company recognized aftertax book gain approximately 11 billion transaction company used aftertax net proceeds approximately 31 billion sale repurchase shares purchase agreement contained customary indemnification provisions sale transactions type global restructuring program fiscal 2005 company launched global restructuring program goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation april 30 2007 company announced third phase global restructuring program move headquarters company’s healthcare supply chain services medical segment certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio company expects third phase substantially completed end fiscal 2009 see company’s form 8k filed april 30 2007 additional information adoption sfas 123r first quarter fiscal 2006 company adopted sfas 123r applying modified prospective method sfas 123r requires equitybased payments employees including grants employee options recognized consolidated statement earnings based grant date fair value award prior adoption sfas 123r company accounted equitybased awards intrinsic value method followed recognition measurement principles apb opinion 25 related interpretations equitybased compensation included pro forma disclosure within notes financial statements anticipation adoption sfas 123r company modify terms previouslygranted options see note 18 “notes consolidated financial statements” additional information regarding equitybased compensation pharmaceutical supply chain business model transition historically significant portion pharmaceutical supply chain business’ gross margin derived company’s ability purchase pharmaceutical inventory hold inventory manufacturer increased prices sell product higher price beginning fiscal 2003 branded pharmaceutical manufacturers began seek greater control amount product available supply chain result began change sales practices restricting volume product available purchase wholesalers addition manufacturers sought additional services company including providing data concerning product sales distribution patterns company believes manufacturers sought changes provide greater visibility product demand movement market increase product safety integrity reducing risks associated product available distributed secondary market changes significantly reduced pharmaceutical price appreciation earned company response developments company established compensation system branded pharmaceutical manufacturers significantly less dependent manufacturers’ pricing practices based services provided company meet unique distribution requirements manufacturer’s products fiscal 2005 company worked individual branded pharmaceutical manufacturers define feeforservice terms compensate company based services provided manufacturers transition completed fiscal 2006 new arrangements moderated seasonality earnings historically reflected pattern manufacturers’ price increases feeforservice arrangements reflected written distribution service agreements company’s compensation services may fee plus pharmaceutical price appreciation certain instances company must achieve certain performance criteria receive maximum fees agreement fee typically fixed percentage either company’s purchases manufacturer company’s sales manufacturer’s products customers company continues generate gross margin sale manufacturers’ products pharmaceutical price appreciation without receiving distribution service agreement fees frequency rate branded pharmaceutical price appreciation slows company’s results operations financial condition could adversely affected distribution service agreements company certain branded pharmaceutical manufacturers generally range oneyear term automatic renewal feature fiveyear term agreements generally cannot terminated unless mutually agreed parties breach agreement occurs cured bankruptcy filing similar insolvency event occurs agreements allow manufacturer terminate agreement without cause within defined notice period critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation company’s financial condition results operations require use complex subjective estimates based upon past experience management’s judgment companies applying reasonable judgment facts circumstances could develop different estimates uncertainty inherent estimates actual results may differ estimates policies applied preparing company’s consolidated financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 “notes consolidated financial statements” allowance doubtful accounts trade receivables amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range ninety days ten years interest rates generally subject fluctuation financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment company’s management determining appropriate allowance doubtful accounts includes portfolio specific reserves company reviews accounts receivable aging industry trends customer financial strength credit standing historical writeoff trends payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults change due changes customers’ financial condition general economic conditions company’s allowance doubtful accounts may require adjustment allowance doubtful accounts 1289 million 1264 million june 30 2007 2006 respectively allowance represented 22 26 customer receivables june 30 2007 2006 respectively allowance doubtful accounts percentage revenue 015 016 june 30 2007 2006 2005 respectively allowance doubtful accounts reduced 284 million 226 million 212 million fiscal 2007 2006 2005 respectively customer deductions writeoffs increased additional provisions 240 million 246 million 77 million fiscal 2007 2006 2005 respectively hypothetical 01 increase decrease reserve percentage trade receivables salestype leases reserve june 30 2007 would result increase decrease bad debt expense approximately 59 million reserve methodologies assessed annually based historical losses economic business market trends addition reserves reviewed quarterly updated unusual circumstances trends present company believes reserve maintained expenses recorded fiscal 2007 appropriate consistent historical methodologies employed time company aware internal process customer issues might lead significant future increase company’s allowance doubtful accounts percentage net revenue see schedule ii included form 10k includes rollforward activity allowance reserves inventories substantial portion inventories approximately 73 75 june 30 2007 2006 respectively stated lower cost using lifo method market inventories included within core distribution facilities within company’s healthcare supply chain services pharmaceutical segment “core distribution facilities” primarily merchandise inventories lifo impact consolidated statement earnings given year dependent pharmaceutical price appreciation level inventory prices branded pharmaceuticals primarily inflationary results increase cost products sold whereas prices generic pharmaceuticals deflationary results decrease cost products sold lifo method assumed recent inventory purchases first items sold company uses lifo better match current costs revenue therefore reductions overall inventory levels resulting declining branded pharmaceutical inventory levels generally result decrease future cost products sold remaining inventory held lower cost due inflationary environment conversely reductions overall inventory levels created declining generic pharmaceutical inventory levels would generally increase future cost products sold remaining inventory held higher cost due deflationary environment company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within core distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2007 company record lifo reserve reductions lifo reserve reduction fiscal 2006 260 million primarily due price deflation within generic pharmaceutical inventories remaining inventory primarily stated lower cost using firstin firstout “fifo” method market company used average cost method inventory valuation inventory within core distribution facilities inventories would changed fiscal 2007 fiscal 2006 fact primarily due continued deflation generic pharmaceutical inventories lifo 558 million 10 million higher average cost value june 30 2007 2006 respectively however company’s policy record inventories excess current market value inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 958 million 1122 million june 30 2007 2006 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable company’s assumptions additional inventory reserves may required however would expected material adverse impact company’s consolidated financial statements business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many company’s acquisitions assigned intangible assets require management use significant judgment determining fair value company typically utilizes thirdparty valuation experts process addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction valuation experts assess status acquired company’s research development projects determine existence iprd connection acquisitions viasys care fusion company required estimate fair value acquired iprd required selecting appropriate discount rate estimating future cash flows project management also assessed current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established accordance fasb interpretation 4 “applicability fasb statement 2 business combinations accounted purchase method” immediately writtenoff special item company’s consolidated statement earnings company recorded 839 million 06 million special item fiscal 2007 representing estimate viasys’s care fusion’s acquired iprd respectively see note 3 “notes consolidated financial statements” goodwill intangibles company accounts goodwill accordance sfas 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test fair value company’s reporting units compared carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s determination fair value reporting units based discounted cash flow analysis review priceearnings ratio publicly traded companies similar nature scope size methods assumptions used test impairment revised segment realignment periods presented discount rate used impairment testing based riskfree rate plus adjustment risk factors use alternative estimates peer groups changes industry adjusting discount rate used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment tests fiscal 2007 2006 neither resulted recognition impairment charges decreasing priceearnings ratio competitors used impairment testing one point increasing discount rate discounted cash flow analysis used impairment testing 1 would indicated impairment company’s reporting units fiscal 2007 2006 see note 9 “notes consolidated financial statements” additional information regarding goodwill intangibles special items company records restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recorded accordance sfas 146 “accounting costs associated exit disposal activities” statement liability measured fair value recognized incurred acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges included within purchase price allocation accordance sfas 141 “business combinations” integration charges recorded special items incurred certain litigation recorded special items consists settlements significant lawsuits infrequent nonrecurring unusual nature company also classified legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters special items majority special items related acquisition integration restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments integration costs employee costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include reduction value company’s assets result integration restructuring activities integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan see note 3 “notes consolidated financial statements” additional information vendor reserves company maintains reserves cover areas exposure vendors determining appropriate vendor reserves company assesses historical experience current outstanding claims company established various levels reserves based type claim status review company researches resolves various types contested transactions based discussions vendors company policy findings research performed though transaction types relatively consistent company periodically refined estimate methodology past years updating reserve estimate percentages based upon historical experiences changes estimate percentages resulted financial impact company’s cost products sold period change made vendor reserves 726 million 1124 million june 30 2007 2006 respectively approximately 61 73 vendor reserve june 30 2007 2006 respectively pertained healthcare supply chain services pharmaceutical segment fluctuations reserve balance caused variations outstanding claims period timing settlements specific vendor issues bankruptcies significant events would described “management’s discussion analysis financial condition results operations” though vendor transactions remain relatively consistent period unforeseen events deterioration financial condition large vendor settlement numerous outstanding claims could cause reserve fluctuate thus financial impact period’s financial results given time outstanding items various stages research resolution ultimate outcome certain claims may different company’s original estimate may require adjustment however company believes reserves recorded disputes adequate based upon current facts circumstances self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 243 million 241 million estimated costs related outstanding claims june 30 2007 2006 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period hypothetically adjusted period equal half month impact earnings would 60 million amount claims medical dental costs increase beyond estimated reserve might sufficient additional expense could required however company believes liabilities recorded adequate based upon current facts circumstances medical dental insurance expense 1746 million 1405 million 1404 million fiscal 2007 2006 2005 respectively wholly owned insurance subsidiary company certain deductibles selfinsured various risks including general liability product liability pharmacist professional liability auto liability property workers’ compensation however claims excess certain limits insured commercial insurers company recorded liabilities totaling 822 million 763 million anticipated costs related liability property workers’ compensation june 30 2007 2006 respectively costs include estimate expected settlements pending claims defense costs claims adjustment costs estimate claims incurred reported certain types exposures company uses third parties assist developing estimate expected ultimate costs settle claim based specific information related claim claims incurred reported liabilities calculated outside actuaries derived accordance generally accepted actuarial practices amount ultimate liability respect matters dependent future contingent events cannot predicted certainty may differ estimates although company believes liability estimates appropriate based information available june 30 2007 possible based generally accepted actuarial analysis adverse conditions ultimate liability could exceed recorded expected liabilities june 30 2007 much 49 million insurance expense general liability product liability pharmacist professional liability auto liability property workers’ compensation 704 million 713 million 665 million fiscal 2007 2006 2005 respectively provision income taxes company’s income tax expense deferred tax assets liabilities income tax reserves reflect management’s assessment estimated future taxes paid items financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities well net operating loss tax credit carry forwards tax purposes company net deferred income tax assets 3942 million 4611 million june 30 2007 2006 respectively company also net deferred income tax liabilities 17 billion june 30 2007 2006 net deferred income tax assets included net federal state local international loss credit carry forwards june 30 2007 2006 1782 million 849 million respectively company established net valuation allowance 1805 million 344 million june 30 2007 2006 respectively certain deferred tax assets primarily relates federal state loss carryforwards ultimate realization future benefits uncertain company established 1271 million valuation allowance fiscal 2007 related capital loss carryforwards resulting pts business divestiture ultimate realization future benefits uncertain expiring carryforwards required valuation allowances adjusted annually application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described addition company established estimated liability federal state nonus income tax exposures arise meet criteria accrual sfas 5 “accounting contingencies” company prepares files tax returns based interpretation tax laws regulations records estimates based judgments interpretations normal course business company’s tax returns subject examination various taxing authorities examinations may result future tax interest assessments taxing authorities inherent uncertainties exist estimates tax contingencies due changes tax law resulting legislation regulation andor concluded various jurisdictions tax court systems company developed methodology estimating tax liability related matters consistently followed methodology period liability amounts matters based evaluation underlying facts circumstances thorough research technical merits company’s arguments assessment probability company prevailing arguments cases company considers previous findings internal revenue service taxing authorities company generally consults external tax advisers reaching conclusions amounts accrued particular period adjusted significant change facts circumstances occurred company believes estimates valuation allowances deferred tax assets tax contingency reserves appropriate based current facts circumstances however people applying reasonable judgment facts circumstances could develop different estimate amount ultimately paid upon resolution issues raised may differ amounts accrued addition income mix geographical regions significant assumptions estimates described preceding paragraphs important contributors ultimate effective tax rate year although material effective tax rate three fiscal years ended june 30 2007 company’s assumptions estimates change increasedecrease company’s effective tax rate 1 earnings income taxes discontinued operations would caused income tax expense increasedecrease 125 million fiscal year ended june 30 2007 first quarter fiscal 2008 company required adopt provisions fasb interpretation “fin” 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard also provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognizing classification interest penalties accounting interim periods disclosure transition company currently assessing impact fin 48 consolidated financial statements loss contingencies company accrues contingencies related litigation accordance sfas 5 requires company assess contingencies determine degree probability range possible settlement estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount settlement reasonably estimated assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate settlement may differ estimates equitybased compensation first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates entered within option valuation model include limited stock price volatility expected option life expected dividend yield option forfeiture rates effective options granted subsequent adoption sfas 123r company estimates future stock price volatility based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years company analyzed historical data estimate option exercise behaviors employee terminations estimate expected option life forfeiture rates company calculated separate option valuations three separate groups employees similar historical exercise behaviors employee stock option values determined current accounting practices permit changed even estimates used valuation model different actual results however sfas 123r requires company compare estimated option forfeiture rates actual forfeiture rates record adjustments necessary see note 18 “notes consolidated financial statements” additional information regarding equitybased compensation liquidity capital resources sources uses cash following table summarizes company’s consolidated statements cash flows fiscal 2007 2006 2005 millions operating activities net cash provided operating activities continuing operations fiscal 2007 totaled 10 billion decrease 847 million compared fiscal 2006 decrease result decline net income continuing operations 324 million due litigation charges cash settlements made fourth quarter fiscal 2007 655 million see note 12 “notes consolidated financial statements” information regarding litigation settlements increase trade receivables 783 million based repurchase trade receivables 550 million company’s committed receivables program discussed note 19 “notes consolidated financial statements” line company’s focus capital deployment inventory levels declined 217 million accounts payable increased 224 million net cash provided operating activities continuing operations fiscal 2006 totaled 19 billion decrease 625 million compared fiscal 2005 decrease primarily result net proceeds received fiscal 2005 company’s committed receivables sales facility program 550 million see note 19 “notes consolidated financial statements” information regarding program fiscal 2006 accounts payable increase 15 billion partially offset increased inventories 356 million increased accounts receivable 895 million accounts payable trade receivable inventory increases due new sales volume existing large retail chain customer timing inventory purchases vendors healthcare supply chain services pharmaceutical segment net cash provided operating activities discontinued operations fiscal 2007 totaled 220 million net cash provided operating activities discontinued operations fiscal 2007 result earnings discontinued operations 11 billion less gain sale pts business 11 billion net cash provided operating activities discontinued operations fiscal 2006 2005 totaled 271 million 380 million respectively net cash provided discontinued operations fiscal 2006 2005 result loss discontinued operations 163 million 16 million respectively offset changes operating assets liabilities discontinued operations investing activities net cash used investing activities continuing operations 16 billion fiscal 2007 reflected cash used complete acquisitions broaden enhance product offerings including viasys within medical products manufacturing segment medmined care fusion within clinical technologies services segment specialtyscripts within healthcare supply chain services pharmaceutical segment see “acquisitions divestitures” within “item 1 business” form 10k note 2 “notes consolidated financial statements” information regarding company’s acquisitions proceeds sale shortterm investments classified available sale 367 million offset capital spending 357 million develop enhance company’s infrastructure including facilities information systems machinery equipment see note 4 “notes consolidated financial statements” information regarding company’s investments net cash used investing activities continuing operations 11 billion fiscal 2006 reflected company’s purchase shortterm investments classified available sale 399 million capital spending 340 million addition fiscal 2006 company used cash complete acquisitions 362 million expand role provider services healthcare industry primarily associated acquisitions dohmen parmed within healthcare supply chain services pharmaceutical segment denver biomedical within medical products manufacturing segment remaining minority interest source medical within healthcare supply chain services medical segment net cash used investing activities continuing operations fiscal 2005 694 million reflected company’s capital spending 340 million acquisitions alaris geodax 273 million purchase shortterm investments classified available sale 100 million net cash provided investing activities discontinued operations fiscal 2007 31 billion reflected proceeds pts business divestiture 32 billion offset capital spending 108 million net cash used investing activities discontinued operations fiscal 2006 2005 100 million 182 million respectively primarily represents capital spending 103 million 214 million respectively financing activities net cash used financing activities continuing operations 26 billion fiscal 2007 reflected company’s repurchase common shares 37 billion dividend payments shareholders 144 million see “share repurchases” additional information company also used cash repay longterm obligations 784 million cash provided financing activities included proceeds received issuance longterm obligations net issuance costs 15 billion proceeds received shares issued various employee stock plans 553 million see “capital resources” discussion company’s financing activities net cash used financing activities continuing operations 10 billion fiscal 2006 reflected company’s repurchase common shares 15 billion dividend payments shareholders 102 million company also used cash purchase certain buildings equipment capital lease agreements 258 million reflected reduction longterm obligations cash provided financing activities includes proceeds received issuance longterm obligations net issuance costs 497 million proceeds received shares issued various employee stock plans 241 million net cash used financing activities continuing operations 17 billion fiscal 2005 reflected company’s decisions retire debt 19 billion commercial paper 551 million assumed alaris acquisition company also used cash repurchase common shares 500 million pay dividends shareholders 52 million authorized board directors cash provided financing activities include proceeds received issuance longterm obligations net issuance costs 13 billion proceeds received shares issued various employee stock plans 111 million net cash used financing activities discontinued operations fiscal 2007 2006 2005 reflected 39 million 48 million 22 million respectively repayments borrowings sources cash fiscal 2007 2006 2005 additional borrowings 4 million 29 million 17 million respectively international cash company’s cash balance approximately 13 billion june 30 2007 included approximately 707 million cash held subsidiaries outside united states although vast majority cash held outside united states available repatriation subjects united states federal income tax see note 11 “notes consolidated financial statements” additional information regarding income taxes share repurchases company repurchased approximately 58 billion common shares aggregate share repurchase programs fiscal 2007 2006 2005 fiscal 2007 company repurchased 38 billion common shares 45 billion repurchase program 538 million shares average price per share 6979 45 billion repurchase program expire june 30 2008 august 8 2007 company announced new 20 billion share repurchase program expires august 31 2009 share repurchase activity apart use net proceeds pts business divestiture supports company’s previously stated longterm goal return 50 net cash provided operating activities continuing operations shareholders fiscal 2006 2005 company repurchased 15 billion 500 million respectively common shares company’s fiscal 2006 2005 common share repurchases represent 220 million 89 million shares average price per share 6839 5676 respectively see “issuer purchases equity securities” within “item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” information regarding company’s recent share repurchase program capital resources addition cash company’s sources liquidity include 15 billion commercial paper program backed 15 billion revolving credit facility committed receivables sales facility program capacity sell 800 million receivables company increased commercial paper program 10 billion 15 billion february 28 2007 company outstanding borrowings commercial paper program june 30 2007 january 24 2007 company amended certain terms revolving credit facility available general corporate purposes part amendment amount facility increased 10 billion 15 billion term extended january 24 2012 expiration facility extended upon mutual consent company lending institutions revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2007 except 79 million standby letters credit issued behalf company second quarter company repurchased aggregate 550 million receivable interests outstanding committed receivables sales facility program capacity sell 800 million receivables repurchases company receivable interest sales outstanding receivables sales facility program october 31 2006 company renewed receivables sales facility program period one year see note 19 “notes consolidated financial statements” information company’s committed receivables sales facility program company also maintains shortterm credit facilities unsecured line credit allows borrowings 131 million 29 million outstanding june 30 2007 company entered 500 million shortterm loan facility march 30 2007 terminated april 10 2007 company also terminated 150 million extendible commercial note program third quarter fiscal 2007 october 3 2006 company sold 350 million aggregate principal amount 2009 floating rate notes 500 million aggregate principal amount 580 notes due 2016 private offering proceeds debt issuance used repay 500 million company’s preferred debt securities 127 million 730 notes due 2006 shortterm obligations company june 8 2007 company sold 300 million aggregate principal amount 565 notes due 2012 300 million aggregate principal amount 600 notes due 2017 private offering proceeds debt issuance used fund portion purchase price viasys acquisition general corporate purposes fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively october 26 2006 company amended certain facility terms company’s preferred debt securities part amendment company repaid 500 million principal balance portion proceeds october 2006 sale notes discussed minimum net worth covenant added whereby minimum net worth company cannot fall 50 billion time amendment eliminated minimum adjusted tangible net worth covenant adjusted tangible net worth could fall 25 billion certain financial ratio covenants repayment company 150 million preferred debt securities outstanding preferred debt securities classified longterm obligations less current portion shortterm obligations company’s consolidated balance sheet see notes 10 19 “notes consolidated financial statements” information company’s capital resources time company considers engages acquisition transactions order expand role leading provider products services improve safety productivity healthcare company evaluates possible candidates merger acquisition considers opportunities expand role provider products services healthcare industry reportable segments additional transactions entered consummated company may need enter funding arrangements mergers acquisitions company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements including related business combinations debt ratingscovenants company’s senior debt credit ratings sp moody’s fitch bbb baa2 bbb respectively commercial paper ratings a2 p2 respectively moody’s fitch rating outlooks “stable” sp outlook “positive” company’s various borrowing facilities longterm debt free financial covenants minimum net worth cannot fall 50 billion time june 30 2007 company compliance covenant breach covenant would followed grace period company may discuss remedies security holders extinguish securities without causing event default interest rate currency risk management company uses foreign currency forward contracts interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 1 14 “notes consolidated financial statements” information regarding use financial instruments derivatives including foreign currency hedging instruments contractual obligations june 30 2007 company’s contractual obligations including estimated payments due period follows millions 1 represents maturities company’s longterm debt obligations excluding capital lease obligations described see note 10 “notes consolidated financial statements” information 2 represents maturities company’s capital lease obligations included within longterm obligations company’s balance sheet related estimated future interest payments 3 represents cash outflows period certain company’s longterm liabilities cash outflows could reasonably estimated certain longterm liabilities deferred taxes excluded table cash outflows associated liabilities timing cash outflows cannot reasonably estimated 4 represents minimum rental payments related estimated future interest payments operating leases initial remaining noncancelable lease terms described note 12 “notes consolidated financial statements” 5 purchase obligations defined agreement purchase goods services enforceable legally binding specifying significant terms including following fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded company’s total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period significant amount disclosed within fiscal 2008 compared periods primarily represents obligations purchase inventories within healthcare supply chain services medical segment offbalance sheet arrangements see “liquidity capital resources capital resources” note 19 “notes consolidated financial statements” incorporated herein reference discussion offbalance sheet arrangements recent financial accounting standards see note 1 “notes consolidated financial statements” discussion recent financial accounting standards item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations discussion matters company’s consolidated financial statements refers continuing operations company overview strategic overview cardinal health 91 billion global company serving healthcare industry products services help hospitals physician offices pharmacies reduce costs improve safety productivity profitability deliver better care patients cardinal health’s distribution businesses consolidate pharmaceuticals medical products thousands manufacturers sitespecific deliveries retail pharmacies hospitals physician offices surgery centers alternate care facilities 18000 employees distribution businesses across north america cardinal health provides comprehensive financial inventory contract management marketing services cardinal health also largest provider specialized nuclear pharmaceuticals delivering 13 million doses year hospitals outpatient care centers cardinal health also manufactures medication infusion dispensing products respiratory equipment surgical instruments leading technologies services help hospitals prevent medication errors reduce hospitalacquired infections manage medications supplies efficiently cardinal health products provide protection medication errors 31 billion doses year using carefusion® patient identification systems alaris® infusion devices pyxis® medication dispensing systems infection prevention products include convertors® brand surgical gowns esteem® brand medical gloves chloraprep® brand preoperative skin preparation products well electronic infection surveillance medmined® services company also leads respiratory care category avea® respirators leading ventilation brands cardinal health’s global manufacturing operations employ 20000 people five continents company believes depth breadth products unique industry give competitive advantage fiscal 2008 company’s four operating reportable segments aligned within two sectors healthcare supply chain services includes healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments clinical medical products includes clinical technologies services medical products technologies segments healthcare supply chain services sector focuses delivering bestinclass distribution logistics services customers sector generates approximately 94 company’s total segment revenue approximately 64 company’s total segment profit defined “segment results operations” section consistent reliable cash flow clinical medical products sector focuses largely developing innovative products hospitals providers care sector higher margin products services faster growing segment profit grown contribute approximately 36 company’s total segment profit july 8 2008 company announced reorganization consolidation businesses two primary operating reportable segments healthcare supply chain services clinical medical products segments reduce costs align resources unique needs segment reflect new management structure beginning july 1 2008 company report results three reportable segments healthcare supply chain services clinical medical products august 7 2008 company publicly announced board directors supported management recommendation actively explore potential separation company’s new healthcare supply chain services clinical medical products reportable segments management proceeding separation explored could involve taxfree spinoff portion businesses comprising clinical medical products reportable segment separate publicly traded company plans announce decision within approximately 60 90 days august 7 2008 assurance given whether company decide pursue separation reportable segments timing terms transaction company determine proceed separation information regarding company’s businesses new segment reporting structure see “item 1 business” within form 10k financial overview continued demand company’s products services fiscal 2008 led revenue 911 billion 5 prior year operating earnings increased approximately 21 billion fiscal 2008 compared 14 billion prior year primarily result 600 million expense recorded prior year settle shareholder litigation operating earnings favorably impacted increased gross margin 389 million offset increases selling general administrative “sga” expenses 333 million healthcare supply chain servicespharmaceutical segment profit declined 14 prior year due primarily increased customer discounts result repricing several large customer contracts last 18 months decrease 2 sales nonbulk customers lost customer revenue expenses dea license suspensions company’s controlled substance antidiversion efforts also adversely affected healthcare supply chain servicespharmaceutical segment profit fiscal 2008 net earnings fiscal 2008 13 billion net diluted earnings per common share 357 lower result effect discontinued operations fiscal 2007 cash operating activities increased 289 million fiscal 2008 15 billion compared prior year primarily due increase earnings continuing operations 476 million changes company’s working capital cash used investing activities 726 million due primarily capital spending 376 million cash paid acquisitions net divestitures 515 million offset net proceeds sale certain shortterm investments classified available sale 132 million cash used financing activities 803 million due company’s cash payments treasury shares 12 billion offset proceeds borrowings 304 million issuance shares 228 million fiscal 2008 company repurchased approximately 750 million common shares 20 billion repurchase authorization announced august 8 2007 expires august 31 2009 approximately 342 million common shares 45 billion repurchase authorization first announced july 11 2006 expired june 30 2008 also fiscal 2008 company paid 173 million dividends 048 per share fourth quarter fiscal 2008 company’s board directors raised quarterly dividend 17 014 per share increased dividend payments support company’s previously stated longterm goal increase dividend payout 20 earnings per share consolidated results operations following table summarizes company’s consolidated results operations fiscal years ended june 30 2008 2007 2006 millions except per common share amounts 1 change calculated percentage increase decrease given year compared immediately preceding year 2 equitybased compensation expense 122 million 138 million 208 million respectively fiscal years ended june 30 2008 2007 2006 revenue increased 42 billion 5 fiscal 2008 increase due pharmaceutical price appreciation increased volume existing customers combined impact pharmaceutical price appreciation increased volume 49 billion impact acquisitions 817 million new customers 643 million company uses internal metric “pharmaceutical price appreciation index” evaluate impact pharmaceutical consumer product price appreciation revenue pharmaceutical supply chain business metric calculated using change manufacturer’s published price beginning period compared end period weighted units sold pharmaceutical supply chain business period pharmaceutical price appreciation index 77 trailing twelve months ended june 30 2008 revenue negatively impacted fiscal 2008 loss customers 21 billion primarily due loss customers within healthcare supply chain servicespharmaceutical segment portion losses due dea license suspensions company’s controlled substance antidiversion efforts refer “segment results operations” discussion specific factors affecting revenue company’s reportable segments revenue increased 72 billion 9 fiscal 2007 due growth company’s four reportable segments including revenue growth 65 billion within healthcare supply chain servicespharmaceutical segment due primarily growth revenue bulk customers 40 billion increase revenue bulk customers due certain existing customers deciding purchase greater volume product company rather directly manufacturer pharmaceutical price appreciation pharmaceutical price appreciation index 63 fiscal 2007 cost products sold cost products sold increased 39 billion 5 68 billion 9 respectively fiscal years ended june 30 2008 2007 increases cost products sold mainly due respective 5 9 growth revenue fiscal 2008 2007 see “gross margin” discussion additional factors impacting cost products sold gross margin gross margin increased 389 million 7 fiscal 2008 increase gross margin primarily due 5 growth revenue includes impact acquisitions 332 million primarily viasys acquisition factors favorably impacting gross margin included increased sales clinical medical products related services 152 million increased manufacturer cash discounts 72 million distribution service agreement fees pharmaceutical price appreciation combined impact 84 million foreign exchange 59 million gross margin negatively impacted primarily increase customer discounts within healthcare supply chain servicespharmaceutical segment 307 million result repricing several large customer contracts past 18 months increased sales bulk customers also negatively impacting gross margin decrease sales nonbulk customers refer “segment results operations” discussion specific factors affecting gross margin company’s reportable segments due competitive markets company’s businesses operate company expects competitive pricing pressures continue however company expects margin impact pricing pressures longterm mitigated sales growth higher margin manufactured products effective product sourcing realization synergies integration acquired businesses continued focus cost controls gross margin increased 431 million 9 fiscal year ended june 30 2007 prior fiscal year increase gross margin primarily due revenue growth 72 billion factors favorably impacting gross margin included increased sales clinical medical products related services 204 million increased manufacturer cash discounts 193 million generic pharmaceutical margin 192 million distribution service agreement fees pharmaceutical price appreciation combined impact 171 million gross margin negatively impacted increase customer discounts within healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments 324 million due increased sales competitive pricing pressures selling general administrative expenses sga expenses increased 333 million 11 fiscal 2008 primarily support revenue growth includes impact acquisitions 262 million sga expenses favorably impacted yearoveryear reduction incentive compensation expense 46 million equitybased compensation expense 16 million fiscal 2008 compared prior year reduction equitybased compensation expense due changes made company’s employee equity compensation program refer “segment results operations” discussion specific factors affecting sga expenses company’s reportable segments company expects sga expenses grow fiscal 2009 support sales growth new product service offerings result impact acquisitions increased investment research development information technology projects however company expect generate expense efficiencies integration acquired companies cost controls company also expects sharebased incentive compensation expense increase fiscal 2009 expected increase sharebased compensation expense due changes standard vesting period employee stock options funding fiscal 2009 incentive compensation pool primarily driven performance company versus financial objectives determined human resources compensation committee company’s board directors fiscal 2008 funding impacted belowtarget performance year sga expenses increased 200 million 7 fiscal 2007 primarily support revenue growth additional items impacting sga expenses included increases due acquisitions 72 million company’s charitable contribution cardinal health foundation 30 million sga expenses favorably impacted yearoveryear reduction equitybased compensation expense 70 million reduction equitybased compensation expense due part changes made company’s equity compensation program grant stock appreciation rights prior year impairment gainloss sale assets net company recognized impairments gainloss sale assets net 32 million fiscal 2008 compared 17 million fiscal 2007 fiscal 2008 company divested investment within healthcare supply chain services pharmaceutical segment result divestiture company recognized 23 million gain impairments gainloss sale assets net see note 3 “notes consolidated financial statements” additional detail regarding impairments gainloss sale assets net special items following summary company’s special items fiscal 2008 2007 2006 millions fiscal 2008 special items charges primarily related company’s restructuring programs integration costs certain acquisitions fiscal 2008 company also recorded litigation charges totaling 74 million primarily related dea matter 34 million matters charges offset 58 million income related settlement derivative actions discussed note 12 “notes consolidated financial statements” fiscal 2009 company expects incur approximately 54 million charges related restructuring segment operating structure effective july 1 2008 consolidated businesses two primary operating reportable segments reduce costs align resources needs segment fiscal 2007 special items charges primarily related reserves litigation settlements 655 million inprocess research development costs “iprd” expenses 85 million primarily connection viasys acquisition company recorded litigation charges made payments 655 million fiscal 2007 related settlement cardinal health federal securities litigation 600 million cardinal health erisa litigation 40 million matters charges offset 29 million income related pharmaceutical manufacturer antitrust litigation addition company settled made payment penalty associated sec investigation 35 million reserved fiscal 2006 2005 see note 3 “notes consolidated financial statements” additional detail company’s special items operating earningsloss operating earnings increased 748 million 54 fiscal 2008 compared prior year increase primarily due 600 million expense recognized within special items prior year related shareholder litigation addition operating earnings favorably impacted higher gross margin 389 million negatively impacted increased sga expenses 333 million operating earnings decreased 471 million 26 fiscal 2007 included increased special items charges 692 million impairments gainloss sale assets net 12 million operating earnings favorably impacted gross margin growth 431 million negatively impacted increased sga expenses 200 million interest expense interest expense increased 50 million 41 fiscal 2008 compared prior year interest expense impacted fiscal 2008 increased borrowing levels 72 million impact prior year allocation portion interest expense discontinued operations 26 million increase interest expense fiscal 2008 partially offset favorable impact foreign exchange items 19 million increased investment income 18 million company expects interest expense increase fiscal 2009 due primarily favorable impact foreign exchange experienced fiscal 2008 expected continue fiscal 2009 interest expense increased 17 million 16 fiscal 2007 primarily due increased borrowing levels interest rates provision income taxes first quarter fiscal 2008 company adopted provisions fin 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement cumulative effect adoption interpretation 139 million reduction retained earnings company 763 million 597 million unrecognized tax benefits june 30 2008 july 1 2007 respectively included june 30 2008 july 1 2007 balances 529 million 387 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility tax positions related acquired companies amount 19 million 21 million june 30 2008 july 1 2007 respectively recognition tax benefits would affect company’s effective tax rate company includes full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation unrecognized tax benefits july 1 2007 june 30 2008 follows company recognizes accrued interest penalties related unrecognized tax benefits income tax expense june 30 2008 july 1 2007 company 195 million 149 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheets fiscal year ended june 30 2008 company recognized 47 million interest penalties consolidated statement earnings company files income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions company subject audit taxing authorities fiscal years ending june 30 2001 current fiscal year internal revenue service “irs” currently ongoing audits fiscal years 2001 2005 three months ended december 31 2007 company notified irs transferred jurisdiction fiscal years 2001 2002 office appeals back examinations level reconsider previouslyunadjusted specific issues three months ended march 31 2008 company received notices proposed adjustment “npas” irs related fiscal years 2001 2005 challenging deductions arising sale trade receivables special purpose accounts receivable financing entity described detail note 10 “notes consolidated financial statements” amount additional tax excluding penalties interest may significant proposed irs notices 179 million company disagrees proposed adjustments intends vigorously contest company anticipates transaction could subject proposed adjustments irs tax audits fiscal years 2006 present company believes adequately reserved uncertain tax position relating arrangement therefore adjusted amount previously recorded unrecognized tax benefits related issue subsequent fiscal year ended june 30 2008 company received irs revenue agent’s report tax years 2003 2005 included npas discussed new npas related company’s transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition company amount additional tax proposed irs new notices totals 598 million excluding penalties interest may significant company disagrees proposed adjustments intends vigorously contest possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations company estimates range possible change unrecognized tax benefits within next twelve months approximately zero 275 million exclusive penalties interest 125 million would affect company’s effective tax rate relates acquired entities provision income taxescontinuing operations provisions income taxes relative earnings income taxes discontinued operations 325 329 332 pretax earnings fiscal 2008 2007 2006 respectively generally fluctuations effective tax rate due changes within international us state effective tax rates resulting company’s business mix changes tax impact special items may unique tax implications depending nature item taxing jurisdiction company’s effective tax rate reflects tax benefits derived increasing operations outside united states generally taxed rates lower us statutory rate 35 company tax incentive agreements several nonus tax jurisdictions expire fiscal years 2009 2024 renewed company expects corporate tax rate increase fiscal 2009 due anticipated shift income lower higher tax jurisdictions combined impact certain expiring nonus tax incentive agreements company’s fiscal 2008 provision income taxes relative earnings income taxes discontinued operations 634 million effective tax rate 325 fiscal 2008 effective tax rate adversely impacted 014 percentage points due nondeductibility certain special items impairments second quarter fiscal 2008 effective tax rate continuing operations favorably impacted 9 million adjustment result release valuation allowance previously established respect investment within healthcare supply chain servicespharmaceutical segment divested second quarter fiscal 2008 third quarter fiscal 2008 effective tax rate negatively impacted 7 million result various discrete miscellaneous tax adjustments fourth quarter fiscal 2008 effective tax rate continuing operations favorably impacted release 30 million tax reserves items pertaining fiscal 2002 2001 statute limitations lapsed negatively impacted recognition 37 million additional tax expense related increase estimated state income tax rate deferred taxes company’s fiscal 2007 provision income taxes relative earnings income taxes discontinued operations 413 million effective tax rate 329 fiscal 2007 effective tax rate adversely impacted 075 percentage points due nondeductibility certain special items impairments principally iprd charge related viasys acquisition first quarter fiscal 2007 effective tax rate continuing operations favorably impacted 10 million adjustment tax reserves primarily due issuance final irs revenue agent report related fiscal years 2001 2002 second quarter fiscal 2007 effective tax rate continuing operations negatively impacted 7 million adjustment tax reserves related ongoing international tax audit third quarter fiscal 2007 company entered agreement irs close fiscal years 1996 2000 federal audits result company reversed tax reserves approximately 9 million company’s fiscal 2006 provision income taxes relative earnings income taxes discontinued operations 577 million effective tax rate 332 fiscal 2006 effective tax rate adversely impacted 02 percentage points due nondeductibility certain special items fiscal 2008 company repatriated cash 308 million nonus subsidiaries result incurred taxable dividends 14 million nontaxable return capitalcurrency gain 161 million taxable capital gain 132 million taxable capital gain amount 132 million fully offset previously unrecognized capital loss carryforward foreign tax credits 14 million recorded related taxable dividends resulting net tax benefit 4 million provision income taxesdiscontinued operations company’s fiscal 2008 provision income taxes relative discontinued operations expense 32 million included within amount 28 million increase unrecognized tax benefits uncertain tax positions related pts business earningsloss discontinued operations earnings discontinued operations net tax decreased 11 billion fiscal 2008 primarily due aftertax gain sale pts business 11 billion prior year see note 8 “notes consolidated financial statements” additional information company’s discontinued operations earnings discontinued operations net tax increased 13 billion fiscal 2007 primarily due aftertax gain sale pts business 11 billion impairment charges prior year 185 million see note 8 “notes consolidated financial statements” information company’s discontinued operations segment results operations reportable segments company’s operations organized four reportable segments healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical clinical technologies services medical products technologies company evaluates performance individual segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expense includes equity compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition special items impairments gainloss sale assets costs associated certain strategic investments require approval executive management allocated segments see note 17 “notes consolidated financial statements” additional information company’s reportable segments following table summarizes segment revenue fiscal years ended june 30 2008 2007 2006 millions 1 growth calculated percentage increase decrease given year compared immediately preceding year 2 bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses nonbulk customers include retail stores pharmacies hospitals alternate care sites customers specifically classified bulk customers deliveries bulk customers consist product shipped form received manufacturer see discussion within healthcare supply chain servicespharmaceutical section detailed description revenue bulk customers 3 corporate revenue primarily consists elimination intersegment revenue healthcare supply chain servicesmedical medical products technologies segments includes 11 billion 10 billion 971 million fiscal years 2008 2007 2006 respectively following table summarizes segment profit fiscal years ended june 30 2008 2007 2006 millions 1 growth calculated percentage increase decrease given year compared immediately preceding year 2 first quarter fiscal 2006 healthcare supply chain servicespharmaceutical segment recorded charge reflecting credits owed certain vendors 32 million prior periods fourth quarter fiscal 2007 adjustment 4 million recorded reduce portion reserve based upon revised estimate 3 third quarter fiscal 2007 company revised method used allocate certain shared costs healthcare supply chain servicesmedical segment medical products technologies segment better align costs segment receives related benefits prior period information adjusted reflect change methodology 4 portion corporate costs previously allocated former pharmaceutical technologies services segment reclassified remaining four segments based upon segment’s respective proportion allocated corporate expenses prior period information adjusted reflect change methodology 5 first quarter fiscal 2008 company revised method used allocate corporate costs healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments resulted decreased expense 22 million allocated healthcare supply chain servicespharmaceutical segment increased expense 22 million allocated healthcare supply chain servicesmedical segment change made effort better align corporate spending segment receives related benefits prior period information adjusted reflect change methodology 6 fiscal 2008 2007 2006 corporate includes among things special items impairments gainloss sale assets net certain corporate investment spending described special items corporate includes special items 130 million 772 million 81 million fiscal years ended june 30 2008 2007 2006 respectively see note 3 “notes consolidated financial statements” discussion special items b impairments gainloss sale assets net asset impairments gains losses sale assets eligible classified special items discontinued operations retained corporate impairments gainloss sale assets net 32 million 17 million 6 million fiscal years ended june 30 2008 2007 2006 respectively see note 3 “notes consolidated financial statements” discussion impairments gainloss sale assets net c investment spending company encouraged business units identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon executive management expenses projects retained corporate investment spending fiscal years 2008 2007 2006 28 million 22 million 19 million respectively healthcare supply chain servicespharmaceutical performance fiscal 2008 healthcare supply chain servicespharmaceutical revenue grew segment profit declined compared prior year revenue growth primarily result additional volume existing bulk customers pharmaceutical price appreciation partially offset decrease volume nonbulk customers decline segment profit primarily result repricing several large customer contracts past 18 months lost customer revenue expenses dea license suspensions company’s controlled substance antidiversion efforts also adversely affected revenue nonbulk customers segment profit fiscal 2008 contract repricings dea license suspensions antidiversion efforts referenced expected continue adversely affect segment revenue segment profit fiscal 2009 although lesser degree healthcare supply chain servicespharmaceutical revenue growth 27 billion 4 fiscal 2008 primarily due additional volume existing bulk customers pharmaceutical price appreciation 77 trailing 12 months ended june 30 2008 combined impact pharmaceutical price appreciation increased volume increased sales fiscal 2008 42 billion negatively impacting growth revenue loss customers 19 billion current year compared prior year slower pharmaceutical market growth partially offset addition new customers 496 million dea license suspensions company’s controlled substance antidiversion efforts resulted nonbulk customer losses adversely affected company’s ability acquire new nonbulk customers healthcare supply chain servicespharmaceutical segment profit decreased 178 million 14 fiscal 2008 compared prior year result 172 million decrease gross margin decline gross margin primarily due increased customer discounts 307 million resulted repricing several large customer contracts last 18 months faster growth 10 sales bulk customers tend larger customer discounts also contributing decline gross margin 2 decline sales nonbulk customers compared fiscal 2007 revenue growth fiscal 2008 lower weighted toward growth revenue bulk customers company expects certain level continued customer discounting due competitive market operates lost customer revenue dea license suspensions company’s controlled substance antidiversion efforts also adversely affected gross margin fiscal 2008 gross margin also negatively impacted decreased generic margin 35 million primarily due impact generic launches prior year occur current year company generally earns greatest margin dollars generic pharmaceuticals period immediately following initial launch generic product marketplace generic pharmaceutical selling prices generally deflationary offsetting negative impact gross margins described higher distribution service agreement fees pharmaceutical price appreciation 84 million year due increased sales volume benefit pharmaceutical price appreciation gross margin also positively impacted fiscal 2008 increased manufacturer cash discounts 72 million due increased sales volume growth distribution service agreement fees pharmaceutical price appreciation manufacturer cash discounts less growth fiscal 2007 due slower revenue growth sga expenses remained relatively flat fiscal 2008 compared prior year positively impacted change allocation corporate costs well spending controls fiscal 2008 change methodology allocating corporate costs healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments better align corporate spending segment receives related benefits resulted decreased expense 22 million allocated healthcare supply chain servicespharmaceutical fiscal 2007 healthcare supply chain servicespharmaceutical segment revenue increased 65 billion 9 primarily revenue bulk customers segment profit increased 157 million due revenue growth increased generic pharmaceutical margin increased distribution service agreement fees pharmaceutical price appreciation offset increased customer discounts increased sga expenses revenue bulk customers described increased 40 billion fiscal 2007 additional volume existing customers 27 billion new customers 13 billion revenue nonbulk customers increased 25 billion growth revenue nonbulk customers driven additional sales volume existing customers pharmaceutical price appreciation 40 billion pharmaceutical price appreciation index 63 fiscal 2007 acquisitions 12 billion mainly dohmen parmed also favorable impact yearoveryear revenue comparison negatively impacting growth revenue nonbulk customers loss existing customers due competition 10 billion sale significant part specialty distribution business 17 billion fourth quarter fiscal 2006 healthcare supply chain servicespharmaceutical segment profit increased 157 million 14 fiscal 2007 gross margin increased segment profit 202 million primarily due segment’s revenue growth increased generic pharmaceutical margin 192 million due new product launches competitive vendor pricing gross margin also favorably impacted increased manufacturer cash discounts due sales volume growth 187 million distribution service agreement fees pharmaceutical price appreciation combined impact 171 million gross margin negatively impacted increased customer discounts 319 million due increased sales volume competitive pressures increases segment sga expenses negatively impacted segment profit approximately 45 million fiscal 2007 increases sga expenses support increased sales volume due impact acquisitions 37 million favorably impacting sga expenses reduction equitybased compensation expense 14 million segment profit negatively impacted prior year sale significant portion specialty distribution business 43 million company’s results could adversely affected sales pharmaceutical products decline competitive pricing pressure intensifies frequency new generic pharmaceutical launches decreases generic price deflation exceeds historical rate pharmaceutical price appreciation branded products decreases historical rate alternatively company’s results could benefit sales pharmaceutical products increase competitive pricing pressure subsides frequency new generic pharmaceutical launches increases generic price deflation decreases historical rate pharmaceutical price appreciation branded products exceeds historical rate bulk nonbulk customers healthcare supply chain servicespharmaceutical segment differentiates bulk nonbulk customers bulk customers generate significantly lower segment profit percentage revenue generated nonbulk customers bulk customers consist customers’ centralized warehouse operations customers’ mail order businesses customers classified nonbulk customers example retail stores pharmacies hospitals alternate care sites bulk customers include warehouse operations retail chains whose retail stores classified nonbulk customers single retail chain pharmacy customer may bulk customer respect warehouse operations nonbulk customer respect retail stores bulk customers ability process large quantities products central locations selfdistribute products individual retail stores customers substantially deliveries bulk customers consist product shipped form product received manufacturer small portion deliveries bulk customers broken smaller units prior shipping nonbulk customers hand require complex servicing company services performed company include receiving inventory large full case quantities breaking smaller quantities warehousing product longer period time picking individual products specific customer’s order delivering smaller order customer location company tracks revenue bulk nonbulk customers financial systems internal analysis prepared allocate segment expenses total segment cost products sold segment sga expenses separately bulk nonbulk customers following table shows allocation segment expenses segment profit segment profit percentage revenue bulk nonbulk customers fiscal 2008 2007 2006 1 amounts shown estimates based upon internal analysis described preparation internal analysis required use complex subjective estimates allocations based upon assumptions past experience judgment company believes reasonable fiscal 2008 company revised certain estimates used allocating certain expenses nonbulk customers bulk customers prior period information adjusted reflect change core pharmaceutical distribution operation “distribution” within healthcare supply chain servicespharmaceutical segment services bulk nonbulk customers therefore expenses associated operation allocated bulk nonbulk customers described brokerage operation “brokerage” within healthcare supply chain servicespharmaceutical segment services bulk customers therefore expenses associated brokerage allocated bulk customers remaining operations ie excluding distribution within healthcare supply chain servicespharmaceutical segment service nonbulk customers therefore expenses associated operations allocated nonbulk customers following describes allocation major components cost products sold distribution bulk nonbulk customers • cost products sold pharmaceutical products determined specifically tracking manufacturer’s designated price products time products sold bulk nonbulk customers manufacturer’s designated price reduced components impacting cost products sold including distribution service agreement fees pharmaceutical price appreciation manufacturer cash discounts manufacturer rebates incentives addition inventory charges credits added subtracted appropriate arrive cost products sold company used following methods believes provide reasonable correlation allocate remaining components cost products sold bulk nonbulk customers • distribution service agreement fees pharmaceutical price appreciation tracked manufacturer therefore company allocated distribution service agreement fees pharmaceutical price appreciation associated manufacturer among products proportion sales product bulk nonbulk customers • manufacturer cash discounts recognized reduction cost products sold related inventory sold allocated proportion manufacturer’s published price product sold bulk nonbulk customers • manufacturers’ rebates incentives based individual agreements entered manufacturers related specific products rebates incentives grouped contract terms allocated proportion sales bulk nonbulk customers • inventory charges credits include charges outdated returned inventory items fluctuation inventory reserves company estimated portion inventory charges credits attributable product allocated bulk nonbulk customers proportion sales products company used methods believes provide reasonable correlation allocate sga expenses distribution bulk nonbulk customers follows • warehouse expense includes laborrelated expenses associated receiving shipping handling inventory well warehouse storage costs including insurance taxes supplies facility costs warehouse expense allocated proportion number invoice line items filled bulk nonbulk customer company believes correlation number different products ordered reflected invoice lines level effort associated receiving shipping handling order bulk customers typically order substantially larger quantities products therefore generate substantially fewer invoice lines results substantially less warehouse expense allocated bulk customers • delivery expense includes transportation costs associated physically moving product warehouse customer’s designated location delivery expense allocated proportion number invoices generated bulk nonbulk customer assumption invoice generates delivery • sales expense includes personnelrelated costs associated sales customer service activities bulk nonbulk customers sales expense allocated proportion number invoices generated bulk nonbulk customer invoices reasonable estimate amount customer service calls sales effort • general administrative expenses allocated proportion units products sold bulk nonbulk customers expenses allocated assumption general administrative expenses increase decrease direct relation volume sales 2 amounts exclude lastin firstout “lifo” credit provisions 0 million 0 million 26 million fiscal 2008 2007 2006 respectively internal analysis indicated segment expenses percentage revenue higher bulk customers nonbulk customers higher segment cost products sold partially offset lower segment sga expenses bulk customers receive lower pricing sales products nonbulk customers due volume pricing competitive market lower costs related services provided company addition sales bulk customers aggregate generate higher segment cost products sold percentage revenue sales nonbulk customers bulk customers’ orders consist almost entirely higher cost branded products higher segment cost products sold percentage revenue bulk customers also driven lower manufacturer distribution service agreement fees branded pharmaceutical price appreciation lower manufacturer cash discounts manufacturer distribution service agreement fees manufacturer cash discounts recognized reduction segment cost products sold lower percentage revenue due mix products sold pharmaceutical price appreciation increases customer pricing turn results higher segment gross margin sales inventory onhand time manufacturer’s price increase since products sold bulk customers generally held inventory shorter time products sold nonbulk customers less opportunity realize benefit pharmaceutical price appreciation consequently segment cost products sold percentage revenue bulk customers higher nonbulk customers segment gross margin percentage revenue substantially lower bulk customers nonbulk customers deliveries bulk customers require substantially less services company deliveries nonbulk customers segment sga expenses percentage revenue bulk customers substantially lower nonbulk customers factors result segment profit percentage revenue significantly lower bulk customers nonbulk customers company defines bulk customers based way company operates business services performs customers company aware industry standard regarding definition bulk customers based solely review annual reports form 10k national pharmaceutical wholesalers company notes companies comparable businesses may use different definition bulk customers fiscal 2008 revenue nonbulk customers decreased 681 million compared prior year due loss customers including impact dea license suspensions company’s controlled substance antidiversion efforts partially offset additional volume existing customers segment profit nonbulk customers decreased 142 million fiscal 2008 compared prior year due increase customer discounts impact generic launches prior year occur current year coupled greater generic deflation decrease fiscal 2008 partially offset increase distribution service agreement fees pharmaceutical price appreciation fiscal 2008 revenue bulk customers increased 34 billion compared prior year due new contracts signed existing customers resulted increased volume existing customers segment profit bulk customers decreased 36 million fiscal 2008 compared prior year due increased customer discounts partially offset increased manufacturer cash discounts related sales volume growth decrease fiscal 2008 also partially offset increase distribution service agreement fees pharmaceutical price appreciation fiscal 2007 revenue bulk customers increased 40 billion compared prior year due additional volume existing customers new customers segment profit bulk customers increased 59 million due increased sales volume described yearoveryear increase distribution service agreement fees pharmaceutical price appreciation fiscal 2008 revenue nonbulk customers increased 25 billion due additional sales volume existing customers pharmaceutical price appreciation segment profit nonbulk customers increased 125 million compared fiscal 2006 increase segment profit nonbulk customers due primarily increase sales volume described impact generic products greater impact profitability nonbulk customers due mix pharmaceuticals distributed nonbulk customers healthcare supply chain servicesmedical performance fiscal 2008 healthcare supply chain servicesmedical segment revenue grew 570 million 8 compared fiscal 2007 primarily due increased volume existing hospital laboratory ambulatory care customers 630 million new customers 87 million impact foreign exchange 61 million revenue negatively impacted loss customers 193 million healthcare supply chain servicesmedical segment profit decreased 15 million 5 fiscal 2008 compared fiscal 2007 segment profit improved second half fiscal 2008 compared first half fiscal 2008 due positive growth core us medical distribution business gross margin increased segment profit 38 million fiscal 2008 compared prior year primarily result revenue growth increases sga expenses decreased segment profit 53 million fiscal 2008 partially result impact foreign exchange 10 million addition impact changing methodology allocating corporate costs healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments resulted increased expense 22 million allocated healthcare supply chain servicesmedical segment change made effort better align corporate spending segment receives related benefits company expects segment profit negatively impacted fiscal 2009 rising cost oil oilrelated commodities company taken steps offset rising costs cost reductions including restructuring initiatives may also recover rising costs price increases fuel surcharges possible fiscal 2007 healthcare supply chain servicesmedical segment revenue grew 315 million 4 primarily due increased volume existing customers 215 million new customer accounts 100 million healthcare supply chain servicesmedical segment profit increased 4 million 1 fiscal 2007 gross margin increased segment profit 27 million primarily result revenue growth impact increased manufacturer cash discounts 6 million negatively impacting gross margin increased customer discounts 5 million trade receivable reserves 7 million related segment’s customer service shared service transition increases sga expenses decreased segment profit 23 million primarily support revenue growth increased transportation costs 5 million favorably impacting sga expenses reduction equitybased compensation expense 14 million clinical technologies services performance fiscal 2008 clinical technologies services segment revenue grew 203 million 8 compared prior year revenue growth favorably impacted new products 65 million new customers 60 million impact foreign exchange 30 million clinical technologies services segment profit increased 111 million 29 fiscal 2008 compared prior year gross margin increased segment profit 142 million fiscal 2008 primarily result revenue growth favorable mix higher margin products combined impact 109 million impact foreign exchange 21 million year impact alaris product corrective actions recalls negatively impacted gross margin fiscal 2008 8 million increases sga expenses decreased segment profit 31 million fiscal 2008 sga expenses increased partially due increased investment product quality research development costs 8 million impact foreign exchange 6 million acquisitions 5 million fiscal 2007 clinical technologies services segment revenue grew 257 million 11 revenue growth favorably impacted new products 119 million increased sales volumes existing customers 90 million due renewals expansion product lines new customers 35 million acquisitions also favorably impacted yearoveryear comparison 18 million clinical technologies services segment profit increased 65 million 20 fiscal 2007 compared prior year gross margin increased segment profit 132 million primarily result revenue growth gross margin negatively impacted estimated costs alaris se pump corrective action plan related consulting expenses 18 million due product recall increases sga expenses decreased segment profit 67 million support revenue growth result impact acquisitions 22 million increased investment product quality research development costs 11 million favorably impacting sga expenses reduction equitybased compensation expense 14 million medical products technologies performance fiscal 2008 medical products technologies segment revenue grew 860 million 47 compared prior year revenue growth segment favorably impacted viasys enturia acquisitions impact 680 million 21 million respectively international revenue growth 100 million includes impact foreign exchange 62 million increased volume existing customers 35 million new product launches 32 million medical products technologies segment profit increased 103 million 52 fiscal 2008 compared prior year gross margin increased segment profit 383 million fiscal 2008 primarily result revenue growth viasys enturia acquisitions impact 309 million 10 million respectively impact foreign exchange 27 million correction prior year error 11 million described increases sga expenses negatively impacted segment profit 280 million fiscal 2008 primarily impact viasys enturia acquisitions impact 234 million 8 million respectively fourth quarter fiscal 2008 company discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 11 million fiscal 2008 7 million pertained fiscal 2007 4 million pertained fiscal 2006 connection matter company implemented action plan addressed issues related error company expects segment profit negatively impacted fiscal 2009 rising cost oil oilrelated commodities company taken steps offset rising costs cost reductions including restructuring initiatives may also recover rising costs price increases fuel surcharges possible fiscal 2007 medical products technologies segment revenue grew 203 million 12 revenue growth favorably impacted increased sales volume 74 million existing customers new customers new gpo contracts competitor exits revenue growth also favorably impacted new product launches 50 million including innovations gloves respiratory products surgical instruments software international revenue growth 62 million includes impact foreign exchange 18 million acquisitions including denver biomedical viasys favorably impacted yearoveryear comparison 37 million medical products technologies segment profit increased 33 million 20 fiscal 2007 gross margin increased segment profit 72 million primarily result revenue growth factors favorably impacting gross margin included manufacturing cost reductions 20 million driven strategic sourcing expense control related company’s restructuring program integration acquisitions 21 million primarily denver biomedical increases sga expenses negatively impacted segment profit 39 million primarily support segment’s revenue growth impact acquisitions 13 million favorably impacting sga expenses reduction equitybased compensation expense 12 million matters acquisitions fiscal 2008 company acquired assets privately held enturia included enturia’s line infection prevention products sold chloraprep® brand name value transaction including assumption liabilities totaled approximately 490 million addition fiscal 2008 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 35 million assumed liabilities acquired businesses approximately 6 million consolidated financial statements include results operations business combinations date acquisition information regarding company’s acquisitions see “item 1 businessacquisitions divestitures” note 2 “notes consolidated financial statements” fiscal 2007 company acquired viasys offered products services directed critical care ventilation respiratory diagnostics clinical services medical surgical products markets value transaction including assumption liabilities totaled approximately 15 billion addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 174 million assumed liabilities acquired businesses approximately 22 million consolidated financial statements include results operations business combinations date acquisition fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 364 million assumed liabilities acquired businesses approximately 149 million consolidated financial statements include results operations business combinations date acquisition company’s trend regard acquisitions expand role provider services innovative products healthcare industry trend resulted expansion areas complement company’s existing operations provide opportunities company develop synergies strengthen acquired business healthcare industry continues change company evaluates possible candidates acquisition considers opportunities expand role provider services healthcare industry reportable segments assurance however company able successfully take advantage opportunity arises consummate transaction pursued additional transactions pursued consummated company would incur additional acquisition integration charges may need enter funding arrangements acquisitions assurance integration efforts associated transaction would successful divestitures fiscal 2007 company completed sale pts business affiliate blackstone group closing sale company received approximately 32 billion cash purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement company recognized aftertax book gain approximately 11 billion transaction company used aftertax net proceeds approximately 31 billion sale repurchase shares purchase agreement contained customary indemnification provisions sale transactions type company continues evaluate performance strategic fit businesses may decide sell business product line based evaluation discussed effective july 1 2008 company begin reporting three reportable segments july 1 2008 segment includes medicine shoppe pharmacy services tecomet medsystems businesses continue add value company conducting indepth review fiscal 2009 evaluate fit businesses existing segment structure company entered definitive agreement sell tecomet business charlesbank capital partners tecomet management july 22 2008 divestitures may result significant writeoffs including related goodwill intangible assets could adverse effect company’s results operations financial condition addition company may encounter difficulty finding buyers alternative exit strategies acceptable prices terms timely manner government investigations legal proceedings last fiscal years company involved number significant government investigations litigation matters fiscal 2008 company settled sec conclude respect company previouslyreported sec investigation relating principally company’s financial reporting disclosures included civil penalty 35 million addition fiscal 2007 company settled cardinal health federal securities litigation payment 600 million cardinal health erisa litigation payment 40 million also fiscal 2007 company entered civil settlement paid 11 million resolve civil investigation new york attorney general’s office focusing trading secondary market pharmaceuticals company entered consent decree fda resolve seizure litigation alaris se pumps information regarding matters see 2007 form 10k series actions taken november december 2007 dea suspended licenses distribute controlled substances held three company’s distribution centers settlement discussions recently commenced dea regarding resolution matter august 7 2008 company dea staff reached oral agreement principle resolve license suspensions oral agreement subject completion definitive documentation well approval dea administrator us department justice result developments company recorded reserve 34 million quarter ended june 30 2008 matter company expects license suspensions lifted quarter ending december 31 2008 assurance however company’s efforts resolve dea matter successful within expected timeframe successful company cannot predict final terms settlement company discusses dea matter greater detail note 12 “notes consolidated financial statements” additional significant government investigations significant litigation matters could adverse effect company’s results operations financial condition liquidity capital resources sources uses cash following table summarizes company’s consolidated statements cash flows fiscal 2008 2007 2006 millions operating activities net cash provided operating activities continuing operations fiscal 2008 totaled 16 billion increase 556 million prior year due primarily increase earnings continuing operations 476 million current year compared prior year combined impact changes working capital net cash provided operating activities continuing operations fiscal 2007 totaled 10 billion decrease 847 million compared fiscal 2006 decrease result decline net income continuing operations 324 million due litigation charges cash settlements made fourth quarter fiscal 2007 655 million increase trade receivables 783 million based repurchase trade receivables 550 million company’s committed receivables program line company’s focus capital deployment inventory levels declined 217 million accounts payable increased 224 million net cash provided operating activities continuing operations fiscal 2006 totaled 19 billion decrease 625 million compared fiscal 2005 decrease primarily result net proceeds received fiscal 2005 company’s committed receivables sales facility program 550 million fiscal 2006 accounts payable increase 15 billion partially offset increased inventories 356 million increased accounts receivable 895 million accounts payable trade receivable inventory increases due new sales volume existing large retail chain customer timing inventory purchases vendors healthcare supply chain servicespharmaceutical segment net cash used operating activities discontinued operations fiscal 2008 totaled 47 million net cash used discontinued operations fiscal 2008 result loss discontinued operations 15 million combined impact changes operating liabilities discontinued operations net cash provided operating activities discontinued operations fiscal 2007 totaled 220 million net cash provided operating activities discontinued operations fiscal 2007 result earnings discontinued operations 11 billion less gain sale pts business 11 billion net cash provided operating activities discontinued operations fiscal 2006 totaled 271 million net cash provided discontinued operations fiscal 2006 result loss discontinued operations 163 million offset changes operating assets liabilities discontinued operations investing activities net cash used investing activities continuing operations 726 million fiscal 2008 reflected capital spending 376 million partially offset net proceeds sale shortterm investments classified available sale 132 million company utilized 515 million cash acquisitions net cash received divestiture investment within healthcare supply chain servicespharmaceutical segment divestiture assets associated particular line business within medical products technologies segment combined impact approximately 74 million acquisitions completed fiscal 2008 included enturia minor acquisitions within medical products technologies segment see “acquisitions divestitures” within “item 1 business” form 10k note 2 “notes consolidated financial statements” information regarding company’s acquisitions net cash used investing activities continuing operations 16 billion fiscal 2007 reflected cash used complete acquisitions viasys within medical products technologies segment medmined care fusion within clinical technologies services segment specialtyscripts within healthcare supply chain servicespharmaceutical segment proceeds sale shortterm investments classified available sale 367 million offset capital spending 357 million develop enhance company’s infrastructure including facilities information systems machinery equipment see note 4 “notes consolidated financial statements” information regarding company’s investments net cash used investing activities continuing operations 11 billion fiscal 2006 reflected company’s purchase shortterm investments classified available sale 399 million capital spending 340 million addition fiscal 2006 company used cash complete acquisitions 362 million including acquisitions dohmen parmed within healthcare supply chain servicespharmaceutical segment denver biomedical within medical products technologies segment remaining minority interest source medical within healthcare supply chain servicesmedical segment net cash provided investing activities discontinued operations fiscal 2007 31 billion reflected proceeds pts business divestiture 32 billion offset capital spending 108 million net cash used investing activities discontinued operations fiscal 2006 100 million primarily represents capital spending 103 million financing activities net cash used financing activities continuing operations 803 million fiscal 2008 reflected company’s repurchase common shares 12 billion dividend payments shareholders 173 million see “share repurchase program” additional information however amounts may differ due timing share settlements end reporting periods cash provided financing activities included proceeds received shares issued various employee stock plans 228 million proceeds received issuance longterm obligations net issuance costs 304 million see “capital resources” discussion company’s financing activities net cash used financing activities continuing operations 26 billion fiscal 2007 reflected company’s repurchase common shares 37 billion primarily driven use proceeds sale pts business dividend payments shareholders 144 million company also used cash repay longterm obligations 784 million cash provided financing activities included proceeds received issuance longterm obligations net issuance costs 15 billion proceeds received shares issued various employee stock plans 553 million see “capital resources” discussion company’s financing activities net cash used financing activities continuing operations 10 billion fiscal 2006 reflected company’s repurchase common shares 15 billion dividend payments shareholders 102 million company also used cash purchase certain buildings equipment capital lease agreements 258 million reflected reduction longterm obligations cash provided financing activities includes proceeds received issuance longterm obligations net issuance costs 594 million proceeds received shares issued various employee stock plans 241 million net cash used financing activities discontinued operations fiscal 2007 2006 reflected 39 million 48 million respectively repayments borrowings sources cash fiscal 2007 2006 additional borrowings 4 million 29 million respectively international cash company’s cash balance approximately 13 billion june 30 2008 included approximately 719 million cash held subsidiaries outside united states although vast majority cash held outside united states available repatriation subjects us federal state local income tax fiscal 2008 company repatriated cash 308 million nonus subsidiaries result incurred taxable dividends 14 million nontaxable return capitalcurrency gain 161 million taxable capital gain 132 million taxable capital gain amount 132 million fully offset previously unrecognized capital loss carryforward foreign tax credits 14 million recorded related taxable dividends resulting net tax benefit 4 million see note 11 “notes consolidated financial statements” additional information regarding income taxes share repurchases company repurchased approximately 64 billion common shares aggregate share repurchase programs fiscal 2008 2007 2006 described company used aftertax net proceeds approximately 31 billion sale pts business repurchase shares fiscal 2007 first quarter fiscal 2008 share repurchase activity apart use net proceeds pts business divestiture supports company’s previously stated longterm goal return 50 net cash provided operating activities continuing operations shareholders company anticipate repurchasing common shares fiscal 2009 dollar amount comparable dollar amount common shares repurchased fiscal 2008 outcome company’s exploration potential separation company’s new healthcare supply chain services clinical medical products reportable segments could also impact amount share repurchases fiscal 2009 fiscal 2008 company repurchased approximately 750 million common shares 20 billion share repurchase program announced august 8 2007 repurchase authorization expire august 31 2009 june 30 2008 approximately 13 billion remained 20 billion repurchase authorization addition company repurchased approximately 342 million common shares 45 billion combined repurchase authorization expired june 30 2008 approximately 406 million remaining unused company’s fiscal 2008 common share repurchases represented 168 million shares average price per share 6481 fiscal 2007 company repurchased approximately 38 billion common shares 45 billion combined repurchase authorization referenced company’s fiscal 2007 common share repurchases represented 538 million shares average price per share 6979 fiscal 2006 company repurchased 15 billion common shares company’s fiscal 2006 common share repurchases represented 220 million shares average price per share 6839 see “issuer purchases equity securities” within “item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” information regarding company’s recent share repurchase programs capital resources addition cash company’s sources liquidity include 15 billion commercial paper program backed 15 billion revolving credit facility committed receivables sales facility program capacity sell 850 million receivables company increased commercial paper program 10 billion 15 billion february 28 2007 company outstanding borrowings commercial paper program june 30 2008 january 24 2007 company amended certain terms revolving credit facility available general corporate purposes part amendment amount facility increased 10 billion 15 billion term extended january 24 2012 expiration facility extended upon mutual consent company lending institutions revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2008 except 72 million standby letters credit issued behalf company amended receivables sales facility program second quarter fiscal 2008 resulted increasing program 800 million 850 million extending additional 364 days second quarter fiscal 2007 company repurchased aggregate 550 million receivable interests outstanding committed receivables sales facility program june 30 2008 company receivable interest sales outstanding receivables sales facility program see note 19 “notes consolidated financial statements” information company’s committed receivables sales facility program company also maintains shortterm credit facilities unsecured line credit allows borrowings 69 million 20 million outstanding june 30 2008 company entered 300 million shortterm loan facility april 10 2008 terminated may 28 2008 company also entered 500 million shortterm loan facility march 30 2007 terminated april 10 2007 company terminated 150 million extendible commercial note program february 2 2007 june 2 2008 company sold 300 million aggregate principal amount 550 notes due 2013 registered offering company used portion proceeds date repay 150 million 625 notes due 2008 july 15 2008 company expects use remaining proceeds general corporate purposes may include refinancing outstanding preferred debt securities discussed june 8 2007 company sold 300 million aggregate principal amount 565 notes due 2012 300 million aggregate principal amount 600 notes due 2017 private offering proceeds debt issuance used fund portion purchase price viasys acquisition general corporate purposes effective march 14 2008 company completed registered exchange offer 565 notes due 2012 600 notes due 2017 may sold public market october 3 2006 company sold 350 million aggregate principal amount 2009 floating rate notes 500 million aggregate principal amount 580 notes due 2016 private offering proceeds debt issuance used repay 500 million company’s preferred debt securities 127 million 730 notes due 2006 53 million outstanding shortterm credit facility subsidiary guaranteed company general corporate purposes effective march 14 2008 company completed registered exchange offer 2009 floating rate notes 580 notes due 2016 may sold public market fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued preferred variable debt securities parties affiliated company june 30 2008 company 150 million preferred debt securities outstanding preferred debt securities classified longterm obligations less current portion shortterm obligations company’s consolidated balance sheet result opening initial exchange period preferred debt securities company may refinance outstanding preferred debt securities fiscal 2009 see notes 10 19 “notes consolidated financial statements” information company’s capital resources time company considers engages acquisition transactions order expand role leading provider products services improve safety productivity healthcare company evaluates possible candidates acquisition considers opportunities expand role provider products services healthcare industry reportable segments additional transactions entered consummated company may need enter funding arrangements acquisitions company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements including related business combinations fiscal 2008 company retired 128 million common shares treasury debt ratingscovenants company’s senior debt credit ratings sp moody’s fitch bbb baa2 bbb respectively commercial paper ratings a2 p2 respectively sp moody’s fitch rating outlooks “stable” company’s various borrowing facilities longterm debt free financial covenants minimum net worth cannot fall 50 billion time june 30 2008 company compliance covenant breach covenant would followed grace period company may discuss remedies security holders extinguish securities without causing event default 550 notes due 2013 565 notes due 2012 600 notes due 2017 combined aggregate principal amount 900 million contain provision company experiences specific types change control notes rated investment grade sp moody’s fitch company required offer purchase notes 101 principal amount thereof plus accrued unpaid interest date repurchase interest rate currency risk management company uses foreign currency forward contracts interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 1 14 “notes consolidated financial statements” information regarding use financial instruments derivatives including foreign currency hedging instruments contractual obligations june 30 2008 company’s contractual obligations including estimated payments due period follows millions 1 represents maturities company’s longterm debt obligations excluding capital lease obligations described see note 10 “notes consolidated financial statements” information 2 represents maturities company’s capital lease obligations included within longterm debt company’s balance sheet related estimated future interest payments 3 represents cash outflows period certain company’s longterm liabilities cash outflows could reasonably estimated certain longterm liabilities unrecognized tax benefits 7629 million deferred taxes excluded table inherent uncertainty underlying tax positions inability reasonably estimate timing cash outflows see note 11 “notes consolidated financial statements” discussion income taxes 4 represents minimum rental payments related estimated future interest payments operating leases initial remaining noncancelable lease terms described note 12 “notes consolidated financial statements” 5 purchase obligation defined agreement purchase goods services enforceable legally binding specifying significant terms including following fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded company’s total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period significant amount disclosed within fiscal 2008 compared periods primarily represents obligations purchase inventories within healthcare supply chain servicespharmaceutical segment offbalance sheet arrangements see “liquidity capital resourcescapital resources” note 19 “notes consolidated financial statements” incorporated herein reference discussion offbalance sheet arrangements recent financial accounting standards see note 1 “notes consolidated financial statements” discussion recent financial accounting standards critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation company’s financial condition results operations require use complex subjective estimates based upon past experience management’s judgment companies applying reasonable judgment facts circumstances could develop different estimates uncertainty inherent estimates actual results may differ estimates policies applied preparing company’s consolidated financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 “notes consolidated financial statements” allowance doubtful accounts trade receivables amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range 90 days 10 years interest rates generally subject fluctuation financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment company’s management determining appropriate allowance doubtful accounts includes portfolio specific reserves company reviews accounts receivable aging industry trends customer financial strength credit standing historical writeoff trends payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults change due changes customers’ financial condition general economic conditions company’s allowance doubtful accounts may require adjustment allowance doubtful accounts 1357 million 1289 million june 30 2008 2007 respectively allowance represented 21 22 customer receivables june 30 2008 2007 respectively allowance doubtful accounts percentage revenue 015 016 june 30 2008 2007 2006 respectively allowance doubtful accounts reduced 253 million 284 million 226 million fiscal 2008 2007 2006 respectively customer deductions writeoffs increased additional provisions 261 million 240 million 246 million fiscal 2008 2007 2006 respectively hypothetical 01 increase decrease reserve percentage trade receivables salestype leases reserve june 30 2008 would result increase decrease bad debt expense approximately 63 million reserve methodologies assessed annually based historical losses economic business market trends addition reserves reviewed quarterly updated unusual circumstances trends present company believes reserve maintained expenses recorded fiscal 2008 appropriate consistent historical methodologies employed time company aware internal process customer issues might lead significant future increase company’s allowance doubtful accounts percentage net revenue see schedule ii included form 10k includes rollforward activity allowance reserves inventories substantial portion inventories approximately 70 73 june 30 2008 2007 respectively stated lower cost using lifo method market inventories included within core distribution facilities within company’s healthcare supply chain servicespharmaceutical segment “core distribution facilities” primarily merchandise inventories lifo impact consolidated statement earnings given year dependent pharmaceutical price appreciation level inventory prices branded pharmaceuticals primarily inflationary results increase cost products sold whereas prices generic pharmaceuticals deflationary results decrease cost products sold lifo method assumed recent inventory purchases first items sold company uses lifo better match current costs revenue therefore reductions overall inventory levels resulting declining branded pharmaceutical inventory levels generally result decrease future cost products sold remaining inventory held lower cost due inflationary environment conversely reductions overall inventory levels created declining generic pharmaceutical inventory levels would generally increase future cost products sold remaining inventory held higher cost due deflationary environment company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within core distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2008 2007 company record lifo reserve reductions remaining inventory stated lower cost using firstin firstout “fifo” method market company used average cost method inventory valuation inventory within core distribution facilities inventories would changed fiscal 2008 fiscal 2007 fact primarily due continued deflation generic pharmaceutical inventories lifo 425 million 558 million higher average cost value june 30 2008 2007 respectively however company’s policy record inventories excess current market value inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 945 million 958 million june 30 2008 2007 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable company’s assumptions additional inventory reserves may required however would expected material adverse impact company’s consolidated financial statements business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many company’s acquisitions assigned intangible assets requires management use significant judgment determining fair value addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction status acquired company’s research development projects assessed determine existence iprd connection certain acquisitions company required estimate fair value acquired iprd requires selecting appropriate discount rate estimating future cash flows project management also assesses current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established accordance fasb interpretation 4 “applicability fasb statement 2 business combinations accounted purchase method” immediately writtenoff special item company’s consolidated statement earnings fiscal 2008 company reversed 250 million previously recorded writeoff iprd costs associated viasys result finalization viasys purchase price allocation process recorded charges 177 million 253 million related writeoff iprd costs associated enturia minor acquisitions respectively fiscal 2007 company recorded charges 839 million 06 million related writeoff iprd costs associated viasys care fusion respectively see note 3 “notes consolidated financial statements” goodwill intangibles company accounts goodwill accordance sfas 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test fair value company’s reporting units compared carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s determination fair value reporting units based discounted cash flow analysis multiple earnings interest taxes depreciation amortization “ebitda” available review priceearnings ratio publicly traded companies similar nature scope size methods assumptions used test impairment revised segment realignments periods presented discount rates used impairment testing based riskfree rate plus adjustment risk factors ebitda multiples used impairment testing judgmentally selected based factors nature scope size applicable reporting unit use alternative estimates peer groups changes industry adjusting discount rate ebitda multiples price earnings ratios used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment tests fiscal 2008 2007 neither resulted recognition impairment charges decreasing priceearnings ratio competitors used impairment testing one point increasing discount rate discounted cash flow analysis used impairment testing 1 would indicated impairment company’s reporting units fiscal 2008 2007 see note 9 “notes consolidated financial statements” additional information regarding goodwill intangibles special items company records restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recorded accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 liability measured fair value recognized incurred acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges included within purchase price allocation accordance sfas 141 “business combinations” integration charges recorded special items incurred company recognizes income favorable outcome legal settlements judgments resolution legal regulatory matters special items consolidated financial statements associated cash assets received generally expenses due unfavorable outcome legal settlements judgments resolution legal regulatory matters “litigation settlement losses” charged segment matter relates result classified sga expenses company’s consolidated financial statements certain circumstances significant litigation settlement losses classified special items consolidated statement earnings factors considered determining whether particular litigation settlement loss classified special items include size settlement nature matter ie significant matters infrequent nonrecurring unusual nature classified special items age matter pervasiveness matter entire organization company also classifies legal fees document preservation production costs incurred connection previouslydisclosed sec investigation related audit committee internal review related matters special items majority special items related acquisition integration restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments iprd costs integration costs employeerelated costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility asset impairment costs include reduction value company’s assets result integration restructuring activities iprd costs include writeoff research development projects process time acquisition yet reached technological feasibility deemed alternative use integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan see note 3 “notes consolidated financial statements” additional information vendor reserves company maintains reserves cover areas exposure vendors determining appropriate vendor reserves company assesses historical experience current outstanding claims company established various levels reserves based type claim status review company researches resolves various types contested transactions based discussions vendors company policy findings research performed though transaction types relatively consistent company periodically refined estimate methodology past years updating reserve estimate percentages based upon historical experiences changes estimate percentages resulted financial impact company’s cost products sold period change made vendor reserves 373 million 726 million june 30 2008 2007 respectively approximately 78 61 vendor reserve june 30 2008 2007 respectively pertained healthcare supply chain servicespharmaceutical segment fluctuations reserve balance caused variations outstanding claims period timing settlements specific vendor issues bankruptcies significant events would described “management’s discussion analysis financial condition results operations” though vendor transactions remain relatively consistent period unforeseen events deterioration financial condition large vendor settlement numerous outstanding claims could cause reserve fluctuate thus financial impact period’s financial results given time outstanding items various stages research resolution ultimate outcome certain claims may different company’s original estimate may require adjustment company believes however reserves recorded disputes adequate based upon current facts circumstances self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 207 million 243 million estimated costs related outstanding claims june 30 2008 2007 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period hypothetically adjusted period equal half month impact earnings would 61 million amount claims medical dental costs increase beyond estimated reserve might sufficient additional expense could required company believes however liabilities recorded adequate based upon current facts circumstances medical dental insurance expense 1668 million 1746 million 1405 million fiscal 2008 2007 2006 respectively wholly owned insurance subsidiary company certain deductibles selfinsured various risks including general liability product liability pharmacist professional liability auto liability property workers’ compensation claims excess certain limits however insured commercial insurers company recorded liabilities totaling 773 million 822 million anticipated costs related liability property workers’ compensation june 30 2008 2007 respectively costs include estimate expected settlements pending claims defense costs claims adjustment costs estimate claims incurred reported certain types exposures company develops estimate expected ultimate costs settle claim based specific information related claim claims incurred reported liabilities calculated outside actuaries derived accordance generally accepted actuarial practices amount ultimate liability respect matters dependent future contingent events cannot predicted certainty may differ estimates although company believes liability estimates appropriate based information available june 30 2008 possible based generally accepted actuarial analysis adverse conditions ultimate liability could exceed recorded expected liabilities june 30 2008 much 56 million insurance expense general liability product liability pharmacist professional liability auto liability property workers’ compensation 511 million 704 million 713 million fiscal 2008 2007 2006 respectively provision income taxes company’s income tax expense deferred tax assets liabilities unrecognized tax benefits reflect management’s assessment estimated future taxes paid items financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities well net operating loss tax credit carryforwards tax purposes company net deferred income tax assets 6564 million 3942 million june 30 2008 2007 respectively company also net deferred income tax liabilities 17 billion june 30 2008 2007 net deferred income tax assets included net federal state local international loss credit carryforwards june 30 2008 2007 2000 million 1782 million respectively company established net valuation allowance 1780 million 1805 million june 30 2008 2007 respectively certain deferred tax assets primarily relates federal state loss carryforwards ultimate realization future benefits uncertain expiring carryforwards required valuation allowances adjusted annually application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described company believes estimates valuation allowances deferred tax assets unrecognized tax benefits appropriate based current facts circumstances however people applying reasonable judgment facts circumstances could develop different estimate amount ultimately paid upon resolution issues raised may differ amounts accrued first quarter fiscal 2008 company adopted provisions fin 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard also provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognizing classification interest penalties accounting interim periods disclosure transition company’s assumptions estimates change increasedecrease company’s effective tax rate 1 earnings income taxes discontinued operations would caused income tax expense increasedecrease 195 million fiscal year ended june 30 2008 loss contingencies company accrues contingencies related litigation accordance sfas 5 requires company assess contingencies determine degree probability range possible loss estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions could occur assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate loss may differ estimates equitybased compensation first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates entered within option valuation model include limited stock price volatility expected option life expected dividend yield option forfeiture rates effective options granted subsequent adoption sfas 123r company estimates future stock price volatility based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years company analyzed historical data estimate option exercise behaviors employee terminations estimate expected option life forfeiture rates company calculated separate option valuations three separate groups employees similar historical exercise behaviors employee stock option values determined current accounting practices permit changed even estimates used valuation model different actual results sfas 123r requires however company compare estimated option forfeiture rates actual forfeiture rates record adjustments necessary see note 18 “notes consolidated financial statements” additional information regarding equitybased compensation item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations referring continuing operations executive overview 985 billion global company serving healthcare industry products services help hospitals physician offices pharmacies reduce costs improve safety productivity deliver better care patients report financial results two segments pharmaceutical medical 2010 fiscal year significant transition year completed spinoff carefusion transitioned new management team commenced number key programs enhance refocus operations responded challenging economic environment uncertain healthcare industry landscape fiscal 2010 medical segment profit grew 11 percent continuing make key strategic investments pharmaceutical segment profit declined 3 percent primarily due pricing changes renewed customer contracts negative impact actions took improve strategic positioning negative impact yearoveryear value generic launches severe supply shortage nuclear pharmacy items largely offset execution major programs disciplined cost controls cash equivalents balance 28 billion june 30 2010 compared 12 billion june 30 2009 increase primarily derived net cash provided operating activities 20 billion result earnings successful working capital management fiscal 2010 plan continue execute balanced deployment available capital position sustainable competitive advantage create shareholder value includes reinvesting business fiscal 2010 made capital expenditures totaling 260 million majority area information technology projects may seek complement internal capabilities scale acquisitions acquisition healthcare solutions holding llc “p4 healthcare” recently completed early fiscal 2011 fiscal 2010 paid quarterly dividends 0175 per share 070 per share annualized basis may 5 2010 board directors approved 11 percent increase quarterly dividend beginning july 2010 fiscal 2010 also repurchased 250 million shares 20 million cash settled july 2010 trends enter fiscal 2011 expect low singledigit growth primary markets serve actual revenue growth realized two segments may vary market trends based customer gains losses product customer sales mix shifts growth specific customers serve gross margin relatively flat past three years decreased percentage revenues primarily result competitive pressures began number business programs improve gross margin increase sales higher margin products success fiscal 2010 going forward gross margin could influenced rates growth key markets product customer sales mix competitive pricing intensity sourcing activity rate value generic pharmaceutical launches price changes products including generic branded pharmaceutical price appreciation deflation pharmaceutical segment’s nuclear pharmacy services business dispenses several products prepared using particular radioisotope present time difficult acquire sufficient quantities radioisotope third party suppliers continued prolonged shortage critical raw material used derive radioisotope two nuclear reactors experiencing prolonged downtimes based information obtained parties involved two affected nuclear reactors anticipate supply raw material normalize first half fiscal 2011 within medical segment variability cost raw materials oil oilrelated commodities significant impact cost products sold fiscal 2011 anticipate negative yearoveryear impact higher commodity prices march 2010 congress approved president signed law patient protection affordable care act health care education reconciliation act “health reform acts” health reform acts seek expand health insurance coverage approximately 32 million uninsured americans many significant changes healthcare reform acts take effect 2014 including requirement americans carry health insurance although expect expansion access health insurance increase demand products services overall effect provisions health reform acts us uncertain could adverse health reform acts contain many provisions designed generate revenues necessary fund coverage expansions reduce costs medicare medicaid could adversely affected among things changes delivery pricing reimbursement pharmaceuticals medical devices healthcare services addition beginning 2013 medical device manufacturer pay tax amount equal 23 price manufacturer sells medical devices manufacture sell medical devices subject tax acquisitions divestitures july 2010 subsequent end fiscal 2010 completed acquisition p4 healthcare cash payment 517 million acquisition agreement also includes earnout payments 150 million next three years acquisition plan expand presence specialty pharmaceutical services distribution p4 healthcare’s results reported within pharmaceutical segment consider acquisitions expand role provider services innovative products healthcare industry especially complement existing operations provide opportunities us develop synergies strengthen acquired business assurance however able successfully take advantage opportunity arises consummate transaction pursued additional transactions pursued consummated would incur additional acquisition related charges may need enter funding arrangements acquisitions assurance integration efforts associated transaction successful fourth quarter fiscal 2010 sold united kingdombased martindale injectable manufacturing business “martindale” 141 million spinoff carefusion corporation august 31 2009 separated clinical medical products businesses pro rata distribution shareholders approximately 81 outstanding shares carefusion common stock “spinoff” retained certain surgical exam gloves surgical drapes apparel fluid management businesses previously part clinical medical products business explained elsewhere form 10k spinoff significant impact results operations financial condition fiscal 2010 sold approximately 109 million shares 414 million shares carefusion common stock held immediately spinoff 271 million resulted gross pretax realized gain approximately 45 million june 30 2010 ownership approximately 305 million shares carefusion common stock estimated fair value 692 million private letter ruling irs relating spinoff must dispose carefusion shares soon practicable spinoff consistent reasons retaining shares later august 31 2014 carefusion registered carefusion stock sec although may sell stock exemption registration net assets carefusion presented separately assets businesses held sale discontinued operations operating results presented within discontinued operations reporting periods date spinoff continuing relationship carefusion july 22 2009 entered separation agreement carefusion effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement employee matters agreement intellectual property agreements certain commercial agreements carefusion agreements including separation agreement provide allocation assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior spinoff govern certain relationships carefusion us spinoff pursuant transition services agreement carefusion fiscal 2010 recognized approximately 99 million transition service fee income approximately offsets costs associated providing transition services additionally fiscal 2010 purchased 606 million carefusion trade receivables pursuant accounts receivable factoring arrangement carefusion us tax matters agreement connection spinoff carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff june 30 2010 245 million indemnification receivable balance sheet related item results operations revenue fiscal 2010 compared fiscal pharmaceutical segment pharmaceutical segment revenue positively impacted pharmaceutical price appreciation increased volume existing customers combined impact 34 billion partially offset losses customers excess gains 13 billion revenue nonbulk customers 458 billion 441 billion 422 billion fiscal 2010 2009 2008 respectively revenue bulk customers 440 billion 437 billion 373 billion fiscal 2010 2009 2008 respectively see item 1 business information bulk nonbulk customers medical segment medical segment revenue positively impacted increased volume existing hospital laboratory ambulatory care customers 462 million driven partially strong demand flurelated products also positively impacting revenue new products 74 million favorable impact foreign exchange 55 million addition connection spinoff recognized previously deferred intercompany revenue sales carefusion 51 million prior spinoff deferred revenue products sold carefusion businesses products sold end customers losses existing customers excess gains new customers reduced revenue 200 million fiscal 2009 compared fiscal 2008 pharmaceutical segment pharmaceutical segment revenue positively impacted pharmaceutical price appreciation increased volume existing customers combined impact 78 billion revenue negatively impacted lost customer revenue dea’s suspensions licenses distribute controlled substances held three distribution centers enhanced controlled substance antidiversion efforts undertook resumed controlled substance distributions distribution centers impacted license suspensions second quarter fiscal 2009 medical segment medical segment revenue positively impacted increased volume existing hospital laboratory ambulatory care customers 386 million revenue negatively impacted foreign exchange 88 million cost products sold consistent increases revenue cost products sold increased 25 billion 3 fiscal 2010 increased 86 billion 10 fiscal 2009 gross margin fiscal 2010 compared fiscal 2009 pharmaceutical segment gross margin decreased 65 million result factors listed • pricing changes renewed customer contracts exclusive related volume impact decreased gross margin 103 million • fiscal 2009 medicine shoppe offered alternative franchise model franchisees position franchise system future growth transformation adversely impacted gross margin 65 million however partially offset efficiencies gained within sga • increased branded margin exclusive related volume impact positive impact gross margin 38 million despite adverse timing impact transition significant vendor relationship distribution service agreement several factors influence branded margin including service level performance distribution service agreements inventory level mix magnitude timing pharmaceutical price appreciation • sales volume growth pharmaceutical distribution positive impact 22 million • within nuclear pharmacy fiscal 2010 negative impact isotope supply shortage largely offset use alternative isotopes favorable impact cost materials savings conversion generic products however negative impact second half year due severe shortages experienced period • favorable impact various generic pharmaceutical product programs pharmaceutical distribution partially offset lower generic margins due timing value new generic launches medical segment gross margin increased 95 million result factors listed • increased sales volume resulted 67 million increase gross margin • decreased cost oil oilrelated commodities favorably impacted gross margin 36 million fiscal 2009 compared fiscal 2008 pharmaceutical segment gross margin increased 48 million result factors listed • pricing changes renewed customer contracts exclusive related volume impact decreased gross margin 132 million • higher sales volume mainly result growth pharmaceutical distribution increased gross margin 122 million • timing new generic pharmaceutical launches resulted higher generic margins 69 million medical segment gross margin decreased 69 million result factors listed • higher cost oil oilrelated commodities decreased gross margin 34 million • negative impact foreign exchange impacted gross margin 32 million distribution selling general administrative expenses “sga” fiscal 2010 compared fiscal 2009 increased sga fiscal 2010 primarily due increase management incentive compensation fiscal 2010 incentive compensation accruals 46 million plan due better expected consolidated performance compared incentive compensation accruals 36 million plan fiscal 2009 addition incurred increased spending strategic projects 51 million sga expense growth significantly mitigated cost control measures instituted fiscal 2009 reduced bad debt expense 25 million included within sga 11 million 5 million costs related spinoff fiscal 2010 2009 respectively fiscal 2009 compared fiscal 2008 cost control programs enabled us decrease sga expenses fiscal 2009 7 million even though incurred higher bad debt expense 38 million increased bad debt expense due poor economic conditions affecting certain customers four regional chain customers pharmaceutical segment filing bankruptcy segment profit operating earnings segment profit evaluate performance individual segments based upon among things segment profit segment revenue less segment cost products sold less segment sga expenses allocate restructuring employee severance acquisition related costs impairments gainloss sale assets litigation creditscharges net certain investment spending segments costs retained corporate investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects retained corporate addition spinoff costs included within sga allocated segments pharmaceutical segment principal drivers decrease fiscal 2010 pricing changes renewed customer contracts fewer significant generic pharmaceutical launches prior year medicine shoppe franchise transformation decline segment profit partially offset contributions generic programs disciplined cost controls solid branded margin growth principal drivers increase fiscal 2009 increased volume contributions new generic launches increase partially offset pricing changes renewed customer contracts impact antidiversion activities bad debt expense segment profits sales bulk customers percentage pharmaceutical segment profit 11 17 15 fiscal 2010 2009 2008 decrease fiscal 2009 fiscal 2010 due pricing changes renewed bulk customer contracts medical segment principal drivers increase fiscal 2010 growth sales certain existing customers decreased cost raw materials associated commodity price movements segment profit growth partially dampened increased spending strategic projects decrease fiscal 2009 primarily due increased cost raw materials associated commodity price movements negative impact foreign exchange consolidated operating earnings addition revenue gross margin sga discussed operating earnings impacted following fiscal 2010 • restructuring employee severance fiscal 2010 restructuring employee severance charges included 65 million costs arising spinoff including approximately 19 million costs related retirement former chairman chief executive officer expect incur additional costs associated existing restructuring activitiesprimarily arising spinofftotaling approximately 15 million • impairments gainloss sale assets recognized impairment charge 18 million related writedown specialtyscripts business within pharmaceutical segment completed sale specialtyscripts third quarter fiscal 2010 • litigation creditscharges net received income 41 million resulting settlement class action antitrust claim alleging defendant branded pharmaceutical manufacturer took improper actions delay entry generic version branded pharmaceutical addition received 26 million income insurance proceeds released escrow litigation certain directors officers resolved fiscal 2009 • restructuring employee severance fiscal 2009 restructuring employee severance primarily related spinoff 74 million realignment segment operating structure 16 million fiscal 2008 • restructuring employee severance fiscal 2008 restructuring employee severance primarily related relocation medical products distribution headquarters certain corporate functions waukegan illinois corporate headquarters dublin 28 million realignment business operations 10 million • impairments gainloss sale assets fiscal 2008 divested investment within pharmaceutical segment recognized 23 million gain • litigation creditscharges net recognized litigation charges totaling 74 million due resolution dea license suspensions 34 million matters charges offset 58 million income related settlement several derivative actions certain directors officers earnings income taxes discontinued operations addition items discussed earnings income taxes discontinued operations impacted following fiscal 2010 compared fiscal • incomeexpense net incomeexpense net favorable compared fiscal 2009 primarily due income 6 million related performance deferred compensation plan assets versus 12 million expense fiscal 2009 income expense related performance deferred compensation plan assets offset within sga incomeexpense net also favorably impacted foreign exchange 16 million • loss extinguishment debt september 24 2009 completed debt tender 12 billion certain outstanding debt securities ultimately purchasing 11 billion offer funded 14 billion cash distribution received carefusion immediately prior spinoff connection debt tender incurred pretax loss early retirement debt approximately 40 million included early tender premium 66 million writeoff 5 million unamortized debt issuance costs offsetting 32 million fair value adjustment debt related previously terminated interest rate swaps • gain sale carefusion common stock recognized 45 million income related realized gains sale shares carefusion common stock fiscal 2009 compared fiscal 2008 • incomeexpense net incomeexpense net unfavorable compared fiscal 2008 primarily due impact foreign exchange • interest expense net decrease interest expense net due favorable impact interest rate swaps fixed rate debt provision income taxes generally fluctuations effective tax rate due changes within international us state effective tax rates resulting business mix discrete items reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2010 2009 2008 see note 9 “notes consolidated financial statements” detailed disclosure effective tax rate reconciliation fiscal 2010 compared fiscal 2009 effective tax rate unfavorably impacted charge 168 million 139 percentage points attributable earnings longer indefinitely invested offshore fiscal 2010 effective tax rate also unfavorably impacted 18 percentage points due changes business mix resulted higher percentage pretax income generated us lower tax rate international jurisdictions favorable audit settlement state taxing authority fiscal 2009 see also unfavorably impacted yearoveryear comparison effective tax rate fiscal 2009 compared fiscal 2008 effective tax rate unfavorably impacted 34 percentage points due changes business mix resulted higher percentage pretax income generated us lower tax rate international jurisdictions effective tax rate favorably impacted 14 percentage points due audit settlement state taxing authority addition effective tax rate favorably impacted 31 percentage points due release valuation allowance deferred tax asset established capital loss carryforward ongoing audits irs currently ongoing audits fiscal years 2001 2007 received proposed adjustments irs related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us irs proposed additional taxes 598 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement 462 million total amount disagree proposed adjustments intend vigorously contest believe reserves matters adequate earnings discontinued operations earnings discontinued operations 55 million fiscal 2010 carefusion operating results included within earnings discontinued operations periods date spinoff earnings discontinued operations net tax decreased 60 million fiscal 2009 primarily carefusion’s earnings declinedin large part hospitals deferred capital spending see note 5 “notes consolidated financial statements” additional information discontinued operations liquidity capital resources currently believe based upon available capital resources cash hand ownership shares carefusion common stock projected operating cash flow access committed credit facilities adequate access capital resources fund working capital needs currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements dividends share repurchases first quarter fiscal 2011 acquired p4 healthcare using cash hand decide engage one additional acquisitions depending size timing transactions may need supplemental funding capital resources cash equivalents cash equivalents balance 28 billion june 30 2010 compared 12 billion june 30 2009 increase primarily derived net cash provided operating activities 20 billion net cash provided operating activities primarily driven net earnings changes working capital changes working capital vary significantly depending factors timing inventory purchases customer payments accounts receivable payments vendors regular course business use days sales outstanding “dso” days inventory hand “dioh” days payable outstanding “dpo evaluate working capital performance dso calculated trade receivables net divided average daily revenue last month reporting period dioh calculated inventories divided average daily cost products sold chargeback billings last quarter reporting period dpo calculated accounts payable divided average daily cost products sold chargeback billings last quarter reporting period chargeback billings difference product’s wholesale acquisition cost contract price established vendors end customer focused efforts manage customer accounts reduce delinquency rates led improved dso significant improvement dioh largely due enhanced efficiency supply chain operations reduce inventory requirements change dpo fiscal 2010 largely driven change payable terms supplier pharmaceutical segment fiscal 2010 deployed 260 million capital expenditures 253 million dividends 230 million share repurchases additional 20 million repurchased fiscal 2010 settled fiscal 2011 part balanced capital deployment strategy fiscal 2010 received 271 million proceeds sale carefusion common stock 154 million divestitures martindale business united kingdom specialtyscripts addition completed debt tender resulting purchase 11 billion debt securities using cash 14 billion distributed us carefusion connection spinoff fiscal 2009 deployed 421 million capital expenditures 301 million repayment longterm obligations 200 million dividends fiscal 2008 deployed 12 billion share repurchases 189 million capital expenditures 173 million dividends also fiscal 2008 received 300 million issuance longterm obligations 228 million shares issued sharebased compensation plans cash equivalents balance end fiscal 2010 included 398 million cash held subsidiaries outside united states although vast majority cash available repatriation bringing money united states could trigger us federal state local income tax obligations us parent company may temporarily access cash held foreign subsidiaries without becoming subject us federal income tax taking intercompany loans previously disclosed cash held foreign subsidiaries include intercompany loans 844 million 237 million foreign entities currently planned repaid fiscal 2013 fiscal 2020 respectively net cash provided discontinued operations fiscal 2010 14 billion primarily reflected permanent financing obtained carefusion prior spinoff offset 90 million cash funding provided us carefusion pursuant spinoff separation agreement net cash provided byused discontinued operations fiscal 2009 2008 341 million 224 million respectively primarily related earnings changes working capital carefusion ownership shares carefusion common stock fiscal 2010 sold approximately 109 million shares 414 million shares carefusion common stock held immediately spinoff resulted cash proceeds 271 million june 30 2010 remaining 305 million shares carefusion common stock estimated fair value 692 million private letter ruling irs relating spinoff must dispose carefusion shares soon practicable spinoff consistent reasons retaining shares later august 31 2014 carefusion registered carefusion stock owned us sec although may sell stock exemption registration credit facilities commercial paper sources liquidity include 15 billion revolving credit facility 950 million committed receivables sales facility program also commercial paper program 15 billion backed revolving credit facility outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2010 ability access commercial paper market limited based current credit rating moody’s investor services revolving credit facility receivables sales facility program require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2010 compliance financial covenants longterm obligations june 30 2010 total longterm obligations 21 billion compared 36 billion june 30 2009 decrease longterm obligations primarily driven debt tender completed september 2009 resulting purchase 11 billion debt securities additionally october 2009 repaid 350 million floating rate notes reached maturity fiscal 2009 repaid 150 million 625 notes reached maturity also repaid 149 million preferred debt securities capital expenditures capital expenditures fiscal 2010 2009 2008 260 million 421 million 189 million respectively primarily related information technology projects investments improve efficiency distribution facilities fiscal 2009 capital expenditures included 151 million repurchase assets operating lease arrangement expect capital expenditures fiscal 2011 generally line level spending fiscal 2010 anticipate able fund expenditures cash provided operating activities fiscal 2011 capital expenditures largely focused information technology projects dividends fiscal 2010 paid quarterly dividends 0175 per share 070 per share annualized basis may 5 2010 board directors approved 11 percent increase quarterly dividend 0195 per share 078 per share annualized basis payable july 15 2010 shareholders record july 1 2010 august 4 2010 board directors approved 104th consecutive regular quarterly dividend share repurchases fiscal 2010 repurchased 250 million common shares 20 million cash settled july 2010 july august 2010 repurchased additional 250 million common shares completes share repurchases current board authorization funded repurchases available cash fiscal 2009 repurchase common shares fiscal 2008 repurchased approximately 11 billion common shares portion aftertax net proceeds approximately 31 billion sale pts business used repurchase shares first quarter fiscal 2008 interest rate currency risk management use foreign currency forward contracts interest rate swaps commodity swaps manage exposure cash flow variability also use foreign currency forward contracts protect value existing foreign currency assets liabilities interest rate swaps protect value debt see item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations referring continuing operations executive overview healthcare services company providing pharmaceutical medical products services help pharmacies hospitals surgery centers physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality report financial results two segments pharmaceutical medical fiscal 2011 achieved record revenue 1026 billion increased operating earnings 16 percent 15 billion also acted important strategic priorities strengthen longterm position expanded retail independent customer base significantly kinray acquisition created strong growth generic pharmaceutical programs significantly enhanced specialty business p4 healthcare acquisition launched growth platform china yong yu acquisition fiscal 2011 pharmaceutical segment profit increased 26 percent primarily due strong performance generic pharmaceutical programs including impact new product launches solid performance branded manufacturer agreements positive impact acquisitions medical segment profit decreased 14 percent adversely affected increased cost commodities used selfmanufactured private brand products also fiscal 2011 paid quarterly cash dividends 0195 per share 078 per share annualized basis increase 11 percent fiscal 2010 may 2011 board directors also approved 10 percent increase quarterly dividend beginning july 2011 cash equivalents balance 19 billion june 30 2011 compared 28 billion june 30 2010 used 23 billion acquisitions received 14 billion net cash provided operations 706 million sale remaining investment carefusion plan continue execute balanced deployment available capital position sustainable competitive advantage enhance shareholder value trends within pharmaceutical segment expect branded pharmaceutical price appreciation fiscal 2012 similar fiscal 2011 also expect significant new generic pharmaceutical launches fiscal 2012 however impact gross margin vary significantly depending timing size number entrants may less fiscal 2012 fiscal 2011 addition expect recent acquisitions positive yearoveryear impact revenue operating earnings finally may negative impact lifo charge fiscal 2012 within medical segment variability cost commodities oilbased resins cotton latex diesel fuel commodities significant impact cost products sold fiscal 2012 anticipate negative yearoveryear impact higher commodity prices addition given current economic healthcare environments expect healthcare utilization including surgical procedures remain somewhat sluggish fiscal 2012 acquisitions december 2010 acquired kinray cash payment 13 billion acquisition expanded ability pharmaceutical distribution business serve retail independent pharmacies northeastern united states november 2010 acquired yong yu leading health care distribution business china 458 million including assumption 57 million debt pharmaceutical market china expected grow significantly faster market united states next years july 2010 completed acquisition p4 healthcare specialty pharmaceutical services company cash payment 506 million acquisition contributes expansion presence specialty pharmaceutical services distribution acquisition agreement also included contingent consideration obligation 150 million next three years since completed acquisition made cash payment 10 million first measurement period subsequent june 30 2011 amended agreement former owners extend last measurement period one year reduce maximum contingent consideration payout 100 million june 30 2011 estimate remaining contingent consideration obligation fair value 75 million three acquisitions reported within pharmaceutical segment fiscal 2011 increased revenues 29 billion operating earnings 61 million compared fiscal 2010 see note 2 “notes consolidated financial statements” additional information kinray yong yu p4 healthcare acquisitions spinoff carefusion effective august 31 2009 separated clinical medical products business distribution shareholders 81 percent outstanding common stock carefusion retained remaining 414 million shares carefusion common stock fiscal 2011 2010 disposed 305 million 109 million shares carefusion common stock respectively july 22 2009 entered separation agreement carefusion effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement accounts receivable factoring agreement carefusion among agreements transition services agreement fiscal 2011 2010 recognized 65 million 99 million respectively transition service fees approximately offsets costs associated providing transition services substantially transition service arrangements expired fiscal 2011 early fiscal 2012 expect transition service fees fiscal 2012 substantially less fiscal 2011 loss fees fiscal 2012 partially offset cost reductions periods subsequent fiscal 2012 plans place largely offset loss fees cost reductions accounts receivable factoring agreement fiscal 2011 2010 purchased 460 million 606 million respectively carefusion trade receivables accounts receivable factoring arrangement expired april 1 2011 tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff indemnification receivable 264 million 245 million june 30 2011 2010 respectively included consolidated financial statements expect transition relationship carefusion traditional distribution model fourth quarter fiscal 2011 50 60 million per quarter positive impact medical segment revenue first three quarters fiscal 2012 however expect change minimal impact medical segment profit results operations revenue fiscal 2011 compared fiscal 2010 pharmaceutical segment fiscal 2011 pharmaceutical revenue positively impacted acquisitions net divestitures 27 billion increased sales existing customers 18 billion revenue negatively impacted losses customers excess gains 584 million revenue bulk sales 419 billion 440 billion fiscal 2011 2010 respectively fiscal 2011 revenue bulk sales decreased 5 percent result conversion branded pharmaceuticals generic pharmaceuticals well shift sales certain national chain customers nonbulk bulk revenue nonbulk sales 518 billion 458 billion fiscal 2011 2010 respectively revenue nonbulk sales increased 13 percent fiscal 2011 primarily due acquisitions previously mentioned shift sales kinray yong yu p4 healthcare nonbulk see “item 1 business” information bulk nonbulk sales medical segment medical revenue positively impacted fiscal 2011 increased volume existing customers 354 million revenue gains partially offset impact lost customers excess gains 165 million decreased volume result strong demand flurelated products prior year 51 million fiscal 2010 compared fiscal 2009 pharmaceutical segment pharmaceutical segment revenue positively impacted fiscal 2010 pharmaceutical price appreciation increased volume existing customers combined impact 34 billion partially offset losses customers excess gains 13 billion medical segment medical segment revenue positively impacted fiscal 2010 increased volume existing hospital laboratory ambulatory care customers 462 million driven partially strong demand flurelated products also positively impacting revenue new products 74 million foreign exchange 55 million addition connection spinoff recognized previously deferred intercompany revenue sales carefusion 51 million prior spinoff deferred revenue products sold carefusion businesses products sold end customers losses existing customers excess gains new customers reduced revenue 200 million cost products sold consistent increases revenue cost products sold increased 38 billion 4 percent fiscal 2011 increased 25 billion 3 percent fiscal 2010 gross margin fiscal 2011 compared fiscal 2010 pharmaceutical segment gross margin increased 446 million fiscal 2011 primarily result factors listed • strong performance generic pharmaceutical programs including impact new product launches increased gross margin 239 million • acquisitions net divestitures positively impacted gross margin 198 million • increased margin branded pharmaceutical sales exclusive related volume impact positive impact gross margin 72 million increase primarily due performance distribution service agreements transition certain vendors distribution service agreements factors influence margin branded pharmaceutical sales include servicelevel performance distribution service agreements inventory level mix magnitude timing pharmaceutical price appreciation • customer pricing changes including rebates exclusive related volume impact adversely impacted gross margin 99 million adverse impact customer pricing changes partially offset product mix sourcing programs sources margin medical segment gross margin decreased 59 million fiscal 2011 primarily result factors listed • increased cost oilbased resins cotton latex diesel fuel commodities used selfmanufactured private brand products decreased gross margin 59 million • increased net sales volume resulted 22 million favorable impact gross margin • first quarter fiscal 2010 realized onetime gain 14 million result recognition previously deferred intercompany revenue sales carefusion • somewhat sluggish healthcare utilization disproportionately affected surgical procedures consequently highermargin products fiscal 2010 compared fiscal 2009 pharmaceutical segment gross margin decreased 65 million fiscal 2010 result factors listed • pricing changes renewed customer contracts exclusive related volume impact decreased gross margin 103 million • fiscal 2009 medicine shoppe offered alternative franchise model franchisees position franchise system future growth transformation adversely impacted gross margin 65 million fiscal 2010 however partially offset efficiencies gained within sga • increased margin branded pharmaceutical sales exclusive related volume impact positive impact gross margin 38 million despite adverse timing impact transition significant vendor relationship distribution service agreement • sales volume growth pharmaceutical distribution positive impact 22 million • within nuclear pharmacy fiscal 2010 negative impact isotope supply shortage largely offset use alternative isotopes favorable impact cost materials savings conversion generic products however negative impact second half year due severe shortages experienced period • favorable impact various generic pharmaceutical product programs pharmaceutical distribution partially offset lower generic margins due timing value new generic launches medical segment gross margin increased 95 million fiscal 2010 result factors listed • increased sales volume resulted 67 million increase gross margin • decreased cost oilbased resins commodities favorably impacted gross margin 36 million • onetime gain 14 million result recognition previously deferred intercompany revenue sales carefusion distribution selling general administrative expenses “sga” fiscal 2011 compared fiscal 2010 increase sga fiscal 2011 primarily due acquisitions net divestitures 147 million included amortization acquisitionrelated intangible assets 67 million 10 million fiscal 2011 2010 respectively sga also included costs related spinoff 10 million 11 million fiscal 2011 2010 respectively fiscal 2010 compared fiscal 2009 increased sga fiscal 2010 primarily due increase management incentive compensation fiscal 2010 incentive compensation accruals 46 million plan due better expected consolidated performance compared incentive compensation accruals 36 million plan fiscal 2009 addition incurred increased spending strategic projects 51 million sga expense growth significantly mitigated cost control measures instituted fiscal 2009 reduced bad debt expense 25 million sga also included 11 million 5 million costs related spinoff fiscal 2010 2009 respectively segment profit operating earnings segment profit evaluate performance individual segments based upon among things segment profit segment revenue less segment cost products sold less segment sga expenses allocate restructuring employee severance acquisitionrelated costs impairments gainloss sale assets litigation recoveriescharges net certain investment spending segments costs retained corporate investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate addition spinoff costs included within sga allocated segments pharmaceutical segment principal drivers fiscal 2011 compared prior year strong performance generic pharmaceutical programs including impact new product launches positive impact acquisitions increased margin branded pharmaceutical sales offset customer pricing changes see gross margin section discussion items principal drivers decrease fiscal 2010 pricing changes renewed customer contracts fewer significant generic pharmaceutical launches prior year medicine shoppe franchise transformation decline segment profit partially offset contributions generic programs disciplined cost controls increased margin branded pharmaceutical sales segment profit bulk sales increased 20 million fiscal 2011 compared fiscal 2010 11 percent pharmaceutical segment profit years segment profit nonbulk sales increased 243 million fiscal 2011 compared fiscal 2010 89 percent pharmaceutical segment profit years generic pharmaceutical items acquisitions discussed primarily impacted segment profit nonbulk sales medical segment compared prior year results fiscal 2011 adversely affected increased cost commodities used selfmanufactured private brand products partially offset increased sales volume results also impacted negative yearoveryear impact recognizing fiscal 2010 onetime gain related previously deferred intercompany revenue sales carefusion principal drivers increase fiscal 2010 growth sales certain existing customers decreased cost raw materials associated commodity price movements results also positively affected onetime gain related previously deferred intercompany revenue sales carefusion segment profit growth partially dampened increased spending strategic projects consolidated operating earnings addition revenue gross margin sga discussed operating earnings impacted following restructuring employee severance fiscal 2011 2010 2009 restructuring employee severance charges included 7 million 65 million 74 million respectively costs arising spinoff acquisitionrelated costs fiscal 2011 net acquisitionrelated costs included 21 million related kinray yong yu p4 healthcare acquisitions costs partially offset 6 million income result decrease contingent consideration liability relating p4 healthcare acquisition reflects actual performance first measurement period changes estimate performance future measurement periods see note 2 “notes consolidated financial statements” additional information change impairments loss sale assets fiscal 2010 recognized impairment charge 18 million related writedown specialtyscripts business within pharmaceutical segment completed sale specialtyscripts third quarter fiscal 2010 litigation recoveriescharges net fiscal 2010 received income 41 million resulting settlement class action antitrust claim class member addition received 26 million income insurance proceeds released escrow litigation commenced certain directors officers 2004 resolved earnings income taxes discontinued operations addition items discussed earnings income taxes discontinued operations impacted following interest expense net decrease interest expense fiscal 2011 primarily due favorable impact interest rate swaps loss extinguishment debt fiscal 2010 recognized 40 million loss early retirement 11 billion debt securities tender offer gain sale investment carefusion common stock recognized 75 million 45 million income fiscal 2011 2010 respectively related realized gains sale shares carefusion common stock provision income taxes generally fluctuations effective tax rate due changes within international united states state effective tax rates resulting business mix discrete items reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2011 2010 2009 see note 9 “notes consolidated financial statements” detailed disclosure effective tax rate reconciliation fiscal 2011 compared fiscal 2010 effective tax rate favorably impacted 28 million 19 percentage points attributable recognizing income tax expense sale carefusion stock due release previously established deferred tax valuation allowance unfavorable charge attributable earnings longer indefinitely invested offshore fiscal 2010 favorably impacted yearoveryear comparison effective tax rate see fiscal 2010 compared fiscal 2009 effective tax rate unfavorably impacted charge 168 million 139 percentage points attributable earnings longer indefinitely invested offshore fiscal 2010 effective tax rate also unfavorably impacted 18 percentage points due changes business mix resulting spinoff resulted higher percentage pretax income generated united states lower tax rate international jurisdictions favorable audit settlement state taxing authority fiscal 2009 also unfavorably impacted yearoveryear comparison effective tax rate ongoing audits irs currently conducting audits fiscal years 2001 2010 received proposed adjustments irs related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us irs proposed additional taxes 849 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement 592 million total amount disagree proposed adjustments intend vigorously contest believe accruals matters adequate earningsloss discontinued operations carefusion operating results included within earnings discontinued operations periods date spinoff significant impact earnings discontinued operations fiscal 2010 2009 see note 5 “notes consolidated financial statements” additional information discontinued operations recent developments late august 2011 fda notified us halting entry united states procedure kits assemble mexico import el paso texas “imported kits” fda indicated supplied adequate documentary support certain components imported kits indicated concerns patient safety working fda address concerns interim implementing steps mitigate impact customers business including shifting assembly kits facilities united states sales imported kits approximately 5 percent medical segment revenue fiscal 2011 liquidity capital resources currently believe based upon available capital resources cash hand projected operating cash flow access committed credit facilities adequate capital resources fund working capital needs currently anticipated capital expenditures business growth expansion contractual obligations current projected debt service requirements dividends share repurchases fiscal 2011 acquired kinray yong yu p4 healthcare cash hand decide engage one additional acquisitions depending size timing transactions may need supplemental funding capital resources cash equivalents cash equivalents balance 19 billion june 30 2011 compared 28 billion june 30 2010 june 30 2011 cash equivalents held cash depository accounts major banks around world invested high quality shortterm liquid investments decrease primarily driven acquisitions offset net cash provided operating activities primarily driven net earnings working capital sale remaining investment carefusion changes working capital vary significantly depending factors timing inventory purchases customer payments accounts receivable payments vendors regular course business use days sales outstanding “dso” days inventory hand “dioh” days payable outstanding “dpo” evaluate working capital performance dso calculated trade receivables net divided average daily revenue last month reporting period dioh calculated inventories divided average daily cost products sold chargeback billings last quarter reporting period dpo calculated accounts payable divided average daily cost products sold chargeback billings last quarter reporting period chargeback billings difference product’s wholesale acquisition cost contract price established vendors end customer increase dso fiscal 2011 driven impact acquisitions increase dpo due timing payments vendors regular course business decrease dso fiscal 2010 driven focused efforts manage customer accounts reduce delinquency rates significant improvement dioh fiscal 2010 largely due enhanced efficiency supply chain operations reduce inventory requirements change dpo fiscal 2010 largely driven change payable terms supplier pharmaceutical segment fiscal 2011 deployed 23 billion cash acquisitions 291 million capital expenditures 274 million dividends 270 million share repurchases fiscal 2011 received 706 million proceeds sale carefusion common stock fiscal 2010 deployed 260 million cash capital expenditures 253 million dividends 230 million share repurchases additional 20 million repurchased fiscal 2010 settled first quarter 2011 fiscal 2010 received 271 million proceeds sale carefusion common stock 154 million divestitures martindale business united kingdom specialtyscripts addition completed debt tender resulting purchase 11 billion debt securities using cash 14 billion distributed us carefusion connection spinoff additionally october 2009 repaid 350 million floating rate notes maturity cash equivalents balance end fiscal 2011 included 266 million cash held subsidiaries outside united states although vast majority cash available repatriation permanently bringing money united states could trigger us federal state local income tax obligations us parent company may temporarily access cash held foreign subsidiaries without becoming subject us federal income tax intercompany loans net cash provided discontinued operations fiscal 2010 14 billion primarily reflected permanent financing obtained carefusion prior spinoff offset 90 million cash funding provided us carefusion pursuant spinoff separation agreement net cash provided byused discontinued operations fiscal 2009 341 million primarily related earnings changes working capital carefusion ownership shares carefusion common stock fiscal 2011 2010 disposed 305 million 109 million shares carefusion common stock cash proceeds 706 million 271 million respectively credit facilities commercial paper sources liquidity include 15 billion revolving credit facility 950 million committed receivables sales facility program fiscal 2011 replaced prior revolving credit facility new 15 billion facility expires may 2016 amended committed receivables sales facility program extend term november 2012 also commercial paper program 15 billion backed revolving credit facility outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2011 ability access commercial paper market limited based current credit rating moody’s investor services revolving credit facility committed receivables sales facility require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2011 compliance financial covenants heldtomaturity investments hold high quality investment grade heldtomaturity fixed income debt securities amortized cost basis 142 million june 30 2011 investments vary maturity date ranging three months sixteen months pay interest semiannually longterm obligations june 30 2011 total longterm obligations 25 billion compared 21 billion june 30 2010 december 2010 sold 500 million fixed rate notes due 2020 registered offering 2020 notes mature december 15 2020 accrue interest 4625 per year payable semiannually used proceeds general corporate purposes repayment 220 million 675 notes due february 15 2011 capital expenditures capital expenditures fiscal 2011 2010 2009 291 million 260 million 421 million respectively primarily related information technology projects investments improve efficiency distribution facilities expect capital expenditures fiscal 2012 generally line level spending fiscal 2011 anticipate able fund expenditures cash provided operating activities fiscal 2012 capital expenditures largely focused information technology projects dividends fiscal 2011 paid quarterly dividends 0195 per share 078 per share annualized basis increase 11 percent fiscal 2010 may 4 2011 board directors approved 10 percent increase quarterly dividend 0215 per share 086 per share annualized basis payable july 15 2011 shareholders record july 1 2011 august 3 2011 board directors approved 108th consecutive regular quarterly dividend share repurchases fiscal 2011 repurchased 250 million common shares fiscal 2010 repurchased 250 million common shares 20 million cash settled july 2010 subsequent june 30 2011 august 12 2011 repurchased approximately 300 million common shares funded repurchases available cash 450 million remaining current board repurchase authorization november 2013 interest rate currency risk management use foreign currency forward contracts interest rate swaps commodity swaps manage exposure cash flow variability also use foreign currency forward contracts protect value existing foreign currency assets liabilities interest rate swaps protect value debt see item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations referring continuing operations overview healthcare services company providing pharmaceutical medical products services help pharmacies hospitals surgery centers physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality report financial results two segments pharmaceutical medical fiscal 2012 achieved revenue 1076 billion increased operating earnings 18 percent 18 billion growth revenue due increased volume existing customers 24 billion acquisitions 24 billion increase operating earnings reflects strong performance pharmaceutical segment generic programs positive impact acquisitions 71 million gain realized upon adjusting contingent consideration obligation associated p4 healthcare acquisition earnings continuing operations 11 percent twelve months ended june 30 2012 due factors discussed cash equivalents balance 23 billion june 30 2012 compared 19 billion june 30 2011 increase cash equivalents primarily attributable net cash provided operating activities 12 billion partially offset share repurchases 450 million cash dividends 300 million plan continue execute balanced deployment available capital position sustainable competitive advantage enhance shareholder value trends within pharmaceutical segment expect revenue decrease fiscal 2013 factors contributing decrease include reduced revenue result brandedtogeneric pharmaceutical conversions expiration september 30 2012 pharmaceutical distribution contract express scripts inc brandedtogeneric pharmaceutical conversions impact revenues generic pharmaceuticals generally sell lower price corresponding branded product customers source generic products directly manufacturers rather purchasing us contract express scripts inc renewed connection combined pharmaceutical distribution contract awarded us following companys merger medco health solutions inc recognized approximately 90 billion revenue sales express scripts inc fiscal 2012 classified bulk sales pharmaceutical segment also anticipate fewer significant new generic pharmaceutical product launches fiscal 2013 however impact launches gross margin vary depending timing size number entrants within medical segment variability cost commodities oilbased resins cotton latex diesel fuel commodities significant impact cost products sold although commodity prices fluctuate expect changes commodity prices significant impact yearoveryear results operations fiscal 2013 healthcare reform acts include tax paid medical device manufacturers equal 23 percent price manufacturers sell products scheduled begin january 1 2013 manufacture sell devices based currently proposed rules subject tax proposals repeal tax modify proposed rules adopted may reduce impact tax us acquisitions completed several acquisitions since july 1 2009 largest kinray p4 healthcare cardinal health china completed fiscal 2011 managements discussion analysis identify contribution acquisition oneyear anniversary acquisition using definition fiscal 2012 2011 acquisitions contributed revenues 24 billion 29 billion respectively operating earnings 79 million 61 million respectively see note 2 “notes consolidated financial statements” information acquisitions spinoff carefusion effective august 31 2009 separated clinical medical products business distribution shareholders 81 percent outstanding common stock carefusion retained remaining 41 million shares carefusion common stock fiscal 2011 2010 disposed 30 million 11 million shares carefusion common stock respectively entered separation agreement carefusion july 22 2009 effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement accounts receivable factoring agreement carefusion among agreements transition services agreement fiscal 2012 2011 2010 recognized 3 million 65 million 99 million respectively transition service fee income tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff indemnification receivable 265 million 264 million june 30 2012 2011 respectively included longterm assets consolidated balance sheets accounts receivable factoring agreement fiscal 2011 2010 purchased 460 million 606 million carefusion trade receivables respectively accounts receivable factoring arrangement expired april 1 2011 results operations revenue fiscal 2012 compared fiscal 2011 pharmaceutical segment revenue positively impacted fiscal 2012 acquisitions 23 billion increased sales existing customers 20 billion revenue bulk sales 402 billion 419 billion fiscal 2012 2011 respectively fiscal 2012 revenue bulk sales decreased 4 percent result conversion branded pharmaceuticals generic pharmaceuticals well shift sales mix certain retail chain pharmacy customers nonbulk bulk revenue nonbulk sales 577 billion 518 billion fiscal 2012 2011 respectively revenue nonbulk sales increased 11 percent fiscal 2012 primarily due acquisitions previously mentioned shift sales see “item 1 business” information bulk nonbulk sales medical segment revenue positively impacted fiscal 2012 increased volume existing customers 335 million including positive impact sales selfmanufactured private brand products transition fourth quarter fiscal 2011 relationship carefusion feeforservice arrangement traditional distribution model 131 million transition minimal impact medical segment profit fiscal 2011 compared fiscal 2010 pharmaceutical segment fiscal 2011 pharmaceutical revenue positively impacted acquisitions net divestitures 27 billion increased sales existing customers 18 billion revenue negatively impacted losses customers excess gains 584 million medical segment medical revenue positively impacted fiscal 2011 increased volume existing customers 354 million revenue gains partially offset impact lost customers excess gains 165 million decreased volume result strong demand flurelated products prior year 51 million cost products sold consistent increases revenue cost products sold increased 45 billion 5 percent fiscal 2012 increased 38 billion 4 percent fiscal 2011 see following gross margin discussion additional drivers impacting cost products sold gross margin fiscal 2012 compared fiscal 2011 pharmaceutical segment gross margin increased 335 million fiscal 2012 strong performance generic pharmaceutical programs including impact new product launches increased gross margin 287 million acquisitions positively impacted gross margin 122 million increased margin branded generic manufacturer agreements exclusive related volume impact positive impact gross margin 49 million due part price appreciation specific generic pharmaceutical products pharmaceutical distribution customer pricing changes including rebates exclusive related volume impact adversely impacted gross margin estimated 179 million adverse impact customer pricing changes partially offset product mix sourcing programs sources margin medical segment gross margin increased 47 million fiscal 2012 favorable product sales mix increased sales volume resulted 100 million favorable impact gross margin increased cost oilbased resins cotton latex commodities used selfmanufactured products decreased gross margin 66 million fiscal 2011 compared fiscal 2010 pharmaceutical segment gross margin increased 446 million fiscal 2011 strong performance generic pharmaceutical programs including impact new product launches increased gross margin 239 million acquisitions net divestitures positively impacted gross margin 198 million increased margin branded pharmaceutical agreements exclusive related volume impact positive impact gross margin 72 million increase primarily due performance distribution service agreements transition certain vendors distribution service agreements pharmaceutical distribution customer pricing changes including rebates exclusive related volume impact adversely impacted gross margin estimated 99 million adverse impact customer pricing changes partially offset product mix sourcing programs sources margin medical segment gross margin decreased 59 million fiscal 2011 increased cost oilbased resins cotton latex diesel fuel commodities used selfmanufactured products decreased gross margin 59 million increased net sales volume resulted 22 million favorable impact gross margin first quarter fiscal 2010 realized onetime gain 14 million result recognition previously deferred intercompany revenue sales carefusion somewhat sluggish healthcare utilization disproportionately affected surgical procedures consequently highermargin products distribution selling general administrative expenses increased sga fiscal 2012 primarily due acquisitions 65 million business system investments including medical segment business transformation project increase sga fiscal 2011 primarily due acquisitions net divestitures 90 million sga also included costs related spinoff 2 million 10 million 11 million fiscal 2012 2011 2010 respectively segment profit consolidated operating earnings segment profit evaluate performance individual segments based upon among things segment profit segment revenue less segment cost products sold less segment sga expenses allocate restructuring employee severance acquisitionrelated costs impairments gainloss sale assets litigation recoveriescharges net certain investment spending segments costs retained corporate investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate addition spinoff costs included within sga allocated segments see note 15 notes consolidated financial statements additional information segment profit pharmaceutical segment profit principal drivers increase fiscal 2012 2011 strong performance generic pharmaceutical programs including impact new product launches positive impact acquisitions increased margin branded pharmaceutical agreements offset unfavorable impact pharmaceutical distribution customer pricing changes see discussion gross margin information drivers segment profit bulk sales increased 19 million fiscal 2012 fiscal 2011 10 percent pharmaceutical segment profit years segment profit nonbulk sales increased 210 million fiscal 2012 fiscal 2011 90 percent pharmaceutical segment profit years generic pharmaceutical programs acquisitions discussed primarily impacted segment profit nonbulk sales medical segment profit principal drivers decrease fiscal 2012 increased cost commodities used selfmanufactured products increase sga expenditures including impact business system investments items partially offset favorable impact product sales mix increased net sales volume see discussion information drivers results fiscal 2011 adversely affected increased cost commodities used selfmanufactured products partially offset increased sales volume results also impacted negative yearoveryear impact recognizing fiscal 2010 onetime gain related previously deferred intercompany revenue sales carefusion consolidated operating earnings addition revenue gross margin sga discussed operating earnings impacted following restructuring employee severance fiscal 2011 2010 restructuring employee severance charges included 7 million 65 million respectively costs arising spinoff acquisitionrelated costs acquisitionrelated costs fiscal 2012 included income realized upon adjusting contingent consideration obligation incurred connection p4 healthcare acquisition former owners p4 healthcare right receive certain contingent payments based targeted earnings interest taxes depreciation amortization ebitda result changes estimate performance future periods due large part loss revenue significant customer p4 healthcare legacy business fiscal 2012 revised timing amount ebitda estimates made changes probability assumptions respect likelihood achieving ebitda targets changes coupled progress discussions former owners regarding early termination settlement contingent consideration obligation resulted 71 million decrease fair value obligation 4 million june 30 2012 early july 2012 reached final settlement payment remaining contingent consideration liability 4 million see note 2 notes consolidated financial statements additional information item amortization acquisitionrelated intangible assets 78 million 67 million 10 million fiscal 2012 2011 2010 respectively impairments loss disposal assets fiscal 2012 recorded charge 16 million write indefinite life intangible asset related p4 healthcare trade name rebranded p4 healthcare cardinal health specialty solutions name fiscal 2010 recognized impairment charge 18 million related writedown specialtyscripts llc specialty scripts business within pharmaceutical segment sold specialtyscripts third quarter fiscal 2010 litigation recoveriescharges net fiscal 2010 recognized income 41 million resulting settlement class action antitrust claim class member addition recognized 26 million income insurance proceeds released escrow litigation commenced certain directors officers 2004 resolved earnings income taxes discontinued operations addition items discussed earnings income taxes discontinued operations impacted following interest expense net decrease interest expense fiscal 2011 primarily due favorable interest rate swaps loss extinguishment debt fiscal 2010 recognized 40 million loss early retirement 11 billion debt securities tender offer gain sale investment carefusion common stock recognized 75 million 45 million income fiscal 2011 2010 respectively related sale investment carefusion common stock provision income taxes generally fluctuations effective tax rate due changes within international united states state effective tax rates resulting business mix discrete items reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2012 2011 2010 see note 8 “notes consolidated financial statements” detailed disclosure effective tax rate reconciliation fiscal 2012 compared fiscal 2011 fiscal 2012 effective tax rate favorably impacted settlement fiscal 2001 2002 irs audits 40 million 24 percentage points yearoveryear comparison effective tax rate unfavorably impacted release fiscal 2011 previously established deferred tax valuation allowance fiscal 2011 compared fiscal 2010 effective tax rate favorably impacted 28 million 19 percentage points attributable recognizing income tax expense sale carefusion stock due release previously established deferred tax valuation allowance unfavorable charge 168 million 139 percentage points attributable earnings longer indefinitely invested offshore fiscal 2010 favorably impacted yearoveryear comparison effective tax rate ongoing audits fiscal 2012 irs closed audits fiscal 2001 2002 currently conducting audits fiscal years 2003 2010 received proposed adjustments irs fiscal 2003 2007 related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us irs proposed additional taxes 849 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement 592 million total amount disagree proposed adjustments contesting accounted unrecognized tax benefits related earningsloss discontinued operations carefusion operating results included within earnings discontinued operations periods date spinoff significant impact earnings discontinued operations fiscal 2010 see note 5 “notes consolidated financial statements” additional information discontinued operations liquidity capital resources currently believe based upon available capital resources cash hand projected operating cash flow access committed credit facilities adequate capital resources fund working capital needs currently anticipated capital expenditures business growth expansion contractual obligations payments tax settlements current projected debt service requirements dividends share repurchases fiscal 2012 completed several small acquisitions cash hand decide engage one additional acquisitions depending size timing transactions may need supplemental funding cash equivalents cash equivalents balance 23 billion june 30 2012 compared 19 billion june 30 2011 june 30 2012 cash equivalents held cash depository accounts major banks invested high quality shortterm liquid investments increase cash equivalents fiscal 2012 primarily attributable net cash provided operating activities 12 billion net proceeds 290 million sale repayment notes fiscal 2012 deployed 450 million cash share repurchases 300 million dividends 263 million capital expenditures 174 million acquisitions fiscal 2011 deployed 23 billion cash acquisitions 291 million capital expenditures 274 million dividends 270 million share repurchases fiscal 2011 received 706 million proceeds sale remaining investment carefusion common stock fiscal 2010 deployed 350 million cash repay floating rate notes maturity 260 million capital expenditures 253 million dividends 230 million share repurchases fiscal 2010 completed 11 billion debt tender using portion 14 billion cash distributed us carefusion connection spinoff also received 271 million proceeds sale investment carefusion common stock 154 million divestitures use days sales outstanding “dso” days inventory hand “dioh” days payable outstanding “dpo” evaluate working capital performance dso calculated trade receivables net divided average daily revenue last month reporting period dioh calculated inventories divided average daily cost products sold chargeback billings last quarter reporting period dpo calculated accounts payable divided average daily cost products sold chargeback billings last quarter reporting period chargeback billings difference product’s wholesale acquisition cost contract price established vendors end customer changes working capital vary significantly depending factors timing inventory purchases customer payments accounts receivable payments vendors regular course business dso increased fiscal 2012 result medical segments business transformation project implementation led increase trade receivables june 30 2012 dioh increased fiscal 2012 result inventory increases related onboarding new pharmaceutical customer medical segments business transformation project implementation increase dso fiscal 2011 driven impact acquisitions increase dpo due timing payments vendors regular course business cash equivalents balance end fiscal 2012 included 380 million cash held subsidiaries outside united states although vast majority cash available repatriation permanently bringing money united states could trigger us federal state local income tax obligations us parent company may temporarily access cash held foreign subsidiaries without becoming subject us federal income tax intercompany loans fiscal 2013 expect two matters adversely affect operating cash flows approximately 500 million compared fiscal 2012 specifically anticipate make cash payments irs work reach resolution audits fiscal 2003 2005 however provide assurance regarding likelihood timing reaching resolution also expect negative working capital impact expiration contract express scripts inc ownership carefusion common stock fiscal 2011 2010 disposed 30 million 11 million shares carefusion common stock cash proceeds 706 million 271 million respectively remaining ownership carefusion credit facilities commercial paper sources liquidity include 15 billion revolving credit facility 950 million committed receivables sales facility program times availability committed receivables sales facility program may less 950 million based receivables concentration limits outstanding eligible receivables balance revolving credit facility expires may 2016 committed receivables sales facility program expires november 2012 also commercial paper program 15 billion backed revolving credit facility outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2012 2011 also outstanding balance revolving credit facility june 30 2012 2011 except 44 million standby letters credit fiscal year revolving credit committed receivables sales facility programs require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2012 compliance financial covenants heldtomaturity investments held high quality investment grade heldtomaturity fixed income debt securities amortized cost basis 72 million 142 million june 30 2012 2011 respectively investments vary maturity date ranging one six months pay interest semiannually longterm obligations june 30 2012 total longterm obligations 29 billion compared 25 billion june 30 2011 may 2012 sold 250 million aggregate principal amount fixed rate notes due 2017 interest 1900 per year “1900 notes” registered offering 1900 notes mature june 15 2017 may 2012 also sold 250 million aggregate principal amount fixed rate notes due 2022 interest 3200 per year “3200 notes” registered offering 3200 notes mature june 15 2022 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness used proceeds repay 206 million 565 notes due june 15 2012 remaining net proceeds used general corporate purposes may include repayment indebtedness including 300 million aggregate principal 550 notes due june 15 2013 capital expenditures capital expenditures fiscal 2012 2011 2010 263 million 291 million 260 million respectively primarily related information technology projects expect capital expenditures fiscal 2013 less fiscal 2012 anticipate able fund expenditures cash provided operating activities fiscal 2013 capital expenditures largely focused information technology projects dividends fiscal 2012 paid quarterly dividends 0215 per share 086 per share annualized basis increase 10 percent fiscal 2011 may 2 2012 board directors approved 10 percent increase quarterly dividend 02375 per share 095 per share annualized basis payable july 15 2012 shareholders record july 1 2012 august 8 2012 board directors approved 112th consecutive regular quarterly dividend payable shareholders record october 1 2012 share repurchases fiscal 2012 2011 repurchased 450 million 250 million common shares respectively june 30 2012 300 million remaining current repurchase authorization expire november 30 2013 august 8 2012 board directors approved new 750 million share repurchase program expires august 31 2015 canceled share repurchase program expire november 30 2013 interest rate currency risk management use foreign currency forward contracts interest rate swaps commodity swaps manage exposure cash flow variability also use foreign currency forward contracts protect value existing foreign currency assets liabilities interest rate swaps protect value debt see item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout managements discussion analysis financial condition results operations referring continuing operations overview healthcare services company providing pharmaceutical medical products services help pharmacies hospitals ambulatory surgery centers clinical laboratories physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality also provide medical products patients home report financial results two segments pharmaceutical medical fiscal 2013 revenue decreased 6 percent 1011 billion largely due previously disclosed expiration pharmaceutical distribution contract express scripts impact brandtogeneric pharmaceutical conversions gross margin increased 8 percent 49 billion reflecting strong performance pharmaceutical segment generic programs operating earnings decreased 44 percent 10 billion earnings continuing operations decreased 69 percent 335 million due 829 million 799 million net tax noncash goodwill impairment charge related nuclear pharmacy services division cash equivalents balance 19 billion june 30 2013 compared 23 billion june 30 2012 decrease cash equivalents fiscal 2013 driven acquisitions 22 billion share repurchases 450 million dividends 353 million offset strong net cash provided operating activities 17 billion net proceeds longterm obligations 981 million plan execute balanced deployment available capital position sustainable competitive advantage enhance shareholder value large customers april 25 2013 announced renewal pharmaceutical distribution contracts cvs accounted approximately 23 percent fiscal 2013 revenue pharmaceutical distribution contract walgreens expire end august 2013 sales walgreens generated approximately 20 percent consolidated revenue fiscal 2013 expect expiration contract adverse impact results operations taking steps reduce costs otherwise mitigate impact expiration walgreens contract fiscal 2014 afterward largely result contract expiration currently expect diluted earnings per share continuing operations grow fiscal 2014 compared fiscal 2013 excluding effects periods restructuring employee severance costs acquisitionrelated costs credits impairments gains losses disposal assets including 829 million nuclear pharmacy services division goodwill impairment charge fiscal 2013 net litigation recoveries charges tax benefits associated items expiration contract also anticipate significant net working capital decrease based reduced inventory accounts receivable partially offset reduced accounts payable based expected working capital decrease factors anticipate expiration walgreens contract result net aftertax benefit cash flow operating activities fiscal 2014 excess 500 million goodwill conjunction preparation consolidated financial statements fiscal year ended june 30 2013 recently completed annual goodwill impairment test perform annually fourth quarter part annual test concluded entire goodwill amount nuclear pharmacy services division impaired resulting noncash impairment charge 829 million 799 million net tax impairment charge impact liquidity cash flows operations compliance debt covenants majority goodwill nuclear pharmacy services division acquired acquisition syncor international corporation fiscal 2003 681 million goodwill excluding impact impairment charge total approximately 10 billion invested capital nuclear pharmacy services division inclusive syncor acquisition accumulated past 12 years previously disclosed quarterly reports form 10q quarters ended december 31 2012 march 31 2013 nuclear pharmacy services division experienced significant softness lowenergy diagnostics market second half fiscal 2013 experienced sustained volume declines price erosion core lowenergy products provided division addition experienced reduced sales existing highenergy diagnostic products slowerthanexpected adoption new highenergy diagnostic products recent reimbursement developments may adversely impact future growth products using information adjusted outlook longterm business plans division annual budgeting process recently concluded update resulted significant reductions anticipated future cash flows estimated fair value reporting unit see note 5 “notes consolidated financial statements” additional information restructuring january 30 2013 announced restructuring plan within medical segment restructuring plan moving production procedure kits facility waukegan illinois facilities selling property consolidating office space waukegan illinois addition reorganized medical segment plan sell sterilization processes el paso texas estimate total costs associated restructuring plan approximately 79 million pretax basis 51 million recognized fiscal 2013 estimated 28 million remaining costs recognized end fiscal 2014 estimate approximately 3 million employeerelated costs 11 million facility exit costs 14 million expected loss disposal property waukegan illinois described evaluated property determined june 30 2013 meet criteria classification held sale costs recognized 2013 classified restructuring employee severance impairments loss disposal assets consolidated statements earnings cardinal health inc subsidiaries financial review continued expect start realizing cost savings benefits plan fiscal 2014 acquisitions march 18 2013 completed acquisition assuramed 207 billion net cash acquired allcash transaction funded acquisition issuance 13 billion fixed rate notes cash hand acquisition assuramed provider medical supplies homecare providers patients home expands ability serve patient base expect amortization acquisitionrelated intangible assets significant expense future periods excluding impact amortization acquisitionrelated intangible assets acquisition positive impact operating earnings fiscal 2013 expect positive impact operating earnings future periods see note 2 “notes consolidated financial statements” additional information assuramed acquisition trends within pharmaceutical segment expect continued strength generic pharmaceutical programs well continued price appreciation branded pharmaceutical products fiscal 2014 within medical segment variability cost commodities oilbased resins cotton latex diesel fuel commodities significant impact cost products sold although commodity prices fluctuate expect changes commodity prices significant impact yearoveryear results operations fiscal 2014 also expect continuation relatively flat proceduralbased utilization fiscal 2014 results operations revenue fiscal 2013 compared fiscal 2012 pharmaceutical segment revenue fiscal 2013 compared prior year negatively impacted expiration september 30 2012 pharmaceutical distribution contract express scripts approximately 67 billion revenue classified bulk sales revenue existing pharmaceutical distribution customers decreased approximately 36 billion primarily result brandtogeneric pharmaceutical conversions brandtogeneric pharmaceutical conversions impact revenue generic pharmaceuticals generally sell lower price corresponding brand product customers primarily source generic products directly manufacturers rather us decrease partially offset increased pharmaceutical distribution revenue new customers approximately 38 billion revenue growth within specialty solutions division 961 million revenue bulk sales 298 billion 402 billion fiscal 2013 2012 respectively bulk sales fiscal 2013 decreased 26 percent driven primarily expiration contract express scripts brandtogeneric conversions revenue nonbulk sales 613 billion 577 billion fiscal 2013 2012 respectively nonbulk sales fiscal 2013 increased 6 percent driven growth new customers see “item 1 business” information bulk nonbulk sales light reduction bulk sales expiration pharmaceutical distribution contract walgreens expect distinction revenue profit bulk sales meaningful future expect present separate information bulk nonbulk sales investors medical segment revenue fiscal 2013 compared prior year reflects benefit acquisitions 459 million fiscal 2012 compared fiscal 2011 pharmaceutical segment revenue positively impacted fiscal 2012 compared prior year acquisitions 23 billion increased sales existing customers 20 billion medical segment revenue positively impacted fiscal 2012 compared prior year increased volume existing customers 335 million including positive impact sales selfmanufactured private brand products transition fourth quarter fiscal 2011 relationship carefusion feeforservice arrangement traditional distribution model 131 million cost products sold consistent change revenue cost products sold decreased 68 billion 7 percent fiscal 2013 increased 45 billion 5 percent fiscal 2012 see gross margin discussion additional drivers impacting cost products sold gross margin fiscal 2013 compared fiscal 2012 gross margin increased fiscal 2013 compared prior year driven strong performance generic pharmaceutical programs 350 million acquisitions 131 million increased margin branded pharmaceutical distribution agreements exclusive related volume impact also positive impact gross margin 81 million pricing changes including rebates exclusive related volume impact adversely impacted gross margin 211 million driven part customer product mix adverse impact pricing changes offset sourcing programs sources margin result significant market softness gross margin nuclear pharmacy services division decreased 71 million fiscal 2013 cost oilbased resins cotton latex commodities used medical segment selfmanufactured products slightly favorable impact gross margin described expiration cardinal health inc subsidiaries financial review continued express scripts contract resulted lower revenue slightly unfavorable impact gross margin fiscal 2012 compared fiscal 2011 gross margin increased fiscal 2012 compared prior year primarily due strong performance generic pharmaceutical programs 344 million including impact new product launches price appreciation specific products acquisitions 137 million favorable medical segment product sales mix increased sales volume resulted 100 million favorable impact gross margin pricing changes including rebates exclusive related volume impact adversely impacted gross margin 205 million adverse impact pricing changes offset sourcing programs sources margin increased cost oilbased resins cotton latex commodities used medical segment selfmanufactured products decreased gross margin 66 million distribution selling general administrative sga expenses sga expenses increased 2013 fiscal 2012 primarily due acquisitions 84 million investment spending 17 million increased sga expenses fiscal 2012 fiscal 2011 primarily due acquisitions 65 million business system investments including medical segment business transformation project segment profit consolidated operating earnings segment profit evaluate segment performance based upon segment profit among measures segment profit segment revenue less segment cost products sold less segment sga expenses allocate restructuring employee severance acquisitionrelated costs impairments loss disposal assets litigation recoveriescharges net certain investment spending segments costs retained corporate investment spending generally includes first year spend certain projects require incremental investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate see note 14 notes consolidated financial statements additional information segment profit pharmaceutical segment profit principal drivers increase fiscal 2013 fiscal 2012 strong performance generic pharmaceutical programs increased margin branded pharmaceutical distribution agreements benefits partially offset unfavorable impact pharmaceutical distribution pricing changes significant market softness nuclear pharmacy services division principal drivers increase fiscal 2012 fiscal 2011 strong performance generic pharmaceutical programs including impact new product launches positive impact acquisitions offset unfavorable impact pharmaceutical distribution pricing changes segment profit bulk sales decreased 36 million fiscal 2013 compared fiscal 2012 7 percent 10 percent pharmaceutical segment profit fiscal 2013 2012 respectively segment profit nonbulk sales increased 212 million fiscal 2013 fiscal 2012 93 percent 90 percent pharmaceutical segment profit fiscal 2013 2012 respectively generic pharmaceutical programs discussed primarily impacted segment profit nonbulk sales medical segment profit principal drivers increase fiscal 2013 fiscal 2012 positive impact acquisitions decreased cost commodities used selfmanufactured products partially offset unfavorable impact pricing changes driven part customer product mix segment profit also moderated softness proceduralbased utilization 23 percent excise tax certain manufactured imported medical devices became effective january 1 2013 slightly unfavorable impact segment profit principal drivers decrease fiscal 2012 fiscal 2011 increased cost commodities used selfmanufactured products increase sga expenses including impact business system investments items partially offset favorable impact product sales mix increased net sales volume corporate discussed principal driver decrease corporate fiscal 2013 829 million noncash goodwill impairment charge related nuclear pharmacy services division addition costs allocated segments consolidated operating earnings addition revenue gross margin sga expenses discussed operating earnings impacted following cardinal health inc subsidiaries financial review continued restructuring employee severance addition restructuring activities fiscal 2013 recognized 30 million employeerelated costs 10 million facility exit costs related restructuring within medical segment also recognized 11 million employeerelated costs part restructuring plan within nuclear pharmacy services division fourth quarter fiscal 2013 acquisitionrelated costs acquisitionrelated costs fiscal 2013 included transaction costs associated purchase assuramed 20 million additionally amortization acquisitionrelated intangible assets 118 million 78 million 67 million fiscal 2013 2012 2011 respectively increase amortization fiscal 2013 primarily due intangible assets acquisition assuramed acquisitionrelated costs fiscal 2012 included income recognized upon adjustment contingent consideration obligation incurred connection p4 healthcare acquisition 71 million early fiscal 2013 terminated settled remaining contingent consideration obligation 4 million impairments loss disposal assets fourth quarter fiscal 2013 recognized 829 million 799 million net tax noncash goodwill impairment charge related nuclear pharmacy services division discussed overview section note 5 notes consolidated financial statements connection medical segment restructuring plan discussed note 3 fiscal 2013 recognized 11 million loss write gamma sterilization assets el paso texas estimated fair value less costs sell also fiscal 2013 recorded 8 million writeoff commercial software development within pharmaceutical segment connection decision discontinue project fiscal 2012 recorded charge 16 million write indefinitelife intangible asset related p4 healthcare trade name litigation recoveriescharges net fiscal 2013 recognized 38 million income resulting settlements class action antitrust claims class member earnings income taxes discontinued operations addition items discussed earnings income taxes discontinued operations impacted following interest expense net increase interest expense net fiscal 2013 fiscal 2012 primarily due 13 billion notes issued connection assuramed acquisition gain sale investment carefusion recognized 75 million income fiscal 2011 related sale investment carefusion common stock provision income taxes generally fluctuations effective tax rate due changes within international united states state effective tax rates resulting business mix discrete items reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows see note 7 notes consolidated financial statements detailed disclosure effective tax rate reconciliation fiscal 2013 compared fiscal 2012 fiscal 2013 effective tax rate unfavorably impacted 332 percentage points 295 million due nondeductibility substantially goodwill impairment partially offset favorable impact revaluation deferred tax liability related interest unrepatriated foreign earnings result agreement tax authorities 64 million 72 percentage points fiscal 2012 compared fiscal 2011 fiscal 2012 effective tax rate favorably impacted settlement fiscal 2001 2002 irs audits 40 million 24 percentage points yearoveryear comparison effective tax rate unfavorably impacted release fiscal 2011 previously established deferred tax valuation allowance ongoing audits irs currently conducting audits fiscal years 2003 2010 received proposed adjustments irs fiscal years 2003 2007 related transfer pricing arrangements foreign domestic subsidiaries irs proposed additional taxes 399 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement entered connection carefusion spinoff 142 million total amount disagree proposed adjustments contesting accounted unrecognized tax benefits related irs also proposed additional taxes 450 million excluding penalties interest related transfer intellectual property among subsidiaries acquired entity prior acquisition us carefusion would liable tax matters agreement fourth quarter fiscal 2013 carefusion settled cardinal health inc subsidiaries financial review continued matter irs adjusted indemnification receivable recorded matter settlement net impact provision income taxes liquidity capital resources currently believe based upon available capital resources cash hand access committed credit facilities projected operating cash flow adequate capital resources fund working capital needs currently anticipated capital expenditures business growth expansion contractual obligations payments tax settlements current projected debt service requirements dividends share repurchases fiscal 2013 completed acquisition assuramed funded issuance 13 billion fixed rate notes cash hand addition several small acquisitions funded cash hand decide engage one additional acquisitions depending size timing transactions may need access capital addition cash hand cash equivalents cash equivalents balance 19 billion june 30 2013 compared 23 billion june 30 2012 june 30 2013 cash equivalents held cash depository accounts major banks invested high quality shortterm liquid investments decrease cash equivalents fiscal 2013 driven acquisitions 22 billion share repurchases 450 million dividends 353 million offset strong net cash provided operating activities 17 billion net proceeds longterm obligations 981 million net cash provided operating activities 17 billion driven primarily increased gross margin product mix working capital changes expected increase partially offset adverse impact cash tax payments expiration pharmaceutical distribution contract express scripts fiscal 2012 deployed 450 million cash share repurchases 300 million dividends 263 million capital expenditures 174 million acquisitions fiscal 2012 received net proceeds longterm obligations 290 million fiscal 2011 deployed 23 billion cash acquisitions 291 million capital expenditures 274 million dividends 270 million share repurchases fiscal 2011 received 706 million proceeds sale remaining investment carefusion common stock use days sales outstanding “dso” days inventory hand “dioh” days payable outstanding “dpo” evaluate working capital performance dso calculated trade receivables net divided quarterly revenue divided 90 days dioh calculated inventories net divided quarterly cost products sold plus chargeback billings divided 90 days dpo calculated accounts payable divided quarterly cost products sold plus chargeback billings divided 90 days chargeback billings difference product’s wholesale acquisition cost contract price chargeback billings 43 billion 40 billion 36 billion fiscal 2013 2012 2011 respectively beginning first quarter fiscal 2013 changed method calculating dso order align 90day convention use calculation dioh dpo prior change calculated dso dividing trade receivables net monthly revenue divided 30 days connection change revised prioryear information conform new method calculating dso changes working capital vary significantly depending factors timing inventory purchases customer payments accounts receivable payments vendors regular course business dso dioh increased fiscal 2013 fiscal 2012 primarily result expiration pharmaceutical distribution contract express scripts dpo increased primarily due expiration pharmaceutical distribution contract express scripts brandtogeneric conversions dso increased fiscal 2012 fiscal 2011 due implementation medical segments business transformation project led increase trade receivables june 30 2012 dioh increased fiscal 2012 result inventory increases related onboarding new pharmaceutical customer medical segments business transformation project implementation cash equivalents balance june 30 2013 included 428 million cash held subsidiaries outside united states although vast majority cash available repatriation permanently bringing money united states could trigger us federal state local income tax obligations us parent company may temporarily access cash held foreign subsidiaries without becoming subject us federal income tax intercompany loans expiration walgreens contract fiscal 2014 anticipate significant net working capital decrease based reduced inventory accounts receivable partially offset reduced accounts payable based expected working capital decrease factors anticipate expiration walgreens contract result net aftertax benefit cash flow operating activities fiscal 2014 excess 500 million credit facilities commercial paper sources liquidity include 15 billion revolving credit facility 950 million committed receivables sales facility program times availability committed receivables sales facility program may less 950 million based receivables concentration limits outstanding eligible receivables balance also commercial paper program 15 billion backed revolving credit facility outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2013 2012 also outstanding balance revolving credit facility june 30 2013 2012 except 43 million 44 million respectively standby letters credit year revolving credit facility committed receivables sales facility program require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2013 compliance financial covenants november 6 2012 renewed 950 million committed cardinal health inc subsidiaries financial review continued receivables sales facility program november 6 2014 following expiration pharmaceutical distribution contract walgreens expect availability committed receivables sales facility program less 950 million based outstanding eligible receivables balance june 4 2013 extended term 15 billion revolving credit facility june 4 2018 longterm obligations june 30 2013 total longterm obligations 39 billion compared 29 billion june 30 2012 february 19 2013 sold registered offering 400 million aggregate principal amount 17 notes mature march 15 2018 550 million aggregate principal amount 32 notes mature march 15 2023 350 million aggregate principal amount 46 notes mature march 15 2043 used cash hand repay 300 million 55 notes due june 15 2013 funding assuramed acquisition funded acquisition assuramed issuance 13 billion notes described cash hand obtained commitment letter february 2013 certain financial institutions 13 billion unsecured bridge term loan facility could used complete acquisition incurred fees 5 million related facility included interest expense net amounts drawn facility terminated commitment letter connection notes offering capital expenditures capital expenditures fiscal 2013 2012 2011 195 million 263 million 291 million respectively primarily related information technology projects expect capital expenditures fiscal 2014 245 million 265 million dividends fiscal 2013 paid quarterly dividends totaling 1025 per share increase 19 percent fiscal 2012 may 1 2013 board directors approved 10 percent increase quarterly dividend 03025 per share 121 per share annualized basis payable july 15 2013 shareholders record july 1 2013 august 7 2013 board directors approved 116th consecutive regular quarterly dividend payable shareholders record october 1 2013 share repurchases fiscal 2013 repurchased 450 million common shares funded repurchases cash hand june 30 2013 400 million remaining current repurchase authorization expires august 31 2015 interest rate currency risk management use interest rate swaps foreign currency forward contracts commodity swaps manage exposure cash flow variability also use interest rate swaps protect value debt foreign currency forward contracts protect value existing foreign currency assets liabilities see item 7aitem 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout managements discussion analysis financial condition results operations referring continuing operations overview healthcare services company providing pharmaceutical medical products services help pharmacies hospitals healthcare providers focus patient care reducing costs enhancing efficiency improving quality also provide medical products patients home report financial results two segments pharmaceutical medical fiscal 2014 revenue decreased 10 percent 911 billion largely due previously disclosed expiration pharmaceutical distribution contract walgreen co walgreens august 31 2013 gross margin increased 5 percent 52 billion reflecting positive impact acquisitions strong performance generic programs offset part impact walgreens contract expiration operating earnings increased 19 billion earnings continuing operations increased 12 billion due primarily 829 million 799 million net tax noncash goodwill impairment charge related nuclear pharmacy services division fiscal 2013 cash equivalents balance 29 billion june 30 2014 compared 19 billion june 30 2013 increase cash equivalents fiscal 2014 driven net cash provided operating activities 25 billion includes decrease net working capital associated walgreens contract expiration net cash provided operating activities deployed share repurchases 673 million acquisitions 519 million dividends 415 million plan continue execute balanced deployment available capital position sustainable competitive advantage enhance shareholder value walgreens contract walgreens contract expiration unfavorably impacted periodoverperiod comparisons revenue operating earnings fiscal 2014 favorably affected net cash provided operating activities due significant reduction net working capital revenue walgreens 33 billion first quarter fiscal 2014 expect contract expiration adverse impact periodoverperiod comparisons revenue operating earnings first quarter fiscal 2015 joint venture cvs caremark july 2014 established red oak sourcing llc “red oak sourcing” usbased generic pharmaceutical sourcing entity cvs caremark corporation “cvs” initial term 10 years companies contributed sourcing supply chain expertise 5050 joint venture committed source generic pharmaceuticals arrangements negotiated red oak sourcing negotiate generic pharmaceutical supply contracts behalf companies products hold inventory behalf either company required pay 39 quarterly payments 256 million cvs commencing october 2014 certain milestones achieved pay additional predetermined amounts cvs beginning fiscal 2016 fixed payments 256 million expensed evenly commencing rampup venture expect begin end first quarter fiscal 2015 physical assets contributed either company red oak sourcing minimal funding provided capitalize entity acquisitions completed several acquisitions since july 1 2011 largest assuramed inc assuramed fiscal 2013 access closure inc accessclosure fiscal 2014 may 9 2014 completed acquisition accessclosure 320 million allcash transaction funded acquisition cash hand acquisition accessclosure manufacturer distributor extravascular closure devices expands medical segments portfolio selfmanufactured products march 18 2013 completed acquisition assuramed 207 billion net cash acquired allcash transaction funded acquisition issuance 13 billion fixed rate notes cash hand acquisition assuramed provider medical supplies homecare providers patients home expands medical segments ability serve patient base assuramed division known cardinal health home division home division acquisition increased revenue operating earnings fiscal 2014 increase amortization acquisitionrelated costs fiscal 2014 primarily due intangible assets acquisition expect amortization acquisitionrelated intangible assets continue significant expense future periods see note 2 notes consolidated financial statements additional information acquisitions cardinal health inc subsidiaries financial review continued goodwill part annual goodwill impairment test fiscal 2013 concluded entire goodwill amount nuclear pharmacy services division impaired resulting noncash impairment charge 829 million 799 million net tax impairment charge impact liquidity cash flows operations compliance debt covenants see note 5 “notes consolidated financial statements” additional information restructuring january 30 2013 announced restructuring plan within medical segment restructuring plan among things reorganized medical segment moved production procedure kits facility waukegan illinois facilities consolidated office space waukegan illinois addition selling property waukegan illinois exiting gamma sterilization business el paso texas currently estimate total costs associated restructuring plan approximately 74 million pretax basis 18 million 51 million recognized fiscal 2014 fiscal 2013 respectively trends within pharmaceutical segment pharmaceutical price appreciation generic products positively impacted margins fiscal 2014 frequency magnitude future generic product price appreciation uncertain impact earnings may less fiscal 2015 fiscal 2014 results operations revenue fiscal 2014 compared fiscal 2013 pharmaceutical segment revenue fiscal 2014 compared fiscal 2013 negatively impacted walgreens contract expiration 169 billion expiration pharmaceutical distribution contract express scripts inc express scripts september 30 2012 20 billion decrease partially offset sales growth existing pharmaceutical distribution customers 71 billion medical segment revenue fiscal 2014 compared fiscal 2013 reflects benefit acquisitions 816 million fiscal 2013 compared fiscal 2012 pharmaceutical segment revenue fiscal 2013 compared fiscal 2012 negatively impacted expiration pharmaceutical distribution contract express scripts approximately 67 billion revenue existing pharmaceutical distribution customers decreased approximately 36 billion primarily result brandtogeneric pharmaceutical conversions decrease partially offset increased pharmaceutical distribution revenue new customers approximately 38 billion revenue growth within specialty solutions division 961 million medical segment revenue fiscal 2013 compared fiscal 2012 reflects benefit acquisitions 459 million cost products sold result factors affecting change revenue cost products sold decreased 102 billion 11 percent 68 billion 7 percent fiscal 2014 fiscal 2013 respectively see gross margin discussion additional drivers impacting cost products sold gross margin fiscal 2014 compared fiscal 2013 gross margin increased fiscal 2014 compared fiscal 2013 240 million reflecting positive impact acquisitions 221 million gross margin fiscal 2014 positively impacted 32 million due sales growth primarily reflects growth existing customers largely offset impact walgreens contract expiration gross margin rate apart impact walgreens contract expiration flat fiscal 2014 gross margin rate positively impacted strong performance generic programs including impact generic pharmaceutical price appreciation adversely impacted customer pricing changes fiscal 2013 compared fiscal 2012 gross margin increased fiscal 2013 compared fiscal 2012 driven strong performance generic pharmaceutical programs 350 million acquisitions 131 million increased margin branded pharmaceutical distribution agreements exclusive related volume impact also positive impact gross margin 81 million pricing changes including rebates exclusive related volume impact adversely impacted gross margin 211 million driven part customer product mix adverse impact cardinal health inc subsidiaries financial review continued pricing changes offset sourcing programs sources margin result significant market softness gross margin nuclear pharmacy services division decreased 71 million fiscal 2013 distribution selling general administrative sga expenses sga expenses increased fiscal 2014 fiscal 2013 primarily due acquisitions 129 million sga expenses increased fiscal 2013 fiscal 2012 primarily due acquisitions 84 million investment spending 17 million segment profit consolidated operating earnings segment profit evaluate segment performance based upon segment profit among measures see note 15 notes consolidated financial statements additional information segment profit pharmaceutical segment profit increase fiscal 2014 fiscal 2013 reflected positive impact sales growth primarily reflects growth existing customers largely offset impact walgreens contract expiration impact gross margin rate apart impact walgreens contract expiration flat fiscal 2014 gross margin rate positively impacted strong performance generic programs including impact generic pharmaceutical price appreciation adversely impacted customer pricing changes principal drivers increase fiscal 2013 fiscal 2012 strong performance generic pharmaceutical programs increased margin branded pharmaceutical distribution agreements benefits partially offset unfavorable impact pharmaceutical distribution pricing changes significant market softness nuclear pharmacy services division medical segment profit principal driver increase fiscal 2014 fiscal 2013 positive impact acquisitions principal drivers increase fiscal 2013 fiscal 2012 positive impact acquisitions decreased cost commodities used selfmanufactured products partially offset unfavorable impact pricing changes driven part customer product mix segment profit also moderated softness proceduralbased utilization 23 percent excise tax certain manufactured imported medical devices became effective january 1 2013 slightly unfavorable impact segment profit corporate discussed principal driver change corporate fiscal 2014 fiscal 2013 829 million noncash goodwill impairment charge recognized fiscal 2013 related nuclear pharmacy services division consolidated operating earnings addition revenue gross margin sga expenses discussed operating earnings impacted following restructuring employee severance addition restructuring activities fiscal 2014 2013 recognized restructuring costs 10 million 40 million respectively related restructuring plan medical segment also recognized 11 million employeerelated costs related restructuring plan within nuclear pharmacy services division fourth quarter fiscal 2013 amortization acquisitionrelated costs amortization acquisitionrelated intangible assets 187 million 118 million 78 million fiscal 2014 2013 2012 respectively increase amortization 2014 2013 primarily due intangible assets acquisition assuramed also recognized transaction costs associated purchase assuramed 20 million fiscal 2013 amortization acquisitionrelated costs fiscal 2012 included income recognized upon adjustment contingent consideration obligation incurred connection healthcare solutions holding llc p4 healthcare acquisition 71 million early fiscal 2013 terminated settled remaining contingent consideration obligation 4 million cardinal health inc subsidiaries financial review continued impairments loss disposal assets fiscal 2014 recognized 8 million loss write property waukegan illinois connection medical segment restructuring plan also connection medical segment restructuring plan fiscal 2013 recognized 11 million loss write gamma sterilization assets el paso texas fiscal 2013 recognized 829 million 799 million net tax goodwill impairment charge related nuclear pharmacy services division discussed overview section note 5 notes consolidated financial statements also recognized 8 million loss fiscal 2013 write commercial software development within pharmaceutical segment fiscal 2012 recognized 16 million loss write indefinitelife intangible asset related p4 healthcare trade name litigation recoveriescharges net recognized income resulting settlements class action antitrust claims class member 24 million 38 million fiscal 2014 2013 respectively earnings income taxes discontinued operations addition items discussed earnings income taxes discontinued operations impacted following income net income net fiscal 2014 included 32 million pretax gain related sale minority equity interests two investments interest expense net increase interest expense net fiscal 2014 2013 primarily due 13 billion notes issued connection assuramed acquisition fiscal 2013 provision income taxes generally fluctuations effective tax rate due changes within international us state effective tax rates resulting business mix discrete items reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows see note 8 notes consolidated financial statements detailed disclosure effective tax rate reconciliation fiscal 2014 compared fiscal 2013 fiscal 2014 effective tax rate impacted net favorable discrete items 37 million reduced rate 21 percentage points discrete items include favorable impact settlement federal state tax controversies 80 million release valuation allowances 12 million unfavorable impact remeasurement unrecognized tax benefits 65 million primarily result proposed assessments additional tax fiscal 2013 compared fiscal 2012 fiscal 2013 effective tax rate unfavorably impacted 332 percentage points 295 million due nondeductibility substantially goodwill impairment partially offset favorable impact revaluation deferred tax liability related interest unrepatriated foreign earnings result agreement tax authorities 64 million 72 percentage points ongoing audits fiscal 2014 us internal revenue service irs closed audits fiscal years 2003 2005 irs currently conducting audits fiscal years 2006 2010 liquidity capital resources currently believe based upon available capital resources cash hand access committed credit facilities projected operating cash flow adequate capital resources fund working capital needs currently anticipated capital expenditures business growth expansion contractual obligations tax payments current projected debt service requirements dividends share repurchases decide engage one additional cardinal health inc subsidiaries financial review continued acquisitions depending size timing transactions may need access capital addition cash hand existing committed credit facilities cash equivalents cash equivalents balance 29 billion june 30 2014 compared 19 billion june 30 2013 june 30 2014 cash equivalents held cash depository accounts major banks invested high quality shortterm liquid investments increase cash equivalents fiscal 2014 driven net cash provided operating activities 25 billion deployed share repurchases 673 million acquisitions 519 million dividends 415 million anticipated net cash provided operating activities benefited net working capital decrease excess 500 million result walgreens contract expiration fiscal 2013 deployed 22 billion cash acquisitions 450 million share repurchases 353 million dividends fiscal 2013 received net proceeds longterm obligations 981 million fiscal 2012 deployed 450 million cash share repurchases 300 million dividends 260 million capital expenditures 174 million acquisitions fiscal 2012 received net proceeds longterm obligations 290 million working capital vary significantly depending factors customer payments accounts receivable timing inventory purchases payments vendors regular course business decrease net working capital june 30 2014 compared june 30 2013 primarily result walgreens contract expiration cash equivalents balance june 30 2014 included 420 million cash held subsidiaries outside united states although vast majority cash available repatriation permanently bringing money united states could trigger us federal state local income tax obligations us parent company may temporarily access cash held foreign subsidiaries without becoming subject us federal income tax intercompany loans credit facilities commercial paper october 15 2013 reduced committed receivables sales facility program cardinal health funding llc chf 950 million 700 million light walgreens contract expiration addition committed receivables sales facility program sources liquidity include 15 billion revolving credit facility commercial paper program 15 billion backed revolving credit facility outstanding balance revolving credit facility june 30 2014 2013 except standby letters credit zero 43 million june 30 2014 2013 respectively outstanding borrowings commercial paper program june 30 2014 2013 outstanding balance committed receivables sales facility program june 30 2014 2013 except standby letters credit 41 million zero june 30 2014 2013 respectively revolving credit facility committed receivables sales facility program require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2014 compliance financial covenants availableforsale securities fiscal 2014 purchased 100 million marketable securities classified availableforsale longterm obligations shortterm borrowings june 30 2014 total longterm obligations shortterm borrowings 40 billion compared 39 billion june 30 2013 capital expenditures capital expenditures fiscal 2014 2013 2012 249 million 195 million 260 million respectively expect capital expenditures fiscal 2015 335 million 365 million primarily growth projects core businesses well information technology projects dividends fiscal 2014 paid quarterly dividends totaling 121 per share increase 18 percent fiscal 2013 may 7 2014 board directors approved 13 percent increase quarterly dividend 03425 per share 137 per share annualized basis paid july 15 2014 shareholders record july 1 2014 august 6 2014 board directors approved quarterly dividend 03425 per share 137 per share annualized basis payable october 15 2014 shareholders record october 1 2014 share repurchases fiscal 2014 repurchased 673 million common shares funded repurchases cash hand june 30 2014 727 million remaining current repurchase authorization expires december 31 2016 august 6 2014 board directors authorized additional 10 billion share repurchase program interest rate currency risk management use interest rate swaps foreign currency contracts commodity contracts manage exposure cash flow variability also use interest rate swaps protect value debt foreign currency forward contracts protect cardinal health inc subsidiaries financial review continued value existing foreign currency assets liabilities see item 7anannannannannanitem 7 managements discussion analysis financial condition results operations managements discussion analysis prepared giving retroactive effect poolingofinterests business combination whitmire february 7 1994 see note 3 notes consolidated financial statements see item 6 selected financial data discussion regarding terms used herein periods used combine cardinal whitmire change companys fiscal year discussion analysis presented read conjunction consolidated financial statements related notes appearing report results operations net sales net sales fiscal 1995 increased 35 compared fiscal 1994 due internal business growth 25 acquisition humistonkeeling inc july 1994 merger transaction behrens inc july 1994 see note 3 notes consolidated financial statements 25 increase net sales fiscal 1994 compared fiscal 1993 due internal business growth 20 sales resulting acquisition solomons company may 1993 merger transaction prn services inc december 1993 see note 3 notes consolidated financial statements internal business growth fiscal 1995 fiscal 1994 resulted primarily addition new customers partially result expanded sales territories increased sales existing customers price increases gross margin percentage net sales gross margin declined 595 fiscal 1995 613 fiscal 1994 642 fiscal 1993 decreases gross margin percentages due lower selling margins reflecting competitive market greater mix higher volume customers lower cost distribution better asset management cash flow enable company offer lower selling margins offset 1995 slight increase purchasing gains associated drug price inflation decline gross margin rate moderated 1995 prior fiscal years point gross margin percentage fourth quarter fiscal 1995 approximated comparable quarter fiscal 1994 moderation due primarily stabilization customer mix growth higher margin specialty business units selling general administrative expenses selling general administrative expenses percentage net sales improved consistently 440 fiscal 1993 403 fiscal 1994 385 fiscal 1995 improvements due primarily economies associated companys significant sales growth particularly major customers support costs generally lower consolidating distribution centers administrative functions selectively automating facilities unusual items february 1994 company recorded charge reflect estimated whitmire merger costs approximately 359 million 282 million net tax including fees transaction costs related combination b costs expected incurred connection integration cardinals whitmires business operations estimated costs included approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate integration distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement estimated costs approximately 7 million pertained revaluation certain operating assets 2 million pertained employee relocation retraining termination costs june 30 1995 company incurred actual costs aggregating approximately 269 million relative whitmire merger company anticipates remainder costs expended fiscal 1996 current estimates merger costs ultimately incurred materially different amounts originally recorded fiscal 1993 company received termination fee approximately 135 million resulting termination durrfillauer medical inc agreement merge company also fiscal 1993 company recorded charges totaling approximately 137 million primarily related closing certain noncore operations rationalization standardization improvement selected distribution operations information systems support functions charges included writedown certain assets moving costs associated affected operations modification costs necessary centralize standardize certain information systems support functions june 30 1995 initiatives contemplated substantially completed accordance original plan related funds expended modification terms certain whitmire stock options fiscal 1993 resulted onetime stock option compensation charge approximately 52 million see note 11 notes consolidated financial statements interest expense increase interest expense fiscal 1995 due higher average shortterm borrowings resulting increased working capital requirements associated companys growth portion funds used increased working capital requirements provided proceeds issuance approximately 1867000 companys common shares common shares offering pursuant public offering completed september 26 1994 see note 11 notes consolidated financial statements decrease interest expense fiscal 1994 compared fiscal 1993 due primarily conversion june 1993 debt equity companys 75 million 725 convertible debentures see note 11 notes consolidated financial statements reduced borrowings whitmires revolving credit agreements reduction interest expense fiscal 1994 discussed partially offset increased interest expense resulting sale company 100 million 65 notes february 23 1994 see note 5 notes consolidated financial statements company entered various interest rate swap agreements serve reduce companys aggregate interest cost 100 million 8 notes 8 notes response falling interest rates subsequent issuance 8 notes see note 5 notes consolidated financial statements net effect swap agreements company exchanged fixed rate position 8 notes fixed rate 51 period july 15 1992 march 1 1993 fixed rate 65 period march 2 1993 march 1 1994 thereafter fixed rate 81 march 1 1997 maturity date 8 notes may 1993 two offsetting swap agreements canceled gain loss company provision income taxes companys provision income taxes relative pretax earnings decreased significantly fiscal 1995 compared fiscal 1994 due primarily certain nondeductible costs associated whitmire merger recorded third quarter fiscal 1994 see note 2 notes consolidated financial statements cumulative effect change accounting principle effective beginning fiscal 1993 company adopted statement financial accounting standards 109 accounting income taxes sfas 109 cumulative effect adopting sfas 109 10 million reported change accounting principle retroactive beginning fiscal 1993 10 million cumulative effect resulted primarily fact sfas 109 modifies accounting business combinations recorded using purchase method liquidity capital resources working capital increased 1302 million 6013 million june 30 1995 4711 million june 30 1994 included increased investments merchandise inventories trade receivables 2036 million 1754 million respectively increased holdings cash equivalents marketable securities 83 million decrease notes payablebanks 220 million offset primarily increase accounts payable 2536 million increase accrued liabilities 265 million increases merchandise inventories accounts payable reflect timing seasonal purchases related payments companys internal growth current year business combinations see note 3 notes consolidated financial statements increase cash equivalents well decrease notes payablebanks reflect timing seasonal purchases payments noted partial use proceeds common shares offering see interest expense increase trade receivables due primarily increased sales see net sales current year business combinations completed fiscal 1995 see note 3 notes consolidated financial statements increase accrued liabilities primarily due income tax liability arising current year net earnings property equipment net accumulated depreciation amortization increased 352 million increase reflects companys continuing investment management information systems including customer support systems upgrade automation distribution facilities shareholders equity increased 5482 million june 30 1995 3685 million june 30 1994 due primarily common shares offering 705 million b net earnings company approximately 850 million c recording tax benefits related restricted stock exercise stock options approximately 181 million addition behrens inc shareholders equity approximately 98 million see note 3 notes consolidated financial statements offset primarily dividends paid company approximately 49 million company lineofcredit agreements various bank sources aggregating 325 million 100 million represented committed lineofcredit agreements balance uncommitted company drawn upon 30 million available linesofcredit june 30 1995 leaving 322 million available companys existing lineofcredit agreements june 30 1995 company capacity offer public debt securities 200 million pursuant shelf registrations filed securities exchange commission company believes adequate capital resources disposal meet currently anticipated capital expenditures routine business growth expansion current projected debt service august 26 1995 company signed definitive agreement medicine shoppe international inc medicine shoppe franchisor independent retail pharmacies terms transaction shareholders medicine shoppe receive company common shares exchange common shares medicine shoppe company issue approximately 60 million 68 million common shares transaction depending part upon average closing price company common shares specified period certain circumstances company could issue approximately 72 million company common shares transaction subject certain conditions including approval medicine shoppe shareholders expected accounted poolingofinterests item 8item 7 management’s discussion analysis financial condition results operations discussion analysis presented refers read conjunction consolidated financial statements related notes included form 10k unless otherwise indicated throughout management’s discussion analysis financial condition results operations discussion matters company’s consolidated financial statements refers continuing operations company overview strategic overview cardinal health inc “company” approximately 100 billion global company serving healthcare industry products services help hospitals physician offices pharmacies reduce costs improve safety productivity deliver better care patients spinoff carefusion corporation 2008 management cardinal health commenced review longterm strategy cardinal health’s businesses september 29 2008 company announced intended separate clinical medical products businesses pro rata distribution shareholders “distribution” “spinoff” common stock wholly owned subsidiary carefusion corporation “carefusion” formed purpose holding majority clinical medical products businesses spinoff company retain certain surgical exam gloves surgical drapes apparel fluid management businesses previously part clinical medical products segment carefusion manufactures medication infusion dispensing products respiratory equipment surgical instruments leading technologies services help hospitals prevent medication errors reduce hospitalacquired infections manage medications supplies efficiently carefusion products provide protection medication errors using alaris® infusion devices pyxis® medication dispensing systems infection prevention products include convertors® brand surgical gowns esteem® brand medical gloves chloraprep® brand preoperative skin preparation products well electronic infection surveillance medmined® services carefusion also leads respiratory care category avea® respirators leading ventilation brands july 10 2009 company’s board directors approved distribution shareholders 801 shares carefusion common stock basis 05 shares carefusion common stock common share company distribution made close trading august 31 2009 company’s shareholders record 5 pm eastern daylight time august 25 2009 following spinoff company retain 199 outstanding shares carefusion common stock company required dispose retained shares carefusion common stock within five years distribution subject number conditions including among others • private letter ruling company received irs revoked modified material respect • receipt opinions counsel company effect contribution distribution qualify transaction described sections 355a 368a1d internal revenue code 1986 amended “code” • rating agency action likely result either company carefusion downgraded investment grade • making cash distribution carefusion company prior distribution company cannot assure conditions met company currently anticipates expenditures associated spinoff approximately 261 million pretax basis approximately 113 million incurred fiscal 2009 remainder expected incurred fiscal 2010 beyond expenditures primarily consist functional area separation costs standup costs employeerelated costs onetime transaction related costs approximately 222 million costs expected result cash expenditures approximately 96 million incurred fiscal 2009 company expects fund remainder costs current sources liquidity including cash hand company expects activities connection spinoff completed fiscal 2011 estimated costs include costs expected incurred carefusion following spinoff upon completion spinoff company also expects tax charge approximately 150 million related anticipated repatriation portion cash currently loaned company’s entities within united states reasons spinoff company’s board directors believes separating clinical medical products businesses remainder company best interests company shareholders separation expected • improve strategic planning increase management focus streamline decisionmaking providing flexibility implement unique strategic plans company respond effectively different customer needs company changing economic environment • allow company carefusion adopt capital structure investment policy dividend policy best suited business’ financial profile business needs well resolve current competition capital among company investors • facilitate incentive compensation arrangements employees directly tied performance relevant company’s business enhance employee hiring retention among things improving alignment management employee incentives performance growth objectives time creating independent equity structure facilitate carefusion’s ability effect future acquisitions utilizing common stock company’s board directors considered number potentially negative factors evaluating separation including risks relating creation new public company possible increased costs onetime separation costs concluded potential benefits spinoff outweighed factors significance carefusion company’s consolidated results operations financial position following spinoff historical operating results carefusion businesses reclassified discontinued operations company’s consolidated statement earnings fiscal years ended june 30 2009 2008 2007 carefusion businesses constituted approximately following percentages company’s consolidated operating results june 30 2009 2008 carefusion businesses constituted approximately 28 30 respectively company’s consolidated assets approximately 8 9 respectively company’s consolidated liabilities impact spinoff company’s capital structure subsequent fiscal 2009 company carefusion entered several transactions order establish respective capital structures spinoff immediately prior spinoff carefusion distribute approximately 14 billion cash company order finance distribution july 1 2009 carefusion entered 14 billion senior unsecured bridge loan facility term 364 days date funding subsequently july 14 2009 carefusion obtained permanent financing 14 billion form fixed rate senior notes carefusion able obtain permanent financing prior spinoff bridge loan facility drawn upon terminated upon spinoff net proceeds notes placed escrow account used fund 14 billion cash distribution company august 27 2009 company announced use 12 billion cash distribution fund debt tender offer certain outstanding debt securities 780 debentures due october 15 2016 allegiance corporation 700 debentures due october 15 2026 allegiance corporation tender offer funded company’s cash hand described remainder cash distribution used pay debt maturing second quarter fiscal 2010 see discussion additional detail debt securities subject debt tender offer august 27 2009 company announced commenced cash tender offer aggregate purchase price including early tender premium excluding accrued interest fees expenses 12 billion following series debt securities listed order acceptance priority 780 debentures due october 15 2016 allegiance corporation ii 675 notes due february 15 2011 company iii 600 notes due june 15 2017 company iv 700 debentures due october 15 2026 allegiance corporation v 585 notes due december 15 2017 company vi 580 notes due october 15 2016 company vii 565 notes due june 15 2012 company viii 550 notes due june 15 2013 company ix 400 notes due june 15 2015 company amount series debt securities purchased based 12 billion cap order priority set forth addition company offering purchase 700 debentures due october 15 2026 allegiance corporation aggregate purchase price excluding accrued interest fees expenses 100000000 tender offer company intends fund purchase 780 debentures due october 15 2016 allegiance corporation 700 debentures due october 15 2026 allegiance corporation cash hand 700 debentures due 2026 tendered aggregate purchase price notes would exceed 100 million subject proration debt securities series tendered higher acceptance priority level accepted debt securities series lower acceptance priority level debt securities series lowest acceptance priority level accepted purchase accordance terms conditions tender offer may subject proration described offer purchase related letter transmittal dated august 27 2009 relating tender offer tender offer conditioned upon company’s receipt approximately 14 billion cash distribution carefusion customary conditions set forth offer purchase related letter transmittal tender offer expire september 24 2009 unless extended earlier terminated company relationship company carefusion following spinoff july 22 2009 company carefusion entered separation agreement effect spinoff provide framework relationship company carefusion spinoff addition company enter agreements carefusion including transition services agreement tax matters agreement employee matters agreement intellectual property agreements certain commercial agreements including separation agreement provide allocation company carefusion company’s assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior carefusion’s separation company govern certain relationships company carefusion spinoff company carefusion also enter stockholder’s registration rights agreement pursuant among things carefusion agree upon request company carefusion use commercially reasonable efforts effect registration applicable federal state securities laws shares carefusion common stock retained cardinal health remaining products businesses cardinal health’s supply chain businesses consolidate pharmaceuticals medical products thousands manufacturers sitespecific deliveries retail pharmacies hospitals physician offices surgery centers alternate care facilities cardinal health provides comprehensive financial inventory contract management marketing services cardinal health also largest provider specialized nuclear pharmaceuticals delivering nearly 10 million doses year hospitals outpatient care centers information regarding company’s businesses see “item 1 business” within form 10k financial overview company negatively affected current economic downturn exhibited deferral hospital capital spending affecting clinical medical products segment increased bad debt expense within healthcare supply chain services segment however customer demand within healthcare supply chain services segment remained relatively strong resulting increased revenue slightly increased segment profit fiscal 2009 demand company’s products services fiscal 2009 led revenue 995 billion 9 operating earnings approximately 19 billion 10 fiscal 2009 primarily due increase restructuring expenses 99 million decrease gross margin 53 million net earnings fiscal 2009 12 billion net diluted earnings per common share 318 cash provided operating activities totaled 16 billion fiscal 2009 included cash provided operating activities 123 million settlement proceeds related termination certain fixedtofloating interest rate swaps cash used investing activities 543 million primarily due capital spending 533 million includes 151 million repurchase assets previously operating lease arrangement cash used financing activities 468 million primarily due company’s repayment certain longterm obligations 305 million payment dividends 200 million fourth quarter fiscal 2009 company’s board directors increased regular quarterly dividend 25 0175 per share payable july 15 2009 shareholders record july 1 2009 company anticipates quarterly dividend remain 0175 per share spinoff payment amount future dividends remain however within discretion company’s board directors depend upon company’s future earnings financial condition capital requirements factors fourth quarter fiscal 2009 company committed plans sell united kingdombased martindale injectable manufacturing business “martindale” specialtyscripts llc “specialtyscripts” within healthcare supply chain services segment net assets martindale specialtyscripts presented separately held sale operating results martindale presented within discontinued operations periods presented results specialtyscripts reported within earnings continuing operations company’s consolidated statements earnings consolidated results operations following table summarizes company’s consolidated results operations fiscal years ended june 30 2009 2008 2007 millions except per common share amounts 1 change calculated percentage increase decrease given year compared immediately preceding year 2 equitybased compensation expense 123 million 122 million 138 million respectively fiscal years ended june 30 2009 2008 2007 revenue fiscal 2009 increased 85 billion 9 compared prior year increase due pharmaceutical price appreciation increased volume existing customers combined impact two factors 80 billion addition new customers within healthcare supply chain services segment 954 million impact acquisitions 887 million company uses internal metric “pharmaceutical price appreciation index” evaluate impact pharmaceutical consumer product price appreciation revenue pharmaceutical supply chain business metric calculated using change manufacturer’s published price beginning period compared end period weighted units sold pharmaceutical supply chain business period pharmaceutical price appreciation index 88 trailing twelve months ended june 30 2009 revenue negatively impacted fiscal 2009 loss customers 972 million refer “segment results operations” discussion specific factors affecting revenue company’s reportable segments revenue increased 42 billion 5 fiscal 2008 increase due pharmaceutical price appreciation increased volume existing customers combined impact two factors 49 billion impact acquisitions 817 million new customers 643 million pharmaceutical price appreciation index 77 trailing twelve months ended june 30 2008 revenue negatively impacted fiscal 2008 loss customers 21 billion within healthcare supply chain services segment portion customer losses due dea license suspensions company’s controlled substance antidiversion efforts cost products sold cost products sold increased 86 billion 10 38 billion 5 respectively fiscal years ended june 30 2009 2008 increases cost products sold mainly due respective 9 5 growth revenue fiscal 2009 2008 see “gross margin” discussion additional factors impacting cost products sold gross margin gross margin fiscal 2009 decreased 53 million 1 decline gross margin primarily reflects deferral hospital capital spending alaris product recalls reserves corrective action plan submitted fda hold shipping certain infusion products within clinical medical products segment see note 11 “notes consolidated financial statements” information regarding corrective action plan hold shipping certain infusion products addition gross margin negatively impacted increase customer discounts within healthcare supply chain services segment 356 million increase primarily due increased sales volumes customer repricings gross margin also negatively impacted foreign exchange 99 million gross margin favorably impacted 9 growth revenue included impact acquisitions 157 million gross margin also favorably impacted increased distribution service agreement fees pharmaceutical price appreciation combined impact 164 million increased manufacturer cash discounts 157 million within healthcare supply chain services segment increased distribution service agreement fees manufacturer cash discounts primarily result increased sales volume refer “segment results operations” discussion specific factors affecting gross margin company’s reportable segments due competitive markets company’s businesses operate company expects competitive pricing pressures continue addition company expects certain factors negatively impact fiscal 2010 including timing generic launches price deflation repricing certain customer contracts strategic positioning moves repositioning medicine shoppe transitioning significant vendor relationship distribution service agreement gross margin increased 382 million 7 fiscal 2008 increase gross margin primarily due 5 growth revenue includes impact acquisitions 332 million primarily viasys acquisition factors favorably impacting gross margin included increased sales clinical medical products related services 152 million increased manufacturer cash discounts 72 million distribution service agreement fees pharmaceutical price appreciation combined impact 84 million foreign exchange 59 million gross margin negatively impacted primarily increase customer discounts within healthcare supply chain servicespharmaceutical segment 307 million result repricing several large customer contracts increased sales bulk customers also negatively impacting gross margin decrease sales nonbulk customers selling general administrative expenses sga expenses fiscal 2009 increased 48 million 1 driven impact acquisitions net divestitures 69 million increased bad debt expense 40 million driven general economic conditions impacting certain customers bankruptcy filings four regional chain customers within healthcare supply chain services segment company continuing closely monitor portfolio outstanding accounts receivable identify mitigate customer credit risk however future results could adversely impacted deterioration financial condition one large customers increases sga expenses largely offset cost control initiatives refer “segment results operations” discussion specific factors affecting sga expenses company’s reportable segments sga expenses increased 329 million 11 fiscal 2008 primarily support revenue growth includes impact acquisitions 262 million sga expenses favorably impacted yearoveryear reduction incentive compensation expense 46 million equitybased compensation expense 16 million fiscal 2008 compared prior year reduction equitybased compensation expense due changes made company’s employee equity compensation program impairment gainloss sale assets net company recognized impairments gainloss sale assets net 25 million fiscal 2009 32 million fiscal 2008 17 million fiscal 2007 see note 3 “notes consolidated financial statements” additional detail regarding impairments gainloss sale assets net special items following summary company’s special items fiscal 2009 2008 2007 millions fiscal 2009 special items charges included restructuring charges 164 million primarily related spinoff 97 million restructuring company’s segment operating structure 31 million headcount reductions within clinical medical products segment 19 million fiscal 2008 special items charges primarily related company’s restructuring programs integration costs certain acquisitions fiscal 2008 company also recorded litigation charges totaling 74 million primarily related dea matter 34 million matters charges offset 58 million income related settlement derivative actions see note 3 “notes consolidated financial statements” additional detail regarding derivative action fiscal 2007 special items charges primarily related reserves litigation settlements 655 million inprocess research development costs “iprd” expenses 85 million primarily connection viasys acquisition company recorded litigation charges made payments 655 million fiscal 2007 related settlement cardinal health federal securities litigation 600 million cardinal health erisa litigation 40 million matters charges offset 29 million income related pharmaceutical manufacturer antitrust litigation addition company settled made payment penalty associated sec investigation 35 million reserved fiscal 2006 2005 see note 3 “notes consolidated financial statements” additional detail company’s special items company estimates incur additional costs future periods associated currently anticipated acquisition integration restructuring activities totaling approximately 168 million estimated costs primarily due costs associated spinoff integration viasys headcount reductions within clinical medical products segment operating earnings operating earnings decreased 206 million 10 fiscal 2009 decrease primarily due increased restructuring charges 99 million lower gross margin 53 million operating earnings increased 745 million 55 fiscal 2008 compared prior year increase primarily due 600 million expense recognized within special items prior year related shareholder litigation addition operating earnings favorably impacted higher gross margin 382 million negatively impacted increased sga expenses 329 million interest expense interest expense increased 49 million 29 fiscal 2009 primarily due unfavorable impact foreign exchange items 43 million march 20 2009 company terminated certain fixedtofloating interest rate swaps received settlement proceeds totaling 123 million immediate impact statement earnings however fair value adjustment debt amortized life underlying debt reduction interest expense interest expense increased 49 million 41 fiscal 2008 compared prior year interest expense impacted fiscal 2008 increased borrowing levels 72 million impact prior year allocation portion interest expense related pts business divestiture discontinued operations 26 million increase interest expense fiscal 2008 partially offset favorable impact foreign exchange items 19 million increased investment income 18 million provision income taxes effective july 1 2007 company adopted provisions fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” resulting 139 million reduction retained earnings company 849 million 763 million unrecognized tax benefits june 30 2009 june 30 2008 respectively included balances 611 million 548 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect company’s effective tax rate company includes full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation beginning ending amounts unrecognized tax benefits fiscal 2009 2008 follows company recognizes accrued interest penalties related unrecognized tax benefits income tax expense june 30 2009 june 30 2008 company 247 million 195 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities condensed consolidated balance sheets year ended june 30 2009 company recognized 51 million interest penalties consolidated statement earnings company files income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions company subject audit taxing authorities fiscal years ending june 30 2001 current fiscal year internal revenue service “irs” currently ongoing audits fiscal years 2001 2007 three months ended december 31 2007 company notified irs transferred jurisdiction fiscal years 2001 2002 office appeals back examinations level reconsider previouslyunadjusted specific issues three months ended march 31 2008 company received notices proposed adjustment “npa’s” irs related fiscal years 2001 2005 challenging deductions arising sale trade receivables special purpose accounts receivable financing entity described detail note 9 amount additional tax excluding penalties interest proposed irs notices 179 million company disagrees proposed adjustments intends vigorously contest company anticipates transaction could subject proposed adjustments irs tax audits fiscal years 2006 present company believes adequately reserved uncertain tax position relating arrangement therefore adjusted amount previously recorded unrecognized tax benefits related issue subsequent fiscal year ended june 30 2008 company received revenue agent’s report tax years 2003 2005 included npa’s discussed new npa’s related company’s transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition company amount additional tax proposed irs new notices total 598 million excluding penalties interest company disagrees proposed adjustments intends vigorously contest company anticipates transaction could subject proposed adjustments irs tax audits fiscal years 2006 present company believes adequately reserved uncertain tax position relating arrangement therefore adjusted amount previously recorded unrecognized tax benefits related issue reasonably possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations company estimates range possible change unrecognized tax benefits within next 12 months decrease approximately zero 24 million exclusive penalties interest provision income taxescontinuing operations company’s provisions income taxes percentage pretax earnings continuing operations “effective tax rates” 314 326 331 pretax earnings fiscal 2009 2008 2007 respectively generally fluctuations effective tax rate due changes within international us state effective tax rates resulting company’s business mix impact special items impairments discrete items company’s effective tax rate reflects tax benefits derived operations outside united states generally taxed rates lower us statutory rate 35 company tax incentive agreements several nonus tax jurisdictions expire fiscal years 2010 2024 renewed company expects corporate tax rate increase fiscal 2010 result spinoff company’s fiscal 2009 provision income taxes relative earnings income taxes discontinued operations 524 million effective tax rate 314 fiscal 2009 effective tax rate adversely impacted approximately 14 due termination agreement company previously entered 2001 sell trade receivables special purpose accounts receivable financing entity see note 9 “notes consolidated financial statements” information termination agreement effective tax rate also adversely impacted 085 due nondeductibility certain special items primarily related spinoff fiscal 2009 effective tax rate continuing operations favorably impacted 65 million 39 result various discrete tax adjustments included 65 million favorable adjustments 37 million release portion valuation allowance previously established capital loss company’s ability utilize uncertain favorable adjustment 24 million related filing claim irs amend filing position taken company’s federal income tax return fiscal years 2004 2006 transaction qualifies secured loan tax purposes favorable adjustment 16 million related audit settlement state taxing authority unfavorable adjustment 7 million related increase estimated state income tax rate deferred taxes unfavorable adjustments 5 million related miscellaneous discrete adjustments company’s fiscal 2008 provision income taxes relative earnings income taxes discontinued operations 626 million effective tax rate 326 fiscal 2008 effective tax rate adversely impacted 014 due nondeductibility certain special items impairments fiscal 2008 effective tax rate continuing operations unfavorably impacted 6 million 33 result various discrete tax adjustments included 6 million favorable adjustment 9 million release valuation allowance previously established capital losses company’s ability utilize uncertain favorable adjustment 30 million reserve releases related fiscal years 2001 2002 statute limitations lapsed unfavorable adjustment 37 million related increase estimated state income tax rate deferred taxes unfavorable adjustments 8 million related miscellaneous discrete adjustments fiscal 2008 company repatriated cash 308 million nonus subsidiaries result incurred taxable dividends 14 million nontaxable return capital currency gain 161 million taxable capital gain 132 million taxable capital gain amount 132 million fully offset previously unrecognized capital loss carryforward foreign tax credits 14 million recorded related taxable dividends resulting net tax benefit 4 million company’s fiscal 2007 provision income taxes relative earnings income taxes discontinued operations 406 million effective tax rate 331 fiscal 2007 effective tax rate adversely impacted 075 due nondeductibility certain special items impairments principally iprd charge related viasys acquisition fiscal 2007 effective tax rate continuing operations favorably impacted 12 million 1 result various discrete tax adjustments included 12 million favorable adjustment 10 million release tax reserves primarily due issuance final irs revenue agent report related fiscal years 2001 2002 favorable adjustment 9 million release tax reserves reflect agreement company entered irs close federal audit years 1996 2000 unfavorable adjustment 7 million increase tax reserves related ongoing international tax audit provision income taxes discontinued operations company’s fiscal 2009 provision income taxes relative discontinued operations expense 9 million included within amount 5 million related martindale results reclassified discontinued operations company’s fiscal 2008 provision income taxes relative discontinued operations expense 40 million included within amount 28 million increase unrecognized tax benefits uncertain tax positions related pts business earnings discontinued operations earnings discontinued operations net tax increased 4 million fiscal 2009 earnings discontinued operations net tax decreased 11 billion fiscal 2008 primarily due aftertax gain sale pts business 11 billion prior year see note 7 “notes consolidated financial statements” additional information company’s discontinued operations segment results operations reportable segments first quarter fiscal 2009 company reorganized businesses three reportable segments healthcare supply chain services clinical medical products order reduce costs align resources needs segment healthcare supply chain services segment focuses delivering bestinclass distribution logistics services customers segment generates approximately 94 company’s total segment revenue approximately 64 company’s total segment profit defined “segment results operations” section clinical medical products segment focuses largely developing innovative products hospitals providers care segment contributed approximately 32 company’s total segment profit segment franchises operates apothecarystyle retail pharmacies provides pharmacy services hospitals healthcare facilities prior period segment information reclassified conform new financial reporting presentation company evaluates performance individual segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expense includes equity compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated hospital sales organization information interest income expense income taxes provided segment level addition special items impairments gainloss sale assets net allocated segments see note 17 “notes consolidated financial statements” additional information company’s reportable segments following table summarizes segment revenue fiscal years ended june 30 2009 2008 2007 millions 1 change calculated percentage increase decrease given year compared immediately preceding year 2 corporate revenue primarily consists elimination intersegment revenue following table summarizes segment profit fiscal years ended june 30 2009 2008 2007 millions 1 change calculated percentage increase decrease given year compared immediately preceding year 2 company encouraged segments identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses investment spending previously held corporate allocated segments new segment structure prior period information reclassified conform new presentation 3 fiscal 2009 2008 2007 corporate includes among things special items impairments gainloss sale assets net allocated segments healthcare supply chain services segment performance fiscal year ended june 30 2009 compared fiscal year ended june 30 2008 healthcare supply chain services revenue growth 86 billion 10 fiscal 2009 primarily due additional volume existing customers pharmaceutical price appreciation combined impact two factors 80 billion pharmaceutical price appreciation index 88 trailing twelve months ended june 30 2009 revenue also positively impacted addition new customers 954 million revenue growth negatively impacted loss customers 969 million lost customer revenue dea license suspensions company’s controlled substance antidiversion efforts also adversely affected revenue nonbulk customers company resumed controlled substance distributions distribution centers impacted license suspensions second quarter fiscal 2009 healthcare supply chain services segment profit increased 5 million fiscal 2009 compared prior year segment profit positively impacted increase gross margin 56 million negatively impacted 51 million increase sga increase gross margin primarily due increased distribution service agreement fees pharmaceutical price appreciation combined impact 164 million increased manufacturer cash discounts 157 million increased distribution service agreement fees manufacturer cash discounts primarily result increased sales volume gross margin negatively impacted increased customer discounts 356 million result sales growth including faster growth 17 sales bulk customers tend larger customer discounts customer repricings company expects certain level continued pricing pressure due competitive market operates sga expenses twelve months ended june 30 2009 increased slightly compared prior year primarily due increase bad debt expense 38 million based general economic conditions impacting certain customers bankruptcy filings four regional chain customers partially offset disciplined cost controls increase segment profit fiscal 2009 also partially due impact acquisitions 11 million company’s results could adversely affected sales pharmaceutical products decline competitive pricing pressure intensifies frequency new generic pharmaceutical launches decreases generic price deflation increases pharmaceutical price appreciation branded products decreases alternatively company’s results could benefit sales pharmaceutical products increase competitive pricing pressure subsides frequency new generic pharmaceutical launches increases generic price deflation decreases pharmaceutical price appreciation branded products increases company expects certain factors negatively impact fiscal 2010 including timing generic launches price deflation repricing certain customer contracts strategic positioning moves repositioning medicine shoppe transitioning significant vendor relationship distribution service agreement fiscal year ended june 30 2008 compared fiscal year ended june 30 2007 healthcare supply chain services revenue growth 33 billion 4 fiscal 2008 primarily due additional volume existing customers pharmaceutical price appreciation combined impact two factors 48 billion pharmaceutical price appreciation index 77 trailing twelve months ended june 30 2008 revenue also positively impacted addition new customers 583 million impact foreign exchange 65 million revenue growth negatively impacted loss customers 21 billion slower pharmaceutical market growth dea license suspensions company’s controlled substance antidiversion efforts resulted nonbulk customer losses adversely affected company’s ability acquire new nonbulk customers healthcare supply chain services segment profit decreased 188 million 12 fiscal 2008 compared prior year result decrease 146 million gross margin decline gross margin primarily due increased customer discounts 307 million resulted repricing several large customer contracts faster growth 10 sales bulk customers tend larger customer discounts also contributing decline gross margin 2 decline sales nonbulk customers compared fiscal 2007 revenue growth fiscal 2008 lower weighted toward growth revenue bulk customers lost customer revenue dea license suspensions company’s controlled substance antidiversion efforts also adversely affected gross margin fiscal 2008 gross margin also negatively impacted decreased generic margin 35 million primarily due impact generic launches prior year occur current year company generally earns greatest margin dollars generic pharmaceuticals period immediately following initial launch generic product marketplace generic pharmaceutical selling prices generally deflationary offsetting negative impact gross margins described higher distribution service agreement fees pharmaceutical price appreciation 84 million year due increased sales volume benefit pharmaceutical price appreciation gross margin also positively impacted fiscal 2008 increased manufacturer cash discounts 80 million due increased sales volume growth distribution service agreement fees pharmaceutical price appreciation manufacturer cash discounts less growth fiscal 2007 due slower revenue growth increases sga expenses decreased segment profit 42 million fiscal 2008 partially result impact foreign exchange 10 million bulk nonbulk customers healthcare supply chain services segment differentiates bulk nonbulk customers respect distribution pharmaceutical radiopharmaceutical overthecounter healthcare products bulk customers generate significantly lower segment profit percentage revenue generated nonbulk customers hereinafter references bulk nonbulk customers confined product categories bulk customers consist retail chain customers’ centralized warehouse operations customers’ mail order businesses customers classified nonbulk customers example retail stores pharmacies hospitals alternate care sites bulk customers include warehouse operations retail chains whose retail stores classified nonbulk customers single retail chain pharmacy customer may bulk customer respect warehouse operations nonbulk customer respect retail stores bulk customers ability process large quantities products central locations selfdistribute products individual retail stores customers substantially deliveries bulk customers consist product shipped form product received manufacturer small portion deliveries bulk customers broken smaller units prior shipping nonbulk customers hand require complex servicing company services performed company include receiving inventory large full case quantities breaking smaller quantities warehousing product longer period time picking individual products specific customer’s order delivering smaller order customer location company tracks revenue bulk nonbulk customers financial systems internal analysis prepared estimate segment profit bulk nonbulk customers allocating segment expenses total segment cost products sold segment sga expenses separately bulk nonbulk customers following table shows allocation segment expenses segment profit segment profit percentage revenue bulk nonbulk customers fiscal 2009 2008 2007 prior period amounts differ previously disclosed updated remove martindale reclassified discontinued operations 1 amounts shown estimates based upon internal analysis described preparation internal analysis required use complex subjective estimates allocations based upon assumptions past experience judgment company believes reasonable core pharmaceutical distribution operation “distribution” services bulk nonbulk customers therefore expenses associated operation allocated bulk nonbulk customers described brokerage operation “brokerage” services bulk customers therefore expenses associated brokerage allocated bulk customers remaining operations ie excluding distribution service nonbulk customers therefore expenses associated operations allocated nonbulk customers following describes allocation major components cost products sold distribution bulk nonbulk customers • cost products sold pharmaceutical products determined specifically tracking manufacturer’s designated price products time products sold bulk nonbulk customers manufacturer’s designated price reduced components impacting cost products sold including distribution service agreement fees pharmaceutical price appreciation manufacturer cash discounts manufacturer rebates incentives addition inventory charges credits added subtracted appropriate arrive cost products sold company used following methods believes provide reasonable correlation allocate remaining components cost products sold bulk nonbulk customers • distribution service agreement fees pharmaceutical price appreciation tracked manufacturer therefore company allocated distribution service agreement fees pharmaceutical price appreciation associated manufacturer among products proportion sales product bulk nonbulk customers • manufacturer cash discounts recognized reduction cost products sold related inventory sold allocated proportion manufacturer’s published price product sold bulk nonbulk customers • manufacturers’ rebates incentives based individual agreements entered manufacturers related specific products rebates incentives grouped contract terms allocated proportion sales bulk nonbulk customers • inventory charges credits include charges outdated returned inventory items fluctuation inventory reserves company estimated portion inventory charges credits attributable product allocated bulk nonbulk customers proportion sales products company used methods believes provide reasonable correlation allocate sga expenses distribution bulk nonbulk customers follows • warehouse expense includes laborrelated expenses associated receiving shipping handling inventory well warehouse storage costs including insurance taxes supplies facility costs warehouse expense allocated proportion number invoice line items filled bulk nonbulk customer company believes correlation number different products ordered reflected invoice lines level effort associated receiving shipping handling order bulk customers typically order substantially larger quantities products therefore generate substantially fewer invoice lines results substantially less warehouse expense allocated bulk customers • delivery expense includes transportation costs associated physically moving product warehouse customer’s designated location delivery expense allocated proportion number invoices generated bulk nonbulk customer assumption invoice generates delivery • sales expense includes personnelrelated costs associated sales customer service activities bulk nonbulk customers sales expense allocated proportion number invoices generated bulk nonbulk customer invoices reasonable estimate amount customer service calls sales effort • general administrative expenses allocated proportion units products sold bulk nonbulk customers expenses allocated assumption general administrative expenses increase decrease direct relation volume sales internal analysis indicated segment expenses percentage revenue higher bulk customers nonbulk customers lower pricing sales bulk customers higher segment cost products sold partially offset lower segment sga expenses bulk customers receive lower pricing sales products nonbulk customers due volume pricing competitive market lower costs related services provided company addition sales bulk customers aggregate generate higher segment cost products sold percentage revenue sales nonbulk customers bulk customers’ orders consist almost entirely higher cost branded products higher segment cost products sold percentage revenue bulk customers also driven lower manufacturer distribution service agreement fees branded pharmaceutical price appreciation lower manufacturer cash discounts manufacturer distribution service agreement fees manufacturer cash discounts recognized reduction segment cost products sold lower percentage revenue due mix products sold pharmaceutical price appreciation increases customer pricing turn results higher segment gross margin sales inventory onhand time manufacturer’s price increase since products sold bulk customers generally held inventory shorter time products sold nonbulk customers less opportunity realize benefit pharmaceutical price appreciation consequently segment cost products sold percentage revenue bulk customers higher nonbulk customers segment gross margin percentage revenue substantially lower bulk customers nonbulk customers deliveries bulk customers require substantially less services company deliveries nonbulk customers segment sga expenses percentage revenue bulk customers substantially lower nonbulk customers however lower sga expenses offset higher cost products sold result segment profit percentage revenue significantly lower bulk customers nonbulk customers company defines bulk nonbulk customers based way company operates business services performs customers company aware industry standard regarding definition bulk customers based solely review annual reports form 10k national pharmaceutical wholesalers company notes companies comparable businesses may use different definition bulk customers fiscal 2009 revenue nonbulk customers increased 19 billion due increased volume existing customers segment profit nonbulk customers increased 6 million fiscal 2009 due increased manufacturer cash discounts increase distribution service agreement fees pharmaceutical price appreciation partially offset increase customer discounts fiscal 2009 revenue bulk customers increased 64 billion due increased volume existing customers new customers segment profit bulk customers decreased 3 million fiscal 2009 due increased customer discounts partially offset increase distribution service agreement fees pharmaceutical price appreciation increased manufacturer cash discounts related sales volume growth fiscal 2008 revenue nonbulk customers decreased 647 million compared prior year due loss customers including impact dea license suspensions company’s controlled substance antidiversion efforts partially offset additional volume existing customers segment profit nonbulk customers decreased 147 million fiscal 2008 compared prior year due increase customer discounts impact generic launches prior year occur current year coupled greater generic deflation decrease fiscal 2008 partially offset increase distribution service agreement fees pharmaceutical price appreciation fiscal 2008 revenue bulk customers increased 34 billion compared prior year due new contracts signed existing customers resulted increased volume existing customers segment profit bulk customers decreased 36 million fiscal 2008 compared prior year due increased customer discounts result customer repricings partially offset increased manufacturer cash discounts related sales volume growth decrease fiscal 2008 also partially offset increase distribution service agreement fees pharmaceutical price appreciation clinical medical products segment performance fiscal year ended june 30 2009 compared fiscal year ended june 30 2008 fiscal 2009 clinical medical products revenue segment profit declined compared prior year declines primarily driven deferral hospital customers’ capital spending unfavorable impact foreign exchange partially offset enturia acquisition additionally segment profit negatively impacted product recalls reserves alaris corrective action plan submitted fda hold shipping certain infusion products company expects deferral hospital capital spending referenced adverse impact carefusion results middle calendar year 2010 hold shipping certain infusion products referenced lifted july 2009 clinical medical products segment revenue decreased 17 million 0 fiscal 2009 compared prior year primarily due negative impact foreign exchange 118 million decreased volume existing customers primarily result ship hold 65 million partially offset impact acquisitions 171 million clinical medical products segment profit decreased 65 million 9 fiscal 2009 compared prior year period addition factors described gross margin decreased segment profit 58 million primarily result revenue decline unfavorable impact foreign exchange 77 million increase raw material cost 50 million partly offset favorable impact acquisitions 112 million addition negatively impacting segment profit fiscal 2009 21 million charges product recalls reserves corrective action plan submitted fda product recalls reserves also 21 million fiscal 2008 sga expenses remained relatively flat compared prior year primarily due cost control initiatives offset impact acquisitions 60 million fiscal year ended june 30 2008 compared fiscal year ended june 30 2007 clinical medical products segment revenue increased 11 billion 30 fiscal 2008 primarily due acquisitions 708 million revenue also positively impacted new products 97 million foreign exchange 91 million new customers 60 million increased volume existing customers 43 million clinical medical products segment profit increased 200 million 37 fiscal 2008 gross margin increased segment profit 508 million primarily due acquisitions 321 million gross margin also favorably impacted favorable mix higher margin products combined impact 109 million impact foreign exchange 48 million correction prior year error 11 million described year impact alaris product corrective actions recalls negatively impacted gross margin fiscal 2008 8 million increases sga expenses negatively impacted segment profit 308 million primarily due acquisitions 246 million lesser degree impact foreign exchange 21 million increased investment product quality research development costs 11 million fourth quarter fiscal 2008 company discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 11 million fiscal 2008 7 million pertained fiscal 2007 4 million pertained fiscal 2006 connection matter company implemented action plan addressed issues related error segment performance fiscal year ended june 30 2009 compared fiscal year ended june 30 2008 segment revenue declined 172 million 14 fiscal 2009 segment profit decreased 5 million 5 fiscal 2009 decline gross margin decreased segment profit 40 million decline sga expenses increased segment profit 35 million fiscal year ended june 30 2008 compared fiscal year ended june 30 2007 segment revenue increased 39 million 3 fiscal 2008 segment profit decreased 6 million 6 fiscal 2008 increase gross margin increased segment profit 22 million increase sga expenses decreased segment profit 28 million new segment structure fiscal 2010 effective july 1 2009 company changed reportable segments pharmaceutical medical carefusion pharmaceutical segment encompasses businesses previously within healthcare supply chain services segment distributed pharmaceutical radiopharmaceutical overthecounter healthcare products well businesses previously within segment medical segment encompasses remaining medical distribution supply chain businesses within healthcare supply chain services segment well certain surgical exam gloves surgical drapes apparel fluid management businesses previously within clinical medical products segment carefusion segment encompasses businesses previously within clinical medical products segment excluding referenced surgical exam gloves surgical drapes apparel fluid management businesses includes businesses included spinoff upon completion spinoff carefusion segment reported discontinued operations company operate two remaining segments matters acquisitions fiscal 2009 company completed acquisition individually significant aggregate purchase price acquisition paid cash approximately 129 million potential maximum contingent payments 14 million assumed liabilities acquired business approximately 102 million consolidated financial statements include results operations business combination date acquisition information regarding company’s acquisitions see “item 1 businessacquisitions divestitures” note 2 “notes consolidated financial statements” fiscal 2008 company acquired assets privately held enturia included enturia’s line infection prevention products sold chloraprep® brand name value transaction including assumption liabilities totaled approximately 490 million addition fiscal 2008 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 35 million assumed liabilities acquired businesses approximately 6 million consolidated financial statements include results operations business combinations date acquisition fiscal 2007 company acquired viasys offered products services directed critical care ventilation respiratory diagnostics clinical services medical surgical products markets value transaction including assumption liabilities totaled approximately 15 billion addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 174 million assumed liabilities acquired businesses approximately 22 million consolidated financial statements include results operations business combinations date acquisition company’s trend regard acquisitions expand role provider services innovative products healthcare industry trend resulted expansion areas complement company’s existing operations provide opportunities company develop synergies strengthen acquired business healthcare industry continues change company evaluates possible candidates acquisition considers opportunities expand role provider services healthcare industry reportable segments assurance however company able successfully take advantage opportunity arises consummate transaction pursued additional transactions pursued consummated company would incur additional acquisition integration charges may need enter funding arrangements acquisitions assurance integration efforts associated transaction would successful divestitures fiscal 2009 company divested tecomet orthopedic implants instruments medsystems enteral devices airway management products businesses fiscal 2007 company completed sale pts business affiliate blackstone group closing sale company received approximately 32 billion cash purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement company recognized aftertax book gain approximately 11 billion transaction company used aftertax net proceeds approximately 31 billion sale repurchase shares purchase agreement contained customary indemnification provisions sale transactions type company continues evaluate performance strategic fit businesses may decide sell business product line based evaluation discussed company plans spin carefusion august 31 2009 addition fourth quarter fiscal 2009 company approved plans divest martindale specialtyscripts divestitures may result significant writeoffs including related goodwill intangible assets could adverse effect company’s results operations financial condition addition company may encounter difficulty finding buyers alternative exit strategies acceptable prices terms timely manner liquidity capital resources sources uses cash following table summarizes company’s consolidated statements cash flows fiscal 2009 2008 2007 operating activities net cash provided operating activities fiscal 2009 totaled 16 billion driven net earnings changes working capital significant changes working capital increased trade receivables 649 million increased inventories 342 million partially offset increased accounts payable 749 million increases due primarily healthcare supply chain services revenue growth well timing inventory purchases receipts payments cash flows operations year significantly impacted factors timing cash receipts customers payments vendors regular course business addition march 20 2009 company terminated certain fixedtofloating interest rate swaps received settlement proceeds totaling 123 million march 24 2009 proceeds classified cash provided operating activities consolidated statements cash flows net cash provided operating activities fiscal 2008 totaled 15 billion increase 284 million prior year due primarily increase earnings continuing operations 475 million compared prior year combined impact changes working capital net cash provided operating activities continuing operations fiscal 2007 totaled 975 million net income continuing operations 821 million impacted litigation charges cash settlements made fourth quarter fiscal 2007 655 million increase trade receivables 781 million based repurchase trade receivables 550 million company’s committed receivables program addition inventory levels declined 220 million accounts payable increased 224 million net cash provided operating activities discontinued operations fiscal 2007 totaled 259 million net cash provided operating activities discontinued operations fiscal 2007 result earnings discontinued operations 11 billion less gain sale pts business 11 billion investing activities net cash used investing activities 543 million fiscal 2009 primarily reflected capital spending 533 million continuing operations included 151 million repurchase assets previously operating lease arrangement net cash used investing activities 726 million fiscal 2008 reflected capital spending 366 million partially offset net proceeds sale shortterm investments classified available sale 132 million company utilized 515 million cash acquisitions net cash received divestiture investment within healthcare supply chain services segment divestiture assets associated particular line business within clinical medical products segment combined impact approximately 74 million acquisitions completed fiscal 2008 included enturia minor acquisitions within clinical medical products segment see “acquisitions divestitures” within “item 1 business” form 10k note 2 “notes consolidated financial statements” information regarding company’s acquisitions net cash used investing activities continuing operations 16 billion fiscal 2007 reflected cash used complete acquisitions viasys minor acquisitions within clinical medical products segment specialtyscripts within healthcare supply chain services segment proceeds sale shortterm investments classified available sale 367 million offset capital spending 356 million develop enhance company’s infrastructure including facilities information systems machinery equipment net cash provided investing activities discontinued operations fiscal 2007 31 billion reflected proceeds pts business divestiture 32 billion offset capital spending 110 million financing activities net cash used financing activities 468 million fiscal 2009 reflected company’s repayment longterm obligations 305 million dividend payments shareholders 200 million company’s repayment longterm obligations included july 2008 repayment 150 million 625 notes due 2008 repayment 149 million preferred debt securities see “capital resources” discussion company’s financing activities net cash used financing activities 803 million fiscal 2008 reflected company’s repurchase common shares 12 billion dividend payments shareholders 173 million see “share repurchase program” additional information however amounts may differ due timing share settlements end reporting periods cash provided financing activities included proceeds received shares issued various employee stock plans 228 million proceeds received issuance longterm obligations net issuance costs 304 million net cash used financing activities continuing operations 26 billion fiscal 2007 reflected company’s repurchase common shares 37 billion primarily driven use proceeds sale pts business dividend payments shareholders 144 million company also used cash repay longterm obligations 784 million cash provided financing activities included proceeds received issuance longterm obligations net issuance costs 15 billion proceeds received shares issued various employee stock plans 553 million net cash used financing activities discontinued operations fiscal 2007 reflected 39 million repayments borrowings sources cash fiscal 2007 additional borrowings 4 million international cash company’s cash balance approximately 18 billion june 30 2009 included approximately 906 million cash held subsidiaries outside united states approximately twothirds related carefusion although vast majority cash held outside united states available repatriation subjects us federal state local income tax fiscal 2008 company repatriated cash 308 million nonus subsidiaries result incurred taxable dividends 14 million nontaxable return capitalcurrency gain 161 million taxable capital gain 132 million taxable capital gain amount 132 million fully offset previously unrecognized capital loss carryforward foreign tax credits 14 million recorded related taxable dividends resulting net tax benefit 4 million see note 10 “notes consolidated financial statements” additional information regarding income taxes share repurchases company repurchased approximately 49 billion common shares aggregate share repurchase programs fiscal 2008 2007 described company used aftertax net proceeds approximately 31 billion sale pts business repurchase shares fiscal 2007 first quarter fiscal 2008 fiscal 2009 company repurchase common shares 20 billion share repurchase program announced august 8 2007 june 30 2009 approximately 13 billion remained 20 billion repurchase authorization repurchase program cancelled company august 5 2009 fiscal 2008 company repurchased approximately 750 million common shares pursuant 20 billion repurchase program referenced addition company repurchased approximately 342 million common shares 45 billion combined repurchase authorization expired june 30 2008 approximately 406 million remaining unused company’s fiscal 2008 common share repurchases represented 17 million shares average price per share 6481 fiscal 2007 company repurchased approximately 38 billion common shares company’s fiscal 2007 common share repurchases represented 54 million shares average price per share 6979 august 5 2009 company announced new 500 million share repurchase program expires august 31 2012 company expects use repurchase program offset equity plan issuances see “issuer purchases equity securities” within “item 5 market registrant’s common equity related stockholder matters issuer purchases equity securities” information regarding company’s recent share repurchase programs capital resources company’s cash equivalents balance 18 billion june 30 2009 compared 13 billion june 30 2008 cash balance june 30 2009 increased net cash provided operating activities 16 billion driven earnings described decreased july 2008 repayment 150 million 625 notes due 2008 repayment 149 million preferred debt securities see discussion information october 2008 capital spending dividends company’s cash equivalents balance june 30 2009 included 906 million cash held subsidiaries outside united states approximately twothirds related carefusion although vast majority cash held outside united states available repatriation could subject us federal state local income tax us parent company may temporarily access cash held foreign subsidiaries without subjecting us federal income tax intercompany loans notice issued irs october 2008 announced us treasury department issue regulations temporary period extend permitted duration intercompany loans qualify suspended deemed dividend treatment section 956 code intercompany loans foreign subsidiaries us parent must repaid within 60 days commencement cannot exceed 180 cumulative days year june 30 2009 2008 company outstanding intercompany loan balance section 956 position set forth notice apply company june 30 2010 included previously disclosed cash held subsidiaries outside united states intercompany loan 852 million company’s international accounts receivable financing entity see discussion entity due fiscal 2012 addition cash company’s sources liquidity include 15 billion commercial paper program backed 15 billion revolving credit facility committed receivables sales facility program capacity sell 950 million receivables may 1 2009 company amended committed receivables sales facility program increase purchase limit 850 million 950 million company outstanding borrowings commercial paper program june 30 2009 due general market conditions market demand company’s a2 p2 andrated commercial paper six months ended december 31 2008 limited however market improved since end second quarter fiscal 2009 company issued 400 million commercial paper second half fiscal 2009 announcement spinoff company’s commercial paper downgraded p3 moody’s shortterm ratings downgrade moody’s triggered spinoff may diminish company’s ability gain access commercial paper market company believes able event utilize alternative sources credit available company terminated certain fixedtofloating interest rate swaps received settlement proceeds totaling 123 million march 24 2009 proceeds classified cash provided operating activities consolidated statements cash flows immediate impact statement earnings however fair value adjustment debt amortized life underlying debt reduction interest expense fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued preferred variable debt securities parties affiliated company october 3 2008 company repaid remaining balance 149 million preferred debt securities agreement terminated see notes 4 9 19 “notes consolidated financial statements” information company’s capital resources company currently believes based upon existing cash operating cash flows available capital resources discussed available market transactions adequate capital resources disposal fund currently anticipated capital expenditures business growth expansion working capital needs contractual obligations current projected debt service requirements including related business combinations time company considers engages acquisition transactions order expand role leading provider products services improve safety productivity healthcare company evaluates possible candidates acquisition considers opportunities expand role provider products services healthcare industry reportable segments additional transactions entered consummated company may need enter funding arrangements acquisitions see “impact spinoff company’s capital structure” information company’s capital structure spinoff debt ratingscovenants company’s senior debt credit ratings standard poor’s rating services “sp” moody’s investors service “moody’s” fitch ratings “fitch” bbb baa3 bbb respectively shortterm ratings a2 p3 respectively sp fitch ratings outlooks “stable” moody’s outlook “negative” shortterm ratings downgrade moody’s triggered spinoff may diminish company’s ability gain access commercial paper market company believes able event utilize alternative sources credit available company prior spinoff company’s various borrowing facilities longterm debt free financial covenants minimum net worth cannot fall 50 billion time june 30 2009 company compliance covenant april 16 2009 connection spinoff company amended 15 billion revolving credit facility among things replace minimum net worth covenant covenants require company maintain consolidated interest coverage ratio end fiscal quarter least 4to1 maintain consolidated leverage ratio 325to1 new covenants become effective company consummates spinoff including payment contemplated cash distribution carefusion company prior spinoff may 1 2009 company amended committed sales facility program replace minimum net worth covenant performance guaranty covenants require company maintain consolidated interest coverage ratio end fiscal quarter least 4to1 maintain consolidated leverage ratio 325to1 new covenants become effective date new financial covenants become effective company’s 15 billion revolving credit facility described interest rate currency risk management company uses foreign currency forward contracts interest rate swaps manage exposure cash flow variability company also uses foreign currency forward contracts interest rate swaps protect value existing foreign currency assets liabilities value debt see notes 1 13 “notes consolidated financial statements” information regarding use financial instruments derivatives including foreign currency hedging instruments contractual obligations june 30 2009 company’s contractual obligations including estimated payments due period follows 1 represents maturities company’s longterm debt obligations excluding capital lease obligations described see note 9 “notes consolidated financial statements” information 2 represents maturities company’s capital lease obligations included within longterm debt company’s consolidated balance sheet related estimated future interest payments 3 represents cash outflows period certain company’s longterm liabilities cash outflows could reasonably estimated certain longterm liabilities unrecognized tax benefits 8488 million deferred taxes excluded table inherent uncertainty underlying tax positions inability reasonably estimate timing cash outflows see note 10 “notes consolidated financial statements” discussion income taxes 4 represents minimum rental payments related estimated future interest payments operating leases initial remaining noncancelable lease terms described note 11 “notes consolidated financial statements” 5 purchase obligations defined agreement purchase goods services enforceable legally binding specifying significant terms including following fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligation amounts disclosed represent estimates minimum company obligated time period cash outflows occur purchase orders authorizations purchase involve firm commitment either party excluded table addition contracts unilaterally cancelled termination fee proper notice excluded company’s total purchase obligations except amount termination fee minimum amount goods must purchased requisite notice period offbalance sheet arrangements see “liquidity capital resourcescapital resources” note 19 “notes consolidated financial statements” incorporated herein reference discussion offbalance sheet arrangements recent financial accounting standards see note 1 “notes consolidated financial statements” discussion recent financial accounting standards critical accounting policies sensitive accounting estimates critical accounting policies accounting policies significant impact presentation company’s financial condition results operations require use complex subjective estimates based upon past experience management’s judgment companies applying reasonable judgment facts circumstances could develop different estimates uncertainty inherent estimates actual results may differ estimates policies applied preparing company’s consolidated financial statements management believes dependent application estimates assumptions additional accounting policies see note 1 “notes consolidated financial statements” allowance doubtful accounts trade receivables amounts owed company operating activities presented net allowance doubtful accounts company also provides financing various customers financing arrangements range 90 days 10 years interest rates generally subject fluctuation financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables recorded net allowance doubtful accounts included assets extending credit terms calculating required allowance doubtful accounts involve use judgment company’s management determining appropriate allowance doubtful accounts includes portfolio specific reserves company reviews accounts receivable aging industry trends customer financial strength credit standing historical writeoff trends payment history assess probability collection company continuously monitors collectibility receivable portfolio analyzing aging accounts receivable assessing credit worthiness customers evaluating impact changes economic conditions may impact credit risks frequency severity customer defaults change due changes customers’ financial condition general economic conditions company’s allowance doubtful accounts may require adjustment allowance doubtful accounts 1397 million 1357 million june 30 2009 2008 respectively allowance represented 20 21 customer receivables june 30 2009 2008 respectively allowance doubtful accounts percentage revenue 014 015 june 30 2009 2008 2007 respectively allowance doubtful accounts reduced 566 million 253 million 284 million fiscal 2009 2008 2007 respectively customer deductions writeoffs increased additional provisions 621 million 261 million 240 million fiscal 2009 2008 2007 respectively hypothetical 01 increase decrease reserve percentage trade receivables salestype leases reserve june 30 2009 would result increase decrease bad debt expense approximately 70 million reserve methodologies assessed annually based historical losses economic business market trends addition reserves reviewed quarterly updated unusual circumstances trends present company believes reserve maintained expenses recorded fiscal 2009 appropriate consistent historical methodologies employed time company aware internal process customer issues might lead significant future increase company’s allowance doubtful accounts percentage net revenue see schedule ii included form 10k includes rollforward activity allowance reserves inventories substantial portion inventories approximately 71 70 june 30 2009 2008 respectively stated lower cost using lifo method market inventories included within core pharmaceutical distribution facilities within company’s healthcare supply chain services segment “distribution facilities” primarily merchandise inventories lifo impact consolidated statements earnings given year dependent pharmaceutical price appreciation level inventory prices branded pharmaceuticals primarily inflationary results increase cost products sold whereas prices generic pharmaceuticals deflationary results decrease cost products sold lifo method assumed recent inventory purchases first items sold company uses lifo better match current costs revenue therefore reductions overall inventory levels resulting declining branded pharmaceutical inventory levels generally result decrease future cost products sold remaining inventory held lower cost due inflationary environment conversely reductions overall inventory levels created declining generic pharmaceutical inventory levels would generally increase future cost products sold remaining inventory held higher cost due deflationary environment company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2009 2008 company record lifo reserve reductions remaining inventory stated lower cost using firstin firstout “fifo” method market company used average cost method inventory valuation inventory within distribution facilities inventories would changed fiscal 2009 fiscal 2008 fact primarily due continued deflation generic pharmaceutical inventories lifo 349 million 425 million higher average cost value june 30 2009 2008 respectively however company’s policy record inventories excess current market value inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 879 million 931 million june 30 2009 2008 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory actual conditions less favorable company’s assumptions additional inventory reserves may required however would expected material adverse impact company’s consolidated financial statements business combinations assumptions estimates used determining fair value assets acquired liabilities assumed business combination significant portion purchase price many company’s acquisitions assigned intangible assets requires management use significant judgment determining fair value addition current future amortization expense intangibles impacted purchase price allocations well assessment estimated useful lives intangibles excluding goodwill company believes assets recorded useful lives established appropriate based upon current facts circumstances conjunction review transaction status acquired company’s research development projects assessed determine existence iprd connection certain acquisitions company required estimate fair value acquired iprd requires selecting appropriate discount rate estimating future cash flows project management also assesses current status development nature timing efforts complete development uncertainties factors estimating fair value costs assigned iprd unless future development probable fair value determined asset established accordance fasb interpretation 4 “applicability fasb statement 2 business combinations accounted purchase method” immediately writtenoff special item company’s consolidated statements earnings fiscal 2009 company record charges related writeoff iprd costs fiscal 2008 company reversed 250 million previously recorded writeoff iprd costs associated viasys result finalization viasys purchase price allocation process recorded charges 177 million 253 million related writeoff iprd costs associated enturia minor acquisitions respectively fiscal 2007 company recorded charges 839 million 06 million related writeoff iprd costs associated acquisitions viasys care fusion respectively see note 3 “notes consolidated financial statements” december 2007 fasb issued sfas 141r “business combinations” sfas 160 “noncontrolling interests consolidated financial statements” statements provide guidance accounting reporting business combinations minority interests consolidated financial statements effective fiscal years beginning december 15 2008 upon adoption fiscal 2010 statements expected significant impact company’s accounting disclosure practices future business combinations goodwill intangibles company accounts goodwill accordance sfas 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives conducting impairment test estimated fair value company’s reporting units compared carrying amount including goodwill estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value analysis performed assess impairment company’s determination estimated fair value reporting units based discounted cash flow analysis multiple earnings interest taxes depreciation amortization “ebitda” available review priceearnings ratio publicly traded companies similar nature scope size applicable reporting unit methods assumptions used test impairment revised segment realignments periods presented discount rates used impairment testing based riskfree rate plus adjustment risk factors ebitda multiples used impairment testing judgmentally selected based factors nature scope size applicable reporting unit use alternative estimates peer groups changes industry adjusting discount rate ebitda multiples price earnings ratios used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment tests fiscal 2009 2008 2007 resulted impairment charges decreasing priceearnings ratio competitors used impairment testing one point increasing discount rate discounted cash flow analysis used impairment testing 1 would indicated impairment company’s reporting units fiscal 2009 2008 see note 8 “notes consolidated financial statements” additional information regarding goodwill intangibles special items company records restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recorded accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 liability measured fair value recognized incurred acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges included within purchase price allocation accordance sfas 141 “business combinations” integration charges recorded special items incurred company recognizes income favorable outcome legal settlements judgments resolution legal regulatory matters special items consolidated financial statements associated cash assets received generally expenses due unfavorable outcome legal settlements judgments resolution legal regulatory matters “litigation settlement losses” charged segment matter relates result classified sga expenses company’s consolidated financial statements certain circumstances significant litigation settlement losses classified special items consolidated statements earnings factors considered determining whether particular litigation settlement loss classified special items include size settlement nature matter ie significant matters infrequent nonrecurring unusual nature classified special items age matter pervasiveness matter entire organization company also classifies legal fees document preservation production costs incurred connection previouslydisclosed sec investigation related audit committee internal review related matters special items majority special items related acquisition integration restructurings classified one following categories employeerelated costs exit costs including lease termination costs asset impairments iprd costs integration costs employeerelated costs include severance termination benefits lease termination costs include lease cancellation fees forfeited deposits remaining payments due existing lease agreements less estimated sublease income facility exit costs include costs move equipment inventory facility well costs incurred shut facility addition facility exit costs include certain costs related spinoff costs evaluate execute transaction costs start certain stand alone functions information technology systems onetime transaction related costs asset impairment costs include reduction value company’s assets result integration restructuring activities iprd costs include writeoff research development projects process time acquisition yet reached technological feasibility deemed alternative use integration costs primarily include charges directly related integration plan consulting costs related information systems employee benefit plans well relocation travel costs directly associated integration plan see note 3 “notes consolidated financial statements” additional information vendor reserves company maintains reserves cover areas exposure vendors determining appropriate vendor reserves company assesses historical experience current outstanding claims company established various levels reserves based type claim status review company researches resolves various types contested transactions based discussions vendors company policy findings research performed though transaction types relatively consistent company periodically refined estimate methodology past years updating reserve estimate percentages based upon historical experiences changes estimate percentages resulted financial impact company’s cost products sold period change made vendor reserves 563 million 373 million june 30 2009 2008 respectively approximately 94 92 vendor reserve june 30 2009 2008 respectively pertained healthcare supply chain services segment fluctuations reserve balance caused variations outstanding claims period timing settlements specific vendor issues bankruptcies significant events would described “management’s discussion analysis financial condition results operations” though vendor transactions remain relatively consistent period unforeseen events deterioration financial condition large vendor settlement numerous outstanding claims could cause reserve fluctuate thus financial impact period’s financial results given time outstanding items various stages research resolution ultimate outcome certain claims may different company’s original estimate may require adjustment company believes however reserves recorded disputes adequate based upon current facts circumstances self insurance accruals company selfinsured employee medical dental insurance programs company recorded liabilities totaling 214 million 207 million estimated costs related outstanding claims june 30 2009 2008 respectively costs include estimate expected settlements pending claims administrative fees estimate claims incurred reported estimates based company’s assessment outstanding claims historical analysis current payment trends company records estimate claims incurred reported using estimated lag period lag period assumption consistently applied periods presented lag period hypothetically adjusted period equal half month impact earnings would 69 million amount claims medical dental costs increase beyond estimated reserve might sufficient additional expense could required company believes however liabilities recorded adequate based upon current facts circumstances medical dental insurance expense 2439 million 1668 million 1746 million fiscal 2009 2008 2007 respectively wholly owned insurance subsidiary company certain deductibles selfinsured various risks including general liability product liability pharmacist professional liability auto liability property workers’ compensation claims excess certain limits however insured commercial insurers company recorded liabilities totaling 796 million 773 million anticipated costs related liability property workers’ compensation june 30 2009 2008 respectively costs include estimate expected settlements pending claims defense costs claims adjustment costs estimate claims incurred reported certain types exposures company develops estimate expected ultimate costs settle claim based specific information related claim claims incurred reported liabilities calculated derived accordance generally accepted actuarial practices amount ultimate liability respect matters dependent future contingent events cannot predicted certainty may differ estimates although company believes liability estimates appropriate based information available june 30 2009 possible based generally accepted actuarial analysis adverse conditions ultimate liability could exceed recorded expected liabilities june 30 2009 much 80 million insurance expense general liability product liability pharmacist professional liability auto liability property workers’ compensation 528 million 511 million 704 million fiscal 2009 2008 2007 respectively provision income taxes company’s income tax expense deferred tax assets liabilities unrecognized tax benefits reflect management’s assessment estimated future taxes paid items financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities well net operating loss tax credit carryforwards tax purposes company net deferred income tax assets 622 million 656 million june 30 2009 2008 respectively company also net deferred income tax liabilities 18 billion 17 billion june 30 2009 2008 respectively net deferred income tax assets included net federal state local international loss credit carryforwards june 30 2009 2008 193 million 200 million respectively company established net valuation allowance 152 million 178 million june 30 2009 2008 respectively certain deferred tax assets primarily relates federal state loss carryforwards ultimate realization future benefits uncertain expiring carryforwards required valuation allowances adjusted annually application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described company believes estimates valuation allowances deferred tax assets unrecognized tax benefits appropriate based current facts circumstances however people applying reasonable judgment facts circumstances could develop different estimate amount ultimately paid upon resolution issues raised may differ amounts accrued first quarter fiscal 2008 company adopted provisions fin 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard also provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognizing classification interest penalties accounting interim periods disclosure transition company’s assumptions estimates change increasedecrease company’s effective tax rate 1 earnings income taxes discontinued operations would caused income tax expense increasedecrease 167 million fiscal year ended june 30 2009 loss contingencies company accrues contingencies related litigation accordance sfas 5 requires company assess contingencies determine degree probability range possible loss estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions could occur assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate loss may differ estimates equitybased compensation company accounts equitybased compensation accordance sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statements earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates entered within option valuation model include limited stock price volatility expected option life expected dividend yield option forfeiture rates effective options granted subsequent adoption sfas 123r company estimates future stock price volatility based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years company analyzed historical data estimate option exercise behaviors employee terminations estimate expected option life forfeiture rates company calculated separate option valuations three separate groups employees similar historical exercise behaviors employee stock option values determined current accounting practices permit changed even estimates used valuation model different actual results sfas 123r requires however company compare estimated option forfeiture rates actual forfeiture rates record adjustments necessary see note 18 “notes consolidated financial statements” additional information regarding equitybased compensation item 7a nannannanitem 7a quantitative qualitative disclosures market risk applicable item 8item 7a quantitative qualitative disclosures market risk company exposed market risks include changes us interest rates changes foreign currency exchange rates measured us dollar changes commodity prices interest rates company utilizes mix debt maturities along fixedrate variablerate debt manage exposures changes interest rates company expect changes interest rates material effect income cash flows fiscal 2000 although assurances interest rates significantly change june 30 1999 company total longterm obligations outstanding 12355 million 10080 million represented notes debentures fixed interest rates maturity dates beginning fiscal 2004 june 30 1998 company total longterm obligations outstanding 13373 million 8989 million represented notes debentures fixed interest rates maturity dates beginning fiscal 2004 average interest rate related obligations 68 70 june 30 1999 1998 respectively majority remaining outstanding longterm obligations credit facilities variable interest rates fluctuate libor prime rates june 30 1999 1998 fair value total longterm obligations 12333 million 13653 million respectively maturities longterm obligations future fiscal years 2000 116 million 2001 1176 million 2002 31 million 2003 21 million 2004 2739 million 2005 thereafter 8272 million company periodically enters interest rate swap agreements existing conditions market situations dictate company enter interest rate swap agreements trading speculative purposes impact interest rate swaps significant see note 6 notes consolidated financial statements foreign exchange company conducts business several major international currencies company periodically uses financial instruments principally foreign currency options attempt manage impact foreign exchange rate changes earnings addition company periodically enters forward foreign currency exchange contracts hedge certain exposures related selected transactions relatively certain timing amount hedge portion production costs expected denominated foreign currency purpose entering hedge transactions minimize impact foreign currency fluctuations results operations cash flows gains losses hedging activities recognized concurrently gains losses underlying transactions company enter forward exchange contracts foreign currency options trading purposes addition company uses commodity contracts hedge raw material costs expected denominated foreign currency contracts generally cover oneyear period gains losses deferred recognized cost goods sold underlying product costs june 30 1999 company material foreign currency options forward exchange contracts outstanding june 30 1998 companys foreign currency options consisted option exchange german marks fixed exchange rate 1722 german marks per us dollar british pound sterling fixed exchanged rate 16242 per pound sterling notional principal amount foreign currency option contracts approximately 3 million related fair value 01 million june 30 1998 addition june 30 1998 companys forward exchange contracts consisted forward contracts sell german marks us dollars british pound sterling fixed exchange rate 305679 german mark per british pound sterling 167 per pound sterling notional principal amount foreign exchange contracts approximately 356 million related fair value 04 million june 30 1998 june 30 1998 notional amount commodity hedge contracts 142 million related fair market value contracts 17 million june 30 1999 notional amount commodity hedge contracts 96 million related fair market value contracts 03 million unrealized gains losses options contracts represent hedges foreign exchange gains losses portion companys foreign earnings cash flows selected transactions result company expect future gains losses contracts material impact companys consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk company exposed market risks include changes us interest rates changes foreign currency exchange rates measured us dollar changes commodity prices interest rates company utilizes mix debt maturities along fixedrate variablerate debt manage exposures changes interest rates company expect changes interest rates material effect income cash flows fiscal 2001 although assurances interest rates significantly change june 30 2000 company total longterm obligations outstanding 14951 million 8953 million represented notes debentures fixed interest rates maturity dates beginning fiscal 2004 june 30 1999 company total longterm obligations outstanding 12355 million 10080 million represented notes debentures fixed interest rates maturity dates beginning fiscal 2004 average interest rate related obligations 67 68 june 30 2000 1999 respectively majority remaining outstanding longterm obligations credit facilities variable interest rates fluctuate libor prime rates june 30 2000 1999 fair value total longterm obligations 14559 million 12333 million respectively maturities longterm obligations future fiscal years 2001 93 million 2002 5681 million 2003 29 million 2004 2012 million 2005 16 million 2006 thereafter 7120 million company periodically enters interest rate swap agreements existing conditions market situations dictate company enter interest rate swap agreements trading speculative purposes impact interest rate swaps significant see note 5 notes consolidated financial statements foreign exchange company conducts business several major international currencies company periodically uses financial instruments principally foreign currency options attempt manage impact foreign exchange rate changes anticipated sales addition company periodically enters forward foreign currency exchange contracts hedge certain exposures related selected transactions relatively certain timing amount purpose entering hedge transactions minimize impact foreign currency fluctuations results operations cash flows gains losses hedging activities recognized concurrently gains losses underlying transactions company enter forward exchange contracts foreign currency options trading speculative purposes addition company uses commodity contracts hedge raw material costs expected denominated foreign currency contracts generally cover oneyear period gains losses deferred recognized cost goods sold underlying product costs june 30 2000 notional amount forward exchange contracts outstanding 172 million related fair value gain contracts 01 million june 30 1999 company material foreign currency options forward exchange contracts outstanding june 30 2000 1999 notional amounts commodity hedge contracts 39 million 96 million fair value gainloss contracts 01 million 03 million respectively unrealized gains losses options contracts represent hedges foreign exchange gains losses portion companys foreign earnings cash flows selected transactions result company expect future gains losses contracts material impact companys consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk see note 5 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign exchange rate sensitivity company exposed cash flow earnings fluctuations due exchange rate variation foreign currency risk exists nature companys global operations company manufactures sells products throughout world foreign currency risk diversified fiscal 2002 companys net transactional exposure approximately 2035 million june 30 2002 hypothetical 10 aggregate increase decrease currencies company exposure would result gain loss approximately 204 million principally driven exposures euro mexican peso order mitigate transactional exposure foreign currency risk company enters hedging instruments fiscal 2002 company hedged approximately 40 exposure transactions denominated different foreign currencies event hypothetical 10 aggregate increase decrease currencies company exposure resulting gain loss previously noted would decrease approximately 81 million therefore result companys hedging activity june 30 2002 hypothetical 10 aggregate increase decrease currencies company exposure would result net gain loss approximately 123 million 204 million less 81 million mitigated via hedges see notes 1 5 notes consolidated financial statements discussion company also exposure related translation financial statements local currency foreign divisions back us dollars functional reporting currency parent company fiscal 2002 translational exposure totaled approximately 672 million potential gain loss due foreign currency translation assuming 10 aggregate increase decrease respective currencies would approximately 67 million company hedge translational exposure interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities used maintain liquidity fund business operations nature amount companys longterm shortterm debt expected fluctuate result business requirements market conditions factors company utilizes interest rate swap instruments mitigate exposure interest rate movements june 30 2002 potential gain loss due hypothetical 10 change interest rates would approximately 23 million see notes 1 5 notes consolidated financial statements discussion commodity price sensitivity company purchases certain commodities use manufacturing processes include rubber heating oil diesel fuel polystyrene company typically purchases commodities market prices affected fluctuations market prices fiscal 2002 total commodity exposure approximately 320 million impact hypothetical 10 fluctuation commodity prices would approximately 32 million item 8item 7a quantitative qualitative disclosures market risk foreign exchange rate sensitivity company exposed cash flow earnings fluctuations due exchange rate variation foreign currency risk exists nature companys global operations company manufactures sells products throughout world foreign currency risk diversified fiscal 2003 2002 companys net transactional exposure approximately 2603 million 2035 million respectively june 30 2003 2002 hypothetical 10 aggregate increase decrease currencies company exposure would result gain loss approximately 260 million 204 million respectively principally driven exposures euro mexican peso order mitigate transactional exposure foreign currency risk company enters hedging contracts fiscal 2003 2002 company hedged approximately 54 40 respectively exposure transactions denominated different foreign currencies event hypothetical 10 aggregate increase decrease currencies company exposure resulting gain loss previously noted fiscal 2003 2002 would decrease approximately 141 million 81 million respectively therefore result companys hedging activity june 30 2003 2002 hypothetical 10 aggregate increase decrease currencies company exposure would result net gain loss approximately 119 million 123 million respectively 260 million less 141 million mitigated hedges fiscal 2003 204 million less 81 million mitigated hedges fiscal 2002 see notes 1 5 notes consolidated financial statements discussion company also exposure related translation financial statements local currency foreign divisions back us dollars functional reporting currency parent company fiscal 2003 2002 translational exposure totaled approximately 1088 million 672 million respectively potential gain loss due foreign currency translation assuming 10 aggregate increase decrease respective currencies would approximately 109 million 67 million respectively fiscal 2003 2002 company typically hedge translational exposure translational hedges outstanding june 30 2003 2002 interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities used maintain liquidity fund business operations nature amount companys longterm shortterm debt expected fluctuate result business requirements market conditions factors company utilizes interest rate swap instruments mitigate exposure interest rate movements june 30 2003 2002 potential gain loss due hypothetical 10 change interest rates would approximately 13 million 23 million respectively see notes 1 5 notes consolidated financial statements discussion commodity price sensitivity company purchases certain commodities use manufacturing processes include rubber heating oil diesel fuel polystyrene company typically purchases commodities market prices affected fluctuations market prices fiscal 2003 2002 total commodity exposure approximately 333 million 320 million respectively impact hypothetical 10 fluctuation commodity prices would approximately 33 million 32 million respectively fiscal 2003 2002 item 8item 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 3 7 notes consolidated financial statements discussion regarding companys use derivative instruments foreign exchange rate sensitivity nature companys global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include european euro mexican peso british pound thai bhat transactional exposure companys transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year analysis assumes hypothetical 10 strengthening weakening us dollar included analysis estimated impact hedging program mitigates companys transactional exposure june 30 2004 2003 company hedged approximately 52 61 transactional exposures respectively following table summarizes analysis relates companys transactional exposure millions 1 impact hypothetical 10 strengthening weakening us dollar translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included companys analysis june 30 2004 2003 following table summarizes companys translational exposure impact hypothetical 10 strengthening weakening us dollar millions 1 impact hypothetical 10 strengthening weakening us dollar increase net estimated translational exposure fiscal 2004 2003 resulted primarily international acquisitions completed fiscal 2004 interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount companys longterm shortterm debt expected fluctuate result business requirements market conditions factors companys policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2004 2003 potential increase decrease interest expense analysis result hypothetical change 64 million 32 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include rubber heating oil diesel fuel polystyrene company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year june 30 2004 2003 company hedged exposures table summarizes companys analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2004 2003 millions 1 impact hypothetical 10 change commodity market prices company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating companys distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 3 7 “notes consolidated financial statements” discussion regarding company’s use derivative instruments foreign exchange rate sensitivity nature company’s global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include european euro mexican peso british pound canadian dollar australian dollar thai bhat transactional exposure company’s transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year analysis assumes hypothetical 10 strengthening weakening us dollar included analysis estimated impact hedging program mitigates company’s transactional exposure june 30 2005 2004 company hedged approximately 52 transactional exposures following table summarizes analysis relates company’s transactional exposure 1 impact hypothetical 10 strengthening weakening us dollar translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included company’s analysis june 30 2005 2004 following table summarizes company’s translational exposure impact hypothetical 10 strengthening weakening us dollar 1 impact hypothetical 10 strengthening weakening us dollar interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount company’s longterm shortterm debt expected fluctuate result business requirements market conditions factors company’s policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2005 2004 potential increase decrease interest expense analysis result hypothetical change 46 million 64 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include rubber heating oil diesel fuel polystyrene company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year june 30 2005 2004 company hedged exposures table summarizes company’s analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2005 2004 company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating company’s distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 5 “notes consolidated financial statements” discussion regarding company’s use derivative instruments foreign exchange rate sensitivity nature company’s global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include european euro mexican peso british pound canadian dollar australian dollar thai baht transactional exposure company’s transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year 2006 analysis utilizes implied volatility measurement currency estimate net potential gain loss 2005 analysis assumed hypothetical 10 strengthening weakening us dollar included analysis estimated impact hedging program mitigates company’s transactional exposure june 30 2006 2005 company hedged approximately 44 52 respectively transactional exposures following table summarizes analysis relates company’s transactional exposure translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included company’s analysis june 30 2006 2005 following table summarizes company’s translational exposure impact hypothetical 10 strengthening weakening us dollar interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount company’s longterm shortterm debt expected fluctuate result business requirements market conditions factors company’s policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2006 2005 potential increase decrease interest expense analysis result hypothetical change 62 million 46 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include latex heating oil diesel fuel polystyrene among others company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year june 30 2006 2005 company hedged exposures table summarizes company’s analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2006 2005 company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating company’s distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 14 “notes consolidated financial statements” discussion regarding company’s use derivative instruments foreign exchange rate sensitivity nature company’s global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include canadian dollar european euro mexican peso thai baht british pound australian dollar transactional exposure company’s transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year analysis utilizes implied volatility measurement currency estimate net potential gain loss analysis included estimated impact hedging program mitigates company’s transactional exposure june 30 2007 2006 company hedged approximately 46 44 respectively transactional exposures following table summarizes analysis relates company’s transactional exposure millions translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included company’s analysis june 30 2007 2006 following table summarizes company’s translational exposure impact hypothetical 10 strengthening weakening us dollar millions interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount company’s longterm shortterm debt expected fluctuate result business requirements market conditions factors company’s policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2007 2006 potential increase decrease interest expense analysis result hypothetical change 94 million 62 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include latex heating oil diesel fuel polystyrene among others company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year june 30 2007 2006 company hedged exposures table summarizes company’s analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2007 2006 millions company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating company’s distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 14 “notes consolidated financial statements” discussion regarding company’s use derivative instruments foreign exchange rate sensitivity nature company’s global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include canadian dollar european euro mexican peso thai baht british pound australian dollar transactional exposure company’s transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year fiscal 2008 analysis utilizes currency portfolio model encompassing implied volatility historical correlation estimate net potential gain loss fiscal 2007 analysis utilizes implied volatility measurement currency estimate net potential gain loss analyses included estimated impact hedging program mitigates company’s transactional exposure june 30 2008 2007 company hedged approximately 45 46 respectively transactional exposures following table summarizes analysis relates company’s transactional exposure millions translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included company’s analysis june 30 2008 2007 following table summarizes company’s translational exposure impact hypothetical 10 strengthening weakening us dollar millions interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount company’s longterm shortterm debt expected fluctuate result business requirements market conditions factors company’s policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2008 2007 potential increase decrease interest expense analysis result hypothetical change 59 million 94 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include latex heating oil diesel fuel polystyrene among others company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year june 30 2008 2007 company hedged exposures table summarizes company’s analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2008 2007 millions company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating company’s distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk businesses exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes maintain comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 12 “notes consolidated financial statements” discussion regarding use derivative instruments foreign exchange rate sensitivity nature global operations businesses exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since manufacture sell products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include canadian dollar european euro mexican peso thai baht transactional exposure businesses’ transactional exposure arises purchase sale goods services currencies functional currency functional currency subsidiaries part risk management program end fiscal year perform sensitivity analysis forecasted transactional exposure upcoming fiscal year fiscal 2010 fiscal 2009 analyses utilize currency portfolio model encompassing implied volatility historical correlation estimate net potential gain loss analyses included estimated impact hedging program mitigates businesses’ transactional exposure june 30 2010 2009 hedged approximately 45 46 respectively businesses’ transactional exposures following table summarizes analysis relates businesses’ transactional exposure millions translational exposure businesses also exposure related translation financial statements foreign divisions us dollars functional currency perform similar analysis described related translational exposure typically hedge translational exposure hedging impact included analysis june 30 2010 2009 following table summarizes businesses’ translational exposure impact hypothetical 10 strengthening weakening us dollar millions interest rate sensitivity exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount longterm shortterm debt expected fluctuate result business requirements market conditions factors policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management utilize interest rate swap instruments mitigate exposure interest rate movements part risk management program annually perform sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2010 2009 potential increase decrease interest expense analysis result hypothetical change 03 million 01 million respectively commodity price sensitivity purchase certain commodities use manufacturing distribution processes include latex nitrile diesel fuel polypropylene among others typically purchase commodities market prices result affected price fluctuations part risk management program perform sensitivity analysis forecasted commodity exposure following fiscal year june 30 2010 2009 hedged portion commodity exposures see note 12 “notes consolidated financial statements” discussion table summarizes analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2010 2009 millions also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating distribution manufacturing corporate facilities certain deregulated markets time enter longterm purchase contracts supply items specific price item 8item 7a quantitative qualitative disclosures market risk businesses exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity price related changes maintain hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 12 “notes consolidated financial statements” discussion regarding use derivative instruments foreign exchange rate sensitivity nature global operations businesses exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature principal drivers foreign exchange exposure include canadian dollar european euro mexican peso thai baht transactional exposure businesses’ transactional exposure arises purchase sale goods services currencies functional currency functional currency subsidiaries part risk management program end fiscal year perform sensitivity analysis forecasted transactional exposure upcoming fiscal year fiscal 2011 fiscal 2010 analyses utilize currency portfolio model encompassing implied volatility historical correlation estimate net potential gain loss analyses included estimated impact hedging program mitigates businesses’ transactional exposure june 30 2011 2010 hedged approximately 45 percent businesses’ transactional exposures following table summarizes analysis relates businesses’ transactional exposure impact hypothetical 10 percent increase decrease translational exposure related translation financial statements foreign operations us dollars functional currency perform similar analysis described related translational exposure typically hedge translational exposure hedging impact included analysis june 30 2011 2010 following table summarizes businesses’ translational exposure impact hypothetical 10 percent strengthening weakening us dollar interest rate sensitivity exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount longterm shortterm debt expected fluctuate result business requirements market conditions factors policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management utilize interest rate swap instruments mitigate exposure interest rate movements part risk management program perform annual sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 percent change interest rates june 30 2011 2010 potential increase decrease annual interest expense analysis result hypothetical change 04 million 03 million respectively commodity price sensitivity exposed market price changes commodities including oilbased resins cotton latex diesel fuel typically purchase raw materials market prices finished goods prices based part commodity price index part risk management program perform sensitivity analysis forecasted commodity exposure following fiscal year forecasted commodity exposure june 30 2011 increased prior year primarily result contract adjustments vendors volatility commodity prices changes purchasing volumes changes mix items buy updated prior year comparable commodity exposure include items meeting criteria june 30 2011 2010 hedged portion commodity exposures see note 12 “notes consolidated financial statements” discussion table summarizes analysis forecasted commodity exposures hypothetical 10 percent fluctuation commodity prices june 30 2011 2010 also additional exposure commodities purchase finished goods various energyrelated commodities including natural gas electricity normal course business contracts directly tied commodity index believe total gross range exposure commodities including items listed table 500 million 600 million june 30 2012 item 8item 7a quantitative qualitative disclosures market risk businesses exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity price related changes maintain hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 11 “notes consolidated financial statements” discussion regarding use derivative instruments foreign exchange rate sensitivity nature global operations businesses exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature principal drivers foreign exchange exposure include canadian dollar chinese renminbi european euro japanese yen malaysian ringgit mexican peso thai baht transactional exposure businesses’ transactional exposure arises purchase sale goods services currencies functional currency functional currency subsidiaries part risk management program end fiscal year perform sensitivity analysis forecasted transactional exposure upcoming fiscal year fiscal 2012 fiscal 2011 analyses utilized currency portfolio model encompassing implied volatility historical correlation estimate net potential gain loss analyses included estimated impact hedging program mitigates transactional exposure june 30 2012 2011 hedged approximately 45 percent businesses’ transactional exposures following table summarizes analysis relates transactional exposure impact hypothetical 10 percent increase decrease translational exposure related translation financial statements foreign operations us dollars functional currency perform similar analysis described related translational exposure typically hedge translational exposure hedging impact included analysis june 30 2012 2011 following table summarizes translational exposure impact hypothetical 10 percent strengthening weakening us dollar interest rate sensitivity exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount longterm shortterm debt expected fluctuate result business requirements market conditions factors policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management utilize interest rate swap instruments mitigate exposure interest rate movements part risk management program perform annual sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 percent change interest rates june 30 2012 2011 potential increase decrease net annual interest expense analysis result hypothetical change 2 million 1 million respectively commodity price sensitivity exposed market price changes commodities including oilbased resins cotton latex diesel fuel typically purchase raw materials market prices finished goods prices based part commodity price index part risk management program perform sensitivity analysis forecasted commodity exposure following fiscal year forecasted commodity exposure june 30 2012 decreased prior year primarily result commodity prices changes purchasing volumes june 30 2012 2011 hedged portion commodity exposures see note 11 “notes consolidated financial statements” discussion table summarizes analysis forecasted commodity exposures hypothetical 10 percent fluctuation commodity prices june 30 2012 2011 additional exposure commodities purchase finished goods various energyrelated commodities including natural gas electricity normal course business contracts directly tied commodity index believe total gross range exposure commodities including items listed table 500 million 600 million june 30 2012 item 8item 7a quantitative qualitative disclosures market risk businesses exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity pricerelated changes maintain hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 11 “notes consolidated financial statements” discussion regarding use derivative instruments foreign exchange rate sensitivity nature global operations businesses exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature principal drivers foreign exchange exposure include canadian dollar chinese renminbi european euro mexican peso thai baht malaysian ringgit japanese yen transactional exposure businesses transactional exposure arises purchase sale goods services currencies functional currency functional currency subsidiaries part risk management program end fiscal year perform sensitivity analysis forecasted transactional exposure upcoming fiscal year analyses include estimated impact hedging program mitigates businesses transactional exposure june 30 2013 2012 hedged approximately 45 percent businesses transactional exposures following table summarizes analysis relates businesses transactional exposure impact hypothetical 10 percent increase decrease june 30 translational exposure related translation financial statements foreign operations us dollars functional currency perform similar analysis described related translational exposure typically hedge translational exposure hedging impact included analysis june 30 2013 2012 following table summarizes businesses translational exposure impact hypothetical 10 percent strengthening weakening us dollar june 30 interest rate sensitivity exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount longterm shortterm debt expected fluctuate result business requirements market conditions factors policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management utilize interest rate swap instruments mitigate exposure interest rate movements part risk management program perform annual sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 percent change interest rates june 30 2013 2012 potential increase decrease annual interest expense analysis result hypothetical change 2 million commodity price sensitivity exposed market price changes commodities including oilbased resins cotton latex diesel fuel typically purchase raw materials market prices finished goods prices based part commodity price index part risk management program perform sensitivity analysis forecasted commodity exposure following fiscal year forecasted commodity exposure june 30 2013 decreased prior year primarily result commodity prices changes purchasing volumes june 30 2013 2012 hedged portion commodity exposures see note 11 “notes consolidated financial statements” discussion table summarizes analysis forecasted commodity exposures hypothetical 10 percent fluctuation commodity prices june 30 also exposed fluctuations commodities prices purchase finished goods various energyrelated commodities including natural gas electricity normal course business contracts directly tied commodity index believe total gross range exposure commodities including items listed table 500 million 600 million june 30 2013 cardinal health inc subsidiaries item 8item 7a quantitative qualitative disclosures market risk exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity pricerelated changes maintain hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 12 “notes consolidated cardinal health inc subsidiaries financial statements” discussion regarding use derivative instruments foreign exchange rate sensitivity nature global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature principal drivers foreign exchange exposure include canadian dollar thai baht mexican peso chinese renminbi european euro japanese yen singapore dollar malaysian ringgit transactional exposure transactional exposure arises purchase sale goods services currencies functional currency functional currency subsidiaries part risk management program end fiscal year perform sensitivity analysis forecasted transactional exposure upcoming fiscal year analyses include estimated impact hedging program mitigates transactional exposure june 30 2014 2013 hedged approximately 48 45 percent transactional exposures respectively following table summarizes analysis relates transactional exposure impact hypothetical 10 percent increase decrease june 30 translational exposure related translation financial statements foreign operations us dollars functional currency perform similar analysis described related translational exposure typically hedge translational exposure hedging impact included analysis june 30 2014 2013 following table summarizes translational exposure impact hypothetical 10 percent strengthening weakening us dollar june 30 interest rate sensitivity exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund operations nature amount longterm shortterm debt expected fluctuate result business requirements market conditions factors policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management utilize interest rate swap instruments mitigate exposure interest rate movements part risk management program perform annual sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 percent change interest rates june 30 2014 2013 potential increase decrease annual interest expense analysis result hypothetical change 4 million 2 million respectively fiscal 2014 purchased marketable securities classified availableforsale carried fair value consolidated balance sheets fair value subject change primarily result changes market interest rates investment risk related issuers credit worthiness june 30 2014 hypothetical increase decrease 100 basis points interest rates would cause potential decrease 1 million estimated fair value commodity price sensitivity exposed market price changes commodities including oilbased resins cotton latex diesel fuel typically purchase raw materials market prices finished goods prices based part commodity price index part risk management program perform sensitivity analysis forecasted commodity exposure following fiscal year forecasted commodity exposure june 30 2014 decreased prior year primarily result commodity prices changes purchasing volumes june 30 2014 2013 hedged portion commodity exposures see note 12 “notes consolidated financial statements” discussion table summarizes analysis forecasted commodity exposures hypothetical 10 percent fluctuation commodity prices june 30 also exposed fluctuations commodities prices purchase finished goods various energyrelated commodities including natural gas electricity normal course business contracts directly tied commodity index believe total gross range exposure commodities including items listed table 400 million 500 million june 30 2014 cardinal health inc subsidiaries item 8nannannannannannanitem 7a quantitative qualitative disclosures market risk company exposed cash flow earnings fluctuations result certain market risks market risks primarily relate foreign exchange interest rate commodity related changes company maintains comprehensive hedging program manage volatility related market exposures employs operational economic derivative financial instruments order mitigate risk see notes 1 13 “notes consolidated financial statements” discussion regarding company’s use derivative instruments foreign exchange rate sensitivity nature company’s global operations exposed cash flow earnings fluctuations resulting foreign exchange rate variation exposures transactional translational nature since company manufactures sells products throughout world foreign currency risk diversified principal drivers diversified foreign exchange exposure include canadian dollar european euro mexican peso thai baht british pound australian dollar transactional exposure company’s transactional exposure arises purchase sale goods services currencies functional currency parent subsidiaries part risk management program end fiscal year company performs sensitivity analysis forecasted transactional exposure upcoming fiscal year fiscal 2009 fiscal 2008 analyses utilize currency portfolio model encompassing implied volatility historical correlation estimate net potential gain loss analyses included estimated impact hedging program mitigates company’s transactional exposure june 30 2009 2008 company hedged approximately 44 45 respectively transactional exposures following table summarizes analysis relates company’s transactional exposure millions translational exposure company also exposure related translation financial statements foreign divisions us dollars functional currency parent performs similar analysis described related translational exposure company typically hedge translational exposure hedging impact included company’s analysis june 30 2009 2008 following table summarizes company’s translational exposure impact hypothetical 10 strengthening weakening us dollar millions interest rate sensitivity company exposed changes interest rates primarily result borrowing investing activities maintain liquidity fund business operations nature amount company’s longterm shortterm debt expected fluctuate result business requirements market conditions factors company’s policy manage exposures interest rates using mix fixed floating rate debt deemed appropriate management company utilizes interest rate swap instruments mitigate exposure interest rate movements part risk management program company annually performs sensitivity analysis forecasted exposure interest rates following fiscal year analysis assumes hypothetical 10 change interest rates june 30 2009 2008 potential increase decrease interest expense analysis result hypothetical change 01 million 59 million respectively commodity price sensitivity company purchases certain commodities use manufacturing processes include latex heating oil diesel fuel polystyrene among others company typically purchases commodities market prices result affected price fluctuations part risk management program company performs sensitivity analysis forecasted commodity exposure following fiscal year company hedge exposures june 30 2008 june 30 2009 company hedged portion commodity exposures see note 13 “notes consolidated financial statements” discussion table summarizes company’s analysis forecasted commodity exposures hypothetical 10 fluctuation commodity prices june 30 2009 2008 millions company also exposure certain energy related commodities including natural gas electricity normal course business exposures result primarily operating company’s distribution manufacturing corporate facilities certain deregulated markets company time enters longterm purchase contracts supply items specific price item 8 item 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal year ended june 30 1994 twelve months ended june 30 1993 fiscal years ended march 31 1993 march 31 1992 consolidated balance sheets june 30 1994 march 31 1993 consolidated statements shareholders equity fiscal years ended june 30 1994 march 31 1993 march 31 1992 consolidated statements cash flows fiscal years ended june 30 1994 march 31 1993 march 31 1992 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1994 march 31 1993 related consolidated statements earnings shareholders equity cash flows years ended june 30 1994 march 31 1993 march 31 1992 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits consolidated financial statements financial statement schedule give retroactive effect poolingofinterests business combination cardinal health inc whitmire distribution corporation february 7 1994 described note 1 consolidated financial statements audit balance sheet whitmire distribution corporation july 3 1993 related statements earnings shareholders equity cash flows whitmire distribution corporation years ended july 3 1993 june 27 1992 statements reflect total assets 451855000 july 3 1993 net sales 2666829000 2033067000 years ended july 3 1993 june 27 1992 respectively net earnings available common shares cumulative effect change accounting principle 4039000 330000 years ended july 3 1993 june 27 1992 respectively statements audited auditors whose report furnished us opinion insofar relates amounts included whitmire distribution corporation march 31 1993 1992 financial statements based solely report auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1994 march 31 1993 results operations cash flows years ended june 30 1994 march 31 1993 march 31 1992 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 7 consolidated financial statements company changed method accounting income taxes conform statement financial accounting standards 109 applying retroactively effective april 1 1992 deloitte touche llp columbus ohio august 16 1994 report independent public accountants board directors whitmire distribution corporation audited balance sheet whitmire distribution corporation delaware corporation july 3 1993 related statements operations stockholders equity cash flows two years period ended july 3 1993 presented herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position whitmire distribution corporation july 3 1993 results operations cash flows two years period ended july 3 1993 conformity generally accepted accounting principles arthur andersen co sacramento california september 3 1993 except respect matter discussed note 10 date october 11 1993 cardinal health inc subsidiaries accompanying notes integral part statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies company full service wholesaler distributing broad line pharmaceuticals surgical hospital supplies health beauty care products items typically sold hospitals retail drug stores health care providers company currently operating one business segment basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany amounts eliminated consolidated financial statements prepared give retroactive effect poolingofinterests business combination whitmire distribution corporation whitmire merger february 7 1994 see note 3 term cardinal used herein refers cardinal health inc subsidiaries prior whitmire merger cardinals fiscal year historically ended march 31 whitmires fiscal year ended saturday closest end june march 1 1994 company changed fiscal year end march 31 june 30 accordingly accompanying consolidated financial statements fiscal year ended june 30 1994 twelve months ended june 30 1993 combine information cardinal whitmire june 30 1994 two years ended accompanying consolidated financial statements earlier fiscal years combine information cardinals march year end whitmires subsequent fiscal june year end consolidated statement earnings twelve months ended june 30 1993 unaudited presented purpose supplemental analysis due different fiscal period ends merged companies results whitmire three months ended july 3 1993 included consolidated statements earnings periods ended june 30 1993 march 31 1993 cardinals results operations exclusive whitmire three months ended june 30 1993 included consolidated statement earnings included adjustment consolidated statement shareholders equity amounts along certain cash flow information summarized follows thousands cash equivalents company considers liquid investments purchased maturity three months less cash equivalents marketable securities marketable securities recorded cost approximates market value trade receivables trade receivables presented net related allowance doubtful accounts approximately 21594000 13428000 june 30 1994 march 31 1993 respectively merchandise inventories substantially merchandise inventories stated lower cost lastin firstout lifo method market company used firstin firstout fifo method inventory valuation approximates current replacement cost inventories would higher reported june 30 1994 61852000 march 31 1993 55374000 impact partial inventory liquidations certain lifo pools reduced lifo provision approximately 2500000 fiscal 1993 property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range three forty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense assets primarily represent intangible assets related excess cost net assets subsidiaries acquired noncurrent deferred tax assets see note 7 intangible assets amortized using straightline method lives range ten forty years accumulated amortization 16571000 15369000 june 30 1994 march 31 1993 respectively balance sheet date determination made management ascertain whether intangible assets impaired based several criteria including limited sales trends undiscounted operating cash flows operating factors sales recognition company records sales merchandise delivered customers company obligation provide services related merchandise delivered service fees related bulk sales pharmaceuticals included net sales amounts significant fiscal 1994 1993 1992 income taxes effective beginning fiscal 1993 cardinal began accounting income taxes liability method adopting statement financial accounting standards sfas 109 accounting income taxes sfas 109 cumulative effect adopting statement 10000000 reported change accounting principle retroactive beginning fiscal 1993 cumulative effect adopting sfas 109 whitmire material included fiscal 1992 provision income taxes separately presented accompanying consolidated financial statements prior adoption sfas 109 cardinal whitmire accounted income taxes accordance accounting principles board opinion 11 capital stock companys authorized capital shares consist 60000000 common shares without par value class common shares june 30 1994 34862835 outstanding b 5000000 class b common shares without par value class b common shares june 30 1994 2971375 outstanding c 500000 nonvoting preferred shares without par value preferred shares none issued class b common shares issued former whitmire stockholder february 1994 connection whitmire merger outstanding class b common shares held one holder holders class common shares class b common shares collectively common shares participate equally dividends declared companys board directors holders class common shares entitled one vote per share election directors upon matters shareholders entitled vote holders class b common shares entitled onefifth one vote per share election directors upon matters shareholders entitled vote earnings per common share primary earnings per common share based weighted average number common shares outstanding period dilutive effect stock options warrants date grant computed using treasury stock method fully diluted earnings per common share reflect dilutive effect stock options warrants date grant computed using treasury stock method b full conversion 725 convertible subordinated debentures due 2015 conversion redemption july 1993 see note 5 stock split company paid 25 stock dividend june 30 1994 effect fiveforfour stock split companys common shares share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted reflect stock split 2 unusual items february 1994 company recorded nonrecurring charge reflect estimated whitmire merger costs approximately 359 million 282 million net tax including fees transaction costs related combination b nonrecurring costs expected incurred connection integration cardinals whitmires business operations estimated costs include approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate restructuring distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement estimated costs approximately 7 million pertain revaluation certain operating assets 2 million pertain employee relocation retraining termination costs certain amounts based preliminary estimate costs incurred company actual costs may differ estimate june 30 1994 company incurred actual costs aggregating approximately 117 million relating whitmire merger companys current estimates merger costs ultimately incurred materially different amounts originally recorded fiscal 1993 company received termination fee approximately 135 million resulting termination durrfillauer medical inc agreement merge company also fiscal 1993 company recorded nonrecurring charges totaling approximately 137 million primarily related closing certain noncore operations rationalization standardization improvement selected distribution operations information systems support functions charges included writedown certain assets moving costs associated affected operations modification costs necessary centralize standardize certain information systems support functions june 30 1994 company incurred actual costs aggregating approximately 91 million related charges expects remaining amounts incurred fiscal 1995 modification terms certain whitmire stock options fiscal 1993 also resulted onetime stock option compensation charge approximately 52 million see note 11 fiscal 1992 completion whitmire certain equity transactions resulted recording unusual expense approximately 20 million see note 11 following supplemental information summarizes results operations company adjusted pro forma basis reflect elimination effect unusual items discussed b redemption whitmires preferred stock pursuant terms reorganization agreement solely purposes summary presented redemption assumed funded liquidation investments taxexempt marketable securities 3 business combinations january 27 1994 shareholders cardinal whitmire approved adopted agreement plan reorganization dated october 11 1993 reorganization agreement pursuant cardinal merger corp wholly owned subsidiary cardinal merged whitmire effective february 7 1994 merger accounted poolingofinterests business combination holders outstanding whitmire common stock received aggregate approximately 6802000 class common shares approximately 1861000 class b common shares exchange previously outstanding common stock whitmire addition whitmires outstanding stock options converted options purchase aggregate approximately 1721000 additional class common shares pursuant terms options reorganization agreement following presents reconciliation amounts net sales net earnings available common shares reported accompanying consolidated financial statements previously reported cardinal well information interim period combination occurred thousands december 17 1993 company issued approximately 296000 class common shares merger transaction capital stock prn services inc distributor pharmaceuticals medical supplies oncologists oncology clinics transaction accounted poolingofinterests business combination impact prn merger historical pro forma basis significant accordingly prior periods restated prn merger may 4 1993 company acquired outstanding capital stock solomons company wholesale drug distributor based savannah georgia exchange approximately 1062000 class common shares transaction accounted purchase method acquisition occurred beginning fiscal 1993 operating results pro forma basis would significantly different october 15 1991 company acquired issued outstanding shares chapman drug company drug wholesaler based knoxville tennessee cash 16800000 transaction accounted purchase method acquisition occurred beginning fiscal 1992 operating results pro forma basis would significantly different 4 notes payable banks company entered various uncommitted lineofcredit arrangements allow borrowings 221000000 various money market rates amount outstanding arrangements june 30 1994 25000000 addition aforementioned credit arrangements june 30 1994 company revolving credit agreements eight banks maturity less one year renewable quarterly basis allow company borrow 100000000 none use june 30 1994 either prime rate eurodollar rates plus 5 mutually agreed upon rate company required pay commitment fee annual rate 125 average daily unused amounts total credit allowed revolving credit agreements total unused lines credit june 30 1994 march 31 1993 296000000 176000000 respectively following summarizes notes payable banks activity thousands except interest rate data weighted average interest rates periods represent annualized rates computed based number days borrowings outstanding average amounts borrowed computed based average daily amounts outstanding respective periods 5 longterm obligations longterm obligations consist following thousands february 23 1994 company sold 100000000 65 notes due 2004 new notes public offering new notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 860000 incurred connection offering amortized straightline basis period new notes outstanding company used proceeds sale general corporate purposes including repayment bank lines credit incurred part whitmire merger see note 3 anticipation sale new notes company entered interest rate hedge agreement terminated approximate time issuance new notes resulting deferred gain approximately 13 million amortized reduction interest expense period new notes outstanding march 11 1992 company sold 100000000 8 notes due 1997 notes public offering notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 718000 incurred connection offering amortized straightline basis period notes outstanding company entered various interest rate swap agreements serve hedge notes net effect swap agreements company exchanged 8 fixed rate position notes fixed rate 51 period july 15 1992 march 1 1993 fixed rate 65 period march 2 1993 march 1 1994 thereafter fixed rate 81 march 1 1997 maturity date notes may 1993 two offsetting swap agreements canceled gain loss company due offsetting nature swaps market value net receivable position approximates market value net payable position risk accounting loss event nonperformance counterparties approximately 4 million june 30 1994 however based credit quality counterparties company believes likelihood credit loss remote fiscal 1992 company whitmire entered revolving credit agreement could borrow 210000000 fiscal 1993 agreement amended provide seasonal increases availability 235000000 interest payable monthly 15 prime rate whitmires election 325 london interbank offered rate libor average interest rate revolving credit agreement end fiscal 1993 69 agreement replaced 175000000 credit agreement interest expense fiscal 1992 includes charge 1837000 associated replacement february 7 1994 revolving credit agreement terminated subordinated debentures outstanding march 31 1993 convertible companys class common shares time july 1 2015 unless previously redeemed conversion price 1751 per share issuance costs approximately 2000000 incurred connection offering amortized straightline basis original period subordinated debentures outstanding june 11 1993 company called subordinated debentures redemption effective july 2 1993 following call 74920000 subordinated debentures outstanding march 31 1993 converted class common shares company remaining 80000 subordinated debentures outstanding march 31 1993 redeemed cash pro forma primary earnings per share company conversion redemption occurred beginning fiscal 1992 would 080 074 fiscal 1993 1992 respectively amount credited shareholders equity result conversion subordinated debentures reduced unamortized offering costs approximately 1767000 costs directly related conversion approximately 13000 certain longterm obligations collateralized property equipment company aggregate book value approximately 13500000 june 30 1994 maturities longterm obligations future fiscal years follows thousands 6 disclosures fair value financial instruments following methods assumptions used estimate fair value material class financial instruments estimates practicable cash equivalents marketable securities accrued liabilities carrying amount june 30 1994 march 31 1993 approximates fair value shortterm maturities items longterm obligations companys longterm obligations composed notes longterm revolving credit agreement convertible debentures various mortgage revenue bonds notes capital leases fair value companys longterm obligations estimated based quoted market prices similar issues current interest rates offered debt remaining maturities considerable judgment required interpreting market data develop estimates fair value accordingly estimates presented herein necessarily indicative amounts company could realize current market exchange fair values include early redemption premiums underwriters fees commissions refunding costs legal registration fees estimated value companys longterm obligations 206116000 313704000 compared carrying amounts 213015000 281225000 june 30 1994 march 31 1993 respectively fair value estimates presented herein based pertinent information available management dates indicated although management aware factors would significantly affect estimated fair value amounts comprehensively revalued purposes financial statements since date current estimates fair values may differ significantly amounts presented herein 7 income taxes effective beginning fiscal 1993 cardinal adopted statement financial accounting standards 109 accounting income taxes sfas 109 provisions sfas 109 income taxes recorded liability method sfas 109 results recognition deferred tax assets liabilities expected future tax consequences existing differences financial reporting tax reporting bases assets liabilities temporary differences operating loss tax credit carryforwards tax purposes cumulative effect adopting sfas 109 10000000 cardinal reported change accounting principle retroactive beginning fiscal 1993 cumulative effect adopting sfas 109 whitmire material included fiscal 1992 provision income taxes separately presented accompanying consolidated statements earnings provision income taxes consists following thousands 8 employee retirement benefit plans substantially companys nonunion employees enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide matching company contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified union employees covered companysponsored multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement effect companysponsored defined benefit plans companys consolidated financial statements material employee retirement benefit plans expense follows thousands financial accounting standards board issued statement 112 employers accounting postemployment benefits requires employers accrue certain postemployment benefits provided former inactive employees beneficiaries covered dependents employment retirement change must implemented company fiscal 1995 based upon preliminary estimates management believe new statement material effect consolidated financial statements company 9 commitments contingent liabilities company leases certain warehouse office facilities vehicles data processing equipment operating leases expire various dates next thirteen years certain leases provide renewal options andor contingent rentals based various factors future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 1994 follows thousands minimum rental payments reduced sublease rentals approximately 582000 1995 215000 1996 79000 1997 12000 1998 rental expense net sublease rental income relating operating leases shortterm cancelable leases approximately 11189000 10316000 8990000 fiscal 1994 1993 1992 respectively connection supplier relationship various customers company guaranteed certain indebtedness lease payments june 30 1994 guarantees total approximately 2251000 fiscal 1994 company began program whereby certain customer notes receivables sold full recourse commercial bank june 30 1994 amounts outstanding customer notes receivables sold commercial bank program totaled approximately 67 million company becomes involved timetotime litigation arising normal business activities addition november 1993 cardinal whitmire five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system company believes allegations set forth cardinal whitmire lawsuits without merit opinion management companys liability pending litigation would material adverse effect companys financial condition 10 redeemable preferred stock company authorized 360000 shares redeemable preferred 01 par value stock whitmire redeemable preferred stock divided two series 350000 shares designated senior preferred stock 10000 shares designated series preferred stock holders whitmire redeemable preferred stock entitled cumulative annual dividends 1000 per share senior preferred stock 10125 series preferred stock declared whitmires board directors lieu paying cash dividends holders senior preferred stock series preferred stock whitmire could election pay scheduled dividends additional shares senior preferred stock series preferred stock appropriate whitmire would required redeem 10000 per share plus accrued unpaid dividends shares senior series preferred stock commencing october 1994 july 1996 stockholders equity charged 840000 fiscal 1993 1992 accretion relative mandatory redemption obligation march 31 1993 total 4200000 credited redeemable preferred stock accretion pursuant terms reorganization agreement cardinal whitmire see note 3 outstanding shares senior series preferred stock redeemed february 7 1994 date whitmire merger 11 stockholders equity fiscal 1992 company whitmire completed series transactions affected capitalization follows warrants purchase whitmire common stock returned canceled options granted benefit key employees purchase shares whitmire common stock outside investors granted adjustment share rights representing rights purchase shares whitmire common stock defined percentage adjustment share rights cancelable annually 100 based upon achievement certain financial targets shares whitmires series preferred stock issued certain outside investors reimbursement expenses incurred connection ownership interest put call provisions certain outstanding warrants canceled fiscal 1992 consolidated statement earnings reflects expense associated transactions approximately 20 million fiscal 1993 adjustment share rights canceled certain conditions relative exercise options eliminated financial reporting purposes modification terms options treated options issued date terms modified accordingly compensation charge totaling approximately 52 million recorded relative changes compensation charge equal fair value determined independent appraisal options date terms options modified pursuant terms reorganization agreement see note 3 warrants purchase shares whitmire common stock upon exercise became convertible approximately 2831000 common shares average price 08 per share exercised prior consummation poolingofinterests business combination cardinal whitmire 12 stock options restricted shares company maintains stock incentive plans benefit certain officers directors key employees plans june 30 1994 company authorized issue aggregate approximately 3875000 class common shares form incentive stock options nonqualified stock options restricted shares options granted generally exercisable periods ten years date grant price approximating fair market value date grant june 30 1994 approximately 389000 option shares plans exercisable approximately 2919000 class common shares reserved issuance plans connection 1988 acquisition company issued options approximately 133000 class common shares 745 per share options exercised fiscal 1993 connection whitmire merger outstanding whitmire stock options granted current former whitmire officers employees automatically converted options cardinal exchange options purchase aggregate approximately 1721000 additional cardinal class common shares pursuant terms options reorganization agreement see note 3 terms original issuance reflected reorganization agreement exercise price substantially cardinal exchange options remitted certain former investors whitmire fiscal 1994 cardinal exchange options purchase approximately 271000 shares exercised average option price 160 per share june 30 1994 cardinal exchange options purchase approximately 1450000 shares outstanding average exercise price 160 per share substantially cardinal exchange options outstanding june 30 1994 100 vested exercisable october 25 1995 market value restricted shares awarded company recorded unamortized restricted stock awards shown separate component shareholders equity compensation awards amortized expense period participants perform services generally four seven years june 30 1994 approximately 414000 restricted shares issued approximately 195000 shares remain restricted subject forfeiture approximately 16000 shares forfeited 13 supplemental information regarding noncash investing financing activities capital lease obligations 906000 648000 2130000 incurred 1994 1993 1992 respectively result company entering leases equipment conjunction acquisitions solomons chapman see note 3 liabilities assumed follows thousands total debt assumed company result acquisitions 6275000 fiscal 1992 4315000 three months ended june 30 1993 included part amount liabilities assumed conjunction poolingofinterests combination prn see note 3 fiscal 1994 historical cost prn assets combined approximately 16946000 total prn liabilities assumed including total debt approximately 5847000 approximately 16564000 amounts differ amounts reported previously filed quarterly reports due poolingofinterests transaction cardinal whitmire consummated february 7 1994 amounts originally reported cardinal poolingofinterests transaction follows following supplemental information presented show seasonal trend earnings reflects selected quarterly financial data basis consolidating calendar quarters cardinal whitmire excludes impact unusual items see note 2 assumes redemption whitmires preferred stock solely purposes supplemental information presented redemption assumed funded liquidation investments taxexempt marketable securities 15 common shares repurchase april 14 1993 company repurchased class common shares approximately 725000 owned subsidiaries north american national corporation former chairman also director company price 2120 per share nearly shares subject certain restrictions contained shareholders agreement among north american national corporation individual shareholders restrictions released part repurchase transaction 16 subsequent events july 1 1994 company purchased common stock humistonkeeling inc transaction accounted purchase method humistonkeeling calumet city illinois based wholesale drug distributor annualized revenues approximately 330 million july 18 1994 company issued class common shares exchange common shares behrens inc transaction accounted poolingofinterests business combination impact behrens combination historical pro forma basis significant accordingly prior periods restated behrens combination behrens waco texas based wholesale drug distributor annualized revenues approximately 185 million august 17 1994 company filed securities exchange commission registration statement underwritten public offering 5250000 class common shares 5250000 shares 1600000 sold company 3650000 sold certain shareholders company underwriters granted option purchase 787500 additional class common shares cover overallotments including 266949 shares company net proceeds payable company used finance working capital growth general corporate purposes item 9item 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal years ended june 30 1996 1995 1994 consolidated balance sheets june 30 1996 1995 consolidated statements shareholders equity fiscal years ended june 30 1996 1995 1994 consolidated statements cash flows fiscal years ended june 30 1996 1995 1994 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1996 1995 related consolidated statements earnings shareholders equity cash flows three years period ended june 30 1996 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits consolidated financial statements financial statement schedule give retroactive effect poolingofinterests business combination cardinal health inc pyxis corporation may 7 1996 described note 2 consolidated financial statements audit financial statements pyxis corporation year statements reflect total assets constituting 105 112 respectively consolidated total assets june 30 1996 1995 total revenues net income constituting 25 20 21 317 266 399 respectively three years period ended june 30 1996 statements audited auditors whose report furnished us opinion insofar relates amounts included pyxis corporation based solely report auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1996 1995 results operations cash flows three years period ended june 30 1996 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp columbus ohio august 13 1996 report ernst young llp independent auditors board directors cardinal health inc audited consolidated balance sheets pyxis corporation june 30 1996 1995 related consolidated statements income shareholders equity cash flows three years period ended june 30 1996 included herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position pyxis corporation june 30 1996 1995 consolidated results operations cash flows three years period ended june 301996 conformity generally accepted accounting principles ernst young llp san diego california august 2 1996 cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc subsidiaries company health care service provider distributes broad line pharmaceuticals surgical hospital supplies therapeutic plasma specialty pharmaceutical products health beauty care products items typically sold hospitals retail drug stores health care providers companys subsidiary pyxis corporation pyxis company manufactures leases sells services pointofuse pharmacy systems automate distribution management medications supplies hospitals health care facilities pharmacy management services provided companys subsidiary allied pharmacy service inc allied company also franchisor apothecarystyle pharmacies subsidiary medicine shoppe international inc medicine shoppe see basis presentation note 2 company currently operating one business segment primarily continental united states basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect poolingofinterests business combinations whitmire distribution corporation whitmire february 7 1994 medicine shoppe november 13 1995 pyxis may 7 1996 preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value marketable securities availableforsale company classified investment municipal bonds us treasury obligations availableforsale fair value marketable securities approximates original costs determined specific identification basis june 30 1996 gross net realized unrealized holding gains losses material period presented accompanying financial statements companys marketable securities availableforsale mature various dates fiscal 1997 receivables trade receivables primarily comprised amounts owed company pharmaceutical wholesaling activities presented net allowance doubtful accounts 32414000 31529000 june 30 1996 1995 respectively medicine shoppe provides financing selected franchisees primarily development acquisition conversion costs exclusive origination fees financing arrangements generally require repayment seven ten years interest rates fluctuate prime rate financings collateralized property franchisees thirdparty guarantors finance notes accrued interest receivable 36438000 32340000 june 30 1996 1995 respectively current portion 5827000 5062000 respectively included assets amounts reported net allowance doubtful accounts 8042000 7385000 june 30 1996 1995 respectively cardinal health inc subsidiaries notes consolidated financial statements merchandise inventories substantially merchandise inventories 83 1996 91 1995 stated lower cost using lastin firstout lifo method market company used firstin firstout fifo method inventory valuation approximates current replacement cost inventories would higher reported june 30 1996 76321000 june 30 1995 79365000 company continues consolidate locations automate selected distribution facilities invest management information systems achieve efficiencies inventory management processes result facility related inventory consolidations operational efficiencies achieved fiscal 1996 company partial inventory liquidations certain lifo pools reduced lifo provision approximately 7 million property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range three forty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense certain software costs related internally developed purchased software capitalized amortized using straightline method useful lives exceeding five years goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range ten forty years accumulated amortization 23901000 18819000 june 30 1996 1995 respectively balance sheet date determination made management ascertain whether intangible assets impaired based several criteria including limited sales trends undiscounted operating cash flows operating factors revenue recognition company records revenues merchandise shipped customers company obligation provide services related merchandise company also arranges direct deliveries made customer warehouses excluded net revenues totaled 2179000000 1779000000 562000000 fiscal 1996 1995 1994 respectively service fees related direct deliveries included net revenues significant fiscal years presented revenues recognized salestype leases pointofuse pharmacy systems installed andor customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse pharmacy systems recognized upon installationdelivery customer acceptance revenues systems installed operating lease arrangements recognized lease term becomes receivable according provisions lease revenue operating leases significant company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenues earned origination fees signing new franchise agreements recognized revenues new franchise store opened master franchise origination fees recognized revenues significant conditions relating master franchise agreement satisfied company pharmacy management revenue recognized according contracts established fee charged contracts monthly management fee arrangement capitated fee arrangement portion hospital charges patients cardinal health inc subsidiaries notes consolidated financial statements earnings per common share primary fully diluted earnings per common share computed using treasury stock method based weighted average number common shares outstanding period dilutive effect stock options date grant excluding dividends paid entities company merged company paid cash dividends per common share 012 009 fiscal years ended june 30 1996 1995 1994 respectively stock split company paid 25 stock dividend june 30 1994 effect fiveforfour stock split companys common shares share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted reflect stock split 2 business combinations effective may 7 1996 wholly owned subsidiary company merged pyxis merger pyxis merger accounted poolingofinterests business combination company issued approximately 15076000 common shares pyxis shareholders addition pyxis outstanding stock options converted options purchase approximately 1562000 additional common shares table presents reconciliation net revenues net earnings available common shares reported accompanying consolidated financial statements previously reported company thousands adjustments affecting net income shareholders equity resulting pyxis merger adopt accounting practices material periods presented herein material intercompany transactions november 13 1995 wholly owned subsidiary company merged medicine shoppe medicine shoppe merger accounted poolingofinterests business combination company issued approximately 6426000 common shares medicine shoppe shareholders addition medicine shoppes outstanding stock options converted options purchase approximately 121000 common shares fiscal 1996 company recorded costs totaling 673 million 478 million net tax related primarily mergers medicine shoppe pyxis costs included approximately 224 million investment advisor legal accounting internal personnel transaction fees associated business combinations 147 million related costs exit restructure certain activities including operating lease terminations asset impairment charges 78 million related employee retention employee severance personnel costs 29 million activities related integrating operations implementing efficiencies cardinal health inc subsidiaries notes consolidated financial statements merged companies certain amounts based upon estimates actual amounts paid may ultimately differ estimates june 30 1996 company paid approximately 221 million related charges additional costs incurred items expensed subsequent periods fiscal 1996 company completed two business combinations accounted purchase method accounting business combinations primarily related companys pointofuse pharmacy systems pharmacy management services aggregate purchase price paid primarily cash including fees expenses 400 million liabilities operations assumed approximately 332 million consisting primarily debt 278 million purchases occurred beginning fiscal 1995 operating results fiscal 1996 1995 pro forma basis would significantly different july 18 1994 company issued approximately 944000 common shares merger transaction common shares behrens inc behrens pharmaceutical wholesaler based waco texas transaction accounted poolingofinterests business combination historical cost behrens assets combined approximately 25396000 total liabilities assumed including total debt approximately 1336000 approximately 15617000 impact behrens merger historical pro forma basis significant accordingly prior periods restated behrens merger july 1 1994 company acquired outstanding stock humistonkeeling inc pharmaceutical wholesaler based calumet city illinois cash 33334000 assumed total liabilities 94390000 including total debt approximately 1670000 transaction accounted purchase method january 27 1994 shareholders cardinal whitmire approved adopted agreement plan reorganization dated october 11 1993 reorganization agreement pursuant wholly owned subsidiary cardinal merged whitmire effective february 7 1994 whitmire merger holders outstanding whitmire common stock received aggregate approximately 6802000 class common shares approximately 1861000 class b common shares exchange previously outstanding common stock whitmire class b common shares converted class common shares fiscal 1995 addition whitmires outstanding stock options converted options purchase aggregate approximately 1721000 additional common shares pursuant terms options reorganization agreement fiscal 1994 company recorded charge reflect whitmire merger costs approximately 359 million 282 million net tax costs included approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate integration distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement june 30 1996 company disbursed amounts related liabilities actual amounts paid approximating original amounts recorded december 17 1993 company issued approximately 296000 common shares merger transaction capital stock prn services inc prn distributor pharmaceuticals medical supplies oncologists oncology clinics transaction accounted poolingofinterests business combination historical cost prn assets combined approximately 16946000 total liabilities assumed including total debt approximately 5847000 approximately 16564000 impact prn merger historical pro forma basis significant accordingly prior periods restated prn merger cardinal health inc subsidiaries notes consolidated financial statements following supplemental information presented purposes facilitating meaningful comparisons ongoing operations companies summarizes results operations company adjusted pro forma basis reflect elimination effect merger costs discussed b redemption whitmires preferred stock pursuant terms reorganization agreement solely purposes summary presented redemption assumed funded liquidation investments taxexempt marketable securities operating earnings net earnings available common shares earnings reported companys consolidated financial statements reconciled respective amounts preceding table follows 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows thousands cardinal health inc subsidiaries notes consolidated financial statements future minimum lease payments received pursuant salestype leases follows june 30 1996 lease related financing arrangements prior merger may 7 1996 pyxis financed working capital needs sale certain lease receivables nonbank financing company march 1994 pyxis entered fiveyear financing servicing agreement financing company whereby financing company agreed purchase minimum 500 million pyxis lease receivables certain conditions provided total investment lease receivables one time exceed 350 million aggregate lease receivables sold arrangement totaled approximately 233 million 154 million june 30 1996 1995 respectively result merger company intends amend agreement financing company made provision estimated cost exiting arrangement 4 notes payable banks company entered various uncommitted lineofcredit arrangements allow borrowings 250000000 june 30 1996 various money market rates amounts outstanding arrangements june 30 1996 3000000 weighted average interest rate 689 outstanding june 30 1995 addition company revolving credit agreements maturity less one year seven banks credit agreements renewable quarterly basis allow company borrow 95000000 none use june 30 1996 company required pay commitment fee annual rate 125 average daily unused amounts total credit allowed revolving credit agreements total available unused lines credit june 30 1996 345000000 5 longterm obligations longterm obligations consist following thousands cardinal health inc subsidiaries notes consolidated financial statements january 23 1996 company sold 150 million 6 notes due 2006 6 notes public offering 6 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 13 million incurred connection offering amortized straightline basis period 6 notes outstanding february 23 1994 company sold 100 million 65 notes due 2004 65 notes public offering 65 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 860000 incurred connection offering amortized straightline basis period 65 notes outstanding 8 notes represent unsecured obligations company redeemable prior maturity subject sinking fund company entered various interest rate swap agreements serve hedge companys aggregate interest cost 8 notes response falling interest rates subsequent issuance 8 notes 1992 net effect swap agreements company exchanged fixed rate position 8 notes fixed rate 51 period july 15 1992 march 1 1993 fixed rate 65 period march 2 1993 march 1 1994 thereafter fixed rate 81 march 1 1997 maturity date 8 notes may 1993 two offsetting swap agreements canceled gain loss company notional principal four swap agreements outstanding june 30 1996 100 million due offsetting nature swaps market value net receivable position approximates market value net payable position risk accounting loss based discounted cash flows event nonperformance counterparties company net receivable position approximately 777000 june 30 1996 however based credit quality counterparties company believes likelihood credit loss remote company recognizes income periodic net cash settlements matched swap agreements accrue certain longterm obligations collateralized property equipment company aggregate book value approximately 10542000 june 30 1996 maturities longterm obligations future fiscal years follows thousands 6 estimated fair value financial instruments carrying amounts cash equivalents marketable securities notes payable banks accrued liabilities june 30 1996 1995 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 354197000 212251000 compared carrying amounts 371151000 212376000 june 30 1996 1995 respectively fair value companys longterm obligations estimated based quoted market prices similar issues current interest rates offered debt remaining maturities cardinal health inc subsidiaries notes consolidated financial statements 7 income taxes provision income taxes consists following thousands reconciliation provision based federal statutory income tax rate companys income tax provision follows deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows thousands cardinal health inc subsidiaries notes consolidated financial statements amounts classified consolidated balance sheets follows thousands june 30 1996 1995 result pyxis merger company federal net operating loss carryforwards 73 million also june 30 1996 1995 company state net operating loss carryforwards 50 million 56 million respectively valuation allowance 24 million 27 million june 30 1996 1995 respectively provided state net operating loss carryforwards utilization carryforwards within applicable statutory periods uncertain addition use companys net operating loss carryforwards limited due change control pyxis federal net operating loss carryforwards begin expiring 2001 state net operating loss carryforwards began expiring 1994 8 employee retirement benefit plans substantially companys nonunion employees enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified union employees covered multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement total expense employee retirement benefit plans follows thousands 9 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 1996 follows thousands cardinal health inc subsidiaries notes consolidated financial statements rental expense relating operating leases approximately 20607000 14637000 12645000 fiscal 1996 1995 1994 respectively sublease rental income material period presented herein june 30 1996 amounts outstanding customer notes receivable sold full recourse commercial bank totaled approximately 13923000 company also outstanding guarantees indebtedness financial assistance commitments totaled approximately 2822000 june 30 1996 company becomes involved timetotime litigation arising normal business activities addition november 1993 cardinal whitmire five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system company believes allegations set forth cardinal whitmire lawsuits without merit opinion management companys liability pending litigation would material adverse effect companys financial condition results operations 10 redeemable preferred stock prior february 7 1994 whitmire outstanding 360000 shares redeemable preferred 01 par value stock whitmire would required redeem 10000 per share plus accrued unpaid dividends shares senior series preferred stock commencing october 1994 july 1996 pursuant terms reorganization agreement cardinal whitmire see note 2 outstanding shares whitmire senior series preferred stock redeemed february 7 1994 date whitmire merger 11 shareholders equity june 30 1996 companys authorized capital shares consisted 100000000 class common shares without par value 63959267 63006246 adjusted reflect business combinations outstanding 222626 193292 held treasury cost june 30 1996 1995 respectively b 5000000 class b common shares without par value none outstanding either balance sheet date c 500000 nonvoting preferred shares without par value none issued class common shares class b common shares collectively referred common shares september 26 1994 8050000 companys common shares sold pursuant public offering approximately 1867000 common shares sold company approximately 6183000 common shares existing shares sold certain shareholders company receive proceeds sale existing shares 12 concentrations credit risk major customers companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail health care sectors however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 1996 companys two largest customers individually accounted 12 net revenues 70 direct deliveries respectively fiscal 1995 companys two largest customers individually accounted 11 net revenues 82 direct deliveries respectively trade receivables due two customers aggregated approximately 25 total trade receivables june 30 1996 1995 cardinal health inc subsidiaries notes consolidated financial statements 13 stock options restricted shares company maintains stock incentive plans benefit certain officers directors key employees options granted generally exercisable periods ten years date grant price equals fair market value date grant november 14 1995 companys shareholders approved new equity incentive plan new plan authorized issuance aggregate 2000000 common shares form incentive stock options nonqualified stock options performance shares restricted shares common shares authorized issuance new plan addition 1766000 common shares issuable pursuant stock options outstanding immediately prior approval new plan 1562000 stock options issuable pursuant pyxis merger following summarizes stock option transactions company excluding whitmire see plans june 30 1993 june 30 1996 giving retroactive effect conversions options connection merger transactions stock splits thousands except per share amounts june 30 1996 approximately 2118000 option shares plans exercisable addition options outstanding restricted shares granted approximately 1472000 shares available issued pursuant plans connection whitmire merger outstanding whitmire stock options granted current former whitmire officers employees automatically converted options cardinal exchange options purchase aggregate approximately 1721000 additional common shares pursuant terms options reorganization agreement see note 2 terms original issuance reflected reorganization agreement exercise price substantially cardinal exchange options remitted certain former investors whitmire cardinal exchange options purchase 190000 1250000 271000 common shares average option price 206 152 160 exercised fiscal 1996 1995 1994 respectively june 30 1996 substantially cardinal exchange options exercised market value restricted shares awarded company recorded component shareholders equity accompanying balance sheets compensation awards amortized expense period participants perform services generally one six years june 30 1996 approximately 467000 restricted shares issued approximately 158000 shares remain restricted subject forfeiture approximately 26000 shares forfeited cardinal health inc subsidiaries notes consolidated financial statements 14 selected quarterly financial data unaudited following selected quarterly financial data thousands except per share amounts fiscal 1996 1995 restated reflect poolingofinterests business combinations see note 2 following supplemental information fiscal 1996 excludes impact unusual items thousands except per share amounts see note 2 additional information operating earnings net earnings available common shares earnings reported companys selected quarterly financial data fiscal 1996 reconciled respective amounts preceding table follows thousands selected quarterly financial data differs amounts previously reported company due pyxis merger amounts reported company prior pyxis merger completed may 7 1996 presented cardinal health inc subsidiaries notes consolidated financial statements differ selected quarterly financial data solely due addition pyxis amounts pursuant poolingofinterests accounting method business combinations thousands except per share amounts 15 supplemental cash flow information income tax interest payments fiscal years ended june 30 1996 1995 1994 follows thousands see note 2 additional information regarding non cash investing financing activities 16 recently issued financial accounting standards october 1995 financial accounting standards board issued statement financial accounting standards 123 accounting stockbased compensation requires adoption later companys fiscal 1997 new standard defines fair value method accounting stock options similar equity instruments compensation cost measured grant date based fair value award recognized service period usually vesting period pursuant new standard companies encouraged required adopt fair value method accounting employee stockbased transactions companies also permitted continue account transactions accounting principles board opinion 25 accounting stock issued employees would required disclose financial statements pro forma net income earnings per share new method accounting applied accounting requirements new method effective employee awards granted beginning fiscal year adoption company yet determined elect change fair value method cardinal health inc subsidiaries notes consolidated financial statements determined effect new standard net income earnings per share elect make change adoption new standard effect companys cash flows addition march 1995 financial accounting standards board issued statement financial accounting standards 121 sfas 121 accounting impairment longlived assets longlived assets disposed requires adoption later companys fiscal 1997 sfas 121 requires impairment losses recorded longlived assets used operations indication impairment present undiscounted cash flows estimated generated assets less assets carrying amount sfas 121 also addresses accounting longlived assets expected disposed company believe based current circumstances adoption sfas 121 material effect financial condition results operations 17 subsequent event july 24 1996 company announced entered definitive merger agreement pci services inc pci pursuant pci become wholly owned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes connection merger company estimates issue approximately 21 million common shares terms merger agreement shareholders pci receive 0336 common shares share pci time transaction consummated subject adjustment specified circumstances addition pursuant terms merger agreement options pci common stock converted equivalent options approximately 157920 common shares based upon exchange ratio upon consummation merger company record onetime charge reflect transaction costs incurred result merger expected completed fall 1996 subject satisfaction certain conditions including approval shareholders pci item 9item 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal years ended june 30 1997 1996 1995 consolidated balance sheets june 30 1997 1996 consolidated statements shareholders equity fiscal years ended june 30 1997 1996 1995 consolidated statements cash flows fiscal years ended june 30 1997 1996 1995 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1997 1996 related statements earnings shareholders equity cash flows three years period ended june 30 1997 audits also included consolidated financial statement schedule listed index item 14 consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits audit financial statements owen healthcare inc owen pyxis corporation pyxis wholly owned subsidiaries cardinal health inc years ended june 30 1996 1995 combined financial statement amounts owen pyxis represent approximately 13 consolidated total assets june 30 1996 represent combined revenues net income approximately 6 37 29 respectively consolidated amounts two years period ended june 30 1996 statements audited auditors whose reports furnished us opinion insofar relates amounts included owen pyxis based solely reports auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1997 1996 results operations cash flows three years period ended june 30 1997 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp columbus ohio august 12 1997 except note 16 date august 23 1997 report ernst young llp independent auditors board directors cardinal health inc audited consolidated balance sheets pyxis corporation june 30 1996 related consolidated statements income shareholders equity cash flows two years period ended june 30 1996 included herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position pyxis corporation june 30 1996 consolidated results operations cash flows two years period ended june 301996 conformity generally accepted accounting principles ernst young llp san diego california august 2 1996 report independent accountants board directors stockholders owen healthcare inc opinion consolidated balance sheet related consolidated statements income stockholders equity cash flows owen healthcare inc subsidiaries presented separately herein present fairly material respects financial position owen healthcare inc subsidiaries owen november 30 1995 results operations cash flows two years period ended november 30 1995 conformity generally accepted accounting principles financial statements responsibility owens management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp houston texas january 30 1997 cardinal health inc subsidiaries consolidated statements earnings thousands except per share amounts accompanying notes integral part statements cardinal health inc subsidiaries consolidated balance sheets thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements shareholders equity thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc subsidiaries company provider services healthcare industry offering array valueadded pharmaceutical distribution services pharmaceuticalrelated products services broad base customers company distributes broad line pharmaceuticals surgical hospital supplies therapeutic plasma specialty pharmaceutical products health beauty care products items typically sold hospitals retail drug stores healthcare providers company also operates variety related healthcare service businesses including pyxis corporation pyxis develops manufactures leases sells services pointofuse pharmacy systems automate distribution management medications supplies hospitals healthcare facilities medicine shoppe international inc medicine shoppe franchisor apothecarystyle retail pharmacies pci services inc pci international provider integrated packaging services pharmaceutical manufacturers owen healthcare inc owen provider pharmacy management information services hospitals see basis presentation company currently operating one business segment primarily continental united states basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect mergers medicine shoppe november 13 1995 pyxis may 7 1996 owen march 18 1997 see note 2 business combinations accounted poolingof interests method october 11 1996 company completed merger pci merger pci merger accounted poolingofinterests company issued approximately 31 million common shares pci shareholders pcis outstanding stock options converted options purchase approximately 02 million common shares impact pci merger historical basis significant prior period financial statements restated march 18 1997 company completed merger owen merger company issued approximately 77 million common shares owen shareholders owens outstanding stock options converted options purchase approximately 07 million common shares term cardinal used footnote refers cardinal health inc subsidiaries prior owen merger cardinals fiscal year end june 30 owens fiscal year end november 30 fiscal years ended june 30 1996 1995 consolidated financial statements combine cardinals fiscal year ended june 30 1996 1995 financial results owens fiscal years ended november 30 1995 1994 respectively fiscal year ended june 30 1997 consolidated financial statements combine cardinals fiscal year ended june 30 1997 owens financial results period june 1 1996 june 30 1997 excluding owens financial results december 1996 order change owens november 30 fiscal year end june 30 due change owens fiscal year november 30 conform cardinals june 30 fiscal year end owens results operations periods december 1 1995 may 31 1996 month december 1996 included combined results operations reflected adjustment consolidated statements shareholders equity owens net revenues net earnings periods 2601 million 57 million respectively owens cash flows operating financing activities periods 09 million 07 million respectively cash flows used investing activities 56 million preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ estimated amounts cardinal health inc subsidiaries notes consolidated financial statements cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value marketable securities availableforsale june 30 1996 company classified investment municipal bonds us treasury obligations availableforsale fair value marketable securities approximates adjusted book value determined specific identification basis june 30 1996 gross net realized unrealized holding gains losses material period presented accompanying financial statements receivables trade receivables primarily comprised amounts owed company pharmaceutical wholesaling activities presented net allowance doubtful accounts 350 million 362 million june 30 1997 1996 respectively company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 525 million 591 million june 30 1997 1996 respectively current portion 121 million 148 million respectively included assets amounts reported net allowance doubtful accounts 82 million 91 million june 30 1997 1996 respectively merchandise inventories substantially merchandise inventories 86 1997 81 1996 stated lower cost using lastin firstout lifo method market company used firstin firstout fifo method inventory valuation approximates current replacement cost inventories would higher reported june 30 1997 696 million june 30 1996 763 million company continues consolidate locations automate selected distribution facilities invest management information systems achieve efficiencies inventory management processes result facility related inventory consolidations operational efficiencies achieved fiscal 1997 1996 company partial inventory liquidations certain lifo pools reduced lifo provision approximately 2 million 7 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range three forty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense certain software costs related internally developed purchased software capitalized amortized using straightline method useful lives exceeding five years goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range ten forty years accumulated amortization 203 million 256 million june 30 1997 1996 respectively balance sheet date determination made management ascertain whether indication intangible assets may impaired based undiscounted operating cash flows cardinal health inc subsidiaries notes consolidated financial statements revenue recognition company records distribution revenues merchandise shipped customers company obligation provide services related merchandise company also arranges bulk deliveries made customer warehouses excluded net revenues totaled 25 billion 22 billion 18 billion fiscal 1997 1996 1995 respectively service fees related bulk deliveries included net revenues significant fiscal years presented revenues recognized salestype leases pointofuse pharmacy systems delivered customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse pharmacy systems recognized upon delivery customer acceptance revenues systems installed operating lease arrangements recognized lease term becomes receivable according provisions lease revenue operating leases significant company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenues earned origination fees signing new franchise agreements recognized revenues new franchise store opened master franchise origination fees recognized revenues significant conditions relating master franchise agreement satisfied company pharmacy management revenue recognized related services rendered according contracts established fee charged contracts monthly management fee arrangement capitated fee arrangement portion hospital charges patients certain contracts fees management services guaranteed company exceed stipulated amounts risksharing provisions revenues include estimated effects contractual guarantees risksharing provisions packaging revenues recognized services provided upon completion services earnings per common share primary fully diluted earnings per common share computed using treasury stock method based weighted average number common shares outstanding period dilutive effect stock options date grant additionally fully diluted earnings per share periods prior conversion include effect shares assumed issued upon conversion convertible subordinated notes see note 5 excluding dividends paid entities company merged company paid cash dividends per common share 009 fiscal year ended june 30 1997 008 fiscal years ended june 30 1996 1995 stock splits october 29 1996 company declared threefortwo stock split effected stock dividend distributed december 16 1996 shareholders record december 2 1996 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock split cardinal health inc subsidiaries notes consolidated financial statements new accounting pronouncement march 1995 financial accounting standards board fasb issued statement financial accounting standards 121 sfas 121 accounting impairment longlived assets longlived assets disposed company adopted beginning fiscal 1997 sfas 121 requires impairment losses recorded longlived assets used operations indication impairment present undiscounted cash flows estimated generated assets less assets carrying amount sfas 121 also addresses accounting longlived assets expected disposed impact adopting sfas 121 immaterial effect companys financial condition results operations 2 business combinations march 18 1997 company completed owen merger owen merger accounted poolingofinterests business combination company issued approximately 77 million common shares owen shareholders owens outstanding stock options converted options purchase approximately 07 million common shares company recorded costs approximately 396 million 275 million net tax related owen merger costs include 167 million transaction employee related costs associated merger 132 million asset impairments 106 million related meditrol discussed 97 million related integration activities including elimination duplicate facilities certain exit restructuring costs time owen merger owen whollyowned subsidiary meditrol manufactured marketed sold serviced pointofuse medication distribution systems similar pyxis upon consummation owen merger management committed merge operations meditrol pyxis phaseout production separate meditrol product line result decision meditrol patent 74 million certain operating assets 32 million written impaired october 11 1996 company completed pci merger pci merger accounted poolingofinterests business combination company issued approximately 31 million common shares pci shareholders pcis outstanding stock options converted options purchase approximately 02 million common shares historical cost pci assets combined approximately 1476 million total liabilities assumed including total debt approximately 620 million approximately 872 million impact pci merger historical basis significant prior period financial statements restated company recorded costs totaling approximately 174 million 127 million net tax related pci merger costs include 145 million transaction employee related costs associated pci merger including 76 million retirement benefits incentive fees two executives pci vested became payable upon consummation merger 29 million related integration activities including exit costs effect merger related costs recorded fiscal 1997 reduce reported net earnings 402 million 1811 million reduce reported fully diluted earnings per common share 37 per share 166 per share certain merger related costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed subsequent periods table presents reconciliation net revenues net earnings reported accompanying consolidated financial statements previously reported company term cardinal used footnote refers cardinal health inc subsidiaries prior owen merger adjustments affecting net income shareholders equity resulting merger adopt accounting practices material periods presented herein cardinal health inc subsidiaries notes consolidated financial statements may 7 1996 company completed merger pyxis merger pyxis merger accounted poolingofinterests business combination company issued approximately 226 million common shares pyxis shareholders addition pyxis outstanding stock options converted options purchase approximately 23 million additional common shares company recorded costs totaling approximately 507 million 353 million net tax related pyxis merger costs include 30 million transaction employee related costs associated merger including 76 million vested stay bonuses covering substantially pyxis employees 176 million related certain exit lease termination costs including 172 million exit long term contract financing company see note 3 31 million related asset impairments integration activities november 13 1995 company completed merger medicine shoppe medicine shoppe merger medicine shoppe merger accounted poolingofinterests business combination company issued approximately 96 million common shares medicine shoppe shareholders addition medicine shoppes outstanding stock options converted options purchase approximately 02 million common shares company recorded costs totaling approximately 166 million 125 million net tax related medicine shoppe merger costs include 67 million transaction employee related costs associated medicine shoppe merger 74 million unconditional commitments franchisees 25 million related integration activities effect merger related costs recorded fiscal 1996 reduce reported net earnings 478 million 1176 million reduce reported fully diluted earnings per common share 46 per share 114 per share certain merger related costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed subsequent periods june 30 1997 1996 company incurred approximately 1019 million 221 million respectively related costs recorded time various mergers companys current estimates merger related costs ultimately incurred materially different amounts originally recorded fiscal 1996 company completed two business combinations accounted purchase method accounting business combinations primarily related companys pointofuse pharmacy systems pharmacy management services aggregate purchase price paid primarily cash including fees expenses 400 million liabilities operations assumed approximately 332 million consisting primarily debt 278 million purchases occurred beginning fiscal 1995 operating results fiscal 1996 1995 pro forma basis would significantly different july 18 1994 company issued approximately 14 million common shares merger transaction common shares behrens inc behrens pharmaceutical wholesaler based waco texas transaction accounted poolingofinterests business combination historical cost behrens assets combined approximately 254 million total liabilities assumed including total debt approximately 13 million approximately 156 million impact behrens merger historical pro forma basis significant prior periods restated fiscal 1995 company completed two business combinations accounted purchase method accounting business combinations primarily related companys drug distribution pointofuse pharmacy systems aggregate purchase price 545 million 89 million assumed debt included approximately 08 million common shares valued 112 million liabilities operations assumed approximately 989 million consisting 17 million debt purchases occurred beginning fiscal 1995 operating results fiscal 1995 pro forma basis would significantly different cardinal health inc subsidiaries notes consolidated financial statements 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows thousands future minimum lease payments received pursuant salestype leases follows june 30 1997 1998 52104 1999 51166 2000 41511 2001 28246 2002 15813 thereafter 970 total 189810 lease related financing arrangements prior pyxis merger pyxis financed working capital needs sale certain lease receivables nonbank financing company march 1994 pyxis entered fiveyear financing servicing agreement financing company whereby financing company agreed purchase minimum 500 million pyxis lease receivables certain conditions provided total investment lease receivables one time exceed 350 million june 30 1997 203 million lease receivables owned financing company aggregate lease receivables sold arrangement totaled approximately 312 million 233 million june 30 1997 1996 respectively result pyxis merger company entered negotiations financing company amend terminate arrangement june 1997 agreement financing company amended modify financing levels remaining term agreement terminate lease portfolio servicing responsibilities financing company made provision estimated costs associated exiting arrangement time pyxis merger 4 notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 279 million june 30 1997 various money market rates june 30 1997 222 million weighted average interest rate 626 outstanding arrangements amounts outstanding june 30 1996 addition company revolving credit agreements maturity less one year seven banks credit agreements renewable quarterly basis allow company borrow 95 million none use june 30 1997 company required pay cardinal health inc subsidiaries notes consolidated financial statements commitment fee annual rate 125 average daily unused amounts total credit allowed revolving credit agreements total available unused lines credit june 30 1997 352 million 5 longterm obligations longterm obligations consist following thousands january 23 1996 company sold 150 million 6 notes due 2006 6 notes public offering 6 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 13 million incurred connection offering amortized straightline basis period 6 notes outstanding fiscal 1996 holders 10 million 953 convertible subordinated notes due 2002 originally issued owen converted notes equivalent approximately 11 million common shares additionally owen repaid 348 million debt proceeds common stock offering previously mentioned conversion retirement debt occurred beginning periods presented changes primary earnings per share would less 3 65 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 860000 incurred connection notes amortized straightline basis period 65 notes outstanding 8 notes represented unsecured obligations company redeemable prior maturity march 1 1997 subject sinking fund certain longterm obligations collateralized property equipment company aggregate book value approximately 335 million june 30 1997 maturities longterm obligations future fiscal years follows thousands 1998 6158 1999 6706 2000 3985 2001 3016 2002 1890 thereafter 262169 total 283924 cardinal health inc subsidiaries notes consolidated financial statements company filed shelf debt registration statement form s3 securities exchange commission declared effective april 21 1997 registration increases companys shelf debt capacity 350 million total 400 million securities sold registration statement 6 estimated fair value financial instruments carrying amounts cash equivalents marketable securities trade receivables accounts payables notes payablebanks accrued liabilities june 30 1997 1996 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 2701 million 3542 million compared carrying amounts 2839 million 3712 million june 30 1997 1996 respectively fair value companys longterm obligations estimated based quoted market prices similar issues current interest rates offered debt remaining maturities 7 income taxes provision income taxes consists following thousands reconciliation provision based federal statutory income tax rate companys income tax provision follows cardinal health inc subsidiaries notes consolidated financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes amounts fiscal 1996 reclassified conform fiscal 1997 presentation components deferred income tax assets liabilities follows thousands amounts classified consolidated balance sheets follows thousands company federal net operating loss carryforwards 91 million june 30 1997 1996 also june 30 1997 1996 company state net operating loss carryforwards 56 million 63 million respectively valuation allowance 27 million 30 million june 30 1997 1996 respectively provided state net operating loss carryforwards utilization carryforwards within applicable statutory periods uncertain addition use companys net operating loss carryforwards limited due pyxis merger carryforwards also available offset future taxable income pyxis however exception valuation allowance described company anticipates limitations apply federal net operating loss carryforwards begin expiring 2001 state net operating loss carryforwards began expiring 1994 8 employee retirement benefit plans substantially companys nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans cardinal health inc subsidiaries notes consolidated financial statements qualified union employees covered multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement total expense employee retirement benefit plans follows thousands prior owen merger owen established employee stock ownership plan esop costs esop debt service recognized additional contributions satisfy esop obligations plan operating expenses january 2 1996 contributions esop suspended participants became fully vested 9 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 1997 follows thousands 1998 17083 1999 12626 2000 7655 2001 6339 2002 5601 thereafter 22341 total 71645 rental expense relating operating leases approximately 23 million 226 million 164 million fiscal 1997 1996 1995 respectively sublease rental income material period presented herein company entered operating lease agreements several banks construction various new facilities initial terms lease agreements extend april 2003 optional five year renewal periods event termination company required either purchase facility vacate property make reimbursement portion uncompensated price property cost instruments provide maximum fundings 159 million total estimated cost construction projects june 30 1997 amount expended 325 million currently companys minimum annual lease payments agreements approximately 22 million june 30 1997 amounts outstanding customer notes receivable sold full recourse commercial bank totaled approximately 129 million company also outstanding guarantees indebtedness financial assistance commitments totaled approximately 3 million june 30 1997 company becomes involved timetotime litigation incidental business addition november 1993 cardinal whitmire five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system company believes allegations set forth cardinal whitmire lawsuits without merit although ultimate resolution litigation cannot forecast certainty company believe outcome pending litigation would material adverse effect companys financial statements cardinal health inc subsidiaries notes consolidated financial statements 10 shareholders equity june 30 1997 companys authorized capital shares consisted 150000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value june 30 1996 companys authorized capital shares consisted 100000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 1997 1996 september 26 1994 approximately 121 million companys common shares sold pursuant public offering approximately 28 million common shares sold company approximately 93 million common shares existing shares sold certain shareholders company receive proceeds sale existing shares 11 concentrations credit risk major customers companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting acute care portion healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 1997 companys two largest customers individually accounted 13 net revenues 62 bulk deliveries respectively fiscal 1996 companys two largest customers individually accounted 12 net revenues 70 bulk deliveries respectively fiscal 1995 companys two largest customers individually accounted 11 net revenues 82 bulk deliveries respectively trade receivables due two customers aggregated approximately 23 total trade receivables june 30 1997 1996 12 stock options restricted shares company maintains stock incentive plans benefit certain officers directors employees options granted generally vest three years exercisable periods ten years date grant price equals fair market value date grant company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income earnings per share would reduced 23 million 02 per share respectively fiscal 1997 64 million 07 per share respectively fiscal 1996 sfas 123 method accounting applied options granted prior july 1 1995 resulting pro forma compensation cost may representative expected future years following summarizes stock option transactions company excluding whitmire see plans june 30 1994 june 30 1997 giving retroactive effect conversions options connection merger transactions stock splits thousands except per share amounts cardinal health inc subsidiaries notes consolidated financial statements weighted average fair value options granted fiscal 1997 1996 1448 1450 respectively fair value options granted estimated date grant using blackscholes optionpricing model following assumptions grants fiscal 1997 1996 risk free interest rate 623 expected life 3 years expected volatility 25 dividend yield 17 information relative stock options outstanding june 30 1997 june 30 1997 remained approximately 15 million additional shares available issued pursuant plans connection whitmire merger outstanding whitmire stock options granted current former whitmire officers employees automatically converted options cardinal exchange options purchase aggregate approximately 26 million additional common shares terms original issuance exercise price substantially cardinal exchange options remitted certain former investors whitmire cardinal exchange options purchase 03 million 19 million common shares average option price 137 101 exercised fiscal 1996 1995 respectively june 30 1996 cardinal exchange options exercised market value restricted shares awarded company recorded component shareholders equity accompanying balance sheets compensation awards amortized expense period participants perform services generally one six years june 30 1997 approximately 07 cardinal health inc subsidiaries notes consolidated financial statements million restricted shares issued approximately 02 million shares remained restricted subject forfeiture approximately 67000 shares forfeited 13 selected quarterly financial data unaudited following selected quarterly financial data thousands except per share amounts fiscal 1997 1996 restated reflect poolingofinterests business combinations see note 2 fully discussed note 2 merger related costs recorded various quarters fiscal 1997 1996 following table summarizes impact costs net earnings fully diluted earnings per share quarters recorded 14 supplemental cash flow information income tax interest payments fiscal years ended june 30 1997 1996 1995 follows thousands see notes 2 5 additional information regarding non cash investing financing activities 15 recently issued financial accounting standards february 1997 fasb issued statement financial accounting standards 128 sfas 128 earnings per share require retroactive adoption companys fiscal quarter ending december 31 1997 new standard simplifies computation earnings per share requires presentation basic diluted earnings per share light present capital structure impact adopting sfas 128 significant june 1997 financial accounting standard board issued statement financial accounting standards 130 sfas 130 reporting comprehensive income require adoption later companys fiscal quarter ending september 30 1998 new statement defines comprehensive income changes equity period exception stock issuances dividends new pronouncement establishes standards reporting display comprehensive income components financial statements cardinal health inc subsidiaries notes consolidated financial statements june 1997 financial accounting standard board issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information require adoption later fiscal 1999 sfas 131 requires companies define report financial descriptive information operating segments also establishes standards related disclosure products services geographic areas major customers company presently evaluating applicability sfas 130 131 operations 16 pending mergers may 27 1997 company announced entered definitive merger agreement mediqual systems inc mediqual pursuant mediqual become wholly owned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes upon consummation merger company record merger related charge reflect transaction costs incurred result merger amount charge expected significant connection merger company estimates issue approximately 06 million common shares merger expected completed first half fiscal 1998 subject satisfaction certain conditions including approval shareholders mediqual august 23 1997 company signed definitive merger agreement bergen brunswig corporation bergen distributor pharmaceuticals medicalsurgical supplies terms transaction shareholders bergen receive fixed exchange ratio 775 company common shares exchange common share bergen company issue approximately 40 million common shares transaction also assume approximately 386 million longterm debt merger expected completed end third quarter fiscal 1998 subject certain conditions including approval shareholders receipt certain regulatory approvals transaction expected accounted poolingofinterests item 9item 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal years ended june 30 1998 1997 1996 consolidated balance sheets june 30 1998 1997 consolidated statements shareholders equity fiscal years ended june 30 1998 1997 1996 consolidated statements cash flows fiscal years ended june 30 1998 1997 1996 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1998 1997 related consolidated statements earnings shareholders equity cash flows three years period ended june 30 1998 audits also included consolidated financial statement schedule listed index item 14 consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits audit financial statements owen healthcare inc owen pyxis corporation pyxis wholly owned subsidiaries cardinal health inc year ended june 30 1996 combined financial statement amounts owen pyxis represent combined revenue net income approximately 5 34 respectively consolidated amounts year ended june 30 1996 statements audited auditors whose reports furnished us opinion insofar relates amounts included owen pyxis based solely reports auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based audits reports auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1998 1997 results operations cash flows three years period ended june 30 1998 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp deloitte touche llp columbus ohio august 12 1998 report ernst young llp independent auditors board directors cardinal health inc audited consolidated statements income shareholders equity cash flows pyxis corporation year ended june 30 1996 included herein financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated results operations cash flows pyxis corporation year ended june 301996 conformity generally accepted accounting principles ernst young llp ernst young llp san diego california august 2 1996 report independent accountants board directors stockholders owen healthcare inc opinion consolidated statements income stockholders equity cash flows owen healthcare inc subsidiaries presented separately herein present fairly material respects results operations cash flows year ended november 30 1995 conformity generally accepted accounting principles financial statements responsibility owen healthcare inc management responsibility express opinion financial statements based audit conducted audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion expressed pricewaterhousecoopers llp pricewaterhousecoopers llp houston texas january 30 1997 cardinal health inc subsidiaries consolidated statements earnings thousands except per share amounts accompanying notes integral part statements cardinal health inc subsidiaries consolidated balance sheets thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements shareholders equity thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc subsidiaries company provider services healthcare industry offering array valueadded pharmaceutical distribution services pharmaceuticalrelated products services broad base customers company distributes broad line pharmaceuticals surgical hospital supplies therapeutic plasma specialty pharmaceutical products health beauty care products items typically sold hospitals retail drug stores healthcare providers company also operates variety related healthcare service businesses including pyxis corporation pyxis develops manufactures leases sells services pointofuse pharmacy systems automate distribution management medications supplies hospitals healthcare facilities medicine shoppe international inc medicine shoppe franchisor apothecarystyle retail pharmacies pci services inc pci international provider integrated packaging services pharmaceutical manufacturers owen healthcare inc owen provider pharmacy management information services hospitals mediqual systems inc mediqual developer provider clinical information systems see basis presentation company currently operating one business segment primarily continental united states basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect mergers medicine shoppe november 13 1995 pyxis may 7 1996 pci october 11 1996 owen march 18 1997 see note 2 business combinations accounted poolingofinterests method companys fiscal year end june 30 owens fiscal year end november 30 fiscal year ended june 30 1996 consolidated financial statements combine companys fiscal year ended june 30 1996 financial results owens fiscal year ended november 30 1995 fiscal year ended june 30 1997 consolidated financial statements combine companys fiscal year ended june 30 1997 owens financial results period june 1 1996 june 30 1997 excluding owens financial results december 1996 order change owens november 30 fiscal year end june 30 due change owens fiscal year november 30 conform companys june 30 fiscal year end owens results operations periods december 1 1995 may 31 1996 month december 1996 included combined results operations reflected adjustment consolidated statements shareholders equity february 18 1998 company completed merger mediqual merger mediqual merger accounted poolingofinterests impact mediqual merger significant historical basis prior period financial statements restated mediquals financial information periods beginning march 1 1998 included companys consolidated financial results fiscal 1998 preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed company pharmaceutical wholesaling activities presented net allowance doubtful accounts 342 million 350 million june 30 1998 1997 respectively cardinal health inc subsidiaries notes consolidated financial statements company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 666 million 525 million june 30 1998 1997 respectively current portion 294 million 121 million respectively included assets amounts reported net allowance doubtful accounts 64 million 82 million june 30 1998 1997 respectively merchandise inventories substantially merchandise inventories 81 1998 87 1997 stated lower cost using lastin firstout lifo method market company used firstin firstout fifo method inventory valuation approximates current replacement cost inventories would higher reported june 30 1998 546 million june 30 1997 696 million company continues consolidate locations automate selected distribution facilities invest management information systems achieve efficiencies inventory management processes result facility related inventory consolidations operational efficiencies achieved fiscal 1998 1997 company partial inventory liquidations certain lifo pools reduced lifo provision approximately 23 million 20 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range three forty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense certain software costs related internally developed purchased software capitalized amortized using straightline method useful lives exceeding five years balance sheet date company assesses recoverability longlived property based review projected undiscounted cash flows associated assets goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range ten forty years accumulated amortization 237 million 203 million june 30 1998 1997 respectively balance sheet date determination made management ascertain whether indication intangible assets may impaired based undiscounted operating cash flows subsidiary revenue recognition company records distribution revenue merchandise shipped customers company obligation provide services related merchandise along companies industry company begun reporting revenue bulk deliveries made customers warehouses whereby company acts intermediary ordering subsequent delivery pharmaceutical products years presented reclassified include bulk deliveries revenue previously service fees related bulk deliveries reported revenues service fees significant period presented fluctuations bulk deliveries result largely circumstances beyond control company including consolidation within chain drugstore industry decisions chains either begin discontinue warehousing activities changes policy manufacturers related selling directly chain drugstore customers due insignificant margins generated bulk deliveries fluctuations amount significant impact operating earnings cardinal health inc subsidiaries notes consolidated financial statements revenue recognized salestype leases pointofuse pharmacy systems delivered customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse pharmacy systems recognized upon delivery customer acceptance revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened master franchise origination fees recognized revenue significant conditions relating master franchise agreement satisfied company pharmacy management revenues recognized related services rendered according contracts established fee charged contracts either monthly management fee arrangement capitated fee arrangement portion hospital charges patients certain contracts fees management services guaranteed company exceed stipulated amounts risksharing provisions revenues adjusted reflect estimated effects contractual guarantees risksharing provisions packaging revenues recognized services provided upon completion services system license revenues recognized upon shipment system customer portion license fee related system maintenance deferred recognized annual maintenance period earnings per common share company adopted statement financial accounting standards 128 sfas 128 earnings per share quarter ended december 31 1997 accordance provisions standard prior periods presented restated comply sfas 128 basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options outstanding computed using treasury stock method fiscal 1996 dilutive effect convertible debentures 270000 impact diluted net earnings increase 717000 diluted shares excluding dividends paid entities company merged company paid cash dividends per common share 0105 009 008 fiscal years ended june 30 1998 1997 1996 respectively stock splits october 29 1996 company declared threefortwo stock split effected stock dividend distributed december 16 1996 shareholders record december 2 1996 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock split august 12 1998 company declared threefortwo stock split effected stock dividend distributed october 30 1998 shareholders record end business october 9 1998 giving effect retroactive stock split diluted earnings per common share fiscal years ended june 30 1998 1997 1996 148 113 080 per common share respectively cardinal health inc subsidiaries notes consolidated financial statements 2 business combinations mergersrelated costs special charges merger transaction mediqual completed february 18 1998 company issued approximately 576000 common shares mediqual shareholders mediquals outstanding stock options converted options purchase approximately 24000 common shares company historical cost mediquals assets combined approximately 73 million total liabilities assumed approximately 16 million impact mediqual merger historical basis significant accordingly prior period historical financial statements restated mediqual merger mediquals financial results included consolidated financial results company since march 1 1998 may 15 1998 company completed business combination comprehensive reimbursement consultants inc crc accounted purchase aggregate purchase price paid primarily cash approximately 6 million included issuance common shares valued approximately 13 million financial results crc included consolidated financial results company since date acquisition purchase occurred beginning fiscal 1997 operating results pro forma basis would significantly different fiscal 1998 company recorded mergersrelated charges associated transaction costs incurred connection mediqual merger 23 million transaction costs incurred connection proposed merger transaction bergen brunswig corporation bergen 334 million terminated subsequent yearend see note 17 accordance terms bergen merger agreement termination gave rise obligation company reimburse bergen 7 million transaction costs additional mergersrelated costs related asset impairments 38 million integrating operations companies previously merged company 96 million incurred recorded fiscal 1998 fiscal 1998 company recorded special charge 86 million 52 million net tax related rationalization distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection final settlement labor dispute former employees companys boston distribution facility resulting termination union relationship march 18 1997 company completed merger transaction owen merger owen merger accounted poolingofinterests business combination company issued approximately 77 million common shares owen shareholders owens outstanding stock options converted options purchase approximately 07 million common shares fiscal 1997 company recorded costs approximately 311 million 224 million net tax related owen merger costs include 131 million transaction employeerelated costs associated merger 132 million asset impairments 106 million related meditrol discussed 48 million related integration activities including elimination duplicate facilities certain exit restructuring costs time owen merger owen wholly owned subsidiary meditrol manufactured marketed sold serviced pointofuse medication distribution systems similar pyxis upon consummation owen merger management committed merge operations meditrol pyxis phaseout production separate meditrol product line result decision meditrol patent 74 million certain operating assets 32 million written impaired october 11 1996 company completed merger transaction pci merger pci merger accounted poolingofinterests business combination company issued approximately 31 million common shares pci shareholders pcis outstanding stock options converted options purchase approximately 02 million common shares fiscal 1997 company recorded costs totaling approximately 151 million 114 million net tax related pci merger costs include 138 million transaction employeerelated costs associated pci merger including 76 million retirement benefits incentive fees two executives pci vested became payable upon consummation merger 13 million related integration activities including exit costs cardinal health inc subsidiaries notes consolidated financial statements addition mergersrelated costs recorded fiscal 1997 owen pci mergers discussed company recorded 47 million 28 million net tax related integrating operations companies previously merged company may 7 1996 company completed merger transaction pyxis merger pyxis merger accounted poolingofinterests business combination company issued approximately 226 million common shares pyxis shareholders addition pyxis outstanding stock options converted options purchase approximately 23 million common shares fiscal 1996 company recorded costs totaling approximately 420 million 306 million net tax related pyxis merger costs include 254 million transaction employeerelated costs associated merger including 76 million vested stay bonuses covering substantially pyxis employees 156 million related certain exit leasetermination costs pertaining cancellation longterm contract financing company connection servicing accounts receivable pyxis customers time pyxis merger see note 3 10 million related asset impairments integration activities november 13 1995 company completed merger transaction medicine shoppe medicine shoppe merger medicine shoppe merger accounted poolingofinterests business combination company issued approximately 96 million common shares medicine shoppe shareholders addition medicine shoppes outstanding stock options converted options purchase approximately 02 million common shares fiscal 1996 company recorded costs totaling approximately 72 million 64 million net tax related medicine shoppe merger costs include 63 million transaction employeerelated costs associated medicine shoppe merger 09 million related integration activities effect various mergersrelated costs special charges recorded fiscal 1998 reduce reported net earnings 358 million 2471 million reduce reported diluted earnings per common share 032 per share 222 per share effect various mergersrelated costs recorded fiscal 1997 reduce reported net earnings 366 million 1846 million reduce reported diluted earnings per common share 034 per share 169 per share effect various mergersrelated costs recorded fiscal 1996 reduce reported net earnings 369 million 1272 million reduce reported diluted earnings per common share 034 per share 119 per share certain mergersrelated costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed incurred fiscal 1996 company completed three business combinations accounted purchase method accounting business combinations primarily related companys pointofuse pharmacy systems pharmacy management services aggregate purchase price paid primarily cash including fees expenses 588 million liabilities operations assumed approximately 417 million consisting primarily debt 297 million purchases occurred beginning fiscal 1996 operating results fiscal 1996 pro forma basis would significantly different cardinal health inc subsidiaries notes consolidated financial statements 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows thousands future minimum lease payments received pursuant salestype leases follows june 30 1998 thousands lease related financing arrangements prior pyxis merger pyxis financed working capital needs sale certain lease receivables nonbank financing company march 1994 pyxis entered fiveyear financing servicing agreement financing company whereby financing company agreed purchase minimum 500 million pyxis lease receivables certain conditions provided total investment lease receivables one time exceed 350 million june 30 1998 198 million lease receivables owned financing company aggregate lease receivables sold arrangement totaled approximately 382 million 312 million june 30 1998 1997 respectively result pyxis merger company entered negotiations financing company amend terminate arrangement june 1997 agreement financing company amended modify financing levels remaining term agreement terminate lease portfolio servicing responsibilities financing company june 1998 agreement financing company amended terminate pyxis obligation sell lease receivables financing company made provision estimated costs associated exiting arrangement time pyxis merger see note 2 cardinal health inc subsidiaries notes consolidated financial statements 4 notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 408 million june 30 1998 various money market rates june 30 1998 239 million weighted average interest rate 72 outstanding arrangements 222 million weighted average interest rate 626 outstanding june 30 1997 addition company revolving credit agreements maturity less one year seven banks credit agreements renewable quarterly basis allow company borrow 95 million none use june 30 1998 company required pay commitment fee annual rate 0125 average daily unused amounts total credit allowed revolving credit agreements total available unused lines credit june 30 1998 479 million 5 longterm obligations longterm obligations consist following thousands 6 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 13 million incurred connection offering amortized straightline basis period 6 notes outstanding 65 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 860000 incurred connection notes amortized straightline basis period 65 notes outstanding fiscal 1996 holders 10 million 953 convertible subordinated notes due 2002 originally issued owen converted notes equivalent approximately 11 million common shares additionally owen repaid 348 million debt proceeds common stock offering previously mentioned conversion retirement debt occurred beginning periods presented changes diluted earnings per share would material certain longterm obligations collateralized property equipment company aggregate book value approximately 318 million june 30 1998 cardinal health inc subsidiaries notes consolidated financial statements maturities longterm obligations future fiscal years follows thousands july 13 1998 company issued 150 million 625 notes due 2008 proceeds used working capital needs due growth companys business 625 notes represent unsecured obligations company redeemable prior maturity subject sinking fund subsequent issuing 625 notes company capacity issue 250 million additional longterm debt pursuant shelf debt registration statement filed securities exchange commission addition part merger transaction rp scherer corporation scherer august 7 1998 company assumed approximately 212 million longterm debt 6 estimated fair value financial instruments carrying amounts cash equivalents trade receivables accounts payables notes payablebanks accrued liabilities june 30 1998 1997 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 2802 million 2701 million compared carrying amounts 2794 million 2839 million june 30 1998 1997 respectively fair value companys longterm obligations estimated based quoted market prices similar issues current interest rates offered debt remaining maturities 7 income taxes provision income taxes consists following thousands cardinal health inc subsidiaries notes consolidated financial statements reconciliation provision based federal statutory income tax rate companys effective income tax rate follows deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows thousands amounts classified consolidated balance sheets follows thousands company federal net operating loss carryforwards 954 million 910 million state net operating loss carryforwards 951 million 56 million june 30 1998 1997 respectively valuation allowance 64 million 27 million june 30 1998 1997 respectively provided state net operating loss carryforwards utilization carryforwards within applicable statutory periods uncertain companys federal tax operating loss carryforwards portion state net operating loss carryforwards subject change ownership limitation calculation internal revenue code section 382 cardinal health inc subsidiaries notes consolidated financial statements application valuation allowance described company anticipates limitations apply respect utilization assets federal net operating loss carryforward begins expiring 2001 state net operating loss carryforward began expiring 1994 expiring state net operating loss carryforwards required valuation allowances adjusted annually 8 employee retirement benefit plans substantially companys nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified union employees covered multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement prior owen merger owen established employee stock ownership plan esop costs esop debt service recognized additional contributions satisfy esop obligations plan operating expenses january 2 1996 contributions esop suspended participants became fully vested total expense employee retirement benefit plans follows thousands 9 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancellable lease terms excess one year june 30 1998 follows thousands rental expense relating operating leases approximately 241 million 230 million 234 million fiscal 1998 1997 1996 respectively sublease rental income material period presented herein company entered operating lease agreements several banks construction various new facilities initial terms lease agreements extend april 2003 optional five year renewal periods event termination company required either purchase facility vacate property make reimbursement portion uncompensated price property cost instruments provide maximum fundings 1812 million total estimated cost construction projects june 30 1998 cardinal health inc subsidiaries notes consolidated financial statements amount expended 1082 million currently companys minimum annual lease payments agreements approximately 70 million june 30 1998 amounts outstanding customer notes receivable sold full recourse commercial bank totaled approximately 134 million company also outstanding guarantees indebtedness financial assistance commitments totaled approximately 42 million june 30 1998 upon consummation scherer merger august 7 1998 see note 16 company guaranteed additional 292 million representing outstanding longterm debt available credit facilities scherer company becomes involved timetotime litigation incidental business november 1993 cardinal whitmire five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system trial set prescription drug litigation begin september 14 1998 company believes allegations set forth cardinal whitmire lawsuits without merit january 1995 company named defendant lawsuit alleging violations various antitrust statutes company tortiously interfered another pharmaceutical wholesalers contractual realtions trial date action set november 2 1998 company believes allegations made litigation without merit although ultimate resolution litigation cannot forecast certainty company believe outcome pending litigation would material adverse effect companys consolidated financial statements 10 shareholders equity june 30 1998 companys authorized capital shares consisted 300000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value june 30 1997 companys authorized capital shares consisted 150000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 1998 1997 11 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting acute care portion healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 1998 companys two largest customers individually accounted 12 operating revenue 62 bulk deliveries respectively fiscal 1997 companys two largest customers individually accounted 13 operating revenue 62 bulk deliveries respectively fiscal 1996 companys cardinal health inc subsidiaries notes consolidated financial statements two largest customers individually accounted 11 operating revenue 70 bulk deliveries respectively trade receivables due two customers aggregated approximately 16 23 total trade receivables june 30 1998 1997 respectively 12 stock options restricted shares company maintains stock incentive plans benefit certain officers directors employees options granted generally vest three years exercisable periods ten years date grant price equals fair market value date grant company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income diluted earnings per common share would reduced 45 million 004 per share respectively fiscal 1998 23 million 002 per share respectively fiscal 1997 64 million 007 per share respectively fiscal 1996 sfas 123 method accounting applied options granted prior july 1 1995 resulting pro forma compensation cost may representative expected future years following summarizes stock option transactions company excluding whitmire see plans june 30 1995 june 30 1998 giving retroactive effect conversions options connection merger transactions stock splits thousands except per share amounts weighted average fair value options granted fiscal 1998 1997 1996 1992 1448 1450 respectively fair values options granted estimated date grant using blackscholes optionpricing model following assumptions grants fiscal 1998 riskfree interest rate 553 expected life 3 years expected volatility 027 dividend yield 016 fair values options granted estimated date grant using blackscholes optionpricing model following assumptions grants fiscal 1997 1996 riskfree interest rate 623 expected life 3 years expected volatility 025 dividend yield 017 cardinal health inc subsidiaries notes consolidated financial statements information relative stock options outstanding june 30 1998 june 30 1998 remained approximately 650000 additional shares available issued pursuant plans connection whitmire merger outstanding whitmire stock options granted current former whitmire officers employees automatically converted options cardinal exchange options purchase aggregate approximately 26 million additional common shares terms original issuance exercise price substantially cardinal exchange options remitted certain former investors whitmire cardinal exchange options purchase 03 million common shares average option price 137 exercised fiscal 1996 june 30 1996 cardinal exchange options exercised market value restricted shares awarded company recorded component shareholders equity accompanying consolidated balance sheets compensation awards amortized expense period participants perform services generally one seven years june 30 1998 approximately 02 million shares remained restricted subject forfeiture 13 selected quarterly financial data unaudited following selected quarterly financial data thousands except per share amounts fiscal 1998 1997 restated reflect poolingofinterests business combinations discussed note 2 earnings per common share restated accordance sfas 128 see note 1 cardinal health inc subsidiaries notes consolidated financial statements august 12 1998 company declared threefortwo stock split effected stock dividend distributed october 30 1998 shareholders record close business october 9 1998 see note 1 giving retroactive effect stock split earnings per common share selected quarterly financial data fiscal 1998 1997 restated follows upon distribution october 30 1998 fully discussed note 2 mergersrelated costs special charges recorded various quarters fiscal 1998 1997 following table summarizes impact costs net earnings diluted earnings per share quarters recorded giving retroactive effect stock split declared august 12 1998 see note 1 impact diluted net earnings per common share mergersrelated costs special charges recorded various quarters fiscal 1998 1997 restated follows upon distribution october 30 1998 cardinal health inc subsidiaries notes consolidated financial statements 14 supplemental cash flow information income tax interest payments fiscal years ended june 30 1998 1997 1996 follows thousands see notes 2 5 additional information regarding non cash investing financing activities 15 recently issued financial accounting standards june 1997 financial accounting standard board fasb issued statement financial accounting standards 130 sfas 130 reporting comprehensive income require adoption later companys fiscal quarter ending september 30 1998 new statement defines comprehensive income changes equity period exception stock issuances dividends new pronouncement establishes standards reporting display comprehensive income components financial statements june 1997 fasb issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information require adoption later fiscal 1999 sfas 131 requires companies define report financial descriptive information operating segments also establishes standards related disclosure products services geographic areas major customers june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities require adoption later companys fiscal quarter ending september 30 1999 new statement requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value march 1998 american institute certified public accountants aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use require adoption later beginning companys fiscal year ending june 30 1999 new statement provides guidance accounting costs computer software developed obtained internal use adoption statements expected material impact companys consolidated financial statements 16 subsequent business combination may 17 1998 company announced entered definitive merger agreement scherer merger transaction completed august 7 1998 accounted poolingofinterests financial reporting purposes scherer merger company issued approximately 228 million common shares scherer stockholders scherers outstanding stock options converted options purchase approximately 24 million common shares company assumed approximately 212 million longterm debt part scherer merger company expects record mergerrelated charge reflect transaction costs incurred result scherer merger first quarter fiscal 1999 company currently assessing appropriate reporting periods combined potential cardinal health inc subsidiaries notes consolidated financial statements financial implications conforming accounting policies company scherer connection restatement historical financial statements result scherer merger 17 terminated merger agreement august 24 1997 company bergen announced entered definitive merger agreement subsequently amended parties march 16 1998 pursuant wholly owned subsidiary company would merged bergen merger agreement subsequently approved companies shareholders february 20 1998 march 9 1998 ftc filed complaint united states district court district columbia seeking preliminary injunction halt proposed merger july 31 1998 district court granted ftcs request injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement termination gave rise obligation company reimburse bergen 7 million transaction costs additionally termination bergen merger agreement cause costs incurred company would deductible merger consummated become tax deductible resulting tax benefit 122 million obligation reimburse bergen additional tax benefit reflected consolidated financial statements fourth quarter fiscal year ended june 30 1998 cardinal health inc subsidiaries notes consolidated financial statements item 9item 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal years ended june 30 1999 1998 1997 consolidated balance sheets june 30 1999 1998 consolidated statements shareholders equity fiscal years ended june 30 1999 1998 1997 consolidated statements cash flows fiscal years ended june 30 1999 1998 1997 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1999 1998 related consolidated statements earnings shareholders equity cash flows three years period ended june 30 1999 audits also included consolidated financial statement schedule listed index item 14 consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits audit financial statements allegiance corporation allegiance wholly owned subsidiary cardinal health inc june 30 1999 1998 years ended june 30 1999 1998 december 31 1997 also audit financial statements rp scherer corporation scherer wholly owned subsidiary cardinal health inc june 30 1999 march 31 1998 years ended june 30 1999 march 31 1998 1997 combined financial statements allegiance scherer represent approximately 45 47 consolidated total assets june 30 1999 1998 respectively represent combined revenues net income approximately 25 28 31 37 42 44 respectively consolidated amounts three years period ended june 30 1999 statements audited auditors whose reports furnished us opinion insofar relates amounts included allegiance scherer based solely reports auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based audits reports auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1999 1998 results operations cash flows three years period ended june 30 1999 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp deloitte touche llp columbus ohio august 10 1999 report independent public accountants rp scherer corporation audited accompanying consolidated statements financial position rp scherer corporation delaware corporation whollyowned subsidiary cardinal health inc subsidiaries june 30 1999 march 31 1998 related consolidated statements income comprehensive income cash flows shareholders equity year ended june 30 1999 years ended march 31 1998 1997 presented separately herein financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position rp scherer corporation subsidiaries june 30 1999 march 31 1998 results operations cash flows year ended june 30 1999 years ended march 31 1998 1997 conformity generally accepted accounting principles audits made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole arthur andersen llp arthur andersen llp detroit michigan august 9 1999 report independent accountants stockholders allegiance corporation opinion consolidated balance sheets related consolidated statements operations cash flows equity allegiance corporation whollyowned subsidiary cardinal health inc subsidiaries presented separately herein present fairly material respects financial position allegiance corporation subsidiaries june 30 1999 1998 results operations cash flows years ended june 30 1999 1998 year ended december 31 1997 conformity generally accepted accounting principles financial statements responsibility allegiance corporations management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 report independent accountants financial statement schedule stockholders allegiance corporation audits consolidated financial statements allegiance corporation subsidiaries referred report dated july 29 1999 appearing page 22 cardinal health inc 1999 annual report form 10k also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule allegiance corporation subsidiaries presented separately herein opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 accompanying notes integral part statements accompanying notes integral part statements accompanying notes integral part statements accompanying notes integral part statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc together subsidiaries collectively company provider services healthcare industry offering array valueadded pharmaceutical healthcare products distribution services pharmaceuticalrelated products services broad base customers company currently conducts business within three business segments pharmaceutical distribution pharmaceutical services medicalsurgical products pharmaceutical distribution segment distributes broad line pharmaceuticals therapeutic plasma specialty pharmaceutical products health beauty care products items typically sold hospitals retail drug stores healthcare providers company within pharmaceutical services segment operates variety related healthcare service manufacturing businesses including pyxis corporation pyxis develops manufactures leases sells services pointofuse pharmacy systems automate distribution management medications supplies hospitals healthcare facilities medicine shoppe international inc medicine shoppe franchisor apothecarystyle retail pharmacies pci services inc pci international provider integrated packaging services pharmaceutical manufacturers owen healthcare inc owen provider pharmacy management information services hospitals cardinal information group companies cic developer provider clinical information systems rp scherer corporation scherer international developer manufacturer drug delivery systems medicalsurgical products segment primarily encompasses allegiance corporation allegiance distributor manufacturer medical surgical respiratory therapy products provider distribution costsaving services see basis presentation basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect mergers pci october 11 1996 owen march 18 1997 mediqual systems inc mediqual february 18 1998 scherer august 7 1998 allegiance february 3 1999 see note 2 business combinations accounted poolingofinterests method companys fiscal year end june 30 owens mediquals scherers allegiances fiscal year ends november 30 december 31 march 31 december 31 respectively fiscal year ended june 30 1997 consolidated financial statements combine companys fiscal year ended june 30 1997 owens financial results period june 1 1996 june 30 1997 excluding owens financial results december 1996 order change owens november 30 fiscal year end june 30 financial results mediquals fiscal year ended december 31 1996 scherers fiscal year ended march 31 1997 allegiances fiscal year ended december 31 1997 fiscal year ended june 30 1998 consolidated financial statements combine companys fiscal year ended june 30 1998 scherers fiscal year ended march 31 1998 due change owens fiscal year november 30 conform companys june 30 fiscal year end owens results operations month december 1996 included combined results operations reflected adjustment consolidated statements shareholders equity result changing mediquals fiscal year end december 31 june 30 results operations six months ended june 30 1997 included combined results operations reflected adjustment consolidated statements shareholders equity mediquals total revenue net earnings period 60 million 17 million respectively mediquals cash flows operating activities period 12 million cash flows used investing financing activities 03 million 01 million respectively due change scherers fiscal year end march 31 conform companys june 30 fiscal year end scherers results operations three months ended june 30 1998 included combined results operations reflected adjustment consolidated statements shareholders equity scherers net revenue net earnings period 1616 million 86 million respectively scherers cash flows operating financing activities period 126 million 326 million respectively cash flows used investing activities 122 million result changing allegiances fiscal year end december 31 june 30 results operations six months ended december 31 1997 included combined results operations fiscal years ended june 30 1997 1998 reflected adjustment consolidated statements shareholders equity allegiances total revenue net earnings period 22 billion 479 million respectively allegiances cash flows operating cardinal health inc subsidiaries notes consolidated financial statements activities period 1472 million cash flows used investing financing activities 637 million 838 million respectively may 21 1999 company completed merger pacific surgical innovations inc psi merger transaction psi accounted poolingofinterests impact merger transaction psi significant historical basis prior period financial statements restated psis financial information periods beginning may 21 1999 included companys consolidated financial results fiscal 1999 preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1055 million 974 million 1114 million cash payments income taxes 795 million 1469 million 1168 million fiscal 1999 1998 1997 respectively see notes 2 5 additional information regarding noncash investing financing activities receivables trade receivables primarily comprised amounts owed company pharmaceutical healthcare distribution activities presented net allowance doubtful accounts 536 million 646 million june 30 1999 1998 respectively company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 198 million 666 million june 30 1999 1998 respectively current portions 92 million 294 million respectively included assets amounts reported net allowance doubtful accounts 49 million 64 million june 30 1999 1998 respectively fiscal 1999 company formed medicine shoppe capital corporation mscc pyxis capital corporation pcc wholly owned subsidiaries medicine shoppe pyxis respectively mscc pcc incorporated sole purpose buying receivables selling receivables certain financial institutions investors designed special purpose bankruptcy remote entities although consolidated extent required generally accepted accounting principles mscc pcc separate corporations company medicine shoppe pyxis maintain separate financial statements assets available first foremost satisfy claims creditors inventories majority inventories approximately 60 1999 1998 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 1999 1998 504 million 544 million respectively company continues consolidate locations automate selected distribution facilities invest management information systems achieve efficiencies inventory management processes result facility related inventory consolidations operational efficiencies achieved fiscal 1999 1998 company partial inventory liquidations certain lifo pools reduced lifo provision approximately 01 million 23 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range one fifty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense balance sheet date company assesses recoverability longlived property based review projected undiscounted cash flows associated assets cardinal health inc subsidiaries notes consolidated financial statements goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range ten forty years accumulated amortization 5999 million 5298 million june 30 1999 1998 respectively balance sheet date determination made management ascertain whether indication intangible assets may impaired based review projected undiscounted operating cash flows subsidiary except allegiance assesses goodwill impairment based upon fair value approach revenue recognition company records distribution revenue merchandise shipped customers company obligation provide services related merchandise along companies drug distribution industry company reports revenue bulk deliveries made customers warehouses whereby company acts intermediary ordering subsequent delivery pharmaceutical products fluctuations bulk deliveries result largely circumstances beyond control company including consolidation within customers industry decisions customers either begin discontinue warehousing activities changes policy manufacturers related selling directly customers due insignificant margins generated bulk deliveries fluctuations amount significant impact earnings revenue recognized salestype leases pointofuse pharmacy systems delivered customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse pharmacy systems recognized upon delivery customer acceptance revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenue recognized related services rendered according contracts established fee charged contracts monthly management fee arrangement capitated fee arrangement portion hospital charges patients certain contracts fees management services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions packaging revenue recognized services provided upon completion services clinical information system license revenue recognized upon shipment system customer portion license fee related system maintenance deferred recognized annual maintenance period drug delivery system revenue recognized upon shipment products customer nonproduct revenue related option milestone exclusivity fees recognized earned obligations performance completed translation foreign currencies financial position results operations companys foreign operations excluding companys malaysian mexican manufacturing operations denominated us dollars measured using local currencies countries operate translated us dollars although effects foreign currency fluctuations mitigated fact expenses foreign subsidiaries generally incurred currencies sales generated reported results operations companys foreign subsidiaries affected changes foreign currency exchange rates compared prior periods higher lower depending upon weakening strengthening us dollar addition net assets foreign subsidiaries translated us dollars foreign currency exchange rates effect end period accordingly companys consolidated shareholders equity fluctuate depending upon relative strengthening weakening us dollar versus relevant foreign currencies derivative financial instrument risk company uses derivative financial instruments minimize impact foreign exchange rate changes earnings cash flows company also periodically enters foreign currency exchange contracts hedge certain exposures related selected transactions relatively certain timing amount company use derivative financial instruments trading speculative purposes see note 6 discussion cardinal health inc subsidiaries notes consolidated financial statements research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses net customer reimbursements 497 million 457 million 354 million fiscal 1999 1998 1997 respectively customer reimbursements amount 118 million 130 million 80 million received fiscal years ended june 30 1999 1998 1997 respectively income taxes provision made us income taxes earnings foreign subsidiary companies company controls include consolidated federal income tax return since managements practice intent permanently reinvest earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options outstanding computed using treasury stock method excluding dividends paid entities company merged company paid cash dividends per common share 0095 0070 0060 fiscal years ended june 30 1999 1998 1997 respectively stock splits august 12 1998 company declared threefortwo stock split effected stock dividend distributed october 30 1998 shareholders record october 9 1998 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock splits allegiance spinoff september 30 1996 distribution date baxter international inc baxter subsidiaries transferred allegiance subsidiaries us healthcare distribution business surgical respiratory therapy business healthcare costsaving business well certain foreign operations allegiance business connection spinoff allegiance business baxter spinoff occurred distribution date distribution allegiance common stock baxter stockholders distribution based distribution ratio one allegiance share five baxter shares held distribution approximately 684 million equivalent company common shares allegiance common stock made baxter stockholders record september 26 1996 2 business combinations mergerrelated costs special items business combinations mergerrelated costs february 3 1999 company completed merger transaction allegiance accounted poolingofinterests transaction company issued approximately 707 million common shares allegiance stockholders allegiances outstanding stock options converted options purchase approximately 103 million company common shares addition august 7 1998 company completed merger transaction scherer accounted poolingofinterests company issued approximately 342 million common shares scherer stockholders scherers outstanding stock options converted options purchase approximately 35 million common shares company recorded mergerrelated charge reflect transaction costs incurred result merger transactions fiscal 1999 additional mergerrelated costs associated integrating separate companies instituting efficiencies charged expense subsequent periods incurred may 21 1999 company completed merger transaction psi company issued approximately 233000 common shares psi shareholders historical cost psis assets combined approximately 39 million total liabilities assumed approximately 30 million impact merger transaction psi historical basis significant accordingly prior period historical financial statements restated psi merger psis financial results included consolidated financial results company since may 21 1999 fiscal 1999 mergerrelated costs totaling 1466 million 1176 million net tax recorded amount approximately 954 million related transaction employeerelated costs 361 million related business restructuring asset impairment costs associated companys merger transactions scherer allegiance part business restructuring company currently closing certain facilities company incurred employeerelated costs associated elimination approximately 360 positions asset impairment costs exit costs cardinal health inc subsidiaries notes consolidated financial statements related termination contracts lease agreements addition company recorded costs 40 million related write impaired inventory related previous merger 11 million related severance costs restructuring associated change management resulted merger owen company recorded costs 137 million related integrating operations companies previously engaged merger transactions company partially offsetting charge recorded 37 million credit adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation bergen see note 17 adjustment relates primarily services provided third parties engaged company connection terminated bergen transaction cost services estimated recorded prior periods services performed actual billings less estimate originally recorded resulting reduction current period mergerrelated costs february 18 1998 company completed merger transaction mediqual merger accounted poolingofinterests company issued approximately 860000 common shares mediqual shareholders mediquals outstanding stock options converted options purchase approximately 36000 common shares company table presents reconciliation total revenue net earnings available common shares reported accompanying consolidated financial statements previously reported company term cardinal health used herein refers cardinal health inc subsidiaries prior mediqual scherer allegiance mergers see note 1 periods combined adjustments affecting net earnings shareholders equity resulting mediqual scherer allegiance mergers adopt accounting practices material periods presented herein material intercompany transactions addition merger transactions described fiscal 1999 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys medsurg distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 1608 million liabilities operations assumed approximately 189 million consisting debt 32 million acquisitions taken place july 1 1998 consolidated results would materially different reported results fiscal 1998 company made number individually immaterial acquisitions aggregate purchase price 478 million exchanged nonmonetary assets value approximately 105 million acquire interest source medical corporation new venture canada acquisitions accounted purchase transactions acquisitions taken place july 1 1997 consolidated results would materially different reported results fiscal 1998 company recorded mergerrelated charges associated transaction costs incurred connection mediqual merger 23 million transaction costs incurred connection proposed merger transaction bergen 334 million terminated subsequent june 30 1998 see note 17 accordance terms agreement plan merger company wholly owned subsidiary company bergen amended termination required company reimburse bergen 70 million transaction costs upon termination agreement see note 17 additional mergerrelated costs related asset impairments 38 million cardinal health inc subsidiaries notes consolidated financial statements integrating operations companies previously merged company 96 million incurred recorded fiscal 1998 march 18 1997 company completed merger transaction owen merger owen merger accounted poolingofinterests business combination company issued approximately 116 million common shares owen shareholders owens outstanding stock options converted options purchase approximately 10 million common shares fiscal 1997 company recorded costs approximately 311 million 224 million net tax related owen merger costs include 131 million transaction employeerelated costs associated merger 132 million asset impairments 106 million related meditrol discussed 48 million related integration activities including elimination duplicate facilities certain exit restructuring costs time owen merger owen wholly owned subsidiary meditrol manufactured marketed sold serviced pointofuse medication distribution systems similar pyxis upon consummation owen merger management committed merge operations meditrol pyxis phaseout production separate meditrol product line result decision meditrol patent 74 million certain operating assets 32 million written impaired october 11 1996 company completed merger transaction pci merger pci merger accounted poolingofinterests business combination company issued approximately 47 million common shares pci shareholders pcis outstanding stock options converted options purchase approximately 03 million common shares fiscal 1997 company recorded costs totaling approximately 151 million 114 million net tax related pci merger costs include 138 million transaction employeerelated costs associated pci merger including 76 million retirement benefits incentive fees two executives pci vested became payable upon consummation merger 13 million related integration activities including exit costs fiscal 1997 company made individually immaterial acquisitions accounted purchase method accounting totaling 714 million acquisitions taken place july 1 1996 consolidated results would materially different reported results addition mergerrelated costs recorded fiscal 1997 owen merger pci merger discussed company recorded 47 million 28 million net tax related integrating operations companies previously merged company special items fiscal 1998 company recorded special charge 86 million 52 million net tax related rationalization pharmaceutical distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection final settlement labor dispute former employees companys boston pharmaceutical distribution facility resulting termination union relationship fiscal 1998 scherer finalized part longterm tax planning strategy converting joint venture partner legal ownership structure scherers 51 owned subsidiary germany corporation partnership result change tax status companys tax basis german subsidiary adjusted resulting onetime tax refund approximately 46 million well reduction cash taxes paid current future years combined factors resulted onetime reduction fiscal 1998 income tax expense approximately 117 million net effect various mergerrelated costs special items recorded fiscal 1999 reduce reported net earnings 1176 million 4563 million reduce reported diluted earnings per common share 042 per share 164 per share fiscal 1998 effect various mergerrelated charges special items reduce reported net earnings 241 million 4251 million reduce reported diluted earnings per common share 009 per share 153 per share effect various mergerrelated costs recorded fiscal 1997 reduce reported net earnings 366 million 3348 million reduce reported diluted earnings per common share 013 per share 123 per share certain mergerrelated costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed incurred cardinal health inc subsidiaries notes consolidated financial statements restructuring program fiscal 1993 baxter see note 1 announced restructuring plan designed part make allegiance efficient responsive addressing changes us healthcare system charges totaling 5600 million recorded cover costs associated restructuring initiatives fiscal 1999 1998 1997 company cash outflows related restructuring program 66 million 158 million 156 million respectively noncash charges restructuring program 74 million 91 million 09 million respectively prior fiscal 1997 total cash outflows noncash charges related restructuring program 2424 million 2515 million respectively fiscal year ended june 30 1999 79 million unnecessary restructuring reserves reversed reversal unnecessary reserves principally result facility closures consolidations finalized costs lower originally anticipated cash outflows pertain primarily employeerelated costs severance outplacement assistance relocation implementation teams facility consolidations since inception restructuring program approximately 2500 positions eliminated june 30 1999 1998 remaining restructuring reserve balance 28 million 247 million respectively classified current liabilities remaining expenditures charged restructuring program expected occur fiscal 2000 implementation projects completed planned 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions future minimum lease payments received pursuant salestype leases next five years 2000 1695 million 2001 1660 million 2002 1515 million 2003 1321 million 2004 837 million 2005 thereafter 149 million lease related financing arrangements pyxis previously financed working capital needs sale certain lease receivables nonbank financing company june 30 1999 689 million lease receivables owned financing company june 1998 agreement financing company amended terminate pyxis obligation sell lease receivables financing company due pyxis customers upgrading pyxis machines expanding number units leased original lease agreements sold financing company pyxis converting original lease agreements customers updated lease agreement pyxis maintaining revised leases selling financing company replace original lease receivables fiscal 1999 pyxis entered agreement financing company pay financing company remaining portion original lease receivables outstanding time revision original terms future minimum payments notes june 30 1999 2000 395 million 2001 269 million 2002 140 million 2003 31 million 4 notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 1778 million june 30 1999 various money market rates june 30 1999 286 million weighted average interest rate 64 outstanding arrangements 247 million weighted average interest rate 72 outstanding june 30 1998 total available unused lines credit june 30 1999 1492 million cardinal health inc subsidiaries notes consolidated financial statements 5 longterm obligations credit facilities longterm obligations consist following millions 6 625 65 notes represent unsecured obligations company 675 notes represent unsecured obligations scherer guaranteed company 73 notes 78 70 debentures represent unsecured obligations allegiance guaranteed company obligations redeemable prior maturity subject sinking fund fiscal 1999 company established unsecured bank credit facility expires march 2004 credit facility provides aggregate 10 billion borrowings 1500 million part multicurrency allocation 2500 million represents 364day facility interest rates outstanding borrowings libor plus 025 june 30 1999 807 million borrowings outstanding multicurrency allocation portion facility amounts outstanding shortterm portion credit facility classified longterm debt amounts supported longterm credit facility refinanced agreement requires company maintain minimum net worth 255 billion company commercial paper program providing issuance 7500 million aggregate maturity value commercial paper commercial paper aggregate maturity value 492 million 1420 million outstanding june 30 1999 1998 respectively effective interest rate 482 fiscal 1999 company terminated unsecured revolving credit agreement originally expiring 2001 unsecured bank credit facility originally expiring 2002 provided aggregate 9000 million 1750 million borrowings respectively june 30 1998 513 million outstanding 1750 million facility amounts outstanding 9000 million facility company maintains shortterm credit facilities june 30 1999 1998 515 million 1975 million respectively outstanding uncommitted facilities effective interest rate june 30 1999 600 amounts outstanding commercial paper program shortterm credit facilities classified longterm debt amounts supported longterm credit facility continue refinanced certain longterm obligations collateralized property equipment company aggregate book value approximately 287 million june 30 1999 maturities longterm obligations future fiscal years 2000 116 million 2001 1117 million 2002 31 million 2003 22 million 2004 2788 million 2005 thereafter 8281 million june 30 1999 company capacity issue 250 million additional longterm debt pursuant shelf debt registration statement filed securities exchange commission cardinal health inc subsidiaries notes consolidated financial statements 6 financial instruments interest rate management company entered interest rate swap agreement matures november 2002 hedge variable interest rates company exchanged variable rate position related lease agreement fixed rate 708 company recognizes income periodic net cash settlements swap agreement accrues foreign exchange risk management company fiscal 1998 purchased various foreign currency options expired june 30 1999 partially protect company risk fluctuations foreign currency rates could adverse effect foreign subsidiaries earnings addition fiscal 1998 company foreign currency forward option contracts hedged portion anticipated production costs expected denominated foreign currency dollar strengthens foreign currencies decline value foreign currency cash flows partially offset recognition gains value purchased currency options conversely dollar weakens foreign currencies increase value foreign currency cash flows reduced recognition premium paid acquire options market value gains losses premiums contracts recognized income upon occurrence fair value based upon estimated amount company would receive terminate options net expense fiscal 1999 material net expense fiscal 1998 116 million related foreign currency forward contracts options addition company periodically enters forward foreign currency exchange contracts hedge certain exposures related identifiable foreign currency transactions relatively certain timing amount gains losses forward contracts recognized concurrently gains losses underlying transactions company also uses commodity contracts hedge raw material costs expected denominated foreign currency contracts generally cover oneyear period gains losses deferred recognized cost goods sold underlying product costs contracts qualify hedges accounting purposes accordance criteria established sfas 80 accounting futures contracts cash flows resulting commodity contracts classified category items hedged counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payables notes payablebanks accrued liabilities june 30 1999 1998 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 12400 million 13653 million compared carrying amounts 12355 million 13373 million june 30 1999 1998 respectively fair value longterm insurance receivables longterm litigation liabilities june 30 1999 522 million 317 million compared carrying amounts 573 million 341 million respectively june 30 1998 company balances related longterm receivables longterm liabilities fair value companys longterm obligations items estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value companys derivative instruments based upon estimated amount company would receive pay terminate contracts reporting date fair values based quoted market prices similar instruments cardinal health inc subsidiaries notes consolidated financial statements 7 income taxes consolidated income taxes millions provision income taxes consists following millions reconciliation provision based federal statutory income tax rate companys effective income tax rate follows provision made us additional foreign taxes 3432 million undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practical estimate amount tax might payable eventual remittance earnings cardinal health inc subsidiaries notes consolidated financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions amounts classified consolidated balance sheets follows millions company federal net operating loss carryforwards 33 million state net operating loss carryforwards 1863 million june 30 1999 june 30 1999 company foreign tax credit capital loss carryforwards valuation allowance 70 million june 30 1999 provided state net operating loss foreign tax credit capital loss carryforwards utilization carryforwards within applicable statutory periods uncertain companys federal tax operating loss carryforwards portion state net operating loss carryforwards subject change ownership limitation calculation internal revenue code section 382 application valuation allowance described company anticipates limitations apply respect utilization assets federal net operating loss carryforward begins expiring 2000 state net operating loss carryforward expires 2013 expiring state net operating loss carryforwards required valuation allowances adjusted annually taxsharing agreement baxter allegiance pay increases reimbursed decreases net deferred tax assets transferred distribution date increases decreases may result audit adjustments baxters prior period tax returns cardinal health inc subsidiaries notes consolidated financial statements 8 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified domestic union employees covered multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement certain allegiance employees participated baxtersponsored defined benefit plans prior distribution see note 1 eligible receive contribution qualified 401k account amount ranging 2 8 percent annual compensation depending years service transitional benefit provided eligible employees 2003 total expense employee retirement benefit plans excluding defined benefit plans see follows millions defined benefit plans company several defined benefit plans covering substantially salaried hourly scherer employees companys domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations effective july 1 1998 company adopted sfas 132 employers disclosures pensions postretirement benefits accordance sfas 132 following tables provide reconciliation change benefit obligation change plan assets net amount recognized consolidated balance sheets based measurement date march 31 millions cardinal health inc subsidiaries notes consolidated financial statements projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 894 million 851 million 478 million respectively june 30 1999 854 million 758 million 406 million respectively june 30 1998 components companys net periodic benefit costs follows millions fiscal 1999 1998 weighted average actuarial assumptions used determining funded status information net periodic benefit cost information discount rate 64 75 expected return plan assets 62 101 rate compensation increase 37 46 respectively cardinal health inc subsidiaries notes consolidated financial statements 9 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 1999 2000 428 million 2001 273 million 2002 185 million 2003 153 million 2004 130 million 2005 thereafter 328 million rental expense relating operating leases approximately 696 million 648 million 682 million fiscal 1999 1998 1997 respectively sublease rental income material period presented herein company entered operating lease agreements several banks construction various new facilities initial terms lease agreements extend may 2004 optional fiveyear renewal periods event termination company required either purchase facility vacate property make reimbursement portion uncompensated price property cost instruments provide maximum fundings 2862 million total estimated cost construction projects june 30 1999 amount expended 1768 million currently companys minimum annual lease payments agreements approximately 115 million june 30 1999 company capital expenditure commitments related primarily plant expansions facility acquisitions approximately 1193 million june 30 1999 amounts outstanding customer notes receivable sold full recourse commercial bank totaled approximately 96 million company also outstanding guarantees indebtedness financial assistance commitments totaled approximately 30 million june 30 1999 company becomes involved timetotime litigation incidental business november 1993 cardinal five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system trial matter began september 23 1998 november 19 1998 close plaintiffs caseinchief wholesaler defendants manufacturer defendants moved judgment matter law favor november 30 1998 court granted motions ordered judgment matter law favor wholesaler manufacturer defendants january 25 1999 class plaintiffs filed notice appeal district courts decision court appeals seventh circuit july 13 1999 court appeals seventh circuit issued decision part affirmed dismissal wholesaler defendants including company july 27 1999 class plaintiffs filed petition rehearing court appeals seventh circuit company believes allegations set forth cardinal lawsuits without merit allegiance assumed defense litigation involving claims related allegiance business baxter see note 1 including certain claims alleged personal injuries result exposure natural rubber latex gloves since none cases involving natural rubber latex gloves proceeded hearing merits company unable evaluate extent potential liability unable estimate potential loss company believes substantial portion potential liability defense costs excluding defense costs already reserved related natural latex gloves cases claims covered insurance subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency although ultimate resolution litigation cannot forecast certainty company believe outcome pending litigation would material adverse effect companys consolidated financial statements 10 shareholders equity june 30 1999 companys authorized capital shares consisted 500000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value june 30 1998 companys authorized capital shares consisted 300000000 class common shares without par value b 5000000 b common shares without par value c 500000 nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one cardinal health inc subsidiaries notes consolidated financial statements vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 1999 1998 11 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting acute care portion healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 1999 companys two largest customers individually accounted 11 13 operating revenue respectively fiscal 1998 two customers individually accounted 14 11 operating revenue respectively fiscal 1997 two customers individually accounted 13 10 operating revenue respectively two customers serviced primarily pharmaceutical distribution medicalsurgical products segments fiscal 1999 one customer accounted 57 bulk deliveries fiscal years 1998 1997 one customer accounted 62 bulk deliveries 12 stock options restricted shares company maintains stock incentive plans benefit certain officers directors employees options granted generally vest two three years exercisable periods ten years date grant price equals fair market value date grant company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income diluted earnings per common share would reduced 831 million 030 per share respectively fiscal 1999 336 million 012 per share respectively fiscal 1998 192 million 007 per share respectively fiscal 1997 fiscal 1999 stock option grants previous allegiance scherer plans vested immediately merger date accelerated grants increased fiscal 1999 pro forma effect net income diluted earnings per common share 329 million 012 per share respectively sfas 123 method accounting applied options granted prior july 1 1995 resulting pro forma compensation cost may representative expected future years following summarizes stock option transactions company plans july 1 1996 june 30 1999 giving retroactive effect conversions options connection merger transactions stock splits millions except per share amounts cardinal health inc subsidiaries notes consolidated financial statements giving retroactive effect conversion stock options related mergers stock splits weighted average fair value options granted fiscal 1999 1998 1997 2255 1419 957 respectively fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods information relative stock options outstanding june 30 1999 june 30 1999 remained approximately 08 million additional shares available issued pursuant plans market value restricted shares awarded company recorded component shareholders equity accompanying consolidated balance sheets compensation awards amortized expense period participants perform services generally one seven years june 30 1999 approximately 03 million shares remained restricted subject forfeiture prior allegiance merger allegiance employee stock purchase plan sale 40 million allegiances common stock authorized purchase price lower 85 percent closing market price date subscription 85 percent closing market price date purchase plan allegiance sold employees 06 million shares average price per share 2333 fiscal 1999 12 million shares average price per share 1088 fiscal 1998 june 30 1998 subscriptions 07 million outstanding weighted average fair value purchase rights 332 subsequent allegiance merger outstanding subscriptions canceled may 2 1997 allegiance received 548 million cash 141 members management purchased approximately 30 million equivalent cardinal common shares allegiance granted oneday options shares immediately exercised shared investment plan designed align management stockholders interests 13 segment information june 30 1999 company adopted statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information sfas 131 requires companies define report financial descriptive information operating segments company organized based products services offers organizational structure company operates three business segments pharmaceutical distribution pharmaceutical services medicalsurgical products cardinal health inc subsidiaries notes consolidated financial statements pharmaceutical distribution segment involves distribution broad line pharmaceuticals health beauty care products therapeutic plasma specialty pharmaceutical products items typically sold hospitals retail drug stores healthcare providers pharmaceutical services segment provides services healthcare industry design unique drug delivery systems comprehensive packaging services integrated pharmacy management reimbursement services clinical information system services pharmacy automation equipment medicalsurgical products segment involves manufacture medical surgical laboratory products distribution products hospitals physician offices surgery centers healthcare providers company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies following table includes revenue operating earnings capital expenditures depreciation amortization expense fiscal years ended june 30 1999 1998 1997 assets june 30 1999 1998 1997 segment reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 1 intersegment revenue consists primarily elimination intersegment activity primarily sales pharmaceutical distribution pharmaceutical services sales one segment another priced equivalent external customer selling prices 2 corporate operating earnings primarily consists special charges 1466 million 578 million 509 million fiscal 1999 1998 1997 unallocated corporate depreciation amortization administrative expenses 3 corporate assets include primarily corporate cash equivalents corporate property plant equipment net unallocated deferred taxes elimination investment subsidiaries following table presents revenue longlived assets geographic area millions longlived assets include property plant equipment net accumulated depreciation cardinal health inc subsidiaries notes consolidated financial statements 14 selected quarterly financial data unaudited following selected quarterly financial data millions except per share amounts fiscal 1999 1998 restated reflect poolingofinterests business combinations discussed note 2 fully discussed note 2 mergerrelated costs special charges recorded various quarters fiscal 1999 1998 following table summarizes impact costs net earnings diluted earnings per share quarters recorded millions except per share amounts 15 related party transactions certain foreign subsidiaries purchase gelatin materials companys german subsidiary leases plant facilities purchases services receives loans timetotime german company also minority partner companys german certain european subsidiaries gelatin purchases prices comparable estimated market cardinal health inc subsidiaries notes consolidated financial statements prices amounted 280 million 250 million 246 million fiscal years ended june 30 1999 1998 1997 respectively rental payments amounted 84 million 48 million 54 million purchased services amounted 94 million 52 million 55 million respective fiscal years 16 recently issued financial accounting standards june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities new statement requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value amended statement financial accounting standards 137 sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 provisions sfas 133 require adoption later beginning companys fiscal year ending june 30 2001 march 1998 american institute certified public accountants aicpa issued statement position 981 sop 981 accounting costs computer software developed obtained internal use require adoption later beginning companys fiscal year ending june 30 2000 new statement provides guidance accounting costs computer software developed obtained internal use adoption statements expected material impact companys consolidated financial statements 17 terminated merger agreement august 24 1997 company bergen announced entered definitive merger agreement subsequently amended parties march 16 1998 pursuant wholly owned subsidiary company would merged bergen merger agreement march 9 1998 ftc filed complaint united states district court district columbia seeking preliminary injunction halt proposed merger july 31 1998 district court granted ftcs request injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement company required reimburse bergen 70 million transaction costs upon termination bergen merger agreement additionally termination bergen merger agreement cause costs incurred company would deductible merger consummated become tax deductible resulting tax benefit 122 million obligation reimburse bergen additional tax benefit reflected consolidated financial statements fourth quarter fiscal year ended june 30 1998 18 subsequent events august 5 1999 company announced entered definitive merger agreement automatic liquid packaging inc alp pursuant alp become wholly owned subsidiary company stockforstock merger expected accounted poolingofinterests financial reporting purposes upon consummation merger company record mergerrelated charge reflect transaction costs incurred result merger expected completed first quarter fiscal 2000 subject satisfaction certain conditions including regulatory clearances july 12 1999 company completed purchase medsurg industries inc 318 million acquisition accounted purchase item 9item 8 financial statements supplementary data independent auditors reports financial statements schedules consolidated statements earnings fiscal years ended june 30 2000 1999 1998 consolidated balance sheets june 30 2000 1999 consolidated statements shareholders equity fiscal years ended june 30 2000 1999 1998 consolidated statements cash flows fiscal years ended june 30 2000 1999 1998 notes consolidated financial statements report independent public accountants shareholders directors cardinal health inc audited accompanying consolidated balance sheet cardinal health inc subsidiaries june 30 2000 related consolidated statements earnings shareholders equity cash flows year ended consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2000 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole arthur andersen llp arthur andersen llp columbus ohio july 21 2000 independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheet cardinal health inc subsidiaries june 30 1999 related consolidated statements earnings shareholders equity cash flows two years period ended june 30 1999 audits also included consolidated financial statement schedule relates years ended june 30 1999 1998 listed index item 14 consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audits audit financial statements allegiance corporation allegiance wholly owned subsidiary cardinal health inc june 30 1999 years ended june 30 1999 1998 also audit financial statements rp scherer corporation scherer wholly owned subsidiary cardinal health inc june 30 1999 years ended june 30 1999 march 31 1998 combined financial statements allegiance scherer represent approximately 44 consolidated total assets june 30 1999 represent combined revenues net income approximately 25 28 35 39 respectively consolidated amounts two years period ended june 30 1999 statements audited auditors whose reports furnished us opinion insofar relates amounts included allegiance scherer based solely reports auditors conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based audits reports auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1999 results operations cash flows two years period ended june 30 1999 conformity accounting principles generally accepted united states america also opinion consolidated financial statement schedule relates years ended june 30 1999 1998 considered relation basic fiscal 1999 1998 consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp deloitte touche llp columbus ohio august 10 1999 except first paragraph note 2 date may 26 2000 fiscal 1999 1998 amounts note 12 date september 5 2000 report independent public accountants rp scherer corporation audited accompanying consolidated statement financial position rp scherer corporation delaware corporation whollyowned subsidiary cardinal health inc subsidiaries june 30 1999 related consolidated statements income comprehensive income cash flows shareholders equity year ended june 30 1999 year ended march 31 1998 presented separately herein financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position rp scherer corporation subsidiaries june 30 1999 results operations cash flows year ended june 30 1999 year ended march 31 1998 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audits basic financial statements opinion fairly stated material respects relation basic financial statements taken whole sarthur andersen llp roseland new jersey august 9 1999 report independent accountants stockholders allegiance corporation opinion consolidated balance sheet related consolidated statements operations cash flows equity allegiance corporation subsidiaries presented separately herein present fairly material respects financial position allegiance corporation whollyowned subsidiary cardinal health inc subsidiaries june 30 1999 results operations cash flows years ended june 30 1999 1998 conformity generally accepted accounting principles financial statements responsibility allegiance corporations management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 report independent accountants financial statement schedule stockholders allegiance corporation audits consolidated financial statements allegiance corporation subsidiaries referred report dated july 29 1999 appearing page 24 cardinal health inc annual report form 10k year ended june 30 2000 also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule allegiance corporation subsidiaries presented separately herein opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 cardinal health inc subsidiaries consolidated statements earnings millions except per share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc together subsidiaries collectively company provider services healthcare industry offering array valueadded pharmaceutical healthcare products distribution services pharmaceuticalrelated products services broad base customers company currently conducts business within four business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services see note 12 discussion related companys operating segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect mergers mediqual systems inc mediqual february 18 1998 rp scherer corporation scherer august 7 1998 allegiance corporation allegiance february 3 1999 pacific surgical innovations inc psi may 21 1999 automatic liquid packaging inc alp september 10 1999 see note 2 business combinations accounted poolingofinterests method companys fiscal year end june 30 scherers psis fiscal year ends march 31 september 30 respectively fiscal year ended june 30 1998 consolidated financial statements combine companys fiscal year ended june 30 1998 scherers fiscal year ended march 31 1998 psis fiscal year ended september 30 1998 due change scherers fiscal year end march 31 conform companys june 30 fiscal year end scherers results operations three months ended june 30 1998 included combined results operations reflected adjustment consolidated statements shareholders equity scherers net revenue net earnings period 1616 million 86 million respectively scherers cash flows operating financing activities period 126 million 326 million respectively cash flows used investing activities 122 million result changing allegiances fiscal year end december 31 june 30 results operations six months ended december 31 1997 included combined results operations fiscal years ended june 30 1997 1998 reflected adjustment consolidated statements shareholders equity allegiances total revenue net earnings period 22 billion 479 million respectively allegiances cash flows operating activities period 1472 million cash flows used investing financing activities 637 million 838 million respectively addition company completed several individually immaterial acquisitions fiscal 2000 1999 1998 accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1135 million 1055 million 974 million cash payments income taxes 1064 million 800 million 1579 million fiscal 2000 1999 1998 respectively see notes 2 4 additional information regarding noncash investing financing activities receivables trade receivables primarily comprised amounts owed company pharmaceutical healthcare distribution activities presented net allowance doubtful accounts 616 million 539 million june 30 2000 1999 respectively company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 240 million 198 million june 30 2000 1999 respectively current portions 93 million 92 million respectively included assets amounts reported net allowance doubtful accounts 46 million 49 million june 30 2000 1999 respectively cardinal health inc subsidiaries notes consolidated financial statements company formed medicine shoppe capital corporation mscc pyxis capital corporation pcc cardinal health funding llc chf wholly owned subsidiaries medicine shoppe pyxis griffin capital corporation griffin respectively mscc pcc chf organized sole purpose buying receivables selling receivables certain financial institutions investors designed special purpose bankruptcy remote entities although consolidated extent required generally accepted accounting principles mscc pcc chf separate legal entities company medicine shoppe pyxis griffin maintain separate financial statements assets available first foremost satisfy claims creditors inventories majority inventories approximately 63 2000 59 1999 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2000 1999 460 million 504 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes primarily computed using straightline method estimated useful lives assets range one fifty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense balance sheet date company assesses recoverability longlived property based review projected undiscounted cash flows associated assets goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range ten forty years accumulated amortization 6372 million 5999 million june 30 2000 1999 respectively balance sheet date determination made management ascertain whether indication intangible assets may impaired based primarily review projected undiscounted operating cash flows subsidiary revenue recognition company records distribution revenue merchandise shipped customers company obligation provide services related merchandise company also acts intermediary ordering subsequent delivery bulk shipments pharmaceutical products classified bulk deliveries customer warehouses included total revenue company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenues recognized related services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions packaging liquid fill contract manufacturing revenues recognized services provided upon completion services drug delivery system revenue recognized upon shipment products customer nonproduct revenue related option milestone exclusivity fees recognized earned obligations performance completed revenue recognized salestype leases pointofuse pharmacy systems delivered customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse pharmacy systems recognized upon delivery customer acceptance revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease cardinal health inc subsidiaries notes consolidated financial statements clinical information system license revenue recognized upon delivery software customer completion implementationset training necessary operate software portion license fee related system support deferred recognized annual license period translation foreign currencies financial position results operations companys foreign operations excluding companys malaysian mexican manufacturing operations denominated us dollars measured using local currencies countries operate translated us dollars although effects foreign currency fluctuations mitigated fact expenses foreign subsidiaries generally incurred currencies sales generated reported results operations companys foreign subsidiaries affected changes foreign currency exchange rates compared prior periods higher lower depending upon weakening strengthening us dollar addition net assets foreign subsidiaries translated us dollars foreign currency exchange rates effect end period accordingly companys consolidated shareholders equity fluctuate depending upon relative strengthening weakening us dollar versus relevant foreign currencies derivative financial instrument risk company uses derivative financial instruments minimize impact foreign exchange rate changes earnings cash flows company also periodically enters foreign currency exchange contracts hedge certain exposures related selected transactions relatively certain timing amount company use derivative financial instruments trading speculative purposes see note 5 discussion research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses net customer reimbursements 485 million 497 million 457 million fiscal 2000 1999 1998 respectively customer reimbursements amount 104 million 118 million 130 million received fiscal years ended june 30 2000 1999 1998 respectively income taxes provision made us income taxes earnings foreign subsidiary companies company controls include consolidated federal income tax return since managements practice intent permanently reinvest earnings pro forma adjustment income taxes september 10 1999 company completed merger transaction alp merger april 1998 alp elected scorporation status income tax purposes result merger alp terminated scorporation election pro forma adjustment income taxes presents pro forma tax expense alp subject federal income taxes periods presented see note 2 earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options outstanding computed using treasury stock method excluding dividends paid entities company merged company paid cash dividends per common share 0100 0095 0070 fiscal years ended june 30 2000 1999 1998 respectively stock splits august 12 1998 company declared threefortwo stock split effected stock dividend distributed october 30 1998 shareholders record october 9 1998 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock splits new accounting pronouncement july 1 1999 company adopted statement position 981 sop 981 accounting costs computer software developed obtained internal use sop 981 provides guidance accounting costs computer software developed obtained internal use adoption statement material impact companys consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 2 business combinations mergerrelated costs special items business combinations september 10 1999 company completed alp merger accounted poolingofinterests alp merger company issued approximately 58 million common shares alp stockholders may 21 1999 company completed merger transaction psi company issued approximately 233000 common shares psi shareholders accounted merger transaction poolingofinterests accompanying financial statements addition merger transactions described fiscal 2000 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys medicalsurgical distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 635 million liabilities operations assumed approximately 70 million including debt 40 million acquisitions taken place july 1 1999 consolidated results would materially different reported results february 3 1999 company completed merger transaction allegiance accounted poolingofinterests transaction company issued approximately 707 million common shares allegiance stockholders allegiances outstanding stock options converted options purchase approximately 103 million common shares addition august 7 1998 company completed merger transaction scherer accounted poolingofinterests company issued approximately 342 million common shares scherer stockholders scherers outstanding stock options converted options purchase approximately 35 million common shares company recorded mergerrelated charge reflect transaction costs incurred result merger transactions fiscal 1999 additional mergerrelated costs associated integrating separate companies instituting efficiencies charged expense subsequent periods incurred addition merger transactions described fiscal 1999 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys medicalsurgical distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 1608 million liabilities operations assumed approximately 189 million including debt 32 million acquisitions taken place july 1 1998 consolidated results would materially different reported results february 18 1998 company completed merger transaction mediqual merger accounted poolingofinterests company issued approximately 860000 common shares mediqual shareholders mediquals outstanding stock options converted options purchase approximately 36000 common shares company fiscal 1998 company made number individually immaterial acquisitions aggregate purchase price 478 million exchanged nonmonetary assets value approximately 105 million acquire interest source medical corporation new venture canada acquisitions accounted purchase transactions acquisitions taken place july 1 1997 consolidated results would materially different reported results cardinal health inc subsidiaries notes consolidated financial statements special charges following summary special charges fiscal years ended june 30 2000 1999 1998 mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger transactions alp allegiance scherer fiscal years presented table herein company incurred direct transaction costs related merger transactions expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition company incurred employeerelated costs consist primarily severance transactionstay bonuses result alp allegiance scherer merger transactions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billings employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs exit costs relate primarily costs associated lease terminations moving expenses direct result merger transactions alp allegiance scherer integration costs include charges related integrating operations previous merger transactions company recorded charges 96 million 267 million fiscal years ended june 30 2000 1999 respectively associated business restructuring result companys merger transaction scherer part business restructuring company closing certain facilities connection closings company incurred employeerelated costs asset impairment charges exit costs related termination contracts lease agreements charges 40 million related writedown impaired inventory associated merger transaction owen healthcare inc owen recorded fiscal year ended june 30 1999 also fiscal 1999 cardinal health inc subsidiaries notes consolidated financial statements company recorded 11 million related severance costs restructuring associated change management resulted merger transaction owen partially offsetting total mergerrelated charges fiscal 1999 credit recorded adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation bergen see note 15 actual billings services provided third parties engaged company less estimate resulting reduction mergerrelated costs special items fiscal 1998 company recorded special charge 86 million 52 million net tax related rationalization pharmaceutical distribution operations approximately 61 million related asset impairments lease exit costs resulting primarily companys decision accelerate consolidation number distribution facilities relocation modern facilities certain others remaining amount related employee severance costs including approximately 20 million incurred connection final settlement labor dispute former employees companys boston pharmaceutical distribution facility resulting termination union relationship fiscal 1998 scherer finalized part longterm tax planning strategy converting joint venture partner legal ownership structure scherers 51 owned subsidiary germany corporation partnership result change tax status companys tax basis german subsidiary adjusted resulting onetime tax refund approximately 46 million well reduction cash taxes paid current future years combined factors resulted onetime reduction fiscal 1998 income tax expense approximately 117 million pro forma impact since april 1998 alp organized scorporation tax purposes accordingly alp subject federal income tax april 1998 date merger transaction fiscal years ended 1999 1998 net earnings would reduced 93 million 46 million respectively alp subject federal income taxes fiscal 2000 net effect various mergerrelated charges reduced reported net earnings 498 million 6797 million reduced reported diluted earnings per common share 018 per share 239 per share net tax effect various mergerrelated costs recorded pro forma adjustments related alp taxes fiscal 1999 reduce reported net earnings 1083 million 4810 million reduce reported diluted earnings per common share 038 per share 168 per share fiscal 1998 effect various mergerrelated charges special items recorded pro forma adjustments related alp taxes fiscal 1998 reduce reported net earnings 195 million 4485 million reduce reported diluted earnings per common share 006 per share 158 per share certain mergerrelated costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed incurred 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions cardinal health inc subsidiaries notes consolidated financial statements future minimum lease payments received pursuant salestype leases next five years 2001 2199 million 2002 2144 million 2003 2006 million 2004 1579 million 2005 856 million 2006 thereafter 119 million lease related financing arrangements pyxis previously financed working capital needs sale certain lease receivables nonbank financing company june 30 2000 225 million lease receivables owned financing company agreement financing company amended terminate pyxis obligation sell lease receivables financing company due pyxis customers upgrading pyxis machines expanding number units leased original lease agreements sold financing company pyxis converting original lease agreements customers updated lease agreements pyxis maintaining revised leases selling financing company replace original lease receivables result pyxis entered agreement financing company pay financing company remaining portion original lease receivables outstanding time revision original terms future minimum payments notes june 30 2000 2001 362 million 2002 201 million 2003 54 million classified part liabilities 4 shortterm borrowings longterm obligations notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 493 million june 30 2000 various money market rates june 30 2000 191 million weighted average interest rate 74 outstanding arrangements 286 million weighted average interest rate 64 outstanding june 30 1999 total available unused lines credit june 30 2000 302 million longterm obligations longterm obligations consist following millions 60 625 65 notes represent unsecured obligations company 675 notes represent unsecured obligations scherer guaranteed company 73 notes 78 70 debentures represent unsecured obligations allegiance guaranteed company obligations redeemable prior maturity subject sinking fund company commercial paper program providing issuance 10 billion aggregate maturity value commercial paper company 5092 million outstanding program june 30 2000 market interest rate based upon libor company also maintains shortterm credit facilities allow borrowings 2500 million june 30 2000 1999 542 million 353 million outstanding cardinal health inc subsidiaries notes consolidated financial statements uncommitted facilities effective interest rate june 30 2000 1999 63 60 respectively company also unsecured bank credit facility provides aggregate 15 billion borrowings 750 million expires march 31 2001 750 million expires march 31 2004 expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remains unused june 30 2000 june 30 2000 1999 commercial paper shortterm borrowings totaling 5634 million 845 million respectively reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings fiscal 1999 company issued 150 million 625 notes due 2008 proceeds used working capital needs due growth companys business june 30 2000 company currently capacity issue 250 million additional debt securities pursuant shelf registration statement filed securities exchange commission certain longterm obligations collateralized property equipment company aggregate book value approximately 275 million june 30 2000 maturities longterm obligations future fiscal years 2001 93 million 2002 5681 million 2003 29 million 2004 2012 million 2005 16 million 2006 thereafter 7120 million 5 financial instruments interest rate management company entered interest rate swap agreement notional amount 200 million matures november 2002 hedge variable interest rates company exchanged variable rate position related lease agreement fixed rate 708 company recognizes income periodic net cash settlements swap agreement accrues foreign exchange risk management normal course business operations company exposed fluctuations foreign exchange rates order reduce uncertainty impact foreign exchange rate movements operations company periodically enters foreign currency options forward contracts principally european currencies japanese yen hedge certain anticipated sales firm commitments denominated foreign currencies option forward contracts typically mature within one year companys forward contracts subject material risks due exchange rate movements gains losses contracts offset losses gains assets liabilities transactions hedged risk loss associated foreign currency option contracts limited premium paid option contracts gains losses forward option contracts recognized concurrently gains losses underlying transactions premiums paid option contract amortized incomeexpense life underlying hedged transactions company also uses commodity contracts hedge raw material costs expected denominated foreign currency contracts generally cover oneyear period gains losses deferred recognized cost goods sold underlying product costs contracts qualify hedges accounting purposes accordance criteria established sfas 80 accounting futures contracts cash flows resulting commodity contracts classified category items hedged counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material cardinal health inc subsidiaries notes consolidated financial statements fair value financial instruments carrying amounts cash equivalents trade receivables accounts payables notes payablebanks accrued liabilities june 30 2000 1999 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 14559 million 12333 million compared carrying amounts 14951 million 12355 million june 30 2000 1999 respectively fair value companys longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss companys derivative instruments based upon estimated amount company would receive pay terminate contracts reporting date fair values based quoted market prices similar instruments millions 6 income taxes consolidated us income taxes millions provision income taxes consists following millions cardinal health inc subsidiaries notes consolidated financial statements reconciliation provision based federal statutory income tax rate companys effective income tax rate follows provision made us additional foreign taxes 3032 million undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practicable estimate amount tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions cardinal health inc subsidiaries notes consolidated financial statements amounts classified consolidated balance sheets follows millions company federal net operating loss carryforwards 23 million state net operating loss carryforwards 1669 million june 30 2000 valuation allowance 27 million june 30 2000 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain companys federal net operating loss carryforwards portion state net operating loss carryforwards subject change ownership limitation calculation internal revenue code section 382 application valuation allowance described company anticipates limitations apply respect utilization assets federal net operating loss carryforward begins expiring 2005 state net operating loss carryforward expires 2020 expiring state net operating loss carryforwards required valuation allowances adjusted annually june 30 2000 company foreign tax credit carryforwards taxsharing agreement baxter international inc baxter allegiance pay increases reimbursed decreases net deferred tax assets transferred date baxter spinoff allegiance increases decreases may result audit adjustments baxters prior period tax returns 7 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified domestic union employees covered multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement total expense employee retirement benefit plans excluding defined benefit plans see follows millions cardinal health inc subsidiaries notes consolidated financial statements defined benefit plans company several defined benefit plans covering substantially salaried hourly scherer employees companys domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations following tables provide reconciliation change benefit obligation change plan assets net amount recognized consolidated balance sheets based measurement date march 31 millions projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 987 million 949 million 635 million respectively june 30 2000 894 million 851 million 478 million respectively june 30 1999 cardinal health inc subsidiaries notes consolidated financial statements components companys net periodic benefit costs follows millions fiscal 2000 1999 weightedaverage actuarial assumptions used determining funded status information net periodic benefit cost information discount rate 65 64 expected return plan assets 74 62 rate compensation increase 40 37 respectively 8 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2000 2001 470 million 2002 343 million 2003 277 million 2004 233 million 2005 187 million 2006 thereafter 359 million addition company entered operating lease agreements several banks construction various new facilities initial terms lease agreements extend may 2005 optional fiveyear renewal periods event termination company required either purchase facility vacate property make reimbursement portion unrecovered property cost instruments provide maximum fundings 4062 million total estimated cost construction projects june 30 2000 amount expended 2799 million currently companys minimum annual lease payments agreements approximately 188 million neither facilities cost minimum annual lease payments included future minimum rental payments disclosed rental expense relating operating leases approximately 737 million 696 million 648 million fiscal 2000 1999 1998 respectively sublease rental income material period presented herein june 30 2000 company capital expenditure commitments related primarily plant expansions facility acquisitions approximately 180 million company whitmire distribution corporation whitmire one companys whollyowned subsidiaries well pharmaceutical wholesalers named defendants series purported class action lawsuits regarding sale brand name prescription drugs later consolidated transferred judicial panel multidistrict litigation united states district court northern district illinois november 30 1998 court ordered judgment matter law favor defendants february 22 2000 united states supreme court denied plaintiffs final attempt appeal ruling refusing grant plaintiffs petition writ certiorari wholesaler defendants including company whitmire entered judgment sharing agreement whereby total exposure company subsidiaries limited lesser 1 million 1 judgment wholesalers manufacturers provides reimbursement mechanism legal fees expenses company whitmire also named defendants series related antitrust lawsuits brought chain drug stores independent pharmacies opted federal class action lawsuits series state court cases alleging similar claims various state laws regarding sale brand name prescription drugs judgment sharing agreement applies related cases well september 30 1996 baxter international inc baxter subsidiaries transferred allegiance subsidiaries us healthcare distribution business surgical respiratory therapy business healthcare costsaving business well certain foreign operations allegiance business connection spinoff cardinal health inc subsidiaries notes consolidated financial statements allegiance business baxter connection spinoff allegiance acquired company february 3 1999 assumed defense litigation involving claims related allegiance business baxter healthcare corporation bhc including certain claims alleged personal injuries result exposure natural rubber latex gloves allegiance defending indemnifying bhc contemplated agreements baxter allegiance expenses potential liabilities associated claims pertaining litigation assumed allegiance june 30 2000 approximately 533 lawsuits involving bhc andor allegiance containing allegations sensitization natural rubber latex products cases beginning proceed trial increase claims filed ongoing defense costs incurred company believes probable continue incur significant expenses related defense cases involving natural rubber latex gloves time company unable evaluate extent total potential liability unable estimate total potential loss company believes substantial portion liability covered insurance subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs although ultimate resolution litigation referenced herein cannot forecast certainty company intends vigorously defend believe outcome pending litigation material adverse effect companys consolidated financial statements 9 shareholders equity june 30 2000 1999 companys authorized capital shares consisted 500000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2000 1999 march 16 2000 companys board directors authorized repurchase aggregate 750 million common shares june 30 2000 approximately 7 million common shares aggregate cost 3028 million repurchased accelerated share repurchase program placed treasury shares 7 million shares repurchased program subject future contingent purchase price adjustment settled based upon difference market price companys common stock time settlement compared market price march 16 2000 forward stock purchase contract allows company determine method settlement june 30 2000 cost settle transaction would approximately 1151 million settled amount charged common shares treasury 10 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting acute care portion healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 2000 companys two largest customers individually accounted 12 14 operating revenue respectively fiscal 1999 fiscal 1998 two customers individually accounted 11 13 operating revenue respectively two customers serviced primarily pharmaceutical distribution cardinal health inc subsidiaries notes consolidated financial statements provider services medicalsurgical products services segments fiscal 2000 1999 1998 one customer accounted 52 57 62 bulk deliveries respectively 11 stock options restricted shares company maintains stock incentive plans benefit certain officers directors employees options granted generally vest two three years exercisable periods ten years date grant price equals fair market value date grant company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income diluted earnings per common share would reduced 216 million 008 per share respectively fiscal 2000 831 million 029 per share respectively fiscal 1999 336 million 012 per share respectively fiscal 1998 fiscal 1999 stock option grants previous allegiance scherer plans vested immediately merger date accelerated grants increased fiscal 1999 pro forma effect net income diluted earnings per common share 329 million 012 per share respectively sfas 123 method accounting applied options granted prior july 1 1995 resulting pro forma compensation cost may representative expected future years following summarizes stock option transactions company plans july 1 1997 june 30 2000 giving retroactive effect conversions options connection merger transactions stock splits millions except per share amounts weighted options average outstanding exercise price balance june 30 1997 201 1925 granted 63 4370 exercised 37 1462 canceled 09 2146 change fiscal year 07 2826 balance june 30 1998 211 2396 granted 34 6961 exercised 36 1680 canceled 06 4560 balance june 30 1999 203 3451 granted 64 4702 exercised 39 2274 canceled 10 5507 balance june 30 2000 218 3921 giving retroactive effect conversion stock options related mergers stock splits weighted average fair value options granted fiscal 2000 1999 1998 1764 2255 1419 respectively cardinal health inc subsidiaries notes consolidated financial statements fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods information relative stock options outstanding june 30 2000 june 30 2000 remained approximately 48 million additional shares available issued pursuant plans market value restricted shares awarded company recorded component shareholders equity accompanying consolidated balance sheets compensation awards amortized expense period participants perform services generally one seven years june 30 2000 approximately 03 million shares remained restricted subject forfeiture company employee stock purchase plan sale 50 million cardinals common stock authorized purchase price determined lower 85 percent closing market price date subscription 85 percent closing market price last day offering period june 30 2000 subscriptions 03 million outstanding however shares issued employees plan 12 segment information prior year company comprised three reportable segments pharmaceutical distribution pharmaceutical services medicalsurgical products september 2000 company expanded management reporting structure three four reportable segments separating pharmaceutical services segment primarily two segments pharmaceutical technologies services automation information services prior period amounts restated change companys operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services pharmaceutical distribution provider services segment involves distribution broad line pharmaceuticals healthcare beautycare products therapeutic plasma specialty pharmaceutical products items typically sold hospitals retail drug stores healthcare providers addition segment provides services healthcare industry integrated pharmacy management temporary pharmacy staffing well franchising apothecarystyle retail pharmacies cardinal health inc subsidiaries notes consolidated financial statements medicalsurgical products services segment involves manufacture medical surgical laboratory products distribution products hospitals physician offices surgery centers healthcare providers pharmaceutical technologies services segment provides services healthcare manufacturing industry design unique drug delivery systems liquid fill contract manufacturing comprehensive packaging services reimbursement services automation information services segment provides services hospitals healthcare providers pharmacy automation equipment clinical information system services company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies following tables include revenue operating earnings fiscal years ended june 30 2000 1999 1998 segment reconciling items necessary total amounts reported consolidated financial statements following tables include depreciation amortization expense well capital expenditures fiscal years ended june 30 2000 1999 1998 assets june 30 2000 1999 1998 segment reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 1 corporateoperating earnings primarily consist special charges 647 million 1466 million 578 million fiscal years ended june 30 2000 1999 1998 respectively unallocated corporate depreciation amortization administrative expenses 2 corporateassets include primarily corporate cash equivalents corporate property plant equipment net unallocated deferred taxes elimination investment subsidiaries following table presents revenue longlived assets geographic area millions longlived assets include property plant equipment net accumulated depreciation 13 selected quarterly financial data unaudited following selected quarterly financial data millions except per share amounts fiscal 2000 1999 restated reflect poolingofinterests business combinations discussed note 2 fully discussed note 2 mergerrelated costs special charges recorded various quarters fiscal 2000 1999 following table summarizes impact costs well impact pro forma adjustments related alp taxes net earnings diluted earnings per share quarters recorded millions except per share amounts cardinal health inc subsidiaries notes consolidated financial statements 14 recently issued financial accounting standards june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities amended june 2000 statement financial accounting standards 138 sfas 138 accounting certain derivative instruments certain hedging activities requires companies recognize derivatives either assets liabilities balance sheet measure instruments fair value amended statement financial accounting standards 137 sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 provisions sfas 133 require adoption later beginning companys fiscal year ending june 30 2001 adoption sfas 133 amended sfas 138 expected material impact companys consolidated financial statements december 3 1999 sec issued staff accounting bulletin 101 sab 101 revenue recognition financial statements requires adoption fourth quarter fiscal 2001 time company anticipate adoption sab 101 material impact consolidated financial statements company continue analyze impact sab 101 including amendments interpretation based upon relevant facts circumstances time adoption 15 terminated merger agreement august 24 1997 company bergen announced entered definitive merger agreement subsequently amended parties march 16 1998 pursuant wholly owned subsidiary company would merged bergen merger agreement march 9 1998 ftc filed complaint united states district court district columbia seeking preliminary injunction halt proposed merger july 31 1998 district court granted ftcs request injunction halt proposed merger august 7 1998 company bergen jointly terminated bergen merger agreement accordance terms bergen merger agreement company required reimburse bergen 70 million transaction costs upon termination bergen merger agreement additionally termination bergen merger agreement caused costs incurred company would deductible merger consummated become tax deductible resulting tax benefit 122 million obligation reimburse bergen additional tax benefit reflected consolidated financial statements fourth quarter fiscal year ended june 30 1998 16 subsequent events august 16 2000 company completed purchase bergen brunswig medical corporation approximately 180 million subject postclosing adjustments july 26 2000 company completed purchase manufacturing facility rights two proprietary topical drug delivery technologies advanced polymer systems inc 250 million closing contingent future payments totaling potentially additional 265 million july 19 2000 company completed purchase rexam healthcare packagings foldingcarton manufacturing operations guaynabo puerto rico 325 million subject postclosing adjustments three acquisitions accounted purchase transactions financial reporting purposes item 9item 8 financial statements supplementary data independent auditors reports consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2001 2000 1999 consolidated balance sheets june 30 2001 2000 consolidated statements shareholders equity fiscal years ended june 30 2001 2000 1999 consolidated statements cash flows fiscal years ended june 30 2001 2000 1999 notes consolidated financial statements report independent public accountants shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc ohio corporation subsidiaries june 30 2001 2000 related consolidated statements earnings shareholders equity cash flows two years period ended june 30 2001 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits audit historical consolidated financial statements bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended historical consolidated financial statements bindley represent approximately 15 consolidated total assets june 30 2000 represent total revenues net income approximately 22 5 respectively consolidated amounts year ended consolidated financial statements audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditor provides reasonable basis opinion based upon audit report auditor consolidated financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2001 2000 consolidated results operations cash flows two years period ended june 30 2001 conformity accounting principles generally accepted united states consolidated financial statements cardinal health inc subsidiaries year ended june 30 1999 prior restatement pooling interests separate financial statements bindley year ended december 31 1998 included june 30 1999 restated consolidated financial statements cardinal health inc audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions statements audited combination accompanying consolidated statements earnings shareholders equity cash flows year ended june 30 1999 restatement fiscal 2001 pooling interests opinion consolidated statements properly combined basis described note 1 notes consolidated financial statements arthur andersen llp arthur andersen llp columbus ohio july 27 2001 report independent public accountants financial statement schedule shareholders directors cardinal health inc audit consolidated financial statements referred report dated july 27 2001 appearing page 18 form 10k also included audit information twoyear period ended june 30 2001 financial statement schedule valuation qualifying accounts audit historical financial statement schedule bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended financial statement schedule audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor financial statement schedule cardinal health inc year ended june 30 1999 prior restatement pooling interests separate financial statement schedule bindley years ended december 31 1998 included june 30 1999 restated consolidated financial statement schedule audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions schedule audited combination information year ended june 30 1999 restatement 2001 pooling interests opinion financial statement schedule presents fairly material respects information set forth therein twoyear period ended june 30 2001 read conjunction related consolidated financial statements opinion information year ended june 30 1999 properly combined basis described note 1 notes consolidated financial statements audit made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole arthur andersen llp arthur andersen llp columbus ohio july 27 2001 independent auditors report shareholders directors cardinal health inc audited consolidated statements earnings shareholders equity cash flows cardinal health inc subsidiaries year ended june 30 1999 audit also included consolidated financial statement schedule relates year ended june 30 1999 listed index item 14 consolidated financial statements financial statement schedule audited us prior restatement 2001 pooling interests bindley western industries inc bindley described note 2 consolidated financial statements consolidated financial statements consolidated financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements consolidated financial statement schedule based audit financial statements allegiance corporation allegiance wholly owned subsidiary cardinal health inc year ended june 30 1999 also audit financial statements rp scherer corporation scherer wholly owned subsidiary cardinal health inc year ended june 30 1999 combined financial statements allegiance scherer represent combined revenues net income approximately 25 35 consolidated amounts year ended june 30 1999 statements audited auditors whose reports furnished us opinion insofar relates amounts included allegiance scherer based solely reports auditors conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit reports auditors provide reasonable basis opinion based audit reports auditors consolidated financial statements referred present fairly material respects results operations cash flows cardinal health inc subsidiaries year ended june 30 1999 conformity accounting principles generally accepted united states america also opinion consolidated financial statement schedule relates year ended june 30 1999 considered relation basic fiscal 1999 consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp deloitte touche llp columbus ohio august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 report independent public accountants rp scherer corporation audited consolidated statements income comprehensive income cash flows shareholders equity year ended june 30 1999 presented separately herein rp scherer corporation delaware corporation whollyowned subsidiary cardinal health inc subsidiaries financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects results rp scherer corporations subsidiaries operations cash flows year ended june 30 1999 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole sarthur andersen llp arthur andersen llp roseland new jersey august 9 1999 report independent accountants stockholders allegiance corporation opinion consolidated statements operations cash flows equity allegiance corporation subsidiaries presented separately herein present fairly material respects results operations cash flows year ended june 30 1999 conformity accounting principles generally accepted united states america financial statements responsibility allegiance corporations management responsibility express opinion financial statements based audit conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion expressed audited consolidated financial statements allegiance corporation period subsequent june 30 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 report independent accountants financial statement schedule stockholders allegiance corporation audit consolidated financial statements allegiance corporation subsidiaries referred report dated july 29 1999 appearing cardinal health inc annual report form 10k year ended june 30 2001 also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule allegiance corporation subsidiaries year ended june 30 1999 presented separately herein opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements audited consolidated financial statements financial statement schedule allegiance corporation period subsequent june 30 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois july 29 1999 report independent accountants board directors shareholders bindley western industries inc opinion consolidated balance sheet december 31 1999 related consolidated statements earnings shareholders equity cash flows two years period ended december 31 1999 bindley western industries inc subsidiaries company presented separately herein present fairly material respects financial position results operations cash flows december 31 1999 two years period ended december 31 1999 prior adjustments related 2001 pooling interests cardinal health inc conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed audited consolidated financial statements bindley western industries inc period subsequent december 31 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp indianapolis indiana march 21 2000 except note 3 note 20 december 15 2000 report independent accountants financial statement schedule board directors shareholders bindley western industries inc audits consolidated financial statements referred report dated march 21 2000 except note 3 note 20 december 15 2000 appearing cardinal health inc annual report form 10k year ended june 30 2001 also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule bindley western industries inc subsidiaries year ended december 31 1999 presented separately herein opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements audited consolidated financial statements financial statement schedule bindley western industries inc period subsequent december 31 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp indianapolis indiana march 21 2000 except note 3 note 20 december 15 2000 cardinal health inc subsidiaries consolidated statements earnings millions except per share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc together subsidiaries collectively company provider services healthcare industry offering array valueadded pharmaceutical healthcare products distribution services pharmaceuticalrelated products services broad base customers company currently conducts business within four business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services see note 12 information related companys operating segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect merger transactions rp scherer corporation scherer august 7 1998 allegiance corporation allegiance february 3 1999 pacific surgical innovations inc psi may 21 1999 automatic liquid packaging inc alp september 10 1999 bindley western industries inc bindley february 14 2001 see note 2 business combinations accounted poolingofinterests method scherers fiscal year end march 31 order conform companys june 30 fiscal year end scherers results operations three months ended june 30 1998 included combined results operations reflected adjustment consolidated statements shareholders equity scherers net revenue net earnings period 1616 million 86 million respectively scherers cash flows operating financing activities period 126 million 326 million respectively cash flows used investing activities 122 million companys fiscal year end june 30 bindleys fiscal year end december 31 fiscal years ended june 30 1999 2000 consolidated financial statements combine companys fiscal years ended june 30 1999 2000 bindleys fiscal years ended december 31 1998 1999 respectively result changing bindleys fiscal year end december 31 june 30 bindleys results operations six months ended june 30 2000 included combined results operations reflected adjustment consolidated statements shareholders equity bindleys net revenue net earnings excluding special charges 49 billion 229 million respectively including special charges period bindleys net loss 28 million cash flows operating activities 1667 million cash flows used investing financing activities 57 million 1134 million respectively fiscal 2001 2000 1999 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related companys acquisitions provided note 2 preparation financial statements conformity generally accepted accounting principles united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1448 million 1338 million 1251 million cash payments income taxes 2136 million 1255 million 949 million fiscal 2001 2000 1999 respectively see notes 2 4 additional information regarding noncash investing financing activities receivables trade receivables primarily comprised amounts owed company pharmaceutical healthcare distribution activities presented net allowance doubtful accounts 1068 million 711 million june 30 2001 2000 respectively company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 278 million 240 million june 30 2001 2000 respectively current portions 133 million 93 million respectively included assets amounts reported net allowance doubtful accounts 48 million 46 million june 30 2001 2000 respectively cardinal health inc subsidiaries notes consolidated financial statements company formed medicine shoppe capital corporation mscc cardinal health funding llc chf wholly owned subsidiaries medicine shoppe griffin capital corporation griffin respectively mscc chf organized sole purpose buying receivables selling receivables certain financial institutions investors designed special purpose bankruptcy remote entities although consolidated extent required generally accepted accounting principles mscc chf separate legal entities company medicine shoppe griffin maintain separate financial statements assets available first foremost satisfy claims creditors company formed bindley western funding corporation bwfc wholly owned subsidiary bindley bwfc organized sole purpose buying receivables selling receivables certain financial institutions investors although consolidated extent required generally accepted accounting principles bwfc separate legal entity company bindley maintains separate financial statements assets available first foremost satisfy claims creditors see note 4 additional information bwfc fiscal 2001 company entered agreement sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued preferred variable debt securities parties affiliated company preferred debt securities must retired redeemed company access spes receivables see note 4 additional information inventories majority inventories approximately 66 2001 69 2000 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2001 2000 528 million 573 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes primarily computed using straightline method estimated useful lives assets range one fifty years including capital lease assets amortized terms respective leases balance sheet date company assesses recoverability longlived property based review projected undiscounted cash flows associated assets goodwill intangibles goodwill intangibles primarily represent intangible assets related excess cost net assets subsidiaries acquired intangible assets amortized using straightline method lives range five forty years accumulated amortization 6805 million 6462 million june 30 2001 2000 respectively balance sheet date determination made management ascertain whether indication intangible assets may impaired based primarily review projected undiscounted operating cash flows segment revenue recognition company records distribution revenue merchandise shipped customers company obligation provide services related merchandise company also acts intermediary ordering subsequent delivery bulk shipments pharmaceutical products classified bulk deliveries customer warehouses included total revenue company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenues recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions cardinal health inc subsidiaries notes consolidated financial statements packaging liquid fill contract manufacturing revenues recognized services provided upon completion services drug delivery system revenue recognized upon shipment products customer nonproduct revenue related option milestone exclusivity fees recognized earned obligations performance completed revenue recognized salestype leases pointofuse systems delivered customer accepts system lease becomes noncancellable unearned income salestype leases recognized using interest method sales pointofuse systems recognized upon delivery customer acceptance revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease clinical information system license revenue recognized upon delivery software customer completion implementationsetup training necessary operate software portion license fee related system support deferred recognized annual license period shipping handling company records shipping handling costs part selling general administrative expenses shipping handling revenue received immaterial periods presented translation foreign currencies financial statements companys subsidiaries outside us generally measured using local currency functional currency adjustments translate statements us dollars accumulated separate component shareholders equity transactional exchange gains losses reflected earnings interest rate currency risk management beginning fiscal 2001 company adopted financial accounting standard sfas 133 amended accounting derivatives hedging activity standard derivative instruments recorded fair value balance sheet changes fair value recorded earnings shareholders equity comprehensive income adoption standard material impact companys consolidated financial statements taken whole company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates forward foreign currency exchange contracts protect value existing foreign currency assets liabilities contracts designated fair value hedges company use derivative instruments trading speculative purposes companys derivative contracts adjusted current market values period qualify hedge accounting sfas 133 periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities companys policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract either designated hedge designated ineffective marked market recognized earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contracts fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related companys hedging contracts provided note 5 cardinal health inc subsidiaries notes consolidated financial statements research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 538 million 485 million 497 million fiscal 2001 2000 1999 respectively income taxes provision made us income taxes earnings foreign subsidiary companies company controls include consolidated federal income tax return since managements practice intent permanently reinvest earnings pro forma adjustment income taxes september 10 1999 company completed merger transaction alp april 1998 alp elected scorporation status income tax purposes result merger alp terminated scorporation election pro forma adjustment income taxes presents pro forma tax expense alp subject federal income taxes periods presented see note 2 earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options computed using treasury stock method dividends excluding dividends paid entities company merged company paid cash dividends per common share 0080 0067 0063 fiscal years ended june 30 2001 2000 1999 respectively stock splits august 12 1998 company declared threefortwo stock split effected stock dividend distributed october 30 1998 shareholders record october 9 1998 addition february 27 2001 company declared threefortwo stock split effected stock dividend distributed april 20 2001 shareholders record april 5 2001 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock splits distribution priority healthcare corporation december 31 1998 bindley distributed holders common stock 102 million shares priority healthcare corporation priority owned bindley result distribution priority ceased subsidiary bindley end fiscal 1999 dividend distribution 589 million represents bindleys ownership interest net assets priority reclassifications certain reclassifications made conform prior periods amounts current presentation recent financial accounting standards june 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 company believe prospective adoption standard material impact consolidated financial statements sfas 142 changes accounting goodwill certain intangible assets amortization method impairment approach due adoption sfas 142 company amortize goodwill beginning fiscal 2002 goodwill amortization expense fiscal 2001 approximately 489 million company complete initial impairment assessment required sfas 142 december 31 2001 company anticipate assessment result material write fiscal 2002 september 2000 fasb issued sfas 140 accounting transfers servicing financial assets extinguishments liabilities effective activities occurring march 31 2001 sfas 140 replaces sfas 125 accounting transfers servicing financial assets extinguishment liabilities therefore revising disclosure securitizations transfers financial assets collateral adoption sfas 140 material impact companys consolidated financial statements december 3 1999 sec issued staff accounting bulletin 101 sab 101 revenue recognition financial statements required adoption fourth quarter fiscal 2001 adoption sab 101 material impact consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 2 business combinations mergerrelated costs special items business combinations fiscal 2001 february 14 2001 company completed merger transaction bindley accounted poolingofinterests merger transaction bindley company issued approximately 231 million common shares bindley stockholders bindleys outstanding stock options converted options purchase approximately 51 million common shares fiscal 2001 company recorded mergerrelated charge reflect transaction costs incurred result merger transaction bindley august 16 2000 company completed purchase bergen brunswig medical corporation bbmc approximately 180 million subject postclosing adjustments bbmc distributes medical surgical laboratory supplies doctors offices longterm care nursing centers hospitals providers care addition company also completed several individually immaterial acquisitions fiscal 2001 approximately 1939 million including future contingent payments liabilities operations assumed approximately 1478 million including debt 250 million transactions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition transactions occurred july 1 2000 results operations would differed materially reported results fiscal 2000 september 10 1999 company completed merger transaction alp accounted poolingofinterests company issued approximately 87 million common shares alp stockholders fiscal 2000 company recorded mergerrelated charge reflect transaction costs incurred result merger transaction alp august 31 1999 bindley completed merger transaction central pharmacy services inc central pharmacy accounted purchase method accounting aggregate purchase price approximately 567 million including fees expenses primarily paid bindley common stock liabilities assumed approximately 161 million acquisition taken place july 1 1999 consolidated results would materially different reported results addition merger transactions described fiscal 2000 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys medicalsurgical distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 635 million liabilities operations assumed approximately 70 million including debt 40 million acquisitions taken place july 1 1999 consolidated results would materially different reported results fiscal 1999 may 21 1999 company completed merger transaction psi company issued approximately 03 million common shares psi shareholders accounted merger transaction poolingofinterests february 3 1999 company completed merger transaction allegiance accounted poolingofinterests company issued approximately 1061 million common shares allegiance stockholders allegiances outstanding stock options converted options purchase approximately 155 million common shares addition august 7 1998 company completed merger transaction scherer accounted poolingofinterests company issued approximately 513 million common shares scherer stockholders scherers outstanding stock options converted options purchase approximately 53 million common shares company recorded mergerrelated charge reflect transaction costs incurred result merger transactions fiscal 1999 addition merger transactions described fiscal 1999 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys medicalsurgical distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 1608 million liabilities operations assumed approximately 189 million including debt 32 million acquisitions taken place july 1 1998 consolidated results would materially different reported results cardinal health inc subsidiaries notes consolidated financial statements additional mergerrelated costs associated integrating various acquired companies instituting efficiencies relating charged expense subsequent periods incurred special charges following summary special charges fiscal years ended june 30 2001 2000 1999 mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger transactions bindley alp allegiance scherer fiscal years presented table company incurred direct transaction costs related merger transactions expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition company incurred employeerelated costs consist primarily severance transactionstay bonuses result bindley alp allegiance scherer merger transactions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billing employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs company recorded charge 158 million fiscal 2001 associated companys plans consolidate distribution centers result companys merger transaction bindley connection consolidations company incurred employeerelated costs exit costs related termination contracts lease agreements year cardinal health inc subsidiaries notes consolidated financial statements exit costs relate primarily costs associated lease terminations moving expenses direct result merger transactions alp allegiance scherer company recorded charges 16 million 96 million 267 million fiscal years 2001 2000 1999 respectively charges business restructuring costs relating companys merger transaction scherer part business restructuring company closed certain facilities connection closings company incurred employeerelated costs asset impairment charges exit costs related termination contracts lease agreements company recorded charges 40 million fiscal 1999 charge related writedown impaired inventory associated merger transaction owen healthcare inc owen also fiscal 1999 company recorded charges 11 million related severance costs restructuring associated change management resulted merger transaction owen partially offsetting total mergerrelated charges fiscal 1999 credit recorded adjust estimated transaction termination costs previously recorded connection canceled merger transaction bergen brunswig corporation also actual amount billed services provided third parties engaged company less estimate resulting reduction mergerrelated costs integration costs include charges related integration operations previous merger transactions special charges fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount related employee severance costs addition fiscal 2001 company recorded special charge 68 million related rationalization certain health nutritional manufacturing facilities approximately 22 million related lease exit costs remaining amount related employee severance costs fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated fiscal 1999 bindley recorded special charge 188 million approximately 110 million related noncash charge acceleration amortization compensation related restricted stock grants connection spinoff priority healthcare corporation priority see note 1 notes consolidated financial statements approximately 70 million related writeoff goodwill acquisition prior 1996 remaining 08 million represented legal settlement pro forma impact since april 1998 alp organized scorporation tax purposes accordingly alp subject federal income tax april 1998 date merger transaction fiscal 1999 net earnings would reduced 93 million alp subject federal income taxes summary fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share fiscal 2000 net effect various special charges reduced reported net earnings 498 million 7178 million reduced reported diluted earnings per common share 011 per share 160 per share net tax effect various special charges recorded pro forma adjustments related alp taxes fiscal 1999 reduce reported net earnings 1223 million 4993 million reduce reported diluted earnings per common share 027 per share 112 per share certain mergerrelated costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred items expensed incurred cardinal health inc subsidiaries notes consolidated financial statements 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions future minimum lease payments received pursuant salestype leases next five fiscal years thereafter 2002 2596 million 2003 2656 million 2004 2371 million 2005 1868 million 2006 1037 million 2007 thereafter 135 million lease related financing arrangements pyxis previously financed working capital needs sale certain lease receivables nonbank financing company june 30 2001 54 million lease receivables owned financing company agreement financing company amended terminate pyxis obligation sell lease receivables financing company due pyxis customers upgrading pyxis machines expanding number units leased original lease agreements sold financing company pyxis converting original lease agreements customers updated lease agreements pyxis maintaining revised leases selling financing company replace original lease receivables result pyxis entered agreement financing company pay financing company remaining portion original lease receivables outstanding time revision future minimum payments notes june 30 2001 fiscal 2002 238 million fiscal 2003 66 million classified part liabilities 4 shortterm borrowings longterm obligations notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 231 million june 30 2001 various money market rates june 30 2001 83 million weighted average interest rate 650 outstanding arrangements 641 million weighted average interest rate 620 outstanding june 30 2000 total available unused lines credit june 30 2001 148 million shortterm borrowings bindley receivables securitization facility receivables facility pursuant bindley sold substantially receivables arising connection sale goods rendering services receivables bwfc wholly owned special purpose corporation subsidiary see note 1 fiscal year end 2000 3500 million receivables interests outstanding bearing discount rate 610 per annum fiscal 2001 company repaid outstanding borrowings terminated facility cardinal health inc subsidiaries notes consolidated financial statements longterm obligations longterm obligations consist following millions 600 625 650 notes 675 notes due 2011 represent unsecured obligations company 675 notes due 2004 represent unsecured obligations scherer guaranteed company 793 notes represent private placement unsecured obligations bindley paid fiscal 2001 730 notes 780 700 debentures represent unsecured obligations allegiance guaranteed company obligations redeemable prior maturity subject sinking fund fiscal 2001 company entered agreement sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued 400 million preferred variable debt securities parties affiliated company preferred debt securities must retired redeemed company access spes receivables june 30 2001 spe owned approximately 4972 million receivables included companys consolidated balance sheet company commercial paper program providing june 30 2001 issuance 15 billion aggregate maturity value commercial paper company borrowing outstanding program june 30 2001 june 30 2000 company 5092 million outstanding program market interest rate based upon libor company also maintains shortterm credit facilities allow borrowings 1210 million june 30 2001 2000 263 million 542 million outstanding uncommitted facilities effective interest rate june 30 2001 2000 430 630 respectively company also unsecured bank credit facility provides aggregate 15 billion borrowings 750 million expires march 28 2002 750 million expires march 31 2004 expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2001 june 30 2001 2000 commercial paper shortterm borrowings totaling 263 million 5634 million respectively reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings fiscal 2001 company issued 500 million 675 notes due 2011 proceeds debt issuance used early redemption bindley debt repayment portion companys commercial paper general corporate cardinal health inc subsidiaries notes consolidated financial statements purposes including working capital expenditures repayment refinancing indebtedness acquisitions investments issuance company capacity issue approximately 10 billion additional equity debt securities pursuant shelf registration statements filed securities exchange commission certain longterm obligations collateralized property equipment company aggregate book value approximately 128 million june 30 2001 maturities longterm obligations future fiscal years 2002 59 million 2003 320 million 2004 2189 million 2005 34 million 2006 1532 million 2007 thereafter 14635 million 5 financial instruments interest rate risk management company exposed impact interest rate changes companys objective manage impact interest rate changes earnings cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2001 company held payfixed interest rate swaps hedge variability cash flows related changes interest rates borrowing costs variable rate debt contracts classified cash flow hedges mature january 2004 company adjusts payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted interest rate payments hedged company anticipates contracts continue effective gainloss deferred comprehensive income recognized immediately earnings contracts longer effective forecasted transactions expected occur company also held payfloating interest rate swaps hedge change fair value fixed rate debt related fluctuations interest rates contracts classified fair value hedges mature february 2011 hedged fixed rate debt payfloating interest rate swaps adjusted current market values incomeexpense fiscal 2001 market value adjustments debt hedged payfloating interest rate swaps directly offset one another following represents notional amount hedged fair value interest rate swaps outstanding june 30 2001 included liabilities amount loss either deferred comprehensive income recognized incomeexpense fiscal 2001 counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates companys objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention core business issues challenges accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenues expenses gains losses contracts offset changes value underlying transactions occur june 30 2001 company held forward contracts expiring june 2002 hedge probable firmly committed revenues expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment carrying amounts underlying transactions period transactions recognized principal currencies hedged european euro japanese yen british pound canadian dollar thai bhat cardinal health inc subsidiaries notes consolidated financial statements company also held forward contracts expiring july 2001 hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values incomeexpense directly offsetting adjustment foreign currency asset liability following represents notional amount hedged value forward contracts outstanding june 30 2001 included assets liabilities amount net gainloss either deferred comprehensive income recognized incomeexpense fiscal 2001 counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2001 2000 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 19059 million 14946 million compared carrying amounts 18769 million 15338 million june 30 2001 2000 respectively fair value companys longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss companys derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments 6 income taxes consolidated earnings income taxes millions cardinal health inc subsidiaries notes consolidated financial statements provision income taxes consists following millions reconciliation provision based federal statutory income tax rate companys effective income tax rate follows provision made us additional foreign taxes 4104 million undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practicable estimate amount tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions cardinal health inc subsidiaries notes consolidated financial statements amounts classified consolidated balance sheets follows millions company state net operating loss carryforwards 2743 million june 30 2001 valuation allowance 83 million june 30 2001 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain state net operating loss carryforward expires 2021 expiring state net operating loss carryforwards required valuation allowances adjusted annually june 30 2001 company foreign tax credit carryforwards application valuation allowance described company anticipates limitations apply respect utilization net deferred income tax assets described taxsharing agreement baxter international inc baxter allegiance pay increases reimbursed decreases net deferred tax assets transferred date baxter spinoff allegiance increases decreases may result audit adjustments baxters prior period tax returns 7 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit plans see 478 million 472 million 466 million june 30 2001 2000 1999 respectively defined benefit plans company several defined benefit plans covering substantially salaried hourly scherer employees companys domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations following tables provide reconciliation change benefit obligation change plan assets net amount recognized consolidated balance sheets based measurement date march 31 millions june 30 2001 2000 change benefit obligation benefit obligation beginning year 1000 987 service cost 40 46 interest cost 63 57 plan participant contributions 07 05 actuarial loss 06 61 benefits paid 17 28 translation 54 125 curtailments 03 benefit obligation end year 1045 1000 cardinal health inc subsidiaries notes consolidated financial statements june 30 2001 2000 change plan assets fair value plan assets beginning year 649 557 actual return plan assets 75 63 employer contributions 52 35 plan participant contributions 07 05 benefits paid 18 23 translation 35 12 fair value plan assets end year 580 649 june 30 2001 2000 funded status 465 351 unrecognized net actuarial loss 206 80 unrecognized net transition asset 04 unrecognized prior service cost 02 translation 01 05 net amount recognized 260 268 amounts recognized consolidated balance sheets accrued benefit liability 260 268 net amount recognized 260 268 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1034 million 956 million 568 million respectively june 30 2001 987 million 919 million 635 million respectively june 30 2000 cardinal health inc subsidiaries notes consolidated financial statements components companys net periodic benefit costs follows millions 1 amount represents primarily amortization unrecognized actuarial losses well amortization transition obligation prior service costs fiscal 2001 2000 weightedaverage actuarial assumptions used determining funded status information net periodic benefit cost information discount rate 64 65 expected return plan assets 73 74 rate compensation increase 39 40 respectively 8 commitments contingent liabilities future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2001 fiscal 2002 479 million fiscal 2003 402 million fiscal 2004 314 million fiscal 2005 230 million fiscal 2006 157 million fiscal 2007 thereafter 286 million addition company entered operating lease agreements several banks construction various new facilities equipment initial terms lease agreements extend september 2005 optional fiveyear renewal periods event termination company required either purchase facility vacate property make reimbursement portion unrecovered property cost instruments provide maximum fundings 5012 million total estimated cost construction projects june 30 2001 amount expended 3680 million june 30 2001 companys minimum annual lease payments agreements approximately 191 million neither facilitys cost minimum annual lease payments included future minimum rental payments disclosed rental expense relating operating leases approximately 784 million 761 million 719 million fiscal 2001 2000 1999 respectively sublease rental income material period presented herein september 30 1996 baxter international inc baxter subsidiaries transferred allegiance subsidiaries us healthcare distribution business surgical respiratory therapy business healthcare costsaving business well certain foreign operations allegiance business connection spinoff allegiance business baxter connection spinoff allegiance acquired company february 3 1999 agreed indemnify baxter healthcare corporation bhc certain claims related allegiance business including certain claims alleged personal injuries result exposure natural rubber latex gloves allegiance defending indemnifying bhc contemplated agreements baxter allegiance expenses potential liabilities associated claims pertaining litigation assumed allegiance june 30 2001 approximately 610 lawsuits involving bhc andor allegiance containing allegations sensitization natural rubber latex products cases proceeding trial increase claims filed ongoing defense costs incurred company believes probable continue incur significant expenses related resolution cases involving natural rubber latex gloves aeia one insurers latex glove litigation advised company intent resolve arbitration extent obligation reimburse company certain defense costs loss expenses incurred connection litigation company believes substantial portion liability covered insurance subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency cardinal health inc subsidiaries notes consolidated financial statements company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs although ultimate resolution litigation referenced herein cannot forecast certainty company intends vigorously defend currently believe outcome pending litigation material adverse effect companys consolidated financial statements 9 shareholders equity june 30 2001 companys authorized capital shares consisted 750000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value june 30 2000 companys authorized capital shares consisted 500000000 class common shares without par value b 5000000 class b common shares without par value c 500000 nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2001 2000 march 2000 companys board directors authorized repurchase common shares aggregate amount 7500 million approximately 70 million common shares aggregate cost approximately 4402 million repurchased via accelerated share repurchase program placed treasury shares november 2000 companys board directors rescinded remainder repurchase program fiscal 2001 company issued approximately 08 million common shares received aggregate proceeds 477 million used general corporate purposes fiscal quarter ended june 30 2001 company filed shelf registration statement form s4 increasing number common shares available issuance connection future business combinations 150 million common shares 10 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 2001 companys two largest customers individually accounted 12 10 operating revenue respectively fiscal 2000 1999 companys two largest customers individually accounted 10 11 operating revenue respectively customers serviced primarily pharmaceutical distribution provider services medical surgical products services segments fiscal 2001 two customers individually accounted 46 22 bulk deliveries two customers accounted 42 30 bulk deliveries respectively fiscal 2000 19 29 bulk deliveries respectively fiscal 1999 additionally third customer accounted 16 18 bulk deliveries fiscal 2000 1999 cardinal health inc subsidiaries notes consolidated financial statements 11 stock options restricted shares company maintains stock incentive plans benefit certain officers directors employees options granted generally vest two three years exercisable periods ten years date grant price equals fair market value date grant company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income diluted earnings per common share would reduced 803 million 017 per share respectively fiscal 2001 247 million 006 per share respectively fiscal 2000 864 million 019 per share respectively fiscal 1999 fiscal 2001 stock option grants previous bindley plans vested immediately merger date accelerated grants increased fiscal 2001 pro forma effect net income diluted earnings per common share 319 million 007 per share respectively fiscal 1999 stock option grants previous allegiance scherer plans vested immediately merger date accelerated grants increased fiscal 1999 pro forma effect net income diluted earnings per common share 329 million 007 per share respectively following summarizes stock option transactions company plans july 1 1998 june 30 2001 giving retroactive effect conversions options connection merger transactions stock splits millions except per share amounts options weighted average outstanding exercise price balance june 30 1998 353 1607 granted 51 4633 exercised 66 1167 canceled 11 2885 spinoff priority 21 balance june 30 1999 348 2137 granted 104 3124 exercised 65 1449 canceled 15 3630 02 355 balance june 30 2000 374 2453 granted 70 6476 exercised 103 1735 canceled 13 4199 change fiscal year 05 3412 balance june 30 2001 333 3483 giving retroactive effect conversion stock options related mergers stock splits weighted average fair value options granted fiscal 2001 2000 1999 2342 1168 1503 respectively fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods june 30 2001 2000 1999 riskfree interest rate 466 625 572 expected life 4 years 4 years 4 years expected volatility 38 37 30 dividend yield 015 018 cardinal health inc subsidiaries notes consolidated financial statements information relative stock options outstanding june 30 2001 june 30 2001 remained approximately 163 million additional shares available issued pursuant plans market value restricted shares awarded company recorded component shareholders equity accompanying consolidated balance sheets compensation awards amortized expense period participants perform services generally one seven years june 30 2001 approximately 05 million shares remained restricted subject forfeiture company employee stock purchase plans sale 120 million companys common shares authorized purchase price determined lower 85 percent closing market price date subscription 85 percent closing market price last day offering period june 30 2001 subscriptions 03 million outstanding june 30 2001 05 million shares issued employees plans 12 segment information companys operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services pharmaceutical distribution provider services segment involves distribution broad line pharmaceuticals healthcare beautycare products radiopharmaceuticals therapeutic plasma specialty pharmaceutical products items typically sold hospitals retail drug stores healthcare providers addition segment provides services healthcare industry integrated pharmacy management temporary pharmacy staffing well franchising apothecarystyle retail pharmacies medicalsurgical products services segment involves manufacture medical surgical laboratory products distribution products hospitals physician offices surgery centers healthcare providers pharmaceutical technologies services segment provides services healthcare manufacturing industry design unique drug delivery systems liquid fill contract manufacturing comprehensive packaging services reimbursement services automation information services segment provides services hospitals healthcare providers pharmacy automation equipment clinical information system services company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies cardinal health inc subsidiaries notes consolidated financial statements following tables include revenue operating earnings fiscal years ended june 30 2001 2000 1999 segment reconciling items necessary total amounts reported consolidated financial statements following tables include depreciation amortization expense well capital expenditures fiscal years ended june 30 2001 2000 1999 assets june 30 2001 2000 1999 segment reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 1 corporateoperating earnings primarily consist special charges 1249 million 647 million 1654 million fiscal years ended june 30 2001 2000 1999 respectively unallocated corporate administrative expenses investment spending 2 corporateassets include primarily corporate cash equivalents corporate property equipment net unallocated deferred taxes following table presents revenue longlived assets geographic area millions longlived assets include property equipment net accumulated depreciation 13 selected quarterly financial data unaudited following selected quarterly financial data millions except per share amounts fiscal 2001 2000 restated reflect poolingofinterests business combinations discussed note 2 discussed note 2 mergerrelated costs special charges recorded various quarters fiscal 2001 2000 following table summarizes impact costs net earnings diluted earnings per share quarters recorded millions except per share amounts item 9item 8 financial statements supplementary data independent auditors reports consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2002 2001 2000 consolidated balance sheets june 30 2002 2001 consolidated statements shareholders equity fiscal years ended june 30 2002 2001 2000 consolidated statements cash flows fiscal years ended june 30 2002 2001 2000 notes consolidated financial statements report independent public accountants shareholders board directors cardinal health inc audited accompanying consolidated balance sheet cardinal health inc subsidiaries june 30 2002 related consolidated statements earnings shareholders equity cash flows fiscal year ended audit also included financial statement schedule listed index item 14a2 consolidated financial statements schedule responsibility cardinal health incs management responsibility express opinion consolidated financial statements schedule based audit consolidated financial statements financial statement schedule cardinal health inc fiscal years ended june 30 2001 2000 audited auditors ceased operations auditors expressed unqualified opinion statements report dated july 27 2001 conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion fiscal 2002 consolidated financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2002 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states also opinion related fiscal 2002 financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 14 consolidated financial statements first quarter fiscal 2002 cardinal health inc changed method recognizing revenue pharmacy automation equipment addition discussed note 1 consolidated financial statements cardinal health inc changed method accounting purchased goodwill intangible assets accordance statement financial accounting standards statement 142 first quarter fiscal 2002 discussed financial statements cardinal health inc company june 30 2001 2000 years ended audited auditors ceased operations described note 1 financial statements updated include transitional disclosures required statement 142 goodwill intangible assets adopted company july 1 2002 audit procedures respect disclosures note 1 fiscal 2001 2000 included agreeing previously reported earnings cumulative effect change accounting earnings previously issued financial statements adjustments reported earnings representing amortization expense including related tax effects recognized periods related goodwill longer amortized companys underlying records obtained management ii testing mathematical accuracy reconciliation adjusted earnings reported earnings related earningspershare amounts audit procedures respect disclosures note 15 fiscal 2001 2000 included agreeing goodwill amortization amounts segment gross intangible accumulated amortization amounts companys underlying records obtained management ii testing mathematical accuracy tables opinion disclosures fiscal 2001 2000 notes 1 15 related transitional disclosures statement 142 appropriate however engaged audit review apply procedures companys financial statements fiscal 2001 2000 respect disclosures accordingly express opinion form assurance companys fiscal 2001 2000 financial statements taken whole ernst young llp ernst young llp columbus ohio august 6 2002 report independent public accountants shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc ohio corporation subsidiaries june 30 2001 2000 related consolidated statements earnings shareholders equity cash flows two years period ended june 30 2001 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits audit historical consolidated financial statements bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended historical consolidated financial statements bindley represent approximately 15 consolidated total assets june 30 2000 represent total revenues net income approximately 22 5 respectively consolidated amounts year ended consolidated financial statements audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditor provides reasonable basis opinion based upon audit report auditor consolidated financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2001 2000 consolidated results operations cash flows two years period ended june 30 2001 conformity accounting principles generally accepted united states consolidated financial statements cardinal health inc subsidiaries year ended june 30 1999 prior restatement pooling interests separate financial statements bindley year ended december 31 1998 included june 30 1999 restated consolidated financial statements cardinal health inc audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions statements audited combination accompanying consolidated statements earnings shareholders equity cash flows year ended june 30 1999 restatement fiscal 2001 pooling interests opinion consolidated statements properly combined basis described note 1 notes consolidated financial statements arthur andersen llp arthur andersen llp columbus ohio july 27 2001 note copy audit report previously issued arthur andersen llp andersen connection cardinal health incs form 10k filing fiscal year ended june 30 2001 inclusion previously issued andersen report pursuant temporary final rule final rule requirements arthur andersen llp auditing clients issued us securities exchange commission march 2002 note previously issued andersen report includes references certain fiscal years required presented accompanying consolidated financial statements years ended june 30 2002 audit report reissued arthur andersen llp connection filing form 10k see exhibit 2302 discussion report independent public accountants financial statement schedule shareholders directors cardinal health inc audit consolidated financial statements referred report dated july 27 2001 appearing page 18 form 10k also included audit information twoyear period ended june 30 2001 financial statement schedule valuation qualifying accounts audit historical financial statement schedule bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended financial statement schedule audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor financial statement schedule cardinal health inc year ended june 30 1999 prior restatement pooling interests separate financial statement schedule bindley years ended december 31 1998 included june 30 1999 restated consolidated financial statement schedule audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions schedule audited combination information year ended june 30 1999 restatement 2001 pooling interests opinion financial statement schedule presents fairly material respects information set forth therein twoyear period ended june 30 2001 read conjunction related consolidated financial statements opinion information year ended june 30 1999 properly combined basis described note 1 notes consolidated financial statements audit made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole arthur andersen llp arthur andersen llp columbus ohio july 27 2001 note copy audit report previously issued arthur andersen llp andersen connection cardinal health incs form 10k filing fiscal year ended june 30 2001 inclusion previously issued andersen report pursuant temporary final rule final rule requirements arthur andersen llp auditing clients issued us securities exchange commission march 2002 note previously issued andersen report includes references certain fiscal years required presented accompanying consolidated financial statements years ended june 30 2002 audit report reissued arthur andersen llp connection filing form 10k see exhibit 2302 discussion report independent accountants board directors shareholders bindley western industries inc opinion consolidated balance sheet december 31 1999 related consolidated statements earnings shareholders equity cash flows year ended bindley western industries inc subsidiaries company presented separately herein present fairly material respects financial position results operations cash flows december 31 1999 period ended prior adjustments related 2001 pooling interests cardinal health inc conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion audited consolidated financial statements bindley western industries inc period subsequent december 31 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp indianapolis indiana march 21 2000 except note 3 note 20 december 15 2000 report independent accountants financial statement schedule board directors shareholders bindley western industries inc audits consolidated financial statements bindley western industries inc subsidiaries year ended december 31 1999 presented separately herein referred report dated march 21 2000 except note 3 note 20 december 15 2000 appearing cardinal health inc annual report form 10k year ended june 30 2002 also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule presented separately herein opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements audited consolidated financial statements financial statement schedule bindley western industries inc period subsequent december 31 1999 pricewaterhousecoopers llp pricewaterhousecoopers llp indianapolis indiana march 21 2000 except note 3 note 20 december 15 2000 cardinal health inc subsidiaries consolidated statements earnings millions except per share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc together subsidiaries collectively company provider services healthcare industry offering array valueadded pharmaceutical healthcare products distribution services pharmaceuticalrelated products services broad base customers company currently conducts business within four business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services see note 16 information related companys business segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect merger transactions automatic liquid packaging inc alp september 10 1999 bindley western industries inc bindley february 14 2001 see note 2 business combinations accounted poolingofinterests method companys fiscal year end june 30 bindleys fiscal year end december 31 fiscal year ended june 30 2000 consolidated financial statements combine companys fiscal year ended june 30 2000 bindleys fiscal year ended december 31 1999 result changing bindleys fiscal year end december 31 june 30 bindleys results operations six months ended june 30 2000 included combined results operations reflected adjustment consolidated statement shareholders equity sixmonth period ending june 30 2000 bindleys net revenue net earnings excluding special charges 49 billion 229 million respectively including special charges period bindleys net loss 28 million cash flows operating activities 1667 million cash flows used investing financing activities 57 million 1134 million respectively fiscal 2002 2001 2000 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related companys acquisitions provided note 2 preparation financial statements conformity generally accepted accounting principles united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes estimates include limited inventory valuation allowance doubtful accounts goodwill intangible asset impairment restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1165 million 1448 million 1338 million cash payments income taxes 2460 million 2136 million 1255 million fiscal 2002 2001 2000 respectively see notes 2 4 additional information regarding noncash investing financing activities receivables trade receivables primarily comprised amounts owed company pharmaceutical healthcare distribution activities presented net allowance doubtful accounts 948 million 1068 million june 30 2002 2001 respectively decrease allowance doubtful accounts fiscal 2002 result writeoff fully reserved accounts offset additional provision recorded company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 308 million 278 million june 30 2002 2001 respectively current portions 143 million 133 million respectively included assets amounts reported net allowance doubtful accounts 47 million 48 million june 30 2002 2001 respectively company formed medicine shoppe capital corporation mscc cardinal health funding chf pyxis funding llc pyxis funding pyxis funding llc ii pyxis funding ii wholly owned subsidiaries medicine shoppe griffin capital llc griffin pyxis funding respectively mscc chf organized sole purpose buying receivables selling receivables certain multiseller conduits administered thirdparty banks thirdparty investors pyxis funding organized sole purpose acquiring pool salestype leases related equipment pyxis selling lease receivables pyxis funding ii pyxis funding ii organized sole purpose acquiring lease receivables capital leases pyxis funding issuing notes secured assets multiseller conduit administered thirdparty bank entities designed special purpose bankruptcyremote entities although consolidated company accordance generally accepted accounting principles mscc chf pyxis funding separate legal entities company medicine shoppe griffin pyxis funding ii also separate legal entity consolidated company qualified special purpose entity defined sfas 140 accounting transfer servicing financial assets extinguishment liabilities mscc chf pyxis funding pyxis funding ii maintain separate financial statements assets available first foremost satisfy claims creditors additional disclosure regarding balance sheet financing provided note 8 cardinal health inc subsidiaries notes consolidated financial statements fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued 400 million preferred variable debt securities parties affiliated company fiscal 2001 preferred debt securities must retired redeemed spe company creditors access spes receivables see note 4 additional information inventories majority inventories approximately 67 2002 66 2001 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2002 2001 2000 504 million 528 million 573 million respectively property equipment property equipment stated cost depreciation amortization financial reporting purposes primarily computed using straightline method estimated useful lives assets range one fifty years including capital lease assets amortized terms respective leases revenue recognition company records distribution revenue selfmanufactured medical surgical product revenue merchandise shipped customers company obligation provide services related merchandise revenues recorded net sales returns allowances company recognizes sales returns reduction revenue cost sales price cost respectively products returned companys customer return policy allows customers return products ability added back inventory resold full value returned vendors credit company also acts intermediary ordering subsequent delivery bulk shipments pharmaceutical products classified bulk deliveries customer warehouses included total revenue company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenues recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions manufacturing packaging revenues recognized either upon shipment delivery product accordance terms contract specify transfer title occurs revenues services provided development sales marketing services recognized upon completion services drug delivery system revenue recognized upon shipment products customer nonproduct revenues include annual exclusivity fees option fees extend exclusivity agreements milestone payments attaining certain regulatory approvals company receives exclusivity payments certain manufacturers return commitment enter agreements manufacture competing products revenues related agreements recognized term exclusivity term option agreement unless particular milestone designated case revenues recognized obligations performance completed analytical science revenues fixed contracts recorded projects completed billed projects primarily shortterm duration certain contracts contain provisions price redetermination cost overruns amounts included service revenue realization assured amounts reasonably determined cardinal health inc subsidiaries notes consolidated financial statements revenue recognized salestype leases pointofuse systems installed customer site lease becomes noncancellable see note 14 additional information unearned income salestype leases recognized using interest method sales pointofuse systems recognized upon installation customer site revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease shipping handling shipping handling costs included selling general administrative expenses consolidated statement earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2119 million fiscal 2002 2066 million fiscal 2001 1763 million fiscal 2000 shipping handling revenue received immaterial periods presented translation foreign currencies financial statements companys subsidiaries outside us generally measured using local currency functional currency adjustments translate statements us dollars accumulated separate component shareholders equity transactional exchange gains losses reflected earnings interest rate currency risk management beginning fiscal 2001 company adopted financial accounting standard sfas 133 amended accounting derivatives hedging activity standard derivative instruments recorded fair value balance sheet changes fair value recorded earnings shareholders equity comprehensive income adoption standard material impact companys consolidated financial statements company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value incomeexpense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included incomeexpense remeasurement adjustment offset foreign currency forward contract settlements also classified incomeexpense interest rate swaps foreign currency forward contracts designated fair value hedges company use derivative instruments trading speculative purposes companys derivative contracts adjusted current market values period qualify hedge accounting sfas no133 periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities companys policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract either designated hedge designated ineffective adjusted market value recognized earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contracts fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related companys hedging contracts provided note 5 research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 651 million 538 million 485 million fiscal 2002 2001 2000 respectively cardinal health inc subsidiaries notes consolidated financial statements income taxes accordance provisions sfas 109 accounting income taxes company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases companys assets liabilities provision made us income taxes undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options computed using treasury stock method dividends excluding dividends paid entities company merged company paid cash dividends per common share 0100 0080 0067 fiscal years ended june 30 2002 2001 2000 respectively stock splits february 27 2001 company declared threefortwo stock split effected stock dividend distributed april 20 2001 shareholders record april 5 2001 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock split recent financial accounting standards june 2002 financial accounting standards board fasb issued sfas 146 accounting costs associated exit disposal activities effective exit disposal activities initiated december 31 2002 statement nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring statement requires liability cost associated exit disposal activity associated business combination recognized liability incurred instead recognizing liability date entitys commitment exit plan required issue 943 adoption statement anticipated material effect companys financial position results operations april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections effective fiscal years beginning transactions occurring may 15 2002 statement clarifies several accounting issues including classification gains losses early extinguishment debt lease modifications accounted manner similar salesleaseback transaction adoption statement anticipated material effect companys financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed provides single accounting model disposal longlived assets continuing discontinued operations adoption statement anticipated material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations effective fiscal years beginning june 15 2002 statement addresses diverse accounting practices obligations associated retirement tangible longlived assets associated asset retirement costs adoption statement anticipated material effect companys financial position results operations june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 adoption standard material impact companys consolidated financial statements sfas 142 revises accounting purchased goodwill intangible assets sfas 142 effective fiscal years beginning december 15 2001 earlier adoption permitted company elected adopt sfas 142 beginning first quarter fiscal 2002 sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually accordingly company ceased amortization goodwill intangible assets indefinite lives july 1 2001 intangible assets finite lives primarily patents trademarks cardinal health inc subsidiaries notes consolidated financial statements continue amortized useful lives sfas 142 requires two step impairment test goodwill first step compare carrying amount reporting units assets fair value reporting unit carrying amount exceeds fair value second step required completed involves allocating fair value reporting unit asset liability excess implied goodwill impairment loss amount recorded goodwill exceeds implied goodwill company required complete transitional impairment test goodwill beginning fiscal year statement adopted transitional impairment test required company complete step one goodwill impairment test within six months date initial adoption december 31 2001 company completed transitional impairment test incur impairment charges following table reconciles companys net earnings per share amounts cumulative effect change accounting net earnings per share amounts adjusted amortization intangible assets goodwill 2 business combinations mergerrelated costs special items business combinations fiscal 2002 company completed several individually immaterial acquisitions fiscal 2002 accounted purchase method accounting business combinations primarily focused expanding service offerings within pharmaceutical technologies services segment include contract pharmaceutical development integrated medical education aggregate purchase price paid primarily cash approximately 4180 million company issued approximately 03 million common shares stockholders outstanding stock options converted options purchase total approximately 10 million common shares liabilities operations assumed approximately 935 million including debt 111 million consolidated financial statements include results operations business combinations subsequent date acquisition transactions occurred july 1 2000 results operations would differed materially reported results fiscal 2001 february 14 2001 company completed merger transaction bindley accounted cardinal health inc subsidiaries notes consolidated financial statements poolingofinterests merger transaction bindley company issued approximately 231 million common shares bindley stockholders bindleys outstanding stock options converted options purchase approximately 51 million common shares fiscal 2002 2001 company recorded mergerrelated charges reflect transaction costs incurred result merger transaction bindley addition company also completed several individually immaterial acquisitions fiscal 2001 approximately 3749 million liabilities operations assumed approximately 1478 million including debt 250 million transactions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition transactions occurred july 1 1999 results operations would differed materially reported results fiscal 2000 september 10 1999 company completed merger transaction alp accounted poolingofinterests company issued approximately 87 million common shares alp stockholders fiscal 2000 subsequent years company recorded mergerrelated charges reflect transaction costs incurred result merger transaction alp addition merger transactions described fiscal 2000 company completed several individually immaterial acquisitions accounted purchase method accounting business combinations primarily related companys centralized nuclear pharmacies medicalsurgical distribution pointofuse pharmacy systems pharmaceuticalpackaging services aggregate purchase price paid primarily cash including fees expenses approximately 1202 million liabilities operations assumed approximately 231 million including debt 40 million acquisitions taken place july 1 1998 consolidated results would materially different reported results additional mergerrelated costs associated integrating various acquired companies instituting efficiencies relating charged expense subsequent periods incurred special charges following summary special charges fiscal years ended june 30 2002 2001 2000 cardinal health inc subsidiaries notes consolidated financial statements mergerrelated charges costs effecting mergers subsequently integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs primarily result merger acquisition transactions bindley bergen brunswig medical corporation bbmc august 16 2000 alp allegiance corporation allegiance february 3 1999 rp scherer corporation scherer august 7 1998 fiscal 2001 2000 company incurred direct transaction costs related merger transactions accounted poolingofinterests expenses primarily include investment banking legal accounting professional fees associated respective merger transactions addition periods shown company incurred employeerelated costs consist primarily severance noncompete agreements transactionstay bonuses result certain acquisitions partially offsetting transaction employeerelated costs recorded fiscal year ended june 30 2000 103 million credit adjust estimated transaction employeerelated costs previously recorded connection allegiance merger transaction actual billing employeerelated costs less amounts originally anticipated resulting reduction mergerrelated costs fiscal 2002 2001 company recorded charges 524 million 103 million respectively primarily associated companys plans consolidate distribution centers corporate offices result companys merger transaction bindley connection consolidations company incurred employeerelated costs 75 million 05 million fiscal 2002 2001 respectively arising termination approximately 950 employees primarily related closure 14 bindley distribution centers addition exit costs related termination contracts lease agreements incurred fiscal 2002 2001 36 million 98 million also asset impairment charges 272 million incurred fiscal 2002 remaining 141 million incurred fiscal 2002 primarily related costs associated moving inventory assets consolidation distribution centers corporate offices june 30 2002 majority 950 employees terminated company anticipates completing distribution center consolidations june 30 2003 part restructuring company plans closing total 16 bindley distribution centers exit costs relate primarily costs associated lease terminations moving expenses direct result merger acquisition transactions bbmc alp allegiance scherer fiscal 2001 2000 company recorded charges 16 million 96 million respectively business restructuring costs relating companys merger transaction scherer part business restructuring company closed certain facilities connection closings company incurred employeerelated costs 16 million 15 million fiscal 2001 2000 respectively arising termination approximately 400 manufacturing office employees terminated june 30 2001 addition asset impairment charges 39 million recorded fiscal 2000 remaining costs relate exit costs termination contracts lease agreements june 30 2001 restructuring plan completed integration costs include charges directly related integration operations previous merger transactions consulting costs related information systems employee benefit integration well relocation travel costs directly associated integrations special charges fiscal 2002 company incurred employeerelated costs 152 million primarily associated restructuring distribution custom kitting operations medicalsurgical products services segment significant portion charges recorded represent severance accrued upon communication severance terms employees fourth quarter fiscal 2002 restructuring plan expected completed december 31 2002 result termination approximately 600 employees fourth quarter fiscal 2002 company recorded income net litigation settlements 113 million settlements included 133 million special item resulting recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years recovery totaled 353 million 220 million previously recorded 100 million second quarter fiscal 2001 120 million first quarter fiscal 2002 amounts previously recorded reflected reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded company still pending claims manufacturers amount future recovery currently estimable future recoveries recorded special item period settlement reached vitamin litigation income offset items totaling 20 million majority involved litigation settlement reached fiscal 2002 related bindley cardinal health inc subsidiaries notes consolidated financial statements fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount 06 million arose connection employeerelated costs associated termination approximately 100 employees primarily related closure distribution centers june 30 2001 restructuring plan completed addition fiscal 2002 2001 company recorded special charges 28 million 68 million respectively related restructuring certain health nutritional manufacturing facilities fourth quarter fiscal 2002 company incurred asset impairment costs 18 million primarily due writeoff obsolete inventory created rationalization certain health nutritional manufacturing facilities approximately 09 million 22 million related lease exit costs fiscal 2002 2001 respectively remaining 01 million 46 million periods related employeerelated costs associated termination approximately 185 employees primarily consisting manufacturing employees certain management positions june 30 2002 majority positions eliminated restructuring plan expected completed june 30 2003 fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated accrual rollforward following table summarizes activity related liabilities associated companys special charges fiscal years ended june 30 2002 2001 2000 1 amounts represent items either expensed incurred accrued according generally accepted accounting principles 2 result changing bindleys fiscal year end calendar june 30 bindleys results operations six months ended june 30 2000 included combined results operation reflected adjustment consolidated statements shareholders equity see note 1 discussion bindleys six months ended june 30 2000 bindley recorded special charge 263 million 257 million net tax related litigation accrual settlement summary fiscal 2002 net effect various special charges reduced reported earnings cumulative effect change accounting 871 million 11263 million see note 14 discussion cumulative effect change accounting reduced reported diluted earnings per common share cumulative effect change accounting 019 per share 245 per share fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share fiscal 2000 net effect various special charges reduced reported net earnings 498 million 7178 million reduced reported diluted earnings per common share 011 per share 160 per share certain mergerrelated restructuring costs based upon estimates actual amounts paid may ultimately differ cardinal health inc subsidiaries notes consolidated financial statements estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special charges incurred 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions future minimum lease payments received pursuant salestype leases next five fiscal years thereafter pyxis funding ii acquired pool salestype leases pyxis funding sold undivided interest leases third party investor approximately 150 million see notes 1 8 additional information cardinal health inc subsidiaries notes consolidated financial statements 4 shortterm borrowings longterm obligations notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 365 million june 30 2002 various money market rates june 30 2002 08 million weighted average interest rate 33 outstanding arrangements 83 million weighted average interest rate 650 outstanding june 30 2001 total available unused lines credit june 30 2002 357 million longterm obligations longterm obligations consist following millions 445 600 625 650 notes 675 notes due 2011 represent unsecured obligations company 675 notes due 2004 represent unsecured obligations scherer guaranteed company 730 notes 780 700 debentures represent unsecured obligations allegiance guaranteed company obligations redeemable prior maturity subject sinking fund interest paid pursuant terms notes fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued 400 million preferred variable debt securities parties affiliated company fiscal 2001 preferred debt securities classified longterm debt companys consolidated balance sheet preferred debt securities must retired redeemed spe company creditors access spes receivables june 30 2002 2001 spe owned approximately 5347 million 4972 million respectively receivables included companys consolidated balance sheet effective interest rate june 30 2002 2001 341 647 respectively loans made company breaches certain representations warranties covenants spe recourse general credit company commercial paper program providing june 30 2002 issuance 15 billion aggregate maturity value commercial paper company borrowings outstanding program june 30 2002 2001 company also maintains shortterm credit facilities allow borrowings 1319 million june 30 cardinal health inc subsidiaries notes consolidated financial statements 2002 2001 224 million 263 million outstanding uncommitted facilities effective interest rate june 30 2002 2001 205 430 respectively company also unsecured bank credit facility provides aggregate 15 billion borrowings 750 million expires march 27 2003 750 million expires march 31 2004 facility expiring march 27 2003 allows company option extend maturity monies borrowed one year expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2002 june 30 2002 2001 commercial paper shortterm borrowings totaling 224 million 263 million respectively reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings fiscal 2002 company issued 300 million 445 notes due 2005 proceeds debt issuance used toward repayment portion companys indebtedness general corporate purposes including working capital expenditures acquisitions investments issuance company capacity issue approximately 700 million additional equity debt securities pursuant shelf registration statements filed securities exchange commission fiscal 2001 company issued 500 million 675 notes due 2011 proceeds debt issuance used early redemption bindley debt repayment portion companys commercial paper general corporate purposes including working capital expenditures repayment refinancing indebtedness acquisitions investments certain longterm obligations collateralized property equipment company aggregate book value approximately 47 million june 30 2002 maturities longterm obligations future fiscal years 5 financial instruments interest rate risk management company exposed impact interest rate changes companys objective manage impact interest rate changes earnings cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2002 2001 company held payfixed interest rate swaps hedge variability cash flows related changes interest rates borrowing costs variable rate debt contracts classified cash flow hedges mature january 2004 company adjusts payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted interest rate payments hedged company anticipates contracts continue effective gainloss deferred comprehensive income recognized immediately earnings contracts longer effective forecasted transactions expected occur company also held payfloating interest rate swaps hedge change fair value fixed rate debt related fluctuations interest rates contracts classified fair value hedges mature october 2006 hedged fixed rate debt payfloating interest rate swaps adjusted current market values incomeexpense fiscal 2002 2001 market value adjustments debt hedged payfloating interest rate swaps directly offset one another incomeexpense following table represents notional amount hedged fair value interest rate swaps outstanding june 30 2002 2001 included assetsliabilities amount net gainloss either deferred comprehensive income cardinal health inc subsidiaries notes consolidated financial statements recognized incomeexpense fiscal 2002 2001 incomeloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting incomeloss recorded incomeexpense counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates companys objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenues expenses gains losses contracts offset changes value underlying transactions occur june 30 2002 2001 company held forward contracts expiring june 2003 june 2002 respectively hedge probable firmly committed revenues expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged european euro british pound swiss franc mexican peso thai bhat june 30 2002 2001 company also held forward contracts expiring july 2002 july 2001 respectively hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values incomeexpense directly offsetting adjustment foreign currency asset liability following table represents notional amount hedged value forward contracts outstanding june 30 2002 2001 included assets liabilities amount net gainloss either deferred comprehensive income recognized incomeexpense fiscal 2002 2001 cardinal health inc subsidiaries notes consolidated financial statements incomeloss recorded forward contract fair value hedge offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense end period counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2002 2001 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 23172 million 19059 million compared carrying amounts 22244 million 18769 million june 30 2002 2001 respectively fair value companys longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss companys derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments cardinal health inc subsidiaries notes consolidated financial statements 6 income taxes consolidated us income taxes change accounting millions provision income taxes change accounting consists following millions reconciliation provision based federal statutory income tax rate companys effective income tax rate change accounting follows provision made us additional foreign taxes 4538 million undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practicable estimate amount tax might payable unlikely event eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions cardinal health inc subsidiaries notes consolidated financial statements amounts classified consolidated balance sheets follows millions company state net operating loss carryforwards 5950 million june 30 2002 valuation allowance 176 million june 30 2002 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain state net operating loss carryforwards expire 2022 expiring state net operating loss carryforwards required valuation allowances adjusted annually june 30 2002 company foreign tax credit carryforwards application valuation allowance described company anticipates limitations apply respect utilization net deferred income tax assets described taxsharing agreement baxter international inc baxter allegiance pay increases reimbursed decreases net deferred tax assets transferred date baxter spinoff allegiance increases decreases may result audit adjustments baxters prior period tax returns 7 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit plans see 590 million 577 million 472 million june 30 2002 2001 2000 respectively defined benefit plans company several defined benefit plans covering substantially scherer salaried hourly employees companys domestic defined benefit plans provide defined benefits based years service level cardinal health inc subsidiaries notes consolidated financial statements compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations following tables provide reconciliation change projected benefit obligation change plan assets net amount recognized consolidated balance sheets based measurement date march 31 millions cardinal health inc subsidiaries notes consolidated financial statements projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1235 million 1114 million 632 million respectively june 30 2002 1034 million 956 million 568 million respectively june 30 2001 components companys net periodic benefit costs follows millions 1 amount represents primarily amortization unrecognized actuarial losses well amortization transition obligation prior service costs fiscal 2002 2001 weighted average actuarial assumptions used determining funded status information net periodic benefit cost information discount rate 63 64 expected return plan assets 72 73 rate compensation increase 40 39 respectively 8 balance sheet risk company formed pyxis funding sole purpose acquiring pool salestype leases related leased equipment pyxis selling lease receivables pyxis funding ii pyxis funding wholly owned special purpose bankruptcyremote subsidiary pyxis funding ii formed sole purposes acquiring lease receivables salestype leases pyxis funding issuing pyxis funding iis notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii wholly owned special purpose bankruptcyremote subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities accordingly related receivables included companys consolidated financial statements required us generally accepted accounting principles company consolidates pyxis funding consolidate pyxis funding ii pyxis funding ii qualified special purpose entity defined sfas 140 pyxis funding pyxis funding ii separate legal entities maintain separate financial statements assets pyxis funding pyxis funding ii available first foremost satisfy claims creditors investor pyxis funding iis notes principal balance 954 million august 31 2002 provided credit protection form 20 238 million overcollateralization june 30 2002 company 2800 million committed receivables sales facility programs mscc chf mscc chf organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance generally accepted accounting principles mscc chf separate legal entities company medicine shoppe griffin sale receivables mscc chf qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishment liabilities accordingly related receivables included companys consolidated financial statements total amount receivables sold mscc program 88 million 135 million june 30 2002 2001 respectively outstanding sold receivables chf program june 30 2002 2001 recourse provided mscc program requirement mscc retain 20 subordinated interest sold receivables subordinated interest june 30 2002 22 million recourse provided chf program requirement chf retain percentage subordinated interest sold receivables percentage determined based upon composition receivables sold june 30 2002 receivables sold program result subordinated interest outstanding cardinal health inc subsidiaries notes consolidated financial statements companys aggregate cash flows related receivable transfers follows fiscal 2002 2001 pyxis mscc chf required repurchase receivables sold determined representations warranties regard related receivables accurate date sold company entered operating lease agreements several banks construction various new facilities equipment initial terms lease agreements varied maturity dates ranging november 2003 october 2008 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2002 amount expended acquire andor construct facilities 4797 million agreements provide maximum fundings 6041 million greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2002 weighted average interest rate agreements approximated 26 companys minimum annual lease payments agreements june 30 2002 approximately 132 million 9 commitments contingent liabilities future minimum rental payments operating leases excluding referenced note 8 initial remaining noncancelable lease terms excess one year june 30 2002 rental expense relating operating leases including referenced note 8 approximately 776 million 784 million 761 million fiscal 2002 2001 2000 respectively sublease rental income material period presented herein september 30 1996 baxter international inc baxter subsidiaries transferred allegiance subsidiaries baxters us healthcare distribution business surgical respiratory therapy business healthcare costsaving business well certain foreign operations allegiance business connection spinoff allegiance business baxter connection spinoff allegiance merged subsidiary company february 3 1999 agreed indemnify baxter defend indemnify baxter healthcare corporation bhc contemplated agreements baxter allegiance expenses potential liabilities associated claims arising allegiance business including certain claims alleged personal injuries result exposure natural rubber latex gloves company party lawsuits agreed pay settlements plaintiffs june 30 2002 approximately 380 lawsuits bhc andor allegiance involving allegations sensitization natural rubber latex products cases proceeding trial total dollar amount potential damages cannot reasonably quantified plaintiffs plead damages extreme excess reasonably expect recover plead modest amount include request specific dollar amount including cases ask specific damages damage requests per action ranged 10000 240 million cases name multiple defendants addition baxterallegiance average number defendants per case exceeds twentyfive based cardinal health inc subsidiaries notes consolidated financial statements significant differences range damages sought based multiple number defendants lawsuits allegiance cannot reasonably quantify total amount possiblepotential damages therefore allegiance company believe numbers considered indication either reasonably possible probable liability since inception litigation baxterallegiance named defendant approximately eight hundred cases june 30 2002 fewer half lawsuits remain pending nearly half lawsuits resolved concluded without liability baxterallegiance fiscal year ended june 30 2002 allegiance began settling lawsuits greater frequency individual claim settled material amount settled claims aggregate comprised material amount due number claims filed ongoing defense costs incurred allegiance believes probable incur substantial legal fees related resolution cases still pending although company continues believe cannot reasonably estimate potential cost settle lawsuits company believes impact lawsuits upon allegiance immaterial companys financial position liquidity results operations could range 0 20 million net insurance proceeds top end range reflecting virtually insurance coverage company believes unlikely scenario given insurance coverage place company believes substantial portion liability covered insurance policies allegiance financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency company allegiance continue believe insurance recovery probable company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs although ultimate resolution litigation referenced herein cannot forecast certainty company intends vigorously defend currently believe outcome pending litigation material adverse effect companys consolidated financial statements 10 shareholders equity june 30 2002 2001 companys authorized capital shares consisted 750 million class common shares without par value b 5 million class b common shares without par value c 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2002 2001 september 2001 companys board directors authorized repurchase common shares aggregate amount 500 million june 30 2002 51 million common shares aggregate cost approximately 3083 million repurchased plan subsequent end fiscal 2002 32 million common shares aggregated cost approximately 1917 million repurchased plan company completed program august 2002 repurchased shares held treasury shares used general corporate purposes march 2000 companys board directors authorized repurchase common shares aggregate amount 7500 million approximately 70 million common shares aggregate cost approximately 4402 million repurchased via accelerated share repurchase program placed treasury shares november 2000 companys board directors rescinded remainder repurchase program fiscal 2001 company issued approximately 08 million common shares received aggregate proceeds 475 million used general corporate purposes fiscal quarter ended june 30 2001 company filed shelf registration statement form s4 increasing number common shares available issuance connection future business combinations 150 million common shares 11 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments cardinal health inc subsidiaries notes consolidated financial statements mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivable lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 2002 companys two largest customers cvs novation individually accounted 13 11 operating revenue respectively two customers individually accounted 12 10 operating revenue respectively fiscal 2001 additionally third customer premier accounted 10 operating revenue fiscal 2001 fiscal 2000 companys two largest customers premier novation individually accounted 11 10 operating revenue respectively customers serviced primarily pharmaceutical distribution provider services medicalsurgical products services segments fiscal 2002 two customers cvs walgreens individually accounted 60 20 respectively bulk deliveries two customers accounted 46 22 bulk deliveries respectively fiscal 2001 42 30 bulk deliveries respectively fiscal 2000 additionally eckerd accounted 16 bulk deliveries fiscal 2000 june 30 2002 cvs walgreens accounted 18 8 respectively companys gross trade receivable balance june 30 2001 two customers accounted 21 5 respectively companys total trade receivable balance premier novation group purchasing organizations gpo companys trade receivable balances individual members gpo therefore significant concentration credit risk exists organizations 12 stock options restricted shares company maintains several stock incentive plans benefit certain officers directors employees options granted generally vest three years exercisable periods ten years date grant price equals fair market value date grant certain plans subject shareholder approval plans authorized solely board directors board following description plans authorized shareholders broadlybased equity incentive plan amended broadlybased equity incentive plan adopted board effective november 15 1999 amended pursuant resolutions board adopted august 8 2001 plan provides grants form nonqualified stock options restricted shares restricted share units employees company aggregate number common shares authorized issuance pursuant plan 360 million shares generally 10 authorized amount issuable form restricted shares restricted share units restriction period less three years broadlybased equity incentive plan qualified section 401a internal revenue code subject provisions employee retirement income security act 1974 erisa outside directors equity incentive plan outside directors equity incentive plan adopted board effective may 10 2000 plan reserves makes available distribution aggregate 15 million shares grants form nonqualified stock options restricted shares members board serve employees company plan qualified section 401a internal revenue code subject provisions erisa cardinal health inc subsidiaries notes consolidated financial statements following table summarizes plans june 30 2002 following summarizes stock option transactions company plans july 1 1999 june 30 2002 giving retroactive effect conversions options connection merger transactions stock splits millions except per share amounts cardinal health inc subsidiaries notes consolidated financial statements additional information concerning stock options outstanding june 30 2002 presented company accounts plans accordance apb opinion 25 compensation cost recognized compensation cost plans determined consistent statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net earnings diluted earnings per common share would reduced follows fiscal 2001 stock options outstanding previous bindley plans vested immediately merger date accelerated grants increased fiscal 2001 pro forma effect net earnings diluted earnings per common share 319 million 007 per share respectively giving retroactive effect conversion stock options related mergers stock splits weighted average fair value options granted fiscal 2002 2001 2000 2595 2342 1168 respectively fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods market values restricted shares restricted share units awarded company recorded component shareholders equity accompanying consolidated balance sheets restricted shares amortized expense period participants perform services generally one seven years restricted share units generally amortized fiveyear vesting period june 30 2002 approximately 06 million shares units remained restricted subject forfeiture company employee stock purchase plans sale 120 million companys common shares authorized purchase price determined lower 85 percent closing market price date subscription 85 percent closing market price last day offering period june 30 2002 subscriptions 04 million outstanding june 30 2002 14 million shares issued employees plans 13 earnings per share following table reconciles number shares used compute basic diluted earnings per share three years ending june 30 2002 cardinal health inc subsidiaries notes consolidated financial statements potentially dilutive employee stock options antidilutive fiscal 2002 2001 2000 09 million 57 million 56 million respectively 14 change accounting first quarter fiscal 2002 method recognizing revenue pharmacy automation equipment changed recognizing revenue units delivered customer recognizing revenue units installed customer site management believes change accounting method provide objectively determinable method revenue recognition addition company implemented changes better service customers leverage operational efficiencies company recorded cumulative effect change accounting 701 million net tax 446 million consolidated statement earnings first quarter fiscal 2002 tax dilutive impact cumulative effect 015 per diluted share effect change fiscal year ended june 30 2002 reduce net earnings cumulative effect approximately 186 million change reduced diluted earnings per share 004 fiscal year ended june 30 2002 proforma effect accounting change prior periods presented required information available 15 goodwill intangible assets following table summarizes changes carrying amount goodwill three years ended june 30 2002 total reporting segment intangible assets periods presented subject amortization intangible assets amortized using straightline method periods range five forty years detail intangible assets class three years ended june 30 2002 follows cardinal health inc subsidiaries notes consolidated financial statements significant acquisitions intangible assets periods presented amortization expense years ended june 30 2002 2001 2000 including goodwill amortization fiscal 2001 2000 30 million 506 million 461 million respectively amortization expense estimated 16 segment information companys operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medicalsurgical products services pharmaceutical technologies services automation information services pharmaceutical distribution provider services segment involves distribution broad line pharmaceuticals healthcare radiopharmaceuticals specialty pharmaceutical products items typically sold hospitals retail drug stores healthcare providers addition segment provides services healthcare industry integrated pharmacy management temporary pharmacy staffing well franchising apothecarystyle retail pharmacies medicalsurgical products services segment involves manufacture medical surgical laboratory products distribution products well products manufactured internally hospitals physician offices surgery centers healthcare providers pharmaceutical technologies services segment provides services healthcare industry design unique drug delivery systems liquid fill capsule contract manufacturing comprehensive packaging pharmaceutical development commercialization services automation information services segment provides services hospitals healthcare providers pharmacy automation equipment clinical information system services company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies cardinal health inc subsidiaries notes consolidated financial statements following tables include revenue operating earnings business segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2002 2001 2000 following tables include depreciation amortization expense well capital expenditures fiscal years ended june 30 2002 2001 2000 assets june 30 2002 2001 2000 segment reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements 1 pharmaceutical distribution provider services segments operating revenues derived three main product categories product categories respective contributions operating revenue follows 2 pharmaceutical technologies services segments operating revenues derived three main product categories product categories respective contributions operating revenue follows 3 corporateoperating earnings primarily consist special charges 1386 million 1249 million 647 million fiscal years ended june 30 2002 2001 2000 respectively unallocated corporate administrative expenses investment spending 4 total depreciation amortization expense declined fiscal 2002 compared fiscal 2001 result adoption sfas 142 goodwill intangible assets july 1 2001 sfas 142 purchased goodwill intangible assets indefinite lives longer amortized see additional information notes 1 15 5 corporateassets include primarily corporate cash equivalents corporate property equipment net unallocated deferred taxes following table presents revenue longlived assets geographic area millions longlived assets include property equipment net accumulated depreciation cardinal health inc subsidiaries notes consolidated financial statements 17 selected quarterly financial data unaudited following selected quarterly financial data millions except per share amounts fiscal 2002 2001 restated reflect poolingofinterests business combinations discussed note 2 cardinal health inc subsidiaries notes consolidated financial statements discussed note 2 mergerrelated costs special charges recognized various quarters fiscal 2002 2001 following table summarizes impact costs net earnings diluted earnings per share quarters recorded millions except per share amounts 18 subsequent event pending transactions june 14 2002 company announced entered definitive agreement acquire syncor international corporation syncor woodland hills californiabased company leading provider nuclear pharmacy services acquisition syncor stockforstock merger transaction expected completed end second quarter fiscal 2003 subject customary conditions including syncor stockholder approval completion acquisition syncor share converted 052 common share based closing sale price common share september 27 2002 value common shares received syncor stockholders connection merger approximately 900 million august 7 2002 companys board directors authorized repurchase common shares aggregate 500 million august 31 2002 11 million common shares aggregate cost approximately 731 million repurchased plan repurchased shares held treasury shares used general corporate purposes item 9item 8 financial statements supplementary data independent auditors reports consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2003 2002 2001 consolidated balance sheets june 30 2003 2002 consolidated statements shareholders equity fiscal years ended june 30 2003 2002 2001 consolidated statements cash flows fiscal years ended june 30 2003 2002 2001 notes consolidated financial statements schedule ii report independent auditors shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries company june 30 2003 2002 related consolidated statements earnings shareholders equity cash flows fiscal years ended audit also included financial statement schedule listed index item 14a2 consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits consolidated financial statements financial statement schedule company fiscal year ended june 30 2001 audited auditors ceased operations auditors expressed unqualified opinion statements report dated july 27 2001 conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion fiscal 2003 2002 consolidated financial statements referred present fairly material respects consolidated financial position company june 30 2003 2002 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states also opinion related fiscal 2003 2002 financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein discussed note 14 consolidated financial statements first quarter fiscal 2002 company changed method recognizing revenue pharmacy automation equipment addition discussed note 1 consolidated financial statements company changed method accounting purchased goodwill intangible assets accordance statement financial standards statement 142 first quarter fiscal 2002 discussed financial statements company june 30 2001 year ended audited auditors ceased operations described note 1 financial statements updated include transitional disclosures required statement 142 goodwill intangible assets adopted company july 1 2002 audit procedures respect disclosures note 1 fiscal 2001 included agreeing previously reported earnings cumulative effect change accounting earnings previously issued financial statements adjustments reported earnings representing amortization expense including related tax effects recognized periods related goodwill longer amortized companys underlying records obtained management ii testing mathematical accuracy reconciliation adjusted earnings reported earnings related earningspershare amounts audit procedures respect disclosures note 15 fiscal 2001 included agreeing goodwill amortization amounts segment gross intangible accumulated amortization amounts companys underlying records obtained management ii testing mathematical accuracy tables opinion disclosures fiscal 2001 notes 1 15 related transitional disclosures statement 142 appropriate however engaged audit review apply procedures companys financial statements fiscal 2001 respect disclosures accordingly express opinion form assurance companys fiscal 2001 financial statements taken whole ernst young llp ernst young llp columbus ohio july 30 2003 except note 20 date september 11 2003 report independent public accountants shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc ohio corporation subsidiaries june 30 2001 2000 related consolidated statements earnings shareholders equity cash flows two years period ended june 30 2001 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits audit historical consolidated financial statements bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended historical consolidated financial statements bindley represent approximately 15 consolidated total assets june 30 2000 represent total revenues net income approximately 22 5 respectively consolidated amounts year ended consolidated financial statements audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditor provides reasonable basis opinion based upon audit report auditor consolidated financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2001 2000 consolidated results operations cash flows two years period ended june 30 2001 conformity accounting principles generally accepted united states consolidated financial statements cardinal health inc subsidiaries year ended june 30 1999 prior restatement pooling interests separate financial statements bindley year ended december 31 1998 included june 30 1999 restated consolidated financial statements cardinal health inc audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions statements audited combination accompanying consolidated statements earnings shareholders equity cash flows year ended june 30 1999 restatement fiscal 2001 pooling interests opinion consolidated statements properly combined basis described note 1 notes consolidated financial statements arthur andersen llp arthur andersen llp columbus ohio july 27 2001 note copy audit report previously issued arthur andersen llp andersen connection cardinal health incs form 10k filing fiscal year ended june 30 2001 inclusion previously issued andersen report pursuant temporary final rule final rule requirements arthur andersen llp auditing clients issued sec march 2002 note previously issued andersen report includes references certain fiscal years required presented accompanying consolidated financial statements years ended june 30 2003 audit report reissued arthur andersen llp connection filing form 10k see exhibit 2302 discussion report independent public accountants financial statement schedule shareholders directors cardinal health inc audit consolidated financial statements referred report dated july 27 2001 appearing page 18 form 10k also included audit information twoyear period ended june 30 2001 financial statement schedule valuation qualifying accounts audit historical financial statement schedule bindley western industries inc bindley wholly owned subsidiary cardinal health inc december 31 1999 year ended financial statement schedule audited another auditor whose report presented herein opinion insofar relates amounts included bindley based solely report auditor financial statement schedule cardinal health inc year ended june 30 1999 prior restatement pooling interests separate financial statement schedule bindley years ended december 31 1998 included june 30 1999 restated consolidated financial statement schedule audited reported separately auditors whose reports presented herein dated august 10 1999 except first sentence third paragraph note 2 date may 26 2000 fiscal 1999 amounts note 12 date september 5 2000 b dated march 21 2000 except note 3 note 20 december 15 2000 respectively expressed unqualified opinions schedule audited combination information year ended june 30 1999 restatement 2001 pooling interests opinion financial statement schedule presents fairly material respects information set forth therein twoyear period ended june 30 2001 read conjunction related consolidated financial statements opinion information year ended june 30 1999 properly combined basis described note 1 notes consolidated financial statements audit made purpose forming opinion basic financial statements taken whole schedule valuation allowances presented purposes complying securities exchange commissions rules required part basic financial statements presented separately herein schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole arthur andersen llp arthur andersen llp columbus ohio july 27 2001 note copy audit report previously issued arthur andersen llp andersen connection cardinal health incs form 10k filing fiscal year ended june 30 2001 inclusion previously issued andersen report pursuant temporary final rule final rule requirements arthur andersen llp auditing clients issued sec march 2002 note previously issued andersen report includes references certain fiscal years required presented accompanying consolidated financial statements years ended june 30 2003 audit report reissued arthur andersen llp connection filing form 10k see exhibit 2302 discussion cardinal health inc subsidiaries consolidated statements earnings millions except per share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc together subsidiaries collectively company leading provider products services supporting health care industry helping health care providers manufacturers improve efficiency quality health care company currently conducts business within four business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services see note 16 information related companys business segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany accounts transactions eliminated addition consolidated financial statements give retroactive effect merger transaction bindley western industries inc bindley february 14 2001 see note 2 business combination accounted poolingofinterests method result changing bindleys fiscal year end december 31 june 30 bindleys results operations six months ended june 30 2000 included combined results operations reflected adjustment consolidated statement shareholders equity sixmonth period ending june 30 2000 bindleys net revenue net loss 49 billion 28 million respectively cash flows operating activities 1667 million cash flows used investing financing activities 57 million 1134 million respectively fiscal 2003 2002 2001 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related companys acquisitions provided note 2 preparation financial statements conformity generally accepted accounting principles united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes estimates include limited inventory valuation allowance doubtful accounts goodwill intangible asset impairment restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1153 million 1165 million 1448 million cash payments income taxes 2568 million 2460 million 2136 million fiscal 2003 2002 2001 respectively see notes 2 4 additional information regarding noncash investing financing activities receivables trade receivables primarily comprised amounts owed company pharmaceutical health care distribution activities presented net allowance doubtful accounts 917 million 948 million june 30 2003 2002 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service charges higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company write amounts deemed uncollectible established bad debt reserve company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivable 308 million june 30 2003 2002 current portions 149 million 143 million respectively included assets amounts reported net allowance doubtful accounts 45 million 47 million june 30 2003 2002 respectively company formed special purpose entities sole purpose buying receivables sales type leases various legal entities company selling receivables sales type leases certain multiseller conduits administered thirdparty banks third party investors see note 8 additional disclosure regarding balance sheet financing fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued 400 million preferred variable debt securities parties affiliated company fiscal 2001 preferred debt securities must retired redeemed spe company creditors access spes receivables see note 4 additional information cardinal health inc subsidiaries notes consolidated financial statements inventories majority inventories approximately 68 2003 67 2002 stated lower cost using lastin firstout lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2003 2002 2001 562 million 504 million 528 million respectively property equipment property equipment stated cost depreciation expense financial reporting purposes primarily computed using straightline method estimated useful lives assets range one fifty years including capital lease assets depreciated terms respective leases depreciation expense 2490 million 2312 million 2226 million fiscal 2003 2002 2001 respectively company expenses repairs maintenance expenditures incurred company capitalizes interest longterm fixed asset projects using companys weighted average interest rate longterm debt 58 amount repairs maintenance expense capitalized interest immaterial fiscal years presented accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal year ended june 30 2003 largest component accrued liabilities deferred tax liabilities approximately 5661 million revenue recognition company records distribution revenue selfmanufactured medical product revenue merchandise shipped customers company obligation provide services related merchandise revenues recorded net sales returns allowances company recognizes sales returns reduction revenue cost sales price cost respectively products returned companys customer return policy allows customers return products ability added back inventory resold full value returned vendors credit company also acts intermediary ordering subsequent delivery bulk shipments pharmaceutical products classified bulk deliveries customer warehouses included total revenue company earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenues recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions manufacturing packaging revenues recognized either upon shipment delivery product accordance terms contract specify transfer title occurs radiopharmaceutical revenue recognized upon delivery product customer revenues services provided development sales marketing services recognized upon completion services drug delivery system revenue recognized upon shipment products customer nonproduct revenues include annual exclusivity fees option fees extend exclusivity agreements milestone payments attaining certain regulatory approvals company receives exclusivity payments certain manufacturers return commitment enter agreements manufacture competing products revenues related agreements recognized term exclusivity term option agreement unless particular milestone designated case revenues recognized obligations performance completed analytical science revenues fixed contracts recorded projects completed billed projects primarily shortterm duration certain contracts contain provisions price redetermination cost overruns amounts included service revenue realization assured amounts reasonably determined revenue recognized salestype leases pointofuse systems installed customer site lease becomes noncancellable see note 14 additional information unearned income salestype leases recognized using interest method sales pointofuse systems recognized upon installation customer site revenue systems cardinal health inc subsidiaries notes consolidated financial statements installed operating lease arrangements recognized lease term amounts become receivable according provisions lease shipping handling shipping handling costs included selling general administrative expenses consolidated statement earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2138 million fiscal 2003 2119 million fiscal 2002 2066 million fiscal 2001 shipping handling revenue received immaterial periods presented translation foreign currencies financial statements companys subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated separate component shareholders equity foreign currency transaction gains losses included consolidated statements earnings immaterial fiscal years ended june 30 2003 2002 2001 interest rate currency risk management company accounts derivative instruments accordance statement financial accounting standards sfas 133 amended accounting derivatives hedging activity standard derivative instruments recorded fair value balance sheet changes fair value recorded earnings shareholders equity comprehensive income company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value incomeexpense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included incomeexpense remeasurement adjustment offset foreign currency forward contract settlements also classified incomeexpense interest rate swaps foreign currency forward contracts designated fair value hedges company generally use derivative instruments trading speculative purposes fiscal 2003 company entered one speculative interest rate swap transaction resulting immaterial gain companys derivative contracts adjusted current market values period qualify hedge accounting sfas no133 periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities companys policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract either designated hedge designated ineffective adjusted market value recognized earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contracts fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related companys hedging contracts provided note 5 research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 569 million 651 million 538 million fiscal 2003 2002 2001 respectively income taxes accordance provisions sfas 109 accounting income taxes company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets cardinal health inc subsidiaries notes consolidated financial statements liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases companys assets liabilities provision made us income taxes undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options computed using treasury stock method dividends excluding dividends paid entities company merged company paid cash dividends per common share 0100 0080 fiscal years ended june 30 2003 2002 2001 respectively stock splits february 27 2001 company declared threefortwo stock split effected stock dividend distributed april 20 2001 shareholders record april 5 2001 share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted retroactively reflect stock split reclassifications certain reclassifications made conform prior period amounts current presentation recent financial accounting standards may 2003 financial accounting standards board fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity statement clarifies definition liability currently defined fasb concepts statement 6 elements financial statements well items statement requires financial instruments embody obligation issuer classified liability furthermore standard provides guidance initial subsequent measurement well disclosure requirements financial instruments sfas 150 effective financial instruments entered may 31 2003 adoption statement material effect companys financial position results operations april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities statement amends clarifies financial accounting reporting requirements originally established fasb statement 133 derivative instruments hedging activities fasb statement 149 provides greater clarification characteristics derivative instrument contracts similar characteristics accounted consistently statement effective contracts entered modified june 30 2003 well hedging relationships designated june 30 2003 excluding certain implementation issues effective prior date fasb statement 133 adoption statement anticipated material effect companys financial position results operations january 2003 emerging issues task force eitf finalized consensus issue 0216 accounting customer including reseller certain consideration received vendor issue requires cash consideration received customer vendor recorded reduction cost sales within companys results operations excluding payments received customer sells products services vendor well reimbursement costs incurred customer selling vendors product issue also requires rebates refunds provided customer result achieving certain purchase levels defined measures recorded reduction cost sales rebate refund probable reasonably estimable allocated time period earned adoption consensus material effect companys financial position results operations january 2003 fasb issued interpretation 46 consolidation variable interest entities interpretation defines business enterprise must consolidate variable interest entity interpretation applies immediately variable interest entities created january 31 2003 applies first fiscal year interim period beginning june 15 2003 entities enterprise holds variable interest acquired february 1 2003 adoption interpretation material effect companys financial position results operations company material unconsolidated variable interest entities june 30 2003 see note 4 discussion companys special purpose accounts receivable financing entity included consolidated financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amends sfas 123 statement provides alternative methods transition voluntary change fair valuebased method accounting stockbased employee compensation amends disclosure requirements sfas 123 transition guidance annual disclosure provisions shown effective fiscal years ending cardinal health inc subsidiaries notes consolidated financial statements december 15 2002 adoption statement material effect companys financial position results operations june 30 2003 company maintained several stock incentive plans benefit certain employees fully described note 12 company accounts plans accordance apb 25 related interpretations except costs related restricted stock restricted stock units compensation expense recognized net earnings options granted exercise price equal market value underlying stock date grant following tables illustrate effect net earnings per share adjusting anticipated plan changes company adopted fair value recognition provisions sfas 123 accounting stockbased compensation fiscal 2001 stock options outstanding previous bindley plans vested upon consummation merger transaction accelerated grants increased fiscal 2001 pro forma effect net earnings diluted earnings per common share 319 million 007 per common share respectively november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation requires guarantor recognize inception guarantee liability fair value obligation undertaken issuing guarantee also enhances guarantors disclosure requirements made interim annual financial statements obligations certain guarantees issued initial recognition initial measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements interim annual periods ending december 15 2002 company adopted enhanced disclosure requirements second quarter fiscal 2003 adoption recognition initial measurement provisions third quarter fiscal 2003 material effect companys financial position results operations november 2002 eitf finalized consensus issue 0021 accounting revenue arrangements multiple deliverables effective arrangements entered june 15 2003 issue defines units accounting arrangements multiple deliverables resulting revenue allocated units accounting revenue recognition purposes adoption consensus anticipated material effect companys financial position results operations june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities effective exit disposal activities initiated december 31 2002 statement nullifies eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred cardinal health inc subsidiaries notes consolidated financial statements restructuring statement requires liability cost associated exit disposal activity associated business combination recognized liability incurred instead recognizing liability date entitys commitment exit plan required issue 943 adoption statement material effect companys financial position results operations april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections effective fiscal years beginning transactions occurring may 15 2002 statement clarifies several accounting issues including classification gains losses early extinguishment debt lease modifications accounted manner similar salesleaseback transaction adoption statement material effect companys financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed provides single accounting model disposal longlived assets continuing discontinued operations adoption statement material effect companys financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations effective fiscal years beginning june 15 2002 statement addresses diverse accounting practices obligations associated retirement tangible longlived assets associated asset retirement costs adoption statement material effect companys financial position results operations first quarter fiscal 2002 company adopted sfas 142 goodwill intangible assets revises accounting purchased goodwill intangible assets sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually accordingly company ceased amortization goodwill intangible assets indefinite lives july 1 2001 intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company performed annual impairment test fiscal 2003 result recognition impairment charges cardinal health inc subsidiaries notes consolidated financial statements following table reconciles companys earnings continuing operations cumulative effect change accounting related per share amounts earnings continuing operations cumulative effect change accounting related per share amounts reflect proforma adjustment amortization intangible assets goodwill 2 business combinations special items mergerrelated costs policy company primarily records costs relate integration previously acquired companies costs restructuring operations improve productivity special charges integration costs acquisitions accounted pooling interests method recorded accordance emerging issues task force eitf 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring staff accounting bulletin 100 restructuring impairment charges certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf 953 recognition liabilities connection purchase business combination certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan formalized adopted management certain integration costs meet criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 accounting costs associated exit disposal activities account costs incurred restructuring activities standard liability cardinal health inc subsidiaries notes consolidated financial statements exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring required company recognize liability restructuring costs date commitment exit plan business combinations fiscal 2003 january 1 2003 company completed acquisition syncor woodland hills californiabased company leading provider nuclear pharmacy services acquisition accounted purchase method accounting company issued approximately 125 million common shares valued approximately 780 million syncor stockholders syncors outstanding stock options converted options purchase approximately 30 million common shares company also assumed approximately 120 million debt due acquisition connection acquisition certain operations syncor sold see note 19 operations integrated companys existing nuclear pharmacy services business component pharmaceutical technologies services segment part restructuring integration plans company accrued part acquisition adjustments liability 121 million related employee termination relocation costs 77 million related closing duplicate facilities june 30 2003 company paid 65 million employee related costs payments made associated facility closures allocation purchase price yet finalized subject adjustment company still assessing value acquired discontinued operations preacquisition contingencies finalizing evaluation plans close relocate certain facilities certain matters preliminary allocation syncor purchase price resulted allocation goodwill 6875 million allocation identifiable intangible assets 387 million company valued intangible assets related customer relationships vendor agreements patents trademarks trade names software breakdown category follows supplemental pro forma results operations required disclosed impact company syncor acquisition material addition fiscal 2003 company also completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 144 million assumed liabilities acquired businesses including syncor approximately 3401 million consolidated financial statements include results operations business combinations date acquisition transactions including syncor occurred july 1 2000 results operations would differed materially reported results fiscal 2002 fiscal 2002 company completed several acquisitions individually material accounted purchase method accounting business combinations primarily focused expanding service offerings within pharmaceutical technologies services segment include contract pharmaceutical development integrated medical education aggregate purchase price paid primarily cash approximately 4180 million company issued approximately 03 million common shares stockholders outstanding stock options converted options purchase total approximately 10 million common shares assumed liabilities acquired businesses approximately 935 million including debt 111 million consolidated financial statements include results operations business combinations subsequent date acquisition transactions occurred july 1 2000 results operations would differed materially reported results fiscal 2001 february 14 2001 company completed merger transaction bindley accounted poolingofinterests merger transaction bindley company issued approximately 231 million common shares bindley stockholders bindleys outstanding stock options converted options purchase approximately 51 million common shares fiscal 2003 2002 2001 company recorded mergerrelated charges reflect transaction costs incurred result merger transaction bindley cardinal health inc subsidiaries notes consolidated financial statements addition fiscal 2001 company also completed several acquisitions individually material approximately 3749 million assumed liabilities acquired businesses approximately 1478 million including debt 250 million transactions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition transactions occurred july 1 2000 results operations would differed materially reported results special items mergerrelated costs following summary mergerrelated costs special items fiscal years ended june 30 2003 2002 2001 mergerrelated costs integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs recognized fiscal years shown primarily result merger acquisition transactions involving syncor blp magellan bindley bbmc allegiance scherer direct transaction costs fiscal 2001 company incurred direct transaction costs related merger transaction bindley accounted poolingofinterests expenses 208 million primarily included investment banking legal accounting professional fees associated merger employeerelated costs fiscal 2003 2002 2001 company incurred employeerelated costs associated certain merger acquisition transactions 187 million 237 million 462 million respectively costs primarily consist severance noncompete agreements transactionstay bonuses direct result mergers acquisitions addition types costs fiscal 2003 company incurred charge 88 million related approved plan curtail certain defined benefit pension plans within pharmaceutical technologies services segment curtailment resulted plan conform scherers employee benefit plans companys benefit plan structure time scherer merger pharmaceutical distribution center consolidation fiscal 2003 2002 2001 company recorded charges 227 million 524 million 103 million respectively primarily associated companys plans close consolidate total 16 bindley distribution centers bindleys corporate office one companys data centers result merger transaction bindley connection bindley related consolidations closures company incurred cardinal health inc subsidiaries notes consolidated financial statements employeerelated costs 32 million 75 million 05 million fiscal 2003 2002 2001 respectively arising primarily termination approximately 1250 employees addition exit costs related termination contracts lease agreements incurred fiscal 2003 2002 2001 82 million 36 million 98 million respectively also asset impairment charges 82 million 272 million respectively incurred fiscal 2003 2002 remaining 31 million 141 million incurred fiscal 2003 2002 respectively primarily related costs associated moving inventory assets consolidation distribution centers bindleys corporate office one companys data centers june 30 2003 company completed closures consolidations noted employees noted terminated asset impairments exit costs asset impairments exit costs fiscal 2003 2002 2001 54 million 90 million 85 million respectively primarily related costs associated lease terminations moving expenses asset impairments direct result merger acquisition transactions bbmc allegiance scherer integration costs integration costs fiscal 2003 2002 2001 276 million 468 million 323 million respectively included charges directly related integration operations previous merger acquisition transactions operations include limited information systems employee benefits compensation accountingfinance tax treasury internal audit risk management compliance administrative services sales marketing others costs included category generally relate expenses incurred integrate merged acquired companys operations systems companys preexisting operations systems special items distribution center closures fiscal 2001 company recorded special charge 50 million related rationalization certain pharmaceutical distribution centers approximately 44 million related asset impairments lease exit costs duplicate facility costs resulting companys decision consolidate certain distribution centers relocate modern distribution center remaining amount 06 million arose connection employeerelated costs associated termination approximately 100 employees primarily related closure distribution centers june 30 2001 restructuring plan completed manufacturing facility closures restructurings fiscal 2003 2002 2001 company recorded total 402 million 28 million 68 million respectively special charges related closure consolidation restructuring certain manufacturing facilities closures consolidations restructurings occurred within medical products services segment pharmaceutical technologies services segment within medical products services segment three manufacturing facility closures completed fiscal 2003 also certain operations within three facilities identified consolidation rationalization total 236 million recorded related closures consolidations rationalizations 103 million related severance costs due termination approximately 1475 employees approximately 600 employees terminated prior june 30 2003 remaining employees expected terminated fiscal 2004 asset impairment charges 94 million incurred also exit costs 39 million incurred primarily related dismantling moving machinery equipment plans consolidate rationalize three facilities discussed expected completed fiscal 2004 company incurred special charges 137 million related restructuring consolidation closure three manufacturing facilities within pharmaceutical technologies services segment fiscal 2003 one restructuring completed fiscal 2003 two consolidationsclosures expected completed september 30 2003 asset impairment charges 57 million incurred related closures also exit costs 32 million incurred primarily related dismantling machinery equipment transferring certain technologies facilities part restructuring plan remaining 48 million represents employeerelated costs primarily severance related termination approximately 400 employees june 30 2003 majority employees terminated addition fiscal 2003 2002 2001 company recorded special charges 29 million 28 million 68 million respectively related restructuring certain health nutritional manufacturing facilities fiscal 2003 29 million primarily represents costs associated transferring validating health nutrition operations processes rationalized asset impairment costs 18 million incurred fiscal 2002 primarily due writeoff obsolete inventory created rationalization facilities approximately 09 million 22 million related lease exit costs fiscal 2002 2001 respectively remaining 01 million 46 million fiscal 2002 2001 respectively related employeerelated costs associated termination approximately 185 employees primarily cardinal health inc subsidiaries notes consolidated financial statements manufacturing certain management positions june 30 2003 employees terminated restructuring plan expected completed first quarter fiscal 2004 employeerelated costs fiscal 2003 company incurred employeerelated costs 69 million primarily due integration reorganization certain operations within pharmaceutical technologies services segment company recorded charges 50 million related restructuring majority represents severance accrued upon communication severance terms employees restructuring plan completed june 30 2003 resulted termination approximately 185 employees remaining 19 million primarily due restructuring certain operations within pharmaceutical distribution provider services segment significant portion charges represent severance accrued time severance terms communicated employees restructuring plan completed june 30 2003 resulted termination approximately 30 employees fiscal 2002 company incurred employeerelated costs 152 million primarily associated restructuring distribution custom kitting operations medical products services segment significant portion charges recorded represent severance accrued upon communication severance terms employees fourth quarter fiscal 2002 restructuring plan completed fiscal 2003 resulted termination approximately 600 employees asset impairments fiscal 2003 company incurred asset impairment charges 199 million 101 million related asset impairment charges primarily goodwill resulting companys decision exit certain north american commodity operations pharmaceutical technologies services segment additional 78 million related writeoff design tooling costs remaining 20 million primarily includes nonemployee related costs associated certain restructuring activities initiated company outside manufacturing facilities litigation settlements net fiscal 2003 2002 company recorded income net litigation settlements 1015 million 113 million respectively settlements resulted primarily recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years total recovery june 30 2003 1382 million net attorneys fees payments due interested parties expenses withheld total recovery 1029 million 133 million recorded special items fiscal 2003 2002 respectively remaining 220 million previously recorded 100 million second quarter fiscal 2001 120 million first quarter fiscal 2002 reflected reduction cost goods sold consistent classification original overcharge based minimum amounts estimated recoverable based facts circumstances available time recorded company still pending claims smaller vitamin manufacturers total amount future recovery currently estimable company believes likely material amount future recoveries recorded special item period settlement reached fiscal 2001 bindley recorded benefit approximately 50 million related reduction litigation settlement accrual previously recorded amount final settlement lower originally anticipated accrual rollforward following table summarizes activity related liabilities associated companys special items 1 amounts represent items either expensed incurred accrued according generally accepted accounting principles amounts include net litigation settlement income recorded fiscal 2003 2002 1029 million 133 million respectively recorded special items cardinal health inc subsidiaries notes consolidated financial statements 2 result changing bindleys fiscal year end calendar year end june 30 bindleys results operations six months ended june 30 2000 included combined results operation reflected adjustment consolidated statements shareholders equity see note 1 discussion bindleys six months ended june 30 2000 bindley recorded special charge 263 million 257 million net tax related litigation accrual settlement summary fiscal 2003 net effect various special items reduced reported earnings continuing operations 332 million 14119 million reduced reported diluted earnings per common share continuing operations 007 per share 312 per share fiscal 2002 net effect various special items reduced reported earnings cumulative effect change accounting 871 million 11263 million see note 14 discussion cumulative effect change accounting reduced reported diluted earnings per common share cumulative effect change accounting 019 per share 245 per share fiscal 2001 net effect various special charges reduced reported net earnings 853 million 8574 million reduced reported diluted earnings per common share 019 per share 188 per share certain merger acquisition related restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred company estimates incur additional costs associated various merger acquisition restructuring activities entered date totaling approximately 90 million approximately 60 million net tax future periods estimate subject adjustment pending resolution syncor acquisition related litigation contingencies company believes incur costs order properly integrate rationalize operations portion represents facility rationalizations implementing efficiencies regard among things information systems customer systems marketing programs administrative functions amounts charged expense incurred 3 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions future minimum lease payments received pursuant salestype leases next five fiscal years thereafter fiscal 2003 company entered two separate agreements transfer ownership certain lease receivables along security interest related leased equipment leasing subsidiary thirdparty bank net book value leases sold 3560 million see note 8 additional information fiscal 2002 pyxis funding ii acquired pool salestype leases pyxis funding sold undivided interest leases third party investor approximately 1500 million see note 8 additional information cardinal health inc subsidiaries notes consolidated financial statements 4 shortterm borrowings longterm obligations notes payable banks company entered various unsecured uncommitted lineofcredit arrangements allow borrowings 1221 million june 30 2003 various money market rates june 30 2003 nothing outstanding arrangements 08 million weighted average interest rate 33 outstanding june 30 2002 total available unused lines credit june 30 2003 1221 million longterm obligations longterm obligations consist following millions 400 445 600 625 650 notes 675 notes due 2011 represent unsecured obligations company 675 notes due 2004 represent unsecured obligations scherer guaranteed company 730 notes 780 700 debentures represent unsecured obligations allegiance guaranteed company obligations subject sinking fund redeemable prior maturity except 700 debentures included put options expired september 15 2003 without put options exercised interest paid pursuant terms notes structurally subordinated liabilities companys subsidiaries including trade payables 53 billion 4000 million preferred debt securities fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity spe exclusively engaged purchasing trade receivables making loans company spe consolidated company issued 400 million preferred variable debt securities parties affiliated company fiscal 2001 preferred debt securities classified longterm debt companys consolidated balance sheet preferred debt securities must retired redeemed spe company creditors access spes receivables june 30 2003 2002 spe owned approximately 4636 million 5347 million respectively receivables included companys consolidated balance sheet effective interest rate june 30 2003 2002 281 341 respectively loans made company breaches certain representations warranties covenants spe recourse general credit company june 30 2003 company commercial paper program providing issuance 15 billion aggregate maturity value commercial paper company also extendible commercial notes program providing issuance 1500 million extendible commercial notes company borrowings outstanding programs june 30 2003 2002 company also maintains shortterm credit facilities allow borrowings 1000 million june 30 cardinal health inc subsidiaries notes consolidated financial statements 2003 2002 210 million 224 million outstanding uncommitted facilities effective interest rate june 30 2003 2002 228 205 respectively company also unsecured bank credit facility provides aggregate 15 billion borrowings 7500 million expires march 26 2004 7500 million expires march 27 2008 facility expiring march 26 2004 allows company option extend maturity monies borrowed one year expiration facilities extended upon mutual consent company lending institutions credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2003 except 237 million standby letters credit issued behalf company june 30 2003 2002 commercial paper shortterm borrowings totaling 210 million 224 million respectively reclassified longterm reflecting companys intent ability existence unused credit facility refinance borrowings june 30 2003 company asset securitization facility available allows company sell receivables generated radiopharmaceutical operations whollyowned subsidiary turn sells receivables multiseller conduit administered third party bank securitization program allows company borrow 650 million company borrowings outstanding facility june 30 2003 fiscal 2003 company issued 500 million 400 notes due 2015 proceeds debt issuance used general corporate purposes including working capital expenditures acquisitions investments repurchases debt equity securities issuance company capacity issue approximately 500 million additional equity debt securities pursuant effective shelf registration statements filed securities exchange commission fiscal 2002 company issued 300 million 445 notes due 2005 proceeds debt issuance used toward repayment portion companys indebtedness general corporate purposes including working capital expenditures acquisitions investments certain longterm obligations collateralized property equipment company aggregate book value approximately 10 million june 30 2003 maturities longterm obligations future fiscal years 5 financial instruments interest rate risk management company exposed impact interest rate changes companys objective manage impact interest rate changes earnings cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2003 2002 company held payfixed interest rate swaps hedge variability cash flows related changes interest rates borrowing costs variablerate debt contracts classified cash flow hedges mature january 2004 company adjusts payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted interest rate payments hedged company anticipates contracts continue effective gainloss deferred comprehensive income recognized immediately earnings contracts longer effective forecasted transactions expected occur company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2003 2002 company also held payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2015 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded incomeexpense cardinal health inc subsidiaries notes consolidated financial statements following table represents notional amount hedged fair value interest rate swaps outstanding june 30 2003 2002 included assetsliabilities amount net gainloss payfloating interest rate swaps recognized incomeexpense fiscal 2003 2002 june 30 2003 2002 company net deferred losses payfixed interest rate swaps 35 million 98 million respectively recorded comprehensive income fiscal 2003 2002 company recognized losses 119 million 29 million respectively within incomeexpense related interest rate swaps counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates companys objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenues expenses gains losses contracts offset changes value underlying transactions occur june 30 2003 2002 company held forward contracts expiring june 2005 june 2003 respectively hedge probable firmly committed revenues expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged european euro british pound swiss franc mexican peso thai bhat june 30 2003 2002 company also held forward contracts expiring september 2003 july 2002 respectively hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values incomeexpense directly offsetting adjustment foreign currency asset liability cardinal health inc subsidiaries notes consolidated financial statements following table represents notional amount hedged value forward contracts outstanding june 30 2003 2002 included assets liabilities amount net gainloss related fair value forward contracts recognized incomeexpense fiscal 2003 2002 june 30 2003 2002 company net deferred gains related forward contract cash flow hedges 142 million 150 million respectively recorded comprehensive income fiscal 2003 2002 company recognized losses 122 million 76 million respectively within net earnings related forward contracts incomeloss recorded forward contract fair value hedge offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense end period company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2003 2002 counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2003 2002 approximate fair value shortterm maturities items cash balances invested accordance companys investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value companys longterm obligations 29261 million 23172 million compared carrying amounts 27006 million 22244 million june 30 2003 2002 respectively fair value companys longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss companys derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments cardinal health inc subsidiaries notes consolidated financial statements 6 income taxes consolidated us income continuing operations income taxes cumulative effect change accounting millions provision income taxes continuing operations cumulative effect change accounting consists following millions reconciliation provision based federal statutory income tax rate companys effective income tax rate continuing operations cumulative effect change accounting follows provision made us additional foreign taxes 7509 million undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practicable estimate amount tax might payable eventual remittance earnings cardinal health inc subsidiaries notes consolidated financial statements deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions amounts classified consolidated balance sheets follows millions company state net operating loss carryforwards 7058 million june 30 2003 valuation allowance 207 million june 30 2003 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain state net operating loss carryforwards expire 2023 expiring state net operating loss carryforwards required valuation allowances adjusted annually june 30 2003 company foreign tax credit carryforwards 65 million expire 2007 application valuation allowance described company anticipates limitations apply respect utilization foreign tax credits net deferred income tax assets described taxsharing agreement baxter international inc baxter allegiance pay increases reimbursed decreases net deferred tax assets transferred date baxter spinoff allegiance increases decreases may result audit adjustments baxters prior period tax returns 7 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit plans see 642 million 590 million 577 million fiscal years ended june 30 2003 2002 2001 respectively cardinal health inc subsidiaries notes consolidated financial statements defined benefit plans company several defined benefit plans covering substantially scherer salaried hourly employees companys domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations following tables provide reconciliation change projected benefit obligation change plan assets net amount recognized consolidated balance sheets based measurement date march 31 millions cardinal health inc subsidiaries notes consolidated financial statements projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1610 million 1512 million 740 million respectively june 30 2003 1235 million 1114 million 632 million respectively june 30 2002 components companys net periodic benefit costs follows millions 1 amount primarily represents amortization unrecognized actuarial losses well amortization transition obligation prior service costs fiscal 2003 2002 weighted average actuarial assumptions used determining funded status information net periodic benefit cost information discount rate 60 63 expected return plan assets 69 72 rate compensation increase 38 40 respectively 8 balance sheet transactions fiscal 2003 company entered two separate agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank amounts 1560 million 2000 million immaterial gain recognized transactions classified operating revenue within companys results operations order qualify sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities company formed two whollyowned special purpose bankruptcyremote entities spes pyxis spes formed two whollyowned qualified special purpose entities qspes effectuate removal lease receivables companys consolidated financial statements accordance sfas 140 company consolidates spes consolidate qspes spes qspes separate legal entities maintain separate financial statements company pyxis assets spes qspes available first foremost satisfy claims respective creditors company formed pyxis funding llc pyxis funding sole purpose acquiring pool salestype leases related leased equipment pyxis ultimately selling lease receivables multiseller conduit administered cardinal health inc subsidiaries notes consolidated financial statements thirdparty bank pyxis funding whollyowned special purpose bankruptcyremote subsidiary pyxis funding ii llc pyxis funding ii formed sole purposes acquiring lease receivables salestype leases pyxis funding issuing pyxis funding iis notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii whollyowned qualified special purpose subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities accordingly related receivables included companys consolidated financial statements required us generally accepted accounting principles company consolidates pyxis funding consolidate pyxis funding ii pyxis funding ii qualified special purpose entity defined sfas 140 pyxis funding pyxis funding ii separate legal entities maintain separate financial statements assets pyxis funding pyxis funding ii available first foremost satisfy claims creditors notes held investor principal balance 515 million june 30 2003 investor provided credit protection form 20 129 million overcollateralization august 31 2002 notes held investor principal balance 954 million investor provided credit protection 238 million june 30 2003 company 2800 million committed receivables sales facility programs medicine shoppe capital corporation mscc cardinal health funding chf mscc chf organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance generally accepted accounting principles mscc chf separate legal entities company medicine shoppe financial shared services business formerly griffin sale receivables mscc chf qualifies sale treatment sfas 140 accounting transfers servicing financial assets extinguishment liabilities accordingly related receivables included companys consolidated financial statements total amount receivables sold mscc program 54 million 88 million june 30 2003 2002 respectively outstanding sold receivables chf program june 30 2003 2002 recourse provided mscc program requirement mscc retain 20 subordinated interest sold receivables subordinated interests 13 million 22 million june 30 2003 2002 respectively subsequent june 30 2003 company elected terminate liquidate mscc result company incurred immaterial loss recourse provided chf program requirement chf retain percentage subordinated interest sold receivables percentage determined based upon composition receivables sold june 30 2003 receivables sold program result subordinated interest outstanding companys aggregate cash flows related receivable transfers follows fiscal 2003 2002 2001 pyxis mscc chf required repurchase receivables sold determined representations warranties regard related receivables accurate date sold company entered operating lease agreements several banks construction various new facilities equipment initial terms lease agreements varied maturity dates ranging may 2004 june 2013 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2003 amount expended acquire andor construct facilities 5013 million agreements provide maximum fundings 5964 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts cardinal health inc subsidiaries notes consolidated financial statements drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2003 weighted average interest rate agreements approximated 184 companys minimum annual lease payments agreements june 30 2003 approximately 92 million 9 commitments contingent liabilities future minimum rental payments operating leases excluding referenced note 8 initial remaining noncancelable lease terms excess one year june 30 2003 rental expense relating operating leases including referenced note 8 approximately 1028 million 776 million 784 million fiscal 2003 2002 2001 respectively sublease rental income material period presented herein latex litigation september 30 1996 baxter international inc baxter subsidiaries transferred allegiance subsidiaries baxters us health care distribution business surgical respiratory therapy business health care costsaving business well certain foreign operations allegiance business connection spinoff allegiance business baxter baxterallegiance spinoff connection spinoff allegiance merged subsidiary company february 3 1999 agreed indemnify baxter defend indemnify baxter healthcare corporation bhc contemplated agreements baxter allegiance expenses potential liabilities associated claims arising allegiance business including certain claims alleged personal injuries result exposure natural rubber latex gloves company party lawsuits agreed pay settlements plaintiffs june 30 2003 233 lawsuits pending bhc andor allegiance involving allegations sensitization natural rubber latex products cases proceeding trial total dollar amount potential damages cannot reasonably quantified plaintiffs plead damages extreme excess reasonably expect recover plead modest amount include request specific dollar amount including cases ask specific damages damage requests per action ranged 10000 240 million cases name multiple defendants addition baxterallegiance average number defendants per case exceeds twentyfive based significant differences range damages sought based multiple number defendants lawsuits allegiance cannot reasonably quantify total amount possibleprobable damages therefore allegiance company believe numbers considered indication either reasonably possible probable liability since inception litigation baxterallegiance named defendant 833 cases fiscal year ended june 30 2002 allegiance began settling lawsuits greater frequency june 30 2003 allegiance resolved seventy percent cases twenty percent lawsuits resolved concluded without liability baxterallegiance individual claim settled material amount settled claims aggregate comprised material amount due number claims filed ongoing defense costs incurred allegiance believes probable incur substantial legal fees related resolution cases still pending although company continues believe cannot reasonably estimate potential cost settle lawsuits company believes impact lawsuits upon allegiance immaterial companys financial position liquidity results operations could range 0 20 million net insurance proceeds range reflecting companys reasonable estimation potential insurance coverage defense indemnity costs company believes substantial portion liability covered insurance policies allegiance financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency company allegiance continue believe insurance recovery probable shareholder litigation cardinal health november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action march 21 2003 company filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate companys cardinal health inc subsidiaries notes consolidated financial statements proposed acquisition syncor b determine propriety indemnifying monty fu former chairman syncor company filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants includes new allegations company improperly recognized revenue december 2000 september 2001 related settlements certain vitamins manufacturers company filed motion dismiss second amended complaint company believes allegations made second amended complaint without merit intends vigorously defend action company currently believe impact lawsuit material adverse effect companys financial position liquidity results operations company currently believes insurance coverage available companys directors officers liability insurance policies effect time action filed shareholder litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws collectively referred federal securities actions filed united states district court central district california federal securities actions purport brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 allege among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncors international business omitting mention certain allegedly improper payments syncors foreign customers thereby artificially inflating price syncor shares lead plaintiff appointed court federal securities actions consolidated amended complaint filed may 19 2003 naming syncor 12 individuals former syncor officers directors employees syncor filed motion dismiss consolidated amended complaint august 1 2003 november 14 2002 two additional actions filed individual stockholders syncor court chancery state delaware actions seven syncors nine directors director defendants complaints delaware actions identical alleged director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncors employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments including costs federal securities actions described single purported class action claim seeking recover damages behalf holders syncor shares amount losses sustained consideration received merger syncor stockholders reduced november 22 2002 plaintiff one two delaware actions filed amended complaint adding defendants company subsidiary mudhen merger corporation remaining two syncor directors hereafter included term director defendants november 18 2002 two additional actions filed individual stockholders syncor superior court california county los angeles california actions director defendants complaints california actions allege director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncors employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments amended complaint filed december 6 2002 one cases purporting allege direct claims behalf class shareholders defendants motion stay california actions pending resolution delaware actions discussed granted april 30 2003 proposed class action complaint filed april 8 2003 company syncor certain officers employees company purported participant syncor employees savings stock ownership plan suit alleges defendants breached certain fiduciary duties owed employee retirement income security act erisa actions described heading shareholder litigation syncor early stages impossible predict outcome proceedings impact syncor company however company currently believe impact actions material adverse effect companys financial position liquidity results operations company syncor believe allegations made complaints described without merit intend vigorously defend actions informed individual director officer defendants deny liability claims asserted actions believe meritorious defenses intend vigorously defend actions company syncor currently believe portion liability covered insurance cardinal health inc subsidiaries notes consolidated financial statements policies company syncor financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs although ultimate resolution litigation referenced herein cannot forecast certainty company intends vigorously defend currently believe outcome pending litigation material adverse effect companys consolidated financial statements 10 shareholders equity june 30 2003 2002 companys authorized capital shares consisted 750 million class common shares without par value b 5 million class b common shares without par value c 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2003 2002 january 2003 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 86 million common shares aggregate cost approximately 500 million repurchase completed february 2003 repurchased shares placed treasury shares used general corporate purposes august 2002 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 78 million common shares aggregate cost approximately 500 million repurchase completed january 2003 repurchased shares placed treasury shares used general corporate purposes september 2001 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 83 million common shares aggregate cost approximately 500 million repurchase completed august 2002 repurchased shares placed treasury shares used general corporate purposes 11 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivables lease receivables exposed concentration credit risk customers retail health care sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors health care industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations following table summarizes companys customers individually account least 10 companys operating revenue customers serviced primarily pharmaceutical distribution provider services medical products services segments cardinal health inc subsidiaries notes consolidated financial statements following table summarizes companys customers individually account least 10 companys bulk deliveries customers serviced primarily pharmaceutical distribution provider services segment june 30 2003 2002 cvs walgreens accounted 18 8 respectively companys gross trade receivable balance novation premier group purchasing organizations gpo companys trade receivable balances individual members gpo therefore significant concentration credit risk exists organizations 12 stock options restricted shares company maintains several stock incentive plans benefit certain officers directors employees options granted generally vest three years exercisable periods ten years date grant price equals fair market value date grant certain plans subject shareholder approval plans authorized solely board directors board following description plans authorized shareholders broadlybased equity incentive plan amended broadlybased equity incentive plan adopted board effective november 15 1999 amended pursuant resolutions board adopted august 8 2001 plan provides grants form nonqualified stock options restricted shares restricted share units employees company aggregate number common shares authorized issuance pursuant plan 360 million shares generally 10 authorized amount issuable form restricted shares restricted share units restriction period less three years broadlybased equity incentive plan qualified section 401a internal revenue code subject provisions employee retirement income security act 1974 erisa outside directors equity incentive plan outside directors equity incentive plan adopted board effective may 10 2000 plan reserves makes available distribution aggregate 15 million common shares grants form nonqualified stock options restricted shares members board serve employees company plan qualified section 401a internal revenue code subject provisions erisa following table summarizes plans june 30 2003 cardinal health inc subsidiaries notes consolidated financial statements following summarizes stock option transactions company plans july 1 2000 june 30 2003 giving retroactive effect conversions options connection merger transactions stock splits millions except per common share amounts additional information concerning stock options outstanding june 30 2003 presented company accounts plans accordance apb opinion 25 compensation cost recognized see note 1 table illustrating effect net income earnings per share company adopted fair value recognition provisions sfas 123 accounting stock based compensation weighted average fair value options granted fiscal 2003 2002 2196 2595 respectively fiscal 2001 weighted average fair value options granted gives retroactive effect conversion stock options related stock splits mergers accounted pooling interests weighted average fair value options granted fiscal 2001 2342 cardinal health inc subsidiaries notes consolidated financial statements fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods market values restricted shares restricted share units awarded company recorded component shareholders equity accompanying consolidated balance sheets restricted shares amortized expense period participants perform services generally one seven years restricted share units generally amortized fiveyear vesting period june 30 2003 approximately 03 million shares units remained restricted subject forfeiture company employee stock purchase plans sale 120 million companys common shares authorized employees employed company least thirty days eligible contribute 1 15 eligible compensation purchase price determined lower 85 percent closing market price first day offering period 85 percent closing market price last day offering period given calendar year two offering periods january 1 june 30 july 1 december 31 june 30 2003 subscriptions 04 million shares outstanding june 30 2003 22 million shares issued employees plans 13 earnings per share following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2003 potentially dilutive employee stock options antidilutive fiscal 2003 2002 2001 225 million 09 million 57 million respectively 14 change accounting first quarter fiscal 2002 method recognizing revenue pharmacy automation equipment changed recognizing revenue units delivered customer recognizing revenue units installed customer site management believes change accounting method provide objectively determinable method revenue recognition addition company implemented changes better service customers leverage operational efficiencies company recorded cumulative effect change accounting 701 million net tax 446 million consolidated statement earnings first quarter fiscal 2002 tax dilutive impact cumulative effect 015 per diluted share effect change fiscal year ended june 30 2002 reduce net earnings cumulative effect approximately 186 million change reduced diluted earnings per share 004 fiscal year ended june 30 2002 proforma effect accounting change prior periods presented required information available cardinal health inc subsidiaries notes consolidated financial statements 15 goodwill intangible assets following table summarizes changes carrying amount goodwill three years ended june 30 2003 total reporting segment see note 2 discussion fiscal 2003 goodwill writeoff primarily goodwill additions fiscal 2003 related syncor acquisition see note 2 intangible assets periods presented subject amortization intangible assets amortized using straightline method periods range five forty years detail intangible assets class three years ended june 30 2003 follows additions intangible assets fiscal 2003 primarily relate syncor acquisition see note 2 amortization expense years ended june 30 2003 2002 2001 including goodwill amortization fiscal 2001 67 million 30 million 506 million respectively amortization expense estimated millions cardinal health inc subsidiaries notes consolidated financial statements 16 segment information companys operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services fiscal 2003 company reclassified central pharmacy services inc cord logistics inc pharmaceutical distribution provider services segment pharmaceutical technologies services segment therefore restated segments financial results prior period financial results presented form 10k also restated reflect reclassification addition completion syncor acquisition january 1 2003 syncor included within pharmaceutical technologies services segment pharmaceutical distribution provider services segment involves distribution broad line pharmaceuticals health care specialty pharmaceutical products items typically sold hospitals retail drug stores health care providers addition segment provides services health care industry integrated pharmacy management temporary pharmacy staffing well franchising apothecarystyle retail pharmacies medical products services segment involves manufacture medical surgical laboratory products distribution products well products manufactured internally hospitals physician offices surgery centers health care providers pharmaceutical technologies services segment provides services health care industry design manufacture proprietary drug delivery systems including softgel capsules controlled release forms zydisr fast dissolving wafers advanced sterile delivery technologies also provides comprehensive packaging radiopharmaceutical manufacturing pharmaceutical development analytical science expertise well medical education marketing contract sales services automation information services segment provides services hospitals health care providers focusing meeting customer needs unique proprietary automation information products services addition segment markets pointofuse supply systems nonhealth care market segment also provides information systems analyze clinical outcomes clinical pharmaceutical utilization information company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies following tables include revenue operating earnings business segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2003 2002 2001 cardinal health inc subsidiaries notes consolidated financial statements following tables include depreciation amortization expense capital expenditures total assets fiscal years ended june 30 2003 2002 2001 segment well reconciling items necessary total amounts reported consolidated financial statements 1 pharmaceutical distribution provider services segments operating revenues derived three main product categories product categories respective contributions operating revenue follows cardinal health inc subsidiaries notes consolidated financial statements 2 pharmaceutical technologies services segments operating revenues derived three main product categories product categories respective contributions operating revenue follows product category 2003 2002 2001 manufactured products radiopharmaceuticals 69 68 71 packaged products 19 27 26 products services 12 5 3 total 100 3 corporate operating revenue primarily consists foreign currency translation adjustments 4 beginning fiscal 2003 company began classifying outofpocket expenses received recently acquired sales marketing services business within bulk deliveries customer warehouses line item customer contractually required reimburse company expenses company generate margin reimbursements 5 corporate operating earnings primarily consist special items 399 million 1386 million 1249 million fiscal years ended june 30 2003 2002 2001 respectively unallocated corporate administrative expenses investment spending see note 2 discussion special items addition beginning fiscal 2003 company began expanding use shared service center previously supported medical products services segment benefit support companywide initiatives business segments accordingly cost shared service center previously reported within medical products services segment classified within corporate operating earnings fiscal 2003 consistent internal segment reporting cost services fiscal 2003 approximately 190 million costs included within corporate operating earnings portion included general corporate cost allocation segment 6 total depreciation amortization expense declined fiscal 2002 compared fiscal 2001 result adoption sfas 142 goodwill intangible assets july 1 2001 sfas 142 purchased goodwill intangible assets indefinite lives longer amortized see additional information notes 1 15 7 corporate assets include primarily corporate cash equivalents corporate property equipment net unallocated deferred taxes following table presents revenue operating bulk longlived assets geographic area millions longlived assets include property equipment net accumulated depreciation cardinal health inc subsidiaries notes consolidated financial statements 17 selected quarterly financial data unaudited following selected quarterly financial data millions except per common share amounts fiscal 2003 2002 cardinal health inc subsidiaries notes consolidated financial statements discussed note 2 mergerrelated costs special items recognized various quarters fiscal 2003 2002 following table summarizes impact costs net earnings diluted earnings per common share quarters recorded millions except per common share amounts 18 guarantees november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others see note 1 interpretation enhances guarantors disclosure requirements interim annual financial statements regarding obligations certain guarantees company adopted enhanced disclosure requirements second quarter fiscal 2003 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 company contingent commitments related certain operating lease agreements see note 8 operating leases consist certain real estate equipment used operations company event termination operating leases range length one ten years company guarantees reimbursement portion unrecovered property cost june 30 2003 maximum amount company could required reimburse 3771 million based upon current information company believes proceeds sale properties operating lease agreements would exceed contingent obligation accordance fasb interpretation 45 company recorded 48 million related guarantees ordinary course business company time agrees indemnify certain parties agreements company including acquisition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount companys aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact companys results operations 19 discontinued operations connection merger transaction involving syncor company acquired certain operations syncor discontinued prior acquisition syncor announced discontinuation certain operations including medical imaging business cmi certain overseas operations company continuing discontinuation operations added additional international noncore domestic businesses discontinued operations accordance sfas 144 accounting impairment disposal longlived assets net assets results operations businesses presented discontinued operations company currently overseeing planned sale discontinued operations actively marketing businesses company expects sell remaining discontinued operations january 1 2004 net assets discontinued operations included within pharmaceutical technologies cardinal health inc subsidiaries notes consolidated financial statements services segment results discontinued operations fiscal year ended june 30 2003 summarized follows interest expense allocated discontinued operations fiscal year ended june 30 2003 05 million interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets syncor june 30 2003 major components assets liabilities discontinued operations follows cash flows generated discontinued operations immaterial company therefore disclosed separately 20 subsequent events august 1 2003 companys board directors authorized repurchase common shares aggregate amount 10 billion pursuant authorization company repurchased approximately 170 million common shares aggregate cost approximately 10 billion repurchase completed first quarter fiscal 2004 repurchased shares placed treasury shares used general corporate purposes september 11 2003 ei du pont de nemours company dupont filed lawsuit company others united states district court middle district tennessee complaint alleges various causes action company relating production sale surgical drapes gowns companys medical products services segment duponts claims generally fall categories breach contract false advertising patent infringement complaint request specific amount damages company believes claims made complaint without merit intends vigorously defend action company believes owed defense indemnity codefendants respect duponts claim patent infringement company currently believe impact lawsuit material adverse effect companys financial position liquidity results operation item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries company june 30 2004 2003 related consolidated statements earnings shareholders equity cash flows three years period ended june 30 2004 audits also included financial statement schedule listed index item 15a2 consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position company june 30 2004 2003 consolidated results operations cash flows three years period ended june 30 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited adjustments described note 1 consolidated financial statements applied restate opening retained earnings july 1 2002 opinion adjustments appropriate properly applied discussed note 16 consolidated financial statements company changed method recognizing cash discounts effective beginning fiscal year 2004 first quarter fiscal 2002 company changed method recognizing revenue pharmacy automation equipment ernst young llp ernst young llp columbus ohio october 25 2004 cardinal health inc subsidiaries consolidated statements earnings millions except per common share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 accounting investigations restatement previously reported october 2003 securities exchange commission sec initiated informal inquiry regarding cardinal health inc company secs request sought historical financial related information including limited accounting treatment certain recoveries vitamin manufacturers secs request sought variety documentation including companys accounting records fiscal 2001 fiscal 2003 well notes memoranda presentations email correspondence budgets forecasts estimates connection secs informal inquiry audit committee board directors company commenced internal review april 2004 assisted independent counsel may 6 2004 company notified sec converted informal inquiry formal investigation june 21 2004 part secs formal investigation company received additional sec subpoena included request production documents relating revenue classification methods used classification companys pharmaceutical distribution business either operating revenue bulk deliveries customer warehouses addition company learned us attorney southern district new york also commenced inquiry respect company understands relates revenue classification issue october 12 2004 connection secs formal investigation company received subpoena sec requesting production documents relating compensation information specific current former employees officers company continues respond secs investigation audit committees internal review provide information required september october 2004 audit committee reached certain conclusions respect findings date internal review conclusions regarding certain items impact revenue earnings relate four primary areas focus 1 classification sales customer warehouses operating revenue bulk deliveries customer warehouses within companys pharmaceutical distribution provider services segment 2 disclosure companys practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment 3 timing revenue recognition within companys automation information services segment 4 certain balance sheet reserve accrual adjustments identified internal review audit committees internal review respect financial statement impact matters reviewed date substantially complete connection conclusions audit committee determined financial statements company respect fiscal 2000 2001 2002 2003 well first three quarters fiscal 2004 restated reflect conclusions internal review date company continues respond secs investigation audit committees internal review assurance additional restatements required historical financial statements included form 10k change require amendment addition audit committee may identify new issues make additional findings receives additional information may impact companys financial statements scope restatements described form 10k conclusions audit committees internal review date follows revenue impact classification sales customer warehouses operating revenue bulk deliveries customer warehouses within companys pharmaceutical distribution provider services segment presented historically since 1998 pharmaceutical distribution provider services segments revenue classified two categories operating revenue bulk deliveries customer warehouses bulk deliveries customer warehouses historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer ships product directly customers warehouse product shipped customers warehouse company shortly received company put companys inventory either case bulk revenue bulk revenue product shipped customer bulk form received company manufacturers company previously since november 2001 followed internal policy distinguishing operating revenue bulk revenue based long product companys possession prior shipped customers product possession company 24 hours prior shipped customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue companys internal policy also provided customer orders bulk shipments filled inventory within companys warehouse deemed operating revenue order product placed manufacturer prior company receiving bulk order customer based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held beyond 24 hours pursuant internal policy shipments classified operating revenue four quarters within fiscal 2003 2002 impact practice previously quantified disclosed part companys reported operating revenue improper classification bulk revenue operating revenue impact companys previously reported total revenue operating net earnings periods see note 2 discussion matters cardinal health inc subsidiaries notes consolidated financial statements undisclosed earnings impact disclosure companys practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment historically company recognized cash discounts reduction cost products sold primarily upon payment vendor invoices cash discounts company receives vendors timely payment invoices company practice accelerating payment vendor invoices end certain reporting periods order accelerate recognition cash discounts effect improving operating results reporting periods although effect accelerated payments properly included companys reported earnings impact acceleration practice separately quantified disclosed periods company benefited practice net increase decrease net earnings result practice fiscal 2004 2003 2002 follows fourth quarter fiscal 2004 company changed accounting method recognizing cash discounts recognition primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale company purchased inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenues change retroactively effective beginning fiscal 2004 result company restated previously reported fiscal 2004 quarterly results reflect change see note 16 discussion change accounting revenue earnings impact timing revenue recognition within companys automation information services segment within automation information services segment companys revenue recognition policy equipment systems installed customers site recognize revenue companys installation obligations complete equipment functioning according material specifications users manual customer accepted equipment evidenced signing equipment confirmation document company learned concerns audit committees internal review equipment confirmation documents executed prior time installations complete revenue could recognized order assess implications premature execution equipment confirmations corresponding revenue recognition audit committee review included document process reviews including sample equipment confirmation forms b certifications selected employees involved installation process c interviews selected employees across regions within us various levels company interviews certain former employees company e interviews selected customers across regions within us inquiry indicated equipment confirmations particularly sales regions prematurely executed customers request certain company employees including certain situations inducements customer deferral payments offered obtain premature execution result material weakness internal controls company internal controls place assure equipment installations fact completed equipment confirmations executed company concluded impact actions follows equipment confirmations last several weeks quarter likely executed early customer due requests certain company employees evidence discovered fictitious sales recorded company revenue recognized early primarily one quarter cases installations completed following quarter impact companys financial results deemed material individual quarter annually cardinal health inc subsidiaries notes consolidated financial statements net impact premature revenue recognition assessed june 30 2004 based upon interviews customers june 30 2004 representing substantial percentage segments end quarter reported revenues resulting approximately 108 revenue last 10 days quarter recognized prematurely based upon extrapolation company recorded 83 million reduction revenue 53 million reduction operating earnings fourth quarter fiscal 2004 adjust premature revenue recognition determined occurred within quarter revenues operating earnings recognized first quarter fiscal 2005 company maintain accounting records allow determine precise impact matter prior quarters however investigation sufficient data accumulated independent accounting systems estimate impact using variety methods utilized solely test materiality prior periods necessarily indicative actual results would results june 30 2004 interviews applied prior years ie utilizing 108 exception rate utilized fourth quarter fiscal 2004 adjustment net increase decrease revenue operating earnings fiscal 2002 previously reported quarter fiscal 2003 2004 related percentage automation information services segments reported amounts would follows using different estimation methods methodology used derive table percentage change operating earnings periods noted would range less 1 high 66 two quarters estimated impact 5 first quarter fiscal 2003 negative impact 66 third quarter fiscal 2004 negative impact 55 company believes impact adjustments resulting estimation methods material previously reported results estimated adjustments distort trends revenue operating earnings growth previously reported would alter companys previous disclosures related automation information services segment company recently reiterated revenue recognition policy equipment systems installed customers site automation information services segment instructed employees strictly adhere policy company process implementing following corrective actions response initial conclusions adoption new customer contracts equipment confirmation forms clarify installation complete confirmation executed revision policies procedures equipment installation revenue recognition processes enhanced level internal training company employees involved equipment installation revenue recognition processes reemphasizing availability companys ethics compliance hotline reporting questions appropriateness companys business accounting practices including channels communication companys audit committee enhanced random audits companys equipment confirmation process random audits performed companys internal audit department procedures reviewed periodically tested independent auditors within next year expected system enhancements implemented allow automated audit installation equipment customers location cardinal health inc subsidiaries notes consolidated financial statements restated earnings certain balance sheet reserve accrual adjustments audit committees internal review included review determine periodend adjustments balance sheet reserve accounts accruals recorded fiscal 2000 fiscal 2004 properly recorded accordance generally accepted accounting principles gaap based upon audit committees internal review company determined various situations amount reserve b timing reserve recognition c timing reserve adjustments could substantiated error result financial statements certain prior fiscal quarters years restated company types balance sheet reserves accrual adjustments restated consist following 1 errors arising misapplication gaap errors primarily include reductions reserve accounts made periods subsequent period excess identified company b lastin firstout lifo inventory adjustment c change accounting policy dividends recognition declared versus paid 2 errors made previous periods identified appropriately corrected subsequent period discovered items reported prior period corrections time discovery deemed immaterial time however company restated prior financial statements correct items identified internal review 3 result discussions sec staff company decided reverse previous recognition estimated recoveries vitamin manufacturers amounts overcharged prior years recognize income recoveries special item period cash received manufacturers company recognized 100 million operating earnings 65 million net taxes second quarter fiscal 2001 120 million operating earnings 79 million net taxes first quarter fiscal 2002 based estimate amounts would subsequently received actual cash payments received manufacturers exceed amounts previously recorded fourth quarter fiscal 2002 sec staff previously advised company view company appropriate basis recognizing income advance receiving cash following table summarizes restatement impact previously reported net earnings defined fiscal 2004 2003 2002 cardinal health inc subsidiaries notes consolidated financial statements following table summarizes restatement impact previously reported earnings per common share amounts fiscal 2003 2002 company reduced june 30 2001 retained earnings balance 41460 million 336 million due restatement adjustments restatement amount consists 36 million decrease misapplication gaap 235 million decrease errors 65 million decrease vitamin litigation see note 19 restatement impact previously reported quarterly earnings per common share amounts fiscal 2004 2003 sec investigation us attorney inquiry audit committee internal review remain ongoing company continuing efforts respond secs investigation audit committees internal review provide information required company cannot predict outcome sec investigation us attorney inquiry outcome sec investigation us attorney inquiry related legal administrative proceedings could include institution administrative civil injunctive criminal proceedings well imposition fines penalties remedies sanctions 2 reclassifications presented historically since 1998 pharmaceutical distribution provider services segments revenue classified two categories operating revenue bulk deliveries customer warehouses bulk deliveries customer warehouses historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer ships product directly customers warehouse product shipped customers warehouse company shortly received company put companys inventory either case bulk revenue bulk revenue product shipped customer bulk form received company manufacturers company since november 2001 previously followed internal policy distinguishing operating revenue bulk revenue based long product companys possession prior shipped customers product possession company 24 hours prior shipped cardinal health inc subsidiaries notes consolidated financial statements customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue companys internal policy also provided customer orders bulk shipments filled inventory within companys warehouse deemed operating revenue order product placed manufacturer prior company receiving bulk order customer based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held beyond 24 hours pursuant internal policy shipments classified operating revenue four quarters within fiscal 2003 2002 impact practice previously quantified disclosed part companys reported operating revenue improper classification bulk revenue operating revenue impact companys previously reported total revenue operating net earnings periods following table shows amount bulk revenue estimated improperly classified operating revenue manner described impact adjusting bulk revenue operating revenue periods improper classifications occurred fiscal 2004 company decided aggregate revenue classes within form 10k operating revenue bulk deliveries customer warehouses combined periods presented total revenue total cost products sold presented single amounts consolidated statements earnings reclassifications effect previously reported total revenue related cost products sold operating earnings net earnings per share beginning form 10k information concerning portion companys revenue arises bulk revenue discussed companys managements discussion analysis financial condition results operations certain insignificant reclassifications made conform prior period amounts current presentation 3 summary significant accounting policies company leading provider products services supporting health care industry helping health care providers manufacturers improve efficiency quality health care june 30 2004 company conducted business within following four business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services see note 18 information related companys business segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries addition significant intercompany accounts transactions eliminated upon consolidation fiscal 2004 2003 2002 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related companys acquisitions provided note 4 preparation financial statements conformity gaap united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes estimates include limited inventory valuation allowance doubtful accounts goodwill intangible asset impairment vendor reserves restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1127 million 1153 million 1165 million cash payments income taxes 5663 million 2568 million 2460 million fiscal 2004 2003 2002 respectively see note 4 additional information regarding noncash investing activities cardinal health inc subsidiaries notes consolidated financial statements receivables trade receivables primarily comprised amounts owed company pharmaceutical health care service activities presented net allowance doubtful accounts 1191 million 1213 million june 30 2004 2003 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company write amounts deemed uncollectible established bad debt reserve company provides financing various customers financing arrangements range one year ten years interest rates generally fluctuate prime rate interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 354 million 308 million june 30 2004 2003 respectively current portions 172 million 149 million respectively included assets amounts reported net allowance doubtful accounts 41 million 45 million june 30 2004 2003 respectively company formed special purpose entities sole purpose buying receivables sales type leases various legal entities company selling receivables sales type leases certain multiseller conduits administered banks thirdparty investors see note 10 additional disclosure regarding offbalance sheet financing fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entitys receivables see note 6 additional information inventories majority inventories approximately 66 2004 68 2003 stated lower cost using lifo method market primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout fifo method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2004 2003 578 million 614 million respectively goodwill intangibles company accounts purchased goodwill intangible assets accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company performed annual impairment test fiscal 2004 result recognition impairment charges see note 17 additional disclosure regarding goodwill intangible assets property equipment property equipment stated cost depreciation expense financial reporting purposes primarily computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements 1 50 years machinery equipment 3 20 years furniture fixtures 7 years depreciation expense 2780 million 2490 million 2312 million fiscal 2004 2003 2002 respectively company expenses repairs maintenance expenditures incurred company capitalizes interest longterm fixed asset projects using rate 50 approximates companys weighted average interest rate longterm debt amount capitalized interest immaterial fiscal years presented accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal years ended june 30 2004 2003 largest component accrued liabilities deferred tax liabilities approximately 5302 million 5661 million respectively significant components accrued liabilities current taxes payable employee compensation related benefit accruals fiscal 2004 2003 current taxes payable 2864 million 2247 million respectively employee compensation related benefit accruals 3108 million 3736 million respectively cardinal health inc subsidiaries notes consolidated financial statements revenue recognition pharmaceutical distribution provider services segment records distribution revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances see sales returns allowances information segment also records bulk revenue defined transactions one following characteristics deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products b delivery products customer form products received manufacturer c warehouse customer warehouse process center deliveries customers large high volume full case quantities see notes 1 2 discussion bulk revenue segment also owns certain consignment inventory recognizes revenue inventory sold third party segments customer segment earns franchise origination fees apothecarystyle pharmacy franchisees franchise fees represent monthly fees based upon franchisees sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medical products services segment records distribution selfmanufactured medical product revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances see sales returns allowances information pharmaceutical technologies services manufacturing packaging revenue recognized either upon shipment delivery product accordance terms contract specify transfer title occurs radiopharmaceutical revenue recognized upon delivery product customer revenue services provided development sales marketing services recognized upon completion services drug delivery system revenue recognized upon shipment products customer nonproduct revenue includes annual exclusivity fees option fees extend exclusivity agreements milestone payments attaining certain regulatory approvals segment receives exclusivity payments certain manufacturers return commitment enter agreements manufacture competing products revenue related agreements recognized term exclusivity term option agreement unless particular milestone designated case revenue recognized obligations performance completed analytical science revenue fixed contracts recorded projects completed billed projects primarily shortterm duration certain contracts contain provisions price redetermination cost overruns amounts included service revenue realization assured amounts reasonably determined automation information services revenue recognized salestype leases pointofuse systems companys installation obligations complete equipment functioning according material specifications users manual customer accepted equipment evidenced signing equipment confirmation document point lease becomes noncancellable see note 16 additional information interest income salestype leases recognized revenue using interest method sales pointofuse systems recognized upon installation customer site revenue systems installed operating lease arrangements recognized lease term amounts become receivable according provisions lease cardinal health inc subsidiaries notes consolidated financial statements alaris medical systems inc alaris companys recently acquired subsidiary alaris recognizes revenue net allowance estimated returns credits upon delivery andor installation depending product transfer title risk loss occurred alaris frequently enters revenue arrangements multiple deliverables depending nature contract terms subject provisions sec staff accounting bulletin sab 104 revenue recognition emerging issues task force eitf issue 0021 revenue arrangements multiple deliverables statement position 972 software revenue recognition sales returns allowances pharmaceutical distribution revenue recorded net sales returns allowances pharmaceutical distribution business recognizes sales returns reduction revenue cost sales price cost respectively products returned pharmaceutical distribution business customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost sales accounting policy closely approximate would recorded sfas 48 revenue recognition right return exists applying provisions sfas 48 would materially change companys financial position results operations sales returns allowances pharmaceutical distribution business approximately 13 billion 12 billion 10 billion fiscal 2004 2003 2002 respectively distributed selfmanufactured medical product revenue recorded net sales returns allowances medical products services segment established reserve returned goods accordance sfas 48 reserve amount immaterial periods presented segments customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer sales returns allowances medical products services segment approximately 569 million 556 million 531 million fiscal 2004 2003 2002 respectively cash discounts cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold see note 16 information regarding cash discounts change accounting method adopted 2004 accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different companys original estimate may require adjustment shipping handling shipping handling costs included selling general administrative expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2503 million 2138 million 2119 million fiscal 2004 2003 2002 respectively shipping handling revenue received immaterial periods presented translation foreign currencies financial statements companys subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated separate component shareholders equity foreign currency transaction gains losses included consolidated statements earnings immaterial fiscal years ended june 30 2004 2003 2002 interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended accounting derivatives hedging activity standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders equity comprehensive income company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges cardinal health inc subsidiaries notes consolidated financial statements company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value interest expense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included interest expense remeasurement adjustment offset foreign currency forward contract settlements also classified interest expense interest rate swaps foreign currency forward contracts designated fair value hedges company generally use derivative instruments trading speculative purposes fiscal 2003 company entered one speculative interest rate swap transaction resulting gain approximately 67 million companys derivative contracts adjusted current market values period qualify hedge accounting sfas no133 periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities companys policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contracts fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related companys hedging contracts provided note 7 research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 565 million 569 million 651 million fiscal 2004 2003 2002 respectively income taxes accordance provisions sfas 109 accounting income taxes company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases companys assets liabilities provision made us income taxes undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries earnings per common share basic earnings per common share basic computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options computed using treasury stock method dividends excluding dividends paid entities company merged company paid cash dividends per common share 012 010 fiscal years ended june 30 2004 2003 2002 respectively recent financial accounting standards december 2003 financial accounting standards board fasb issued revision sfas 132 employers disclosures pensions postretirement benefits revision relates employers disclosures pension plans postretirement benefit plans revision alter measurement recognition provisions original sfas 132 revision requires additional disclosures regarding assets obligations cash flows net periodic benefit costs cardinal health inc subsidiaries notes consolidated financial statements pension plans defined benefit postretirement plans excluding certain disclosure requirements revised sfas 132 effective financial statements fiscal years ended december 15 2003 see note 9 companys disclosures december 2003 fasb issued revision interpretation 46 consolidation variable interest entities revised interpretation defines business enterprise must consolidate variable interest entity revised interpretation provisions effective variable interest entities commonly referred specialpurpose entities periods ending december 15 2003 revised interpretation provisions apply types variable interest entities financial statement periods ending march 15 2004 june 30 2004 company hold significant variable interest variable interest entity company primary beneficiary see note 6 discussion companys accounts receivable financing entity included consolidated financial statements company primary beneficiary variable interest entity adoption subsequent provisions interpretation material impact companys financial position results operations april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies financial accounting reporting requirements originally established sfas 133 derivative instruments hedging activities sfas 149 provides greater clarification characteristics derivative instrument contracts similar characteristics accounted consistently sfas 149 effective contracts entered modified june 30 2003 well hedging relationships designated june 30 2003 excluding certain implementation issues effective prior date sfas 133 adoption sfas 149 material effect companys financial position results operations cardinal health inc subsidiaries notes consolidated financial statements accounting stockbased compensation december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amends sfas 123 statement provides alternative methods transition voluntary change fair valuebased method accounting stockbased employee compensation amends disclosure requirements sfas 123 transition guidance annual disclosure provisions shown effective fiscal years ending december 15 2002 adoption statement material effect companys financial position results operations june 30 2004 company maintained several stock incentive plans benefit certain employees fully described note 14 company accounts plans accordance accounting principles bulletin apb 25 related interpretations except costs related restricted shares restricted share units compensation expense recognized net earnings options granted exercise price equal market value underlying stock date grant following tables illustrate effect net earnings per share company adopted fair value recognition provisions sfas 123 accounting stockbased compensation 1 total stockbased employee compensation expense adjusted include employee stock purchase plan expense 84 million 68 million 69 million fiscal years ended june 30 2004 2003 2002 respectively 2 company uses treasury stock method calculating diluted earnings per common share presented table treasury stock method diluted shares outstanding adjusted weightedaverage unrecognized compensation component company adopt sfas 123 information table revised respect option award previously granted companys chairman chief executive officer november 1999 information see note 14 cardinal health inc subsidiaries notes consolidated financial statements 4 business combinations special items mergerrelated costs policy companys special items primarily consist costs relating integration previously acquired companies costs restructuring operations improve productivity integration costs acquisitions accounted pooling interests method recorded accordance eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sab 100 restructuring impairment charges certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meeting criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 recognition liabilities connection purchase business combination certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan formalized adopted management certain integration costs meeting criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 accounting costs associated exit disposal activities account costs incurred restructuring activities standard liability exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 required company recognize liability restructuring costs date commitment exit plan company records settlements significant lawsuits infrequent nonrecurring unusual nature special items also company records time material charges onetime unusual infrequent nature special items business combinations fiscal 2004 june 28 2004 company acquired approximately 987 outstanding common stock alaris san diego californiabased company leading provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction acquisition extends companys portfolio market leading products services health care providers increases presence strategic markets outside united states complementary operations product lines distribution networks geographic presence acquisition enable company broaden integrated product service offerings better serve customers globally deliver comprehensive suite medication safety solutions acquisition accounted purchase method accounting cash transaction valued approximately 21 billion including assumption approximately 358 million debt agreement company agreed make cash tender offer acquire outstanding shares alaris common stock price 2235 per share alaris employees outstanding stock options either elected receive cash payment convert options option purchase companys common shares july 2004 certain alaris employees elected convert options right purchase total approximately 06 million common shares company preliminary allocation alaris purchase price resulted allocation goodwill approximately 15 billion allocation identifiable intangible assets 4132 million company valued intangible assets related trademarks trade names patents customer relationships detail category follows given size timing acquisition allocation purchase price yet finalized subject adjustment company worked thirdparty valuation expert determine fair value inprocess research development iprd fair value identifiable intangible assets required sfas 141 business combinations cardinal health inc subsidiaries notes consolidated financial statements amounts assigned tangible intangible assets used research development projects alternate future use charged expense acquisition date company recorded charge 127 million within special items companys consolidated statement earnings estimate acquired iprd supplemental pro forma results operations disclosed impact company alaris acquisition material consolidated financial statements include results operations june 28 2004 prior completion alaris acquisition june 16 2004 icu medical inc filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsiter family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief preventing alaris selling smartsiter products july 30 2004 court denied icus application preliminary injunction finding among things icu failed show substantial likelihood success merits company intends vigorously defend action december 2003 company completed acquisition intercare group plc intercare leading european pharmaceutical products services company acquisition increased companys scale proprietary sterile manufacturing broadened participation fastgrowing european generic including manufacturing capabilities injectible product market cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt addition fiscal 2004 company also completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 168 million assumed liabilities acquired businesses including alaris intercare approximately 11 billion consolidated financial statements include results operations business combinations date acquisition transactions including alaris intercare occurred july 1 2001 results operations would differed materially reported results fiscal 2003 january 1 2003 company completed acquisition syncor international corporation woodland hills californiabased company given legal designation cardinal health 414 inc referred notes consolidated financial statements syncor leading provider nuclear pharmacy services acquisition accounted purchase method accounting company issued approximately 125 million common shares valued approximately 780 million syncor stockholders syncors outstanding stock options converted options purchase approximately 30 million common shares company also assumed approximately 120 million debt connection acquisition certain operations syncor sold see note 21 operations integrated companys existing nuclear pharmacy services business component pharmaceutical technologies services segment addition fiscal 2003 company also completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 144 million assumed liabilities acquired businesses including syncor approximately 3401 million consolidated financial statements include results operations business combinations date acquisition transactions including syncor occurred july 1 2001 results operations would differed materially reported results fiscal 2002 fiscal 2002 company completed several acquisitions individually material accounted purchase method accounting business combinations primarily focused expanding service offerings within pharmaceutical technologies services segment include contract pharmaceutical development integrated medical education aggregate purchase price paid primarily cash approximately 4180 million company issued approximately 03 million common shares stockholders outstanding stock options converted options purchase total approximately 10 million common shares assumed liabilities acquired businesses approximately 935 million including debt 111 million consolidated financial statements include results operations business combinations subsequent date acquisition transactions occurred july 1 2001 results operations would differed materially reported results cardinal health inc subsidiaries notes consolidated financial statements special items mergerrelated costs following summary companys special items fiscal years ended june 30 2004 2003 2002 1 company applies varying tax rates special items depending upon tax jurisdiction item incurred overall effective tax rate varies period depending upon unique nature companys special items tax jurisdiction item incurred mergerrelated costs integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs incurred fiscal 2004 primarily result syncor acquisition mergerrelated costs incurred fiscal 2003 2002 primarily result bindley western industries inc given legal designation cardinal health 100 inc referred notes consolidated financial statements bindley acquisition fiscal years noted company also incurred mergerrelated costs numerous smaller acquisitions following table paragraphs provide additional detail regarding types mergerrelated costs incurred company employeerelated costs fiscal 2004 2003 2002 company incurred employeerelated costs associated certain merger acquisition transactions 119 million 187 million 237 million respectively costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result mergers acquisitions addition types costs fiscal 2003 company incurred charge 88 million related approved plan curtail defined benefit pension plans within pharmaceutical technologies services segment curtailment resulted plan conform employee benefit plans rp scherer corporation acquired august 1998 given legal designation cardinal health 409 inc referred notes consolidated financial statements scherer companys benefit plan structure time scherer merger pharmaceutical distribution center consolidation fiscal 2004 2003 2002 company incurred charges 01 million 227 million 524 million respectively primarily associated companys plans close consolidate total 16 bindley distribution centers bindleys corporate office one companys data centers result bindley acquisition charges include limited following 1 employeerelated costs primarily termination approximately 1250 employees due closures consolidations noted 2 exit costs consolidate close various facilities mentioned including asset impairment charges inventory move costs contractlease termination costs 3 duplicate salary costs incurred shutdown periods cardinal health inc subsidiaries notes consolidated financial statements asset impairments exit costs fiscal 2004 2003 2002 company incurred asset impairment exit costs 09 million 54 million 90 million respectively asset impairment exit costs incurred fiscal 2004 related primarily plans consolidate operations result syncor acquisition asset impairment exit costs incurred fiscal 2003 2002 related primarily plans close consolidate facilities result bergen brunswig medical corporation acquisition well asset impairments lease terminations exit costs incurred internationally result scherer acquisition inprocess research development fourth quarter fiscal 2004 company recorded charge 127 million related writeoff inprocess research development costs associated alaris acquisition integration costs fiscal 2004 2003 2002 company incurred integration costs 191 million 276 million 468 million respectively costs included category generally relate expenses incurred integrate merged acquired companies operations systems companys preexisting operations systems costs include limited integration information systems employee benefits compensation accountingfinance tax treasury internal audit risk management compliance administrative services sales marketing others restructuring costs following table segregates companys restructuring costs various reporting segments restructuring projects impacted see paragraphs follow additional information regarding companys restructuring plans pharmaceutical distribution provider services fiscal years noted company initiated restructuring projects impacted pharmaceutical distribution provider services segment costs incurred fiscal 2003 2002 primarily comprised employeerelated costs incurred reduce headcount certain businesses within segment realign management structure businesses restructuring projects resulted approximately 30 employees terminated majority occurred fiscal 2003 restructuring projects impacted pharmaceutical distribution provider services segment substantially completed end fiscal 2003 medical products services fiscal 2004 2003 2002 company incurred costs 87 million 236 million 149 million respectively restructure operations domestically internationally restructuring plans focused various aspects segments operations specifically close consolidate certain manufacturing operations rationalize headcount domestically internationally align certain distribution manufacturing operations strategic cost efficient structure connection implementation restructuring plans company incurred costs included limited following 1 employeerelated costs majority represents severance accrued upon either communication terms employees managements commitment restructuring plan depending upon project 2 exit costs including asset impairment charges costs incurred relocate physical assets project management costs earliest restructuring plans initiated fiscal 2002 others implemented throughout fiscal 2003 2004 restructuring plans completed fiscal 2003 2004 plans completed throughout fiscal 2005 overall restructuring plans result termination approximately 2200 employees approximately 1900 terminated june 30 2004 pharmaceutical technologies services fiscal 2004 2003 2002 company incurred costs 233 million 407 million 28 million respectively restructure operations domestically internationally restructuring plans focused various aspects segments operations specifically close consolidate certain manufacturing cardinal health inc subsidiaries notes consolidated financial statements business facilities exit nonstrategic businesses integrate align operations strategic cost efficient manner rationalize headcount domestically internationally result integration plans market changes connection implementation restructuring plans company incurred costs included limited following 1 employeerelated costs majority represents severance accrued upon communication terms employees 2 asset impairment charges including writedown physical assets well goodwill writeoffs exit nonstrategic nonintegrated businesses 3 exit costs including leasecontract termination costs dismantle move machinery equipment physical assets costs transfer certain technologies existing facilities earliest restructuring plans initiated fiscal 2001 others implemented throughout fiscal 2003 2004 restructuring plans completed fiscal 2003 2004 plans completed throughout fiscal 2005 overall restructuring plans result termination approximately 1000 employees approximately 900 terminated june 30 2004 automation information services fiscal 2004 company incurred restructuring costs 42 million related plans exit dispose certain nonstrategic businesses well close manufacturing facility within segment connection implementation restructuring plans company incurred employeerelated costs primarily severance accrued upon communication terms employees asset impairment charges facility exit costs company expects restructuring plans completed fiscal 2005 overall restructuring plans result termination approximately 35 employees approximately 10 terminated june 30 2004 fiscal 2004 2003 2002 company incurred costs 09 million 13 million 05 million related restructuring plans impacted one segment costs related primarily plan restructure companys delivery information technology infrastructure services plans initiated fiscal 2003 expected completed fiscal 2005 overall restructuring plans resulted termination approximately 20 employees terminated june 30 2004 litigation settlements net following table summarizes companys net litigation settlements fiscal 2004 2003 2002 vitamin litigation fiscal 2004 2003 2002 company recorded income 65 million 1029 million 353 million respectively resulting recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years total recovery antitrust claims certain vitamin manufacturers june 30 2004 1447 million net attorney fees payments due interested parties expenses withheld see note 1 additional information regarding periods recoveries recorded company settled one known claim total amount future recovery likely material amount pharmaceutical manufacturer antitrust litigation fiscal 2004 company recorded income 559 million resulting settlement antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition litigation fiscal 2004 2003 2002 company recorded settlement charges 01 million 14 million 15 million respectively related certain immaterial litigation matters fully resolved special items fiscal 2004 fiscal 2004 company incurred special items totaling 379 million total comprises two items first company executed special contribution cardinal health foundation fourth quarter totaled approximately 317 million special contribution executed direct result large pharmaceutical manufacturer antitrust litigation settlement received fourth quarter cardinal health foundation cardinal health inc subsidiaries notes consolidated financial statements primary vehicle used company provide charitable support community various organizations prior contributions cardinal health foundation immaterial second company incurred costs 62 million fourth quarter related sec investigation audit committees internal review costs primarily represent legal fees document preservation production costs incurred responding requests related secs investigation audit committees internal review prior costs incurred related matters immaterial information regarding secs investigation audit committees internal review see note 1 special items accrual rollforward following table summarizes activity related liabilities associated companys special items 1 amounts represent items expensed incurred accrued accordance gaap amounts include gross litigation settlement income recorded fiscal 2004 2003 2002 624 million 1029 million 353 million respectively recorded special items purchase accounting accruals connection restructuring integration plans related intercare company accrued part acquisition adjustments liability 104 million related employee termination relocation costs 110 million related closing certain facilities fiscal 2004 company paid 15 million employeerelated costs payments made associated facility closures fiscal 2004 connection restructuring integration plans related syncor company accrued part acquisition adjustments liability 151 million related employee termination relocation costs 104 million related closing duplicate facilities june 30 2004 company paid 120 million employee related costs 10 million associated facility closure 15 million restructuring costs certain merger acquisition restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred company estimates incur additional costs future periods associated various mergers acquisitions restructuring activities totaling approximately 70 million approximately 45 million net tax company believes incur costs properly integrate rationalize operations portion represents facility rationalizations implementing efficiencies regarding information systems customer systems marketing programs administrative functions among things amounts expensed special items incurred estimate include costs associated integration alaris companywide restructuring project announced september 2004 company still process determining costs associated projects cardinal health inc subsidiaries notes consolidated financial statements 5 leases salestype leases companys salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components companys net investment salestype leases follows millions future minimum lease payments received pursuant salestype leases next five fiscal years thereafter fiscal 2004 2003 company entered four separate agreements two fiscal 2004 two fiscal 2003 transfer ownership certain lease receivables along security interest related leased equipment leasing subsidiary bank net book value leases sold 3142 million 3560 million fiscal 2004 2003 respectively see note 10 additional information cardinal health inc subsidiaries notes consolidated financial statements 6 notes payable longterm obligations notes payable banks company entered unsecured uncommitted lineofcredit arrangement allows borrowings 73 million june 30 2004 interest rate 55 basis points three month euro libor june 30 2004 56 million outstanding arrangement effective interest rate 213 total available unused lines credit june 30 2004 17 million june 30 2003 notes payable outstanding longterm obligations longterm obligations consist following millions 400 445 600 625 650 notes 675 notes due 2011 represent unsecured obligations company 675 notes due 2004 represent unsecured obligations scherer guaranteed company 730 notes 780 700 debentures represent unsecured obligations allegiance corporation guaranteed company obligations subject sinking fund redeemable prior maturity except 700 debentures included put options expired september 15 2003 without put options exercised interest paid pursuant terms notes structurally subordinated liabilities companys subsidiaries including trade payables 64 billion 6500 million preferred debt securities part companys acquisition alaris company assumed 1953 million senior subordinated notes due 2011 includes premium 203 million based fair value debt senior subordinated notes bear interest annual rate 725 payable semiannually arrears july 1 january 1 year commencing january 1 2004 mature july 1 2011 senior subordinated notes redeemable option company whole part time july 1 2007 initial redemption price 103625 plus accrued unpaid interest date redemption price declining annually thereafter addition subject certain limitations company may redeem 35 senior subordinated notes july 1 2006 net cash proceeds one equity offerings price 10725 plus accrued unpaid interest date redemption event change control defined indenture governing senior subordinated notes holders may require company purchase senior subordinated notes 101 principal amount thereof plus accrued unpaid interest date repurchase senior subordinated notes subject certain restrictive reporting covenants june 30 2004 company compliance covenants subsequent june 30 2004 company paid 1836 million senior subordinated notes amended bond indenture remove restrictive covenants remaining 117 million cardinal health inc subsidiaries notes consolidated financial statements balance callable time july 1 2007 also related alaris acquisition company acquired bank credit facility consisting sixyear 245 million term loan fiveyear 30 million revolving credit facility june 30 2004 1626 million outstanding term loan term loan bears interest annual rate equal current libor fluctuating base rate plus margin 225 june 30 2004 company elect use either one two three sixmonth libor rate alaris made elections resulting weighted average interest rate june 30 2004 336 per annum 111 plus margin 225 subsequent june 30 2004 company paid term loan terminated credit facility company commercial paper program providing issuance 15 billion aggregate maturity value commercial paper company 6342 million outstanding program june 30 2004 market interest rate based upon libor company also extendible commercial notes program providing issuance 1500 million extendible commercial notes company borrowings outstanding extendible commercial notes program june 30 2004 company also maintains shortterm credit facilities allow borrowings 1764 million june 30 2004 2003 628 million 210 million respectively outstanding uncommitted facilities june 30 2004 balance includes 15 million shortterm borrowings reclassified effective interest rate june 30 2004 2003 168 228 respectively balance also includes 478 million classified obligations remaining 498 million balance obligations consists primarily additional notes loans capital leases company also two unsecured 750 million bank revolving credit facilities provide aggregate 15 billion borrowings one facilities expires march 24 2008 expires march 23 2009 expiration revolving credit facilities extended upon mutual consent company lending institutions revolving credit facilities exist largely support issuances commercial paper well shortterm borrowings remained unused june 30 2004 except 373 million standby letters credit issued behalf company june 30 2004 5000 million commercial paper 150 million shortterm borrowings reclassified longterm june 30 2003 210 million shortterm borrowings reclassified longterm reclassifications reflect companys intent ability existence unused revolving credit facilities refinance borrowings remaining 1342 million commercial paper outstanding june 30 2004 classified shortterm fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified longterm debt companys consolidated balance sheet preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entitys receivables june 30 2004 2003 accounts receivable financing entity owned approximately 5069 million 4636 million respectively receivables included companys consolidated balance sheet effective interest rate june 30 2004 2003 236 281 respectively loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company june 30 2003 company asset securitization facility available allows company sell receivables generated radiopharmaceutical operations whollyowned subsidiary turn sells receivables multiseller conduit administered third party bank securitization program allowed company borrow 650 million securitization facility terminated fiscal year 2004 fiscal 2003 company issued 500 million 400 notes due 2015 proceeds debt issuance used general corporate purposes including working capital expenditures acquisitions investments repurchases debt equity securities issuance company capacity issue approximately 500 million additional equity debt securities pursuant effective shelf registration statements filed sec cardinal health inc subsidiaries notes consolidated financial statements certain longterm obligations collateralized property equipment company aggregate book value approximately 70 million june 30 2004 maturities longterm obligations future fiscal years 7 financial instruments interest rate risk management company exposed impact interest rate changes companys objective manage impact interest rate changes earnings cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2004 company held two payfixed interest rate swaps acquired alaris acquisition payfixed interest rate swaps utilized alaris hedge bank term loan swaps unwound subsequent june 30 2004 upon companys election pay bank term loan see note 6 swaps material impact upon companys financial statements june 30 2003 company held payfixed interest rate swaps hedge variability cash flows related changes interest rates borrowing costs variablerate debt contracts classified cash flow hedges matured january 2004 company adjusted payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted interest rate payments hedged company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2003 company also held payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2015 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded interest expense following table represents notional amount hedged fair value interest rate swaps outstanding june 30 2004 2003 included assetsliabilities amount net gainloss payfloating interest rate swaps recognized interest expense fiscal 2004 2003 june 30 2003 company net deferred losses payfixed interest rate swaps 35 million recorded comprehensive income fiscal 2004 2003 company recognized losses 45 million 119 million respectively within interest expense related interest rate swaps counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material cardinal health inc subsidiaries notes consolidated financial statements currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates companys objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses gains losses contracts offset changes value underlying transactions occur june 30 2004 2003 company held forward contracts expiring june 2005 hedge probable firmly committed revenue expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged european euro british pound mexican peso thai bhat june 30 2004 2003 company also held forward contracts expiring december 2013 september 2003 respectively hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values interest expense directly offsetting adjustment foreign currency asset liability following table represents notional amount hedged value forward contracts outstanding june 30 2004 2003 included assets liabilities amount net gainloss related fair value forward contracts recognized interest expense fiscal 2004 2003 june 30 2004 2003 company net deferred losses related forward contract cash flow hedges 35 million 95 million respectively recorded comprehensive income fiscal 2004 2003 company recognized losses 149 million 122 million respectively within net earnings related forward contracts incomeloss recorded forward contract fair value hedge offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2004 2003 connection companys acquisition alaris company acquired certain options hedging european euro australian dollar canadian dollar british pound options entered alaris reduce risk earnings cash flow volatility related certain forecasted transactions june 30 2004 exercise options would result material impact company counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material cardinal health inc subsidiaries notes consolidated financial statements fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2004 2003 approximate fair value shortterm maturities items cash balances invested accordance companys investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value companys longterm obligations 37871 million 29261 million compared carrying amounts 36897 million 27006 million june 30 2004 2003 respectively fair value companys longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss companys derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments 8 income taxes earnings income taxes discontinued operations cumulative effect changes accounting follows millions provision income taxes continuing operations cumulative effect changes accounting consists following millions cardinal health inc subsidiaries notes consolidated financial statements reconciliation provision based federal statutory income tax rate companys effective income tax rate continuing operations cumulative effect changes accounting follows companys effective tax rate reflects tax benefits derived significant operations outside united states generally taxed rates lower us statutory rate 35 fiscal 2004 companys results operations benefited lower effective tax rate due increased profits production lower tax international countries dominican republic thailand addition company subsidiaries operating puerto rico tax incentive agreement expiring 2019 provision income taxes made approximately 12 billion undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries practicable estimate amount tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions cardinal health inc subsidiaries notes consolidated financial statements amounts classified consolidated balance sheets follows millions company state net operating loss carryforwards 8666 million june 30 2004 valuation allowance 99 million june 30 2004 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain state net operating loss carryforwards expire 2024 expiring state net operating loss carryforwards required valuation allowances adjusted annually company also federal capital loss carryovers 156 million june 30 2004 100 valuation allowance established since usage carryovers uncertain time application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described taxsharing agreement baxter international inc allegiance corporation pay increases reimbursed decreases net deferred tax assets transferred date baxterallegiance spinoff hereinafter defined note 11 increases decreases may result audit adjustments baxters prior period tax returns 9 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit postretirement benefit defined contribution plans substantially companys domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code 1986 amended code provide company matching profit sharing contributions companys contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit postretirement benefit plans see 545 million 642 million 590 million fiscal years ended june 30 2004 2003 2002 respectively defined benefit postretirement benefit plans company several defined benefit plans covering substantially scherer salaried hourly employees company also assumed defined benefit plans intercare alaris acquisitions companys domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations company also postretirement medical plan postretirement life insurance plan covers eligible scherer participants company uses measurement date march 31 substantially pension postretirement benefit plans cardinal health inc subsidiaries notes consolidated financial statements obligations funded status following table provides reconciliation change projected benefit obligation millions following table provides reconciliation change fair value plan assets millions cardinal health inc subsidiaries notes consolidated financial statements following table provides reconciliation net amount recognized consolidated balance sheets millions projected benefit obligation fair value plan assets pension plans postretirement plans projected benefit obligations excess plan assets follows millions accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets follows millions cardinal health inc subsidiaries notes consolidated financial statements net periodic benefit cost components companys net periodic benefit costs follows millions 1 amount primarily represents amortization unrecognized actuarial losses well amortization transition obligation prior service costs assumptions weighted average assumptions used determining benefit obligations follows weighted average assumptions used determining net periodic pension cost follows 1 develop expected longterm rate return assets assumption company considered historical returns future expectations returns asset class well target asset allocation pension portfolio rate gross investment administrative expenses health care cost trend rates health care cost trend rates assumed next year postretirement benefits december 31 112 116 premedicare postmedicare respectively health care cost trend rates assumed decline 56 premedicare postmedicare 2014 one percentage point change assumed health care cost trend rates would material impact total service cost total interest cost accumulated postretirement benefit obligation cardinal health inc subsidiaries notes consolidated financial statements plan assets companys weighted average asset allocations measurement date target asset allocations category follows investment policy reflects longterm nature plans funding obligations assets invested provide opportunity income growth principal objective pursued longterm goal designed provide required benefits participants without undue risk expected objective achieved welldiversified asset portfolio equity investments made within guidelines quality marketability diversification mandated employee retirement income security act erisa relevant statutes investment managers directed maintain equity portfolios risk level approximately equivalent specific benchmark established portfolio assets invested fixed income securities pooled fixed income portfolios managed actively pursue opportunities presented changes interest rates credit ratings maturity premiums contributions total estimated contributions 2005 measurement year 54 million estimated future benefit payments future benefit payments reflect expected future service appropriate next five fiscal years aggregate five fiscal years thereafter millions 10 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties lease receivablerelated arrangements fiscal 2004 2003 company entered four separate agreements two fiscal 2004 two fiscal 2003 transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank amounts 1642 million 1500 million fiscal 2004 1560 million 2000 million fiscal 2003 transactions resulted immaterial gains losses classified company revenue within results operations order qualify sale treatment sfas 140 accounting transfers servicing financial assets extinguishments liabilities company formed whollyowned special purpose bankruptcyremote subsidiaries pyxis spes pyxis corporation given legal designation cardinal health 301 inc referred form 10k pyxis spes formed whollyowned qualified special purpose subsidiaries qspes effectuate removal lease receivables companys consolidated financial statements accordance sfas cardinal health inc subsidiaries notes consolidated financial statements 140 company consolidates pyxis spes consolidate qspes pyxis spes qspes separate legal entities maintain separate financial statements company pyxis assets pyxis spes qspes available first foremost satisfy claims respective creditors company formed pyxis funding llc pyxis funding sole purpose acquiring pool leases related leased equipment pyxis ultimately selling lease receivables multiseller conduit administered thirdparty bank pyxis funding whollyowned special purpose bankruptcyremote subsidiary pyxis funding ii llc pyxis funding ii formed sole purpose acquiring lease receivables pyxis funding issuing notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii whollyowned qualified special purpose subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accordingly related receivables included companys consolidated financial statements required us gaap company consolidates pyxis funding consolidate pyxis funding ii pyxis funding pyxis funding ii separate legal entities maintain separate financial statements company pyxis assets pyxis funding pyxis funding ii available first foremost satisfy claims creditors notes held investors principal balance 160 million june 30 2004 investors provided credit protection form 20 40 million overcollateralization june 30 2003 notes principal balance 515 million 129 million credit protection provided receivablerelated arrangements cardinal health funding chf medicine shoppe capital corporation mscc organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance gaap mscc chf separate legal entities company medicine shoppe international inc companys financial shared services business sale receivables mscc chf qualify sales treatment sfas 140 accordingly included companys consolidated financial statements june 30 2004 company committed receivables sales facility program available chf capacity sell 5000 million receivables recourse provided chf program requirement chf retain percentage subordinated interest sold receivables june 30 2004 company outstanding receivables subordinated interests related facility fiscal 2004 company terminated liquidated mscc resulting immaterial loss june 30 2003 company 2800 million committed receivables sales facility programs available chf mscc receivables outstanding subordinated interests related chf june 30 2003 total amount receivables outstanding mscc program 54 million recourse provided mscc program requirement mscc retain 20 subordinated interest sold receivables subordinated interests 13 million june 30 2003 cash flows receivablerelated arrangements companys net cash flow benefit related receivable transfers fiscal 2004 2003 2002 follows pyxis mscc chf required repurchase receivables sold determined representations warranties regard related receivables accurate date sold cardinal health inc subsidiaries notes consolidated financial statements operating leases company entered operating lease agreements several third party banks construction various new facilities equipment initial terms lease agreements varied maturity dates ranging february 2005 june 2013 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2004 amount expended acquire andor construct facilities 5256 million agreements provide maximum funding 5750 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2004 weighted average interest rate agreements approximated 179 companys estimated minimum annual lease payments agreements june 30 2004 approximately 94 million 11 commitments contingent liabilities future minimum rental payments operating leases excluding referenced note 10 initial remaining noncancelable lease terms excess one year june 30 2004 rental expense relating operating leases including referenced note 10 approximately 1206 million 1028 million 776 million fiscal 2004 2003 2002 respectively sublease rental income material period presented herein latex litigation september 30 1996 baxter international inc baxter subsidiaries transferred allegiance corporation subsidiaries allegiance acquired company february 1999 baxters us health care distribution business surgical respiratory therapy business health care costmanagement business well certain foreign operations allegiance business connection spinoff allegiance business baxter baxterallegiance spinoff connection spinoff allegiance corporation merged subsidiary company february 3 1999 agreed indemnify baxter defend indemnify baxter healthcare corporation bhc contemplated agreements baxter allegiance corporation expenses potential liabilities associated claims arising allegiance business including certain claims alleged personal injuries result exposure natural rubber latex gloves company party lawsuits agreed pay settlements plaintiffs june 30 2004 36 lawsuits pending bhc andor allegiance involving allegations sensitization natural rubber latex products cases proceeding trial total dollar amount potential damages cannot reasonably quantified plaintiffs plead damages extreme excess reasonably expect recover plead modest amount include request specific dollar amount including cases ask specific damages damage requests per action ranged 10000 240 million cases name multiple defendants addition baxterallegiance average number defendants per case exceeds 25 based significant differences range damages sought based multiple number defendants lawsuits allegiance cannot reasonably quantify total amount possibleprobable damages therefore allegiance company believe numbers considered indication either reasonably possible probable liability since inception litigation baxterallegiance named defendant 834 cases fiscal year ended june 30 2002 allegiance began settling lawsuits greater frequency june 30 2004 allegiance resolved 90 cases 20 lawsuits resolved concluded without liability baxterallegiance individual claim settled material amount settled claims june 30 2004 amounted aggregate approximately 28 million due number claims filed ongoing defense costs incurred allegiance believes probable incur substantial legal fees related resolution cases still pending although company continues believe cannot reasonably estimate potential cost settle lawsuits company believes impact lawsuits upon allegiance immaterial companys financial position liquidity results operations could range 0 20 million net insurance proceeds range reflecting companys reasonable estimation potential insurance coverage defense indemnity costs company believes substantial cardinal health inc subsidiaries notes consolidated financial statements portion liability covered insurance policies allegiance financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency company allegiance continue believe insurance recovery probable derivative actions november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action march 21 2003 company filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate companys proposed acquisition syncor b determine propriety indemnifying monty fu former chairman syncor company filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants included new allegations company improperly recognized revenue december 2000 september 2001 related settlements certain vitamin manufacturers company filed motion dismiss second amended complaint november 20 2003 court denied motion discovery proceeding action defendants intend vigorously defend action company currently believe impact lawsuit material adverse effect companys financial position liquidity results operations july 9 2004 complaint filed purported shareholder members companys board directors company nominal defendant court common pleas franklin county ohio purported derivative action complaint alleges individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap companys audit committee charter complaint seeks money damages equitable relief defendant directors award attorneys fees none defendants responded complaint yet company august 27 2004 complaint filed purported shareholder members companys board directors current former officers andor employees company nominal defendant court common pleas franklin county ohio purported derivative action complaint alleges individual defendants breached various fiduciary duties owed company complaint seeks money damages equitable relief individual defendants award attorneys fees none defendants responded complaint yet company september 22 2004 complaint filed purported shareholder members companys board directors company nominal defendant court common pleas franklin county ohio purported derivative action complaint alleges individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap companys audit committee charter complaint seeks money damages equitable relief defendant directors award attorneys fees none defendants responded complaint yet company shareholdererisa litigation cardinal health since july 2 2004 ten purported class action complaints filed purported purchasers companys securities company certain officers directors asserting claims federal securities laws collectively referred cardinal health federal securities actions date actions filed united states district court southern district ohio cardinal health federal securities actions purport brought behalf purchasers companys securities various periods beginning early october 24 2000 ending late july 26 2004 allege among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series false andor misleading statements concerning companys financial results prospects condition alleged misstatements relate companys accounting recoveries relating antitrust litigation vitamin manufacturers classification revenue companys pharmaceutical distribution business either operating revenue bulk deliveries customer warehouses among matters alleged misstatements claimed caused artificial inflation companys stock price proposed class period complaints seek unspecified money damages equitable relief defendants award attorneys fees none defendants yet responded complaints cardinal health federal securities actions cardinal health inc subsidiaries notes consolidated financial statements since july 2 2004 fourteen purported class action complaints filed company certain officers directors employees company purported participants cardinal health profit sharing retirement savings plan collectively referred cardinal health erisa actions date actions filed united states district court southern district ohio cardinal health erisa actions purport brought behalf participants cardinal health profit sharing retirement savings plan also behalf plan complaints allege defendants breached certain fiduciary duties owed erisa generally asserting defendants failed make full disclosure risks plan participants investing companys stock detriment plans participants beneficiaries company stock made available investment alternative plan participants misstatements alleged cardinal health erisa actions significantly overlap misstatements alleged complaints cardinal health federal securities actions complaints seek unspecified money damages equitable relief defendants award attorneys fees none defendants yet responded complaints cardinal health erisa actions respect proceedings described headings derivative actions shareholdererisa litigation cardinal health company currently believes insurance coverage available companys insurance policies effect time actions filed policies financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency shareholdererisa litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws collectively referred syncor federal securities actions filed united states district court central district california syncor federal securities actions purport brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 actions allege among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncors international business omitting mention certain allegedly improper payments syncors foreign customers thereby artificially inflating price syncor shares lead plaintiff appointed court syncor federal securities actions consolidated amended complaint filed may 19 2003 naming syncor 12 individuals former syncor officers directors andor employees defendants syncor filed motion dismiss consolidated amended complaint august 1 2003 december 12 2003 court granted motion dismiss without prejudice second amended consolidated class action complaint filed january 28 2004 naming syncor 14 individuals former syncor officers directors andor employees defendants syncor filed motion dismiss second amended consolidated class action complaint march 4 2004 july 6 2004 court granted defendants motion dismiss without prejudice defendants syncor monty fu robert funari haig bagerdjian individual defendants motion dismiss granted prejudice september 14 2004 lead plaintiff filed motion clarification courts july 6 2004 dismissal order november 14 2002 two additional actions filed individual stockholders syncor court chancery state delaware actions seven syncors nine directors director defendants complaints delaware actions identical alleged director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncors employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments including costs syncor federal securities actions described single purported class action claim seeking recover damages behalf holders syncor shares amount losses sustained consideration received merger syncor stockholders reduced november 22 2002 plaintiff one two delaware actions filed amended complaint adding defendants company subsidiary mudhen merger corporation remaining two syncor directors hereafter included term director defendants cases consolidated one action consolidated delaware action august 14 2003 company filed motion dismiss operative complaint consolidated delaware action end september 2003 plaintiffs consolidated delaware action moved court file second amended complaint plaintiffs request granted february 2004 monty fu named defendant second amended complaint september 15 2004 court granted monty fus motion dismiss second amended complaint court dismissed second amended complaint prejudice cardinal health inc subsidiaries notes consolidated financial statements november 18 2002 two additional actions filed individual stockholders syncor superior court california county los angeles california actions director defendants complaints california actions allege director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncors employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments amended complaint filed december 6 2002 one cases purporting allege direct claims behalf class shareholders defendants motion stay california actions pending resolution delaware actions discussed granted april 30 2003 purported class action complaint filed april 8 2003 company syncor certain officers employees company purported participant syncor employees savings stock ownership plan syncor essop related purported class action complaint filed september 11 2003 company syncor certain individual defendants another related purported class action complaint filed january 14 2004 company syncor certain individual defendants consolidated complaint filed february 24 2004 syncor certain former syncor officers directors andor employees alleging defendants breached certain fiduciary duties owed erisa based underlying allegations improper unlawful conduct alleged federal securities litigation april 26 2004 defendants filed motions dismiss consolidated complaint august 24 2004 court granted part denied part defendants motions dismiss court dismissed without prejudice claims defendants ed burgos sheila coop claims alleging cofiduciary liability defendants claims alleging individual defendants conflicts interest precluding properly exercising fiduciary duties erisa claim breach duty prudently manage plan assets upheld syncor claim breach alleged duty monitor performance syncors plan administrative committee upheld defendants monty fu robert funari addition united states department labor conducting investigation syncor essop respect compliance erisa requirements company responded subpoena received department labor continues cooperate investigation impossible predict outcome proceedings described heading shareholdererisa litigation syncor impact company however company currently believe impact actions material adverse effect companys financial position liquidity results operations company believes allegations made complaints described without merit intends vigorously defend actions company informed individual director officer defendants deny liability claims asserted actions believe meritorious defenses intend vigorously defend actions company currently believes portion liability covered insurance policies company syncor financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency dupont litigation september 11 2003 ei du pont de nemours company dupont filed lawsuit company others united states district court middle district tennessee complaint alleges various causes action company relating production sale surgical drapes gowns companys medical products services segment duponts claims generally fall categories breach contract false advertising patent infringement complaint request specific amount damages company believes claims made complaint without merit intends vigorously defend action although action early stages impossible accurately predict outcome proceedings impact company believes owed defense indemnity codefendants respect duponts claim patent infringement company currently believe impact lawsuit material adverse effect companys financial position liquidity results operations matters company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs company intends vigorously defend litigation currently believe outcome litigation pending material adverse effect companys consolidated financial statements see also discussion sec investigation us attorney inquiry note 1 cardinal health inc subsidiaries notes consolidated financial statements 12 shareholders equity june 30 2004 2003 companys authorized capital shares consisted 750 million common shares without par value class common shares b 5 million class b common shares without par value c 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred common shares holders class b common shares entitled share equally dividends declared companys board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2004 2003 february 27 2004 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 69 million common shares accelerated share repurchase program aggregate cost approximately 4603 million initial price paid per share 6680 approximately 69 million shares repurchased program subject future contingent purchase price adjustment settled fourth quarter fiscal 2004 purchase price adjustment based upon volume weighted average price actual repurchase period subject certain provisions establish cap floor average share price companys agreement brokerdealer executed repurchase transactions accelerated share repurchase program completed may 11 2004 final volume weighted average price 7007 result company settled forward contract 225 million cash cost included amount associated common shares treasury company used remaining 172 million initial authorization repurchase additional shares approximately 02 million average price paid per share 7073 repurchased shares placed treasury used general corporate purposes august 1 2003 companys board directors authorized repurchase common shares aggregate amount 10 billion pursuant authorization company repurchased approximately 170 million common shares aggregate cost approximately 10 billion three months ended september 30 2003 average price paid per share 5865 repurchase completed first quarter fiscal 2004 repurchased shares placed treasury used general corporate purposes january 2003 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 86 million common shares aggregate cost approximately 500 million repurchase completed february 2003 repurchased shares placed treasury shares used general corporate purposes august 2002 companys board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 78 million common shares aggregate cost approximately 500 million repurchase completed january 2003 repurchased shares placed treasury shares used general corporate purposes 13 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses companys trade receivables finance notes accrued interest receivables lease receivables exposed concentration credit risk customers retail health care sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors health care industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations cardinal health inc subsidiaries notes consolidated financial statements following table summarizes companys customers individually account least 10 companys revenue customer table serviced pharmaceutical distribution provider services segment june 30 2004 2003 cvs corporation cvs accounted 18 companys gross trade receivable balance certain companys businesses entered agreements group purchasing organizations gpos organizations act purchasing agents negotiate vendor contracts behalf members fiscal 2004 2003 2002 approximately 17 18 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp companys two largest gpo relationships terms revenue however companys trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements 14 stock options restricted shares company maintains several stock incentive plans benefit certain officers directors employees options granted generally vest three years exercisable periods ten years date grant price equals fair market value date grant information following tables note 14 revised reflect maximum number shares could granted companys amended restated equity incentive plan amended equity incentive plan respect option award board directors human resources compensation committee compensation committee granted companys chairman chief executive officer november 1999 1425000 shares giving effect stock splits occurring date grant maximum number shares could granted pursuant terms equity incentive plan 562500 shares compensation committee currently exploring alternatives substitute remaining portion stock option granted individual november 1999 excess 562500 shares equivalent value equity compensation plan information certain plans subject shareholder approval plans authorized solely board directors board following description companys plans approved shareholders broadlybased equity incentive plan amended companys broadlybased equity incentive plan amended broadlybased equity incentive plan adopted board effective november 15 1999 amended pursuant resolutions board adopted august 8 2001 plan provides grants form nonqualified stock options restricted shares restricted share units employees company aggregate number common shares authorized issuance pursuant plan 36 million generally 10 authorized amount issuable form restricted shares restricted share units restriction period less three years plan intended qualify section 401a code subject provisions erisa outside directors equity incentive plan companys outside directors equity incentive plan adopted board effective may 10 2000 plan reserves makes available distribution aggregate 15 million common shares grants form nonqualified stock options restricted shares members board employees company plan intended qualify section 401a code subject provisions erisa deferred compensation plan amended companys deferred compensation plan amended deferred compensation plan adopted board effective april 7 1994 subsequently amended several times since recently may 25 2004 plan permits certain management cardinal health inc subsidiaries notes consolidated financial statements employees company defer salary bonus longterm incentive plan payments one several investment alternatives including stock equivalent account addition company may discretion make additional matching fixed contributions deferred balances participating management employees deferrals stock equivalent account valued deferral invested companys common shares deferral date deferred balances paid upon retirement termination employment death disability maximum aggregate number common shares credited stock equivalent accounts pursuant plan 225 million deferred balances paid cash common shares kind fractional shares paid cash plan contains dividend reinvestment feature stock equivalent account dividends generally reinvested investment options stock equivalent account reporting persons section 16 exchange act plan intended qualify section 401a code exempt many provisions erisa top hat plan select group management highly compensated employees directors deferred compensation plan amended restated companys directors deferred compensation plan amended restated directors deferred compensation plan adopted board effective august 11 1999 recently amended restated may 1 2004 plan permits directors company defer board fees one several investment alternatives including stock equivalent account deferrals stock equivalent account valued deferral invested companys common shares deferral date deferred balances paid upon retirement termination board service death disability maximum aggregate number common shares credited stock equivalent accounts pursuant plan 90000 deferred balances paid cash common shares kind fractional shares paid cash plan contains dividend reinvestment feature stock equivalent account dividends generally reinvested investment options stock equivalent account plan intended qualify section 401a code subject provisions erisa global employee stock purchase plan companys global employee stock purchase plan adopted board effective august 11 1999 plan permits companys international employees purchase common shares payroll deductions total number common shares made available purchase plan 45 million international employees employed company least 30 days eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1june 30 july 1december 31 plan intended qualify section 401a code subject provisions erisa cardinal health inc subsidiaries notes consolidated financial statements following table summarizes information relating companys equity compensation plans june 30 2004 1 companys equity incentive plan approved companys shareholders november 1995 total number common shares available grant awards plan amount equal sum 15 total outstanding common shares last day companys immediately preceding fiscal year plus b number common shares available grant plan november 23 1998 plus c common shares related awards expire unexercised forfeited terminated cancelled settled manner common shares covered award issued participant returned company payment exercise price tax withholding obligations connection outstanding awards plus unused portion common shares available clause previous two fiscal years result used previous two fiscal years 2 addition stock options outstanding companys equity incentive plan also includes 430302 restricted share units outstanding equity incentive plan payable solely common shares restricted share units exercise price therefore included purposes computing weightedaverage exercise price 3 includes approximately 42 million common shares available issuance companys employee stock purchase plan 4 addition stock options outstanding companys broadlybased equity incentive plan outside director equity incentive plan also includes 10000 restricted share units outstanding companys broadlybased equity incentive plan payable solely common shares also includes 22564 4076 common share units respectively outstanding companys directors deferred compensation plan deferred compensation plan payable solely common shares awards exercise price therefore included purposes computing weightedaverage exercise price 5 includes approximately 43 million common shares available issuance companys global employee stock purchase plan 6 includes options purchase approximately 34 million common shares aggregate assumed company connection acquisitions approved companys shareholders remaining options purchase approximately 24 million common shares aggregate assumed company connection acquisitions approved companys shareholders cardinal health inc subsidiaries notes consolidated financial statements following summarizes stock option transactions company plans july 1 2001 june 30 2004 giving retroactive effect conversions options connection merger transactions stock splits millions except per common share amounts additional information concerning stock options outstanding june 30 2004 presented company accounts plans accordance apb opinion 25 compensation cost recognized see note 3 table illustrating effect net income earnings per share company adopted fair value recognition provisions sfas 123 accounting stock based compensation weighted average fair value options granted fiscal 2004 2003 2002 2278 2196 2595 respectively cardinal health inc subsidiaries notes consolidated financial statements fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods market values restricted shares restricted share units awarded company recorded component shareholders equity accompanying consolidated balance sheets restricted shares amortized expense period participants perform services generally one seven years restricted share units generally amortized fiveyear vesting period june 30 2004 approximately 03 million shares share units remained restricted subject forfeiture company employee stock purchase plans sale 120 million companys common shares authorized employees employed company least 30 days eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1june 30 july 1december 31 june 30 2004 subscriptions 04 million shares outstanding june 30 2004 30 million shares issued employees plans 15 earnings per share following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2004 potentially dilutive employee stock options antidilutive fiscal 2004 2003 2002 184 million 225 million 09 million respectively cardinal health inc subsidiaries notes consolidated financial statements 16 change accounting effective fiscal 2004 company changed method recognizing cash discounts recognizing cash discounts reduction cost products sold primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenue company recorded 385 million net tax 225 million cumulative effect change accounting consolidated statements earnings cumulative effect reduced net diluted earnings per common share 009 impact change fiscal year ended june 30 2004 increase earnings continuing operations cumulative effect change accounting approximately 132 million resulted increase diluted earnings per common share continuing operations 003 fiscal 2004 pro forma effect accounting change prior periods follows fiscal 2002 method recognizing revenue pharmacy automation equipment changed recognizing revenue units delivered customer recognizing revenue units installed customer site management believes change accounting method provides objectively determinable method revenue recognition addition company implemented changes better service customers leverage operational efficiencies company recorded cumulative effect change accounting 701 million net tax 446 million consolidated statement earnings fiscal 2002 tax dilutive impact cumulative effect 015 per diluted share effect change fiscal year ended june 30 2002 reduce net earnings cumulative effect approximately 186 million change reduced diluted earnings per share 004 fiscal year ended june 30 2002 proforma effect accounting change prior periods presented required information available cardinal health inc subsidiaries notes consolidated financial statements 17 goodwill intangible assets following table summarizes changes carrying amount goodwill three years ended june 30 2004 total reporting segment 1 fourth quarter fiscal 2004 company acquired approximately 987 outstanding common stock alaris merged subsidiary company complete transaction july 7 2004 see note 4 additional information regarding acquisition june 30 2004 acquisition alaris resulted preliminary goodwill allocation 15368 million second quarter fiscal 2004 company completed acquisition intercare june 30 2004 company finalized intercare purchase price allocation resulting goodwill allocation 4309 million six months ended december 31 2003 company also finalized syncor purchase price allocation resulting goodwill reduction 69 million remaining amounts represent goodwill acquired immaterial acquisitions purchase price adjustments prior period acquisitions foreign currency translation adjustments 2 segment reporting purposes june 30 2004 goodwill allocation 664 million included within pharmaceutical distribution provider services segment related intercares specialty pharmaceutical distribution business goodwill allocations intercare included within pharmaceutical technologies services segment 3 first quarter fiscal 2004 company transferred consulting services business previously reported within medical products services segment clinical services consulting business within pharmaceutical distribution provider services segment better align business operations transfer resulted approximately 316 million goodwill reclassed two segments purchase price allocation alaris immaterial acquisitions yet finalized subject adjustment due short period time alaris acquisition date fiscal year end company determined alariss reporting segment treatment june 30 2004 see note 18 information regarding recently announced new segment include alaris cardinal health inc subsidiaries notes consolidated financial statements intangible assets limited lives amortized using straightline method periods range five forty years detail intangible assets class three years ended june 30 2004 follows additions intangible assets fiscal 2003 primarily relate syncor acquisition see note 4 additions intangible assets fiscal 2004 primarily relate alaris intercare acquisitions see note 4 amortization expense years ended june 30 2004 2003 2002 139 million 67 million 30 million respectively amortization expense estimated millions 18 segment information companys operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services automation information services first quarter fiscal 2004 company transferred consulting services business previously included within medical products services segment clinical services consulting business within pharmaceutical distribution provider services segment also first quarter fiscal 2004 company transferred clinical information business previously included within automation information services segment clinical services consulting business within pharmaceutical distribution provider services segment transfers done better align business operations prior period financial results restated businesses significant within respective segments therefore transfers material impact segments growth rates fiscal 2003 company reclassified central pharmacy services inc cord logistics inc pharmaceutical distribution provider services segment pharmaceutical technologies services segment therefore restated segments financial results prior period financial results presented form 10k restated reflect reclassification addition completion syncor acquisition january 1 2003 syncor included within pharmaceutical technologies services segment december 2003 company acquired intercare operates specialty pharmaceutical distribution pharmaceutical manufacturing operations europe see notes 4 17 discussion intercare acquisition fiscal year ended june 30 2004 results operations intercares specialty pharmaceutical distribution business similar companys cardinal health inc subsidiaries notes consolidated financial statements pharmaceutical distribution business included within pharmaceutical distribution provider services segment see note 3 table information results operations intercare included within pharmaceutical technologies services segment reporting purposes intercares results operations continue reported manner classification reported second quarter fiscal 2004 immediately following acquisition company still assessing appropriate segment reporting treatment intercares results operations second quarter fiscal 2004 material company companys individual segments company acquired approximately 987 outstanding common stock alaris merged subsidiary company complete transaction july 7 2004 results alaris operations period following completion transaction included within corporate segment year ended june 30 2004 due short period time acquisition date year end impact results material see notes 4 17 additional information regarding alaris acquisition august 30 2004 company announced creation new segment clinical technologies services replace companys automation information services segment include alaris companys existing businesses formerly within automation information services segment companys existing clinical services consulting business formerly reported pharmaceutical distribution provider services segment company begin reporting results new segment beginning first quarter fiscal 2005 addition effective first quarter fiscal 2005 company transfer specialty pharmaceutical distribution business previously included within pharmaceutical distribution provider services segment medical products services segment prior periods restated reflect transfers beginning fiscal 2005 pharmaceutical distribution provider services segment involves distribution broad line pharmaceuticals health care specialty pharmaceutical products items typically sold hospitals retail drug stores health care providers addition segment provides services health care industry integrated pharmacy management temporary pharmacy staffing well franchising apothecarystyle retail pharmacies medical products services segment involves manufacture medical surgical laboratory products distribution products well products manufactured internally hospitals physician offices surgery centers health care providers pharmaceutical technologies services segment provides services health care industry design manufacture proprietary drug delivery systems including softgel capsules controlled release forms zydisr fast dissolving wafers advanced sterile delivery technologies segment also provides sterile injectible pharmaceutical products pharmacies united kingdom also provides comprehensive packaging radiopharmaceutical manufacturing pharmaceutical development analytical science expertise well medical education marketing contract sales services automation information services segment provides services hospitals health care providers focusing meeting customer needs unique proprietary automation information products services addition segment markets pointofuse supply systems use life sciences market company evaluates performance segments based operating earnings corporate allocation administrative expenses information interest income expense income taxes provided segment level addition special charges allocated segments accounting policies segments described summary significant accounting policies cardinal health inc subsidiaries notes consolidated financial statements following tables include revenue operating earnings business segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2004 2003 2002 following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2004 2003 2002 segment well reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements following table includes total assets fiscal years ended june 30 2004 2003 segment well reconciling items necessary total amounts reported consolidated financial statements 1 revenue previously classified bulk deliveries customer warehouses reclassified within form 10k periods presented result companys decision aggregate revenue classes additional information concerning reclassification see note 2 pharmaceutical distribution provider services segments revenue derived three main product categories product categories respective contributions revenue follows 3 operating results intercare acquired december 2003 include specialty pharmaceutical distribution business similar companys pharmaceutical distribution business segment reporting purposes specialty pharmaceutical distribution business included pharmaceutical distribution provider services segment fiscal year ended june 30 2004 classification reported second quarter fiscal 2004 immediately following acquisition company still assessing appropriate segment reporting treatment intercares results operations second quarter fiscal 2004 material company companys individual segments 4 pharmaceutical technologies services segments revenue derived three main product categories product categories respective contributions revenue follows 5 corporate revenue primarily consists foreign currency translation adjustments elimination intersegment revenue 6 corporate operating earnings consist special items 574 million 399 million 1166 million fiscal years ended june 30 2004 2003 2002 respectively see note 4 discussion special items corporate costs allocated business segments generally based certain factors revenue operating earnings employee base addition company attempts maintain relatively consistent year rate corporate allocated costs per segments net revenue corporate cost allocations may change period depending upon individual segments use corporate services company allocate corporate costs human resources finance technology corporate operating earnings include unallocated corporate administrative expenses costs attributable operations segments certain corporate directed costs follows investment spending company encouraged business units identify investment projects provide future returns cardinal health inc subsidiaries notes consolidated financial statements projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon corporate management expenses projects retained corporate segment investment spending fiscal years 2004 2003 2002 483 million 580 million 306 million respectively interest income adjustment direction corporate management automation information services segment sold portions leased asset portfolio transferred proceeds corporate capital proceeds associated sales redeployed within business segment utilized general corporate purposes segment allocated benefit corporate interest income would earned associated sold leases fiscal 2004 segment received 21 million allocation corporate foreign exchange adjustments company assesses financial performance pharmaceutical technologies services business applying constant foreign exchange rates translate foreign business units operating results us dollars fiscal 2004 2003 2002 112 million 175 million 174 million expenses allocated corporate representing difference constant rates actual exchange rates beginning fiscal 2003 company began expanding use shared service center previously supported medical products services segment benefit support companywide initiatives business segments accordingly cost shared service center previously reported within medical products services segment classified within corporate operating earnings fiscal 2004 2003 cost services approximately 184 million 190 million respectively fiscal 2004 fiscal 2003 7 includes alaris assets approximately 24 billion approximately 15 billion relates preliminary goodwill allocation 4132 million relates intangible assets remaining assets primarily include corporate cash equivalents corporate net property equipment unallocated deferred taxes following table presents revenue longlived assets geographic area millions longlived assets include property equipment net accumulated depreciation cardinal health inc subsidiaries notes consolidated financial statements 19 selected quarterly financial data unaudited following selected quarterly financial data millions except per common share amounts fiscal 2004 2003 sum quarters may equal yeartodate due rounding cardinal health inc subsidiaries notes consolidated financial statements 1 revenue previously classified bulk deliveries customer warehouses reclassified within form 10k periods presented result companys decision aggregate revenue classes reclassifications effect previously reported total revenue gross margins earnings continuing operations net earnings per common share amounts additional information concerning reclassification see note 2 fiscal 2004 company changed method recognizing cash discounts payments made vendors see note 16 fiscal 2004 quarterly financial information restated previously issued quarterly financial statements reflect change accounting change accounting column reflects reported numbers restated change accounting restated column includes restatements including change accounting discussed note 4 mergerrelated costs special items recognized various quarters fiscal 2004 2003 following table summarizes impact costs net earnings diluted earnings per common share quarters recorded millions except per common share amounts 20 guarantees november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation enhances guarantors disclosure requirements interim annual financial statements regarding obligations certain guarantees company adopted enhanced disclosure requirements second quarter fiscal 2003 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 company contingent commitments related certain operating lease agreements see note 10 operating leases consist certain real estate equipment used operations company event termination operating leases range length one ten years company guarantees reimbursement portion unrecovered cardinal health inc subsidiaries notes consolidated financial statements property cost june 30 2004 maximum amount company could required reimburse 3969 million based upon current information company believes proceeds sale properties operating lease agreements would exceed contingent obligation accordance fasb interpretation 45 company recorded 43 million related guarantees ordinary course business company time agrees indemnify certain parties agreements company including acquisition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount companys aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact companys results operations 21 discontinued operations connection acquisition syncor company acquired certain operations syncor discontinued prior acquisition syncor announced discontinuation certain operations including medical imaging business certain overseas operations company continuing plans added additional international noncore domestic businesses discontinued operations syncor accordance sfas 144 accounting impairment disposal longlived assets net assets results operations businesses presented discontinued operations company currently overseeing planned sale discontinued operations actively marketing businesses company expects sell substantially remaining discontinued operations end second quarter fiscal 2005 net assets discontinued operations included within pharmaceutical technologies services segment results discontinued operations fiscal years ended june 30 2004 2003 summarized follows interest expense allocated discontinued operations 02 million 05 million fiscal years ended june 30 2004 2003 respectively interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets syncor cardinal health inc subsidiaries notes consolidated financial statements june 30 2004 2003 major components assets liabilities discontinued operations follows cash flows generated discontinued operations immaterial company therefore disclosed separately 22 subsequent events subsequent june 30 2004 company borrowed 125 billion aggregate two 750 million bank revolving credit facilities proceeds borrowing utilized repay significant portion companys commercial paper none remained outstanding filing date form 10k general corporate purposes including establishment pharmaceutical inventory pharmaceutical distribution business national logistics center groveport ohio see note 6 discussion regarding nature terms companys bank revolving credit facilities also subsequent june 30 2004 company received commitment letter 500 million committed borrowing facility used general corporate purposes facility process negotiated additionally subsequent june 30 2004 company sold aggregate 800 million receivables committed receivables sales facility program capacity committed receivables sales facility program increased 500 million 800 million september 2004 see note 10 information regarding facility item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2005 2004 2003 consolidated balance sheets june 30 2005 2004 consolidated statements shareholders’ equity fiscal years ended june 30 2005 2004 2003 consolidated statements cash flows fiscal years ended june 30 2005 2004 2003 notes consolidated financial statements schedule ii report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2005 2004 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2005 audits also included financial statement schedule listed index item 15a2 consolidated financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position company june 30 2005 2004 consolidated results operations cash flows three years period ended june 30 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 16 consolidated financial statements company changed method recognizing cash discounts effective beginning fiscal year 2004 also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting june 30 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 9 2005 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio september 9 2005 cardinal health inc subsidiaries consolidated statements earnings millions except per common share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 accounting investigations restatement following summary previously reported governmental internal investigations regarding cardinal health inc “company” related matters summary updates information provided company’s annual report form 10k fiscal year ended june 30 2004 “2004 form 10k” quarterly reports fiscal 2005 2004 form 10k reflected certain conclusions reached company’s audit committee restated reclassified company’s consolidated financial statements fiscal 2000 2001 2002 2003 first three quarters fiscal 2004 discussed fully previously reported settlement discussions recently commenced securities exchange commission “sec” regarding resolution investigation respect company recorded reserve 25 million fiscal 2005 respect sec investigation previously reported october 2003 sec initiated informal inquiry regarding company sec’s initial request sought historical financial related information including limited accounting treatment certain recoveries vitamin manufacturers connection sec’s informal inquiry audit committee board directors company commenced internal review april 2004 assisted independent counsel may 6 2004 company notified sec converted informal inquiry formal investigation june 21 2004 part sec’s formal investigation company received additional sec subpoena included request production documents relating revenue classification methods used classification company’s pharmaceutical distribution business either “operating revenue” “bulk deliveries customer warehouses other” addition company learned us attorney southern district new york also commenced inquiry respect company understands relates revenue classification issue october 12 2004 connection sec’s formal investigation company received subpoena sec requesting production documents relating compensation information specific current former employees officers company notified april 2005 certain current former employees directors received subpoenas sec requesting production documents subject matter requests consistent subject matter subpoenas company previously received sec company continues respond sec’s investigation audit committee’s internal review provide information required september october 2004 audit committee reached certain conclusions respect findings internal review conclusions regarding certain items impact revenue earnings related four primary areas focus 1 classification sales customer warehouses “operating revenue” “bulk deliveries customer warehouses other” within company’s pharmaceutical distribution provider services segment 2 disclosure company’s practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment 3 timing revenue recognition within company’s former automation information services segment 4 certain balance sheet reserve accrual adjustments identified internal review connection conclusions audit committee determined consolidated financial statements company respect fiscal 2000 2001 2002 2003 well first three quarters fiscal 2004 restated reflect conclusions internal review date restatements reflected 2004 form 10k following conclusions reached audit committee september october 2004 audit committee began task assigning responsibility financial statement matters described reflected 2004 form 10k january 2005 took disciplinary actions respect company’s employees determined bore responsibility matters respect accounting treatment certain recoveries vitamin manufacturers separate board committee internal review discussed disciplinary actions ranged terminations resignations employment required repayments fiscal 2003 bonuses certain employees letters reprimand disciplinary actions affected senior financial managerial personnel well personnel corporate level four business segments none company’s current corporate executive officers identified heading “executive officers company” following item 4 company’s annual report form 10k fiscal year ended june 30 2005 subject disciplinary action audit committee connection determinations made audit committee company’s former controller resigned effective february 15 2005 audit committee completed determinations responsibility financial statement matters described reflected 2004 form 10k although responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers addressed separate committee board audit committee internal review substantially complete connection sec’s formal investigation committee board directors assistance independent cardinal health inc subsidiaries notes consolidated financial statements counsel separately initiated internal review assign responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers 2004 form 10k part audit committee’s internal review company reversed previous recognition estimated recoveries vitamin manufacturers amounts overcharged prior years recognized income recoveries special item period cash received manufacturers sec staff previously advised company view company appropriate basis recognizing income advance receiving cash august 2005 separate board committee reached certain conclusions respect findings internal review determined additional disciplinary actions required beyond disciplinary actions already taken audit committee described separate board committee internal review substantially complete settlement discussions recently commenced sec regarding resolution investigation respect company discussions ongoing assurance company’s efforts resolve investigation respect company successful company cannot predict timing outcome matters terms resolution result initiation discussions company recorded reserve 25 million fiscal year ended june 30 2005 respect sec investigation unless sec investigation resolved assurance amount reserved company investigation sufficient larger amount required therefore reserve reviewed quarterly basis adjusted extent company determines necessary conclusions audit committee’s internal review respect financial statement matters set forth notes 1 2 “notes consolidated financial statements” included 2004 form 10k information respect prior conclusions audit committee’s internal review impact reclassification restatement adjustments reporting periods discussed form 10k set forth revenue impact classification sales customer warehouses “operating revenue” “bulk deliveries customer warehouses other” within company’s pharmaceutical distribution provider services segment presented historically since 1998 pharmaceutical distribution provider services segment’s revenue classified two categories “operating revenue” “bulk deliveries customer warehouses other” “bulk deliveries customer warehouses other” category historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer shipped product directly customer’s warehouse product shipped customer’s warehouse company shortly received company put company’s inventory either case “bulk revenue” bulk revenue product shipped customer bulk form received company manufacturers november 2001 march 2004 company followed internal policy distinguishing operating revenue bulk revenue based long product company’s possession prior shipped customers product possession company 24 hours prior shipped customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue company’s internal policy also provided customer orders bulk shipments filled inventory within company’s warehouse deemed operating revenue based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held beyond 24 hours pursuant internal policy shipments classified operating revenue four quarters within fiscal 2003 2002 impact practice previously quantified disclosed part company’s reported operating revenue improper classification bulk revenue operating revenue impact company’s previously reported total revenue operating net earnings periods see note 2 discussion matters undisclosed earnings impact disclosure company’s practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment historically company recognized cash discounts reduction cost products sold primarily upon payment vendor invoices cash discounts company receives vendors timely payment invoices company practice accelerating payment vendor invoices end certain reporting periods order accelerate recognition cash discounts effect improving operating results reporting periods although effect accelerated payments properly included company’s reported earnings impact acceleration practice separately quantified disclosed periods company benefited practice net increasedecrease net earnings result practice fiscal 2004 2003 follows cardinal health inc subsidiaries notes consolidated financial statements table includes corrections amounts reported 2004 form 10k based additional information net impact corrections resulted increasedecrease 03 million 07 million 34 million fiscal 2004 2003 2002 respectively fourth quarter fiscal 2004 company changed accounting method recognizing cash discounts recognition primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale company purchased inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenue change retroactively effective beginning fiscal 2004 result company restated previously reported fiscal 2004 quarterly results reflect change see note 16 discussion change accounting revenue earnings impact timing revenue recognition within company’s former automation information services segment within former automation information services segment included clinical technologies services segment see note 18 company’s revenue recognition policy equipment systems installed customer’s site recognize revenue company’s installation obligations complete equipment functioning according material specifications user’s manual customer accepted equipment evidenced signing equipment confirmation document described 2004 form 10k company learned concerns audit committee’s internal review equipment confirmation documents executed prior time installations complete revenue could recognized order assess implications premature execution equipment confirmations corresponding revenue recognition audit committee review included following • document process reviews including sample equipment confirmation forms • certifications selected employees involved installation process • interviews selected employees across regions within us various levels company • interviews certain former employees company • interviews selected customers across regions within us inquiry indicated equipment confirmations particularly sales regions prematurely executed customers request certain company employees including certain situations inducements customer deferral payments offered obtain premature execution result determined material weakness company’s internal controls existed respect timing revenue recognition within segment company concluded following connection review premature revenue recognition • equipment confirmations last several weeks quarter likely executed early customer due requests certain company employees • evidence discovered fictitious sales recorded company • revenue recognized early primarily one quarter cases installations completed following quarter • impact company’s financial results deemed material individual quarter annually net impact premature revenue recognition assessed june 30 2004 based upon interviews customers representing substantial percentage segment’s end quarter reported revenue result determined approximately 108 revenue last 10 days fourth quarter fiscal 2004 recognized prematurely based upon extrapolation company recorded 83 million reduction revenue 53 million reduction operating earnings fourth quarter fiscal 2004 adjust premature revenue recognition determined occurred within quarter revenue operating earnings recognized first quarter fiscal 2005 upon completion applicable installation process cardinal health inc subsidiaries notes consolidated financial statements company maintain accounting records allow determine precise impact matter prior quarters however investigation sufficient data accumulated independent accounting systems estimate impact using variety methods estimation methods utilized solely test materiality prior periods necessarily indicative actual results would results june 30 2004 interviews applied ie utilizing 108 exception rate net increasedecrease revenue operating earnings first three quarters fiscal 2004 fiscal 2003 related percentage former automation information services segment’s reported amounts would follows using different estimation methods methodology used derive table percentage change operating earnings periods noted would range less 1 high 66 two quarters estimated impact 5 first quarter fiscal 2003 negative impact 66 third quarter fiscal 2004 negative impact 55 company believes impact adjustments resulting estimation methods material previously reported results estimated adjustments distort trends revenue operating earnings growth previously reported would alter company’s previous disclosures related former automation information services segment given premature revenue recognition practices identified june 30 2004 company completed similar review installation process first quarter fiscal 2005 including interviews selected customers representing substantial percentage former automation information services segment’s end quarter reported revenue results interviews performed first quarter fiscal 2005 suggested lower incidence premature revenue recognition june 30 2004 sample customers interviewed limited completed june 30 2004 addition company’s efforts improve system internal controls early stages result company conjunction audit committee decided adjust reported revenue utilizing error rate 108 utilized june 30 2004 utilizing 108 assumed error rate company recorded 42 million reduction revenue 25 million reduction operating earnings first quarter fiscal 2005 adjustment exclusive recognition 83 million revenue 53 million operating earnings first quarter fiscal 2005 described following completion first quarter fiscal 2005 company reiterated revenue recognition policy equipment systems installed customer’s site former automation information services segment instructed employees strictly adhere policy company continues implement corrective actions response findings regarding revenue recognition practices within former automation information services segment described note 1 “notes consolidated financial statements” 2004 form 10k second third fourth quarters fiscal 2005 company’s internal audit function completed review revenue recognition practices associated equipment installation process former automation information services segment including interviews selected customers site visits related customer locations representing substantial percentage former automation information services segment’s end quarter reported revenue results interviews site visits performed internal audit function second third fourth quarters fiscal 2005 indicate additional occurrences premature revenue recognition described cardinal health inc subsidiaries notes consolidated financial statements previously restated earnings certain balance sheet reserve accrual adjustments audit committee’s internal review included review determine periodend adjustments balance sheet reserve accounts accruals recorded fiscal 2000 fiscal 2004 properly recorded accordance generally accepted accounting principles “gaap” based upon audit committee’s internal review company determined various situations amount reserve b timing reserve recognition c timing reserve adjustments could substantiated error result described 2004 form 10k consolidated financial statements certain prior fiscal quarters years restated company types balance sheet reserves accrual adjustments previously restated consist following 1 errors arising misapplication gaap errors primarily include reductions reserve accounts made periods subsequent period excess identified company b lastin firstout “lifo” inventory adjustment c change accounting policy dividends recognition declared versus paid net impact errors first three quarters fiscal 2004 fiscal 2003 reflected table 2 errors made previous periods identified appropriately corrected subsequent period discovered items reported prior period corrections time discovery deemed immaterial however company restated prior consolidated financial statements correct items identified internal review net impact errors first three quarters fiscal 2004 fiscal 2003 reflected table following table summarizes restatement impact previously reported net earnings defined fiscal 2004 2003 following table summarizes restatement impact previously reported earnings per common share amounts fiscal 2003 prior period errors company continued respond sec’s investigation audit committee’s internal review company identified errors certain restatement adjustments reflected 2004 form 10k impact individual consolidated adjustments operating earnings net earnings related per share amounts immaterial periods presented tables adjusted reflect impact errors tables adjusted total restatements would increaseddecreased 01 million 06 million 08 million 05 million first second third fourth quarters fiscal 2003 respectively net earnings would increaseddecreased result errors fiscal years 2003 2002 2001 02 million 05 million 28 million respectively impact previously reported earnings per share periods effected addition errors would also decrease company’s june 30 2000 retained earnings 11 million cardinal health inc subsidiaries notes consolidated financial statements sec investigation us attorney inquiry audit committee internal review separate board committee internal review remain ongoing although audit committee internal review separate board committee internal review substantially complete company continuing efforts respond inquiries provide information required company cannot predict outcome sec investigation us attorney inquiry audit committee internal review separate board committee internal review outcome sec investigation us attorney inquiry related legal administrative proceedings could include institution administrative civil injunctive criminal proceedings involving company andor current former company employees officers andor directors well imposition fines penalties remedies sanctions addition assurance additional restatements required historical consolidated financial statements included 2004 form 10k forms 10q quarterly periods fiscal 2005 form 10k change require amendment additional disciplinary actions required circumstances sec’s investigation us attorney’s inquiry audit committee’s internal review continue audit committee may identify new issues make additional findings receives additional information may impact company’s consolidated financial statements scope restatements described 2004 form 10k forms 10q quarterly periods fiscal 2005 form 10k 2 reclassifications presented historically since 1998 pharmaceutical distribution provider services segment’s revenue classified two categories “operating revenue” “bulk deliveries customer warehouses other” “bulk deliveries customer warehouses other” category historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer shipped product directly customer’s warehouse product shipped customer’s warehouse company shortly received company put company’s inventory either case “bulk revenue” bulk revenue product shipped customer bulk form received company manufacturers november 2001 march 2004 company followed internal policy distinguishing operating revenue bulk revenue based long product company’s possession prior shipped customers product possession company 24 hours prior shipped customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue company’s internal policy also provided customer orders bulk shipments filled inventory within company’s warehouse deemed operating revenue based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held beyond 24 hours pursuant internal policy shipments classified operating revenue two quarters within fiscal 2003 impact practice previously quantified disclosed part company’s reported operating revenue improper classification bulk revenue operating revenue impact company’s previously reported total revenue operating net earnings periods following table shows amount bulk revenue estimated improperly classified operating revenue manner described impact adjusting bulk revenue operating revenue periods improper classifications occurred company decided aggregate revenue classes within 2004 form 10k “operating revenue” “bulk deliveries customer warehouses other” combined periods presented total revenue total cost products sold presented single amounts consolidated statements earnings reclassifications effect previously reported total revenue related cost products sold operating earnings net earnings per share beginning 2004 form 10k information concerning portion company’s revenue arises bulk revenue discussed company’s “management’s discussion analysis financial condition results operations” cardinal health inc subsidiaries notes consolidated financial statements certain insignificant reclassifications made conform prior period amounts current presentation 3 summary significant accounting policies company leading provider products services supporting health care industry helping health care providers manufacturers improve efficiency quality health care june 30 2005 company conducted business within following four business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services see note 18 information related company’s business segments basis presentation consolidated financial statements company include accounts majorityowned subsidiaries addition significant intercompany accounts transactions eliminated upon consolidation fiscal 2005 2004 2003 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related company’s acquisitions provided note 4 preparation financial statements conformity gaap united states requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes estimates include limited inventory valuation allowance doubtful accounts goodwill intangible asset impairment vendor reserves restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value cash payments interest 1274 million 1127 million 1153 million cash payments income taxes 5358 million 5663 million 2568 million fiscal 2005 2004 2003 respectively see note 4 additional information regarding noncash investing activities related certain recent acquisitions shortterm investments company’s shortterm investments include approximately 798 million taxexempt variable demand notes approximately 200 million taxexempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet company’s investments securities recorded cost approximates fair market value due variable interest rates see note 23 additional information regarding shortterm investments receivables trade receivables primarily comprised amounts owed company pharmaceutical health care service activities presented net allowance doubtful accounts 1098 million 1191 million june 30 2005 2004 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company writeoff amounts deemed uncollectible established bad debt reserve company provides financing various customers financing arrangements range one year ten years interest rates generally subject fluctuation interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 575 million 354 million june 30 2005 2004 respectively current portions 405 million 172 million respectively included assets amounts reported net allowance doubtful accounts 44 million 41 million june 30 2005 2004 respectively company formed special purpose entities sole purpose buying receivables salestype leases various legal entities company selling receivables salestype leases certain multiseller conduits administered banks thirdparty investors see note 10 additional disclosure regarding offbalance sheet financing fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company cardinal health inc subsidiaries notes consolidated financial statements fiscal 2004 2001 respectively preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entity’s receivables see note 6 additional information inventories substantial portion inventories approximately 67 2005 66 2004 stated lower cost using lifo method market inventories included within company’s pharmaceutical distribution business primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout “fifo” method market company used fifo method inventory valuation approximates current replacement cost inventories would higher lifo method reported june 30 2005 2004 260 million 578 million respectively goodwill intangibles company accounts purchased goodwill intangible assets accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company performed annual impairment test fiscal 2005 2004 neither resulted recognition impairment charges see note 17 additional disclosure regarding goodwill intangible assets property equipment property equipment primarily stated cost depreciation expense financial reporting purposes primarily computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements 1 50 years machinery equipment 3 20 years furniture fixtures 7 years depreciation expense 3378 million 2780 million 2490 million fiscal 2005 2004 2003 respectively company expenses repairs maintenance expenditures incurred company capitalizes interest longterm fixed asset projects using rate 50 approximates company’s weighted average interest rate longterm debt amount capitalized interest within corporate entity immaterial fiscal years presented accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal years ended june 30 2005 2004 largest component accrued liabilities deferred tax liabilities approximately 7308 million 5302 million respectively significant components accrued liabilities current taxes payable employee compensation related benefit accruals fiscal 2005 2004 current taxes payable 2098 million 2864 million respectively employee compensation related benefit accruals 3813 million 3108 million respectively revenue recognition accordance sec staff accounting bulletin “sab” 104 “revenue recognition” company recognizes revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectibility reasonably assured revenue recognized net sales returns allowances pharmaceutical distribution provider services segment records distribution revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances see “sales returns allowances” information segment defines bulk revenue transactions one following characteristics • deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products • delivery products customer form products received manufacturer • warehouse customer warehouse process center deliveries • deliveries customers large high volume full case quantities bulk revenue recorded title transfers customers business obligation provide services related merchandise see notes 1 2 discussion bulk revenue cardinal health inc subsidiaries notes consolidated financial statements revenue deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products recorded gross accordance emerging issues task force “eitf” 9919 “reporting revenue gross principal versus net agent” revenue recorded gross basis since company incurs credit risk customer bears risk loss incomplete shipments receive separate fee commission transaction segment also owns certain consignment inventory recognizes revenue inventory sold third party segment’s customer medicine shoppe medicap franchise operations company apothecarystyle pharmacy franchisees earns franchise origination fees franchise fees represent monthly fees based upon franchisees’ sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened medical products services segment records distribution selfmanufactured medical product revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances see “sales returns allowances” information pharmaceutical technologies services manufacturing packaging revenue recognized either upon shipment delivery product accordance terms contract specify transfer title occurs nonproduct revenue includes annual exclusivity fees option fees extend exclusivity agreements milestone payments attaining certain regulatory approvals exclusivity payments received certain manufacturers return company’s commitment enter agreements manufacture competing products revenue related agreements recognized term exclusivity agreement term option agreement unless particular milestone designated case revenue recognized obligations performance completed radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services clinical technologies services company’s pyxis products business leases sells pointofuse systems revenue recognized transactions follows • revenue recognized salestype leases lease becomes noncancellable lease determined noncancellable upon completion installation equipment functioning according material specifications user’s manual customer accepted equipment evidenced signing equipment confirmation document see note 16 additional information interest income salestype leases recognized revenue using interest method • revenue recognized sale pointofuse systems upon completion company’s installation obligations upon customer acceptance equipment evidenced signing equipment confirmation document • consistent salestype leases revenue recognized operating leases installation complete customer acceptance occurred operating lease revenue recognized lease term amounts become receivable according provisions lease alaris medical systems inc given legal designation cardinal health 303 inc referred “notes consolidated financial statements” “alaris” recognizes revenue net allowance estimated returns credits upon delivery andor installation depending product transfer title risk loss occurred alaris frequently enters revenue arrangements multiple deliverables recognized upon completion installation process allocated element using relative fair value vendorspecific objective evidence appropriate pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated cardinal health inc subsidiaries notes consolidated financial statements amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions multiple segments business units arrangements containing multiple revenue generating activities accounted accordance eitf issue 0021 “revenue arrangements multiple deliverables” deliverable meets criteria separate unit accounting arrangement revenue allocated element based upon relative fair value recognized accordance applicable revenue recognition criteria element savings guarantees company’s customer contracts include guarantee certain amount savings utilization company’s services revenue associated guarantee form consideration cash credit memos recorded guaranteed savings fully recognized guarantees consideration paid form free products services cost goods sold related sales increased amount guarantee sales returns allowances pharmaceutical distribution revenue recorded net sales returns allowances pharmaceutical distribution business recognizes sales returns reduction revenue cost sales price cost respectively products returned pharmaceutical distribution business’ customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost sales accounting policy closely approximate would recorded sfas 48 “revenue recognition right return exists” applying provisions sfas 48 would materially change company’s financial position results operations sales returns allowances pharmaceutical distribution business approximately 14 billion 13 billion 12 billion fiscal 2005 2004 2003 respectively distributed selfmanufactured medical product revenue recorded net sales returns allowances medical products services segment established reserve returned goods accordance sfas 48 reserve amount immaterial periods presented segment’s customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer sales returns allowances medical products services segment approximately 708 million 569 million 556 million fiscal 2005 2004 2003 respectively cash discounts cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold see note 16 information regarding cash discounts change accounting method adopted 2004 distribution service agreement fees company’s pharmaceutical distribution business accounts fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory reduction cost sales accordance eitf issue 0216 “accounting customer certain consideration received vendor” accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different company’s original estimate may require adjustment shipping handling shipping handling costs included selling general administrative expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2757 million 2503 million 2138 million fiscal 2005 2004 2003 respectively shipping handling revenue received immaterial periods presented translation foreign currencies financial statements company’s subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated separate component shareholders’ equity utilizing periodend exchange rates foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings “interest expense other” immaterial fiscal years ended june 30 2005 2004 2003 cardinal health inc subsidiaries notes consolidated financial statements interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended “accounting derivatives hedging activity” standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders’ equity comprehensive income company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value “interest expense other” end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included “interest expense other” remeasurement adjustment offset foreign currency forward contract settlements also classified “interest expense ” interest rate swaps foreign currency forward contracts designated fair value hedges company generally use derivative instruments trading speculative purposes fiscal 2003 company entered one speculative interest rate swap transaction resulting gain approximately 67 million company’s derivative contracts adjusted current market values period qualify hedge accounting sfas 133 amended periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities company’s policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related company’s hedging contracts provided note 7 research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 1172 million 565 million 569 million fiscal 2005 2004 2003 respectively increase fiscal 2005 primarily relates incremental expenses acquisition alaris company received reimbursement certain research development costs reimbursements immaterial periods presented income taxes accordance provisions sfas 109 “accounting income taxes” company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases company’s assets liabilities historically provision made us income taxes undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries fourth quarter fiscal 2005 company determined repatriate 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions american jobs creation act 2004 “ajca” accordingly company recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca see note 8 “notes consolidated financial statements” additional information earnings per common share basic earnings per common share “basic” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic except denominator increased dilutive effect stock options restricted shares restricted share units computed using treasury stock method cardinal health inc subsidiaries notes consolidated financial statements dividends excluding dividends paid entities company merged company paid cash dividends per common share 012 010 fiscal years ended june 30 2005 2004 2003 respectively recent financial accounting standards may 2004 financial accounting standards board “fasb” issued fasb staff position sfas 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fasb staff position provides guidance accounting disclosure effective date transition requirements related medicare prescription drug improvement modernization act 2003 fasb staff position sfas 1062 effective interim annual periods beginning june 15 2004 adoption pronouncement material impact company’s financial position results operations november 2004 fasb issued sfas 151 “inventory costsan amendment accounting research bulletin “arb” 43 chapter 4” statement requires abnormal amounts idle capacity spoilage costs excluded cost inventory expensed incurred sfas 151 applicable inventory costs incurred fiscal years beginning june 15 2005 adoption statement expected material impact company’s financial position results operations december 2004 fasb issued sfas 153 “exchanges nonmonetary assetsan amendment accounting principles board “apb” opinion 29” statement requires exchanges productive assets accounted fair value rather carryover basis unless neither asset received asset surrendered fair value determinable within reasonable limits b transactions lack commercial substance sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption statement expected material impact company’s financial position results operations december 2004 fasb issued fasb staff position sfas 1091 “application fasb statement 109 accounting income taxes tax deduction provided usbased manufacturers american jobs creation act 2004” fasb staff position clarifies tax deduction domestic manufacturers ajca accounted special deduction accordance fasb statement 109 “accounting income taxes” fasb staff position sfas 1091 effective upon issuance adoption pronouncement material impact company’s financial position results operations december 2004 fasb issued fasb staff position sfas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” pronouncement provides entities time evaluate impact ajca entity’s plan reinvestment repatriation certain foreign earnings purposes applying sfas 109 “accounting income taxes” fasb staff position sfas 1092 effective upon issuance fourth quarter fiscal 2005 company determined repatriate 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions ajca accordingly recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca see note 8 additional information regarding ajca december 2004 fasb issued sfas 123r “sharebased payment” revises sfas 123 “accounting stockbased compensation” sfas 123r supersedes apb opinion 25 “accounting stock issued employees” amends sfas 95 “statement cash flows” statement requires public entity measure cost equitybased service awards based grant date fair value award sharebased payments employees including grants employee stock options required recognized income statement based fair value sfas 123r effective company beginning first annual reporting period june 15 2005 company adopt statement july 1 2005 sfas 123r allows public companies adopt requirement using one following transition methods “modified prospective” method compensation cost sharebased payments granted effective date recognized based requirements sfas 123r compensation cost awards granted employees prior effective date unvested effective date sfas 123r recognized based sfas 123 b “modified retrospective” method includes requirements modified prospective method also permits entities restate prior periods presented prior interim periods year adoption based amounts previously recognized sfas 123 pro forma disclosures company adopting sfas 123r using modified prospective method cardinal health inc subsidiaries notes consolidated financial statements company currently accounts sharebased payments employees using intrinsic value method apb opinion 25 company generally recognize compensation cost stock options granted employees adoption sfas 123r expected significant impact company’s results operations however expected material impact company’s overall financial position company cannot determine impact sfas 123r time depend sharebased payments granted future however company adopted sfas no123r prior periods impact would approximated impact sfas 123 described “accounting stockbased compensation” disclosure pro forma net income earnings per share sfas no123r also requires benefits excess tax deductions excess recognized compensation cost reported financing cash flow rather operating cash flow currently required periods adoption requirement sfas 123r reduce net operating cash flows increase net financing cash flow company cannot estimate future tax benefits amounts depend among items future employee stock option exercises however amount operating cash flows recognized year ended june 30 2005 2004 2003 excess tax deductions 188 million 664 million 655 million respectively march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” interpretation clarifies term conditional asset retirement obligations used sfas 143 “accounting asset retirement obligations” interpretation effective later end fiscal years ending december 15 2005 adoption interpretation anticipated material impact company’s financial position results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 replacement apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” statement requires voluntary changes accounting accounted retrospectively prior periods restated newly adopted policy always used unless impracticable apb opinion 20 previously required voluntary changes accounting recognized including cumulative effect change accounting net income period change statement also requires change method depreciation amortization depletion longlived asset accounted change estimate affected change accounting principle sfas 154 effective fiscal years beginning december 15 2005 adopted company statement could impact prior year consolidated financial statements company change accounting stockbased compensation june 30 2005 company maintained several stock incentive plans benefit certain employees company accounts plans accordance apb 25 related interpretations except costs related restricted shares restricted share units stock appreciation rights insignificant number amended options requiring new measurement date compensation expense recognized net earnings options granted exercise price equal market value underlying stock date grant following tables illustrate effect net earnings per share company adopted fair value recognition provisions sfas 123 “accounting stockbased compensation” cardinal health inc subsidiaries notes consolidated financial statements 4 business combinations special items business combinations fiscal 2005 fiscal 2005 company completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 107 million assumed liabilities acquired businesses approximately 27 million consolidated financial statements include results operations business combinations date acquisition transactions occurred july 1 2002 results operations would differed materially reported results fiscal 2004 june 28 2004 company acquired approximately 987 outstanding common stock alaris san diego californiabased provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction acquisition accounted purchase method accounting cash transaction valued approximately 21 billion including assumption approximately 358 million debt agreement company agreed make cash tender offer acquire outstanding shares alaris common stock price 2235 per share alaris employees outstanding stock options either elected receive cash payment convert options option purchase company’s common shares july 2004 certain alaris employees elected convert options right purchase total approximately 06 million common shares company allocation alaris purchase price resulted allocation goodwill approximately 16 billion allocation identifiable intangible assets 4132 million company valued intangible assets related trademarks trade names patents customer relationships detail category follows company worked thirdparty valuation expert determine fair value inprocess research development “iprd” fair value identifiable intangible assets required sfas 141 “business combinations” amounts assigned tangible intangible assets used research development projects alternate future use charged expense acquisition date company recorded charge fiscal 2004 127 million within special items cardinal health inc subsidiaries notes consolidated financial statements company’s consolidated statement earnings estimate acquired iprd supplemental pro forma results operations disclosed impact company alaris acquisition material fiscal 2004 consolidated financial statements include results operations june 28 2004 prior completion alaris acquisition june 16 2004 icu medical inc filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsite® family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief preventing alaris selling smartsite® products july 30 2004 court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits company intends vigorously defend action december 2003 company completed acquisition intercare group plc given legal designation cardinal health uk 432 limited referred “notes consolidated financial statements” “intercare” european pharmaceutical products services company cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt addition fiscal 2004 company completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 168 million assumed liabilities acquired businesses including alaris intercare approximately 11 billion consolidated financial statements include results operations business combinations date acquisition transactions including alaris intercare occurred july 1 2002 results operations would differed materially reported results fiscal 2003 january 1 2003 company completed acquisition syncor international corporation woodland hills californiabased company given legal designation cardinal health 414 inc referred “notes consolidated financial statements” “syncor” provider nuclear pharmacy services acquisition accounted purchase method accounting company issued approximately 125 million common shares valued approximately 780 million syncor stockholders syncor’s outstanding stock options converted options purchase approximately 30 million common shares company also assumed approximately 120 million debt connection acquisition certain operations syncor sold see note 22 operations integrated company’s existing nuclear pharmacy services business component pharmaceutical technologies services segment addition fiscal 2003 company completed acquisitions individually material accounted purchase method accounting aggregate purchase price individually immaterial acquisitions paid cash approximately 144 million assumed liabilities acquired businesses including syncor approximately 3401 million consolidated financial statements include results operations business combinations date acquisition transactions including syncor occurred july 1 2002 results operations would differed materially reported results special items policy company’s special items primarily consist costs relating integration previously acquired companies costs restructuring operations improve productivity integration costs acquisitions accounted pooling interests method recorded accordance eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sab 100 “restructuring impairment charges” certain costs related acquisitions employee lease terminations facility exit costs recognized date integration plan adopted management certain integration costs meeting criteria accrual commitment date expensed integration plan implemented costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 “recognition liabilities connection purchase business combination” certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan committed adopted management certain integration costs meeting criteria accrual commitment date expensed integration plan implemented cardinal health inc subsidiaries notes consolidated financial statements beginning third quarter fiscal 2003 company implemented sfas 146 “accounting costs associated exit disposal activities” account costs incurred restructuring activities standard liability exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 required company recognize liability restructuring costs date commitment exit plan company records settlements significant lawsuits infrequent nonrecurring unusual nature special items also company records time material charges onetime unusual infrequent nature special items special items following summary company’s special items fiscal years ended june 30 2005 2004 2003 1 company applies varying tax rates special items depending upon tax jurisdiction item incurred overall effective tax rate varies period depending upon unique nature company’s special items tax jurisdiction item incurred restructuring costs following table segregates company’s restructuring costs various reporting segments restructuring projects impacted see paragraphs follow additional information regarding company’s restructuring plans global restructuring program previously announced company launched global restructuring program connection one cardinal health initiative goal increasing value company provides customers cardinal health inc subsidiaries notes consolidated financial statements better integration existing businesses improved efficiency disciplined approach procurement resource allocation company expects program implemented two phases substantially completed end fiscal 2008 see form 8k filed company december 14 2004 description costs company expects incur connection first phase global restructuring program “phase i” see form 8k filed company august 5 2005 description costs company expects incur connection second phase global restructuring program “phase ii” following tables summarize significant costs recorded within special items fiscal 2005 connection phase ii year project activities expected completed expected headcount reductions actual headcount reductions date 1 employeerelated costs consist primarily severance accrued upon either communication terms employees management’s commitment restructuring plan defined severance plan exists outplacement services provided employees involuntarily terminated duplicate payroll costs transition periods also included within classification 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring company’s delivery information technology infrastructure services 3 asset impairments recorded connection company’s plan sell three facilities transfer business fourth facility described detail cardinal health inc subsidiaries notes consolidated financial statements company incurred costs 95 million related restructuring projects associated phase initiated within pharmaceutical distribution provider services segment fiscal 2005 projects within segment include closing two distribution centers consolidation existing locations closing multiple companyowned pharmacies within medicine shoppe international inc outsourcing information technology functions company incurred costs 270 million related restructuring projects associated phase initiated within medical products services segment fiscal 2005 projects within segment include centralizing management functions within distribution business transitioning customer needsbased sales representative model ambulatory care business improvements within manufacturing business consolidation outsourcing production higher cost facilities lower cost facilities company incurred costs 1189 million related restructuring projects associated phase initiated within pharmaceutical technologies services segment fiscal 2005 projects within segment include planned reductions headcount within existing operations consolidation overlapping operations total costs fiscal 2005 include 1027 million asset impairment charges approximately 1024 million related plan sell three facilities transfer business fourth facility company plans sell portion businesses housed three facilities available sale transfer remaining portion businesses existing company facilities one facility sold fiscal 2005 company expects complete sale remaining two facilities later end fiscal 2006 carrying amount three facilities sold 1063 million included 187 million goodwill allocated accordance sfas 142 “goodwill intangible assets” company determined plan sale criteria sfas 144 “accounting impairment disposal longlived assets” met fiscal 2005 carrying value asset groups sold adjusted 285 million estimated fair market values less costs sell result company recognized asset impairment charges 778 million associated three businesses fiscal 2005 stated company also committed plan transfer production fourth facility within pharmaceutical technologies services facilities another existing company facility fiscal 2005 production expected continue facility fiscal 2007 company recorded asset impairment 246 million fiscal 2005 based analysis discounted cash flows accordance sfas 144 company incurred costs 07 million related restructuring project associated phase initiated within clinical technologies services segment fiscal 2005 costs incurred connection planned headcount reduction fiscal 2005 company incurred costs 300 million related restructuring projects associated phase ii impacted multiple segments costs related primarily project consulting fees incurred result design implementation company’s overall restructuring plan restructuring company’s delivery information technology infrastructure services severance accrued upon management’s commitment restructuring plan defined severance plan exists cardinal health inc subsidiaries notes consolidated financial statements restructuring programs separate global restructuring program discussed company incurred costs 169 million fiscal 2005 restructure operations domestically internationally throughout company compared 371 million fiscal 2004 670 million fiscal 2003 see costs segment table restructuring plans across segments focused various aspects operations including closing consolidating certain manufacturing operations rationalizing headcount domestically internationally aligning operations strategic costefficient structure included costs fiscal 2004 137 million asset impairments related company’s decision exit certain north american commodity operations within pharmaceutical technologies services segment connection implementing restructuring plans company incurred costs included limited following employeerelated costs majority represents severance accrued upon either communication terms employees management’s commitment restructuring plan defined severance plan exists b exit costs including asset impairment charges costs incurred relocate physical assets project management costs earliest restructuring plans initiated fiscal 2001 others implemented throughout fiscal 2002 2003 2004 restructuring plans completed fiscal 2003 2004 2005 plans completed throughout fiscal 2006 overall restructuring plans within pharmaceutical distribution provider services segment resulted termination approximately 43 employees 41 terminated june 30 2005 restructuring plans within medical products services segment result termination approximately 2200 employees approximately 2185 terminated june 30 2005 restructuring plans within pharmaceutical technologies services segment overall result termination approximately 1100 employees 1050 terminated june 30 2005 restructuring plans within clinical technologies services segment resulted termination 35 employees terminated june 30 2005 restructuring plans impacted multiple segments resulted termination 20 employees terminated june 30 2005 mergerrelated costs integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs incurred fiscal 2005 primarily result alaris syncor acquisitions mergerrelated costs incurred fiscal 2004 primarily result syncor acquisition mergerrelated costs incurred fiscal 2003 primarily result bindley western industries inc given legal designation cardinal health 100 inc referred “notes consolidated financial statements” “bindley” acquisition fiscal years noted company also incurred mergerrelated costs numerous smaller acquisitions following table paragraphs provide additional detail regarding types mergerrelated costs incurred company employeerelated costs fiscal 2005 2004 2003 company incurred employeerelated costs associated certain merger acquisition transactions 163 million 119 million 187 million respectively costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result mergers acquisitions fiscal 2005 charges related primarily alaris syncor acquisitions fiscal 2004 charges primarily result syncor acquisition addition types costs fiscal 2003 company incurred charge 88 million related approved plan curtail defined benefit pension plans within pharmaceutical technologies services segment curtailment resulted plan conform employee benefit plans rp scherer corporation given legal designation cardinal health 409 inc referred “notes consolidated financial statements” “scherer” company’s benefit plan structure time scherer merger fiscal 2005 29 million remaining accrual balance reversed result lowered estimates future payouts due reduced headcount cardinal health inc subsidiaries notes consolidated financial statements pharmaceutical distribution center consolidation fiscal 2004 2003 company incurred charges 01 million 227 million respectively primarily associated company’s plans close consolidate total 16 bindley distribution centers bindley’s corporate office one company’s data centers result bindley acquisition charges include limited following employeerelated costs primarily termination approximately 1250 employees due closures consolidations noted b exit costs consolidate close various facilities mentioned including asset impairment charges inventory move costs contractlease termination costs c duplicate salary costs incurred shutdown periods asset impairments exit costs fiscal 2005 2004 2003 company incurred asset impairment exit costs 16 million 09 million 54 million respectively asset impairment exit costs incurred fiscal 2005 primarily result fixed asset disposals due alaris acquisition facility closures associated syncor acquisition asset impairment exit costs incurred fiscal 2004 related primarily plans consolidate operations result syncor acquisition asset impairment exit costs incurred fiscal 2003 related primarily plans close consolidate facilities result bergen brunswig medical corporation acquisition well asset impairments lease terminations exit costs incurred internationally result scherer acquisition debt issuance cost writeoff first two quarters fiscal 2005 company incurred charges 88 million related writeoff debt issuance costs debt tender offer costs related company’s decision retire certain alaris debt instruments carried higher interest rates company’s cost debt result company retired debt instruments advance original maturity dates inprocess research development fourth quarter fiscal 2004 company recorded charge 127 million related writeoff inprocess research development costs associated alaris acquisition integration costs fiscal 2005 2004 2003 company incurred integration costs 222 million 191 million 276 million respectively costs included category generally relate expenses incurred integrate merged acquired companies’ operations systems company’s preexisting operations systems costs include limited integration information systems employee benefits compensation accountingfinance tax treasury internal audit risk management compliance administrative services sales marketing others litigation settlements net following table summarizes company’s net litigation settlements fiscal 2005 2004 2003 vitamin litigation fiscal 2005 2004 2003 company recorded income 06 million 65 million 1029 million respectively resulting recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years total recovery antitrust claims certain vitamin manufacturers june 30 2005 1453 million net attorney fees payments due interested parties expenses withheld company settled known claims total amount future recovery likely material pharmaceutical manufacturer antitrust litigation fiscal 2005 company recorded income 417 million compared 559 million fiscal 2004 resulting settlement antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition total recovery claims june 30 2005 976 million net attorney fees payments due interested parties expenses withheld cardinal health inc subsidiaries notes consolidated financial statements litigation fiscal 2004 2003 company recorded settlement charges 01 million 14 million respectively related certain immaterial litigation matters fully resolved fiscal 2005 fiscal 2005 company incurred costs recorded within special items totaling 546 million costs primarily relate legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters addition costs include 250 million reserve potential settlement sec regarding resolution investigation respect company unless sec investigation resolved assurance amount reserved company investigation sufficient larger amount required therefore reserve reviewed quarterly basis adjusted extent company determines necessary information regarding matters see note 1 fiscal 2004 fiscal 2004 company incurred special items totaling 379 million total comprises two items first company made special contribution cardinal health foundation fourth quarter totaled approximately 317 million special contribution made direct result large pharmaceutical manufacturer antitrust litigation settlement received fourth quarter cardinal health foundation primary vehicle used company provide charitable support community various organizations prior contributions cardinal health foundation immaterial second company incurred costs 62 million fourth quarter related sec investigation audit committee’s internal review costs primarily represent legal fees document preservation production costs incurred responding requests related sec’s investigation audit committee’s internal review prior costs incurred related matters immaterial information regarding matters see note 1 special items accrual rollforward following table summarizes activity related liabilities associated company’s special items purchase accounting accruals connection restructuring integration plans related intercare company accrued part acquisition adjustments liability 104 million related employee termination relocation costs 110 million related closing certain facilities june 30 2005 company paid 30 million employeerelated costs also fiscal 2005 company reversed 15 million accrual goodwill longer necessary payments made associated facility closures connection restructuring integration plans related syncor company accrued part acquisition adjustments liability 151 million related employee termination relocation costs 104 million related closing duplicate facilities june 30 2005 company paid 138 million employee related costs 51 million associated facility closures 11 million restructuring costs certain merger acquisition restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred cardinal health inc subsidiaries notes consolidated financial statements company estimates incur additional costs future periods associated various mergers acquisitions restructuring activities totaling approximately 268 million approximately 175 million net tax estimated costs primarily associated first second phases company’s previouslyannounced global restructuring program alaris acquisition company believes incur costs properly restructure integrate rationalize operations portion represents facility rationalizations implementing efficiencies regarding information systems customer systems marketing programs administrative functions among things amounts expensed special items incurred 5 leases salestype leases company’s salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components company’s net investment salestype leases follows future minimum lease payments received pursuant salestype leases next five fiscal years thereafter fiscal 2004 company entered two separate agreements transfer ownership certain lease receivables along security interest related leased equipment leasing subsidiary bank net book value leases sold 3142 million fiscal 2004 see note 10 additional information cardinal health inc subsidiaries notes consolidated financial statements 6 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following 400 445 600 625 675 notes represent unsecured obligations company 730 notes 780 700 debentures represent unsecured obligations allegiance corporation guaranteed company obligations subject sinking fund redeemable prior maturity except 700 debentures included put options expired september 15 2003 without put options exercised interest paid pursuant terms notes structurally subordinated liabilities company’s subsidiaries including trade payables 76 billion 6500 million preferred debt securities part company’s acquisition alaris fiscal 2004 company assumed 1953 million senior subordinated notes due 2011 includes premium 203 million based fair value debt senior subordinated notes bear interest annual rate 725 payable semiannually arrears july 1 january 1 year commencing january 1 2004 mature july 1 2011 senior subordinated notes redeemable option company whole part time july 1 2007 initial redemption price 103625 plus accrued unpaid interest date redemption price declining annually thereafter addition subject certain limitations company may redeem 35 senior subordinated notes july 1 2006 net cash proceeds one equity offerings price 10725 plus accrued unpaid interest date redemption event change control defined indenture governing senior subordinated notes holders may require company purchase senior subordinated notes 101 principal amount thereof plus accrued unpaid interest date repurchase senior subordinated notes subject certain restrictive reporting covenants june 30 2004 company compliance covenants fiscal 2005 company paid 1836 million senior subordinated notes amended bond indenture remove restrictive covenants remaining balance june 30 2005 116 million callable time july 1 2007 also related alaris acquisition company assumed bank credit facility consisting sixyear 245 million term loan fiveyear 30 million revolving credit facility fiscal 2005 company paid term loan terminated credit facility june 30 2004 1626 million outstanding term loan term loan bore interest annual rate equal current libor fluctuating base rate plus margin 225 june 30 2004 company could elect use either one two three sixmonth libor rate alaris made elections resulting weighted average interest rate june cardinal health inc subsidiaries notes consolidated financial statements 30 2004 336 per annum 111 plus margin 225 company commercial paper program providing issuance 15 billion aggregate maturity value commercial paper company borrowings outstanding program june 30 2005 6342 million outstanding program june 30 2004 market interest rate based upon libor company also extendible commercial notes program providing issuance 1500 million extendible commercial notes company borrowings outstanding extendible commercial notes program june 30 2005 june 30 2004 company also maintains shortterm credit facilities unsecured line credit allow borrowings 3227 million june 30 2005 2004 1360 million 684 million respectively outstanding uncommitted facilities june 30 2005 2004 balances include 56 million 150 million respectively shortterm borrowings reclassified effective interest rate june 30 2005 2004 072 168 respectively june 30 2005 balance also includes 1304 million classified obligations remaining 1539 million balance obligations june 30 2005 consisted primarily additional notes loans capital leases june 30 2004 balance also includes 534 million classified obligations remaining 498 million balance obligations june 30 2004 consists primarily additional notes loans capital leases company also two unsecured 750 million bank revolving credit facilities provide aggregate 15 billion borrowings one facilities expires march 24 2008 expires march 23 2009 expiration revolving credit facilities extended upon mutual consent company lending institutions first quarter fiscal 2005 company borrowed 500 million revolving credit facilities proceeds borrowing utilized repay portion company’s commercial paper general corporate purposes including establishment pharmaceutical inventory pharmaceutical distribution business’ national logistics center groveport ohio second quarter fiscal 2005 company borrowed additional 750 million revolving credit facilities proceeds utilized primarily establishment inventory national logistics center company fully repaid 125 billion outstanding balances bank revolving credit facilities second quarter fiscal 2005 due stabilization shortterm liquidity requirements light among things company substantially completed initial establishment inventory national logistics center revolving credit facilities exist largely support issuances commercial paper well shortterm borrowings remained unused june 30 2005 2004 except 462 million 373 million respectively standby letters credit issued behalf company june 30 2005 56 million shortterm borrowings reclassified longterm june 30 2004 5000 million commercial paper 150 million shortterm borrowings reclassified longterm reclassifications reflect company’s intent ability existence unused revolving credit facilities refinance borrowings remaining 1342 million commercial paper outstanding june 30 2004 classified shortterm fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified longterm debt company’s consolidated balance sheet preferred debt securities must retired redeemed accounts receivable financing entity company creditors access accounts receivable financing entity’s receivables june 30 2005 2004 accounts receivable financing entity owned approximately 5340 million 5069 million respectively receivables included company’s consolidated balance sheet effective interest rate june 30 2005 2004 396 236 respectively loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company longterm obligation collateralized property equipment company aggregate book value approximately 70 million june 30 2004 collateralized obligation paid fiscal 2005 future obligation borrowing facility would subject collateralization provisions maturities longterm obligations future fiscal years cardinal health inc subsidiaries notes consolidated financial statements 7 financial instruments interest rate risk management company exposed impact interest rate changes company’s objective manage impact interest rate changes earnings cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2005 company held two payfixed interest rate swaps hedge variability cash flows relating forecasted transactions contracts classified cash flow hedges mature 2010 2017 respectively company adjusted payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted transactions fiscal 2005 company held two additional payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts classified cash flow hedges matured 2010 2017 respectively forecasted transactions related two additional payfixed interest rate swaps occur fiscal 2005 thus portion contracts became ineffective payments totaling 116 million made terminate contracts fiscal 2005 ineffective portion contracts totaling 13 million recorded interest expense fiscal 2005 remaining 103 million payments relates portion contracts effective prior termination date adjusted current market value comprehensive income fiscal 2005 adjustment recognized interest expense future periods conjunction occurrence originally forecasted transactions june 30 2004 company held two payfixed interest rate swaps acquired alaris acquisition payfixed interest rate swaps utilized alaris hedge bank term loan swaps unwound fiscal 2005 upon company’s election pay bank term loan see note 6 impact company’s consolidated financial statements material company also held payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2015 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded interest expense following table represents notional amount hedged fair value interest rate swaps outstanding june 30 2005 2004 included assetsliabilities net gains payfloating interest rate swaps recognized interest expense fiscal 2005 2004 2003 approximately 227 million 348 million 271 million respectively addition 103 million described company net deferred losses payfixed interest rate swaps 73 million recorded comprehensive income june 30 2005 company net deferred gains payfixed interest rate swaps 08 million recorded comprehensive income june 30 2004 fiscal 2005 2004 2003 company recognized losses approximately 07 million 45 million 119 million respectively within interest expense related interest rate swaps cardinal health inc subsidiaries notes consolidated financial statements counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates company’s objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses gains losses contracts offset changes value underlying transactions occur june 30 2005 2004 company held forward contracts expiring june 2006 june 2005 respectively hedge probable firmly committed revenue expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged european euro british pound mexican peso canadian dollar australian dollar thai bhat company also held forward contracts expiring december 2013 june 30 2005 2004 respectively hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values interest expense directly offsetting adjustment foreign currency asset liability following table represents notional amount hedged value forward contracts outstanding june 30 2005 2004 included assets liabilities amount net losses related fair value forward contracts recognized interest expense fiscal 2005 2004 2003 approximately 185 million 127 million 81 million respectively june 30 2005 company net deferred gains related forward contract cash flow hedges 54 million compared net deferred losses 35 million june 30 2004 gains losses recorded comprehensive income fiscal 2005 2004 2003 company recognized losses approximately 80 million 149 million 122 million respectively within net earnings related forward contracts incomeloss recorded forward contract fair value hedge offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2005 2004 connection company’s acquisition alaris company acquired certain options hedging european euro australian dollar canadian dollar british pound options entered alaris reduce risk earnings cash flow volatility related certain forecasted transactions options expired fiscal 2005 company recognize material gainslosses related options counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material cardinal health inc subsidiaries notes consolidated financial statements fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2005 2004 approximate fair value shortterm maturities items cash balances invested accordance company’s investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value company’s longterm obligations 27202 million 37871 million compared carrying amounts 26278 million 36897 million june 30 2005 2004 respectively fair value company’s longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss company’s derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments 8 income taxes earnings income taxes discontinued operations cumulative effect change accounting follows provision income taxes continuing operations cumulative effect change accounting consists following cardinal health inc subsidiaries notes consolidated financial statements reconciliation provision based federal statutory income tax rate company’s effective income tax rate continuing operations cumulative effect change accounting follows october 22 2004 ajca signed law provision ajca creates temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends controlled foreign corporations fourth quarter fiscal 2005 company determined repatriate 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions ajca accordingly recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca june 30 2005 company 905 million net 500 million repatriated fiscal 2006 undistributed earnings foreign subsidiaries intended permanently reinvested foreign operations earnings considered permanently reinvested thus us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows amounts classified consolidated balance sheets follows cardinal health inc subsidiaries notes consolidated financial statements june 30 2005 company gross federal state net operating loss carryforwards 1271 million 7083 million respectively gross valuation allowance 3978 million june 30 2005 provided state net operating loss utilization carryforwards within applicable statutory periods uncertain state net operating loss carryforwards expire 2025 expiring state net operating loss carryforwards required valuation allowances adjusted annually company also gross federal capital loss carryovers 147 million june 30 2005 valuation allowance established application valuation allowances described company anticipates limitations apply respect utilization net deferred income tax assets described taxsharing agreement baxter international inc allegiance corporation pay increases reimbursed decreases net deferred tax assets transferred date baxterallegiance spinoff hereinafter defined note 11 increases decreases may result audit adjustments baxter’s prior period tax returns 9 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit postretirement benefit defined contribution plans substantially company’s domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code 1986 amended “code” provide company matching profit sharing contributions company’s contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit postretirement benefit plans see 861 million 545 million 642 million fiscal years ended june 30 2005 2004 2003 respectively defined benefit postretirement benefit plans company several defined benefit plans covering substantially scherer salaried hourly employees company also assumed defined benefit plans certain acquisitions including intercare alaris company’s domestic defined benefit plans provide defined benefits based years service level compensation foreign subsidiaries provide pension benefits accordance local customs law company funds pension plans amounts required applicable regulations company also postretirement medical plan postretirement life insurance plan covers eligible scherer participants company uses measurement date march 31 substantially pension postretirement benefit plans cardinal health inc subsidiaries notes consolidated financial statements obligations funded status following table provides reconciliation change projected benefit obligation following table provides reconciliation change fair value plan assets cardinal health inc subsidiaries notes consolidated financial statements following table provides reconciliation net amount recognized consolidated balance sheets projected benefit obligation fair value plan assets pension plans postretirement plans projected benefit obligations excess plan assets follows accumulated benefit obligation fair value plan assets pension plans postretirement plans accumulated benefit obligations excess plan assets follows net periodic benefit cost components company’s net periodic benefit costs follows 1 amount primarily represents amortization unrecognized actuarial losses well amortization transition obligation prior service costs cardinal health inc subsidiaries notes consolidated financial statements assumptions weighted average assumptions used determining benefit obligations follows weighted average assumptions used determining net periodic pension cost follows 1 develop expected longterm rate return assets assumption company considered historical returns future expectations returns asset class well target asset allocation pension portfolio rate gross investment administrative expenses health care cost trend rates health care cost trend rates assumed next year postretirement benefits december 31 follows one percentage point change assumed health care cost trend rates would material impact total service cost total interest cost accumulated postretirement benefit obligation cardinal health inc subsidiaries notes consolidated financial statements plan assets company’s weighted average asset allocations measurement date target asset allocations category follows investment policy reflects longterm nature plans’ funding obligations assets invested provide opportunity income growth principal objective pursued longterm goal designed provide required benefits participants without undue risk expected objective achieved welldiversified asset portfolio equity investments made within guidelines quality marketability diversification mandated employee retirement income security act “erisa” relevant statutes investment managers directed maintain equity portfolios risk level approximately equivalent specific benchmark established portfolio assets invested fixed income securities pooled fixed income portfolios managed actively pursue opportunities presented changes interest rates credit ratings maturity premiums contributions total estimated contributions 2006 measurement year 34 million estimated future benefit payments future benefit payments reflect expected future service appropriate next five fiscal years aggregate five fiscal years thereafter 10 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties lease receivablerelated arrangements fiscal 2004 company entered two separate agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank amounts 1642 million 1500 million transactions resulted immaterial gains losses classified company revenue within results operations order qualify sale treatment sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” company formed whollyowned special purpose bankruptcyremote subsidiaries “pyxis spes” pyxis corporation given legal designation cardinal health 301 inc referred form 10k “pyxis” pyxis spes formed whollyowned qualified special purpose subsidiaries “qspes” effectuate removal lease receivables company’s consolidated financial cardinal health inc subsidiaries notes consolidated financial statements accordance sfas 140 company consolidates pyxis spes consolidate qspes pyxis spes qspes separate legal entities maintain separate financial statements company pyxis assets pyxis spes qspes available first foremost satisfy claims respective creditors company formed pyxis funding llc “pyxis funding” sole purpose acquiring pool leases related leased equipment pyxis ultimately selling lease receivables multiseller conduit administered thirdparty bank pyxis funding whollyowned special purpose bankruptcyremote subsidiary pyxis funding ii llc “pyxis funding ii” formed sole purpose acquiring lease receivables pyxis funding issuing notes secured assets multiseller conduit administered thirdparty bank pyxis funding ii whollyowned qualified special purpose subsidiary pyxis funding transaction qualifies sale treatment sfas 140 accordingly related receivables included company’s consolidated financial statements required us gaap company consolidates pyxis funding consolidate pyxis funding ii pyxis funding pyxis funding ii separate legal entities maintain separate financial statements company pyxis assets pyxis funding pyxis funding ii available first foremost satisfy claims respective creditors fiscal 2005 pyxis exercised option recall agreement issued aforementioned notes result company recorded immaterial loss therefore june 30 2005 notes balance related credit protection notes held investors principal balance 160 million june 30 2004 investors provided credit protection form 20 40 million overcollateralization receivablerelated arrangements cardinal health funding “chf” medicine shoppe capital corporation “mscc” organized sole purpose buying receivables selling receivables multiseller conduits administered third party banks third party investors mscc chf designed special purpose bankruptcyremote entities although consolidated accordance gaap mscc chf separate legal entities company medicine shoppe international inc company’s financial shared services business sale receivables mscc chf qualify sales treatment sfas 140 accordingly included company’s consolidated financial statements fiscal 2004 company terminated liquidated mscc resulting immaterial loss june 30 2005 company committed receivables sales facility program available chf capacity sell 800 million receivables first quarter fiscal 2005 capacity committed receivables sales facility program increased 500 million 800 million recourse provided program requirement chf retain percentage subordinated interest sold receivables company sold 500 million receivables committed receivables sales facility program first quarter fiscal 2005 company sold additional 300 million program second quarter fiscal 2005 third quarter fiscal 2005 company repurchased subsequently sold 1338 million receivables program fourth quarter fiscal 2005 company repurchased 250 million receivables program transactions company 550 million receivable sales outstanding june 30 2005 company also provided secured interest existing receivables 2742 million june 30 2005 required program june 30 2004 company outstanding receivables subordinated interests related facility cash flows receivablerelated arrangements company’s net cash flow benefit related receivable transfers fiscal 2005 2004 2003 follows cardinal health inc subsidiaries notes consolidated financial statements pyxis mscc chf required repurchase receivables sold determined representations warranties regard related receivables accurate date sold operating leases company entered operating lease agreements several third party banks construction various facilities equipment initial terms lease agreements varied maturity dates ranging june 2006 june 2013 optional renewal periods generally five years event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2005 amount expended acquire andor construct facilities 2564 million agreements provide maximum funding 3016 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn fiscal 2005 company decided purchase certain buildings equipment approximately 1323 million previously operating lease agreements addition certain leases qualified capital lease obligations accordingly company approximately 811 million property equipment offset longterm liabilities balance sheet june 30 2005 based upon current market information obtained third party valuation expert company believes payment obligation certain leases would exceed proceeds sale related properties equipment therefore company recorded impairment charges fiscal 2005 see note 21 additional information regarding impairment charges lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2005 weighted average interest rate agreements approximated 401 company’s estimated minimum annual lease payments agreements june 30 2005 approximately 103 million 11 commitments contingent liabilities future minimum rental payments operating leases including referenced note 10 initial remaining noncancelable lease terms excess one year june 30 2005 amounts within 2009 thereafter include company’s obligation purchase certain buildings equipment end related lease term see note 10 additional information related lease agreements rental expense relating operating leases including referenced note 10 approximately 1252 million 1206 million 1028 million fiscal 2005 2004 2003 respectively sublease rental income material period presented herein latex litigation september 30 1996 baxter international inc “baxter” subsidiaries transferred allegiance corporation subsidiaries “allegiance” baxter’s us health care distribution business surgical respiratory therapy business health care costmanagement business well certain foreign operations “allegiance business” connection spinoff allegiance business baxter connection spinoff allegiance corporation later merged subsidiary company february 3 1999 agreed indemnify baxter defend indemnify baxter healthcare corporation contemplated agreements baxter allegiance corporation expenses potential liabilities associated claims arising allegiance business including certain claims alleged personal injuries result exposure natural rubber latex gloves claims name multiple defendants addition baxterallegiance involved allegations sensitization natural rubber latex products company party lawsuits agreed pay settlements plaintiffs first quarter fiscal 2005 company reassessed ability estimate potential remaining costs lawsuits following reassessment first quarter fiscal 2005 company recognized charge 164 million reasonable estimate net future costs incurred defending settling outstanding claims well pursuing insurance recoveries fourth quarter fiscal 2005 company resolved claims relating substantially remaining insurance coverage litigation following resolution claims company concluded position reasonably estimate total remaining uninsured costs litigation fourth quarter fiscal 2005 company recognized additional charge 118 million reasonable estimate uninsured costs already incurred defending settling outstanding claims company anticipate significant charges future periods additional charges may required significant increase number new lawsuits filed currently company considers potential cardinal health inc subsidiaries notes consolidated financial statements event remote derivative actions november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action doris staehr v robert walter et al 02cvg11639 march 21 2003 company filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate company’s proposed acquisition syncor determine propriety indemnifying monty fu former chairman syncor company filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants included new allegations among things company improperly recognized revenue december 2000 september 2001 related settlements certain vitamin manufacturers company filed motion dismiss second amended complaint november 20 2003 court denied motion april 14 2005 court stayed action period six months defendants intend vigorously defend action company currently believe impact lawsuit material adverse effect company’s financial position liquidity results operations since july 1 2004 three complaints filed purported shareholders members company’s board directors certain officers employees company nominal defendant court common pleas franklin county ohio purported derivative actions collectively referred “cardinal health franklin county derivative actions” cases include donald bosley derivatively behalf cardinal health inc v david bing et al sam wietschner v robert walter et al green meadow partners llp derivatively behalf cardinal health inc v david bing et al cardinal health franklin county derivative actions allege individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap company’s audit committee charter complaints cardinal health franklin county derivative actions seek money damages equitable relief defendant directors award attorney’s fees november 22 2004 cardinal health franklin county derivative actions consolidated furthermore agreement parties cardinal health franklin county derivative actions stayed none defendants responded complaints yet company shareholdererisa litigation cardinal health since july 2 2004 ten purported class action complaints filed purported purchasers company’s securities company certain officers directors asserting claims federal securities laws collectively referred “cardinal health federal securities actions” date actions filed united states district court southern district ohio cases include gerald burger v cardinal health inc et al 04 cv 575 todd fener v cardinal health inc et al 04 cv 579 e miles senn v cardinal health inc et al 04 cv 597 david kim v cardinal health inc 04 cv 598 arace brothers v cardinal health inc et al 04 cv 604 john hessian v cardinal health inc et al 04 cv 635 constance matthews living trust v cardinal health inc et al 04 cv 636 mariss partners llp v cardinal health inc et al 04 cv 849 state new jersey v cardinal health inc et al 04 cv 831 first new york securities llc v cardinal health inc et al 04 cv 911 cardinal health federal securities actions purport brought behalf purchasers company’s securities various periods beginning early october 24 2000 ending late july 26 2004 allege among things defendants violated section 10b securities exchange act 1934 amended “exchange act” rule 10b5 promulgated thereunder section 20a exchange act issuing series false andor misleading statements concerning company’s financial results prospects condition certain complaints also allege violations section 11 securities act 1933 amended claiming material misstatements omissions prospectuses issued company connection acquisition bindley 2001 syncor 2003 alleged misstatements relate company’s accounting recoveries relating antitrust litigation vitamin manufacturers classification revenue company’s pharmaceutical distribution business either operating revenue bulk deliveries customer warehouses among matters alleged misstatements claimed caused artificial inflation company’s stock price proposed class period complaints seek unspecified money damages equitable relief defendants award attorney’s fees december 15 2004 cardinal health federal securities actions consolidated one action captioned cardinal health inc federal securities litigation january 26 2005 court appointed pension fund group lead plaintiff consolidated action april 22 2005 lead plaintiff filed consolidated amended complaint naming company certain current former officers employees company’s external auditors defendants complaint seeks unspecified money damages unspecified relief defendants august 22 2005 company certain defendants filed motion dismiss cardinal health inc subsidiaries notes consolidated financial statements consolidated amended complaint since july 2 2004 15 purported class action complaints collectively referred “cardinal health erisa actions” filed company certain officers directors employees company purported participants cardinal health profit sharing retirement savings plan known cardinal health 401k savings plan “401k plan” date actions filed united states district court southern district ohio cases include david mckeehan james syracuse v cardinal health inc et al 04 cv 643 timothy ferguson v cardinal health inc et al 04 cv 668 james decarlo v cardinal health inc et al 04 cv 684 margaret johnson v cardinal health inc et al 04 cv 722 harry anderson v cardinal health inc et al 04 cv 725 charles heitholt v cardinal health inc et al 04 cv 736 dan salinas andrew jones v cardinal health inc et al 04 cv 745 daniel kelley v cardinal health inc et al 04 cv 746 vincent palyan v cardinal health inc et al 04 cv 778 saul cohen v cardinal health inc et al 04 cv 789 travis black v cardinal health inc et al 04 cv 790 wendy erwin v cardinal health inc et al 04 cv 803 susan alston v cardinal health inc et al 04 cv 815 jennifer brister v cardinal health inc et al 04 cv 828 gint baukus v cardinal health inc et al 05 c2 101 cardinal health erisa actions purport brought behalf participants 401k plan syncor employees’ savings stock ownership plan “syncor essop” together 401k plan “plans” also behalf plans complaints allege defendants breached certain fiduciary duties owed erisa generally asserting defendants failed make full disclosure risks plans’ participants investing company’s stock detriment plans’ participants beneficiaries company stock made available investment alternative plans’ participants misstatements alleged cardinal health erisa actions significantly overlap misstatements alleged cardinal health federal securities actions complaints seek unspecified money damages equitable relief defendants award attorney’s fees december 15 2004 cardinal health erisa actions consolidated one action captioned cardinal health inc erisa litigation january 14 2005 court appointed lead counsel liaison counsel consolidated cardinal health erisa action april 29 2005 lead plaintiff filed consolidated amended erisa complaint naming company certain current former directors officers employees company’s employee benefits policy committee putnam fiduciary trust company defendants complaint seeks unspecified money damages unspecified relief defendants august 22 2005 company certain defendants filed motion dismiss consolidated amended erisa complaint respect proceedings described headings “derivative actions” “shareholdererisa litigation cardinal health” company currently believes insurance coverage available company’s insurance policies effect time actions filed policies financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency shareholdererisa litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws collectively referred “syncor federal securities actions” actions filed united states district court central district california cases include richard bowe v syncor int’l corp et al cv 028560 lgb rcx cd cal alan kaplan v syncor int’l corp et al cv 028575 cbm manx cd cal franklin embon jr v syncor int’l corp et al cv 028687 ddp ajwx cd cal jonathan alk v syncor int’l corp et al cv 028841 ghk rzx cd cal joyce oldham v syncor int’l corp et al cv 028972 fmc rcx cd cal west virginia laborers pension trust fund v syncor int’l corp et al cv 029076 nm rnbx cd cal brad lookingbill v syncor int’l corp et al cv 029248 rswl ex cd cal luu v syncor int’l corp et al cv 029583 rgk jwjx cd cal david hall v syncor int’l corp et al cv 029621 cas cwx cd cal phyllis walzer v syncor int’l corp et al cv 029640 rmt ajwx cd cal larry hahn v syncor int’l corp et al cv 0352 lgb rcx cd cal syncor federal securities actions purport brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 actions allege among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncor’s international business omitting mention certain allegedly improper payments syncor’s foreign customers thereby artificially inflating price syncor shares lead plaintiff appointed court syncor federal securities actions consolidated amended complaint filed may 19 2003 naming syncor 12 individuals former syncor officers directors andor employees defendants consolidated complaint seeks unspecified money damages unspecified relief defendants syncor filed motion dismiss consolidated amended complaint august 1 2003 december 12 2003 court granted motion dismiss without prejudice second amended consolidated class action complaint filed cardinal health inc subsidiaries notes consolidated financial statements january 28 2004 naming syncor 14 individuals former syncor officers directors andor employees defendants syncor filed motion dismiss second amended consolidated class action complaint march 4 2004 july 6 2004 court granted defendants’ motion dismiss without prejudice defendants syncor monty fu robert funari haig bagerdjian individual defendants motion dismiss granted prejudice september 14 2004 lead plaintiff filed motion clarification court’s july 6 2004 dismissal order court clarified july 6 2004 dismissal order november 29 2004 lead plaintiff filed third amended consolidated complaint december 29 2004 syncor filed motion dismiss third amended consolidated complaint january 31 2005 april 15 2005 court granted motion dismiss prejudice lead plaintiff appealed decision november 14 2002 two additional actions filed individual stockholders syncor court chancery state delaware “delaware actions” seven syncor’s nine directors “director defendants” complaints delaware actions identical alleged director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncor’s employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments including costs syncor federal securities actions described single purported class action claim seeking recover damages behalf holders syncor shares amount losses sustained consideration received syncor stockholders company’s merger syncor reduced november 22 2002 plaintiff one two delaware actions filed amended complaint adding defendants company subsidiary mudhen merger corporation remaining two syncor directors hereafter included term “director defendants” cases consolidated caption syncor international corp shareholders litigation “consolidated delaware action” august 14 2003 company filed motion dismiss operative complaint consolidated delaware action end september 2003 plaintiffs consolidated delaware action moved court file second amended complaint plaintiffs’ request granted february 2004 monty fu named defendant second amended complaint september 15 2004 court granted monty fu’s motion dismiss second amended complaint court dismissed second amended complaint prejudice november 18 2002 two additional actions filed individual stockholders syncor superior court california county los angeles “california actions” director defendants complaints california actions allege director defendants breached certain fiduciary duties syncor failing maintain adequate controls practices procedures ensure syncor’s employees representatives engage improper unlawful conduct complaints asserted single derivative claim behalf syncor seeking recover costs expenses syncor incurred result allegedly improper payments cases include joseph famularo v monty fu et al case bc285478 cal sup ct los angeles cty mark stroup v robert g funari et al case bc285480 cal sup ct los angeles cty amended complaint filed december 6 2002 one cases purporting allege direct claims behalf class shareholders defendants’ motion stay california actions pending resolution delaware actions discussed granted april 30 2003 november 29 2004 court dismissed california actions prejudice purported class action complaint captioned pilkington v cardinal health et al filed april 8 2003 company syncor certain officers employees company purported participant syncor essop related purported class action complaint captioned donna brown et al v syncor international corp et al filed september 11 2003 company syncor certain individual defendants another related purported class action complaint captioned thompson v syncor international corp et al filed january 14 2004 company syncor certain individual defendants actions brought united states district court central district california consolidated complaint filed february 24 2004 syncor certain former syncor officers directors andor employees alleging defendants breached certain fiduciary duties owed erisa based underlying allegations improper unlawful conduct alleged federal securities litigation consolidated complaint seeks unspecified money damages unspecified relief defendants april 26 2004 defendants filed motions dismiss consolidated complaint august 24 2004 court granted part denied part defendants’ motions dismiss court dismissed without prejudice claims defendants ed burgos sheila coop claims alleging cofiduciary liability defendants claims alleging individual defendants conflicts interest precluding properly exercising fiduciary duties erisa claim breach duty prudently manage plan assets upheld syncor claim breach alleged duty “monitor” performance syncor’s plan administrative committee upheld defendants monty fu robert funari addition united states department labor conducting investigation syncor essop respect compliance erisa requirements cardinal health inc subsidiaries notes consolidated financial statements company responded subpoena received department labor continues cooperate investigation impossible predict outcome proceedings described heading “shareholdererisa litigation syncor” impact company however company currently believe impact actions material adverse effect company’s financial position liquidity results operations company believes allegations made complaints described without merit intends vigorously defend actions company informed individual director officer defendants deny liability claims asserted actions believe meritorious defenses intend vigorously defend actions company currently believes portion liability covered insurance policies company syncor financially viable insurance companies subject selfinsurance retentions exclusions conditions coverage gaps policy limits insurer solvency dupont litigation september 11 2003 ei du pont de nemours company “dupont” filed lawsuit company others united states district court middle district tennessee ei du pont de nemours company v cardinal health inc bba materials technology bba nonwovens simpsonville inc 3030848 complaint alleges various causes action company relating production sale surgical drapes gowns company’s medical products services segment dupont’s claims generally fall categories breach contract false advertising patent infringement complaint request specific amount damages company believes claims made complaint without merit intends vigorously defend action company owed defense indemnity codefendants respect dupont’s claim patent infringement company currently believe impact lawsuit material adverse effect company’s financial position liquidity results operations matter currently scheduled trial second quarter fiscal 2006 matters company also becomes involved timetotime litigation incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs well litigation connection future prior acquisitions company intends vigorously defend litigation currently believe outcome litigation material adverse effect company’s consolidated financial statements see also discussion sec investigation us attorney inquiry note 1 12 shareholders’ equity june 30 2005 2004 company’s authorized capital shares consisted following 750 million common shares without par value “class common shares” 5 million class b common shares without par value 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared company’s board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2005 2004 june 27 2005 company announced board directors authorized purchase 10 billion common shares management deems appropriate company expects begin repurchasing shares first half fiscal 2006 december 2004 company’s board directors authorized repurchase common shares aggregate amount 5000 million pursuant authorization company repurchased approximately 88 million common shares aggregate cost approximately 5000 million six months ended june 30 2005 average price paid per common share 5676 repurchased shares held treasury used general corporate purposes february 27 2004 company’s board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 69 million common shares cardinal health inc subsidiaries notes consolidated financial statements accelerated share repurchase program aggregate cost approximately 4603 million initial price paid per share 6680 approximately 69 million shares repurchased program subject future contingent purchase price adjustment settled fourth quarter fiscal 2004 purchase price adjustment based upon volume weighted average price actual repurchase period subject certain provisions establish cap floor average share price company’s agreement brokerdealer executed repurchase transactions accelerated share repurchase program completed may 11 2004 final volume weighted average price 7007 result company settled forward contract 225 million cash cost included amount associated common shares treasury company used remaining 172 million initial authorization repurchase additional shares approximately 02 million average price paid per share 7073 repurchased shares placed treasury used general corporate purposes august 1 2003 company’s board directors authorized repurchase common shares aggregate amount 10 billion pursuant authorization company repurchased approximately 170 million common shares aggregate cost approximately 10 billion average price paid per share 5865 repurchase completed first quarter fiscal 2004 repurchased shares placed treasury used general corporate purposes january 2003 company’s board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 86 million common shares aggregate cost approximately 500 million repurchase completed february 2003 repurchased shares placed treasury shares used general corporate purposes august 2002 company’s board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 78 million common shares aggregate cost approximately 500 million repurchase completed january 2003 repurchased shares placed treasury shares used general corporate purposes 13 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses company’s trade receivables finance notes accrued interest receivables lease receivables exposed concentration credit risk customers retail health care sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors health care industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers’ financial conditions maintains reserves credit losses historically within company’s expectations following table summarizes company’s customers individually account least 10 company’s revenue customers table serviced pharmaceutical distribution provider services segment june 30 2005 2004 cvs accounted 25 18 respectively walgreens accounted 19 9 respectively company’s gross trade receivable balance certain company’s businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members fiscal 2005 2004 2003 approximately 15 17 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp company’s two largest gpo relationships terms revenue cardinal health inc subsidiaries notes consolidated financial statements however company’s trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements 14 stock options restricted shares company maintains several stock incentive plans “plans” benefit certain officers directors employees historically employee options granted plans generally vested full third anniversary grant date exercisable periods ten years date grant price equals fair market value date grant beginning fiscal 2006 employee options granted plans generally vest equal annual installments four years exercisable periods seven years date grant price equals fair market value date grant plans company currently utilizes equity award grants company authorized grant 768 million shares june 30 2005 537 million shares granted following summarizes stock option transactions company plans july 1 2002 june 30 2005 giving retroactive effect conversions options connection merger transactions stock splits additional information concerning stock options outstanding june 30 2005 presented cardinal health inc subsidiaries notes consolidated financial statements company accounts plans accordance apb opinion 25 except costs related restricted shares restricted share units insignificant number amended options requiring new measurement date compensation cost recognized see note 3 table illustrating effect net income earnings per share company adopted fair value recognition provisions sfas 123 “accounting stock based compensation” weighted average fair value options granted fiscal 2005 2004 2003 1799 2278 2196 respectively fair values options granted company employees directors estimated date grant using blackscholes optionpricing model following assumptions grants respective periods market values restricted shares restricted share units awarded company recorded “other” component shareholders’ equity accompanying consolidated balance sheets restricted shares amortized expense period participants perform services generally one seven years restricted share units generally amortized fiveyear vesting period june 30 2005 approximately 09 million shares share units remained restricted subject forfeiture company employee stock purchase plans sale 120 million company’s common shares authorized employees employed company least 30 days may eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1june 30 july 1december 31 june 30 2005 subscriptions 04 million shares outstanding june 30 2005 39 million shares issued employees plans 15 earnings per share following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2005 potentially dilutive employee stock options antidilutive fiscal 2005 2004 2003 270 million 184 million 225 million respectively cardinal health inc subsidiaries notes consolidated financial statements 16 change accounting effective fiscal 2004 company changed method recognizing cash discounts recognizing cash discounts reduction cost products sold primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenue company recorded 385 million net tax 225 million cumulative effect change accounting consolidated statements earnings cumulative effect reduced net diluted earnings per common share 009 impact change fiscal year ended june 30 2004 increase earnings continuing operations cumulative effect change accounting approximately 132 million resulted increase diluted earnings per common share continuing operations 003 fiscal 2004 pro forma effect accounting change prior periods follows subsequent filing 2004 form 10k certain errors identified related company’s fiscal 2002 pro forma disclosures related cash discounts errors result incomplete information used corresponding calculations corrected fiscal 2002 pro forma disclosures reflected table impact correction errors previously reported pro forma fiscal 2002 amounts follows decreased pro forma earnings continuing operations cumulative effect change accounting pro forma net earnings 111 million decreased pro forma basic diluted earnings per common share continuing operations 003 decreased pro forma net basic diluted earnings per common share continuing operations 002 cardinal health inc subsidiaries notes consolidated financial statements 17 goodwill intangible assets following table summarizes changes carrying amount goodwill three years ended june 30 2005 total reporting segment 1 june 30 2004 balances former automation information services segment alaris combined clinical technologies services 2 increase within pharmaceutical distribution provider services segment primarily relates medicap pharmacies incorporated purchase price tax adjustments approximately 252 million 3 increase within pharmaceutical technologies services segment primarily relates acquisition geodax technology inc acquisition within intercare business resulted goodwill allocations approximately 638 266 million respectively affect acquisitions partially offset purchase price adjustments approximately 186 million remaining amounts represent goodwill acquired immaterial acquisition purchase price adjustments foreign currency translation adjustments 4 increase within clinical technologies services segment primarily relates alaris purchase price tax adjustments approximately 1179 million offset approximately 193 million reclassification goodwill intangibles within alaris business 5 impairment charges relate pharmaceutical development oral technologies biotechnology sterile life science businesses within pharmaceutical technologies services segment see note 4 additional information regarding impairment charges 6 goodwill decrease relates sale radiation management services business within pharmaceutical technologies services segment second quarter see note 22 additional information regarding sale business cardinal health inc subsidiaries notes consolidated financial statements 7 first quarter fiscal 2005 company transferred clinical services consulting business previously reported within pharmaceutical distribution provider services segment clinical technologies services segment better align business operations transfer resulted approximately 601 million goodwill reclassed segments allocation purchase price related certain immaterial acquisitions yet finalized subject adjustment company assesses value preacquisition contingencies certain matters company expects future adjustments allocation purchase price recorded goodwill intangible assets definite lives amortized using straightline method periods range three forty years detail intangible assets class three years ended june 30 2005 follows additions intangible assets fiscal 2004 primarily relate alaris intercare acquisitions see note 4 amortization expense years ended june 30 2005 2004 2003 approximately 586 million 139 million 67 million respectively amortization expense estimated cardinal health inc subsidiaries notes consolidated financial statements 18 segment information company’s operations principally managed products services basis comprised four reportable business segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services formed first quarter fiscal 2005 clinical technologies services includes alaris company’s businesses formerly within automation information services segment company’s clinical services consulting business formerly reported pharmaceutical distribution provider services segment june 2004 company acquired approximately 987 alaris’ outstanding common stock july 2004 alaris merged subsidiary company complete transaction also first quarter fiscal 2005 company transferred specialty pharmaceutical distribution business previously included within pharmaceutical distribution provider services segment medical products services segment transfers effected better align business operations current management reporting structure prior period financial results adjusted reflect changes fiscal 2003 company reclassified central pharmacy services inc cord logistics inc pharmaceutical distribution provider services segment pharmaceutical technologies services segment therefore restated segments’ financial results prior period financial results presented adjusted reflect changes addition completion syncor acquisition january 1 2003 syncor included within pharmaceutical technologies services segment december 2003 company acquired intercare operates specialty pharmaceutical distribution pharmaceutical manufacturing operations europe fiscal year ended june 30 2004 results operations intercare’s specialty pharmaceutical distribution business similar company’s pharmaceutical distribution business included within pharmaceutical distribution provider services segment see footnote 1 table information results operations intercare included within pharmaceutical technologies services segment classification reported second quarter fiscal 2004 immediately following acquisition company still assessing appropriate segment reporting treatment intercare’s results operations second quarter fiscal 2004 material company’s individual segments pharmaceutical distribution provider services segment distributes broad line pharmaceuticals health care products items typically sold hospitals retail drug stores health care providers acquisition intercare segment also operates distribution network within united kingdom offering specialized range branded generic pharmaceutical products segment also provides distribution services pharmaceutical manufacturers new distribution service agreements segment also provides support services complementing distribution activities addition segment operates franchises apothecarystyle retail pharmacies medical products services segment manufactures medical surgical laboratory products distributes selfmanufactured products well products manufactured suppliers hospitals physician offices surgery centers health care providers addition segment distributes oncology therapeutic plasma specialty pharmaceutical biotechnology products hospitals clinics managedcare facilities pharmaceutical technologies services segment provides products services health care industry pharmaceutical development manufacturing services nearly oral sterile dose forms including incorporating company’s proprietary drug delivery systems softgel capsules controlled release forms zydis® fast dissolving wafers advanced sterile delivery technologies segment also provides comprehensive packaging radiopharmaceutical manufacturing distribution pharmaceutical development analytical science services scientific regulatory consulting well medical education marketing contract sales services also manufactures markets generic injectible pharmaceutical products sale hospitals clinics pharmacies united kingdom clinical technologies services segment provides products services hospitals health care providers focus patient safety segment designs develops markets intravenous medication safety infusion therapy delivery systems develops manufactures leases sells services pointofuse systems automate distribution management medications supplies hospitals health care facilities addition segment provides services health care industry integrated pharmacy management temporary pharmacy staffing gathering recording clinical information review analysis interpretation cardinal health inc subsidiaries notes consolidated financial statements company evaluates performance segments based operating earnings corporate allocation certain administrative expenses information interest income expense income taxes provided segment level addition special items impairment charges allocated segments see note 4 discussion company’s special items note 21 additional information regarding impairment charges accounting policies segments described summary significant accounting policies following tables include revenue operating earnings business segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2005 2004 2003 following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2005 2004 2003 segment well reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements following table includes total assets fiscal years ended june 30 2005 2004 segment well reconciling items necessary total amounts reported consolidated financial statements 1 operating results intercare acquired december 2003 include specialty pharmaceutical distribution business similar company’s pharmaceutical distribution business segment reporting purposes specialty pharmaceutical distribution business included pharmaceutical distribution provider services segment classification reported second quarter fiscal 2004 immediately following acquisition company still assessing appropriate segment reporting treatment intercare’s results operations second quarter fiscal 2004 material company’s individual segments 2 medical products services segment’s revenue derived two main product categories product categories respective contributions revenue follows 3 pharmaceutical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows 4 clinical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows 5 corporate revenue primarily consists elimination intersegment revenue foreign currency translation adjustments cardinal health inc subsidiaries notes consolidated financial statements 6 corporate operating earnings include special items 2642 million 574 million 399 million fiscal years ended june 30 2005 2004 2003 respectively see note 4 discussion special items company allocated portion corporate costs business segments estimate costs segments would incurred certain services provided corporate entity addition company attempts maintain relatively consistent yearoveryear rate corporate allocated costs first quarter fiscal 2006 company modify way corporate costs allocated business segments better align corporate spending business segments based benefits received presentation first quarter fiscal 2006 results include reallocation historical segment amounts comparative purposes fiscal 2005 2004 2003 corporate operating earnings include unallocated corporate administrative expenses costs attributable operations segments certain corporate directed costs described • investment spending company encouraged business units identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon corporate management expenses projects retained corporate segment investment spending fiscal years 2005 2004 2003 180 million 483 million 580 million respectively • interest income adjustment direction corporate management former automation information services segment sold portions leased asset portfolio transferred proceeds corporate capital proceeds associated sales redeployed within business segment utilized general corporate purposes segment allocated benefit corporate interest income would earned associated sold leases fiscal 2004 segment received 21 million allocation corporate effective first quarter fiscal 2005 pyxis products business receive allocation adjustment corporate estimated interest income related sale certain lease portfolios • foreign exchange adjustments effective first quarter fiscal 2005 pharmaceutical technologies services segment changed basis measuring impact translating foreign subsidiaries’ operating results us dollars historically since 2000 segment’s revenue operating earnings impacted foreign exchange fluctuations company applied constant exchange rates translate foreign operating results us dollars recorded actual impact foreign exchange rate changes within corporate segment fiscal 2004 2003 112 million 175 million expenses allocated corporate representing difference “constant rates” “actual” exchange rates effective first quarter fiscal 2005 impact foreign exchange fluctuations included pharmaceutical technologies services segment following table presents revenue longlived assets geographic area longlived assets include property equipment net accumulated depreciation cardinal health inc subsidiaries notes consolidated financial statements 19 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2005 2004 sum quarters may equal yeartodate due rounding company recorded following significant adjustments fourth quarter fiscal 2005 • favorable adjustment approximately 317 million changes lifo reserve primarily due price deflation within generic pharmaceutical inventories lower inventory levels lower price increases related branded pharmaceutical inventories • product line rationalization inventory accounts receivable reserve adjustments within pyxis products business approximately 303 million • adjustment approximately 263 million pursuant repatriation provisions ajca • adjustment approximately 118 million within medical products services segment related estimated remaining liabilities settlement insurance proceeds due outstanding latex litigation • increase inventory reserves approximately 147 million within pharmaceutical distribution provider services segment related generic manufacturer’s bankruptcy approximately 100 million related slow moving inventory reserves • adjustments approximately 80 million related write inventory within biotechnology sterile life sciences business cardinal health inc subsidiaries notes consolidated financial statements discussed note 4 special items recognized various quarters fiscal 2005 2004 following table summarizes impact costs net earnings diluted earnings per common share quarters recorded 20 guarantees november 2002 fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation enhances guarantor’s disclosure requirements interim annual financial statements regarding obligations certain guarantees company adopted enhanced disclosure requirements second quarter fiscal 2003 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 company contingent commitments related certain operating lease agreements see note 10 operating leases consist certain real estate equipment used operations company event termination operating leases range length one ten years company guarantees reimbursement portion unrecovered property cost june 30 2005 maximum amount company could required reimburse 2785 million fiscal 2005 company decided repurchase certain buildings equipment approximately 1323 million previously operating lease agreements addition certain leases qualified capital lease obligations accordingly company recorded approximately 811 million property equipment offset longterm liabilities balance sheet june 30 2005 based upon current market information obtained third party valuation expert company believed payment obligation certain leases would exceed proceeds sale related properties equipment therefore company recorded impairment charges fiscal 2005 see note 21 additional information regarding impairment charges accordance fasb interpretation 45 company recorded liability 38 million june 30 2005 related agreements ordinary course business company time agrees indemnify certain parties agreements company including acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount company’s aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact company’s results operations cardinal health inc subsidiaries notes consolidated financial statements 21 impairment charges company classifies certain asset impairments related restructurings special items included operating earnings within consolidated statements earnings asset impairments eligible classified special items gains losses sale assets historically classified “interest expense other” within consolidated statements earnings significant asset impairments incurred fiscal 2005 expected incurred future due company’s global restructuring program ongoing strategic planning efforts effective second quarter fiscal 2005 company presented asset impairments gains losses eligible classified special items within “impairment charges other” within consolidated statements earnings asset impairment charges included within corporate segment’s results prior period financial results reclassified conform change presentation fiscal 2005 2004 2003 company recorded chargesgains 1180 million 115 million 90 million respectively respect significant asset impairments recorded fiscal 2005 company incurred following impairments • impairments approximately 707 million within pharmaceutical technologies services segment impairments related primarily recognizing reductions value assets within oral technologies business based discounted cash flow analyses performed accordance sfas 144 “accounting impairment disposal longlived assets” result strategic business decisions made second quarter fiscal 2005 • impairments approximately 219 million related lease agreements certain real estate equipment used operations company see notes 10 20 additional information regarding lease agreements • impairments 72 million within corporate entity relating decision writeoff internally developed software • impairment 54 million record machinery equipment net realizable value met held sale criteria sfas 144 within pharmaceutical technology services segment • impairment 52 million aircraft within corporate entity repurchased operating lease agreement aircraft met criteria classified held sale second quarter fiscal 2005 asset impairment recognized reduced cost aircraft fair market value based upon quoted market prices similar assets company subsequently sold aircraft third quarter fiscal 2005 significant gain loss recognized see notes 10 20 additional information regarding lease agreements respect significant items recorded fiscal 2004 company incurred following • net gain approximately 87 million related sale nonstrategic business within pharmaceutical technologies services segment • net gain approximately 68 million related sale land within medical products services segment • net gain approximately 63 million related sale nonstrategic business within medical products services segment • company recorded 42 million asset impairment charge relating domestic intellectual property rights within former automation information services segment respect significant items recorded fiscal 2003 company incurred following • net gain approximately 176 million related sale nonstrategic business within pharmaceutical distribution provider services segment • impairment 79 million related certain obsolete assets result system implementation within pharmaceutical technologies services segment • impairment 60 million related two investments within company’s former automation information services segment • impairment 55 million related aircraft within corporate entity met criteria classified held sale second quarter fiscal 2003 cardinal health inc subsidiaries notes consolidated financial statements 22 discontinued operations connection acquisition syncor company acquired certain operations syncor discontinued prior acquisition syncor announced discontinuation certain operations including medical imaging business certain overseas operations company continued plans added additional international noncore domestic businesses discontinued operations accordance sfas 144 “accounting impairment disposal longlived assets” net assets results operations businesses presented discontinued operations company sold substantially remaining discontinued operations prior end third quarter fiscal 2005 net assets june 30 2004 discontinued operations included within pharmaceutical technologies services segment second quarter fiscal 2005 company recorded gain approximately 187 million related sale radiation management services business within company’s pharmaceutical technologies services segment business unit previously classified discontinued operations qualify accordance sfas 144 second quarter fiscal 2005 assets liabilities results operations related business included tables amounts significant results discontinued operations fiscal years ended june 30 2005 2004 2003 summarized follows interest expense allocated discontinued operations fiscal 2005 note assumed connection syncor acquisition paid fourth quarter fiscal 2004 interest expense allocated discontinued operations 02 million 05 million fiscal 2004 2003 respectively interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets syncor june 30 2005 2004 major components assets liabilities discontinued operations follows operating cash flows generated discontinued operations immaterial company therefore disclosed separately however proceeds received sale discontinued operations approximately 474 million presented separately consolidated statements cash flows cardinal health inc subsidiaries notes consolidated financial statements 23 investments june 30 2005 company invested approximately 798 million tax exempt variable demand notes approximately 200 million tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet interest rate payable investments resets every seven days investments automatically reinvested unless company provides notice intent liquidate broker company’s investments securities recorded cost approximates fair market value due variable interest rates underlying maturities investments range eight thirtyfive years bonds issued municipalities tax exempt entities backed letters credit banking institutions broker debt placements investments held custody major financial institutions june 30 2005 company also held 167 million cost investment entity invested continuously incurring losses company believes investment impaired however believes impairment temporary therefore impairment recorded june 30 2005 entity start organization expected incur losses fiscal year 2005 entity strong cash flow believes profitable fiscal year 2006 company continue evaluate investment impairment recognize loss investment deemed otherthantemporarily impaired 24 subsequent events proxy statement 2004 annual meeting shareholders company disclosed discovered 2004 portion option purchase 1425000 company’s common shares giving effect stock splits occurring date grant granted november 1999 robert walter chairman chief executive officer company excess permitted granted single individual fiscal year company’s amended restated equity incentive plan “equity incentive plan” maximum number common shares option awards could granted pursuant terms equity incentive plan 562500 common shares although company would permitted time make larger grant outside equity incentive plan order satisfy original intent understanding company respect 1999 option award consulting outside compensation consultant august 2 2005 human resources compensation committee company’s board directors approved grant mr walter lieu portion 1999 option award excess share limitation full satisfaction claims respect portion deferred payment stock appreciation right “sar” respect 862500 common shares following ratification board directors agreement mr walter company setting forth terms sar grant “sar agreement” executed august 3 2005 terms sar agreement upon exercise sar mr walter become entitled receive cash amount equal fair market value per underlying common share date exercise minus 31167 original exercise price 1999 option award multiplied number common shares sar exercised consistent fact 1999 option award fully vested sar fully vested term expiring november 15 2009 expiration date 1999 option award earlier sixmonth anniversary mr walter’s termination employment order comply section 409a code avoid potential loss company tax deduction section 162m code payment due mr walter deferred six months following termination employment credited interest prime rate date exercise payment date payment subject applicable tax withholding sar agreement contains confirmation agreement mr walter company portion 1999 option award excess share limitation null void 1999 option purchase 562500 common shares excess maximum number permitted equity incentive plan remains outstanding continues governed terms original option agreement sar agreement also provides reimbursement certain legal fees incurred mr walter connection sar march 2005 deferred payment stock appreciation right grant also subsequent june 30 2005 company decided repurchase certain buildings equipment approximately 1336 million operating capital lease agreements june 30 2005 amounts capital lease agreements recorded “longterm obligations less current portion” within company’s consolidated balance sheets june 30 2005 due original maturity date february 2009 see notes 6 10 20 additional information regarding lease agreements item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2006 2005 2004 consolidated balance sheets june 30 2006 2005 consolidated statements shareholders’ equity fiscal years ended june 30 2006 2005 2004 consolidated statements cash flows fiscal years ended june 30 2006 2005 2004 notes consolidated financial statements schedule ii report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2006 2005 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2006 audits also included financial statement schedule listed index item 15a2 consolidated financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position company june 30 2006 2005 consolidated results operations cash flows three years period ended june 30 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 13 consolidated financial statements company adopted sfas 123r “sharebased payment” applying modified prospective method beginning fiscal year 2006 discussed note 15 consolidated financial statements company changed method recognizing cash discounts effective beginning fiscal year 2004 also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting june 30 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 31 2006 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 31 2006 cardinal health inc subsidiaries consolidated statements earnings millions except per common share amounts accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies company leading provider products services supporting healthcare industry helping healthcare providers manufacturers improve productivity safety healthcare june 30 2006 company conducted business within following four reportable segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services see note 17 information related company’s reportable segments effective first quarter fiscal year ended june 30 2007 company report financial information following five reportable segments supply chain services pharmaceutical supply chain services medical products manufacturing pharmaceutical technologies services clinical technologies services basis presentation consolidated financial statements cardinal health inc include accounts majorityowned subsidiaries significant intercompany amounts eliminated references “company” consolidated financial statements shall deemed references cardinal health inc majorityowned subsidiaries unless context otherwise requires fiscal 2006 2005 2004 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related company’s acquisitions provided note 2 company revised consolidated statement cash flows fiscal 2005 2004 separately disclose operating portions cash flows attributable company’s discontinued operations company previously reported amounts within “other accrued liabilities operating items net” within statement cash flows effective third quarter fiscal 2006 company reclassified significant portion healthcare marketing services business united kingdombased intercare pharmaceutical distribution business discontinued operations addition effective first quarter fiscal 2006 company reclassified sterile pharmaceutical manufacturing business humacao puerto rico discontinued operations prior period financial results reclassified conform changes presentation see note 21 additional information also third quarter fiscal 2006 company committed plan sell significant portion specialty distribution business accordance statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” net assets held sale business presented separately consolidated balance sheet june 30 2005 recorded net expected fair value less costs sell amount lower business’ net carrying value fourth quarter fiscal 2006 company sold business see note 21 additional information preparation financial statements conformity generally accepted accounting principles “gaap” united states requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes estimates include limited allowance doubtful accounts inventory valuation goodwill intangible asset impairment vendor reserves equitybased compensation income taxes loss contingencies restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value see note 2 additional information regarding noncash investing activities related certain recent acquisitions cardinal health inc subsidiaries notes consolidated financial statementscontinued shortterm investments company’s shortterm investments june 30 2006 2005 include approximately 2089 million 798 million respectively taxexempt variable rate demand notes approximately 2895 million 200 million respectively taxexempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet company’s investments securities recorded cost approximates fair market value due variable interest rates see note 22 additional information regarding shortterm investments receivables trade receivables primarily comprised amounts owed company pharmaceutical healthcare service activities presented net allowance doubtful accounts 1132 million 1041 million june 30 2006 2005 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company writeoff amounts deemed uncollectible established bad debt reserve company provides financing various customers financing arrangements range one year ten years interest rates generally subject fluctuation interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 328 million 465 million june 30 2006 2005 respectively current portions 278 million 296 million respectively included assets fiscal 2006 company sold certain notes bank see note 19 additional information amounts reported net allowance doubtful accounts 150 million 44 million june 30 2006 2005 respectively company formed special purpose entities sole purpose buying receivables salestype leases various legal entities company selling receivables salestype leases certain multiseller conduits administered banks thirdparty investors see note 8 additional disclosure regarding offbalance sheet financing fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively see note 4 additional information inventories substantial portion inventories approximately 73 2006 67 2005 stated lower cost using lastin firstout “lifo” method market inventories included within core distribution facilities within company’s pharmaceutical distribution business primarily merchandise inventories remaining inventory primarily stated lower cost using firstin firstout “fifo” method market company used fifo method inventory valuation approximates current replacement cost inventories would june 30 2006 higher lifo method reported june 30 2005 260 million fiscal 2006 2005 company recorded lifo reserve reductions 260 million 317 million respectively goodwill intangibles company accounts purchased goodwill intangible assets accordance sfas 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives longer amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company’s impairment analysis based cardinal health inc subsidiaries notes consolidated financial statementscontinued review priceearnings ratio publicly traded companies similar nature scope size discounted cash flow analysis methods assumptions used test impairment consistently applied periods presented discount rate used impairment testing based riskfree rate plus adjustment risk factors use alternative estimates peer groups changes industry adjusting discount rate used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment test fiscal 2006 2005 neither resulted recognition impairment charges see note 16 additional disclosure regarding goodwill intangible assets property equipment property equipment primarily stated cost depreciation expense financial reporting purposes primarily computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements 1 50 years machinery equipment 3 20 years furniture fixtures 7 years depreciation expense 3322 million 3321 million 2724 million fiscal 2006 2005 2004 respectively company expenses repairs maintenance expenditures incurred company capitalizes interest longterm fixed asset projects using rate 59 approximates company’s weighted average interest rate longterm debt amount capitalized interest within corporate entity immaterial fiscal years presented accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal years ended june 30 2006 2005 largest component accrued liabilities net current deferred tax liabilities approximately 6072 million 5389 million respectively significant components accrued liabilities current taxes payable employee compensation related benefit accruals fiscal 2006 2005 current taxes payable 2251 million 2176 million respectively employee compensation related benefit accruals 4141 million 3801 million respectively revenue recognition accordance securities exchange commission “sec” staff accounting bulletin “sab” 104 “revenue recognition” company recognizes revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectibility reasonably assured revenue recognized net sales returns allowances pharmaceutical distribution provider services segment records distribution revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances see “sales returns allowances” information revenue within segment includes revenue bulk customers deliveries bulk customers consist product shipped form product received manufacturer bulk customers ability process large quantities products central locations self distribute products individual retail stores customers revenue bulk customers recorded title transfers customers business obligation provide services related merchandise revenue deliveries customer warehouses whereby company acts intermediary ordering delivery pharmaceutical products recorded gross accordance emerging issues task force “eitf” issue 9919 “reporting revenue gross principal versus net agent” revenue recorded gross basis since company incurs credit risk customer bears risk loss incomplete shipments receive separate fee commission transaction cardinal health inc subsidiaries notes consolidated financial statementscontinued segment also owns certain consignment inventory recognizes revenue inventory sold third party segment’s customer medicine shoppe international inc “medicine shoppe” medicap pharmacies incorporated “medicap” franchise operations company apothecarystyle pharmacy franchisees earns franchise origination fees franchise fees represent monthly fees based upon franchisees’ sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened medical products services segment records distribution selfmanufactured medical product revenue title transfers customers business obligation provide services related merchandise generally occurs upon delivery revenue recorded net sales returns allowances see “sales returns allowances” information pharmaceutical technologies services manufacturing packaging revenue recognized either upon shipment delivery product accordance terms contract specify transfer title occurs nonproduct revenue includes annual exclusivity fees option fees extend exclusivity agreements milestone payments attaining certain regulatory approvals exclusivity payments received certain manufacturers return company’s commitment enter agreements manufacture competing products revenue related agreements recognized term exclusivity agreement term option agreement unless particular milestone designated case revenue recognized obligations performance completed radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services clinical technologies services pyxis products business leases sells pointofuse systems revenue recognized transactions follows • revenue recognized salestype leases lease becomes noncancellable lease determined noncancellable upon completion installation equipment functioning according material specifications user’s manual customer accepted equipment evidenced signing equipment confirmation document interest income salestype leases recognized revenue using interest method • revenue recognized sale pointofuse systems upon completion company’s installation obligations upon customer acceptance equipment evidenced signing equipment confirmation document • consistent salestype leases revenue recognized operating leases installation complete customer acceptance occurred operating lease revenue recognized lease term amounts become receivable according provisions lease alaris products business recognizes revenue net allowance estimated returns credits upon delivery andor installation depending product transfer title risk loss occurred business frequently enters revenue arrangements multiple deliverables recognized upon completion installation process allocated element using relative fair value vendorspecific objective evidence appropriate cardinal health inc subsidiaries notes consolidated financial statementscontinued pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions multiple segments business units arrangements containing multiple revenue generating activities accounted accordance eitf issue 0021 “revenue arrangements multiple deliverables” deliverable meets criteria separate unit accounting arrangement revenue allocated element based upon relative fair value vendor specific objective evidence recognized accordance applicable revenue recognition criteria element savings guarantees company’s customer contracts include guarantee certain amount savings utilization company’s services revenue associated guarantee form consideration cash credit memos recorded guaranteed savings fully recognized guarantees consideration paid form free products services cost goods sold related sales increased amount guarantee sales returns allowances pharmaceutical distribution revenue recorded net sales returns allowances pharmaceutical distribution business recognizes sales returns reduction revenue cost sales price cost respectively products returned pharmaceutical distribution business’ customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost sales accounting policy closely approximate would recorded sfas 48 “revenue recognition right return exists” applying provisions sfas 48 would materially change company’s financial position results operations sales returns allowances pharmaceutical distribution business approximately 14 billion 14 billion 13 billion fiscal 2006 2005 2004 respectively distributed selfmanufactured medical product revenue recorded net sales returns allowances medical products services segment established reserve returned goods accordance sfas 48 reserve amount immaterial periods presented segment’s customer return policy requires product physically returned subject restocking fees allows customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer sales returns allowances medical products services segment approximately 606 million 708 million 569 million fiscal 2006 2005 2004 respectively cash discounts cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold see note 15 information regarding cash discounts change accounting method adopted 2004 distribution service agreement vendor fees company’s pharmaceutical distribution business accounts fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory reduction cost sales accordance eitf issue 0216 “accounting customer certain consideration received vendor” cardinal health inc subsidiaries notes consolidated financial statementscontinued accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different company’s original estimate may require adjustment adjustments vendor reserves included cost sales equitybased compensation first quarter fiscal 2006 company adopted sfas 123r applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates entered within option valuation model include limited stock price volatility expected option life expected dividend yield option forfeiture rates see note 13 additional information regarding equitybased compensation shipping handling shipping handling costs included selling general administrative expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2743 million 2757 million 2503 million fiscal 2006 2005 2004 respectively shipping handling revenue received immaterial periods presented translation foreign currencies financial statements company’s subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated separate component shareholders’ equity utilizing periodend exchange rates foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings “interest expense other” immaterial fiscal years ended june 30 2006 2005 2004 interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended “accounting derivatives hedging activity” standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders’ equity comprehensive income company uses forward currency exchange contracts currency options interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value “interest expense other” end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included “interest expense other” cardinal health inc subsidiaries notes consolidated financial statementscontinued remeasurement adjustment offset foreign currency forward contract settlements also classified “interest expense other” interest rate swaps foreign currency forward contracts designated fair value hedges company’s derivative contracts adjusted current market values period qualify hedge accounting sfas 133 amended periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities company’s policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related company’s hedging contracts provided note 5 research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 1333 million 1172 million 565 million fiscal 2006 2005 2004 respectively increase fiscal 2005 primarily relates incremental expenses acquisition alaris medical systems inc “alaris” company received reimbursement certain research development costs select customers approximately 349 million 187 million 117 million fiscal 2006 2005 2004 respectively income taxes accordance provisions sfas 109 “accounting income taxes” company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases company’s assets liabilities historically provision made us income taxes undistributed earnings foreign subsidiaries earnings considered permanently reinvested operations subsidiaries deferred tax assets liabilities measured using enacted tax rates respective jurisdictions company operates assessing ability realize deferred tax assets company considers whether likely portion deferred tax assets realized deferred taxes provided unremitted earnings subsidiaries outside us expected earnings permanently reinvested company repatriated 500 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions american jobs creation act 2004 “ajca” total liability 267 million 263 million june 30 2006 2005 respectively 500 million maximum repatriation available company repatriation provisions ajca see note 6 additional information earnings per common share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period cardinal health inc subsidiaries notes consolidated financial statementscontinued denominator diluted earnings per common share similar computation basic eps except denominator increased dilutive effect stock options restricted shares restricted share units computed using treasury stock method dividends excluding dividends paid entities company merged company paid cash dividends per common share 024 012 fiscal years ended june 30 2006 2005 2004 respectively recent financial accounting standards november 2004 financial accounting standards board “fasb” issued sfas 151 “inventory costsan amendment arb 43 chapter 4” statement requires abnormal amounts idle capacity spoilage costs excluded cost inventory expensed incurred sfas 151 applicable inventory costs incurred fiscal years beginning june 15 2005 adoption statement material impact company’s financial position results operations december 2004 fasb issued sfas 153 “exchanges nonmonetary assetsan amendment accounting principles board “apb” opinion 29” statement requires exchanges productive assets accounted fair value rather carryover basis unless neither asset received asset surrendered fair value determinable within reasonable limits b transactions lack commercial substance statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption statement material impact company’s financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” revises sfas 123 “accounting stockbased compensation” sfas 123r supersedes apb opinion 25 “accounting stock issued employees” amends sfas 95 “statement cash flows” statement requires public entity measure cost equitybased service awards based grant date fair value award sharebased payments employees including grants employee stock options required recognized income statement based fair value company adopted statement july 1 2005 see note 13 company’s disclosure march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” interpretation clarifies term conditional asset retirement obligations used sfas 143 “accounting asset retirement obligations” interpretation effective later end fiscal years ending december 15 2005 adoption interpretation material impact company’s financial position results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 replacement apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” statement requires voluntary changes accounting accounted retrospectively prior periods restated newly adopted policy always used unless impracticable apb opinion 20 previously required voluntary changes accounting recognized including cumulative effect change accounting net income period change statement also requires change method depreciation amortization depletion longlived asset accounted change estimate affected change accounting principle statement effective fiscal years beginning december 15 2005 adopted company statement could impact prior year consolidated financial statements company change accounting november 2005 fasb issued fasb staff position “fsp” sfas 1151 sfas 1241 “the meaning otherthantemporary impairment application certain investments” fsp amends cardinal health inc subsidiaries notes consolidated financial statementscontinued sfas 115 “accounting certain investments debt equity securities” sfas 124 “accounting certain investments held notforprofit organizations” apb opinion 18 “the equity method accounting investments common stock” fsp provides guidance determination investment considered impaired whether impairment otherthantemporary measurement impairment loss fsp also requires disclosure unrealized losses recognized otherthantemporary impairments fsp effective reporting periods beginning december 15 2005 adoption fsp material impact company’s financial position results operations november 2005 fasb issued fsp fas 123r3 “transition election related accounting tax effects sharebased payment awards” fsp provides companies may elect use specified “shortcut” method calculate historical pool windfall tax benefits upon adoption sfas 123r option use “shortcut” method available regardless whether sfas 123r adopted using modified prospective modified retrospective application transition method whether ability calculate pool windfall tax benefits accordance guidance paragraph 81 sfas 123r method applies awards fully vested outstanding upon adoption sfas 123r fsp became effective november 10 2005 company elected specified “short cut” method calculate beginning pool additional paidin capital related equitybased compensation election impact company’s financial statements see note 13 company’s disclosure february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amendment sfas 133 “accounting derivative instruments hedging activities” sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise required bifurcated host contract election measure hybrid financial instrument fair value entirety irrevocable changes fair value recognized earnings statement also clarifies amends certain provisions sfas 133 sfas 140 statement effective financial instruments acquired issued subject remeasurement event occurring fiscal years beginning september 15 2006 early adoption permitted provided company yet issued financial statements including financial statements interim period fiscal year adoption statement expected material impact company’s financial position results operations july 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxes” interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns interpretation effective fiscal years beginning december 15 2006 cumulative effects applying interpretation recorded adjustment retained earnings beginning period adoption company process determining impact adopting interpretation 2 business combinations special items business combinations fiscal 2006 fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 364 million assumed liabilities acquired businesses approximately 149 million consolidated financial statements include results operations business combinations date acquisition company still finalizing allocation purchase price certain transactions occurred cardinal health inc subsidiaries notes consolidated financial statementscontinued later half fiscal 2006 transactions occurred july 1 2003 results operations would differed materially reported results fiscal 2005 fiscal 2005 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 107 million assumed liabilities acquired businesses approximately 27 million consolidated financial statements include results operations business combinations date acquisition transactions occurred july 1 2003 results operations would differed materially reported results fiscal 2004 june 28 2004 company acquired approximately 987 outstanding common stock alaris san diego californiabased provider intravenous medication safety products services july 7 2004 alaris merged subsidiary company complete transaction cash transaction valued approximately 21 billion including assumption approximately 358 million debt agreement company agreed make cash tender offer acquire outstanding shares alaris common stock price 2235 per share alaris employees outstanding stock options either elected receive cash payment convert options option purchase company’s common shares july 2004 certain alaris employees elected convert options right purchase total approximately 06 million common shares company allocation alaris purchase price resulted allocation goodwill approximately 16 billion allocation identifiable intangible assets 4132 million company valued intangible assets related trademarks trade names patents customer relationships detail category follows company worked thirdparty valuation expert determine fair value inprocess research development “iprd” fair value identifiable intangible assets required sfas 141 “business combinations” amounts assigned tangible intangible assets used research development projects alternate future use charged expense acquisition date company recorded charge fiscal 2004 127 million within special items company’s consolidated statement earnings estimate acquired iprd supplemental pro forma results operations disclosed impact company alaris acquisition material fiscal 2004 consolidated financial statements include results operations june 28 2004 december 2003 company completed acquisition intercare group plc “intercare” european pharmaceutical products services company cash transaction valued approximately 570 million including assumption approximately 150 million intercare debt fiscal 2006 united kingdombased intercare pharmaceutical distribution business classified discontinued operations see note 21 additional information addition fiscal 2004 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 168 cardinal health inc subsidiaries notes consolidated financial statementscontinued million assumed liabilities acquired businesses including alaris intercare approximately 11 billion consolidated financial statements include results operations business combinations date acquisition transactions including alaris intercare occurred july 1 2003 results operations would differed materially reported results special items policy costs associated integrating acquired companies purchase method recorded accordance eitf issue 953 “recognition liabilities connection purchase business combination” certain costs incurred company acquirer employee lease terminations facility exit costs recognized date integration plan committed adopted management certain integration costs meeting criteria accrual commitment date expensed integration plan implemented beginning third quarter fiscal 2003 company implemented sfas 146 “accounting costs associated exit disposal activities” account costs incurred restructuring activities standard liability exit cost recognized incurred discussed company previously accounted costs associated restructuring activities eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” required company recognize liability restructuring costs date commitment exit plan company records settlements significant lawsuits infrequent nonrecurring unusual nature special items company also records legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters special items also company records time material charges onetime unusual infrequent nature special items special items following summary company’s special items fiscal years ended june 30 2006 2005 2004 1 company applies varying tax rates special items depending upon tax jurisdiction item incurred overall effective tax rate varies period depending upon unique nature company’s special items tax jurisdictions items incurred cardinal health inc subsidiaries notes consolidated financial statementscontinued restructuring costs following table segregates company’s restructuring costs various reportable segments impacted restructuring projects see paragraphs follow additional information regarding company’s restructuring plans global restructuring program previously reported fiscal 2005 company launched global restructuring program connection one cardinal health initiative goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation program implemented two phases expected substantially completed end fiscal 2008 first phase program “phase i” focuses business consolidations process improvements including rationalizing facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines second phase program “phase ii” focuses longer term integration activities enhance service customers improved integration across company’s segments continue streamline internal operations cardinal health inc subsidiaries notes consolidated financial statementscontinued following tables summarize significant costs recorded within special items fiscal 2006 2005 connection phase ii including year project activities expected completed expected headcount reductions actual headcount reductions date 1 employeerelated costs consist primarily severance accrued upon either communication terms employees management’s commitment restructuring plan defined severance plan exists outplacement services provided employees involuntarily terminated duplicate payroll costs transition periods also included within classification 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring company’s delivery information technology infrastructure services 3 fiscal 2005 asset impairments recorded connection company’s plan sell two facilities transfer business third facility fiscal 2006 adjustment recorded decision made sell one facilities items discussed detail cardinal health inc subsidiaries notes consolidated financial statementscontinued 1 represents projects initiated june 30 2006 company incurred costs 09 million 95 million fiscal 2006 2005 respectively related restructuring projects associated phase initiated within pharmaceutical distribution provider services segment projects within segment include closing two distribution centers consolidation existing locations closing multiple companyowned pharmacies within medicine shoppe outsourcing information technology functions company incurred costs 90 million 270 million fiscal 2006 2005 respectively related restructuring projects associated phase initiated within medical products services segment projects within segment include centralizing management functions consolidation facilities within distribution business transitioning customer needsbased sales representative model ambulatory care business improvements within manufacturing business consolidation outsourcing production higher cost facilities lower cost facilities company incurred costs 03 million 807 million fiscal 2006 2005 respectively related restructuring projects associated phases ii initiated within pharmaceutical technologies services segment projects within segment include planned reductions headcount within existing operations consolidation overlapping operations total costs fiscal 2005 include 667 million asset impairment charges approximately 664 million related plan sell two facilities transfer business third facility company planned sell portion businesses housed two facilities available sale transfer remaining portion businesses existing company facilities one facility sold fiscal 2005 carrying amount two facilities sold 646 million included 154 million goodwill allocated accordance sfas 142 “goodwill intangible assets” company determined plan sale criteria sfas 144 “accounting impairment disposal longlived assets” met fiscal 2005 carrying value asset groups sold adjusted 228 million estimated fair market values less costs sell result company recognized asset impairment charges 418 million associated two businesses fiscal 2005 fourth quarter fiscal 2006 company made decision sell one two facilities originally planned sell resulting adjustment 38 million increase carrying value disposal group fair value time decision sell stated company also committed plan transfer production third facility within segment another existing company facility fiscal 2005 production expected continue third facility fiscal 2009 company recorded asset impairment 246 million fiscal 2005 based analysis discounted cash flows accordance sfas 144 cardinal health inc subsidiaries notes consolidated financial statementscontinued company incurred costs 07 million fiscal 2005 related restructuring project associated phase initiated within clinical technologies services segment costs incurred connection planned headcount reduction fiscal 2006 2005 company incurred costs 338 million 300 million respectively related restructuring projects associated phases ii impacted multiple segments costs fiscal 2006 related primarily design implementation company’s restructuring plans certain administrative functions restructuring company’s delivery information technology infrastructure services consolidation existing customer service operations two locations severance accrued upon communication terms employees costs fiscal 2005 related primarily design implementation company’s overall restructuring plan restructuring company’s delivery information technology infrastructure services severance accrued upon communication terms employees management’s commitment restructuring plan defined severance plan exists restructuring programs separate global restructuring program discussed company incurred costs 167 million fiscal 2006 restructure operations domestically internationally throughout company compared 115 million fiscal 2005 357 million fiscal 2004 restructuring plans across segments focused various aspects operations including closing consolidating certain manufacturing operations rationalizing headcount domestically internationally aligning operations strategic costefficient structure connection implementing restructuring plans company incurred costs included employeerelated costs majority represents severance accrued upon either communication terms employees management’s commitment restructuring plan defined severance plan exists exit costs including asset impairment charges costs incurred relocate physical assets project management costs restructure delivery information technology infrastructure services included costs fiscal 2006 70 million asset impairments reduce longlived assets one north american manufacturing facilities within pharmaceutical technologies services segment net realizable value based upon discounted cash flow analysis due company’s commitment plan exit facility company expects continue production facility fiscal 2008 included costs fiscal 2004 137 million asset impairments related company’s decision exit certain north american commodity operations within pharmaceutical technologies services segment respect restructuring programs following table summarizes year project activities expected completed expected headcount reductions actual headcount reductions june 30 2006 1 represents projects initiated june 30 2006 cardinal health inc subsidiaries notes consolidated financial statementscontinued mergerrelated costs integrating operations various merged companies recorded mergerrelated costs incurred mergerrelated costs incurred fiscal 2006 2005 primarily result alaris syncor international corporation “syncor” acquisitions mergerrelated costs incurred fiscal 2004 primarily result syncor acquisition fiscal years noted company also incurred mergerrelated costs numerous smaller acquisitions following table paragraphs provide additional detail regarding types mergerrelated costs incurred company employeerelated costs fiscal 2006 2005 2004 company incurred employeerelated costs associated certain merger acquisition transactions 100 million 163 million 118 million respectively costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result mergers acquisitions fiscal 2006 charges relate primarily alaris acquisition fiscal 2005 charges related primarily alaris syncor acquisitions fiscal 2004 charges primarily result syncor acquisition asset impairments exit costs fiscal 2006 2005 2004 company incurred asset impairment exit costs 16 million 14 million 09 million respectively asset impairment exit costs incurred fiscal 2006 primarily result facility integration plans alaris acquisition asset impairment exit costs incurred fiscal 2005 primarily result fixed asset disposals due alaris acquisition facility closures associated syncor acquisition asset impairment exit costs incurred fiscal 2004 related primarily plans consolidate operations result syncor acquisition debt issuance cost writeoff first two quarters fiscal 2005 company incurred charges 88 million related writeoff debt issuance costs debt tender offer costs related company’s decision retire certain alaris debt instruments carried higher interest rates company’s cost debt result company retired debt instruments advance original maturity dates inprocess research development fourth quarter fiscal 2004 company recorded charge 127 million related writeoff inprocess research development costs associated alaris acquisition integration costs fiscal 2006 2005 2004 company incurred integration costs 149 million 199 million 185 million respectively costs included category generally relate expenses incurred integrate merged acquired companies’ operations systems company’s preexisting operations systems costs include limited integration information systems employee benefits compensation accounting finance tax treasury internal audit risk management compliance administrative services sales marketing cardinal health inc subsidiaries notes consolidated financial statementscontinued litigation settlements net following table summarizes company’s net litigation settlements fiscal 2006 2005 2004 pharmaceutical manufacturer antitrust litigation company recorded income 255 million 417 million 559 million fiscal 2006 2005 2004 respectively resulting settlement antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition total recovery claims june 30 2006 1231 million net attorney fees payments due interested parties expenses withheld new york attorney general investigation company recorded reserve 80 million fiscal 2006 respect previouslyreported investigation new york attorney general’s office company recently commenced negotiations new york attorney general’s office civil resolution investigation assurance company’s efforts resolve new york attorney general’s office’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement information regarding matter see note 10 vitamin litigation fiscal 2005 2004 company recorded income 06 million 65 million respectively resulting recovery antitrust claims certain vitamin manufacturers amounts overcharged prior years total recovery antitrust claims certain vitamin manufacturers june 30 2005 1453 million net attorney fees payments due interested parties expenses withheld recoveries since december 31 2004 company settled known claims total amount future recovery likely material litigation fiscal 2006 2004 company recorded settlement recoveries 15 million settlement charges 01 million respectively related certain immaterial litigation matters fiscal 2006 fiscal 2006 company incurred costs recorded within special items totaling 265 million costs primarily relate settlement reserves legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters company continues engage settlement discussions staff sec reached agreementinprinciple basic terms potential settlement involving company sec staff indicated prepared recommend commission proposed settlement subject completion definitive documentation well acceptance authorization commission would among things require company pay 35 million penalty company accordingly recorded reserve 10 million fiscal 2006 addition 25 million reserve recorded fiscal 2005 cardinal health inc subsidiaries notes consolidated financial statementscontinued assurance company’s efforts resolve sec’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement information regarding matter see notes 9 10 fiscal 2005 fiscal 2005 company incurred costs recorded within special items totaling 545 million costs primarily relate legal fees document preservation production costs incurred connection sec investigation audit committee internal review related matters addition costs include 250 million reserve potential settlement sec regarding resolution investigation respect company information regarding matter see notes 9 10 fiscal 2004 fiscal 2004 company incurred special items totaling 379 million total comprises two items first company made special contribution cardinal health foundation fourth quarter totaled approximately 317 million special contribution made direct result large pharmaceutical manufacturer antitrust litigation settlement received fourth quarter cardinal health foundation primary vehicle used company provide charitable support community various organizations prior contributions cardinal health foundation immaterial second company incurred costs 62 million fourth quarter related sec investigation audit committee’s internal review costs primarily represent legal fees document preservation production costs incurred responding requests related sec’s investigation audit committee’s internal review prior costs incurred related matters immaterial special items accrual rollforward following table summarizes activity related liabilities associated company’s special items 1 amounts represent items expensed incurred accrued accordance gaap amounts include gross litigation settlement income recorded fiscal 2006 2005 2004 270 million 423 million 623 million respectively recorded special items purchase accounting accruals connection restructuring integration plans related acquisition wholesale pharmaceutical health beauty related drugstore products distribution business f dohmen co certain subsidiaries “dohmen” company accrued part acquisition adjustments liability 48 million related employee termination relocation costs 174 million related closing certain facilities company still finalizing allocation purchase price dohmen payments made connection employee related costs facility closures fiscal 2006 connection restructuring integration plans related intercare company accrued part acquisition adjustments liability 104 million related employee termination relocation costs 110 million related closing certain facilities fiscal 2006 amounts specifically related united kingdombased intercare pharmaceutical distribution business reclassified discontinued cardinal health inc subsidiaries notes consolidated financial statementscontinued operations addition amounts allocated planned facility closures 163 million reversed goodwill deferred taxes company subsequently decided close facilities fiscal 2005 company reversed 15 million accrual goodwill longer necessary connection restructuring integration plans related syncor company accrued part acquisition adjustments liability 151 million related employee termination relocation costs 104 million related closing duplicate facilities june 30 2006 company paid 140 million employee related costs 74 million associated facility closures 11 million restructuring costs certain merger acquisition restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred company estimates incur additional costs future periods associated various mergers acquisitions restructuring activities totaling approximately 96 million approximately 62 million net tax estimated costs primarily associated first second phases company’s previouslyannounced global restructuring program restructurings within pharmaceutical technologies services segment alaris acquisition company believes incur costs properly restructure integrate rationalize operations portion represents facility rationalizations implementing efficiencies regarding information systems customer systems marketing programs administrative functions among things amounts expensed special items incurred 3 leases salestype leases company’s salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components company’s net investment salestype leases follows future minimum lease payments received pursuant salestype leases next five fiscal years thereafter fiscal 2004 company entered two separate agreements transfer ownership certain lease receivables along security interest related leased equipment leasing subsidiary bank net book value leases sold 3142 million fiscal 2004 see note 8 additional information cardinal health inc subsidiaries notes consolidated financial statementscontinued 4 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following 400 585 600 625 675 notes represent unsecured obligations company 730 notes 780 700 debentures represent unsecured obligations allegiance corporation guaranteed company obligations subject sinking fund redeemable prior maturity except 700 debentures included put options expired september 15 2003 without put options exercised interest paid pursuant terms obligations notes guarantees company structurally subordinated liabilities company’s subsidiaries including trade payables 90 billion part company’s acquisition alaris fiscal 2004 company assumed 1953 million senior subordinated notes due 2011 includes premium 203 million based fair value debt senior subordinated notes bear interest annual rate 725 payable semiannually arrears july 1 january 1 year commencing january 1 2004 mature july 1 2011 senior subordinated notes redeemable option company whole part time july 1 2007 initial redemption price 103625 plus accrued unpaid interest date redemption price declining annually thereafter addition subject certain limitations company could redeem 35 senior subordinated notes july 1 2006 net cash proceeds one equity offerings price 10725 plus accrued unpaid interest date redemption event change control defined indenture governing senior subordinated notes holders may require company purchase senior subordinated notes 101 principal amount thereof plus accrued unpaid interest date repurchase senior subordinated notes subject certain restrictive reporting covenants june 30 2004 company compliance covenants fiscal 2005 company paid 1836 million senior subordinated notes amended bond indenture remove restrictive covenants remaining balance june 30 2006 114 million callable time july 1 2007 also related alaris acquisition company assumed bank credit facility consisting sixyear 245 million term loan cardinal health inc subsidiaries notes consolidated financial statementscontinued fiveyear 30 million revolving credit facility fiscal 2005 company paid term loan terminated credit facility addition cash company’s sources liquidity include 1 billion commercial paper program backed 1 billion revolving credit facility 150 million extendible commercial note program company initiated 1 billion commercial paper program august 2006 replaced former 15 billion commercial paper program company outstanding borrowings commercial paper program extendible commercial notes program june 30 2006 june 30 2005 company also maintains shortterm credit facilities unsecured line credit allow borrowings 3236 million june 30 2006 2005 1635 million 1360 million respectively outstanding uncommitted facilities june 30 2006 2005 balances include 28 million 56 million respectively shortterm borrowings reclassified effective interest rate shortterm borrowings reclassified june 30 2006 2005 093 072 respectively june 30 2006 balance also includes 1607 million classified obligations remaining 362 million balance obligations june 30 2006 consists primarily additional notes loans capital leases june 30 2005 balance also includes 1304 million classified obligations remaining 1539 million balance obligations june 30 2005 consisted primarily additional notes loans capital leases company entered 1 billion revolving credit agreement november 2005 replaced two 750 million revolving credit facilities new facility expires november 18 2010 available general corporate purposes expiration facility extended upon mutual consent company lending institutions first quarter fiscal 2005 company borrowed 500 million revolving credit facilities proceeds borrowing utilized repay portion company’s commercial paper general corporate purposes including establishment pharmaceutical inventory pharmaceutical distribution business’ national logistics center groveport ohio second quarter fiscal 2005 company borrowed additional 750 million revolving credit facilities proceeds utilized primarily establishment inventory national logistics center company fully repaid 125 billion outstanding balances bank revolving credit facilities second quarter fiscal 2005 due stabilization shortterm liquidity requirements light among things company substantially completed initial establishment inventory national logistics center revolving credit facility exists largely support issuances commercial paper well shortterm borrowings remained unused june 30 2006 2005 except 578 million 462 million respectively standby letters credit issued behalf company june 30 2006 2005 28 million 56 million respectively shortterm borrowings reclassified longterm reclassifications reflect company’s intent ability existence unused revolving credit facilities refinance borrowings fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified “longterm obligations less current portion shortterm obligations” debt company’s consolidated balance sheet june 30 2006 2005 accounts receivable financing entity owned approximately 5808 million 5340 million respectively receivables included company’s consolidated balance sheet effective interest rate june 30 2006 2005 590 396 respectively loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company cardinal health inc subsidiaries notes consolidated financial statementscontinued maturities longterm obligations future fiscal years 5 financial instruments interest rate risk management company exposed impact interest rate changes company’s objective manage impact interest rate changes cash flows market value borrowings company maintains fixed rate debt percentage net debt within certain range company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2006 company held payfixed interest rate swaps payfixed interest rate swaps held june 30 2005 terminated september 2005 forecasted transactions related swaps occur time thus portion contracts became ineffective termination contracts resulted cash receipt 12 million ineffective portion contracts totaling less 01 million loss recorded “interest expense other” fiscal 2006 fiscal 2006 company held two payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts matured 2010 2017 respectively contracts also terminated resulting cash receipt 127 million ineffective portion contracts totaling gain 27 million recorded “interest expense other” fiscal 2006 june 30 2005 company held two payfixed interest rate swaps hedge variability cash flows relating forecasted transactions contracts classified cash flow hedges matured 2010 2017 respectively company adjusted payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted transactions fiscal 2005 company held two additional payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts matured 2010 2017 respectively forecasted transactions related two additional payfixed interest rate swaps occur fiscal 2005 thus portion contracts became ineffective payments totaling 116 million made terminate contracts fiscal 2005 ineffective portion contracts totaling 13 million loss recorded interest expense fiscal 2005 remaining 103 million payments relates portion contracts effective prior termination date adjusted current market value comprehensive income fiscal 2005 adjustment recognized interest expense future periods conjunction occurrence originally forecasted transactions company also holds payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2015 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded interest expense cardinal health inc subsidiaries notes consolidated financial statementscontinued following table represents notional amount hedged fair value interest rate swaps outstanding june 30 2006 2005 included assetsliabilities net gainslosses payfloating interest rate swaps recognized interest expense fiscal 2006 2005 2004 approximately 64 million 227 million 348 million respectively company net deferred gainslosses payfixed interest rate swaps 08 million recorded comprehensive income june 30 2006 company net deferred losses payfixed interest rate swaps 73 million recorded comprehensive income june 30 2005 fiscal 2006 company incurred gains less 01 million fiscal 2005 2004 company recognized losses approximately 07 million 45 million respectively within interest expense related interest rate swaps counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates company’s objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses gains losses contracts offset changes value underlying transactions occur june 30 2006 2005 company held forward contracts expiring june 2007 june 2006 respectively hedge probable firmly committed revenue expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged european euro british pound mexican peso canadian dollar australian dollar thai baht company also held forward contracts expiring december 2013 june 30 2006 2005 respectively hedge value foreign currency assets liabilities forward contracts classified fair value hedges adjusted current market values “interest expense other” directly offsetting adjustment foreign currency asset liability cardinal health inc subsidiaries notes consolidated financial statementscontinued following table represents notional amount hedged value forward contracts outstanding june 30 2006 2005 included assets liabilities amount net losses related fair value forward contracts recognized interest expense fiscal 2006 2005 2004 approximately 99 million 185 million 127 million respectively june 30 2006 company net deferred losses related forward contract cash flow hedges 42 million compared net deferred gains 54 million june 30 2005 gains losses recorded comprehensive income fiscal 2006 company recognized gains approximately 56 million within net earnings related forward contracts fiscal 2005 2004 company recognized losses approximately 80 million 149 million respectively within net earnings related forward contracts incomeloss recorded forward contract fair value hedge offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2006 2005 connection company’s acquisition alaris company acquired certain options hedging european euro australian dollar canadian dollar british pound options entered alaris reduce risk earnings cash flow volatility related certain forecasted transactions options expired fiscal 2005 company recognize material gainslosses related options counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2006 2005 approximate fair value shortterm maturities items cash balances invested accordance company’s investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value company’s longterm obligations 28241 million 27202 million compared carrying amounts 28289 million 26278 million june 30 2006 2005 respectively fair value company’s longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows cardinal health inc subsidiaries notes consolidated financial statementscontinued following summary fair value gainloss company’s derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments 6 income taxes earnings income taxes discontinued operations cumulative effect change accounting follows millions provision income taxes continuing operations discontinued operations cumulative effect change accounting consists following millions cardinal health inc subsidiaries notes consolidated financial statementscontinued reconciliation provision based federal statutory income tax rate company’s effective income tax rate continuing operations discontinued operations cumulative effect change accounting follows provision american jobs creation act 2004 “ajca” created temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends nonus subsidiaries fourth quarter fiscal 2005 company determined would repatriate 500 million accumulated nonus earnings fiscal 2006 pursuant repatriation provisions ajca accordingly company recorded related tax liability 263 million june 30 2005 500 million maximum repatriation available company repatriation provisions ajca fiscal 2006 company repatriated 500 million accumulated foreign earnings accordance plan adopted fiscal 2005 additional tax liability 04 million recorded fiscal 2006 due new state legislation respect ajca bringing company’s total tax liability related repatriation recorded june 30 2006 267 million uses repatriated funds include domestic expenditures related nonexecutive salaries capital assets investments permitted activities june 30 2006 company 15229 million undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings cardinal health inc subsidiaries notes consolidated financial statementscontinued deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities follows millions deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet 1 included “prepaid expenses other” 2 included “other assets” 3 included “other accrued liabilities” 4 included “deferred income taxes liabilities” 5 includes 249 deferred tax asset june 30 2006 “assets held sale discontinued operations” fiscal 2006 company discovered netting current deferred tax assets liabilities longterm deferred tax assets liabilities consistently reflected balance sheet resulting inconsistent classification balance sheet tax footnote disclosure prior years result prior period amounts reclassified conform current year presentation fiscal 2005 cardinal health inc subsidiaries notes consolidated financial statementscontinued balance sheet depicts reclassification resulting reduction net current deferred tax assets liabilities 204 million reduction net long term deferred tax assets liabilities 17 million reported 2005 form 10k similar reclassifications impacted disclosed total assets year presented item 6 “selected financial data” june 30 2006 company gross federal state international loss credit carryforwards 567 million 8946 million 1678 million respectively tax effect aggregate deferred tax asset 849 million substantially carryforwards available least three years indefinite carryforward period approximately 228 million valuation allowance june 30 2006 applies certain nonus state local carryforwards opinion management likely expire unutilized however extent tax benefits related carryforwards realized future 04 million reduction valuation allowance could potentially applied goodwill reductions would applied income tax expense exceptions company longer subject us federal state local nonus income tax audits tax authorities years june 30 1995 years subsequent 1995 contain matters could subject differing interpretations applicable tax laws regulations relates amount andor timing income deductions tax credits internal revenue service “irs” commenced examination company’s us income tax returns fiscal 2003 2005 fourth quarter fiscal 2006 addition ongoing examinations open years 1996 2002 although outcome tax audits always uncertain company believes adequate amounts tax interest provided adjustments expected result years currently possible predict impact settlements irs audit activity income tax expense cash flows next 12 months company expect significant impact financial position august 2 2006 company received revenue agent report internal revenue service related fiscal years 2001 2002 company currently assessing report company expects complete initial communications irs respect revenue agent report end september 2006 7 employee retirement benefit plans company sponsors various retirement pension plans including defined benefit retirement plans postretirement benefit plans defined contribution retirement plans substantially company’s domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code 1986 amended provide company matching profit sharing contributions company’s contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans excluding defined benefit retirement postretirement benefit plans see 1210 million 861 million 545 million fiscal years ended june 30 2006 2005 2004 respectively defined benefit postretirement benefit plans company several defined benefit retirement plans covering substantially rp scherer corporation “scherer” salaried hourly employees united states elsewhere around world company also assumed defined benefit retirement plans certain acquisitions including intercare alaris company’s domestic defined benefit retirement cardinal health inc subsidiaries notes consolidated financial statementscontinued plans provide defined benefits based years service level compensation foreign subsidiaries provide retirement benefits accordance local customs law company funds retirement plans amounts required applicable regulations company also postretirement medical life insurance plans united states canada cover eligible scherer alaris participants company uses measurement date june 30 substantially retirement postretirement benefit plans obligations funded status following table provides reconciliation change projected benefit obligation following table provides reconciliation change fair value plan assets cardinal health inc subsidiaries notes consolidated financial statementscontinued following table provides reconciliation net amount recognized consolidated balance sheets projected benefit obligation fair value plan assets retirement plans postretirement plans projected benefit obligations excess plan assets follows accumulated benefit obligation fair value plan assets pension plans postretirement plans accumulated benefit obligations excess plan assets follows net periodic benefit cost components company’s net periodic benefit costs follows 1 amount primarily represents amortization unrecognized actuarial losses well amortization transition obligation prior service costs cardinal health inc subsidiaries notes consolidated financial statementscontinued assumptions weighted average assumptions used determining benefit obligations follows weighted average assumptions used determining net periodic pension cost follows 1 develop expected longterm rate return assets assumption company considered historical returns future expectations returns asset class well target asset allocation pension portfolio healthcare cost trend rates united states healthcare cost trend rates assumed next year postretirement benefits december 31 follows one percentage point change assumed healthcare cost trend rates would material impact total service cost total interest cost accumulated postretirement benefit obligation cardinal health inc subsidiaries notes consolidated financial statementscontinued plan assets company’s weighted average asset allocations measurement date target asset allocations category follows investment policy reflects longterm nature plans’ funding obligations assets invested provide opportunity income growth principal objective pursued longterm goal designed provide required benefits participants without undue risk expected objective achieved welldiversified asset portfolio equity investments made within guidelines quality marketability diversification mandated employee retirement income security act “erisa” plans subject erisa relevant statutes investment managers directed maintain equity portfolios risk level approximately equivalent specific benchmark established portfolio assets invested fixed income securities pooled fixed income portfolios managed actively pursue opportunities presented changes interest rates credit ratings maturity premiums contributions total estimated contributions 2007 measurement year 38 million estimated future benefit payments future benefit payments reflect expected future service appropriate next five fiscal years aggregate five fiscal years thereafter cardinal health inc subsidiaries notes consolidated financial statementscontinued 8 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties lease receivablerelated arrangements subsidiary company agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank order qualify sale treatment sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” company formed whollyowned special purpose bankruptcyremote subsidiaries “pyxis spes” subsidiary cardinal health 301 inc “pyxis” pyxis spes formed whollyowned qualified special purpose subsidiaries “qspes” effectuate removal lease receivables company’s consolidated financial statements accordance sfas 140 company consolidates pyxis spes consolidate qspes pyxis spes qspes separate legal entities maintain separate financial statements company pyxis assets pyxis spes qspes available first foremost satisfy claims respective creditors receivablerelated arrangements cardinal health funding llc “chf” organized sole purpose buying receivables selling undivided interests receivables multiseller conduits administered third party banks third party investors chf designed special purpose bankruptcyremote entity although consolidated accordance gaap chf separate legal entity company’s subsidiary sells contributes receivables chf sale receivables chf qualifies sales treatment sfas 140 accordingly receivables included company’s consolidated financial statements june 30 2006 company committed receivables sales facility program available chf capacity sell 800 million receivables recourse provided program requirement chf retain percentage subordinated interest sold receivables third quarter fiscal 2006 company sold subsequently repurchased 1500 million receivable interests receivables sales facility program transactions company 550 million receivable interest sales outstanding june 30 2006 company also provided security interest residual interest receivables 2655 million june 30 2006 required program june 30 2005 company committed receivables sales facility program available chf capacity sell 800 million receivables first quarter fiscal 2005 capacity committed receivables sales facility program increased 500 million 800 million chf retained undivided subordinated percentage interest receivables acts credit enhancement sold interests company sold 500 million receivable interests committed receivables sales facility program first quarter fiscal 2005 company sold additional 300 million receivable interests program second quarter fiscal 2005 third quarter fiscal 2005 company repurchased subsequently sold 1338 million receivable interests program fourth quarter fiscal 2005 company repurchased 250 million receivable interests program transactions company 550 million receivable interest sales outstanding june 30 2005 company also provided security interest residual interest receivables 2742 million june 30 2005 required program cardinal health inc subsidiaries notes consolidated financial statementscontinued cash flows receivablerelated arrangements company’s net cash flow benefit related receivable interest transfers fiscal 2006 2005 2004 follows pyxis chf required repurchase receivables interests sold determined representations warranties regard related receivables accurate date sold operating leases company entered operating lease agreements several third party banks construction various facilities equipment initial terms lease agreements varied maturity dates ranging september 2008 june 2013 event termination company required election either purchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse exceed amount expended acquire andor construct facilities june 30 2006 amount expended acquire andor construct facilities 2023 million agreements provide maximum funding 2498 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn fiscal 2006 company purchased certain buildings equipment approximately 1420 million previously operating lease agreements lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2006 weighted average interest rate agreements approximated 601 company’s estimated minimum annual lease payments agreements june 30 2006 approximately 122 million fiscal 2005 company decided purchase certain buildings equipment land approximately 1323 million previously operating lease agreements addition certain leases qualified capital lease obligations accordingly company approximately 811 million property equipment offset longterm liabilities balance sheet june 30 2005 based upon current market information obtained thirdparty valuation expert company believed payment obligation certain leases would exceed proceeds sale related properties equipment therefore company recorded impairment charges fiscal 2005 see note 20 additional information regarding impairment charges cardinal health inc subsidiaries notes consolidated financial statementscontinued 9 accounting investigations restatement following summary previously reported governmental internal investigations regarding company related matters company’s annual report form 10k fiscal year ended june 30 2004 “2004 form 10k” reflected certain conclusions reached audit committee company’s board directors restated reclassified company’s consolidated financial statements fiscal 2000 2001 2002 2003 first three quarters fiscal 2004 certain information updated andor corrected company’s annual report form 10k fiscal year ended june 30 2005 “2005 form 10k” discussed fully company engaged settlement discussions sec regarding resolution investigation respect company recorded total reserves 35 million fiscal 2005 2006 respect possible settlement sec investigation october 2003 sec initiated informal inquiry regarding company sec’s initial request sought historical financial related information including limited accounting treatment certain recoveries vitamin manufacturers connection sec’s informal inquiry audit committee board directors company commenced internal review april 2004 assisted independent counsel may 6 2004 company notified pending sec informal inquiry converted formal investigation june 21 2004 part sec’s formal investigation company received additional sec subpoena included request production documents relating revenue classification methods used classification company’s pharmaceutical distribution business either “operating revenue” “bulk deliveries customer warehouses other” addition company learned us attorney’s office southern district new york also commenced inquiry company understands relates subject october 12 2004 connection sec’s formal investigation company received subpoena sec requesting production documents relating compensation information specific current former employees officers company notified april 2005 certain current former employees directors received subpoenas sec requesting production documents subject matter requests consistent subject matter subpoenas company previously received sec september october 2004 audit committee reached certain conclusions respect findings internal review conclusions regarding certain items impact revenue earnings related four primary areas focus 1 classification sales customer warehouses “operating revenue” “bulk deliveries customer warehouses other” within company’s pharmaceutical distribution provider services segment 2 disclosure company’s practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment 3 timing revenue recognition within company’s former automation information services segment 4 certain balance sheet reserve accrual adjustments identified internal review connection conclusions audit committee determined consolidated financial statements company respect fiscal 2000 2001 2002 2003 well first three quarters fiscal 2004 restated reflect conclusions internal review restatements reflected 2004 form 10k following conclusions reached audit committee september october 2004 audit committee began task assigning responsibility financial statement matters described reflected 2004 form 10k january 2005 took disciplinary actions respect company’s employees determined bore responsibility matters respect accounting treatment certain recoveries vitamin manufacturers separate board committee internal review completed discussed disciplinary actions ranged terminations resignations employment required repayments fiscal 2003 bonuses certain employees letters reprimand disciplinary actions affected senior financial managerial personnel well personnel corporate level four business segments audit cardinal health inc subsidiaries notes consolidated financial statementscontinued committee completed determinations responsibility financial statement matters described reflected 2004 form 10k although responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers addressed separate committee board discussed audit committee internal review substantially complete connection sec’s formal investigation committee board directors assistance independent counsel separately initiated internal review assign responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers 2004 form 10k part audit committee’s internal review company reversed previous recognition estimated recoveries vitamin manufacturers amounts overcharged prior years recognized income recoveries special item period cash received manufacturers sec staff previously advised company view company appropriate basis recognizing income advance receiving cash august 2005 separate board committee reached certain conclusions respect findings internal review determined additional disciplinary actions required beyond disciplinary actions already taken audit committee described separate board committee internal review complete company continues engage settlement discussions staff sec reached agreementinprinciple basic terms potential settlement involving company sec staff indicated prepared recommend commission proposed settlement subject completion definitive documentation well acceptance authorization commission would among things require company pay 35 million penalty company accordingly recorded reserve 10 million fiscal year ended june 30 2006 addition 25 million reserve recorded fiscal year ended june 30 2005 assurance company’s efforts resolve sec’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement conclusions audit committee’s internal review respect financial statement matters set forth notes 1 2 “notes consolidated financial statements” included 2004 form 10k additional information respect prior conclusions audit committee’s internal review impact reclassification restatement adjustments relevant reporting periods set forth notes 1 2 “notes consolidated financial statements” included 2005 form 10k revenue impact classification sales customer warehouses “operating revenue” “bulk deliveries customer warehouses other” within company’s pharmaceutical distribution provider services segment presented historically since 1998 pharmaceutical distribution provider services segment’s revenue classified two categories “operating revenue” “bulk deliveries customer warehouses other” “bulk deliveries customer warehouses other” category historically included revenue arising sales company ordered pharmaceutical product bulk behalf specific warehousing customer either manufacturer shipped product directly customer’s warehouse product shipped customer’s warehouse company shortly received company put company’s inventory either case “bulk revenue” bulk revenue product shipped customer bulk form received company manufacturers november 2001 march 2004 company followed internal policy distinguishing operating revenue bulk revenue based long product company’s possession prior shipped customers product possession company 24 hours prior shipped customers regardless characteristics transaction reason product held 24 hours sale product deemed operating revenue company’s internal policy also provided customer orders bulk shipments filled cardinal health inc subsidiaries notes consolidated financial statementscontinued inventory within company’s warehouse deemed operating revenue based results internal review conducted audit committee company concluded certain bulk shipments ordered customers intentionally held beyond 24 hours pursuant internal policy shipments classified operating revenue four quarters within fiscal 2003 2002 impact practice previously quantified disclosed part company’s reported operating revenue improper classification bulk revenue operating revenue impact company’s previously reported total revenue operating net earnings periods undisclosed earnings impact disclosure company’s practice certain reporting periods accelerating receipt recognition cash discounts earned suppliers prompt payment historically company recognized cash discounts reduction cost products sold primarily upon payment vendor invoices cash discounts company receives vendors timely payment invoices company practice accelerating payment vendor invoices end certain reporting periods order accelerate recognition cash discounts effect improving operating results reporting periods although effect accelerated payments properly included company’s reported earnings impact acceleration practice separately quantified disclosed periods company benefited practice net increasedecrease net earnings result practice fiscal 2004 follows information includes corrections amounts reported 2004 form 10k based additional information reported note 1 “notes consolidated financial statements” included 2005 form 10k net impact corrections resulted increase 03 million fiscal 2004 fourth quarter fiscal 2004 company changed accounting method recognizing cash discounts recognition primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale company purchased inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenue change retroactively effective beginning fiscal 2004 result company restated previously reported fiscal 2004 quarterly results reflect change see note 15 discussion change accounting revenue earnings impact timing revenue recognition within company’s former automation information services segment within former automation information services segment pyxis products business clinical technologies services segment see note 17 company’s revenue recognition policy equipment systems installed customer’s site recognize revenue company’s installation obligations complete equipment functioning according material specifications user’s manual customer accepted equipment evidenced signing equipment cardinal health inc subsidiaries notes consolidated financial statementscontinued confirmation document described 2004 form 10k company learned concerns audit committee’s internal review equipment confirmation documents executed prior time installations complete revenue could recognized order assess implications premature execution equipment confirmations corresponding revenue recognition audit committee review included following • document process reviews including sample equipment confirmation forms • certifications selected employees involved installation process • interviews selected employees across regions within us various levels company • interviews certain former employees company • interviews selected customers across regions within us inquiry indicated equipment confirmations particularly sales regions prematurely executed customers request certain company employees including certain situations inducements customer deferral payments offered obtain premature execution result determined material weakness company’s internal controls existed respect timing revenue recognition within segment company concluded following connection review premature revenue recognition • equipment confirmations last several weeks quarter likely executed early customer due requests certain company employees • evidence discovered fictitious sales recorded company • revenue recognized early primarily one quarter cases installations completed following quarter • impact company’s financial results deemed material individual quarter annually net impact premature revenue recognition assessed june 30 2004 based upon interviews customers representing substantial percentage segment’s end quarter reported revenue result determined approximately 108 revenue last 10 days fourth quarter fiscal 2004 recognized prematurely based upon extrapolation company recorded 83 million reduction revenue 53 million reduction operating earnings fourth quarter fiscal 2004 adjust premature revenue recognition determined occurred within quarter revenue operating earnings recognized first quarter fiscal 2005 upon completion applicable installation process company maintain accounting records allow determine precise impact matter prior quarters however investigation sufficient data accumulated independent accounting systems estimate impact using variety methods estimation methods utilized solely test materiality prior periods necessarily indicative actual results would results june 30 2004 interviews applied ie utilizing 108 exception rate net increasedecrease revenue operating earnings first three quarters fiscal 2004 related percentage former automation information services segment’s reported amounts would follows cardinal health inc subsidiaries notes consolidated financial statementscontinued using different estimation methods methodology used derive table percentage change operating earnings periods noted would range less 1 high 55 one quarter estimated impact 5 third quarter fiscal 2004 negative impact 55 company believes impact adjustments resulting estimation methods material previously reported results estimated adjustments distort trends revenue operating earnings growth previously reported would alter company’s previous disclosures related former automation information services segment given premature revenue recognition practices identified june 30 2004 company completed similar review installation process first quarter fiscal 2005 including interviews selected customers representing substantial percentage former automation information services segment’s end quarter reported revenue results interviews performed first quarter fiscal 2005 suggested lower incidence premature revenue recognition june 30 2004 sample customers interviewed limited completed june 30 2004 addition company’s efforts improve system internal controls early stages result company conjunction audit committee decided adjust reported revenue utilizing error rate 108 utilized june 30 2004 utilizing 108 assumed error rate company recorded 42 million reduction revenue 25 million reduction operating earnings first quarter fiscal 2005 adjustment exclusive recognition 83 million revenue 53 million operating earnings first quarter fiscal 2005 described following completion first quarter fiscal 2005 company reiterated revenue recognition policy equipment systems installed customer’s site former automation information services segment instructed employees strictly adhere policy company implemented corrective actions response findings regarding revenue recognition practices within former automation information services segment described note 1 “notes consolidated financial statements” 2004 form 10k second third fourth quarters fiscal 2005 company’s internal audit function completed review revenue recognition practices associated equipment installation process former automation information services segment including interviews selected customers site visits related customer locations representing substantial percentage former automation information services segment’s end quarter reported revenue results interviews site visits performed internal audit function second third fourth quarters fiscal 2005 indicate additional occurrences premature revenue recognition described previously restated earnings certain balance sheet reserve accrual adjustments audit committee’s internal review included review determine periodend adjustments balance sheet reserve accounts accruals recorded fiscal 2000 fiscal 2004 properly recorded accordance gaap based upon audit committee’s internal review company determined various situations amount reserve b timing reserve recognition c timing reserve adjustments could substantiated error result described 2004 form 10k consolidated financial statements certain prior fiscal quarters years restated company types balance sheet reserves accrual adjustments previously restated consist following 1 errors arising misapplication gaap errors primarily include reductions reserve accounts made periods subsequent period excess identified company b lifo inventory adjustment c change accounting policy dividends recognition declared versus paid net impact errors first three quarters fiscal 2004 reflected table cardinal health inc subsidiaries notes consolidated financial statementscontinued 2 errors made previous periods identified appropriately corrected subsequent period discovered items reported prior period corrections time discovery deemed immaterial however company restated prior consolidated financial statements correct items identified internal review net impact errors first three quarters fiscal 2004 reflected table following table summarizes restatement impact previously reported net earnings defined first three quarters fiscal 2004 prior period errors corrections company continued respond sec’s investigation audit committee’s internal review company identified errors certain restatement adjustments reflected 2004 form 10k impact individual consolidated adjustments operating earnings net earnings related per share amounts immaterial periods presented corrections errors addressed note 1 “notes consolidated financial statements” included 2005 form 10k sec investigation us attorney inquiry remain ongoing although company continuing efforts respond inquiries provide information required company cannot predict outcome sec investigation us attorney inquiry outcome sec investigation us attorney inquiry related legal administrative proceedings could include institution administrative civil injunctive criminal proceedings involving company andor current former company employees officers andor directors well imposition fines penalties remedies sanctions addition assurance additional restatements required historical consolidated financial statements included company’s previouslyfiled public reports report change require amendment additional disciplinary actions required circumstances addition sec investigation us attorney inquiry continue new issues may identified audit committee may make additional findings receives additional information may impact company’s consolidated financial statements scope restatements described company’s previouslyfiled public reports report 10 commitments contingent liabilities future minimum rental payments operating leases including referenced note 8 initial remaining noncancelable lease terms excess one year june 30 2006 cardinal health inc subsidiaries notes consolidated financial statementscontinued amounts within 2009 thereafter include company’s obligation purchase certain buildings equipment end related lease term see note 8 additional information related lease agreements rental expense relating operating leases including referenced note 8 approximately 1206 million 1252 million 1206 million fiscal 2006 2005 2004 respectively sublease rental income material period presented herein derivative actions november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action doris staehr v robert walter et al 02cvg11639 march 21 2003 defendants filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate company’s proposed acquisition syncor determine propriety indemnifying monty fu former chairman syncor defendants filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants included new allegations among things defendants improperly recognized revenue december 2000 september 2001 related settlements certain vitamin manufacturers defendants filed motion dismiss second amended complaint november 20 2003 court denied motion may 31 2006 plaintiffs filed third amended complaint mirrors substantive allegations consolidated amended complaint filed cardinal health federal securities actions see “shareholdererisa litigation cardinal health” defendants intend vigorously defend action currently possible estimate amount loss range possible loss might result adverse judgment settlement proceeding however company currently believe proceeding material adverse effect company’s results operations financial condition since july 1 2004 three complaints filed purported shareholders members company’s board directors certain company’s current former officers employees company nominal defendant court common pleas franklin county ohio purported derivative actions collectively referred “cardinal health franklin county derivative actions” cases include donald bosley derivatively behalf cardinal health inc v david bing et al sam wietschner derivatively behalf cardinal health inc v robert walter et al green meadow partners llp derivatively behalf cardinal health inc v david bing et al cardinal health franklin county derivative actions allege individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap company’s audit committee charter complaints cardinal health franklin county derivative actions seek money damages equitable relief defendant directors award attorney’s fees november 22 2004 cardinal health franklin county derivative actions transferred heard judge june 20 2006 plaintiffs filed consolidated amended complaint raises many substantive allegations consolidated amended complaint filed cardinal health federal securities actions see “shareholdererisa litigation cardinal health” bean complaint see august 22 2006 court granted parties’ joint motion stay actions pending court’s resolution plaintiffs’ motion consolidate cardinal health franklin county derivative actions staehr derivative action pending delaware county discussed none defendants responded complaint currently possible estimate amount loss range possible loss might result adverse judgment settlement proceedings cardinal health inc subsidiaries notes consolidated financial statementscontinued december 6 2005 derivative complaint filed purported shareholder certain members human resources compensation committee company’s board directors certain company’s current former officers company nominal defendant court common pleas franklin county ohio purported derivative action vernon bean v john f havens et al 05cvh1213644 complaint alleges individual defendants breached fiduciary duties respect timing company’s option grants august 2004 officer defendants unjustly enriched respect grants complaint seeks money damages disgorgement options equitable relief individual defendants award attorney’s fees july 20 2006 court conditionally granted defendants’ motion dismiss failure verify complaint required dismissal entered august 23 2006 shareholdererisa litigation cardinal health since july 2 2004 10 purported class action complaints filed purported purchasers company’s securities company certain current former officers directors asserting claims federal securities laws collectively referred “cardinal health federal securities actions” date actions filed united states district court southern district ohio cases include gerald burger v cardinal health inc et al 04 cv 575 todd fener v cardinal health inc et al 04 cv 579 e miles senn v cardinal health inc et al 04 cv 597 david kim v cardinal health inc 04 cv 598 arace brothers v cardinal health inc et al 04 cv 604 john hessian v cardinal health inc et al 04 cv 635 constance matthews living trust v cardinal health inc et al 04 cv 636 mariss partners llp v cardinal health inc et al 04 cv 849 state new jersey v cardinal health inc et al 04 cv 831 first new york securities llc v cardinal health inc et al 04 cv 911 cardinal health federal securities actions purport brought behalf purchasers company’s securities various periods beginning early october 24 2000 ending late july 26 2004 allege among things defendants violated section 10b securities exchange act 1934 amended “exchange act” rule 10b5 promulgated thereunder section 20a exchange act issuing series false andor misleading statements concerning company’s financial results prospects condition alleged misstatements relate company’s accounting recoveries relating antitrust litigation vitamin manufacturers classification revenue company’s pharmaceutical distribution business either operating revenue bulk deliveries customer warehouses accounting business model transition issues including reserve accounting alleged misstatements claimed caused artificial inflation company’s stock price proposed class period complaints seek unspecified money damages equitable relief defendants award attorney’s fees december 15 2004 cardinal health federal securities actions consolidated one action captioned cardinal health inc federal securities litigation january 26 2005 court appointed pension fund group lead plaintiff consolidated action april 22 2005 lead plaintiff filed consolidated amended complaint naming company certain current former officers employees company’s external auditors defendants complaint seeks unspecified money damages unspecified relief defendants includes aforementioned section 10b rule 10b5 section 20 claims march 27 2006 court granted motion dismiss respect company’s external auditors former officer denied motion dismiss respect company individual defendants discovery proceeding since july 2 2004 15 purported class action complaints collectively referred “cardinal health erisa actions” filed company certain officers directors employees company purported participants cardinal health profit sharing retirement savings plan known cardinal health 401k savings plan “401k plan” date actions cardinal health inc subsidiaries notes consolidated financial statementscontinued filed united states district court southern district ohio cases include david mckeehan james syracuse v cardinal health inc et al 04 cv 643 timothy ferguson v cardinal health inc et al 04 cv 668 james decarlo v cardinal health inc et al 04 cv 684 margaret johnson v cardinal health inc et al 04 cv 722 harry anderson v cardinal health inc et al 04 cv 725 charles heitholt v cardinal health inc et al 04 cv 736 dan salinas andrew jones v cardinal health inc et al 04 cv 745 daniel kelley v cardinal health inc et al 04 cv 746 vincent palyan v cardinal health inc et al 04 cv 778 saul cohen v cardinal health inc et al 04 cv 789 travis black v cardinal health inc et al 04 cv 790 wendy erwin v cardinal health inc et al 04 cv 803 susan alston v cardinal health inc et al 04 cv 815 jennifer brister v cardinal health inc et al 04 cv 828 gint baukus v cardinal health inc et al 05 c2 101 cardinal health erisa actions purport brought behalf participants 401k plan syncor employees’ savings stock ownership plan “syncor essop” together 401k plan “plans” also behalf plans complaints allege defendants breached certain fiduciary duties owed employee retirement income security act “erisa” generally asserting defendants failed make full disclosure risks plans’ participants investing company’s stock detriment plans’ participants beneficiaries company stock made available investment alternative plans’ participants misstatements alleged cardinal health erisa actions significantly overlap misstatements alleged cardinal health federal securities actions complaints seek unspecified money damages equitable relief defendants award attorney’s fees december 15 2004 cardinal health erisa actions consolidated one action captioned cardinal health inc erisa litigation january 14 2005 court appointed lead counsel liaison counsel consolidated cardinal health erisa action april 29 2005 lead plaintiff filed consolidated amended erisa complaint naming company certain current former directors officers employees company’s employee benefits policy committee putnam fiduciary trust company defendants complaint seeks unspecified money damages unspecified relief defendants march 31 2006 court granted motion dismiss respect putnam fiduciary trust company respect plaintiffs’ claim equitable relief court denied remainder motion dismiss filed company certain defendants discovery proceeding respect proceedings described headings “derivative actions” “shareholdererisa litigation cardinal health” company currently believes insurance coverage available company’s insurance policies financially viable insurance companies subject selfinsurance retentions exclusions conditions potential coverage defenses gaps policy limits insurer solvency company currently unable predict determine outcome resolution proceedings described heading “shareholdererisa litigation cardinal health” estimate amounts potential range loss respect proceedings range possible resolutions proceedings could include judgments company settlements could require substantial payments company payments could material adverse effect company’s results operations financial condition liquidity cash flows shareholdererisa litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws collectively referred “syncor federal securities actions” actions filed united states district court central district cardinal health inc subsidiaries notes consolidated financial statementscontinued california cases include richard bowe v syncor int’l corp et al cv 028560 lgb rcx cd cal alan kaplan v syncor int’l corp et al cv 028575 cbm manx cd cal franklin embon jr v syncor int’l corp et al cv 028687 ddp ajwx cd cal jonathan alk v syncor int’l corp et al cv 028841 ghk rzx cd cal joyce oldham v syncor int’l corp et al cv 028972 fmc rcx cd cal west virginia laborers pension trust fund v syncor int’l corp et al cv 029076 nm rnbx cd cal brad lookingbill v syncor int’l corp et al cv 029248 rswl ex cd cal luu v syncor int’l corp et al cv 029583 rgk jwjx cd cal david hall v syncor int’l corp et al cv 029621 cas cwx cd cal phyllis walzer v syncor int’l corp et al cv 029640 rmt ajwx cd cal larry hahn v syncor int’l corp et al cv 0352 lgb rcx cd cal syncor federal securities actions purport brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 actions allege among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncor’s international business omitting mention certain allegedly improper payments syncor’s foreign customers thereby artificially inflating price syncor shares lead plaintiff filed third amended consolidated complaint december 29 2004 syncor filed motion dismiss third amended consolidated complaint january 31 2005 april 15 2005 court granted motion dismiss prejudice lead plaintiff appealed decision purported class action complaint captioned pilkington v cardinal health et al filed april 8 2003 company syncor certain officers employees company purported participant syncor essop related purported class action complaint captioned donna brown et al v syncor international corp et al filed september 11 2003 company syncor certain individual defendants another related purported class action complaint captioned thompson v syncor international corp et al filed january 14 2004 company syncor certain individual defendants actions brought united states district court central district california consolidated complaint filed february 24 2004 syncor certain former syncor officers directors andor employees alleging defendants breached certain fiduciary duties owed erisa based underlying allegations improper unlawful conduct alleged federal securities litigation consolidated complaint seeks unspecified money damages unspecified relief defendants april 26 2004 defendants filed motions dismiss consolidated complaint august 24 2004 court granted part denied part defendants’ motions dismiss court dismissed without prejudice claims two individual defendants claims alleging cofiduciary liability defendants claims alleging individual defendants conflicts interest precluding properly exercising fiduciary duties erisa claim breach duty prudently manage plan assets upheld syncor claim breach alleged duty “monitor” performance syncor’s plan administrative committee upheld defendants monty fu robert funari january 10 2006 court entered summary judgment favor defendants remaining claims consistent ruling january 11 2006 court entered final order dismissing case lead plaintiff appealed decision currently possible estimate amount loss range possible loss might result adverse judgment settlement proceedings described heading “shareholdererisa litigation syncor” however company currently believe impact proceedings material adverse effect company’s results operations financial condition company currently believes insurance coverage available company’s syncor’s insurance policies financially viable insurance companies subject selfinsurance retentions exclusions conditions potential coverage defenses gaps policy limits insurer solvency cardinal health inc subsidiaries notes consolidated financial statementscontinued dupont litigation september 11 2003 ei du pont de nemours company “dupont” filed lawsuit company others united states district court middle district tennessee ei du pont de nemours company v cardinal health inc bba materials technology bba nonwovens simpsonville inc 3030848 complaint alleges various causes action company relating production sale surgical drapes gowns company’s medical products services segment dupont’s claims generally fall categories breach contract false advertising patent infringement september 12 2005 court granted summary judgment favor company dupont’s patent infringement claims november 7 2005 court granted summary judgment favor company dupont’s federal false advertising claims dismissed dupont’s remaining claims lack jurisdiction october 17 2005 dupont filed lawsuit company circuit court davidson county tennessee ei dupont de nemours company v cardinal health 200 inc 05c3191 lawsuit essentially repeats breach contract claims dupont’s earlier federal lawsuit complaint request specific amount damages company believes claims made complaint without merit intends vigorously defend action currently possible estimate amount loss range possible loss might result adverse judgment settlement proceeding however company currently believe impact proceeding material adverse effect company’s results operations financial condition icu litigation prior completion company’s acquisition alaris june 16 2004 icu medical inc “icu” filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsite® family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief prevent alaris selling smartsite® products july 30 2004 court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits company intends vigorously defend action currently possible estimate amount loss range possible loss might result adverse judgment settlement proceeding however company currently believe proceeding material adverse effect company’s results operations financial condition sec investigation us attorney inquiry october 7 2003 company received request sec connection informal inquiry historical financial related information sec’s request sought variety documentation including company’s accounting records fiscal 2001 fiscal 2003 well notes memoranda presentations email correspondence budgets forecasts estimates may 6 2004 company notified pending sec informal inquiry converted formal investigation june 21 2004 part sec’s formal investigation company received sec subpoena included request production documents relating revenue classification methods used classification company’s pharmaceutical distribution business either “operating revenue” “bulk deliveries customer warehouses other” addition company learned us attorney’s office southern district new york also commenced inquiry company understands relates subject october 12 2004 company received subpoena sec requesting production documents relating compensation information specific current former employees officers company notified april 2005 cardinal health inc subsidiaries notes consolidated financial statementscontinued certain current former employees directors received subpoenas sec requesting production documents subject matter requests consistent subject matter subpoenas company previously received sec connection sec’s informal inquiry company’s audit committee commenced internal review april 2004 assisted independent counsel internal review prompted documents contained production sec raised issues certain accounting financial reporting matters including limited establishment adjustment certain reserves impact company’s quarterly earnings audit committee independent counsel also reviewed revenue classification issue subject sec’s june 21 2004 subpoena matters identified course audit committee’s internal review september october 2004 audit committee reached certain conclusions respect findings internal review connection audit committee’s conclusions reached september october 2004 company made certain reclassification restatement adjustments fiscal 2004 prior historical consolidated financial statements audit committee’s conclusions disclosed reclassification restatement adjustments reflected 2004 form 10k subsequent public reports filed company following conclusions reached audit committee september october 2004 audit committee began task assigning responsibility financial statement matters described reflected 2004 form 10k january 2005 took disciplinary actions respect company’s employees determined bore responsibility matters respect accounting treatment certain recoveries vitamin manufacturers separate board committee internal review completed discussed disciplinary actions ranged terminations resignations employment required repayments fiscal 2003 bonuses certain employees letters reprimand disciplinary actions affected senior financial managerial personnel well personnel corporate level four business segments audit committee completed determinations responsibility financial statement matters described reflected 2004 form 10k although responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers addressed separate committee board discussed audit committee internal review substantially complete connection sec’s formal investigation committee board directors assistance independent counsel separately initiated internal review assign responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers 2004 form 10k part audit committee’s internal review company reversed previous recognition estimated recoveries vitamin manufacturers amounts overcharged prior years recognized income recoveries special item period cash received manufacturers sec staff previously advised company view company appropriate basis recognizing income advance receiving cash august 2005 separate board committee reached certain conclusions respect findings internal review determined additional disciplinary actions required beyond disciplinary actions already taken audit committee described separate board committee internal review complete company continues engage settlement discussions staff sec reached agreementinprinciple basic terms potential settlement involving company sec staff indicated prepared recommend commission proposed settlement subject completion definitive documentation well acceptance authorization commission would among things require company pay 35 million penalty company accordingly recorded reserve 10 million fiscal year ended june 30 2006 addition 25 million reserve recorded fiscal cardinal health inc subsidiaries notes consolidated financial statementscontinued year ended june 30 2005 assurance company’s efforts resolve sec’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement sec investigation us attorney inquiry remain ongoing although company continuing efforts respond inquiries provide information required company cannot predict outcome sec investigation us attorney inquiry outcome sec investigation us attorney inquiry related legal administrative proceedings could include institution administrative civil injunctive criminal proceedings involving company andor current former company employees officers andor directors well imposition fines penalties remedies sanctions addition assurance additional restatements required historical consolidated financial statements included company’s previouslyfiled public reports report change require amendment additional disciplinary actions required circumstances addition sec investigation us attorney inquiry continue new issues may identified audit committee may make additional findings receives additional information may impact company’s consolidated financial statements scope restatements described company’s previouslyfiled public reports report new york attorney general investigation april 2005 one company’s subsidiaries received subpoena attorney general’s office state new york company believes new york attorney general conducting broad industry inquiry appears focus among things secondary market within wholesale pharmaceutical industry company one multiple parties received subpoena company producing documents providing information testimony new york attorney general’s office response april 2005 subpoena well subsequent informal requests company recently commenced negotiations new york attorney general’s office civil resolution investigation connection developments company recorded reserve 80 million respect matter fiscal year ended june 30 2006 assurance company’s efforts resolve new york attorney general’s office’s investigation respect company successful amount reserved sufficient company cannot predict timing final terms settlement matters addition matters described company also becomes involved timetotime litigation regulatory matters incidental business including without limitation inclusion certain subsidiaries potentially responsible party environmental cleanup costs well litigation connection acquisitions company intends vigorously defend litigation currently believe outcome litigation material adverse effect company’s consolidated financial statements 11 shareholders’ equity june 30 2006 2005 company’s authorized capital shares consisted following 750 million common shares without par value “class common shares” 5 million class b common shares without par value 05 million nonvoting preferred shares without par value class common shares class b cardinal health inc subsidiaries notes consolidated financial statementscontinued common shares collectively referred “common shares” holders common shares entitled share equally dividends declared company’s board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2006 2005 april 26 2006 company’s board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 74 million common shares aggregate cost approximately 5000 million fiscal 2006 average price paid per common share 6728 repurchased shares held treasury used general corporate purposes june 22 2005 company’s board directors authorized repurchase common shares aggregate amount 1 billion pursuant authorization company repurchased approximately 145 million common shares aggregate cost approximately 1 billion fiscal 2006 average price paid per common share 6896 repurchased shares held treasury used general corporate purposes december 8 2004 company’s board directors authorized repurchase common shares aggregate amount 5000 million pursuant authorization company repurchased approximately 88 million common shares aggregate cost approximately 5000 million fiscal 2005 average price paid per common share 5676 repurchased shares held treasury used general corporate purposes february 27 2004 company’s board directors authorized repurchase common shares aggregate amount 500 million pursuant authorization company repurchased approximately 69 million common shares accelerated share repurchase program aggregate cost approximately 4603 million initial price paid per share 6680 approximately 69 million shares repurchased program subject future contingent purchase price adjustment settled fourth quarter fiscal 2004 purchase price adjustment based upon volume weighted average price actual repurchase period subject certain provisions establish cap floor average share price company’s agreement brokerdealer executed repurchase transactions accelerated share repurchase program completed may 11 2004 final volume weighted average price 7007 result company settled forward contract 225 million cash cost included amount associated common shares treasury company used remaining 172 million initial authorization repurchase additional shares approximately 02 million average price paid per share 7073 repurchased shares placed treasury used general corporate purposes august 1 2003 company’s board directors authorized repurchase common shares aggregate amount 10 billion pursuant authorization company repurchased approximately 170 million common shares aggregate cost approximately 10 billion fiscal 2004 average price paid per share 5865 repurchased shares placed treasury used general corporate purposes 12 concentrations credit risk major customers company invests cash deposits major banks throughout world high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses cardinal health inc subsidiaries notes consolidated financial statementscontinued company’s trade receivables finance notes accrued interest receivables lease receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers’ financial conditions maintains reserves credit losses historically within company’s expectations following table summarizes company’s customers individually account least 10 company’s revenue customers table serviced pharmaceutical distribution provider services segment june 30 2006 2005 cvs accounted 25 27 respectively walgreens accounted 26 20 respectively company’s gross trade receivable balance certain company’s businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members fiscal 2006 2005 2004 approximately 15 17 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp company’s two largest gpo relationships terms revenue however company’s trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements 13 equitybased compensation company maintains several stock incentive plans collectively “plans” benefit certain officers directors employees historically employee options granted plans typically vested full third anniversary grant date exercisable periods ten years date grant price equal fair market value common shares underlying option date grant employee options granted plans fiscal 2006 generally vest equal annual installments four years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant plans company currently utilizes equity award grants company authorized grant 195 million shares june 30 2006 11 million shares granted first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants employee options recognized consolidated statement earnings based grant date fair value award modified prospective method company required record equitybased compensation expense awards granted date adoption unvested portion previously granted awards outstanding date adoption fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company believes lattice model provides better estimates ability take account employee exercise patterns based changes company’s stock price variables provides range input assumptions impact adopting sfas 123r relates employee stock options company’s stock purchase plan approximately 1170 million net earnings 028 027 respectively net basic diluted earnings per share cardinal health inc subsidiaries notes consolidated financial statementscontinued anticipation adoption sfas 123r company modify terms previouslygranted options company made significant changes equity compensation program annual equity grant first quarter fiscal 2006 including reducing overall number employee options granted utilizing mix restricted share option awards company also moved threeyear cliff vesting installment vesting four years annual employee option awards shortened option term ten seven years fair value restricted shares restricted share units determined number shares granted grant date market price company’s common shares compensation expense recognized equitybased awards net estimated forfeitures recognized using straightline method awards’ service period accordance sab 107 company classified equitybased compensation within selling general administrative expenses correspond line item majority cash compensation paid employees company allocate equitybased compensation reportable segments accordance fsp fas 123r3 issued november 2005 company elected specified “short cut” method calculate beginning pool additional paidin capital related equitybased compensation accounting policy election impact company’s financial statements following table illustrates impact equitybased compensation reported amounts 1 prior first quarter fiscal 2006 company accounted equitybased awards intrinsic value method followed recognition measurement principles apb opinion 25 related interpretations 2 total equitybased compensation expense includes gross employee option expense approximately 1627 million fiscal 2006 expense related options represents unvested portion previously granted option awards outstanding date adoption expense awards granted date adoption 3 total equitybased compensation expense includes gross stock appreciation rights “sars” expense approximately 369 million fiscal 2006 expense primarily relates previously reported august 3 2005 sar grant company’s chairman chief executive officer robert walter satisfied company’s original intent understanding respect 1999 option award excess number shares permitted granted single individual fiscal year relevant equity compensation plan equitybased compensation expense significantly impacted first quarter fiscal 2006 vesting sars upon issuance exercise price significantly thencurrent price company’s common shares subsequent quarters fair value sars remeasured settled increase fair value recorded equitybased compensation decrease fair value sars recognized extent expense previously recorded cardinal health inc subsidiaries notes consolidated financial statementscontinued 4 total equitybased compensation expense includes gross restricted share restricted share unit expense approximately 255 million fiscal 2006 5 total equitybased compensation expense also includes gross employee stock purchase plan expense approximately 122 million fiscal 2006 total equitybased compensation expense 2373 million discussed includes approximately 153 million related acceleration vesting conditions unvested equity awards held company’s executive chairman board mr walter acceleration equitybased compensation resulted second amended restated employment agreement dated april 17 2006 relinquished service period related outstanding unvested equity awards august 2 2006 company mr walter entered amendment second amended restated employment agreement amendment removes company’s commitment accelerate vesting event company terminates mr walter’s employment cause mr walter terminates employment without good reason prior termination employment period amendment applies existing future equity awards amendment impact acceleration 153 million noted following summarizes stock option transactions company plans july 1 2003 june 30 2006 giving retroactive effect conversions options connection merger transactions stock splits additional information concerning stock options outstanding june 30 2006 presented aggregate intrinsic value options exercised fiscal 2006 outstanding exercisable june 30 2006 approximately 1248 million 4629 million 2162 million respectively weighted average fair value options granted fiscal 2006 2005 2004 1879 1689 2278 respectively cardinal health inc subsidiaries notes consolidated financial statementscontinued fair values options granted company’s employees directors fiscal 2006 estimated date grant using lattice valuation model lattice valuation model incorporates ranges assumptions disclosed table riskfree rate based united states treasury yield curve time grant company analyzed historical data estimate option exercise behaviors employee terminations used within lattice model company calculated separate option valuations three separate groups employees similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified company based option exercise behaviors expected volatilities based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years following table provides range assumptions used options valued fiscal 2006 fair values options granted company employees directors fiscal years 2005 2004 estimated date grant using blackscholes optionpricing model following assumptions grants respective periods company’s restricted shares share units expensed awards’ service period generally three years june 30 2006 approximately 17 million shares share units remained restricted subject forfeiture company employee stock purchase plans sale 120 million company’s common shares authorized employees employed company least 30 days may eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1june 30 july 1december 31 june 30 2006 subscriptions 04 million shares outstanding june 30 2006 47 million shares issued employees plans fair value disclosures prior adopting sfas 123r prior first quarter fiscal 2006 company accounted equitybased awards accordance apb 25 related interpretations except costs related restricted shares restricted share units stock appreciation rights insignificant number amended options requiring new measurement date cardinal health inc subsidiaries notes consolidated financial statementscontinued compensation expense recognized net earnings options granted exercise price equal market value underlying stock date grant following tables illustrate effect net earnings per share company adopted fair value recognition provisions sfas 123 “accounting stockbased compensation” 1 total stockbased employee compensation expense adjusted include net employee stock purchase plan expense 75 million 84 million fiscal years ended june 30 2005 2004 respectively 2 company uses treasury stock method calculating diluted earnings per common share presented table treasury stock method diluted shares outstanding adjusted weightedaverage unrecognized compensation component company adopt sfas 123 14 earnings per share following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2006 potentially dilutive employee stock options antidilutive fiscal 2006 2005 2004 138 million 270 million 184 million respectively cardinal health inc subsidiaries notes consolidated financial statementscontinued 15 change accounting effective fiscal 2004 company changed method recognizing cash discounts recognizing cash discounts reduction cost products sold primarily upon payment vendor invoices recording cash discounts component inventory cost recognizing discounts reduction cost products sold upon sale inventory company believes change accounting method provides objectively determinable method recognizing cash discounts better matching inventory cost revenue company recorded 385 million net tax 225 million cumulative effect change accounting consolidated statements earnings cumulative effect reduced net diluted earnings per common share 009 impact change fiscal year ended june 30 2004 increase earnings continuing operations cumulative effect change accounting approximately 132 million resulted increase diluted earnings per common share continuing operations 003 fiscal 2004 cardinal health inc subsidiaries notes consolidated financial statementscontinued 16 goodwill intangible assets following table summarizes changes carrying amount goodwill two years ended june 30 2006 total reportable segment 1 increase within pharmaceutical distribution provider services segment primarily relates medicap purchase price tax adjustments approximately 252 million 2 increase within pharmaceutical technologies services segment primarily relates acquisition geodax technology inc acquisition within intercare business resulted goodwill allocations approximately 638 266 million respectively affect acquisitions partially offset purchase price adjustments approximately 186 million remaining amounts represent goodwill acquired another immaterial acquisition purchase price adjustments foreign currency translation adjustments 3 increase within clinical technologies services segment primarily relates alaris purchase price tax adjustments approximately 1179 million offset approximately 193 million reclassification goodwill intangibles within alaris business 4 impairment charges relate pharmaceutical development oral technologies biotechnology sterile life science businesses within pharmaceutical technologies services segment 5 goodwill decrease relates sale radiation management services business within pharmaceutical technologies services segment second quarter see note 21 additional information regarding sale business 6 first quarter fiscal 2005 company transferred clinical services consulting business previously reported within pharmaceutical distribution provider services segment clinical technologies services segment better align business operations transfer resulted approximately 601 million goodwill reclassed segments 7 increase within pharmaceutical distribution provider services segment primarily relates acquisition parmed pharmaceutical inc dohmen resulting goodwill allocation 229 million 1014 million respectively remaining amounts represent purchase price adjustments foreign currency translation adjustments cardinal health inc subsidiaries notes consolidated financial statementscontinued 8 increase within medical products services segment primarily relates acquisition remaining interest source medical joint venture acquisition denver biomedical inc resulting goodwill allocation 365 million 782 million respectively remaining amounts represent purchase price adjustments foreign currency translation adjustments 9 decrease within pharmaceutical technologies services includes purchase accounting accrual amounts allocated planned facility closures intercare acquisition 121 million reversed goodwill company subsequently decided close facilities see note 2 additional information 10 decrease within clinical technologies services segment primarily relates deferred tax adjustment approximately 322 million related alaris acquisition allocation purchase price related certain acquisitions yet finalized subject adjustment company assesses value preacquisition contingencies certain matters company expects future adjustments allocation purchase price recorded goodwill intangible assets definite lives amortized using straightline method periods range three forty years detail intangible assets class three years ended june 30 2006 follows cardinal health inc subsidiaries notes consolidated financial statementscontinued amortization expense years ended june 30 2006 2005 2004 approximately 547 million 553 million 122 million respectively amortization expense estimated 17 segment information company’s operations principally managed products services basis comprised four reportable segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services first quarter fiscal 2006 company changed methodology allocating corporate costs reportable segments better align corporate spending segments receive related benefits prior period results adjusted reflect change methodology addition first quarter fiscal 2006 company transferred certain businesses administrative support functions better align business operations prior period financial results adjusted transfers significant within segment material impact segment’s growth rates third quarter fiscal 2006 company committed plans sell significant portion healthcare marketing services business united kingdombased intercare pharmaceutical distribution business thereby meeting held sale criteria set forth sfas 144 accordance sfas 144 eitf issue 0313 “applying conditions paragraph 42 fasb statement 144 accounting impairment disposal longlived assets determining whether report discontinued operations” net assets businesses presented separately assets held sale operating results businesses presented within discontinued operations prior period results adjusted reflect change see note 21 additional information fourth quarter fiscal 2005 company decided close humacao operations part global restructuring program committed sell assets humacao operations planned transfer certain production existing facilities thereby meeting held sale criteria set forth sfas 144 three months ended september 30 2005 company subsequently decided transfer production humacao operations companyowned facilities thereby meeting criteria classification discontinued operations accordance sfas 144 eitf issue 0313 net assets businesses presented separately assets held sale operating results businesses presented within discontinued operations prior period results adjusted reflect change see note 21 additional information first quarter fiscal 2005 company transferred specialty distribution business previously included within pharmaceutical distribution provider services segment medical products services segment transfer effected better align business operations current management reporting structure prior period financial results adjusted reflect changes pharmaceutical distribution provider services segment distributes pharmaceuticals healthcare products items typically sold hospitals retail drug stores healthcare providers segment provides distribution services certain pharmaceutical manufacturers segment also provides support services complementing distribution activities pharmaceutical repackaging distribution program independent chain drug store customers well customers mail order business addition segment franchises operates apothecarystyle retail pharmacies cardinal health inc subsidiaries notes consolidated financial statementscontinued medical products services segment manufactures medical surgical products distributes selfmanufactured products well medical surgical laboratory products manufactured suppliers hospitals physician offices surgery centers healthcare providers addition segment distributes therapeutic plasma hospitals clinics providers fourth quarter fiscal 2006 company completed sale oncology distribution capabilities see note 21 additional information pharmaceutical technologies services segment provides products services healthcare industry pharmaceutical development manufacturing services nearly oral sterile dose forms including incorporating company’s proprietary drug delivery systems softgel capsules controlled release forms zydis® fast dissolving wafers advanced sterile delivery technologies segment also provides packaging radiopharmaceutical manufacturing distribution pharmaceutical development analytical science services scientific regulatory consulting also manufactures markets generic pharmaceutical products sale hospitals clinics pharmacies united kingdom clinical technologies services segment provides products services hospitals healthcare providers focus patient treatment safety well improving hospital operating efficiencies segment designs develops manufactures sells services intravenous medication safety infusion therapy delivery systems designs develops manufactures leases sells services pointofuse systems automate distribution management medications supplies hospitals healthcare facilities addition segment provides services healthcare industry integrated pharmacy management company evaluates performance segments based operating earnings corporate allocation certain administrative expenses information interest income expense income taxes provided segment level addition equitybased compensation special items impairment charges investment spending allocated segments see notes 2 13 discussion company’s special items equitybased compensation note 20 discussion impairment charges accounting policies segments described summary significant accounting policies following tables include revenue operating earnings business segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2006 2005 2004 cardinal health inc subsidiaries notes consolidated financial statementscontinued following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2006 2005 2004 segment well reconciling items necessary total amounts reported consolidated financial statements following table includes total assets june 30 2006 2005 segment well reconciling items necessary total amounts reported consolidated financial statements 1 pharmaceutical distribution provider services segment’s revenue primarily derived one main product category pharmaceutical healthcare products fiscal periods presented cardinal health inc subsidiaries notes consolidated financial statementscontinued 2 medical products services segment’s revenue derived two main product categories product categories respective contributions revenue follows 3 pharmaceutical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows 4 clinical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows 5 corporate revenue consists elimination intersegment revenue fiscal 2004 foreign currency translation adjustments 6 corporate operating earnings include special items 947 million 2180 million 552 million fiscal years ended june 30 2006 2005 2004 respectively see note 2 discussion special items discussed company modified way corporate costs allocated business segments better align corporate spending business segments based benefits received fiscal 2006 2005 2004 corporate operating earnings include special items equitybased compensation impairment charges certain corporate directed costs described • investment spending company encouraged business units identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon corporate management expenses projects retained corporate segment investment spending fiscal years 2006 2005 2004 189 million 180 million 417 million respectively • interest income adjustment direction corporate management former automation information services segment sold portions leased asset portfolio transferred proceeds corporate capital proceeds associated sales redeployed within business segment utilized general corporate purposes segment allocated benefit corporate interest income would earned associated sold leases fiscal 2004 segment received 21 million allocation corporate effective first quarter fiscal 2005 pyxis products business receive allocation adjustment corporate estimated interest income related sale certain lease portfolios cardinal health inc subsidiaries notes consolidated financial statementscontinued • foreign exchange adjustments effective first quarter fiscal 2005 pharmaceutical technologies services segment changed basis measuring impact translating foreign subsidiaries’ operating results us dollars historically since 2000 segment’s revenue operating earnings impacted foreign exchange fluctuations company applied constant exchange rates translate foreign operating results us dollars recorded actual impact foreign exchange rate changes within corporate segment fiscal 2004 112 million expenses allocated corporate representing difference “constant rates” “actual” exchange rates effective first quarter fiscal 2005 impact foreign exchange fluctuations included pharmaceutical technologies services segment 7 three months ended september 30 2005 company changed methodology allocating corporate costs reportable segments better align corporate spending segments receive related benefits reported prior period amounts adjusted reflect change methodology 8 corporate assets primarily include cash equivalents net property equipment unallocated deferred taxes following table presents revenue longlived assets geographic area longlived assets include property equipment net accumulated depreciation 18 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2006 2005 sum quarters may equal yeartodate due rounding cardinal health inc subsidiaries notes consolidated financial statementscontinued company recorded following significant adjustments fourth quarter fiscal 2006 • adjustment approximately 153 million related acceleration vesting conditions unvested equity awards held company’s executive chairman board robert walter acceleration equitybased compensation resulted second amended restated employment agreement dated april 17 2006 relinquished service period related unvested equity awards • adjustment approximately 100 million related excess inventory particular pharmaceutical manufacturer within pharmaceutical distribution provider services segment • adjustment 80 million current year impact company’s longterm incentive cash program fiscal years 2006 2008 discussed note 2 special items recognized quarter fiscal 2006 2005 following table summarizes impact costs net earnings diluted earnings per common share quarters recorded 19 guarantees company contingent commitments related certain operating lease agreements see note 8 operating leases consist certain real estate equipment used operations company event termination operating leases range length five ten years company guarantees reimbursement portion unrecovered property cost june 30 2006 maximum amount company could required reimburse 1620 million accordance fasb interpretation 45 cardinal health inc subsidiaries notes consolidated financial statementscontinued company recorded liability 34 million june 30 2006 related agreements company’s maximum amount reimbursed decreased significantly fiscal 2006 due company’s decision repurchase certain buildings equipment land approximately 1420 million previously lease agreements ordinary course business company time agrees indemnify certain parties agreements company including acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount company’s aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact company’s results operations ordinary course business pharmaceutical distribution provider services segment company time extend loans customers subsequently sold bank services administers loans well new loans company may direct order bank purchase loans requires absolute unconditional obligation company repurchase loans upon occurrence certain events described agreement including limited borrower payment default exceeds 90 days insolvency bankruptcy event default addition repurchasing loans company must repay premium received advance bank’s collection loan june 30 2006 2005 notes program subject guaranty company totaled 351 million 112 million respectively june 30 2006 2005 accruals premiums received advance bank’s collection notes 06 million 05 million respectively 20 impairment charges company classifies certain asset impairments related restructurings special items included operating earnings within consolidated statements earnings asset impairments gains losses sale assets eligible classified special items discontinued operations classified within “impairment charges other” within consolidated statements earnings asset impairment charges included within corporate segment’s results fiscal 2006 2005 2004 company recorded chargesgains 202 million 1137 million 115 million respectively fiscal 2006 significant charge approximately 62 million related loss sale significant portion company’s specialty distribution business see note 21 additional information cardinal health inc subsidiaries notes consolidated financial statementscontinued respect significant asset impairments recorded fiscal 2005 company incurred following • impairments approximately 717 million within pharmaceutical technologies services segment impairments related primarily recognizing reductions value assets within oral technologies business based discounted cash flow analyses performed accordance sfas 144 “accounting impairment disposal longlived assets” result strategic business decisions made second quarter fiscal 2005 • impairments approximately 219 million related lease agreements certain real estate equipment used operations company see notes 8 19 additional information regarding lease agreements • impairments 72 million within corporate entity relating decision writeoff internally developed software respect significant items recorded fiscal 2004 company incurred following gains • net gain approximately 87 million related sale nonstrategic business within pharmaceutical technologies services segment • net gain approximately 68 million related sale land within medical products services segment • net gain approximately 63 million related sale nonstrategic business within medical products services segment 21 discontinued operations assets held sale third quarter fiscal 2006 company committed plans sell significant portion healthcare marketing services “hms” business “hms disposal group” united kingdombased intercare pharmaceutical distribution business “ipd” thereby meeting held sale criteria set forth sfas 144 remaining portion hms business remain within company accordance sfas 144 eitf issue 0313 “applying conditions paragraph 42 fasb statement 144 accounting impairment disposal longlived assets determining whether report discontinued operations” net assets businesses presented separately assets held sale operating results businesses presented within discontinued operations accordance sfas 144 net assets held sale business recorded net expected fair value less costs sell amount lower businesses’ net carrying value resulting impairment charges approximately 1710 million approximately 664 million hms disposal group ipd business respectively recorded within discontinued operations company continue assess net expected value less costs sell determine adjustments necessary prior closing sale transaction net assets held sale hms disposal group june 30 2006 2005 included within pharmaceutical technologies services segment net assets held sale ipd business june 30 2006 2005 included within pharmaceutical distribution provider services segment company expects sell businesses prior end third quarter fiscal 2007 specialty distribution business’ largest customer began self distribution january 1 2006 significantly impacted revenue operating earnings business customer represented approximately 15 billion fiscal 2005 revenue third quarter fiscal 2006 company committed plan sell significant portion specialty distribution business accordance sfas 144 net assets held sale business presented separately consolidated balance sheets recorded net expected fair value less costs sell amount lower business’ net cardinal health inc subsidiaries notes consolidated financial statementscontinued carrying value resulting impairment charge approximately 62 million recorded within “impairment charges other” fiscal 2006 see note 20 additional information “impairment charges other” fourth quarter fiscal 2006 company sold business results specialty distribution business reported within earnings continuing operations consolidated statements earnings net assets held sale portion specialty distribution business june 30 2005 included within medical products services segment fourth quarter fiscal 2005 company decided close sterile pharmaceutical manufacturing business humacao puerto rico part global restructuring program committed sell assets humacao operations thereby meeting held sale criteria set forth sfas 144 fourth quarter fiscal 2005 company recognized asset impairment write carrying value humacao assets fair value less costs sell first quarter fiscal 2006 company subsequently decided transfer production humacao companyowned facilities thereby meeting criteria classification discontinued operations accordance sfas 144 eitf issue 0313 accordance sfas 144 net assets humacao presented assets held sale results operations humacao presented discontinued operations net assets june 30 2006 2005 discontinued operations included within pharmaceutical technologies services segment connection acquisition syncor company acquired certain operations syncor discontinued prior acquisition syncor announced discontinuation certain operations including medical imaging business certain overseas operations company continued plans added additional international noncore domestic businesses discontinued operations accordance sfas 144 eitf issue 0313 results operations businesses presented discontinued operations company sold remaining syncor discontinued operations prior end fiscal 2005 second quarter fiscal 2005 company recorded gain approximately 187 million related sale radiation management services business within company’s pharmaceutical technologies services segment business unit previously classified discontinued operations qualify accordance sfas 144 eitf issue 0313 second quarter fiscal 2005 assets liabilities classified held sale results operations related business classified discontinued operations amounts significant results discontinued operations fiscal years ended june 30 2006 2005 2004 summarized follows cardinal health inc subsidiaries notes consolidated financial statementscontinued 1 discontinued operations income tax benefit 360 million 128 fiscal 2006 tax rate percentage significantly impacted nontax deductibility 1507 million goodwill writeoffs included aforementioned impairment charges ipd hms recorded fiscal 2006 result net effective tax benefit 285 122 2374 million impairment charges included discontinued operations 2 discontinued operations income tax benefit 08 million 14 fiscal 2005 tax rate percentage significantly impacted tax expense recognized 187 million gain sale related radiation management services business discussed interest expense allocated hms discontinued operations 18 million 20 million 23 million fiscal 2006 2005 2004 respectively interest expense allocated ipd discontinued operations 11 million 14 million 07 million fiscal 2006 2005 2004 respectively interest expense allocated humacao discontinued operations 02 million 02 million 06 million fiscal 2006 2005 2004 respectively interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets company interest expense allocated syncor discontinued operations fiscal 2006 2005 note assumed connection syncor acquisition paid fourth quarter fiscal 2004 interest expense allocated syncor discontinued operations 02 million fiscal 2004 interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets syncor june 30 2006 2005 major components assets liabilities held sale discontinued operations follows operating cash flows generated discontinued operations presented separately company’s consolidated statements cash flows 22 investments june 30 2006 2005 company invested approximately 2089 million 798 million respectively tax exempt variable rate demand notes approximately 2895 million 200 million respectively tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet interest rate payable company’s current investments resets every seven twentyeight thirtyfive days investments automatically reinvested unless company provides notice intent liquidate broker company’s investments securities recorded cost approximates fair market value due variable interest rates underlying maturities current investments range four thirtyfive years bonds issued cardinal health inc subsidiaries notes consolidated financial statementscontinued municipalities tax exempt entities backed letters credit banking institutions broker debt placements another financial institution investments ratings least aa june 30 2006 company also held 167 million cost investment entity invested “investee” continuously incurring losses company’s share investee’s loss fiscal 2006 deemed immaterial company also noted investee expecting net income fiscal 2007 2008 therefore company believe investment impaired company continue evaluate investee’s financial performance order assess impairment 23 subsequent events subsequent june 30 2006 company signed definitive agreement acquire medmined inc provides technology services identify prevent hospitalacquired infections business consolidated within company’s clinical technologies services segment also subsequent june 30 2006 company announced sale united kingdombased intercare pharmaceutical distribution unit alliance boots plc business consolidated within pharmaceutical distribution provider services segment also subsequent june 30 2006 company announced sale manufacturing facility within pharmaceutical technologies services segment adams respiratory therapeutics inc sale finalized july 31 2006 july 11 2006 company agreed repurchase 395 million common shares private transaction unaffiliated third party share repurchase completed july 14 2006 part 500 million share repurchase program approved company’s board directors june 28 2006 august 3 2006 company announced 15 billion share repurchase program addition 500 million plan approved june 28 2006 company plans complete combined 2 billion share repurchase fiscal 2007 2008 august 2 2006 company received revenue agent report internal revenue service related fiscal years 2001 2002 company currently assessing report company expects complete initial communications irs respect revenue agent report end september 2006 august 28 2006 company announced suspended production sales repairs installation alaris® se infusion pump approximately 1300 units seized food drug administration “fda” august 15 2006 company initiated voluntary field corrective action product result information indicating sensitive keypad posed risk “key bounce” could lead overinfusion patients part field corrective action company sent letters warning labels customers currently testing modification reduces sensitivity keypad modification need validated product approved fda actions require return products currently use customers company currently plans recalling products company stopped manufacturing distribution alaris se infusion pumps pending resolution issue fda approximately 140000 alaris se infusion pumps distributed worldwide past 12 years product line currently represents less 1 annual revenue clinical technologies services segment company believe implementation modification currently tested materially affect company’s results operations financial condition however company completed testing received approval fda additional remedial actions deemed necessary company fda effect could become material company’s results operations financial condition item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2007 2006 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2007 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position company june 30 2007 2006 consolidated results operations cash flows three years period ended june 30 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 18 consolidated financial statements company adopted sfas 123r “sharebased payment” applying modified prospective method beginning fiscal year 2006 also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting june 30 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 22 2007 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 22 2007 cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc ohio corporation formed 1979 cardinal health inc leading provider products services improve safety productivity healthcare references “company” consolidated financial statements shall deemed references cardinal health inc majorityowned subsidiaries unless context otherwise requires company changed reportable segments beginning first quarter fiscal 2007 june 30 2006 company conducted business within following four reportable segments pharmaceutical distribution provider services medical products services pharmaceutical technologies services clinical technologies services effective first quarter fiscal 2007 company began reporting financial information within following five reportable segments healthcare supply chain services pharmaceutical healthcare supply chain services medical clinical technologies services pharmaceutical technologies services medical products manufacturing second quarter fiscal 2007 company committed plans sell pharmaceutical technologies services segment certain genericfocused businesses segment excluding certain genericfocused businesses sold referred “pts business” company completed sale pts business fourth quarter fiscal 2007 following explanation fiscal 2007 changes company’s reportable segments june 30 2006 healthcare supply chain services pharmaceutical healthcare supply chain services pharmaceutical segment encompasses businesses previously within former pharmaceutical distribution provider services segment addition nuclear pharmacy thirdparty logistics support certain genericfocused businesses previously within former pharmaceutical technologies services segment therapeutic plasma distribution capabilities previously within former medical products services segment healthcare supply chain services medical healthcare supply chain services medical segment encompasses company’s medical products distribution business assembly sterile nonsterile procedure kits previously within former medical products services segment clinical technologies services changes clinical technologies services segment medical products manufacturing medical products manufacturing segment encompasses medical surgical products manufacturing businesses previously within former medical products services segment basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany amounts eliminated fiscal 2007 2006 2005 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related company’s acquisitions provided note 2 effective second quarter fiscal 2007 company reclassified pts business discontinued operations effective third quarter fiscal 2006 company reclassified significant portion healthcare marketing services business “hms disposal group” united kingdombased intercare pharmaceutical distribution business “ipd” discontinued operations addition effective first quarter fiscal 2006 company reclassified sterile pharmaceutical manufacturing business humacao puerto rico “humacao” cardinal health inc subsidiaries notes consolidated financial statements continued discontinued operations prior period financial results reclassified conform changes presentation see note 8 additional information regarding discontinued operations second quarter fiscal 2007 company changed classification certain immaterial implementation costs associated sale medical supply storage devices clinical technologies services segment selling general administrative expenses cost products sold prior period financial results reclassified conform changes presentation preparation financial statements conformity generally accepted accounting principles “gaap” united states requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes estimates include limited allowance doubtful accounts inventory valuation goodwill intangible asset impairment preliminary purchase accounting allocations including acquired inprocess research development costs “iprd” vendor reserves equitybased compensation income taxes loss contingencies restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value shortterm investments company’s shortterm investments june 30 2007 included 1320 million tax exempt auction rate securities june 30 2006 company’s shortterm investments included 2089 million tax exempt variable rate demand notes 2895 million tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet company’s investments securities recorded cost approximates fair market value due variable interest rates see note 4 additional information regarding shortterm investments receivables trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain services pharmaceutical healthcare supply chain services medical segments presented net allowance doubtful accounts see note 5 additional information concentrations credit risk major customers company maintains cash depository accounts major banks throughout world invests high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses company’s trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry however credit risk limited due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers’ financial conditions maintains reserves credit losses historically within company’s expectations following table summarizes company’s customers individually account least 10 company’s revenue customers table serviced healthcare supply chain services pharmaceutical segment cardinal health inc subsidiaries notes consolidated financial statements continued june 30 2007 2006 cvs accounted 20 27 respectively walgreens accounted 27 28 respectively company’s gross trade receivable balance certain company’s businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members fiscal 2007 2006 2005 approximately 10 15 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp company’s two largest gpo relationships terms revenue however company’s trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories stated lower cost using lastin firstout “lifo” method market remaining inventory primarily stated lower cost using firstin firstout “fifo” method market see note 7 additional information cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment primarily stated cost depreciation expense financial reporting purposes primarily computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements 1 50 years machinery equipment 2 20 years furniture fixtures 3 10 years depreciation expense 2522 million 2387 million 2397 million fiscal 2007 2006 2005 respectively company expenses repairs maintenance expenditures incurred repairs maintenance expense 613 million 522 million 465 million fiscal 2007 2006 2005 respectively company capitalizes interest longterm fixed asset projects using rate 59 approximates company’s weighted average interest rate longterm obligations amount capitalized interest immaterial fiscal years presented goodwill intangibles company accounts purchased goodwill intangible assets accordance financial accounting standards board “fasb” statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives sfas 142 requires impairment testing conducted reporting unit level operating segment level defined sfas 131 “disclosures segments enterprise related information” one level operating segment company determined reporting unit used impairment assessment operating segment level business units comprising operating segments service common group customers offer complementary products share common strategy conducting impairment test fair value company’s reporting units compared respective carrying amounts including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s determination fair value reporting units based discounted cash flow analysis review priceearnings ratio publicly traded companies similar nature scope size methods assumptions used test impairment revised segment realignment periods presented discount rate used impairment testing based riskfree rate plus adjustment risk factors use alternative estimates peer groups changes industry adjusting discount rate could affect estimated fair value reporting units potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment test fiscal cardinal health inc subsidiaries notes consolidated financial statements continued 2007 2006 neither resulted recognition impairment charges see note 9 additional information regarding goodwill intangible assets income taxes accordance provisions sfas 109 “accounting income taxes” company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases company’s assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions company operates assessing ability realize deferred tax assets company considers whether likely portion deferred tax assets realized deferred taxes provided unremitted earnings subsidiaries outside us expected earnings permanently reinvested company repatriated 4940 million accumulated foreign earnings fiscal 2006 pursuant repatriation provisions american jobs creation act 2004 “ajca” total liability 267 million june 30 2006 maximum repatriation available company repatriation provisions ajca 5000 million see note 11 additional information accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different company’s original estimate may require adjustment adjustments vendor reserves included cost products sold accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal years ended june 30 2007 2006 largest component accrued liabilities net current deferred tax liabilities approximately 6500 million 6069 million respectively significant components accrued liabilities current income taxes payable employee compensation related benefit accruals fiscal 2007 2006 current income taxes payable 1197 million 2228 million respectively employee compensation related benefit accruals 3775 million 3235 million respectively equitybased compensation first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates include limited stock price volatility expected option life expected dividend yield option forfeiture rates compensation expense recognized equitybased awards net estimated forfeitures recognized using straightline method awards’ service period company classifies equitybased compensation within selling general administrative expenses correspond line item majority cash compensation paid employees see note 18 additional information regarding equitybased compensation dividends company paid cash dividends per common share 036 024 012 fiscal years ended june 30 2007 2006 2005 respectively cardinal health inc subsidiaries notes consolidated financial statements continued revenue recognition accordance us securities exchange commission “sec” staff accounting bulletin “sab” 104 “revenue recognition” company recognizes revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectibility reasonably assured revenue recognized net sales returns allowances healthcare supply chain services pharmaceutical segment records distribution revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances revenue within segment includes revenue bulk customers deliveries bulk customers consist product shipped form product received manufacturer bulk customers ability process large quantities products central locations self distribute products individual retail stores customers revenue bulk customers recorded title transfers customers company obligation provide services related merchandise revenue deliveries direct shipped customer warehouses manufacturer whereby company acts intermediary ordering delivery products recorded gross accordance fasb emerging issues task force “eitf” issue 9919 “reporting revenue gross principal versus net agent” revenue recorded gross basis since company incurs credit risk customer bears risk loss incomplete shipments receive separate fee commission transaction radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services medicine shoppe international inc medicap pharmacies incorporated franchise operations collectively “medicine shoppe” company apothecarystyle pharmacy franchisees earns franchise origination fees franchise fees represent monthly fees based upon franchisees’ sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened healthcare supply chain services medical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue recorded net sales returns allowances clinical technologies services leasing revenue accounted accordance sfas 13 “accounting leases” revenue recognized salestype leases lease becomes noncancellable lease determined noncancellable upon completion installation equipment functioning according material specifications user’s manual customer accepted equipment evidenced signing equipment confirmation document interest income salestype leases recognized revenue using interest method consistent salestype leases revenue recognized operating leases installation complete customer acceptance occurred operating lease revenue recognized lease term amounts become receivable according provisions lease revenue safety systems contain software essential functionality product subject provisions american institute certified public accountants statement position “sop” 972 cardinal health inc subsidiaries notes consolidated financial statements continued “software revenue recognition” elements safety system sales arrangements may contain following infusion devices disposables hardware software maintenance programs professional services multiple element arrangement total fees allocated element based vendorspecific objective evidence fair value element using residual method applicable vendorspecific objective evidence generally based price charged element sold separately allocated fees recognized separately element delivered contractual obligations relation element perpetual software license revenue generally recognized upon shipment customer software maintenance revenue recognized ratably contract period vendorspecific objective evidence software maintenance determined based contract renewal price maintenance rights unspecified software upgrades whenandif available basis included software maintenance professional service revenue recognized services rendered revenues recognized net sales returns allowances pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medical products manufacturing segment records selfmanufactured medical product revenue title transfers customers generally occurs upon delivery revenues recorded net sales returns allowances multiple segments business units arrangements involving multiple segments business units containing software incidental functionality product service arrangements involving single segment business unit multiple deliverables accounted accordance eitf issue 0021 “revenue arrangements multiple deliverables” deliverable meets criteria separate unit accounting arrangement revenue allocated element based upon relative fair value recognized accordance applicable revenue recognition criteria element savings guarantees company’s customer contracts include guarantee certain amount savings utilization company’s services revenue associated guarantee form consideration cash credit memos recorded guaranteed savings fully recognized guarantees consideration paid form free products services cost products sold related sales increased amount guarantee sales returns allowances revenue recorded net sales returns allowances company recognizes sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees allow customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded sfas 48 “revenue recognition right return exists” applying provisions sfas 48 would materially change company’s financial position results operations sales returns allowances approximately 18 billion 15 billion 15 billion fiscal 2007 2006 2005 respectively cardinal health inc subsidiaries notes consolidated financial statements continued distribution service agreement vendor fees company’s pharmaceutical supply chain business within healthcare supply chain services pharmaceutical segment accounts fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory reduction cost products sold accordance eitf issue 0216 “accounting customer certain consideration received vendor” shipping handling shipping handling costs included selling general administrative expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 3058 million 2743 million 2757 million fiscal 2007 2006 2005 respectively shipping handling revenue received immaterial periods presented research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 1028 million 968 million 872 million fiscal 2007 2006 2005 respectively translation foreign currencies financial statements company’s subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated separate component shareholders’ equity utilizing periodend exchange rates net tax foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings interest expense immaterial fiscal years ended june 30 2007 2006 2005 interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended “accounting derivative instruments hedging activity” standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders’ equity comprehensive income net tax company uses forward currency exchange contracts interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value interest expense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included interest expense remeasurement adjustment offset foreign currency forward contract settlements also classified interest expense interest rate swaps designated fair value hedges company’s derivative contracts adjusted current market values period qualify hedge accounting sfas 133 amended periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities company’s policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases cardinal health inc subsidiaries notes consolidated financial statements continued qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related company’s hedging contracts provided note 14 earnings per common share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share similar computation basic eps except denominator increased dilutive effect stock options restricted shares restricted share units computed using treasury stock method recent financial accounting standards february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amendment sfas 133 sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise required bifurcated host contract election measure hybrid financial instrument fair value entirety irrevocable changes fair value recognized earnings statement also clarifies amends certain provisions sfas 133 sfas 140 statement effective company’s financial instruments acquired issued subject remeasurement event july 1 2007 adoption statement expected material impact company’s financial position results operations july 2006 fasb issued fasb interpretation “fin” 48 “accounting uncertainty income taxes” interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns interpretation effective company july 1 2007 cumulative effects applying interpretation recorded adjustment retained earnings beginning period adoption company currently assessing impact adopting interpretation september 2006 fasb issued sfas 157 “fair value measurements” statement defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements statement effective company july 1 2008 interim periods within fiscal 2009 company process determining impact adopting statement september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” statement requires entity recognize statement financial position asset defined benefit postretirement plan’s overfunded status liability plan’s underfunded status measure defined benefit postretirement plan’s assets obligations determine funded status end employer’s fiscal year recognize changes funded status defined benefit postretirement plan comprehensive income year changes occur statement requires balance sheet recognition funded status pension postretirement benefit plans effective fiscal years ending december 15 2006 statement also requires plan assets benefit obligations measured company’s balance sheet date effective fiscal years ending december 15 2008 adoption statement fiscal 2007 material impact company’s financial position results operations september 2006 sec issued sab 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” bulletin addresses quantifying financial statement effects misstatements including effects prior year uncorrected errors must considered quantifying misstatements current year financial statements bulletin effective fiscal years ending november 15 2006 allows onetime transitional cumulative effect adjustment beginning retained cardinal health inc subsidiaries notes consolidated financial statements continued earnings fiscal year adopted errors previously deemed material guidance sab 108 adoption bulletin material impact company’s financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets liabilities including amendment fasb statement 115” statement creates fair value option entity may irrevocably elect fair value initial subsequent measurement attribute certain assets liabilities instrumentbyinstrument basis fair value option elected instrument subsequent changes fair value instrument shall reported earnings statement effective company july 1 2008 company process determining impact adopting statement 2 business combinations fiscal 2007 june 21 27 2007 company completed initial subsequent tender offers outstanding common stock viasys conshohocken pennsylvaniabased provider products services directed critical care ventilation respiratory diagnostics clinical services neurological vascular audio homecare orthopedics sleep diagnostics medical surgical products markets tender offers total approximately 293 million shares viasys common stock validly tendered 4275 per share represented approximately 88 outstanding shares viasys june 28 2007 company acquired viasys number additional shares would hold 90 outstanding shares fully diluted basis day viasys merged subsidiary company complete transaction cash transaction valued approximately 15 billion including assumption approximately 542 million debt viasys employees outstanding stock options elected either receive cash payment convert options purchase company’s common shares certain viasys employees elected convert options resulted employees receiving right purchase total approximately 01 million common shares company preliminary valuation acquired assets liabilities resulted goodwill approximately 10 billion identifiable intangible assets 4420 million company valued intangible assets related trade names patents customer relationships valuation yet finalized subject adjustment company assesses value preacquisition contingencies certain matters detail category follows millions fiscal 2007 company recorded charge 839 million related writeoff iprd costs associated viasys acquisition portion purchase price allocated iprd determined independent thirdparty appraisal represents estimated fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately charged special items expense acquisition date accordance fin 4 “applicability fasb statement 2 business combinations accounted purchase method” cardinal health inc subsidiaries notes consolidated financial statements continued addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 1738 million potential maximum contingent payments 523 million assumed liabilities acquired businesses approximately 224 million consolidated financial statements include results operations business combinations date acquisition transactions including viasys occurred beginning fiscal 2006 consolidated results operations would differed materially reported results fiscal 2006 fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 3640 million assumed liabilities acquired businesses approximately 1490 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2005 consolidated results operations would differed materially reported results fiscal 2005 fiscal 2005 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 1070 million assumed liabilities acquired businesses approximately 270 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2004 consolidated results operations would differed materially reported results purchase accounting accruals connection restructuring integration plans related acquisition viasys company accrued part acquisition adjustments liability 217 million related employee termination relocation costs 64 million related closing certain facilities payments made connection employee related costs facility closures fiscal 2007 connection restructuring integration plans related syncor company accrued part acquisition adjustments liability 151 million related employee termination relocation costs 104 million related closing duplicate facilities june 30 2007 company paid 142 million employee related costs 87 million associated facility closures 10 million restructuring charges 3 special items impairments special items policy company records restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recorded accordance sfas 146 “accounting costs associated exit disposal activities” statement liability measured fair value recognized incurred acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges included within purchase price allocation accordance sfas 141 “business combinations” integration charges recorded special items incurred certain litigation recorded special items consists settlements significant lawsuits infrequent nonrecurring unusual nature company also classified legal fees document preservation cardinal health inc subsidiaries notes consolidated financial statements continued production costs incurred connection sec investigation audit committee internal review related matters special items special items following summary company’s special items fiscal years ended june 30 2007 2006 2005 millions except per diluted eps amounts 1 company applies varying tax rates special items depending upon tax jurisdiction item incurred overall effective tax rate varies period depending upon unique nature company’s special items tax jurisdictions items incurred restructuring charges fiscal 2005 company launched global restructuring program goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation company expects program implemented three phases substantially completed end fiscal 2009 first phase program announced december 2004 focuses business consolidations process improvements including rationalizing facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines second phase program announced august 2005 focuses longerterm integration activities enhance service customers improved integration across company’s segments continued streamlining internal operations third phase program announced april 2007 focuses moving headquarters company’s healthcare supply chain services medical segment certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio addition global restructuring program time company incurs costs implement smaller restructuring efforts specific operations within segments restructuring plans focus various aspects operations including closing consolidating certain manufacturing operations rationalizing headcount aligning operations strategic costefficient structure cardinal health inc subsidiaries notes consolidated financial statements continued following table segregates company’s restructuring charges various reportable segments affected restructuring projects fiscal years ended june 30 2007 2006 2005 millions see paragraphs follow additional information regarding company’s restructuring plans 1 employeerelated costs consist primarily severance accrued upon either communication terms employees management’s commitment restructuring plan defined severance plan exists outplacement services provided employees involuntarily terminated duplicate payroll costs transition periods also included within classification 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring company’s delivery information technology infrastructure services costs incurred within healthcare supply chain services pharmaceutical segment fiscal 2007 13 million primarily related reorganization business units within segment evolve customer offerings differentiate business competitors costs incurred fiscal 2006 2005 34 million 125 million respectively primarily related closing distribution centers cardinal health inc subsidiaries notes consolidated financial statements continued consolidation existing locations closing multiple companyowned pharmacies within medicine shoppe closure facilities acquired part syncor international corporation “syncor” outsourcing information technology functions costs incurred within healthcare supply chain services medical segment fiscal 2007 92 million primarily related relocation segment’s headquarters company’s corporate headquarters reorganization business units within segment evolve customer offerings differentiate business competitors costs incurred fiscal 2006 2005 16 million 37 million respectively primarily related centralization management functions consolidation facilities within distribution business transitioning customer needsbased sales representative model ambulatory care business costs incurred within clinical technologies services segment fiscal 2007 52 million primarily related closure facility costs incurred fiscal 2005 13 million related headcount reductions discontinuation certain operations costs incurred within medical products manufacturing segment fiscal 2007 2006 2005 43 million 91 million 318 million respectively primarily related projects aimed improvements manufacturing cost efficiency consolidation facilities outsourcing production higher cost platforms lower cost platforms addition costs incurred 2005 related headcount reductions moving operations internationally costs incurred related projects impacted multiple segments fiscal 2007 2006 2005 201 million 335 million 310 million respectively primarily related design implementation company’s restructuring plans certain administrative functions restructuring company’s delivery information technology infrastructure services addition costs incurred fiscal 2007 related restructuring outsourcing certain human resource functions fiscal 2006 2005 related consolidation existing customer service operations two locations respect restructuring programs following table summarizes year project activities expected completed expected headcount reductions actual headcount reductions june 30 2007 1 represents projects initiated june 30 2007 cardinal health inc subsidiaries notes consolidated financial statements continued acquisition integration charges costs integrating operations various acquired companies recorded acquisition integration charges incurred acquisition integration charges incurred fiscal 2007 primarily result viasys acquisition costs incurred fiscal 2006 2005 primarily result alaris medical systems inc “alaris” syncor acquisitions fiscal years noted company also incurred acquisition integration charges numerous smaller acquisitions following table paragraphs provide additional detail regarding types acquisition integration charges incurred company fiscal years ended june 30 2007 2006 2005 millions employeerelated costs fiscal 2007 2006 2005 company incurred employeerelated costs associated integrating acquired companies 19 million 91 million 188 million respectively costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result acquisitions fiscal 2007 costs primarily related acquisition wholesale pharmaceutical health beauty related drug store products distribution business f dohmen co certain subsidiaries “dohmen” fiscal 2006 charges primarily related alaris acquisition fiscal 2005 charges primarily related alaris syncor acquisitions asset impairments exit costs fiscal 2007 2006 2005 company incurred asset impairment exit costs 15 million 15 million 13 million respectively asset impairment exit costs incurred fiscal 2007 2006 primarily result facility integration plans alaris acquisition asset impairment exit costs incurred fiscal 2005 primarily result fixed asset disposals due alaris acquisition facility closures associated syncor acquisition iprd costs fiscal 2007 company recorded charges 839 million 06 million related writeoff iprd costs associated viasys care fusion incorporated “care fusion” respectively portion purchase price allocated iprd determined independent thirdparty appraisal represented estimated fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately charged special items expense acquisition date accordance fin 4 integration costs fiscal 2007 2006 2005 company incurred integration costs 136 million 148 million 194 million respectively costs included category generally relate expenses incurred integrate acquired companies’ operations systems company’s preexisting operations systems costs include limited integration information systems employee benefits compensation accountingfinance tax treasury internal audit risk management compliance administrative services sales marketing costs fiscal 2007 primarily relate acquisitions dohmen alaris costs fiscal 2006 2005 primarily relate acquisitions alaris syncor cardinal health inc subsidiaries notes consolidated financial statements continued debt issuance cost writeoff first two quarters fiscal 2005 company incurred charges 88 million related writeoff debt issuance costs debt tender offer costs related company’s decision retire certain alaris debt instruments carried higher interest rates company’s cost debt result company retired debt instruments advance original maturity dates litigation following table summarizes company’s net litigation settlements fiscal 2007 2006 2005 millions pharmaceutical manufacturer antitrust litigation company recorded income 285 million 255 million 417 million fiscal 2007 2006 2005 respectively resulting settlement antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition company named plaintiff class actions member direct purchasers’ class ie purchasers purchase directly drug manufacturers total recovery claims june 30 2007 1516 million net attorney fees payments due interested parties expenses withheld company unable time estimate future recoveries receive result class actions cardinal health federal securities litigation fiscal 2007 company incurred charges made payment 6000 million settle previouslyreported cardinal health federal securities litigation described note 12 cardinal health erisa litigation fiscal 2007 company incurred charges made payment 400 million settle previouslyreported cardinal health erisa litigation described note 12 dupont litigation fiscal 2007 company incurred charges made payment 115 million settle previouslyreported litigation ei du pont de nemours company new york attorney general investigation company incurred charges 30 million 80 million fiscal 2007 2006 respectively respect previouslyreported investigation new york attorney general’s office fiscal 2007 company entered civil settlement resolved investigation made payments totaling 110 million part settlement litigation fiscal 2006 company recorded settlement recoveries 15 million related certain immaterial litigation matters fiscal 2007 2006 2005 company incurred costs recorded within special items totaling 44 million 265 million 546 million respectively costs primarily relate estimated settlement costs legal fees document preservation production costs incurred connection sec investigation cardinal health inc subsidiaries notes consolidated financial statements continued audit committee internal review related matters included within costs litigation reserves 100 million 250 million recognized fiscal 2006 2005 respectively settlement sec resolve investigation respect company fiscal 2007 company made payment 350 million resulting final settlement matter sec information regarding matter see note 12 special items accrual rollforward following table summarizes activity related liabilities associated company’s special items fiscal years ended june 30 2007 2006 2005 millions 1 amounts represent items expensed incurred accrued accordance gaap amounts include gross litigation settlement income recorded fiscal 2007 2006 2005 285 million 270 million 417 million respectively recorded special items future spend certain acquisition restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recorded amounts exceed costs changes estimates recorded special items incurred company estimates incur additional costs future periods associated various acquisitions restructuring activities totaling approximately 731 million approximately 462 million net tax estimated costs primarily associated relocation healthcare supply chain services medical segment’s headquarters company’s corporate headquarters integration viasys company believes incur costs properly restructure integrate rationalize operations portion represents facility rationalizations implementing efficiencies regarding information systems customer systems marketing programs administrative functions among things amounts estimates expensed special items incurred impairment charges company classifies certain asset impairments related restructurings special items asset impairments gains losses sale assets eligible classified special items discontinued operations classified within impairment charges within consolidated statements earnings fiscal 2007 2006 2005 company incurred impairment charges 173 million 58 million 383 million respectively asset impairment charges included within corporate segment’s results fiscal 2007 significant charge impairment approximately 123 million related certain investment see note 4 additional information fiscal 2006 significant charge approximately 62 million related loss sale significant portion company’s specialty distribution business see note 8 additional information respect significant asset impairments recorded fiscal 2005 company incurred following impairments approximately 182 million related lease cardinal health inc subsidiaries notes consolidated financial statements continued agreements certain real estate equipment used operations company impairments 72 million relating decision writeoff certain internally developed software 4 investments june 30 2007 company held approximately 1320 million tax exempt auction rate securities june 30 2006 company held approximately 2089 million tax exempt variable rate demand notes approximately 2895 million tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet interest rate earned company’s current investments resets every 28 35 days investments automatically reinvested unless company provides notice intent liquidate broker company’s investments securities recorded cost approximates fair market value due variable interest rates underlying maturities current investments range one 33 years bonds issued municipalities tax exempt entities backed letters credit banking institutions broker debt placements another financial institution current investments ratings least aaa june 30 2006 company held 167 million cost investment global healthcare exchange llc “ghx” three months ended december 31 2006 valuation ghx performed independent thirdparty conjunction business transaction initiated ghx based results valuation company determined investment impaired recorded 123 million charge impairment charges within consolidated statement earnings june 30 2007 investment held 44 million company continue monitor ghx’s financial performance order assess additional impairment 5 accounts receivable trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain services pharmaceutical healthcare supply chain services medical segments presented net allowance doubtful accounts 1188 million 1047 million june 30 2007 2006 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company writeoff amounts deemed uncollectible established allowance doubtful accounts company provides financing various customers financing arrangements range approximately 90 days 10 years interest rates generally subject fluctuation interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 355 million 327 million june 30 2007 2006 respectively current portions 156 million 278 million respectively included assets fiscal 2006 company sold certain notes bank see note 13 additional information finance notes receivable reported net allowance doubtful accounts 43 million 151 million june 30 2007 2006 respectively company formed special purpose entities sole purpose buying receivables salestype leases various legal entities company selling receivables salestype leases certain multiseller conduits administered banks thirdparty investors see note 19 additional disclosure regarding offbalance sheet financing fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts cardinal health inc subsidiaries notes consolidated financial statements continued receivable financing entity consolidated company issued 250 million 400 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively part amendment certain facility terms preferred debt securities october 2006 company repaid 5000 million principal balance see note 10 additional information 6 leases salestype leases company’s salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components company’s net investment salestype leases follows june 30 2007 2006 millions future minimum lease payments received pursuant salestype leases next five fiscal years thereafter follows millions 7 inventories substantial portion inventories approximately 73 75 june 30 2007 2006 respectively stated lower cost using lifo method market inventories included within core distribution facilities within company’s healthcare supply chain services pharmaceutical segment “core distribution facilities” primarily merchandise inventories company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within core distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2007 company record lifo reserve reductions 2006 company recorded lifo reserve reductions 260 million remaining inventory primarily stated lower cost using fifo method market company used average cost method inventory valuation inventory within core distribution facilities inventories would changed fiscal 2007 fiscal 2006 fact primarily due continued deflation generic pharmaceutical inventories lifo 558 million 10 million higher average cost value june 30 2007 2006 respectively however company’s policy record inventories excess current market value inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 958 million 1122 million june 30 2007 2006 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory cardinal health inc subsidiaries notes consolidated financial statements continued 8 discontinued operations assets held sale pts business second quarter fiscal 2007 company committed plans sell pts business thereby meeting held sale criteria set forth sfas 144 “accounting impairment disposal longlived assets” accordance sfas 144 eitf issue 0313 “applying conditions paragraph 42 fasb statement 144 accounting impairment disposal longlived assets determining whether report discontinued operations” net assets pts business presented separately held sale operating results presented within discontinued operations periods presented net assets held sale pts business included within corporate segment fourth quarter fiscal 2007 company completed sale pts business phoenix charter llc “phoenix” affiliate blackstone group pursuant purchase sale agreement company phoenix dated january 25 2007 amended “purchase agreement” closing sale company received approximately 32 billion cash phoenix purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement working capital cash indebtedness earnings interest taxes depreciation amortization pts business company recognized aftertax book gain approximately 11 billion transaction results pts business included discontinued operations fiscal years ended june 30 2007 2006 2005 summarized follows millions net periodic benefit cost included discontinued operations pts business 229 million 82 million 68 million fiscal 2007 2006 2005 respectively interest expense allocated discontinued operations pts business 250 million 251 million 218 million fiscal 2007 2006 2005 respectively interest expense allocated based upon ratio invested capital pts business versus overall invested capital company addition portion corporate costs previously allocated pts business reclassified remaining four segments prior period information reclassified conform new presentation june 30 2007 2006 major components pts business’s assets liabilities held sale included discontinued operations follows millions cardinal health inc subsidiaries notes consolidated financial statements continued 1 current liabilities primarily consist retention bonuses transaction costs june 30 2007 cash flows generated discontinued operations presented separately company’s condensed consolidated statements cash flows third quarter fiscal 2006 company committed plans sell hms disposal group ipd thereby meeting held sale criteria set forth sfas 144 remaining portion healthcare marketing services business remains within company accordance sfas 144 eitf issue 0313 net assets businesses presented separately held sale operating results businesses presented within discontinued operations accordance sfas 144 net assets held sale business recorded net expected fair value less costs sell amount lower business’ net carrying value impairment charges 300 million 1710 million recorded fiscal 2007 2006 respectively within discontinued operations hms disposal group third quarter fiscal 2007 company completed sale hms disposal group net assets held sale hms disposal group june 30 2006 included within corporate segment impairment charges 173 million 664 million recorded fiscal 2007 2006 respectively within discontinued operations ipd first quarter fiscal 2007 company completed sale ipd net assets held sale ipd june 30 2006 included within healthcare supply chain services pharmaceutical segment fourth quarter fiscal 2005 company decided close sterile pharmaceutical manufacturing business humacao puerto rico part global restructuring program committed sell assets humacao operations thereby meeting held sale criteria set forth sfas 144 fourth quarter fiscal 2005 company recognized impairment charge write carrying value humacao assets fair value less costs sell first quarter fiscal 2006 company subsequently decided transfer production humacao companyowned facilities thereby meeting criteria classification discontinued operations accordance sfas 144 eitf issue 0313 impairment charge 52 million recorded fiscal 2007 result recording net assets held sale net expected fair value less costs sell humacao’s net assets june 30 2007 2006 included within corporate segment connection acquisition syncor company acquired certain operations syncor discontinued prior acquisition syncor announced discontinuation certain operations including medical imaging business certain overseas operations company continued plans added additional international noncore domestic businesses discontinued operations accordance sfas 144 eitf issue 0313 results operations businesses presented discontinued operations company sold remaining syncor discontinued operations prior end fiscal 2005 second quarter fiscal 2005 company recorded gain approximately 187 million related sale radiation management services business within company’s healthcare supply chain services pharmaceutical segment business unit previously classified discontinued operations qualify accordance sfas 144 eitf issue 0313 second quarter fiscal 2005 assets liabilities classified held sale results operations related business classified discontinued operations amounts significant cardinal health inc subsidiaries notes consolidated financial statements continued combined results hms disposal group ipd humacao certain operations syncor included discontinued operations fiscal years ended june 30 2007 2006 2005 summarized follows millions interest expense allocated hms disposal group ipd humacao discontinued operations 14 million 31 million 36 million fiscal 2007 2006 2005 respectively interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets company interest expense allocated syncor discontinued operations combined results hms disposal group ipd humacao included assets liabilities held sale discontinued operations june 30 2006 follows millions cash flows generated discontinued operations presented separately company’s consolidated statements cash flows cardinal health inc subsidiaries notes consolidated financial statements continued 9 goodwill intangible assets company accounts purchased goodwill intangible assets accordance sfas 142 “goodwill intangible assets” following table summarizes changes carrying amount goodwill two years ended june 30 2007 total segment millions 1 increase within healthcare supply chain services pharmaceutical segment primarily relates acquisitions parmed pharmaceutical inc dohmen resulting goodwill allocation 229 million 1014 million respectively remaining amounts represent purchase price adjustments foreign currency translation adjustments 2 increase within healthcare supply chain services medical segment primarily relates acquisition remaining interest source medical corporation joint venture resulting goodwill allocation 365 million remaining amounts represent purchase price adjustments foreign currency translation adjustments 3 decrease within clinical technologies services segment primarily relates deferred tax adjustment approximately 322 million related alaris acquisition 4 increase within medical products manufacturing segment primarily relates acquisition denver biomedical inc resulting goodwill allocation 782 million remaining amounts represent purchase price adjustments foreign currency translation adjustments 5 decrease within healthcare supply chain services pharmaceuticals segment primarily relates dohmen purchase accounting adjustments offset acquisition specialtyscripts llc resulted preliminary goodwill allocation 69 million specialtyscripts llc acquisition also includes potential maximum future contingent payment 410 million 6 increase within clinical technologies services segment primarily relates acquisition medmined inc care fusion resulted preliminary goodwill allocation 661 million 442 million respectively medmined inc acquisition also includes potential maximum future contingent payment 105 million cardinal health inc subsidiaries notes consolidated financial statements continued 7 increase within medical products manufacturing segment primarily relates acquisition viasys resulting preliminary goodwill allocation 10 billion offset denver biomedical inc purchase accounting adjustments 167 million 8 end fiscal 2006 company divided businesses previously reported within medical products services segment healthcare supply chain services medical products manufacturing segments better align business operations transfer adjustment goodwill initially allocated new segments allocations purchase prices related viasys acquisitions yet finalized subject adjustment company assesses value preacquisition contingencies certain matters company expects future adjustments allocations purchase prices potential future contingent payments recorded goodwill intangible assets definite lives amortized using straightline method periods range one forty years detail intangible assets class two years ended june 30 2007 follows millions additions intangible assets fiscal 2007 primarily relate acquisition viasys see note 2 cardinal health inc subsidiaries notes consolidated financial statements continued significant acquisitions intangible assets periods presented amortization expense fiscal 2007 2006 2005 approximately 609 million 530 million 533 million respectively amortization expense next five fiscal years estimated millions 10 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following june 30 2007 2006 millions 400 565 580 585 600 625 675 notes floating rate notes due 2009 represent unsecured obligations company 730 notes 780 700 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary company guaranteed company obligations subject sinking fund redeemable prior maturity interest paid pursuant terms obligations notes guarantees company structurally subordinated liabilities company’s subsidiaries including trade payables 92 billion october 2006 company sold 3500 million aggregate principal amount floating rate notes due 2009 “2009 notes” 5000 million aggregate principal amount fixed rate notes due 2016 “2016 notes” private offering 2009 notes mature october 2 2009 interest notes accrue floating rate equal threemonth libor plus 027 payable quarterly 2016 notes mature october 15 2016 interest 2016 notes accrue 580 per year payable semiannually company also agreed benefit holders register 2009 2016 notes us securities act 1933 amended “securities act” pursuant registered exchange offer notes may sold public market company meet certain deadlines completion exchange offer interest rates cardinal health inc subsidiaries notes consolidated financial statements continued 2009 2016 notes increased 25 basis points june 1 2007 increase additional 25 basis points august 30 2007 exchange offer completed prior date upon completion exchange offer additional interest 2009 2016 notes longer payable maximum amount additional interest company must pay prior completion exchange offer 2009 2016 notes 50 basis points per year company used proceeds sale 2009 2016 notes repay 5000 million company’s preferred debt securities 1274 million 730 notes due 2006 531 million outstanding shortterm credit facility subsidiary guaranteed company general corporate purposes second private offering june 2007 company sold 3000 million aggregate principal amount fixed rate notes due 2012 “2012 notes” 3000 million aggregate principal amount fixed rate notes due 2017 “2017 notes” 2012 notes mature june 15 2012 2017 notes mature june 15 2017 interest 2012 notes 2017 notes accrue 565 600 respectively per year payable semiannually company experiences specific types change control may required offer purchase 2012 2017 notes 101 principal amount thereof plus accrued unpaid interest date repurchase company also agreed benefit holders register 2012 2017 notes securities act pursuant registered exchange offer notes may sold public market company meet certain deadlines completion exchange offer interest rates 2012 2017 notes increase 25 basis points february 4 2008 increase additional 25 basis points march 4 2008 exchange offer completed prior date upon completion exchange offer additional interest 2012 2017 notes would longer payable maximum amount additional interest company would pay prior completion exchange offer 2012 2017 notes 50 basis points per year company used net proceeds sale 2012 2017 notes fund portion purchase price viasys acquisition general corporate purposes part company’s acquisition alaris fiscal 2004 company assumed 1953 million 725 senior subordinated notes due 2011 fiscal 2005 company paid 1836 million senior subordinated notes july 2 2007 company exercised option call senior subordinated notes resulting repayment remaining balance 112 million fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company “accounts receivable financing entity” accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 2500 million 4000 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively preferred debt securities classified “longterm obligations less current portion shortterm obligations” company’s consolidated balance sheet company amended certain facility terms company’s preferred debt securities october 2006 part amendment company repaid 5000 million principal balance portion proceeds october 2006 offering described added minimum net worth covenant whereby minimum net worth company cannot fall 50 billion time amendment eliminated minimum adjusted net worth covenant adjusted tangible net worth could fall 25 billion certain financial ratio covenants repayment company 1500 million outstanding preferred debt securities june 30 2007 2006 accounts receivable financing entity owned approximately 5947 million 5808 million respectively receivables included company’s consolidated balance sheet effective interest rate june 30 2007 2006 594 590 respectively loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company cardinal health inc subsidiaries notes consolidated financial statements continued addition cash june 30 2007 2006 company’s sources liquidity included 15 billion 10 billion commercial paper program respectively backed 15 billion 10 billion revolving credit facility respective years company initiated 10 billion commercial paper program august 2006 replaced former 15 billion commercial paper program company increased commercial paper program 15 billion february 28 2007 company outstanding borrowings commercial paper program june 30 2007 2006 january 2007 company amended certain terms revolving credit facility part amendment amount facility increased 10 billion 15 billion term extended january 24 2012 expiration facility extended upon mutual consent company lending institutions revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2007 2006 except 792 million 578 million respectively standby letters credit issued behalf company additionally june 30 2006 company maintained 1500 million extendible commercial note program outstanding borrowings june 30 2006 company terminated 1500 million extendible commercial note program february 2007 company also maintained shortterm credit facilities unsecured line credit allowed borrowings 1311 million 3072 million june 30 2007 2006 respectively june 30 2007 2006 290 million 1618 million respectively outstanding uncommitted facilities 251 million june 30 2006 related pts business june 30 2007 2006 outstanding balance uncommitted facilities included 41 million 1366 million classified obligations june 30 2007 2006 respectively remaining 202 million 218 million balance obligations june 30 2007 2006 respectively consisted primarily additional notes loans capital leases additionally march 2007 company entered 5000 million unsecured committed short term loan facility terminated april 2007 maturities longterm obligations future fiscal years millions 11 income taxes earnings income taxes discontinued operations follows fiscal years ended june 30 2007 2006 2005 millions cardinal health inc subsidiaries notes consolidated financial statements continued provisionbenefit income taxes continuing operations consists following fiscal years ended june 30 2007 2006 2005 millions reconciliation provision benefit based federal statutory income tax rate company’s effective income tax rate continuing operations follows fiscal years ended june 30 2007 2006 2005 provision ajca created temporary incentive us corporations repatriate undistributed income earned abroad providing 85 dividends received deduction certain dividends nonus subsidiaries fourth quarter fiscal 2005 company determined would repatriate 5000 million accumulated nonus earnings fiscal 2006 pursuant repatriation provisions ajca accordingly company recorded related tax liability 263 million june 30 2005 maximum repatriation available company 5000 million repatriation provisions ajca fiscal 2006 company repatriated 4940 million qualifying accumulated foreign earnings accordance plan adopted fiscal 2005 additional tax liability 04 million recorded fiscal 2006 due new state legislation respect ajca bringing company’s total tax liability related repatriation recorded june 30 2006 267 million uses repatriated funds included domestic expenditures related nonexecutive salaries capital asset investments permitted activities june 30 2007 company 24 billion undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings cardinal health inc subsidiaries notes consolidated financial statements continued practicable estimate amount us tax might payable eventual remittance earnings june 30 2007 liability 40 million established related estimated cost repatriating 180 million undistributed earnings viasys nonus subsidiaries deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2007 2006 follows millions 1 certain june 30 2006 deferred income tax amounts reclassified propertyrelated revenue lease contracts captions conform june 30 2007 presentation deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2007 2006 millions 1 included “prepaid expenses other” 2 included “other assets” cardinal health inc subsidiaries notes consolidated financial statements continued 3 included “assets held sale discontinued operations” 4 included “other accrued liabilities” 5 included “deferred income taxes liabilities” 6 included “liabilities businesses held sale discontinued operations” 7 includes 676 net deferred tax liability june 30 2006 related discontinued operations june 30 2007 company gross federal state international loss credit carryforwards 3610 million 11 billion 1470 million respectively tax effect aggregate deferred tax asset 1782 million significant increase loss carryforwards fiscal 2007 attributable tax capital loss pts business divestiture estimated 1271 million capital loss carrryforward full 1271 million valuation allowance carried forward five years pts business capital loss estimate related valuation allowance subject change based results us federal capital loss disallowance rules review conducted june 2007 tax returns filed substantially remaining carryforwards available least three years indefinite carryforward period approximately 1556 million valuation allowance june 30 2007 applies certain federal international state local carryforwards opinion management likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would applied income tax expense exceptions company longer subject us federal nonus income tax audits tax authorities fiscal years ending june 30 2001 years subsequent fiscal 2000 contain matters could subject differing interpretations applicable tax laws regulations relates amount andor timing income deductions tax credits internal revenue service “irs” currently ongoing examinations open years 2001 2005 although outcome tax audits always uncertain company believes adequate amounts tax interest provided adjustments expected result years currently possible predict impact settlements irs audit activity income tax expense cash flows next 12 months company expect significant impact financial position first quarter fiscal 2008 company required adopt provisions fin 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard also provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition company currently assessing impact adopting fin 48 consolidated financial statements 12 commitments contingent liabilities future minimum rental payments operating leases including referenced note 19 initial remaining noncancelable lease terms excess one year june 30 2007 millions amounts within 2009 thereafter include company’s obligation purchase certain buildings equipment end related lease term see note 19 additional information related lease agreements cardinal health inc subsidiaries notes consolidated financial statements continued rental expense relating operating leases including referenced note 19 approximately 1171 million 917 million 998 million fiscal 2007 2006 2005 respectively sublease rental income material period presented herein legal proceedings shareholder litigation cardinal health since july 2 2004 multiple purported class action complaints filed putative purchasers company’s securities company certain current former officers directors asserting claims federal securities laws actions filed united states district court southern district ohio december 15 2004 consolidated single proceeding referred cardinal health inc federal securities litigation “cardinal health federal securities litigation” january 26 2005 court appointed pension fund group lead plaintiff april 22 2005 lead plaintiff filed consolidated amended complaint naming company certain current former officers employees company’s external auditors defendants cardinal health federal securities litigation purports brought behalf purchasers company’s securities various periods beginning early october 24 2000 ending late july 26 2004 consolidated amended complaint alleges among things defendants violated section 10b securities exchange act 1934 amended “exchange act” rule 10b5 promulgated thereunder section 20a exchange act issuing series false andor misleading statements concerning company’s financial results prospects condition alleged misstatements relate company’s accounting recoveries relating antitrust litigation vitamin manufacturers classification revenue company’s pharmaceutical supply chain business formerly referred pharmaceutical distribution business either operating revenue bulk deliveries customer warehouses accounting business model transition issues including reserve accounting alleged misstatements claimed caused artificial inflation company’s stock price proposed class period consolidated amended complaint seeks unspecified money damages unspecified relief defendants march 27 2006 court granted motion dismiss respect company’s external auditors former officer denied motion dismiss respect company individual defendants december 12 2006 parties stipulated case could proceed class action class comprised persons company officers directors purchased otherwise acquired company’s stock class period company entered memorandum understanding effective may 24 2007 settle cardinal health federal securities litigation memorandum understanding cardinal health federal securities litigation terminated payment 600 million company established reserve 600 million quarter ended march 31 2007 transferred 600 million escrow account may 25 2007 company entered stipulation settlement counsel plaintiffs filed court july 27 2007 july 31 2007 court entered order preliminarily approving settlement defendants cardinal health federal securities litigation continue deny violations law alleged litigation settlement reached solely eliminate uncertainties burden expense protracted litigation final settlement subject certain conditions including notice class plaintiffs cardinal health federal securities litigation court approval time assurance conditions settlement met settlement receive final court approval erisa litigation cardinal health beginning july 2004 multiple purported class action complaints filed company certain officers directors employees purported participants cardinal health profit sharing retirement cardinal health inc subsidiaries notes consolidated financial statements continued savings plan known cardinal health 401k savings plan “plan” actions filed united states district court southern district ohio december 15 2004 consolidated single proceeding referred cardinal health inc erisa litigation “cardinal health erisa litigation” january 14 2005 court appointed lead counsel liaison counsel cardinal health erisa litigation april 29 2005 lead plaintiffs filed consolidated amended erisa complaint naming company certain current former directors officers employees company’s employee benefits policy committee putnam fiduciary trust company defendants cardinal health erisa litigation purports brought behalf participants plan consolidated amended complaint alleges defendants breached certain fiduciary duties owed employee retirement income security act “erisa” generally asserting defendants failed make full disclosure risks plan’s participants investing company’s stock detriment plan’s participants beneficiaries company stock made available investment alternative plan’s participants misstatements alleged cardinal health erisa litigation significantly overlap misstatements alleged cardinal health federal securities litigation consolidated amended complaint seeks unspecified money damages equitable relief defendants award attorney’s fees march 31 2006 court granted defendants’ motion dismiss consolidated complaint respect putnam fiduciary trust company former trustee plan respect plaintiffs’ claim equitable relief court denied remainder motion dismiss filed company certain defendants september 8 2006 plaintiffs filed motion class certification seeking certification class plan participants bought held company shares plan accounts october 24 2000 july 2 2004 may 2007 company reached understanding counsel plaintiffs regarding proposed settlement cardinal health erisa litigation would terminated payment company 40 million result company recorded reserve 40 million quarter ended june 30 2007 june 21 2007 company entered class action settlement agreement counsel plaintiffs settlement agreement provides cardinal health erisa litigation terminated payment company plan 40 million net proceeds settlement apportioned plan accounts participants bought held company shares plan accounts october 24 2000 july 2 2004 defendants cardinal health erisa litigation continue deny violations law alleged litigation settlement reached solely eliminate uncertainties burden expense protracted litigation final settlement subject certain conditions including notice class plaintiffs cardinal health erisa litigation approval independent fiduciary behalf plan court approval court granted preliminary approval settlement june 28 2007 company transferred 400 million escrow account june 29 2007 time assurance conditions settlement met settlement receive final court approval derivative actions november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action doris staehr v robert walter et al 02cv11639 march 21 2003 defendants filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate company’s proposed acquisition syncor determine propriety indemnifying monty fu former chairman syncor defendants filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants included new allegations among cardinal health inc subsidiaries notes consolidated financial statements continued things defendants improperly recognized revenue december 2000 september 2001 related settlements certain vitamin manufacturers defendants filed motion dismiss second amended complaint november 20 2003 court denied motion may 31 2006 plaintiffs filed third amended complaint mirrors substantive allegations consolidated amended complaint filed cardinal health federal securities litigation complaint seeks money damages equitable relief defendant directors award attorney’s fees discovery proceeding since july 1 2004 three complaints filed purported shareholders members company’s board directors certain company’s current former officers employees company nominal defendant court common pleas franklin county ohio purported derivative actions collectively referred “cardinal health franklin county derivative actions” cases include donald bosley v david bing et al 04 cv a077167 sam weitschner v dave bing et al 04 cv c088970 green meadow partners llp v david bing et al 04 cv h099891 cardinal health franklin county derivative actions allege among things individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap company’s audit committee charter complaints cardinal health franklin county derivative actions seek money damages equitable relief defendant directors award attorney’s fees november 22 2004 cardinal health franklin county derivative actions transferred heard judge june 20 2006 plaintiffs filed consolidated amended complaint raises many substantive allegations consolidated amended complaint filed cardinal health federal securities litigation weed complaint discussed september 27 2006 derivative complaint filed purported shareholder certain members human resources compensation committee company’s board directors certain company’s current former officers company nominal defendant court common pleas franklin county ohio purported derivative action barry e weed v john f havens et al 06 cv h09 12620 complaint alleges individual defendants breached fiduciary duties respect timing company’s option grants august 2004 officer defendants unjustly enriched respect grants complaint seeks money damages disgorgement options equitable relief costs disbursements action including attorney’s fees june 29 2007 company parties litigation described entered memorandum understanding settle staehr derivative action cardinal health franklin county derivative actions weed derivative action collectively “derivative actions” addition plaintiffs company parties memorandum understanding include individual named defendants derivative actions consisting following current former executives directors david bing george h conrades john f finn robert l gerbig john f havens j michael losh john b mccoy richard c notebaert michael o’halleran david w raisbeck jean g spaulding matthew walter robert walter william e bindley regina e herzlinger melburn g whitmire george l fotiades james f millar mark w parrish richard j miller ronald k labrum anthony j rucci memorandum understanding full final settlement claims derivative actions individual defendants cause proceeds applicable directors officers insurance policies totaling 70 million paid company less amount 12 million approved court order plaintiffs’ attorneys’ fees costs see discussion heading “insurance coverage shareholdererisa litigation cardinal health derivative actions” information regarding insurance proceeds upon final court approval settlement company expects recognize net proceeds settlement income within special items consolidated statement earnings memorandum understanding provides company board directors adopt corporate governance enhancement requiring audit committee board meet executive session company’s chief financial officer chief legal officer less annually also memorandum cardinal health inc subsidiaries notes consolidated financial statements continued understanding plaintiff derivative actions company grant individual defendants employees agents representatives company comprehensive release covenant sue broad permissible law certain narrow exceptions cover claims behalf company could asserted derivative actions arise connection related acts matters transactions referred derivative actions individual defendants derivative actions continue deny violations law alleged actions settlement acknowledge individual defendants entering settlement solely eliminate uncertainties burden expense protracted litigation settlement subject completion definitive documentation conditions including notice shareholders approval necessary courts formal final dismissal derivative actions time assurance conditions met settlement receive final court approval connection settlement order consolidate cardinal health franklin county derivative actions july 18 2007 plaintiffs actions filed joint complaint court common pleas delaware county ohio nearly identical consolidated amended complaint plaintiffs previously filed court common pleas franklin county ohio procedures discussed delaware county court company expects defendants answer delaware county complaint franklin county complaint dismissed august 1 2007 plaintiff weed derivative action filed complaint court common pleas delaware county ohio substantially identical plaintiff’s pending franklin county complaint company expects defendants answer delaware county complaint plaintiff dismiss franklin county action seek proceed consolidated basis delaware county cardinal health franklin county derivative actions staehr derivative action described insurance coverage shareholdererisa litigation cardinal health derivative actions insurance coverage available company individuals named defendants legal proceedings described headings “shareholder litigation cardinal health” “derivative actions” october 12 2006 complaint filed federal insurance company “federal” company certain current former members board directors officers andor employees court common pleas franklin county ohio federal insurance company v cardinal health inc et al 06cvh10 13447 among things complaint sought determination court federal’s rights obligations successive directors’ officers’ liability insurance policies issued federal respect cardinal health federal securities litigation various statecourt shareholder derivative lawsuits complaint also sought declaration coverage exists respect cardinal health erisa litigation successive fiduciary liability insurance policies issued federal january 26 2007 company individual defendants filed respective answers counterclaims sought add additional insurers counterclaim defendants leave granted march 14 2007 company expects file amended counterclaims two additional insurance companies result settlements described following paragraph federal along three settling insurance companies dismissed lawsuit company entered settlement agreements federal three insurance companies agreements four insurance companies agreed pay aggregate amount 94 million would available appropriate benefit company individuals defendants cardinal health federal securities litigation derivative actions 94 million 70 million used connection settling derivative actions addition approximately 4 million proceeds paid company fiscal year ended june 30 2007 defray previously incurred legal expenses company receive record remaining 20 million insurance proceeds unless definitive settlement agreements finalized executed allocation proceeds among defendants cardinal health inc subsidiaries notes consolidated financial statements continued determined company believes additional insurance coverage available carriers partially satisfy defense costs liabilities matters additional coverage likely immaterial amount shareholdererisa litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws actions filed united states district court central district california consolidated single proceedings referred syncor international corp securities litigation “syncor federal securities litigation” lead plaintiff filed third amended consolidated complaint december 29 2004 syncor federal securities litigation purport brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 prior company’s acquisition syncor litigation alleges among things defendants violated section 10b exchange act rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncor’s international business omitting mention certain allegedly improper payments syncor’s foreign customers thereby artificially inflating price syncor shares consolidated complaint seeks unspecified money damages unspecified relief defendants syncor filed motion dismiss third amended consolidated complaint january 31 2005 april 15 2005 court granted motion dismiss prejudice lead plaintiff appealed decision united states court appeals ninth circuit june 12 2007 ninth circuit entered order reversing part district court’s dismissal plaintiffs’ claims remanding case district court order reversed dismissal claims syncor certain individual defendants including former chairman ceo affirmed dismissal defendants syncor filed petition rehearing june 26 2007 pending purported class action complaint captioned pilkington v cardinal health et al filed april 8 2003 company syncor certain officers employees company purported participant syncor employee savings stock ownership plan related purported class action complaint captioned donna brown et al v syncor international corp et al filed september 11 2003 company syncor certain individual defendants another related purported class action complaint captioned thompson v syncor international corp et al filed january 14 2004 company syncor certain individual defendants actions brought united states district court central district california consolidated complaint filed february 24 2004 syncor certain former syncor officers directors andor employees alleging defendants breached certain fiduciary duties owed erisa based underlying allegations improper unlawful conduct alleged federal securities litigation consolidated complaint seeks unspecified money damages unspecified relief defendants april 26 2004 defendants filed motions dismiss consolidated complaint august 24 2004 court granted part denied part defendants’ motions dismiss court dismissed without prejudice claims two individual defendants claims alleging cofiduciary liability defendants claims alleging individual defendants conflicts interest precluding properly exercising fiduciary duties erisa claim breach duty prudently manage plan assets syncor dismissed claim breach alleged duty “monitor” performance syncor’s plan administrative committee defendants monty fu robert funari dismissed january 10 2006 court entered summary judgment favor defendants remaining claims consistent ruling january 11 2006 court entered final order dismissing case lead plaintiff appealed decision united states court appeals ninth circuit currently possible estimate amount loss range possible loss might result adverse judgment settlement proceedings described heading “shareholdererisa litigation syncor” however company currently believe impact proceedings cardinal health inc subsidiaries notes consolidated financial statements continued material adverse effect company’s results operations financial condition company currently believes insurance coverage available company’s syncor’s insurance policies financially viable insurance companies subject selfinsurance retentions exclusions conditions potential coverage defenses gaps policy limits insurer solvency icu litigation prior completion company’s acquisition alaris june 16 2004 icu medical inc “icu” filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsite® family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief prevent alaris selling smartsite products july 30 2004 court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits july august 2006 court granted summary judgment alaris three four patents asserted icu issued order interpreting certain claims certain patents manner could impair icu’s ability enforce patents alaris january 22 2007 court granted summary judgment favor alaris icu’s remaining claims declared certain patent claims invalid june 28 2007 court ordered icu pay alaris 48 million attorneys’ fees costs decisions subject appeal company intends continue vigorously defend action currently possible estimate amount loss range possible loss might result adverse judgment settlement proceeding however company currently believe proceeding material adverse effect company’s results operations financial condition sec investigation us attorney inquiry october 7 2003 company received request sec connection informal inquiry historical financial related information subsequently converted formal investigation sec’s request sought variety documentation including company’s accounting records fiscal 2001 fiscal 2003 well notes memoranda presentations email correspondence budgets forecasts estimates june 21 2004 part sec’s formal investigation company received sec subpoena included request production documents relating revenue classification methods used classification company’s pharmaceutical supply chain business either “operating revenue” “bulk deliveries customer warehouses other” addition company learned us attorney’s office southern district new york also commenced inquiry october 12 2004 company received subpoena sec requesting production documents relating compensation information specific current former employees officers company notified april 2005 certain current former employees directors received subpoenas sec requesting production documents connection sec’s informal inquiry company’s audit committee commenced internal review april 2004 assisted independent counsel internal review prompted documents contained production sec raised issues certain accounting financial reporting matters including limited establishment adjustment certain reserves impact company’s quarterly earnings audit committee independent counsel also reviewed revenue classification issue subject sec’s june 21 2004 subpoena matters identified course audit committee’s internal review september october 2004 audit committee reached certain conclusions respect findings internal review connection audit committee’s conclusions reached september october 2004 company made certain reclassification restatement adjustments fiscal 2004 prior historical consolidated financial statements audit committee’s conclusions disclosed reclassification restatement adjustments reflected company’s annual report form 10k fiscal year ended june 30 2004 “2004 form 10k” subsequent public reports filed company cardinal health inc subsidiaries notes consolidated financial statements continued following conclusions reached audit committee september october 2004 audit committee began task assigning responsibility financial statement matters described reflected 2004 form 10k january 2005 took disciplinary actions respect company’s employees determined bore responsibility matters respect accounting treatment certain recoveries vitamin manufacturers separate board committee internal review completed discussed disciplinary actions ranged terminations resignations employment required repayments fiscal 2003 bonuses certain employees letters reprimand disciplinary actions affected senior financial managerial personnel well personnel corporate level four business segments audit committee completed determinations responsibility financial statement matters described reflected form 10k although responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers addressed separate committee board discussed connection sec’s formal investigation committee board directors assistance independent counsel separately initiated internal review assign responsibility matters relating company’s accounting treatment certain recoveries vitamin manufacturers 2004 form 10k part audit committee’s internal review company reversed previous recognition estimated recoveries vitamin manufacturers amounts overcharged prior years recognized income recoveries special item period cash received manufacturers sec staff previously advised company view company appropriate basis recognizing income advance receiving cash august 2005 separate board committee reached certain conclusions respect findings internal review determined additional disciplinary actions required beyond disciplinary actions already taken audit committee described july 26 2007 company announced settlement sec concludes respect company sec investigation connection settlement sec filed complaint company united states district court southern district new york complaint alleges violations several provisions federal securities laws including antifraud provisions relating principally company’s financial reporting disclosures company agreed without admitting denying allegations complaint consent entry final judgment entered court final judgment entered court august 2 2007 among things enjoined company future violations federal securities laws required company pay civil penalty 35 million retain independent consultant review certain company policies procedures company paid civil penalty retained independent consultant company reserved 35 million relating settlement matter quarters ended june 30 2005 december 31 2005 july 2007 company informed us attorney’s office investigation closed settlement sec resolve investigation sec activities certain current former members company’s management investigation ongoing january 2007 company learned executive chairman board well four former officers employees received “wells” notices staff sec procedures wells notice indicates sec staff made preliminary decision recommend sec commence civil administrative action recipient notice recipient wells notice opportunity respond sec staff makes formal recommendation whether civil action brought sec company continuing cooperate sec investigation outcome continuing sec investigation related legal administrative proceedings could include institution administrative civil injunctive proceedings involving current former company employees officers andor directors well imposition fines penalties remedies sanctions upon persons cardinal health inc subsidiaries notes consolidated financial statements continued alaris se pump recall august 15 2006 company initiated voluntary field corrective action alaris® se pump result information indicating product risk “key bounce” associated keypad entries could lead overinfusion patients august 23 2006 united states filed complaint us district court southern district california effect seizure alaris se pumps company suspended production sales repairs installation pumps approximately 1300 units seized us food drug administration “fda” february 8 2007 consent decree condemnation permanent injunction “consent decree” company fda entered district court resolve seizure litigation consent decree outlines steps company must take resume manufacturing selling alaris se pumps united states steps include submitting plan fda outlining corrections alaris se pumps currently use customers submitting reconditioning plan seized alaris se pumps engaging independent expert inspect alaris se pump facilities certify company’s infusion pump operations corrective action reconditioning plans must approved fda prior implementation company march 30 2007 company received fda’s approval corrective action plan alaris se pumps currently use customers april 19 2007 company received fda’s approval reconditioning plan alaris se pumps seized approximately 140000 alaris se pumps distributed worldwide past 12 years product line currently represents less 1 annual revenue clinical technologies services segment company recorded 135 million charge related matter third quarter fiscal 2006 company begun taking steps necessary comply terms consent decree believe compliance consent decree materially affect results operations financial condition however assurance additional costs penalties incurred effect could material company’s results operations state attorneys general investigation related repackaged pharmaceuticals october 2005 company received subpoena attorney general’s office state illinois subpoena stated illinois attorney general’s office examining whether company presented caused presented false claims payment illinois medicaid program relating repackaged pharmaceuticals company received letter may 2007 sent jointly illinois new york attorney general’s offices behalf national association medicaid fraud control units team letter alleges company caused medicaid reimbursements paid repackaged pharmaceuticals without paying required medicaid rebate alleges certain company’s repackaging business practices violate medicaid rebate statute letter requests company change business practices asks additional information asserts potential theories damages company providing requested information state attorney general offices participating ongoing discussions offices regarding matter including whether changes business practices required company cannot currently predict outcome investigation ultimate impact company’s business cannot estimate amount loss range possible loss matters addition matters described company also becomes involved timetotime litigation regulatory matters incidental business including without limitation personal injury claims employment matters commercial disputes intellectual property matters inclusion certain subsidiaries potentially responsible party environmental cleanup costs litigation connection acquisitions company intends vigorously defend litigation currently believe cardinal health inc subsidiaries notes consolidated financial statements continued outcome litigation material adverse effect company’s consolidated financial statements healthcare industry highly regulated government agencies continue scrutinize certain practices affecting government programs otherwise time company receives subpoenas requests information various government agencies including state attorneys general sec us department justice relating business accounting disclosure practices customers suppliers company generally responds subpoenas requests timely thorough manner responses sometimes require considerable time effort result considerable costs incurred company expects incur additional costs future connection existing future requests 13 guarantees company contingent commitments related certain operating lease agreements see note 19 operating leases consist certain real estate used operations company event termination operating leases mature june 2013 company guarantees reimbursement portion unrecovered property cost june 30 2007 maximum amount company could required reimburse 1209 million accordance fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” company recorded liability 29 million june 30 2007 related agreements company’s maximum amount reimbursed decreased significantly fiscal 2007 due company’s decision repurchase certain buildings equipment land approximately 512 million previously lease agreements total amount repurchased 442 million related pts business ordinary course business company time agrees indemnify certain parties agreements company including acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount company’s aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact company’s results operations ordinary course business healthcare supply chain services pharmaceutical segment company time extends loans customers subsequently sold bank services administers loans well new loans company may direct order bank purchase loans requires absolute unconditional obligation company repurchase loans upon occurrence certain events described agreement including limited borrower payment default exceeds 90 days insolvency bankruptcy event default addition repurchasing cardinal health inc subsidiaries notes consolidated financial statements continued loans company must repay premium received advance bank’s collection loan june 30 2007 2006 notes program subject guarantee company totaled 367 million 351 million respectively june 30 2007 2006 accruals premiums received advance bank’s collection notes 08 million 06 million respectively 14 financial instruments interest rate risk management company exposed impact interest rate changes company’s objective manage impact interest rate changes cash flows market value borrowings company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2007 company held payfixed interest rate swaps fiscal 2007 company held six payfixed interest rate swaps hedge variability cash flows related forecasted transactions four contracts matured 2012 “2012 contracts” two contracts matured 2016 “2016 contracts” contracts terminated fiscal 2007 resulting cash receipts totaling 34 million 2012 contracts cash payments totaling 34 million 2016 contracts ineffective portion 2012 contracts totaling gain 01 million recorded interest expense fiscal 2007 ineffective portion 2016 contracts totaling loss 01 million recorded interest expense fiscal 2007 remaining amounts relate portion contracts effective recorded comprehensive income fiscal 2007 adjustment recognized interest expense conjunction occurrence originally forecasted transactions june 30 2006 company held payfixed interest rate swaps payfixed interest rate swaps held june 30 2005 terminated september 2005 forecasted transactions related swaps occur time thus portion contracts became ineffective termination contracts resulted cash receipt 12 million ineffective portion contracts totaling less 01 million loss recorded interest expense fiscal 2006 fiscal 2006 company held two payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts matured 2010 2017 respectively contracts also terminated resulting cash receipt 127 million ineffective portion contracts totaling gain 27 million recorded interest expense fiscal 2006 remaining amounts relate portion contracts effective recorded comprehensive income fiscal 2006 adjustment recognized interest expense conjunction occurrence originally forecasted transactions company also holds payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2017 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded interest expense following table shows notional amount hedged fair value interest rate swaps outstanding june 30 2007 2006 included assetsliabilities millions net gainslosses payfloating interest rate swaps recognized interest expense fiscal 2007 2006 2005 approximately 112 million 64 million 227 million respectively cardinal health inc subsidiaries notes consolidated financial statements continued company net deferred gains payfixed interest rate swaps 09 million 08 million recorded comprehensive income june 30 2007 2006 respectively fiscal 2007 company incurred losses 03 million fiscal 2006 company incurred gains less 01 million fiscal 2005 company recognized losses approximately 07 million within interest expense related interest rate swaps counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates company’s objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses gains losses contracts offset changes value underlying transactions occur june 30 2007 2006 company held forward contracts expiring june 2008 june 2007 respectively hedge probable firmly committed revenue expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged canadian dollar european euro mexican peso thai baht british pound australian dollar company also held forward contracts expiring december 2013 june 30 2007 2006 manage foreign exchange exposure foreign currency assets liabilities subject revaluation instruments meet requirements hedge accounting treatment adjusted current market values interest expense following table represents notional amount hedged value forward contracts outstanding june 30 2007 2006 included assets liabilities millions 1 “forward contracts other” refers forward contracts used manage company’s foreign exchange exposure intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment amount net losses related instruments recognized interest expense fiscal 2007 2006 2005 approximately 195 million 97 million 124 million respectively incomeloss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability cardinal health inc subsidiaries notes consolidated financial statements continued settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period june 30 2007 company net deferred losses related forward contract cash flow hedges 35 million compared net deferred losses 46 million june 30 2006 gains losses recorded comprehensive income fiscal 2007 company recognized losses approximately 29 million within net earnings related forward contracts fiscal 2006 company recognized gains approximately 69 million within net earnings related forward contracts company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2007 2006 counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2007 2006 approximate fair value shortterm maturities items cash balances invested accordance company’s investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value company’s longterm obligations 34755 million 27836 million compared carrying amounts 34733 million 27876 million june 30 2007 2006 respectively fair value company’s longterm obligations estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss company’s derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 2007 2006 millions fair values based quoted market prices similar instruments 15 shareholders’ equity june 30 2007 2006 company’s authorized capital shares consisted following 750 million common shares without par value “class common shares” 5 million class b common shares without par value “class b common shares” 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared company’s board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2007 2006 july 11 2006 company’s board directors authorized repurchase common shares aggregate amount 5000 million august 3 2006 company’s board director’s authorized cardinal health inc subsidiaries notes consolidated financial statements continued repurchase additional 15 billion common shares november 30 2006 company’s board directors authorized repurchase additional 10 billion common shares january 31 2007 company’s board directors authorized repurchase additional 15 billion common shares bringing company’s thentotal repurchase authorization 45 billion pursuant authorization company repurchased approximately 538 million common shares aggregate cost approximately 38 billion fiscal 2007 average price paid per common share 6979 repurchased common shares held treasury used general corporate purposes june 22 2005 company’s board directors authorized repurchase common shares aggregate amount 10 billion april 26 2006 company’s board directors authorized additional 5000 million share repurchase program pursuant authorization company repurchased approximately 220 million common shares aggregate cost approximately 15 billion fiscal 2006 average price paid per common share 6839 repurchased common shares held treasury used general corporate purposes december 8 2004 company’s board directors authorized repurchase common shares aggregate amount 5000 million pursuant authorization company repurchased approximately 89 million common shares aggregate cost approximately 5000 million fiscal 2005 average price paid per common share 5676 repurchased common shares held treasury used general corporate purposes 16 earnings per share following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2007 millions potentially dilutive employee stock options antidilutive fiscal 2007 2006 2005 54 million 138 million 270 million respectively 17 segment information company’s operations principally managed products services basis discussed note 1 first quarter fiscal 2007 company realigned operations following reportable segments healthcare supply chain services pharmaceutical healthcare supply chain services medical clinical technologies services pharmaceutical technologies services medical products manufacturing change segment reporting resulted realignment individual businesses better correlate operations company needs customers factors determining reportable segments included manner management evaluates performance company combined nature individual business activities accordance sfas 131 “disclosures segments enterprise related information” prior period segment information reclassified conform new financial reporting presentation second quarter fiscal 2007 company committed plans sell pts business thereby meeting held sale criteria set forth sfas 144 company completed sale pts business fourth quarter fiscal 2007 accordance sfas 144 eitf issue 0313 assets liabilities pts business presented separately held sale prior periods operating results cardinal health inc subsidiaries notes consolidated financial statements continued presented within discontinued operations periods result sale pts business company’s remaining reportable segments healthcare supply chain services pharmaceutical healthcare supply chain services medical clinical technologies services medical products manufacturing prior period results adjusted reflect change see note 8 additional information healthcare supply chain services pharmaceutical segment provides logistics services pharmaceutical industry distributing products providing services retail alternate care hospital pharmacies services include pharmaceutical repackaging distribution program independent chain drug store customers well alternate care customers mail order business segment also operates centralized nuclear pharmacies provides thirdparty logistics support services distributes therapeutic plasma hospitals clinics providers located united states manufactures markets generic pharmaceutical products sale hospitals clinics pharmacies united kingdom segment also operates specialty pharmacy franchises operates apothecarystyle retail pharmacies healthcare supply chain services medical segment provides integrated supply chain logistics solutions healthcare customers united states canada solutions include sterile nonsterile kitting distribution medical surgical products hospitals surgery centers laboratories physician offices clinical technologies services segment develops manufactures leases sells medical technologies products hospitals healthcare providers including intravenous medication safety infusion therapy delivery systems software applications needlefree disposables related patient monitoring equipment dispensing systems automate distribution management medications hospitals healthcare facilities segment also develops manufactures leases sells dispensing systems medical supplies provides pharmacy services clinical intelligence solutions medical products manufacturing segment develops manufactures sources medical surgical products distribution hospitals physician offices surgery centers healthcare providers following table includes revenue reportable segment reconciling items necessary agree amounts reported condensed consolidated financial statements fiscal years ended june 30 2007 2006 2005 millions 1 healthcare supply chain services pharmaceutical segment’s revenue primarily derived distribution pharmaceutical healthcare products fiscal periods presented 2 healthcare supply chain services medical segment’s revenue primarily derived distribution medical surgical laboratory products fiscal periods presented 3 clinical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows cardinal health inc subsidiaries notes consolidated financial statements continued 4 medical products manufacturing segment’s revenue primarily derived manufacturing medical surgical products fiscal periods presented 5 corporate revenue primarily consists elimination intersegment revenue company evaluates performance segments based segment profit segment profit segment revenue less segment cost products sold less segment selling general administrative expenses segment sga expenses include allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition special items impairment charges investment spending allocated segments see explanation investment spending see note 3 discussion company’s special items impairment charges accounting policies segments described summary significant accounting policies following table includes segment profit reportable segment reconciling items necessary agree consolidated operating earnings condensed consolidated financial statements fiscal years ended june 30 2007 2006 2005 millions 1 portion corporate costs previously allocated pts business reclassified remaining four segments based upon segment’s respective proportion allocated corporate expenses addition equitybased compensation allocated segments based upon forecasted equitybased compensation expense respective segment plus onefourth forecasted equitybased compensation expense corporate prior period information adjusted reflect changes methodology 2 equitybased compensation expense 1381 million 2078 million 85 million respectively fiscal years ended june 30 2007 2006 2005 3 first quarter fiscal 2006 healthcare supply chain services pharmaceutical segment recorded charge 318 million reflecting credits owed certain vendors prior periods fourth quarter fiscal 2007 adjustment 35 million recorded reduce portion reserve based upon revised estimate cardinal health inc subsidiaries notes consolidated financial statements continued 4 third quarter fiscal 2007 company revised method used allocate certain shared costs healthcare supply chain services medical segment medical products manufacturing segment better align costs segment receives related benefits prior period information reclassified conform new presentation 5 fiscal 2007 2006 2005 corporate operating earnings include special items impairment charges certain corporate investment spending described special items corporate operating earnings include special items 7720 million 805 million 1415 million fiscal 2007 2006 2005 respectively see note 3 discussion special items b impairment charges see note 3 discussion impairment charges c investment spending company encouraged segments identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon corporate executive management expenses projects retained corporate segment investment spending fiscal years 2007 2006 2005 223 million 189 million 175 million respectively following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2007 2006 2005 millions segment well reconciling items necessary total amounts reported consolidated financial statements cardinal health inc subsidiaries notes consolidated financial statements continued following table includes total assets june 30 2007 2006 millions segment well reconciling items necessary total amounts reported consolidated financial statements 1 corporate assets primarily include cash equivalents assets held sale discontinued operations net property equipment unallocated deferred taxes following table presents revenue net property equipment millions geographic area 18 employee equity savings plans employee equity plans company maintains several stock incentive plans collectively “plans” benefit certain officers directors employees prior fiscal 2006 employee options granted plans typically vested full third anniversary grant date exercisable periods ten years date grant price equal fair market value common shares underlying option date grant employee options granted plans fiscal 2007 2006 generally vest equal annual installments four years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant plans company currently utilizes equity award grants company authorized grant 195 million shares june 30 2007 69 million shares granted first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants employee options recognized consolidated statement earnings based grant date fair value award modified prospective method company required record equitybased compensation expense awards granted date adoption unvested portion previously granted awards outstanding date adoption fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company believes lattice model provides better estimates ability take account employee exercise patterns based changes company’s stock price variables provides range input assumptions anticipation adoption sfas 123r company modify terms previouslygranted options cardinal health inc subsidiaries notes consolidated financial statements continued fair values restricted shares restricted share units determined number shares granted grant date market price company’s common shares compensation expense recognized equitybased awards net estimated forfeitures recognized using straightline method awards’ service period accordance sab 107 company classified equitybased compensation within selling general administrative expenses correspond line item majority cash compensation paid employees accordance fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” issued november 2005 company elected specified “shortcut” method calculate beginning pool additional paidin capital related equitybased compensation accounting policy election impact company’s financial statements following table illustrates impact equitybased compensation reported amounts fiscal years ended june 30 2007 2006 millions except per share amounts 1 total equitybased compensation expense fiscal year ended june 30 2007 2006 includes gross stock appreciation rights “sars” expense approximately 40 million 369 million respectively sars granted august 3 2005 company’s chairman chief executive officer equitybased compensation expense recognized vesting sars upon issuance exercise price thencurrent price company’s common shares quarters subsequent issuing sars fair value remeasured using blackscholes model continue remeasured quarter unexercised sars exercised increase fair value recorded equitybased compensation decrease fair value sars recognized extent expense previously recorded fourth quarter fiscal 2007 06 million 10 million sars outstanding exercised based upon terms agreement benefit deferred six months following termination employment credited interest prime rate date exercise payment date 2 total equitybased compensation expense year ended june 30 2007 2006 also includes gross restricted share restricted share unit expense approximately 362 million 220 million respectively gross employee option expense approximately 884 million 1385 million respectively gross employee stock purchase plan expense approximately 95 million 104 million respectively 3 equitybased compensation charged discontinued operations approximately 240 million 222 million net tax benefits 125 million 119 million fiscal 2007 2006 respectively 4 fiscal 2006 equitybased compensation expense includes approximately 153 million related acceleration vesting conditions unvested equity awards held company’s executive chairman board acceleration equitybased compensation resulted second amended restated employment agreement dated april 17 2006 relinquished service period related outstanding unvested equity awards cardinal health inc subsidiaries notes consolidated financial statements continued following summarizes stock option transactions company plans july 1 2005 june 30 2007 millions except per common share amounts giving retroactive effect conversions options connection merger transactions stock splits additional information concerning stock options outstanding june 30 2007 2006 presented options millions aggregate intrinsic value options exercised fiscal 2007 fiscal 2006 approximately 1756 million 1248 million respectively aggregate intrinsic value options outstanding june 30 cardinal health inc subsidiaries notes consolidated financial statements continued 2007 june 30 2006 approximately 4938 million 4629 million respectively aggregate intrinsic value options exercisable june 30 2007 june 30 2006 approximately 2281 million 2162 million respectively weighted average fair value options granted fiscal 2007 2006 2005 2129 1879 1689 respectively total equitybased compensation expense net estimated forfeitures related unvested stock options yet recognized june 30 2007 2006 1030 million 1313 million respectively fair values options granted company’s employees directors fiscal 2007 fiscal 2006 estimated date grant using lattice valuation model lattice valuation model incorporates ranges assumptions disclosed table riskfree rate based united states treasury yield curve time grant company analyzed historical data estimate option exercise behaviors employee terminations used within lattice model company calculated separate option valuations three separate groups employees similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified company based option exercise behaviors expected volatilities based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years following table provides range assumptions used options valued fiscal 2007 2006 fair value options granted company employees directors fiscal 2005 estimated date grant using blackscholes optionpricing model following assumptions grants company’s restricted shares share units expensed awards’ service period generally three years june 30 2007 2006 approximately 19 million 17 million shares share units remained restricted subject forfeiture respectively total equitybased compensation expense net estimated forfeitures related unvested restricted shares share units yet recognized 459 million 128 million respectively june 30 2007 299 million 107 million respectively june 30 2006 company employee stock purchase plans sale 120 million common shares authorized employees employed company least 30 days may eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1 june 30 july 1 december 31 june 30 2007 subscriptions 04 million shares outstanding june 30 2007 55 million shares issued employees plans cardinal health inc subsidiaries notes consolidated financial statements continued fair value disclosures prior adopting sfas 123r prior first quarter fiscal 2006 company accounted equitybased awards accordance apb 25 related interpretations except costs related restricted shares restricted share units stock appreciation rights insignificant number amended options requiring new measurement date compensation expense recognized net earnings options granted exercise price equal market value underlying stock date grant following tables illustrate effect net earnings millions earnings per share fiscal year ended june 30 2005 company adopted fair value recognition provisions sfas 123 “accounting stockbased compensation” 1 total equitybased employee compensation expense adjusted include net employee stock purchase plan expense 75 million fiscal 2005 2 company used treasury stock method calculating diluted earnings per common share presented table treasury stock method diluted shares outstanding adjusted weightedaverage unrecognized compensation component company used sfas 123 employee savings plan substantially company’s domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code 1986 amended provide company matching profit sharing contributions company’s contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans 1078 million 1125 million 737 million fiscal 2007 2006 2005 respectively 19 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties cardinal health inc subsidiaries notes consolidated financial statements continued lease receivablerelated arrangements subsidiary company agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank order qualify sale treatment sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” company formed whollyowned special purpose bankruptcyremote subsidiaries “pyxis spes” subsidiary cardinal health solutions inc “pyxis” pyxis spes formed whollyowned qualified special purpose subsidiaries “qspes” effectuate removal lease receivables company’s consolidated financial statements accordance sfas 140 company consolidates pyxis spes consolidate qspes pyxis spes qspes separate legal entities maintain separate financial statements company pyxis assets pyxis spes qspes available first foremost satisfy claims respective creditors receivablerelated arrangements cardinal health funding llc “chf” organized sole purpose buying receivables selling undivided interests receivables multiseller conduits administered thirdparty banks thirdparty investors chf designed special purpose bankruptcyremote entity although consolidated accordance gaap chf separate legal entity company’s subsidiary sells contributes receivables chf sale receivables chf qualifies sales treatment sfas 140 accordingly receivables included company’s consolidated financial statements june 30 2007 2006 company committed receivables sales facility program available chf capacity sell 8000 million receivables recourse provided program requirement chf retain percentage subordinated interest sold receivables october 2006 company repurchased aggregate 5500 million receivable interests committed receivables sales facility program october 31 2006 company renewed receivables sales facility program period one year third quarter fiscal 2006 company sold subsequently repurchased 1500 million receivable interests receivable sales facility program company receivable interest sales outstanding receivables sales facility program june 30 2007 5500 million receivable interest sales june 30 2006 company provided security interest residual interest receivables 2655 million june 30 2006 required program cash flows receivablerelated arrangements company’s net cash flow increase decrease related receivable interest transfers fiscal 2007 2006 2005 follows millions pyxis chf required repurchase receivables interests sold determined representations warranties regard related receivables accurate date sold cardinal health inc subsidiaries notes consolidated financial statements continued operating leases company entered operating lease agreement thirdparty bank construction various facilities equipment lease agreement matures june 2013 event termination company required election either repurchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse 1209 million june 30 2007 june 30 2007 amount expended acquire andor construct facilities 1512 million agreement provides maximum funding 2450 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn fiscal 2007 company repurchased certain buildings equipment land approximately 512 million previously operating lease agreements total amount repurchased approximately 442 million related pts business lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2007 weighted average interest rate agreements approximated 625 company’s estimated minimum annual lease payments agreements june 30 2007 approximately 95 million 20 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2007 2006 millions except per common share amounts sum quarters may equal yeartodate due rounding 1 amounts agree previously disclosed company’s form 10q period ended september 30 2006 reclassified classification pts business discontinued operations company record significant adjustments fourth quarter fiscal 2007 disclosed within notes cardinal health inc subsidiaries notes consolidated financial statements continued company recorded following significant adjustments fourth quarter fiscal 2006 adjustment approximately 153 million related acceleration vesting conditions unvested equity awards held company’s executive chairman board acceleration equitybased compensation resulted second amended restated employment agreement dated april 17 2006 relinquished service period related unvested equity awards b adjustment approximately 100 million related excess inventory particular pharmaceutical manufacturer within healthcare supply chain services pharmaceutical segment c adjustment 73 million current year impact company’s longterm incentive cash program fiscal years 2006 2008 discussed note 3 special items recognized quarter fiscal 2007 2006 following table summarizes impact costs net earnings millions diluted earnings per common share quarters recorded sum quarters may equal yeartodate due rounding 21 subsequent events august 8 2007 company announced new 20 billion share repurchase program expires august 31 2009 item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2008 2007 2006 consolidated balance sheets june 30 2008 2007 consolidated statements shareholders’ equity fiscal years ended june 30 2008 2007 2006 consolidated statements cash flows fiscal years ended june 30 2008 2007 2006 notes consolidated financial statements schedule ii report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2008 2007 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2008 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position company june 30 2008 2007 consolidated results operations cash flows three years period ended june 30 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 11 consolidated financial statements company adopted financial accounting standards board interpretation 48 “accounting uncertainty income taxes” july 1 2007 also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 22 2008 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 22 2008 cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc ohio corporation formed 1979 leading provider products services improve safety productivity healthcare references “company” consolidated financial statements shall deemed references cardinal health inc majorityowned subsidiaries unless context otherwise requires company reports financial information four reportable segments healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical clinical technologies services medical products technologies effective first quarter fiscal 2008 former medical products manufacturing segment renamed medical products technologies connection company’s acquisition viasys healthcare inc “viasys” completed fourth quarter fiscal 2007 changes company’s reportable segments fiscal 2008 basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany amounts eliminated fiscal 2008 2007 2006 company completed several acquisitions accounted purchase method accounting consolidated financial statements include results operations business combinations date acquisition additional disclosure related company’s acquisitions provided note 2 effective second quarter fiscal 2007 company reclassified former pharmaceutical technologies services segment certain genericfocused businesses segment excluding certain genericfocused businesses sold referred “pts business” discontinued operations effective third quarter fiscal 2006 company reclassified significant portion healthcare marketing services business “hms disposal group” united kingdombased intercare pharmaceutical distribution business “ipd” discontinued operations addition effective first quarter fiscal 2006 company reclassified sterile pharmaceutical manufacturing business humacao puerto rico “humacao” discontinued operations prior period financial results reclassified conform changes presentation see note 8 additional information regarding discontinued operations preparation financial statements conformity generally accepted accounting principles united states “gaap” requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes estimates include limited allowance doubtful accounts inventory valuation goodwill intangible asset impairment preliminary final purchase accounting allocations including acquired inprocess research development costs “iprd” vendor reserves equitybased compensation income taxes loss contingencies self insurance accruals restructuring charge reserves actual amounts may differ estimated amounts cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value shortterm investments june 30 2008 company hold shortterm investments company’s shortterm investments june 30 2007 included 1320 million tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet company’s investments securities recorded cost approximated fair market value due variable interest rates see note 4 additional information regarding shortterm investments receivables trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments presented net allowance doubtful accounts see note 5 additional information concentrations credit risk major customers company maintains cash depository accounts major banks throughout world invests high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses company’s trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry credit risk limited however due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers’ financial conditions maintains reserves credit losses historically within company’s expectations following table summarizes company’s customers individually account least 10 company’s revenue customers table serviced healthcare supply chain servicespharmaceutical segment june 30 2008 2007 cvs accounted 19 20 respectively walgreens accounted 26 27 respectively company’s gross trade receivable balance certain company’s businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members fiscal 2008 2007 2006 approximately 16 10 15 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp company’s two largest gpo relationships terms revenue however company’s trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories stated lower cost using lastin firstout “lifo” method market remaining inventory stated lower cost using firstin firstout “fifo” method market see note 7 additional information cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment stated cost property equipment held sale recorded lower cost fair value less cost sell depreciation expense financial reporting purposes computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements1 50 years machinery equipment2 20 years furniture fixtures3 10 years depreciation expense 2897 million 2522 million 2387 million fiscal 2008 2007 2006 respectively certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts company expenses repairs maintenance expenditures incurred repairs maintenance expense 612 million 613 million 522 million fiscal 2008 2007 2006 respectively company capitalizes interest longterm fixed asset projects using rate 59 approximates company’s weighted average interest rate longterm obligations amount capitalized interest immaterial fiscal years presented certain prior year balances reclassified conform current year presentation goodwill intangibles company accounts purchased goodwill intangible assets accordance financial accounting standards board “fasb” statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives sfas 142 requires impairment testing conducted reporting unit level operating segment level defined sfas 131 “disclosures segments enterprise related information” one level operating segment conducting impairment test fair value company’s reporting units compared respective carrying amount including goodwill fair value exceeds carrying amount impairment exists carrying amount exceeds fair value analysis performed assess impairment company’s determination fair value reporting units based discounted cash flow analysis multiple earnings interest taxes depreciation amortization “ebitda” available review priceearnings ratio publicly traded companies similar nature scope size methods assumptions used test impairment revised segment realignments periods presented discount rates used impairment testing based riskfree rate plus adjustment risk factors ebitda multiples used impairment testing judgmentally selected based factors nature scope size applicable reporting unit use alternative estimates peer groups changes industry adjusting discount rate ebitda multiples price earnings ratios used could affect estimated fair value assets potentially result impairment identified impairment would result adjustment company’s results operations company performed annual impairment test fiscal 2008 2007 neither resulted recognition impairment charges see note 9 additional information regarding goodwill intangible assets income taxes accordance provisions sfas 109 “accounting income taxes” company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases company’s assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions company operates deferred taxes provided unremitted earnings subsidiaries outside us expected earnings permanently reinvested first quarter fiscal 2008 company adopted provisions fasb interpretation “fin” 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different company’s original estimate may require adjustment adjustments vendor reserves included cost products sold accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable fiscal years ended june 30 2008 2007 largest component accrued liabilities net current deferred tax liabilities approximately 5066 million 6500 million respectively significant components accrued liabilities current income taxes payable employee compensation related benefit accruals june 30 2008 2007 current income taxes payable 725 million 1197 million respectively employee compensation related benefit accruals 2322 million 3775 million respectively equitybased compensation first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires estimation future uncertain events estimates include limited stock price volatility expected option life expected dividend yield option forfeiture rates compensation expense recognized equitybased awards net estimated forfeitures recognized ratably awards’ service period company classifies equitybased compensation within selling general administrative “sga” expenses correspond line item majority cash compensation paid employees see note 18 additional information regarding equitybased compensation dividends company paid cash dividends per common share 048 036 024 fiscal years ended june 30 2008 2007 2006 respectively revenue recognition accordance us securities exchange commission “sec” staff accounting bulletin “sab” 104 “revenue recognition” company recognizes revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectibility reasonably assured revenue recognized net sales returns allowances healthcare supply chain servicespharmaceutical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue within segment includes revenue bulk customers deliveries bulk customers consist product shipped form product received manufacturer bulk customers ability process large quantities products central locations self distribute products individual retail stores customers revenue bulk customers recorded title transfers customer company obligation provide services related merchandise revenue deliveries direct shipped customer warehouses manufacturer whereby company acts intermediary ordering delivery products recorded gross accordance fasb emerging issues task force “eitf” issue 9919 “reporting revenue gross principal versus net agent” revenue recorded gross basis since company incurs credit risk customer bears risk loss incomplete shipments receive separate fee commission transaction primary obligor radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services medicine shoppe international inc medicap pharmacies incorporated franchise operations collectively “medicine shoppe” company apothecarystyle pharmacy franchisees earns franchise origination fees franchise fees represent monthly fees based upon franchisees’ sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened healthcare supply chain servicesmedical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise clinical technologies services leasing revenue accounted accordance sfas 13 “accounting leases” revenue recognized salestype leases lease becomes noncancellable lease determined noncancellable upon completion installation equipment functioning according material specifications user’s manual customer accepted equipment interest income salestype leases recognized revenue using interest method consistent salestype leases revenue recognized operating leases installation complete customer acceptance occurred operating lease revenue recognized lease term amounts become receivable according provisions lease revenue safety systems contain software essential functionality product subject provisions american institute certified public accountants statement position 972 “software revenue recognition” elements safety system sales arrangements may contain following infusion devices disposables hardware software maintenance programs professional services multiple element arrangement total fees allocated element based vendorspecific objective evidence fair value element using residual method applicable vendorspecific objective evidence generally based price charged element sold separately allocated fees recognized separately element delivered contractual obligations relation element perpetual software license revenue generally recognized upon shipment customer software maintenance revenue recognized ratably contract period vendorspecific objective evidence software maintenance determined based contract renewal price maintenance rights unspecified software upgrades whenandif available basis included software maintenance professional service revenue recognized services rendered pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medical products technologies segment records selfmanufactured medical product revenue title transfers customers generally occurs upon delivery multiple segments business units arrangements involving multiple segments business units containing software incidental functionality product service arrangements involving single segment business unit multiple deliverables accounted accordance eitf issue 0021 “revenue arrangements multiple deliverables” deliverable meets criteria separate unit accounting arrangement revenue allocated element based upon relative fair value recognized accordance applicable revenue recognition criteria element sales returns allowances revenue recorded net sales returns allowances company recognizes sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees allow customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded sfas 48 “revenue recognition right return exists” applying provisions sfas 48 would materially change company’s financial position results operations sales returns allowances approximately 18 billion 18 billion 15 billion fiscal 2008 2007 2006 respectively distribution service agreement vendor fees company’s pharmaceutical supply chain business within healthcare supply chain servicespharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory fees earned company entitled payment company recognizes fees reduction carrying value inventory generated fees recognized reduction cost products sold statements earnings inventory sold shipping handling shipping handling costs included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 2912 million 3058 million 2743 million fiscal 2008 2007 2006 respectively shipping handling revenue received immaterial periods presented research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 1529 million 1028 million 968 million fiscal 2008 2007 2006 respectively translation foreign currencies financial statements company’s subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity comprehensive income utilizing periodend exchange rates foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings interest expense immaterial fiscal years ended june 30 2008 2007 2006 interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended “accounting derivative instruments hedging activity” standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders’ equity comprehensive income net tax company uses forward currency exchange contracts interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value interest expense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included interest expense remeasurement adjustment offset foreign currency forward contract settlements also classified interest expense interest rate swaps designated fair value hedges company’s derivative contracts adjusted current market values period qualify hedge accounting sfas 133 amended periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities company’s policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related company’s hedging contracts provided note 14 earnings per common share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share “diluted eps” similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method recent financial accounting standards february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” amendment sfas 133 sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” statement permits fair value remeasurement hybrid financial instrument contains embedded derivative would otherwise required bifurcated host contract election measure hybrid financial instrument fair value entirety irrevocable changes fair value recognized earnings statement also clarifies amends certain provisions sfas 133 sfas 140 statement effective company’s financial instruments acquired issued subject remeasurement event occurring fiscal years beginning september 15 2006 adoption statement fiscal 2008 material impact company’s financial position results operations july 2006 fasb issued fin 48 “accounting uncertainty income taxes” interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns interpretation effective fiscal years beginning december 15 2006 refer note 11 additional information regarding company’s adoption fin 48 fiscal 2008 september 2006 fasb issued sfas 157 “fair value measurements” statement defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements statement effective fiscal years beginning november 15 2007 interim periods within fiscal years february 2008 fasb issued fasb staff position fas 1572 “effective date fasb statement 157” staff position delays effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis company evaluated portions statement effective fiscal 2009 expect adoption statement material impact company’s financial position results operations company process determining impact adopting remaining portions statement effective fiscal 2010 september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” statement requires entity recognize statement financial position asset defined benefit postretirement plan’s overfunded status liability plan’s underfunded status measure defined benefit postretirement plan’s assets obligations determine funded status end employer’s fiscal year recognize changes funded status defined benefit postretirement plan comprehensive income year changes occur statement requires balance sheet recognition funded status pension postretirement benefit plans effective fiscal years ending december 15 2006 statement also requires plan assets benefit obligations measured company’s balance sheet date effective fiscal years ending december 15 2008 company adopted recognition disclosure provisions standard required prospectively fourth quarter fiscal 2007 material impact company’s financial position results operations upon adoption provisions likewise company expect adoption measurement date provision material impact fiscal 2009 february 2007 fasb issued sfas 159 “the fair value option financial assets liabilitiesincluding amendment fasb statement 115” statement creates fair value option entity may irrevocably elect fair value initial subsequent measurement attribute certain assets liabilities instrumentbyinstrument basis fair value option elected instrument subsequent changes fair value instrument shall reported earnings statement effective beginning entity’s first fiscal year beginning november 15 2007 company believe adoption statement material impact company’s financial position results operations december 2007 fasb issued sfas 141r “business combinations” sfas 160 “noncontrolling interests consolidated financial statements” statements provide guidance accounting reporting business combinations minority interests consolidated financial statements effective fiscal years beginning december 15 2008 company process determining impact adopting statements however statements expected significant impact company’s accounting disclosure practices business combinations adopted march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” statement amends expands disclosure requirements sfas 133 statement effective fiscal years beginning november 15 2008 interim periods within fiscal years company process determining impact adopting statement may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” statement reorganizes gaap hierarchy statement effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” company believe adoption statement material impact company’s financial position results operations 2 acquisitions fiscal 2008 may 12 2008 company completed acquisition assets privately held enturia inc “enturia” leawood kansasbased manufacturer products services directed infection prevention markets purchase price acquisition paid cash approximately 4900 million including assumption approximately 142 million liabilities includes 51 million debt preliminary valuation acquired assets liabilities resulted goodwill approximately 3278 million identifiable intangible assets 1294 million company identified valued intangible assets related trade names trademarks developed technology customer relationships valuation yet finalized subject adjustments company completes valuation analysis detail category follows fiscal 2008 company recorded charge 177 million related writeoff estimated iprd costs associated enturia acquisition portion purchase price allocated iprd fiscal 2008 represented company’s preliminary estimate fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately charged special items expense acquisition date accordance fin 4 “applicability fasb statement 2 business combinations accounted purchase method” value assigned iprd subject adjustment company completes valuation analysis addition fiscal 2008 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 353 million potential maximum contingent payments 850 million assumed liabilities acquired businesses approximately 56 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2007 consolidated results operations would differed materially reported results fiscal 2007 june 21 27 2007 company completed initial subsequent tender offers outstanding common stock viasys conshohocken pennsylvaniabased provider products services directed critical care ventilation respiratory diagnostics clinical services medical surgical products markets tender offers total approximately 293 million shares viasys common stock validly tendered 4275 per share represented approximately 88 outstanding shares viasys june 28 2007 company acquired viasys number additional shares would hold 90 outstanding shares fully diluted basis day viasys merged subsidiary company complete transaction cash transaction valued approximately 15 billion including assumption approximately 2178 million liabilities included 542 million debt viasys employees outstanding stock options elected either receive cash payment convert options purchase company’s common shares certain viasys employees elected convert options resulted employees receiving right purchase total approximately 01 million common shares company preliminary valuation acquired assets liabilities resulted goodwill approximately 10 billion identifiable intangible assets 4420 million reported june 30 2007 final valuation completed fiscal 2008 resulted 815 million reclassification goodwill identifiable intangible assets company identified valued intangible assets related trade names trademarks developed technology customer relationships detail category follows fiscal 2007 company recorded charge 839 million related writeoff estimated iprd costs associated viasys acquisition charge based company’s preliminary estimate fair value iprd fiscal 2008 company completed valuation iprd recorded 250 million adjustment reduce total writeoff iprd associated viasys acquisition 589 million portion purchase price allocated iprd represents estimated fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly charged special items expense accordance fin 4 addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 1738 million potential maximum contingent payments 523 million assumed liabilities acquired businesses approximately 224 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2006 consolidated results operations would differed materially reported results fiscal 2006 fiscal 2006 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 3640 million assumed liabilities acquired businesses approximately 1490 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2005 consolidated results operations would differed materially reported results purchase accounting accruals connection restructuring integration plans related acquisition enturia company accrued part acquisition adjustments liability 201 million related closing certain facilities 38 million related employee termination costs payments made fiscal 2008 items connection restructuring integration plans related acquisition viasys company accrued part acquisition adjustments liability 174 million legal recall charges 113 million related employee termination relocation costs 109 million related closing certain facilities 20 million restructuring charges june 30 2008 company paid 30 million legal recall related costs 65 million employeerelated costs 83 million associated facility closures 3 special items impairments gainloss sale assets special items policy company classifies restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recorded accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 liability measured fair value recognized incurred acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges included within purchase price allocation accordance sfas 141 “business combinations” integration charges recognized special items incurred company recognizes income favorable outcome legal settlements judgments resolution legal regulatory matters special items consolidated financial statements associated cash assets received generally expenses due unfavorable outcome legal settlements judgments resolution legal regulatory matters “litigation settlement losses” charged segment matter relates result classified sga expenses company’s consolidated financial statements certain circumstances significant litigation settlement losses classified special items consolidated statement earnings factors considered determining whether particular litigation settlement loss classified special items include size settlement nature matter ie significant matters infrequent nonrecurring unusual nature classified special items age matter pervasiveness matter entire organization company also classifies legal fees document preservation production costs incurred connection previouslydisclosed sec investigation related audit committee internal review related matters special items information regarding investigations see company’s annual report form 10k fiscal year ended june 30 2007 amended “2007 form 10k” special items following summary special items fiscal years ended june 30 2008 2007 2006 1 company applies varying tax rates special items depending upon tax jurisdiction item incurred restructuring charges fiscal 2005 company launched global restructuring program goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation company expects program implemented three phases substantially completed end fiscal 2009 first phase program announced december 2004 focused business consolidations process improvements including rationalizing facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines second phase program announced august 2005 focused longerterm integration activities enhance service customers improved integration across company’s segments continued streamlining internal operations third phase program announced april 2007 focused moving headquarters company’s healthcare supply chain servicesmedical segment certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio fiscal 2009 company undertaking major restructuring segment operating structure effective july 1 2008 company consolidated businesses two primary operating reportable segments reduce costs align resources needs segment addition restructuring programs discussed time company incurs costs implement smaller restructuring efforts specific operations within segments restructuring plans focus various aspects operations including closing consolidating certain manufacturing operations rationalizing headcount aligning operations strategic costefficient structure following table segregates company’s restructuring charges various reportable segments affected restructuring projects fiscal years ended june 30 2008 2007 2006 1 employeerelated costs consist primarily severance accrued upon either communication terms employees required service period outplacement services provided employees involuntarily terminated duplicate payroll costs transition periods also included within classification 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring company’s delivery information technology infrastructure services 3 certain costs previously classified within healthcare supply chain servicesmedical reclassified costs incurred within healthcare supply chain servicespharmaceutical segment fiscal 2008 primarily related closure logistics center headcount reductions within existing operations realignment business operations costs incurred fiscal 2007 primarily related reorganization business units within segment evolve customer offerings differentiate business competitors costs incurred fiscal 2006 primarily related closure distribution centers consolidation existing locations closure multiple companyowned pharmacies within medicine shoppe closure facilities acquired part syncor international corporation “syncor” acquisition costs incurred within healthcare supply chain servicesmedical segment fiscal 2008 primarily related outsourcing certain logistics functions order align segment common platform closure distribution center headcount reductions within existing operations costs incurred fiscal 2007 primarily related reorganization business units within segment evolve customer offerings differentiate business competitors consolidation distribution sites costs incurred fiscal 2006 primarily related consolidation facilities within distribution business costs incurred within clinical technologies services segment fiscal 2008 2007 primarily related facility closures costs incurred within medical products technologies segment fiscal 2008 primarily related headcount reductions costs incurred fiscal 2007 2006 primarily related projects aimed improvements manufacturing cost efficiency consolidation facilities outsourcing production higher cost platforms lower cost platforms costs incurred related projects impacted multiple segments fiscal 2008 primarily related relocation headquarters company’s healthcare supply chain servicemedical segment certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio also included within facility exit costs fiscal 2008 58 million accelerated depreciation restructuring human resources administrative function related prior periods costs incurred related projects impacted multiple segments fiscal 2007 2006 primarily related design implementation company’s restructuring plans certain administrative functions restructuring company’s delivery information technology infrastructure services outsourcing certain human resources functions following table summarizes year project activities expected completed expected headcount reductions july 31 2008 actual headcount reductions june 30 2008 1 represents projects initiated july 31 2008 2 headcount reduction includes among restructuring projects employees displaced result relocation healthcare supply chainmedical headquarters certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio reduction expected offset positions created corporate headquarters acquisition integration charges costs integrating operations various acquired companies recorded acquisition integration charges incurred acquisition integration charges incurred fiscal 2008 primarily result acquisitions viasys enturia costs incurred fiscal 2007 2006 primarily result acquisition wholesale pharmaceutical health beauty related drugstore products distribution business f dohmen co certain subsidiaries “dohmen” alaris medical systems inc “alaris” parmed pharmaceutical inc “parmed” syncor fiscal years noted company also incurred acquisition integration charges numerous smaller acquisitions following table paragraphs provide additional detail regarding types acquisition integration charges incurred company fiscal years ended june 30 2008 2007 2006 employeerelated costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result acquisitions fiscal 2008 costs primarily related acquisition care fusion incorporated “care fusion” viasys fiscal 2007 costs primarily related acquisition dohmen fiscal 2006 charges primarily related alaris acquisition asset impairments exit costs fiscal 2008 costs primarily related viasys acquisition fiscal 2007 2006 costs primarily related facility integration alaris acquisition iprd costs fiscal 2008 company recorded charges 177 million 253 million related writeoff iprd costs associated enturia another minor acquisition respectively charges partially offset 250 million adjustment reduce total writeoff iprd associated viasys acquisition 589 million see note 2 information fiscal 2007 company recorded charges 839 million 06 million related writeoff iprd costs associated viasys care fusion respectively integration costs integration costs generally relate expenses incurred integrate acquired company’s operations systems company’s existing operations systems costs include limited integration information systems employee benefits compensation accounting finance tax treasury internal audit risk management compliance administrative services sales marketing costs fiscal 2008 primarily related acquisitions viasys dohmen alaris costs fiscal 2007 primarily related acquisitions dohmen parmed alaris costs fiscal 2006 primarily related acquisition alaris litigation net following table summarizes company’s net litigation costs included within special items fiscal 2008 2007 2006 derivative litigation company recognized income 580 million fiscal 2008 related settlement derivative actions discussed note 12 amount comprised 700 million received company directors officers’ insurance policies less 120 million paid plaintiffs’ attorneys’ fees costs information regarding matter see note 12 pharmaceutical manufacturer antitrust litigation company recognized income 02 million 285 million 255 million fiscal 2008 2007 2006 respectively resulting settlement class action antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition company named plaintiff class actions member direct purchasers’ class ie purchasers purchase directly drug manufacturers total recovery claims june 30 2008 1518 million net attorney fees payments due interested parties expenses withheld company unable time estimate future recoveries receive result class actions dea matter fiscal 2008 company recorded reserve 340 million related dea matter information regarding matter see note 12 syncor erisa litigation fiscal 2008 company recorded reserve 54 million related syncor erisa litigation information regarding matter see note 12 syncor federal securities litigation fiscal 2008 company recorded reserve 27 million fiscal 2008 related syncor federal securities litigation information regarding matter see note 12 dupont actions fiscal 2008 company incurred charges 60 million related settlement previouslyreported litigation ei du pont de nemours company “dupont” company also recognized charges 115 million fiscal 2007 related settlement litigation october 2006 company entered settlement agreement dupont required company part make initial payment dupont 115 million possible additional payment future could offset additional purchases 60 million referenced relates additional payment called settlement agreement information regarding matter see company’s quarterly report form 10q quarter ended september 30 2006 cardinal health federal securities litigation fiscal 2007 company recorded reserve made payment 6000 million related previouslyreported cardinal health federal securities litigation information regarding matter see 2007 form 10k cardinal health erisa litigation fiscal 2007 company incurred charges made payment 400 million related previouslyreported cardinal health erisa litigation information regarding matter see 2007 form 10k new york attorney general investigation company incurred charges 30 million 80 million fiscal 2007 2006 respectively respect previouslyreported investigation new york attorney general’s office fiscal 2007 company entered civil settlement resolved investigation made payments totaling 110 million part settlement information regarding matter see company’s quarterly report form 10q quarter ended december 31 2006 litigation company recorded reserves totaling 256 million fiscal 2008 respect settlement certain pending disputes litigation matters company’s healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments fiscal 2006 company recorded settlement recoveries 15 million related certain immaterial litigation matters fiscal 2008 2007 2006 company incurred costs recorded within special items totaling 40 million 44 million 265 million respectively costs primarily relate estimated settlement costs legal fees document preservation production costs incurred connection sec investigation related audit committee internal review related matters included within costs additional reserves 100 million recognized fiscal 2006 settlement sec resolve investigation respect company fiscal 2007 company made payment 350 million resulting final settlement matter sec information regarding matter see 2007 form 10k special items accrual rollforward following table summarizes activity related liabilities associated company’s special items fiscal years ended june 30 2008 2007 2006 1 amounts represent items expensed incurred accrued accordance gaap amounts include gross litigation settlement income recorded fiscal 2008 2007 2006 582 million 285 million 270 million respectively recorded special items future spend certain acquisition restructuring costs based upon estimates actual amounts paid may ultimately differ estimates additional costs incurred recognized amounts exceed costs changes estimates recognized special items incurred company estimates incur additional costs future periods associated various acquisition integration restructuring activities totaling approximately 1333 million approximately 844 million net tax estimated costs primarily associated integration viasys within medical products technologies segment consolidation company’s business units two reportable segments impairments gainloss sale assets net company classifies certain asset impairments related restructurings special items asset impairments gains losses sale assets eligible classified special items discontinued operations classified within impairments gainloss sale assets net within consolidated statements earnings fiscal 2008 2007 2006 company incurred impairments gainloss sale assets net 320 million 173 million 58 million respectively charges included within corporate segment results see note 17 information regarding items included within corporate fiscal 2008 company recognized 233 million gain divestiture investment within healthcare supply chain services pharmaceutical segment also included impairments gainsloss sale assets net 159 million gain related sale particular line business within medical products technologies segment fiscal 2007 company determined certain investment impaired recognized 123 million charge see note 4 additional information fiscal 2006 significant charge approximately 62 million related loss sale significant portion company’s specialty distribution business see note 8 additional information 4 investments june 30 2008 company hold shortterm investments company’s shortterm investments june 30 2007 included 1320 million tax exempt auction rate securities shortterm investments classified availableforsale company’s consolidated balance sheet company’s investments securities carried cost approximated fair value june 30 2006 company held 167 million cost investment global healthcare exchange llc “ghx” fiscal 2007 company determined investment impaired recognized 123 million charge see note 3 june 30 2008 2007 carrying amount investment 44 million company continue monitor ghx’s financial performance order assess additional impairment 5 accounts receivable trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments presented net allowance doubtful accounts 1247 million 1188 million june 30 2008 2007 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company writeoff amounts deemed uncollectible established allowance doubtful accounts company provides financing various customers financing arrangements range approximately 90 days 10 years interest rates generally subject fluctuation interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 290 million 355 million june 30 2008 2007 respectively current portions 204 million 156 million respectively included assets fiscal 2006 company sold certain notes bank see note 13 additional information finance notes receivable reported net allowance doubtful accounts 44 million 43 million june 30 2008 2007 respectively company formed special purpose entities sole purpose buying receivables salestype leases various legal entities company selling receivables salestype leases certain multiseller conduits administered banks third party investors see note 19 additional disclosure regarding offbalance sheet arrangements fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 2500 million 4000 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively part amendment certain facility terms preferred debt securities october 2006 company repaid 5000 million principal balance see note 10 additional information 6 leases company’s salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components company’s net investment salestype leases follows june 30 2008 2007 future minimum lease payments received pursuant salestype leases next five fiscal years thereafter follows 7 inventories substantial portion inventories approximately 70 73 june 30 2008 2007 respectively stated lower cost using lifo method market inventories included within core distribution facilities within company’s healthcare supply chain servicespharmaceutical segment “core distribution facilities” primarily merchandise inventories company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within core distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2008 2007 company record lifo reserve reductions company used average cost method inventory valuation inventory within core distribution facilities inventories would changed fiscal 2008 fiscal 2007 fact primarily due continued deflation generic pharmaceutical inventories lifo 425 million 558 million higher average cost value june 30 2008 2007 respectively company’s policy however record inventories excess current market value remaining inventory primarily stated lower cost using fifo method market inventories recorded company’s consolidated balance sheets net reserves excess obsolete inventory 945 million 958 million june 30 2008 2007 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory 8 discontinued operations assets held sale pts business second quarter fiscal 2007 company committed plans sell pts business thereby meeting held sale criteria set forth sfas 144 “accounting impairment disposal longlived assets” accordance sfas 144 eitf issue 0313 “applying conditions paragraph 42 fasb statement 144 accounting impairment disposal longlived assets determining whether report discontinued operations” net assets pts business presented separately held sale operating results presented within discontinued operations periods presented net assets held sale pts business included within corporate fourth quarter fiscal 2007 company completed sale pts business affiliate blackstone group closing sale company received approximately 32 billion cash purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement company recognized aftertax book gain approximately 11 billion fiscal year ended june 30 2007 transaction company incurred activity fiscal year ended june 30 2008 result changes certain estimates made time sale activity transition service agreements adjustments also included within year ended june 30 2008 adjustment deferred tax item included book basis pts business sold fourth quarter fiscal 2007 adjustment resulted 123 million increase gain sale pts business results pts business included discontinued operations fiscal years ended june 30 2008 2007 2006 summarized follows net periodic benefit cost included discontinued operations pts business 229 million 82 million fiscal 2007 2006 respectively interest expense allocated discontinued operations pts business 250 million 251 million fiscal 2007 2006 respectively interest expense allocated based upon ratio invested capital pts business versus overall invested capital company addition portion corporate costs previously allocated pts business reclassified remaining four segments prior period information reclassified conform new presentation accordance eitf issue 937 “recognition deferred tax assets parent company’s excess tax basis stock subsidiary accounted discontinued operation” second quarter fiscal 2007 company recognized 4250 million net tax benefit related difference company’s tax basis stock various pts businesses included discontinued operations book basis company’s investment businesses tax benefit offset related tax expense gain net book value fourth quarter fiscal 2007 upon completion pts business sale liabilities pts business included liabilities held sale discontinued operations 25 million 342 million june 30 2008 2007 respectively cash flows generated discontinued operations presented separately company’s consolidated statements cash flows third quarter fiscal 2008 company committed plans sell certain smaller noncore businesses within medical products technologies segment thereby meeting held sale criteria set forth sfas 144 accordance sfas 144 eitf issue 0313 net assets businesses presented separately held sale company’s consolidated balance sheet june 30 2008 results businesses reported within earnings continuing operations company’s consolidated statements earnings june 30 2008 major components businesses’ assets liabilities held sale follows third quarter fiscal 2006 company committed plans sell hms disposal group ipd thereby meeting held sale criteria set forth sfas 144 remaining portion healthcare marketing services business remains within company accordance sfas 144 eitf issue 0313 net assets businesses presented separately held sale operating results businesses presented within discontinued operations accordance sfas 144 net assets held sale business recorded net expected fair value less costs sell amount lower businesses’ net carrying value impairment charges 473 million 2374 million recorded fiscal 2007 2006 respectively within discontinued operations hms disposal group ipd first quarter fiscal 2007 company completed sale ipd third quarter fiscal 2007 company completed sale hms disposal group fourth quarter fiscal 2005 company decided close humacao part global restructuring program committed sell assets humacao operations thereby meeting held sale criteria set forth sfas 144 fourth quarter fiscal 2005 company recognized impairment charge write carrying value humacao assets fair value less costs sell first quarter fiscal 2006 company subsequently decided transfer production humacao companyowned facilities thereby meeting criteria classification discontinued operations accordance sfas 144 eitf issue 0313 impairment charge 52 million recorded fiscal 2007 result recording net assets held sale net expected fair value less costs sell beginning fiscal 2008 humacao reclassified continuing operations combined results hms disposal group ipd humacao included discontinued operations fiscal years ended june 30 2007 2006 summarized follows interest expense allocated hms disposal group ipd humacao discontinued operations 14 million 31 million fiscal 2007 2006 respectively interest expense allocated ipd hms disposal group quarters subsequent respective sales interest expense allocated discontinued operations based upon ratio net assets discontinued operations versus overall net assets company cash flows generated discontinued operations presented separately company’s consolidated statements cash flows 9 goodwill intangible assets company accounts purchased goodwill intangible assets accordance sfas 142 following table summarizes changes carrying amount goodwill total segment two years ended june 30 2008 1 decrease within healthcare supply chain servicespharmaceuticals segment primarily related dohmen purchase accounting adjustments offset acquisition specialtyscripts llc “specialtyscripts” resulted preliminary goodwill allocation 69 million specialtyscripts acquisition also included potential maximum future contingent payment 410 million 2 increase within clinical technologies services segment primarily related acquisition medmined inc “medmined” care fusion resulted preliminary goodwill allocation 661 million 442 million respectively medmined acquisition also included potential maximum future contingent payment 105 million 3 increase within medical products technologies segment primarily related acquisition viasys resulting preliminary goodwill allocation 10 billion offset denver biomedical inc purchase accounting adjustments 167 million 4 end fiscal 2006 company divided businesses previously reported within medical products services segment healthcare supply chain servicesmedical medical products technologies segments better align business operations transfer adjustment goodwill initially allocated new segments 5 increase within healthcare supply chain servicespharmaceutical segment primarily related adjustments minor acquisitions 150 million deferred tax adjustments foreign currency translation adjustments 6 increase within healthcare supply chain servicesmedical segment primarily related minor acquisition resulted preliminary goodwill allocation 55 million remaining amounts represent foreign currency translation adjustments 7 increase within clinical technologies services segment primarily related adjustments minor acquisitions 196 million partially offset deferred tax adjustment related alaris acquisition 57 million 8 increase within medical products technologies segment primarily related acquisition enturia resulted preliminary goodwill allocation 3278 million adjustment inprocess research development related viasys acquisition 250 million partially offset reclassification goodwill identified intangible assets final viasys acquisition valuation 815 million 9 amount within medical products technologies segment related reclassification certain smaller noncore businesses within segment held sale 374 million divestiture particular line business 58 million allocations purchase prices related enturia acquisitions yet finalized subject adjustment company completes valuation analysis company expects future adjustments allocations purchase prices potential future contingent payments recorded goodwill intangible assets definite lives amortized using straightline method periods range three forty years detail intangible assets class two years ended june 30 2008 follows significant acquisitions intangible assets period presented certain increases within intangible asset classes result 815 million reclassification goodwill related final viasys acquisition valuation certain decreases within intangible asset classes result 634 million net intangibles related certain smaller noncore offerings within medical products technologies segment reclassified assets held sale fiscal 2008 amortization expense fiscal 2008 2007 2006 approximately 851 million 609 million 530 million respectively amortization expense next five fiscal years estimated 10 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following june 30 2008 2007 400 550 565 580 585 600 625 675 notes floating rate notes due 2009 represent unsecured obligations company 780 700 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary company guaranteed company obligations subject sinking fund redeemable prior maturity interest paid pursuant terms obligations notes company effectively subordinated liabilities company’s subsidiaries including trade payables 83 billion october 2006 company sold 3500 million aggregate principal amount floating rate notes due 2009 “2009 notes” 5000 million aggregate principal amount fixed rate notes due 2016 “2016 notes” private offering 2009 notes mature october 2 2009 interest notes accrues floating rate equal threemonth libor plus 027 payable quarterly 2016 notes mature october 15 2016 interest 2016 notes accrues 580 per year payable semiannually company also agreed benefit holders register 2009 2016 notes us securities act 1933 amended “securities act” pursuant registered exchange offer 2009 2016 notes may sold public market company meet certain deadlines completion exchange offer interest rates 2009 2016 notes increased 25 basis points june 1 2007 additional 25 basis points august 30 2007 effective march 14 2008 company completed exchange offer additional interest 2009 2016 notes longer payable company used proceeds sale 2009 2016 notes repay 5000 million company’s preferred debt securities 1274 million 730 notes due 2006 531 million outstanding shortterm credit facility subsidiary guaranteed company general corporate purposes second private offering occurred june 2007 company sold 3000 million aggregate principal amount fixed rate notes due 2012 “2012 notes” 3000 million aggregate principal amount fixed rate notes due 2017 “2017 notes” 2012 notes mature june 15 2012 2017 notes mature june 15 2017 interest 2012 2017 notes accrues 565 600 respectively per year payable semiannually company experiences specific types change control notes rated investment grade sp moody’s fitch company required offer purchase 2012 2017 notes 101 principal amount thereof plus accrued unpaid interest date repurchase company also agreed benefit holders register 2012 2017 notes securities act pursuant registered exchange offer 2012 2017 notes may sold public market company meet certain deadlines completion exchange offer interest rates 2012 2017 notes increased 25 basis points february 4 2008 effective march 14 2008 company completed exchange offer additional interest 2012 notes 2017 notes longer payable company used net proceeds sale 2012 2017 notes fund portion purchase price viasys acquisition general corporate purposes june 2008 company sold 300 million aggregate principal amount fixed rate notes due 2013 “the 2013 notes” registered offering 2013 notes mature june 15 2013 interest 2013 notes accrues 550 per year payable semiannually company experiences specific types change control notes rated investment grade sp moody’s fitch company required offer purchase 2013 notes 101 principal amount thereof plus accrued unpaid interest date repurchase company used portion proceeds date repay 150 million 625 notes due 2008 july 15 2008 company expects use remaining proceeds general corporate purposes may include refinancing outstanding preferred debt securities discussed part company’s acquisition alaris fiscal 2004 company assumed 1953 million 725 senior subordinated notes due 2011 fiscal 2005 company paid 1836 million senior subordinated notes july 2 2007 company exercised option call senior subordinated notes resulting repayment remaining balance 112 million fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company “accounts receivable financing entity” accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 2500 million 4000 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively october 26 2006 company amended certain facility terms company’s preferred debt securities part amendment company repaid 5000 million principal balance portion proceeds october 2006 sale notes discussed minimum net worth covenant added whereby minimum net worth company cannot fall 50 billion time amendment eliminated minimum adjusted tangible net worth covenant adjusted tangible net worth could fall 25 billion certain financial ratio covenants repayment company 150 million preferred debt securities outstanding preferred debt securities classified “longterm obligations less current portion shortterm obligations” company’s consolidated balance sheet result opening initial exchange period preferred debt securities company may refinance outstanding preferred debt securities fiscal 2009 june 30 2008 2007 accounts receivable financing entity owned approximately 6077 million 5947 million respectively receivables included company’s consolidated balance sheet effective interest rate june 30 2008 2007 348 594 respectively loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company addition cash june 30 2008 2007 company’s sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility company initiated 10 billion commercial paper program august 2006 replaced former 15 billion commercial paper program company increased commercial paper program 15 billion february 28 2007 company outstanding borrowings commercial paper program june 30 2008 2007 january 2007 company amended certain terms 15 billion revolving credit facility part amendment amount facility increased 10 billion 15 billion term extended january 24 2012 expiration facility extended upon mutual consent company lending institutions revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2008 2007 except 722 million 792 million respectively standby letters credit issued behalf company also maintains shortterm credit facilities unsecured line credit allowed borrowings 689 million 1311 million june 30 2008 2007 respectively june 30 2008 2007 202 million 290 million respectively outstanding uncommitted facilities june 30 2008 2007 outstanding balance uncommitted facilities included 54 million 41 million classified obligations june 30 2008 2007 respectively remaining 171 million 202 million balance obligations june 30 2008 2007 respectively consisted primarily additional notes loans capital leases april 2008 company entered 3000 million shortterm loan facility terminated may 2008 additionally march 2007 company entered 5000 million unsecured committed short term loan facility terminated april 2007 company terminated unutilized 150 million extendible commercial note program february 2007 maturities longterm obligations next five fiscal years thereafter follows 11 income taxes earnings income taxes discontinued operations follows fiscal years ended june 30 2008 2007 2006 millions provisionbenefit income taxes continuing operations consists following fiscal years ended june 30 2008 2007 2006 reconciliation provision benefit based federal statutory income tax rate company’s effective income tax rate continuing operations follows fiscal years ended june 30 2008 2007 2006 1 fourth quarter fiscal 2008 company recognized 373 million additional tax expense related increase estimated state income tax rate deferred tax items 2 fourth quarter fiscal 2008 company recognized 304 million previously unrecognized tax benefits items pertaining fiscal 2002 2001 statute limitations lapsed approximately 18 million included “state local income taxes net federal benefit” approximately 286 million included “other” june 30 2008 company 31 billion undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings fiscal 2008 company repatriated cash 3075 million nonus subsidiaries result incurred taxable dividends 144 million nontaxable return capitalcurrency gain 1613 million taxable capital gain 1318 million taxable capital gain amount 1318 million fully offset previously unrecognized capital loss carryforward foreign tax credits 141 million recognized related taxable dividends resulting net tax benefit 41 million deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2008 2007 follows millions 1 decrease net deferred income tax liabilities primarily attributable adoption fin 48 created deferred income tax assets federal benefits related state taxes interest reclasses deferred income tax liabilities fin 48 liability totaling 2299 million deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2008 2007 millions 1 included “prepaid expenses other” 2 included “other assets” 3 included “other accrued liabilities” 4 included “deferred income taxes liabilities” june 30 2008 company gross federal state international loss credit carryforwards 1805 million 9431 million 1454 million respectively tax effect aggregate deferred tax asset 2000 million substantially carryforwards available least three years indefinite carryforward period approximately 1621 million valuation allowance june 30 2008 applies certain federal international state local carryforwards opinion management likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would applied income tax expense following exception subsequent fiscal year ended june 30 2008 company completed acquisition borschow hospital medical supplies inc determined amount valuation allowance released due acquisition release could applied goodwill maximum amount potential release goodwill associated transaction estimated 397 million first quarter fiscal 2008 company adopted provisions fin 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” standard provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement cumulative effect adoption interpretation 1393 million reduction retained earnings company 7629 million 5966 million unrecognized tax benefits june 30 2008 july 1 2007 respectively included june 30 2008 july 1 2007 balances 5291 million 3865 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility tax positions related acquired companies amount 188 million 210 million june 30 2008 july 1 2007 respectively recognition tax benefits would affect company’s effective tax rate company includes full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation unrecognized tax benefits july 1 2007 june 30 2008 follows company recognizes accrued interest penalties related unrecognized tax benefits income tax expense june 30 2008 july 1 2007 company 1954 million 1489 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheets year ended june 30 2008 company recognized 465 million interest penalties consolidated statement earnings company files income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions company subject audit taxing authorities fiscal years ending june 30 2001 current fiscal year internal revenue service “irs” currently ongoing audits fiscal years 2001 2005 three months ended december 31 2007 company notified irs transferred jurisdiction fiscal years 2001 2002 office appeals back examinations level reconsider previouslyunadjusted specific issues three months ended march 31 2008 company received notices proposed adjustment “npas” irs related fiscal years 2001 2005 challenging deductions arising sale trade receivables special purpose accounts receivable financing entity described detail note 10 amount additional tax excluding penalties interest may significant proposed irs notices 1789 million company disagrees proposed adjustments intends vigorously contest company anticipates transaction could subject proposed adjustments irs tax audits fiscal years 2006 present company believes adequately reserved uncertain tax position relating arrangement therefore adjusted amount previously recorded unrecognized tax benefits related issue subsequent fiscal year ended june 30 2008 company received irs revenue agent report tax years 2003 2005 included npas discussed new npas related company’s transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition company amount additional tax proposed irs new notices total 5981 million excluding penalties interest may significant company disagrees proposed adjustments intends vigorously contest possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations company estimates range possible change unrecognized tax benefits within next 12 months approximately zero 2750 million exclusive penalties interest 1250 million would affect company’s effective tax rate relates acquired entities 12 commitments contingent liabilities commitments future minimum rental payments operating leases including referenced note 19 initial remaining noncancelable lease terms excess one year june 30 2008 amounts within 2009 thereafter include company’s obligation purchase certain buildings equipment end related lease term see note 19 additional information related lease agreements rental expense relating operating leases including referenced note 19 approximately 1259 million 1171 million 917 million fiscal 2008 2007 2006 respectively sublease rental income material period presented herein legal proceedings addition commitments obligations ordinary course business company subject various claims pending potential legal actions damages investigations relating governmental laws regulations matters arising normal conduct business company accrues contingencies related litigation accordance sfas 5 “accounting contingencies” requires company assess contingencies determine degree probability range possible loss estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions could occur assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate loss may differ estimates possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies derivative actions november 8 2002 complaint filed purported shareholder company directors court common pleas delaware county ohio purported derivative action doris staehr v robert walter et al 02cv11639 march 21 2003 defendants filed motion dismiss complaint amended complaint filed alleging breach fiduciary duties corporate waste connection alleged failure board directors company renegotiate terminate company’s proposed acquisition syncor determine propriety advancing legal expenses behalf monty fu former chairman syncor defendants filed motion dismiss amended complaint plaintiffs subsequently filed second amended complaint added three new individual defendants included new allegations among things defendants improperly recognized revenue december 2000 september 2001 related settlements certain vitamin manufacturers defendants filed motion dismiss second amended complaint november 20 2003 court denied motion may 31 2006 plaintiffs filed third amended complaint included significant overlap substantive allegations contained consolidated amended complaint filed cardinal health federal securities litigation described 2007 form 10k complaint sought money damages equitable relief defendant directors award attorney’s fees since july 1 2004 three complaints filed purported shareholders members company’s board directors certain company’s current former officers employees company nominal defendant court common pleas franklin county ohio purported derivative actions collectively referred “cardinal health franklin county derivative actions” cases include donald bosley v david bing et al 04 cv a077167 sam weitschner v dave bing et al 04 cv c088970 green meadow partners llp v david bing et al 04 cv h099891 cardinal health franklin county derivative actions alleged among things individual defendants failed implement adequate internal controls company thereby violated fiduciary duty good faith gaap company’s audit committee charter complaints cardinal health franklin county derivative actions sought money damages equitable relief defendant directors award attorney’s fees november 22 2004 cardinal health franklin county derivative actions transferred heard judge june 20 2006 plaintiffs filed consolidated amended complaint included significant overlap substantive allegations contained consolidated amended complaint filed cardinal health federal securities litigation weed complaint discussed september 27 2006 derivative complaint filed purported shareholder certain members human resources compensation committee company’s board directors certain company’s current former officers company nominal defendant court common pleas franklin county ohio purported derivative action barry e weed v john f havens et al 06 cv h09 12620 complaint alleged individual defendants breached fiduciary duties respect timing company’s option grants august 2004 officer defendants unjustly enriched respect grants complaint sought money damages disgorgement options equitable relief costs disbursements action including attorney’s fees june 29 2007 company parties derivative litigation described entered memorandum understanding settle staehr derivative action cardinal health franklin county derivative actions weed derivative action collectively “derivative actions” addition plaintiffs company parties memorandum understanding included individual named defendants derivative actions consisting following current former executives directors david bing george h conrades john f finn robert l gerbig john f havens j michael losh john b mccoy richard c notebaert michael o’halleran david w raisbeck jean g spaulding matthew walter robert walter william e bindley regina e herzlinger melburn g whitmire george l fotiades james f millar mark w parrish richard j miller ronald k labrum anthony j rucci memorandum understanding full final settlement claims derivative actions individual defendants cause proceeds applicable directors officers insurance policies totaling 700 million paid company less amount 120 million approved court order plaintiffs’ attorneys’ fees costs memorandum understanding provided company board directors adopt corporate governance enhancement requiring audit committee board meet executive session company’s chief financial officer chief legal officer less annually also memorandum understanding plaintiff derivative actions company grant individual defendants employees agents representatives company comprehensive release covenant sue broad permissible law certain narrow exceptions covers claims behalf company could asserted derivative actions arise connection related acts matters transactions referred derivative actions connection settlement order consolidate cardinal health franklin county derivative actions derivative actions july 18 2007 plaintiffs cardinal health franklin county derivative actions filed joint complaint court common pleas delaware county ohio substantively identical consolidated amended complaint plaintiffs previously filed court common pleas franklin county ohio donald bosley et al v david bing et al 07cvh07852 august 24 2007 cardinal health franklin county derivative actions complaint franklin county dismissed connection settlement order consolidate weed derivative action derivative actions august 1 2007 plaintiff action filed complaint court common pleas delaware county ohio substantively identical complaint plaintiff previously filed court common pleas franklin county ohio barry e weed v john f havens et al 07cvg080897 august 27 2007 weed complaint franklin county dismissed august 22 2007 court common pleas delaware county consolidated cardinal health franklin county derivative actions weed derivative action filed court staehr derivative action october 8 2007 stipulation settlement incorporating terms settlement discussed filed court entered order preliminarily approving settlement december 17 2007 court held final approval hearing entered order approving settlement awarding plaintiffs’ counsel 120 million fees 700 million settlement amount dismissing case quarter ended december 31 2007 company received 230 million net proceeds settlement proceeds recognized income within special items consolidated statement earnings quarter ended june 30 2008 company received remaining 350 million net proceeds recognized income within special items consolidated statement earnings quarter individual defendants derivative actions continue deny violations law alleged actions settlement acknowledged individual defendants entered settlement solely eliminate uncertainties burden expense protracted litigation shareholdererisa litigation syncor eleven purported class action lawsuits filed syncor certain officers directors asserting claims federal securities laws actions filed united states district court central district california consolidated single proceedings referred syncor international corp securities litigation “syncor federal securities litigation” lead plaintiff filed third amended consolidated complaint december 29 2004 syncor federal securities litigation purports brought behalf purchasers syncor shares various periods beginning early march 30 2000 ending late november 5 2002 prior company’s acquisition syncor federal securities litigation alleges among things defendants violated section 10b securities exchange act 1934 amended “exchange act” rule 10b5 promulgated thereunder section 20a exchange act issuing series press releases public filings disclosing significant sales growth syncor’s international business omitting mention certain allegedly improper payments syncor’s foreign customers thereby artificially inflating price syncor shares consolidated complaint seeks unspecified money damages unspecified relief defendants syncor filed motion dismiss third amended consolidated complaint january 31 2005 april 15 2005 district court granted motion dismiss prejudice lead plaintiff appealed decision united states court appeals ninth circuit june 12 2007 court appeals entered order reversing part district court’s dismissal plaintiffs’ claims remanding case district court order reversed dismissal claims syncor certain individual defendants including former chairman ceo affirmed dismissal defendants january 17 2008 defendants filed answer third amended consolidated complaint defendants entered memorandum understanding effective june 27 2008 settle syncor federal securities litigation payment 155 million substantial majority settlement payment funded insurance purported class action complaint captioned pilkington v cardinal health et al filed april 8 2003 company syncor certain officers employees company purported participant syncor employee savings stock ownership plan related purported class action complaint captioned donna brown et al v syncor international corp et al filed september 11 2003 company syncor certain individual defendants another related purported class action complaint captioned thompson v syncor international corp et al filed january 14 2004 company syncor certain individual defendants actions brought united states district court central district california consolidated complaint filed february 24 2004 syncor certain former syncor officers directors andor employees alleging defendants breached certain fiduciary duties owed employee retirement income security act “erisa” based underlying allegations improper unlawful conduct alleged federal securities litigation “syncor erisa litigation” consolidated complaint seeks unspecified money damages unspecified relief defendants april 26 2004 defendants filed motions dismiss consolidated complaint august 24 2004 district court granted part denied part defendants’ motions dismiss district court dismissed without prejudice claims two individual defendants claims alleging cofiduciary liability defendants claims alleging individual defendants conflicts interest precluding properly exercising fiduciary duties erisa claim breach duty prudently manage plan assets syncor dismissed claim breach alleged duty “monitor” performance syncor’s plan administrative committee defendants monty fu robert funari dismissed january 10 2006 syncor parties entered term sheet settle syncor erisa litigation cash payment 40 million payment additional amount exceed 40 million litigation fees expenses reported settlement district court also january 10 2006 district court entered summary judgment favor defendants remaining claims consistent ruling january 11 2006 district court entered final order dismissing case lead plaintiff appealed decision united states court appeals ninth circuit february 19 2008 court appeals entered order reversing district court’s dismissal plaintiffs’ claims remanded case district court hold hearing review fairness settlement agreement june 25 2008 parties submitted settlement agreement district court preliminary approval july 29 2008 district court preliminarily approved 40 settlement amount ordered parties revise attorneys’ fees exceed 33 13 settlement amount company recorded reserve 54 million fiscal year ended june 30 2008 related syncor erisa litigation settlement syncor federal securities litigation subject completion definitive documentation certain conditions including notice class plaintiffs litigation court approval settlement syncor erisa litigation subject completion certain conditions including notice class plaintiffs litigation final court approval defendants matters continue deny violations law alleged actions settlement reached would solely eliminate uncertainties burden expense protracted litigation time assurance conditions settlements met icu litigation prior completion company’s acquisition alaris june 16 2004 icu medical inc “icu” filed patent infringement lawsuit alaris united states district court southern district california lawsuit icu claims alaris smartsite® family needlefree valves systems infringes upon icu patents icu seeks monetary damages plus permanent injunctive relief prevent alaris selling smartsite products july 30 2004 district court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits july august 2006 district court granted summary judgment alaris three four patents asserted icu issued order interpreting certain claims certain patents manner could impair icu’s ability enforce patents alaris january 22 2007 district court granted summary judgment favor alaris icu’s remaining claims declared certain patent claims invalid district court ordered icu pay alaris approximately 50 million attorneys’ fees costs october 24 2007 icu appealed decisions united states court appeals federal circuit company intends continue vigorously defend action currently possible estimate amount loss range possible loss might result adverse judgment settlement proceeding company currently believe however proceeding material adverse effect company’s results operations financial condition state attorneys general investigation related repackaged pharmaceuticals october 2005 company received subpoena attorney general’s office state illinois subpoena stated illinois attorney general’s office examining whether company presented caused presented false claims payment illinois medicaid program relating repackaged pharmaceuticals company received letter may 2007 sent jointly illinois new york attorney general’s offices behalf national association medicaid fraud control units team letter alleged company caused medicaid reimbursements paid repackaged pharmaceuticals without paying required medicaid rebate alleges certain company’s repackaging business practices violate medicaid rebate statute letter requested company change business practices asked additional information asserted potential theories damages company cooperating state attorney general offices regarding matter company cannot currently predict outcome investigation ultimate impact company’s business including whether changes business practices required cannot estimate amount loss range possible loss dea matter series actions drug enforcement administration “dea” us department justice suspended licenses distribute controlled substances held certain company’s distribution centers specifically dea issued order show cause immediate suspension “order” dated november 28 2007 respect company’s auburn washington distribution center order dated december 5 2007 respect company’s lakeland florida distribution center order dated december 7 2007 respect company’s swedesboro new jersey distribution center order dea asserts company maintain effective controls diversion particular controlled substances legitimate medical scientific industrial channels specifically cites company’s sale hydrocodone pharmacies allegedly dispensed excessive amounts drug illegitimate purposes december 26 2007 administrative law judge handling orders granted company’s request consolidate revocation hearings stay consolidated matter company taken steps deliver controlled substances customers distribution centers affected orders using company distribution centers cases delayed delivery schedules addition dea issued order show cause dated january 30 2008 pertaining license distribute controlled substances held company’s stafford texas distribution center “stafford order” stafford order suspend facility’s license distribute controlled substances march 5 2008 license revocation proceeding respect stafford order consolidated pending proceedings distribution centers affected orders company substantially completed evaluation controls diversion controlled substances companywide basis taken actions enhance controls including following establishing new centralized supply chain security antidiversion function accountable executive management including addition new personnel continuing implementation technological enhancements augment company’s controls diversion controlled substances enhancing employee training programs suspending distribution controlled substances certain pharmacies based nature activity pharmacies’ accounts company made substantial progress implementation enhancements continues make additional modifications enhancements company’s antidiversion processes company may supplement plans appropriate provide opportunity reassess antidiversion controls make necessary improvements february 2008 company voluntarily discontinued controlled substance shipments stafford distribution center retail independent pharmacy customers settlement discussions recently commenced dea regarding resolution matter august 7 2008 company dea staff reached oral agreement principle resolve license suspensions oral agreement subject completion definitive documentation well approval dea administrator us department justice result developments company recorded reserve 340 million quarter ended june 30 2008 matter company expects license suspensions lifted quarter ending december 31 2008 assurance however company’s efforts resolve dea matter successful within expected timeframe successful company cannot predict final terms settlement matters addition matters described company also becomes involved timetotime litigation regulatory matters incidental business including without limitation personal injury claims employment matters commercial disputes intellectual property matters inclusion potentially responsible party environmental cleanup costs litigation connection acquisitions divestitures company intends vigorously defend litigation currently believe outcome litigation material adverse effect company’s consolidated financial statements time company receives subpoenas requests information various government agencies including state attorneys general sec us department justice relating business accounting disclosure practices customers suppliers company generally responds subpoenas requests timely thorough manner responses sometimes require considerable time effort result considerable costs incurred company expects incur additional costs future connection existing future requests subpoenas requests also lead assertion claims commencement legal proceedings company well settlements also time company may determine products manufactured marketed company may meet company specifications published standards regulatory requirements circumstances company investigate take appropriate corrective action withdrawal product market correction product customer location notice customer revised labeling andor actions company recalled andor conducted field alerts relating certain products time activities lead costs repair replace affected products temporary interruptions product sales action regulators impact reported results operations company believe activities material adverse effect business results operations 13 guarantees company contingent commitments related certain operating lease agreement see note 19 operating lease consists certain real estate used operations company event termination operating lease matures june 2013 company guarantees reimbursement portion unrecovered property cost june 30 2008 maximum amount company could required reimburse 1209 million accordance fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness othersan interpretation fasb statements 5 57 107 rescission fasb interpretation 34” company liability 24 million recorded june 30 2008 related agreement company’s maximum amount reimbursed decreased significantly fiscal 2007 due company’s decision repurchase certain buildings equipment land approximately 512 million previously operating lease agreements total amount repurchased approximately 442 million related pts business divested fourth quarter fiscal 2007 fiscal 2008 company repurchase buildings equipment land operating lease agreements ordinary course business company time agrees indemnify certain parties agreements company including acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount company’s aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact company’s results operations ordinary course business healthcare supply chain servicespharmaceutical segment time extends loans customers subsequently sold bank services administers loans well new loans company may direct order bank purchase loans requires absolute unconditional obligation company repurchase loans upon occurrence certain events described agreement including limited borrower payment default exceeds 90 days insolvency bankruptcy event default addition repurchasing loans company must repay premium received advance bank’s collection loan june 30 2008 2007 notes program subject guaranty company totaled 334 million 367 million respectively june 30 2008 2007 accruals premiums received advance bank’s collection notes 07 million 08 million respectively 14 financial instruments interest rate risk management company exposed impact interest rate changes company’s objective manage impact interest rate changes cash flows market value borrowings company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs june 30 2008 company held three payfixed interest rate swaps hedge variability cash flows relating forecasted transactions contracts classified cash flow hedges matured 2008 2009 company adjusted payfixed interest rate swaps current market values comprehensive income contracts effective offsetting interest rate exposure forecasted transactions fiscal 2008 company held three additional payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts matured 2013 contracts terminated fiscal 2008 resulting cash receipts totalling 64 million ineffective portion contracts totalling gain 01 million recorded interest expense fiscal 2008 remaining 63 million receipts relate portion contracts effective recorded comprehensive income fiscal 2008 adjustment recognized interest expense future periods conjunction occurrence originally forecasted transactions june 30 2007 company held payfixed interest rate swaps fiscal 2007 company held six payfixed interest rate swaps hedge variability cash flows related forecasted transactions four contracts matured 2012 “2012 contracts” two contracts matured 2016 “2016 contracts” contracts terminated fiscal 2007 resulting cash receipts totaling 34 million 2012 contracts cash payments totaling 34 million 2016 contracts ineffective portion 2012 contracts totaling gain 01 million recorded interest expense fiscal 2007 ineffective portion 2016 contracts totaling loss 01 million recorded interest expense fiscal 2007 remaining amounts relate portion contracts effective recorded comprehensive income fiscal 2007 adjustment recognized interest expense conjunction occurrence originally forecasted transactions company also holds payfloating interest rate swaps hedge change fair value fixedrate debt related fluctuations interest rates contracts classified fair value hedges mature june 2017 gainloss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gainloss recorded interest expense following table shows notional amount hedged fair value interest rate swaps outstanding june 30 2008 2007 included assetsliabilities net gainslosses payfixed interest rate swaps recognized interest expense fiscal 2008 2007 2006 approximately 30 million 03 million less 01 million respectively net gainslosses payfloating interest rate swaps recognized interest expense fiscal 2008 2007 2006 approximately 42 million 112 million 64 million respectively company net deferred gainslosses previously settled payfixed interest rate swaps 67 million 09 million recorded comprehensive income june 30 2008 2007 respectively counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates company’s objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses gains losses contracts offset changes value underlying transactions occur june 30 2008 2007 company held forward contracts expiring june 2009 june 2008 respectively hedge probable firmly committed revenue expenses hedging contracts classified cash flow hedges accordingly adjusted current market values comprehensive income underlying transactions recognized upon recognition gains losses recorded operations adjustment recorded amounts underlying transactions period transactions recognized principal currencies hedged canadian dollar european euro mexican peso thai baht british pound australian dollar company also held forward contracts expiring december 2013 june 30 2008 2007 manage foreign exchange exposure foreign currency assets liabilities subject revaluation instruments meet requirements hedge accounting treatment adjusted current market values interest expense following table represents notional amount hedged value forward contracts outstanding june 30 2008 2007 included assets liabilities 1 “forward contractsother” refers forward contracts used manage company’s foreign exchange exposure intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment amount net losses related instruments recognized interest expense fiscal 2008 2007 2006 approximately 368 million 195 million 97 million respectively incomeloss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period june 30 2008 2007 company net deferred losses related forward contract cash flow hedges 52 million 35 million respectively gains losses recorded comprehensive income fiscal 2008 2007 company recognized losses approximately 144 million 29 million respectively within net earnings related forward contracts company recognize material gainslosses related contracts effective forecasted transactions occur fiscal 2008 2007 counterparties contracts major financial institutions company significant exposure one counterparty management believes risk loss remote event would material fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2008 2007 approximate fair value shortterm maturities items cash balances invested accordance company’s investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value company’s longterm obligations shortterm borrowings 37655 million 34755 million compared carrying amounts 38464 million 34733 million june 30 2008 2007 respectively fair value company’s longterm obligations shortterm borrowings estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss company’s derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 2008 2007 fair values based quoted market prices similar instruments 15 shareholders’ equity june 30 2008 2007 company’s authorized capital shares consisted following 750 million common shares without par value “class common shares” 5 million class b common shares without par value “class b common shares” 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared company’s board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2008 2007 company repurchased approximately 64 billion common shares aggregate share repurchase programs fiscal 2008 2007 2006 described fiscal 2008 august 8 2007 company announced 20 billion share repurchase program pursuant program company repurchased approximately 120 million common shares aggregate cost approximately 750 million fiscal 2008 also fiscal 2008 company repurchased additional 48 million common shares aggregate cost approximately 342 million 45 billion combined share repurchase program first announced july 11 2006 recently amended january 31 2007 average price paid per common share common shares repurchased fiscal 2008 6481 fiscal 2007 pursuant 45 billion combined share repurchase program referenced company repurchased approximately 538 million common shares aggregate cost approximately 38 billion fiscal 2007 average price paid per common share 6979 fiscal 2006 june 27 2005 company announced 10 billion share repurchase program amended april 26 2006 increasing program 15 billion pursuant program company repurchased approximately 220 million common shares aggregate cost approximately 15 billion fiscal 2006 average price paid per common share 6839 common shares repurchased held treasury used general corporate purposes fiscal 2008 company retired 128 million common shares treasury retirement shares impact total shareholders’ equity however impact certain individual components shareholders’ equity follows 10 billion decrease common shares 75 billion decrease retained earnings 85 billion decrease common shares treasury 16 earnings per share basic eps computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method following table reconciles number common shares used compute basic diluted earnings per common share three years ending june 30 2008 2007 2006 potentially dilutive securities antidilutive fiscal 2008 2007 2006 221 million 54 million 138 million respectively total amount common shares issued less shares held treasury used determine common shares outstanding 17 segment information current segment reporting structure company’s operations principally managed products services basis comprised four reportable segments healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical clinical technologies services medical products technologies healthcare supply chain servicespharmaceutical segment provides logistics services pharmaceutical industry distributing products providing services retail alternate care hospital pharmacies segment also operates pharmaceutical repackaging distribution program chain independent drug store customers well alternate care customers addition segment operates centralized nuclear pharmacies provides thirdparty logistics support services distributes therapeutic plasma hospitals clinics providers located united states manufactures markets generic pharmaceutical products sale hospitals clinics pharmacies united kingdom lastly segment operates specialty pharmacy facilities franchises operates apothecarystyle retail pharmacies healthcare supply chain servicesmedical segment provides integrated supply chain logistics solutions healthcare customers united states canada solutions include sterile nonsterile kitting distribution medical surgical products hospitals surgery centers laboratories physician offices clinical technologies services segment develops manufactures leases sells medical technologies products hospitals healthcare providers including intravenous medication safety infusion therapy delivery systems software applications needlefree disposables related patient monitoring equipment dispensing systems automate distribution management medications hospitals healthcare facilities segment also develops manufactures leases sells dispensing systems medical supplies provides pharmacy services clinical intelligence solutions medical products technologies segment develops manufactures sources medical surgical products technologies distribution hospitals physician offices surgery centers healthcare providers following table includes revenue reportable segment reconciling items necessary agree amounts reported consolidated financial statements fiscal years ended june 30 2008 2007 2006 1 healthcare supply chain servicespharmaceutical segment’s revenue primarily derived distribution pharmaceutical healthcare products fiscal years presented 2 healthcare supply chain servicesmedical segment’s revenue primarily derived distribution medical surgical laboratory products fiscal years presented 3 clinical technologies services segment’s revenue derived three main product categories product categories respective contributions revenue follows 4 medical products technologies segment’s revenue primarily derived manufacturing medical surgical products fiscal years presented 5 corporate revenue primarily consists elimination intersegment revenue medical products technologies healthcare supply chain servicesmedical segments includes 11219 million 10450 million 9706 million respectively fiscal years ended june 30 2008 2007 2006 company evaluates performance segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expense includes equity compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition special items impairments gainloss sale assets net costs associated certain strategic investments require approval executive management allocated segments see note 3 discussion company’s special items impairments gainloss sale assets net accounting policies segments described summary significant accounting policies note 1 following table includes segment profit reportable segment reconciling items necessary agree consolidated operating earnings consolidated financial statements fiscal years ended june 30 2008 2007 2006 1 first quarter fiscal 2006 healthcare supply chain servicespharmaceutical segment recorded charge 318 million reflecting credits owed certain vendors prior periods fourth quarter fiscal 2007 adjustment 35 million recorded reduce portion reserve based upon revised estimate 2 third quarter fiscal 2007 company revised method used allocate certain shared costs healthcare supply chain servicesmedical segment medical products technologies segment better align costs segment receives related benefits prior period information reclassified conform new presentation 3 portion corporate costs previously allocated former pharmaceutical technologies services segment reclassified remaining four segments based upon segment’s respective proportion allocated corporate expenses prior period information adjusted reflect change methodology 4 first quarter fiscal 2008 company revised method used allocate corporate costs healthcare supply chain servicespharmaceutical healthcare supply chain servicesmedical segments resulted decreased expense 22 million allocated healthcare supply chain servicespharmaceutical segment increased expense 22 million allocated healthcare supply chain servicesmedical segment change made effort better align corporate spending segment receives related benefits prior period information adjusted reflect change methodology 5 fourth quarter fiscal 2008 company discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 111 million fiscal 2008 74 million pertained fiscal 2007 37 million pertained fiscal 2006 connection matter company implemented action plan addressed issues related error 6 corporate includes among things special items impairments gainloss sale assets net certain corporate investment spending described special items corporate includes special items 1301 million 7720 million 805 million fiscal 2008 2007 2006 respectively see note 3 discussion special items b impairments gainloss sale assets net asset impairments gains losses sale assets eligible classified special items discontinued operations retained corporate impairments gainloss sale assets net 320 million 173 million 58 million fiscal years 2008 2007 2006 respectively see note 3 discussion impairments gainloss sale assets net c investment spending company encouraged segments identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses approval decisions projects dependent upon executive management expenses projects retained corporate investment spending totaled 279 million 223 million 189 million fiscal years 2008 2007 2006 respectively following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2008 2007 2006 segment well reconciling items necessary total amounts reported consolidated financial statements following table includes total assets june 30 2008 2007 segment well reconciling items necessary total amounts reported consolidated financial statements 1 corporate assets primarily include cash equivalents assets held sale discontinued operations net property equipment following table presents revenue net property equipment geographic area new segment reporting structure july 8 2008 company announced reorganization consolidation businesses two primary operating reportable segments healthcare supply chain services clinical medical products segments reduce costs align resources needs segment effective july 1 2008 would begin reporting three reportable segments following indicates changes fiscal 2008 reporting structure new reporting structure effective july 1 2008 healthcare supply chain services reportable segment comprise businesses formerly within healthcare supply chain servicespharmaceutical segment medicine shoppe comprise businesses formerly within healthcare supply chain servicesmedical segment clinical medical products reportable segment comprise businesses formerly within clinical technologies services segment pharmacy services business outsourced hospital pharmacy management services comprise businesses formerly within medical products technologies segment tecomet orthopedic implants instruments medsystems enteral devices airway management products businesses acquired company acquisition viasys reportable segment comprise medicine shoppe pharmacy services tecomet medsystems businesses company entered definitive agreement sell tecomet business charlesbank capital partners tecomet management july 22 2008 august 7 2008 company publicly announced board directors supported management recommendation actively explore potential separation company’s new healthcare supply chain services clinical medical products segments management proceeding separation explored could involve taxfree spinoff portion businesses comprising clinical medical products reportable segment separate publicly traded company plans announce decision within approximately 60 90 days august 7 2008 18 employee equity savings plans employee equity plans company maintains several stock incentive plans collectively “plans” benefit certain officers directors employees employee options granted plans fiscal 2007 2006 generally vest equal annual installments four years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant employee options granted plans fiscal 2008 generally vest equal annual installments three years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant plans company currently utilizes equity award grants company authorized grant 188 million shares june 30 2008 114 million shares granted employee restricted shares restricted share units granted plans fiscal 2006 2007 2008 generally vest equal installments three years entitle holders dividends cash dividend equivalents restricted shares restricted share units awarded august 1 2006 accrue dividends cash dividend equivalents payable upon vesting awards first quarter fiscal 2006 company adopted sfas 123r “sharebased payment” applying modified prospective method statement requires equitybased payments employees including grants employee options recognized consolidated statement earnings based grant date fair value award modified prospective method company required record equitybased compensation expense awards granted date adoption unvested portion previously granted awards outstanding date adoption fair values options granted company adopted statement determined using lattice valuation model company believes lattice model provides better estimates ability take account employee exercise patterns based changes company’s stock price variables provides range input assumptions anticipation adoption sfas 123r company modify terms previouslygranted options fair values restricted shares restricted share units determined number shares granted grant date market price company’s common shares compensation expense recognized equitybased awards net estimated forfeitures recognized using straightline method awards’ service period accordance sab 107 company classified equitybased compensation within sga expense correspond line item majority cash compensation paid employees following table illustrates impact equitybased compensation reported amounts fiscal years ended june 30 2008 2007 2006 1 total equitybased compensation expense fiscal years ended june 30 2008 2007 2006 includes gross sar incomeexpense approximately 66 million 40 million 369 million respectively sars granted march 3 2005 august 3 2005 company’s chairman chief executive officer equitybased compensation expense recognized vesting august 3 2005 sars upon issuance exercise price thencurrent price company’s common shares quarters subsequent issuing sars fair value remeasured using blackscholes model continue remeasured quarter unexercised sars exercised increase fair value recorded equitybased compensation decrease fair value sars recognized extent expense previously recorded 10 million sars granted 06 million sars exercised fiscal 2007 03 million sars exercised fiscal 2008 2 total equitybased compensation expense fiscal years ended june 30 2008 2007 2006 also includes gross restricted share restricted share unit expense approximately 577 million 362 million 220 million respectively gross employee option expense approximately 601 million 884 million 1385 respectively gross employee stock purchase plan expense approximately 111 million 95 million 104 million respectively 3 equitybased compensation charged discontinued operations approximately 240 million 222 million net tax benefits 125 million 119 million fiscal years ended june 30 2007 2006 respectively 4 fiscal 2008 equitybased compensation expense includes approximately 87 million related unvested equity awards held former executive director company also referred company’s executive chairman board acceleration equitybased compensation expense resulted change status employee nonemployee director fiscal 2006 equitybased compensation expense includes approximately 153 million related unvested equity awards held company’s executive chairman board acceleration equitybased compensation expense resulted second amended restated employment agreement dated april 17 2006 following summarizes stock option transactions company plans july 1 2006 june 30 2008 giving retroactive effect conversions options connection acquisitions stock splits additional information concerning stock options outstanding june 30 2008 2007 2006 presented options millions aggregate intrinsic value options exercised fiscal 2008 fiscal 2007 fiscal 2006 approximately 873 million 1756 million 1248 million respectively aggregate intrinsic value options outstanding june 30 2008 june 30 2007 june 30 2006 approximately 900 million 4938 million 4629 million respectively aggregate intrinsic value options exercisable june 30 2008 june 30 2007 june 30 2006 approximately 898 million 2281 million 2162 million respectively weighted average fair value options granted fiscal 2008 2007 2006 1782 2129 1879 respectively total equitybased compensation expense net estimated forfeitures related unvested stock options yet recognized june 30 2008 2007 2006 895 million 1030 million 1313 million respectively fair values options granted company’s employees directors fiscal 2008 fiscal 2007 fiscal 2006 estimated date grant using lattice valuation model lattice valuation model incorporates ranges assumptions disclosed table riskfree rate based united states treasury yield curve time grant company analyzed historical data estimate option exercise behaviors employee terminations used within lattice model company calculated separate option valuations three separate groups employees groups determined using similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified company based option exercise behaviors expected volatilities based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years following table provides range assumptions used options valued fiscal 2008 2007 2006 company’s restricted shares share units expensed awards’ service period generally three years june 30 2008 2007 2006 approximately 24 million 19 million 17 million restricted shares share units remained restricted subject forfeiture respectively total equitybased compensation expense net estimated forfeitures related unvested restricted shares share units yet recognized 631 million 177 million respectively june 30 2008 459 million 128 million respectively june 30 2007 299 million 107 million respectively june 30 2006 company employee stock purchase plans sale 120 million common shares authorized generally employees employed company least 30 days may eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1 june 30 july 1 december 31 june 30 2008 subscriptions 05 million shares outstanding june 30 2008 63 million shares issued employees plans employee savings plan substantially company’s domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code 1986 amended provide company matching profit sharing contributions company’s contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans 1062 million 1078 million 1125 million fiscal 2008 2007 2006 respectively 19 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties lease receivablerelated arrangements subsidiary company agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank order qualify sale treatment sfas 140 company formed whollyowned special purpose bankruptcyremote subsidiaries “spes” subsidiary cardinal health solutions inc “chs” spes formed whollyowned qualified special purpose subsidiaries “qspes” effectuate removal lease receivables company’s consolidated financial statements accordance sfas 140 company consolidates spes consolidate qspes spes qspes separate legal entities maintain separate financial statements company chs assets spes qspes available first foremost satisfy claims respective creditors receivablerelated arrangements cardinal health funding llc “chf” organized sole purpose buying receivables selling undivided interests receivables multiseller conduits administered third party banks third party investors chf designed special purpose bankruptcyremote entity although consolidated accordance gaap chf separate legal entity company’s subsidiary sells contributes receivables chf sale receivables chf qualifies sales treatment sfas 140 accordingly receivables included company’s consolidated financial statements june 30 2008 2007 company committed receivables sales facility program available chf capacity sell 8500 8000 million receivables respectively recourse provided program requirement chf retain subordinated interest sold receivables second quarter fiscal 2008 company amended committed receivables sales facility program increase 8000 million 8500 million extend additional 364 days company receivable interest sales outstanding receivables sales facility program june 30 2008 2007 respectively cash flows receivablerelated arrangements company’s net cash flow decrease related receivable interest transfers fiscal 2008 2007 2006 follows chs chf required repurchase receivables interests sold determined representations warranties regard related receivables accurate date sold operating leases company entered operating lease agreement third party bank construction various facilities equipment lease agreement matures june 2013 event termination company required election either repurchase facility vacate property make reimbursement portion unrecovered property cost maximum portion unrecovered property costs company could required reimburse 1209 million june 30 2008 june 30 2008 amount expended acquire andor construct facilities 1512 million agreement provides maximum funding 2450 million currently greater estimated cost complete construction projects required lease payments equal interest expense period amounts drawn lease payments agreements based primarily upon libor subject interest rate fluctuations june 30 2008 weighted average interest rate agreements approximated 332 company’s estimated minimum annual lease payments agreements june 30 2008 approximately 65 million fiscal 2008 company repurchase buildings equipment land operating lease agreements fiscal 2007 company repurchased certain buildings equipment land approximately 512 million previously operating lease agreements total amount repurchased approximately 442 million related pts business divested fourth quarter fiscal 2007 20 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2008 2007 sum quarters may equal yeartodate due rounding 1 fourth quarter fiscal 2008 company’s medical products technologies segment discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 159 million fourth quarter fiscal 2008 48 million pertained first three quarters fiscal 2008 74 million pertained fiscal 2007 37 million pertained fiscal 2006 connection matter company implemented action plan addressed issues related error 2 fourth quarter fiscal 2008 company recognized equitybased compensation expense related unvested equity awards held former executive director company also recognized consulting arrangement fees paid former executive director company acceleration equitybased compensation expense consulting arrangement fees totaled 122 million resulted change status employee nonemployee director 3 fourth quarter fiscal 2008 company recognized 373 million additional tax expense related increase estimated state income tax rate deferred tax items recognized 304 million reduction tax expense items pertaining fiscal 2002 2001 statute limitations lapsed company record significant adjustments fourth quarter fiscal 2008 disclosed within notes 1 amounts agree previously disclosed company’s form 10q period ended september 30 2006 reclassified classification pts business discontinued operations company record significant adjustments fourth quarter fiscal 2007 disclosed within notes discussed note 3 special items recognized quarter fiscal 2008 2007 following table summarizes impact costs net earnings diluted earnings per common share quarters recorded sum quarters may equal yeartodate due rounding 21 subsequent events august 7 2008 company publicly announced board directors supported management recommendation actively explore potential separation company’s new healthcare supply chain services clinical medical products reportable segments management proceeding separation explored could involve taxfree spinoff portion businesses comprising clinical medical products reportable segment separate publicly traded company plans announce decision within approximately 60 90 days august 7 2008 item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2010 2009 consolidated balance sheets june 30 2010 2009 consolidated statements shareholders’ equity fiscal years ended june 30 2010 2009 2008 consolidated statements cash flows fiscal years ended june 30 2010 2009 notes consolidated financial statements schedule iivaluation qualifying accounts report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2010 2009 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2010 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position company june 30 2010 2009 consolidated results operations cash flows three years period ended june 30 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 26 2010 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 26 2010 cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc ohio corporation formed 1979 global healthcare solutions company providing products services help hospitals physician offices pharmacies healthcare providers reduce costs improve safety productivity deliver better care patients references “we” “our” similar pronouns consolidated financial statements shall deemed references cardinal health inc majorityowned subsidiaries unless context otherwise requires fiscal year ends june 30 references fiscal 2010 2009 2008 consolidated financial statements shall deemed references fiscal years ended june 30 2010 2009 2008 respectively spinoff carefusion corporation effective august 31 2009 completed distribution shareholders 81 outstanding common stock carefusion corporation “carefusion” retained remaining 414 million shares carefusion common stock “spinoff” requirements private letter ruling obtained internal revenue service required dispose retained shares carefusion common stock within five years spinoff fiscal 2010 disposed 109 million shares carefusion common stock refer note 7 additional information regarding investment carefusion party separation agreement various agreements relating separation including transition services agreement tax matters agreement employee matters agreement intellectual property agreements commercial agreements determined significant continuing involvement operations carefusion accordingly net assets carefusion presented separately consolidated financial statements assets businesses held sale discontinued operations operating results carefusion presented within discontinued operations periods presented date spinoff fiscal 2009 three reportable segmentshealthcare supply chain services clinical medical products effective july 1 2009 changed reportable segments pharmaceutical medical carefusion pharmaceutical segment encompasses businesses previously within healthcare supply chain services segment distributed pharmaceutical radiopharmaceutical overthecounter healthcare products well businesses previously within segment medical segment encompasses remaining businesses within healthcare supply chain services segment well certain surgical exam gloves surgical drapes apparel fluid management businesses previously within clinical medical products segment carefusion segment encompasses businesses previously within clinical medical products segment excluding abovereferenced surgical exam gloves surgical drapes apparel fluid management businesses includes businesses included spinoff connection spinoff reorganized reportable segments two segments pharmaceutical medical see note 16 information segments relationship carefusion july 22 2009 entered separation agreement carefusion effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement employee matters agreement intellectual property agreements certain commercial agreements carefusion agreements including separation agreement carefusion us provide allocation assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior spinoff govern certain relationships carefusion us spinoff pursuant transition services agreement fiscal 2010 recognized 992 million transition service fee income approximately offsets costs associated providing transition services additionally fiscal 2010 purchased 6056 million carefusion trade receivables pursuant accounts receivable factoring arrangement carefusion us tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff june 30 2010 2446 million indemnification receivable balance sheet related item basis presentation consolidated financial statements include accounts majorityowned subsidiaries significant intercompany transactions amounts eliminated certain prior year balances reclassified conform current year presentation results businesses acquired disposed included consolidated financial statements effective date acquisition date disposal use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires us make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation goodwill intangible asset impairment vendor reserves sharebased compensation income taxes actual amounts could ultimately differ estimated amounts cash equivalents consider liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed us distribution businesses presented net allowance doubtful accounts 1314 million 1118 million june 30 2010 2009 respectively account considered past due first day due date accordance contract terms generally ability charge customer’s service fees higher prices account considered past due continuously monitor past due accounts establish appropriate reserves cover potential losses writeoff amounts deemed uncollectible established allowance doubtful accounts provide financing various customers financing arrangements range 90 days 10 years interest rates generally subject fluctuation interest income accounts recognized earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 1099 million current portion 209 million 540 million current portion 268 million june 30 2010 2009 respectively included assets current portion included prepaid expenses finance notes receivable reported net allowance doubtful accounts 83 million 52 million june 30 2010 2009 respectively concentrations credit risk major customers maintain cash depository accounts major banks throughout world invest high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months incurred related losses trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry credit risk limited however due supporting collateral diversity customer base including wide geographic dispersion perform ongoing credit evaluations customers’ financial conditions maintain reserves credit losses historically within expectations following table summarizes customers individually account least 10 revenue corresponding percent gross trade receivables customers table serviced pharmaceutical segment certain businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members following table summarizes revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp two largest gpo relationships terms revenue trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories 73 june 30 2010 74 june 30 2009 valued lower cost using lifo method market inventories included within core pharmaceutical distribution facilities pharmaceutical segment “distribution facilities” primarily merchandise inventories believe average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2010 2009 record lifo reserve reductions used average cost method inventory valuation inventory within distribution facilities inventories would changed fiscal 2010 fiscal 2009 fact primarily due continued generic pharmaceutical deflation inventories valued lifo 377 million 349 million higher average cost value june 30 2010 2009 respectively policy however record inventories excess replacement cost remaining inventory primarily stated lower cost using fifo method market inventories presented consolidated balance sheets net reserves excess obsolete inventory 344 million 395 million june 30 2010 2009 respectively reserve inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell depreciation expense computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases use following range useful lives property equipment categories buildings improvements1 50 years machinery equipment2 20 years furniture fixtures3 10 years following table shows depreciation expense fiscal 2010 2009 2008 certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts repairs maintenance expenditures expensed incurred interest longterm projects capitalized using rate approximates weighted average interest rate longterm obligations 55 june 30 2010 amount capitalized interest immaterial fiscal years presented goodwill intangibles purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite livesprimarily customer relationships patents trademarkscontinue amortized useful lives impairment testing involves comparison estimated fair value respective carrying amount estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value second step performed determine amount impairment would recorded expense results operations application goodwill impairment testing involves judgment including limited identification reporting units estimating fair value reporting unit reporting unit defined operating segment one level operating segment fiscal 2010 identified three reporting units pharmaceutical segment excluding nuclear pharmacy services division medical segment nuclear pharmacy services division fair values determined using market income costbased approaches determination estimated fair value reporting units based combination incomebased marketbased approaches marketbased approach determine fair value comparing reporting units similar businesses guideline companies whose securities actively traded public markets incomeapproach use discounted cash flow model cash flows anticipated several periods plus terminal value end time horizon discounted present value using appropriate rate return confirm fair value compare aggregate fair value reporting units market capitalization use alternate estimates assumptions changes industry peer groups could materially affect determination fair value reporting unit potentially result goodwill impairment performed annual impairment testing fiscal 2010 concluded impairments goodwill fair value reporting unit exceeded carrying value due spinoff reorganization reporting units goodwill also tested impairment first quarter fiscal 2010 based analysis impairment also performed annual impairment testing fiscal 2009 2008 determined impairment see note 6 additional information regarding goodwill intangible assets income taxes account income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions operate deferred taxes provided unremitted earnings subsidiaries outside us expected earnings permanently reinvested tax benefits uncertain tax positions recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement accounting vendor reserves ordinary course business vendors may dispute deductions billings taken payments otherwise due disputed transactions researched resolved based upon policy findings research performed given time outstanding items various stages research resolution determining appropriate reserves areas exposure vendors assess historical experience current outstanding claims established various levels reserves based type claim status review though transaction types relatively consistent periodically refine estimate methodology updating reserve estimate percentages reflect actual historical experience ultimate outcome certain claims may different original estimate may require adjustment adjustments vendor reserves included cost products sold addition reserve balance fluctuate due variations outstanding claims period timing settlements specific vendor issues bankruptcies following table summarizes vendor reserves june 30 2010 2009 accounting vendor incentives fees services incentives received vendors relating purchase distribution inventory generally reported reduction cost products sold consolidated statements earnings consider fees incentives represent product discounts result amounts recorded reduction product cost recognized cost products sold upon sale related inventory accrued liabilities accrued liabilities represent various current obligations including certain accrued operating expenses taxes payable sharebased compensation sharebased compensation employees including grants stock options recognized consolidated statement earnings based grant date fair value award fair value stock options determined using lattice valuation model believe lattice model provides better estimates ability take account employee exercise patterns based changes stock price variables provides range input assumptions compensation expense recognized sharebased awards net estimated forfeitures recognized ratably service period award classify sharebased compensation expense within distribution selling general administrative “sga” expenses correspond line item majority cash compensation paid employees however certain sharebased compensation incurred connection spinoff classified within restructuring employee severance see note 17 additional information regarding sharebased compensation dividends following table summarizes cash dividends per common share paid fiscal 2010 2009 2008 revenue recognition recognize revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured revenue recognized net sales returns allowances pharmaceutical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue within segment includes revenue bulk customers substantially deliveries bulk customers consist product shipped form received manufacturer bulk customers ability process large quantities products central locations distribute products individual retail stores facilities revenue bulk customers recognized title transfers customer obligation provide services related merchandise revenue deliveries directly shipped customer warehouses manufacturer whereby act intermediary ordering delivery products recorded gross accordance accounting standards addressing reporting revenue gross basis principal versus net basis agent revenue recorded gross basis since incur credit risk customer bear risk loss incomplete shipments receive separate fee commission transaction primary obligor radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services pharmacy management thirdparty logistics service revenue recognized services rendered according contracts established fee charged contracts capitation fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed us exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medicine shoppe international inc medicap pharmacies incorporated earn franchise origination fees franchise fees represent monthly fees either fixed based upon franchisees’ sales recognized revenue earned medical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue sale medical products supplies recognized title risk loss transfers customers typically upon delivery multiple segments business units arrangements involving multiple segments business units containing software incidental functionality product service accounted revenue arrangements multiple deliverables deliverable meets criterion separate unit accounting revenue allocated element based upon relative fair value recognized accordance applicable revenue recognition criteria element sales returns allowances revenue recorded net sales returns allowances recognize sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees allow customers return products added back inventory resold full value returned vendors credit “merchantable product” product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded accrued sales returns allowances time sale transaction following table summarizes sales returns allowances fiscal years ended june 30 2010 2009 2008 since generally accept nonmerchantable product returns customers many customers return nonmerchantable pharmaceutical products vendors via thirdparties generally customers direct relationship vendors pass value returns us usually form accounts payable deduction turn pass value received less administrative fee customer certain instances pass estimated value return customer prior processing deduction vendors although general believe satisfactory contractual protections could subject allegations liability customers vendors administration overall process deficient significant respect certain situations maintained reserves allegations based nature historical experience resolution reserves significant fiscal 2010 2009 2008 distribution service agreement vendor fees pharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory fees earned entitled payment recognize fees reduction carrying value inventory generated fees recognized reduction cost products sold statements earnings inventory sold shipping handling shipping handling costs included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer following table summarizes shipping handling costs fiscal 2010 2009 2008 shipping handling revenue received immaterial periods presented translation foreign currencies financial statements subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity comprehensive income utilizing periodend exchange rates revenues expenses foreign subsidiaries translated using average exchange rates year following table summarizes foreign currency translation gainslosses recognized accumulated comprehensive income june 30 2010 2009 foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings incomeexpense net immaterial fiscal 2010 2009 2008 respectively interest rate currency risk management derivative instruments recognized fair value balance sheet changes fair value recognized net earnings shareholders’ equity comprehensive income net tax use forward currency exchange contracts interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges also use interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted fair value interest expense end period use foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included incomeexpense net remeasurement adjustment offset foreign currency forward contract settlements also classified incomeexpense net interest rate swaps designated fair value hedges foreign currency forward contracts designated economic hedges certain derivative contracts adjusted current market values period qualify hedge accounting periodic gains losses contracts designated cash flow hedges deferred accumulated comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted fair value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred accumulated comprehensive income would recognized immediately earnings additional disclosure related hedging contracts provided note 12 earnings per common share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share “diluted eps” similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method recent financial accounting standards june 2009 financial accounting standards board “fasb” issued new accounting guidance accounting transfers financial assets guidance improves relevance representational faithfulness comparability information provided transfer financial assets effects transfer financial assets entity’s financial statements transferor’s continuing involvement financial assets transferred guidance effective fiscal years beginning november 15 2009 result new guidance determined committed receivables sales facility qualify offbalance sheet arrangement beginning fiscal 2011 june 30 2010 amounts outstanding facility june 2009 fasb issued new accounting guidance regarding consolidation variable interest entities guidance improves financial reporting enterprises involved variable interest entities guidance effective fiscal years beginning november 15 2009 expect adoption new accounting guidance material impact financial position results operations january 2010 fasb issued new disclosure guidance regarding fair value measurements guidance improves transparency disclosures use fair value measurements financial statements guidance effective interim annual reporting periods beginning december 15 2009 exception certain disclosure requirements regarding gross changes level 3 measurements effective fiscal years beginning december 15 2010 adopted new disclosure guidance third quarter fiscal 2010 included required additional disclosures form 10k 2 acquisitions fiscal 2010 fiscal 2010 completed acquisition individually significant aggregate purchase price acquisition paid cash 320 million including assumption 19 million liabilities consolidated financial statements include results operations business combination date acquisition transaction occurred beginning fiscal 2009 consolidated results operations would differed materially reported results fiscal 2009 fiscal 2009 completed acquisition individually significant aggregate purchase price acquisition paid cash 1286 million including potential maximum contingent payments 140 million assumed liabilities acquired business 1021 million consolidated financial statements include results operations business combination date acquisition transaction occurred beginning fiscal 2008 consolidated results operations would differed materially reported results fiscal 2008 may 12 2008 completed acquisition assets privately held enturia inc “enturia” leawood kansasbased manufacturer products services directed infection prevention markets purchase price acquisition paid cash 4900 million including assumption 142 million liabilities included 51 million debt valuation acquired assets liabilities resulted goodwill 3278 million identifiable intangible assets 1294 million identified valued intangible assets related trade names trademarks developed technology customer relationships detail category follows fiscal 2008 recorded charge 177 million related writeoff estimated inprocess research development costs “iprd” associated enturia acquisition portion purchase price allocated iprd fiscal 2008 represented preliminary estimate fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately expensed acquisition related costs acquisition date connection spinoff enturia transferred carefusion reclassified discontinued operations periods date spinoff addition fiscal 2008 completed acquisitions individually significant aggregate purchase price acquisitions paid cash 353 million including assumption 56 million liabilities connection spinoff 306 million total cash paid reclassified net cash used investing activitiesdiscontinued operations consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2007 consolidated results operations would differed materially reported results connection spinoff businesses also reclassified discontinued operations periods date spinoff acquisition related costs classify costs incurred connection acquisitions acquisition related costs consist primarily transaction costs integration costs changes fair value contingent payments earnouts acquisition transaction costs incurred initial evaluation potential targeted acquisition primarily relate costs analyze negotiate consummate transaction well financial legal due diligence activities integration activities costs incurred combine operations acquired enterprise operations 3 restructuring employee severance restructuring policy consider restructuring activities programs whereby fundamentally change operations closing facilities moving manufacturing product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions liability cost associated exit disposal activity recognized measured initially fair value period incurred except liability onetime termination benefit recognized future service period restructuring employee severance following table summarizes activity related restructuring employee severance costs fiscal 2010 2009 2008 1 employeerelated costs primarily consist onetime termination benefits provided employees involuntarily terminated duplicate payroll costs transition periods 2 facility exit costs facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring delivery information technology infrastructure services restructuring employee severance fiscal 2010 2009 2008 included costs related following significant projects 1 fiscal 2009 fiscal 2010 incurred restructuring expenses related spinoff consisting employeerelated costs sharebased compensation costs evaluate execute transaction costs separate certain functions information technology systems onetime transaction related costs see note 17 information regarding sharebased compensation incurred connection spinoff also included within costs 186 million costs related retirement former chairman chief executive officer upon completion spinoff 2 fiscal 2009 consolidated businesses two primary operating reportable segments reduce costs align resources needs segment “segment realignment” connection spinoff reportable segments since reorganized refer notes 1 16 additional information regarding current reportable segments 3 april 2007 announced plan move medical products distribution headquarters certain corporate functions waukegan illinois corporate headquarters dublin ohio addition significant restructuring programs discussed time incur costs implement smaller restructuring efforts specific operations within segments restructuring plans focus various aspects operations including closing consolidating certain manufacturing distribution operations rationalizing headcount aligning operations strategic costefficient structure estimate incur additional costs future periods associated currently anticipated restructuring activities totaling 145 million additional costs primarily associated spinoff restructuring employee severance accrual rollforward following table summarizes activity related liabilities associated restructuring employee severance activities fiscal 2010 2009 2008 4 impairments gainloss sale assets fiscal 2010 recognized 181 million impairment charge related writedown specialtyscripts llc “specialtyscripts” business within pharmaceutical segment net expected fair value less costs sell see note 5 information regarding sale specialtyscripts fiscal 2008 recognized 233 million gain divestiture within pharmaceutical segment 5 discontinued operations assets held sale carefusion effective august 31 2009 completed distribution shareholders 81 outstanding common stock carefusion retained investment carefusion common stock provide us ability influence operating financial policies carefusion accordingly constitute significant continuing involvement required separation agreement vote carefusion shares proportion votes cast carefusion’s shareholders furthermore party separation agreement various agreements relating separation including transition services agreement tax matters agreement employee matters agreement intellectual property agreements certain commercial agreements determined continuing cash flows generated agreements expected eliminated within five years spinoff investment carefusion common stock constitute significant continuing involvement operations carefusion accordingly net assets carefusion presented separately discontinued operations operating results presented within discontinued operations periods presented date spinoff results carefusion included discontinued operations fiscal 2010 2009 2008 summarized follows 1 reflects results carefusion august 31 2009 effective date spinoff interest expense allocated historical periods considering debt issued carefusion connection spinoff overall debt balance addition portion corporate costs previously allocated carefusion reclassified remaining two segments following table summarizes interest expense allocated discontinued operations carefusion fiscal 2010 2009 2008 assets liabilities businesses held sale carefusion june 30 2010 june 30 2009 major components assets liabilities businesses held sale carefusion follows cash flows discontinued operations presented separately consolidated statements cash flows fourth quarter fiscal 2007 sold businesses within former pharmaceutical technologies services segment certain genericfocused businesses “pts business” see note 7 “notes consolidated financial statements” annual report form 10k fiscal year ended june 30 2009 “2009 form 10k” information regarding sale pts business incurred minor amounts activity related pts business fiscal 2009 result changes certain estimates made time sale activity transition services agreement adjustments fourth quarter fiscal 2009 committed plans sell united kingdombased martindale injectable manufacturing business “martindale” within pharmaceutical segment martindale met criteria classification discontinued operations financial statements fourth quarter fiscal 2010 completed sale martindale resulting pretax gain 363 million accordingly net assets martindale presented separately discontinued operations operating results martindale presented within discontinued operations periods presented date sale fourth quarter fiscal 2009 also committed plans sell specialtyscripts within pharmaceutical segment specialtyscripts met criteria classification held sale financial statements third quarter fiscal 2010 completed sale specialtyscripts accordingly net assets business presented separately assets held sale consolidated balance sheet date sale results specialtyscripts reported within earnings continuing operations consolidated statements earnings date sale satisfy criteria classification discontinued operations additionally net assets held sale specialtyscripts recorded net expected fair value less costs sell amount lower net carrying value results pts business martindale included discontinued operations fiscal 2010 2009 2008 summarized follows assets liabilities businesses held sale pts business martindale specialtyscripts june 30 2010 june 30 2009 major components assets liabilities businesses held sale related pts business martindale specialtyscripts follows 6 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill total segment two years ended june 30 2010 allocations purchase price related certain small acquisitions yet finalized subject adjustment complete valuation analyses acquisitions intangible assets intangible assets definite lives amortized useful lives range three twenty years detail intangible assets class two years ended june 30 2010 follows significant acquisitions intangible assets periods presented following table summarizes amortization expense fiscal 2010 2009 2008 amortization expense next five fiscal years estimated 7 investment carefusion following table provides summary investment carefusion classified availableforsale june 30 2010 1 equity securities consist remaining ownership 305 million shares 414 million shares carefusion common stock held immediately spinoff securities stated fair value unrealized gains losses reported comprehensive income realized gains losses declines fair value deemed otherthantemporary recognized net earnings immediately fiscal 2010 disposed 109 million shares carefusion common stock resulting cash proceeds 2707 million pretax realized gain 446 million 2 represents cost investment net book value carefusion’s assets immediately following spinoff adjusted sale securities fiscal 2010 8 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following june 30 2010 2009 400 550 565 580 585 600 675 notes floating rate notes due 2009 represent unsecured obligations 780 700 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary cardinal health inc guaranteed none obligations subject sinking fund allegiance obligations redeemable prior maturity interest paid pursuant terms obligations notes effectively subordinated liabilities subsidiaries including trade payables 95 billion september 24 2009 completed debt tender announced august 27 2009 aggregate purchase price including early tender premium excluding accrued interest fees expenses 11 billion following series debt securities 780 debentures due october 15 2016 allegiance corporation ii 675 notes due february 15 2011 iii 600 notes due june 15 2017 iv 700 debentures due october 15 2026 allegiance corporation v 585 notes due december 15 2017 vi 580 notes due october 15 2016 vii 565 notes due june 15 2012 viii 550 notes due june 15 2013 ix 400 notes due june 15 2015 connection debt tender incurred pretax loss early extinguishment debt approximately 399 million included early tender premium 664 million writeoff 53 million unamortized debt issuance costs offsetting 318 million fair value adjustment respective debt related previously terminated interest rate swaps debt tender completed using portion 14 billion cash distributed us carefusion connection spinoff june 2008 sold 300 million aggregate principal amount fixed rate notes due 2013 “the 2013 notes” registered offering 2013 notes mature june 15 2013 interest 2013 notes accrues 550 per year payable semiannually experience specific types change control notes rated investment grade sp moody’s fitch required offer purchase 2013 notes 101 principal amount thereof plus accrued unpaid interest date repurchase used proceeds repay 1500 million 625 notes due 2008 july 15 2008 repay 1490 million preferred debt securities october 3 2008 addition cash equivalents june 30 2010 2009 sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2010 2009 except 482 million 702 million respectively standby letters credit april 16 2009 connection spinoff amended 15 billion revolving credit facility among things replace minimum net worth covenant covenants require us maintain consolidated interest coverage ratio end fiscal quarter least 4to1 maintain consolidated leverage ratio 325to1 new covenants became effective upon spinoff june 30 2010 compliance financial covenants also maintain shortterm credit facilities unsecured line credit allowed borrowings 48 million 489 million june 30 2010 2009 respectively june 30 2009 157 million outstanding uncommitted facilities related carefusion amount outstanding june 30 2010 61 million 78 million balance obligations june 30 2010 2009 respectively consisted primarily additional notes loans capital leases maturities longterm obligations shortterm borrowings next five fiscal years thereafter follows 9 income taxes earnings income taxes discontinued operations follows fiscal 2010 2009 2008 provision income taxes continuing operations consists following fiscal 2010 2009 2008 reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2010 2009 2008 june 30 2010 20 billion total undistributed earnings nonus subsidiaries 13 billion intended permanently reinvested nonus operations recorded charge 168 million fiscal 2010 reflect anticipated repatriation certain foreign earnings respect earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings fiscal 2008 repatriated cash 3075 million nonus subsidiaries result incurred taxable dividends 144 million nontaxable return capitalcurrency gain 1613 million taxable capital gain 1318 million taxable capital gain amount 1318 million fully offset previously unrecognized capital loss carryforward foreign tax credits 141 million recognized related taxable dividends resulting net tax benefit 41 million deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2010 2009 follows millions deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2010 2009 millions 1 included “prepaid expenses other” 2 included “other assets” 3 included “assets business held sale discontinued operations” 4 included “other accrued liabilities” 5 included “deferred income taxes liabilities” 6 included “liabilities business held sale discontinued operations” june 30 2010 gross federal state international loss credit carryforwards 1591 million 5389 million 1686 million respectively tax effect aggregate deferred tax asset 1971 million substantially carryforwards available least three years indefinite carryforward period approximately 1427 million valuation allowance june 30 2010 applies certain federal state international loss carryforwards opinion likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense effective july 1 2007 adopted new accounting guidance regarding accounting tax benefits uncertain tax positions resulting 1393 million reduction retained earnings accounting guidance provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition 7306 million 8488 million unrecognized tax benefits june 30 2010 june 30 2009 respectively included june 30 2010 june 30 2009 balances 3113 million 6109 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect effective tax rate include full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation beginning ending amounts unrecognized tax benefits fiscal 2010 2009 follows recognize accrued interest penalties related unrecognized tax benefits income tax expense june 30 2010 june 30 2009 2330 million 2468 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheets year ended june 30 2010 recognized 345 million interest penalties income tax expense file income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions subject audit taxing authorities fiscal 2001 current fiscal year internal revenue service “irs” currently ongoing audits fiscal 2001 2007 fiscal 2008 notified irs transferred jurisdiction fiscal years 2001 2002 office appeals back examinations level reconsider previouslyunadjusted specific issues fiscal 2008 received notices proposed adjustment “npa’s” irs related fiscal years 2001 2005 challenging deductions arising sale trade receivables special purpose accounts receivable financing entity amount additional tax excluding penalties interest proposed irs notices 1789 million anticipate transaction could subject proposed adjustments irs tax audits fiscal years 2006 2009 due anticipated repatriation earnings tax associated transaction including tax assessed irs longer represented uncertain tax benefit fiscal 2010 classified deferred taxes liabilities current taxes payable balance sheet fiscal 2009 received revenue agent’s report tax years 2003 2005 included new npa’s related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us amount additional tax proposed irs new notices total 5981 million excluding penalties interest including 4621 million related issues carefusion liable tax matters agreement event amount must paid taxing authority disagree proposed adjustments intend vigorously contest believe adequately reserved uncertain tax position relating matters reasonably possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations estimate range possible change unrecognized tax benefits within next 12 months decrease approximately zero 45 million exclusive penalties interest 10 commitments contingent liabilities litigation commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2010 rental expense relating operating leases 803 million 847 million 557 million fiscal 2010 2009 2008 respectively sublease rental income material period presented herein legal proceedings become involved timetotime litigation regulatory matters incidental business including governmental investigations enforcement actions personal injury claims employment matters commercial disputes intellectual property matters disputes regarding environmental cleanup costs litigation connection acquisitions divestitures matters arising normal conduct business intend vigorously defend litigation believe outcome pending litigation material adverse effect consolidated financial statements occasionally may suspect products manufacture market distribute meet specifications published standards regulatory requirements circumstances investigate take appropriate corrective action actions lead costs repair replace affected products temporary interruptions product sales action regulators accrue contingencies related litigation regulatory matters accrue estimated loss contingency consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals adequate amount ultimate loss may differ estimates recognize income favorable outcome litigation receive associated cash assets recognize estimated loss contingencies litigation regulatory matters income favorable resolution litigation creditscharges net consolidated statements earnings insurance proceeds fiscal 2010 recognized 272 million income related insurance proceeds released escrow following resolution securities derivative litigation certain directors officers amount comprised 257 million received directors officers’ insurance policies recognized litigation creditscharges net 15 million accrued interest income recognized interest expense net fiscal 2008 recognized 580 million income related settlement several derivative actions directors officers amount comprised 700 million received directors officers’ insurance policies less 120 million paid plaintiffs’ attorneys’ fees costs amounts recognized litigation creditscharges net information matter see annual reports form 10k fiscal 2008 2007 antitrust litigation proceeds fiscal 2010 recognized 408 million income resulting settlement class action antitrust claim alleging defendant branded pharmaceutical manufacturer took improper actions delay entry generic version branded pharmaceutical amount recognized litigation creditscharges net income taxes see note 9 discussion contingencies related income taxes 11 guarantees ordinary course business agree indemnify certain parties acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically individually aggregate made payments indemnification obligations material amounts certain circumstances believe existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition believe likelihood material liability triggered indemnification obligations significant enter agreements obligate us make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount june 30 2010 aggregate exposure obligations assuming achievement financial performance measures material however connection purchase healthcare solutions holding llc july 2010 obligated pay 1500 million contingent consideration also extend loans customers subsequently sold bank services administers loans well new loans may direct order bank purchase loans requires absolute unconditional obligation repurchase loans upon occurrence certain events described agreement including limited borrower payment default exceeds 90 days insolvency bankruptcy june 30 2010 2009 notes program subject guaranty totaled 414 million 399 million respectively loans reported consolidated balance sheets 12 financial instruments utilize derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk use derivative instruments trading speculative purposes majority derivative instruments designated hedging instruments also enter derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current fair value earnings end period interest rate risk management exposed impact interest rate changes objective manage impact interest rate changes cash flows market value borrowings utilize mix debt maturities along fixedrate variablerate debt manage changes interest rates addition enter interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency risk management conduct business several major international currencies subject risks associated changing foreign exchange rates objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly enter various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management exposed changes price certain commodities objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations accordingly enter derivative contracts manage price risk associated forecasted purchases exposed counterparty credit risk derivative instruments accordingly established maintain strict counterparty credit guidelines enter derivative instruments major financial institutions investment grade better significant exposure one counterparty management believes risk loss remote event would material additionally require collateral agreements following table summarizes fair value assets liabilities related derivative financial instruments respective line items recorded consolidated balance sheets june 30 2010 2009 fair value hedges enter payfloating interest rate swaps hedge changes fair value fixedrate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense net consolidated statements earnings fiscal 2010 entered payfloating interest rate swaps total notional value 10060 million fair value payfloating interest rate swaps included consolidated balance sheet june 30 2010 march 20 2009 terminated existing payfloating interest rate swaps received net settlement proceeds totaling 1231 million proceeds classified cash provided operating activities consolidated statements cash flows immediate impact statements earnings however fair value adjustment debt amortized life underlying debt reduction interest expense conjunction occurrence originally forecasted transactions following table summarizes interest rate swaps designated fair value hedges outstanding june 30 2010 june 30 2009 following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges fiscal 2010 2009 2008 ineffectiveness associated derivative instruments cash flow hedges enter derivative instruments hedge exposure changes cash flows attributable currency interest rate commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component comprehensive income “oci” reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately enter payfixed interest rate swaps hedge variability cash flows relating interest rate payments variable rate debt june 30 2009 held payfixed interest rate swaps hedge variability cash flows relating forecasted transactions october 2 2009 payfixed interest rate swaps matured underlying floatingrate debt maturation payfixed interest rate swaps led zero balance fiscal 2010 enter foreign currency contracts protect value anticipated foreign currency revenues expenses june 30 2010 2009 held contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar european euro mexican peso thai baht enter derivative contracts manage price risk associated forecasted purchases certain commodities used medical segment following table summarizes outstanding cash flow hedges june 30 2010 2009 following table summarizes accumulated gainloss recognized oci derivative instruments designated cash flow hedges june 30 2010 2009 1 includes gainloss recognized oci related carefusion 41 million 02 million fiscal 2009 2008 respectively following table summarizes gainloss reclassified accumulated oci earnings derivative instruments designated cash flow hedges fiscal 2010 2009 2008 amount ineffectiveness associated derivative instruments material economic nondesignated hedges enter foreign currency contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period earnings gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense net end period fiscal 2010 received cash receipts cross currency swap settlement totaling 425 million proceeds classified cash provided operating activities consolidated statement cash flows following table summarizes economic nondesignated derivative instruments outstanding june 30 2010 2009 following table summarizes gainloss recognized earnings economic nondesignated derivative instruments fiscal 2010 2009 2008 fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable shortterm borrowings accrued liabilities june 30 2010 2009 approximate fair value shortterm maturities items cash balances invested accordance investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification following table summarizes estimated fair value longterm obligations shortterm borrowings compared respective carrying amounts june 30 2010 2009 fair value longterm obligations shortterm borrowings estimated based either quoted market prices similar issues inputs derived available market information following summary fair value gainloss derivative instruments based upon estimated amount would receive pay terminate contracts june 30 2010 2009 fair values based quoted market prices similar instruments see note 13 information regarding fair value measurements 13 fair value measurements fair value defined price would received upon selling asset price paid transfer liability measurement date focuses exit price principal advantageous market asset liability orderly transaction willing market participants threetier fair value hierarchy established basis considering assumptions inputs used valuation methodologies measuring fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values follows level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities recurring fair value measurements following table presents fair values assets liabilities measured recurring basis june 30 2010 following table presents fair values assets liabilities measured recurring basis june 30 2009 1 cash equivalents comprised highly liquid investments purchased maturity three months less carrying value cash equivalents approximates fair value due shortterm maturities 2 fair value investment carefusion common stock determined using quoted market price security 3 fair value foreign currency contracts commodity contracts interest rate swaps determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities observable level 2 inputs used determine present value expected future cash flows see note 12 information regarding fair value financial instruments 4 investments balance includes investments mutual funds used offset fluctuations deferred compensation liabilities mutual funds primarily comprised large cap domestic international equity securities fair value investments determined using quoted market prices 14 shareholders’ equity june 30 2010 2009 authorized capital shares consisted following 750 million class common shares without par value 5 million class b common shares without par value 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2010 2009 repurchased 13 billion common shares aggregate share repurchase programs fiscal 2010 2009 2008 described fiscal 2010 fiscal 2010 repurchased 74 million common shares aggregate cost 2500 million included 198 million unsettled repurchases june 30 2010 average price paid per common share common shares repurchased fiscal 2010 3385 fiscal 2009 repurchase common shares fiscal 2009 fiscal 2008 repurchased 168 million common shares aggregate cost 11 billion fiscal 2008 average price paid per common share common shares repurchased fiscal 2008 6481 common shares repurchased held treasury used general corporate purposes fiscal 2008 retired 128 million common shares treasury retirement shares impact total shareholders’ equity however impact certain individual components shareholders’ equity follows 10 billion decrease common shares 75 billion decrease retained earnings 85 billion decrease common shares treasury 15 earnings per share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share “diluted eps” similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method total number common shares issued less common shares held treasury used determine common shares outstanding following table reconciles number common shares used compute basic eps diluted eps fiscal 2010 2009 2008 following table presents number potentially dilutive securities antidilutive fiscal 2010 2009 2008 16 segment information operations principally managed products services basis connection spinoff reorganized businesses two reportable segmentspharmaceutical medical factors determining reportable segments include manner management evaluates performance combined nature individual business activities pharmaceutical segment distributes branded generic pharmaceutical overthecounter healthcare consumer products also operates nuclear pharmacies cyclotron facilities prepare deliver radiopharmaceuticals use nuclear imaging procedures hospitals clinics addition segment distributes specialty pharmaceutical products provides thirdparty logistics support services hospitals clinics providers franchises retail pharmacies medicine shoppe® medicap® brands provides pharmacy services hospitals healthcare facilities segment also provides pharmaceutical repackaging services helps pharmaceutical manufacturers services including distribution inventory management datareporting new product launch support contract chargeback administration maintains prime vendor relationships streamline purchasing process resulting greater efficiency lower costs customers medical segment distributes broad range medical surgical laboratory products hospitals surgery centers laboratories physician offices healthcare providers segment also develops manufactures sources medical surgical products include sterile nonsterile procedure kits singleuse surgical drapes gowns apparel exam surgical gloves fluid suction collection systems medical surgical products sold directly thirdparty distributors united states canada europe south america asiapacific region following table includes revenue reportable segment reconciling items necessary agree amounts reported consolidated financial statements 1 pharmaceutical segment’s revenue primarily derived distribution branded generic pharmaceutical overthecounter healthcare consumer products 2 medical segment’s revenue primarily derived manufacturing distribution medical surgical laboratory products medical procedure kits 3 corporate revenue consists elimination intersegment revenue evaluate performance segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment distribution selling general administrative expense “sga” segment sga expenses include equity sharebased compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition restructuring employee severance acquisition related costs impairments gainloss sale assets litigation creditscharges net certain investment spending allocated segments investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects retained corporate see notes 2 3 4 10 respectively discussion acquisition related costs restructuring employee severance impairments gainloss sale assets litigation creditscharges net addition spinoff costs included sga 108 million 45 million fiscal 2010 2009 respectively allocated segments accounting policies segments described note 1 following table includes segment profit reportable segment reconciling items necessary agree amounts reported consolidated financial statements following tables include depreciation amortization expense capital expenditures fiscal 2010 2009 2008 segment following table includes total assets june 30 2010 2009 segment well reconciling items necessary total amounts reported consolidated financial statements 1 corporate assets primarily consist cash equivalents investment carefusion certain net property equipment contractual tax indemnification receivable carefusion see note 1 information regarding receivable additionally corporate assets june 30 2009 included carefusion assets held sale discontinued operations following table presents revenue net property equipment geographic area 17 sharebased compensation savings plans sharebased compensation plans maintain stock incentive plans collectively “plans” benefit certain officers directors employees employee stock options granted plans fiscal 2008 fiscal 2010 generally vest equal annual installments three years exercisable periods seven years date grant price equal market price common shares underlying option date grant employee stock options granted plans fiscal 2007 generally vest equal annual installments four years exercisable periods seven years date grant price equal market price common shares underlying option date grant employee restricted shares restricted share units granted plans fiscal 2007 fiscal 2010 generally vest equal installments three years entitle holders dividends cash dividend equivalents restricted shares restricted share units accrue dividends cash dividend equivalents payable upon vesting awards compensation expense recognized sharebased compensation awards net estimated forfeitures recognized using straightline method applicable service period classify sharebased compensation within sga expenses correspond line item majority cash compensation paid employees however certain sharebased compensation incurred connection spinoff classified within restructuring employee severance following table illustrates impact sharebased compensation reported amounts fiscal 2010 2009 2008 1 included table amounts recorded within restructuring employee severance related spinoff following provides amounts fiscal 2010 2009 2008 2 fiscal 2008 sharebased compensation expense includes 87 million related unvested equity awards held former executive director acceleration sharebased compensation expense resulted change status employee nonemployee director 3 following table provides total sharebased compensation expense type award fiscal 2010 2009 2008 4 following table provides total sharebased compensation expense net tax charged discontinued operations fiscal 2010 2009 2008 stock options fair value stock options determined using lattice valuation model believe lattice model provides better estimates ability take account employee exercise patterns based changes stock price variables provides range input assumptions following summarizes stock option transactions plans july 1 2008 june 30 2010 giving retroactive effect conversions options connection acquisitions stock splits 1 stock options granted canceled forfeited activity fiscal 2010 included impact stock option exchange program adjustments outstanding stock options connection spinoff discussed 2 exercise prices related stock options adjusted connection spinoff dates august 31 2009 effective date adjustments following table provides data related stock option activity fiscal 2010 2009 2008 1 weightedaverage grant date fair value per stock option include impact stock option exchange program fair values stock options granted employees directors fiscal 2010 2009 2008 estimated date grant using lattice valuation model lattice valuation model incorporates ranges assumptions disclosed table riskfree rate based united states treasury yield curve time grant analyzed historical data estimate option exercise behaviors employee terminations used within lattice model 2010 calculated separate option valuations two groups employees fiscal 2009 2008 calculated separate option valuations three groups employees groups determined using similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified based option exercise behaviors expected volatilities based implied volatility traded options common shares historical volatility period time commensurate contractual term option grant 7 years following table provides range assumptions used options valued fiscal 2010 2009 2008 1 range assumptions used options fiscal 2010 include impact stock option exchange program restricted shares restricted share units fair value restricted shares restricted share units determined number shares granted grant date market price common shares following tables summarize activity related restricted shares restricted share units fiscal 2010 2009 1 restricted shares restricted share units canceled forfeited activity fiscal 2010 included impact adjustments outstanding awards connection spinoff discussed 2 grant date fair values per share awards granted prior date spinoff adjusted reflect impact spinoff stock option exchange program may 6 2009 board directors authorized june 23 2009 shareholders approved program permitted certain current employees exchange certain outstanding stock options exercise prices substantially current market price common shares lesser number stock options fair value lower fair value “out money” options program began june 19 2009 completed july 17 2009 believe program necessary closely align employee shareholder interests equity compensation programs program designed motivate retain key employees reinforce alignment employees’ interests shareholders result program 98 million outstanding eligible stock options exchanged 14 million new options exercise price 3127 new options new minimum vesting condition additional 12 months term new option longer three years grant date remaining term eligible stock option exchanged new options treated probabletoprobable modification accounting guidance sharebased compensation incur incremental expense associated modification adjustments stock incentive plans connection spinoff august 31 2009 adjusted sharebased compensation awards granted plans awards based common shares andor carefusion common stock applicable purposes vesting equity awards continued employment service us carefusion treated continued employment purposes carefusion’s equity awards adjustments summarized follows • converted stock options granted prior september 26 2007 one adjusted stock options carefusion stock option exercise prices adjusted stock options carefusion stock option number shares subject stock options reflected adjustment designed intrinsic value stock options held immediately following spinoff equaled intrinsic value stock options held immediately prior spinoff • adjusted exercise price number shares stock options granted september 26 2007 current former employees directors intrinsic value stock option held immediately following spinoff equaled intrinsic value stock option held immediately prior spinoff stock options granted september 26 2007 employee director joined carefusion connection spinoff replaced carefusion stock option exercisable shares carefusion common stock exercise price number shares established intrinsic value stock option held immediately following spinoff equaled intrinsic value stock option held immediately prior spinoff • holders restricted shares restricted share units granted prior september 26 2007 granted connection announcement spinoff granted exchange option initially granted prior september 26 2007 received shares carefusion restricted stock carefusion restricted stock units ratio outstanding common shares spinoff 05 shares carefusion common stock common share adjust underlying restricted shares restricted share units • adjusted canceled reissued restricted shares restricted share units ie described fair value shares subject awards held immediately following spinoff equaled fair value awards held immediately prior spinoff restricted shares restricted share units granted employees directors joined carefusion connection spinoff canceled replaced number shares carefusion restricted stock carefusion restricted stock units established fair value shares subject awards held immediately following spinoff equaled fair value awards held immediately prior spinoff • adjusted stock options restricted shares restricted share units carefusion stock options restricted stock restricted stock units holder received subject substantially terms vesting conditions restrictions applicable prior spinoff adjustments stock incentive plans treated modification accordance sharebased compensation accounting guidance resulted total incremental compensation cost 06 million following table summarizes sharebased compensation awards outstanding june 30 2010 employee savings plan substantially domestic nonunion employees eligible enrolled companysponsored contributory retirement savings plan include features section 401k internal revenue code 1986 amended provide matching profit sharing contributions us contributions plans determined board directors subject certain minimum requirements specified plan following table summarizes total expense employee retirement savings plans fiscal 2010 2009 2008 18 offbalance sheet arrangements periodically enter certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties receivablerelated arrangements cardinal health funding llc “chf” organized sole purpose buying receivables selling undivided interests receivables multiseller conduits administered third party banks third party investors chf designed special purpose bankruptcyremote entity although consolidated accordance gaap chf separate legal entity cardinal health subsidiary sells contributes receivables chf june 30 2010 sale receivables chf qualified sales treatment accordance accounting guidance regarding financial asset transfers discussed note 1 fasb issued new accounting guidance accounting transfers financial assets result new guidance determined committed receivables sales facility qualify offbalance sheet arrangement beginning fiscal 2011 june 30 2010 2009 committed receivables sales facility program available chf capacity sell 9500 million receivables recourse provided program requirement chf retain subordinated interest sold receivables outstanding committed receivables sales facility program june 30 2010 2009 second quarter fiscal 2010 amended committed receivables sales facility program extend additional 364 days cash flows receivablerelated arrangements net cash flow decrease related receivable interest transfers fiscal 2010 2009 2008 follows chf required repurchase receivables interests sold determined representations warranties regard related receivables accurate date sold respect committed sales facility program event failed comply covenants performance guaranty customary amortization event occurred fiscal 2010 satisfied outstanding obligations agreements operating leases prior year entered operating lease agreement third party bank construction various facilities equipment june 26 2009 repurchased remaining buildings equipment land previously operating lease agreement 1512 million addition part repurchase recognized 38 million impairment charge 19 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2010 2009 sum quarters may equal yeartodate due rounding 1 fourth quarter fiscal 2010 recorded outofperiod increase income tax expense 147 million related state provisiontoreturn reconciliation 51 million pertained first three quarters fiscal 2010 96 million pertained fiscal 2009 amounts material individually aggregate current prior periods 1 fourth quarter fiscal 2009 recorded certain period items increased gross margin 52 million 25 million pertained first three quarters fiscal 2009 27 million pertained fiscal 2008 increased distribution selling general administrative expenses 136 million 42 million pertained first three quarters fiscal 2009 48 million pertained fiscal 2008 46 million pertained periods prior fiscal 2008 decreased earnings continuing operations net earnings 45 million 14 million pertained fiscal 2008 31 million pertained periods prior fiscal 2008 amounts material individually aggregate current prior periods 20 subsequent events july 15 2010 completed acquisition healthcare solutions holding llc 5170 million cash agreement also includes potential maximum contingent payments 1500 million next three years subsequent fiscal 2010 repurchased 75 million common shares aggregate cost 250 million average price paid per common share common shares repurchased july august 3322 item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2011 2010 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2011 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position company june 30 2011 2010 consolidated results operations cash flows three years period ended june 30 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 25 2011 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 25 2011 cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc ohio corporation formed 1979 healthcare services company providing pharmaceutical medical products services help pharmacies hospitals surgery centers physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality references “we” “our” similar pronouns consolidated financial statements cardinal health inc majorityowned subsidiaries unless context otherwise requires fiscal year ends june 30 references fiscal 2011 2010 2009 consolidated financial statements fiscal years ended june 30 2011 2010 2009 respectively spinoff carefusion corporation effective august 31 2009 separated clinical medical products businesses distribution shareholders 81 percent outstanding common stock carefusion corporation “carefusion” retained remaining 414 million shares carefusion common stock “spinoff” fiscal 2011 2010 disposed 305 million 109 million shares carefusion common stock respectively party separation agreement various agreements relating separation determined significant continuing involvement operations carefusion accordingly operating results carefusion presented within discontinued operations periods presented date spinoff relationship carefusion july 22 2009 entered separation agreement carefusion effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement accounts receivable factoring agreement carefusion among agreements including separation agreement provide allocation assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior spinoff govern certain relationships carefusion us spinoff transition services agreement fiscal 2011 2010 recognized 647 million 992 million respectively transition service fee income approximately offsets costs associated providing transition services substantially transition service arrangements expired fiscal 2011 early fiscal 2012 accounts receivable factoring agreement fiscal 2011 2010 purchased 4604 million 6056 million respectively carefusion trade receivables accounts receivable factoring arrangement expired april 1 2011 tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff indemnification receivable included balance sheet 2639 million 2446 million june 30 2011 2010 respectively basis presentation consolidated financial statements include accounts majorityowned subsidiaries significant intercompany transactions amounts eliminated certain prior year balances reclassified conform current year presentation results businesses acquired disposed included consolidated financial statements effective date acquisition date disposal respectively use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires us make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation business combinations goodwill intangible asset impairment vendor reserves sharebased compensation income taxes actual amounts could ultimately differ estimated amounts cash equivalents consider liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed us distribution businesses presented net allowance doubtful accounts 1345 million 1235 million june 30 2011 2010 respectively account considered past due first day due date accordance contract terms generally ability charge customers service fees higher prices account considered past due continuously monitor past due accounts establish appropriate reserves cover potential losses based primarily historical collection rates credit worthiness customer writeoff amounts deemed uncollectible established allowance doubtful accounts provide financing various customers financing arrangements range 90 days 10 years interest rates generally subject fluctuation interest income arrangements recognized earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 904 million current portion 189 million 1099 million current portion 209 million june 30 2011 2010 respectively included assets current portion included prepaid expenses finance notes receivable reported net allowance doubtful accounts 149 million 162 million june 30 2011 2010 respectively estimate allowance financing receivables based historical collection rates credit worthiness customer concentrations credit risk major customers maintain cash depository accounts major banks throughout world invest high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months incurred related losses trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry credit risk limited due supporting collateral diversity customer base including wide geographic dispersion perform ongoing credit evaluations customers’ financial conditions maintain reserves credit losses historically within expectations following table summarizes customers individually account least 10 percent revenue corresponding percent gross trade receivables customers table serviced pharmaceutical segment entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members following table summarizes revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp two largest gpo relationships terms revenue trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories 70 percent june 30 2011 73 percent june 30 2010 valued lower cost using lifo method market inventories included within core pharmaceutical distribution facilities pharmaceutical segment “distribution facilities” primarily merchandise inventories believe average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2011 2010 record lifo reserve reductions used average cost method inventory valuation inventory within distribution facilities inventories would changed fiscal 2011 fiscal 2010 inventories valued lifo 76 million 377 million higher average cost value june 30 2011 2010 respectively record inventories excess replacement cost remaining inventory primarily stated lower cost using fifo method market inventories presented consolidated balance sheet net reserves excess obsolete inventory 400 million 344 million june 30 2011 2010 respectively reserve inventory obsolescence using estimates based historical experience sales trends specific categories inventory age onhand inventory cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell depreciation expense computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases use following range useful lives property equipment categories buildings improvements1 50 years machinery equipment2 20 years furniture fixtures3 10 years following table shows depreciation expense fiscal 2011 2010 2009 certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts repairs maintenance expenditures expensed incurred interest longterm projects capitalized using rate approximates weighted average interest rate longterm obligations 421 june 30 2011 amount capitalized interest immaterial fiscal years presented business combinations purchase price acquired business allocated assets acquired liabilities assumed based estimated fair values date acquisition including identifiable intangible assets acquisition involves contingent consideration recognize liability equal fair value contingent consideration obligation date acquisition excess purchase price estimated fair value net tangible identifiable intangible assets acquired recorded goodwill base fair values identifiable intangible assets detailed valuations require management make significant judgments estimates assumptions critical estimates assumptions include expected future cash flows trade names customer relationships identifiable intangible assets discount rates reflect risk factors associated future cash flows estimates useful lives see note 2 additional information regarding acquisitions including contingent consideration related p4 healthcare acquisition goodwill intangibles purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite livesprimarily customer relationships patents trademarksare amortized useful lives goodwill impairment testing involves comparison estimated fair value reporting units respective carrying amount estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value second step performed determine amount impairment would recorded expense results operations application goodwill impairment testing involves judgment including limited identification reporting units estimating fair value reporting unit reporting unit defined operating segment one level operating segment fiscal 2011 identified four reporting units pharmaceutical segment excluding nuclear pharmacy services division yong yu division medical segment nuclear pharmacy services division yong yu division fair values determined using market income costbased approaches determination estimated fair value reporting units based combination incomebased marketbased approaches marketbased approach determine fair value comparing reporting units similar businesses guideline companies whose securities actively traded public markets incomebased approach use discounted cash flow model cash flows anticipated several periods plus terminal value end time horizon discounted present value using appropriate rate return confirm fair value compare aggregate fair value reporting units market capitalization use alternate estimates assumptions changes industry peer groups could materially affect determination fair value reporting unit potentially result goodwill impairment performed annual impairment testing fiscal 2011 2010 2009 concluded impairments goodwill fair value reporting unit exceeded carrying value see note 6 additional information regarding goodwill intangible assets income taxes account income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions operate deferred taxes provided unremitted earnings subsidiaries outside united states expected earnings permanently reinvested tax benefits uncertain tax positions recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 percent likely realized upon settlement see note 9 additional information regarding income taxes accounting vendor reserves ordinary course business vendors may dispute deductions taken payments otherwise due assert billing disputes disputed transactions researched resolved based upon policy findings research performed given time outstanding items various stages research resolution determining appropriate reserves areas exposure vendors assess historical experience current outstanding claims established various levels reserves based type claim status review though transaction types relatively consistent periodically refine estimate methodology updating reserve estimate percentages reflect actual historical experience ultimate outcome certain claims may different original estimate may require adjustment adjustments vendor reserves included cost products sold addition reserve balance fluctuate due variations outstanding claims period timing settlements specific vendor issues bankruptcies following table summarizes vendor reserves june 30 2011 2010 thirdparty returns excluded vendor reserves see separate section note 1 description thirdparty returns accounting vendor incentives fees services incentives received vendors relating purchase distribution inventory generally reported reduction cost products sold consolidated statements earnings consider fees incentives represent product discounts result amounts recorded reduction product cost recognized cost products sold upon sale related inventory accrued liabilities accrued liabilities represent various current obligations including certain accrued operating expenses taxes payable sharebased compensation sharebased compensation employees including grants stock options recognized consolidated statements earnings based grant date fair value awards fair value stock options determined using lattice valuation model believe lattice model provides better estimates ability take account employee exercise patterns based changes stock price variables provides range input assumptions compensation expense recognized sharebased awards net estimated forfeitures recognized ratably service period awards classify sharebased compensation expense within distribution selling general administrative “sga” expenses correspond line item majority cash compensation paid employees however certain sharebased compensation incurred connection spinoff classified within restructuring employee severance see note 17 additional information regarding sharebased compensation dividends following table summarizes cash dividends per common share paid fiscal 2011 2010 2009 revenue recognition recognize revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured revenue recognized net sales returns allowances pharmaceutical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue deliveries directly shipped customer warehouses manufacturer whereby act intermediary ordering delivery products recorded gross accordance accounting standards addressing reporting revenue gross basis principal versus net basis agent revenue recorded gross basis since incur credit risk customer bear risk loss incomplete shipments receive separate fee commission transaction primary obligor revenue sales recognized title transfers customer obligation provide services related merchandise radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services pharmacy management thirdparty logistics service revenue recognized services rendered according contracts established fee charged contracts capitation fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed us exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medicine shoppe international inc medicap pharmacies incorporated earn franchise fees franchise fees represent monthly fees either fixed based upon franchisees’ sales recognized revenue earned medical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue sale medical products supplies recognized title risk loss transfers customers typically upon delivery sales returns allowances revenue recorded net sales returns allowances recognize sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees condition suitable added back inventory resold full value returned vendors credit “merchantable product” product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded accrued sales returns allowances time sale transaction following table summarizes sales returns allowances fiscal years ended june 30 2011 2010 2009 thirdparty returns since generally accept nonmerchantable product returns customers many customers return nonmerchantable pharmaceutical products vendors third parties generally customers direct relationship vendors pass value returns us usually form accounts payable deduction turn pass value received less administrative fee customer certain instances pass estimated value return customer prior processing deduction vendors although general believe satisfactory contractual protections could subject claims customers vendors administration overall process deficient respect contractual terms vendors conflict contractual terms customers maintained reserves situations based nature historical experience resolution distribution service agreement vendor fees pharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendors’ inventory fees earned entitled payment recognize fees reduction carrying value inventory generated fees recognized reduction cost products sold statements earnings inventory sold shipping handling shipping handling costs included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer following table summarizes shipping handling costs fiscal 2011 2010 2009 revenue received shipping handling immaterial periods presented translation foreign currencies financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity accumulated comprehensive income utilizing periodend exchange rates revenues expenses foreign subsidiaries translated using average exchange rates year following table summarizes foreign currency translation gainslosses included accumulated comprehensive income june 30 2011 2010 foreign currency transaction gains losses period included consolidated statements earnings incomeexpense net immaterial fiscal 2011 2010 2009 respectively interest rate currency commodity risk management derivative instruments recognized fair value balance sheet changes fair value recognized net earnings shareholders’ equity accumulated comprehensive income net tax contracts qualify hedge accounting treatment policy requires hedge contracts must effective reducing risk associated exposure hedged must designated hedge inception contract hedge effectiveness assessed periodically contract designated hedge designated ineffective adjusted fair value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred accumulated comprehensive income would recognized immediately earnings see note 12 additional information regarding derivative instruments including accounting treatment instruments designated fair value cash flow economic hedges earnings per common share basic earnings per common share “eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method recent financial accounting standards june 2009 financial accounting standards board “fasb” issued new accounting guidance accounting transfers financial assets guidance improves relevance representational faithfulness comparability information provided transfer financial assets effects transfer financial assets entity’s financial statements transferor’s continuing involvement financial assets transferred guidance effective fiscal years beginning november 15 2009 result new guidance determined committed receivables sales facility longer qualified offbalance sheet arrangement beginning fiscal 2011 june 30 2011 2010 amounts outstanding facility july 2010 fasb issued new accounting guidance requires additional disclosures regarding allowance credit loss financing receivables guidance requires entity provide additional disclosures related credit risk related financing receivables risk analyzed determining related allowance credit losses adopted guidance january 1 2011 adoption guidance material impact financial position results operations 2 acquisitions fiscal 2011 fiscal 2011 completed several acquisitions significant described detail results acquisitions described included within pharmaceutical segment also completed acquisitions period significant individually aggregate valuation identifiable intangible assets utilizes significant unobservable inputs thus represents level 3 fair value measurement fair value measurements assets acquired liabilities assumed acquisition dates completed fiscal 2011 consolidated financial statements include results operations business combinations date acquisition fiscal 2011 three acquisitions increased revenues 29 billion operating earnings 613 million compared fiscal 2010 kinray december 21 2010 completed acquisition privately held kinray inc “kinray” 13 billion allcash transaction kinray wholesale pharmaceutical distribution company serves retail independent pharmacies primarily new york metropolitan area yong yu november 29 2010 completed acquisition yong yu subsidiary 4577 million including assumption 574 million debt yong yu health care distribution business headquartered shanghai china p4 healthcare july 15 2010 completed acquisition privately held healthcare solutions holding llc “p4 healthcare” 5061 million cash certain contingent consideration p4 healthcare serves key participants across chain specialty care including physicians pharmaceutical companies payors providing essential tools services data help improve quality patient outcomes increase efficiency delivery health care services accordance agreement former owners p4 healthcare right receive certain contingent payments based targeted earnings interest taxes depreciation amortization “ebitda” contingent consideration earned four measurement periods spanned three years measurement period specific targets payout amounts contingent consideration payout limited 1500 million subsequent june 30 2011 amended agreement former owners extend fourth measurement period beginning january 1 2013 six months eighteen months reduce maximum contingent consideration payout 1000 million determined estimated fair value contingent consideration obligation based probabilityweighted income approach derived ebitda estimates probability assessments respect likelihood achieving various ebitda targets fair value measurement based significant inputs observable market thus represents level 3 fair value measurement reporting date revalue contingent consideration obligation estimated fair value record changes fair value income expense consolidated statement earnings acquisitionrelated costs changes fair value contingent consideration obligation may result changes terms contingent payments changes discount periods rates changes timing amount ebitda estimates changes probability assumptions respect timing likelihood achieving ebitda targets actual progress toward achieving ebitda targets remaining measurement periods may different expectations performance future measurement periods failure meet current expectations progress could increase probability achieving targets within measurement periods result material reduction fair value contingent consideration obligation fair value contingent consideration obligation 754 million june 30 2011 compared initial valuation 920 million 166 million decrease contingent consideration liability reflects cash payment 102 million first measurement period changes estimate performance future measurement periods following table summarizes fair values assets acquired liabilities assumed acquisition date three acquisitions described 1 weighted average lives trade names relating kinray yong yu acquisitions range two three years p4 healthcare trade names indefinite lives 2 weighted average lives customer relationships range 4 15 years 3 weighted average life noncompete agreements five years 4 weighted average lives identified intangible assets range 2 10 years fiscal 2010 fiscal 2010 completed acquisition individually significant aggregate purchase price acquisition paid cash 320 million including assumption 19 million liabilities consolidated financial statements include results operations business combination date acquisition fiscal 2009 fiscal 2009 completed acquisition individually significant aggregate purchase price acquisition paid cash 1286 million assumed liabilities acquired business 1021 million consolidated financial statements include results operations business combination date acquisition acquisitionrelated costs classify costs incurred connection acquisitions acquisitionrelated costs consist primarily transaction costs integration costs changes fair value contingent payments transaction costs incurred initial evaluation potential targeted acquisition primarily relate costs analyze negotiate consummate transaction well financial legal due diligence activities integration costs relate activities needed combine operations acquired enterprise operations described record changes fair value contingent payments relating acquisitions income expense acquisitionrelated costs 3 restructuring employee severance consider restructuring activities programs whereby fundamentally change operations closing facilities moving manufacturing product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions liability cost associated exit disposal activity recognized measured initially fair value period incurred except liability onetime termination benefit recognized future service period following table summarizes activity related restructuring employee severance costs fiscal 2011 2010 2009 1 employeerelated costs primarily consist onetime termination benefits provided employees involuntarily terminated duplicate payroll costs transition periods 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring delivery information technology infrastructure services restructuring employee severance fiscal 2011 2010 2009 included costs related following significant projects 1 incurred restructuring expenses related spinoff consisting employeerelated costs sharebased compensation costs evaluate execute transaction costs separate certain functions information technology systems onetime transaction related costs see note 17 information regarding sharebased compensation incurred connection spinoff also included within costs 186 million costs related retirement former chairman chief executive officer upon completion spinoff 2 fiscal 2009 consolidated businesses two primary operating reportable segments reduce costs align resources needs segment connection spinoff reportable segments reorganized refer note 16 additional information regarding current reportable segments addition significant restructuring programs discussed time incur costs implement smaller restructuring efforts specific operations within segments restructuring plans focus various aspects operations including closing consolidating certain manufacturing distribution operations rationalizing headcount aligning operations strategic costefficient structure restructuring employee severance accrual rollforward following table summarizes activity related liabilities associated restructuring employee severance projects fiscal 2011 2010 2009 4 impairments loss sale assets fiscal 2010 recognized 181 million impairment charge related writedown specialtyscripts llc “specialtyscripts” business within pharmaceutical segment net expected fair value less costs sell see note 5 information regarding sale specialtyscripts recognize material impairment charges fiscal 2011 5 discontinued operations assets held sale carefusion party transition services agreement tax matters agreement carefusion among agreements determined continuing cash flows generated agreements constitute significant continuing involvement operations carefusion accordingly operating results carefusion presented within discontinued operations periods presented date spinoff results carefusion included discontinued operations fiscal 2011 2010 2009 summarized follows 1 reflects subsequent changes certain estimates made time spinoff 2 reflects results carefusion august 31 2009 date spinoff completed subsequent changes certain estimates made time spinoff interest expense allocated historical periods considering debt issued carefusion connection spinoff overall debt balance addition portion corporate costs previously allocated carefusion reclassified remaining two segments following table summarizes interest expense allocated discontinued operations carefusion fiscal 2011 2010 2009 assets liabilities businesses held sale carefusion june 30 2011 2010 cash flows discontinued operations presented separately consolidated statements cash flows fourth quarter fiscal 2007 sold businesses within former pharmaceutical technologies services segment certain genericfocused businesses “pts business” see note 7 “notes consolidated financial statements” annual report form 10k fiscal year ended june 30 2009 information regarding sale pts business incurred minor amounts activity related pts business fiscal 2009 result changes certain estimates made time sale activity transition services agreement adjustments fourth quarter fiscal 2009 committed plans sell united kingdombased martindale injectable manufacturing business “martindale” within pharmaceutical segment martindale met criteria classification discontinued operations consolidated financial statements fourth quarter fiscal 2010 completed sale martindale resulting pretax gain 363 million accordingly net assets martindale presented separately discontinued operations operating results martindale presented within discontinued operations periods presented date sale fourth quarter fiscal 2009 also committed plans sell specialtyscripts within pharmaceutical segment specialtyscripts met criteria classification held sale consolidated financial statements third quarter fiscal 2010 completed sale specialtyscripts results specialtyscripts reported within earnings continuing operations consolidated statements earnings date sale satisfy criteria classification discontinued operations results included discontinued operations pts business fiscal 2010 2009 martindale fiscal 2011 2010 2009 summarized follows 1 reflects subsequent changes certain estimates made time sale assets liabilities businesses held sale pts business martindale specialtyscripts june 30 2011 2010 6 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill total segment fiscal 2011 2010 increase pharmaceutical segment fiscal 2011 primarily due acquisitions kinray yong yu p4 healthcare goodwill recognized connection acquisitions primarily represents expected benefit synergies integrating businesses well existing workforce acquired entities see note 2 discussion acquisitions intangible assets intangible assets definite lives amortized useful lives range two twenty years detail intangible assets class june 30 2011 2010 follows increase identifiable intangible assets fiscal 2011 primarily due acquisitions kinray yong yu p4 healthcare see note 2 discussion acquisitions following table summarizes amortization expense fiscal 2011 2010 2009 amortization expense next five fiscal years estimated 7 heldtomaturity investments june 30 2011 heldtomaturity investments included fixed income debt securities amortized cost 1420 million shortterm portion 932 million included within prepaid expenses consolidated balance sheet longterm portion 488 million included within longterm assets consolidated balance sheet investments vary maturity date ranging three sixteen months pay interest semiannually heldtomaturity investments stated amortized cost approximates fair value heldtomaturity investments june 30 2010 8 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following june 30 2011 2010 maturities longterm obligations shortterm borrowings next five fiscal years thereafter follows longterm debt 400 550 565 580 585 600 675 notes represent unsecured obligations 780 700 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary cardinal health inc guaranteed none obligations subject sinking fund allegiance obligations redeemable prior maturity interest paid pursuant terms obligations notes effectively subordinated liabilities subsidiaries including trade payables 113 billion december 2010 sold 5000 million aggregate principal amount fixed rate notes due 2020 interest 4625 per year “the 4625 notes” registered offering 4625 notes mature december 15 2020 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness used proceeds general corporate purposes repay 2197 million 675 notes february 15 2011 565 notes due 2012 550 notes due 2013 600 notes due 2017 4625 notes require us offer purchase notes 101 principal amount plus accrued unpaid interest defined change control specified ratings investment grade sp moody’s fitch september 24 2009 completed debt tender announced august 27 2009 aggregate purchase price including early tender premium excluding accrued interest fees expenses 11 billion following series debt securities 780 debentures due october 15 2016 allegiance corporation ii 675 notes due february 15 2011 iii 600 notes due june 15 2017 iv 700 debentures due october 15 2026 allegiance corporation v 585 notes due december 15 2017 vi 580 notes due october 15 2016 vii 565 notes due june 15 2012 viii 550 notes due june 15 2013 ix 400 notes due june 15 2015 connection debt tender incurred pretax loss early extinguishment debt approximately 399 million included early tender premium 664 million writeoff 53 million unamortized debt issuance costs offsetting 318 million fair value adjustment respective debt related previously terminated interest rate swaps debt tender completed using portion 14 billion cash distributed us carefusion connection spinoff financing arrangements addition cash equivalents june 30 2011 2010 sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility may 12 2011 replaced prior revolving credit facility new 15 billion facility expires may 2016 revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes also maintain 9500 million committed receivables sales facility program november 9 2010 amended committed receivables sales facility extend term november 2012 committed receivables sales facility exists largely provide liquidity selling interests receivables outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2011 2010 also outstanding balance revolving credit facility june 30 2011 2010 except 443 million 482 million respectively standby letters credit revolving credit facility committed receivables sales facility require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2011 compliance financial covenants also maintain shortterm credit facilities unsecured line credit allowed borrowings 1739 million 48 million june 30 2011 2010 respectively 1106 million 61 million balance obligations june 30 2011 2010 respectively consisted primarily additional notes loans capital leases 9 income taxes earnings income taxes discontinued operations follows fiscal 2011 2010 2009 provision income taxes continuing operations consists following fiscal 2011 2010 2009 reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2011 2010 2009 june 30 2011 21 billion total undistributed earnings nonus subsidiaries 14 billion intended permanently reinvested nonus operations recorded charge 1683 million fiscal 2010 reflect anticipated repatriation certain foreign earnings respect earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2011 2010 follows deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2011 2010 1 included “prepaid expenses other” consolidated balance sheets 2 included “other assets” consolidated balance sheets 3 included “other accrued liabilities” consolidated balance sheets 4 included “deferred income taxes liabilities” consolidated balance sheets june 30 2011 gross federal state international loss credit carryforwards 2254 million 5689 million 1318 million respectively tax effect aggregate deferred tax asset 1899 million substantially carryforwards available least three years indefinite carryforward period approximately 1429 million valuation allowance june 30 2011 applies certain federal state international loss carryforwards opinion likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense 7468 million 7306 million 8488 million unrecognized tax benefits june 30 2011 2010 2009 respectively june 30 2011 2010 2009 balances include 3324 million 3113 million 6109 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect effective tax rate include full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation beginning ending amounts unrecognized tax benefits fiscal 2011 2010 2009 follows recognize accrued interest penalties related unrecognized tax benefits income tax expense june 30 2011 2010 2009 2672 million 2330 million 2468 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheet year ended june 30 2011 recognized 360 million interest penalties income tax expense file income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions subject audit taxing authorities fiscal 2001 current fiscal year internal revenue service “irs” currently conducting audits fiscal years 2001 2010 received proposed adjustments irs fiscal years 2003 2007 related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us irs proposed additional taxes 8490 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement 5915 million total amount disagree proposed adjustments vigorously contesting believe adequately reserved uncertain tax positions related matters reasonably possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations estimate range possible change unrecognized tax benefits within next 12 months decrease approximately zero 2150 million exclusive penalties interest 10 commitments contingent liabilities litigation commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2011 rental expense relating operating leases 788 million 803 million 847 million fiscal 2011 2010 2009 respectively sublease rental income material period presented herein legal proceedings become involved timetotime litigation regulatory matters incidental business including governmental investigations enforcement actions personal injury claims employment matters commercial disputes intellectual property matters disputes regarding environmental cleanup costs litigation connection acquisitions divestitures matters arising normal conduct business intend vigorously defend litigation believe outcome pending litigation material adverse effect consolidated financial statements occasionally may suspect products manufacture market distribute meet product specifications published standards regulatory requirements circumstances investigate take appropriate corrective action actions lead product recalls costs repair replace affected products temporary interruptions product sales action regulators accrue contingencies related litigation regulatory matters accrue estimated loss contingency consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals adequate amount ultimate loss may differ estimates recognize income favorable outcome litigation receive associated cash assets recognize estimated loss contingencies litigation regulatory matters income favorable resolution litigation recoveriescharges net consolidated statements earnings insurance proceeds fiscal 2010 recognized 272 million income related insurance proceeds released escrow following resolution previously disclosed settled securities derivative litigation certain directors officers amount comprised 257 million received directors’ officers’ insurance policies recognized litigation recoveriescharges net 15 million accrued interest income recognized interest expense net antitrust litigation proceeds fiscal 2010 recognized 408 million income resulting settlement class action antitrust claim class member amount recognized litigation recoveriescharges net income taxes see note 9 discussion contingencies related income taxes 11 guarantees ordinary course business agree indemnify certain parties acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically individually aggregate made payments indemnification obligations material amounts certain circumstances believe existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition believe likelihood material liability triggered indemnification obligations significant enter agreements obligate us make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount see note 2 detail regarding p4 healthcare contingent consideration arrangement 12 financial instruments utilize derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk use derivative instruments trading speculative purposes majority derivative instruments designated hedging instruments also enter derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current fair value earnings end period interest rate risk management exposed impact interest rate changes objective manage impact interest rate changes cash flows market value borrowings utilize mix debt maturities along fixedrate variablerate debt manage changes interest rates addition enter interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency exchange risk management conduct business several major international currencies subject risks associated changing foreign exchange rates objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly enter various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management exposed changes price certain commodities objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations accordingly enter derivative contracts manage price risk associated forecasted purchases exposed counterparty credit risk derivative instruments accordingly established maintain strict counterparty credit guidelines enter derivative instruments major financial institutions investment grade better significant exposure one counterparty management believes risk loss remote event would material additionally require collateral agreements following table summarizes fair value assets liabilities related derivative financial instruments respective line items recorded consolidated balance sheets june 30 2011 2010 fair value hedges enter payfloating interest rate swaps hedge changes fair value fixedrate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense net consolidated statements earnings fiscal 2011 2010 entered payfloating interest rate swaps total notional values 2500 million 10 billion respectively fair value payfloating interest rate swaps included consolidated balance sheet june 30 2011 2010 following table summarizes interest rate swaps designated fair value hedges outstanding june 30 2011 2010 following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges fiscal 2011 2010 2009 ineffectiveness associated derivative instruments cash flow hedges enter derivative instruments hedge exposure changes cash flows attributable currency interest rate commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component comprehensive income “oci” reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately enter foreign currency contracts protect value anticipated foreign currency revenues expenses june 30 2011 2010 held contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar european euro mexican peso thai baht enter commodity contracts manage price risk associated forecasted purchases certain commodities used medical segment following table summarizes outstanding cash flow hedges june 30 2011 2010 following table summarizes accumulated gainloss included oci derivative instruments designated cash flow hedges june 30 2011 2010 following table summarizes gainloss reclassified accumulated oci earnings derivative instruments designated cash flow hedges fiscal 2011 2010 2009 amount ineffectiveness associated derivative instruments material economic nondesignated hedges foreign currency enter foreign currency contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period earnings gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense net end period fiscal 2010 received cash receipts cross currency swap settlement totaling 425 million proceeds classified cash provided operating activities consolidated statement cash flows commodity contracts fiscal 2011 entered swap contracts certain commodities mitigate price volatility materials purchase use manufacturing distribution businesses instruments qualify hedge accounting fair value changes well periodic settlements contracts recorded within incomeexpense net consolidated statements earnings following table summarizes economic nondesignated derivative instruments outstanding june 30 2011 2010 following table summarizes gainloss recognized earnings economic nondesignated derivative instruments fiscal 2011 2010 2009 fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable shortterm borrowings accrued liabilities june 30 2011 2010 approximate fair value due shortterm maturities cash balances invested accordance investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification following table summarizes estimated fair value longterm obligations shortterm borrowings compared respective carrying amounts june 30 2011 2010 fair value longterm obligations shortterm borrowings estimated based either quoted market prices similar issues inputs derived available market information following summary fair value gainloss derivative instruments based upon estimated amount would receive pay terminate contracts june 30 2011 2010 fair values based quoted market prices similar instruments see note 13 information regarding fair value measurements 13 fair value measurements fair value defined price would received upon selling asset price paid transfer liability measurement date focuses exit price principal advantageous market asset liability orderly transaction willing market participants threetier fair value hierarchy established basis considering assumptions inputs used valuation methodologies measuring fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values follows level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities recurring fair value measurements following table presents fair values assets liabilities measured recurring basis june 30 2011 following table presents fair values assets measured recurring basis june 30 2010 1 cash equivalents comprised highly liquid investments purchased maturity three months less carrying value cash equivalents approximates fair value due shortterm maturities 2 fair value foreign currency contracts commodity contracts interest rate swaps determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities observable level 2 inputs used determine present value expected future cash flows see note 12 information regarding fair value financial instruments 3 investments balance includes investments mutual funds used offset fluctuations deferred compensation liabilities mutual funds primarily comprised large cap domestic international equity securities fair value investments determined using quoted market prices 4 contingent consideration represents obligation incurred connection acquisition p4 healthcare fair value contingent consideration obligation determined based probabilityweighted income approach derived ebitda estimates probability assessments respect likelihood achieving various ebitda targets fair value measurement based significant inputs unobservable market thus represents level 3 measurement 166 million decrease contingent consideration liability reflects cash payment 102 million first measurement period changes estimate performance future measurement periods failure meet current expectations progress could increase probability achieving targets within measurement periods result material reduction fair value contingent consideration obligation see note 2 additional information regarding contingent consideration obligation related p4 healthcare acquisition 5 fair value investment carefusion common stock determined using quoted market price security 14 shareholders’ equity june 30 2011 2010 authorized capital shares consisted following 7500 million class common shares without par value 50 million class b common shares without par value 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2011 2010 repurchased 5000 million common shares aggregate share repurchase programs fiscal 2011 2010 2009 described funded repurchases available cash common shares repurchased held treasury used general corporate purposes fiscal 2011 november 3 2010 board directors approved new 7500 million share repurchase program expires november 30 2013 twelve months ended june 30 2011 repurchase common shares program three months ended september 30 2010 repurchased 75 million common shares aggregate cost approximately 2500 million completed authorized amount share repurchases available share repurchase program place september 30 2010 average price paid per common share common shares repurchased fiscal 2011 3322 fiscal 2010 fiscal 2010 repurchased 74 million common shares aggregate cost approximately 2500 million 198 million cash settled fiscal 2011 average price paid per common share common shares repurchased fiscal 2010 3385 fiscal 2009 repurchase common shares fiscal 2009 15 earnings per share basic eps computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method total number common shares issued less common shares held treasury used determine common shares outstanding following table reconciles number common shares used compute basic eps diluted eps fiscal 2011 2010 2009 following table presents number potentially dilutive securities antidilutive fiscal 2011 2010 2009 16 segment information operations principally managed products services basis comprised two reportable segments pharmaceutical medical factors determining reportable segments include manner management evaluates performance combined nature individual business activities results acquisitions kinray yong yu p4 healthcare included within pharmaceutical segment date acquisition see note 2 description acquisitions pharmaceutical segment distributes branded generic pharmaceutical overthecounter healthcare consumer products also operates nuclear pharmacies cyclotron facilities prepare deliver radiopharmaceuticals use nuclear imaging procedures hospitals clinics addition segment provides thirdparty logistics support services hospitals clinics providers franchises retail pharmacies medicine shoppe® medicap® brands provides pharmacy services hospitals healthcare facilities segment also distributes specialty pharmaceutical products provides services pharmaceutical manufacturers thirdparty payors healthcare service providers supporting marketing distribution payment specialty pharmaceutical products segment also provides pharmaceutical repackaging services helps pharmaceutical manufacturers services including distribution inventory management datareporting new product launch support contract chargeback administration maintains prime vendor relationships streamline purchasing process resulting greater efficiency lower costs customers yong yu business segment imports distributes pharmaceuticals healthcare products china medical segment distributes broad range medical surgical laboratory products hospitals surgery centers laboratories physician offices healthcare providers segment also develops manufactures sources medical surgical products include sterile nonsterile procedure kits singleuse surgical drapes gowns apparel exam surgical gloves fluid suction collection systems medical surgical products sold directly thirdparty distributors united states canada europe south america asiapacific region following table includes revenue reportable segment reconciling items necessary agree amounts reported consolidated financial statements 1 pharmaceutical segment’s revenue primarily derived distribution branded generic pharmaceutical overthecounter healthcare consumer products 2 medical segment’s revenue primarily derived manufacturing distribution medical surgical laboratory products medical procedure kits 3 corporate revenue consists elimination intersegment revenue evaluate segment performance based upon segment profit among measures segment profit segment revenue less segment cost products sold less segment distribution selling general administrative expense “sga” segment sga expenses include equity sharebased compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition restructuring employee severance acquisitionrelated costs impairments loss sale assets litigation recoveriescharges net certain investment spending allocated segments investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate investment spending within corporate 138 million 265 million fiscal 2011 2010 respectively see notes 2 3 4 10 respectively discussion acquisitionrelated costs restructuring employee severance impairments loss sale assets litigation recoveriescharges net addition spinoff costs included sga 96 million 108 million fiscal 2011 2010 respectively allocated segments accounting policies segments described note 1 following table includes segment profit reportable segment reconciling items necessary agree amounts reported consolidated financial statements following tables include depreciation amortization expense capital expenditures fiscal 2011 2010 2009 segment following table includes total assets june 30 2011 2010 2009 segment well reconciling items necessary total amounts reported consolidated financial statements following table presents revenue net property equipment geographic area 17 sharebased compensation savings plans sharebased compensation plans maintain stock incentive plans collectively “plans” benefit certain officers directors employees employee stock options granted plans fiscal 2008 fiscal 2011 generally vest equal annual installments three years exercisable periods seven years date grant price equal market price common shares underlying option date grant employee stock options granted plans fiscal 2007 generally vest equal annual installments four years exercisable periods seven years date grant price equal market price common shares underlying option date grant employee restricted shares restricted share units granted plans since fiscal 2007 generally vest equal installments three years entitle holders dividends cash dividend equivalents restricted shares restricted share units accrue dividends cash dividend equivalents payable upon vesting awards compensation expense recognized sharebased compensation awards net estimated forfeitures recognized using straightline method applicable service period classify sharebased compensation within sga expenses correspond line item majority cash compensation paid employees however described note 3 certain sharebased compensation incurred connection spinoff classified within restructuring employee severance following table provides total sharebased compensation expense continuing operations type award fiscal 2011 2010 2009 1 excludes sharebased compensation expense charged discontinued operations approximately 23 million net tax benefits 15 million fiscal 2010 2 sharebased compensation expense charged restructuring employee severance related spinoff approximately 99 million net tax benefits 57 million fiscal 2010 3 excludes sharebased compensation expense charged discontinued operations approximately 141 million net tax benefits 63 million fiscal 2009 4 sharebased compensation expense charged restructuring employee severance related spinoff approximately 49 million net tax benefits 26 million fiscal 2009 following table summarizes total tax benefit continuing operations related sharebased compensation fiscal 2011 2010 2009 stock options following summarizes stock option transactions plans june 30 2009 june 30 2011 1 stock options granted canceled forfeited activity fiscal 2010 included impact stock option exchange program adjustments outstanding stock options connection spinoff discussed 2 exercise prices related stock options adjusted connection spinoff dates august 31 2009 effective date adjustments following table provides data related stock option activity fiscal 2011 2010 2009 1 weightedaverage grant date fair value per stock option include impact stock option exchange program fair values stock options granted employees directors fiscal 2011 2010 2009 estimated date grant using lattice valuation model believe lattice model provides better estimates ability take account employee exercise patterns based changes stock price variables provides range input assumptions disclosed table riskfree rate based united states treasury yield curve time grant analyzed historical data estimate option exercise behaviors employee terminations used within lattice model fiscal 2011 2010 calculated separate option valuations two groups employees fiscal 2009 calculated separate option valuations three groups employees groups determined using similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified based option exercise behaviors expected volatilities based implied volatility traded options common shares historical volatility period time commensurate contractual term option grant 7 years following table provides range assumptions used options valued fiscal 2011 2010 2009 1 range assumptions used options fiscal 2010 include impact stock option exchange program restricted shares restricted share units fair value restricted shares restricted share units determined number shares granted grant date market price common shares following summarizes transactions related restricted shares restricted share units plans june 30 2009 june 30 2011 1 restricted shares restricted share units canceled forfeited activity fiscal 2010 included impact adjustments outstanding awards connection spinoff discussed 2 grant date fair values per share awards granted prior date spinoff adjusted reflect impact spinoff stock option exchange program may 6 2009 board directors authorized june 23 2009 shareholders approved program permitted certain current employees exchange certain outstanding stock options exercise prices substantially current market price common shares lesser number stock options fair value lower fair value “out money” options program completed july 17 2009 98 million outstanding eligible stock options exchanged 14 million new options exercise price 3127 new options new minimum vesting condition additional 12 months term new option longer three years grant date remaining term eligible stock option exchanged new options treated probabletoprobable modification accounting guidance sharebased compensation incur incremental expense associated modification adjustments stock incentive plans connection spinoff august 31 2009 adjusted sharebased compensation awards granted plans awards based common shares andor carefusion common stock applicable purposes vesting equity awards continued employment service us carefusion treated continued employment purposes carefusion’s equity awards see note 17 consolidated financial statements annual report form 10k fiscal 2010 explanation adjustments stock incentive plans treated modification accordance sharebased compensation accounting guidance resulted total incremental compensation cost 06 million following table summarizes sharebased compensation awards outstanding june 30 2011 employee savings plans substantially domestic nonunion employees eligible enrolled companysponsored contributory retirement savings plans include features section 401k internal revenue code 1986 amended provide matching profit sharing contributions us contributions plans determined board directors subject certain minimum requirements specified plans following table summarizes total expense employee retirement savings plans fiscal 2011 2010 2009 18 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2011 2010 sum quarters may equal yeartodate due rounding 1 fourth quarter fiscal 2010 recorded outofperiod increase income tax expense 147 million related state provisiontoreturn reconciliation 51 million pertained first three quarters fiscal 2010 96 million pertained fiscal 2009 amounts material individually aggregate current prior periods 19 subsequent events subsequent june 30 2011 august 12 2011 repurchased 67 million common shares aggregate cost approximately 3000 million repurchases pursuant 7500 million share repurchase program referenced note 14 average price paid per common share common shares repurchased july august 2011 4489 august 2011 terminated 6400 million notional amount payfloating interest rate swaps received net settlement proceeds 337 million swaps previously designated fair value hedges immediate impact statements earnings however fair value adjustment debt amortized life underlying debt reduction interest expense item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 2012 2011 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2012 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2012 2011 consolidated results operations cash flows three years period ended june 30 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states cardinal health inc subsidiaries internal control financial reporting june 30 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 22 2012 expressed unqualified opinion thereon cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc healthcare services company providing pharmaceutical medical products services help pharmacies hospitals surgery centers physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality references “we” “our” similar pronouns consolidated financial statements cardinal health inc majorityowned controlled subsidiaries unless context otherwise requires fiscal year ends june 30 references fiscal 2012 2011 2010 consolidated financial statements fiscal years ended june 30 2012 2011 2010 respectively basis presentation consolidated financial statements include accounts majorityowned controlled subsidiaries significant intercompany transactions amounts eliminated conform current year presentation certain prior year balances reclassified results businesses acquired disposed included consolidated financial statements effective date acquisition date disposal respectively reclassification announced august 4 2011 changed definition segment profit exclude amortization acquisitionrelated intangible assets revised prior period segment profit disclosures accordingly costs also reclassified sga expenses acquisitionrelated costs consolidated statements earnings comparative prior period information reclassified impact operating earnings net earnings see notes 2 6 information regarding acquisitionrelated costs note 15 information regarding segment profit use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires us make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation business combinations goodwill intangible asset impairment vendor reserves sharebased compensation income taxes actual amounts could ultimately differ estimated amounts spinoff carefusion corporation effective august 31 2009 separated clinical medical products businesses distribution shareholders 81 percent outstanding common stock carefusion retained remaining 41 million shares carefusion common stock “spinoff” fiscal 2011 2010 disposed 30 million 11 million shares carefusion common stock respectively party separation agreement various agreements relating separation determined significant continuing involvement operations carefusion accordingly operating results carefusion presented within discontinued operations periods presented relationship carefusion july 22 2009 entered separation agreement carefusion effect spinoff provide framework relationship carefusion spinoff addition august 31 2009 entered transition services agreement tax matters agreement accounts receivable factoring agreement carefusion among agreements including separation agreement provide allocation assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior spinoff govern certain relationships carefusion us spinoff transition services agreement fiscal 2012 2011 2010 recognized 3 million 65 million 99 million respectively transition service fee income tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior spinoff indemnification receivable 265 million 264 million june 30 2012 2011 respectively included longterm assets consolidated balance sheets accounts receivable factoring agreement purchased 460 million 606 million carefusion trade receivables fiscal 2011 2010 respectively accounts receivable factoring arrangement expired april 1 2011 cash equivalents consider liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed us distribution businesses presented net allowance doubtful accounts 126 million 134 million june 30 2012 2011 respectively account considered past due first day due date accordance contract terms generally ability charge customers service fees higher prices account considered past due continuously monitor past due accounts establish appropriate reserves cover potential losses based primarily historical collection rates credit worthiness customer write amounts deemed uncollectible established allowance doubtful accounts provide financing various customers financing arrangements range 90 days 10 years interest rates generally subject fluctuation interest income arrangements recognized earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 84 million current portion 33 million 90 million current portion 19 million june 30 2012 2011 respectively included assets current portion included prepaid expenses finance notes receivable reported net allowance doubtful accounts 16 million 15 million june 30 2012 2011 respectively estimate allowance financing receivables based historical collection rates credit worthiness customer concentrations credit risk maintain cash depository accounts major banks invest high quality shortterm liquid instruments investments made instruments issued highly rated institutions investments mature within three months incurred related losses trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting healthcare industry credit risk limited due supporting collateral diversity customer base including wide geographic dispersion perform ongoing credit evaluations customers’ financial conditions maintain reserves credit losses historically losses within expectations major customers following table summarizes customers individually account least 10 percent revenue corresponding percent gross trade receivables customers table serviced pharmaceutical segment pharmaceutical distribution contract express scripts inc expires september 30 2012 renewed connection combined pharmaceutical distribution contract awarded us following companys merger medco health solutions inc recognized approximately 90 billion revenue sales express scripts inc fiscal 2012 entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members novation llc premier purchasing partners lp two largest gpo member relationships terms revenue sales members two gpos collectively accounted 13 percent 14 percent 15 percent fiscal 2012 2011 2010 respectively trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories 69 percent 70 percent june 30 2012 2011 respectively valued lower cost using lifo method market inventories included within core pharmaceutical distribution facilities pharmaceutical segment “distribution facilities” primarily merchandise inventories believe average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation used average cost method inventory valuation inventory within distribution facilities value inventories would changed fiscal 2012 fiscal 2011 inventories valued lifo 72 million 8 million higher average cost value june 30 2012 2011 respectively record inventories excess replacement cost record changes lifo reserve fiscal 2012 2011 remaining inventory primarily stated lower cost using fifo method market inventories presented consolidated balance sheets net reserves excess obsolete inventory 37 million 40 million june 30 2012 2011 respectively reserve inventory obsolescence using estimates based historical experience sales trends specific categories inventory age onhand inventory cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts depreciation expense computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases use following range useful lives property equipment categories buildings improvements3 39 years machinery equipment3 20 years furniture fixtures3 7 years recorded depreciation expense 241 million 244 million 233 million fiscal 2012 2011 2010 respectively following table presents components property equipment june 30 2012 2011 repairs maintenance expenditures expensed incurred interest longterm projects capitalized using rate approximates weighted average interest rate longterm obligations 449 percent june 30 2012 amount capitalized interest immaterial fiscal years presented business combinations purchase price acquired business allocated assets acquired liabilities assumed based estimated fair values date acquisition including identifiable intangible assets excess purchase price estimated fair value net tangible identifiable intangible assets acquired recorded goodwill base fair values identifiable intangible assets detailed valuations require management make significant judgments estimates assumptions critical estimates assumptions include expected future cash flows trade names customer relationships identifiable intangible assets discount rates reflect risk factors associated future cash flows estimates useful lives acquisition involves contingent consideration recognize liability equal fair value contingent consideration obligation date acquisition estimate fair value contingent consideration obligation requires subjective assumptions made regarding future business results discount rates probabilities assigned various potential business result scenarios subsequent revisions assumptions could materially change estimate fair value contingent consideration obligations therefore could materially affect financial position results operations see note 2 additional information regarding acquisitions goodwill intangibles purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships trademarks patents noncompete agreements amortized useful lives goodwill impairment testing involves comparison estimated fair value reporting units respective carrying amount estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value second step performed determine amount impairment would recorded expense results operations application goodwill impairment testing involves judgment including identification reporting units estimating fair value reporting unit reporting unit defined operating segment one level operating segment also known component two operating segments reportable segments pharmaceutical medical operating segments comprised divisions components discrete financial information available components aggregated reporting units purposes goodwill impairment testing extent share similar economic characteristics reporting units pharmaceutical operating segment excluding nuclear pharmacy services division cardinal health china pharmaceutical division nuclear pharmacy services division cardinal health china pharmaceutical division medical operating segment fair value determined using market income costbased approaches determination estimated fair value reporting units based combination incomebased marketbased approaches marketbased approach determine fair value comparing reporting units similar businesses guideline companies whose securities actively traded public markets incomebased approach use discounted cash flow model cash flows anticipated several periods plus terminal value end time horizon discounted present value using appropriate rate return confirm fair value compare aggregate fair value reporting units market capitalization use alternate estimates assumptions changes industry peer groups could materially affect determination fair value reporting unit potentially result goodwill impairment performed annual impairment testing fiscal 2012 2011 2010 concluded impairments goodwill fair value reporting unit exceeded carrying value fiscal 2012 testing elected bypass optional qualitative assessment permitted amended accounting guidance adopted year see note 6 additional information regarding goodwill intangible assets income taxes account income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions operate deferred taxes provided unremitted earnings subsidiaries outside united states expected earnings permanently reinvested tax benefits uncertain tax positions recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 percent likely realized upon settlement see note 8 additional information regarding income taxes vendor reserves ordinary course business vendors may dispute deductions taken payments otherwise due assert billing disputes disputed transactions researched resolved based upon policy findings research performed given time outstanding items various stages research resolution determining appropriate reserves areas exposure vendors assess historical experience current outstanding claims established various levels reserves based type claim status review though transaction types relatively consistent periodically refine methodology updating reserve estimate percentages reflect actual historical experience ultimate outcome certain claims may different original estimate may require adjustment adjustments vendor reserves included cost products sold addition reserve balance fluctuate due variations outstanding claims period timing settlements specific vendor issues bankruptcies vendor reserves 55 million 41 million june 30 2012 2011 respectively excluding thirdparty returns see separate section note 1 description thirdparty returns vendor incentives fees services incentives received vendors relating purchase distribution inventory generally reported reduction cost products sold consolidated statements earnings consider fees incentives represent product discounts result amounts recorded reduction product cost recognized cost products sold upon sale related inventory accrued liabilities accrued liabilities represent various current obligations including certain accrued operating expenses taxes payable sharebased compensation sharebased compensation employees including grants stock options recognized consolidated statements earnings based grant date fair value awards fair value stock options determined using lattice valuation model compensation expense recognized sharebased awards net estimated forfeitures recognized ratably service period awards classify sharebased compensation expense within sga expenses correspond line item majority cash compensation paid employees however certain sharebased compensation incurred connection spinoff classified within restructuring employee severance see note 16 additional information regarding sharebased compensation dividends paid cash dividends per common share 086 078 070 fiscal 2012 2011 2010 respectively revenue recognition recognize revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured pharmaceutical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue deliveries directly shipped customer warehouses manufacturer whereby act intermediary ordering delivery products recorded gross accordance accounting standards addressing reporting revenue gross basis principal versus net basis agent revenue recorded gross basis since incur credit risk customer bear risk loss incomplete shipments receive separate fee commission transaction primary obligor revenue sales recognized title transfers customer obligation provide services related merchandise radiopharmaceutical revenue recognized upon delivery product customer business obligation provide services related merchandise medicine shoppe international inc medicap pharmacies incorporated earn franchise fees franchise fees represent monthly fees either fixed based upon franchisees’ sales recognized revenue earned medical segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise sales returns allowances revenue recorded net sales returns allowances recognize sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees condition suitable added back inventory resold full value returned vendors credit “merchantable product” product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded accrued estimated sales returns allowances time sale transaction sales returns allowances 18 billion 17 billion 15 billion fiscal 2012 2011 2010 respectively thirdparty returns since generally accept nonmerchantable product returns customers many customers return nonmerchantable pharmaceutical products vendors third parties since customers generally direct relationship vendors pass value returns us usually form accounts payable deduction turn pass value received less administrative fee customer certain instances pass estimated value return customer prior processing deduction vendors although believe satisfactory protections could subject claims customers vendors administration overall process deficient respect contractual terms vendors conflict contractual terms customers maintained reserves situations based nature historical experience resolution distribution service agreement vendor fees pharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendors’ inventory fees earned entitled payment recognize fees reduction carrying value inventory generated fees recognized reduction cost products sold statements earnings inventory sold shipping handling shipping handling costs included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs 360 million 326 million 294 million fiscal 2012 2011 2010 respectively revenue received shipping handling immaterial periods presented translation foreign currencies financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity accumulated comprehensive income utilizing periodend exchange rates revenues expenses foreign subsidiaries translated using average exchange rates year foreign currency translation gainslosses included accumulated comprehensive incomeloss 37 million 71 million june 30 2012 2011 respectively foreign currency transaction gains losses period included consolidated statements earnings incomeexpense net immaterial fiscal 2012 2011 2010 interest rate currency commodity risk derivative instruments recognized fair value balance sheets changes fair value recognized net earnings shareholders’ equity accumulated comprehensive income net tax contracts qualify hedge accounting treatment policy requires hedge contracts must effective reducing risk associated exposure hedged must designated hedge inception contract hedge effectiveness assessed periodically contract designated hedge designated ineffective adjusted fair value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred accumulated comprehensive income would recognized immediately earnings see note 11 additional information regarding derivative instruments including accounting treatment instruments designated fair value cash flow economic hedges earnings per common share basic earnings per common share “eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method total number common shares issued less common shares held treasury used determine common shares outstanding see note 14 additional information regarding eps recent financial accounting standards january 2010 financial accounting standards board “fasb” issued amended guidance regarding disclosure fair value measurements guidance improves transparency disclosures regarding use fair value measurements financial statements adopted guidance fiscal 2010 except certain disclosure requirements regarding gross changes level 3 measurements effective fiscal years beginning december 15 2010 adopted guidance first quarter fiscal 2012 adoption guidance impact financial position results operations may 2011 fasb issued amended accounting guidance related accounting disclosure requirements fair value measurements guidance clarifies application existing fair value measurement requirements expands disclosure requirements level 3 inputs adopted guidance third quarter fiscal 2012 adoption guidance impact financial position results operations june 2011 fasb issued amended accounting guidance related presentation comprehensive income guidance requires comprehensive income components net income components comprehensive income presented either single continuous statement comprehensive income two separate consecutive statements december 2011 fasb deferred effective date specific requirement present items reclassified accumulated comprehensive income net income alongside respective components net income comprehensive income provisions guidance effective us applied retrospectively beginning first quarter fiscal 2013 adoption guidance impact financial position results operations september 2011 fasb issued amended accounting guidance related testing goodwill impairment guidance permits company assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test company longer required calculate fair value reporting unit unless company determines based qualitative assessment likely estimated fair value less carrying amount adopted guidance fiscal 2012 fiscal 2012 annual impairment testing elected bypass optional qualitative assessment permitted amended accounting guidance adoption guidance impact financial position results operations december 2011 fasb issued amended accounting guidance related disclosures financial instruments related arrangements offset statements financial position companies required provide net offset amounts gross information notes financial statements relevant assets liabilities offset guidance effective us applied retrospectively first quarter fiscal 2014 adoption guidance impact financial position results operations july 2012 fasb issued amended accounting guidance related testing indefinitelived intangible assets impairment similar amended accounting guidance related goodwill impairment company longer required calculate fair value indefinitelived intangible asset unless company determines based qualitative assessment likely estimated fair value less carrying amount guidance effective us fiscal 2014 early adoption permitted adoption guidance impact financial position results operations 2 acquisitions completed several acquisitions since july 1 2009 including fiscal 2011 acquisitions described pro forma results operations results operations acquisitions since acquisition date separately disclosed effects significant enough consolidated financial statements individually aggregate kinray december 21 2010 completed acquisition privately held kinray 13 billion allcash transaction kinray wholesale pharmaceutical distribution company primarily serves retail independent pharmacies new york metropolitan area valuation acquired assets liabilities resulted goodwill 984 million identifiable intangible assets 133 million cardinal health china november 29 2010 completed acquisition cardinal health china 458 million including assumption 57 million debt cardinal health china healthcare distribution business headquartered shanghai china valuation acquired assets liabilities resulted goodwill 240 million identifiable intangible assets 56 million p4 healthcare july 15 2010 completed acquisition privately held healthcare solutions holding llc “p4 healthcare” 506 million cash certain contingent consideration valuation acquired assets liabilities resulted goodwill 368 million identifiable intangible assets 226 million accordance acquisition agreement amended former owners p4 healthcare right receive certain contingent payments based targeted ebitda contingent consideration limited 100 million earned four measurement periods ending fiscal 2014 measurement period specific targets payout amounts completion first measurement period fiscal 2011 paid 10 million accordance agreement result changes estimate performance future periods due large part loss revenue significant customer p4 healthcare legacy business occurred fiscal 2012 revised timing amount ebitda estimates made changes probability assumptions respect likelihood achieving ebitda targets changes coupled progress discussions former owners regarding early termination settlement contingent consideration obligation resulted 71 million decrease fair value obligation 4 million june 30 2012 early july 2012 reached final settlement payment remaining contingent consideration liability 4 million see note 12 explanation fair value measurement contingent consideration obligation acquisitionrelated costs classify costs incurred connection acquisitions acquisitionrelated costs consolidated statements earnings costs consist primarily transaction costs integration costs changes fair value contingent consideration obligations amortization acquisitionrelated intangible assets transaction costs incurred initial evaluation potential targeted acquisition primarily relate costs analyze negotiate consummate transaction well due diligence activities integration costs relate activities needed combine operations acquired enterprise operations record changes fair value contingent consideration obligations relating acquisitions income expense acquisitionrelated costs see note 6 additional information regarding amortization acquisitionrelated intangible assets note 12 additional information regarding changes fair value contingent consideration obligations 3 restructuring employee severance consider restructuring activities programs whereby fundamentally change operations closing consolidating certain manufacturing distribution facilities moving manufacturing product another location outsourcing production employee severance including rationalizing headcount significant changes personnel realigning operations including substantial realignment management structure business unit response changing market conditions following table summarizes restructuring employee severance costs fiscal 2012 2011 2010 1 employeerelated costs primarily consist termination benefits provided employees involuntarily terminated duplicate payroll costs transition periods 2 facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring delivery information technology infrastructure services 3 incurred restructuring expenses related spinoff 7 million 65 million fiscal 2011 2010 respectively following table summarizes activity related liabilities associated restructuring employee severance activities fiscal 2012 2011 2010 4 impairments loss disposal assets fiscal 2012 recorded charge 16 million write indefinite life intangible asset related p4 healthcare trade name asset within pharmaceutical segment rebranded p4 healthcare cardinal health specialty solutions name fiscal 2010 recognized 18 million impairment charge related writedown specialtyscripts business within pharmaceutical segment net expected fair value less costs sell see note 5 information regarding sale specialtyscripts 5 discontinued operations assets held sale discussed note 1 first quarter fiscal 2010 completed spinoff carefusion fourth quarter fiscal 2010 completed sale united kingdombased martindale injectable manufacturing business martindale within pharmaceutical segment 141 million resulting pretax gain 36 million assets liabilities businesses held sale june 30 2012 2011 cash flows discontinued operations presented separately consolidated statements cash flows results included discontinued operations fiscal 2012 2011 2010 summarized follows 1 primarily reflects subsequent changes certain estimates made time spinoff 2 reflects results martindale date sale results carefusion august 31 2009 date spinoff completed subsequent changes certain estimates made time spinoff third quarter fiscal 2010 completed sale specialtyscripts met criteria classification held sale financial statements results specialtyscripts reported within earnings continuing operations consolidated statements earnings date sale satisfy criteria classification discontinued operations 6 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill total segment fiscal 2012 2011 increase pharmaceutical segment fiscal 2011 primarily due acquisition kinray cardinal health china p4 healthcare goodwill recognized connection acquisitions primarily represents expected benefit synergies integrating businesses well existing workforce acquired entities see note 2 discussion acquisitions intangible assets intangible assets definite lives amortized useful lives range two twenty years following table summarizes intangible assets class june 30 2012 decrease indefinite life intangible assets fiscal 2012 primarily due writeoff p4 healthcare trade name see note 4 discussion writeoff following table summarizes intangible assets class june 30 2011 following table summarizes amortization fiscal 2012 2011 2010 estimated annual amortization intangible assets follows 77 million 67 million 51 million 43 million 35 million fiscal 2013 2017 7 longterm obligations shortterm borrowings following table summarizes longterm obligations shortterm borrowings june 30 2012 2011 maturities longterm obligations shortterm borrowings follows 476 million 1 million 526 million 21 million 792 million fiscal 2013 2017 1078 million thereafter longterm debt 1900 3200 400 4625 550 580 585 600 notes represent unsecured obligations 700 780 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary cardinal health inc guaranteed none obligations subject sinking fund allegiance obligations redeemable prior maturity interest paid pursuant terms obligations notes effectively subordinated liabilities subsidiaries including trade payables 117 billion may 2012 sold 250 million aggregate principal amount fixed rate notes due 2017 interest 1900 per year registered offering 1900 notes mature june 15 2017 may 2012 also sold 250 million aggregate principal amount fixed rate notes due 2022 interest 3200 per year registered offering 3200 notes mature june 15 2022 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness december 2010 sold 500 million aggregate principal amount fixed rate notes due 2020 interest 4625 per year “4625 notes” registered offering 4625 notes mature december 15 2020 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness 550 notes due 2013 600 notes due 2017 1900 notes due 2017 4625 notes due 2020 3200 notes due 2022 require us offer purchase notes 101 principal amount plus accrued unpaid interest defined change control specified ratings investment grade sp moody’s fitch september 24 2009 completed debt tender announced august 27 2009 aggregate purchase price including early tender premium excluding accrued interest fees expenses 11 billion connection transaction incurred pretax loss early extinguishment debt 40 million debt tender completed using portion 14 billion cash distributed us carefusion connection spinoff financing arrangements addition cash equivalents june 30 2012 2011 sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility expires may 2016 revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes also maintain 950 million committed receivables sales facility program expires november 2012 committed receivables sales facility program exists largely provide liquidity selling interests receivables outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2012 2011 also outstanding balance revolving credit facility june 30 2012 2011 except 44 million standby letters credit fiscal year revolving credit committed receivables sales facility programs require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2012 compliance financial covenants also maintain shortterm credit facilities unsecured line credit allowed borrowings 218 million 174 million june 30 2012 2011 respectively 183 million 110 million balance obligations june 30 2012 2011 respectively consisted primarily additional notes loans capital leases 8 income taxes earnings income taxes discontinued operations follows fiscal 2012 2011 2010 provision income taxes continuing operations consists following fiscal 2012 2011 2010 reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations follows fiscal 2012 2011 2010 june 30 2012 22 billion total undistributed earnings nonus subsidiaries 15 billion intended permanently reinvested nonus operations recorded charge 168 million fiscal 2010 reflect anticipated repatriation certain foreign earnings respect earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2012 2011 follows deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2012 2011 1 included prepaid expenses consolidated balance sheets 2 included assets consolidated balance sheets 3 included accrued liabilities consolidated balance sheets 4 included deferred income taxes liabilities consolidated balance sheets june 30 2012 gross federal state international loss credit carryforwards 37 million 523 million 135 million respectively tax effect aggregate deferred tax asset 120 million substantially carryforwards available least three years indefinite carryforward period approximately 74 million valuation allowance june 30 2012 applies certain federal state international loss carryforwards opinion likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense 654 million 747 million 731 million unrecognized tax benefits june 30 2012 2011 2010 respectively june 30 2012 2011 2010 balances include 337 million 332 million 311 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect effective tax rate include full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation beginning ending amounts unrecognized tax benefits fiscal 2012 2011 2010 follows recognize accrued interest penalties related unrecognized tax benefits income tax expense june 30 2012 2011 2010 209 million 267 million 233 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheet fiscal 2012 recognized 28 million benefit interest penalties income tax expense fiscal 2011 2010 recognized 36 million 35 million interest penalties income tax expense respectively file income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions subject audit taxing authorities fiscal 2003 current fiscal year irs closed audits fiscal 2001 2002 fiscal 2012 currently conducting audits fiscal 2003 2010 received proposed adjustments irs fiscal years 2003 2007 related transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition us irs proposed additional taxes 849 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement 592 million total amount disagree proposed adjustments contesting accounted unrecognized tax benefits related reasonably possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues primarily irs audits fiscal 2003 2005 expiration applicable statutes limitations estimate range possible change unrecognized tax benefits within next 12 months decrease approximately zero 275 million exclusive penalties interest 9 commitments contingent liabilities litigation commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2012 follows 83 million 64 million 48 million 35 million 25 million fiscal 2013 2017 45 million thereafter rental expense relating operating leases 86 million 79 million 80 million fiscal 2012 2011 2010 respectively sublease rental income material period presented legal proceedings become involved timetotime disputes litigation regulatory matters incidental business including governmental investigations enforcement actions personal injury claims employment matters commercial disputes intellectual property matters government contract compliance matters disputes regarding environmental cleanup costs litigation connection acquisitions divestitures matters arising normal conduct business intend vigorously defend litigation believe outcome pending litigation material adverse effect financial position results operations occasionally may suspect products manufacture market distribute meet product specifications published standards regulatory requirements circumstances investigate take appropriate corrective action actions lead product recalls costs repair replace affected products temporary interruptions product sales action regulators accrue contingencies related litigation regulatory matters accrue estimated loss contingency consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable developments resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals related disclosures adequate amount ultimate loss may differ estimates recognize income favorable outcome litigation receive associated cash assets recognize estimated loss contingencies litigation regulatory matters income favorable resolution litigation recoveriescharges net consolidated statements earnings february 3 2012 dea issued order show cause immediate suspension lakeland florida distribution centers registration distribute controlled substances order dea asserted failed maintain required controls diversion controlled substances filed complaint motion temporary restraining order us district court district columbia enjoin suspension lakeland facilitys registration court granted temporary restraining order restoring dea registration denied motion preliminary injunction february 29 2012 immediate suspension reinstated appealed decision us court appeals dc circuit may 14 2012 entered settlement agreement dea upon entering agreement withdrew appeal us district courts decision grant us preliminary injunction settlement agreement dea lakeland registration remain suspended may 15 2014 ii agreed enhance certain procedures designed detect prevent diversion controlled substances iii dea confirmed planning administrative actions facilities based conduct prior settlement agreement foreclose possibility us department justice seeking civil fines historical conduct covered settlement agreement regard responding civil subpoenas two local offices within dea us department justice related distribution controlled substances due early state matters possible reasonably estimate range possible loss june 26 2012 west virginia attorney general filed complaints fourteen pharmaceutical wholesale distributors including us circuit court boone county west virginia alleging among things distributors failed maintain effective controls guard diversion controlled substances west virginia failed report suspicious orders controlled substances accordance west virginia uniform controlled substances act negligent distributing controlled substances pharmacies serve individuals abuse controlled substances unjustly enriched conduct violated consumer credit protection laws created public nuisance violated state antitrust laws connection distribution controlled substances addition injunctive equitable relief attorney general seeking monetary damages creation courtsupervised fund financed defendants actions medical monitoring program focused prescription drug abuse motions filed remove cases circuit court boone county west virginia united states district court southern district west virginia matter recently commenced possible reasonably estimate range possible loss insurance antitrust litigation proceeds fiscal 2010 recognized 27 million income related insurance proceeds released escrow following resolution previously disclosed settled securities derivative litigation certain directors officers amount comprised 26 million received directors’ officers’ insurance policies recognized litigation recoveriescharges net 1 million accrued interest income recognized interest expense net fiscal 2010 recognized 41 million income resulting settlement class action antitrust claim class member amount recognized litigation recoveriescharges net consolidated statements earnings income taxes see note 8 discussion contingencies related income taxes 10 guarantees ordinary course business agree indemnify certain parties acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically individually aggregate made payments indemnification obligations material amounts certain circumstances believe existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition believe likelihood material liability triggered indemnification obligations significant enter agreements obligate us make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount see note 2 detail regarding p4 healthcare contingent consideration obligation 11 financial instruments utilize derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk use derivative instruments trading speculative purposes majority derivative instruments designated hedging instruments also enter derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current fair value earnings end period exposed counterparty credit risk derivative instruments accordingly established maintain strict counterparty credit guidelines enter derivative instruments major financial institutions investment grade better significant exposure one counterparty management believes risk loss remote additionally require collateral agreements interest rate risk management exposed impact interest rate changes objective manage impact interest rate changes cash flows market value borrowings utilize mix debt maturities along fixedrate variablerate debt manage changes interest rates addition enter interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency exchange risk management conduct business several major international currencies subject risks associated changing foreign exchange rates objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly enter various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management exposed changes price certain commodities objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations accordingly enter derivative contracts manage price risk associated forecasted purchases following table summarizes fair value assets liabilities related derivative financial instruments respective line items recorded consolidated balance sheets june 30 2012 2011 1 included prepaid expenses consolidated balance sheets 2 included deferred income taxes liabilities consolidated balance sheets 3 included accrued liabilities consolidated balance sheets fair value hedges enter payfloating interest rate swaps hedge changes fair value fixedrate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense net consolidated statements earnings fiscal 2012 2011 entered payfloating interest rate swaps total notional values 363 million 250 million respectively fair value payfloating interest rate swaps included consolidated balance sheets june 30 2012 2011 august 2011 terminated 640 million notional amount payfloating interest rate swaps received net settlement proceeds 34 million june 2012 206 million notional amount payfloating interest rate swaps matured following tables summarize interest rate swaps designated fair value hedges outstanding june 30 2012 2011 following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges fiscal 2012 2011 2010 1 included interest expense net consolidated statements earnings ineffectiveness associated derivative instruments cash flow hedges enter derivative instruments hedge exposure changes cash flows attributable currency interest rate commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component comprehensive income “oci” reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately enter foreign currency contracts protect value anticipated foreign currency revenues expenses june 30 2012 2011 held contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar european euro mexican peso thai baht japanese yen enter commodity contracts manage price risk associated forecasted purchases certain commodities used medical segment following tables summarize outstanding cash flow hedges june 30 2012 2011 following table summarizes accumulated gainloss included oci derivative instruments designated cash flow hedges june 30 2012 2011 following table summarizes gainloss reclassified accumulated oci earnings derivative instruments designated cash flow hedges fiscal 2012 2011 2010 1 included interest expense net consolidated statements earnings 2 included revenue consolidated statements earnings 3 included cost products sold consolidated statements earnings 4 included sga expenses consolidated statements earnings amount ineffectiveness associated derivative instruments material economic nondesignated hedges enter foreign currency contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period earnings gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense net end period fiscal 2010 received cash receipts cross currency swap settlement totaling 43 million proceeds classified cash provided operating activities consolidated statement cash flows fiscal 2011 entered swap contracts certain commodities mitigate price volatility materials purchase use manufacturing distribution businesses instruments qualify hedge accounting fair value changes well periodic settlements contracts recorded within incomeexpense net consolidated statements earnings following tables summarize economic nondesignated derivative instruments outstanding june 30 2012 2011 following table summarizes gainloss recognized earnings economic nondesignated derivative instruments fiscal 2012 2011 2010 1 included income net consolidated statements earnings fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable shortterm borrowings accrued liabilities june 30 2012 2011 approximate fair value due shortterm maturities cash balances invested accordance investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification investments fixed income corporate debt securities classified heldtomaturity intent ability hold investments maturity investments held amortized cost approximates fair value fair value estimated based either quoted market prices similar issues inputs derived available market information represents level 2 measurement current portion 72 million 93 million june 30 2012 2011 respectively included within prepaid expenses consolidated balance sheets longterm portion 49 million june 30 2011 included within assets consolidated balance sheets investments currently hold vary maturity date ranging one six months pay interest semiannually following table summarizes estimated fair value longterm obligations shortterm borrowings compared respective carrying amounts june 30 2012 2011 fair value longterm obligations shortterm borrowings estimated based either quoted market prices similar issues inputs derived available market information represents level 2 measurement following summary fair value gainloss derivative instruments based upon estimated amount would receive pay terminate contracts june 30 2012 2011 fair values based quoted market prices similar instruments see note 12 information regarding fair value measurements 12 fair value measurements fair value defined price would received upon selling asset price paid transfer liability measurement date focuses exit price principal advantageous market asset liability orderly transaction willing market participants threetier fair value hierarchy established basis considering assumptions inputs used valuation methodologies measuring fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values follows level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities recurring fair value measurements following table presents fair values assets liabilities measured recurring basis june 30 2012 following table presents fair values assets liabilities measured recurring basis june 30 2011 1 cash equivalents comprised highly liquid investments purchased maturity three months less carrying value cash equivalents approximates fair value due shortterm maturities 2 fair value foreign currency contracts commodity contracts interest rate swaps determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities observable level 2 inputs used determine present value expected future cash flows 3 investments balance includes investments mutual funds used offset fluctuations deferred compensation liabilities mutual funds primarily invest equity securities companies large market capitalization high quality fixed income debt securities fair value investments determined using quoted market prices 4 contingent consideration obligation incurred connection acquisition p4 healthcare see note 2 additional information regarding contingent consideration obligation related p4 healthcare acquisition including explanation reduction estimated fair value fiscal 2012 fair value contingent consideration obligation determined based probabilityweighted income approach derived ebitda estimates probability assessments respect likelihood achieving various ebitda targets fair value measurement based significant inputs unobservable market thus represents level 3 measurement reporting date revalued contingent consideration obligation estimated fair value changes fair value contingent consideration obligation resulted changes terms contingent payments changes discount periods rates changes timing amount ebitda estimates changes probability assumptions respect timing likelihood achieving ebitda targets result changes estimate performance future periods due large part loss revenue significant customer p4 healthcare legacy business fiscal 2012 revised timing amount ebitda estimates made changes probability assumptions respect likelihood achieving ebitda targets following table presents reconciliation liabilities measured fair value recurring basis using unobservable inputs level 3 1 reflects changes estimate performance future measurement periods offset implied interest period amount included acquisitionrelated costs consolidated statements earnings 13 shareholders equity june 30 2012 2011 authorized capital shares consisted following 750 million class common shares without par value 5 million class b common shares without par value 500 thousand nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2012 2011 repurchased 950 million common shares aggregate share repurchase programs fiscal 2012 2011 2010 described funded repurchases available cash common shares repurchased held treasury used general corporate purposes fiscal 2012 fiscal 2012 repurchased 103 million common shares aggregate cost 450 million average price paid per common share common shares repurchased fiscal 2012 4364 fiscal 2011 three months ended september 30 2010 repurchased 75 million common shares aggregate cost 250 million average price paid per common share common shares repurchased fiscal 2011 3322 fiscal 2010 fiscal 2010 repurchased 74 million common shares aggregate cost 250 million 20 million cash settled fiscal 2011 average price paid per common share common shares repurchased fiscal 2010 3385 14 earnings per share following table reconciles number common shares used compute basic eps diluted eps fiscal 2012 2011 2010 potentially dilutive employee stock options antidilutive fiscal 2012 2011 2010 approximately 10 million 11 million 19 million respectively 15 segment information operations principally managed products services basis comprised two operating segments reportable segments pharmaceutical medical factors determining reportable segments include manner management evaluates performance combined nature individual business activities accounting policies segments described note 1 effective first quarter fiscal 2012 began reporting operating results certain operations previously reported within pharmaceutical segment including portions cardinal health china cardinal health puerto rico subsidiaries within medical segment better align reported results nature services provided prior period financial results adjusted change reporting significant previously reported segment results pharmaceutical segment distributes branded generic pharmaceutical specialty pharmaceutical overthecounter healthcare consumer products also operates nuclear pharmacies cyclotron facilities prepare deliver radiopharmaceuticals use nuclear imaging procedures hospitals clinics addition segment franchises retail pharmacies provides pharmacy services hospitals healthcare facilities cardinal health china business segment imports distributes pharmaceuticals overthecounter consumer products well provides services china medical segment develops manufactures sources distributes medical surgical laboratory products medical surgical products sold directly thirdparty distributors united states canada europe south america china parts asiapacific region following table includes revenue reportable segment reconciling items necessary agree amounts reported consolidated financial statements 1 corporate revenue consists elimination intersegment revenue evaluate segment performance based upon segment profit among measures segment profit segment revenue less segment cost products sold less segment sga expense segment sga expenses include equity sharebased compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level restructuring employee severance acquisitionrelated costs impairments loss disposal assets litigation recoveriescharges net certain investment spending allocated segments see notes 2 3 4 9 respectively discussion acquisitionrelated costs restructuring employee severance impairments loss disposal assets litigation recoveriescharges net note 1 discussion reclassification amortization acquisitionrelated intangible assets investment spending generally includes first year spend certain projects require incremental strategic investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate investment spending within corporate 21 million 14 million 26 million fiscal 2012 2011 2010 respectively spinoff costs included sga expenses 2 million 10 million 11 million fiscal 2012 2011 2010 respectively allocated segments following table includes segment profit reportable segment reconciling items necessary agree amounts reported consolidated financial statements following tables include depreciation amortization capital expenditures fiscal 2012 2011 2010 segment following table includes total assets june 30 2012 2011 2010 segment well reconciling items necessary total amounts reported consolidated financial statements following tables present revenue net property equipment fiscal 2012 2011 2010 geographic area 16 sharebased compensation savings plans sharebased compensation plans maintain stock incentive plans collectively “plans” benefit certain officers directors employees june 30 2012 42 million shares remain available future issuances plans amount includes 33 million shares available cardinal health inc 2011 longterm incentive plan “2011 ltip” 1 million shares available cardinal health inc 2007 nonemployee directors equity incentive plan 8 million shares available employee stock purchase plans indefinitely suspended may 2009 number shares authorized issuance 2011 ltip increase shares issued outstanding equity awards 2011 ltip contains fungible share counting provisions stock options counted plan one share every share issued awards stock options counted plan two onehalf shares every share issued means 13 million shares could issued awards stock options 33 million shares could issued stock options following table provides total sharebased compensation expense continuing operations type award fiscal 2012 2011 2010 1 excludes sharebased compensation expense charged discontinued operations approximately 2 million net tax fiscal 2010 sharebased compensation expense charged restructuring employee severance related spinoff approximately 10 million net tax fiscal 2010 total tax benefit continuing operations related sharebased compensation 31 million 29 million 36 million fiscal 2012 2011 2010 respectively stock options employee stock options granted plans generally vest equal annual installments three years exercisable periods ranging seven ten years date grant employee stock options exercisable price equal market value common shares underlying option date grant following summarizes stock option transactions plans june 30 2010 june 30 2012 following table provides data related stock option activity fiscal 2012 2011 2010 fair values stock options granted employees directors fiscal 2012 2011 2010 estimated date grant using lattice valuation model believe lattice model provides reasonable estimates ability take account individual exercise patterns based changes stock price variables provides range input assumptions disclosed table riskfree rate based united states treasury yield curve time grant analyzed historical data estimate option exercise behaviors employee terminations used within lattice model expected life options granted calculated option valuation model represents length time years options granted expected outstanding expected volatilities based implied volatility traded options common shares historical volatility period time commensurate contractual term option grant ten years following table provides range assumptions used options valued fiscal 2012 2011 2010 restricted shares restricted share units restricted shares restricted share units granted plans generally vest equal installments three years fair value determined grant date market price common shares restricted shares restricted share units accrue dividends cash dividend equivalents payable upon vesting awards following table summarizes transactions related restricted shares restricted share units plans june 30 2010 june 30 2012 following table provides data related restricted share restricted share unit activity fiscal 2012 2011 2010 performance share units beginning fiscal 2012 performance share units granted plans represent common shares potentially issuable future performance share units generally vest twoyear threeyear performance periods based achievement specific performance goals based extent targets achieved vested shares may range 0 percent 200 percent target award amount fair value performance share units determined grant date market price common shares compensation expense associated nonvested performance share units dependent periodic assessment probability targets achieved estimate number shares ultimately issued performance share units accrue cash dividend equivalents payable upon vesting awards following table summarizes information related performance share units plans based target award amounts june 30 2011 june 30 2012 following table provides data related performance share unit activity fiscal 2012 2011 2010 adjustments stock incentive plans connection spinoff august 31 2009 adjusted sharebased compensation awards granted plans awards based common shares andor carefusion common stock applicable purposes vesting equity awards continued employment service us carefusion treated continued employment purposes carefusion’s equity awards adjustments stock incentive plans treated modification accordance sharebased compensation accounting guidance resulted total incremental compensation cost 1 million following table summarizes stock options outstanding june 30 2012 employee savings plans substantially domestic nonunion employees eligible enrolled companysponsored contributory retirement savings plans include features section 401k internal revenue code 1986 amended provide matching profit sharing contributions us contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement savings plans 53 million 70 million 84 million fiscal 2012 2011 2010 respectively 17 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2012 2011 sum quarters may equal yeartodate due rounding 18 subsequent events august 8 2012 board directors approved new 750 million share repurchase program expires august 31 2015 canceled share repurchase program expire november 30 2013 item 9item 8 financial statements supplementary data cardinal health inc subsidiaries report independent registered public accounting firm board directors shareholders cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 2013 2012 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended june 30 2013 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2013 2012 consolidated results operations cash flows three years period ended june 30 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states cardinal health inc subsidiaries internal control financial reporting june 30 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission report dated august 20 2013 expressed unqualified opinion thereon cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc healthcare services company providing pharmaceutical medical products services help pharmacies hospitals ambulatory surgery centers clinical laboratories physician offices healthcare providers focus patient care reducing costs enhancing efficiency improving quality cardinal health inc also provides medical products patients home references “we” “our” similar pronouns consolidated financial statements cardinal health inc majorityowned controlled subsidiaries unless context otherwise requires fiscal year ends june 30 references fiscal 2013 2012 2011 consolidated financial statements fiscal years ended june 30 2013 2012 2011 respectively basis presentation consolidated financial statements include accounts majorityowned controlled subsidiaries significant intercompany transactions amounts eliminated conform current year presentation certain prior year disclosure amounts reclassified results businesses acquired disposed included consolidated financial statements effective date acquisition date disposal respectively use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires us make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation business combinations goodwill intangible asset impairment vendor reserves income taxes sharebased compensation actual amounts could ultimately differ estimated amounts carefusion spinoff effective august 31 2009 separated clinical medical products businesses distribution shareholders 81 percent outstanding common stock carefusion corporation carefusion retained remaining shares carefusion common stock carefusion spinoff fiscal 2010 2011 disposed remaining shares carefusion common stock party separation agreement various agreements relating separation including tax matters agreement transition services agreement accounts receivable factoring agreement tax matters agreement carefusion obligated indemnify us certain tax exposures transaction taxes prior carefusion spinoff indemnification receivable 186 million 265 million june 30 2013 2012 respectively included assets consolidated balance sheets transition services agreement fiscal 2013 2012 2011 recognized 3 million 3 million 65 million respectively transition service fee income accounts receivable factoring agreement purchased 460 million carefusion trade receivables fiscal 2011 accounts receivable factoring arrangement expired april 1 2011 cash equivalents consider liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed us distribution businesses presented net allowance doubtful accounts 134 million 126 million june 30 2013 2012 respectively account considered past due first day due date accordance contract terms generally ability charge customers service fees higher prices account considered past due continuously monitor past due accounts establish appropriate reserves cover potential losses based primarily historical collection rates credit worthiness customer write amounts deemed uncollectible established allowance doubtful accounts provide financing various customers financing arrangements range 120 days 7 years interest rates generally subject fluctuation interest income arrangements recognized earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 161 million current portion 29 million 163 million current portion 33 million june 30 2013 2012 respectively included assets current portion included prepaid expenses finance notes receivable reported net allowance doubtful accounts 17 million 16 million june 30 2013 2012 respectively estimate allowance financing receivables based historical collection rates credit worthiness customer concentrations credit risk maintain cash depository accounts major banks invest high quality shortterm liquid instruments investments made instruments issued highly rated institutions investments mature within three months historically incurred related losses trade receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting healthcare industry credit risk limited due supporting collateral diversity customer base including wide geographic dispersion perform ongoing credit evaluations customers’ financial conditions maintain reserves credit losses historically losses within expectations cardinal health inc subsidiaries notes consolidated financial statements continued major customers following table summarizes customers individually account least 10 percent revenue corresponding percent gross trade receivables customers table primarily serviced pharmaceutical segment march 19 2013 announced pharmaceutical distribution contract walgreen co scheduled expire end august 2013 renewed entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members novation llc premier purchasing partners lp two largest gpo member relationships terms revenue sales members two gpos collectively accounted 13 percent 13 percent 14 percent revenue fiscal 2013 2012 2011 respectively trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories 65 percent 69 percent june 30 2013 2012 respectively valued lower cost using lastin firstout lifo method market inventories included within core pharmaceutical distribution facilities pharmaceutical segment “distribution facilities” primarily merchandise inventories believe average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation used average cost method inventory valuation inventory within distribution facilities value inventories would changed fiscal 2013 2012 inventories valued lifo 97 million 72 million higher average cost value june 30 2013 2012 respectively record inventories excess replacement cost record changes lifo reserve fiscal 2013 2012 remaining inventory primarily stated lower cost using firstin firstout method market inventories presented consolidated balance sheets net reserves excess obsolete inventory 40 million 37 million june 30 2013 2012 respectively reserve inventory obsolescence using estimates based historical experience sales trends specific categories inventory age onhand inventory cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts result reductions anticipated future cash flows nuclear pharmacy services division discussed note 5 also performed recoverability testing longlived assets division consist primarily improvements machinery equipment based assessment performed determined carrying amounts longlived assets recoverable depreciation expense computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases generally use following range useful lives property equipment categories buildings improvements3 39 years machinery equipment3 20 years furniture fixtures3 7 years recorded depreciation expense 259 million 241 million 244 million fiscal 2013 2012 2011 respectively following table presents components property equipment net june 30 repairs maintenance expenditures expensed incurred interest longterm projects capitalized using rate approximates weightedaverage interest rate longterm obligations 378 percent june 30 2013 amount capitalized interest immaterial periods presented business combinations assets acquired liabilities assumed business combination including identifiable intangible assets based estimated fair values acquisition date excess purchase price estimated fair value net tangible identifiable intangible assets acquired recorded goodwill base fair values identifiable intangible assets detailed valuations require management make significant judgments estimates assumptions critical estimates assumptions include expected future cash flows customer relationships trade names identifiable intangible assets discount rates reflect risk factors associated future cash flows estimates useful lives acquisition involves contingent consideration recognize liability equal fair value contingent consideration obligation acquisition date estimate fair value contingent consideration obligation requires subjective assumptions made regarding future business results discount rates probabilities assigned various potential business result scenarios subsequent revisions assumptions could materially change estimate fair value contingent consideration obligations cardinal health inc subsidiaries notes consolidated financial statements continued therefore could materially affect financial position results operations see note 2 additional information regarding acquisitions goodwill intangible assets purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships trademarks patents noncompete agreements amortized useful lives goodwill impairment testing involves comparison estimated fair value reporting units respective carrying amount step may performed utilizing either qualitative quantitative assessment estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value second step performed determine amount impairment charge amount carrying amount goodwill exceeds estimated implied fair value goodwill estimate implied fair value goodwill excess estimated fair value reporting unit estimated fair value net tangible identifiable intangible assets manner use recognize goodwill business combination goodwill impairment testing involves judgment including identification reporting units estimation fair value reporting unit necessary estimation implied fair value goodwill reporting unit defined operating segment one level operating segment also known component two operating segments reportable segments pharmaceutical medical operating segments comprised divisions components discrete financial information available components aggregated reporting units purposes goodwill impairment testing extent share similar economic characteristics reporting units pharmaceutical operating segment excluding nuclear pharmacy services division cardinal health china pharmaceutical division nuclear pharmacy services division cardinal health china pharmaceutical division medical operating segment excluding assuramed division assuramed division fair value determined using market income costbased approaches determination estimated fair value reporting units based combination incomebased marketbased approaches incomebased approach use discounted cash flow model cash flows anticipated several future periods plus terminal value end time horizon discounted present value using appropriate riskadjusted rate return use internal forecasts estimate future cash flows include estimate longterm growth rates based recent views longterm outlook reporting unit actual results may differ materially used forecasts use discount rates commensurate risks uncertainty inherent respective reporting units internallydeveloped forecasts discount rates used reporting unit valuations ranged 9 12 percent marketbased approach determine fair value comparing reporting units similar businesses guideline companies whose securities actively traded public markets confirm fair value compare aggregate fair value reporting units total market capitalization estimating fair value reporting units requires use estimates significant judgments based number factors including actual operating results use alternate estimates assumptions changes industry peer groups could materially affect determination fair value reporting unit potentially result goodwill impairment performed annual impairment testing fiscal 2013 2012 2011 exception nuclear pharmacy services division concluded impairments goodwill estimated fair value reporting unit exceeded carrying value fiscal 2013 2012 testing elected bypass optional qualitative assessment discussed note 5 fourth quarter fiscal 2013 recognized 829 million 799 million net tax goodwill impairment charge related nuclear pharmacy services division included impairments loss disposal assets consolidated statements earnings review intangible assets finite lives impairment whenever events changes circumstances indicate related carrying amounts may recoverable determining whether impairment loss occurred requires comparison carrying amount sum undiscounted cash flows expected generated asset vendor reserves ordinary course business vendors may dispute deductions taken payments otherwise due assert billing disputes disputed transactions researched resolved based upon policy findings research performed given time outstanding items various stages research resolution determining appropriate reserves areas exposure vendors assess historical experience current outstanding claims established various levels reserves based type claim status review though transaction types relatively consistent periodically refine methodology updating reserve estimate percentages reflect actual historical experience ultimate outcome certain claims may different original estimate may require adjustment adjustments vendor reserves included cost products sold addition reserve balance fluctuate due variations outstanding claims periodtoperiod timing settlements specific vendor issues bankruptcies vendor reserves 66 million 75 million june 30 2013 2012 respectively excluding thirdparty returns see separate section note 1 description thirdparty returns vendor incentives fees services incentives received vendors relating purchase distribution inventory represent product discounts recorded reduction cost products sold consolidated statements earnings upon sale related inventory income taxes account income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions operate deferred taxes provided unremitted earnings cardinal health inc subsidiaries notes consolidated financial statements continued subsidiaries outside united states expected earnings permanently reinvested tax benefits uncertain tax positions recognized likely position sustained upon examination technical merits position including resolutions related appeals litigation processes amount recognized measured largest amount tax benefit greater 50 percent likely realized upon settlement see note 7 additional information regarding income taxes accrued liabilities accrued liabilities represent various current obligations including certain accrued operating expenses taxes payable sharebased compensation sharebased compensation employees recognized consolidated statements earnings based grant date fair value awards fair value stock options determined using lattice valuation model compensation expense recognized sharebased awards net estimated forfeitures recognized ratably service period awards generally classify sharebased compensation expense within distribution selling general administrative sga expenses correspond line item majority cash compensation paid employees see note 15 additional information regarding sharebased compensation dividends paid cash dividends per common share 1025 086 078 fiscal 2013 2012 2011 respectively revenue recognition recognize revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured pharmaceutical segment pharmaceutical segment recognizes distribution revenue title transfers customers obligation provide services related merchandise revenue deliveries directly shipped customer warehouses manufacturer whereby act intermediary ordering delivery products recorded gross accordance accounting standards addressing reporting revenue gross basis principal versus net basis agent revenue recorded gross basis since incur credit risk customer bear risk loss incomplete shipments receive separate fee commission transaction primary obligor revenue sales recognized title transfers customer obligation provide services related merchandise radiopharmaceutical revenue recognized upon delivery product customer obligation provide services related merchandise medical segment medical segment recognizes revenue title transfers customers obligation provide services related merchandise sales returns allowances revenue recorded net sales returns allowances customer return policies generally require product physically returned subject restocking fees condition suitable added back inventory resold full value returned vendors credit “merchantable product” product returns generally consistent throughout year typically specific particular product customer effective june 30 2013 updated policy accrue estimated sales returns allowances time sale based upon historical customer return trends margin rates processing costs prospective change material effect consolidated revenue cost products sold operating earnings june 30 2013 accrual estimated sales returns allowances 291 million impact reflected trade receivables net inventories net consolidated balance sheets prior change policy recognized sales returns reduction revenue cost products sold sales price cost respectively products returned amounts recorded revenue cost products sold prior accounting policy closely approximated would recorded accrued estimated sales returns allowances time sale transaction retrospective adoption new policy accrue estimated sales returns allowances would materially changed results operations financial position fiscal 2012 2011 sales returns allowances 23 billion 19 billion 17 billion fiscal 2013 2012 2011 respectively thirdparty returns since generally accept nonmerchantable product returns customers many customers return nonmerchantable pharmaceutical products vendors third parties since customers generally direct relationship vendors pass value returns us usually form accounts payable deduction turn pass value received less administrative fee customer certain instances pass estimated value return customer prior processing deduction vendors although believe satisfactory protections could subject claims customers vendors administration overall process deficient respect contractual terms vendors conflict contractual terms customers maintained reserves situations based nature historical experience resolution distribution service agreement vendor fees pharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendors’ inventory fees earned entitled payment recognize fees reduction carrying value inventory generated fees recognized reduction cost products sold consolidated statements earnings inventory sold shipping handling shipping handling costs primarily included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product cardinal health inc subsidiaries notes consolidated financial statements continued shipment end customer shipping handling costs 419 million 389 million 342 million fiscal 2013 2012 2011 respectively revenue received shipping handling immaterial periods presented restructuring employee severance consider restructuring activities programs whereby fundamentally change operations closing consolidating facilities moving manufacturing product another location production business process sourcing employee severance including rationalizing headcount significant changes personnel realigning operations including substantial realignment management structure business unit response changing market conditions see note 3 additional information regarding restructuring activities acquisitionrelated costs classify costs incurred connection acquisitions acquisitionrelated costs consolidated statements earnings costs consist primarily transaction costs integration costs changes fair value contingent consideration obligations amortization acquisitionrelated intangible assets transaction costs incurred initial evaluation potential acquisition primarily relate costs analyze negotiate consummate transaction well due diligence activities integration costs relate activities required combine operations acquired enterprise operations record changes fair value contingent consideration obligations relating acquisitions income expense acquisitionrelated costs see note 5 additional information regarding amortization acquisitionrelated intangible assets note 10 additional information regarding changes fair value contingent consideration obligations translation foreign currencies financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity accumulated comprehensive income aoci utilizing periodend exchange rates revenues expenses foreign subsidiaries translated using average exchange rates year foreign currency translation gainslosses included aoci june 30 2013 2012 presented note 12 foreign currency transaction gains losses period included consolidated statements earnings income net immaterial periods presented interest rate currency commodity risk derivative instruments recognized fair value consolidated balance sheets changes fair value recognized net earnings shareholders’ equity aoci net tax contracts qualify hedge accounting treatment policy requires hedge contracts must effective reducing risk associated exposure hedged must designated hedge inception contract hedge effectiveness assessed periodically contract designated hedge designated ineffective adjusted fair value recognized immediately net earnings fair value cash flow hedge ceases qualify hedge accounting treatment contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized immediately net earnings forecasted transaction longer considered probable occurring amounts previously deferred aoci would recognized immediately net earnings see note 11 additional information regarding derivative instruments including accounting treatment instruments designated fair value cash flow economic hedges earnings per common share basic earnings per share “eps” computed dividing net earnings numerator weightedaverage number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested nonvested stock options restricted shares restricted share units performance share units computed using treasury stock method total number common shares issued less common shares held treasury used determine common shares outstanding see note 13 additional information regarding eps recent financial accounting standards july 2013 financial accounting standards board fasb issued amended accounting guidance related presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists guidance requires entity present unrecognized tax benefit portion unrecognized tax benefit reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward unless certain conditions exists guidance effective us first quarter fiscal 2015 early adoption permitted expect adoption guidance impact financial position results operations march 2013 fasb issued amended accounting guidance related parent companys accounting cumulative translation adjustment upon derecognition certain subsidiaries group assets within foreign entity investment foreign entity amended guidance requires release cumulative translation adjustment net income upon complete substantially complete liquidation controlling interest subsidiary group assets within foreign entity also requires release pro rata portion cumulative translation adjustment net income case sale equity method investment foreign entity amendment effective us first quarter fiscal 2015 early adoption permitted expect adoption guidance impact financial position results operations february 2013 fasb issued amended accounting guidance related reclassifications aoci entity required present either parenthetically face statement net income presented notes significant amounts component reclassified aoci respective line items net income report changes aoci balances component amendment effective us first quarter fiscal 2014 early adoption permitted expect adoption guidance impact financial position results operations january 2013 fasb issued updated guidance limit scope balance sheet offsetting disclosures derivatives repurchase agreements securities lending transactions extent cardinal health inc subsidiaries notes consolidated financial statements continued offset financial statements subject enforceable master netting arrangement similar arrangement guidance effective us applied retrospectively first quarter fiscal 2014 expect adoption guidance impact financial position results operations july 2012 fasb issued amended accounting guidance related testing indefinitelived intangible assets impairment guidance company longer required calculate fair value indefinitelived intangible asset unless company determines based qualitative assessment likely estimated fair value less carrying amount guidance effective us fiscal 2014 early adoption permitted adoption guidance impact financial position results operations june 2011 fasb issued amended accounting guidance related presentation comprehensive income guidance requires comprehensive income components net income components comprehensive income oci presented either single continuous statement comprehensive income two separate consecutive statements adopted amended guidance retrospective basis first quarter fiscal 2013 elected report comprehensive income components separate statement comprehensive income adoption guidance impact financial position results operations 2 acquisitions completed several acquisitions since july 1 2010 including acquisitions described pro forma results operations results operations acquisitions since acquisition date separately disclosed effects significant enough compared consolidated financial statements individually aggregate assuramed march 18 2013 completed acquisition assuramed inc assuramed 207 billion net cash acquired allcash transaction funded acquisition issuance 13 billion fixed rate notes discussed note 6 cash hand acquisition assuramed provider medical supplies homecare providers patients home expands ability serve patient base transaction costs associated purchase assuramed 20 million included acquisitionrelated costs consolidated statements earnings assessment fair value preliminary based information available time consolidated financial statements prepared valuation identifiable intangible assets utilizes significant unobservable inputs thus represents level 3 nonrecurring fair value measurement defined note 10 estimated fair value identifiable intangible assets determined using incomebased approach includes market participant expectations cash flows asset could generate remaining useful life discounted back present value using appropriate rate return discount rate used arrive present value identifiable intangible assets 95 percent reflect internal rate return uncertainty cash flow projections following table summarizes estimated fair values assets acquired liabilities assumed acquisition date assuramed kinray december 21 2010 completed acquisition privatelyheld kinray inc 13 billion allcash transaction valuation acquired assets liabilities resulted goodwill 984 million identifiable intangible assets 133 million cardinal health china november 29 2010 completed acquisition cardinal health china 458 million including assumption 57 million debt valuation acquired assets liabilities resulted goodwill 240 million identifiable intangible assets 56 million p4 healthcare july 15 2010 completed acquisition privatelyheld healthcare solutions holding llc “p4 healthcare” 506 million cash certain contingent consideration valuation acquired assets liabilities resulted goodwill 368 million identifiable intangible assets 226 million accordance acquisition agreement amended former owners p4 healthcare right receive certain contingent payments based targeted earnings interest taxes depreciation amortization ebitda contingent consideration limited 100 million fiscal 2011 paid 10 million accordance agreement fiscal 2012 recorded 71 million decrease fair value obligation fiscal 2013 terminated settled remaining contingent consideration obligation 4 million see note 10 explanation fair value measurement contingent consideration obligation cardinal health inc subsidiaries notes consolidated financial statements continued 3 restructuring employee severance following table summarizes restructuring employee severance costs relating restructuring activities 1 employeerelated costs primarily consist termination benefits provided employees involuntarily terminated duplicate payroll costs transition periods 2 facility exit costs primarily consist lease termination costs accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring delivery information technology infrastructure services 3 includes 30 million employeerelated costs 10 million facility exit costs related restructuring within medical segment described january 30 2013 announced restructuring plan within medical segment restructuring plan moving production procedure kits facility waukegan illinois facilities selling property consolidating office space waukegan illinois addition reorganized medical segment plan sell sterilization processes el paso texas time estimate total costs associated restructuring plan approximately 79 million pretax basis 51 million recognized fiscal 2013 including employeerelated costs facility exit costs discussed well gamma sterilization assets writedown discussed note 4 estimated 28 million remaining costs recognized end fiscal 2014 estimate approximately 3 million employeerelated costs 11 million facility exit costs 14 million expected loss disposal property waukegan illinois described evaluated property determined june 30 2013 meet criteria classification held sale recognized 11 million employeerelated costs related restructuring plan within nuclear pharmacy services division fourth quarter fiscal 2013 following table summarizes activity related liabilities associated restructuring employee severance 4 impairments loss disposal assets fourth quarter fiscal 2013 recognized 829 million 799 million net tax goodwill impairment charge related nuclear pharmacy services division discussed note 5 connection medical segment restructuring plan discussed note 3 fiscal 2013 recognized 11 million loss write gamma sterilization assets el paso texas estimated fair value less costs sell assets met criteria classification held sale fair value gamma sterilization assets estimated using expected selling price unobservable inputs thus fair value represents level 3 nonrecurring fair value measurement also fiscal 2013 recorded 8 million writeoff commercial software development within pharmaceutical segment connection decision discontinue project fiscal 2012 recorded charge 16 million write indefinitelife intangible asset related p4 healthcare trade name asset within pharmaceutical segment rebranded p4 healthcare cardinal health specialty solutions name 5 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill segment total increase medical segment goodwill fiscal 2013 primarily due assuramed acquisition goodwill recognized connection acquisition primarily represents expected benefits synergies integrating business existing workforce acquired entity expected growth new customers longterm brand value see note 2 discussion acquisition decrease pharmaceutical segment goodwill fiscal 2013 primarily due 829 million 799 million net tax noncash goodwill impairment charge related nuclear pharmacy services division included impairments loss disposal assets consolidated statements earnings impairment charge impact liquidity cash flows operations compliance debt covenants conjunction preparation consolidated financial statements fiscal 2013 recently completed annual goodwill impairment test perform annually fourth quarter previously disclosed quarterly reports form 10q cardinal health inc subsidiaries notes consolidated financial statements continued quarters ended december 31 2012 march 31 2013 nuclear pharmacy services division experienced significant softness lowenergy diagnostics market performed interim goodwill impairment testing reporting unit three months ended december 31 2012 determined impairment fair value reporting unit estimated excess carrying amount second half fiscal 2013 experienced sustained volume declines price erosion core lowenergy products provided division addition experienced reduced sales existing highenergy diagnostic products slowerthanexpected adoption new highenergy diagnostic products recent reimbursement developments may adversely impact future growth products using information adjusted outlook longterm business plans division annual budgeting process recently concluded update resulted significant reductions anticipated future cash flows estimated fair value reporting unit using combination incomebased approach using discount rate 10 percent marketbased approach fair value reporting unit estimated carrying amount therefore indicated impairment second step impairment test resulted impairment entire 829 million carrying amount goodwill reporting unit fair value estimates utilize significant unobservable inputs thus represent level 3 fair value measurements intangible assets intangible assets amortized periods ranging one twenty years following tables summarize intangible assets class june 30 total amortization intangible assets 121 million 79 million 68 million fiscal 2013 2012 2011 respectively estimated annual amortization intangible assets follows 180 million 150 million 136 million 124 million 90 million fiscal 2014 2018 increase definitelife intangible assets amortization fiscal 2013 primarily due acquisition assuramed see note 2 discussion acquisition 6 longterm obligations shortterm borrowings following table summarizes longterm obligations shortterm borrowings june 30 maturities longterm obligations shortterm borrowings follows 168 million 525 million 21 million 788 million 556 million fiscal 2014 2018 1796 million thereafter longterm debt 17 19 32 40 46 4625 58 585 60 notes represent unsecured obligations cardinal health inc 70 78 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary cardinal health inc guaranteed none obligations subject sinking fund allegiance obligations redeemable prior maturity interest paid pursuant terms obligations notes effectively subordinated liabilities subsidiaries including trade payables 123 billion june 2013 used cash hand repay 300 million 55 notes due june 15 2013 february 2013 sold registered offering 400 million aggregate principal amount 17 notes mature march 15 2018 550 million aggregate principal amount 32 notes mature march 15 2023 350 million aggregate principal amount 46 notes mature march 15 2043 notes unsecured obligations rank equally right payment existing future unsecured unsubordinated indebtedness used cardinal health inc subsidiaries notes consolidated financial statements continued proceeds fund portion purchase price assuramed discussed note 2 connection agreement acquire assuramed february 13 2013 obtained commitment letter certain financial institutions 13 billion unsecured bridge term loan facility could used complete acquisition incurred fees 5 million related facility included interest expense net consolidated statements earnings amounts drawn facility upon receipt net proceeds notes offering february 22 2013 terminated commitment letter may 2012 sold registered offering 250 million aggregate principal amount 19 notes mature june 15 2017 250 million aggregate principal amount 32 notes mature june 15 2022 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness december 2010 sold registered offering 500 million aggregate principal amount 4625 notes mature december 15 2020 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness 60 notes due 2017 19 notes due 2017 17 notes due 2018 4625 notes due 2020 32 notes due 2022 32 notes due 2023 46 notes due 2043 require us offer purchase notes 101 principal amount plus accrued unpaid interest defined change control specified ratings investment grade standard poors ratings services moodys investors service inc fitch ratings financing arrangements addition cash equivalents june 30 2013 2012 sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes june 4 2013 extended term revolving credit facility june 4 2018 november 6 2012 renewed 950 million committed receivables sales facility program cardinal health funding llc chf november 6 2014 chf organized sole purpose buying receivables selling undivided interests receivables thirdparty purchasers although consolidated accordance gaap chf separate legal entity cardinal health inc subsidiary sells receivables chf designed special purpose bankruptcyremote entity whose assets available solely satisfy claims creditors outstanding borrowings commercial paper program outstanding balance committed receivables sales facility program june 30 2013 2012 also outstanding balance revolving credit facility june 30 2013 2012 except 43 million 44 million respectively standby letters credit revolving credit facility committed receivables sales facility program require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2013 compliance financial covenants also maintain shortterm credit facilities unsecured line credit allowed borrowings 304 million 218 million june 30 2013 2012 respectively 190 million 183 million balance obligations june 30 2013 2012 respectively consisted primarily additional notes loans capital leases 7 income taxes earnings income taxes discontinued operations provision income taxes continuing operations consists following table presents reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations fiscal 2013 effective tax rate unfavorably impacted 332 percentage points 295 million due nondeductibility substantially goodwill impairment partially offset favorable impact revaluation deferred tax liability related interest unrepatriated foreign earnings result agreement tax authorities 64 million 72 percentage points fourth quarter fiscal 2013 recorded outofperiod increase income tax expense 14 million generally less 1 million pertained first three quarters fiscal 2013 quarters fiscal 2012 2008 related uncertain tax benefits decrease retained earnings 15 million related cardinal health inc subsidiaries notes consolidated financial statements continued adoption accounting guidance uncertain tax benefits 2008 amounts material individually aggregate current prior periods june 30 2013 18 billion undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes following table presents components deferred income tax assets liabilities june 30 deferred income tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheets june 30 1 included prepaid expenses consolidated balance sheets 2 included assets consolidated balance sheets 3 included accrued liabilities consolidated balance sheets 4 included deferred income taxes liabilities consolidated balance sheets june 30 2013 gross federal state international loss credit carryforwards 146 million 693 million 114 million respectively tax effect aggregate deferred tax asset 158 million substantially carryforwards available least three years approximately 76 million valuation allowance june 30 2013 applies certain federal state international loss carryforwards opinion likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense 650 million 654 million 747 million unrecognized tax benefits june 30 2013 2012 2011 respectively june 30 2013 2012 2011 balances include 371 million 337 million 332 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect effective tax rate include full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets following table presents reconciliation beginning ending amounts unrecognized tax benefits reasonably possible could change amount unrecognized tax benefits within next 12 months due activities internal revenue service irs taxing authorities including proposed assessments additional tax possible settlement audit issues primarily irs audit settlements various fiscal years reassessment existing unrecognized tax benefits expiration applicable statutes limitations estimate range possible change unrecognized tax benefits within next 12 months net decrease approximately zero 335 million exclusive penalties interest recognize accrued interest penalties related unrecognized tax benefits provision income taxes june 30 2013 2012 2011 198 million 209 million 267 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheets fiscal 2013 2011 recognized 24 million 36 million interest penalties income tax expense respectively fiscal 2012 recognized 28 million benefit interest penalties income tax expense file income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions subject audit taxing authorities fiscal years 2003 current fiscal year irs currently conducting audits fiscal years 2003 2010 received proposed adjustments irs fiscal years cardinal health inc subsidiaries notes consolidated financial statements continued 2003 2007 related transfer pricing arrangements foreign domestic subsidiaries irs proposed additional taxes 399 million excluding penalties interest tax ultimately must paid carefusion liable tax matters agreement entered connection carefusion spinoff 142 million total amount disagree proposed adjustments contesting accounted unrecognized tax benefits related irs also proposed additional taxes 450 million excluding penalties interest related transfer intellectual property among subsidiaries acquired entity prior acquisition us carefusion would liable tax matters agreement fourth quarter fiscal 2013 carefusion settled matter irs adjusted indemnification receivable corresponding unrecognized tax benefit recorded matter settlement net impact provision income taxes 8 commitments contingent liabilities litigation commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2013 follows 89 million 74 million 57 million 45 million 35 million fiscal 2014 2018 65 million thereafter rental expense relating operating leases 92 million 86 million 79 million fiscal 2013 2012 2011 respectively sublease rental income immaterial periods presented legal proceedings become involved time disputes litigation regulatory matters incidental business including governmental investigations enforcement actions personal injury claims employment matters commercial disputes intellectual property matters government contract compliance matters federal state false claim actions disputes regarding environmental cleanup costs litigation connection acquisitions divestitures matters arising normal conduct business intend vigorously defend litigation may named time qui tam actions cases initiated private parties purporting act behalf federal state governments allege false claims submitted caused submitted payment government qui tam action filed government must investigate determine whether intervene matter actions may remain seal government makes determination addition occasionally may suspect products manufacture market distribute meet product specifications published standards regulatory requirements circumstances investigate take appropriate corrective action actions lead product recalls costs repair replace affected products temporary interruptions product sales action regulators accrue contingencies related disputes litigation regulatory matters probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable developments resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals related disclosures adequate amount ultimate loss may differ estimates unable estimate range reasonably possible loss matters described since damages fines specified proceedings early stages significant uncertainty factual issues believe based currently available information outcomes matters material adverse effect financial condition though outcomes could material results operations particular period recognize income favorable outcome litigation receive associated cash assets recognize estimated loss contingencies litigation regulatory matters income favorable resolution litigation recoveriescharges net consolidated statements earnings lakeland florida distribution center dea investigation related matters february 2012 us drug enforcement administration dea issued order show cause immediate suspension lakeland florida distribution centers registration distribute controlled substances asserting failed maintain required controls diversion controlled substances may 2012 entered settlement agreement dea lakeland registration remain suspended may 2014 dea confirmed planning administrative actions facilities based conduct prior settlement agreement foreclose possibility us department justice “doj” seeking civil fines conduct covered settlement agreement regard providing information communicating local offices within dea doj state west virginia vs cardinal health inc june 2012 west virginia attorney general filed complaints 14 pharmaceutical wholesale distributors including us circuit court boone county west virginia alleging among things distributors failed maintain effective controls guard diversion controlled substances west virginia failed report suspicious orders controlled substances accordance west virginia uniform controlled substances act negligent distributing controlled substances pharmacies serve individuals abuse controlled substances unjustly enriched conduct violated consumer credit protection laws created public nuisance violated state antitrust laws connection distribution controlled substances addition injunctive equitable relief complaints seek monetary damages creation courtsupervised fund financed defendants actions medical monitoring program focused prescription drug abuse qui tam action p4 healthcare subsidiaries former p4 healthcare employee named additional defendants another third party defendant civil qui tam action filed us district court central district california action filed seal january 2012 unsealed july 2013 alleged violations federal healthcare fraud abuse laws federal false claims act acquired p4 healthcare following investigation doj declined cardinal health inc subsidiaries notes consolidated financial statements continued intervene us together claimant dismissed us action thirdparty defendant entered settlement agreement doj civil investigative demand september 2012 received civil investigative demand doj federal false claims act demand requires us produce documents relating structure discounts offered provided customers believe focus investigation whether discounts complied federal healthcare fraud abuse laws cooperating doj matter antitrust litigation proceeds fiscal 2013 recognized 38 million income resulting settlements class action antitrust claims class member income taxes see note 7 discussion contingencies related income taxes 9 guarantees ordinary course business agree indemnify certain parties acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically individually aggregate made payments indemnification obligations material amounts certain circumstances believe existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition believe likelihood material liability triggered indemnification obligations significant time enter agreements obligate us make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount see note 2 detail regarding p4 healthcare contingent consideration obligation 10 fair value measurements fair value defined price would received upon selling asset price paid transfer liability measurement date focuses exit price principal advantageous market asset liability orderly transaction willing market participants threetier fair value hierarchy established basis considering assumptions inputs used valuation methodologies measuring fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values follows level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities recurring fair value measurements following tables present fair values assets liabilities measured recurring basis june 30 1 cash equivalents comprised highly liquid investments purchased maturity three months less carrying value cash equivalents approximates fair value due shortterm maturities 2 fair value interest rate swaps foreign currency contracts commodity contracts determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities observable level 2 inputs used determine present value expected future cash flows 3 investments balance includes investments mutual funds used offset fluctuations deferred compensation liabilities mutual funds primarily invest equity securities companies large market capitalization high quality fixed income debt securities fair value investments determined using quoted market prices 4 contingent consideration obligation incurred connection acquisition p4 healthcare former owners p4 healthcare right receive certain contingent payments based targeted ebitda fair value contingent consideration obligation determined based probabilityweighted income approach derived ebitda estimates probability assessments respect likelihood achieving various ebitda targets fair value measurement based significant inputs unobservable market thus represented level 3 measurement reporting date revalued contingent consideration obligation estimated fair value changes fair value contingent consideration obligation resulted changes terms contingent payments changes discount periods rates changes timing amount ebitda estimates changes probability assumptions respect timing likelihood achieving ebitda targets result changes estimate performance future periods coupled progress discussions former owners regarding early termination settlement recorded 71 million decrease fair value obligation 4 million june 30 2012 terminated settled remaining contingent consideration obligation july 2012 4 million 11 financial instruments utilize derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk use derivative instruments trading speculative purposes majority derivative instruments designated hedging instruments also enter derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current fair value earnings end period cardinal health inc subsidiaries notes consolidated financial statements continued exposed counterparty credit risk derivative instruments accordingly established maintain strict counterparty credit guidelines enter derivative instruments major financial institutions investment grade better significant exposure one counterparty believe risk loss remote additionally require collateral agreements interest rate risk management exposed impact interest rate changes objective manage impact interest rate changes cash flows market value borrowings utilize mix debt maturities along fixedrate variablerate debt manage changes interest rates addition enter interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency exchange risk management conduct business several major international currencies subject risks associated changing foreign exchange rates objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly enter various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management exposed changes price certain commodities objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations accordingly enter derivative contracts manage price risk associated forecasted purchases following table summarizes fair value assets liabilities related derivatives designated hedging instruments respective line items recorded consolidated balance sheets june 30 1 included prepaid expenses consolidated balance sheets 2 included assets consolidated balance sheets 3 included accrued liabilities consolidated balance sheets 4 included deferred income taxes liabilities consolidated balance sheets fair value hedges enter payfloating interest rate swaps hedge changes fair value fixedrate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense net consolidated statements earnings fiscal 2013 2012 entered payfloating interest rate swaps total notional amounts 775 million 363 million swaps designated fair value hedges fixed rate debt september 2012 august 2011 terminated notional amounts 350 million 640 million payfloating interest rate swaps respectively received net settlement proceeds 43 million 34 million respectively swaps previously designated fair value hedges immediate impact earnings however fair value adjustment debt amortized life underlying debt reduction interest expense net consolidated statements earnings following tables summarize outstanding interest rate swaps designated fair value hedges june 30 following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges 1 included interest expense net consolidated statements earnings ineffectiveness associated derivative instruments cash flow hedges enter derivative instruments hedge exposure changes cash flows attributable interest rate foreign currency commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component oci reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately cardinal health inc subsidiaries notes consolidated financial statements continued enter forward interest rate swaps manage variability expected future cash flows changing interest rates fiscal 2013 entered forward interest rate swaps total notional amount 250 million hedge probable firmly committed future transactions associated debt enter foreign currency contracts protect value anticipated foreign currency revenues expenses june 30 2013 2012 held contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar japanese yen mexican peso european euro thai baht enter commodity contracts manage price risk associated forecasted purchases certain commodities used medical segment following tables summarize outstanding cash flow hedges june 30 following table summarizes gainloss included aoci derivative instruments designated cash flow hedges june 30 following table summarizes gainloss reclassified aoci earnings derivative instruments designated cash flow hedges 1 included revenue consolidated statements earnings 2 included cost products sold consolidated statements earnings 3 included sga expenses consolidated statements earnings 4 included interest expense net consolidated statements earnings amount ineffectiveness associated derivative instruments material periods presented economic nondesignated hedges enter foreign currency contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period earnings gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense net end period following tables summarize outstanding economic nondesignated derivative instruments june 30 fiscal 2011 entered swap contracts certain commodities mitigate price volatility materials purchased used manufacturing distribution businesses instruments qualify hedge accounting fair value changes well periodic settlements contracts recorded income net consolidated statements earnings instruments matured fiscal year following table summarizes gainloss recognized earnings economic nondesignated derivative instruments 1 included income net consolidated statements earnings fair value financial instruments carrying amounts cash equivalents trade receivables net accounts payable accrued liabilities june 30 2013 2012 approximate fair value due shortterm maturities cash balances invested accordance investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification held investments fixed income corporate debt securities june 30 2012 classified heldtomaturity intent ability hold investments maturity investments held amortized cost approximated fair value fair value estimated based either quoted market prices similar issues inputs derived available market information represented level 2 measurement held 72 million investments june 30 2012 included within prepaid expenses consolidated balance sheets matured fiscal 2013 cardinal health inc subsidiaries notes consolidated financial statements continued following table summarizes estimated fair value longterm obligations shortterm borrowings compared respective carrying amounts june 30 fair value longterm obligations shortterm borrowings estimated based either quoted market prices similar issues inputs derived available market information represents level 2 measurement following table summary fair value gainloss derivative instruments based upon estimated amount would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments represents level 2 measurement see note 10 information regarding fair value measurements 12 shareholders equity june 30 2013 2012 authorized capital shares consisted following 750 million class common shares without par value 5 million class b common shares without par value 500 thousand nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2013 2012 repurchased 115 billion common shares aggregate share repurchase programs fiscal 2013 2012 2011 described funded repurchases available cash common shares repurchased held treasury used general corporate purposes fiscal 2013 fiscal 2013 repurchased 102 million common shares aggregate cost 450 million average price paid per common share 4411 fiscal 2012 fiscal 2012 repurchased 103 million common shares aggregate cost 450 million average price paid per common share 4364 fiscal 2011 fiscal 2011 repurchased 75 million common shares aggregate cost 250 million average price paid per common share 3322 addition 20 million common shares repurchased fiscal 2010 cash settled fiscal 2011 accumulated comprehensive income following table summarizes balance aoci component june 30 13 earnings per share following table reconciles number common shares used compute basic diluted eps potentially dilutive employee stock options restricted shares restricted share units performance share units antidilutive fiscal 2013 2012 2011 9 million 10 million 11 million respectively 14 segment information operations principally managed products services basis comprised two operating segments reportable segments pharmaceutical medical factors determining reportable segments include manner management evaluates performance combined nature individual business activities pharmaceutical segment distributes branded generic pharmaceutical specialty pharmaceutical overthecounter healthcare consumer products segment also operates nuclear pharmacies cyclotron facilities provides pharmacy services hospitals healthcare facilities provides services healthcare companies supporting marketing distribution payment specialty pharmaceutical products cardinal health china division segment imports distributes pharmaceuticals overthecounter consumer products well provides services china medical segment distributes broad range medical surgical laboratory products hospitals ambulatory surgery centers clinical laboratories physician offices healthcare providers united states canada china patients home united states segment also manufactures sources develops line private brand medical surgical products medical surgical products sold directly thirdparty distributors united states canada europe south america asiapacific region results assuramed acquired march 18 2013 included cardinal health inc subsidiaries notes consolidated financial statements continued medical segment date acquisition see note 2 discussion acquisition following table presents revenue reportable segment reconciling items necessary agree amounts reported consolidated statements earnings 1 corporate revenue consists elimination intersegment revenue evaluate segment performance based upon segment profit among measures segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expenses includes sharebased compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial customer care shared services human resources information technology legal corporate expenses allocated segments based upon headcount level benefit provided ratable allocation interest income expense income taxes allocated segment level restructuring employee severance acquisitionrelated costs impairments loss disposal assets litigation recoveriescharges net allocated segments see notes 1 2 3 4 8 information items addition certain investment spending allocated segments investment spending generally includes first year spend certain projects require incremental investments form additional operating expenses encourage segments identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate investment spending within corporate 37 million 21 million 14 million fiscal 2013 2012 2011 respectively following table presents segment profit reportable segment reconciling items necessary agree amounts reported consolidated statements earnings following tables present depreciation amortization additions property equipment reportable segment corporate 1 depreciation incurred corporate shared information technology allocated segments prioryear amounts reclassified reflect presentation resulted impact segment profit consolidated operating earnings following table presents total assets segment well reconciling items necessary total amounts reported consolidated balance sheets june 30 following table presents revenue property equipment net geographic area 15 sharebased compensation savings plans sharebased compensation plans maintain stock incentive plans collectively “plans” benefit certain officers directors employees june 30 2013 30 million shares remain available future issuances cardinal health inc 2011 longterm incentive plan “2011 ltip” number shares authorized issuance 2011 ltip increase shares issued outstanding equity awards 2011 ltips fungible share counting provisions stock options counted plan one share every share issued awards stock options counted plan two onehalf shares every share issued means 12 million shares could issued awards stock options 30 million shares could issued stock options cardinal health inc subsidiaries notes consolidated financial statements continued following table provides total sharebased compensation expense type award total tax benefit related sharebased compensation 32 million 31 million 29 million fiscal 2013 2012 2011 respectively fiscal 2013 certain sharebased compensation awards modified modifications resulted incremental compensation cost 3 million 2 million included restructuring employee severance consolidated statements earnings see note 3 information regarding restructuring activities stock options employee stock options granted plans generally vest equal annual installments three years exercisable periods ranging seven ten years grant date employee stock options exercisable price equal market value common shares underlying option grant date exercised issued treasury shares following table summarizes stock option transactions plans following tables provide additional data related stock option activity stock options granted officers certain employees fair values estimated grant date using lattice valuation model believe lattice model provides reasonable estimates ability take account individual exercise patterns based changes stock price variables provides range input assumptions disclosed table riskfree rate based us treasury yield curve time grant analyzed historical data estimate option exercise behaviors employee terminations used within lattice model expected life options granted calculated option valuation model represents length time years options granted expected outstanding expected volatilities based implied volatility traded options common shares historical volatility period time commensurate contractual term option grant ten years following table provides range assumptions used estimate fair value stock options restricted shares restricted share units restricted shares restricted share units granted plans generally vest equal annual installments three years fair value determined grant date market price common shares restricted shares restricted share units accrue dividends cash dividend equivalents payable upon vesting awards following table summarizes transactions related restricted shares restricted share units plans cardinal health inc subsidiaries notes consolidated financial statements continued following table provides additional data related restricted share restricted share unit activity performance share units performance share units vest twoyear threeyear performance periods based achievement specific performance goals based extent targets achieved vested shares may range zero 200 percent target award amount fair value performance share units determined grant date market price common shares compensation expense associated nonvested performance share units dependent periodic assessment probability targets achieved estimate number shares ultimately issued performance share units accrue cash dividend equivalents payable upon vesting awards following table summarizes transactions related performance share units plans based target award amounts 1 fiscal 2013 350 thousand performance share units granted target weightedaverage fair value 3981 following table provides additional data related performance share unit activity employee retirement savings plans substantially domestic nonunion employees eligible enrolled companysponsored contributory retirement savings plans include features section 401k internal revenue code 1986 amended provide matching profit sharing contributions us contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement savings plans 68 million 53 million 70 million fiscal 2013 2012 2011 respectively 16 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2013 2012 sum quarters may equal yeartodate due rounding 1 fourth quarter fiscal 2013 recorded outofperiod increase income tax expense 14 million related uncertain tax benefits generally less 1 million pertained first three quarters fiscal 2013 quarters fiscal 2012 amounts material individually aggregate current prior periods 2 due loss continuing operations incurred fourth quarter fiscal 2013 potential dilutive common shares included denominator diluted per share computation period due antidilutive effect cardinal health inc subsidiaries item 9item 8 financial statements supplementary data cardinal health inc subsidiaries report independent registered public accounting firm board directors shareholders cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 2014 2013 related consolidated statements earnings comprehensive income shareholders equity cash flows three years period ended june 30 2014 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cardinal health inc subsidiaries june 30 2014 2013 consolidated results operations cash flows three years period ended june 30 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states cardinal health inc subsidiaries internal control financial reporting june 30 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated august 13 2014 expressed unqualified opinion thereon cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc healthcare services company providing pharmaceutical medical products services help pharmacies hospitals healthcare providers focus patient care reducing costs enhancing efficiency improving quality cardinal health inc also provides medical products patients home references “we” “our” similar pronouns consolidated financial statements cardinal health inc majorityowned controlled subsidiaries unless context otherwise requires fiscal year ends june 30 references fiscal 2014 2013 2012 consolidated financial statements fiscal years ended june 30 2014 2013 2012 respectively basis presentation consolidated financial statements include accounts majorityowned controlled subsidiaries significant intercompany transactions amounts eliminated conform current year presentation certain prior year amounts reclassified results businesses acquired disposed included consolidated financial statements date acquisition date disposal respectively use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires us make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation business combinations goodwill intangible asset impairment vendor reserves loss contingencies income taxes sharebased compensation actual amounts could ultimately differ estimated amounts joint venture cvs caremark july 2014 established red oak sourcing llc red oak sourcing usbased generic pharmaceutical sourcing entity cvs caremark corporation “cvs” initial term 10 years companies contributed sourcing supply chain expertise 5050 joint venture committed source generic pharmaceuticals arrangements negotiated red oak sourcing negotiate generic pharmaceutical supply contracts behalf companies products hold inventory behalf either company required pay 39 quarterly payments 256 million cvs commencing october 2014 certain milestones achieved pay additional predetermined amounts cvs beginning fiscal 2016 fixed payments 256 million expensed evenly commencing rampup venture expect begin end first quarter fiscal 2015 physical assets contributed either company red oak sourcing minimal funding provided capitalize entity cash equivalents consider liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed us distribution businesses presented net allowance doubtful accounts 137 million 134 million june 30 2014 2013 respectively account considered past due first day due date accordance contract terms generally ability charge customers service fees higher prices account considered past due continuously monitor past due accounts establish appropriate reserves cover potential losses based primarily historical collection rates credit worthiness customer write amounts deemed uncollectible established allowance doubtful accounts provide financing various customers financing arrangements range 270 days 5 years interest rates generally subject fluctuation interest income arrangements recognized earned financings may collateralized guaranteed third parties unsecured finance notes related accrued interest 158 million current portion 51 million 161 million current portion 29 million june 30 2014 2013 respectively included assets current portion included prepaid expenses consolidated balance sheets finance notes receivable reported net allowance doubtful accounts 18 million 17 million june 30 2014 2013 respectively estimate allowance financing receivables based historical collection rates credit worthiness customer write amounts deemed uncollectible established allowance doubtful accounts concentrations credit risk maintain cash depository accounts major banks invest high quality shortterm liquid instruments marketable securities shortterm liquid instruments mature within three months historically incurred related losses investments marketable securities consist portfolio highgrade instruments investments made instruments issued highlyrated institutions whose financial condition monitor cardinal health inc subsidiaries notes consolidated financial statements continued trade receivables finance notes related accrued interest exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting healthcare industry credit risk limited due supporting collateral diversity customer base including wide geographic dispersion perform ongoing credit evaluations customers’ financial conditions maintain reserves credit losses historically losses within expectations major customers following table summarizes customers individually account least 10 percent revenue corresponding percent gross trade receivables customers table primarily serviced pharmaceutical segment pharmaceutical distribution contract walgreen co walgreens expired august 31 2013 entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members novation llc premier purchasing partners lp two largest gpo member relationships terms revenue sales members two gpos collectively accounted 17 percent 13 percent 13 percent revenue fiscal 2014 2013 2012 respectively trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories 61 percent 65 percent june 30 2014 2013 respectively valued lower cost using lastin firstout lifo method market inventories included within core pharmaceutical distribution facilities pharmaceutical segment “distribution facilities” primarily merchandise inventories lifo method presumes recent inventory purchases first items sold lifo helps us better match current costs revenue believe average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation used average cost method inventory valuation inventory within distribution facilities value inventories would changed fiscal 2014 2013 inventories valued lifo 98 million 97 million higher average cost value june 30 2014 2013 respectively record inventories excess replacement cost record changes lifo reserve fiscal 2014 2013 remaining inventory primarily stated lower cost using firstin firstout method market inventories presented consolidated balance sheets net reserves excess obsolete inventory 44 million 40 million june 30 2014 2013 respectively reserve inventory obsolescence using estimates based historical experience sales trends specific categories inventory age onhand inventory cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts fiscal 2013 result reductions anticipated future cash flows nuclear pharmacy services division discussed note 5 also performed recoverability testing longlived assets division consist primarily leasehold improvements machinery equipment based assessment performed determined carrying amounts longlived assets recoverable depreciation expense computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases generally use following range useful lives property equipment categories buildings improvements3 39 years machinery equipment3 20 years furniture fixtures3 7 years recorded depreciation expense 265 million 269 million 243 million fiscal 2014 2013 2012 respectively cardinal health inc subsidiaries notes consolidated financial statements continued following table presents components property equipment net june 30 repairs maintenance expenditures expensed incurred interest longterm projects capitalized using rate approximates weightedaverage interest rate longterm obligations 368 percent june 30 2014 amount capitalized interest immaterial periods presented business combinations assets acquired liabilities assumed business combination including identifiable intangible assets based estimated fair values acquisition date excess purchase price estimated fair value net tangible identifiable intangible assets acquired recorded goodwill base fair values identifiable intangible assets detailed valuations require management make significant judgments estimates assumptions critical estimates assumptions include expected future cash flows customer relationships trade names identifiable intangible assets discount rates reflect risk factors associated future cash flows estimates useful lives acquisition involves contingent consideration recognize liability equal fair value contingent consideration obligation acquisition date estimate fair value contingent consideration obligation requires subjective assumptions made regarding future business results discount rates probabilities assigned various potential business result scenarios subsequent revisions assumptions could materially change estimate fair value contingent consideration obligations therefore could materially affect financial position results operations see note 2 additional information regarding acquisitions goodwill intangible assets purchased goodwill intangible assets indefinite lives amortized instead tested impairment annually indicators impairment exist intangible assets finite lives primarily customer relationships trademarks trade names patents noncompete agreements amortized useful lives goodwill impairment testing involves comparison estimated fair value reporting units respective carrying amount may performed utilizing either qualitative quantitative assessment reporting unit defined operating segment one level operating segment also known component estimated fair value exceeds carrying amount impairment exists carrying amount exceeds estimated fair value second step performed determine amount impairment charge amount carrying amount goodwill exceeds estimated implied fair value goodwill estimate implied fair value goodwill excess estimated fair value reporting unit estimated fair value net tangible identifiable intangible assets manner use recognize goodwill business combination goodwill impairment testing involves judgment including identification reporting units estimation fair value reporting unit necessary estimation implied fair value goodwill two operating segments reportable segments pharmaceutical medical operating segments comprised divisions components discrete financial information available components aggregated reporting units purposes goodwill impairment testing extent share similar economic characteristics reporting units pharmaceutical operating segment excluding nuclear pharmacy services division cardinal health china pharmaceutical division nuclear pharmacy services division cardinal health china pharmaceutical division medical operating segment excluding cardinal health home division home division home division fair value determined using market income costbased approaches determination estimated fair value reporting units based combination incomebased marketbased approaches incomebased approach use discounted cash flow model cash flows anticipated several future periods plus terminal value end time horizon discounted present value using appropriate riskadjusted rate return use internal forecasts estimate future cash flows include estimate longterm growth rates based recent views longterm outlook reporting unit actual results may differ materially used forecasts use discount rates commensurate risks uncertainty inherent respective reporting units internallydeveloped forecasts discount rates used reporting unit valuations ranged 9 12 percent marketbased approach determine fair value comparing reporting units similar businesses guideline companies whose securities actively traded public markets confirm fair value compare aggregate fair value reporting units total market capitalization estimating fair value reporting units requires use estimates significant judgments based number factors including actual operating results use alternate estimates cardinal health inc subsidiaries notes consolidated financial statements continued assumptions changes industry peer groups could materially affect determination fair value reporting unit potentially result goodwill impairment performed annual impairment testing fiscal 2014 2013 2012 exception nuclear pharmacy services division fiscal 2013 concluded impairments goodwill estimated fair value reporting unit exceeded carrying value fiscal 2014 2013 2012 testing elected bypass optional qualitative assessment discussed note 5 fourth quarter fiscal 2013 recognized 829 million 799 million net tax goodwill impairment charge related nuclear pharmacy services division included impairments loss disposal assets consolidated statements earnings review intangible assets finite lives impairment whenever events changes circumstances indicate related carrying amounts may recoverable determining whether impairment loss occurred requires comparison carrying amount sum undiscounted cash flows expected generated asset investments nonmarketable equity securities accounted either cost equity method accounting included assets consolidated balance sheets investments exercise significant influence use equity method accounting share earnings losses immaterial individually aggregate periods presented recorded income net consolidated statements earnings monitor investments otherthantemporary impairment considering factors operating performance investment current economic market conditions fiscal 2014 sold minority equity interests two investments proceeds 47 million resulted pretax gain 32 million 20 million net tax included income net consolidated statements earnings also fiscal 2014 purchased marketable securities classified availableforsale carried fair value consolidated balance sheets unrealized gains losses availableforsale securities net applicable taxes included within shareholders’ equity accumulated comprehensive income aoci monitor securities otherthantemporary impairment considering factors duration extent fair value cost operating performance credit worthiness issuer securities current economic market conditions see note 6 additional information regarding availableforsale securities previously held 72 million investments fixed income corporate debt securities classified heldtomaturity matured fiscal 2013 vendor reserves ordinary course business vendors may dispute deductions taken payments otherwise due assert billing disputes disputed transactions researched resolved based upon policy findings research performed given time outstanding items various stages research resolution determining appropriate reserves areas exposure vendors assess historical experience current outstanding claims established various levels reserves based type claim status review though claim types relatively consistent periodically refine methodology updating reserve estimate percentages reflect actual historical experience ultimate outcome certain claims may different original estimate may require adjustment adjustments vendor reserves included cost products sold addition reserve balance fluctuate due variations outstanding claims periodtoperiod timing settlements specific vendor issues bankruptcies vendor reserves 82 million 66 million june 30 2014 2013 respectively excluding thirdparty returns see separate section note 1 description thirdparty returns vendor incentives fees services incentives received vendors relating purchase distribution inventory represent product discounts recorded reduction cost products sold consolidated statements earnings upon sale related inventory loss contingencies accrue contingencies related disputes litigation regulatory matters probable liability incurred amount loss reasonably estimated matters inherently unpredictable unfavorable developments resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals related disclosures adequate amount ultimate loss may differ estimates see note 9 additional information regarding loss contingencies income taxes account income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions cardinal health inc subsidiaries notes consolidated financial statements continued operate deferred taxes provided unremitted earnings subsidiaries outside united states expected earnings permanently reinvested tax benefits uncertain tax positions recognized likely position sustained upon examination technical merits position including resolutions related appeals litigation processes amount recognized measured largest amount tax benefit greater 50 percent likely realized upon settlement see note 8 additional information regarding income taxes accrued liabilities accrued liabilities represent various current obligations including certain accrued operating expenses taxes payable sharebased compensation sharebased compensation employees recognized consolidated statements earnings based grant date fair value awards fair value stock options determined grant date using lattice valuation model fair value restricted share units performance share units determined grant date market price common shares compensation expense associated nonvested performance share units dependent periodic assessment probability targets achieved estimate may vary time number shares ultimately issued compensation expense recognized sharebased awards net estimated forfeitures recognized ratably service period awards classify sharebased compensation expense distribution selling general administrative sga expenses correspond line item majority cash compensation paid employees awards modified connection restructuring activity incremental sharebased compensation expense classified restructuring employee severance see note 16 additional information regarding sharebased compensation dividends paid cash dividends per common share 121 1025 086 fiscal 2014 2013 2012 respectively revenue recognition recognize revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured pharmaceutical segment pharmaceutical segment recognizes distribution revenue title transfers customers obligation provide services related merchandise revenue deliveries directly shipped customer warehouses manufacturer act intermediary ordering delivery products recorded gross accordance accounting standards addressing reporting revenue gross basis principal versus net basis agent revenue recorded gross basis since incur credit risk customer bear risk loss incomplete shipments receive separate fee commission transaction primary obligor revenue sales recognized title transfers customer obligation provide services related merchandise radiopharmaceutical revenue recognized upon delivery product customer obligation provide services related merchandise medical segment medical segment recognizes revenue title transfers customers obligation provide services related merchandise sales returns allowances revenue recorded net sales returns allowances customer return policies generally require product physically returned subject restocking fees condition suitable added back inventory resold full value returned vendors credit “merchantable product” product returns generally consistent throughout year typically specific particular product customer effective june 30 2013 updated policy accrue estimated sales returns allowances time sale based upon historical customer return trends margin rates processing costs prospective change material effect consolidated revenue cost products sold operating earnings june 30 2014 2013 accrual estimated sales returns allowances 273 million 291 million respectively impact reflected trade receivables net inventories net consolidated balance sheets prior change policy recognized sales returns reduction revenue cost products sold sales price cost respectively products returned amounts recorded revenue cost products sold prior accounting policy closely approximated would recorded accrued estimated sales returns allowances time sale transaction retrospective adoption new policy accrue estimated sales returns allowances would materially changed results operations financial position fiscal 2012 sales returns allowances 17 billion 23 billion 19 billion fiscal 2014 2013 2012 respectively cardinal health inc subsidiaries notes consolidated financial statements continued thirdparty returns since generally accept nonmerchantable product returns customers many customers return nonmerchantable pharmaceutical products vendors third parties since customers generally direct relationship vendors pass value returns us usually form accounts payable deduction turn pass value received less administrative fee customer certain instances pass estimated value return customer prior processing deduction vendors although believe satisfactory protections could subject claims customers vendors administration overall process deficient respect contractual terms vendors conflict contractual terms customers maintained reserves situations based nature historical experience resolution distribution service agreement vendor fees pharmaceutical segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendors’ inventory fees earned entitled payment since benefit provided vendor related purchase distribution vendor’s inventory recognize fees reduction carrying value inventory generated fees reduction cost products sold consolidated statements earnings inventory sold shipping handling shipping handling costs primarily included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs 430 million 419 million 389 million fiscal 2014 2013 2012 respectively revenue received shipping handling immaterial periods presented restructuring employee severance consider restructuring activities programs fundamentally change operations closing consolidating facilities moving manufacturing product another location production business process sourcing employee severance including rationalizing headcount significant changes personnel realigning operations including realignment management structure business unit response changing market conditions see note 3 additional information regarding restructuring activities amortization acquisitionrelated costs classify costs incurred connection acquisitions amortization acquisitionrelated costs consolidated statements earnings costs consist primarily amortization acquisitionrelated intangible assets transaction costs integration costs changes fair value contingent consideration obligations transaction costs incurred initial evaluation potential acquisition primarily relate costs analyze negotiate consummate transaction well due diligence activities integration costs relate activities required combine operations acquired enterprise operations record changes fair value contingent consideration obligations relating acquisitions income expense amortization acquisitionrelated costs see note 5 additional information regarding amortization acquisitionrelated intangible assets fiscal 2011 completed acquisition privatelyheld healthcare solutions holding llc p4 healthcare cash certain contingent consideration connection acquisition former owners p4 healthcare right receive certain contingent payments based earnings interest taxes depreciation amortization result changes estimate performance future periods coupled progress discussions former owners regarding early termination settlement recorded 71 million decrease fair value obligation fiscal 2012 settled terminated remaining contingent consideration obligation 4 million fiscal 2013 translation foreign currencies financial statements subsidiaries outside united states generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity aoci utilizing periodend exchange rates revenues expenses foreign subsidiaries translated using average exchange rates year foreign currency translation gainslosses included aoci june 30 2014 2013 presented note 13 foreign currency transaction gains losses period included consolidated statements earnings income net immaterial periods presented interest rate currency commodity risk derivative instruments recognized fair value consolidated balance sheets changes fair value recognized net earnings shareholders’ equity aoci net tax contracts qualify hedge accounting treatment policy requires hedge contracts must effective cardinal health inc subsidiaries notes consolidated financial statements continued reducing risk associated exposure hedged must designated hedge inception contract hedge effectiveness assessed periodically contract designated hedge designated ineffective adjusted fair value recognized immediately net earnings fair value cash flow hedge ceases qualify hedge accounting treatment contract continues carried balance sheet fair value settled future adjustments contract’s fair value recognized immediately net earnings forecasted transaction longer considered probable occurring amounts previously deferred aoci recognized immediately net earnings see note 12 additional information regarding derivative instruments including accounting treatment instruments designated fair value cash flow economic hedges earnings per common share basic earnings per share “eps” computed dividing net earnings numerator weightedaverage number common shares outstanding period denominator diluted eps similar computation basic eps except denominator increased dilutive effect vested nonvested stock options restricted shares restricted share units performance share units computed using treasury stock method total number common shares issued less common shares held treasury used determine common shares outstanding see note 14 additional information regarding eps fair value measurements fair value defined price would received upon selling asset price paid transfer liability measurement date focuses exit price principal advantageous market asset liability orderly transaction willing market participants threetier fair value hierarchy established basis considering assumptions inputs used valuation methodologies measuring fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities see note 11 additional information regarding fair value measurements recent financial accounting standards june 2014 financial accounting standards board fasb issued guidance accounting sharebased payments performance targets guidance requires performance target affects vesting could achieved requisite service period treated performance condition guidance effective us first quarter fiscal 2017 early adoption permitted expect adoption guidance material impact financial position results operations may 2014 fasb issued amended accounting guidance related revenue recognition guidance based principle revenue recognized amount reflects consideration entity expects entitled exchange transfer goods services customers guidance also requires additional disclosure nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract amendment effective us first quarter fiscal 2018 currently evaluating options adoption impact financial position results operations april 2014 fasb issued amended accounting guidance related reporting discontinued operations disclosures disposals components entity amended guidance changes thresholds disposals qualify discontinued operations requires additional disclosures amendment effective us first quarter fiscal 2016 early adoption permitted adopt guidance prospective basis expect adoption impact financial position results operations july 2013 fasb issued amended accounting guidance related presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists guidance requires entity present unrecognized tax benefit portion unrecognized tax benefit reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward unless certain conditions exists guidance effective us first quarter fiscal 2015 expect adoption guidance impact financial position results operations march 2013 fasb issued amended accounting guidance related parent companys accounting cumulative translation adjustment upon derecognition certain subsidiaries group assets within foreign entity investment foreign entity amended guidance requires release cumulative translation adjustment net income upon complete substantially complete liquidation controlling interest subsidiary group assets within foreign entity also requires release pro rata portion cumulative translation adjustment net income case sale equity method investment cardinal health inc subsidiaries notes consolidated financial statements continued foreign entity amendment effective us first quarter fiscal 2015 expect adoption guidance impact financial position results operations february 2013 fasb issued amended accounting guidance related reclassifications aoci entity required present either parenthetically face statement net income presented notes significant amounts component reclassified aoci respective line items net income report changes aoci balances component adopted amended guidance prospective basis first quarter fiscal 2014 elected report reclassifications aoci note 13 adoption guidance impact financial position results operations january 2013 fasb issued updated guidance limit scope balance sheet offsetting disclosures derivatives repurchase agreements securities lending transactions extent offset financial statements subject enforceable master netting arrangement similar arrangement adopted amended guidance retrospective basis first quarter fiscal 2014 adoption guidance impact financial position results operations see note 11 additional information regarding fair value measurements derivative instruments july 2012 fasb issued amended accounting guidance related testing indefinitelived intangible assets impairment guidance company longer required calculate fair value indefinitelived intangible asset unless company determines based qualitative assessment likely estimated fair value less carrying amount adopted amended guidance first quarter fiscal 2014 adoption guidance impact financial position results operations 2 acquisitions completed several acquisitions since july 1 2011 including acquisitions within medical segment described pro forma results operations results operations acquisitions since acquisition dates separately disclosed effects significant compared consolidated financial statements individually aggregate accessclosure may 9 2014 completed acquisition access closure inc accessclosure 320 million allcash transaction funded acquisition cash hand acquisition accessclosure manufacturer distributor extravascular closure devices expands medical segments portfolio selfmanufactured products assuramed march 18 2013 completed acquisition assuramed inc assuramed 207 billion net cash acquired allcash transaction funded acquisition issuance 13 billion fixed rate notes discussed note 7 cash hand acquisition assuramed provider medical supplies homecare providers patients home expands medical segments ability serve patient base assuramed known home division recognized 20 million transaction costs associated purchase assuramed fiscal 2013 included amortization acquisitionrelated costs consolidated statements earnings fair value assets acquired liabilities assumed estimation fair value assets acquired liabilities assumed accessclosure resulted goodwill 159 million identifiable intangible assets primarily developed technology 133 million weightedaverage useful life 9 years assessment fair value accessclosure preliminary based information available time consolidated financial statements prepared estimation fair value assets acquired liabilities assumed assuramed completed fiscal 2014 following table summarizes estimated fair values assets acquired liabilities assumed acquisition date assuramed cardinal health inc subsidiaries notes consolidated financial statements continued fair value estimates utilize significant unobservable inputs thus represent level 3 fair value measurements estimated fair value identifiable intangible assets determined primarily using incomebased approach includes market participant expectations cash flows asset could generate remaining useful life discounted back present value using appropriate rate return useful lives determined primarily using inputs projected customer retention rates expected trade name utilization periods projected technology obsolescence rates accessclosure assuramed discount rates used arrive present value identifiable intangible assets 10 95 percent respectively reflect internal rate return uncertainty cash flow projections 3 restructuring employee severance following table summarizes restructuring employee severance costs related restructuring activities 1 employeerelated costs primarily consist termination benefits provided employees involuntarily terminated duplicate payroll costs transition periods 2 facility exit costs primarily consist lease termination costs accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring delivery information technology infrastructure services 3 includes 10 million primarily facility exit costs related restructuring within medical segment described 4 includes 30 million employeerelated costs 10 million facility exit costs related restructuring within medical segment described january 30 2013 announced restructuring plan within medical segment restructuring plan among things reorganized medical segment moved production procedure kits facility waukegan illinois facilities consolidated office space waukegan illinois addition selling property waukegan illinois exiting gamma sterilization business el paso texas currently estimate total costs associated restructuring plan approximately 74 million pretax basis 18 million recognized fiscal 2014 including loss write property waukegan illinois discussed note 4 costs 51 million associated restructuring plan recognized fiscal 2013 including loss write gamma sterilization assets discussed note 4 estimated 5 million remaining costs recognized fiscal 2015 consist facility exit costs fourth quarter fiscal 2013 recognized 11 million employeerelated costs related restructuring plan within nuclear pharmacy services division following table summarizes activity related liabilities associated restructuring employee severance 4 impairments loss disposal assets connection medical segment restructuring plan discussed note 3 property waukegan illinois meets criteria classification held sale result fiscal 2014 recognized 8 million loss write property estimated fair value less costs sell 24 million included prepaid expenses consolidated balance sheets fair value estimated using inputs broker listings sales agreements thus represents level 2 nonrecurring fair value measurement also connection medical segment restructuring plan fiscal 2013 recognized 11 million loss write gamma sterilization assets el paso texas fiscal 2013 recognized 829 million 799 million net tax goodwill impairment charge related nuclear pharmacy services division discussed note 5 also recognized 8 million loss fiscal 2013 write commercial software development within pharmaceutical segment connection decision discontinue project fiscal 2012 recognized 16 million loss write indefinitelife intangible asset related p4 healthcare trade name asset within pharmaceutical segment rebranded p4 healthcare cardinal health specialty solutions name cardinal health inc subsidiaries notes consolidated financial statements continued 5 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill segment total 1 june 30 2014 2013 accumulated goodwill impairment loss 829 million fiscal 2014 increase medical segment goodwill fiscal 2014 primarily due accessclosure acquisition goodwill recognized connection acquisition primarily represents expected benefits synergies integrating business existing workforce acquired entity expected growth new customers new products improvements existing technologies see note 2 discussion acquisition fiscal 2013 increase medical segment goodwill fiscal 2013 primarily due assuramed acquisition goodwill recognized connection acquisition primarily represents expected benefits synergies integrating business existing workforce acquired entity expected growth new customers longterm brand value see note 2 discussion acquisition decrease pharmaceutical segment goodwill fiscal 2013 primarily due 829 million 799 million net tax noncash goodwill impairment charge related nuclear pharmacy services division included impairments loss disposal assets consolidated statements earnings impairment charge impact liquidity cash flows operations compliance debt covenants result significant softness lowenergy diagnostics market performed interim goodwill impairment testing nuclear pharmacy services division three months ended december 31 2012 determined impairment fair value reporting unit estimated excess carrying amount second half fiscal 2013 experienced sustained volume declines price erosion core lowenergy products provided division addition experienced reduced sales existing highenergy diagnostic products slowerthanexpected adoption new highenergy diagnostic products reimbursement developments could adversely impacted future growth products using information adjusted outlook longterm business plans division annual budgeting process update resulted significant reductions anticipated future cash flows estimated fair value reporting unit completed annual goodwill impairment test fiscal 2013 perform annually fourth quarter conjunction preparation fiscal 2013 consolidated financial statements using combination incomebased approach using discount rate 10 percent marketbased approach fair value reporting unit estimated carrying amount therefore indicated impairment second step impairment test resulted impairment entire 829 million carrying amount goodwill reporting unit fair value estimates utilize significant unobservable inputs thus represent level 3 fair value measurements intangible assets intangible assets amortized periods ranging one twenty years following tables summarize intangible assets class june 30 cardinal health inc subsidiaries notes consolidated financial statements continued total amortization intangible assets 188 million 121 million 79 million fiscal 2014 2013 2012 respectively estimated annual amortization intangible assets fiscal 2015 2019 follows 177 million 165 million 153 million 116 million 65 million increase amortization fiscal 2014 2013 primarily due acquisition assuramed see note 2 discussion acquisition 6 availableforsale securities fiscal 2014 purchased marketable securities classified availableforsale carried fair value consolidated balance sheets held following investments marketable securities fair value june 30 gross unrealized gains losses immaterial june 30 2014 recognize otherthantemporary impairments fiscal 2014 june 30 2014 weightedaverage effective maturity current longterm investments approximately 11 months 21 months respectively 7 longterm obligations shortterm borrowings following table summarizes longterm obligations shortterm borrowings june 30 maturities longterm obligations shortterm borrowings fiscal 2015 2019 thereafter follows 801 million 22 million 788 million 561 million 1 million 1799 million longterm debt 17 19 32 40 46 4625 58 585 60 notes represent unsecured obligations cardinal health inc 70 78 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary cardinal health inc guaranteed none obligations subject sinking fund allegiance obligations redeemable prior maturity interest paid pursuant terms obligations notes effectively subordinated liabilities subsidiaries including trade payables 121 billion june 2013 used cash hand repay 300 million 55 notes due june 15 2013 february 2013 sold registered offering 400 million aggregate principal amount 17 notes mature march 15 2018 550 million aggregate principal amount 32 notes mature march 15 2023 350 million aggregate principal amount 46 notes mature march 15 2043 notes unsecured obligations rank equally right payment existing future unsecured unsubordinated indebtedness used proceeds fund portion purchase price assuramed discussed note 2 cardinal health inc subsidiaries notes consolidated financial statements continued may 2012 sold registered offering 250 million aggregate principal amount 19 notes mature june 15 2017 250 million aggregate principal amount 32 notes mature june 15 2022 notes unsecured unsubordinated obligations rank equally right payment existing future unsecured unsubordinated indebtedness 60 notes due 2017 19 notes due 2017 17 notes due 2018 4625 notes due 2020 32 notes due 2022 32 notes due 2023 46 notes due 2043 require us offer purchase notes 101 principal amount plus accrued unpaid interest defined change control specified ratings investment grade standard poors ratings services moodys investors service inc fitch ratings financing arrangements addition cash equivalents june 30 2014 2013 sources liquidity include 15 billion revolving credit facility commercial paper program 15 billion backed revolving credit facility revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes november 6 2012 renewed 950 million committed receivables sales facility program cardinal health funding llc chf november 6 2014 october 15 2013 reduced committed receivables sales facility program 950 million 700 million light walgreens contract expiration chf organized sole purpose buying receivables selling undivided interests receivables thirdparty purchasers although consolidated accordance gaap chf separate legal entity cardinal health subsidiary sells receivables chf designed special purpose bankruptcyremote entity whose assets available solely satisfy claims creditors outstanding balance revolving credit facility june 30 2014 2013 except standby letters credit zero 43 million june 30 2014 2013 respectively outstanding borrowings commercial paper program june 30 2014 2013 outstanding balance committed receivables sales facility program june 30 2014 2013 except standby letters credit 41 million zero june 30 2014 2013 respectively revolving credit facility committed receivables sales facility program require us maintain consolidated interest coverage ratio fiscal quarter end least 4to1 consolidated leverage ratio 325to1 june 30 2014 compliance financial covenants also maintain shortterm credit facilities unsecured line credit allowed borrowings 369 million 304 million june 30 2014 2013 respectively 319 million 190 million balance obligations june 30 2014 2013 respectively consisted shortterm borrowings capital leases 8 income taxes earnings income taxes discontinued operations provision income taxes continuing operations consists following cardinal health inc subsidiaries notes consolidated financial statements continued following table presents reconciliation provision based federal statutory income tax rate effective income tax rate continuing operations fiscal 2014 effective tax rate impacted net favorable discrete items 37 million reduced rate 21 percentage points discrete items include favorable impact settlement federal state tax controversies 80 million release valuation allowances 12 million unfavorable impact remeasurement unrecognized tax benefits 65 million primarily result proposed assessments additional tax fiscal 2013 effective tax rate unfavorably impacted 332 percentage points 295 million due nondeductibility substantially goodwill impairment partially offset favorable impact revaluation deferred tax liability related interest unrepatriated foreign earnings result agreement tax authorities 64 million 72 percentage points fourth quarter fiscal 2013 recorded outofperiod increase income tax expense 14 million generally less 1 million pertained first three quarters fiscal 2013 quarters fiscal 2012 2008 related uncertain tax benefits decrease retained earnings 15 million related adoption accounting guidance uncertain tax benefits 2008 amounts material individually aggregate current prior periods june 30 2014 17 billion undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes following table presents components deferred income tax assets liabilities june 30 cardinal health inc subsidiaries notes consolidated financial statements continued deferred income tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheets june 30 1 included prepaid expenses consolidated balance sheets 2 included assets consolidated balance sheets 3 included accrued liabilities consolidated balance sheets 4 included deferred income taxes liabilities consolidated balance sheets june 30 2014 gross federal state international loss credit carryforwards 210 million 13 billion 85 million respectively tax effect aggregate deferred tax asset 191 million substantially carryforwards available least three years approximately 92 million valuation allowance june 30 2014 applies certain federal state international loss carryforwards opinion likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense 510 million 650 million 654 million unrecognized tax benefits june 30 2014 2013 2012 respectively june 30 2014 2013 2012 balances include 322 million 371 million 337 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect effective tax rate include full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets following table presents reconciliation beginning ending amounts unrecognized tax benefits reasonably possible could change amount unrecognized tax benefits within next 12 months due activities us internal revenue service irs taxing authorities including proposed assessments additional tax possible settlement audit issues reassessment existing unrecognized tax benefits expiration applicable statutes limitations estimate range possible change unrecognized tax benefits within next 12 months decrease approximately 25 million increase approximately 10 million exclusive penalties interest recognize accrued interest penalties related unrecognized tax benefits provision income taxes june 30 2014 2013 2012 143 million 198 million 209 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities consolidated balance sheets fiscal 2014 2012 recognized 46 million 28 million benefit interest penalties income tax expense respectively fiscal 2013 recognized 24 million interest penalties income tax expense file income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions subject audit irs fiscal years 2006 current fiscal year generally subject audit taxing authorities various us state foreign jurisdictions fiscal years 2003 current fiscal year fiscal 2014 irs closed audits fiscal years 2003 2005 irs currently conducting audits fiscal years 2006 2010 transfer pricing arrangements continue consideration part audits irs made could make proposed adjustments transfer pricing arrangements matters defending reported tax positions accounted unrecognized tax benefits associated tax positions party tax matters agreement carefusion corporation carefusion obligated indemnify us certain tax exposures transaction taxes prior fiscal 2010 spinoff carefusion indemnification receivable 210 million 186 million june 30 2014 2013 respectively included assets consolidated balance sheets 9 commitments contingent liabilities litigation commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2014 fiscal 2015 2019 thereafter follows 97 million 80 million 60 million 45 million 31 million 74 million rental expense cardinal health inc subsidiaries notes consolidated financial statements continued relating operating leases 107 million 92 million 86 million fiscal 2014 2013 2012 respectively sublease rental income immaterial periods presented legal proceedings become involved time disputes litigation regulatory matters incidental business including governmental investigations enforcement actions personal injury claims employment matters commercial disputes intellectual property matters government contract compliance matters disputes regarding environmental cleanup costs claims connection acquisitions divestitures matters arising normal conduct business intend vigorously defend matters may named time qui tam actions cases initiated private parties purporting act behalf federal state governments allege false claims submitted caused submitted payment government private party filed qui tam action government must investigate private partys claim determine whether intervene matter actions may remain seal government makes determination addition occasionally may suspect products manufacture market distribute meet product specifications published standards regulatory requirements circumstances investigate take appropriate corrective action actions lead product recalls costs repair replace affected products temporary interruptions product sales action regulators accrue contingencies related disputes litigation regulatory matters probable liability incurred amount loss reasonably estimated matters inherently unpredictable unfavorable developments resolutions occur assessing contingencies highly subjective requires judgments future events regularly review contingencies determine whether accruals related disclosures adequate amount ultimate loss may differ estimates unable estimate range reasonably possible loss matters described since damages fines specified proceedings stages significant uncertainty exists legal factual issues whether matters proceed trial believe based currently available information outcomes matters material adverse effect financial position results operations cash flows though outcome one matters could material results operations particular period recognize income favorable outcome litigation receive associated cash assets recognize estimated loss contingencies litigation regulatory matters income favorable resolution litigation recoveriescharges net consolidated statements earnings lakeland florida distribution center dea investigation related matters february 2012 us drug enforcement administration dea issued order show cause immediate suspension lakeland florida distribution centers registration distribute controlled substances asserting failed maintain required controls diversion controlled substances may 2012 entered settlement agreement dea resolved administrative aspects deas action foreclose possibility us department justice “doj” seeking civil fines conduct covered settlement agreement regard continuing provide information engage discussions including preliminary discussions regarding feasibility settlement dea doj state west virginia vs cardinal health inc june 2012 west virginia attorney general filed january 2014 amended complaints 13 pharmaceutical wholesale distributors including us circuit court boone county west virginia alleging among things distributors failed maintain effective controls guard diversion controlled substances west virginia failed report suspicious orders controlled substances accordance west virginia uniform controlled substances act negligent distributing controlled substances pharmacies serve individuals abuse controlled substances addition injunctive equitable relief complaints seek monetary damages creation courtsupervised fund financed defendants actions medical monitoring program focused prescription drug abuse federal false claims investigation doj requested information connection investigation possible violations federal false claims act respect medical segment’s administration prime vendor agreement federal government cooperating doj matter antitrust litigation proceeds recognized income resulting settlements class action antitrust claims class member 24 million 38 million fiscal 2014 2013 respectively 10 guarantees ordinary course business agree indemnify certain parties acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification cardinal health inc subsidiaries notes consolidated financial statements continued obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically individually aggregate made payments indemnification obligations material amounts certain circumstances believe existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition believe likelihood material liability triggered indemnification obligations significant time enter agreements obligate us make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount 11 fair value measurements following tables present fair values assets measured recurring basis june 30 1 cash equivalents comprised highly liquid investments purchased maturity three months less carrying value cash equivalents approximates fair value due shortterm maturities 2 fair value interest rate swaps foreign currency contracts commodity contracts determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities observable level 2 inputs used determine present value expected future cash flows fair value derivative contracts subject master netting arrangements certain circumstances presented gross basis consolidated balance sheets 3 fiscal 2014 purchased marketable securities classified availableforsale carried fair value consolidated balance sheets observable level 2 inputs quoted prices similar securities interest rate spreads yield curves credit risk used determine fair value see note 6 additional information regarding availableforsale securities 4 investments balance includes investments mutual funds used offset fluctuations deferred compensation liabilities mutual funds primarily invest equity securities companies large market capitalization high quality fixed income debt securities fair value investments determined using quoted market prices 12 financial instruments utilize derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk use derivative instruments trading speculative purposes majority derivative instruments designated hedging instruments also enter derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current fair value earnings end period exposed counterparty credit risk derivative instruments accordingly established maintain strict counterparty credit guidelines enter derivative instruments major financial institutions investment grade better significant exposure one counterparty believe risk loss remote additionally require collateral agreements interest rate risk management exposed impact interest rate changes objective manage impact interest rate changes cash flows market value borrowings utilize mix debt maturities along fixedrate variablerate debt manage changes interest rates addition enter interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency exchange risk management conduct business several major international currencies subject risks associated changing foreign exchange rates objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly enter various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management exposed changes price certain commodities objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations cardinal health inc subsidiaries notes consolidated financial statements continued accordingly enter derivative contracts manage price risk associated forecasted purchases following table summarizes fair value assets liabilities related derivatives designated hedging instruments respective line items recorded consolidated balance sheets june 30 1 included prepaid expenses consolidated balance sheets 2 included assets consolidated balance sheets 3 included accrued liabilities consolidated balance sheets 4 included deferred income taxes liabilities consolidated balance sheets fair value hedges enter payfloating interest rate swaps hedge changes fair value fixedrate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense net consolidated statements earnings fiscal 2014 2013 entered payfloating interest rate swaps total notional amounts 300 million 775 million respectively swaps designated fair value hedges fixed rate debt fiscal 2013 terminated notional amounts 350 million payfloating interest rate swaps received net settlement proceeds 43 million swaps previously designated fair value hedges immediate impact earnings however fair value adjustment debt amortized life underlying debt reduction interest expense net consolidated statements earnings following tables summarize outstanding interest rate swaps designated fair value hedges june 30 following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges 1 included interest expense net consolidated statements earnings ineffectiveness associated derivative instruments cash flow hedges enter derivative instruments hedge exposure changes cash flows attributable interest rate foreign currency commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component comprehensive income reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately enter forward interest rate swaps manage variability expected future cash flows changing interest rates fiscal 2014 2013 entered forward interest rate swaps total notional amounts 50 million 250 million respectively hedge probable firmly committed future transactions associated debt enter foreign currency contracts protect value anticipated foreign currency revenues expenses june 30 2014 2013 held contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar mexican peso european euro thai baht enter commodity contracts manage price risk associated forecasted purchases certain commodities used medical segment cardinal health inc subsidiaries notes consolidated financial statements continued following tables summarize outstanding cash flow hedges june 30 following table summarizes gainloss included aoci derivative instruments designated cash flow hedges june 30 following table summarizes gainloss reclassified aoci earnings derivative instruments designated cash flow hedges 1 included revenue consolidated statements earnings 2 included cost products sold consolidated statements earnings 3 included sga expenses consolidated statements earnings 4 included interest expense net consolidated statements earnings amount ineffectiveness associated derivative instruments immaterial periods presented economic nondesignated hedges enter foreign currency contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period earnings gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded incomeexpense net end period following tables summarize outstanding economic nondesignated derivative instruments june 30 following table summarizes gainloss recognized earnings economic nondesignated derivative instruments 1 included income net consolidated statements earnings fair value financial instruments carrying amounts cash equivalents trade receivables net accounts payable accrued liabilities june 30 2014 june 30 2013 approximate fair value due shortterm maturities cash balances invested accordance investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification following table summarizes estimated fair value longterm obligations shortterm borrowings compared respective carrying amounts june 30 estimated fair value longterm obligations shortterm borrowings estimated based either quoted market prices similar issues inputs derived available market information represents level 2 measurement cardinal health inc subsidiaries notes consolidated financial statements continued following table summary fair value gainloss derivative instruments based upon estimated amount would receive pay terminate contracts june 30 fair values based quoted market prices similar instruments represents level 2 measurement 13 shareholders equity june 30 2014 2013 authorized capital shares consisted following 750 million class common shares without par value 5 million class b common shares without par value 500 thousand nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2014 2013 repurchased 16 billion common shares aggregate share repurchase programs fiscal 2014 2013 2012 described funded repurchases available cash common shares repurchased held treasury used general corporate purposes fiscal 2014 repurchased 99 million common shares aggregate cost 673 million average price paid per common share 6785 fiscal 2013 repurchased 102 million common shares aggregate cost 450 million average price paid per common share 4411 fiscal 2012 repurchased 103 million common shares aggregate cost 450 million average price paid per common share 4364 accumulated comprehensive income following table summarizes changes balance aoci component total activity related unrealized gains losses availableforsale securities described note 6 immaterial fiscal 2014 14 earnings per share following table reconciles number common shares used compute basic diluted earnings per share potentially dilutive employee stock options restricted shares restricted share units performance share units antidilutive fiscal 2014 2013 2012 zero 9 million 10 million respectively 15 segment information operations principally managed products services basis comprised two operating segments reportable segments pharmaceutical medical factors determining reportable segments include manner management cardinal health inc subsidiaries notes consolidated financial statements continued evaluates performance combined nature individual business activities pharmaceutical segment distributes branded generic pharmaceutical specialty pharmaceutical overthecounter healthcare consumer products united states segment also operates nuclear pharmacies cyclotron facilities provides pharmacy services hospitals healthcare facilities provides services healthcare companies supporting marketing distribution payment specialty pharmaceutical products cardinal health china division segment imports distributes pharmaceuticals overthecounter healthcare consumer products well provides specialty pharmacy services china medical segment distributes broad range medical surgical laboratory products hospitals ambulatory surgery centers clinical laboratories physician offices healthcare providers united states canada china patients home united states segment also manufactures sources develops line private brand medical surgical products medical surgical products sold directly thirdparty distributors united states canada europe regions internationally following table presents revenue reportable segment corporate 1 pharmaceutical distribution contract walgreens expired august 31 2013 pharmaceutical distribution contract express scripts inc expired september 30 2012 2 corporate revenue consists elimination intersegment revenue allocated segments evaluate segment performance based upon segment profit among measures segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expenses include sharebased compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial customer care shared services human resources information technology legal corporate expenses allocated segments based upon headcount level benefit provided ratable allocation methodologies income net interest expense net provision income taxes allocated segments restructuring employee severance amortization acquisitionrelated costs impairments loss disposal assets litigation recoveriescharges net allocated segments addition certain investment spending allocated segments investment spending generally includes firstyear spend certain projects require incremental investments form additional operating expenses encourage segments corporate functions identify investment projects promote innovation provide future returns approval decisions projects dependent upon executive management expenses projects often retained corporate investment spending within corporate 33 million 37 million 21 million fiscal 2014 2013 2012 respectively following table presents segment profit reportable segment corporate following tables present depreciation amortization additions property equipment reportable segment corporate following table presents total assets reportable segment corporate june 30 cardinal health inc subsidiaries notes consolidated financial statements continued following tables present revenue property equipment net geographic area 16 sharebased compensation savings plans sharebased compensation plans maintain stock incentive plans collectively “plans” benefit certain officers directors employees june 30 2014 26 million shares remain available future issuances cardinal health inc 2011 longterm incentive plan “2011 ltip” 2011 ltips fungible share counting provisions stock options counted plan one share every share issued awards stock options counted plan two onehalf shares every share issued means 10 million shares could issued awards stock options 26 million shares could issued stock options shares issued treasury shares stock options exercised restricted share units performance share units vest following table provides total sharebased compensation expense type award total tax benefit related sharebased compensation 33 million 32 million 31 million fiscal 2014 2013 2012 respectively stock options employee stock options granted plans generally vest equal annual installments three years exercisable periods ranging seven ten years grant date stock options exercisable price equal market value common shares underlying option grant date following table summarizes stock option transactions plans following tables provide additional data related stock option activity stock options granted officers certain employees fair values estimated grant date using lattice valuation model believe lattice model provides reasonable estimates ability take account individual exercise patterns based changes stock price variables provides range input assumptions disclosed table riskfree rate based us treasury yield curve time grant analyzed historical data estimate option exercise behaviors employee terminations used within lattice model expected life options granted calculated option valuation model represents cardinal health inc subsidiaries notes consolidated financial statements continued length time years options granted expected outstanding expected volatilities based implied volatility traded options common shares historical volatility period time commensurate contractual term option grant ten years following table provides range assumptions used estimate fair value stock options restricted shares restricted share units restricted shares restricted share units granted plans generally vest equal annual installments three years restricted shares restricted share units accrue cash dividend equivalents payable upon vesting awards following table summarizes transactions related restricted shares restricted share units plans following table provides additional data related restricted share restricted share unit activity performance share units performance share units vest threeyear performance period based achievement specific performance goals based extent targets achieved vested shares may range zero 200 percent target award amount performance share units accrue cash dividend equivalents payable upon vesting awards following table summarizes transactions related performance share units plans based target award amounts 1 vested based achievement 143 percent target performance goal following table provides additional data related performance share unit activity employee retirement savings plans substantially domestic nonunion employees eligible enrolled companysponsored contributory retirement savings plans include features section 401k internal revenue code 1986 amended provide matching profit sharing contributions us contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement savings plans 75 million 68 million 53 million fiscal 2014 2013 2012 respectively cardinal health inc subsidiaries notes consolidated financial statements continued 17 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2014 2013 sum quarters may equal yeartodate due rounding 1 fourth quarter fiscal 2014 recorded outofperiod decrease revenue 14 million related customer pricing adjustments 1 million pertained first three quarters fiscal 2014 quarter fiscal 2013 amounts material individually aggregate current prior periods 2 fourth quarter fiscal 2013 recorded outofperiod increase income tax expense 14 million related uncertain tax benefits generally less 1 million pertained first three quarters fiscal 2013 amounts material individually aggregate current prior periods 3 due loss continuing operations incurred fourth quarter fiscal 2013 potential dilutive common shares included denominator diluted per share computation period due antidilutive effect cardinal health inc subsidiaries item 9nannannannannanitem 8 financial statements supplementary data independent auditors reports financial statements consolidated statements earnings fiscal years ended june 30 1995 june 30 1994 twelve months ended june 30 1993 fiscal year ended march 31 1993 consolidated balance sheets june 30 1995 june 30 1994 consolidated statements shareholders equity fiscal years ended june 30 1995 june 30 1994 march 31 1993 consolidated statements cash flows fiscal years ended june 30 1995 june 30 1994 march 31 1993 notes consolidated financial statements independent auditors report shareholders directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries june 30 1995 1994 related consolidated statements earnings shareholders equity cash flows years ended june 30 1995 1994 march 31 1993 audits also included financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits consolidated financial statements financial statement schedule give retroactive effect poolingofinterests business combination cardinal health inc whitmire distribution corporation february 7 1994 described note 1 consolidated financial statements audit statements earnings shareholders equity cash flows whitmire distribution corporation year ended july 3 1993 statements reflect shareholders equity 2223000 july 3 1993 net sales 2666829000 net earnings available common shares cumulative effect change accounting principle 4039000 year ended july 3 1993 statements audited auditors whose report furnished us opinion insofar relates amounts included whitmire distribution corporation march 31 1993 financial statements based solely report auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors consolidated financial statements referred present fairly material respects financial position cardinal health inc subsidiaries june 30 1995 1994 results operations cash flows years ended june 30 1995 1994 march 31 1993 conformity generally accepted accounting principles also opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 7 consolidated financial statements company changed method accounting income taxes conform statement financial accounting standards 109 applying retroactively effective april 1 1992 deloitte touche llp columbus ohio august 14 1995 except note 16 date august 26 1995 report independent public accountants board directors whitmire distribution corporation audited statement operations whitmire distribution corporation delaware corporation year ended july 3 1993 related statements stockholders equity cash flows year ended july 3 1993 presented herein financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects results operations cash flows whitmire distribution corporation year ended july 3 1993 conformity generally accepted accounting principles arthur andersen co sacramento california september 3 1993 except respect matter discussed note 10 date october 11 1993 cardinal health inc subsidiaries consolidated statements earnings thousands except per share amounts accompanying notes integral part statements cardinal health inc subsidiaries consolidated balance sheets thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements shareholders equity thousands accompanying notes integral part statements cardinal health inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part statements cardinal health inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies cardinal health inc subsidiaries company full service wholesaler distributing broad line pharmaceuticals surgical hospital supplies therapeutic plasma specialty pharmaceutical products health beauty care products items typically sold hospitals retail drug stores health care providers company currently operating one business segment basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany amounts eliminated consolidated financial statements give retroactive effect poolingofinterests business combination whitmire distribution corporation whitmire merger february 7 1994 see note 3 term cardinal used herein refers cardinal health inc subsidiaries prior whitmire merger cardinals fiscal year historically ended march 31 whitmires fiscal year ended saturday closest end june march 1 1994 company changed fiscal year end march 31 june 30 accordingly accompanying consolidated financial statements fiscal years ended june 30 1995 june 30 1994 twelve months ended june 30 1993 combine information cardinal whitmire june 30 1995 three years ended accompanying consolidated financial statements fiscal year ended march 31 1993 combine information cardinals fiscal year ended march 31 1993 whitmires fiscal year ended july 3 1993 consolidated statement earnings twelve months ended june 30 1993 unaudited presented purpose supplemental analysis due different fiscal period ends merged companies results whitmire three months ended july 3 1993 included consolidated statements earnings periods ended june 30 1993 march 31 1993 cardinals results operations exclusive whitmire three months ended june 30 1993 included consolidated statement earnings included adjustment consolidated statement shareholders equity three months ended june 30 1993 cardinals net sales net earnings 550034000 7771000 respectively cash provided operating activities 53752000 cash used investing financing activities 36521000 22760000 respectively cardinal paid dividends 478000 three months ended june 30 1993 cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value marketable securities available sale effective july 1 1994 company adopted provisions statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 pursuant sfas 115 company classified investment shortterm municipal bonds availableforsale fair value bonds june 30 1995 approximates original cost determined specific identification basis accordingly net unrealized gain loss recorded separate component shareholders equity gross unrealized gains losses significant june 30 1995 bonds mature various dates fiscal 1996 prior adoption sfas 115 company accounted debt securities held sale using lowerofcost market rule adoption sfas 115 material effect companys financial statements cardinal health inc subsidiaries notes consolidated financial statements continued trade receivables trade receivables presented net related allowance doubtful accounts approximately 28275000 21594000 june 30 1995 june 30 1994 respectively merchandise inventories substantially merchandise inventories stated lower cost lastin firstout lifo method market company used firstin firstout fifo method inventory valuation approximates current replacement cost inventories would higher reported june 30 1995 79365000 june 30 1994 61852000 june 30 1994 difference replacement costs lifo values restated reflect poolingofinterests combination behrens inc see note 3 77465000 impact partial inventory liquidations certain lifo pools reduced lifo provision approximately 2500000 fiscal 1993 property equipment property equipment stated cost depreciation amortization financial reporting purposes computed using straightline method estimated useful lives assets range three forty years including capital lease assets amortized terms respective leases amortization capital lease assets included depreciation amortization expense certain software costs related internally developed purchased software capitalized amortized using straightline method useful lives exceeding three years assets primarily represent intangible assets related excess cost net assets subsidiaries acquired noncurrent deferred tax assets see note 7 intangible assets amortized using straightline method lives range ten forty years accumulated amortization 18670000 16571000 june 30 1995 june 30 1994 respectively balance sheet date determination made management ascertain whether intangible assets impaired based several criteria including limited sales trends undiscounted operating cash flows operating factors sales recognition company records sales merchandise shipped customers company obligation provide services related merchandise company also arranges direct deliveries made customer warehouses excluded net sales totaled 1779000000 562000000 467000000 fiscal 1995 1994 1993 respectively service fees related direct deliveries included net sales significant fiscal 1995 1994 1993 income taxes effective beginning fiscal 1993 cardinal began accounting income taxes liability method adopting statement financial accounting standards 109 accounting income taxes sfas 109 cumulative effect adopting statement 10000000 reported change accounting principle retroactive beginning fiscal 1993 prior adoption sfas 109 income taxes accounted accordance accounting principles board opinion 11 cardinal health inc subsidiaries notes consolidated financial statements continued earnings per common share primary earnings per common share based weighted average number common shares outstanding period dilutive effect stock options warrants date grant computed using treasury stock method fully diluted earnings per common share reflect dilutive effect stock options warrants date grant computed using treasury stock method b full conversion 725 convertible subordinated debentures due 2015 conversion redemption july 1993 see note 11 cash dividends paid per common share 012 009 007 fiscal years ended june 30 1995 1994 march 31 1993 respectively stock split company paid 25 stock dividend june 30 1994 effect fiveforfour stock split companys common shares share per share amounts included consolidated financial statements except consolidated statements shareholders equity adjusted reflect stock split reclassifications certain reclassifications made prior years amounts conform classifications used 1995 2 unusual items february 1994 company recorded charge reflect estimated whitmire merger costs approximately 359 million 282 million net tax including fees transaction costs related combination b costs expected incurred connection integration cardinals whitmires business operations estimated costs included approximately 7 million investment banking legal accounting related transaction fees costs associated combination 13 million corporate integration distribution rationalization 6 million integration information systems 2 million restructuring whitmires revolving credit agreement estimated costs approximately 7 million pertained revaluation certain operating assets 2 million pertained employee relocation retraining termination costs june 30 1995 company incurred actual costs aggregating approximately 269 million relating whitmire merger company anticipates remainder costs expended fiscal 1996 current estimates merger costs ultimately incurred materially different amounts originally recorded fiscal 1993 company received termination fee approximately 135 million resulting termination durrfillauer medical inc agreement merge company also fiscal 1993 company recorded charges totaling approximately 137 million primarily related closing certain noncore operations rationalization standardization improvement selected distribution operations information systems support functions charges included writedown certain assets moving costs associated affected operations modification costs necessary centralize standardize certain information systems support functions june 30 1995 initiatives contemplated substantially completed accordance original plan related funds expended modification terms certain whitmire stock options fiscal 1993 also resulted onetime stock option compensation charge approximately 52 million see note 11 cardinal health inc subsidiaries notes consolidated financial statements continued following supplemental information presented purposes facilitating meaningful comparisons ongoing operations companies drug distribution industry summarizes results operations company adjusted pro forma basis reflect elimination effect unusual items discussed b redemption whitmires preferred stock pursuant terms reorganization agreement see note 3 solely purposes summary presented redemption assumed funded liquidation investments taxexempt marketable securities although anticipated unusual items similar nature could occur future operating earnings net earnings reported companys historical financial statements reconciled respective amounts preceding table follows cardinal health inc subsidiaries notes consolidated financial statements continued 3 business combinations july 18 1994 company issued approximately 944000 common shares merger transaction common shares behrens inc drug wholesaler based waco texas transaction accounted poolingofinterests business combination impact behrens merger historical pro forma basis significant accordingly prior periods restated behrens merger july 1 1994 company acquired outstanding stock humistonkeeling inc drug wholesaler based calumet city illinois cash 33334000 transaction accounted purchase method purchase occurred beginning fiscal 1994 operating results pro forma basis would significantly different january 27 1994 shareholders cardinal whitmire approved adopted agreement plan reorganization dated october 11 1993 reorganization agreement pursuant wholly owned subsidiary cardinal merged whitmire effective february 7 1994 whitmire merger accounted poolingofinterests business combination holders outstanding whitmire common stock received aggregate approximately 6802000 common shares approximately 1861000 class b common shares exchange previously outstanding common stock whitmire addition whitmires outstanding stock options converted options purchase aggregate approximately 1721000 additional common shares pursuant terms options reorganization agreement december 17 1993 company issued approximately 296000 common shares merger transaction capital stock prn services inc distributor pharmaceuticals medical supplies oncologists oncology clinics transaction accounted poolingofinterests business combination impact prn merger historical pro forma basis significant accordingly prior periods restated prn merger may 4 1993 company acquired outstanding capital stock solomons company wholesale drug distributor based savannah georgia exchange approximately 1062000 common shares transaction accounted purchase method acquisition occurred beginning fiscal 1993 operating results pro forma basis would significantly different 4 notes payable banks company entered various uncommitted lineofcredit arrangements allow borrowings 225000000 221000000 june 30 1995 1994 respectively various money market rates amount outstanding arrangements 3000000 25000000 weighted average interest rates 689 428 june 30 1995 1994 respectively addition aforementioned credit arrangements june 30 1995 company revolving credit agreements eight banks maturity less one year renewable quarterly basis allow company borrow 100000000 none use either june 30 1995 1994 company required pay commitment fee annual rate 125 average daily unused amounts total credit allowed revolving credit agreements total available unused lines credit june 30 1995 june 30 1994 322000000 296000000 respectively cardinal health inc subsidiaries notes consolidated financial statements continued 5 longterm obligations longterm obligations consist following thousands february 23 1994 company sold 100000000 65 notes due 2004 65 notes public offering 65 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 860000 incurred connection offering amortized straightline basis period 65 notes outstanding company used proceeds sale general corporate purposes including repayment bank lines credit incurred part whitmire merger see note 3 anticipation sale 65 notes company entered interest rate hedge agreement terminated approximate time issuance 65 notes resulting deferred gain approximately 13 million amortized reduction interest expense period 65 notes outstanding march 11 1992 company sold 100000000 8 notes due 1997 8 notes public offering 8 notes represent unsecured obligations company redeemable prior maturity subject sinking fund issuance costs approximately 718000 incurred connection offering amortized straightline basis period 8 notes outstanding company entered various interest rate swap agreements serve hedge companys aggregate interest cost 8 notes response falling interest rates subsequent issuance 8 notes net effect swap agreements company exchanged fixed rate position 8 notes fixed rate 51 period july 15 1992 march 1 1993 fixed rate 65 period march 2 1993 march 1 1994 thereafter fixed rate 81 march 1 1997 maturity date 8 notes may 1993 two offsetting swap agreements canceled gain loss company notional principal four swap agreements outstanding june 30 1995 100 million due offsetting nature swaps market value net receivable position approximates market value net payable position risk accounting loss based discounted cash flow assumption event nonperformance counterparties company net receivable position approximately 3 million june 30 1995 however based credit quality counterparties company believes likelihood credit loss remote company recognizes income periodic net cash settlements matched swap agreements accrue certain longterm obligations collateralized property equipment company aggregate book value approximately 11480000 june 30 1995 cardinal health inc subsidiaries notes consolidated financial statements continued maturities longterm obligations future fiscal years follows thousands 6 estimated fair value financial instruments carrying amounts cash equivalents marketable securities notes payable banks accrued liabilities june 30 1995 june 30 1994 approximate fair value shortterm maturities items estimated fair value companys longterm obligations 211208000 206116000 compared carrying amounts 211333000 213015000 june 30 1995 june 30 1994 respectively fair value companys longterm obligations estimated based quoted market prices similar issues current interest rates offered debt remaining maturities 7 income taxes effective beginning fiscal 1993 cardinal adopted sfas 109 provisions sfas 109 income taxes recorded liability method sfas 109 results recognition deferred tax assets liabilities expected future tax consequences existing differences financial reporting tax reporting bases assets liabilities temporary differences operating loss tax credit carryforwards tax purposes cumulative effect adopting sfas 109 10000000 reported change accounting principle retroactive beginning fiscal 1993 provision credit income taxes consists following thousands cardinal health inc subsidiaries notes consolidated financial statements continued reconciliation companys income tax provision based federal statutory income tax rate follows components companys deferred income tax assets liabilities current portion liability 15095000 asset 4990000 june 30 1995 june 30 1994 respectively included consolidated balance sheets captions accrued liabilities prepaid expenses noncurrent portion liability 10987000 asset 467000 june 30 1995 june 30 1994 respectively included consolidated balance sheets captions liabilities assets follows thousands 8 employee retirement benefit plans substantially companys nonunion employees enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k internal revenue code provide matching company contributions companys contributions plans determined board directors subject certain minimum requirements specified plans qualified union employees covered companysponsored multiemployer defined benefit pension plans provisions collective bargaining agreements benefits plans generally based employees years service average compensation retirement effect companysponsored defined benefit plans companys consolidated financial statements material cardinal health inc subsidiaries notes consolidated financial statements continued employee retirement benefit plans expense follows thousands adoption financial accounting standards board statement 112 employers accounting postemployment benefits 1995 material effect consolidated financial statements company 9 commitments contingent liabilities company leases certain warehouse office facilities vehicles data processing equipment operating leases expire various dates next twelve years certain leases provide renewal options andor contingent rentals based various factors future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 1995 follows thousands minimum rental payments reduced sublease rentals approximately 438000 1996 353000 1997 rental expense net sublease rental income relating operating leases shortterm cancelable leases approximately 12631000 11189000 10316000 fiscal 1995 1994 1993 respectively connection supplier relationship various customers company guaranteed certain indebtedness lease payments june 30 1995 guarantees total approximately 1633000 fiscal 1994 company began program whereby certain customer notes receivables sold full recourse commercial bank june 30 1995 amounts outstanding customer notes receivables sold commercial bank program totaled approximately 6860000 company becomes involved timetotime litigation arising normal business activities addition november 1993 cardinal whitmire five pharmaceutical wholesalers twentyfour pharmaceutical manufacturers named defendants series purported class action antitrust lawsuits alleging violations various antitrust laws associated chargeback pricing system company believes allegations set forth cardinal whitmire lawsuits without merit opinion management companys liability pending litigation would material adverse effect companys financial condition results operations cardinal health inc subsidiaries notes consolidated financial statements continued 10 redeemable preferred stock company authorized 360000 shares redeemable preferred 01 par value stock whitmire redeemable preferred stock divided two series 350000 shares designated senior preferred stock 10000 shares designated series preferred stock holders whitmire redeemable preferred stock entitled cumulative annual dividends 1000 per share senior preferred stock 10125 series preferred stock declared whitmires board directors lieu paying cash dividends holders senior preferred stock series preferred stock whitmire could election pay scheduled dividends additional shares senior preferred stock series preferred stock appropriate whitmire would required redeem 10000 per share plus accrued unpaid dividends shares senior series preferred stock commencing october 1994 july 1996 stockholders equity charged 840000 fiscal 1993 accretion relative mandatory redemption obligation march 31 1993 total 4200000 credited redeemable preferred stock accretion pursuant terms reorganization agreement cardinal whitmire see note 3 outstanding shares whitmire senior series preferred stock redeemed february 7 1994 date whitmire merger 11 shareholders equity companys authorized capital shares consist 60000000 class common shares without par value 41945472 34862835 outstanding 193292 179878 held treasury cost june 30 1995 june 30 1994 respectively b 5000000 class b common shares without par value none 2971375 outstanding june 30 1995 june 30 1994 respectively c 500000 nonvoting preferred shares without par value none issued class common shares class b common shares collectively referred common shares class b common shares issued former whitmire stockholder february 1994 connection whitmire merger class b common shares outstanding june 30 1994 converted class common shares year ended june 30 1995 prior conversion class b common shares holders class common shares class b common shares participated equally dividends declared companys board directors holders class common shares entitled one vote per share election directors upon matters shareholders entitled vote holders class b common shares entitled onefifth one vote per share election directors upon matters shareholders entitled vote september 26 1994 8050000 companys common shares sold pursuant public offering approximately 1867000 common shares new shares sold company approximately 6183000 common shares existing shares sold certain shareholders company existing shares included issued outstanding class b common shares converted class common shares prior sale public net proceeds received company approximately 70 million sale new shares used finance working capital growth general corporate purposes company receive proceeds sale existing shares june 11 1993 company called 725 convertible subordinated debentures due 2015 subordinated debentures redemption effective july 2 1993 following call 74920000 subordinated debentures converted common shares company remaining 80000 subordinated debentures outstanding redeemed cash amount credited shareholders equity result conversion subordinated debentures reduced unamortized offering costs approximately 1767000 costs directly related conversion approximately 13000 cardinal health inc subsidiaries notes consolidated financial statements continued fiscal 1993 whitmire canceled adjustment share rights previously granted outside investors representing rights purchase shares whitmire common stock defined percentage adjustment share rights cancelable annually 100 based upon achievement certain financial targets additionally certain conditions relative exercise whitmire options eliminated financial reporting purposes modification terms options previously granted key employees treated options issued date terms modified accordingly compensation charge totaling approximately 52 million recorded relative changes compensation charge equal fair value determined independent appraisal options date terms options modified pursuant terms reorganization agreement see note 3 warrants purchase shares whitmire common stock upon exercise became convertible approximately 2831000 common shares average price 08 per share exercised prior consummation poolingof interests business combination cardinal whitmire aril 14 1993 company repurchased common shares approximately 725000 owned subsidiaries north american national corporation former chairman also director company price 2120 per share nearly shares subject certain restrictions contained shareholders agreement among north american national corporation individual shareholders restrictions released part repurchase transaction 12 stock options restricted shares company maintains stock incentive plans benefit certain officers directors key employees plans june 30 1995 company authorized issue aggregate 3875000 common shares form incentive stock options nonqualified stock options restricted shares options granted generally exercisable periods ten years date grant price equals fair market value date grant following summarizes stock option transactions plans march 31 1992 june 30 1995 giving retroactive effect stock dividends stock splits thousands except per share amounts june 30 1995 approximately 476000 option shares plans exercisable approximately 2723000 common shares reserved issuance plans cardinal health inc subsidiaries notes consolidated financial statements continued connection whitmire merger outstanding whitmire stock options granted current former whitmire officers employees automatically converted options cardinal exchange options purchase aggregate approximately 1721000 additional common shares pursuant terms options reorganization agreement see note 3 terms original issuance reflected reorganization agreement exercise price substantially cardinal exchange options remitted certain former investors whitmire cardinal exchange options purchase 1250000 271000 common shares average option price 152 160 exercised fiscal 1995 1994 respectively june 30 1995 cardinal exchange options purchase approximately 200000 shares outstanding average exercise price 208 per share substantially cardinal exchange options outstanding june 30 1995 100 vested exercisable october 25 1995 market value restricted shares awarded company recorded unamortized restricted stock awards shown separate component shareholders equity compensation awards amortized expense period participants perform services generally one six years june 30 1995 approximately 416000 restricted shares issued approximately 148000 shares remain restricted subject forfeiture approximately 16000 shares forfeited 13 supplemental information regarding noncash investing financing activities conjunction acquisitions humistonkeeling solomons see note 3 liabilities assumed follows thousands total debt assumed company result acquisitions 1670000 4315000 fiscal 1995 three months ended june 30 1993 respectively included part amount liabilities assumed conjunction poolingofinterests combination behrens see note 3 fiscal 1995 historical cost behrens assets combined approximately 25396000 total behrens liabilities assumed including total debt approximately 1336000 approximately 15617000 conjunction poolingofinterests combination prn see note 3 fiscal 1994 historical cost prn assets combined approximately 16946000 total prn liabilities assumed including total debt approximately 5847000 approximately 16564000 cardinal health inc subsidiaries notes consolidated financial statements continued 14 selected quarterly financial data unaudited following selected quarterly financial data fiscal 1995 1994 reflects amounts reported previously filed quarterly reports following supplemental information fiscal 1994 excludes impact unusual items see note 2 discussion presentation assumes redemption whitmires preferred stock solely purposes supplemental information presented redemption assumed funded liquidation investments taxexempt marketable securities cardinal health inc subsidiaries notes consolidated financial statements continued operating earnings net earnings reported companys quarterly financial data fiscal 1994 reconciled respective amounts preceding table follows 15 concentrations credit risk major customers companys trade receivables exposed concentration credit risk customers retail health care sectors however credit risk limited due diversity customer base wide geographic dispersion company performs ongoing credit evaluations customers financial conditions maintains reserves credit losses historically within companys expectations fiscal 1995 companys two largest customers accounted 11 net sales 82 direct deliveries respectively trade receivables due two customers aggregated approximately 25 total trade receivables june 30 1995 16 subsequent event august 26 1995 company signed definitive merger agreement medicine shoppe international inc medicine shoppe franchisor independent retail pharmacies terms transaction shareholders medicine shoppe receive companys common shares exchange common shares medicine shoppe company issue approximately 60 million 68 million common shares transaction depending part upon average closing price companys common shares specified period certain circumstances company could issue approximately 72 million common shares transaction subject certain conditions including approval medicine shoppe shareholders expected accounted poolingofinterests item 9item 8 financial statements supplementary data report independent registered public accounting firm consolidated financial statements schedule consolidated statements earnings fiscal years ended june 30 2009 2008 2007 consolidated balance sheets june 30 2009 2008 consolidated statements shareholders’ equity fiscal years ended june 30 2009 2008 2007 consolidated statements cash flows fiscal years ended june 30 2009 2008 2007 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm shareholders board directors cardinal health inc audited accompanying consolidated balance sheets cardinal health inc subsidiaries “company” june 30 2009 2008 related consolidated statements earnings shareholders’ equity cash flows three years period ended june 30 2009 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position company june 30 2009 2008 consolidated results operations cash flows three years period ended june 30 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 10 consolidated financial statements company adopted financial accounting standards board interpretation 48 “accounting uncertainty income taxes” july 1 2007 also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting june 30 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 27 2009 expressed unqualified opinion thereon ernst young llp ernst young llp columbus ohio august 27 2009 cardinal health inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated statements cardinal health inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated statements cardinal health inc subsidiaries notes consolidated financial statements 1 basis presentation summary significant accounting policies cardinal health inc ohio corporation formed 1979 leading provider products services improve safety productivity healthcare references “company” consolidated financial statements shall deemed references cardinal health inc majorityowned subsidiaries unless context otherwise requires basis presentation consolidated financial statements company include accounts majorityowned subsidiaries significant intercompany transactions amounts eliminated certain prior year balances reclassified conform current year presentation results businesses acquired disposed included consolidated financial statements effective date acquisition date disposal effective fourth quarter fiscal 2009 company reclassified united kingdombased martindale injectable manufacturing business “martindale” leading manufacturer supplier large range pharmaceutical products services united kingdom discontinued operations effective second quarter fiscal 2007 company reclassified former pharmaceutical technologies services segment certain genericfocused businesses segment excluding certain genericfocused businesses sold referred “pts business” discontinued operations use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states “gaap” preparation financial statements accordance gaap requires management make estimates judgments assumptions affect amounts reported consolidated financial statements accompanying notes estimates judgments assumptions used accounting disclosure related among items allowance doubtful accounts inventory valuation goodwill intangible asset impairment preliminary final purchase accounting valuations including acquired inprocess research development costs “iprd” vendor reserves equitybased compensation income taxes loss contingencies self insurance accruals accrued restructuring costs actual amounts could ultimately differ estimated amounts spinoff carefusion corporation september 29 2008 company announced intended separate clinical medical products businesses including healthcare supply chain services business pro rata distribution shareholders “distribution” “spinoff” common stock wholly owned subsidiary carefusion corporation “carefusion” formed purpose holding clinical medical products businesses company retain certain surgical exam gloves drapes apparel fluid management businesses part clinical medical products segment july 10 2009 company’s board directors approved distribution shareholders 801 shares carefusion common stock basis 05 shares carefusion common stock common share company distribution made close trading august 31 2009 company’s shareholders record 5 pm edt august 25 2009 following spinoff company retain 199 carefusion common stock company required dispose retained shares carefusion common stock within five years distribution subject number conditions including among others • private letter ruling company received irs revoked modified material respect • receipt opinions counsel company effect contribution distribution qualify transaction described sections 355a 368a1d internal revenue code 1986 amended “code” • rating agency action likely result either company carefusion downgraded investment grade • making cash distribution carefusion company prior distribution company cannot assure conditions met cash equivalents company considers liquid investments purchased maturity three months less cash equivalents carrying value cash equivalents approximates fair value receivables trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain services segment presented net allowance doubtful accounts see note 4 additional information concentrations credit risk major customers company maintains cash depository accounts major banks throughout world invests high quality shortterm liquid instruments investments made instruments issued enhanced high quality institutions investments mature within three months company incurred related losses company’s trade receivables lease receivables finance notes accrued interest receivables exposed concentration credit risk customers retail healthcare sectors credit risk affected changes reimbursement economic pressures impacting hospital acute care sectors healthcare industry credit risk limited however due supporting collateral diversity customer base including wide geographic dispersion company performs ongoing credit evaluations customers’ financial conditions maintains reserves credit losses historically within company’s expectations following table summarizes company’s customers individually account least 10 company’s revenue customers table serviced healthcare supply chain services segment june 30 2009 2008 walgreens accounted 33 26 respectively cvs accounted 19 respectively company’s gross trade receivable balance certain company’s businesses entered agreements group purchasing organizations “gpos” act purchasing agents negotiate vendor contracts behalf members fiscal 2009 2008 2007 approximately 16 10 respectively revenue derived gpo members contractual arrangements established novation llc premier purchasing partners lp company’s two largest gpo relationships terms revenue however company’s trade receivable balances individual members gpo therefore significant concentration credit risk exists types arrangements inventories substantial portion inventories valued lower cost using lastin firstout “lifo” method market remaining inventory valued lower cost using firstin firstout “fifo” method market see note 6 additional information cash discounts manufacturer cash discounts recorded component inventory cost recognized reduction cost products sold related inventory sold property equipment property equipment carried cost less accumulated depreciation property equipment held sale recorded lower cost fair value less cost sell depreciation expense financial reporting purposes computed using straightline method estimated useful lives assets including capital lease assets depreciated terms respective leases company uses following range useful lives property equipment categories buildings improvements1 50 years machinery equipment2 20 years furniture fixtures3 10 years depreciation expense 3063 million 2869 million 2497 million fiscal 2009 2008 2007 respectively certain events changes operating conditions occur impairment assessment may performed recoverability carrying amounts company expenses repairs maintenance expenditures incurred company capitalizes interest longterm fixed asset projects using rate approximates company’s weighted average interest rate longterm obligations 57 june 30 2009 amount capitalized interest immaterial fiscal years presented goodwill intangibles company accounts purchased goodwill intangible assets accordance financial accounting standards board “fasb” statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 purchased goodwill intangible assets indefinite lives amortized instead tested impairment least annually intangible assets finite lives primarily customer relationships patents trademarks continue amortized useful lives company tests impairment fourth quarter fiscal year frequently certain indicators present changes circumstances suggest impairment may exist sfas 142 requires testing goodwill impairment conducted reporting unit level using twostep approach first step requires comparison carrying value reporting units estimated fair value units carrying value reporting unit exceeds estimated fair value company performs second step goodwill impairment measure amount impairment loss second step goodwill impairment test compares estimated implied fair value reporting unit’s goodwill carrying value estimated implied fair value goodwill determined manner amount goodwill recognized business combination determined company allocates estimated fair value reporting unit assets liabilities unit including intangible assets reporting unit acquired business combination excess estimated fair value reporting unit amounts assigned assets liabilities implied fair value goodwill company’s determination estimated fair value reporting units based combination discounted cash flow analysis multiple earnings interest taxes depreciation amortization “ebitda” available review priceearnings ratio publicly traded companies similar nature scope size respective reporting units methods assumptions used test impairment revised segment realignments periods presented discount rates used impairment testing based riskfree rate plus adjustment risk factors ebitda multiples used impairment testing judgmentally selected based factors nature scope size applicable reporting unit use alternative estimates peer groups changes industry adjusting discount rate ebitda multiples price earnings ratios used could affect estimated fair value reporting units potentially result goodwill impairment identified impairment would result expense company’s results operations company performed annual impairment test fiscal 2009 2008 2007 resulted impairment charges see note 8 additional information regarding goodwill intangible assets income taxes accordance provisions sfas 109 “accounting income taxes” company accounts income taxes using asset liability method asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences currently exist tax bases financial reporting bases company’s assets liabilities deferred tax assets liabilities measured using enacted tax rates respective jurisdictions company operates deferred taxes provided unremitted earnings subsidiaries outside us expected earnings permanently reinvested company accounts uncertain tax positions accordance provisions fasb interpretation “fin” 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 standard provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement accounting vendor reserves ordinary course business vendors may challenge deductions billings taken payments otherwise due company contested transactions researched resolved based upon company policy findings research performed given time outstanding items various stages research resolution determining appropriate vendor reserve company assesses historical information current outstanding claims ultimate outcome certain claims may different company’s original estimate may require adjustment adjustments vendor reserves included cost products sold accrued liabilities accrued liabilities represent various obligations company including certain accrued operating expenses taxes payable equitybased compensation company accounts equitybased compensation accordance sfas 123r “sharebased payment” statement requires equitybased payments employees including grants options recognized consolidated statement earnings based grant date fair value award fair values options granted company adopted statement determined using lattice valuation model options granted prior adoption statement valued using blackscholes model company’s estimate option’s fair value dependent complex estimation process requires management make assumptions future uncertain events estimates include limited stock price volatility expected option life expected dividend yield option forfeiture rates compensation expense recognized equitybased awards net estimated forfeitures recognized ratably awards’ service period company classifies equitybased compensation expense within selling general administrative “sga” expenses correspond line item majority cash compensation paid employees see note 18 additional information regarding equitybased compensation dividends company paid cash dividends per common share 056 048 036 fiscal years ended june 30 2009 2008 2007 respectively revenue recognition accordance us securities exchange commission “sec” staff accounting bulletin “sab” 104 “revenue recognition” company recognizes revenue persuasive evidence arrangement exists product delivery occurred services rendered price fixed determinable collectability reasonably assured revenue recognized net sales returns allowances healthcare supply chain services segment recognizes distribution revenue title transfers customers business obligation provide services related merchandise revenue within segment includes revenue bulk customers deliveries bulk customers consist product shipped form product received manufacturer bulk customers ability process large quantities products central locations self distribute products individual retail stores customers revenue bulk customers recorded title transfers customer company obligation provide services related merchandise revenue deliveries direct shipped customer warehouses manufacturer whereby company acts intermediary ordering delivery products recorded gross accordance fasb emerging issues task force “eitf” issue 9919 “reporting revenue gross principal versus net agent” revenue recorded gross basis since company incurs credit risk customer bears risk loss incomplete shipments receive separate fee commission transaction primary obligor radiopharmaceutical revenue recognized upon delivery product customer servicerelated revenue including fees received analytical services sales marketing services recognized upon completion services clinical medical products segment generates revenue sale lease equipment software medical products supplies income associated financing equipment leases majority revenue transactions qualify multiple element arrangements revenue arrangements accounted accordance principles emerging issues task force consensus 0021 “multiple element arrangements” applicable american institute certified public accountants statement position 972 “software revenue recognition” sfas 13 “accounting leases” revenue multiple element arrangements allocated unit accounting using relative fair value method revenue recognized unit accounting individually fair value evidence used allocation process limited vendor specific objective evidence “vsoe” historical prices products sold standalone transactions extent products yet sold standalone basis vsoe fair value price management authority established product event vsoe fair value exist data points outside organization utilized objective evidence fair value nonsoftware products fair value evidence exists undelivered elements exist delivered elements company applies residual method company periodically reviews product offerings embedded software determine whether software incidental product whole embedded software incidental product whole product classified software revenue recognition purposes nonsoftware product software product essential functionality classified software related element softwarerelated elements also include software installation services post contract support software softwarerelated elements recognized revenue accordance guidance sop 972 software softwarerelated elements exception software maintenance recognized revenue upon later delivery completion associated service obligations software maintenance arrangements postcontract support offerings recognized revenue ratably service period equipment sale revenue recognized upon transfer title risk loss customer substantial completion installation training services related installation training services considered inconsequential delivery deemed occur upon transfer title risk loss time revenue costs associated installation training recognized equipment lease transactions evaluated classified either operating leases salestype leases defined sfas 13 segment recognizes salestype leases revenue upon completion installation activities amount present value minimum lease payments operating lease revenue recognized evenly lease term commencing upon completion installation activities equipment financing revenue recognized term salestype lease using effective interest method revenue sale medical products supplies recognized title risk loss transfers customer typically upon shipment pharmacy management service revenue recognized services rendered according contracts established fee charged contracts capitated fee dispensing fee monthly management fee actual costsincurred arrangement certain contracts fees services guaranteed company exceed stipulated amounts risksharing provisions revenue adjusted reflect estimated effects contractual guarantees risksharing provisions medicine shoppe international inc medicap pharmacies incorporated franchise operations collectively “medicine shoppe” company apothecarystyle pharmacy franchisees earns franchise origination fees franchise fees represent monthly fees based upon franchisees’ sales recognized revenue earned origination fees signing new franchise agreements recognized revenue new franchise store opened multiple segments business units arrangements involving multiple segments business units containing software incidental functionality product service accounted accordance eitf issue 0021 “revenue arrangements multiple deliverables” deliverable meets criteria separate unit accounting arrangement revenue allocated element based upon relative fair value recognized accordance applicable revenue recognition criteria element sales returns allowances revenue recorded net sales returns allowances company recognizes sales returns reduction revenue cost products sold sales price cost respectively products returned customer return policies generally require product physically returned subject restocking fees allow customers return products added back inventory resold full value returned vendors credit product returns generally consistent throughout year typically specific particular product customer amounts recorded revenue cost products sold accounting policy closely approximate would recorded sfas 48 “revenue recognition right return exists” applying provisions sfas 48 would materially change company’s financial position results operations sales returns allowances approximately 14 billion 12 billion 12 billion fiscal 2009 2008 2007 respectively distribution service agreement vendor fees company’s pharmaceutical supply chain business within healthcare supply chain services segment recognizes fees received distribution service agreements fees received vendors related purchase distribution vendor’s inventory fees earned company entitled payment company recognizes fees reduction carrying value inventory generated fees recognized reduction cost products sold statements earnings inventory sold shipping handling shipping handling costs included sga expenses consolidated statements earnings shipping handling costs include delivery expenses well costs prepare product shipment end customer shipping handling costs totaled 3245 million 2912 million 3058 million fiscal 2009 2008 2007 respectively shipping handling revenue received immaterial periods presented research development costs incurred connection development new products manufacturing methods charged expense incurred research development expenses 1671 million 1529 million 1028 million fiscal 2009 2008 2007 respectively translation foreign currencies financial statements company’s subsidiaries outside us generally measured using local currency functional currency adjustments translate assets liabilities foreign subsidiaries us dollars accumulated shareholders’ equity comprehensive income utilizing periodend exchange rates foreign currency translation recorded accumulated comprehensive income 962 million 2187 million june 30 2009 2008 respectively foreign currency transaction gains losses calculated utilizing weighted average exchange rates period included consolidated statements earnings interest expense 222 million 86 million 16 million fiscal years ended june 30 2009 2008 2007 respectively interest rate currency risk management company accounts derivative instruments accordance sfas 133 amended “accounting derivative instruments hedging activity” standard derivative instruments recorded fair value balance sheet changes fair value recorded net earnings shareholders’ equity comprehensive income net tax company uses forward currency exchange contracts interest rate swaps manage exposures variability cash flows primarily related foreign exchange rate changes future foreign currency transaction costs interest rate changes borrowing costs contracts designated cash flow hedges company also uses interest rate swaps hedge changes value fixed rate debt due variations interest rates derivative instruments underlying debt adjusted market value interest expense end period company uses foreign currency forward contracts protect value existing foreign currency assets liabilities remeasurement adjustments foreign currency denominated assets liabilities included interest expense remeasurement adjustment offset foreign currency forward contract settlements also classified interest expense interest rate swaps foreign currency forward contracts designated fair value hedges certain company’s derivative contracts adjusted current market values period qualify hedge accounting sfas 133 amended periodic gains losses contracts designated cash flow hedges deferred comprehensive income underlying transactions recognized upon recognition gains losses recorded net earnings adjustment carrying amounts underlying transactions period transactions recognized contracts designated fair value hedges resulting gains losses recognized net earnings offsetting exposures underlying transactions carrying values contracts included assets liabilities company’s policy requires contracts used hedges must effective reducing risk associated exposure hedged must designated hedge inception contract hedging effectiveness assessed periodically contract designated hedge designated ineffective adjusted market value recognized net earnings immediately fair value cash flow hedge ceases qualify hedge accounting terminated contract would continue carried balance sheet fair value settled future adjustments contract’s fair value would recognized earnings immediately forecasted transaction longer probable occur amounts previously deferred comprehensive income would recognized immediately earnings additional disclosure related company’s hedging contracts provided note 13 earnings per common share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share “diluted eps” similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method recent financial accounting standards september 2006 fasb issued sfas 157 “fair value measurements” statement defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements statement effective fiscal years beginning november 15 2007 interim periods within fiscal years february 2008 fasb issued fasb staff position “fsp” fas 1572 “effective date fasb statement 157” fsp delays effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis company adopted provisions sfas 157 first quarter fiscal 2009 financial assets financial liabilities material impact company’s financial position results operations upon adoption portion statement company expect adoption remaining portions statement effective fiscal 2010 material impact company’s financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets liabilitiesincluding amendment fasb statement 115” statement creates fair value option entity may irrevocably elect fair value initial subsequent measurement attribute certain assets liabilities instrumentbyinstrument basis fair value option elected instrument subsequent changes fair value instrument shall reported earnings company chose elect fair value option items already required measured fair value accordance gaap adoption sfas 159 impact company’s financial position results operations december 2007 fasb issued sfas 141r “business combinations” sfas 160 “noncontrolling interests consolidated financial statements” statements provide guidance accounting reporting business combinations minority interests consolidated financial statements effective fiscal years beginning december 15 2008 upon adoption fiscal 2010 statements expected significant impact company’s accounting disclosure practices future business combinations march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” statement amends expands disclosure requirements sfas 133 statement effective fiscal years interim periods beginning november 15 2008 adoption statement third quarter fiscal 2009 material impact company’s financial position results operations june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp addresses whether instruments granted sharebased payment transactions participating securities prior vesting therefore need included computation earnings per share fsp effective fiscal years beginning december 15 2008 interim periods within fiscal years company expect adoption fsp fiscal 2010 material impact financial position results operations may 2009 fasb issued sfas 165 “subsequent events” statement establishes general standards accounting disclosure events occur balance sheet date financial statements issued statement effective fiscal years ending june 15 2009 interim periods within fiscal years adoption statement fourth quarter fiscal 2009 material impact company’s financial position results operations june 2009 fasb issued sfas 166 “accounting transfers financial assetsan amendment fasb statement 140” statement improves relevance representational faithfulness comparability information provided transfer financial assets effects transfer financial assets entity’s financial statements transferor’s continuing involvement financial assets transferred statement effective fiscal years beginning november 15 2009 company process determining impact adopting statement june 2009 fasb issued sfas 167 “amendments fasb interpretation 46r” statement improves financial reporting enterprises involved variable interest entities statement effective fiscal years beginning november 15 2009 company process determining impact adopting statement 2 acquisitions fiscal 2009 fiscal 2009 company completed acquisition individually significant aggregate purchase price acquisition paid cash approximately 1287 million potential maximum contingent payments 140 million assumed liabilities acquired business approximately 1021 million consolidated financial statements include results operations business combination date acquisition transaction occurred beginning fiscal 2008 consolidated results operations would differed materially reported results fiscal 2008 may 12 2008 company completed acquisition assets privately held enturia inc “enturia” leawood kansasbased manufacturer products services directed infection prevention markets purchase price acquisition paid cash approximately 4900 million including assumption approximately 142 million liabilities included 51 million debt preliminary valuation acquired assets liabilities resulted goodwill approximately 3278 million identifiable intangible assets 1294 million final valuation completed fiscal 2009 company identified valued intangible assets related trade names trademarks developed technology customer relationships detail category follows fiscal 2008 company recorded charge 177 million related writeoff estimated iprd costs associated enturia acquisition portion purchase price allocated iprd fiscal 2008 represented company’s preliminary estimate fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly immediately charged special items expense acquisition date accordance fin 4 “applicability fasb statement 2 business combinations accounted purchase method” addition fiscal 2008 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 353 million potential maximum contingent payments 850 million assumed liabilities acquired businesses approximately 56 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2007 consolidated results operations would differed materially reported results fiscal 2007 june 21 27 2007 company completed initial subsequent tender offers outstanding common stock viasys conshohocken pennsylvaniabased provider products services directed critical care ventilation respiratory diagnostics clinical services medical surgical products markets tender offers total approximately 293 million shares viasys common stock validly tendered 4275 per share represented approximately 88 outstanding shares viasys june 28 2007 company acquired viasys number additional shares would hold 90 outstanding shares fully diluted basis day viasys merged subsidiary company complete transaction cash transaction valued approximately 15 billion including assumption approximately 2178 million liabilities included 542 million debt viasys employees outstanding stock options elected either receive cash payment convert options purchase company’s common shares certain viasys employees elected convert options resulted employees receiving right purchase total approximately 01 million common shares company preliminary valuation acquired assets liabilities resulted goodwill approximately 10 billion identifiable intangible assets 4420 million reported june 30 2007 final valuation completed fiscal 2008 resulted 815 million reclassification goodwill identifiable intangible assets company identified valued intangible assets related trade names trademarks developed technology customer relationships detail category follows fiscal 2007 company recorded charge 839 million related writeoff estimated iprd costs associated viasys acquisition charge based company’s preliminary estimate fair value iprd fiscal 2008 company completed valuation iprd recorded 250 million adjustment reduce total writeoff iprd associated viasys acquisition 589 million portion purchase price allocated iprd represents estimated fair value research development projects inprocess time acquisition projects yet reached technological feasibility deemed alternative use accordingly charged special items expense accordance fin 4 addition fiscal 2007 company completed acquisitions individually significant aggregate purchase price acquisitions paid cash approximately 1738 million potential maximum contingent payments 523 million assumed liabilities acquired businesses approximately 224 million consolidated financial statements include results operations business combinations date acquisition transactions occurred beginning fiscal 2006 consolidated results operations would differed materially reported results purchase accounting accruals connection restructuring integration plans related acquisition viasys company accrued part acquisition adjustments liability 174 million legal recall charges 113 million related employee termination relocation costs 109 million related closure certain facilities 20 million restructuring charges june 30 2009 company paid 51 million legal recall related costs 78 million employeerelated costs 84 million associated facility closures 3 special items impairments gainloss sale assets special items policy company classifies restructuring charges acquisition integration charges certain litigation items special items restructuring activity program whereby company fundamentally changes operations closing facilities moving product another location outsourcing production product restructuring activities may also involve substantial realignment management structure business unit response changing market conditions restructuring charges recognized accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 liability cost associated exit disposal activity recognized measured initially fair value period incurred except liability onetime termination benefit recognized future service period acquisition integration charges include costs integrate acquired companies upon acquisition certain integration charges recognized incurred within sga accordance sfas 141 integration charges recognized special items incurred company recognizes income favorable outcome legal settlements judgments resolution legal regulatory matters special items consolidated financial statements associated cash assets received generally expenses due unfavorable outcome legal settlements judgments resolution legal regulatory matters “litigation settlement losses” charged segment matter relates result classified sga expenses company’s consolidated financial statements certain circumstances significant litigation settlement losses classified special items consolidated statement earnings factors considered determining whether particular litigation settlement loss classified special items include size settlement nature matter ie significant matters infrequent nonrecurring unusual nature classified special items age matter pervasiveness matter entire organization company also classified legal fees document preservation production costs incurred connection previouslydisclosed sec investigation related audit committee internal review related matters special items information regarding investigations see company’s annual report form 10k fiscal year ended june 30 2007 amended “2007 form 10k” special items following summary special items fiscal years ended june 30 2009 2008 2007 restructuring charges fiscal 2005 company launched global restructuring program goal increasing value company provides customers better integration existing businesses improved efficiency disciplined approach procurement resource allocation program implemented three phases substantially complete end fiscal 2009 first phase program announced december 2004 focused business consolidations process improvements including rationalizing facilities worldwide reducing company’s global workforce rationalizing discontinuing overlapping underperforming product lines second phase program announced august 2005 focused longerterm integration activities enhance service customers improved integration across company’s segments continued streamlining internal operations third phase program announced april 2007 focused moving company’s medical products distribution headquarters certain corporate functions waukegan illinois company’s corporate headquarters dublin ohio beginning fiscal 2009 company undertook major restructuring segment operating structure effective july 1 2008 company consolidated businesses two primary operating reportable segments reduce costs align resources needs segment addition fiscal 2009 company incurred restructuring expenses related spinoff consisting employeerelated costs evaluate execute transaction costs start certain stand alone functions information technology systems onetime transaction related costs september 29 2008 company announced plans separate clinical medical products businesses described detail note 1 also fiscal 2009 company announced clinical medical products segment would reduce global workforce approximately 800 people six months addition restructuring programs discussed time company incurs costs implement smaller restructuring efforts specific operations within segments restructuring plans focus various aspects operations including closing consolidating certain manufacturing operations rationalizing headcount aligning operations strategic costefficient structure following table paragraphs provide additional detail regarding types restructuring charges incurred company fiscal years ended june 30 2009 2008 2007 employeerelated costs primarily consist onetime termination benefits recognized accordance provisions sfas 146 outplacement services provided employees involuntarily terminated duplicate payroll costs transition periods also included within category facility exit costs facility exit costs consist accelerated depreciation equipment relocation costs project consulting fees costs associated restructuring company’s delivery information technology infrastructure services addition facility exit costs include certain costs related spinoff costs evaluate execute transaction costs start certain stand alone functions information technology systems onetime transaction related costs acquisition integration charges costs integrating operations various acquired companies recorded acquisition integration charges incurred acquisition integration charges incurred fiscal 2009 2008 primarily result acquisitions viasys enturia costs incurred fiscal 2007 primarily result acquisitions viasys wholesale pharmaceutical health beauty related drugstore products distribution business f dohmen co certain subsidiaries “dohmen” alaris medical systems inc “alaris” fiscal years noted company also incurred acquisition integration charges numerous smaller acquisitions following table paragraphs provide additional detail regarding types acquisition integration charges incurred company fiscal years ended june 30 2009 2008 2007 employeerelated costs primarily consist severance stay bonuses noncompete agreements forms compensatory payouts made employees direct result acquisitions iprd costs connection certain acquisitions status acquired company’s research development projects assessed determine existence iprd immediately expensed special item integration costs integration costs generally relate expenses incurred integrate acquired company’s operations systems company’s existing operations systems costs include limited integration information systems employee benefits compensation accounting finance tax treasury internal audit risk management compliance administrative services sales marketing functions litigation net following table summarizes company’s net litigation costs included within special items fiscal 2009 2008 2007 derivative litigation company recognized income 580 million fiscal 2008 related settlement certain derivative actions information see 2008 form 10k pharmaceutical manufacturer antitrust litigation company recognized income 02 million 285 million fiscal 2008 2007 respectively resulting settlement class action antitrust claims alleging certain prescription drug manufacturers took improper actions delay prevent generic drug competition company named plaintiff class actions member direct purchasers’ class ie purchasers purchase directly drug manufacturers total recovery claims june 30 2009 1518 million net attorney fees payments due interested parties expenses withheld company unable time estimate future recoveries receive result class actions dea matter company recorded reserve 340 million fiscal 2008 related previously disclosed dea matter cardinal health federal securities litigation company recorded reserve made payment 6000 million fiscal 2007 related previously disclosed cardinal health federal securities litigation information regarding matter see 2007 form 10k cardinal health erisa litigation company incurred charges made payment 400 million fiscal 2007 related previously disclosed cardinal health erisa litigation information regarding matter see 2007 form 10k costs included special items fiscal 2007 2008 primarily related legal fees document preservation production costs incurred connection previously disclosed sec investigation related matters information see 2008 form 10k restructuring accrual rollforward following table summarizes activity related liabilities associated company’s restructuring activities fiscal years ended june 30 2009 2008 2007 1 amounts represent items expensed incurred accrued accordance gaap impairments gainloss sale assets net company classifies certain asset impairments related restructurings special items asset impairments gains losses sale assets eligible classified special items discontinued operations classified within impairments gainloss sale assets net within consolidated statements earnings fiscal 2009 2008 2007 company incurred impairments gainloss sale assets net 250 million 320 million 173 million respectively amounts included within corporate segment results see note 17 information regarding items included within corporate fiscal 2008 company recognized 233 million gain divestiture investment within healthcare supply chain services segment june 30 2006 company held 167 million cost investment global healthcare exchange llc “ghx” fiscal 2007 company determined investment impaired recognized 123 million charge company continue monitor ghx’s financial performance order assess additional impairment 4 accounts receivable trade receivables primarily comprised amounts owed company distribution businesses within healthcare supply chain services segment presented net allowance doubtful accounts 1272 million 1247 million june 30 2009 2008 respectively account considered past due first day due date accordance contract terms company generally ability charge customer service fees higher prices account considered past due company continuously monitors past due accounts establishes appropriate reserves cover potential losses company writeoff amounts deemed uncollectible established allowance doubtful accounts company provides financing various customers financing arrangements range approximately 90 days 10 years interest rates generally subject fluctuation interest income accounts recognized company earned financings may collateralized guaranteed third parties unsecured finance notes accrued interest receivables 445 million 290 million june 30 2009 2008 respectively current portions 270 million 204 million respectively included assets finance notes receivable reported net allowance doubtful accounts 53 million 44 million june 30 2009 2008 respectively company formed special purpose entities sole purpose buying receivables salestype leases various legal entities company selling receivables salestype leases certain multiseller conduits administered banks third party investors fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity “accounts receivable financing entity” exclusively engaged purchasing trade receivables making loans company accounts receivable financing entity consolidated company issued 2500 million 4000 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively part amendment certain facility terms preferred debt securities october 2006 company repaid 5000 million principal balance october 2008 company repaid remaining balance agreement terminated see note 9 additional information arrangement separate distinct company’s committed receivables sales facility program see note 19 discussion committed receivables sales facility program 5 salestype leases company’s salestype leases terms generally ranging five years lease receivables generally collateralized underlying equipment components company’s net investment salestype leases follows june 30 2009 2008 future minimum lease payments received pursuant salestype leases next five fiscal years thereafter follows 6 inventories substantial portion inventories approximately 71 70 june 30 2009 2008 respectively valued lower cost using lifo method market inventories included within core distribution facilities company’s healthcare supply chain services segment “distribution facilities” primarily merchandise inventories company believes average cost method inventory valuation provides reasonable approximation current cost replacing inventory within distribution facilities lifo reserve difference inventory lower lifo cost market b inventory replacement cost determined using average cost method inventory valuation fiscal 2009 2008 company record lifo reserve reductions company used average cost method inventory valuation inventory within core distribution facilities inventories would changed fiscal 2009 fiscal 2008 fact primarily due continued deflation generic pharmaceutical inventories lifo 349 million 425 million higher average cost value june 30 2009 2008 respectively company’s policy however record inventories excess current market value remaining inventory primarily stated lower cost using fifo method market inventories presented company’s consolidated balance sheets net reserves excess obsolete inventory 879 million 931 million june 30 2009 2008 respectively company reserves inventory obsolescence using estimates based historical experiences sales trends specific categories inventory age onhand inventory 7 discontinued operations assets held sale pts business second quarter fiscal 2007 company committed plans sell pts business met held sale criteria set forth sfas 144 “accounting impairment disposal long lived assets” accordance sfas 144 eitf issue 0313 “applying conditions paragraph 42 fasb statement 144 accounting impairment disposal longlived assets determining whether report discontinued operations” operating results pts business reclassified discontinued operations periods presented fourth quarter fiscal 2007 company completed sale pts business closing sale company received approximately 32 billion cash purchase price approximately 33 billion adjusted pursuant certain provisions purchase agreement company recognized aftertax book gain approximately 11 billion fiscal year ended june 30 2007 transaction company incurred activity fiscal year ended june 30 2008 result changes certain estimates made time sale activity transition service agreements adjustments also included within year ended june 30 2008 adjustment deferred tax item included book basis pts business sold fourth quarter fiscal 2007 adjustment resulted 123 million increase gain sale pts business fiscal year ended june 30 2009 company incurred activity result certain minor adjustments pertaining deferred taxes results pts business included discontinued operations fiscal years ended june 30 2009 2008 2007 summarized follows net periodic benefit cost included discontinued operations pts business 229 million fiscal 2007 interest expense allocated discontinued operations pts business 250 million fiscal 2007 interest expense allocated based upon ratio invested capital pts business versus overall invested capital company addition portion corporate costs previously allocated pts business reclassified remaining segments accordance eitf issue 937 “recognition deferred tax assets parent company’s excess tax basis stock subsidiary accounted discontinued operation” second quarter fiscal 2007 company recognized 4250 million net tax benefit related difference company’s tax basis stock various pts businesses included discontinued operations book basis company’s investment businesses tax benefit offset related tax expense gain net book value fourth quarter fiscal 2007 upon completion sale pts business liabilities related sale pts business included liabilities held sale discontinued operations 14 million 25 million june 30 2009 2008 respectively cash flows generated discontinued operations presented separately company’s consolidated statements cash flows fourth quarter fiscal 2009 company committed plans sell martindale within healthcare supply chain services segment met held sale criteria set forth sfas 144 accordance sfas 144 eitf issue 0313 net assets martindale presented separately held sale discontinued operations operating results presented within discontinued operations periods presented fourth quarter fiscal 2009 company also committed plans sell specialtyscripts llc “specialtyscripts” within healthcare supply chain services segment met held sale criteria set forth sfas 144 accordingly net assets business presented separately held sale company’s consolidated balance sheet june 30 2009 june 30 2009 2008 net assets held sale related business 456 million 345 million respectively results specialtyscripts reported within earnings continuing operations company’s consolidated statements earnings third quarter fiscal 2008 company committed plans sell certain smaller noncore businesses within former medical products technologies segment met held sale criteria set forth sfas 144 accordingly net assets businesses presented separately held sale company’s consolidated balance sheet results businesses reported within earnings continuing operations company’s consolidated statements earnings first quarter fiscal 2009 company completed sale businesses third quarter fiscal 2006 company committed plans sell significant portion healthcare marketing services business “hms disposal group” united kingdombased intercare pharmaceutical distribution business “ipd” met held sale criteria set forth sfas 144 remaining portion healthcare marketing services business remains within company accordance sfas 144 eitf issue 0313 net assets businesses presented separately held sale operating results businesses presented within discontinued operations accordance sfas 144 net assets held sale business recorded net expected fair value less costs sell amount lower businesses’ net carrying value impairment charges 473 million recorded fiscal 2007 within discontinued operations hms disposal group ipd first quarter fiscal 2007 company completed sale ipd third quarter fiscal 2007 company completed sale hms disposal group fourth quarter fiscal 2005 company decided close sterile pharmaceutical manufacturing business humacao puerto rico “humacao” part global restructuring program committed sell assets humacao operations met held sale criteria set forth sfas 144 first quarter fiscal 2006 company subsequently decided transfer production humacao companyowned facilities met criteria classification discontinued operations accordance sfas 144 eitf issue 0313 impairment charge 52 million recorded fiscal 2007 result recording net assets held sale net expected fair value less costs sell results businesses discussed included discontinued operations fiscal years ended june 30 2009 2008 2007 summarized follows cash flows generated discontinued operations presented separately company’s consolidated statements cash flows june 30 2009 2008 major components assets liabilities businesses held sale discontinued operations businesses follows 8 goodwill intangible assets goodwill following table summarizes changes carrying amount goodwill total segment two years ended june 30 2009 1 increase within clinical medical products segment primarily related acquisition enturia resulted preliminary goodwill allocation 3278 million adjustment inprocess research development related viasys acquisition 250 million partially offset reclassification goodwill identified intangible assets final viasys acquisition valuation 815 million deferred tax adjustment related alaris acquisition 57 million allocations purchase prices related certain acquisitions yet finalized subject adjustment company completes valuation analysis company expects future adjustments allocations purchase prices potential future contingent payments recorded goodwill intangible assets intangible assets definite lives amortized useful lives range three twenty one years detail intangible assets class two years ended june 30 2009 follows significant acquisitions intangible assets period presented amortization expense fiscal 2009 2008 2007 approximately 892 million 814 million 570 million respectively amortization expense next five fiscal years estimated 9 longterm obligations shortterm borrowings longterm obligations shortterm borrowings consist following june 30 2009 2008 400 550 565 580 585 600 675 notes floating rate notes due 2009 represent unsecured obligations company 780 700 debentures represent unsecured obligations allegiance corporation whollyowned subsidiary company guaranteed company obligations subject sinking fund redeemable prior maturity interest paid pursuant terms obligations notes company effectively subordinated liabilities company’s subsidiaries including trade payables 91 billion june 2008 company sold 300 million aggregate principal amount fixed rate notes due 2013 “the 2013 notes” registered offering 2013 notes mature june 15 2013 interest 2013 notes accrues 550 per year payable semiannually company experiences specific types change control notes rated investment grade sp moody’s fitch company required offer purchase 2013 notes 101 principal amount thereof plus accrued unpaid interest date repurchase company used proceeds repay 150 million 625 notes due 2008 july 15 2008 repay 149 million preferred debt securities october 3 2008 fiscal 2001 company entered agreement periodically sell trade receivables special purpose accounts receivable financing entity exclusively engaged purchasing trade receivables making loans company “accounts receivable financing entity” accounts receivable financing entity consolidated company primary beneficiary variable interest entity issued 2500 million 4000 million preferred variable debt securities parties affiliated company fiscal 2004 2001 respectively october 26 2006 company amended certain facility terms company’s preferred debt securities part amendment company repaid 5000 million principal balance portion proceeds october 2006 sale notes minimum net worth covenant added whereby minimum net worth company cannot fall 50 billion time amendment eliminated minimum adjusted tangible net worth covenant adjusted tangible net worth could fall 25 billion certain financial ratio covenants october 3 2008 company repaid remaining balance 149 million preferred debt securities agreement terminated june 30 2008 accounts receivable financing entity owned approximately 6077 million receivables included company’s consolidated balance sheet effective interest rate june 30 2008 348 loans made company breaches certain representations warranties covenants accounts receivable financing entity recourse general credit company addition cash equivalents june 30 2009 2008 company’s sources liquidity included 15 billion commercial paper program backed 15 billion revolving credit facility revolving credit facility exists largely support issuances commercial paper well shortterm borrowings general corporate purposes remained unused june 30 2009 2008 except 702 million 722 million respectively standby letters credit issued behalf company april 16 2009 connection spinoff company amended 15 billion revolving credit facility among things replace minimum net worth covenant covenants require company maintain consolidated interest coverage ratio end fiscal quarter least 4to1 maintain consolidated leverage ratio 325to1 new covenants become effective upon spinoff company also maintains shortterm credit facilities unsecured line credit allowed borrowings 489 million 689 million june 30 2009 2008 respectively june 30 2009 2008 157 million 202 million respectively outstanding uncommitted facilities june 30 2009 2008 outstanding balance uncommitted facilities included 42 million 54 million classified obligations june 30 2009 2008 respectively remaining 131 million 171 million balance obligations june 30 2009 2008 respectively consisted primarily additional notes loans capital leases maturities longterm obligations next five fiscal years thereafter follows 10 income taxes earnings income taxes discontinued operations follows fiscal years ended june 30 2009 2008 2007 provision income taxes continuing operations consists following fiscal years ended june 30 2009 2008 2007 reconciliation provision based federal statutory income tax rate company’s effective income tax rate continuing operations follows fiscal years ended june 30 2009 2008 2007 1 fourth quarter fiscal 2008 company recognized 304 million previously unrecognized tax benefits items pertaining fiscal 2002 2001 statute limitations lapsed approximately 18 million included “state local income taxes net federal benefit” approximately 286 million included “other” 2 fourth quarter fiscal 2008 company recognized 373 million additional tax expense related increase estimated state income tax rate deferred taxes june 30 2009 company 34 billion undistributed earnings nonus subsidiaries intended permanently reinvested nonus operations earnings considered permanently reinvested us tax provision accrued related repatriation earnings practicable estimate amount us tax might payable eventual remittance earnings fiscal 2008 company repatriated cash 3075 million nonus subsidiaries result incurred taxable dividends 144 million nontaxable return capital currency gain 1613 million taxable capital gain 1318 million taxable capital gain amount 1318 million fully offset previously unrecognized capital loss carryforward foreign tax credits 141 million recorded related taxable dividends resulting net tax benefit 41 million deferred income taxes arise temporary differences financial reporting tax reporting bases assets liabilities operating loss tax credit carryforwards tax purposes components deferred income tax assets liabilities june 30 2009 2008 follows millions deferred tax assets liabilities preceding table netting taxing jurisdiction following captions consolidated balance sheet june 30 2009 2008 millions 1 included “prepaid expenses other” 2 included “other assets” 3 included “other accrued liabilities” 4 included “deferred income taxes liabilities” 5 included “liabilities business held sale discontinued operations” june 30 2009 company gross federal state international loss credit carryforwards 789 million 7712 million 1874 million respectively tax effect aggregate deferred tax asset 1933 million substantially carryforwards available least three years indefinite carryforward period approximately 1363 million valuation allowance june 30 2009 applies certain federal international state local carryforwards opinion management likely expire unutilized however extent tax benefits related carryforwards realized future reduction valuation allowance would reduce income tax expense effective july 1 2007 company adopted provisions fin 48 resulting 1393 million reduction retained earnings fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” interpretation provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits amount recognized measured largest amount tax benefit greater 50 likely realized upon settlement interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition company 8488 million 7629 million unrecognized tax benefits june 30 2009 june 30 2008 respectively included june 30 2009 june 30 2008 balances 6109 million 5479 million respectively unrecognized tax benefits recognized would impact effective tax rate remaining unrecognized tax benefits relate tax positions ultimate deductibility highly certain uncertainty timing deductibility recognition tax benefits would affect company’s effective tax rate company includes full amount unrecognized tax benefits deferred income taxes liabilities consolidated balance sheets reconciliation beginning ending amounts unrecognized tax benefits fiscal 2009 2008 follows company recognizes accrued interest penalties related unrecognized tax benefits income tax expense june 30 2009 june 30 2008 company 2468 million 1954 million respectively accrued payment interest penalties balances gross amounts tax benefits included deferred income taxes liabilities condensed consolidated balance sheets year ended june 30 2009 company recognized 513 million interest penalties consolidated statement earnings company files income tax returns us federal jurisdiction various us state jurisdictions various foreign jurisdictions exceptions company subject audit taxing authorities fiscal years ending june 30 2001 current fiscal year internal revenue service “irs” currently ongoing audits fiscal years 2001 2007 three months ended december 31 2007 company notified irs transferred jurisdiction fiscal years 2001 2002 office appeals back examinations level reconsider previouslyunadjusted specific issues three months ended march 31 2008 company received notices proposed adjustment “npa’s” irs related fiscal years 2001 2005 challenging deductions arising sale trade receivables special purpose accounts receivable financing entity described detail note 9 amount additional tax excluding penalties interest proposed irs notices 1789 million company disagrees proposed adjustments intends vigorously contest company anticipates transaction could subject proposed adjustments irs tax audits fiscal years 2006 present company believes adequately reserved uncertain tax position relating arrangement therefore adjusted amount previously recorded unrecognized tax benefits related issue fiscal 2009 company received revenue agent’s report tax years 2003 2005 included npa’s discussed new npa’s related company’s transfer pricing arrangements foreign domestic subsidiaries transfer intellectual property among subsidiaries acquired entity prior acquisition company amount additional tax proposed irs new notices total 5981 million excluding penalties interest company disagrees proposed adjustments intends vigorously contest reasonably possible could change amount unrecognized tax benefits within next 12 months due activities irs taxing authorities including proposed assessments additional tax possible settlement audit issues expiration applicable statutes limitations company estimates range possible change unrecognized tax benefits within next 12 months decrease approximately zero 24 million exclusive penalties interest 11 commitments contingent liabilities commitments future minimum rental payments operating leases initial remaining noncancelable lease terms excess one year june 30 2009 rental expense relating operating leases approximately 1334 million 1244 million 1157 million fiscal 2009 2008 2007 respectively sublease rental income material period presented herein legal proceedings addition commitments obligations ordinary course business company subject various claims pending potential legal actions damages investigations relating governmental laws regulations matters arising normal conduct business company accrues contingencies related litigation accordance sfas 5 “accounting contingencies” requires company assess contingencies determine degree probability range possible loss estimated loss contingency accrued company’s consolidated financial statements probable liability incurred amount loss reasonably estimated litigation inherently unpredictable unfavorable resolutions could occur assessing contingencies highly subjective requires judgments future events company regularly reviews contingencies determine adequacy accruals related disclosures amount ultimate loss may differ estimates possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies icu litigation prior completion company’s acquisition alaris medical systems inc known cardinal health 303 inc “cardinal health 303” june 16 2004 icu medical inc “icu” filed patent infringement lawsuit cardinal health 303 us district court southern district california captioned icu medical inc v alaris medical systems inc lawsuit icu alleged alaris smartsite® family needlefree valves systems infringes upon icu patents icu sought monetary damages plus permanent injunctive relief prevent cardinal health 303 selling smartsite products july 30 2004 district court denied icu’s application preliminary injunction finding among things icu failed show substantial likelihood success merits july august 2006 district court granted summary judgment cardinal health 303 three four patents asserted icu issued order interpreting certain claims certain patents manner could impair icu’s ability enforce patents cardinal health 303 january 22 2007 district court granted summary judgment favor cardinal health 303 icu’s remaining claims declared certain patent claims invalid district court also ordered icu pay cardinal health 303 approximately 50 million attorneys’ fees costs october 24 2007 icu appealed decisions us court appeals federal circuit march 13 2009 court appeals affirmed rulings district court matter grounds court appeals denied icu’s request panel rehearing issue attorneys’ fees icu subsequently paid company attorneys’ fees accordance court order fda consent decree february 2009 company us food drug administration “fda” amended consent decree condemnation permanent injunction cardinal health 303 company’s subsidiary manufactures sells infusion pumps united states fda include infusion pumps manufactured cardinal health 303 original consent decree consent decree amended referred hereinafter “consent decree” “amended consent decree” respectively amended consent decree entered us district court southern district california february 23 2009 fda alleged amended consent decree based january 2008 inspection certain company’s infusion pumps satisfy standards federal food drug cosmetic act “fdc act” without admitting allegations contained amended consent decree addition requirements original consent decree company agreed among things would later april 24 2009 submit corrective action plan fda bring alaris system infusion pumps use us market compliance fdc act timely submitted ii later june 3 2009 independent expert perform comprehensive inspection company’s infusion pump facilities certify whether company’s infusion pump operations conformity quality system regulation certain provisions fdc act certification timely submitted fda iii later june 3 2009 independent recall expert inspect company’s recall procedures ongoing recalls involving company’s infusion pumps certify whether recall procedures compliance fdc act whether company take remedial actions respect recalls involving company’s infusion pumps certification timely submitted fda amended consent decree apply intravenous administration sets accessories furthermore prohibit company continuing manufacture market sell infusion pumps alaris se pumps covered consent decree amended consent decree also authorizes fda event violations future order company cease manufacturing distributing recall products take actions company may required pay damages 15000 per day per violation fails comply provision amended consent decree 15 million per year original consent decree entered district court february 8 2007 prior entering consent decree company initiated voluntary field corrective action august 15 2006 alaris se pumps result information indicating product risk “key bounce” associated keypad entries could lead overinfusion patients august 23 2006 united states filed complaint district court effect seizure alaris se pumps approximately 1300 units seized fda consent decree company required among things submit plan fda outlining corrections alaris se pumps currently use customers reconditioning plan seized alaris se pumps since time original consent decree amended consent decree entered company working satisfy obligations consent decree amended consent decree august 24 2007 fda notified company met conditions reconditioning plan alaris se pumps seized fda’s satisfaction addition october 10 2008 company notified fda satisfied best efforts obligation find remediate alaris se pumps united states use customers company also previously engaged independent expert inspect alaris se pump facilities certify infusion pump operations required consent decree april 2 2008 company implemented new quality system infusion pump facilities april 24 2009 independent expert provided certification fda indicating infusion pump operations conformity fdc act meets requirements original consent decree june 2 2009 independent expert provided certification fda remainder items required amended consent decree april 24 2009 cardinal health 303 submitted corrective action plan required amended consent decree fda included corrective action plan among proposed corrective actions software correction addresses potential risk recently identified alaris pca patient controlled analgesia module used alaris pc unit operating software versions 8 91 products used together alaris pca module may infuse intended infusion dose specific sequence events occurs company recorded reserve 178 million third quarter fiscal year 2009 based estimate costs incurred connection corrective action plan june 2 2009 fda notified company corrective action plan acceptable company begin implementation plan company placed hold shipping alaris pca module related alaris pc unit pending 510k clearance fda software correction company received 510k clearance july 9 2009 since resumed shipments company cannot currently predict outcome matter whether additional amounts incurred resolve matter’s ultimate impact business company may obligated pay less amount reserved connection amended consent decree corrective action plan among things cost implementing corrective action plan may different company’s current expectations including result changes manufacturing delivery material costs fda may determine company fully compliant amended consent decree corrective action plan therefore impose penalties amended consent decree andor company may subject future proceedings litigation relating matters addressed amended consent decree matters addition matters described company also becomes involved timetotime litigation regulatory matters incidental business including limited personal injury claims employment matters commercial disputes intellectual property matters inclusion potentially responsible party environmental cleanup costs litigation connection acquisitions divestitures company intends vigorously defend litigation currently believe outcome litigation material adverse effect company’s consolidated financial statements time company receives subpoenas requests information various government agencies including state attorneys general sec us department justice relating business accounting disclosure practices customers suppliers responses subpoenas requests information sometimes require considerable time effort result considerable costs incurred company expects incur additional costs future connection existing future requests subpoenas requests also lead assertion claims commencement legal proceedings company also time company may determine products manufactured marketed distributed company may meet company specifications published standards regulatory requirements circumstances company investigate take appropriate corrective action withdrawal product market correction product customer location notice customer revised labeling andor actions company recalled andor conducted field alerts relating certain products time activities lead costs repair replace affected products temporary interruptions product sales action regulators impact reported results operations company believe activities specifically disclosed form 10k material adverse effect business results operations see note 10 additional discussion contingencies related company’s income taxes 12 guarantees company contingent commitments related certain operating lease agreement see note 19 operating lease consisted certain real estate used operations company june 26 2009 company repurchased remaining buildings equipment land operating lease 1512 million accordingly company longer carries liability related agreement ordinary course business company time agrees indemnify certain parties agreements company including acquisition disposition agreements customer agreements intellectual property licensing agreements indemnification obligations vary scope defined duration many cases maximum obligation explicitly stated therefore overall maximum amount liability indemnification obligations cannot reasonably estimated appropriate indemnification obligations recorded liability historically company individually aggregate made payments indemnification obligations material amounts certain circumstances company believes existing insurance arrangements subject general deduction exclusion provisions would cover portions liability may arise indemnification obligations addition company believes likelihood material liability triggered indemnification obligations significant ordinary course business company time enters agreements obligate company make fixed payments upon occurrence certain events obligations primarily relate obligations arising acquisition transactions company agreed make payments based upon achievement certain financial performance measures acquired business generally obligation capped explicit amount company’s aggregate exposure obligations assuming achievement financial performance measures material potential payment obligations would treated adjustment purchase price related entity would impact company’s results operations ordinary course business company time extends loans customers subsequently sold bank services administers loans well new loans company may direct order bank purchase loans requires absolute unconditional obligation company repurchase loans upon occurrence certain events described agreement including limited borrower payment default exceeds 90 days insolvency bankruptcy june 30 2009 2008 notes program subject guaranty company totaled 399 million 334 million respectively loans qualify sale treatment sfas 140 reported company’s consolidated balance sheet 13 financial instruments company utilizes derivative financial instruments manage exposure certain risks related ongoing operations primary risks managed use derivative instruments include interest rate risk currency exchange risk commodity price risk company use derivative instruments trading speculative purposes majority company’s derivative instruments designated hedging instruments company also enters derivative instruments designed hedge risk designated hedging instruments derivative instruments adjusted current market value interest expense end period interest rate risk management company exposed impact interest rate changes company’s objective manage impact interest rate changes cash flows market value borrowings company utilizes mix debt maturities along fixedrate variablerate debt manage changes interest rates addition company enters interest rate swaps manage exposure interest rate variations related borrowings lower overall borrowing costs currency risk management company conducts business several major international currencies subject risks associated changing foreign exchange rates company’s objective reduce earnings cash flow volatility associated foreign exchange rate changes allow management focus attention business operations accordingly company enters various contracts change value foreign exchange rates change protect value existing foreign currency assets liabilities commitments anticipated foreign currency revenue expenses commodity price risk management company exposed changes price certain commodities company’s objective reduce earnings cash flow volatility associated forecasted purchases commodities allow management focus attention business operations accordingly company enters derivative contracts manage price risk associated forecasted purchases company exposed counterparty credit risk derivative instruments accordingly company established maintains strict counterparty credit guidelines enters derivative instruments major financial institutions investment grade better company significant exposure one counterparty management believes risk loss remote event would material additionally company require collateral agreements following table summarizes fair value company’s assets liabilities related derivative financial instruments respective line items recorded consolidated balance sheets june 30 2009 2008 fair value hedges company enters payfloating interest rate swaps hedge changes fair value fixed rate debt resulting fluctuations interest rates contracts designated qualify fair value hedges accordingly gain loss recorded payfloating interest rate swaps directly offset change fair value underlying debt derivative instrument underlying debt adjusted market value end period resulting gain loss recorded interest expense consolidated statements earnings march 20 2009 company terminated payfloating interest rate swaps received net settlement proceeds totaling 1231 million proceeds classified cash provided operating activities consolidated statements cash flows immediate impact statement earnings however fair value adjustment debt amortized life underlying debt reduction interest expense conjunction occurrence originally forecasted transactions following table summarizes interest rate swaps designated fair value hedges outstanding june 30 2009 2008 millions following table summarizes gainloss recognized earnings interest rate swaps designated fair value hedges fiscal years ended june 30 2009 2008 2007 millions ineffectiveness associated derivative instruments cash flow hedges company enters derivative instruments hedge exposure changes cash flows attributable currency interest rate commodity price fluctuations associated certain forecasted transactions derivative instruments designated qualify cash flow hedges accordingly effective portion gain loss derivative instrument reported component comprehensive income “oci” reclassified earnings line item associated forecasted transaction period hedged transaction affects earnings ineffective portion gain loss derivative instrument recognized earnings immediately company enters payfixed interest rate swaps hedge variability cash flows relating interest rate payments company’s variable rate debt june 30 2009 2008 company held two three payfixed interest rate swaps respectively hedge variability cash flows relating forecasted transactions fiscal 2008 company held three additional payfixed interest rate swaps hedge variability cash flows related forecasted transactions contracts terminated fiscal 2008 resulting cash receipts totaling 64 million proceeds classified cash provided operating activities consolidated statements cash flows ineffective portion contracts totaling gain 01 million recorded interest expense fiscal 2008 remaining 63 million receipts relate portion contracts effective recorded oci fiscal 2008 adjustment recognized interest expense future periods conjunction occurrence originally forecasted transactions company also enters foreign currency forward contracts protect value anticipated foreign currency revenues expenses june 30 2009 2008 company held forward contracts hedge probable firmly committed revenue expenses principal currencies hedged canadian dollar european euro mexican peso thai baht british pound australian dollar company also enters derivative contracts manage price risk associated forecasted purchases certain commodities used healthcare supply chain services segment following table summarizes outstanding cash flow hedges june 30 2009 2008 millions following table summarizes gainloss recognized oci derivative instruments designated cash flow hedges fiscal years ended june 30 2009 2008 2007 millions following table summarizes gainloss reclassified accumulated oci earnings derivative instruments designated cash flow hedges fiscal years ended june 30 2009 2008 2007 millions amount ineffectiveness associated derivative instruments material economic nondesignated hedges company enters foreign currency forward contracts manage foreign exchange exposure related intercompany financing transactions balance sheet items subject revaluation meet requirements hedge accounting treatment accordingly derivative instruments adjusted current market value end period gain loss recorded instruments substantially offset remeasurement adjustment foreign currency denominated asset liability settlement derivative instrument remeasurement adjustment foreign currency denominated asset liability recorded interest expense end period following table summarizes economic derivative instruments outstanding june 30 2009 2008 millions following table summarizes gainloss recognized earnings economic derivative instruments fiscal years ended june 30 2009 2008 2007 millions fair value financial instruments carrying amounts cash equivalents trade receivables accounts payable notes payablebanks shortterm borrowings accrued liabilities june 30 2009 2008 approximate fair value shortterm maturities items cash balances invested accordance company’s investment policy investments exposed market risk interest rate fluctuations credit risk underlying issuers although mitigated diversification estimated fair value company’s longterm obligations shortterm borrowings 34387 million 37655 million compared carrying amounts 36473 million 38464 million june 30 2009 2008 respectively fair value company’s longterm obligations shortterm borrowings estimated based either quoted market prices similar issues current interest rates offered debt remaining maturities estimated discounted cash flows following summary fair value gainloss company’s derivative instruments based upon estimated amount company would receive pay terminate contracts june 30 2009 2008 fair values based quoted market prices similar instruments 14 fair value measurements september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements additionally sfas 157 establishes threelevel fair value hierarchy prioritizes inputs used measure fair value hierarchy requires entities maximize use observable inputs minimize use unobservable inputs three levels inputs used measure fair values follows level 1 observable prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities effective july 1 2008 company adopted provision sfas 157 adoption sfas 157 material impact company’s financial position results operations february 2008 fasb issued fasb staff position 1572 “effective date fasb statement 157” permits oneyear deferral implementation sfas 157 regard nonfinancial assets nonfinancial liabilities recognized disclosed fair value financial statements recurring basis least annually company expect adoption remaining portions statement effective fiscal 2010 material impact company’s financial position results operations following table presents fair values assets liabilities measured recurring basis june 30 2009 cash equivalents balance comprised highly liquid investments purchased maturity three months less investments balance includes investments mutual funds used offset fluctuations company’s deferred compensation liabilities fair value company’s foreign currency forwards interest rate swaps determined based present value expected future cash flows considering risks involved including nonperformance risk using discount rates appropriate respective maturities 15 shareholders’ equity june 30 2009 2008 company’s authorized capital shares consisted following 750 million common shares without par value “class common shares” 5 million class b common shares without par value “class b common shares” 05 million nonvoting preferred shares without par value class common shares class b common shares collectively referred “common shares” holders common shares entitled share equally dividends declared company’s board directors participate equally distributions assets upon liquidation generally holders class common shares entitled one vote per share holders class b common shares entitled onefifth one vote per share proposals presented shareholders vote certain circumstances holders class b common shares entitled vote separate class common shares outstanding june 30 2009 2008 company repurchased approximately 49 billion common shares aggregate share repurchase programs fiscal 2008 2007 described fiscal 2009 august 8 2007 company announced 20 billion share repurchase program pursuant program company repurchase common shares fiscal 2009 repurchase authorization terminated company august 5 2009 fiscal 2008 pursuant 20 billion share repurchase program referenced company repurchased approximately 120 million common shares aggregate cost approximately 750 million fiscal 2008 also fiscal 2008 company repurchased additional 48 million common shares aggregate cost approximately 342 million 45 billion combined share repurchase program first announced july 11 2006 recently amended january 31 2007 average price paid per common share common shares repurchased fiscal 2008 6481 fiscal 2007 pursuant 45 billion combined share repurchase program referenced company repurchased approximately 538 million common shares aggregate cost approximately 38 billion fiscal 2007 average price paid per common share 6979 common shares repurchased held treasury used general corporate purposes fiscal 2008 company retired 128 million common shares treasury retirement shares impact total shareholders’ equity however impact certain individual components shareholders’ equity follows 10 billion decrease common shares 75 billion decrease retained earnings 85 billion decrease common shares treasury 16 earnings per share basic earnings per common share “basic eps” computed dividing net earnings numerator weighted average number common shares outstanding period denominator diluted earnings per common share “diluted eps” similar computation basic eps except denominator increased dilutive effect vested unvested stock options restricted shares restricted share units computed using treasury stock method following table reconciles number common shares used compute basic eps diluted eps three years ending june 30 2009 2008 2007 potentially dilutive employee stock options antidilutive fiscal 2009 2008 2007 288 million 221 million 54 million respectively total number common shares issued less common shares held treasury used determine common shares outstanding 17 segment information company’s operations principally managed products services basis effective first quarter fiscal 2009 company reorganized businesses three reportable segments healthcare supply chain services segment clinical medical products segment factors determining reportable segments include manner management evaluates performance company combined nature individual business activities accordance sfas 131 “disclosures segments enterprise related information” prior period segment information reclassified conform new financial reporting presentation healthcare supply chain services segment distributes pharmaceutical products overthecounter healthcare products consumer health products provides support services retail customers hospitals alternate care providers united states puerto rico segment also distributes medical surgical products hospitals surgery centers laboratories physician offices united states canada puerto rico assembles distributes sterile nonsterile procedure kits provides services branded pharmaceutical manufacturers operates pharmaceutical repackaging distribution program chain independent pharmacy customers alternate care customers addition segment operates centralized nuclear radiopharmaceutical pharmacies provides thirdparty logistics support services distributes therapeutic plasma hospitals clinics providers located united states lastly segment operates pharmacy specialty pharmaceuticals clinical medical products segment develops manufactures leases sells medical technology products hospitals healthcare providers including intravenous medication safety infusion therapy delivery systems software applications needlefree disposables patient monitoring equipment dispensing systems automate distribution management medications medical supplies hospitals healthcare facilities ventilation equipment related disposables segment also develops manufactures sources medical surgical products technologies distribution hospitals physician offices surgery centers healthcare providers medical surgical products include singleuse surgical drapes gowns apparel exam surgical gloves fluid suction collection systems reusable surgical instruments biopsy needles segment franchises operates apothecarystyle retail pharmacies medicine shoppe international inc medicap pharmacies incorporated franchise systems provides pharmacy services hospitals healthcare facilities segment also manufactured sold orthopedic implants instruments tecomet business enteral devices airway management products medsystems businesses sold first quarter fiscal 2009 tecomet medsystems businesses classified held sale june 30 2008 following table includes revenue reportable segment reconciling items necessary agree amounts reported consolidated financial statements 1 healthcare supply chain services segment’s revenue derived two main product categories product categories respective contributions revenue follows 2 clinical medical products segment’s revenue derived three main product categories product categories respective contributions revenue follows 3 segment’s revenue derived three main product categories product categories respective contributions revenue follows 4 corporate revenue primarily consists elimination intersegment revenue company evaluates performance segments based upon among things segment profit segment profit segment revenue less segment cost products sold less segment sga expenses segment sga expense includes equity compensation expense well allocated corporate expenses shared functions including corporate management corporate finance financial shared services human resources information technology legal legislative affairs integrated hospital sales organization corporate expenses allocated segments based upon headcount level benefit provided ratable allocation information interest income expense income taxes provided segment level addition special items impairments gainloss sale assets net allocated segments see note 3 discussion company’s special items impairments gainloss sale assets net accounting policies segments described summary significant accounting policies note 1 following table includes segment profit reportable segment reconciling items necessary agree consolidated operating earnings consolidated financial statements 1 company encouraged segments identify investment projects provide future returns projects typically require incremental strategic investments form additional capital operating expenses investment spending previously held corporate allocated segments new segment structure prior period information reclassified conform new presentation 2 fourth quarter fiscal 2008 company discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 111 million fiscal 2008 74 million pertained fiscal 2007 connection matter company implemented action plan addressed issues related error 3 fiscal years ended june 30 2009 2008 2007 corporate includes among things special items impairments gainloss sale assets net allocated segments following tables include depreciation amortization expense capital expenditures fiscal years ended june 30 2009 2008 2007 segment well reconciling items necessary total amounts reported consolidated financial statements following table includes total assets june 30 2009 2008 segment well reconciling items necessary total amounts reported consolidated financial statements 1 corporate assets primarily include cash equivalents net property equipment following table presents revenue net property equipment geographic area 18 employee equity savings plans employee equity plans company maintains several stock incentive plans collectively “plans” benefit certain officers directors employees employee options granted plans fiscal 2007 generally vest equal annual installments four years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant employee options granted plans fiscal 2009 2008 generally vest equal annual installments three years exercisable periods seven years date grant price equal fair market value common shares underlying option date grant plans company currently utilizes equity award grants company authorized grant 298 million shares june 30 2009 161 million shares granted employee restricted shares restricted share units granted plans fiscal 2009 2008 2007 generally vest equal installments three years entitle holders dividends cash dividend equivalents restricted shares restricted share units awarded august 1 2006 accrue dividends cash dividend equivalents payable upon vesting awards following table illustrates impact equitybased compensation reported amounts 1 total equitybased compensation expense fiscal years ended june 30 2009 2008 2007 includes gross restricted share restricted share unit expense approximately 656 million 577 million 362 million respectively gross employee option expense approximately 467 million 601 million 884 million respectively gross employee stock purchase plan expense approximately 126 million 111 million 95 million respectively gross stock appreciation right incomeexpense 21 million 66 million 40 million respectively 2 equitybased compensation charged discontinued operations approximately 240 million net tax benefits 125 million fiscal year ended june 30 2007 3 fiscal 2008 equitybased compensation expense includes approximately 87 million related unvested equity awards held former executive director company acceleration equitybased compensation expense resulted change status employee nonemployee director stock options fair values options granted company adopted sfas 123r determined using lattice valuation model company believes lattice model provides better estimates ability take account employee exercise patterns based changes company’s stock price variables provides range input assumptions following summarizes stock option transactions company plans july 1 2007 june 30 2009 giving retroactive effect conversions options connection acquisitions stock splits following table provides data related stock option activity fiscal years ended june 30 2009 2008 2007 fair values options granted company’s employees directors fiscal 2009 2008 2007 estimated date grant using lattice valuation model lattice valuation model incorporates ranges assumptions disclosed table riskfree rate based united states treasury yield curve time grant company analyzed historical data estimate option exercise behaviors employee terminations used within lattice model company calculated separate option valuations three separate groups employees groups determined using similar historical exercise behaviors expected life options granted calculated option valuation model represents length time years options granted expected outstanding range expected lives table results separate groups employees identified company based option exercise behaviors expected volatilities based implied volatility traded options company’s common shares historical volatility period time commensurate contractual term option grant 7 years required forfeiture estimates adjusted reflect actual forfeitures award vests actual forfeitures future reporting periods could higher lower company’s current estimates following table provides range assumptions used options valued fiscal 2009 2008 2007 restricted shares restricted share units fair value restricted shares restricted share units determined number shares granted grant date market price company’s common shares compensation expense recognized equitybased awards net estimated forfeitures recognized using straightline method applicable service period accordance sab 107 company classifies equitybased compensation within sga expense correspond line item majority cash compensation paid employees following tables summarize activity related restricted shares restricted share units fiscal years ended june 30 2009 2008 employee stock purchase plan company employee stock purchase plans sale 120 million common shares authorized generally employees employed company least 30 days may eligible contribute 1 15 eligible compensation purchase price determined lower 85 closing market price first day offering period 85 closing market price last day offering period given calendar year two offering periods january 1 june 30 july 1 december 31 june 30 2009 subscriptions 07 million shares outstanding june 30 2009 74 million shares issued employees plans company decided indefinitely suspend employee stock purchase plans employee savings plan substantially company’s domestic nonunion employees eligible enrolled companysponsored contributory profit sharing retirement savings plans include features section 401k code provide company matching profit sharing contributions company’s contributions plans determined board directors subject certain minimum requirements specified plans total expense employee retirement benefit plans 1183 million 1062 million 1078 million fiscal 2009 2008 2007 respectively 19 offbalance sheet arrangements company periodically enters certain offbalance sheet arrangements primarily receivable sales operating leases order maximize diversification funding return assets receivable sales described also provide transfer credit risk third parties lease receivablerelated arrangements subsidiary company agreements transfer ownership certain equipment lease receivables plus security interests related equipment leasing subsidiary bank order qualify sale treatment sfas 140 company formed whollyowned special purpose bankruptcyremote subsidiaries “spes” subsidiary cardinal health solutions inc “chs” spes formed whollyowned qualified special purpose subsidiaries “qspes” effectuate removal lease receivables company’s consolidated financial statements accordance sfas 140 company consolidates spes consolidate qspes spes qspes separate legal entities maintain separate financial statements company chs assets spes qspes available first foremost satisfy claims respective creditors receivablerelated arrangements cardinal health funding llc “chf” organized sole purpose buying receivables selling undivided interests receivables multiseller conduits administered third party banks third party investors chf designed special purpose bankruptcyremote entity although consolidated accordance gaap chf separate legal entity company’s subsidiary sells contributes receivables chf sale receivables chf qualifies sales treatment sfas 140 accordingly receivables included company’s consolidated financial statements june 30 2009 2008 company committed receivables sales facility program available chf capacity sell 9500 8500 million receivables respectively recourse provided program requirement chf retain subordinated interest sold receivables company receivables outstanding committed receivables sales facility program june 30 2009 second quarter fiscal 2009 company amended committed receivables sales facility program extend additional 364 days may 1 2009 company amended committed sales facility program replace minimum net worth covenant 41 billion performance guaranty covenants require company maintain consolidated interest coverage ratio end fiscal quarter least 4to1 maintain consolidated leverage ratio 325to1 amendment also increased purchase limit revolving receivables purchase facility 8500 million 9500 million cash flows receivablerelated arrangements company’s net cash flow decrease related receivable interest transfers fiscal 2009 2008 2007 follows chs chf required repurchase receivables interests sold determined representations warranties regard related receivables accurate date sold respect committed sales facility program event company failed comply covenants performance guaranty customary amortization event occurred fiscal 2009 company satisfied outstanding obligations agreements june 30 2009 company outstanding lease receivablerelated arrangements operating leases prior year company entered operating lease agreement third party bank construction various facilities equipment june 26 2009 company repurchased remaining buildings equipment land approximately 1512 million previously operating lease agreement addition part repurchase company recorded 38 million impairment charge fiscal 2007 company repurchased certain buildings equipment land approximately 512 million previously operating lease agreements total amount repurchased approximately 442 million related pts business divested fourth quarter fiscal 2007 20 selected quarterly financial data unaudited following selected quarterly financial data fiscal 2009 2008 sum quarters may equal yeartodate due rounding 1 amounts agree previously reported updated reflect classification martindale discontinued operations 2 fourth quarter fiscal 2009 company recorded certain period items increased gross margin 52 million 25 million pertained first three quarters fiscal 2009 27 million pertained fiscal 2008 increased selling general administrative expenses 136 million 42 million pertained first three quarters fiscal 2009 48 million pertained fiscal 2008 46 million pertained periods prior fiscal 2008 decreased earnings continuing operations net earnings 09 million 36 million pertained first three quarters fiscal 2009 14 million pertained fiscal 2008 31 million pertained periods prior fiscal 2008 amounts material individually aggregate current prior periods company record significant adjustments fourth quarter fiscal 2009 disclosed within notes 1 amounts agree previously reported updated reflect classification martindale discontinued operations 2 fourth quarter fiscal 2008 company’s clinical medical products segment discovered failed recognize portion profit sales pertaining prior years error resulted system interface reconciliation discrepancies period several years result company recorded income approximately 159 million fourth quarter fiscal 2008 48 million pertained first three quarters fiscal 2008 74 million pertained fiscal 2007 37 million pertained fiscal 2006 connection matter company implemented action plan addressed issues related error 3 fourth quarter fiscal 2008 company recognized equitybased compensation expense related unvested equity awards held former executive director company also recognized consulting arrangement fees paid former executive director company acceleration equitybased compensation expense consulting arrangement fees totaled 122 million resulted change status employee nonemployee director 4 fourth quarter fiscal 2008 company recognized 373 million additional tax expense related increase estimated state income tax rate deferred tax items recognized 304 million reduction tax expense items pertaining fiscal 2002 2001 statute limitations lapsed company record significant adjustments fourth quarter fiscal 2008 disclosed within notes 21 subsequent events company disclosed material subsequent events august 27 2009 date financial statements issued capital structure related spinoff subsequent fiscal 2009 company carefusion entered several transactions order establish respective capital structures spinoff immediately prior spinoff carefusion distribute approximately 14 billion cash company order finance distribution july 1 2009 carefusion entered 14 billion senior unsecured bridge loan facility term 364 days date funding subsequently july 14 2009 carefusion obtained permanent financing 14 billion form fixed rate senior notes carefusion able obtain permanent financing prior spinoff bridge loan facility drawn upon terminated upon spinoff net proceeds notes placed escrow account used fund 14 billion cash distribution company august 27 2009 company announced use 12 billion cash distribution fund debt tender offer certain outstanding debt securities 780 debentures due october 15 2016 allegiance corporation 700 debentures due october 15 2026 allegiance corporation tender offer funded company’s cash hand described remainder cash distribution used pay debt maturing second quarter fiscal 2010 see discussion additional detail debt securities subject debt tender offer noted july 1 2009 carefusion entered senior unsecured bridge loan facility “bridge loan facility” could provide financing aggregate principal amount 14 billion term 364 days date funding facility funding bridge loan facility subject certain closing conditions including limited completion spinoff connection bridge loan facility company paid 175 million underwriting fees july 14 2009 carefusion obtained permanent financing sale 2500 million aggregate principal amount 4125 senior notes due 2012 4500 million aggregate principal amount 5125 senior notes due 2014 7000 million aggregate principal amount 6375 senior notes due 2019 private placement initial purchasers sold notes qualified institutional buyers notes senior unsecured obligations carefusion rank equally carefusion’s existing future unsecured senior debt senior carefusion’s existing future subordinated debt notes effectively subordinated liabilities carefusion’s subsidiaries including trade payables guarantees certain subsidiaries carefusion’s revolving credit facilities notes also effectively rank junior right payment existing future secured debt carefusion extent value assets securing debt proceeds sale notes deposited escrow account released connection spinoff august 27 2009 company announced commenced cash tender offer aggregate purchase price including early tender premium excluding accrued interest fees expenses 12 billion following series debt securities listed order acceptance priority 780 debentures due october 15 2016 allegiance corporation ii 675 notes due february 15 2011 company iii 600 notes due june 15 2017 company iv 700 debentures due october 15 2026 allegiance corporation v 585 notes due december 15 2017 company vi 580 notes due october 15 2016 company vii 565 notes due june 15 2012 company viii 550 notes due june 15 2013 company ix 400 notes due june 15 2015 company amount series debt securities purchased based 12 billion cap order priority set forth may subject proration accordance terms tender offer addition company offering purchase 700 debentures due october 15 2026 allegiance corporation aggregate purchase price excluding accrued interest fees expenses 100000000 tender offer company intends fund purchase 780 debentures due october 15 2016 allegiance corporation 700 debentures due october 15 2026 allegiance corporation cash hand 700 debentures due 2026 tendered aggregate purchase price notes would exceed 100 million subject proration tender offer conditioned upon company’s receipt approximately 14 billion cash distribution carefusion customary conditions offer expire september 24 2009 unless extended earlier terminated company preparation spinoff july 1 2009 carefusion entered revolving credit facilities aggregate principal balance 7200 million commitments thereunder allocated 240 million 364day revolving credit facility 480 million threeyear revolving credit facility commitment threeyear facility subject increase upon request aggregate 300 million subject commitments lenders funding revolving credit facilities subject certain closing conditions including limited completion spinoff revolving credit facilities subject customary covenants obligations revolving credit facilities guaranteed carefusion’s existing future direct indirect material domestic subsidiaries borrowings revolving credit facilities bear interest floating rate per annum based upon london interbank offered rate dollars “libor” alternate base rate “abr” case plus applicable margin threeyear revolving credit facility libor varies 21 3375 based carefusion’s debt ratings case abr varies 11 2375 based carefusion’s debt ratings 364day revolving facility libor varies 22 35 based carefusion’s debt ratings case abr varies 12 25 based carefusion’s debt ratings notwithstanding foregoing loans remain outstanding bridge loan facility see applicable margin applicable borrowings revolving credit facilities increased 10 90 days 20 180 days 30 270 days closing connection revolving credit facilities company paid 38 million underwriting fees stock option exchange program may 6 2009 company’s board directors authorized june 23 2009 company’s shareholders approved program permitted certain current employees exchange certain outstanding stock options exercise prices substantially current market price cardinal health common shares lesser number stock options fair value lower fair value “out money” options program began june 19 2009 completed july 17 2009 company believes program necessary closely align employee shareholder interests equity compensation programs program designed motivate retain key employees reinforce alignment company’s employees’ interests shareholders result program 128 million outstanding eligible stock options exchanged 14 million new options exercise price 3127 share repurchase program august 5 2009 company cancelled previously approved share repurchase program announced new 5000 million share repurchase program expires august 31 2012 company expects use repurchase program offset equity plan issuances item 9 nannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk 1 included exhibit registrants current report form 8k filed november 24 1998 file 111373 incorporated herein reference 2 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 111373 incorporated herein reference 3 included exhibit registrants current report form 8k filed april 21 1997 file 111373 incorporated herein reference 4 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 5 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 111373 incorporated herein reference 6 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 7 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 111373 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33368819 incorporated herein reference 9 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 10 included exhibit companys amendment 1 annual report form 10ka fiscal year ended june 30 1997 file 111373 incorporated herein reference 11 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 111373 incorporated herein reference 12 included exhibit registrants quarterly report form 10q quarter ended december 31 2001 file 111373 incorporated herein reference 13 included exhibit registrants registration statement form s8 33390415 incorporated herein reference 14 included exhibit registrants registration statement form s4 33353394 incorporated herein reference 15 included exhibit registrants registration statement form s8 33338192 incorporated herein reference 16 included exhibit companys posteffective amendment 1 form s8 form s4 registration statement 33353394 incorporated herein reference 17 included exhibit registrants annual report form 10k fiscal year ended june 30 2000 file 111373 incorporated herein reference 18 included exhibit registrants quarterly report form 10q quarter ended december 31 1998 file 111373 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended september 30 2001 file 111373 incorporated herein reference 20 included exhibit registrants quarterly report form 10k fiscal year ended june 30 1999 file 111373 incorporated herein reference 21 included exhibit registrants registration statement form s3 33362944 incorporated herein reference 22 included exhibit registrants annual report form 10k fiscal year ended june 30 2001 file 111373 incorporated herein reference 23 included exhibit registrants current report form 8k filed may 9 2002 file 111373 incorporated herein reference 24 included exhibit registrants annual report form 10k fiscal year ended june 30 2002 file 111373 incorporated herein reference 25 included exhibit registrants quarterly report form 10q quarter ended september 30 2002 file 111373 incorporated herein reference 26 included exhibit registrants quarterly report form 10q quarter ended december 31 2002 file 111373 incorporated herein reference 27 included exhibit registrants quarterly report form 10q quarter ended march 31 2003 file 111373 incorporated herein reference management contract compensation plan arrangement b reports form 8k june 13 2003 company filed current report form 8k item 7 filed exhibits form underwriting agreement company certain underwriters relating proposed issuance debt securities company statement regarding computation ratios earnings fixed charges signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized september 29 2003 cardinal health inc robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated september 29 2003 cardinal health inc subsidiaries schedule ii valuation qualifying accounts millions 1 fiscal 2003 2002 2001 recoveries amounts provided written prior years 24 million 15 million 10 million respectively 2 fiscal 2003 2001 71 million 114 million respectively relate beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accountsitem 15 exhibits financial statement schedules reports form 8k a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement 1 included exhibit registrants quarterly report form 10q quarter ended march 31 1994 file 111373 incorporated herein reference 2 included exhibit registrants current report form 8k filed april 21 1997 file 111373 incorporated herein reference 3 included exhibit registrants registration statement form s4 33374761 incorporated herein reference 4 included exhibit registrants annual report form 10k fiscal year ended june 30 1998 file 111373 incorporated herein reference 5 included exhibit registrants registration statement form s4 33330889 incorporated herein reference 6 included exhibit registrants annual report form 10k fiscal year ended june 30 1994 file 111373 incorporated herein reference 7 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33368819 incorporated herein reference 8 included exhibit registrants posteffective amendment 1 form s8 form s4 registration statement 33356655 incorporated herein reference 9 included exhibit registrants quarterly report form 10q quarter ended september 30 1996 file 111373 incorporated herein reference 10 included exhibit registrants quarterly report form 10q quarter ended december 31 2001 file 111373 incorporated herein reference 11 included exhibit registrants registration statement form s8 33338192 incorporated herein reference 12 included exhibit companys posteffective amendment 1 form s8 form s4 registration statement 33353394 incorporated herein reference 13 included exhibit registrants quarterly report form 10q quarter ended december 31 1998 file 111373 incorporated herein reference 14 included exhibit registrants quarterly report form 10q quarter ended september 30 2001 file 111373 incorporated herein reference 15 included exhibit registrants annual report form 10k fiscal year ended june 30 1999 file 111373 incorporated herein reference 16 included exhibit registrants registration statement form s3 33362944 incorporated herein reference 17 included exhibit registrants annual report form 10k fiscal year ended june 30 2001 file 111373 incorporated herein reference 18 included exhibit registrants annual report form 10k fiscal year ended june 30 2002 file 111373 incorporated herein reference 19 included exhibit registrants quarterly report form 10q quarter ended december 31 2002 file 111373 incorporated herein reference 20 included exhibit registrants quarterly report form 10q quarter ended march 31 2003 file 111373 incorporated herein reference 21 included exhibit registrants quarterly report form 10q quarter ended december 31 2003 file 111373 incorporated herein reference 22 included exhibit registrants current report form 8k filed february 6 2004 file 111373 incorporated herein reference 23 included exhibit registrants current report form 8k filed october 20 2004 file 111373 incorporated herein reference b reports form 8k may 17 2004 company filed current report form 8k item 5 filed exhibit press release providing chronology supplemental information sec matter may 19 2004 company filed current report form 8k items 5 7 filed exhibit press release announcing companys proposed acquisition alaris medical systems inc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized october 26 2004 cardinal health inc bys robert walter robert walter chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated october 26 2004 cardinal health inc subsidiaries schedule ii valuation qualifying accounts millions 1 fiscal 2004 2003 2002 recoveries amounts provided written prior years 38 million 24 million 15 million respectively 2 fiscal 2004 2003 139 million 71 million respectively relates beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accounts 4 amounts restated include trade receivable valuation reserves related service charges pricing previously included within scheduleitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report page schedule ii valuation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk exhibit number exhibit description 1002 fiveyear credit agreement dated march 27 2003 registrant certain subsidiaries registrant certain lenders bank one na administrative agent bank america na syndication agent wachovia bank national association syndication agent barclays bank plc documentation agent credit suisse first boston documentation agent deutsche bank securities inc documentation agent banc one capital markets inc lead arranger book manager 12 1003 first amendment credit agreement agency agreement amendment guaranty dated march 24 2004 registrant certain subsidiaries registrant certain lenders bank one na wachovia bank national association 15 1004 fiveyear credit agreement dated march 23 2004 registrant certain subsidiaries registrant certain lenders wachovia bank national association administrative agent bank one na syndication agent bank america na syndication agent barclays bank plc documentation agent deutsche bank securities inc documentation agent wachovia capital markets llc lead arranger book manager banc one capital markets inc lead arranger book manager 15 1005 partnership agreement rp scherer gmbh co kg 3 1006 amended restated receivables purchase agreement dated may 21 2004 among cardinal health funding llc seller griffin capital llc servicer conduits party thereto financial institutions party thereto managing agents party thereto bank one na main office chicago agent confidential treatment requested certain confidential commercial financial information pursuant rule 24b2 exchange act 18 1007 omnibus amendment reaffirmation performance guaranty dated august 18 2004 among cardinal health funding llc griffin capital llc conduits party thereto financial institutions party thereto managing agents party thereto bank one na main office chicago agent cardinal health inc confidential treatment requested certain confidential commercial financial information pursuant rule 24b2 exchange act 18 1008 omnibus limited waiver second omnibus amendment reaffirmation performance guaranty dated september 24 2004 among cardinal health funding llc griffin capital llc conduits party thereto financial institutions party thereto managing agents party thereto bank one na main office chicago agent cardinal health inc confidential treatment requested certain confidential commercial financial information pursuant rule 24b2 exchange act 18 1009 amendment 3 amended restated receivables purchase agreement confirmations transfers dated september 30 2004 among griffin capital llc cardinal health funding llc entity signatory thereto conduit entity signatory thereto financial institution entity signatory thereto managing agent bank one na main office chicago agent confidential treatment requested certain confidential commercial financial information pursuant rule 24b2 exchange act 18 1010 amended restated performance guaranty dated september 30 2004 executed cardinal health inc favor cardinal health funding llc 18 1011 amended restated equity incentive plan amended 8 10 1012 form nonqualified stock option agreement amended restated equity incentive plan amended cliff vesting manual signature 22 1013 form nonqualified stock option agreement amended restated equity incentive plan amended residents california cliff vesting manual signature 1014 form nonqualified stock option agreement amended restated equity incentive plan amended cliff vesting electronic signature 22 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized september 12 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated september 12 2005 signature title robert walter robert walter chairman chief executive officer director principal executive officer jeffrey w henderson jeffrey w henderson executive vice president chief financial officer principal financial officer eric r slusser eric r slusser senior vice presidentfinance chief accounting officer controller principal accounting officer dave bing dave bing director george h conrades george h conrades director john f finn john f finn director robert l gerbig robert l gerbig director john f havens john f havens director j michael losh j michael losh director john b mccoy john b mccoy director richard c notebaert richard c notebaert director michael o’halleran michael o’halleran director david w raisbeck david w raisbeck director jean g spaulding jean g spaulding director matthew walter matthew walter director cardinal health inc subsidiaries schedule ii valuation qualifying accounts millionsitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report page report independent registered public accounting firm financial statements consolidated statements earnings fiscal years ended june 30 2006 2005 2004 consolidated balance sheets june 30 2006 2005 consolidated statements shareholders’ equity fiscal years ended june 30 2006 2005 2004 consolidated statements cash flows fiscal years ended june 30 2006 2005 2004 notes consolidated financial statements a2 following supplemental schedule included report page schedule ii valuation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized september 1 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated september 1 2006 signature title r kerry clark r kerry clark president chief executive officer director principal executive officer jeffrey w henderson jeffrey w henderson chief financial officer principal financial officer eric r slusser eric r slusser executive vice president chief accounting officer controller principal accounting officer calvin darden calvin darden director george h conrades george h conrades director john f finn john f finn director robert l gerbig robert l gerbig director john f havens john f havens director j michael losh j michael losh director john b mccoy john b mccoy director richard c notebaert richard c notebaert director michael o’halleran michael o’halleran director david w raisbeck david w raisbeck director jean g spaulding jean g spaulding director matthew walter matthew walter director robert walter robert walter director cardinal health inc subsidiaries schedule iivaluation qualifying accounts millions 1 fiscal 2006 2005 2004 recoveries amounts provided written prior years 25 million 36 million 38 million respectively 2 fiscal 2006 2005 2004 119 million 02 million 139 million respectively relates beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accountsitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk schedules exhibits omitted pursuant item 601b2 regulation sk company undertakes furnish supplementally copies omitted schedules exhibits upon request us securities exchange commission management contract compensation plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 24 2007 cardinal health inc r kerry clark r kerry clark president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 24 2007 cardinal health inc subsidiaries schedule ii valuation qualifying accounts 1 fiscal 2007 2006 2005 recoveries amounts provided written prior years 08 million 25 million 35 million respectively 2 fiscal 2007 2006 2005 61 million 119 million 02 million respectively relates beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accountsitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report page report independent registered public accounting firm financial statements consolidated statements earnings fiscal years ended june 30 2008 2007 2006 consolidated balance sheets june 30 2008 2007 consolidated statements shareholders’ equity fiscal years ended june 30 2008 2007 2006 consolidated statements cash flows fiscal years ended june 30 2008 2007 2006 notes consolidated financial statements a2 following supplemental schedule included report page schedule iivaluation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 26 2008 cardinal health inc r kerry clark r kerry clark chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 26 2008 cardinal health inc subsidiaries schedule iivaluation qualifying accounts 1 fiscal 2008 2007 2006 recoveries amounts provided written prior years 35 million 08 million 25 million respectively 2 fiscal 2008 2007 2006 01 million 61 million 119 million respectively relates beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accountsitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report page report independent registered public accounting firm financial statements consolidated statements earnings fiscal years ended june 30 2010 2009 consolidated balance sheets june 30 2010 2009 consolidated statements shareholders’ equity fiscal years ended june 30 2010 2009 2008 consolidated statements cash flows fiscal years ended june 30 2010 2009 notes consolidated financial statements a2 following supplemental schedule included report page schedule iivaluation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement xbrl extensible business reporting language information furnished filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections information filed amendment within 30 days rule 405 regulation st cardinal health website cardinal health uses website channel distribution material information us important information including news releases earnings analyst presentations financial information regarding cardinal health routinely posted accessible investors page wwwcardinalhealthcom addition cardinal health’s website allows investors interested persons sign automatically receive email alerts post news releases sec filings certain information website signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 26 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 26 2010 cardinal health inc subsidiaries schedule iivaluation qualifying accounts 3 1 fiscal 2010 2009 2008 recoveries amounts provided written prior years 10 million 05 million 31 million respectively 2 writeoff uncollectible accounts 3 amounts included herein pertain continuing operations cardinal healthitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement cardinal health website use website channel distribution material information us important information including news releases earnings analyst presentations financial information regarding us routinely posted accessible investors page wwwcardinalhealthcom addition website allows investors interested persons sign automatically receive email alerts post news releases sec filings certain information website signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 25 2011 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 25 2011 cardinal health inc subsidiaries schedule iivaluation qualifying accounts 3 1 fiscal 2011 2010 2009 recoveries amounts provided written prior years 03 million 42 million 05 million respectively 2 writeoff uncollectible accounts 3 amounts included herein pertain continuing operations companyitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report page schedule iivaluation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement cardinal health website use website channel distribution material information us important information including news releases earnings analyst presentations financial information routinely posted accessible investors page wwwcardinalhealthcom addition website allows investors interested persons sign automatically receive email alerts post news releases sec filings certain information website signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 22 2012 cardinal health inc george barrett george barrett chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 22 2012 name title george barrett chairman chief executive officer director principal executive officer george barrett jeffrey w henderson chief financial officer principal financial officer jeffrey w henderson stuart g laws senior vice president chief accounting officer principal accounting officer stuart g laws colleen f arnold director colleen f arnold glenn britt director glenn britt carrie cox director carrie cox calvin darden director calvin darden bruce l downey director bruce l downey john f finn director john f finn gregory b kenny director gregory b kenny david p king director david p king richard c notebaert director richard c notebaert david w raisbeck director david w raisbeck jean g spaulding md director jean g spaulding md cardinal health inc subsidiaries schedule ii valuation qualifying accounts 3 1 fiscal 2012 2010 recoveries amounts provided written prior years 1 million 4 million respectively 2 writeoff uncollectible accounts 3 amounts included herein pertain continuing operations companyitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report page schedule ii valuation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health website use website channel distribution material information us important information including news releases earnings analyst presentations financial information routinely posted accessible investors page wwwcardinalhealthcom addition website allows investors interested persons sign automatically receive email alerts post news releases sec filings certain information website signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 20 2013 cardinal health inc george barrett george barrett chairman chief executive officer pursuant requirements securities exchange act 1934 registrant duly caused report signed following persons behalf registrant capacities indicated august 20 2013 name title george barrett chairman chief executive officer director principal executive officer george barrett jeffrey w henderson chief financial officer principal financial officer jeffrey w henderson stuart g laws senior vice president chief accounting officer principal accounting officer stuart g laws colleen f arnold director colleen f arnold glenn britt director glenn britt carrie cox director carrie cox calvin darden director calvin darden bruce l downey director bruce l downey john f finn director john f finn clayton jones director clayton jones gregory b kenny director gregory b kenny david p king director david p king richard c notebaert director richard c notebaert jean g spaulding md director jean g spaulding md cardinal health inc subsidiaries schedule ii valuation qualifying accounts 1 amounts included herein pertain continuing operations company 2 fiscal 2013 includes 10 million reserves related customer pricing disputes excluded provision bad debts consolidated statements cash flows classified reduction gross margin consolidated statements earnings 3 recoveries amounts provided written prior years 1 million fiscal 2013 2012 respectively 4 writeoff uncollectible accountsitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report page schedule ii valuation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health inc subsidiaries cardinal health website use website channel distribution material information us important information including news releases earnings analyst presentations financial information routinely posted accessible investors page wwwcardinalhealthcom addition website allows investors interested persons sign automatically receive email alerts post news releases sec filings certain information website signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 13 2014 cardinal health inc george barrett george barrett chairman chief executive officer pursuant requirements securities exchange act 1934 registrant duly caused report signed following persons behalf registrant capacities indicated august 13 2014 name title george barrett chairman chief executive officer director principal executive officer george barrett jeffrey w henderson chief financial officer principal financial officer jeffrey w henderson stuart g laws senior vice president chief accounting officer principal accounting officer stuart g laws david j anderson director david j anderson colleen f arnold director colleen f arnold carrie cox director carrie cox calvin darden director calvin darden bruce l downey director bruce l downey john f finn director john f finn patricia hemingway hall director patricia hemingway hall clayton jones director clayton jones gregory b kenny director gregory b kenny david p king director david p king richard c notebaert director richard c notebaert cardinal health inc subsidiaries schedule ii valuation qualifying accounts 1 amounts included herein pertain continuing operations company 2 fiscal 2014 2013 include 9 million 10 million respectively reserves related customer pricing disputes excluded provision bad debts consolidated statements cash flows classified reduction gross margin consolidated statements earnings 3 recoveries amounts provided written prior years 3 million fiscal 2014 1 million fiscal 2013 2012 respectively 4 writeoff uncollectible accounts actual sales returns 5 effective june 30 2013 prospectively updated policy accrue estimated sales returns allowances time sale based upon historical customer return trends margin rates processing costs prior change policy recognized sales returns reduction revenue cost products sold sales price cost respectively products returnednannannannannannanitem 15 exhibits financial statement schedules a1 following financial statements included item 8 report a2 following supplemental schedule included report page schedule iivaluation qualifying accounts schedules listed omitted applicable required information included consolidated financial statements notes thereto a3 exhibits required item 601 regulation sk management contract compensation plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized august 27 2009 cardinal health inc r kerry clark r kerry clark chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated august 27 2009 cardinal health inc subsidiaries schedule iivaluation qualifying accounts 1 fiscal 2009 2008 2007 recoveries amounts provided written prior years 04 million 35 million 08 million respectively 2 fiscal 2008 2007 01 million 61 million respectively relates beginning balance acquisitions accounted purchase transactions 3 writeoff uncollectible accounts