SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2002 Commission File Number 0-8640
SYNCOR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0229124
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6464 Canoga Avenue, Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
(818) 737-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 2002,
26,219,271 shares of $.05 par value common stock were outstanding.
--------------------------------------------------------------------------------
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information ................................................................ 3
Item 1. Condensed Consolidated Financial Statements ..................................... 3
Balance Sheets as of September 30, 2002 and December 31, 2001 .................... 3
Statements of Operations for Three Months Ended September 30, 2002 and 2001 ...... 5
Statements of Operations for Nine Months Ended September 30, 2002 and 2001 ....... 7
Statements of Cash Flows for Nine Months Ended September 30, 2002 and 2001 ....... 9
Notes to Condensed Consolidated Financial Statements ............................. 10
Item 2. Management's Discussion and Analysis of Financial Condition ..................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...................... 25
Item 4. Controls and Procedures ......................................................... 25
Part II. Other Information .................................................................... 27
Item 5. Other Information .............................................................. 27
Item 6. Exhibits and Reports on Form 8-K ................................................ 29
Signature ....................................................................................... 30
Certifications .................................................................................. 31
2
Part I. FINANCIAL INFORMATION
Item 1.
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
ASSETS
Current assets:
Cash and cash equivalents $ 21,541 $ 17,634
Short-term investments 16,611 10,215
Trade receivables, net 106,715 97,003
Inventory 28,875 28,879
Prepaids and other current assets 23,824 19,215
Total assets - discontinued operations (note 2) 235,794 283,154
Total current assets 433,360 456,100
Marketable investment securities 510 1,006
Property and equipment, net 98,192 86,812
Excess of purchase price over net assets acquired, net 36,368 30,498
Other assets 13,457 13,425
$581,887 $587,841
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,204 $ 62,021
Accrued liabilities 27,012 13,982
Accrued wages and related costs 21,677 13,149
Federal and state taxes payable - 4,530
Current maturities of long-term debt 1,922 6,345
Total liabilities - discontinued operations (note 2) 221,109 215,635
Total current liabilities: 336,924 315,662
3
Long-term debt, net of current maturities 18,941 35,118
Deferred taxes 2,661 2,233
Stockholders' equity:
Common stock, $.05 par value 1,493 1,420
Additional paid-in capital 150,900 124,909
Notes receivable-related parties (3,337) (6,197)
Accumulated other comprehensive loss (7,070) (3,653)
Retained earnings 119,311 151,888
Treasury stock, at cost; 3,750 shares at September 30, 2002
and 3,575 shares at December 31, 2001
(37,936) (33,539)
Total stockholders' equity 223,361 234,828
$581,887 $587,841
See notes to condensed consolidated financial statements.
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
Net sales $ 192,212 $ 149,818
Cost of sales 133,458 105,009
Gross profit 58,754 44,809
Operating, selling and administrative expenses 42,104 29,506
Depreciation and amortization 5,007 4,391
Operating income 11,643 10,912
Other income (expense), net (2,114) 595
Income from continuing operations before taxes 9,529 11,507
4
Provision for income taxes 5,870 4,432
Income from continuing operations $ 3,659 $ 7,075
Income (loss) from discontinued operations, net of taxes (32,150) 759
---------- -----------
Net income (loss) $(28,491) $ 7,834
Net income (loss) per share - Basic:
Continuing operations $ 0.14 $ 0.29
Discontinued operations $ (1.25) $ 0.03
Net income (loss) per share $ (1.11) $ 0.32
Net income (loss) per share - Diluted:
Continuing operations $ 0.13 $ 0.26
Discontinued operations $ (1.17) $ 0.03
---------- -----------
Net income (loss) per share $ (1.04) $ 0.29
Weighted average shares outstanding - Basic 25,695 24,603
Weighted average shares outstanding - Diluted 27,405 27,024
See notes to condensed consolidated financial statements.
5
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
Net sales $ 555,112 $ 434,288
Cost of sales 380,760 303,203
Gross profit 174,352 131,085
Operating, selling and administrative expenses 116,463 74,859
Depreciation and amortization 14,609 11,713
Operating income 43,280 44,513
Other expense, net (3,029) (912)
Income from continuing operations before taxes 40,251 43,601
Provision for income taxes 17,697 16,858
Income from continuing operations $ 22,554 $ 26,743
Income (loss) from discontinued operations, net of taxes (55,131) 2,280
Net income (loss) $ (32,577) $ 29,023
Net income (loss) per share - Basic:
Continuing operations $ 0.90 $ 1.09
Discontinued operations $ (2.20) $ 0.09
Net income (loss) per share $ (1.30) $ 1.18
Net income (loss) per share - Diluted:
Continuing operations $ 0.83 $ 0.99
6
Discontinued operations (2.04) $ 0.08
Net income (loss) per share $ (1.21) $ 1.07
Weighted average shares outstanding - Basic 25,081 24,494
Weighted average shares outstanding - Diluted 26,993 27,047
See notes to condensed consolidated financial statements.
7
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $(32,577) $29,023
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss (income) from discontinued operations 55,131 (2,280)
Depreciation and amortization 14,609 11,713
Unrealized gain on investments 3 20
Provision for losses on receivables 1,917 772
Amortization of loan guarantee - 1,264
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables (11,629) (16,201)
Inventory 149 44,186
Prepaids and other current assets (1,470) (4,041)
Other assets (109) 3,008
Accounts payable 3,183 (25,996)
Accrued liabilities 12,912 (1,203)
Accrued wages and related costs 8,528 (4,485)
Federal and state taxes payable 3,185 5,259
Deferred taxes 428 1,574
Net cash provided by operating activities 54,260 42,613
Cash flows from investing activities:
Purchase of property and equipment, net (20,741) (32,226)
Acquisitions of businesses, net of cash acquired (6,446) (25,415)
Purchases of short-term investments (6,396) (6,296)
Proceeds from sales of (purchases of) long-term investments 496 (19)
Net cash used in investing activities (33,087) (63,956)
Cash flows from financing activities:
8
Proceeds from long-term debt 3,906 23,266
Repayment of long-term debt (29,325) (8,212)
Notes receivable-related parties 2,860 9,798
Issuance of common stock 15,210 11,625
Reacquisition of common stock for treasury (4,397) (13,927)
Net cash (used in) provided by financing activities (11,746) 22,550
Net change in cash and cash equivalents 9,427 1,207
Cash flows (used in) provided by discontinued operations (Note 2) (5,520) 70
Cash and cash equivalents at beginning of period 17,634 24,330
Cash and cash equivalents at end of period $21,541 $25,607
See notes to condensed consolidated financial statements.
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. GENERAL. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results for the nine months ended September 30, 2002, are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K/A-1 for the year ended
December 31, 2001. Certain line items in the prior year's consolidated condensed
financial statements presented herein have been reclassified to conform to the
current year's presentation.
2. MERGER AGREEMENT, DISCONTINUED OPERATIONS AND OTHER CHARGES. On June 14,
2002, we entered into an agreement and plan of merger with Cardinal Health Inc.
(Cardinal Health) and its wholly owned subsidiary, Mudhen Merger Corp. Under the
terms and subject to the conditions of the agreement, we will become a wholly
owned subsidiary of Cardinal Health. The merger agreement provides for Syncor
stockholders to receive 0.52 Cardinal Health shares for each Syncor share they
own. Pursuant to certain terms and conditions in the merger agreement, if the
agreement is terminated we could be required to pay Cardinal Health termination
fees ranging from $4,000,000 to $24,125,000. The obligation to pay, and the
amount of such fees are based upon the circumstances relating to the
termination. Syncor's special meeting of stockholders to consider the approval
of the merger agreement is scheduled for December 6, 2002. See Part II, Item 5 -
"Other Information".
We also announced on June 14, 2002 our decision to discontinue certain
operations including our medical imaging business-CMI (a separate segment for
reporting purposes), certain overseas locations, and the brachytherapy seeds
manufacturing operations of the Pharmacy Services Business. On June 14, 2002, we
recorded net after-tax charges in discontinued operations for severance,
impairment of assets held for sale and other charges totaling $24.9 million or
$0.93 per fully diluted share. Included in discontinued operations was a net
after tax charge of $11.2 million or $0.42 per fully diluted share for CMI. Of
this total, $1.5 million related to our change in estimates for contractual
allowances, $4.2 million related to the change in estimated reserves for bad
debt, $1.1 million related to a write-down of existing costs of a billing system
that would no longer be utilized and $4.4 million related to severance expenses.
The adjustments to contractual allowances and bad debt reserves were made after
extensive reviews of our billing and collection processes completed in June
2002. Included in these reviews were recommendations from outside consultants
for enhancements to our reporting systems and methodology for estimating and
recording our contractual allowances and bad debt reserves. Based upon these
refinements
9
and improvements we identified the need for an adjustment to contractual
allowances and bad debt reserves. The timing of the changes to these estimates
for contractual allowances and bad debt reserves was not related to the decision
to discontinue the operations of CMI. The charges relating to our overseas
business totaled $13.2 million, net after taxes. Of this amount, $1.0 million
related to severance charges with the remaining $12.2 million related to asset
impairment charges. The $0.5 million of charges related to the seeds
manufacturing facilities was for the discontinuance of seeds production.
Our June 14, 2002 announcement also included a special charge to earnings of
$5.0 million ($3.1 million net of tax or $0.11 per fully diluted share). Of this
amount $2.5 million related to severance and information technology
reorganization costs and $0.6 million related to expenses arising from the
transaction with Cardinal Health.
We are marketing each of the discontinued operations for sale with the exception
of the seeds business, which has been closed, and an investment in Brazil, which
has been terminated. We are also in various stages of discussions with U.S. and
local foreign buyers for the sale of our discontinued overseas operations. We
expect to complete these transactions within one year from our June 14, 2002
announcement to discontinue these operations as prescribed by the Financial
Accounting Standards Board (FASB), in SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We recorded severance related
accruals both in our overseas business and CMI in accordance with the provisions
of the FASB, Emerging Issues Task Force (EITF) No. 94-3 Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
In our June 14, 2002 announcement regarding the discontinuation of CMI
operations, we indicated that we were entertaining bids for the sale of CMI.
Since that announcement, numerous potential buyers have conducted due diligence
on the CMI business. During the quarter ended September 30, 2002, we received
various offers from potential buyers, and based on these offers, we believe that
it is probable that the sale of CMI will result in a loss on disposal to Syncor.
During the quarter ended September 30, 2002 we recognized an asset impairment
charge in discontinued operations relative to CMI in an amount of $31.3 million
net after tax reflective of these offers.
Accruals for Estimated Fines and Penalties
------------------------------------------
Based on the current status of the discussions with the governmental authorities
described in Part II, Item 5 below, Syncor has accrued $2.5 million in the
"other income and (expense), net" category for estimated potential fines and
other penalties that may be imposed by U.S. governmental authorities in
connection with this matter. There can be no assurance that this reserve will be
sufficient to address any such fines or other penalties actually imposed by
governmental authorities. At this time Syncor cannot predict the extent to which
the SEC, the DOJ or any other governmental authorities will pursue
administrative, civil injunctive or criminal proceedings, the imposition of
fines or penalties or other remedies or sanctions.
10
The following represents income statement data from the discontinued operations:
Income statement data:
For Three Months Ended For Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
Revenues $ 41,468 $43,976 $123,531 $128,614
Costs and expenses 89,732 42,638 202,921 124,636
Operating income (loss) (48,264) 1,338 (79,390) 3,978
Income tax expense (benefit) (16,114) 579 (24,259) 1,698
Income (loss) from $(32,150) $ 759 $(55,131) $ 2,280
discontinued operations
The following table summarizes the major assets and liabilities for discontinued
operations. The inter-company payables and stockholders' deficit are eliminated
in consolidation and therefore do not appear on the face of the balance sheet.
The discontinued balance sheet is as follows:
September 30, 2002 December 31, 2001
Current assets $ 71,054 $ 74,450
Property and equipment 92,206 90,552
Intangibles and goodwill 72,534 118,152
Total assets $235,794 $283,154
Current liabilities $ 54,564 $ 30,088
Long-term debt 163,954 175,531
Inter-company payables 67,306 68,381
Deferred taxes - 8,463
Other liabilities 2,591 1,553
Stockholders deficit (52,621) (862)
Total liabilities and stockholders' deficit $235,794 $283,154
Included in the September 30, 2002 long-term debt are borrowings from bank
financings of approximately $130.6 million with the remainder primarily capital
leases generally with five-year terms.
The major components of the discontinued operations charges announced are as
follows:
11
Amount Accrued
(in millions) Charge Utilized Costs
Employee termination and severance costs $11.4 $ 2.4 $9.0
Included in the original employee termination and severance costs were estimates
of 189 employees to be terminated, 29 at the corporate level and 160 at CMI. Of
these totals, 41 employees were terminated in this period, 14 from the corporate
level and 27 at CMI. There have been no adjustments to the liabilities accrued
through September 30, 2002.
The remaining notes to the financial statements address/disclose information
relevant to the continuing operations only, except for Note 9 relating to
acquisitions.
3. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
Our critical accounting policies and estimates are as follows:
Revenue Recognition. We recognize our revenue primarily from two sources: (i)
product revenue, which includes sales from our radiopharmacies, and (ii) service
revenue, primarily from our international imaging businesses and our cardiology
management services. Management makes few estimates or judgments in the
recording of revenues and as such few if any changes are expected in the
recording of revenues. Revenues are booked based upon delivery of product to our
customers. Since most of our products are compounded with radioactive materials,
most have a very short useful life of approximately six hours. Due to this short
life and the fact that most items are ordered for specific patients based on a
doctor's prescription, we receive very few returns of product. These returns are
generally handled in the same month so future revenues are not impacted and no
significant allowances for returns are necessary. Service revenues are booked at
the time of service. Allowances are made for contracts and bad debts in the same
month as the service revenue is booked. Service revenues constitute less than 3%
of our overall net revenues.
Cardiolite sales represented $97.0 million and $79.3 million, or approximately
50.5% and 52.9%, of our total sales during the quarters ended September 30, 2002
and 2001, respectively. Cardiolite sales represented $281.4 million and $238.1
million, or approximately 50.7% and 54.8%, of our total sales during the nine
months ended September 30, 2002 and 2001, respectively.
Estimating Valuation Allowances for Doubtful Accounts. The preparation of
financial statements requires our management to make estimates and assumptions
on the collectibility of our accounts receivable. Management specifically
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends, aging of accounts and changes in
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Any changes in these estimates or assumptions could cause material
differences in recorded allowances.
Valuation of Long-Lived Assets and Goodwill. We assess the impairment of
identifiable intangibles, long-lived assets and related goodwill and enterprise
level goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends; and
o our market capitalization relative to net book value.
4. NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Accounting Standards SFAS No. 141, Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001, clarifies the recognition of
intangible assets separately from goodwill and requires that unallocated
negative goodwill be written off immediately as an extraordinary gain. SFAS No.
142, which was effective for fiscal years beginning after December 15, 2001,
requires that ratable amortization of goodwill be replaced with periodic tests
of goodwill impairment and that intangible assets, other than goodwill, which
have determinable useful lives, be amortized over their useful lives. The
Company has adopted these accounting standards effective January 1, 2002 and
determined in the transitional impairment analysis, that based upon the value of
the proposed merger agreement and anticipated sales values of discontinued
business assets that there was no impairment. There were no adjustments to
identifiable intangible assets' useful
12
lives or recorded balances as a result of the adoption of SFAS No.142. We will
perform an annual impairment analysis of goodwill in the fourth quarter of 2002
as required by SFAS No. 142.
As more fully disclosed in Note 2, during the quarter ended September 30, 2002,
we recorded an impairment charge of $31.3 million net of taxes in discontinued
operations for the imaging business assets (goodwill) due to receiving bids for
this business under the current carrying values of these assets. The charge was
not a transitional charge under SFAS No.142, therefore the charge was recorded
in discontinued operations for the quarter ended September 30, 2002.
The following is a reconciliation of net income and earnings per share between
the amounts reported for the three and nine months ended September 30, 2001 and
the adjusted amounts reflecting these new accounting rules:
(Dollars in thousands, except per share Three Months Ended, Three Months Ended, Nine Months Ended Nine Months Ended
data) September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net income
Reported net income (loss) $ (28,491) $ 7,834 $ (32,577) $ 29,023
Goodwill amortization (net of
taxes) - 823 - 2,670
---------- ------- ---------- ---------
Adjusted net income $ (28,491) $ 8,657 $ (32,577) $ 31,693
---------- ------- ---------- ---------
Earnings per share: Basic
Reported $ (1.11) $ 0.32 $ (1.30) $ 1.18
Goodwill - 0.03 - 0.11
---------- ------- ---------- ---------
Adjusted earnings per share $ (1.11) $ 0.35 $ (1.30) $ 1.29
---------- ------- ---------- ---------
Earnings per share: Diluted
Reported $ (1.04) $ 0.29 $ (1.21) $ 1.07
Goodwill - 0.03 - 0.10
---------- ------- ---------- ---------
Adjusted earnings per share $ (1.04) $ 0.32 $ (1.21) $ 1.17
---------- -------- ---------- ---------
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144), which supersedes both FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS No. 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS No. 121. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, Goodwill and Other Intangible Assets.
The Company adopted SFAS No. 144 in the first quarter of 2002. Management does
not expect the adoption of SFAS No. 144 for long-lived assets held for use to
have a material impact on the Company's financial statements because the
impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121.
The provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. The adoption of SFAS No. 144 impacted us as
certain disposal groups qualified as discontinued operations and are presented
accordingly in the accompanying condensed consolidated financial statements.
13
On August 16, 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. The statement requires entities to record the fair value
of a liability for legal obligations associated with the retirement obligations
of tangible long-lived assets in the period in which it is incurred. When the
liability is initially recorded, the entity increases the carrying amount of the
related long-lived asset. Over time, accretion of the liability is recognized
each period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. We do not expect that the adoption of SFAS No.
143 will have a material impact on the Company's results from operations.
In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections which
requires that the extinguishment of debt not be considered an extraordinary item
under Opinion 30 Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions unless the debt extinguishment meets the
unusual in nature and infrequency of occurrence criteria in Opinion 30. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002 and upon
adoption, companies must reclassify prior period items that do not meet the
extraordinary item classification criteria in Opinion 30. The adoption of SFAS
No. 145 is not expected to have a material impact on our financial position and
results of operations.
On July 30, 2002, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 nullifies EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). It requires that a
liability be recognized for those costs only when the liability is incurred,
that is, when it meets the definition of a liability in the FASB's conceptual
framework. SFAS No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. SFAS No.146
is effective for exit or disposal activities that are initiated after December
31, 2002, with earlier adoption encouraged. The Company does not expect that the
adoption of SFAS No. 146 will have a material impact on its financial position
or results from operations.
5. COMPREHENSIVE INCOME (LOSS). Other comprehensive income (loss) includes
foreign currency translation adjustments and net unrealized gains and losses on
investments in equity securities. Such amounts are as follows:
For the three months ended: September 30, 2002 September 30, 2001
Before-Tax Tax Benefit Net-of-Tax Before-Tax Tax Net-of-Tax
Amount (Expense) Amount Amount Expense Amount
Foreign currency translation adjustments $ (2,257) $ - $ (2,257) $ 87 $ - $ 87
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period 1 - 1 28 (11) 17
Other comprehensive income (loss) (2,256) - (2,256) 115 (11) 104
Net income (loss) (38,735) 10,244 (28,491) 12,845 (5,011) 7,834
Total comprehensive income (loss) $(40,991) $10,244 $(30,747) $12,960 $ (5,022) $ 7,938
For the nine months ended: September 30, 2002 September 30, 2001
Before-Tax Tax Benefit Net-of-Tax Before-Tax Tax Net-of-Tax
Amount (Expense) Amount Amount Expense Amount
Foreign currency translation adjustments $ (3,420) $ - $ (3,420) $ 30 $ - $ 30
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period 4 (1) 3 32 (12) 20
Other comprehensive income (loss) (3,416) (1) (3,417) 62 (12) 50
Net income (loss) (39,139) 6,562 (32,577) 47,579 (18,556) 29,023
Total comprehensive income (loss) $(42,555) $ 6,561 $(35,994) $47,641 $(18,568) $29,073
14
6. SEGMENT INFORMATION. Syncor has identified two primary operating segments:
U.S. Pharmacy Services and International Operations. The third segment, which
was the U.S. Medical Imaging Business, has been excluded from this segment
presentation since the operations have been discontinued. The international
locations and seeds manufacturing operations that have been discontinued have
also been excluded from the segment presentation. Segment selection was based
upon internal organizational structures, the process by which these operations
are managed and evaluated, the availability of separate financial results, and
materiality considerations. Segment detail is summarized as follows:
THREE MONTHS ENDED,
September 30, 2002 September 30, 2001
U.S. Pharmacy Services Business
-------------------------------
Revenues $181,877 $142,101
Operating Income $ 23,894 $ 15,587
International Operations
------------------------
Revenues $ 10,335 $ 7,717
Operating Loss $ (1,312) $ (191)
Unallocated Corporate
---------------------
Operating Loss $(10,939) $ (4,484)
NINE MONTHS ENDED,
September 30, 2002 September 30, 2001
------------------ ------------------
U.S. Pharmacy Services Business
-------------------------------
Revenues $524,004 $412,941
Operating Income $ 72,843 $ 56,507
International Operations
------------------------
Revenues $ 31,108 $ 21,347
Operating Loss $ (894) $ (253)
Unallocated Corporate
---------------------
Operating Loss $(28,669) $(11,741)
15
7. NET INCOME PER SHARE. Basic earnings per share (EPS) amounts are computed by
dividing earnings applicable to common stockholders by the weighted average
number of shares outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding. Anti-dilutive
outstanding stock options of 2,642,280 and 2,309,069 for the three months ended
September 30, 2002 and 2001 and 2,661,100 and 2,307,402 for the nine months
ended September 30, 2002 and 2001, respectively have been excluded from the
diluted calculation, respectively.
The reconciliation of the numerator and denominators of the basic and diluted
earnings per share computations are as follows for the three and nine months
ended September 30, 2002 and 2001:
16
THREE MONTHS ENDED,
September 30, 2002 September 30, 2001
------------------ ------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Net income (loss):
Continuing Operations $ 3,659 $ 7,075
Discontinued Operations $(32,150) $ 759
Basic EPS: 25,695 24,603
Continuing Operations $ 3,659 $ 0.14 $ 7,075 $0.29
Discontinued Operations $(32,150) $(1.25) $ 759 $0.03
Effect of Dilutive Stock Options
1,710 2,421
----- -----
Diluted EPS: 27,405 27,024
Continuing Operations $ 3,659 $ 0.13 $ 7,075 $0.26
Discontinued Operations $(32,150) $(1.17) $ 759 $0.03
NINE MONTHS ENDED,
September 30, 2002 September 30, 2001
------------------ ------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Net income (loss):
Continuing Operations $ 22,554 $26,743
Discontinued Operations $(55,131) $ 2,280
Basic EPS: 25,081 24,494
17
Continuing Operations $ 22,554 $0.90 $26,743 $1.09
Discontinued Operations $(55,131) $(2.20) $ 2,280 $0.09
Effect of Dilutive Stock Options 1,912 2,553
----- -----
Diluted EPS: 26,993 27,047
Continuing Operations $ 22,554 $ 0.83 $26,743 $0.99
Discontinued Operations $(55,131) $(2.04) $ 2,280 $0.08
18
8. NOTES RECEIVABLE-RELATED PARTIES. We initiated a Senior Management Stock
Purchase Plan effective June 16, 1998, pursuant to which our officers and key
employees purchased shares of Syncor stock. The shares were paid with a
five-year interest bearing promissory note payable to us. Interest on each note
is payable on each anniversary date, with the entire outstanding principal and
unpaid interest due on the fifth anniversary date. As of September 30, 2002 we
had eight employees with loans outstanding of $3.3 million, as compared to
thirteen employees with $6.2 million outstanding at December 31, 2001.
9. ACQUISITION OF BUSINESSES. The summary below of acquisitions that we made in
the third quarter of 2002 and 2001 reflect acquisitions made by our continuing
operations and discontinued operations. We have not made any amendments to this
note to reflect the discontinuation of our CMI operations and certain overseas
locations announced on June 14, 2002.
During the third quarter of 2002, we had no acquisitions.
During the third quarter of 2001, we made four acquisition investments. The
first two were in our pharmacy services business. We acquired a company that
provides cardiology services for a purchase price of $13.8 million. We also
acquired a domestic company that designs, manufactures and sells radiation
detection and measurement equipment for the medical and nuclear power plant
industry for a purchase price of $10.8 million. In addition, our medical imaging
business acquired three centers via two acquisitions during the quarter. The
first of these was a multi-MRI site in Florida for a purchase price of $5.1
million plus the assumption of $1.5 million of debt. Secondly we acquired two
MRI centers in Texas for a purchase price of $4.3 million plus the assumption of
$3.6 million of debt.
Item 2.
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended September 30, 2002 and 2001
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates are as follows:
Revenue Recognition. We recognize our revenue primarily from two sources: (i)
product revenue, which includes sales from our radiopharmacies, and (ii) service
revenue, primarily from our international imaging businesses and our cardiology
management services. Management makes few estimates or judgments in the
recording of revenues and as such few if any changes are expected in the
recording of revenues. Revenues are booked based upon delivery of product to our
customers. Since most of our products are compounded with radioactive materials,
most have a very short useful life of approximately six hours. Due to this short
life and the fact that most items are ordered for specific patients based on a
doctor's prescription, we receive very few returns of product. These returns are
generally handled in the same month so future revenues are not impacted and no
significant allowances for returns are necessary. Service revenues are booked at
the time of service. Allowances are made for contracts and bad debts in the same
month as the service revenue is booked. Service revenues constitute less than 3%
of our overall net revenues.
Estimating Valuation Allowances for Doubtful Accounts. The preparation of
financial statements requires our management to make estimates and assumptions
on the collectibility of our accounts receivable. Management specifically
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends, aging of accounts and changes in
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Any changes in these estimates or assumptions could cause material
differences in recorded allowances.
Valuation of Long-Lived Assets and Goodwill. We assess the impairment of
identifiable intangibles, long-lived assets and related goodwill and enterprise
level goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends; and
o our market capitalization relative to net book value.
19
NET SALES
Net sales increased 28.3%, or $42.4 million, to $192.2 million for the three
months ended September 30, 2002 and increased 27.8%, or $120.8 million, to
$555.1 million for the nine months ended September 30, 2002. Both of our
business segments had sales growth during the quarter. U.S. Pharmacy Services
revenue increase was primarily due to same store radiopharmacy growth. The sales
growth for International operations was primarily from acquisitions and growth
in our Taiwan businesses. Cardiolite sales represented $97.0 million and $79.3
million, or approximately 50.5% and 52.9%, of our total sales during the
quarters ended September 30, 2002 and 2001, respectively. Cardiolite sales
represented $281.4 million and $238.1 million, or approximately 50.7% and 54.8%,
of our total sales during the nine months ended September 30, 2002 and 2001,
respectively.
Revenues
--------
Three Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $181,877 $142,101
International Operations 10,335 7,717
Total $192,212 $149,818
Revenues
--------
Nine Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $524,004 $412,941
International Operations 31,108 21,347
Total $555,112 $434,288
U.S. Pharmacy Business
Net sales increased 28.0%, or $39.8 million, to $181.9 million for the three
months ended September 30, 2002 and by 26.9%, or $111.1 million to $524.0
million for the nine months ended September 30, 2002. This increase was driven
primarily by increased sales of cardiology imaging agents. For the three months
ended September 30, 2002 sales related to cardiology imaging agents increased
20.4%, or $19.6 million, and by 16.3%, or $47.3 million for the nine months
ended September 30, 2002 both as a result of price and volume increases. This
business also had oncology sales increases of 59.6%, or $9.7 million for the
three months ended September 30, 2002, and 45.9%, or $21.8 million for the nine
months ended September 30, 2002. Acquisitions made during 2001 accounted for the
remainder of the increase for this business during 2002.
International Operations
Net sales increased 33.9%, or $2.6 million, to $10.3 million for the three
months ended September 30, 2002 and by 45.7%, or $9.8 million to $31.1 million
for the nine months ended September 30, 2002. Acquisitions accounted for the
majority of the sales increase. Net sales at our existing centers or facilities
were slightly higher during the quarter and year to date primarily as a result
of higher pharmacy sales in certain countries. The Taiwan market did have higher
same store sales, which increased 4% for the nine months ended September 30,
2002. Taiwan's sales increased 11.0%, or $0.4 million, to $3.9 million for the
three months ended September 30, 2002 and by 15.1%, or $1.5 million, to $11.4
million for the nine months ended September 30, 2002 as compared to the prior
year periods. (See Part II, Item 5.)
20
GROSS PROFIT
Gross profit increased 31.1%, or $13.9 million, to $58.8 million for the three
months ended September 30, 2002 and by 33.0%, or $43.3 million to $174.4 million
for the nine months ended September 30, 2002. Our consolidated gross profit
margin as a percentage of sales improved to 30.6% for the three months ended
September 30, 2002 as compared to 29.9% for the same period in 2001 and
increased to 31.4% for the nine months ended September 30, 2002 as compared to
30.2% for the same period in 2001. The increase for the quarter and year to date
was driven by continued improvement in product mix, price increases, and
operating efficiencies in our radiopharmacy network and increased margins from
new businesses in the Pharmacy Services Business.
Gross Profit
------------
Three Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $55,295 $41,391
International Operations 3,459 3,418
Total $58,754 $44,809
Gross Profit
------------
Nine Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $163,086 $122,137
International Operations 11,266 8,948
Total $174,352 $131,085
U.S. Pharmacy Business
Gross profit increased 33.6%, or $13.9 million, to $55.3 million for the three
months ended September 30, 2002 and increased 33.5%, or $40.9 million, to $163.1
million for the nine months ended September 30, 2002. Gross profit margin as a
percentage of sales increased to 30.4% for the three months ended September 30,
2002 as compared to 29.1% for the same period in 2001 and improved to 31.1% for
the nine months ended September 30, 2002 as compared to 29.6% for the same
period in 2001. This gross profit margin increase for the year to date was due
primarily to improved margins associated with new businesses, such as the
production and distribution of FDG (fluorodeoxyglucose), and higher margins
associated with acquisitions in 2000 and 2001. These initiatives accounted for
0.9% of the overall margin increase on a year to date basis. The remainder of
the gross profit margin increase was the result of continued leveraging of our
radiopharmacy network; we continue to successfully increase volumes without
comparable increases in material, labor and delivery costs.
International Operations
Gross profit increased 1.2%, or $0.1 million, to $3.5 million for the three
months ended September 30, 2002 and increased 25.9%, or $2.3 million, to $11.3
million for the nine months ended September 30, 2002. Our gross profit margin as
a percentage of sales decreased to 33.5% for the three months ended September
30, 2002 compared to 44.3% for the same period in 2001 and decreased to 36.2%
for the nine months ended September 30, 2002 as compared to 41.9% for the same
period in 2001. Margins at our existing radiopharmacy sites decreased in the
quarter and year to date in 2002 primarily from increased material costs, which
was offset in part by improving margins at imaging sites. Our margins were also
reduced by acquired businesses, which have a lower margin than our existing
businesses. Taiwan's gross margins increased 15.4%, or $0.2 million, to $1.8
million for the three months ended September 30, 2002 and by 32.8%, or $1.4
million, to $5.8 million for the nine months ended September 30, 2002 as
compared to the prior year periods. (See Part II, Item 5.)
21
OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Operating, selling and administrative expenses increased 42.7%, or $12.6
million, to $42.1 million for the three months ended September 30, 2002 and
increased by 55.6%, or $41.6 million to $116.5 for the nine months ended
September 30, 2002. The ratio of these expenses to net sales for the quarter was
21.9% compared to 19.7% for the same period in 2001. For the nine months ended
September 30, 2002 the ratio was 20.9% compared to 17.2% for the comparable
period in 2001. Acquisitions in the U.S. pharmacy services business caused the
majority of the increase. In addition, we incurred higher Corporate costs
primarily from increased IT costs associated with new systems and increased
telecommunications expenses. The unallocated corporate expenses include $7.3
million in costs associated with certain severance agreements and costs
associated with the merger agreement with Cardinal Health Inc. Also included in
these unallocated corporate expenses are certain incentive bonuses, which have
increased in 2002 as compared to the prior year period.
Operating, Selling and
Administrative Expenses
-----------------------
Three Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $ 28,863 $23,834
International Operations 3,889 2,513
Unallocated Corporate 9,352 3,159
Total $ 42,104 $29,506
Operating, Selling and
Administrative Expenses
-----------------------
Nine Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $ 83,016 $60,470
International Operations 9,718 6,627
Unallocated Corporate 23,729 7,762
Total $116,463 $74,859
U.S. Pharmacy Business
Operating, selling and administrative costs increased 21.1%, or $5.0 million, to
$28.9 million for the three months ended September 30, 2002 and increased 37.3%,
or $22.5 million, to $83.0 million for the nine months ended September 30, 2002.
The quarter and year to date increase was due primarily to increased costs
associated with acquired businesses, which accounted for $4.0 million of this
increase for the three months and $7.4 million for the nine months ended
September 30, 2002. Costs associated with opening new FDG production facilities
(cyclotrons), used in the production of FDG, accounted for an additional $0.9
million for the three months and $2.3 million for the nine months ended
September 30, 2002. The remainder of the increase is the result of increased
costs in our radiopharmacy network, due to increased volumes and
22
growth. As a percentage of sales, operating, selling and administrative expenses
decreased from 16.8% in 2001 to 15.9% in 2002 for the three months ended
September 30, 2002 but increased from 14.6% in 2001 to 15.8% in 2002 for the
nine months ended September 30, 2002. The decrease in this quarter as compared
to the prior year was due to effective cost controls and sales increases, which
exceeded the sales percentage increases during the first two quarters. On a
year-to-date basis, acquired businesses caused the majority of this increase and
sales increases were exceeded by these increased costs.
International Operations
Operating, selling and administrative expenses increased 54.8%, or $1.4 million,
to $3.9 million for the three months ended September 30, 2002 and increased
46.6%, or $3.1 million, to $9.7 million for the nine months ended September 30,
2002. These expenses increased primarily as a result of new businesses and
start-up centers. As a percentage of sales, these expenses increased from 31.0%
in 2001 to 31.2% in 2002. (See Part II, Item 5.)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 14.0%, or $0.6 million, to $5.0 million
for the three months ended September 30, 2002 and increased 24.7%, or $2.9
million, to $14.6 million for the nine months ended September 30, 2002. The
majority of the increase both for the quarter and year to date was attributable
to our pharmacy services business, primarily in new FDG production facilities
and new businesses, with an increase of $0.4 million for three months ended
September 30, 2002 and $1.2 million for the nine months ended September 30,
2002. Depreciation also increased for our corporate operations, primarily for
new IT systems costs with an increase of $0.04 million for the three months
ended September 30, 2002 and $3.1 million for the nine months ended September
30, 2002. The prior year expenses included goodwill amortization of $1.4 million
for the three months ended September 30, 2001 and $4.5 million for the nine
months ended September 30, 2001.
Depreciation and Amortization
-----------------------------
Three Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $ 2,538 $ 1,970
International Operations 882 1,096
Unallocated Corporate 1,587 1,325
Total $ 5,007 $ 4,391
Depreciation and Amortization
-----------------------------
Nine Months Ended September 30,
2002 2001
U.S. Pharmacy Services Business $ 7,227 $ 5,160
International Operations 2,442 2,574
Unallocated Corporate 4,940 3,979
Total $14,609 $11,713
23
ACQUISITION OF BUSINESSES
The summary below of acquisitions that we made in the third quarter ended
September 30, 2001 reflect acquisitions made by our continuing operations and
discontinued operations. We have not made any amendments to this section to
reflect the discontinuation of our CMI operations and certain overseas locations
announced on June 14, 2002.
During the third quarter of 2002, we had no acquisitions.
During the third quarter of 2001, we made four acquisition investments. The
first two were in our pharmacy services business. We acquired a company that
provides cardiology services for a purchase price of $13.8 million. We also
acquired a domestic company that designs, manufactures and sells radiation
detection and measurement equipment for the medical and nuclear power plant
industry for a purchase price of $10.8 million. In addition, our medical imaging
business acquired three centers via two acquisitions during the quarter. The
first of these was a multi-MRI site in Florida for a purchase price of $5.1
million plus the assumption of $1.5 million of debt. Secondly we acquired two
MRI centers in Texas for a purchase price of $4.3 million plus the assumption of
$3.6 million of debt.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and investments of $38.7 million at September 30,
2002 compared to $28.9 million at December 31, 2001. Total debt (including
discontinued operations debt) was $197.7 million at September 30, 2002 compared
to $226.7 million at December 31, 2001, a reduction of $29.0 million. We had a
positive cash flow from operations of $54.3 million during the first nine months
of 2002. We used a portion of this cash flow to pay down debt balances. Working
capital (excluding discontinued operations) increased to $81.8 million from
$72.9 million at December 31, 2001 primarily due to differences in accruals for
severance related charges in continuing operations and accrued but unpaid
bonuses.
On January 17, 2002, we completed an asset securitization agreement using the
trade receivables as collateral. Under this facility, we sell our receivables
generated from our U.S. radiopharmacy operations to a wholly owned subsidiary,
Syncor Financing Corporation, which in turn sells the receivables to a third
party. These secured borrowings resulted in interest savings for the quarter
ended September 30, 2002 of approximately $0.2 million. At September 30, 2002,
we had $55.6 million extended on this $65 million agreement. In addition, we had
borrowings of $75.0 million outstanding on our $167.5 million credit line. Based
upon our current acquisition and capital plans we believe we have sufficient
resources available to fund our 2002 capital needs.
As further described in note 2, if the merger agreement is terminated under
certain circumstances, we could be required to pay Cardinal Health termination
fees ranging from $4.0 million to $24.1 million. If this obligation becomes
payable, we expect to pay such amounts using our borrowing capacity under our
existing credit agreements.
See Part II, Item 5.
FORWARD LOOKING STATEMENT
Except for the historical information and discussions contained herein,
statements contained in this Report on Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including: our
pending acquisition by Cardinal Health; changes in the regulation of the
healthcare industry at either or both of the federal and state levels; changes
or delays in reimbursement for our services by governmental or private payers;
our failure to continue to develop and market new products and services and to
keep pace with technological change; competitive pressures; failure to obtain or
protect intellectual property rights; quarterly fluctuations in revenues and
volatility of our stock price; our ability to attract and retain key personnel;
currency risks; dependence on certain suppliers; our ability to successfully
manage acquisitions and alliances; legal, political and economic changes; and
other risks, uncertainties and factors discussed in the "Risk Factors" section
in the Annual Report on Form 10-K/A-1 for December 31, 2001 and elsewhere
herein, in our other filings with the SEC or in materials incorporated by
reference. Given these uncertainties, undue reliance should not be placed on
such forward-looking statements.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest income earned on our investment portfolio is affected by changes in the
general level of U.S. interest rates. Our line of credit borrowings effectively
bear interest at variable rates and therefore, changes in U.S. interest rates
affect interest expense incurred thereon. Changes in interest rates do not
affect interest expense incurred on our fixed rate debt. There have been no
significant changes in the debt instruments at December 31, 2001 from the table
as filed in the annual report on Form 10-K/A-1.
24
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The
-------------------------------------------------
Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of a
date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, and
except for the matters described in subsection (b) below,
the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information
relating to the Company required to be included in the
Company's reports filed or submitted under the Exchange Act.
(b) Limitations on the Effectiveness of Controls.
---------------------------------------------
(i) As a result of Cardinal Health's due diligence
relating to the previously announced planned merger
of the two companies, it was brought to the Company's
attention that certain payments made and other
transactions engaged in by international subsidiaries
involving customers in several foreign jurisdictions
appear to have violated both foreign and U.S. law,
including the payment, record-keeping and controls
provisions of the Foreign Corrupt Practices Act. On
November 6, 2002, we announced that a committee of
outside directors, together with outside counsel, has
been investigating the propriety of these payments
and other transactions. Based upon the preliminary
results of this internal investigation (see Item 5 of
Part II below), the Company has concluded that there
appear to be deficiencies and weaknesses in its
internal compliance programs and internal audit
functions and that the Company must modify and
enhance its internal compliance programs and internal
audit functions so that actions of the type described
in this paragraph will not occur in the future. The
Company is in the process of reviewing its existing
internal compliance programs and internal audit
functions and intends to implement the necessary
changes to rectify any deficiencies and weaknesses in
its internal audit function and its compliance
programs relating to Syncor's international
operations. In the course of such review, we are
seeking to identify data errors, controls problems or
violations of law and to confirm that appropriate
corrective action be undertaken.
(ii) The Company's management, including the CEO and CFO,
does not expect that our disclosure controls and
procedures will prevent all error and all violations
of law. A control system, no matter how well
conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the
control system are met. Because of the inherent
limitations in all control systems, no evaluation of
controls can provide absolute assurance that all
control issues and violations of law, if any, within
the Company have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake.
Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two
or more people, or by management override of the
control. The design of any system of controls also is
based in part upon certain assumptions about the
likelihood of future events, and there can be no
assurance that any design will succeed in achieving
its stated goals under all potential future
conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of
compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in
any control system, misstatements due to error or
violations of law may occur and not be detected.
(c) Changes in Internal Controls. Since the Evaluation Date, there
-----------------------------
have not been any significant changes in the Company's
internal controls or in other factors that could significantly
affect such controls, except with respect to the matters
disclosed in subsection (b) above and the action that the
Company intends to take in response to such matters in order
to correct any deficiencies and weaknesses in its internal
audit functions and the compliance programs of Syncor's
international operations.
25
SYNCOR INTERNATIONAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 5.
OTHER INFORMATION
Recent Developments
Investigation of Foreign Operations
In a press release issued on November 6, 2002 (the "November 6 Press Release"),
Syncor announced that a newly established committee of three outside directors,
together with outside counsel, has been investigating the propriety of certain
payments made by international subsidiaries to certain customers in various
foreign countries, and would also investigate Syncor's other foreign operations.
Syncor said that the payments were brought to its attention by Cardinal Health,
Inc. ("Cardinal Health"), which learned of them in the course of its ongoing
post-signing due diligence relating to the previously announced planned merger
(the "Merger") of the two companies pursuant to a merger agreement, dated as of
June 14, 2002 (the "Merger Agreement"), among Syncor, Cardinal Health and Mudhen
Merger Corp., a wholly owned subsidiary of Cardinal Health.
The November 6 Press Release also stated that Mr. Monty Fu, Chairman of Syncor,
and his brother, Mr. Moses Fu, Director, Asia Region -- Syncor Overseas LTD.,
had gone on paid leave pending completion of an investigation into their
involvement in the payments, and that Monty Fu had agreed to suspend his
participation as a director of Syncor pending completion of the investigation.
In the November 6 Press Release, Syncor also announced that its board of
directors had elected Mr. Bernard Puckett, a current director and Chair of the
special committee conducting the investigation, as lead director of the Syncor
Board.
The November 6 Press Release further stated that in order to provide additional
time to complete the investigation of the foreign operations and make
appropriate disclosures to stockholders, Syncor had postponed its special
meeting of stockholders to vote on the pending Merger from its originally
scheduled date of November 19, 2002 until December 6, 2002.
Following issuance of the November 6 Press Release, Cardinal Health issued a
press release in which it stated, among other things, that it "will continue to
carefully monitor the Syncor situation and assess the results of the Syncor
special committee's ongoing investigation as well as the results of Cardinal
Health's continuing due diligence review." Cardinal Health further stated that
it had not yet concluded whether the conditions to the Merger would be satisfied
but that it intended to fully comply with its obligations under the Merger
Agreement. Cardinal Health also stated that "there can be no assurance that the
transaction involving the acquisition of Syncor by Cardinal Health will be
completed."
Later on November 6, 2002, in response to inquiries from The Nasdaq National
Market ("Nasdaq"), Syncor stated in a press release (the "Subsequent Press
Release"), among other things, that, based on the preliminary results of the
investigation, it did not believe as of such date that the amounts of the
questionable payments were material to the financial results of Syncor. Syncor
further stated that it needed to await completion of the investigation to be
able to determine the full impact on its financial results.
Syncor also stated in the Subsequent Press Release that it did not believe as of
such date, based on the information it had obtained, that it would fail to
satisfy the conditions to the proposed Merger. Syncor noted, however, that no
definitive determination as to the impact of the results of its investigation on
Syncor or the proposed Merger could be made until the investigation is
completed.
The Subsequent Press Release also noted that for Syncor's most recent fiscal
year ended December 31, 2001, continuing international operations in total
generated approximately 6% of its overall revenues and 7% of its gross profits,
respectively. For the nine months ended September 30, 2002, continuing
international operations in total also generated approximately 6% of Syncor's
overall revenues and 7% of its gross profits, respectively.
On November 6, 2002, at the direction of the special committee, Syncor
management ordered all of the managers of its international operations to cease
making payments or providing gifts of any kind to any customer or any employee
or agent of any customer.
26
Special Committee Investigation
-------------------------------
The special committee, working together with outside counsel and an independent
forensic accounting firm, believes it has substantially completed its gathering
of facts in connection with the investigation of all of Syncor's foreign
operations (other than Israel where Syncor has only a licensing arrangement and
no operations). The special committee also is investigating certain limited
aspects of Syncor's domestic U.S. operations. The investigation has included
on-site reviews by representatives of the special committee in every foreign
country in which Syncor has operations. The special committee is also
investigating the knowledge and/or involvement of certain employees of Syncor
and its subsidiaries, including Monty Fu and Moses Fu, in the matters subject to
the investigation. Analysis of the information gathered is continuing.
The following is a summary of the findings of the special committee to date
based on the information it has gathered at this time. The investigation is
continuing and there can be no assurance that additional issues will not be
found or that the findings below will be confirmed.
o The special committee has found that questionable payments have been
made over a substantial period of time to customers, including
state-owned and private healthcare facilities and certain of their
employees, in Taiwan. Based on information gathered to date, some or
all of the payments appear to have violated U.S. law, including various
provisions of the Foreign Corrupt Practices Act of 1977 (the "FCPA").
In addition, some or all of the payments appear to have violated local
Taiwan law. Over the past five years, these payments to state-owned
facilities and certain of their employees appear to have totaled an
estimated approximately $500,000.
o The special committee has also found questionable payments and other
transactions at Syncor operations in at least six other countries in
Asia, Latin America and Europe that also may have violated U.S. law,
including the payment, record-keeping and controls provisions of the
FCPA. In addition, some or all of these payments appear to have
violated local laws in the relevant jurisdiction.
o During the course of its investigation of Syncor's foreign operations,
the special committee identified a number of additional instances where
activities of Syncor or of its subsidiaries or representatives may have
constituted violations of local laws and regulations relating to, among
other things, tax, competition and regulatory matters.
While the special committee and its advisors are continuing the
investigation, based on the information available at this time, Syncor does not
expect that any of these payments, transactions or other matters will be
material to the financial results of Syncor or will result in an adjustment or
restatement of Syncor's historical financial statements. The special committee
intends to complete the investigation as promptly as practicable. A final
determination as to the full impact of the investigation on Syncor and Syncor's
financial statements is subject to the completion of the investigation.
Governmental Discussions
------------------------
Syncor has been cooperating fully with the Securities and Exchange Commission
(the "SEC") and the U.S. Department of Justice (the "DOJ") regarding the matters
that have been the subject of its internal investigation. At this time, Syncor
is in advanced discussions with the SEC staff concerning resolution of the
potential claims that the SEC may have against Syncor regarding the matters that
are the subject of the investigation. Any resolution with the staff would be
subject to SEC approval. Syncor is also in advanced discussions with the DOJ
concerning a resolution of these matters. Syncor is seeking to resolve these
matters with the SEC and the DOJ as promptly as practicable although there can
be no assurance that such discussions will result in a satisfactory resolution
of these matters. At this time Syncor cannot predict the extent to which the
SEC, the DOJ or any other governmental authorities will pursue administrative,
civil injunctive or criminal proceedings, the imposition of fines or penalties
or other remedies or sanctions. However, based on the current status of the
discussions with the SEC and the DOJ, Syncor has accrued $2.5 million for
estimated potential fines and other penalties that may be imposed by the SEC and
the DOJ in connection with this matter. There can be no assurance that this
reserve will be sufficient to address any such fines or other penalties actually
imposed by the SEC, the DOJ or any other governmental authorities. At this time,
Syncor also cannot predict what impact such discussions with or actions by the
SEC, the DOJ or any other governmental authorities may have on Syncor.
Impact of Investigation Findings and Government Discussions on the Merger
-------------------------------------------------------------------------
The Merger is subject to the satisfaction or waiver of a number of conditions,
including Syncor stockholder approval. Based on the information Syncor has
reviewed as of the date hereof with respect to the matters currently under
investigation by the special committee, and subject to the terms of any
resolution of these matters with the DOJ and SEC, Syncor believes that the
information it has learned in the investigation would not result in Syncor's
failure to satisfy the conditions to the Merger. However, no definitive
determination as to the impact on the Merger can be made pending completion of
the investigation and resolution of Syncor's discussions with the DOJ and SEC.
Moreover, Cardinal Health has previously stated that it has
27
not yet concluded whether the conditions to the transaction will be satisfied
and that "there can be no assurance that the transaction involving the
acquisition of Syncor by Cardinal Health will be completed."
Class Action Lawsuits
---------------------
Since the announcement by Syncor on November 6, 2002 that a committee of outside
directors, together with outside counsel, has been investigating the propriety
of certain payments made by international subsidiaries of Syncor to customers in
several foreign countries, three purported class action lawsuits have been filed
against Syncor and certain of its officers and directors, asserting claims under
the federal securities laws (the "Federal Securities Actions"). All three
Federal Securities Actions were filed in the United States District Court for
the Central District of California.
The Federal Securities Actions purport to be brought on behalf of all purchasers
of the Company's common stock during various periods, beginning as early as
March 30, 2000, and ending as late as November 5, 2002. The Federal Securities
Actions allege, among other things, that the defendants violated Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange Act, by issuing a
series of press releases and public filings disclosing significant sales growth
in Syncor's international business, but omitting mention of certain allegedly
improper payments to Syncor's foreign customers, thereby artificially inflating
the price of Syncor's common stock. The Federal Securities Actions are in their
earliest stages and it is impossible to predict the outcome of these proceedings
or their impact on Syncor at this time. However, management believes that Syncor
has meritorious defenses to the claims asserted in the Federal Securities
Actions and Syncor intends to contest these actions vigorously.
On November 14, 2002, two additional actions were filed by individual
shareholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware Actions") against seven of Syncor's nine directors (the "Director
Defendants"). The complaints in the Delaware Actions, which are identical,
allege that the Director Defendants breached their fiduciary duties to Syncor by
failing to maintain adequate controls, practices and procedures to ensure that
the Company's employees and representatives did not engage in improper and
unlawful conduct. Each complaint asserts a single derivative claim, for and on
behalf of the Company, seeking to recover all of the costs and expenses that
Syncor incurs as a result of the allegedly improper payments (including the
costs of the Federal Securities Actions described above), and a single class
action count seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses that they may sustain in the event that the
pending merger with Cardinal Health does not occur or the consideration received
therefrom by Syncor stockholders is reduced. The Delaware Actions are also in
their earliest stages and it is impossible to predict their outcome or their
impact on Syncor at this time. However, the Company understands that the
individual Director Defendants deny liability for the claims asserted in the
Delaware Actions, believe they have meritorious defenses and intend to
vigorously contest such actions.
Developments Regarding Form 10-Q
--------------------------------
On November 13, 2002, Syncor announced that it expected it would file a
Notification of Late Filing on Form 12b-25 in order to obtain an automatic five
day extension to file its Form 10-Q for the quarter ended September 30, 2002.
The delay was due to the fact that as of such date Syncor and its auditors
required additional time in order to confirm that the results of the above
described investigation do not materially impact Syncor's financial statements.
The Form 12b-25 was filed on November 15, 2002.
Developments in Medicare Reimbursement
--------------------------------------
On October 31, 2002, the Centers for Medicare and Medicaid Services ("CMS")
published the final rule governing reimbursement to be made in calendar year
2003 under the Outpatient Prospective Payment System ("OPPS"), the system used
by Medicare and Medicaid to reimburse hospitals for services rendered to their
patients in hospital outpatient settings. The final rule changes the manner in
which CMS will reimburse providers for radiopharmaceuticals. Previously, CMS had
reimbursed radiopharmaceuticals using a pass-through methodology based on
manufacturers' prices for the drugs. CMS has discontinued pass-through
reimbursement for radiopharmaceuticals effective in 2003, and will instead
reimburse providers based on the Ambulatory Payment Classification ("APC") to
which a particular radiopharmaceutical is assigned. Reimbursement under the APC
system is generally lower than that made according to the pass-through
methodology. Syncor's sales of radiopharmaceuticals are made to hospitals and
clinics, so we are paid by those providers and not CMS. However, the use of
APC's to reimburse for radiopharmaceuticals could have an impact on the prices
that customers will be willing to pay for the radiopharmaceuticals they purchase
from us, and that impact, in turn, could negatively impact our revenues and
results of operations, although the potential effect cannot be determined at
this time.
Stock Option Grants to Broad Base of Employees
----------------------------------------------
On October 17, 2002, the Compensation Committee of the Board of Directors
granted approximately 420,000 option shares to a broad base of employees under
the 2000 Master Stock Incentive Plan. None of the executive officers of the
Company was a recipient of the stock option grants.
28
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of CEO and CFO Regarding Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2002
(b) Reports on Form 8-K
None.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syncor International Corporation
(Registrant)
November 19, 2002 By: /s/ William P. Forster
-------------------------------------
William P. Forster
Senior Vice President and Chief
Financial Officer
(Principal Financial/Accounting
Officer)
30
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Robert G. Funari, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Syncor
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
By /s/Robert G. Funari
---------------------------------------
Robert G. Funari
President and Chief Executive Officer
31
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, William P. Forster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Syncor
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
By /s/William P. Forster
---------------------------------------
William P. Forster
Sr. Vice President and Chief Executive
Officer
32