CARDINAL HEALTH INC - 10-K - 20041026 - MANAGEMENTS_DISCUSSION
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis presented below refers to and should be read
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K.
In connection with certain conclusions made by the Audit Committee during
September and October 2004 as part of its internal review to date, the Company
made certain reclassification and restatement adjustments to its fiscal 2004 and
prior historical financial statements, as more fully described in Notes 1 and 2
of "Notes to Consolidated Financial Statements." Revenue previously disclosed
separately as "Bulk Deliveries to Customer Warehouses and Others" has been
aggregated with "Operating Revenue" resulting in combined "Revenue" being
reported in the financial statements. In addition, the Company changed its
accounting method for recognizing income from cash discounts. The Company also
reduced its fourth quarter fiscal 2004 results of operations for premature
revenue recognition within its Automation and Information Services segment after
assessing the impact this segment's sales practice had on the Company's results
of operations for the three year period ended June 30, 2004. Lastly, the Company
restated its financial statements for fiscal 2000, 2001, 2002 and 2003 and the
first three quarters of fiscal 2004 as a result of various misapplications of
GAAP and errors relating primarily to balance sheet reserve and accrual
adjustments recorded in prior periods. As a result, the Company supplemented its
historical disclosures within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" to reflect these reclassification and
restatement adjustments on previously reported Company and business segment
operating earnings performance. All prior period disclosures presented in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" have been adjusted to reflect these changes.
27
OVERVIEW
Cardinal Health is a leading provider of products and services supporting
the health care industry. The Company helps health care providers and
manufacturers improve the efficiency and quality of health care. For further
information regarding the Company's business, please see "Part I, Item 1:
Business" within this Form 10-K.
Results of Operations
The following summarizes the Company's results of operations for the
fiscal years ended June 30, 2004, 2003 and 2002.
(in millions, except per Common Share amounts) Growth (1) Results of Operations
----------------- ------------------------------------
Years ended June 30, 2004 2003 2004 2003 2002
-------------------- ---- -------- ---------- ---------- ----------
Adjusted Restated Restated
Revenue 15% 11% $ 65,053.5 $ 56,731.5 $ 51,144.6
Operating earnings 6% 18% $ 2,337.3 $ 2,196.0 $ 1,857.4
Earnings from continuing operations before
cumulative effect of change in accounting 10% 21% $ 1,524.7 $ 1,381.2 $ 1,140.8
Net earnings 7% 28% $ 1,474.5 $ 1,375.1 $ 1,070.7
Net diluted earnings per Common Share 11% 30% $ 3.35 $ 3.03 $ 2.33
(1) Growth is calculated as change (increase or decrease) for a given
year as compared to immediately preceding year.
During the fiscal years noted in the table above, the results of
operations reflect the breadth of products and services the Company offers. The
increasing demand for the Company's diverse portfolio of products and services
led to revenue growth in every segment of the Company. The Company continues to
experience strong demand for integrated solutions from health care providers.
These integrated solutions include products and services from multiple lines of
businesses within the Company. These arrangements currently represent nearly $7
billion of annual sales.
As of June 30, 2004, the Company's operations were organized into four
operating business segments: Pharmaceutical Distribution and Provider Services,
Medical Products and Services, Pharmaceutical Technologies and Services and
Automation and Information Services (see Note 18 of "Notes to Consolidated
Financial Statements" for discussion of changes to business segments resulting
from the ALARIS acquisition which will impact fiscal 2005). The results of
operations also reflect the increasing operating earnings contribution each
segment outside of Pharmaceutical Distribution and Provider Services is making.
The three segments outside of Pharmaceutical Distribution and Provider Services
have gradually increased the amount of operating earnings contributed to the
Company and currently represent more than one-half of the Company's operating
earnings. The Company expects this trend to continue.
As previously reported, the Company's Pharmaceutical Distribution business
is in the midst of a business model transition with respect to how it is
compensated for the logistical, capital and administrative services that it
provides to pharmaceutical manufacturers. Historically, the compensation
received by the Pharmaceutical Distribution business from pharmaceutical
manufacturers was based on each manufacturer's unique sales practices (e.g.,
volume of product available for sale, eligibility to purchase product, cash
discounts for prompt payment, rebates, etc.) and pharmaceutical pricing
practices (e.g., the timing, frequency and magnitude of product price
increases). Specifically, a significant portion of the compensation the
Pharmaceutical Distribution business received from manufacturers was derived
through the Company's ability to purchase pharmaceutical inventory in advance of
pharmaceutical price increases, hold that inventory as manufacturers increased
pharmaceutical prices, and generate a higher operating margin on the subsequent
sale of that inventory. This compensation system was dependent to a large degree
upon the sales practices of each pharmaceutical manufacturer, including
established policies concerning the volume of product available for purchase in
advance of a price increase, and on stable and predictable pharmaceutical
pricing practices. Beginning in fiscal 2003, pharmaceutical manufacturers began
to seek greater control over the amount of pharmaceutical product available in
the supply chain, and, as a result, began to change their sales practices by
restricting the volume of product available for purchase by pharmaceutical
wholesalers. In addition, manufacturers have increasingly sought more services
from the Company, including the provision of data concerning product sales and
distribution patterns. The Company believes these changes have been made to
provide greater visibility to pharmaceutical manufacturers over product demand
and movement in the market and to increase product safety and integrity by
reducing the risks associated with product being available to, and distributed
in, the secondary market. Nevertheless, the impact of these changes has
significantly reduced the compensation received by the Company from
pharmaceutical manufacturers. In addition, since the fourth quarter of fiscal
2004, pharmaceutical manufacturers' product pricing practices have become less
predictable, as the frequency of product price increases generally has slowed
versus historical levels. As a result of these actions by pharmaceutical
manufacturers, the Company is no longer being
28
adequately and consistently compensated for the reliable and consistent
logistical, capital and administrative services being provided by the Company to
these manufacturers.
In response to the developments discussed above, the Company is working to
establish a compensation system that is no longer dependent on manufacturers'
sales or pricing practices, but rather is based on the services provided by the
Company to meet the unique distribution requirements of each manufacturer's
products. To that end, the Company is working with individual pharmaceutical
manufacturers to define fee-for-service terms that will adequately compensate
the Company, in light of each product's unique distribution requirements, for
the logistical, capital and administrative services being provided by the
Company. To accelerate this process, in August 2004, the Company communicated to
its pharmaceutical manufacturing vendors a new policy which sets April 1, 2005
or, for manufacturers with an existing agreement with the Company, the next
anniversary date of such agreement, as the deadline by which manufacturers must
have entered into a mutually satisfactory distribution services agreement with
the Company providing for reliable, predictable and adequate compensation for
the Company's services. For any manufacturer with which the Company is unable to
enter into such a mutually satisfactory agreement, the Company plans to assist
such manufacturer in transitioning to another method of distribution. There can
be no assurance that this business model transition will be successful, or of
the timing of such a successful transition.
Revenue and operating earnings growth within the Company's Automation and
Information Services segment during fiscal 2004 were lower than historical
growth rates. These growth rates were adversely affected by softening demand,
attributable to capital spending pressures experienced by hospitals and
increased competition within the industry. The Company believes this trend may
continue in the short-term; however, the Company remains confident in the
long-term prospects for this segment as patient safety concerns combined with
innovative new products continue to lead to future demand.
Government Investigations and Audit Committee Internal Review
The Company is currently the subject of a formal investigation by the SEC
relating to certain accounting matters. The Company also learned that the U.S.
Attorney for the Southern District of New York has commenced an inquiry with
respect to the Company. Also, the Company's Audit Committee commenced its own
internal review, assisted by independent counsel. For further information
regarding these matters, see "Part I, Item 3: Legal Proceedings" and Note 1 of
"Notes to Consolidated Financial Statements" in this Form 10-K.
Product Safety
As a leading provider of products and services supporting the health care
industry, including the distribution of pharmaceuticals and other health care
products, the Company is monitoring issues regarding importation of
pharmaceuticals and other health care products. The Company is sensitive to the
issue of pharmaceutical prices and the pricing disparity between domestic and
international markets. However, the Company believes that for importation into
the United States to be successful additional controls and protections would
need to be implemented to ensure patients and consumers receive safe and
effective pharmaceutical products. The Company will continue to work proactively
with all participants and regulators in the pharmaceutical supply chain to help
ensure any solution is safe and efficient. The Company continues to work with
its suppliers to help minimize the risks associated with counterfeit products in
the supply chain.
Acquisitions
On June 28, 2004, the Company acquired approximately 98.7% of the
outstanding common stock of ALARIS, a leading provider of intravenous medication
safety products and services. On July 7, 2004, ALARIS merged with a subsidiary
of the Company to complete the transaction. The value of the transaction,
including the assumption of ALARIS' debt, totaled nearly $2.1 billion. For
further information regarding the ALARIS acquisition, the valuation of the
acquisition's intangibles, and the impact on segment reporting, see Notes 4, 17
and 18 of "Notes to Consolidated Financial Statements." Prior to the completion
of the ALARIS acquisition, on June 16, 2004, ICU Medical, Inc. filed a patent
infringement lawsuit against ALARIS in the United States District Court for the
Southern District of California. In the lawsuit, ICU claims that the ALARIS
SmartSite(R) family of needle-free valves and systems infringes upon ICU
patents. ICU seeks monetary damages plus permanent injunctive relief preventing
ALARIS from selling SmartSite(R) products. On July 30, 2004, the Court denied
ICU's application for a preliminary injunction finding, among other things, that
ICU had failed to show a substantial likelihood of success on the merits. The
Company intends to vigorously defend this action.
During December 2003, the Company completed its acquisition of Intercare,
a leading European pharmaceutical products and services company. This
acquisition increased the Company's scale of proprietary sterile manufacturing
and broadened its participation in the fast-growing European generic (including
manufacturing capabilities) and injectible product market. The cash
29
transaction was valued at approximately $570 million, including the assumption
of approximately $150 million in Intercare debt. See Note 18 of "Notes to
Consolidated Financial Statements" for further information regarding the impact
this acquisition had on the Company's segment reporting.
During fiscal 2004, 2003 and 2002, the Company completed numerous
acquisitions, including, but not limited to, ALARIS, Intercare and Syncor. The
Company's trend with regard to acquisitions has been to expand its role as a
provider of services to the health care industry. This trend has resulted in
expansion into areas which (a) complement the Company's existing operations, and
(b) provide opportunities for the Company to develop synergies with, and thus
strengthen, the acquired business. As the health care industry continues to
change, the Company evaluates possible candidates for merger or acquisition and
intends to continue to seek opportunities to expand its role as a provider of
services to the health care industry through all its reporting segments. There
can be no assurance that the Company will be able to successfully pursue any
such opportunity or consummate any such transaction, if pursued. To the extent
the Company continues to pursue acquisitions, its ability to complete such
transactions may be adversely affected by the government investigations
described under "Part I, Item 3: Legal Proceedings" and Note 1 of "Notes to
Consolidated Financial Statements" in this Form 10-K. If additional transactions
are pursued or consummated, the Company would incur additional merger- and
acquisition-related costs, and may need to enter into funding arrangements for
such mergers or acquisitions. There can be no assurance that the integration
efforts associated with any such transaction would be successful.
RESULTS OF OPERATIONS
The following sections provide additional detail regarding the results of
operations of the Company and, where applicable, the results of operations of
the Company's reportable segments.
Revenue
Revenue for the Company and its reportable segments are as follows:
(in millions) 2004 2003 2002
------------- ------------- --------------
Restated Restated
Pharmaceutical Distribution and Provider
Services ("PDPS")
Direct Sales to Customers $ 36,222.0 $ 31,833.6 $ 29,317.3
Bulk Revenue (1) 18,009.0 15,426.5 13,680.7
------------- ------------- --------------
Total PDPS 54,231.0 47,260.1 42,998.0
Medical Products and Services 7,357.6 6,614.7 6,256.7
Pharmaceutical Technologies and Services 2,804.1 2,250.0 1,417.5
Automation and Information Services 680.8 666.7 560.2
Corporate (2) (20.0) (60.0) (87.8)
------------- ------------- --------------
Total Company Revenue $ 65,053.5 $ 56,731.5 $ 51,144.6
============= ============= ==============
(1) See discussion below under "Bulk Deliveries to Customer Warehouses
and Other" for the Company's definition of Bulk Revenue.
(2) Corporate revenue primarily consists of foreign currency translation
adjustments and the elimination of intersegment revenue.
30
The following table summarizes the revenue growth rates for the Company
and its reportable segments, as well as the percent of Company revenue,
excluding Corporate, each segment represents:
Percent of Company
Growth (1) Revenue
------------------ ---------------------------
Years ended June 30, 2004 2003 2004 2003 2002
-------------------- ---- ---------- ---- -------- --------
Adjusted Adjusted Adjusted
Pharmaceutical Distribution and Provider Services 15% 10% 84% 83% 84%
Medical Products and Services 11% 6% 11% 12% 12%
Pharmaceutical Technologies and Services 25% 59% 4% 4% 3%
Automation and Information Services 2% 19% 1% 1% 1%
Total Company 15% 11% 100% 100% 100%
(1) Growth is calculated as change (increase or decrease) for a given
year as compared to immediately preceding year.
TOTAL COMPANY. Revenue increased 15% and 11% during fiscal 2004 and 2003,
respectively. The revenue growth in these fiscal years resulted from a higher
sales volume across each of the Company's segments; revenue growth from existing
customers; addition of new customers, some of which resulted from new corporate
arrangements with health care providers that integrate the Company's diverse
offerings; addition of new products; and pharmaceutical price increases
averaging approximately 6% and 5%, respectively, during fiscal 2004 and 2003. In
addition, acquisitions completed by the Company during fiscal 2004 and 2003
accounted for approximately 1% of the overall growth for fiscal 2004 and 2003.
These increases during fiscal 2004 were partially offset by slower sales growth
within the Pharmaceutical Technologies and Services and Automation and
Information services segments.
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. This segment's revenue
growth of 15% in fiscal 2004 resulted primarily from strong sales to existing
customers, sales to new customers and pharmaceutical price increases. Sales
growth to existing customers within the retail chain and alternate site
categories in this segment's Pharmaceutical Distribution business showed
particular strength. This segment also benefited from (1) contract wins during
fiscal 2004, (2) pharmaceutical price increases averaging approximately 6%
during fiscal 2004, and (3) an extra business day. These revenue gains were
partially dampened by continued reduction in business with Kmart Holding Corp.
("Kmart") due to Kmart's closure of various stores and certain contract losses
during fiscal 2004 in this segment's Pharmaceutical Distribution business.
This segment's revenue growth of 10% in fiscal 2003 resulted from strong
sales to customers within the segment's core Pharmaceutical Distribution
business, some of which were generated from the addition of new contracts, and
pharmaceutical price increases averaging approximately 5%. The most significant
growth was in the alternate site and chain pharmacy businesses. The chain
pharmacy growth rate would have been stronger had it not experienced a reduction
in business with Kmart due to Kmart's closure of various stores in connection
with its reorganization. This segment's overall revenue growth was partially
dampened by the loss of certain customers.
MEDICAL PRODUCTS AND SERVICES. This segment's revenue growth of 11% in
fiscal 2004 resulted from increased sales momentum from new and existing
contracts within the distribution business as well as increased sales volume
from the segment's international businesses. New contracts drove increased sales
of both distributed and self-manufactured products, with sales from the
distribution business particularly strong during fiscal 2004. The international
businesses also generated strong revenue growth, increasing nearly 19% from the
prior fiscal year. Approximately 14% of the international business revenue
growth, however, related to changes in foreign currency rates. Sales of new
self-manufactured products, particularly enhancements within surgeon glove
products, also contributed to the overall revenue growth. This segment's revenue
growth was above industry averages during fiscal 2004.
This segment's revenue growth of 6% in fiscal 2003 resulted from increased
sales of both distributed and self-manufactured products. The addition of
several new contracts with hospitals and health care networks, as well as
increased market share in the growing surgery center market contributed to
increased sales of distributed and self-manufactured products. Increased demand
for certain existing self-manufactured products, including medical gloves,
Medi-vac(R) suction canisters, Procedure Based Delivery System(R) kits and other
minor procedure trays, accounted for a portion of this segment's revenue growth.
The addition of new, self-manufactured products also contributed to the overall
revenue growth in this segment. Some examples of these new, self-manufactured
products include the Esteem(R) surgeon gloves and the Tiburon(TM) and
Astound(TM) fabrics within the Convertors(R) business.
31
PHARMACEUTICAL TECHNOLOGIES AND SERVICES. This segment's revenue growth of
25% in fiscal 2004 resulted from acquisitions and sales momentum within the
Pharmaceutical Development, Nuclear Pharmacy Services and Packaging Services
businesses. Approximately 5% of this segment's revenue growth was due to the
inclusion of Intercare, an acquisition completed during December 2003.
Intercare's results of operations are not included in the prior period amounts.
Intercare's operations have shown considerable sales momentum since the
acquisition was completed, particularly the fourth quarter fiscal 2004. Also,
this segment's revenue growth benefited from the inclusion of Syncor, an
acquisition that was completed on January 1, 2003. Syncor's results of
operations are not included in the amounts for the first half fiscal 2003.
Excluding the impact of acquisitions within this segment, revenue growth would
have been approximately 2% during fiscal 2004. This segment's revenue growth was
partially dampened by a delay in startup of commercial manufacturing of key
sterile products from signed contracts as certain regulatory inspections and
product approvals were delayed in the Biotechnology and Sterile Life Sciences
business. This segment's revenue growth is not impacted by foreign exchange
fluctuations as the Company applies constant exchange rates to translate its
foreign operations' revenue into U.S. dollars. The impact of actual foreign
exchange rate changes for translation purposes is retained within the Corporate
segment (see footnote 6 of the table in Note 18 in "Notes to Consolidated
Financial Statements").
This segment's revenue growth of 59% in fiscal 2003 resulted from
acquisitions and increased demand within the Oral Technologies, Biotechnology
and Sterile Life Sciences, and Packaging Services businesses. The acquisitions
of Syncor, effective January 1, 2003, and Boron, LePore & Associates, Inc.
(which has been given the legal designation of Cardinal Health 401, Inc., and is
referred to in this Form 10-K as "BLP"), effective June 2002, resulted in
significant revenue growth in fiscal 2003. BLP's revenue includes customer
reimbursements of out-of-pocket expenses, which generally comprise travel
expenses and other incidental costs incurred to fulfill the services required by
various contracts and are recorded as gross revenue. Excluding the impact of
acquisitions within this segment, revenue growth would have been approximately
7% during fiscal 2003. Product sales from this segment's businesses that showed
particular strength included Lilly's Zyprexa(R) Zydis(R), an anti-psychotic;
Mylan's Amnesteem(TM), a generic drug for the treatment of acne; and Sepracor's
Xoponex(R), a respiratory drug. The growth within the Biotechnology and Sterile
Life Sciences business was negatively impacted by the planned shutdown for
twelve weeks of a domestic sterile manufacturing facility to expand capacity.
AUTOMATION AND INFORMATION SERVICES. This segment's revenue growth of 2%
in fiscal 2004 is reflective of the premature revenue recognition adjustment
resulting from the Audit Committee's internal review as more fully described
in Note 1 of "Notes to Consolidated Financial Statements." Operationally, this
segment's revenue growth in fiscal 2004 included sales growth within the
medication product lines (such as the Pyxis MedStation(R) system) and addition
of new products. This segment was adversely affected by a softening of demand at
the hospital level. The Company believes this softening is primarily
attributable to capital spending pressures experienced by hospitals and an
increasingly competitive market. These factors were also seen in the weakening
of this segment's committed contract backlog. The Company believes this trend
may continue in the short-term; however, the Company remains confident in the
long-term prospects for this segment as patient safety concerns combine with
innovative new products to drive future demand. In order to aid in the
comparability of this segment's operating results, during fiscal 2004, the
Company recorded a Corporate allocation adjustment to this segment's revenue of
$21 million representing an estimate of interest income this segment would have
earned had the Company not completed sales of its lease receivables. This
allocation was recorded within revenue, consistent with the recording of
interest income received from sales-type leases. The allocation was recorded for
comparative purposes to reflect the segment's growth rate excluding the impact
of the Corporate-initiated lease sales. Excluding the impact of this allocation
entry, this segment's revenue growth would have been negative 1% for fiscal
2004. For more information, see footnote 6 to the table in Note 18 in "Notes to
Consolidated Financial Statements."
This segment's revenue growth of 19% in fiscal 2003 resulted from strong
sales of new and existing patient safety and supply management product lines,
including Pyxis MedStation(R), Pyxis Anesthesia System(TM), Pyxis Connect(TM)
and Pyxis SupplyStation(R) systems. In addition, the segment's revenue
benefited in fiscal 2003 from gains of approximately $10 million, realized upon
sales of its sales-type lease receivables.
Bulk Deliveries to Customer Warehouses and Other
As presented historically, the Pharmaceutical Distribution and Provider
Services segment's revenue was classified into two categories ("Operating
Revenue" and "Bulk Deliveries to Customer Warehouses and Other"). "Bulk
Deliveries to Customer Warehouses and Other" has historically included revenue
arising from sales where the Company ordered pharmaceutical product in bulk on
behalf of a specific warehousing customer and either the manufacturer ships the
product directly to the customer's warehouse or the product is shipped to the
customer's warehouse shortly after it is received by the Company and is not put
into the Company's inventory (in either case, "Bulk Revenue"). For all Bulk
Revenue, the product was shipped to the customer in the same bulk form in which
it was received by the Company from the manufacturers. The Company previously
(since fiscal 2002) followed an internal policy for distinguishing between
Operating Revenue and Bulk Revenue based on how long the product was in the
Company's possession prior to being shipped to customers. If the product was in
the possession of the Company for more than 24 hours prior to being shipped to
customers, then, regardless of other characteristics of the transaction or the
reason for the product being held for more than 24 hours, the sale of that
product was deemed to be Operating Revenue. The Company's internal policy
32
also provided that customer orders for bulk shipments filled from inventory
within the Company's warehouse were deemed to be Operating Revenue if the order
for the product had been placed with the manufacturer prior to the Company
receiving the bulk order from one of its customers ("Just-in-Time"). Operating
Revenue for bulk shipments for product that was in the possession of the Company
for more than 24 hours prior to being shipped to customers (other than with
respect to certain bulk shipments intentionally held for more than 24 hours as
described in the text following the table) and Just-in-Time bulk shipments by
quarter for the three year period ended June 30, 2004 was approximately as
follows:
24 Hour Rule Just-in-Time
--------------------------- ----------------------------
(in millions) Fiscal year ended June 30, Fiscal year ended June 30,
--------------------------- ----------------------------
2004 2003 2002 2004 2003 2002
-------- --------- -------- --------- --------- --------
First Quarter $191 $ 208 - $ 13 $ 351 -
Second Quarter 187 200 156 74 265 -
Third Quarter 148 360 155 31 252 157
Fourth Quarter 149 232 155 - 334 325
-------- --------- -------- --------- --------- --------
Total Year $675 $1,000 $466 $118 $1,202 $482
======== ========= ======== ========= ========= ========
Based on results of the internal review conducted by the Audit Committee, the
Company has concluded that certain bulk shipments ordered by customers were
intentionally held for more than 24 hours so that, pursuant to the internal
policy, such shipments were classified as Operating Revenue in four quarters
within fiscal 2003 and 2002. The Company estimates that approximately $813
million and $414 million being improperly classified as Operating Revenue in
fiscal 2003 and 2002, respectively. The impact of this practice was not
previously quantified and disclosed as part of the Company's reported Operating
Revenue. The improper classification between Bulk Revenue and Operating Revenue
had no impact on the Company's previously reported total revenue or operating or
net earnings for these periods.
The following table shows the estimated amount of Bulk Revenue that was
improperly classified as Operating Revenue in the manner described above, and
shows the estimated impact from adjusting each of Bulk Revenue and Operating
Revenue for the periods in which these improper classifications occurred:
Bulk Revenue Operating Revenue
-------------------------- --------------------------
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
(in millions) 2003 2002 2003 2002
------------- ------- --------- --------- ---------
First Quarter $ - $ - $ - $ -
Second Quarter 673.0 82.0 (673.0) (82.0)
Third Quarter 140.0 - (140.0) -
Fourth Quarter - 332.0 - (332.0)
------- --------- --------- ---------
Total Year $ 813.0 $ 414.0 $ (813.0) $ (414.0)
======= ========= ========= =========
In response to the internal review conducted by the Company's Audit
Committee (see "Part I, Item 3: Legal Proceedings" and Note 1 of "Notes to
Consolidated Financial Statements") and a review of Company policies, the
Company has changed its definition of Bulk Revenue. Transactions with the
following characteristics will now be defined as Bulk Revenue: (a) deliveries to
customer warehouses whereby the Company acts as an intermediary in the ordering
and delivery of pharmaceutical products, (b) delivery of products to the
customer in the same bulk form as the products are received from the
manufacturer, (c) warehouse to customer warehouse or process center deliveries,
or (d) deliveries to customers in large or high volume full case quantities.
Bulk Revenue under this new definition was $18.0 billion in fiscal 2004, $15.4
billion in fiscal 2003 and $13.7 billion in fiscal 2002. The increase in Bulk
Revenue during fiscal 2004 primarily relates to additional volume from existing
customers. The increase in Bulk Revenue during fiscal 2003 primarily relates to
new customers and additional volume from existing customers.
For fiscal 2004, the Company decided to aggregate revenue classes within
this Form 10-K. "Operating Revenue" and "Bulk Deliveries to Customer Warehouses
and Other" have been combined for all periods presented so that revenue and cost
of products sold are presented as single amounts in the consolidated statements
of earnings. These reclassifications have no effect on previously reported total
revenue, related cost of products sold, net earnings or earnings per share.
However, these reclassifications do impact previously reported growth rates
which focused solely on Operating Revenue. Beginning with this Form 10-K,
information concerning the portion of the Company's revenue that arises from
Bulk Revenue will be discussed in the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In the past, "Bulk Deliveries to Customer Warehouses and Other" also
included certain revenue relating to the Pharmaceutical Technologies and
Services segment. The Pharmaceutical Technologies and Services segment's revenue
classified as "Bulk Deliveries to Customer Warehouses and Other" represented
reimbursement from customers of certain out-of-pocket expenses incurred by the
Company on behalf of customers and totaled $200.5 million in fiscal 2003. These
customer reimbursements will not be included within the Company's definition of
Bulk Revenue going forward.
33
Operating Earnings
Operating earnings for the Company and its reportable segments are as
follows:
(in millions) 2004 2003 2002
------------- ------------ ----------- ------------
Restated Restated
Pharmaceutical Distribution and Provider Services $ 1,173.4 $ 1,188.1 $ 1,081.0
Medical Products and Services 666.0 591.8 545.2
Pharmaceutical Technologies and Services 465.4 368.3 265.0
Automation and Information Services 270.2 266.0 209.2
Corporate (1) (237.7) (218.2) (243.0)
------------ ----------- ------------
Total Company Operating Earnings $ 2,337.3 $ 2,196.0 $ 1,857.4
============ =========== ============
(1) See Note 18 of "Notes to Consolidated Financial Statements" for a
description of Corporate operating earnings.
The following table summarizes the operating earnings growth rates for the
Company and its reportable segments, as well as the percent of Company operating
earnings, excluding Corporate, each segment represents:
Percent of Company
Growth (1) Operating Earnings
--------------- --------------------------
Years ended June 30, 2004 2003 2004 2003 2002
-------------------- ---- ---- ---- ---- ----
Adjusted Adjusted Adjusted
Pharmaceutical Distribution and Provider Services (1)% 10% 46% 49% 51%
Medical Products and Services 13% 9% 26% 25% 26%
Pharmaceutical Technologies and Services 26% 39% 18% 15% 13%
Automation and Information Services 2% 27% 10% 11% 10%
Total Company (2) 6% 18% 100% 100% 100%
(1) Growth is calculated as change (increase or decrease) for a given
year as compared to immediately preceding year.
(2) The Company's overall operating earnings growth of 6% and 18%,
respectively, in fiscal 2004 and 2003 includes the effect of special
items. Special items are not allocated to the segments. See Note 4
in "Notes to Consolidated Financial Statements" for further
information regarding the Company's special items.
TOTAL COMPANY. Total operating earnings increased 6% and 18% during fiscal
2004 and 2003, respectively. The following paragraphs provide a description of
the varying dynamics affecting the total Company's operating earnings for fiscal
2004 and 2003.
FISCAL 2004. Operating earnings increased 6% during fiscal 2004 primarily
as a result of the Company's revenue growth of 15% during the same time period,
which yielded a gross margin increase of 6%. Gross margins grew at a slower rate
than revenue primarily as a result of: (1) continued dampening effect of reduced
vendor margins and competitive pricing within the Pharmaceutical Distribution
business driven by changes to its business model (see the "Overview" section for
further discussion); (2) increased mix of lower-margin distribution business
within the Medical Products and Services segment; (3) increased mix of lower
margin business, primarily Nuclear Pharmacy Services, within the Pharmaceutical
Technologies and Services segment; and (4) competitive product and pricing
actions within the Automation and Information Services segment. The overall
increase in gross margin reflects the increased contributions from the Company's
operating segments outside of the Pharmaceutical Distribution and Provider
Services segment, which generate higher gross margins and operating earnings (as
a percentage of revenue). These segments currently account for more than
one-half of the Company's operating earnings. The Company expects this trend to
continue. Acquisitions completed by the Company accounted for approximately 3%
of the operating earnings growth.
The increases in revenue and gross margin were partially offset by a 4%
increase in selling, general and administrative expenses during fiscal 2004, as
well as an increase of $17.5 million in the Company's special items. The overall
increase in operating expenses was primarily a result of the additional expenses
resulting from acquisitions, higher personnel costs associated with overall
business growth and an increase in depreciation and amortization costs.
Additionally, the Company continues to invest in research and development and
strategic initiatives that will benefit future periods. Investments of
approximately $115 million in fiscal 2004 were charged against current operating
earnings as incurred. These increases in selling, general and administrative
34
expenses were offset partially by: (1) reduction versus the prior fiscal year in
incentive compensation expenses of approximately $64 million due to the
performance of the Company's consolidated operations relative to management's
expectations and established financial performance metrics, such reductions
affecting all of the Company's business segments; and (2) adjustments of certain
trade receivable reserves and lower bad debt expenses, combined impact
approximately $10 million, due to changes in customer-specific credit exposures,
as well as improvements in customer credit, billing and collection processes
yielding significant reductions in past due and uncollectible accounts.
FISCAL 2003. The Company attributes the operating earnings increase of 18%
during fiscal 2003 to its revenue growth of 11% during the same time period,
which yielded a gross margin increase of 11%. Selling, general and
administrative expenses grew 8% during this period primarily due to additional
expenses resulting from acquisitions, higher personnel costs associated with the
overall business growth and an increase in depreciation and amortization costs.
However, selling, general and administrative expenses grew at a slower rate than
gross margin which contributed to the overall percentage increase in operating
earnings. In addition, a significant contributor of the overall operating
earnings increase was a decrease of $76.7 million in the Company's special items
due to the recognition of special item income of $101.5 million related to net
litigation settlements received by the Company in fiscal 2003 as compared to
$33.8 million received in fiscal 2002.
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. This segment's
operating earnings declined 1% during fiscal 2004 primarily due to reduced
vendor margins caused by the changing business model within the Pharmaceutical
Distribution business (as further described in the "Overview" section) and the
impact of competitive pricing. Other adjustments which negatively impacted this
segment in fiscal 2004 included the following items within the Pharmaceutical
Distribution business: (a) an increase in inventory valuation and vendor dispute
reserves in the fourth quarter, $11.7 million, and (b) an adverse adjustment in
the third quarter, $9.2 million, for vendor margins. In addition, one of several
aspects of the business model transition adversely impacting Pharmaceutical
Distribution's year over year operating earnings is the change in estimation of
vendor margin with generic, health and beauty products and pharmaceutical
manufacturers, approximately $15.3 million. These declines were partially offset
by the following:
- segment revenue growth of 15% coupled with expense control;
- change in accounting for cash discounts resulting in additional
gross margin of $20.0 million in fiscal 2004 (see additional
discussion of the accounting change in Notes 16 and 19 of "Notes to
Consolidated Financial Statements");
- favorable year over year impact, $14.7 million, from changes in
last-in, first-out ("LIFO") reserve;
- favorable year over year impact of lower incentive compensation
expense;
- favorable year over year impact of certain non-recurring expenses
recorded in fiscal 2003 relating to operations from the Bindley
acquisition; and
- favorable year over year impact of $34 million charge recorded in
fiscal 2003 relating to the segment's vendor margins with its
generic suppliers.
This segment's operating earnings increase of 10% during fiscal 2003
resulted primarily from the following:
- segment revenue growth of 10%;
- change in timing of income recognition for pharmaceutical
manufacturers' payments under existing inventory management
agreements from a modified cash basis to an accrual basis resulting
in a favorable gross margin impact of approximately $13 million
recorded in the third quarter;
- expense controls, which resulted in a decrease of 6% in selling,
general and administrative expenses; and
- favorable year over year impact, $12.4 million, relating to changes
in Corporate expenses allocated to this segment.
Also contributing to the improvement in fiscal 2003 year over year
performance were certain non-recurring expenses of approximately $40 million
recorded in fiscal 2002 associated with operations acquired as part of the
Bindley acquisition. These non-recurring expenses in fiscal 2002 were partially
offset by a $23 million benefit recognized in the same period as a result of
changes in the Company's LIFO calculation with respect to generic products in
order to more accurately reflect inflationary indices. The segment's operating
earnings in fiscal 2003 were negatively impacted by the $5.2 million year over
year impact within the Pharmaceutical Distribution business of the business
model transition impacting its vendor margins with generic, health and beauty
products and pharmaceutical vendors.
MEDICAL PRODUCTS AND SERVICES. This segment's operating earnings growth of
13% during fiscal 2004 resulted primarily from this segment's revenue growth of
11% during the same time period, led by sales momentum from distribution
contracts and gains within international markets. This segment also realized
manufacturing productivity improvements resulting in gross margin gains. In
addition, operating earnings benefited from lower incentive compensation expense
versus prior year. This segment's operating earnings growth was partially
dampened by the increased mix of lower margin distributed products, competitive
pricing within the industry and an increase of approximately $9 million in raw
material prices.
This segment's operating earnings growth of 9% during fiscal 2003 resulted
from this segment's revenue growth of 6% during the same time period and the
ability to leverage this revenue growth into additional gross margin gains. This
segment's gross margin was positively impacted by increased sales of existing
and new higher-margin, self-manufactured products, manufacturing efficiencies
achieved during the fiscal year and outsourcing of some product manufacturing to
more cost efficient areas. In
35
addition, operating earnings benefited from various required balance sheet
reserve adjustments, approximately $8.2 million, recorded during the year
relating to historical customer and vendor disputes. The operating earnings
growth rate was negatively affected by: (1) impact of new distribution
agreements which increased sales of lower-margin distributed products in fiscal
2003; (2) increased Corporate expenses, $2.5 million, allocated to this segment;
and (3) a one-time adjustment recorded in fiscal 2002 to transfer the segment's
incentive compensation expenses, approximately $15 million, to the Corporate
segment. This adjustment was recorded in the Corporate segment as the business
segment's stand-alone incentive compensation program in effect at the time would
have resulted in no incentive compensation expense for the year; however, a
corporate management decision was made to include the segment's employees in the
Company's overall incentive compensation program in advance of integrating
various employee benefit programs.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES. This segment's operating
earnings growth of 26% during fiscal 2004 resulted primarily from this segment's
revenue growth of 25% during the same time period, with sales momentum in the
Pharmaceutical Development, Nuclear Pharmacy Services and Packaging Services
businesses showing particular strength. This segment also benefited from
acquisitions completed by the Company, specifically Intercare and Syncor. The
acquisition of Intercare was completed during the second quarter fiscal 2004
and, therefore, its results of operations are not included in the prior period.
Also, Syncor's results of operations are not included in the first half of
fiscal 2003 since the acquisition was completed on January 1, 2003. Excluding
the impact of acquisitions within this segment, operating earnings growth would
have been approximately 8% during fiscal 2004. This segment's gross margin as a
percentage of revenue was negatively impacted by the increase in services
provided by the Nuclear Pharmacy Services business, which has a lower gross
margin ratio as compared to the other businesses within this segment. The
segment's operating earnings also benefited year over year by reduced incentive
compensation expenses. Operating earnings growth was dampened by the delay in
startup of commercial manufacturing of certain sterile products as discussed in
this segment's revenue discussion. In addition, this segment's operating
earnings growth is not impacted by foreign exchange fluctuations as the Company
applies constant exchange rates to translate its foreign operations' operating
earnings into U.S. dollars. The impact of actual foreign exchange rate changes
for translation purposes is retained within the Corporate segment (see footnote
6 to the table in Note 18 in "Notes to Consolidated Financial Statements").
This segment's operating earnings growth of 39% during fiscal 2003
resulted primarily from this segment's revenue growth of 59% during the same
time period, as discussed above in the "Revenue" section. Excluding the impact
of acquisitions within this segment, operating earnings growth would have been
approximately 13% during fiscal 2003. The deleveraging effect between gross
margin and revenue within this segment was primarily driven by the addition of
Syncor's Nuclear Pharmacy Services business and the addition of BLP's customer
reimbursements of out-of-pocket expenses incurred to fulfill services required
by various contracts. Syncor has a lower gross margin ratio than the other
businesses within this segment, and BLP records these customer reimbursements
gross within revenue and cost of products sold, but generates no margin from
them.
AUTOMATION AND INFORMATION SERVICES. This segment's operating earnings
growth of 2% during fiscal 2004 was impacted by the premature revenue
recognition adjustment resulting from the Audit Committee's internal review as
more fully described in Note 1 of "Notes to Consolidated Financial Statements."
This segment's operating earnings growth during fiscal 2004 resulted, in part,
from this segment's revenue growth of 2% during the same time period in
conjunction with operational improvements and favorable product mix. In
addition, this segment benefited from a reduction in receivable reserves and
lower bad debt expenses, combined impact approximately $8.2 million, due to
improvements in customer-specific credit matters, as well as general
improvements in customer credit, billing and collection procedures, resulting in
significant reductions in past due and uncollectible accounts. The segment's
operating earnings also benefited year over year from reduced (a) incentive
compensation expenses, and (b) Corporate expense allocation of $1.5 million. As
mentioned in this segment's revenue discussion, the Company recorded, for
comparative purposes, a Corporate allocation of $21 million to this segment
representing estimated interest income this segment would have earned had the
Company not initiated the sale of its lease receivables. Excluding the impact of
this allocation, this segment's operating earnings growth would have been
negative 6% during fiscal 2004. See this segment's discussion under "Revenue"
for additional information regarding this allocation entry.
This segment's operating earnings growth of 27% during fiscal 2003
resulted primarily from this segment's revenue growth of 19% during the same
time period in conjunction with an improved mix of higher-margin products sold
and productivity gains realized from operational improvements. In addition,
operating earnings during fiscal 2003 included gains of approximately $10
million from sales of sales-type leases.
36
Special Items
The following is a summary of the Company's special items:
Fiscal Year Ended June 30,
(in millions, except per Common Share amounts) 2004 2003 2002
---------------------------------------------- ------ ------- -------
Restated
Merger-related costs $ 44.7 $ 74.4 $ 131.9
Restructuring costs 37.1 67.0 18.5
Litigation settlements, net (62.3) (101.5) (33.8)
Other special items 37.9 - -
------ ------- -------
Total special items $ 57.4 $ 39.9 $ 116.6
====== ======= =======
See Note 4 of "Notes to Consolidated Financial Statements" for detail of
the Company's special items during fiscal 2004, 2003 and 2002.
Interest Expense and Other
The decrease in interest expense and other of $16.4 million during fiscal
2004 and $17.2 million during fiscal 2003 resulted from lower interest rates and
borrowing levels due to the Company's strong operating cash flow. The Company
manages its exposure to interest rates using various hedging strategies (see
Notes 3 and 7 in "Notes to Consolidated Financial Statements"). Also included
within interest expense and other are gains and losses recognized from
transactions outside of the Company's ordinary course of business (e.g., sales
of lines of businesses or individual facilities as well as adjustments of equity
investments). The following summarizes the more significant transactions that
occurred during fiscal 2004, 2003 and 2002.
- During fiscal 2004, the Company recorded net gains of approximately $11.9
million and $6.3 million related to the sale of non-strategic businesses
within its Pharmaceutical Technologies and Services and Medical Products
and Services segments. The Company also recorded a $6.8 million gain
related to the sale of land within its Medical Products and Services
segment. In addition, the Company recorded a $4.2 million asset impairment
charge relating to domestic intellectual property rights within its
Automation and Information Services segment.
- During fiscal 2003, the Company recorded a net gain of approximately $17.6
million related to the sale of a non-strategic business within the
Pharmaceutical Distribution and Provider Services segment and a gain of
$8.0 million as a result of a payment the Company received in exchange for
amending a contract within the Automation and Information Services segment
(releasing the Company's exclusivity rights in a designated territory).
Also within fiscal 2003, the Company recorded a loss of $7.9 million
related to the write-off of certain obsolete assets as a result of a
system implementation within the Pharmaceutical Technologies and Services
segment.
- During fiscal 2002, the Company recorded a net gain of approximately $22.4
million related to the sale of a non-strategic business which was
partially offset by losses related to asset abandonments within the
Pharmaceutical Technologies and Services segment, $11.5 million, and
Medical Products and Services segment, $4.6 million.
Provision for Income Taxes
The provisions for income taxes relative to earnings before income taxes,
discontinued operations and cumulative effect of changes in accounting were
31.9% of pretax earnings in fiscal 2004, 33.6% in fiscal 2003 and 33.8% in
fiscal 2002. Fluctuations in the effective tax rate are primarily due to changes
within state and foreign effective tax rates resulting from the Company's
business mix and changes in the tax impact of special items, which may have
unique tax implications depending on the nature of the item and the taxing
jurisdiction. The Company's effective tax rate reflects tax benefits derived
from increasing operations outside the United States, which are generally taxed
at rates lower than the U.S. statutory rate of 35 percent. During fiscal 2004,
the Company's provision for income taxes benefited from increased profits from
production in lower tax international countries (e.g., Thailand and the
Dominican Republic). The Company has subsidiaries operating in Puerto Rico under
a tax incentive agreement expiring in 2019, as well as a tax agreement in place
with Thailand that expires in 2013.
Loss from Discontinued Operations
See Note 21 in "Notes to Consolidated Financial Statements" for
information on the Company's discontinued operations.
CRITICAL ACCOUNTING POLICIES AND SENSITIVE ACCOUNTING ESTIMATES
Critical accounting policies are those accounting policies that can have a
significant impact on the presentation of the Company's financial condition and
results of operations, and require use of complex and subjective estimates based
upon past experience and management's judgment. Because of the uncertainty
inherent in such estimates, actual results may differ from these estimates.
Below are those policies applied in preparing the Company's financial statements
that management believes are the most dependent on the application of estimates
and assumptions. For additional accounting policies, see Note 3 of "Notes to
Consolidated Financial Statements."
37
- ALLOWANCE FOR DOUBTFUL ACCOUNTS. Trade receivables comprise amounts owed
to the Company through its operating activities and are presented net of
an allowance for doubtful accounts. The Company also provides financing to
various customers. Such financing arrangements range from one year to ten
years at interest rates that generally fluctuate with the prime rate.
These financings may be collateralized, guaranteed by third parties or
unsecured. Finance notes and accrued interest receivables are recorded net
of an allowance for doubtful accounts and are included in other assets.
Extending credit terms and calculating the required allowance for doubtful
accounts involve the use of judgment by the Company's management.
In determining the appropriate allowance for doubtful accounts, which
includes general and specific reserves, the Company reviews accounts
receivable agings, industry trends, customer financial strength, credit
standing and payment history to assess the probability of collection. The
Company continuously monitors the collectibility of its receivable
portfolio by analyzing the aging of its accounts receivable, assessing
credit worthiness of its customers and evaluating the impact of changes in
economic conditions that may impact credit risks. If the frequency or
severity of customer defaults increases due to changes in customers'
financial condition or general economic conditions, the Company's
allowance for uncollectible accounts may require adjustment.
The allowance for doubtful accounts as a percentage of customer
receivables was 3.3% and 4.1% at June 30, 2004 and 2003, respectively. The
decrease was a result of adjustments to certain trade receivable reserves
due to changes in customer-specific credit exposures, as well as
improvements in customer credit, billing and collections processes. A
hypothetical 0.1% increase or decrease in the reserve as a percentage of
trade receivables to the fiscal 2004 reserve would result in an increase
or decrease in bad debt expense of approximately $4.2 million. The Company
believes the reserve maintained and expenses recorded in fiscal year 2004
are appropriate and consistent with historical methodologies employed. The
favorable net effect results from improvements in the Company's credit and
collection practices and actual experiences. The total reserve at June 30,
2004 and 2003 exceeds the total Company receivable balance greater than 60
days past due at those same dates. See Schedule II included in this Form
10-K which includes a rollforward of activity for these allowance
reserves.
- INVENTORIES. A majority of inventories (approximately 66% in 2004 and 68%
in 2003) are stated at the lower of cost, using the LIFO method, or
market, and are primarily merchandise inventories. The remaining inventory
is primarily stated at the lower of cost, using the first-in, first-out
("FIFO") method, or market. If the Company had used the FIFO method of
inventory valuation, which approximates current replacement cost,
inventories would have increased $57.8 million and $61.4 million in fiscal
2004 and 2003, respectively.
Below is a reconciliation of FIFO inventory to LIFO inventory:
Inventories recorded on the Company's consolidated balance sheets are net
of reserves for excess and obsolete inventory. The Company reserves for
inventory obsolescence using estimates based on historical experiences,
sales trends, specific categories of inventory and age of on-hand
inventory. If actual conditions are less favorable than the Company's
assumptions, additional inventory reserves may be required, however these
would not be expected to have a material adverse impact on the Company's
financial statements.
- GOODWILL. The Company accounts for goodwill in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets." Under SFAS No. 142, purchased goodwill and intangible
assets with indefinite lives are no longer amortized, but instead tested
for impairment annually or when indicators of impairment exist.
Accordingly, the Company does not amortize goodwill and intangible assets
with indefinite lives. Intangible assets with finite lives, primarily
customer relationships and patents and trademarks, continue to be
amortized over their useful lives.
In conducting the impairment test, the fair value of the Company's
reporting units is compared to its carrying amount including goodwill. If
the fair value exceeds the carrying amount, then no impairment exists. If
the carrying amount exceeds the fair value, further analysis is performed
to assess impairment.
38
The Company's impairment analysis is based on a review of the
price/earnings ratio for companies similar in nature, scope and size. The
use of alternative estimates, peer groups or changes in the industry could
affect the estimated fair value of the assets and potentially result in
impairment. Any identified impairment would result in adjustment to the
Company's results of operations. The Company completed the required
impairment testing in fiscal 2004 and 2003 and did not incur any
impairment charges.
- BUSINESS COMBINATIONS. Assumptions and estimates are used in determining
the fair value of assets acquired and liabilities assumed in a business
combination. A significant portion of the purchase price in many of the
Company's acquisitions is assigned to intangible assets which require
management to use significant judgment in determining fair value. The
Company typically utilizes third-party valuation experts ("Valuation
Experts") for this process. In addition, current and future amortization
expense for such intangibles is impacted by purchase price allocations as
well as the assessment of estimated useful lives of such intangibles,
excluding goodwill. The Company believes the assets recorded and the
useful lives established are appropriate based upon current facts and
circumstances.
In conjunction with the review of a transaction, the Valuation Experts
assess the status of the acquired company's research and development
projects to determine the existence of in-process research and development
("IPR&D"). The Company has not historically recorded significant costs
related to IPR&D. However, in conjunction with the recent acquisition of
ALARIS, the Company was required to estimate the fair value of acquired
IPR&D which required selecting an appropriate discount rate and estimating
future cash flows for each project. Management also assessed the current
status of development, nature and timing of efforts to complete such
development, uncertainties and other factors when estimating the fair
value. Costs were not assigned to IPR&D unless future development was
probable. Once the fair value was determined, an asset was established and
immediately written-off as a special item in the Company's consolidated
statement of earnings. The Company recorded $12.7 million as a special
item in fiscal 2004 representing an estimate of ALARIS' IPR&D (see Note 4
of "Notes to Consolidated Financial Statements").
- SPECIAL ITEMS. The Company's special items consist primarily of costs that
relate to the integration of previously acquired companies or costs of
restructuring operations to improve productivity. Integration costs from
acquisitions accounted for under the pooling of interests method have been
recorded in accordance with Emerging Issues Task Force ("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)," and SEC Staff Accounting Bulletin No. 100, "Restructuring
and Impairment Charges." Certain costs related to these acquisitions, such
as employee and lease terminations and other facility exit costs, were
recognized at the date the integration plan was adopted by management.
Certain other integration costs that did not meet the criteria for accrual
at the commitment date have been expensed as the integration plan has been
implemented.
The costs associated with integrating acquired companies under the
purchase method are recorded in accordance with EITF Issue No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination." Certain costs to be incurred by the Company, as the
acquirer, such as employee and lease terminations and other facility exit
costs, are recognized at the date the integration plan is formalized and
adopted by management. Certain other integration costs that do not meet
the criteria for accrual at the commitment date are expensed as the
integration plan is implemented.
At the beginning of the third quarter fiscal 2003, the Company implemented
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," to account for costs incurred in restructuring activities.
Under this standard, a liability for an exit cost is recognized as
incurred. As discussed above, the Company previously accounted for costs
associated with restructuring activities under EITF Issue No. 94-3, which
required the Company to recognize a liability for restructuring costs on
the date of the commitment to an exit plan.
The majority of the special items related to acquisitions and
restructurings can be classified in one of the following categories:
employee-related costs, exit costs (including lease termination costs),
asset impairments and other integration costs. Employee costs include
severance and termination benefits. Lease termination costs include lease
cancellation fees, forfeited deposits and remaining payments due under
existing lease agreements less estimated sublease income. Other facility
exit costs include costs to move equipment or inventory out of a facility
as well as other costs incurred to shut down a facility. Asset impairment
costs include the remaining net book value of assets no longer used as a
result of the integration or restructuring activities. Other integration
costs primarily include charges directly related to the integration plan
such as consulting costs related to information systems and employee
benefit plans as well as relocation and travel costs directly associated
with the integration plan. Actual costs could differ from management's
estimates. If actual results are different from original estimates, the
Company will record additional expense or reverse previously recorded
expenses. These adjustments will be recorded as special items.
39
The Company also records settlements of significant lawsuits that are
infrequent, non-recurring or unusual in nature as special items. See Note
4 of "Notes to Consolidated Financial Statement" for additional
information.
- VENDOR RESERVES. In determining an appropriate vendor reserve, the Company
assesses historical experience and current outstanding claims. The Company
researches and resolves contested transactions based on discussions with
vendors, Company policy and findings of research performed. At any given
time, there are outstanding items in various stages of research and
resolution. The ultimate outcome of certain claims may be different than
the Company's original estimate and may require adjustment. However, the
Company believes reserves recorded for such disputes are adequate based
upon current facts and circumstances.
- INCOME TAX RESERVES. The Company has established an estimated liability
for federal, state and foreign income tax exposures that arise and meet
the criteria for accrual under SFAS No. 5, "Accounting for Contingencies."
This liability addresses a number of issues for which the Company may have
to pay additional taxes (and interest) when all examinations by taxing
authorities are concluded.
The Company has developed a methodology for estimating its tax liability
related to such matters and has consistently followed such methodology
from period to period. The liability amounts for such matters are based on
an evaluation of the underlying facts and circumstances, a thorough
research of the technical merits of the Company's arguments, and an
assessment of the chances of the Company prevailing in its arguments. In
all cases, the Company considers previous IRS findings. The Company
generally consults with external tax advisers in researching its
conclusions. Amounts accrued for a particular period are not adjusted
upward or downward unless a significant change in facts or circumstances
has occurred and been formally documented.
- LOSS CONTINGENCIES. The Company accrues for contingencies related to
litigation in accordance with SFAS No. 5, "Accounting for Contingencies,"
which requires the Company to assess contingencies to determine degree of
probability and range of possible settlement. An estimated loss
contingency is accrued in the Company's consolidated financial statements
if it is probable that a liability has been incurred and the amount of the
settlement can be reasonably estimated. Assessing contingencies is highly
subjective and requires judgments about future events. The Company
regularly reviews contingencies to determine the adequacy of the accruals
and related disclosures. The amount of ultimate settlement may differ from
these estimates.
- SELF INSURANCE ACCRUALS. The Company is self-insured for employee medical
and dental insurance programs. The Company had recorded liabilities
totaling $23.0 million and $12.8 million for estimated costs related to
outstanding claims at June 30, 2004 and 2003, respectively. These costs
include an estimate for expected settlements on pending claims,
administrative fees and an estimate for claims incurred but not reported.
These estimates are based on the Company's assessment of outstanding
claims, historical analysis and current payment trends. The Company
records an estimate for the claims incurred but not reported using an
estimated lag period. This lag period assumption has been consistently
applied for the periods presented. If the lag period was adjusted by a
period equal to a half month, the impact on earnings would be $4.7
million. However, the Company believes the liabilities recorded are
adequate based upon current facts and circumstances.
The Company is also self-insured for various general liability and
workers' compensation claims. The Company had recorded liabilities
totaling $48.0 million and $39.2 million for anticipated costs related to
general liability and workers' compensation at June 30, 2004 and 2003,
respectively. These costs include an estimate for expected settlements on
pending claims, defense costs and an estimate for claims incurred but not
reported. These estimates are based on the Company's assessment of
outstanding claims, historical analysis, actuarial information and current
payment trends. The amount of ultimate liability in respect to these
matters may differ from these estimates.
40
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
The following table summarizes the Company's Consolidated Statements of
Cash Flows for fiscal 2004, 2003 and 2002:
OPERATING ACTIVITIES. Cash provided by operating activities nearly doubled
during fiscal 2004 as compared to fiscal 2003 primarily due to an increase in
accounts payable and increased earnings from continuing operations. The primary
driver of the increase in accounts payable was due to the timing of payments at
fiscal year-end, as well as inventory buys executed shortly before fiscal
year-end within the Company's Pharmaceutical Distribution business. In addition,
as a result of certain non-recurring end of year arrangements, payments to
vendors in fiscal 2004 were reduced by $258 million due to the acceleration of
payments at June 30, 2003 to selected pharmaceutical vendors. Such arrangements
resulted in changes to the original payment terms with the vendors for which an
economic consideration was exchanged between both parties. The Company's overall
investment in inventories declined during fiscal 2004 as compared to fiscal 2003
due primarily to the changing business model of the Pharmaceutical Distribution
business (see the "Overview" section earlier within "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). This business model
change should continue to have a positive impact on the Company's operating cash
flows in the near-term, reducing the Company's inventory on-hand and moderating
historical seasonal fluctuations in working capital. For further discussion of
changes within the Company's earnings from continuing operations, see the
"Results of Operations" section. Additionally, the Company's operating cash flow
benefited by approximately $99.3 million during fiscal 2004 due to sales of
lease receivables from the Company's Automation and Information Services
segment. See Note 10 in "Notes to Consolidated Financial Statements" for
information regarding sales of lease receivables.
Cash provided by operating activities during fiscal 2003 increased $414.1
million as compared to fiscal 2002 primarily due to (a) increased earnings from
continuing operations, and (b) sales of lease receivables, which benefited the
Company's operating cash flow by $247.6 million in fiscal 2003 as compared to
$97.8 million in fiscal 2002. These positive factors were partially offset by
year over year impact of (i) end of year payments to selected pharmaceutical
vendors, approximately $370 million, for which economic consideration was
exchanged between both parties; and (ii) accelerated end of year customer
receipts, approximately $152 million, for which economic consideration was
exchanged between both parties. The positive factors were also partially offset
by increases in trade receivables and inventories. The increase in trade
receivables was driven by the Company's revenue growth. The increase in
inventories resulted primarily from increased sales across each of the Company's
segments. The rate of increase in inventories was less than in prior years due
to the impact of branded to generic product conversions, vendor inventory
policies and inventory management agreements. Synergies realized from the
Bindley integration also lowered the Company's investment in inventory.
INVESTING ACTIVITIES. Cash used in investing activities during fiscal
2004, 2003 and 2002 primarily represents the Company's use of cash to complete
acquisitions which expand its role as a provider of services to the health care
industry (see "Acquisitions and Divestitures" within "Part I, Item 1: Business"
for further information regarding the Company's acquisitions); and develop and
enhance the Company's infrastructure, including facilities, information systems
and other machinery and equipment. During these fiscal years, the Company has
focused on developing the infrastructure within its Pharmaceutical Technologies
and Services segment. The uses of cash noted above were partially offset by
proceeds received from the sale of property, equipment and other assets, as well
as proceeds from the sale of discontinued operations during fiscal 2004 and
2003.
FINANCING ACTIVITIES. The Company's financing activities utilized cash of
$815.7 million and $712.3 million during fiscal 2004 and 2003, respectively, and
provided cash of $114.9 million during fiscal 2002. Cash used in financing
activities during fiscal 2004 and 2003 primarily reflects the Company's decision
to repurchase its shares as authorized by its Board of Directors (see "Share
Repurchases" below for additional information). These cash outflows for fiscal
2004 and 2003 were partially offset by net proceeds received from the Company's
debt facilities (see "Capital Resources" below for additional information) and
proceeds received from shares issued under various employee stock plans. Cash
provided by financing activities during fiscal 2002 primarily reflects the
issuance of $300 million of Notes, partially offset by repurchase of the
Company's shares.
International Cash
The Company's cash balance of approximately $1.1 billion as of June 30,
2004, includes $299.3 million of cash held by its subsidiaries outside of the
United States. Although the vast majority of cash held outside the United States
is available for repatriation, doing so could subject it to United States
federal income tax.
41
Share Repurchases
During fiscal 2004, 2003 and 2002, the Company's Board of Directors
approved, and management completed, several share repurchase programs. These
share repurchase programs, in the aggregate, allowed the Company to repurchase
$3.0 billion of the Company's shares. During fiscal 2004, the Company
repurchased approximately 24.2 million shares having an average price paid per
share of $62.03. During fiscal 2003, the Company repurchased approximately 19.6
million shares having an average price paid per share of $60.77. During fiscal
2002, the Company repurchased approximately 5.1 million shares having an average
price paid per share of $60.24. The repurchased shares were placed into treasury
to be used for general corporate purposes. See "Issuer Purchases of Equity
Securities" within "Part I, Item 5: Market for the Registrant's Common Shares,
Related Shareholder Matters and Issuer Purchases of Equity Securities" for
further information regarding the Company's most recent share repurchase
program.
Capital Resources
In addition to cash, the Company's sources of liquidity include a $1.5
billion commercial paper program backed by $1.5 billion of bank revolving credit
facilities, a $150 million extendible commercial note program and a committed
receivables sales facility program with capacity to sell $500 million in
receivables. Subsequent to June 30, 2004, the capacity under the committed
receivables sales facility program was increased to $800 million and the Company
sold in the aggregate $800 million in receivables under the program (for more
information regarding this committed receivables sales facility program, see
Note 10 of "Notes to Consolidated Financial Statements"). Also subsequent to
June 30, 2004, the Company received a commitment letter for a $500 million
committed borrowing facility to be used for general corporate purposes. This
facility is in the process of being negotiated. As of June 30, 2004, $634.2
million of commercial paper was backed by the $1.5 billion of bank revolving
credit facilities, with the remaining facilities unused. The Company also has
lines of credit of approximately $183.7 million, of which $68.4 million was
outstanding as of June 30, 2004.
The Company maintains two $750 million bank revolving credit facilities.
These facilities are available for general corporate purposes; however, they are
primarily used as backstop liquidity for the Company's commercial paper program.
During the third quarter of fiscal 2004, the Company refinanced its maturing
364-day, $750 million revolving credit facility with a new five-year, $750
million revolving credit facility. Management believes that the extension to a
five-year facility enhanced the Company's liquidity profile by reducing
refinancing risk at nominal marginal cost. In connection with adding the new
five-year revolving credit facility, the Company also amended its existing
five-year $750 million revolving credit facility during the third quarter of
fiscal 2004 to administratively conform it to the new five-year revolving credit
facility. Subsequent to June 30, 2004, the Company borrowed $1.25 billion in the
aggregate on its revolving credit facilities. The proceeds from the Company's
revolving credit facilities were utilized to repay a significant portion of the
Company's commercial paper program, none of which remained outstanding as of the
filing date of this Form 10-K, and for general corporate purposes, including the
establishment of pharmaceutical inventory at the Pharmaceutical Distribution
business' National Logistics Center in Groveport, Ohio.
The Company had an asset securitization facility which allowed the Company
to sell receivables generated from its radiopharmaceutical operations to a
wholly-owned subsidiary, which in turn sold the receivables to a multi-seller
conduit administered by a third party bank. This facility allowed for borrowings
up to $65 million. This securitization facility was terminated in fiscal 2004.
During fiscal 2004, the Company retired two series of $100 million Notes
which matured in 2004. During fiscal 2003 and 2002, the Company issued $500
million of 4.00% Notes (due 2015) and $300 million of 4.45% Notes (due 2005),
respectively. The proceeds of the debt issuances were used for repayment of a
portion of the Company's indebtedness and general corporate purposes, including
working capital, capital expenditures, acquisitions and investments. As of June
30, 2004, the Company, pursuant to a shelf registration statement filed with the
SEC, has the capacity available for issuance of up to $500 million of equity and
debt securities.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "Accounts Receivable and Financing Entity"), which is exclusively
engaged in purchasing trade receivables from, and making loans to, the Company.
The Accounts Receivable and Financing Entity, which is consolidated by the
Company, issued $250 million and $400 million in preferred variable debt
securities to parties not affiliated with the Company during fiscal 2004 and
2001, respectively. These preferred debt securities are classified as long-term
debt in the Company's consolidated balance sheet. These preferred debt
securities must be retired or redeemed by the Accounts Receivable and Financing
Entity before the Company, or its creditors, can have access to the Accounts
Receivable and Financing Entity's receivables.
From time to time, the Company considers and engages in acquisition
transactions in order to expand its role as a leading provider of services to
the health care industry. The Company evaluates possible candidates for merger
or acquisition and intends to continue to seek opportunities to expand its role
as a provider of services to the health care industry through all its reporting
segments. If additional transactions are entered into or consummated, the
Company may need to enter into funding arrangements for such mergers or
acquisitions.
The Company currently believes that, based upon existing cash, operating
cash flows, available capital resources (as discussed above) and other available
market transactions, it has adequate capital resources at its disposal to fund
currently anticipated capital
42
expenditures, business growth and expansion, contractual obligations and current
and projected debt service requirements, including those related to business
combinations.
Debt Ratings/Covenants
The Company's senior debt credit ratings from S&P, Moody's and Fitch are
BBB, Baa3 and BBB+, respectively, the commercial paper ratings are A-3, P-3 and
F-2, respectively, and the ratings outlooks are "negative," "on review for
possible further downgrade" and "negative," respectively. Further reductions in
the Company's credit ratings could negatively impact its ability to access
capital as well as its ability to issue additional debt securities at currently
available interest rates.
The Company's various borrowing facilities and long-term debt, except for
the preferred debt securities as discussed below, are free of any financial
covenants other than minimum net worth which cannot fall below $4.1 billion at
any time. As of June 30, 2004, the Company was in compliance with this covenant.
The Company's preferred debt securities contain a minimum adjusted
tangible net worth covenant (adjusted tangible net worth cannot fall below $3.0
billion) and certain financial ratio covenants. As of June 30, 2004, the Company
was in compliance with these covenants. A breach of any of these covenants would
be followed by a grace period during which the Company may discuss remedies with
the security holders, or extinguish the securities, without causing an event of
default.
Interest Rate and Currency Risk Management
The Company uses forward currency exchange contracts, currency options and
interest rate swaps to manage its exposure to cash flow variability. The Company
also uses foreign currency forward contracts and interest rate swaps to protect
the value of its existing foreign currency assets and liabilities and the value
of its debt. See Notes 3 and 7 of "Notes to Consolidated Financial Statements"
for information regarding the use of financial instruments and derivatives,
including foreign currency hedging instruments. As a matter of policy, the
Company rarely engages in "speculative" transactions involving derivative
financial instruments. During fiscal 2003, the Company entered into one
speculative interest rate swap transaction resulting in a gain of approximately
$6.7 million. This gain was recorded in interest expense and other per the
consolidated statement of earnings.
Contractual Obligations
As of June 30, 2004, the Company's contractual obligations, including
estimated payments due by period, are as follows:
Payments Due by Period
----------------------
(in millions) 2005 2006-2007 2008-2009 Thereafter Total
------------- -------- --------- --------- ---------- --------
On Balance Sheet:
Long-term debt (1) $ 849.9 $ 808.4 $ 803.3 $1,200.9 $3,662.5
Capital lease obligations (2) 5.1 8.8 5.5 7.8 27.2
Other long-term liabilities (3) 7.3 15.5 11.6 36.6 71.0
Off-Balance Sheet:
Operating leases (4) 109.1 137.7 79.4 109.1 435.3
Purchase obligations (5) (6) 2,412.3 57.5 11.7 10.2 2,491.7
-------- -------- -------- -------- --------
Total financial obligations $3,383.7 $1,027.9 $ 911.5 $1,364.6 $6,687.7
======== ======== ======== ======== ========
(1) Represents maturities of the Company's long-term debt obligations, as shown
on the balance sheet. See Note 6 in "Notes to Consolidated Financial Statements"
for further information.
(2) Represents maturities of the Company's capital lease obligations, included
within long-term debt on the Company's balance sheet.
(3) Represents cash outflows by period for certain of the Company's long-term
liabilities in which cash outflows could be reasonably estimated. The primary
items included are estimates of the Company's pension and other post-retirement
benefit obligations as well as accrued marketing fees and other long-term
liabilities. Certain long-term liabilities, such as deferred taxes, have been
excluded from the table above as there are no cash outflows associated with the
liabilities or the timing of the cash outflows cannot reasonably be estimated.
(4) Represents minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms as described in Note 11 of "Notes to
Consolidated Financial Statements." The Company also has required lease payments
based upon LIBOR
43
which are not included in the above amounts due to variability related to such
payments. See description of these leases in Note 10 of "Notes to Consolidated
Financial Statements."
(5) Purchase obligations are defined as an agreement to purchase goods or
services that is enforceable and legally binding and specifying all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and approximate timing of the transaction. The
purchase obligation amounts disclosed above represent estimates of the minimum
for which the Company is obligated and the time period in which cash outflows
will occur. Purchase orders and authorizations to purchase that involve no firm
commitment from either party are excluded from the above table. In addition,
contracts that can be unilaterally cancelled with no termination fee or with
proper notice are excluded from the Company's total purchase obligations except
for the amount of the termination fee or the minimum amount of goods that must
be purchased during the requisite notice period. The significant amount
disclosed within fiscal 2005, as compared to other periods, primarily represents
obligations to purchase inventories within the Pharmaceutical Distribution and
Provider Services segment.
(6) The Company has certain obligations to repurchase franchisee pharmacies from
its Medicine Shoppe and Medicap businesses at the end of the term of the
franchise renewal agreement. These obligations are determined through
third-party appraisals and are for periods beyond fiscal 2009. At this time, the
Company cannot estimate the amount of these obligations and therefore has not
included them in this presentation.
OFF-BALANCE SHEET ARRANGEMENTS
See Note 10 in "Notes to Consolidated Financial Statements" for a
discussion of off-balance sheet arrangements.
OTHER
RECENT FINANCIAL ACCOUNTING STANDARDS. See Note 3 in "Notes to Consolidated
Financial Statements" for a discussion of recent financial accounting standards.
RECENT DEVELOPMENTS. See Notes 1 and 2 in "Notes to Consolidated Financial
Statements" for a discussion of the SEC investigation, U.S. Attorney inquiry and
Audit Committee internal review, and certain reclassification and restatement
adjustments the Company made to its fiscal 2004 and prior historical financial
statements in connection with certain conclusions made by the Audit Committee
during September and October 2004 as part of its internal review to date. See
also Note 22 in "Notes to Consolidated Financial Statements" for discussion of
subsequent events after June 30, 2004.
44
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to cash flow and earnings fluctuations as a result
of certain market risks. These market risks primarily relate to foreign
exchange, interest rate, and commodity related changes. The Company maintains a
comprehensive hedging program to manage volatility related to these market
exposures. It employs operational, economic, and derivative financial
instruments in order to mitigate risk. See Notes 3 and 7 of "Notes to
Consolidated Financial Statements" for further discussion regarding the
Company's use of derivative instruments.
FOREIGN EXCHANGE RATE SENSITIVITY. By nature of the Company's global operations,
it is exposed to cash flow and earnings fluctuations resulting from foreign
exchange rate variation. These exposures are transactional and translational in
nature. Since the Company manufactures and sells its products throughout the
world, its foreign currency risk is diversified. Principal drivers of this
diversified foreign exchange exposure include the European euro, Mexican peso,
British pound and the Thai bhat.
Transactional Exposure
The Company's transactional exposure arises from the purchase and sale of
goods and services in currencies other than the functional currency of the
parent or its subsidiaries. As part of its risk management program, at the end
of each fiscal year the Company performs a sensitivity analysis on its
forecasted transactional exposure for the upcoming fiscal year. This analysis
assumes a hypothetical 10% strengthening or weakening of the U.S. dollar.
Included in the analysis is the estimated impact of its hedging program, which
mitigates the Company's transactional exposure. At June 30, 2004 and 2003, the
Company had hedged approximately 52% and 61% of its transactional exposures,
respectively. The following table summarizes the analysis as it relates to the
Company's transactional exposure (in millions):
(1) Impact of a hypothetical 10% strengthening or weakening of the U.S dollar.
Translational Exposure
The Company also has exposure related to the translation of financial
statements of its foreign divisions into U.S dollars, functional currency of the
parent. It performs a similar analysis as described above related to this
translational exposure. The Company does not typically hedge any of its
translational exposure and no hedging impact was included in the Company's
analysis at June 30, 2004 and 2003. The following table summarizes the Company's
translational exposure and the impact of a hypothetical 10% strengthening or
weakening in the U.S dollar (in millions):
(1) Impact of a hypothetical 10% strengthening or weakening of the U.S dollar.
The increase in net estimated translational exposure between fiscal 2004
and 2003 resulted primarily from international acquisitions completed during
fiscal 2004.
45
INTEREST RATE SENSITIVITY. The Company is exposed to changes in interest rates
primarily as a result of its borrowing and investing activities to maintain
liquidity and fund business operations. The nature and amount of the Company's
long-term and short-term debt can be expected to fluctuate as a result of
business requirements, market conditions, and other factors. The Company's
policy is to manage exposures to interest rates using a mix of fixed and
floating rate debt as deemed appropriate by management. The Company utilizes
interest rate swap instruments to mitigate its exposure to interest rate
movements.
As part of its risk management program, the Company annually performs a
sensitivity analysis on its forecasted exposure to interest rates for the
following fiscal year. This analysis assumes a hypothetical 10% change in
interest rates. At June 30, 2004 and 2003, the potential increase or decrease in
interest expense under this analysis as a result of this hypothetical change was
$6.4 million and $3.2 million, respectively.
COMMODITY PRICE SENSITIVITY. The Company purchases certain commodities for use
in its manufacturing processes, which include rubber, heating oil, diesel fuel,
and polystyrene. The Company typically purchases these commodities at market
prices, and as a result, is affected by price fluctuations. As part of its risk
management program, the Company performs sensitivity analysis on its forecasted
commodity exposure for the following fiscal year. At June 30, 2004 and 2003, the
Company had not hedged any of these exposures. The table below summarizes the
Company's analysis of these forecasted commodity exposures and a hypothetical
10% fluctuation in commodity prices as of June 30, 2004 and 2003 (in millions):
(1) Impact of a hypothetical 10% change in commodity market prices.
The Company also has exposure to certain energy related commodities,
including natural gas and electricity through its normal course of business.
These exposures result primarily from operating the Company's distribution,
manufacturing, and corporate facilities. In certain deregulated markets, the
Company from time to time enters into long-term purchase contracts to supply
these items at a specific price.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements and Schedule:
Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 2004, 2003 and 2002
Consolidated Balance Sheets at June 30, 2004 and 2003
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Schedule II
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the
Board of Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of Cardinal
Health, Inc. and subsidiaries (the "Company") as of June 30, 2004 and 2003, and
the related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 2004. Our audits
also included the financial statement schedule listed in the Index at Item
15(a)(2). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of June 30, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2004, in conformity with the U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
We also audited the adjustments described in Note 1 to the consolidated
financial statements that were applied to restate opening retained earnings as
of July 1, 2002. In our opinion, such adjustments are appropriate and have been
properly applied.
As discussed in Note 16 to the consolidated financial statements, the
Company changed its method of recognizing cash discounts effective at the
beginning of fiscal year 2004 and, in the first quarter of fiscal 2002, the
Company changed its method of recognizing revenue for pharmacy automation
equipment.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Columbus, Ohio
October 25, 2004
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
----------------------------------------
2004 2003 2002
----------------------------------------
RESTATED RESTATED
Revenue $ 65,053.5 $ 56,731.5 $ 51,144.6
Cost of products sold 60,312.3 52,249.3 47,099.6
---------- ---------- ----------
Gross margin 4,741.2 4,482.2 4,045.0
Selling, general and administrative expenses 2,346.5 2,246.3 2,071.0
Special items - merger charges 44.7 74.4 131.9
- foundation contribution 31.7 - -
- other (19.0) (34.5) (15.3)
---------- ---------- ----------
Operating earnings 2,337.3 2,196.0 1,857.4
Interest expense and other 98.9 115.3 132.5
---------- ---------- ----------
Earnings before income taxes, discontinued
operations, and cumulative effect of changes
in accounting 2,238.4 2,080.7 1,724.9
Provision for income taxes 713.7 699.5 584.1
---------- ---------- ----------
Earnings from continuing operations before
cumulative effect of changes in accounting 1,524.7 1,381.2 1,140.8
Loss from discontinued operations
(net of tax of $7.4 and $2.5 for the year-to-date
periods ending June 30, 2004 and 2003,
respectively) (11.7) (6.1) -
Cumulative effect of changes in accounting (38.5) - (70.1)
---------- ---------- ----------
Net earnings $ 1,474.5 $ 1,375.1 $ 1,070.7
========== ========== ==========
Basic earnings per Common Share:
Continuing operations $ 3.51 $ 3.10 $ 2.53
Discontinued operations (0.03) (0.02) -
Cumulative effect of changes in accounting (0.09) - (0.16)
---------- ---------- ----------
Net basic earnings per Common Share $ 3.39 $ 3.08 $ 2.37
========== ========== ==========
Diluted earnings per Common Share:
Continuing operations $ 3.47 $ 3.05 $ 2.48
Discontinued operations (0.03) (0.02) -
Cumulative effect of changes in accounting (0.09) - (0.15)
---------- ---------- ----------
Net diluted earnings per Common Share $ 3.35 $ 3.03 $ 2.33
========== ========== ==========
Weighted average number of shares outstanding:
Basic 434.4 446.0 450.1
Diluted 440.0 453.3 459.6
The accompanying notes are an integral part of these consolidated statements.
48
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2004 2003
--------- ---------
RESTATED
ASSETS
Current assets:
Cash and equivalents $ 1,096.0 $ 1,724.0
Trade receivables, net 3,432.7 2,784.4
Current portion of net investment in sales-type leases 202.1 171.8
Inventories 7,471.3 7,570.9
Prepaid expenses and other 795.4 776.0
Assets held for sale from discontinued operations 60.4 170.1
--------- ---------
Total current assets 13,057.9 13,197.2
--------- ---------
Property and equipment, at cost:
Land, buildings and improvements 1,412.6 1,218.8
Machinery and equipment 2,734.3 2,401.4
Furniture and fixtures 153.2 135.1
--------- ---------
Total 4,300.1 3,755.3
Accumulated depreciation and amortization (1,936.1) (1,665.8)
--------- ---------
Property and equipment, net 2,364.0 2,089.5
Other assets:
Net investment in sales-type leases, less current portion 546.0 557.3
Goodwill and other intangibles, net 4,938.8 2,332.3
Other 462.4 288.8
--------- ---------
Total $21,369.1 $18,465.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and other short term borrowings $ 5.6 $ -
Current portion of long-term obligations 855.0 228.7
Accounts payable 6,432.4 5,288.8
Other accrued liabilities 2,021.3 1,728.4
Liabilities from discontinued operations 55.1 64.3
--------- ---------
Total current liabilities 9,369.4 7,310.2
--------- ---------
Long-term obligations, less current portion 2,834.7 2,471.9
Deferred income taxes and other liabilities 1,188.7 1,008.5
Shareholders' equity:
Preferred Stock, without par value
Authorized - 0.5 million shares, Issued - none - -
Common Shares, without par value
Authorized - 755.0 million shares, Issued - 473.1 million shares
and 467.2 million shares at June 30, 2004 and 2003, respectively 2,653.8 2,403.7
Retained earnings 7,888.0 6,465.2
Common Shares in treasury, at cost, 42.2 million shares and 18.8
million shares at June 30, 2004 and 2003, respectively (2,588.1) (1,135.8)
Other comprehensive income / (loss) 28.9 (50.7)
Other (6.3) (7.9)
--------- ---------
Total shareholders' equity 7,976.3 7,674.5
--------- ---------
Total $21,369.1 $18,465.1
========= =========
The accompanying notes are an integral part of these consolidated statements.
49
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES
----------------- TREASURY SHARES OTHER TOTAL
SHARES RETAINED ------------------ COMPREHENSIVE SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT INCOME/(LOSS) OTHER EQUITY
------ ---------- ---------- ------- --------- ------------- ------- -------------
BALANCE, JUNE 30, 2001 456.2 $ 1,893.1 $ 4,146.0 (7.5) $ (457.2) $ (140.3) $ (4.5) $ 5,437.1
Adjustment for restated beginning balance (33.6) (33.6)
Comprehensive income:
Net earnings 1,070.7 1,070.7
Foreign currency translation adjustments 24.0 24.0
Unrealized loss on derivatives (10.4) (10.4)
Unrealized gain on investments 2.6 2.6
Reclassification adjustment for investment
losses included in net earnings 3.2 3.2
Net change in minimum pension liability (22.1) (22.1)
------------
Total comprehensive income 1,068.0
Employee stock plans activity,
including tax benefits of $73.6 million 4.5 191.6 0.5 28.1 (6.0) 213.7
Treasury shares acquired (5.1) (308.3) (308.3)
Dividends declared (45.0) (45.0)
Stock issued for acquisitions and other 0.3 20.5 (1.1) (0.1) 0.4 19.8
------ ---------- ---------- ------ --------- ----------- ------- ------------
BALANCE, JUNE 30, 2002 (Restated) 461.0 $ 2,105.2 $ 5,137.0 (12.2) $ (737.0) $ (143.0) $ (10.5) $ 6,351.7
Comprehensive income:
Net earnings 1,375.1 1,375.1
Foreign currency translation adjustments 99.7 99.7
Unrealized gain on derivatives 2.0 2.0
Net change in minimum pension liability (9.4) (9.4)
------------
Total comprehensive income 1,467.4
Employee stock plans activity,
including tax benefits of $65.5 million 6.2 227.8 0.5 35.6 2.5 265.9
Treasury shares acquired (19.6) (1,191.7) (1,191.7)
Dividends declared (47.0) (47.0)
Stock issued for acquisitions and other 70.7 0.1 12.5 757.3 0.1 828.2
------ ---------- ---------- ------ --------- ----------- ------- ------------
BALANCE, JUNE 30, 2003 (Restated) 467.2 $ 2,403.7 $ 6,465.2 (18.8) $(1,135.8) $ (50.7) $ (7.9) $ 7,674.5
Comprehensive income:
Net earnings 1,474.5 1,474.5
Foreign currency translation adjustments 68.3 68.3
Unrealized gain on derivatives 11.7 11.7
Unrealized loss on investments (1.3) (1.3)
Net change in minimum pension liability 0.9 0.9
------------
Total comprehensive income 1,554.1
Employee stock plans activity,
including tax benefits of $66.4 million 5.9 237.2 0.8 47.7 1.6 286.5
Treasury shares acquired (24.2) (1,500.0) (1,500.0)
Dividends declared (51.8) (51.8)
Stock issued for acquisitions and other 12.9 0.1 13.0
------ ---------- ---------- ------ --------- ----------- ------- ------------
BALANCE, JUNE 30, 2004 473.1 $ 2,653.8 $ 7,888.0 (42.2) $(2,588.1) $ 28.9 $ (6.3) $ 7,976.3
====== ========== ========== ====== ========= =========== ======= ============
The accompanying notes are an integral part of these consolidated statements.
50
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
--------------------------------
2004 2003 2002
-------- -------- --------
RESTATED RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations before cumulative effect
of changes in accounting $1,524.7 $1,381.2 $1,140.8
Adjustments to reconcile earnings from continuing operations before
cumulative effect of changes in accounting to net cash from
operations:
Depreciation and amortization 299.2 265.8 243.5
Provision for deferred income taxes 105.1 215.2 239.7
Provision for bad debts 1.5 22.2 42.6
Change in operating assets and liabilities,
net of effects from acquisitions:
Decrease/(increase) in trade receivables (457.1) (413.7) 142.7
Decrease/(increase) in inventories 245.5 (217.9) (1,065.9)
Decrease/(increase) in net investment in sales-type leases (7.2) 107.8 71.2
Increase/(decrease) in accounts payable 1,014.6 (278.5) 178.6
Other accrued liabilities and operating items, net (101.6) 315.9 (9.3)
-------- -------- --------
Net cash provided by operating activities 2,624.7 1,398.0 983.9
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (2,089.7) (26.8) (383.8)
Proceeds from sale of property and equipment 19.5 57.7 18.3
Additions to property and equipment (410.2) (423.2) (285.4)
Proceeds from sale of discontinued operations 43.4 48.6 -
-------- -------- --------
Net cash used in investing activities (2,437.0) (343.7) (650.9)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 646.2 8.5 (9.7)
Reduction of long-term obligations (464.3) (191.0) (19.6)
Proceeds from long-term obligations, net of issuance costs 338.0 509.4 362.3
Proceeds from issuance of Common Shares 216.7 197.3 140.0
Dividends on Common Shares (52.3) (44.8) (45.0)
Purchase of treasury shares (1,500.0) (1,191.7) (308.3)
Other - - (4.8)
-------- -------- --------
Net cash provided by/(used in) financing activities (815.7) (712.3) 114.9
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS (628.0) 342.0 447.9
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 1,724.0 1,382.0 934.1
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $1,096.0 $1,724.0 $1,382.0
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
51
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING INVESTIGATIONS AND RESTATEMENT
As previously reported, in October 2003, the Securities and Exchange
Commission (the "SEC") initiated an informal inquiry regarding Cardinal Health,
Inc. (the "Company"). The SEC's request sought historical financial and related
information including but not limited to the accounting treatment of certain
recoveries from vitamin manufacturers. The SEC's request sought a variety of
documentation, including the Company's accounting records for fiscal 2001
through fiscal 2003, as well as notes, memoranda, presentations, e-mail and
other correspondence, budgets, forecasts and estimates. In connection with the
SEC's informal inquiry, the Audit Committee of the Board of Directors of the
Company commenced its own internal review in April 2004, assisted by independent
counsel. On May 6, 2004, the Company was notified that the SEC had converted the
informal inquiry into a formal investigation. On June 21, 2004, as part of the
SEC's formal investigation, the Company received an additional SEC subpoena that
included a request for the production of documents relating to revenue
classification, and the methods used for such classification, in the Company's
Pharmaceutical Distribution business as either "Operating Revenue" or "Bulk
Deliveries to Customer Warehouses and Other." In addition, the Company learned
that the U.S. Attorney for the Southern District of New York had also commenced
an inquiry with respect to the Company that the Company understands relates to
the revenue classification issue. On October 12, 2004, in connection with the
SEC's formal investigation, the Company received a subpoena from the SEC
requesting the production of documents relating to compensation information for
specific current and former employees and officers. The Company continues to
respond to the SEC's investigation and the Audit Committee's internal review and
provide all information required.
During September and October 2004, the Audit Committee reached certain
conclusions with respect to findings to date from its internal review. These
conclusions regarding certain items that impact revenue and earnings relate to
four primary areas of focus: (1) classification of sales to customer warehouses
between "Operating Revenue" and "Bulk Deliveries to Customer Warehouses and
Other" within the Company's Pharmaceutical Distribution and Provider Services
segment; (2) disclosure of the Company's practice, in certain reporting periods,
of accelerating its receipt and recognition of cash discounts earned from
suppliers for prompt payment; (3) timing of revenue recognition within the
Company's Automation and Information Services segment; and (4) certain balance
sheet reserve and accrual adjustments that have been identified in the internal
review. The Audit Committee's internal review with respect to the financial
statement impact of the matters reviewed to date is substantially complete. In
connection with these conclusions, the Audit Committee has determined that the
financial statements of the Company with respect to fiscal 2000, 2001, 2002 and
2003 as well as the first three quarters of fiscal 2004 should be restated to
reflect the conclusions from its internal review to date. As the Company
continues to respond to the SEC's investigation and the Audit Committee's
internal review, there can be no assurance that additional restatements will not
be required or that the historical financial statements included in this Form
10-K will not change or require amendment. In addition, the Audit Committee may
identify new issues, or make additional findings if it receives additional
information, that may impact the Company's financial statements and the scope of
the restatements described in this Form 10-K.
The conclusions of the Audit Committee's internal review to date are as
follows:
REVENUE IMPACT: Classification of Sales To Customer Warehouses Between
"Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other"
Within the Company's Pharmaceutical Distribution and Provider Services
Segment
As presented historically since 1998, the Pharmaceutical Distribution and
Provider Services segment's revenue was classified into two categories
("Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other").
"Bulk Deliveries to Customer Warehouses and Other" has historically included
revenue arising from sales where the Company ordered pharmaceutical product in
bulk on behalf of a specific warehousing customer and either the manufacturer
ships the product directly to the customer's warehouse or the product is shipped
to the customer's warehouse by the Company shortly after it is received by the
Company and is not put into the Company's inventory (in either case, "Bulk
Revenue"). For all Bulk Revenue, the product was shipped to the customer in the
same bulk form in which it was received by the Company from the manufacturers.
The Company previously since November 2001 followed an internal policy for
distinguishing between Operating Revenue and Bulk Revenue based on how long the
product was in the Company's possession prior to being shipped to customers. If
the product was in the possession of the Company for more than 24 hours prior to
being shipped to customers, then, regardless of other characteristics of the
transaction or the reason for the product being held more than 24 hours, the
sale of that product was deemed to be Operating Revenue. The Company's internal
policy also provided that customer orders for bulk shipments filled from
inventory within the Company's warehouse were deemed to be Operating Revenue if
the order for the product had been placed with the manufacturer prior to the
Company receiving the bulk order from its customer. Based on results of the
internal review conducted by the Audit Committee, the Company concluded that
certain bulk shipments ordered by customers were intentionally held beyond 24
hours so that, pursuant to the internal policy, such shipments were classified
as Operating Revenue in four quarters within fiscal 2003 and 2002. The impact of
this practice was not previously quantified and disclosed as part of the
Company's reported Operating Revenue. The improper classification between Bulk
Revenue and Operating Revenue had no impact on the Company's previously reported
total revenue or operating or net earnings for these periods. See Note 2 for
further discussion of these matters.
52
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNDISCLOSED EARNINGS IMPACT: Disclosure of the Company's Practice, in
Certain Reporting Periods, of Accelerating Its Receipt and Recognition of
Cash Discounts Earned From Suppliers for Prompt Payment
Historically, the Company recognized cash discounts as a reduction of cost
of products sold primarily upon payment of vendor invoices. Cash discounts are
discounts the Company receives from some vendors for timely payment of invoices.
The Company had a practice of accelerating payment of vendor invoices at the end
of certain reporting periods in order to accelerate the recognition of cash
discounts, which had the effect of improving operating results for those
reporting periods. Although the effect of these accelerated payments were
properly included in the Company's reported earnings, the impact of this
acceleration practice was not separately quantified and disclosed in the periods
in which the Company benefited from this practice. The net increase (decrease)
in net earnings as a result of this practice for fiscal 2004, 2003 and 2002 is
as follows:
Fiscal Fiscal Fiscal
(in millions) 2004 2003 2002
------ ------ ------
First Quarter $ (0.2) $ - $ (3.3)
Second Quarter 3.0 2.0 -
Third Quarter (0.3) 5.5 -
Fourth Quarter (1.2) 1.3 -
------ ----- -------
Total $ 1.3 $ 8.8 $ (3.3)
====== ===== =======
During the fourth quarter fiscal 2004, the Company changed its accounting
method for recognizing cash discounts from recognition primarily upon payment of
vendor invoices to recording cash discounts as a component of inventory cost and
recognizing such discounts as a reduction to cost of products sold upon sale by
the Company of the purchased inventory. The Company believes the change in
accounting method provides a more objectively determinable method of recognizing
cash discounts and a better matching of inventory cost to revenues. This change
will be retroactively effective to the beginning of fiscal 2004. As a result,
the Company restated its previously reported fiscal 2004 quarterly results to
reflect this change. See Note 16 for further discussion of this change in
accounting.
REVENUE AND EARNINGS IMPACT: Timing of Revenue Recognition Within the
Company's Automation and Information Services Segment
Within its Automation and Information Services segment, the Company's
revenue recognition policy for equipment systems installed at a customer's site
is to recognize revenue once the Company's installation obligations are complete
and the equipment is functioning according to the material specifications of the
user's manual and the customer has accepted the equipment as evidenced by
signing an equipment confirmation document. The Company learned of concerns
during the Audit Committee's internal review that some equipment confirmation
documents were being executed prior to the time when installations were complete
and revenue could be recognized. In order to assess the implications of any
premature execution of equipment confirmations and corresponding revenue
recognition, the Audit Committee review included: (a) document and process
reviews including a sample of equipment confirmation forms; (b) certifications
for selected employees involved in the installation process; (c) interviews of
selected employees across regions within the U.S. and at various levels of the
Company; (d) interviews of certain former employees of the Company; and (e)
interviews of selected customers across all regions within the U.S.
This inquiry indicated some equipment confirmations, particularly in some
sales regions, had been prematurely executed by customers at the request of
certain Company employees, including certain situations where inducements to the
customer (such as deferral of payments) were offered to obtain premature
execution. As a result, there was a material weakness in internal controls
because the Company did not have internal controls in place to assure that
equipment installations were in fact completed before the equipment
confirmations were executed. The Company concluded the impact of such actions
was as follows:
- Equipment confirmations in the last several weeks of a quarter were the
most likely to be executed early by the customer due to requests from
certain Company employees.
- No evidence was discovered of fictitious sales being recorded by the
Company.
- Revenue was recognized early primarily by one quarter. In most cases,
installations were completed in the following quarter.
- Impact on the Company's financial results was not deemed material for
any individual quarter or annually.
53
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Net impact of this premature revenue recognition was assessed as of
June 30, 2004 based upon interviews of customers as of June 30, 2004
representing a substantial percentage of the segment's end of quarter
reported revenues resulting in approximately 10.8% of revenue in the
last 10 days of the quarter being recognized prematurely (based upon an
extrapolation). The Company recorded an $8.3 million reduction of
revenue and a $5.3 million reduction of operating earnings during the
fourth quarter fiscal 2004 to adjust for premature revenue recognition
that was determined to have occurred within that quarter. These
revenues and operating earnings will be recognized in the first quarter
fiscal 2005.
The Company does not maintain accounting records that allow it to
determine the precise impact of this matter on prior quarters. However,
during the investigation there was sufficient data accumulated
independent of the accounting systems to estimate the impact using a
variety of methods. These methods were utilized solely to test the
materiality of prior periods and are not necessarily indicative of what
the actual results would have been. If the results of the June 30, 2004
interviews were applied to prior years (i.e., utilizing the 10.8%
exception rate) as was utilized in the fourth quarter fiscal 2004
adjustment, the net increase (decrease) on revenue and operating
earnings for fiscal 2002 and each previously reported quarter of fiscal
2003 and 2004, and the related percentage of the Automation and
Information Services segment's reported amounts, would have been as
follows:
Using different estimation methods than the methodology used to derive
the table above, the percentage change in operating earnings for the
periods noted above would range from less than 1% to a high of 6.6%.
There were two quarters in which the estimated impact was over 5%
(first quarter fiscal 2003 negative impact of 6.6% and third quarter of
fiscal 2004 negative impact of 5.5%). The Company believes the impact
of the adjustments resulting from the estimation methods are not
material to previously reported results as such estimated adjustments
do not distort trends in revenue and operating earnings growth that
were previously reported and would not alter the Company's previous
disclosures related to the Automation and Information Services segment.
The Company has recently reiterated the revenue recognition policy for
equipment systems installed at a customer's site for its Automation and
Information Services segment, and instructed all employees to strictly
adhere to this policy.
The Company is in the process of implementing the following corrective
actions in response to these initial conclusions:
- Adoption of new customer contracts and equipment confirmation forms
that clarify when the installation is complete and the confirmation is
to be executed.
- Revision of policies and procedures for equipment installation and
revenue recognition processes.
- Enhanced level of internal training for those Company employees
involved in equipment installation and revenue recognition processes.
- Reemphasizing availability of the Company's ethics and compliance
hotline for reporting questions about appropriateness of the Company's
business and accounting practices, including channels of communication
to the Company's Audit Committee.
- Enhanced random audits of the Company's equipment confirmation process.
Such random audits will be performed by the Company's internal audit
department and such procedures will be reviewed and periodically tested
by its independent auditors.
- Within the next year, it is expected that system enhancements will be
implemented that will allow for the automated audit of installation of
equipment at the customer's location.
54
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTATED EARNINGS: Certain Balance Sheet Reserve and Accrual Adjustments
The Audit Committee's internal review included a review to determine if
period-end adjustments to balance sheet reserve accounts and other accruals
recorded in fiscal 2000 through fiscal 2004 were properly recorded in accordance
with generally accepted accounting principles ("GAAP"). Based upon the Audit
Committee's internal review, the Company determined there were various
situations where (a) amount of reserve, (b) timing of reserve recognition, or
(c) timing of reserve adjustments could not be substantiated or was in error. As
a result, the financial statements for certain prior fiscal quarters and years
have been restated by the Company.
The types of balance sheet reserves and accrual adjustments that were
restated consist of the following:
1. Errors arising from misapplication of GAAP. These errors primarily
include (a) reductions in reserve accounts made in periods subsequent to
the period in which the excess had been identified by the Company, (b) a
last-in, first-out ("LIFO") inventory adjustment, and (c) a change in
accounting policy for dividends to recognition when declared versus when
paid.
2. Errors made in previous periods which were identified and appropriately
corrected in a subsequent period when discovered. These items were not
reported as prior period corrections at the time of their discovery because
they were deemed immaterial. At this time, however, the Company has
restated its prior financial statements to correct for such items
identified during the internal review.
3. As a result of discussions with the SEC staff, the Company decided to
reverse its previous recognition of estimated recoveries from vitamin
manufacturers for amounts overcharged in prior years and to recognize the
income from such recoveries as a special item in the period cash was
received from the manufacturers. The Company recognized $10.0 million of
operating earnings ($6.5 million net of taxes) in the second quarter of
fiscal 2001 and $12.0 million of operating earnings ($7.9 million net of
taxes) in the first quarter of fiscal 2002 based on its estimate of amounts
that would subsequently be received. The actual cash payments received from
manufacturers did not exceed the amounts previously recorded until the
fourth quarter of fiscal 2002. The SEC staff had previously advised the
Company that, in its view, the Company did not have an appropriate basis
for recognizing the income in advance of receiving the cash.
The following table summarizes the restatement impact on previously
reported net earnings as defined above for fiscal 2004, 2003 and 2002:
Misapplication Vitamin Total
(in millions) of GAAP Errors Litigation Restatement
------------- ------- ------ ---------- -----------
Fiscal 2004:
First Quarter $ (0.3) $ (4.5) $ - $ (4.8)
Second Quarter (0.4) (4.5) - (4.9)
Third Quarter - (5.7) - (5.7)
------ ------ ------ -------
Total Year-to-Date $ (0.7) $(14.7) $ - $ (15.4)
====== ====== ====== =======
Fiscal 2003:
First Quarter $ (3.1) $ (3.8) $ - $ (6.9)
Second Quarter (1.1) 3.7 - 2.6
Third Quarter (9.1) (5.4) - (14.5)
Fourth Quarter (2.3) (9.6) - (11.9)
------ ------ ------ -------
Total Year $(15.6) $(15.1) $ - $ (30.7)
====== ====== ====== =======
Fiscal 2002:
First Quarter $ 2.8 $ (5.9) $ (7.9) $ (11.0)
Second Quarter (0.6) (2.1) - (2.7)
Third Quarter 2.1 4.4 - 6.5
Fourth Quarter 0.8 7.5 13.4 21.7
------ ------ ------ -------
Total Year $ 5.1 $ 3.9 $ 5.5 $ 14.5
====== ====== ====== =======
55
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the restatement impact on previously
reported earnings per Common Share amounts for fiscal 2003 and 2002:
Fiscal 2003 Fiscal 2002
------------------------- ------------------------
As As As As
Reported Restated Reported Restated
-------- -------- -------- --------
Earnings from continuing
operations per Common Share:
Basic $ 3.17 $ 3.10 $ 2.50 $ 2.53
Diluted $ 3.12 $ 3.05 $ 2.45 $ 2.48
The Company reduced its June 30, 2001 retained earnings balance of
$4,146.0 million by $33.6 million due to the restatement adjustments. This
restatement amount consists of a $3.6 million decrease for misapplication of
GAAP, a $23.5 million decrease for errors and a $6.5 million decrease for
vitamin litigation.
See Note 19 for the restatement impact on previously reported quarterly
earnings per Common Share amounts for fiscal 2004 and 2003.
The SEC investigation, the U.S. Attorney inquiry and the Audit Committee
internal review remain ongoing. While the Company is continuing in its efforts
to respond to the SEC's investigation and the Audit Committee's internal review
and provide all information required, the Company cannot predict the outcome of
the SEC investigation or the U.S. Attorney inquiry. The outcome of the SEC
investigation, the U.S. Attorney inquiry and any related legal and
administrative proceedings could include the institution of administrative,
civil injunctive or criminal proceedings as well as the imposition of fines and
other penalties, remedies and sanctions.
2. RECLASSIFICATIONS
As presented historically since 1998, the Pharmaceutical Distribution and
Provider Services segment's revenue was classified into two categories
("Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other").
"Bulk Deliveries to Customer Warehouses and Other" has historically included
revenue arising from sales where the Company ordered pharmaceutical product in
bulk on behalf of a specific warehousing customer and either the manufacturer
ships the product directly to the customer's warehouse or the product is shipped
to the customer's warehouse by the Company shortly after it is received by the
Company and is not put into the Company's inventory (in either case, "Bulk
Revenue"). For all Bulk Revenue, the product was shipped to the customer in the
same bulk form in which it was received by the Company from the manufacturers.
The Company since November 2001 previously followed an internal policy for
distinguishing between Operating Revenue and Bulk Revenue based on how long the
product was in the Company's possession prior to being shipped to customers. If
the product was in the possession of the Company for more than 24 hours prior to
being shipped to
56
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customers, then, regardless of other characteristics of the transaction or the
reason for the product being held more than 24 hours, the sale of that product
was deemed to be Operating Revenue. The Company's internal policy also provided
that customer orders for bulk shipments filled from inventory within the
Company's warehouse were deemed to be Operating Revenue if the order for the
product had been placed with the manufacturer prior to the Company receiving the
bulk order from its customer. Based on results of the internal review conducted
by the Audit Committee, the Company concluded that certain bulk shipments
ordered by customers were intentionally held beyond 24 hours so that, pursuant
to the internal policy, such shipments were classified as Operating Revenue in
four quarters within fiscal 2003 and 2002. The impact of this practice was not
previously quantified and disclosed as part of the Company's reported Operating
Revenue. The improper classification between Bulk Revenue and Operating Revenue
had no impact on the Company's previously reported total revenue or operating or
net earnings for these periods.
The following table shows the amount of Bulk Revenue that was estimated to
be improperly classified as Operating Revenue in the manner described above and
the impact from adjusting each of Bulk Revenue and Operating Revenue for the
periods in which these improper classifications occurred:
Bulk Revenue Operating Revenue
------------ -----------------
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
---------------------------- -----------------------------
(in millions) 2003 2002 2003 2002
------------- ------- ------- -------- --------
First Quarter $ - $ - $ - $ -
Second Quarter 673.0 82.0 (673.0) (82.0)
Third Quarter 140.0 - (140.0) -
Fourth Quarter - 332.0 - (332.0)
------- ------- -------- --------
Total Year $ 813.0 $ 414.0 $ (813.0) $ (414.0)
======= ======= ======== ========
During fiscal 2004, the Company decided to aggregate revenue classes
within this Form 10-K. "Operating Revenue" and "Bulk Deliveries to Customer
Warehouses and Other" have been combined for all periods presented so that total
revenue and total cost of products sold are presented as single amounts in the
consolidated statements of earnings. These reclassifications have no effect on
previously reported total revenue, related cost of products sold, operating
earnings, net earnings or earnings per share. Beginning with this Form 10-K,
information concerning the portion of the Company's revenue that arises from
Bulk Revenue will be discussed in the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Certain other insignificant reclassifications have been made to conform
prior period amounts to the current presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading provider of products and services supporting the
health care industry, and helping health care providers and manufacturers
improve the efficiency and quality of health care. As of June 30, 2004, the
Company conducted its business within the following four business segments:
Pharmaceutical Distribution and Provider Services; Medical Products and
Services; Pharmaceutical Technologies and Services; and Automation and
Information Services. See Note 18 for information related to the Company's
business segments.
BASIS OF PRESENTATION. The consolidated financial statements of the Company
include the accounts of all majority-owned subsidiaries. In addition, all
significant intercompany accounts and transactions have been eliminated upon
consolidation.
During fiscal 2004, 2003 and 2002, the Company completed several
acquisitions, which were accounted for under the purchase method of accounting.
The consolidated financial statements include the results of operations from
each of these business combinations as of the date of acquisition. Additional
disclosure related to the Company's acquisitions is provided in Note 4.
The preparation of financial statements in conformity with GAAP in the
United States requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates include, but are not limited to, inventory valuation, allowance for
doubtful accounts, goodwill and intangible asset impairment, vendor reserves and
restructuring charge reserves. Actual amounts may differ from these estimated
amounts.
CASH EQUIVALENTS. The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these cash equivalents approximates fair value. Cash payments for interest were
$112.7 million, $115.3 million and $116.5 million and cash payments for income
taxes were $566.3 million, $256.8 million and $246.0 million for fiscal 2004,
2003 and 2002, respectively. See Note 4 for additional information regarding
non-cash investing activities.
57
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the
Company through its pharmaceutical and other health care service activities and
are presented net of an allowance for doubtful accounts of $119.1 million and
$121.3 million at June 30, 2004 and 2003, respectively. An account is considered
past due on the first day after its due date. In accordance with contract terms,
the Company generally has the ability to charge a customer service fees or
higher prices if an account is considered past due. The Company continuously
monitors past due accounts and establishes appropriate reserves to cover
potential losses. The Company will write off any amounts deemed uncollectible
against an established bad debt reserve.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates that generally
fluctuate with the prime rate. Interest income on these accounts is recognized
by the Company as it is earned. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivables
were $35.4 million and $30.8 million at June 30, 2004 and 2003, respectively
(current portions were $17.2 million and $14.9 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $4.1 million and $4.5 million at June 30, 2004 and 2003,
respectively.
The Company has formed special purpose entities with the sole purpose of
buying receivables or sales type leases from various legal entities of the
Company and selling those receivables or sales type leases to certain
multi-seller conduits administered by banks or other third-party investors. See
Note 10 for additional disclosure regarding off-balance sheet financing.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "Accounts Receivable and Financing Entity") which is exclusively
engaged in purchasing trade receivables from, and making loans to, the Company.
The Accounts Receivable and Financing Entity, which is consolidated by the
Company, issued $250 million and $400 million in preferred variable debt
securities to parties not affiliated with the Company during fiscal 2004 and
2001, respectively. These preferred debt securities must be retired or redeemed
by the Accounts Receivable and Financing Entity before the Company, or its
creditors, can have access to the Accounts Receivable and Financing Entity's
receivables. See Note 6 for additional information.
INVENTORIES. A majority of inventories (approximately 66% in 2004 and 68% in
2003) are stated at the lower of cost, using the LIFO method, or market and are
primarily merchandise inventories. The remaining inventory is primarily stated
at the lower of cost, using the first-in, first-out ("FIFO") method, or market.
If the Company had used the FIFO method of inventory valuation, which
approximates current replacement cost, inventories would have been higher than
the LIFO method reported at June 30, 2004 and 2003 by $57.8 million and $61.4
million, respectively.
GOODWILL AND OTHER INTANGIBLES. The Company accounts for purchased goodwill and
other intangible assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, purchased goodwill and intangible assets with indefinite lives are no
longer amortized, but instead are tested for impairment at least annually.
Intangible assets with finite lives, primarily customer relationships and
patents and trademarks, continue to be amortized over their useful lives. The
Company performed its annual impairment test in fiscal 2004 which did not result
in the recognition of any impairment charges. See Note 17 for additional
disclosure regarding goodwill and other intangible assets.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
expense for financial reporting purposes is primarily computed using the
straight-line method over the estimated useful lives of the assets, including
capital lease assets which are depreciated over the terms of their respective
leases. The Company uses the following range of useful lives for its property
and equipment categories: buildings and improvements - 1 to 50 years; machinery
and equipment - 3 to 20 years; furniture and fixtures - 7 years. Depreciation
expense was $278.0 million, $249.0 million and $231.2 million for fiscal 2004,
2003 and 2002, respectively. The Company expenses repairs and maintenance
expenditures as incurred. The Company capitalizes interest on long-term fixed
asset projects using a rate of 5.0%, which approximates the Company's weighted
average interest rate on long-term debt. The amount of capitalized interest was
immaterial for all fiscal years presented.
OTHER ACCRUED LIABILITIES. Other accrued liabilities represent various
obligations of the Company including certain accrued operating expenses and
taxes payable. For the fiscal years ended June 30, 2004 and 2003, the largest
component of other accrued liabilities was deferred tax liabilities of
approximately $530.2 million and $566.1 million, respectively. Other significant
components of other accrued liabilities were current taxes payable and employee
compensation and related benefit accruals. For fiscal 2004 and 2003, current
taxes payable were $286.4 million and $224.7 million, respectively, while
employee compensation and related benefit accruals were $310.8 million and
$373.6 million, respectively.
58
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Pharmaceutical Distribution and Provider Services
This segment records distribution revenue when title transfers to its
customers and the business has no further obligation to provide services related
to such merchandise. This revenue is recorded net of sales returns and
allowances (see "Sales Returns and Allowances" below for further information).
This segment also records Bulk Revenue, defined as transactions having any
one or more of the following characteristics: (a) deliveries to customer
warehouses whereby the Company acts as an intermediary in the ordering and
delivery of pharmaceutical products, (b) delivery of products to the customer in
the same form as the products are received from the manufacturer, (c) warehouse
to customer warehouse or process center deliveries, or (d) deliveries to
customers in large or high volume full case quantities. See Notes 1 and 2 for a
further discussion of Bulk Revenue.
This segment also owns certain consignment inventory and recognizes
revenue when that inventory is sold to a third party by the segment's customer.
This segment earns franchise and origination fees from its
apothecary-style pharmacy franchisees. Franchise fees represent monthly fees
based upon franchisees' sales and are recognized as revenue when they are
earned. Origination fees from signing new franchise agreements are recognized as
revenue when the new franchise store is opened.
Pharmacy management and other service revenue is recognized as the
services are rendered according to the contracts established. A fee is charged
under such contracts through a capitated fee, a dispensing fee, a monthly
management fee or an actual costs-incurred arrangement. Under certain contracts,
fees for services are guaranteed by the Company not to exceed stipulated amounts
or have other risk-sharing provisions. Revenue is adjusted to reflect the
estimated effects of such contractual guarantees and risk-sharing provisions.
Medical Products and Services
This segment records distribution and self-manufactured medical product
revenue when title transfers to its customers and the business has no further
obligation to provide services related to such merchandise. This revenue is
recorded net of sales returns and allowances (see "Sales Returns and Allowances"
below for further information).
Pharmaceutical Technologies and Services
Manufacturing and packaging revenue is recognized either upon shipment or
delivery of the product, in accordance with the terms of the contract which
specify when transfer of title occurs. Radiopharmaceutical revenue is recognized
upon delivery of the product to the customer. Other revenue from services
provided, such as development or sales and marketing services, is recognized
upon the completion of such services.
Drug delivery system revenue is recognized upon shipment of products to
the customer. Non-product revenue includes annual exclusivity fees, option fees
to extend exclusivity agreements and milestone payments for attaining certain
regulatory approvals. This segment receives exclusivity payments from certain
manufacturers in return for its commitment not to enter into agreements to
manufacture competing products. The revenue related to these agreements is
recognized over the term of the exclusivity or the term of the option agreement
unless a particular milestone is designated, in which case revenue is recognized
when all obligations of performance have been completed.
Analytical science revenue from fixed contracts is recorded as projects
are completed and billed. Projects are primarily for a short-term duration.
Certain contracts contain provisions for price redetermination for cost
overruns. Such amounts are included in service revenue when realization is
assured and the amounts are reasonably determined.
Automation and Information Services
Revenue is recognized from sales-type leases of point-of-use systems once
the Company's installation obligations are complete and the equipment is
functioning according to material specifications of the user's manual and the
customer has accepted the equipment, as evidenced by signing an equipment
confirmation document. At this point, the lease becomes noncancellable (see Note
16 for additional information). Interest income on sales-type leases is
recognized in revenue using the interest method. Sales of point-of-use systems
are recognized upon installation at the customer site. Revenue for systems
installed under operating lease arrangements is recognized over the lease term
as such amounts become receivable according to the provisions of the lease.
59
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALARIS Medical Systems, Inc. ("ALARIS")
The Company's recently acquired subsidiary, ALARIS, recognizes revenue,
net of an allowance for estimated returns and credits, upon delivery and/or
installation (depending on the product) and once transfer of title and risk of
loss have occurred. ALARIS frequently enters into revenue arrangements with
multiple deliverables, which, depending on the nature of the contract terms, are
subject to the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition," Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" or Statement of Position 97-2,
"Software Revenue Recognition."
SALES RETURNS AND ALLOWANCES. Pharmaceutical distribution revenue is recorded
net of sales returns and allowances. The Pharmaceutical Distribution business
recognizes sales returns as a reduction of revenue and cost of sales for the
sales price and cost, respectively, when products are returned. The
Pharmaceutical Distribution business' customer return policy requires that the
product be physically returned, subject to restocking fees, and only allows
customers to return products which can be added back to inventory and resold at
full value, or which can be returned to vendors for credit. Product returns are
generally consistent throughout the year, and typically are not specific to any
particular product or customer. Amounts recorded in revenue and cost of sales
under this accounting policy closely approximate what would have been recorded
under SFAS No. 48, "Revenue Recognition When Right of Return Exists." Applying
the provisions of SFAS No. 48 would not materially change the Company's
financial position and results of operations. Sales returns and allowances for
the Pharmaceutical Distribution business were approximately $1.3 billion, $1.2
billion, and $1.0 billion in fiscal 2004, 2003 and 2002, respectively.
Distributed and self-manufactured medical product revenue is recorded
net of sales returns and allowances. The Medical Products and Services segment
has established a reserve against returned goods in accordance with SFAS No. 48.
This reserve amount was immaterial for all periods presented. This segment's
customer return policy requires that the product be physically returned, subject
to restocking fees, and only allows customers to return products which can be
added back to inventory and resold at full value, or which can be returned to
vendors for credit. Product returns are generally consistent throughout the
year, and typically are not specific to any particular product or customer.
Sales returns and allowances for the Medical Products and Services segment were
approximately $56.9 million, $55.6 million and $53.1 million in fiscal 2004,
2003 and 2002, respectively.
CASH DISCOUNTS. Cash discounts are recorded as a component of inventory cost and
recognized as a reduction of cost of products sold when related inventory is
sold. See Note 16 for further information regarding cash discounts and the
change in accounting method adopted in 2004.
ACCOUNTING FOR VENDOR RESERVES. In the ordinary course of business, vendors may
challenge deductions or billings taken against payments otherwise due them from
the Company. These contested transactions are researched and resolved based upon
Company policy and findings of the research performed. At any given time, there
are outstanding items in various stages of research and resolution. In
determining an appropriate vendor reserve, the Company assesses historical
information and current outstanding claims. The ultimate outcome of certain
claims may be different than the Company's original estimate and may require
adjustment.
SHIPPING AND HANDLING. Shipping and handling costs are included in selling,
general and administrative expenses in the consolidated statements of earnings.
Shipping and handling costs include all delivery expenses as well as all costs
to prepare the product for shipment to the end customer. Shipping and handling
costs totaled $250.3 million, $213.8 million and $211.9 million for fiscal 2004,
2003 and 2002, respectively. Shipping and handling revenue received was
immaterial for all periods presented.
TRANSLATION OF FOREIGN CURRENCIES. Financial statements of the Company's
subsidiaries outside the U.S. generally are measured using the local currency as
the functional currency. Adjustments to translate the assets and liabilities of
these foreign subsidiaries into U.S. dollars are accumulated in a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are included in the consolidated statements of earnings and were immaterial for
the fiscal years ended June 30, 2004, 2003 and 2002.
INTEREST RATE AND CURRENCY RISK MANAGEMENT. The Company accounts for derivative
instruments in accordance with SFAS No. 133, as amended, "Accounting for
Derivatives and Hedging Activity." Under this standard, all derivative
instruments are recorded at fair value on the balance sheet and all changes in
fair value are recorded to net earnings or shareholders' equity through other
comprehensive income.
The Company uses forward currency exchange contracts, currency options and
interest rate swaps to manage its exposures to the variability of cash flows
primarily related to the foreign exchange rate changes of future foreign
currency transaction costs and to the interest rate changes on borrowing costs.
These contracts are designated as cash flow hedges.
60
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also uses interest rate swaps to hedge changes in the value of
fixed rate debt due to variations in interest rates. Both the derivative
instruments and underlying debt are adjusted to market value through "interest
expense and other" at the end of each period. The Company uses foreign currency
forward contracts to protect the value of existing foreign currency assets and
liabilities. The remeasurement adjustments for any foreign currency denominated
assets or liabilities are included in "interest expense and other." The
remeasurement adjustment is offset by the foreign currency forward contract
settlements which are also classified in "interest expense and other." Both
interest rate swaps and foreign currency forward contracts are designated as
fair value hedges.
The Company generally does not use derivative instruments for trading or
speculative purposes. During fiscal 2003, the Company entered into one
speculative interest rate swap transaction resulting in a gain of approximately
$6.7 million.
The Company's derivative contracts are adjusted to current market values
each period and qualify for hedge accounting under SFAS No.133. Periodic gains
and losses of contracts designated as cash flow hedges are deferred in other
comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in net earnings as an adjustment
to the carrying amounts of underlying transactions in the period in which these
transactions are recognized. For those contracts designated as fair value
hedges, resulting gains or losses are recognized in net earnings offsetting the
exposures of underlying transactions. Carrying values of all contracts are
included in other assets or liabilities.
The Company's policy requires contracts used as hedges must be effective
at reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Hedging effectiveness is
assessed periodically. Any contract not designated as a hedge, or so designated
but ineffective, is adjusted to market value and recognized in net earnings
immediately. If a fair value or cash flow hedge ceases to qualify for hedge
accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the
contract's fair value would be recognized in earnings immediately. If a
forecasted transaction were no longer probable to occur, amounts previously
deferred in other comprehensive income would be recognized immediately in
earnings. Additional disclosure related to the Company's hedging contracts is
provided in Note 7.
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with development of
new products and manufacturing methods are charged to expense as incurred.
Research and development expenses were $56.5 million, $56.9 million and $65.1
million in fiscal 2004, 2003 and 2002, respectively.
INCOME TAXES. In accordance with provisions of SFAS No. 109, "Accounting for
Income Taxes," the Company accounts for income taxes using the asset and
liability method. The asset and liability method requires recognition of
deferred tax assets and liabilities for expected future tax consequences of
temporary differences that currently exist between tax bases and financial
reporting bases of the Company's assets and liabilities. No provision is made
for U.S. income taxes on undistributed earnings of foreign subsidiaries because
those earnings are considered permanently reinvested in the operations of those
subsidiaries.
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options, computed using
the treasury stock method.
DIVIDENDS. Excluding dividends paid by all entities with which the Company has
merged, the Company paid cash dividends per Common Share of $0.12, $0.10 and
$0.10 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.
RECENT FINANCIAL ACCOUNTING STANDARDS. In December 2003, the Financial
Accounting Standards Board ("FASB") issued a revision to SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits." The
revision relates to employers' disclosures about pension plans and other
postretirement benefit plans. The revision does not alter the measurement or
recognition provisions of the original SFAS No. 132. The revision requires
additional disclosures regarding assets, obligations, cash flows and net
periodic benefit costs of
61
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pension plans and other defined benefit postretirement plans. Excluding certain
disclosure requirements, the revised SFAS No. 132 is effective for financial
statements with fiscal years ended after December 15, 2003 (see Note 9 for the
Company's disclosures).
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities." This revised Interpretation
defines when a business enterprise must consolidate a variable interest entity.
The revised Interpretation provisions are effective for variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. The revised Interpretation provisions apply to all
other types of variable interest entities for financial statement periods ending
after March 15, 2004. As of June 30, 2004, the Company did not hold a
significant variable interest in a variable interest entity in which the Company
is not the primary beneficiary. See Note 6 for discussion of the Company's
accounts receivable and financing entity which is included in the consolidated
financial statements as the Company is the primary beneficiary of the variable
interest entity. Adoption of the subsequent provisions of the Interpretation did
not have a material impact on the Company's financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the financial accounting and reporting requirements as originally
established in SFAS No. 133 for derivative instruments and hedging activities.
SFAS No. 149 provides greater clarification of the characteristics of a
derivative instrument so that contracts with similar characteristics will be
accounted for consistently. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, as well as for hedging relationships designated
after June 30, 2003, excluding certain implementation issues that have been
effective prior to this date under SFAS No. 133. The adoption of SFAS No. 149
did not have a material effect on the Company's financial position or results of
operations.
62
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123. This statement provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation and amends the disclosure requirements of
SFAS No. 123. The transition guidance and annual disclosure provisions (shown
below) are effective for fiscal years ending after December 15, 2002. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations.
At June 30, 2004, the Company maintained several stock incentive plans for
the benefit of certain employees, which are more fully described in Note 14. The
Company accounts for these plans in accordance with Accounting Principles
Bulletin ("APB") 25, and related interpretations. Except for costs related to
restricted shares and restricted share units, no compensation expense has been
recognized in net earnings, as all options granted had an exercise price equal
to the market value of the underlying stock on the date of grant. The following
tables illustrate the effect on net earnings and earnings per share if the
Company adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
Fiscal Year Ended June 30,
--------------------------------------------------------
2004 2003 2002
--------------------------------------------------------
(in millions, except per Common Share amounts) Restated Restated
Net Earnings, as reported $ 1,474.5 $ 1,375.1 $ 1,070.7
Restricted share amortization included in net
earnings, net of related tax effects 2.0 1.8 2.7
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (1) (104.3) (91.6) (79.1)
--------- --------- ---------
Pro Forma net earnings $ 1,372.2 $ 1,285.3 $ 994.3
========= ========= =========
Fiscal Year Ended June 30,
--------------------------------------------------------
2004 2003 2002
--------------------------------------------------------
Restated Restated
Basic earnings per Common Share:
As reported $ 3.39 $ 3.08 $ 2.37
Pro Forma basic earnings per Common Share $ 3.16 $ 2.88 $ 2.21
Diluted earnings per Common Share
As reported $ 3.35 $ 3.03 $ 2.33
Pro Forma diluted earnings per Common Share (2) $ 3.14 $ 2.85 $ 2.17
(1) The total stock-based employee compensation expense was adjusted to
include employee stock purchase plan expense of $8.4 million, $6.8
million and $6.9 million for the fiscal years ended June 30, 2004,
2003 and 2002, respectively.
(2) The Company uses the treasury stock method when calculating diluted
earnings per Common Share as presented in the table above. Under the
treasury stock method, diluted shares outstanding is adjusted for
the weighted-average unrecognized compensation component should the
Company adopt SFAS 123.
The information in the table above has been revised with respect to an
option award previously granted to the Company's Chairman and Chief Executive
Officer in November 1999. For more information, see Note 14.
63
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS COMBINATIONS, SPECIAL ITEMS & MERGER-RELATED COSTS
POLICY
The Company's special items primarily consist of costs relating to the
integration of previously acquired companies or costs of restructuring
operations to improve productivity. Integration costs from acquisitions
accounted for under the pooling of interests method have been recorded in
accordance with 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)," and SAB No. 100, "Restructuring and
Impairment Charges." Certain costs related to these acquisitions, such as
employee and lease terminations and other facility exit costs, were recognized
at the date the integration plan was adopted by management. Certain other
integration costs not meeting the criteria for accrual at the commitment date
have been expensed as the integration plan has been implemented.
Costs associated with integrating acquired companies under the purchase
method are recorded in accordance with EITF Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." Certain costs
to be incurred by the Company, as the acquirer, such as employee and lease
terminations and other facility exit costs, are recognized at the date the
integration plan is formalized and adopted by management. Certain other
integration costs not meeting the criteria for accrual at the commitment date
are expensed as the integration plan is implemented.
At the beginning of the third quarter of fiscal 2003, the Company
implemented SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," to account for costs incurred in restructuring activities. Under
this standard, a liability for an exit cost is recognized as incurred. As
discussed above, the Company previously accounted for costs associated with
restructuring activities under EITF Issue No. 94-3, which required the Company
to recognize a liability for restructuring costs on the date of the commitment
to an exit plan.
The Company records settlements of significant lawsuits that are
infrequent, non-recurring or unusual in nature as special items. Also, the
Company records, from time to time, material charges that are one-time, unusual
or infrequent in nature as special items.
BUSINESS COMBINATIONS
FISCAL 2004. On June 28, 2004, the Company acquired approximately 98.7% of the
outstanding common stock of ALARIS, a San Diego, California-based company which
is a leading provider of intravenous medication safety products and services. On
July 7, 2004, ALARIS merged with a subsidiary of the Company to complete the
transaction. The acquisition extends the Company's portfolio of market leading
products and services to health care providers, and increases its presence in
strategic markets outside the United States. With complementary operations,
product lines, distribution networks and geographic presence, the acquisition
will enable the Company to broaden integrated product and service offerings,
better serve customers globally and deliver a comprehensive suite of medication
safety solutions.
This acquisition was accounted for under the purchase method of
accounting. The cash transaction was valued at approximately $2.1 billion,
including the assumption of approximately $358 million of debt. Under the
agreement, the Company agreed to make a cash tender offer to acquire all of the
outstanding shares of ALARIS common stock at a price of $22.35 per share. ALARIS
employees with outstanding stock options either elected to receive a cash
payment or convert their options into an option to purchase the Company's Common
Shares. In July 2004, certain ALARIS employees elected to convert their options
for the right to purchase a total of approximately 0.6 million Common Shares of
the Company.
The preliminary allocation of the ALARIS purchase price resulted in an
allocation to goodwill of approximately $1.5 billion and an allocation to
identifiable intangible assets of $413.2 million. The Company valued intangible
assets related to trademarks, trade names, patents and customer relationships.
The detail by category is as follows:
Amount Average
Category (in millions) Life (Years)
-------- ------------- ------------
Trademarks and trade names $ 153.8 Indefinite
Patents 108.2 10
Customer relationships 151.2 8
-------
Total intangible assets acquired $ 413.2
=======
Given the size and timing of the acquisition, the allocation of the
purchase price is not yet finalized and is subject to adjustment. The Company
worked with a third-party valuation expert to determine the fair value of
in-process research and development ("IPR&D") and the fair value of identifiable
intangible assets. As required by SFAS 141 "Business Combinations,"
64
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts assigned to tangible and intangible assets to be used in research and
development projects that have no alternate future use were charged to expense
at the acquisition date. The Company recorded a charge of $12.7 million, within
special items in the Company's consolidated statement of earnings, for an
estimate of acquired IPR&D.
Supplemental pro forma results of operations are not disclosed as the
impact to the Company from the ALARIS acquisition was not material. The
consolidated financial statements include the results of operations as of June
28, 2004.
Prior to the completion of the ALARIS acquisition, on June 16, 2004, ICU
Medical, Inc. filed a patent infringement lawsuit against ALARIS in the United
States District Court for the Southern District of California. In the lawsuit,
ICU claims that the ALARIS SmartSite(R) family of needle-free valves and systems
infringes upon ICU patents. ICU seeks monetary damages plus permanent injunctive
relief preventing ALARIS from selling SmartSite(R) products. On July 30, 2004,
the Court denied ICU's application for a preliminary injunction finding, among
other things, that ICU had failed to show a substantial likelihood of success on
the merits. The Company intends to vigorously defend this action.
During December 2003, the Company completed its acquisition of The
Intercare Group, plc ("Intercare"), a leading European pharmaceutical products
and services company. This acquisition increased the Company's scale of
proprietary sterile manufacturing and broadened its participation in the
fast-growing European generic (including manufacturing capabilities) and
injectible product market. The cash transaction was valued at approximately $570
million, including the assumption of approximately $150 million in Intercare
debt.
In addition, during fiscal 2004, the Company also completed other
acquisitions that individually were not material and were accounted for under
the purchase method of accounting. The aggregate purchase price of these
individually immaterial acquisitions, which was paid in cash, was approximately
$168 million. Assumed liabilities of acquired businesses, including those of
ALARIS and Intercare, were approximately $1.1 billion. The consolidated
financial statements include the results of operations from each of these
business combinations as of the date of acquisition. Had the transactions,
including ALARIS and Intercare, occurred on July 1, 2001, results of operations
would not have differed materially from reported results.
FISCAL 2003. On January 1, 2003, the Company completed the acquisition of Syncor
International Corporation, a Woodland Hills, California-based company (which has
been given the legal designation of Cardinal Health 414, Inc., and is referred
to in these "Notes to Consolidated Financial Statements" as "Syncor"), which is
a leading provider of nuclear pharmacy services. This acquisition was accounted
for under the purchase method of accounting. The Company issued approximately
12.5 million Common Shares, valued at approximately $780 million, to Syncor
stockholders and Syncor's outstanding stock options were converted into options
to purchase approximately 3.0 million Common Shares. The Company also assumed
approximately $120 million in debt. In connection with this acquisition, certain
operations of Syncor have been or will be sold (see Note 21) and other
operations have been integrated with the Company's existing Nuclear Pharmacy
Services business, a component of the Pharmaceutical Technologies and Services
segment.
In addition, during fiscal 2003, the Company also completed other
acquisitions that individually were not material and were accounted for under
the purchase method of accounting. The aggregate purchase price of these
individually immaterial acquisitions, which was paid in cash, was approximately
$14.4 million. Assumed liabilities of the acquired businesses, including those
of Syncor, were approximately $340.1 million. The consolidated financial
statements include the results of operations from each of these business
combinations as of the date of acquisition. Had the transactions, including
Syncor, occurred on July 1, 2001, results of operations would not have differed
materially from reported results.
FISCAL 2002. During fiscal 2002, the Company completed several acquisitions that
individually were not material and were accounted for under the purchase method
of accounting. These business combinations primarily focused on expanding the
service offerings within the Pharmaceutical Technologies and Services segment to
include contract pharmaceutical development and integrated medical education.
The aggregate purchase price, which was paid primarily in cash, was
approximately $418.0 million. The Company issued approximately 0.3 million
Common Shares to stockholders and outstanding stock options were converted into
options to purchase a total of approximately 1.0 million Common Shares. Assumed
liabilities of the acquired businesses were approximately $93.5 million,
including debt of $11.1 million. The consolidated financial statements include
the results of operations from each of these business combinations subsequent to
the date of acquisition. Had these transactions occurred on July 1, 2001,
results of operations would not have differed materially from reported results.
65
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPECIAL ITEMS & MERGER-RELATED COSTS.
The following is a summary of the Company's special items for fiscal years
ended June 30, 2004, 2003 and 2002.
Fiscal Year Ended June 30,
---------------------------------------
(in millions, except per Common Share amounts) 2004 2003 2002
---------------------------------------------- ---------------------------------------
Restated
Merger-related costs $ 44.7 $ 74.4 $ 131.9
Restructuring costs 37.1 67.0 18.5
Litigation settlements, net (62.3) (101.5) (33.8)
Other special items 37.9 - -
------- -------- -------
Total special items 57.4 39.9 116.6
Tax effect of special items (1) (21.8) (6.7) (42.9)
------- -------- -------
Net earnings effect of special items 35.6 33.2 73.7
======= ======== =======
Net decrease on Diluted EPS $ 0.08 $ 0.07 $ 0.16
======= ======== =======
(1) The Company applies varying tax rates to its special items depending
upon the tax jurisdiction where the item was incurred. The overall
effective tax rate varies each period depending upon the unique
nature of the Company's special items and the tax jurisdiction where
the item was incurred.
Merger-Related Costs
Costs of integrating operations of various merged companies are recorded
as merger-related costs when incurred. The merger-related costs incurred during
fiscal 2004 were primarily a result of the Syncor acquisition. Merger-related
costs incurred during fiscal 2003 and 2002 were primarily a result of the
Bindley Western Industries, Inc. (which has been given the legal designation of
Cardinal Health 100, Inc., and is referred to in these "Notes to Consolidated
Financial Statements" as "Bindley") acquisition. During the fiscal years noted
above, the Company also incurred merger-related costs for numerous smaller
acquisitions. The following table and paragraphs provide additional detail
regarding the types of merger-related costs incurred by the Company.
Fiscal Year Ended June 30,
-------------------------------------
(in millions) 2004 2003 2002
------------- -------------------------------------
Merger-related costs:
Employee-related costs $11.9 $18.7 $ 23.7
Pharmaceutical distribution center consolidation 0.1 22.7 52.4
Asset impairments & other exit costs 0.9 5.4 9.0
In-Process research & development 12.7 - -
Integration costs and other 19.1 27.6 46.8
----- ----- ------
Total merger-related costs $44.7 $74.4 $131.9
===== ===== ======
EMPLOYEE-RELATED COSTS. During fiscal 2004, 2003 and 2002, the Company
incurred employee-related costs associated with certain merger and acquisition
transactions of $11.9 million, $18.7 million and $23.7 million, respectively.
These costs primarily consist of severance, stay bonuses, non-compete agreements
and other forms of compensatory payouts made to employees as a direct result of
the mergers or acquisitions. In addition to these types of costs, during fiscal
2003, the Company incurred a charge of $8.8 million related to an approved plan
to curtail defined benefit pension plans within the Pharmaceutical Technologies
and Services segment. This curtailment resulted from the plan to conform the
employee benefit plans of R.P. Scherer Corporation (which was acquired in August
1998, has been given the legal designation of Cardinal Health 409, Inc. and is
referred to in these "Notes to Consolidated Financial Statements" as "Scherer")
to the Company's benefit plan structure at the time of the Scherer merger.
PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During fiscal 2004, 2003
and 2002, the Company incurred charges of $0.1 million, $22.7 million and $52.4
million, respectively, primarily associated with the Company's plans to close
and consolidate a total of 16 Bindley distribution centers, Bindley's corporate
office and one of the Company's data centers as a result of the Bindley
acquisition. These charges include, but are not limited to, the following: (1)
employee-related costs, primarily from the termination of approximately 1,250
employees due to the closures and consolidations noted above; (2) exit costs to
consolidate and close the various facilities mentioned above, including asset
impairment charges, inventory move costs and contract/lease termination costs;
and (3) duplicate salary costs incurred during the shutdown periods.
66
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSET IMPAIRMENTS & OTHER EXIT COSTS. During fiscal 2004, 2003 and 2002,
the Company incurred asset impairment and other exit costs of $0.9 million, $5.4
million and $9.0 million, respectively. The asset impairment and other exit
costs incurred during fiscal 2004 related primarily to plans to consolidate
operations as a result of the Syncor acquisition. The asset impairment and other
exit costs incurred during fiscal 2003 and 2002 related primarily to plans to
close and consolidate facilities as a result of the Bergen Brunswig Medical
Corporation acquisition as well as asset impairments, lease terminations and
other exit costs incurred internationally as a result of the Scherer
acquisition.
IN-PROCESS RESEARCH & DEVELOPMENT. During the fourth quarter of fiscal
2004, the Company recorded a charge of $12.7 million related to the writeoff of
in-process research and development costs associated with the ALARIS
acquisition.
OTHER INTEGRATION COSTS. During fiscal 2004, 2003 and 2002, the Company
incurred integration costs and other of $19.1 million, $27.6 million and $46.8
million, respectively. The costs included in this category generally relate to
expenses incurred to integrate merged or acquired companies' operations and
systems into the Company's pre-existing operations and systems. These costs
include, but are not limited to, the integration of information systems,
employee benefits and compensation, accounting/finance, tax, treasury, internal
audit, risk management, compliance, administrative services, sales and marketing
and others.
Restructuring Costs
The following table segregates the Company's restructuring costs into the
various reporting segments the restructuring projects impacted. See the
paragraphs that follow for additional information regarding the Company's
restructuring plans.
Fiscal Year Ended June 30,
-------------------------------------
(in millions) 2004 2003 2002
------------- ------------------------------------
Restructuring costs:
Pharmaceutical Distribution and Provider Services - $ 1.4 $ 0.3
Medical Products and Services 8.7 23.6 14.9
Pharmaceutical Technologies and Services 23.3 40.7 2.8
Automation and Information Services 4.2 - -
Other 0.9 1.3 0.5
----- ----- ------
Total restructuring costs $37.1 $67.0 $ 18.5
===== ===== ======
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. During the fiscal years
noted above, the Company has initiated very few restructuring projects that
impacted the Pharmaceutical Distribution and Provider Services segment. Costs
incurred during fiscal 2003 and 2002 primarily comprised employee-related costs
incurred to reduce headcount for certain businesses within the segment and to
realign the management structure of those businesses. These restructuring
projects resulted in approximately 30 employees being terminated, the majority
of which occurred during fiscal 2003. The restructuring projects that impacted
the Pharmaceutical Distribution and Provider Services segment were substantially
completed by the end of fiscal 2003.
MEDICAL PRODUCTS AND SERVICES. During fiscal 2004, 2003 and 2002, the
Company incurred costs of $8.7 million, $23.6 million and $14.9 million,
respectively, to restructure operations both domestically and internationally.
These restructuring plans focused on various aspects of the segment's
operations, specifically to close and consolidate certain manufacturing
operations, rationalize headcount both domestically and internationally, and
align certain distribution and manufacturing operations in the most strategic
and cost efficient structure. In connection with the implementation of these
restructuring plans, the Company incurred costs which included, but are not
limited to, the following: (1) employee-related costs, the majority of which
represents severance accrued upon either communication of terms to employees or
management's commitment to the restructuring plan, depending upon the project;
and (2) exit costs, including asset impairment charges, costs incurred to
relocate physical assets and project management costs. The earliest of these
restructuring plans was initiated during fiscal 2002, with others being
implemented throughout fiscal 2003 and 2004. Some of these restructuring plans
were completed during fiscal 2003 and 2004, while other plans will be completed
throughout fiscal 2005. Overall, these restructuring plans will result in
termination of approximately 2,200 employees, of which approximately 1,900 had
been terminated as of June 30, 2004.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES. During fiscal 2004, 2003 and
2002, the Company incurred costs of $23.3 million, $40.7 million and $2.8
million, respectively, to restructure operations both domestically and
internationally. These restructuring plans focused on various aspects of the
segment's operations, specifically to close and consolidate certain
manufacturing and other
67
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business facilities, exit non-strategic businesses, integrate and align
operations in the most strategic and cost efficient manner and rationalize
headcount both domestically and internationally as a result of integration plans
and market changes. In connection with the implementation of these restructuring
plans, the Company incurred costs which included, but are not limited to, the
following: (1) employee-related costs, the majority of which represents
severance accrued upon communication of terms to employees; (2) asset impairment
charges, including the writedown of physical assets as well as goodwill
writeoffs from the exit of non-strategic and non-integrated businesses; and (3)
other exit costs, including lease/contract termination costs, costs to dismantle
and move machinery, equipment and other physical assets and costs to transfer
certain technologies to other existing facilities. The earliest of these
restructuring plans was initiated during fiscal 2001, with others being
implemented throughout fiscal 2003 and 2004. Some of the restructuring plans
were completed during fiscal 2003 and 2004, while other plans will be completed
throughout fiscal 2005. Overall, these restructuring plans will result in the
termination of approximately 1,000 employees, of which approximately 900 had
been terminated as of June 30, 2004.
AUTOMATION AND INFORMATION SERVICES. During fiscal 2004, the Company
incurred restructuring costs of $4.2 million related to plans to exit or dispose
of certain non-strategic businesses as well as close a manufacturing facility
within this segment. In connection with the implementation of these
restructuring plans, the Company incurred employee-related costs, primarily
severance accrued upon communication of terms to employees, asset impairment
charges and facility exit costs. The Company expects these restructuring plans
to be completed during fiscal 2005. Overall, these restructuring plans will
result in the termination of approximately 35 employees, of which approximately
10 had been terminated as of June 30, 2004.
OTHER. During fiscal 2004, 2003 and 2002, the Company incurred costs of
$0.9 million, $1.3 million and $0.5 million related to restructuring plans that
impacted more than just one segment. These costs related primarily to a plan to
restructure the Company's delivery of information technology infrastructure
services. These plans were initiated during fiscal 2003 and are expected to be
completed during fiscal 2005. Overall, these restructuring plans resulted in the
termination of approximately 20 employees, all of which had been terminated as
of June 30, 2004.
Litigation Settlements, Net
The following table summarizes the Company's net litigation settlements
during fiscal 2004, 2003 and 2002.
Fiscal Year Ended June 30,
--------------------------------------
(in millions) 2004 2003 2002
------------- --------------------------------------
Restated
Litigation settlements, net:
Vitamin litigation ($ 6.5) ($102.9) ($35.3)
Pharmaceutical manufacturer antitrust litigation (55.9) - -
Other litigation 0.1 1.4 1.5
------ ------- ------
Total litigation settlements, net ($62.3) ($101.5) ($33.8)
====== ======= ======
VITAMIN LITIGATION. During fiscal 2004, 2003 and 2002, the Company
recorded income of $6.5 million, $102.9 million and $35.3 million, respectively,
resulting from the recovery of antitrust claims against certain vitamin
manufacturers for amounts overcharged in prior years. The total recovery of
antitrust claims against certain vitamin manufacturers through June 30, 2004 was
$144.7 million (net of attorney fees, payments due to other interested parties
and expenses withheld). See Note 1 for additional information regarding the
periods in which these recoveries were recorded. The Company has settled all but
one known claim, and the total amount of any future recovery is not likely to be
a material amount.
PHARMACEUTICAL MANUFACTURER ANTITRUST LITIGATION. During fiscal 2004, the
Company recorded income of $55.9 million resulting from settlement of antitrust
claims alleging certain prescription drug manufacturers took improper actions to
delay or prevent generic drug competition.
OTHER LITIGATION. During fiscal 2004, 2003 and 2002, the Company recorded
settlement charges of $0.1 million, $1.4 million and $1.5 million, respectively,
related to certain immaterial litigation matters, all of which have been fully
resolved.
Other Special Items
FISCAL 2004. During fiscal 2004, the Company incurred other special items
totaling $37.9 million. This total comprises two items. First, the Company
executed a special contribution to The Cardinal Health Foundation during the
fourth quarter which totaled approximately $31.7 million. The special
contribution was executed as a direct result of a large pharmaceutical
manufacturer antitrust litigation settlement received during the fourth quarter.
The Cardinal Health Foundation is the
68
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
primary vehicle used by the Company to provide charitable support to the
community and various organizations. Prior contributions to the Cardinal Health
Foundation were immaterial. Second, the Company incurred costs of $6.2 million
during the fourth quarter related to the SEC investigation and the Audit
Committee's internal review. These costs primarily represent legal fees and
document preservation and production costs incurred in responding to requests
related to the SEC's investigation and the Audit Committee's internal review.
Prior costs incurred related to these matters were immaterial. For further
information regarding the SEC's investigation and the Audit Committee's internal
review, see Note 1.
Special Items Accrual Rollforward
The following table summarizes activity related to liabilities associated
with the Company's special items.
Fiscal Year Ended June 30,
---------------------------------------
($ in millions) 2004 2003 2002
---------------------------------------
Balance at beginning of year $ 45.7 $ 64.7 $ 34.7
Additions (1) 119.8 142.8 151.9
Payments (125.6) (161.8) (121.9)
-------- -------- --------
Balance at end of year $ 39.9 $ 45.7 $ 64.7
======== ======== ========
(1) Amounts represent items that have been expensed as incurred or
accrued in accordance with GAAP. These amounts do not include gross
litigation settlement income recorded during fiscal 2004, 2003 and
2002 of $62.4 million, $102.9 million and $35.3 million,
respectively, which were recorded as special items.
Purchase Accounting Accruals
In connection with restructuring and integration plans related to
Intercare, the Company accrued, as part of its acquisition adjustments, a
liability of $10.4 million related to employee termination and relocation costs
and $11.0 million related to closing of certain facilities. During fiscal 2004,
the Company paid $1.5 million of employee-related costs. No payments were made
associated with the facility closures during fiscal 2004.
In connection with restructuring and integration plans related to Syncor,
the Company accrued, as part of its acquisition adjustments, a liability of
$15.1 million related to employee termination and relocation costs and $10.4
million related to closing of duplicate facilities. As of June 30, 2004, the
Company had paid $12.0 million of employee related costs, $1.0 million
associated with the facility closure and $1.5 million of other restructuring
costs.
Other
Certain merger, acquisition and restructuring costs are based upon
estimates. Actual amounts paid may ultimately differ from these estimates. If
additional costs are incurred or recorded amounts exceed costs, such changes in
estimates will be recorded in special items when incurred.
The Company estimates it will incur additional costs in future periods
associated with various mergers, acquisitions and restructuring activities
totaling approximately $70 million (approximately $45 million net of tax). The
Company believes it will incur these costs to properly integrate and rationalize
operations, a portion of which represents facility rationalizations and
implementing efficiencies regarding information systems, customer systems,
marketing programs and administrative functions, among other things. Such
amounts will be expensed as special items when incurred. This estimate does not
include costs associated with the integration of ALARIS or the Company-wide
restructuring project announced in September 2004 as the Company is still in the
process of determining the costs associated with these projects.
69
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASES
SALES-TYPE LEASES. The Company's sales-type leases are for terms generally
ranging up to five years. Lease receivables are generally collateralized by the
underlying equipment. The components of the Company's net investment in
sales-type leases are as follows (in millions):
June 30, June 30,
2004 2003
-------- ---------
Future minimum lease payments receivable $ 844.0 $ 840.5
Unguaranteed residual values 21.6 18.6
Unearned income (101.8) (112.2)
Allowance for uncollectible minimum lease payments
receivable (15.7) (17.8)
--------- ----------
Net investment in sales-type leases 748.1 729.1
Less: current portion 202.1 171.8
--------- ----------
Net investment in sales-type leases, less current portion $ 546.0 $ 557.3
========= ==========
Future minimum lease payments to be received pursuant to sales-type leases
during the next five fiscal years and thereafter are:
During fiscal 2004 and 2003, the Company entered into four separate
agreements (two in fiscal 2004 and two in fiscal 2003) to transfer ownership of
certain lease receivables along with a security interest in the related leased
equipment to the leasing subsidiary of a bank. The net book value of the leases
sold was $314.2 million and $356.0 million for fiscal 2004 and 2003,
respectively (see Note 10 for additional information).
70
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE & LONG-TERM OBLIGATIONS
NOTES PAYABLE, BANKS. The Company has entered into an unsecured, uncommitted
line-of-credit arrangement that allows for borrowings up to $7.3 million at June
30, 2004, at an interest rate of 55 basis points over three month Euro Libor. At
June 30, 2004, $5.6 million was outstanding under this arrangement, at an
effective interest rate of 2.13%. Total available but unused lines of credit at
June 30, 2004 were $1.7 million. At June 30, 2003, there were no notes payable
outstanding.
LONG-TERM OBLIGATIONS. Long-term obligations consist of the following (in
millions):
June 30, June 30,
2004 2003
-------- ---------
4.00% Notes due 2015 $ 432.9 $ 475.7
4.45% Notes due 2005 305.5 317.8
6.00% Notes due 2006 151.6 158.0
6.25% Notes due 2008 150.0 150.0
6.50% Notes due 2004 - 100.0
6.75% Notes due 2011 497.0 495.4
6.75% Notes due 2004 - 100.0
7.25% Senior subordinated notes due 2011 195.3 -
7.30% Notes due 2006 130.3 135.2
7.80% Debentures due 2016 75.7 75.7
7.00% Debentures due 2026 192.0 192.0
Bank term loan due 2009 162.6 -
Commercial paper 634.2 -
Preferred debt securities 650.0 400.0
Short-term borrowings, reclassified 15.0 21.0
Other obligations; interest averaging 4.65% in 2004 and
5.29% in 2003, due in varying installments
through 2015 97.6 79.8
--------- ----------
Total 3,689.7 2,700.6
Less: current portion 855.0 228.7
--------- ----------
Long-term obligations, less current portion $ 2,834.7 $ 2,471.9
========= ==========
The 4.00%, 4.45%, 6.00%, 6.25% and 6.50% Notes and the 6.75% Notes due
2011 represent unsecured obligations of the Company, and the 6.75% Notes due
2004 represent unsecured obligations of Scherer, which are guaranteed by the
Company. The 7.30% Notes and the 7.80% and 7.00% Debentures represent unsecured
obligations of Allegiance Corporation, which are guaranteed by the Company.
These obligations are not subject to a sinking fund and are not redeemable prior
to maturity, except for the 7.00% Debentures which included put options that
expired on September 15, 2003, without any put options being exercised. Interest
is paid pursuant to the terms of the notes. These notes are structurally
subordinated to the liabilities of the Company's subsidiaries, including trade
payables of $6.4 billion and $650.0 million of preferred debt securities.
As part of the Company's acquisition of ALARIS, the Company assumed $195.3
million of Senior subordinated notes due 2011, which includes a premium of $20.3
million based on the fair value of the debt. The Senior subordinated notes bear
interest at an annual rate of 7.25%, which is payable semi-annually in arrears
on July 1 and January 1 of each year, commencing January 1, 2004, and mature on
July 1, 2011. The Senior subordinated notes are redeemable at the option of the
Company, in whole or in part, at any time on or after July 1, 2007 at an initial
redemption price of 103.625%, plus accrued and unpaid interest, if any, to the
date of redemption, with the redemption price declining annually thereafter. In
addition, subject to certain limitations, the Company may redeem up to 35% of
the Senior subordinated notes on or before July 1, 2006 with the net cash
proceeds of one or more equity offerings, at a price of 107.25%, plus accrued
and unpaid interest, if any, to the date of redemption. In the event of a change
of control, as defined in the indenture governing the Senior subordinated notes,
holders may require the Company to purchase their Senior subordinated notes at
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of repurchase. The Senior subordinated notes are subject to certain
restrictive and reporting covenants. As of June 30, 2004, the Company was in
compliance with all such covenants. Subsequent to June 30, 2004, the Company
paid off $183.6 million of the Senior subordinated notes and amended the bond
indenture to remove the restrictive covenants. The remaining $11.7 million
71
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balance is callable at any time on or after July 1, 2007.
Also related to the ALARIS acquisition, the Company acquired a bank credit
facility consisting of a six-year $245 million term loan and a five-year $30
million revolving credit facility. At June 30, 2004, $162.6 million was
outstanding under the term loan. The term loan bears interest at an annual rate
equal to current LIBOR or a fluctuating base rate, plus a margin of 2.25% as of
June 30, 2004. The Company can elect to use either a one-, two-, three-, or
six-month LIBOR rate. ALARIS has made elections resulting in a weighted average
interest rate at June 30, 2004 of 3.36% per annum (1.11% plus the margin of
2.25%). Subsequent to June 30, 2004, the Company paid off the term loan and
terminated the credit facility.
The Company has a commercial paper program, providing for the issuance of
up to $1.5 billion in aggregate maturity value of commercial paper. The Company
had $634.2 million outstanding under this program at June 30, 2004 with a market
interest rate based upon LIBOR. The Company also had an extendible commercial
notes program providing for the issuance of up to $150.0 million of extendible
commercial notes. The Company did not have any borrowings outstanding under this
extendible commercial notes program at June 30, 2004. The Company also maintains
other short-term credit facilities that allow for borrowings up to $176.4
million. At June 30, 2004 and 2003, $62.8 million and $21.0 million,
respectively, were outstanding under these uncommitted facilities. The June 30,
2004 balance includes $15 million in short-term borrowings reclassified. The
effective interest rate as of June 30, 2004 and 2003 was 1.68% and 2.28%,
respectively. The balance also includes $47.8 million which is classified in
other obligations. The remaining $49.8 million balance of other obligations
consists primarily of additional notes, loans and capital leases.
The Company also has two unsecured $750 million bank revolving credit
facilities, which provide for up to an aggregate of $1.5 billion in borrowings.
One of these facilities expires on March 24, 2008 and the other expires on March
23, 2009. At expiration, these revolving credit facilities can be extended upon
mutual consent of the Company and the lending institutions. These revolving
credit facilities exist largely to support issuances of commercial paper as well
as other short-term borrowings and remained unused at June 30, 2004, except for
$37.3 million of standby letters of credit issued on behalf of the Company. At
June 30, 2004, $500.0 million of commercial paper and $15.0 million of other
short-term borrowings were reclassified as long-term. At June 30, 2003, $21.0
million of other short-term borrowings were reclassified as long-term. These
reclassifications reflect the Company's intent and ability, through the
existence of the unused revolving credit facilities, to refinance these
borrowings. The remaining $134.2 million of commercial paper outstanding at June
30, 2004 was classified as short-term.
During fiscal 2001, the Company entered into an agreement to periodically
sell trade receivables to a special purpose accounts receivable and financing
entity (the "Accounts Receivable and Financing Entity"), which is exclusively
engaged in purchasing trade receivables from, and making loans to, the Company.
The Accounts Receivable and Financing Entity, which is consolidated by the
Company, issued $250 million and $400 million in preferred variable debt
securities to parties not affiliated with the Company during fiscal 2004 and
2001, respectively. These preferred debt securities are classified as long-term
debt in the Company's consolidated balance sheet. These preferred debt
securities must be retired or redeemed by the Accounts Receivable and Financing
Entity before the Company, or its creditors, can have access to the Accounts
Receivable and Financing Entity's receivables. At June 30, 2004 and 2003, the
Accounts Receivable and Financing Entity owned approximately $506.9 million and
$463.6 million, respectively, of receivables that are included in the Company's
consolidated balance sheet. The effective interest rate as of June 30, 2004 and
2003 was 2.36% and 2.81%, respectively. Other than for loans made to the Company
or for breaches of certain representations, warranties or covenants, the
Accounts Receivable and Financing Entity does not have any recourse against the
general credit of the Company.
At June 30, 2003, the Company had an asset securitization facility
available which allows the Company to sell receivables generated from its
radiopharmaceutical operations to a wholly-owned subsidiary, which in turn sells
the receivables to a multi-seller conduit administered by a third party bank.
This securitization program allowed the Company to borrow up to $65.0 million.
This securitization facility was terminated in fiscal year 2004.
During fiscal 2003, the Company issued $500 million of 4.00% Notes due
2015. The proceeds of the debt issuance were used for general corporate
purposes, including working capital, capital expenditures, acquisitions,
investments and repurchases of our debt and equity securities. After such
issuance, the Company has the capacity to issue approximately $500 million of
additional equity or debt securities pursuant to effective shelf registration
statements filed with the SEC.
72
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain long-term obligations are collateralized with property and
equipment of the Company with an aggregate book value of approximately $70
million at June 30, 2004. Maturities of long-term obligations for future fiscal
years are:
(in millions) 2005 2006 2007 2008 2009 Thereafter Total
--------------------------------------------------------------------------------------------------------
Maturities of long-term obligations $855.0 $680.7 $136.5 $4.5 $804.3 $ 1,208.7 $3,689.7
7. FINANCIAL INSTRUMENTS
INTEREST RATE RISK MANAGEMENT. The Company is exposed to the impact of interest
rate changes. The Company's objective is to manage the impact of interest rate
changes on earnings and cash flows and on the market value of its borrowings.
The Company maintains fixed rate debt as a percentage of its net debt within a
certain range.
The Company utilizes a mix of debt maturities along with both fixed-rate
and variable-rate debt to manage changes in interest rates. In addition, the
Company enters into interest rate swaps to further manage its exposure to
interest rate variations related to its borrowings and to lower its overall
borrowing costs.
At June 30, 2004, the Company held two pay-fixed interest rate swaps
acquired through the ALARIS acquisition. These pay-fixed interest rate swaps
were utilized by ALARIS to hedge a bank term loan. The swaps were unwound
subsequent to June 30, 2004 upon the Company's election to pay down the bank
term loan (see Note 6). These swaps did not have a material impact upon the
Company's financial statements. At June 30, 2003, the Company held pay-fixed
interest rate swaps to hedge the variability of cash flows related to changes in
interest rates on borrowing costs of variable-rate debt. These contracts were
classified as cash flow hedges and matured through January 2004. The Company
adjusted the pay-fixed interest rate swaps to current market values through
other comprehensive income, as the contracts were effective in offsetting the
interest rate exposure of the forecasted interest rate payments hedged. The
Company did not recognize any material gains/(losses) related to contracts that
were not effective or forecasted transactions that did not occur during fiscal
2003.
The Company also held pay-floating interest rate swaps to hedge the change
in fair value of the fixed-rate debt related to fluctuations in interest rates.
These contracts are classified as fair value hedges and mature through June
2015. The gain/(loss) recorded on the pay-floating interest rate swaps is
directly offset by the change in fair value of the underlying debt. Both the
derivative instrument and the underlying debt are adjusted to market value at
the end of each period with any resulting gain/(loss) recorded in interest
expense and other.
The following table represents the notional amount hedged, fair value of
the interest rate swaps outstanding at June 30, 2004 and 2003 included in other
assets/liabilities and the amount of net gain/(loss) for pay-floating interest
rate swaps recognized through interest expense and other during fiscal 2004 and
2003.
(in millions) 2004 2003 Classification of net gain/loss
--------------------------------- -------- -------- -------------------------------
Pay-fixed interest rate swaps:
Notional amount $ 171.0 $ 125.0
Assets 0.8 -
Liabilities - 3.5
Pay-floating interest rate swaps:
Notional amount $1,327.8 $1,077.8
Assets 10.6 33.2
Liabilities 67.1 24.4
Gain/(loss) 34.8 27.1 Interest expense and other
At June 30, 2003, the Company had net deferred losses on pay-fixed
interest rate swaps of $3.5 million, recorded in other comprehensive income.
During fiscal 2004 and 2003, the Company recognized losses of $4.5 million and
$11.9 million, respectively, within interest expense and other related to these
interest rate swaps.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
73
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CURRENCY RISK MANAGEMENT. The Company conducts business in several major
international currencies and is subject to risks associated with changing
foreign exchange rates. The Company's objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes to allow
management to focus its attention on its business operations. Accordingly, the
Company enters into various contracts that change in value as foreign exchange
rates change to protect the value of existing foreign currency assets and
liabilities, commitments and anticipated foreign currency revenue and expenses.
The gains and losses on these contracts offset changes in the value of the
underlying transactions as they occur.
At June 30, 2004 and 2003, the Company held forward contracts expiring
through June 2005 to hedge probable, but not firmly committed, revenue and
expenses. These hedging contracts are classified as cash flow hedges and,
accordingly, are adjusted to current market values through other comprehensive
income until the underlying transactions are recognized. Upon recognition, such
gains and losses are recorded in operations as an adjustment to the recorded
amounts of the underlying transactions in the period in which these transactions
are recognized. The principal currencies hedged are the European euro, British
pound, Mexican peso, and the Thai bhat.
At June 30, 2004 and 2003, the Company also held forward contracts
expiring in December 2013 and September 2003, respectively, to hedge the value
of foreign currency assets and liabilities. These forward contracts are
classified as fair value hedges and are adjusted to current market values
through interest expense and other, directly offsetting the adjustment of the
foreign currency asset or liability.
The following table represents the notional amount hedged, the value of
the forward contracts outstanding at June 30, 2004 and 2003 included in other
assets or liabilities and the amount of net gain/(loss) related to fair value
forward contracts recognized through interest expense and other during fiscal
2004 and 2003.
(in millions) 2004 2003 Classification of net gain/loss
--------------------------------- -------- -------- -------------------------------
Forward contracts - cash flow hedge:
Notional amount $ 276.9 $ 240.5
Assets 1.4 4.7
Liabilities 4.9 14.2
Forward contracts - fair value hedge:
Notional amount $ 489.0 $ 114.0
Assets - 0.3
Liabilities 19.5 1.1
Gain/(loss) (12.7) (8.1) Interest expense and other
At June 30, 2004 and 2003, the Company had net deferred losses related to
forward contract cash flow hedges of $3.5 million and $9.5 million,
respectively, recorded in other comprehensive income. During fiscal 2004 and
2003, the Company recognized losses of $14.9 million and $12.2 million,
respectively, within net earnings related to these forward contracts.
The income/loss recorded on the forward contract fair value hedge is
offset by the remeasurement adjustment on the foreign currency denominated asset
or liability. The settlement of the derivative instrument and the remeasurement
adjustment on the foreign currency denominated asset or liability are both
recorded in interest expense and other at the end of each period. The Company
did not recognize any material gains/(losses) related to contracts that were not
effective or forecasted transactions that did not occur during fiscal 2004 and
2003.
In connection with the Company's acquisition of ALARIS, the Company
acquired certain options hedging European euro, Australian dollar, Canadian
dollar, and British pound. These options were entered into by ALARIS to reduce
the risk of earnings and cash flow volatility related to certain forecasted
transactions. As of June 30, 2004, exercise of these options would not result in
a material impact to the Company.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
74
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and
equivalents, trade receivables, accounts payable, notes payable-banks, other
short-term borrowings and other accrued liabilities at June 30, 2004 and 2003,
approximate their fair value because of the short-term maturities of these
items.
Cash balances are invested in accordance with the Company's investment
policy. These investments are exposed to market risk from interest rate
fluctuations and credit risk from the underlying issuers, although this is
mitigated through diversification.
The estimated fair value of the Company's long-term obligations was
$3,787.1 million and $2,926.1 million as compared to the carrying amounts of
$3,689.7 million and $2,700.6 million at June 30, 2004 and 2003, respectively.
The fair value of the Company's long-term obligations is estimated based on
either the quoted market prices for the same or similar issues and the current
interest rates offered for debt of the same remaining maturities or estimated
discounted cash flows.
The following is a summary of the fair value gain/(loss) of the Company's
derivative instruments, based upon the estimated amount that the Company would
receive (or pay) to terminate the contracts as of June 30. The fair values are
based on quoted market prices for the same or similar instruments.
Earnings before income taxes, discontinued operations and cumulative
effect of changes in accounting are as follows (in millions):
Fiscal Year Ended June 30,
------------------------------
2004 2003 2002
-------- -------- --------
Restated Restated
U.S. Based Operations $1,845.1 $1,733.8 $1,486.8
Non-U.S. Based Operations 393.3 346.9 238.1
-------- -------- --------
$2,238.4 $2,080.7 $1,724.9
======== ======== ========
The provision for income taxes from continuing operations before
cumulative effect of changes in accounting consists of the following (in
millions):
Fiscal Year Ended June 30,
--------------------------------
2004 2003 2002
-------- -------- --------
Restated Restated
Current:
Federal $ 547.3 $ 426.5 $ 296.2
State 39.1 29.5 23.8
Foreign 22.2 28.3 24.4
-------- -------- --------
Total 608.6 484.3 344.4
Deferred:
Federal 99.8 191.0 208.5
State 7.1 27.1 29.8
Foreign (1.8) (2.9) 1.4
-------- -------- --------
Total 105.1 215.2 239.7
-------- -------- --------
Total provision $ 713.7 $ 699.5 $ 584.1
======== ======== ========
75
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision based on the federal statutory income
tax rate to the Company's effective income tax rate from continuing operations
before cumulative effect of changes in accounting is as follows:
Fiscal Year Ended June 30,
--------------------------
2004 2003 2002
------ ------ ------
Provision at federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 2.0 1.7 2.6
Foreign tax rates (4.0) (3.2) (3.2)
Nondeductible expenses 0.3 0.5 0.2
Other (1.4) (0.4) (0.8)
---- ---- ----
Effective income tax rate 31.9% 33.6% 33.8%
==== ==== ====
The Company's effective tax rate reflects tax benefits derived from
significant operations outside the United States, which are generally taxed at
rates lower than the U.S. statutory rate of 35%. During fiscal 2004, the
Company's results of operations benefited from a lower effective tax rate due to
increased profits from production in lower tax international countries such as
the Dominican Republic and Thailand. In addition, the Company has subsidiaries
operating in Puerto Rico under a tax incentive agreement expiring in 2019.
No provision for income taxes has been made on approximately $1.2 billion
of undistributed earnings of foreign subsidiaries because those earnings are
considered permanently reinvested in the operations of those subsidiaries. It is
not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in millions):
June 30, June 30,
2004 2003
---------- ----------
Deferred income tax assets:
Receivable basis difference $ 32.5 $ 55.6
Accrued liabilities 146.8 86.3
Net operating loss carryforwards 21.6 35.3
---------- ----------
Total deferred income tax assets 200.9 177.2
Valuation allowance for deferred income tax assets (15.8) (20.7)
---------- ----------
Net deferred income tax assets $ 185.1 $ 156.5
---------- ----------
Deferred income tax liabilities:
Inventory basis differences (498.8) (521.1)
Property-related (339.2) (359.4)
Revenues on lease contracts (231.2) (207.8)
Other (153.3) (112.2)
---------- ----------
Total deferred income tax liabilities (1,222.5) (1,200.5)
---------- ----------
Net deferred income tax liabilities $ (1,037.4) $ (1,044.0)
========== ==========
76
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
2004 2003
--------- ---------
Other current assets and current liabilities $ (175.8) $ (204.3)
Deferred income taxes and other liabilities (861.6) (839.7)
--------- ---------
Net deferred income tax liabilities $(1,037.4) $(1,044.0)
========= =========
The Company had state net operating loss carryforwards of $866.6 million
at June 30, 2004. A valuation allowance of $9.9 million at June 30, 2004 has
been provided for the state net operating loss, as utilization of such
carryforwards within the applicable statutory periods is uncertain. The state
net operating loss carryforwards expire through 2024. Expiring state net
operating loss carryforwards and the required valuation allowances have been
adjusted annually. The Company also has federal capital loss carryovers of $15.6
million at June 30, 2004 for which a 100% valuation allowance has been
established since usage of these carryovers is uncertain at this time. After
application of the valuation allowances described above, the Company anticipates
no limitations will apply with respect to utilization of any of the other net
deferred income tax assets described above.
Under a tax-sharing agreement with Baxter International Inc., Allegiance
Corporation will pay for increases and be reimbursed for decreases to the net
deferred tax assets transferred on the date of the Baxter-Allegiance Spin-Off
(as hereinafter defined in Note 11). Such increases or decreases may result from
audit adjustments to Baxter's prior period tax returns.
9. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including
defined benefit, other postretirement benefit and defined contribution plans.
Substantially all of the Company's domestic non-union employees are eligible to
be enrolled in Company-sponsored contributory profit sharing and retirement
savings plans, which include features under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"), and provide for Company matching
and profit sharing contributions. The Company's contributions to the plans are
determined by the Board of Directors subject to certain minimum requirements as
specified in the plans.
The total expense for employee retirement benefit plans (excluding defined
benefit and other postretirement benefit plans, see below) was $54.5 million,
$64.2 million and $59.0 million for the fiscal years ended June 30, 2004, 2003
and 2002, respectively.
DEFINED BENEFIT AND OTHER POSTRETIREMENT BENEFIT PLANS. The Company has several
defined benefit plans covering substantially all Scherer salaried and hourly
employees. The Company also assumed defined benefit plans through the Intercare
and ALARIS acquisitions. The Company's domestic defined benefit plans provide
defined benefits based on years of service and level of compensation. Foreign
subsidiaries provide for pension benefits in accordance with local customs or
law. The Company funds its pension plans at amounts required by applicable
regulations.
The Company also has a postretirement medical plan and a postretirement
life insurance plan that covers all eligible Scherer participants.
The Company uses a measurement date of March 31 for substantially all its
pension and postretirement benefit plans.
77
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations and Funded Status
The following table provides a reconciliation of the change in projected
benefit obligation (in millions):
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
2004 2003 2004 2003
------ ------ ------ ------
Projected benefit obligation at
beginning of year $161.0 $128.8 $ 5.6 $ 10.6
Service cost 1.6 4.6 - 0.6
Interest cost 9.2 8.4 0.2 0.7
Plan participant contributions 0.3 1.2 - -
Actuarial (gain)/loss 0.4 14.1 (0.6) 4.7
Benefits paid (5.9) (4.5) (0.1) (0.1)
Special termination benefits - - - 1.2
Translation 15.2 14.6 - -
Curtailments (7.3) (4.8) - (12.1)
Settlements - (1.4) - -
Plan amendments 0.1 - - -
Business combinations 21.0 - - -
------ ------ ------ ------
Projected benefit obligation at end
of year $195.6 $161.0 $ 5.1 $ 5.6
====== ====== ====== ======
The following table provides a reconciliation of the change in fair value
of plan assets (in millions):
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
2004 2003 2004 2003
------ ------ ------ ------
Fair value of plan assets at beginning of
year $ 74.0 $ 68.4 $ - $ -
Actual return on plan assets 8.5 (2.9) - -
Employer contributions 16.4 5.4 - -
Plan participant contributions 0.3 1.2 0.1 0.1
Benefits paid (5.5) (3.9) (0.1) (0.1)
Settlements - (1.4) - -
Translation 5.7 7.2 - -
Business combinations 20.1 - - -
------ ------ ------ ------
Fair value of plan assets at end of year $119.5 $ 74.0 $ - $ -
====== ====== ====== ======
78
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of the net amount recognized
in the consolidated balance sheets (in millions):
The projected benefit obligation and fair value of plan assets for pension
plans and other postretirement plans with projected benefit obligations in
excess of plan assets are as follows (in millions):
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
2004 2003 2004 2003
------ ------- ------ ------
Projected benefit obligation $178.5 $161.0 $ 5.1 $ 5.6
Fair value of plan assets $101.8 $ 74.0 $ - $ -
The accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets are
as follows (in millions):
Pension Benefits
----------------
2004 2003
------ ------
Accumulated benefit obligation $174.6 $151.2
Fair value of plan assets $101.8 $ 74.0
79
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Periodic Benefit Cost
Components of the Company's net periodic benefit costs are as follows (in
millions):
Pension Benefits Other Postretirement Benefits
-------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
Components of net periodic benefit cost:
Service cost $ 1.6 $ 4.6 $ 4.1 $ - $ 0.6 $ 0.6
Interest cost 9.2 8.4 7.2 0.3 0.7 0.7
Expected return on plan assets (5.6) (5.4) (4.8) - - -
Net amortization and other (1) 2.8 1.2 0.7 (0.1) - 0.1
------ ------ ------ ------ ------ ------
Net amount recognized $ 8.0 $ 8.8 $ 7.2 $ 0.2 $ 1.3 $ 1.4
====== ====== ====== ====== ====== ======
(1) Amount primarily represents the amortization of unrecognized
actuarial losses, as well as the amortization of the transition
obligation and prior service costs.
Assumptions
The weighted average assumptions used in determining benefit obligations
are as follows:
The weighted average assumptions used in determining net periodic pension
cost are as follows:
Pension Benefits Other Postretirement Benefits
---------------------- -----------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Discount rate 5.50% 6.00% 6.30% 6.25% 7.25% 7.25%
Rate of increase in compensation levels 3.50% 3.80% 4.00% N/A N/A N/A
Expected long-term rate of return on
plan assets (1) 6.30% 6.90% 7.20% N/A N/A N/A
(1) To develop the expected long-term rate of return on assets
assumption, the Company considered the historical returns and the
future expectations for returns for each asset class, as well as the
target asset allocation of the pension portfolio. This rate is gross
of any investment or administrative expenses.
Health Care Cost Trend Rates
The health care cost trend rates assumed for next year for other
postretirement benefits at December 31 are 11.2% and 11.6% for Pre-Medicare and
Post-Medicare, respectively. The health care cost trend rates are assumed to
decline to 5.6% for Pre-Medicare and Post-Medicare by 2014. A one percentage
point change in the assumed health care cost trend rates would not have a
material impact on total service cost, total interest cost or the accumulated
postretirement benefit obligation.
80
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
The Company's weighted average asset allocations at the measurement date
and the target asset allocations by category are as follows:
2004 2003
Actual Actual Target
------ ------ ------
Asset Category
Equity Securities 46% 50% 52%
Debt Securities 29% 30% 28%
Real Estate 0% 0% 6%
Other 25% 20% 14%
------ ------ ------
Total 100% 100% 100%
The investment policy reflects the long-term nature of the plans' funding
obligations. The assets are invested to provide the opportunity for both income
and growth of principal. This objective is pursued as a long-term goal designed
to provide required benefits for participants without undue risk. It is expected
that this objective can be achieved through a well-diversified asset portfolio.
All equity investments are made within the guidelines of quality, marketability
and diversification mandated by the Employee Retirement Income Security Act
("ERISA") and other relevant statutes. Investment managers are directed to
maintain equity portfolios at a risk level approximately equivalent to that of
the specific benchmark established for that portfolio. Assets invested in fixed
income securities and pooled fixed income portfolios are managed actively to
pursue opportunities presented by changes in interest rates, credit ratings or
maturity premiums.
Contributions
The total estimated contributions for the 2005 measurement year are $5.4
million.
Estimated Future Benefit Payments
Future benefit payments, which reflect expected future service, as
appropriate, during the next five fiscal years, and in the aggregate for the
five fiscal years thereafter, are (in millions):
The Company periodically enters into certain off-balance sheet
arrangements, primarily receivable sales and operating leases, in order to
maximize diversification of funding and return on assets. The receivable sales,
as described below, also provide for the transfer of credit risk to third
parties.
Lease Receivable-Related Arrangements
During fiscal 2004 and 2003, the Company entered into four separate
agreements (two in fiscal 2004 and two in fiscal 2003) to transfer ownership of
certain equipment lease receivables, plus security interests in the related
equipment, to the leasing subsidiary of a bank in the amounts of $164.2 million
and $150.0 million in fiscal 2004 and $156.0 million and $200.0 million in
fiscal 2003. These transactions resulted in immaterial gains or losses
classified by the Company as revenue within its results of operations. In order
to qualify for sale treatment under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," the Company
formed wholly-owned, special purpose, bankruptcy-remote subsidiaries (the "Pyxis
SPEs") of Pyxis Corporation (which has been given the legal designation of
Cardinal Health 301, Inc. and is referred to in this Form 10-K as "Pyxis"), and
each of the Pyxis SPEs formed wholly-owned, qualified special purpose
subsidiaries (the "QSPEs") to effectuate the removal of the lease receivables
from the Company's consolidated financial statements. In accordance with SFAS
81
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No. 140, the Company consolidates the Pyxis SPEs and does not consolidate the
QSPEs. Both the Pyxis SPEs and QSPEs are separate legal entities that maintain
separate financial statements from the Company and Pyxis. The assets of the
Pyxis SPEs and QSPEs are available first and foremost to satisfy the claims of
their respective creditors.
The Company formed Pyxis Funding LLC ("Pyxis Funding") for the sole
purpose of acquiring a pool of leases and the related leased equipment from
Pyxis and ultimately selling the lease receivables to a multi-seller conduit
administered by a third-party bank. Pyxis Funding is a wholly-owned, special
purpose, bankruptcy-remote subsidiary of Pyxis. Pyxis Funding II LLC ("Pyxis
Funding II") was formed for the sole purpose of acquiring lease receivables from
Pyxis Funding and issuing notes secured by its assets to a multi-seller conduit
administered by a third-party bank. Pyxis Funding II is a wholly-owned,
qualified special purpose subsidiary of Pyxis Funding. The transaction qualifies
for sale treatment under SFAS No. 140. Accordingly, the related receivables are
not included in the Company's consolidated financial statements. As required by
U.S. GAAP, the Company consolidates Pyxis Funding and does not consolidate Pyxis
Funding II. Both Pyxis Funding and Pyxis Funding II are separate legal entities
that maintain separate financial statements from the Company and Pyxis. The
assets of Pyxis Funding and Pyxis Funding II are available first and foremost to
satisfy the claims of their creditors. The notes held by investors had a
principal balance of $16.0 million on June 30, 2004, and the investors are
provided with credit protection in the form of 20% ($4.0 million)
over-collateralization. As of June 30, 2003, the notes had a principal balance
of $51.5 million, and $12.9 million of credit protection was provided.
Other Receivable-Related Arrangements
Cardinal Health Funding ("CHF") and Medicine Shoppe Capital Corporation
("MSCC") were organized for the sole purpose of buying receivables and selling
those receivables to multi-seller conduits administered by third party banks or
other third party investors. MSCC and CHF were designed to be special purpose,
bankruptcy-remote entities. Although consolidated in accordance with GAAP, MSCC
and CHF are separate legal entities from the Company, Medicine Shoppe
International, Inc. and the Company's Financial Shared Services business. The
sale of receivables by MSCC and CHF qualify for sales treatment under SFAS No.
140 and accordingly are not included in the Company's consolidated financial
statements.
At June 30, 2004, the Company had a committed receivables sales facility
program available through CHF with capacity to sell $500.0 million in
receivables. Recourse is provided under the CHF program by the requirement that
CHF retain a percentage subordinated interest in the sold receivables. At June
30, 2004, the Company had no outstanding receivables or subordinated interests
related to this facility. During fiscal 2004, the Company terminated and
liquidated MSCC resulting in an immaterial loss.
At June 30, 2003, the Company had $280.0 million in committed receivables
sales facility programs available through CHF and MSCC. There were no
receivables outstanding or subordinated interests related to CHF at June 30,
2003. The total amount of receivables outstanding under the MSCC program was
$5.4 million. Recourse was provided under the MSCC program by the requirement
that MSCC retain a 20% subordinated interest in the sold receivables.
Subordinated interests were $1.3 million at June 30, 2003.
Cash Flows from all Receivable-Related Arrangements
The Company's net cash flow benefit related to receivable transfers for
fiscal 2004, 2003 and 2002 were as follows:
(in millions) 2004 2003 2002
-------------------------------------------------- ------ ------ ------
Proceeds received on transfer of receivables $321.4 $375.8 $295.4
Cash collected in servicing of related receivables 3.9 2.2 1.2
Proceeds received on subordinated interests 8.9 18.3 58.4
------ ------ ------
Cash inflow to the Company 334.2 396.3 355.0
Cash collection remitted to the bank 226.0 131.0 257.2
Cash collection remitted to QSPE 8.9 17.7 -
------ ------ ------
Net benefit to the Company's Cash Flow $ 99.3 $247.6 $ 97.8
====== ====== ======
Pyxis, MSCC and CHF are required to repurchase any receivables sold only
if it is determined that the representations and warranties with regard to the
related receivables were not accurate on the date sold.
82
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Leases
The Company has entered into operating lease agreements with several third
party banks for the construction of various new facilities and equipment. The
initial terms of the lease agreements have varied maturity dates ranging from
February 2005 through June 2013, with optional renewal periods, generally five
years. In the event of termination, the Company is required (at its election) to
either purchase the facility or vacate the property and make reimbursement for a
portion of any unrecovered property cost. The maximum portion of unrecovered
property costs that the Company could be required to reimburse does not exceed
the amount expended to acquire and/or construct the facilities. As of June 30,
2004, the amount expended to acquire and/or construct the facilities was $525.6
million. The agreements provide for maximum funding of $575.0 million, which is
currently greater than the estimated cost to complete the construction projects.
The required lease payments equal the interest expense for the period on the
amounts drawn. Lease payments under the agreements are based primarily upon
LIBOR and are subject to interest rate fluctuations. As of June 30, 2004, the
weighted average interest rate on the agreements approximated 1.79%. The
Company's estimated minimum annual lease payments under the agreements at June
30, 2004 were approximately $9.4 million.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases (excluding those
referenced in Note 10) having initial or remaining non-cancelable lease terms in
excess of one year at June 30, 2004 are:
Rental expense relating to operating leases (including those referenced in
Note 10) was approximately $120.6 million, $102.8 million and $77.6 million in
fiscal 2004, 2003 and 2002, respectively. Sublease rental income was not
material for any period presented herein.
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance Corporation and its subsidiaries
("Allegiance"), which were acquired by the Company in February 1999, Baxter's
U.S. health care distribution business, surgical and respiratory therapy
business and health care cost-management business, as well as certain foreign
operations (the "Allegiance Business") in connection with a spin-off of the
Allegiance Business by Baxter (the "Baxter-Allegiance Spin-Off"). In connection
with this spin-off, Allegiance Corporation, which merged with a subsidiary of
the Company on February 3, 1999, agreed to indemnify Baxter, and to defend and
indemnify Baxter Healthcare Corporation ("BHC"), as contemplated by the
agreements between Baxter and Allegiance Corporation, for all expenses and
potential liabilities associated with claims arising from the Allegiance
Business, including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. The Company is not a party to any of
the lawsuits and has not agreed to pay any settlements to the plaintiffs.
As of June 30, 2004, there were 36 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products, and some of these cases were proceeding to trial. The total dollar
amount of potential damages cannot be reasonably quantified. Some plaintiffs
plead damages in extreme excess of what they reasonably can expect to recover,
some plead a modest amount and some do not include a request for any specific
dollar amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds 25. Based on the significant differences in the
range of damages sought and, based on the multiple number of defendants in these
lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore, Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in 834 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
June 30, 2004, Allegiance had resolved more than 90% of these cases. About 20%
of the lawsuits that have been resolved were concluded without any liability to
Baxter/Allegiance. No individual claim has been settled for a material amount
and all the settled claims through June 30, 2004 amounted to, in the aggregate,
approximately $28 million. Due to the number of claims filed and the ongoing
defense costs that will be incurred, Allegiance believes it is probable that it
will incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity or results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds (with the range reflecting
the Company's reasonable estimation of potential insurance coverage, and defense
and indemnity costs). The Company believes a substantial
83
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
portion of any liability will be covered by insurance policies Allegiance has
with financially viable insurance companies, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency. The Company and Allegiance continue to believe that insurance recovery
is probable.
Derivative Actions
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. On or about March 21, 2003,
after the Company filed a Motion to Dismiss the complaint, an amended complaint
was filed alleging breach of fiduciary duties and corporate waste in connection
with the alleged failure by the Board of Directors of the Company to (a)
renegotiate or terminate the Company's proposed acquisition of Syncor, and (b)
determine the propriety of indemnifying Monty Fu, the former Chairman of Syncor.
The Company filed a Motion to Dismiss the amended complaint and the plaintiffs
subsequently filed a second amended complaint that added three new individual
defendants and included new allegations that the Company improperly recognized
revenue in December 2000 and September 2001 related to settlements with certain
vitamin manufacturers. The Company filed a Motion to Dismiss the second amended
complaint and, on November 20, 2003, the Court denied the motion. Discovery is
proceeding in this action. The defendants intend to vigorously defend this
action. The Company currently does not believe that the impact of this lawsuit
will have a material adverse effect on the Company's financial position,
liquidity or results of operations.
On July 9, 2004, a complaint was filed by a purported shareholder against
the members of the Company's Board of Directors, and the Company as a nominal
defendant in the Court of Common Pleas, Franklin County, Ohio, as a purported
derivative action. The complaint alleges that the individual defendants failed
to implement adequate internal controls for the Company and thereby violated
their fiduciary duty of good faith, GAAP and the Company's Audit Committee
charter. The complaint seeks money damages and equitable relief against the
defendant directors, and an award of attorney's fees. None of the defendants has
responded to the complaint yet, nor has the Company.
On August 27, 2004, a complaint was filed by a purported shareholder
against members of the Company's Board of Directors, current and former officers
and/or employees of the Company and the Company as a nominal defendant in the
Court of Common Pleas, Franklin County, Ohio, as a purported derivative action.
The complaint alleges that the individual defendants breached various fiduciary
duties owed to the Company. The complaint seeks money damages and equitable
relief against the individual defendants, and an award of attorney's fees. None
of the defendants has responded to the complaint yet, nor has the Company.
On September 22, 2004, a complaint was filed by a purported shareholder
against the members of the Company's Board of Directors, and the Company as a
nominal defendant in the Court of Common Pleas, Franklin County, Ohio, as a
purported derivative action. The complaint alleges that the individual
defendants failed to implement adequate internal controls for the Company and
thereby violated their fiduciary duty of good faith, GAAP and the Company's
Audit Committee charter. The complaint seeks money damages and equitable relief
against the defendant directors, and an award of attorney's fees. None of the
defendants has responded to the complaint yet, nor has the Company.
Shareholder/ERISA Litigation against Cardinal Health
Since July 2, 2004, ten purported class action complaints have been filed
by purported purchasers of the Company's securities against the Company and
certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "Cardinal Health federal
securities actions"). To date, all of these actions have been filed in the
United States District Court for the Southern District of Ohio. The Cardinal
Health federal securities actions purport to be brought on behalf of all
purchasers of the Company's securities during various periods beginning as early
as October 24, 2000 and ending as late as July 26, 2004 and allege, among other
things, that the defendants violated Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder and Section 20(a) of the Exchange Act by issuing a
series of false and/or misleading statements concerning the Company's financial
results, prospects and condition. The alleged misstatements relate to the
Company's accounting for recoveries relating to antitrust litigation against
vitamin manufacturers, and to classification of revenue in the Company's
Pharmaceutical Distribution business as either operating revenue or revenue from
bulk deliveries to customer warehouses, among other matters. The alleged
misstatements are claimed to have caused an artificial inflation in the
Company's stock price during the proposed class period. The complaints seek
unspecified money damages and equitable relief against the defendants, and an
award of attorney's fees. None of the defendants has yet responded to any of the
complaints in the Cardinal Health federal securities actions.
84
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since July 2, 2004, fourteen purported class action complaints have been
filed against the Company and certain officers, directors and employees of the
Company by purported participants in the Cardinal Health Profit Sharing,
Retirement and Savings Plan (collectively referred to as the "Cardinal Health
ERISA actions"). To date, all of these actions have been filed in the United
States District Court for the Southern District of Ohio. The Cardinal Health
ERISA actions purport to be brought on behalf of participants in the Cardinal
Health Profit Sharing, Retirement and Savings Plan (the "Plan"), and also on
behalf of the Plan itself. The complaints allege that the defendants breached
certain fiduciary duties owed under ERISA, generally asserting that the
defendants failed to make full disclosure of the risks to plan participants of
investing in the Company's stock, to the detriment of the plan's participants
and beneficiaries, and that Company stock should not have been made available as
an investment alternative for plan participants. The misstatements alleged in
the Cardinal Health ERISA actions significantly overlap with the misstatements
alleged in the complaints in the Cardinal Health federal securities actions. The
complaints seek unspecified money damages and equitable relief against the
defendants, and an award of attorney's fees. None of the defendants has yet
responded to any of the complaints in the Cardinal Health ERISA actions.
With respect to the proceedings described under the headings "Derivative
Actions" and "Shareholder/ERISA Litigation against Cardinal Health," the
Company currently believes that there will be some insurance coverage available
under the Company's insurance policies in effect at the time the actions were
filed. Such policies are with financially viable insurance companies, and are
subject to self-insurance retentions, exclusions, conditions, coverage gaps,
policy limits and insurer solvency.
Shareholder/ERISA Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor and
certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "Syncor federal securities
actions"). All of these actions were filed in the United States District Court
for the Central District of California. The Syncor federal securities actions
purport to be brought on behalf of all purchasers of Syncor shares during
various periods, beginning as early as March 30, 2000, and ending as late as
November 5, 2002. The actions allege, among other things, that the defendants
violated Section 10(b) of the Exchange Act and 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
shares. A lead plaintiff has been appointed by the court in the Syncor federal
securities actions and a consolidated amended complaint was filed May 19, 2003,
naming Syncor and 12 individuals, all former Syncor officers, directors and/or
employees, as defendants. Syncor filed a Motion to Dismiss the consolidated
amended complaint on August 1, 2003 and, on December 12, 2003, the Court granted
the motion to dismiss without prejudice. A second amended consolidated class
action complaint was filed on January 28, 2004, naming Syncor and 14
individuals, all former Syncor officers, directors and/or employees, as
defendants. Syncor filed a Motion to Dismiss the second amended consolidated
class action complaint on March 4, 2004. On July 6, 2004, the court granted
Defendants' Motion to Dismiss without prejudice as to defendants Syncor, Monty
Fu, Robert Funari and Haig Bagerdjian. As to the other individual defendants,
the motion to dismiss was granted with prejudice. On September 14, 2004, lead
plaintiff filed a Motion for Clarification of the Court's July 6, 2004 dismissal
order.
On November 14, 2002, two additional actions were filed by individual
stockholders 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 each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the Syncor federal securities actions described above), and a single purported
class action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corporation and the
remaining two Syncor directors, who are hereafter included in the term "director
defendants." These cases have been consolidated into one action (the
"consolidated Delaware action"). On August 14, 2003, the Company filed a Motion
to Dismiss the operative complaint in the consolidated Delaware action. At the
end of September 2003, plaintiffs in the consolidated Delaware action moved the
court to file a second amended complaint. Plaintiffs' request was granted in
February 2004. Monty Fu is the only named defendant in the second amended
complaint. On September 15, 2004, the Court granted Monty Fu's Motion to Dismiss
the second amended complaint. The Court dismissed the second amended complaint
with prejudice.
85
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. An amended complaint was filed on December 6, 2002 in one of
the cases, purporting to allege direct claims on behalf of a class of
shareholders. The defendants' motion for a stay of the California actions
pending the resolution of the Delaware actions (discussed above) was granted on
April 30, 2003.
A purported class action complaint was filed on April 8, 2003, against the
Company, Syncor and certain officers and employees of the Company by a purported
participant in the Syncor Employees' Savings and Stock Ownership Plan (the
"Syncor ESSOP"). A related purported class action complaint was filed on
September 11, 2003, against the Company, Syncor and certain individual
defendants. Another related purported class action complaint was filed on
January 14, 2004, against the Company, Syncor and certain individual defendants.
A consolidated complaint was filed on February 24, 2004 against Syncor and
certain former Syncor officers, directors and/or employees alleging that the
defendants breached certain fiduciary duties owed under ERISA based on the same
underlying allegations of improper and unlawful conduct alleged in the federal
securities litigation. On April 26, 2004, the defendants filed Motions to
Dismiss the consolidated complaint. On August 24, 2004, the Court granted in
part and denied in part Defendants' Motions to Dismiss. The Court dismissed,
without prejudice, all claims against defendants Ed Burgos and Sheila Coop, all
claims alleging co-fiduciary liability against all defendants, and all claims
alleging that the individual defendants had conflicts of interest precluding
them from properly exercising their fiduciary duties under ERISA. A claim for
breach of the duty to prudently manage plan assets was upheld against Syncor,
and a claim for breach of the alleged duty to "monitor" the performance of
Syncor's Plan Administrative Committee was upheld against defendants Monty Fu
and Robert Funari. In addition, the United States Department of Labor is
conducting an investigation of the Syncor ESSOP with respect to its compliance
with ERISA requirements. The Company has responded to a subpoena received from
the Department of Labor and continues to cooperate in the investigation.
It is impossible to predict the outcome of the proceedings described under
the heading "Shareholder/ERISA Litigation against Syncor" or their impact on the
Company. However, the Company currently does not believe that the impact of
these actions will have a material adverse effect on the Company's financial
position, liquidity or results of operations. The Company believes the
allegations made in the complaints described above are without merit and it
intends to vigorously defend such actions. The Company has been informed that
the individual director and officer defendants deny liability for the claims
asserted in these actions and believe they have meritorious defenses and intend
to vigorously defend such actions. The Company currently believes that a portion
of any liability will be covered by insurance policies that the Company and
Syncor have with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency.
DuPont Litigation
On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont")
filed a lawsuit against the Company and others in the United States District
Court for the Middle District of Tennessee. The complaint alleges various causes
of action against the Company relating to the production and sale of surgical
drapes and gowns by the Company's Medical Products and Services segment.
DuPont's claims generally fall into the categories of breach of contract, false
advertising and patent infringement. The complaint does not request a specific
amount of damages. The Company believes that the claims made in the complaint
are without merit and it intends to vigorously defend this action. Although this
action is in its early stages and it is impossible to accurately predict the
outcome of the proceedings or their impact on the Company, the Company believes
that it is owed a defense and indemnity from its co-defendants with respect to
DuPont's claim for patent infringement. The Company currently does not believe
that the impact of this lawsuit, if any, will have a material adverse effect on
the Company's financial position, liquidity or results of operations.
Other Matters
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including, without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
clean-up costs. The Company intends to vigorously defend itself against this
other litigation and does not currently believe that the outcome of this other
litigation now pending will have a material adverse effect on the Company's
consolidated financial statements.
See also the discussion of the SEC investigation and U.S. Attorney inquiry
in Note 1.
86
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SHAREHOLDERS' EQUITY
At June 30, 2004 and 2003, the Company's authorized capital shares
consisted of (a) 750 million common shares, without par value ("Class A common
shares"); (b) 5 million Class B common shares, without par value; and (c) 0.5
million non-voting preferred shares, without par value. The Class A common
shares and Class B common shares are collectively referred to as "Common
Shares." Holders of Class A and Class B common shares are entitled to share
equally in any dividends declared by the Company's Board of Directors and to
participate equally in all distributions of assets upon liquidation. Generally,
the holders of Class A common shares are entitled to one vote per share and the
holders of Class B common shares are entitled to one-fifth of one vote per share
on proposals presented to shareholders for vote. Under certain circumstances,
the holders of Class B common shares are entitled to vote as a separate class.
Only Class A common shares were outstanding as of June 30, 2004 and 2003.
On February 27, 2004, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 6.9 million Common
Shares under an accelerated share repurchase program having an aggregate cost of
approximately $460.3 million. The initial price paid per share was $66.80. The
approximately 6.9 million shares repurchased under the program were subject to a
future contingent purchase price adjustment which was settled during the fourth
quarter of fiscal 2004. The purchase price adjustment was based upon the volume
weighted average price during the actual repurchase period and was subject to
certain provisions which establish a cap and a floor for the average share price
in the Company's agreement with its broker-dealer who executed the repurchase
transactions.
The accelerated share repurchase program was completed on May 11, 2004.
The final volume weighted average price was $70.07. As a result, the Company
settled the forward contract for $22.5 million in cash, which cost was included
in the amount associated with Common Shares in treasury. The Company used the
remaining $17.2 million of the initial authorization to repurchase additional
shares of approximately 0.2 million having an average price paid per share of
$70.73. The repurchased shares were placed into treasury to be used for general
corporate purposes.
On August 1, 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $1.0 billion. Pursuant
to this authorization, the Company repurchased approximately 17.0 million Common
Shares having an aggregate cost of approximately $1.0 billion during the three
months ended September 30, 2003. The average price paid per share was $58.65.
This repurchase was completed during the first quarter of fiscal 2004, and the
repurchased shares were placed into treasury to be used for general corporate
purposes.
In January 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.6 million Common
Shares having an aggregate cost of approximately $500 million. This repurchase
was completed in February 2003, and the repurchased shares were placed into
treasury shares to be used for general corporate purposes.
In August 2002, the Company's Board of Directors authorized the repurchase
of Common Shares up to an aggregate amount of $500 million. Pursuant to this
authorization, the Company repurchased approximately 7.8 million Common Shares
having an aggregate cost of approximately $500 million. This repurchase was
completed in January 2003, and the repurchased shares were placed into treasury
shares to be used for general corporate purposes.
13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company invests cash in deposits with major banks throughout the world
and in high quality short-term liquid instruments. Such investments are made
only in instruments issued or enhanced by high quality institutions. These
investments mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivables, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and health care sectors. Credit risk can be
affected by changes in reimbursement and other economic pressures impacting the
hospital and acute care sectors of the health care industry. However, such
credit risk is limited due to supporting collateral and the diversity of the
customer base, including its wide geographic dispersion. The Company performs
ongoing credit evaluations of its customers' financial conditions and maintains
reserves for credit losses. Such losses historically have been within the
Company's expectations.
87
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all of the Company's customers which
individually account for at least 10% of the Company's revenue. The customer in
the table below is serviced through the Pharmaceutical Distribution and Provider
Services segment.
At June 30, 2004 and 2003, CVS Corporation ("CVS") accounted for 18% of
the Company's gross trade receivable balance.
Certain of the Company's businesses have entered into agreements with
group purchasing organizations ("GPOs"), which organizations act as purchasing
agents that negotiate vendor contracts on behalf of their members. In fiscal
2004, 2003 and 2002, approximately 17%, 17% and 18%, respectively, of revenue
was derived from GPO members through the contractual arrangements established
with Novation, LLC and Premier Purchasing Partners, L.P.-- the Company's two
largest GPO relationships in terms of revenue. However, the Company's trade
receivable balances are with individual members of the GPO and therefore no
significant concentration of credit risk exists with these types of
arrangements.
14. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains several stock incentive plans (the "Plans") for the
benefit of certain officers, directors and employees. Options granted generally
vest over three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The information in the following tables in this Note 14 has been revised
to reflect the maximum number of shares that could be granted under the
Company's Amended and Restated Equity Incentive Plan, as amended (the "Equity
Incentive Plan"), with respect to an option award that the Board of Directors
and its Human Resources and Compensation Committee (the "Compensation
Committee") granted to the Company's Chairman and Chief Executive Officer in
November 1999 for 1,425,000 shares (giving effect to stock splits occurring
after the date of grant). The maximum number of shares that could be granted
pursuant to the terms of the Equity Incentive Plan was 562,500 shares. The
Compensation Committee is currently exploring alternatives to substitute the
remaining portion of the stock option granted to this individual in November
1999 in excess of the 562,500 shares with equivalent value.
EQUITY COMPENSATION PLAN INFORMATION
Certain plans are subject to shareholder approval while other plans have
been authorized solely by the Board of Directors (the "Board"). The following is
a description of the Company's plans that have not been approved by
shareholders:
Broadly-based Equity Incentive Plan, as amended
The Company's Broadly-based Equity Incentive Plan, as amended (the
"Broadly-based Equity Incentive Plan"), was adopted by the Board effective
November 15, 1999 and further amended pursuant to resolutions of the Board
adopted on August 8, 2001. The plan provides for grants in the form of
nonqualified stock options, restricted shares and restricted share units to
employees of the Company. The aggregate number of Common Shares authorized for
issuance pursuant to the plan is 36 million with generally no more than 10% of
the authorized amount issuable in the form of restricted shares and restricted
share units having a restriction period of less than three years. The plan is
not intended to qualify under Section 401(a) of the Code and is not subject to
any of the provisions of ERISA.
Outside Directors Equity Incentive Plan
The Company's Outside Directors Equity Incentive Plan was adopted by the
Board effective May 10, 2000. The plan reserves and makes available for
distribution an aggregate of 1.5 million Common Shares for grants in the form of
nonqualified stock options and restricted shares to members of the Board who are
not employees of the Company. The plan is not intended to qualify under Section
401(a) of the Code and is not subject to any of the provisions of ERISA.
Deferred Compensation Plan, as amended
The Company's Deferred Compensation Plan, as amended (the "Deferred
Compensation Plan"), was adopted by the Board effective April 7, 1994 and has
been subsequently amended several times since then, most recently on May 25,
2004. The plan permits certain management
88
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employees of the Company to defer salary, bonus and long-term incentive plan
payments into one of several investment alternatives, including a stock
equivalent account. In addition, the Company may, in its discretion, make
additional matching or fixed contributions to the deferred balances of
participating management employees. Deferrals into the stock equivalent account
are valued as if each deferral were invested in the Company's Common Shares as
of the deferral date. Deferred balances are paid upon retirement, termination
from employment, death or disability. The maximum aggregate number of Common
Shares that can be credited to stock equivalent accounts pursuant to the plan is
2.25 million. Deferred balances are paid in cash, or in Common Shares in kind,
with any fractional shares paid in cash. The plan contains a dividend
reinvestment feature for the stock equivalent account with dividends generally
being reinvested in investment options other than the stock equivalent account
for reporting persons under Section 16 of the Exchange Act. The plan is not
intended to qualify under Section 401(a) of the Code and is exempt from many of
the provisions of ERISA as a "top hat" plan for a select group of management or
highly compensated employees.
Directors Deferred Compensation Plan, as amended and restated
The Company's Directors Deferred Compensation Plan, as amended and
restated (the "Directors Deferred Compensation Plan"), was adopted by the Board
effective August 11, 1999 and was recently amended and restated on May 1, 2004.
The plan permits directors of the Company to defer board fees into one of
several investment alternatives, including a stock equivalent account. Deferrals
into the stock equivalent account are valued as if each deferral were invested
in the Company's Common Shares as of the deferral date. Deferred balances are
paid upon retirement or other termination from board service, death or
disability. The maximum aggregate number of Common Shares that can be credited
to stock equivalent accounts pursuant to the plan is 90,000. Deferred balances
are paid in cash, or in Common Shares in kind, with any fractional shares paid
in cash. The plan contains a dividend reinvestment feature for the stock
equivalent account with dividends generally being reinvested in investment
options other than the stock equivalent account. The plan is not intended to
qualify under Section 401(a) of the Code and is not subject to any of the
provisions of ERISA.
Global Employee Stock Purchase Plan
The Company's Global Employee Stock Purchase Plan was adopted by the Board
effective August 11, 1999. The plan permits the Company's international
employees to purchase Common Shares through payroll deductions. The total number
of Common Shares made available for purchase under the plan is 4.5 million.
International employees who have been employed by the Company for at least 30
days are eligible to contribute from 1% to 15% of eligible compensation. The
purchase price is determined by the lower of 85% of the closing market price on
the first day of the offering period or 85% of the closing market price on the
last day of the offering period. During any given calendar year, there are two
offering periods: January 1-June 30; and July 1-December 31. The plan is not
intended to qualify under Section 401(a) of the Code and is not subject to any
of the provisions of ERISA.
89
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information relating to the Company's equity
compensation plans at June 30, 2004:
Outstanding
------------------------------------
Number of Common Weighted
Shares to be Issued Average Common Shares
Upon Exercise of Exercise Price Available for
Outstanding Options per Common Future Issuance
(in millions) Share (in millions)
------------------- -------------- ---------------
Plans approved by
shareholders (1) 11.8 (2) $ 52.31 (2) 22.6 (3)
Plans not approved by
shareholders 25.2 (4) $ 62.01 (4) 14.0 (5)
Plans acquired through
acquisition (6) 5.8 (6) $ 33.63 -
------------------ ------------- --------------
Balance at June 30, 2004 42.8 $ 55.52 36.6
================== ============= ==============
(1) Under the Company's Equity Incentive Plan, which was approved by the
Company's shareholders in November 1995, the total number of Common Shares
available for grant of awards under the plan is an amount equal to the sum of
(a) 1.5% of the total outstanding Common Shares as of the last day of the
Company's immediately preceding fiscal year, plus (b) the number of Common
Shares available for grant under the plan as of November 23, 1998, plus (c) any
Common Shares related to awards that expire or are unexercised, forfeited,
terminated, cancelled, settled in such a manner that all or some of the Common
Shares covered by an award are not issued to a participant, or returned to the
Company in payment of the exercise price or tax withholding obligations in
connection with outstanding awards, plus (d) any unused portion of the Common
Shares available under clause (a) above for the previous two fiscal years as a
result of not being used in such previous two fiscal years.
(2) In addition to stock options outstanding under the Company's Equity
Incentive Plan, also includes 430,302 restricted share units outstanding under
the Equity Incentive Plan that are payable solely in Common Shares. Restricted
share units do not have an exercise price, and therefore were not included for
purposes of computing the weighted-average exercise price.
(3) Includes approximately 4.2 million Common Shares available for issuance
under the Company's Employee Stock Purchase Plan.
(4) In addition to stock options outstanding under the Company's Broadly-based
Equity Incentive Plan and Outside Director Equity Incentive Plan, also includes
10,000 restricted share units outstanding under the Company's Broadly-based
Equity Incentive Plan that are payable solely in Common Shares. Also includes
22,564 and 4,076 Common Share units, respectively, outstanding under the
Company's Directors Deferred Compensation Plan and Deferred Compensation Plan
that are payable solely in Common Shares. These awards do not have an exercise
price, and therefore were not included for purposes of computing the
weighted-average exercise price.
(5) Includes approximately 4.3 million Common Shares available for issuance
under the Company's Global Employee Stock Purchase Plan.
(6) Includes options to purchase approximately 3.4 million Common Shares in the
aggregate that were assumed by the Company in connection with acquisitions that
were approved by the Company's shareholders. The remaining options to purchase
approximately 2.4 million Common Shares in the aggregate were assumed by the
Company in connection with acquisitions that were not approved by the Company's
shareholders.
90
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes all stock option transactions for the Company
under the Plans from July 1, 2001 through June 30, 2004, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per Common Share amounts):
Weighted Average
Options Exercise Price
Outstanding per Common Share
----------- ----------------
Balance at June 30, 2001 32.4 $ 34.92
Granted 8.7 68.02
Exercised (4.5) 23.40
Canceled (1.4) 51.75
Other 1.0 47.32
----------- ----------------
Balance at June 30, 2002 36.2 $ 43.95
Granted 9.5 67.49
Exercised (6.2) 27.04
Canceled (2.5) 63.29
Other 3.0 49.23
----------- ----------------
Balance at June 30, 2003 40.0 $ 51.35
Granted 11.8 61.48
Exercised (5.9) 29.78
Canceled (4.2) 65.30
Other 0.6 34.24
----------- ----------------
Balance at June 30, 2004 42.3 $ 55.52
=========== ================
Additional information concerning stock options outstanding as of June 30,
2004 is presented below:
Outstanding Exercisable
------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Range of average average average
exercise prices remaining exercise price exercise price
per Common Options contractual life per Common Options per Common
Share (in millions) in years Share (in millions) Share
----------------- ------------- ---------------- -------------- ------------- --------------
$ 0.92 - $ 29.96 4.2 2.9 $ 18.76 4.2 $ 18.76
$29.99 - $ 59.19 8.2 5.3 $ 38.62 7.9 $ 38.12
$59.60 - $ 64.11 11.8 9.3 $ 61.47 0.1 $ 63.00
$64.40 - $ 67.90 11.5 7.7 $ 67.24 4.0 $ 66.08
$67.98 - $132.23 6.6 7.3 $ 69.07 0.8 $ 75.16
---------------- ------------- ---------------- -------------- ------------- --------------
$ 0.92 - $132.23 42.3 7.1 $ 55.52 17.0 $ 41.71
---------------- ------------- ---------------- -------------- ------------- --------------
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. See Note 3 for table
illustrating the effect on net income and earnings per share if the Company
adopted the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock Based Compensation."
The weighted average fair value of options granted during fiscal 2004,
2003 and 2002 are $22.78, $21.96 and $25.95, respectively.
91
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the options granted to Company employees and directors
were estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants in the respective periods:
As of June 30,
--------------------------------
2004 2003 2002
------- ------- -------
Risk-free interest rate 3.17% 2.32% 3.84%
Expected life 5 years 4 years 5 years
Expected volatility 37% 38% 36%
Dividend yield 0.19% 0.18% 0.15%
The market values of restricted shares and restricted share units awarded
by the Company are recorded in the "Other" component of shareholders' equity in
the accompanying consolidated balance sheets. The restricted shares are
amortized to expense over the period in which participants perform services,
generally one to seven years. The restricted share units are generally amortized
over a five-year vesting period. As of June 30, 2004, approximately 0.3 million
shares and share units remained restricted and subject to forfeiture.
The Company has employee stock purchase plans under which the sale of 12.0
million of the Company's Common Shares has been authorized. All employees who
have been employed by the Company for at least 30 days are eligible to
contribute from 1% to 15% of eligible compensation. The purchase price is
determined by the lower of 85% of the closing market price on the first day of
the offering period or 85% of the closing market price on the last day of the
offering period. During any given calendar year, there are two offering periods:
January 1-June 30; and July 1-December 31. At June 30, 2004, subscriptions
of 0.4 million shares were outstanding. Through June 30, 2004, 3.0 million
shares had been issued to employees under the plans.
15. EARNINGS PER SHARE
The following table reconciles the number of Common Shares used to compute
basic and diluted earnings per Common Share for the three years ending June 30,
2004:
The potentially dilutive employee stock options that were antidilutive for
fiscal 2004, 2003 and 2002 were 18.4 million, 22.5 million and 0.9 million,
respectively.
92
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CHANGE IN ACCOUNTING
Effective fiscal 2004, the Company changed its method of recognizing cash
discounts from recognizing cash discounts as a reduction of cost of products
sold primarily upon payment of vendor invoices to recording cash discounts as a
component of inventory cost and recognizing such discounts as a reduction to
cost of products sold upon the sale of inventory. The Company believes the
change in accounting method provides a more objectively determinable method of
recognizing cash discounts and a better matching of inventory cost to revenue.
The Company recorded a $38.5 million (net of tax of $22.5 million)
cumulative effect of change in accounting in the consolidated statements of
earnings. The cumulative effect reduced net diluted earnings per Common Share by
$0.09. The impact of this change for the fiscal year ended June 30, 2004 was an
increase in earnings from continuing operations before cumulative effect of
change in accounting by approximately $13.2 million. This resulted in an
increase in diluted earnings per Common Share from continuing operations of
$0.03 for fiscal 2004. The pro forma effect of this accounting change on prior
periods is as follows:
(in millions, except per Common Share amounts) 2003 2002
------------------------------------------------------------------------
Earnings from continuing operations before
cumulative effect of changes in accounting:
As restated $ 1,381.2 $ 1,140.8
Pro forma $ 1,368.4 $ 1,142.9
Net earnings:
As restated $ 1,375.1 $ 1,070.7
Pro forma $ 1,362.3 $ 1,072.8
Basic earnings per Common Share from
continuing operations:
As restated $ 3.10 $ 2.53
Pro forma $ 3.07 $ 2.54
Diluted earnings per Common Share from
continuing operations:
As restated $ 3.05 $ 2.48
Pro forma $ 3.02 $ 2.49
Net basic earnings per Common Share:
As restated $ 3.08 $ 2.37
Pro forma $ 3.05 $ 2.38
Net diluted earnings per Common Share:
As restated $ 3.03 $ 2.33
Pro forma $ 3.01 $ 2.33
In fiscal 2002, the method of recognizing revenue for pharmacy automation
equipment was changed from recognizing revenue when the units were delivered to
the customer to recognizing revenue when the units are installed at the customer
site. Management believes that the change in accounting method provides for a
more objectively determinable method of revenue recognition. In addition, the
Company implemented other changes to better service its customers and leverage
operational efficiencies. The Company recorded a cumulative effect of change in
accounting of $70.1 million (net of tax of $44.6 million) in the consolidated
statement of earnings during fiscal 2002. The after tax dilutive impact of the
cumulative effect is $0.15 per diluted share. The effect of the change for the
fiscal year ended June 30, 2002 was to reduce net earnings before the cumulative
effect by approximately $18.6 million. This change reduced diluted earnings per
share by $0.04 for the fiscal year ended June 30, 2002. The pro-forma effect of
this accounting change on prior periods has not been presented as the required
information is not available.
93
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of
goodwill for the three years ended June 30, 2004, in total and by reporting
segment:
Pharmaceutical
Distribution Medical Pharmaceutical Automation and
and Provider Products Technologies Information
(in millions) Services and Services and Services Services ALARIS Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 86.9 $ 671.7 $ 358.3 $ 41.7 - $1,158.6
-----------------------------------------------------------------------------------------------------------------------------------
Goodwill acquired, net of purchase
price adjustments, foreign currency
translation adjustments and other 3.6 3.7 350.4 9.0 - 366.7
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 90.5 $ 675.4 $ 708.7 $ 50.7 - $1,525.3
-----------------------------------------------------------------------------------------------------------------------------------
Goodwill acquired, net of purchase
price adjustments, foreign currency
translation adjustments and other 5.6 19.3 723.6 - - 748.5
Goodwill write-off - - (9.1) - - (9.1)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 96.1 $ 694.7 $ 1,423.2 $ 50.7 - $2,264.7
-----------------------------------------------------------------------------------------------------------------------------------
Goodwill acquired, net of purchase
price adjustments, foreign currency
translation adjustments and other (1)(2) 83.3 14.1 428.0 - 1,536.8 2,062.2
-----------------------------------------------------------------------------------------------------------------------------------
Goodwill related to the divestiture/
closure of businesses - - (7.6) - - (7.6)
-----------------------------------------------------------------------------------------------------------------------------------
Transfer (3) 31.6 (31.6) - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 $ 211.0 $ 677.2 $ 1,843.6 $ 50.7 $1,536.8 $4,319.3
===================================================================================================================================
(1) During the fourth quarter fiscal 2004, the Company acquired approximately
98.7% of the outstanding common stock of ALARIS and ALARIS merged with a
subsidiary of the Company to complete the transaction on July 7, 2004. See
Note 4 for additional information regarding this acquisition. As of June
30, 2004, the acquisition of ALARIS resulted in a preliminary goodwill
allocation of $1,536.8 million. During the second quarter fiscal 2004, the
Company completed the acquisition of Intercare. As of June 30, 2004, the
Company finalized the Intercare purchase price allocation, resulting in a
goodwill allocation of $430.9 million. During the six months ended
December 31, 2003, the Company also finalized the Syncor purchase price
allocation resulting in a goodwill reduction of $6.9 million. The
remaining amounts represent goodwill acquired from other immaterial
acquisitions, purchase price adjustments from prior period acquisitions
and foreign currency translation adjustments.
(2) For segment reporting purposes, as of June 30, 2004, a goodwill allocation
of $66.4 million was included within the Pharmaceutical Distribution and
Provider Services segment related to Intercare's specialty pharmaceutical
distribution business. All other goodwill allocations for Intercare are
included within the Pharmaceutical Technologies and Services segment.
(3) During the first quarter fiscal 2004, the Company transferred its
Consulting and Services business, previously reported within the Medical
Products and Services segment, to its Clinical Services and Consulting
business within the Pharmaceutical Distribution and Provider Services
segment to better align business operations. This transfer resulted in
approximately $31.6 million of goodwill being reclassed between the two
segments.
The purchase price allocation for ALARIS and other immaterial acquisitions
are not yet finalized and are subject to adjustment. Due to the short period of
time between the ALARIS acquisition date and fiscal year end, the Company had
not determined ALARIS's reporting segment treatment as of June 30, 2004. See
Note 18 for information regarding the recently announced new segment which will
include ALARIS.
94
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets with limited lives are being amortized using the
straight-line method over periods that range from five to forty years. The
detail of other intangible assets by class for the three years ended June 30,
2004 is as follows:
Gross Accumulated Net
(in millions) Intangible Amortization Intangible
--------------------------------------------------------------------
June 30, 2002
Trademarks and patents $ 30.0 $ 20.4 $ 9.6
Non-compete agreements 20.4 19.1 1.3
Other 16.8 8.9 7.9
--------------------------------------------------------------------
Total $ 67.2 $ 48.4 $ 18.8
--------------------------------------------------------------------
June 30, 2003
Trademarks and patents $ 48.1 $ 20.8 $ 27.3
Non-compete agreements 27.3 21.9 5.4
Customer relationships 12.5 1.2 11.3
Other 37.1 13.5 23.6
--------------------------------------------------------------------
Total $ 125.0 $ 57.4 $ 67.6
--------------------------------------------------------------------
June 30, 2004
Trademarks and patents $ 345.9 $ 23.4 $ 322.5
Non-compete agreements 32.0 24.8 7.2
Customer relationships 231.4 6.8 224.6
Other 82.4 17.2 65.2
--------------------------------------------------------------------
Total $ 691.7 $ 72.2 $ 619.5
====================================================================
Additions of intangible assets for fiscal 2003 primarily relate to the
Syncor acquisition (see Note 4).
Additions of intangible assets for fiscal 2004 primarily relate to the
ALARIS and Intercare acquisitions (see Note 4).
Amortization expense for the years ended June 30, 2004, 2003 and 2002
was $13.9 million, $6.7 million and $3.0 million, respectively. Amortization
expense is estimated to be (in millions):
The Company's operations are principally managed on a products and
services basis and are comprised of four reportable business segments:
Pharmaceutical Distribution and Provider Services, Medical Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services. During the first quarter fiscal 2004, the Company
transferred its Consulting and Services business, previously included within the
Medical Products and Services segment, to its Clinical Services and Consulting
business within the Pharmaceutical Distribution and Provider Services segment.
Also during the first quarter fiscal 2004, the Company transferred its clinical
information business, previously included within the Automation and Information
Services segment, to its Clinical Services and Consulting business within the
Pharmaceutical Distribution and Provider Services segment. These transfers were
done to better align business operations. Prior period financial results have
not been restated as each of these businesses is not significant within the
respective segments, and, therefore, the transfers did not have a material
impact on each segment's growth rates.
During fiscal 2003, the Company reclassified Central Pharmacy Services,
Inc. and Cord Logistics, Inc. from the Pharmaceutical Distribution and Provider
Services segment to the Pharmaceutical Technologies and Services segment and
therefore restated these segments' financial results. All prior period financial
results presented in this Form 10-K have been restated to reflect this
reclassification. In addition, with the completion of the Syncor acquisition on
January 1, 2003, Syncor was included within the Pharmaceutical Technologies and
Services segment.
In December 2003, the Company acquired Intercare, which operates specialty
pharmaceutical distribution and pharmaceutical manufacturing operations in
Europe (see Notes 4 and 17 for further discussion of the Intercare acquisition).
For the fiscal year ended June 30, 2004, the results of operations of
Intercare's specialty pharmaceutical distribution business, which is similar to
the Company's
95
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pharmaceutical distribution business, were included within the Pharmaceutical
Distribution and Provider Services segment (see Note 3 in the table below for
further information). All other results of operations for Intercare were
included within the Pharmaceutical Technologies and Services segment. For
segment reporting purposes, Intercare's results of operations will continue to
be reported in this manner. This classification was not reported during the
second quarter fiscal 2004 immediately following the acquisition as the Company
was still assessing the appropriate segment reporting treatment. Intercare's
results of operations for the second quarter of fiscal 2004 were not material to
the Company or the Company's individual segments.
The Company acquired approximately 98.7% of the outstanding common stock
of ALARIS and ALARIS merged with a subsidiary of the Company to complete the
transaction on July 7, 2004. The results of ALARIS' operations for the period
following the completion of the transaction have been included within the
Corporate segment for the year ended June 30, 2004. Due to the short period of
time between the acquisition date and year end, the impact of the results is not
material. See Notes 4 and 17 for additional information regarding the ALARIS
acquisition.
On August 30, 2004, the Company announced the creation of a new segment,
Clinical Technologies and Services, which will replace the Company's Automation
and Information Services segment and will include ALARIS, the Company's existing
businesses formerly within the Automation and Information Services segment and
the Company's existing Clinical Services and Consulting business, which was
formerly reported under the Pharmaceutical Distribution and Provider Services
segment. The Company will begin reporting results for this new segment beginning
with the first quarter fiscal 2005. In addition, effective first quarter fiscal
2005, the Company will transfer its Specialty Pharmaceutical Distribution
business, previously included within the Pharmaceutical Distribution and
Provider Services segment, to the Medical Products and Services segment. All
prior periods will be restated to reflect these transfers beginning in fiscal
2005.
The Pharmaceutical Distribution and Provider Services segment involves the
distribution of a broad line of pharmaceuticals, health care, and other
specialty pharmaceutical products and other items typically sold by hospitals,
retail drug stores and other health care providers. In addition, this segment
provides services to the health care industry through integrated pharmacy
management, temporary pharmacy staffing, as well as franchising of
apothecary-style retail pharmacies.
The Medical Products and Services segment involves the manufacture of
medical, surgical and laboratory products and the distribution of these products
as well as products not manufactured internally to hospitals, physician offices,
surgery centers and other health care providers.
The Pharmaceutical Technologies and Services segment provides services to
the health care industry through the design and manufacture of proprietary drug
delivery systems including softgel capsules, controlled release forms, Zydis(R)
fast dissolving wafers and advanced sterile delivery technologies. This segment
also provides sterile injectible pharmaceutical products for pharmacies in the
United Kingdom. It also provides comprehensive packaging, radiopharmaceutical
manufacturing, pharmaceutical development and analytical science expertise, as
well as medical education, marketing and contract sales services.
The Automation and Information Services segment provides services, to
hospitals and other health care providers, focusing on meeting customer needs
through unique and proprietary automation and information products and services.
In addition, this segment markets point-of-use supply systems for use in the
life sciences market.
The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Information
about interest income and expense and income taxes is not provided on a segment
level. In addition, special charges are not allocated to the segments. The
accounting policies of the segments are the same as described in the summary of
significant accounting policies.
96
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables include revenue and operating earnings for each
business segment and reconciling items necessary to agree to amounts reported in
the consolidated financial statements for the fiscal years ended June 30, 2004,
2003 and 2002:
Revenue (1)
------------------------------------
(in millions) 2004 2003 2002
------------------------------------
Restated Restated
Revenue:
Pharmaceutical Distribution and Provider Services (1) (2) (3) $ 54,231.0 $ 47,260.1 $ 42,998.0
Medical Products and Services 7,357.6 6,614.7 6,256.7
Pharmaceutical Technologies and Services (1) (4) 2,804.1 2,250.0 1,417.5
Automation and Information Services (6) 680.8 666.7 560.2
Corporate (5) (20.0) (60.0) (87.8)
------------------------------------
Total revenue $ 65,053.5 $ 56,731.5 $ 51,144.6
====================================
Operating Earnings
------------------------------------
(in millions) 2004 2003 2002
------------------------------------
Restated Restated
Pharmaceutical Distribution and Provider Services (3) $ 1,173.4 $ 1,188.1 $ 1,081.0
Medical Products and Services 666.0 591.8 545.2
Pharmaceutical Technologies and Services (6) 465.4 368.3 265.0
Automation and Information Services (6) 270.2 266.0 209.2
Corporate (6) (237.7) (218.2) (243.0)
------------------------------------
Total operating earnings $ 2,337.3 $ 2,196.0 $ 1,857.4
====================================
The following tables include depreciation and amortization expense and
capital expenditures for the fiscal years ended June 30, 2004, 2003 and 2002 for
each segment as well as reconciling items necessary to total the amounts
reported in the consolidated financial statements:
Depreciation and Amortization Expense
------------------------------------
(in millions) 2004 2003 2002
------------------------------------
Pharmaceutical Distribution and Provider Services $ 56.2 $ 62.3 $ 61.2
Medical Products and Services 88.2 87.7 87.7
Pharmaceutical Technologies and Services 106.6 82.7 65.2
Automation and Information Services 16.3 16.9 14.3
Corporate 31.9 16.2 15.1
------------------------------------
Total depreciation and amortization expense $ 299.2 $ 265.8 $ 243.5
====================================
Capital Expenditures
------------------------------------
(in millions) 2004 2003 2002
------------------------------------
Pharmaceutical Distribution and Provider Services $ 64.0 $ 67.3 $ 60.4
Medical Products and Services 100.7 85.4 88.0
Pharmaceutical Technologies and Services 192.9 182.9 104.4
Automation and Information Services 25.1 10.9 15.1
Corporate 27.5 76.7 17.5
------------------------------------
Total capital expenditures $ 410.2 $ 423.2 $ 285.4
====================================
97
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table includes total assets for the fiscal years ended
June 30, 2004 and 2003 for each segment as well as reconciling items necessary
to total the amounts reported in the consolidated financial statements:
Assets
-----------------------
(in millions) 2004 2003
-----------------------
Restated
Pharmaceutical Distribution and Provider Services $ 9,011.1 $ 8,729.6
Medical Products and Services 3,431.9 3,350.2
Pharmaceutical Technologies and Services 4,389.3 3,094.7
Automation and Information Services 1,192.3 1,203.2
Corporate (7) 3,344.5 2,087.4
-----------------------
Total assets $ 21,369.1 $ 18,465.1
=======================
(1) Revenue previously classified as "Bulk Deliveries to Customer Warehouses
and Other" has been reclassified within this Form 10-K, in all periods
presented, as a result of the Company's decision to aggregate revenue
classes. For additional information concerning the reclassification, see
Note 2.
(2) The Pharmaceutical Distribution and Provider Services segment's revenue is
derived from three main product categories. These product categories and
their respective contributions to revenue are as follows:
Product Category 2004 2003 2002
------------------------------------------------------------------------------
Adjusted Adjusted
Pharmaceuticals and Health Care Products 95% 95% 95%
Specialty Pharmaceutical Products 3% 3% 3%
Other Products & Services 2% 2% 2%
-------------------------------
Total 100% 100% 100%
===============================
(3) Operating results for Intercare, acquired in December 2003, include a
specialty pharmaceutical distribution business that is similar to the
Company's pharmaceutical distribution business. For segment reporting
purposes, this specialty pharmaceutical distribution business was included
in the Pharmaceutical Distribution and Provider Services segment for the
fiscal year ended June 30, 2004. This classification was not reported
during the second quarter of fiscal 2004 immediately following the
acquisition as the Company was still assessing the appropriate segment
reporting treatment. Intercare's results of operations for the second
quarter of fiscal 2004 were not material to the Company or the Company's
individual segments.
(4) The Pharmaceutical Technologies and Services segment's revenue is
derived from three main product categories. These product categories and
their respective contributions to revenue are as follows:
(5) Corporate revenue primarily consists of foreign currency translation
adjustments and the elimination of intersegment revenue.
(6) Corporate operating earnings consist of special items of $57.4 million,
$39.9 million and $116.6 million for the fiscal years ended June 30, 2004,
2003 and 2002, respectively (see Note 4 for discussion of special items).
Corporate costs are allocated to the business segments generally based on
certain factors such as revenue, operating earnings and employee base. In
addition, the Company attempts to maintain a relatively consistent year
over year rate of Corporate allocated costs per segment's net revenue.
These Corporate cost allocations may change from period to period
depending upon an individual segment's use of Corporate services. The
Company does not allocate any Corporate costs for human resources, finance
and technology. Corporate operating earnings include unallocated Corporate
administrative expenses, costs not attributable to the operations of the
segments and certain other Corporate directed costs, as follows:
- Investment spending - the Company has encouraged its business units
to identify investment projects which will provide future returns.
98
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These projects typically require incremental strategic investments
in the form of additional capital or operating expenses. As approval
decisions for such projects are dependent upon Corporate management,
the expenses for such projects are retained at the Corporate
segment. Investment spending for fiscal years, 2004, 2003 and 2002
was $48.3 million, $58.0 million and $30.6 million, respectively.
- Interest income adjustment - At the direction of Corporate
management, the Automation and Information Services segment sold
portions of its leased asset portfolio and transferred the proceeds
to Corporate. As the capital proceeds associated with these sales
have not been redeployed within the business segment, but utilized
for other general corporate purposes, the segment was allocated a
benefit by Corporate for the interest income that would have been
earned associated with these sold leases. In fiscal 2004, the
segment received a $21 million allocation from Corporate.
- Foreign exchange adjustments - The Company assesses the financial
performance of its Pharmaceutical Technologies and Services business
by applying constant foreign exchange rates to translate foreign
business units operating results into U.S. dollars. For fiscal 2004,
2003 and 2002, $11.2 million, $17.5 million and $17.4 million of
expenses were allocated to Corporate representing the difference
between "constant rates" and "actual" exchange rates.
- At the beginning fiscal 2003, the Company began expanding the use of
its shared service center, which previously supported the Medical
Products and Services segment, to benefit and support company-wide
initiatives and other business segments. Accordingly, the cost of
the shared service center, which was previously reported within the
Medical Products and Services segment, has been classified within
Corporate operating earnings for fiscal 2004 and 2003. The cost of
these services was approximately $18.4 million and $19.0 million,
respectively, for fiscal 2004 and fiscal 2003.
(7) Includes ALARIS assets of approximately $2.4 billion of which
approximately $1.5 billion relates to the preliminary goodwill allocation
and $413.2 million relates to intangible assets. The remaining assets
primarily include Corporate cash and cash equivalents, Corporate net
property and equipment and unallocated deferred taxes.
The following table presents revenue and long-lived assets by geographic area
(in millions):
Revenue Long-Lived Assets
------------------------------------ ------------------------------------
For The Fiscal Year Ended June 30, As of June 30,
------------------------------------ ------------------------------------
2004 2003 2002 2004 2003 2002
---------------------------------------------------------------------------
Restated Restated
United States $ 63,627.3 $ 55,673.1 $ 50,193.9 $ 1,932.1 $ 1,693.5 $ 1,416.6
International 1,426.2 1,058.4 950.7 431.9 396.0 477.8
------------------------------------ ------------------------------------
Total $ 65,053.5 $ 56,731.5 $ 51,144.6 $ 2,364.0 $ 2,089.5 $ 1,894.4
==================================== ====================================
Long-lived assets include property and equipment, net of accumulated
depreciation.
99
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is selected quarterly financial data (in millions, except
per Common Share amounts) for fiscal 2004 and 2003. The sum of the quarters may
not equal year-to-date due to rounding.
First Quarter Second Quarter
---------------------------------------- ----------------------------------------
Change in Change in
Reported Accounting (2) Restated (2) Reported Accounting (2) Restated (2)
---------------------------------------- ----------------------------------------
FISCAL 2004
Revenue (1) $ 15,388.7 $ 15,388.7 $ 15,388.2 $ 16,350.4 $ 16,350.4 $ 16,350.8
Gross margin 1,083.2 1,080.0 1,072.8 1,170.7 1,167.2 1,161.0
Selling, general and administrative expenses 547.6 547.6 547.6 586.9 586.9 588.0
Earnings from continuing operations before
cumulative effect of change in accounting 330.4 328.2 323.5 380.9 378.5 373.6
Loss from discontinued operations (1.8) (1.8) (1.8) (5.1) (5.1) (5.1)
Cumulative effect of change in accounting - (38.5) (38.5) - - -
---------------------------------------- ----------------------------------------
Net earnings $ 328.6 $ 287.9 $ 283.2 $ 375.8 $ 373.4 $ 368.5
Earnings from continuing operations before
cumulative effect of change in accounting
per Common Share:
Basic $ 0.75 $ 0.75 $ 0.73 $ 0.88 $ 0.87 $ 0.86
Diluted $ 0.74 $ 0.73 $ 0.72 $ 0.87 $ 0.86 $ 0.85
Third Quarter Fourth Quarter
---------------------------------------- --------------
Change in
Reported Accounting (2) Restated (2) Reported
---------------------------------------- ----------
FISCAL 2004
Revenue (1) $ 16,392.3 $ 16,392.3 $ 16,391.8 $ 16,922.7
Gross margin 1,280.8 1,291.0 1,283.4 1,224.0
Selling, general and administrative expenses 608.0 608.0 608.9 602.1
Earnings from continuing operations before
cumulative effect of change in accounting 428.9 435.8 430.1 397.4
Loss from discontinued operations (0.8) (0.8) (0.8) (3.9)
Cumulative effect of change in accounting - - - -
---------------------------------------- ----------
Net earnings $ 428.1 $ 435.0 $ 429.3 $ 393.5
Earnings from continuing operations before
cumulative effect of change in accounting
per Common Share:
Basic $ 0.99 $ 1.01 $ 1.00 $ 0.92
Diluted $ 0.98 $ 0.99 $ 0.99 $ 0.91
100
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Revenue previously classified as "Bulk Deliveries to Customer Warehouses
and Other" has been reclassified within this Form 10-K, in all periods
presented, as a result of the Company's decision to aggregate revenue
classes. These reclassifications have no effect on previously reported
total revenue, gross margins, earnings from continuing operations, net
earnings or earnings per Common Share amounts. For additional information
concerning the reclassification, see Note 2.
(2) During fiscal 2004, the Company changed its method of recognizing cash
discounts for payments made to vendors (See Note 16). Fiscal 2004
quarterly financial information has been restated from previously issued
quarterly financial statements to reflect this change in accounting. The
"change in accounting" column reflects the reported numbers restated for
the change in accounting. The "restated" column includes all restatements
including the change in accounting.
As discussed in Note 4, merger-related costs and other special items were
recognized in various quarters in fiscal 2004 and 2003. The following table
summarizes the impact of such costs on net earnings and diluted earnings per
Common Share in the quarters in which they were recorded (in millions, except
per Common Share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2004
Net earnings $ (8.7) $ 3.3 $ (4.9) $ (25.3)
Diluted net earnings per Common Share $ (0.02) $ 0.01 $ (0.01) $ (0.06)
------- ------- ------- -------
Fiscal 2003
Net earnings $ (15.6) $ 22.1 $ (6.4) $ (33.3)
Diluted net earnings per Common Share $ (0.03) $ 0.05 $ (0.01) $ (0.07)
------- ------- ------- -------
20. GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation enhances a
guarantor's disclosure requirements in its interim and annual financial
statements regarding obligations under certain guarantees. The Company adopted
the enhanced disclosure requirements in the second quarter of fiscal 2003. The
initial recognition and measurement provisions of the interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
The Company has contingent commitments related to certain operating lease
agreements (see Note 10). These operating leases consist of certain real estate
and equipment used in the operations of the Company. In the event of termination
of these operating leases, which range in length from one to ten years, the
Company guarantees reimbursement for a portion of any unrecovered
101
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property cost. At June 30, 2004, the maximum amount the Company could be
required to reimburse was $396.9 million. Based upon current information, the
Company believes that the proceeds from the sale of properties under these
operating lease agreements would exceed this contingent obligation. In
accordance with FASB Interpretation No. 45, the Company has recorded $4.3
million related to these guarantees.
In the ordinary course of business, the Company, from time to time, agrees
to indemnify certain other parties under agreements with the Company, including
under acquisition agreements, customer agreements, and intellectual property
licensing agreements. Such indemnification obligations vary in scope and, when
defined, in duration. In many cases, a maximum obligation is not explicitly
stated and, therefore, the overall maximum amount of the liability under such
indemnification obligations cannot be reasonably estimated. Where appropriate,
such indemnification obligations are recorded as a liability. Historically, the
Company has not, individually or in the aggregate, made payments under these
indemnification obligations in any material amounts. In certain circumstances,
the Company believes that its existing insurance arrangements, subject to the
general deduction and exclusion provisions, would cover portions of the
liability that may arise from these indemnification obligations. In addition,
the Company believes that the likelihood of material liability being triggered
under these indemnification obligations is not significant.
In the ordinary course of business, the Company, from time to time, enters
into agreements that obligate the Company to make fixed payments upon the
occurrence of certain events. Such obligations primarily relate to obligations
arising under acquisition transactions, where the Company has agreed to make
payments based upon the achievement of certain financial performance measures by
the acquired business. Generally, the obligation is capped at an explicit
amount. The Company's aggregate exposure for these obligations, assuming the
achievement of all financial performance measures, is not material. Any
potential payment for these obligations would be treated as an adjustment to the
purchase price of the related entity and would have no impact on the Company's
results of operations.
21. DISCONTINUED OPERATIONS
In connection with the acquisition of Syncor, the Company acquired certain
operations of Syncor that were or will be discontinued. Prior to the
acquisition, Syncor announced the discontinuation of certain operations
including the medical imaging business and certain overseas operations. The
Company is continuing with these plans and has added additional international
and non-core domestic businesses to the discontinued operations of Syncor. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the net assets and results of operations of these businesses
are presented as discontinued operations. The Company is currently overseeing
the planned sale of the discontinued operations and is actively marketing these
businesses. The Company expects to sell substantially all of the remaining
discontinued operations by the end of the second quarter of fiscal 2005. The net
assets for the discontinued operations are included within the Pharmaceutical
Technologies and Services segment.
The results of discontinued operations for the fiscal years ended June 30,
2004 and 2003 are summarized as follows:
Fiscal Year
Ended June 30,
(in millions) 2004 2003
-------------------------------------------------
Revenue $ 77.1 $ 92.5
==============
Loss before income taxes $(19.1) $ (8.6)
Income tax benefit 7.4 2.5
--------------
Loss from discontinued operations $(11.7) $ (6.1)
==============
Interest expense allocated to discontinued operations was $0.2 million and
$0.5 million for the fiscal years ended June 30, 2004 and 2003, respectively.
Interest expense was allocated to the discontinued operations based upon a ratio
of the net assets of discontinued operations versus the overall net assets of
Syncor.
102
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2004 and 2003 the major components of assets and liabilities
of the discontinued operations were as follows:
Fiscal Year
Ended June 30,
(in millions) 2004 2003
---------------------------------------------------
Current Assets $ 21.2 $ 49.9
Property and Equipment 22.0 63.2
Other Assets 17.2 57.0
--------- --------
Total Assets $ 60.4 $ 170.1
========= ========
Current Liabilities $ 30.9 $ 35.6
Long Term Debt and Other 24.2 28.7
--------- --------
Total Liabilities $ 55.1 $ 64.3
========= ========
Cash flows generated from the discontinued operations are immaterial to
the Company and, therefore, are not disclosed separately.
22. SUBSEQUENT EVENTS
Subsequent to June 30, 2004, the Company borrowed $1.25 billion in the
aggregate on its two $750 million bank revolving credit facilities. The proceeds
of this borrowing were utilized to repay a significant portion of the Company's
commercial paper, none of which remained outstanding as of the filing date of
this Form 10-K, and for general corporate purposes, including the establishment
of pharmaceutical inventory at the Pharmaceutical Distribution business'
National Logistics Center in Groveport, Ohio. See Note 6 for further discussion
regarding the nature and terms of the Company's bank revolving credit
facilities.
Also, subsequent to June 30, 2004, the Company received a commitment
letter for a $500 million committed borrowing facility to be used for general
corporate purposes. This facility is in the process of being negotiated.
Additionally, subsequent to June 30, 2004, the Company sold in the
aggregate $800 million of receivables under its committed receivables sales
facility program. The capacity under the committed receivables sales facility
program was increased from $500 million to $800 million in September 2004. See
Note 10 for further information regarding this facility.
103
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a: CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Exchange Act Rule
13a-15(b), with the participation of the Company's principal executive officer
and principal financial officer, of the effectiveness of the Company's
disclosure controls and procedures, as of the end of the period covered by this
report. This evaluation, which has taken into account conclusions reached to
date in connection with the internal review conducted by the Audit Committee
of the Company's Board of Directors, has allowed the Company to make
conclusions, as set forth below, regarding the state of its disclosure controls
and procedures. As noted below, material weaknesses have been identified in the
Company's internal controls.
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in its reports
filed under the Exchange Act, such as this Form 10-K, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. The Company's disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to management to
allow timely decisions regarding required disclosure. The Company's internal
controls are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements in
conformity with GAAP.
As disclosed in Notes 1 and 2 in "Notes to Consolidated Financial
Statements" and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company has taken certain actions as a
result of the internal review undertaken by the Audit Committee with respect to
certain accounting matters. These actions include: a restatement of the
Company's financial statements for fiscal 2000, 2001, 2002 and 2003 and the
first three quarters of fiscal 2004; a reclassification of certain categories of
revenue; and expanded disclosure with respect to various items in this Form
10-K.
In connection with the Audit Committee's internal review, since the end of
fiscal 2004, the Company has adopted and is in the process of implementing
various measures in connection with the Company's ongoing efforts to improve its
internal control processes and corporate governance. These measures include the
following:
- appointment of an interim Chief Financial Officer with substantial
accounting and public company financial expertise, who is familiar
with the design and operation of effective accounting and disclosure
processes;
- creation of an Office of the Chief Compliance Officer and
appointment of such officer to help ensure that the Company is
following best practices with respect to regulatory and compliance
matters;
- appointment of a Chief Accounting Officer, separate from the
Controller, who will be primarily responsible for keeping the
Company apprised of contemporary accounting issues;
- appointment of a new Treasurer;
- enhancement of the internal audit function by increasing the number
of internal audit staff and recruiting seasoned audit professionals;
- adoption of additional governance processes relating to operation of
the Company's Disclosure Committee;
- development of written procedures for, among other items, reviewing
unusual financial statement adjustments and allocating costs to the
Company's segments;
- adoption of process improvements concerning the Company's financial
statement close process;
- adoption of policy, procedure and oversight improvements concerning
the timing of revenue recognition within the Company's Automation
and Information Services segment (as more fully discussed in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 of "Notes to Consolidated
Financial Statements");
- development of systems enhancements to enable automated audit
verifications of installed automatic dispensing equipment at
customer locations;
- adoption of process improvements for the establishment and
adjustment of reserves;
- adoption of improved accounting and reporting controls for complex
vendor and customer relationships;
- development of additional training programs for the Company's
finance and accounting personnel;
- development of enhanced educational programs for personnel at all
levels in ethics, corporate compliance, disclosure, procedures for
anonymous reporting of concerns and mechanisms for enforcing Company
policies; and
- implementation of an enhanced certification process from the
Company's finance, accounting and operations personnel in connection
with the financial statement close process, which enhancements are,
in part, intended to ensure operating decisions are based on
appropriate business considerations.
The Company is in the process of implementing the control enhancements
discussed above, which are intended to improve the Company's control procedures
and address the issues resulting in the material weaknesses identified by the
Company's independent auditor.
In connection with the completion of its audit with respect to the
Company's financial statements for fiscal 2004, including additional procedures
resulting from the Audit Committee's internal review, the Company's independent
auditor identified and communicated to the Company's management and the Audit
Committee a "material weakness" (as defined under standards established by the
American Institute of Certified Public Accountants) in the Company's entity
level controls relating to the Company's control environment through June 30,
2004. Specifically, the Company's independent auditor communicated that its
conclusion was based on the following:
- bulk sales revenue recognition policy was inappropriately applied to
certain sales in several quarters during fiscal 2003 and 2002;
- errors or lack of substantiation with respect to the amount of
certain reserves and the timing of the release of certain reserves;
104
- lack of effective communication relating to balance sheet reserves
and bulk sales treatment; and
- restatement of the Company's financial statements for prior fiscal
years and corresponding expanded disclosures with respect to those
years.
In addition, the Company's independent auditor stated that the
circumstances described above raised questions regarding whether the overall
tone set by the Company's management clearly communicated a strong commitment to
sound financial reporting practices.
Further, the independent auditor concluded that a material weakness
existed with respect to the timing of revenue recognition within the Company's
Automation and Information Services segment. As described in Note 1 in "Notes to
Consolidated Financial Statements," the Company became aware that some equipment
confirmation forms were being executed prior to completion of installation of
Pyxis equipment. Equipment revenue is recognized upon completion of equipment
confirmation forms. See Note 1 in "Notes to Consolidated Financial Statements"
for a description of this revenue recognition policy. The Company did not have
controls in place to assure that installations had in fact occurred before
customer acceptance.
The independent auditor also acknowledged that in connection with the
Audit Committee's internal review, since the end of fiscal 2004, the Company has
adopted and is in the process of implementing various measures in connection
with the Company's ongoing efforts to improve its internal control process and
corporate governance and address the independent auditor's material weakness
conclusions.
The Company believes that the implementation of the enhancements
identified above in this Item 9a and in Note 1 of "Notes to Consolidated
Financial Statements" will correct these material weaknesses for future periods,
and the Company will continue to examine this issue for possible further
enhancements to its control processes.
In addition, the Company and the Audit Committee will continue to
implement enhancements in the Company's control processes as necessary in
response to specific accounting and reporting issues arising out of the Audit
Committee's internal review. The Company will continue to develop policies and
procedures and reinforce compliance with existing policies and procedures in the
Company's effort to constantly improve its internal control environment.
The Company's management, including its principal executive officer and
the principal financial officer, does not expect that the Company's disclosure
controls and procedures and its internal control processes will prevent all
error and all fraud. 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. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, 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 a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. The
Company monitors its disclosure controls and procedures and internal controls
and makes modifications as necessary; the Company's intent in this regard is
that the disclosure controls and procedures and the internal controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
Based on the evaluation of the effectiveness of the Company's disclosure
controls and procedures as of June 30, 2004, which included an evaluation of the
effectiveness of the Company's disclosure controls and procedures applicable to
the period covered by and existing through the filing of this periodic report,
and subject to the matters described in this Item 9a, the Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures needed improvement and were not
effective as of June 30, 2004. There were no changes in the Company's internal
controls over financial reporting during the quarter ended June 30, 2004 that
have materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting. The Company believes, and its
principal executive officer and principal financial officer have concluded, that
the implementation in fiscal 2005 of the improvements and enhancements described
above should be sufficient to provide for adequate and effective disclosure
controls and procedures for future periods.
Appearing as exhibits to this Form 10-K are the certifications of the
Company's principal executive officer and the principal financial officer
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The
disclosures set forth in this Item 9a contain information concerning the
evaluation of the Company's disclosure controls and procedures, and changes in
internal control over financial reporting, referred to in paragraphs 4(b) and
(c) of the certifications. This Item 9a should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
105
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, principal occupation for the last five years and
selected biographical information for each of the directors and executive
officers of the Company are set forth below. With respect to the principal
occupations held by directors during the past five years, unless otherwise
stated, the occupations listed below have been held during the entire past five
years. All information is provided as of October 25, 2004.
DIRECTORS
ROBERT D. WALTER (Age 59) Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979, and with the
Company's predecessor business since its formation in 1971. Mr. R. Walter also
serves as a director of the American Express Company, a travel, financial and
network services company; and Viacom Inc., a media company. Mr. R. Walter is the
father of Matthew D. Walter, a director of the Company. Mr. R. Walter's term as
a director of the Company expires in 2006.
DAVE BING (Age 60) Director of the Company since 2000; Chairman and
Chief Executive Officer of The Bing Group, L.L.C., an automotive parts
manufacturer. Mr. Bing also serves as a director of DTE Energy Company. Mr.
Bing's term as a director of the Company expires in 2006.
GEORGE H. CONRADES (Age 65) Director of the Company since 1999;
Chairman and Chief Executive Officer of Akamai Technologies, Inc., an e-business
infrastructure provider ("Akamai"), since April 1999; Venture partner in Polaris
Venture Partners, an early stage investment company, since August 1998. Mr.
Conrades also serves as a director of Akamai and Harley-Davidson, Inc., a
motorcycle manufacturer. Mr. Conrades' term as a director of the Company expires
in 2004.
JOHN F. FINN (Age 56) Director of the Company since 1994; Chairman and
Chief Executive Officer of Gardner, Inc., an outdoor power equipment
distributor. Mr. Finn also serves as a director of the One Group Mutual Funds, a
registered investment company. Mr. Finn's term as a director of the Company
expires in 2006.
ROBERT L. GERBIG (Age 59) Director of the Company since its formation
in 1979, and with the Company's predecessor business since 1975; Retired
Chairman and Chief Executive Officer of Gerbig, Snell/Weisheimer & Associates,
Inc., an advertising agency. Mr. Gerbig's term as a director of the Company
expires in 2004.
JOHN F. HAVENS (Age 77) Director of the Company since 1979; Director
Emeritus and retired Chairman of Bank One Corporation, a bank holding company
("Bank One"). Mr. Havens' term as a director of the Company expires in 2006.
J. MICHAEL LOSH (Age 58) Director of the Company since 1996; Chief
Financial Officer of the Company on an interim basis since July 2004; Chairman
of Metaldyne Corporation, an automotive parts manufacturer ("Metaldyne"),
October 2000 to April 2002; Chief Financial Officer of General Motors
Corporation, an automobile manufacturer, 1994 to August 2000. Mr. Losh also
serves as a director of AMB Property Corporation, an industrial real estate
owner and operator; Aon Corporation, an insurance brokerage, consulting and
underwriting company ("Aon"); H.B. Fuller Company, a specialty chemicals and
industrial adhesives manufacturer; Masco Corp., a manufacturer of home
improvement and building products; Metaldyne; and TRW Automotive Holdings Corp.,
a supplier of automotive systems, modules and components. Mr. Losh's term as a
director of the Company expires in 2005.
JOHN B. MCCOY (Age 61) Director of the Company since 1987; Retired
Chairman of Corillian Corporation, an online banking and software services
company, June 2000 to January 2004; Chief Executive Officer of Bank One, 1984 to
December 1999. Mr. McCoy also serves as a director of the Federal Home Loan
Mortgage Corporation, a corporation supporting homeownership and rental housing;
and SBC Communications, Inc., a telecommunications systems company. Mr. McCoy's
term as a director of the Company expires in 2005.
106
RICHARD C. NOTEBAERT (Age 57) Director of the Company since 1999;
Chairman and Chief Executive Officer of Qwest Communications International Inc.,
a telecommunications systems company ("Qwest"), since July 2002; President and
Chief Executive Officer of Tellabs, Inc., a communications equipment and
services provider, September 2000 to July 2002; Chairman and Chief Executive
Officer of Ameritech Corporation, a full-service communications company, April
1994 to December 1999. Mr. Notebaert also serves as a director of Qwest and Aon.
Mr. Notebaert's term as a director of the Company expires in 2004.
MICHAEL D. O'HALLERAN (Age 54) Director of the Company since 1999;
Senior Executive Vice President of Aon since September 2004; President and Chief
Operating Officer of Aon, April 1999 to September 2004. Mr. O'Halleran also
serves as a director of Aon. Mr. O'Halleran's term as a director of the Company
expires in 2005.
DAVID W. RAISBECK (Age 55) Director of the Company since 2002; Vice
Chairman of Cargill, Incorporated, a marketer, processor and distributor of
agricultural, food, financial and industrial products and services ("Cargill"),
since November 1999, and other merchandising and management positions with
Cargill prior to that. Mr. Raisbeck also serves as a director of Eastman
Chemical Company, a plastics, chemicals and fibers manufacturer. Mr. Raisbeck's
term as a director of the Company expires in 2006.
JEAN G. SPAULDING, M.D (Age 57) Director of the Company since 2002;
Consultant, Duke University Health System, a non-profit academic health care
system, since January 2003; Trustee, The Duke Endowment, a charitable trust,
since January 2002; Private medical practice in psychiatry since 1977; Associate
Clinical Professorships at Duke University Medical Center, a non-profit academic
hospital, since 1998; Vice Chancellor for Health Affairs, Duke University Health
System, 1998 to 2002. Dr. Spaulding's term as a director of the Company expires
in 2005.
MATTHEW D. WALTER (Age 35) Director of the Company since 2002; Chief
Executive Officer of BoundTree Medical Products, Inc., a provider of medical
equipment to the emergency medical market, since November 2000; Managing Partner
of Talisman Capital, a private investment company, since June 2000; Vice
President and General Manager of National PharmPak, Inc., a subsidiary of the
Company, July 1996 to September 2000. Mr. M. Walter also serves as a director of
Bancinsurance Corporation, an insurance holding company. Mr. M. Walter is the
son of Robert D. Walter, Chairman and Chief Executive Officer of the Company.
Mr. M. Walter's term as a director of the Company expires in 2005.
EXECUTIVE OFFICERS
Of the above directors, Messrs. R. Walter and Losh also are executive
officers of the Company.
GEORGE L. FOTIADES (Age 51) President and Chief Operating Officer since
February 2004; President and Chief Executive Officer - Life Sciences Products
and Services, December 2002 to February 2004; Executive Vice President and
President and Chief Operating Officer - Pharmaceutical Technologies and
Services, November 2000 to December 2002; Executive Vice President and Group
President of Scherer, a subsidiary of the Company, August 1998 to October 2000.
Mr. Fotiades serves as a director of ProLogis.
RONALD K. LABRUM (Age 48) Chairman and Chief Executive Officer -
Integrated Provider Solutions and Cardinal Health - International since August
2004; President and Chief Executive Officer - Integrated Provider Solutions,
February 2004 to August 2004; Executive Vice President and Group President -
Medical Products and Services, November 2000 to February 2004; President,
Manufacturing and Distribution of Allegiance, a subsidiary of the Company,
October 2000 to November 2000; Corporate Vice President, Regional
Companies/Health Systems of Allegiance, January 1997 to October 2000.
MARK W. PARRISH (Age 49) Chairman and Chief Executive Officer -
Pharmaceutical Distribution and Provider Services since August 2004; Executive
Vice President and Group President - Pharmaceutical Distribution, January 2003
to August 2004; President, Medicine Shoppe, a subsidiary of the Company, July
2001 to January 2003; Executive Vice President - Retail Sales and Marketing,
June 1999 to July 2001.
107
DAVID L. SCHLOTTERBECK (Age 57) Chairman and Chief Executive Officer -
Clinical Technologies and Services since August 2004; President of ALARIS, a
subsidiary of the Company, June 2004 to August 2004; President and Chief
Executive Officer and a director of ALARIS, November 1999 to June 2004;
President and Chief Operating Officer of ALARIS, April 1999 to November 1999.
JODY R. DAVIDS (Age 48) Executive Vice President and Chief Information
Officer since March 2003; Senior Vice President - Information Technology -
Pharmaceutical Distribution, January 2000 to March 2003; Director of Technology
Services of NIKE, Inc., a designer, marketer and distributor of athletic
footwear, apparel, equipment and accessories for sports and fitness activities,
April 1997 to January 2000.
GARY D. DOLCH (Age 57) Executive Vice President - Quality and
Regulatory Affairs since December 2002; Senior Vice President of Quality and
Regulatory Affairs of the American Red Cross, May 2001 to December 2002; Vice
President, Quality Assurance for the pharmaceutical operations of BASF, a
chemical company, under the Knoll name, April 1995 to May 2001.
BRENDAN A. FORD (Age 46) Executive Vice President - Corporate
Development since November 1999; Senior Vice President - Corporate Development,
February 1996 to November 1999.
ANTHONY J. RUCCI (Age 54) Executive Vice President and President of
Strategic Corporate Resources since August 2004; Executive Vice President and
Chief Administrative Officer, January 2000 to August 2004; Executive Vice
President - Human Resources, November 1999 to January 2000; Dean of the
University of Illinois at Chicago's College of Business Administration, 1998 to
November 1999.
CAROLE S. WATKINS (Age 44) Executive Vice President - Human Resources
since August 2000; Senior Vice President - Human Resources - Pharmaceutical
Distribution and Provider Services, February 2000 to August 2000; Vice President
- Human Resources - Cardinal Distribution, November 1996 to February 2000.
PAUL S. WILLIAMS (Age 45) Executive Vice President, Chief Legal Officer
and Secretary since April 2001; Senior Vice President, Deputy General Counsel
and Assistant Secretary, January 2001 to March 2001; Vice President, Deputy
General Counsel and Assistant Secretary, July 1999 to January 2001. Mr. Williams
serves as a director of State Auto Financial Corporation.
APPOINTMENT OF NEW PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
Effective as of July 26, 2004, Mr. Losh was appointed the Company's Chief
Financial Officer on an interim basis and its principal financial officer,
replacing Richard J. Miller. Effective as of October 24, 2004, Mr. Losh was
appointed the Company's principal accounting officer, replacing Gary S. Jensen,
who remains the Company's Controller. Mr. Losh's biographical information
appears above. The Company entered into an employment agreement with Mr. Losh
effective July 26, 2004, the material terms of which are described below in
"Item 11: Executive Compensation," under the heading "Employment Agreements and
Other Arrangements." The compensation to be provided to Mr. Losh under the
employment agreement will not be adjusted as a result of Mr. Losh taking on the
additional role of principal accounting officer.
COMPOSITION OF BOARD COMMITTEES
Messrs. Finn (Chairman), Bing, Conrades, Gerbig, O'Halleran and
Raisbeck are the current members of the Audit Committee of the Company's Board
of Directors. Messrs. McCoy (Chairman), Havens and Notebaert and Dr. Spaulding
are the current members of the Board's Human Resources and Compensation
Committee (the "Compensation Committee"). Messrs. Conrades (Chairman), Finn,
Havens and McCoy are the current members of the Board's Nominating and
Governance Committee.
AUDIT COMMITTEE FINANCIAL EXPERTS
The Board of Directors has determined that each of Messrs. Finn and
O'Halleran is an "audit committee financial expert" for purposes of the SEC
rules. In addition, the Board of Directors has determined that each of Messrs.
Finn and O'Halleran is independent, as defined by the New York Stock Exchange.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during fiscal 2004 and any written representations
regarding the same, except as set forth below, all officers and directors of the
Company, as well as the beneficial holders of more than 10% of the Company's
Common Shares, timely filed all reports required under Section 16(a) of the
Exchange Act during fiscal 2004. Nine of the Company's directors and one
executive officer inadvertently did not report de minimis exempt acquisitions
consisting of dividends that were reinvested in Common Share units in the
Company's
108
non-qualified deferred compensation plans. The aggregate number of Common Share
units acquired by these directors and the executive officer as a result of
dividend reinvestment was 35. The directors have correctly reported the balance
of their holdings in the deferred compensation plans in all filings to date. The
executive officer has correctly reported the balance of his holdings in the
deferred compensation plans in subsequent filings.
POLICIES ON BUSINESS ETHICS
All of the Company's employees, including its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as well as its directors,
are required to comply with the Company's Standards of Business Ethics to ensure
that the Company's business is conducted in a consistently legal and ethical
manner. The full text of the Cardinal Health Ethics Guide, which includes the
Standards of Business Ethics, is posted on the Company's website, at
www.cardinal.com, under the "Investor Relations--Ethics policy" captions. This
information also is available in print (free of charge) to any shareholder who
requests it from the Company's Investor Relations department. The Company will
disclose future amendments to, or waivers from, its Standards of Business Ethics
for its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions on its
website within four business days following the date of the amendment or waiver.
In addition, the Company also will disclose any waiver from its Standards of
Business Ethics for its executive officers and its directors on its website.
109
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following information is set forth with respect to the Company's
Chief Executive Officer, each of the Company's four other most highly
compensated executive officers, and one additional individual for whom
disclosure would have been provided but for the fact that the individual was not
serving as an executive officer of the Company at June 30, 2004.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------- ---------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2) (#) ($)(3)
------------------ ------ ---------- ---------- ------------ ---------- ----------- -------------
Robert D. Walter 2004 $1,037,500 $ 0 $112,363(4) $ 0 507,086 $ 12,349
Chairman and 2003 $1,015,144 $2,112,135 $111,374(4) $ 0 486,009 $ 36,473(5)
Chief Executive Officer 2002 $1,000,000 $2,701,370 $173,545(4) $10,354,500(6) 440,529 $ 208,938
---- ---------- ---------- -------- ----------- ------- ----------
George L. Fotiades 2004 $ 622,692 $ 0 -- $ 0 225,000 $ 11,278
President and 2003 $ 531,633 $ 387,412 -- $ 0 250,000 $ 35,957
Chief Operating Officer 2002 $ 495,692 $ 498,482 -- $ 0 67,915 $1,052,667(7)(8)
---- ---------- ---------- -------- ----------- ------- ----------
Ronald K. Labrum 2004 $ 488,540 $ 0 -- $ 306,900(6) 85,280 $ 7,321
Chairman and Chief Executive 2003 $ 429,423 $ 247,562 -- $ 0 53,019 $ 29,512
Officer - Integrated Provider 2002 $ 418,462 $ 317,886 -- $ 0 44,604 $ 28,444
Solutions and Cardinal ---- ---------- ---------- -------- ----------- ------- ----------
Health - International
Anthony J. Rucci 2004 $ 445,800 $ 0 -- $ 0 57,021 $ 8,864
Executive Vice President and 2003 $ 433,639 $ 279,068 -- $ 0 48,822 $ 34,061
President of Strategic Corporate 2002 $ 416,219 $ 398,263 -- $ 0 48,164 $ 383,729(7)
Resources ---- ---------- ---------- -------- ----------- ------- ----------
Stephen S. Thomas 2004 $ 427,662 $ 0 -- $ 0 0 $ 784,958(9)
Former Executive Vice President 2003 $ 397,331 $ 378,727 -- $ 0 91,237 $ 37,493
and Group President - 2002 $ 380,694 $ 372,003 -- $ 0 38,546 $ 698,229(7)
Automation and Information ---- ---------- ---------- -------- ----------- ------- ----------
Services
Richard J. Miller 2004 $ 407,400 $ 0 -- $ 0 52,134 $ 8,624
Former Executive Vice President 2003 $ 396,309 $ 247,555 -- $ 0 44,686 $ 34,789
and Chief Financial Officer 2002 $ 371,361 $ 343,000 -- $ 0 41,233 $ 309,729(7)
---- ---------- ---------- -------- ----------- ------- ----------
(1) "--" indicates that the aggregate amount of perquisites and other
personal benefits, securities or property in the aggregate did not
exceed the lesser of $50,000 or 10% of the total of Salary and Bonus,
and the executive had no other compensation reportable under this
category.
(2) Aggregate restricted share unit holdings and values on June 30, 2004
(based upon the closing price of the Common Shares on the New York
Stock Exchange on that date, the last trading day of fiscal 2004) for
the named executive officers are as follows: Mr. R. Walter - 264,644
shares, $18,538,312; Mr. Fotiades - 26,362 shares, $1,846,658; Mr.
Labrum - 5,000 shares, $350,250; Mr. Rucci - 25,620 shares, $1,794,681;
Mr. Thomas - 31,039 shares, $2,174,282; and Mr. Miller - 8,325 shares,
$583,166. Dividend equivalents are paid in cash on restricted share
units.
(3) Amounts shown represent Company contributions to the executive's
account under the Company's Profit Sharing, Retirement and Savings Plan
and Deferred Compensation Plan for fiscal 2004 as follows: Mr. R.
Walter - $12,349; Mr. Fotiades - $11,278; Mr. Rucci - $8,864; Mr.
Labrum - $7,321; Mr. Thomas - $8,703; and Mr. Miller - $8,624.
110
(4) Includes $112,363, $111,012 and $160,827 as the incremental cost to the
Company, and related gross-up for taxes, relating to personal use by
Mr. R. Walter of a Company airplane for fiscal 2004, 2003 and 2002,
respectively.
(5) Includes $2,364 for premiums paid by the Company on a split-dollar life
insurance arrangement entered into on April 16, 1993 between the
Company, Mr. R. Walter and a trust for Mr. R. Walter's family. This
arrangement terminated by its terms on January 12, 2003, and the
Company recovered the then-current cash surrender value of the
underlying insurance policy.
(6) Includes restricted share units that vest as follows: Mr. R. Walter -
150,000 shares vesting on January 15, 2006; and Mr. Labrum - 5,000
shares vesting on November 17, 2006.
(7) Includes the vesting of cash incentive awards, granted in fiscal 2000,
as follows: Mr. Fotiades - $878,750; Mr. Rucci - $351,500; Mr. Thomas -
$666,000; and Mr. Miller - $277,500. Employment agreements between the
Company and each of these executive officers during fiscal 2000
provided for such cash incentive awards if the executive officer
remained employed by the Company through February 9, 2002. The
agreements with Messrs. Fotiades and Thomas have since been replaced
and superceded. See "Employment Agreements and Other Arrangements"
below. The agreements with Messrs. Rucci and Miller have since expired.
(8) Includes $166,667 paid to Mr. Fotiades as an incentive fee pursuant to
certain provisions contained in an employment agreement entered into
between the Company and Mr. Fotiades at the time the Company acquired
Scherer. The agreement has since been replaced and superceded. See
"Employment Agreements and Other Arrangements" below.
(9) Includes $776,255 in severance payable to Mr. Thomas pursuant to
certain provisions of an employment agreement entered into between the
Company and Mr. Thomas during fiscal 2003. See "Employment Agreements
and Other Arrangements" below.
With respect to the bonus determinations made for executive officers
for fiscal 2004, the Compensation Committee Report that will be included in the
Company's fiscal 2004 proxy statement for its annual meeting of shareholders
states, in part: "Although the Company achieved double-digit earnings per share
growth during fiscal 2004, actual operating earnings were well below the
Company's internal performance goals for the year, particularly during the third
and fourth quarters. Based on this shortfall and other qualitative factors
considered by the Compensation Committee, overall funding of the Company's
Management Incentive Plan incentive award pool for the Company's management
level employees was significantly below targeted amounts. However, in light of
the Company's pay-for-performance philosophy, it was determined that the
Company's executive officers (including Mr. R. Walter) would not share in that
incentive award pool, and therefore would receive no incentive awards for fiscal
2004. The Compensation Committee determination of a zero incentive award payout
for the Company's executive officers was based upon the factors described above
applicable to fiscal 2004, and does not reflect the Company's overall objectives
concerning annual cash incentives for its executive officers."
OPTION GRANTS IN LAST FISCAL YEAR (1)
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM (4)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------------------
NAME (#)(1) YEAR (2) ($/SH)(3) DATE 0% ($) 5% ($) 10% ($)
---- ---------- ---------- ---------- ---------- ------ ----------- -----------
Robert D. Walter 507,086 4.3% $61.38 11/17/2013 $0.00 $19,574,307 $49,605,136
George L. Fotiades 225,000 1.9% $64.11 2/1/2014 $0.00 $ 9,071,648 $22,989,337
Ronald K. Labrum 85,280 0.7% $61.38 11/17/2013 $0.00 $ 3,291,940 $ 8,342,423
Anthony J. Rucci 57,021 0.5% $61.38 11/17/2013 $0.00 $ 2,201,099 $ 5,578,017
Stephen S. Thomas 0 0% -- -- $0.00 -- --
Richard J. Miller 52,134 0.4% $61.38 11/17/2013 $0.00 $ 2,012,453 $ 5,099,952
111
(1) All options granted during the fiscal year to the named executive
officers are nonqualified stock options granted under the Company's
Amended and Restated Equity Incentive Plan, as amended (the "Equity
Incentive Plan"), are exercisable in full on and after the third
anniversary from the date of grant, and have a term of 10 years.
(2) Based on total options to purchase 11,842,030 Common Shares granted to
all employees during fiscal 2004 under the Company's Equity Incentive
Plan and Broadly-based Equity Incentive Plan, as amended.
(3) Market price on date of grant.
(4) These amounts are based on hypothetical annual appreciation rates of
0%, 5% and 10% over the full term of the applicable option and are not
intended to forecast the actual future appreciation of the Company's
stock price. No gain to optionees is possible without an actual
increase in the price of the Company's Common Shares, which benefits
all of the Company's shareholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FY-END (#) FY-END ($)(2)
ACQUIRED ON REALIZED -------------------------- ----------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------- ----------- ------------- ----------- -------------
Robert D. Walter -0- $ 0 1,624,517 1,433,624 $52,550,526 $7,000,887
George L. Fotiades -0- $ 0 434,728 542,915 $13,865,595 $2,006,434
Ronald K. Labrum -0- $ 0 249,084 182,903 $11,681,379 $ 940,346
Anthony J. Rucci -0- $ 0 136,043 154,007 $ 3,699,066 $ 693,259
Stephen S. Thomas 45,000 $1,447,545 133,768 129,783 $ 3,512,092 $ 466,324
Richard J. Miller -0- $ 0 179,095 138,053 $ 5,427,275 $ 628,481
(1) Value calculated as the amount by which the fair market value of the
Common Shares on the date of exercise exceeds the option exercise price
before payment of any taxes.
(2) Value calculated as the amount by which the market value of the Common
Shares, based upon the closing price per Common Share of $70.05 on June
30, 2004 (the last trading day of fiscal 2004), exceeds the option
exercise price.
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
During fiscal 2004, the Company amended and restated employment
agreements with Mr. R. Walter (the "Walter Agreement"), Mr. Fotiades (the
"Fotiades Agreement") and Mr. Labrum (the "Labrum Agreement"). Mr. Thomas'
employment, which has been terminated, was governed by an employment agreement
dated February 5, 2003 (the "Thomas Agreement"). In addition, in July 2004, the
Company entered into an employment agreement with Mr. Losh, who was appointed
Chief Financial Officer of the Company on an interim basis. Each of Messrs. R.
Walter, Fotiades, Labrum, Thomas and Losh agreed under their respective
agreements to comply with certain non-compete and non-solicitation covenants
during the term of their employment and generally for a period ranging from one
to two years thereafter. In addition, Messrs. R. Walter, Fotiades, Labrum,
Thomas and Losh are obligated to keep the Company's proprietary information and
trade secrets confidential.
The Walter Agreement amends and restates as of February 1, 2004, the
employment agreement dated November 20, 2001 (the "Initial Walter Agreement")
between the Company and Mr. R. Walter. Under the Walter Agreement, the Company
agreed to employ Mr. R. Walter as Chairman and Chief Executive Officer until
February 1, 2007. However, commencing on February 1, 2006, the term shall be
extended each day by one day to create a new one year term until, at any time at
or after such date, either party provides written notice of termination to be
effective one year from the notice date.
The Walter Agreement provides for an annual base salary of not less
than $1,000,000, which will be reviewed simultaneously with the salaries of all
the Company's executive officers, and eligibility for an annual cash bonus
target of at least 250% of annual base salary (although no bonus was awarded to
Mr. R. Walter for fiscal 2004). The Walter Agreement
112
further provides for equity and non-equity awards under the Company's long-term
incentive compensation plans consistent with past practice and competitive pay
practices, including an annual stock option award with a value of no less than
3,000% of annual base salary in terms of dollars at work. The Initial Walter
Agreement provided Mr. R. Walter with 150,000 shares of deferrable restricted
share units effective November 20, 2001. The Walter Agreement, as revised in
fiscal 2004, extends the vesting date of those restricted share units from June
30, 2004 to January 15, 2006 and the vesting date of certain options from
November 19, 2004 to January 15, 2006.
Under the Walter Agreement, if the Company terminates Mr. R. Walter's
employment other than for cause, death or disability, or if Mr. R. Walter
terminates his own employment for good reason, then he is paid: (i) any earned
but unpaid salary; (ii) a prorated portion of his recent average bonus (based on
the average bonus earned in the three previous fiscal years, but not less than
his annual target bonus); and (iii) two times the sum of his annual salary then
in effect and recent average bonus (or three times such sum if a change of
control has occurred within the last three years). If Mr. R. Walter's employment
is terminated by death or disability, then he is paid: (i) any earned but unpaid
salary; and (ii) a prorated portion of his recent average bonus. If Mr. R.
Walter's employment is terminated for any of the reasons above, any stock
options, restricted shares and restricted share units held by Mr. R. Walter vest
immediately and are exercisable until the end of the applicable term of such
award (except that under the Walter Agreement Mr. R. Walter will be treated as a
consulting employee and these awards continue to vest in accordance with their
terms where Mr. R. Walter's employment is terminated by disability or retirement
and the award agreement does not provide for immediate vesting). If the Company
terminates Mr. R. Walter's employment for cause or if Mr. R. Walter terminates
his own employment without good reason, then he is paid any earned but unpaid
salary but no portion of his bonus. If Mr. R. Walter's employment is terminated
for any of the reasons above, to the extent not already provided or paid, he
will also receive any other benefits to which he is entitled pursuant to, and in
accordance with the terms of, existing Company programs and plans. In the event
that any payments made to Mr. R. Walter would be subject to the excise tax
imposed on "parachute payments" by the Internal Revenue Code of 1986, as amended
(the "Code"), under the Walter Agreement, the Company will "gross-up" Mr. R.
Walter's compensation for all such excise taxes and any federal, state and local
taxes applicable to such gross-up payment (including any penalties and
interest).
The Company recently identified an issue with respect to an option
award that the Board of Directors and its Compensation Committee granted to Mr.
R. Walter in November 1999 for 1,425,000 shares (giving effect to stock splits
occurring after the date of grant). This option award was in excess of that
permitted to be granted to a single individual during any fiscal year under the
Company's Equity Incentive Plan. The maximum number of shares that could be
granted pursuant to the terms of the Equity Incentive Plan was 562,500 shares
(although the Company would have been permitted at the time to make a larger
grant outside of such Plan). The information set forth in the "Aggregated Option
Exercises in Last Fiscal Year and FY-End Values" table above under the heading
"Equity Compensation Tables" and the beneficial ownership table and equity
compensation plan information under "Item 12: Security Ownership of Certain
Beneficial Owners and Management" below with respect to Mr. R. Walter has been
revised to reflect the maximum number of shares that could be granted under the
Plan. The Compensation Committee is currently exploring alternatives to
substitute the remaining portion of the stock option granted to him in November
1999 in excess of 562,500 shares with equivalent value.
The Fotiades Agreement replaced the employment agreement previously in
place between the Company and Mr. Fotiades. Under the Fotiades Agreement, the
Company agreed to employ Mr. Fotiades as President and Chief Operating Officer
for three years commencing on February 1, 2004. The Fotiades Agreement provides
for an annual base salary of not less than $725,000 and an annual bonus target
equal to 160% of annual base salary payable under the terms of the bonus plan
for which Mr. Fotiades is eligible (although no bonus was awarded to Mr.
Fotiades for fiscal 2004). The Fotiades Agreement further provides for an
initial stock option grant of 225,000 shares (the "2004 Option"), eligibility
for annual stock option grants beginning in fiscal year 2006 and relocation
benefits.
Under the Fotiades Agreement, if the Company terminates Mr. Fotiades'
employment without cause before February 1, 2009, if Mr. Fotiades' employment is
terminated within one year after a change of control (other than because of
death, incapacity, retirement or for cause) or if he terminates his employment
within one year after a change of control that leads to a qualifying material
diminution of his duties, then he receives: (i) two times the sum of his salary
in effect on the day immediately prior to termination and his annual bonus
target; (ii) any vested benefits required to be paid or provided in law; and
(iii) all benefits provided in the 2004 Option agreement and a November 18, 2002
option agreement. If Mr. Fotiades terminates his employment or if his employment
is terminated by incapacity, death, retirement or for cause, then he receives:
(i) any earned but unpaid salary; (ii) benefits under any long-term disability
insurance coverage (in the event of termination due to incapacity); (iii) any
vested benefits required to be paid or provided in law; and (iv) any benefits
provided for under his then-outstanding equity incentive awards.
The Labrum Agreement replaced the employment agreement previously in
place between the Company and Mr. Labrum. Under the Labrum Agreement, the
Company agreed to employ Mr. Labrum as Executive Vice President and Group
President - Medical Products and Services for three years commencing on
November 5, 2003. The Labrum Agreement
113
provides for an annual base salary of not less than $480,000 and an annual bonus
target equal to 90% of annual base salary payable under the terms of the bonus
plan for which Mr. Labrum is eligible (although no bonus was awarded to Mr.
Labrum for fiscal 2004). The Labrum Agreement further provides for a stock
option grant of 25,000 shares (the "FY2004 Option") and a grant of 5,000
restricted share units effective November 17, 2003.
Under the Labrum Agreement, if the Company terminates Mr. Labrum's
employment without cause, if Mr. Labrum's employment is terminated within one
year after a change of control (other than because of death, incapacity or for
cause) or if he terminates his employment within one year after a change of
control that leads to a material diminution of his duties, then he receives: (i)
the sum of his salary in effect on the day immediately prior to termination and
his annual bonus target; (ii) any vested benefits required to be paid or
provided in law; and (iii) all benefits provided for under the FY2004 Option. If
Mr. Labrum terminates his employment or if his employment is terminated by
incapacity, death or for cause, then he receives: (i) any earned but unpaid
salary; (ii) benefits under any long-term disability insurance coverage (in the
event of termination due to incapacity); (iii) any vested benefits required to
be paid or provided in law; and (iv) any benefits provided for under the FY2004
Option.
Mr. Thomas' employment with the Company terminated on June 14, 2004.
Under the Thomas Agreement, the Company agreed to employ Mr. Thomas as Executive
Vice President and Group President - Automation and Information Services for
three years commencing on February 5, 2003. The Thomas Agreement provided for an
annual base salary of not less than $408,000 and an annual bonus target equal to
90% of annual base salary payable under the terms of the bonus plan for which
Mr. Thomas was eligible (although no bonus was awarded to Mr. Thomas for fiscal
2004). The Thomas Agreement further provided for an initial stock option grant
of 50,000 shares (the "FY2003 Option").
The Thomas Agreement also provided for severance payments and benefits
to Mr. Thomas if the Company terminated Mr. Thomas' employment without cause
prior to the end of his employment period, including (i) payment of the sum of
his salary in effect on the day immediately prior to termination and his annual
bonus target; (ii) any vested benefits required to be paid or provided in law;
and (iii) all benefits provided for under the FY2003 Option. The termination by
the Company of Mr. Thomas' employment was without cause, and pursuant to the
terms of the Thomas Agreement, a severance payment of $776,255 is payable to Mr.
Thomas in twelve equal monthly installments beginning January 2005.
The Company recently entered into an employment agreement with Mr. Losh
(the "Losh Agreement"). Under the Losh Agreement, the Company agreed to employ
Mr. Losh as interim Chief Financial Officer for one year commencing on July 26,
2004. As compensation for the services rendered thereunder, the Losh Agreement
provides for an option grant to purchase 210,000 shares at an exercise price of
$44 per share, the closing price of the Common Shares on July 27, 2004. The
option becomes exercisable in full on July 27, 2007. The Losh Agreement also
provides that Mr. Losh is eligible to receive reimbursement for reasonable
expenses incurred by Mr. Losh during his employment (including travel and living
expenses) in accordance with policies, practices and procedures of the Company
applicable to Mr. Losh. During his employment, Mr. Losh is not eligible to
receive annual option grants during fiscal 2005, unless approved by the
Compensation Committee, or compensation payable solely to nonemployee directors
of the Company.
The Company's Equity Incentive Plan, as well as the Company's Stock
Incentive Plan, as amended (the "Stock Incentive Plan"), which has been replaced
by the Equity Incentive Plan as to ongoing grants, provide for acceleration of
the vesting of stock options, restricted share awards and restricted share unit
awards based upon the occurrence of a change of control of the Company. Messrs.
R. Walter and Miller continue to hold stock options that remain outstanding
under the Stock Incentive Plan.
PENSION PLAN
Mr. Fotiades participates in a defined benefit and supplemental plan
(the "Pension Plan") which was assumed by the Company when it acquired Scherer
in 1998.
Benefits payable under the Pension Plan at retirement are determined
primarily by average final compensation and years of service. The compensation
covered by the Pension Plan for Mr. Fotiades is substantially the same as that
set forth in the Salary and Bonus columns of the Summary Compensation Table
above under the heading "Equity Compensation Tables." The defined benefit plan
was frozen as of December 31, 2002, and the supplemental plan was frozen as of
December 31, 2001. No additional benefits will be earned and no compensation or
credited service will be considered beyond these dates. Mr. Fotiades has 6.5
years of service credited under the defined benefit plan and 5.5 years of
service credited under the supplemental plan.
The annual amount payable to Mr. Fotiades upon retirement is $20,645.
The benefits are payable as a straight-life annuity beginning at age 65. These
benefits are not subject to any deduction for Social Security or any other
offset amounts.
114
COMPENSATION OF DIRECTORS
During fiscal 2004, the Company's directors each were paid a retainer
of $10,000 per quarter. The chairperson of the Audit Committee and each director
serving as the chairperson of another Board committee received an additional
$3,000 and $1,500 per quarter, respectively, for such service during fiscal
2004. Effective as of the beginning of fiscal 2005, the fees for the chairperson
of the Audit Committee were increased to $3,750 per quarter, and the fees for
the chairperson of the Compensation Committee were increased to $2,000 per
quarter. The fees for the chairperson of the Nominating and Governance Committee
remain at $1,500 per quarter. Also effective as of fiscal 2005, the retainer for
each director serving on the Company's Audit Committee was increased to $10,500
per quarter, and the retainer for the Company's non-management presiding
director, currently Mr. McCoy, was increased to $12,500 per quarter. In addition
to regular compensation paid to the chairpersons of each Committee, the members
of the Audit Committee and the presiding director, directors may receive
additional compensation for the performance of duties assigned by the Board or
its committees that are considered beyond the scope of the ordinary
responsibilities of directors or committee members. Directors may elect to defer
payment of their fees into the Company's Directors Deferred Compensation Plan,
one of the investment alternatives for which is a Company Common Shares Fund.
The Company also reimburses directors for out-of-pocket travel expenses incurred
in connection with attendance at Board and committee meetings.
Directors receive an annual option grant to purchase Common Shares with
an aggregate exercise price of $300,000. Each director also receives, upon first
appointment or election to the Board, an option grant to purchase Common Shares
with an aggregate exercise price of $300,000. The exercise price per share of
these options is the fair market value of a Common Share on the date of grant.
The actual value of the options will be the difference between the market value
of the underlying Common Shares on the exercise date and the exercise price. In
determining the value of the director options and, thus, the total compensation
to directors, the Board of Directors made certain assumptions about the future
increase in the market value of the Company's Common Shares over the term of the
options. The options are granted pursuant to the Company's Equity Incentive Plan
and Outside Directors Equity Incentive Plan. All grants to directors generally
vest immediately and are exercisable for 10 years from the date of grant.
Options granted to directors are treated as nonqualified options under the Code.
On November 17, 2003, Messrs. Bing, Conrades, Finn, Gerbig, Havens, Losh, McCoy,
Notebaert, O'Halleran, Raisbeck and M. Walter and Dr. Spaulding each were
granted options to purchase 5,084 Common Shares (having an aggregate exercise
price of $300,000) in accordance with the provisions of the Equity Incentive
Plan and the Outside Directors Equity Incentive Plan. Mr. R. Walter does not
receive any of the compensation described in this paragraph or the preceding
paragraph. Since his appointment on July 26, 2004 as Chief Financial Officer on
an interim basis, Mr. Losh has not received, and does not currently receive, any
of the compensation described in this paragraph or the preceding paragraph.
115
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Shares as of October 25, 2004, by:
(a) the Company's directors; (b) each other person who is known by the Company
to own beneficially more than 5% of the outstanding Common Shares; (c) the
Company's Chief Executive Officer and the other executive officers named in the
Summary Compensation Table under the heading "Equity Compensation Tables" in
"Item 11: Executive Compensation" above; and (d) the Company's executive
officers and directors as a group. Except as otherwise described in the notes
below, the following beneficial owners have sole voting and investment power
with respect to all Common Shares set forth opposite their names:
NUMBER OF
COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------------ ------------------ ----------------
FMR Corp.(1) 50,197,132 11.6%
Wellington Management Company, LLP(2) 25,256,727 5.8%
Robert D. Walter(3)(4)(5)(6) 6,091,835 1.4%
Matthew D. Walter(7)(8) 1,385,009 *
George L. Fotiades(4)(5)(6) 545,368 *
Ronald K. Labrum (4)(5)(6) 313,849 *
Richard J. Miller (4)(5)(6)(9) 240,174 *
Anthony J. Rucci(4)(5)(6) 232,022 *
John B. McCoy(7)(10)(11) 124,375 *
Robert L. Gerbig(7) 89,530 *
John F. Havens(7)(11)(12) 69,264 *
John F. Finn(7)(11)(13) 60,358 *
Richard C. Notebaert(7)(11) 36,917 *
J. Michael Losh(7)(11)(14) 34,492 *
Stephen S. Thomas(4)(5)(6)(15) 31,748 *
Michael D. O'Halleran(7) 26,095 *
Dave Bing(7)(11) 25,143 *
George H. Conrades(7)(11) 22,494 *
David W. Raisbeck(7)(11) 16,895 *
Jean G. Spaulding(7)(11) 13,609 *
All Executive Officers and Directors as a
Group (23 Persons)(16) 9,916,196 2.3%
* Indicates beneficial ownership of less than 1% of the outstanding
Common Shares.
(1) Based on information obtained from a Schedule 13G/A jointly filed with
the SEC on February 17, 2004 by FMR Corp. ("FMR"), Edward C. Johnson,
III and Abigail P. Johnson. The address of FMR is 82 Devonshire Street,
Boston, Massachusetts 02109. FMR reported that it has sole voting power
with respect to 781,067 Common Shares and sole dispositive power with
respect to all Common Shares held. The number of shares held by FMR may
have changed since the filing of the Schedule 13G/A.
(2) Based on information obtained from a Schedule 13G filed with the SEC on
February 12, 2004 by Wellington Management Company, LLP ("Wellington").
The address of Wellington is 75 State Street, Boston, Massachusetts
02109. Wellington reported that it has shared voting power with respect
to 10,663,495 Common Shares, and shared dispositive power with respect
to all Common Shares held. The number of shares held by Wellington may
have changed since the filing of the Schedule 13G.
(3) Includes a total of 2,283,564 Common Shares held in Mr. R. Walter's
four grantor retained annuity trusts and 500,000 Common Shares
beneficially owned by Mr. R. Walter through a limited liability company
in which Mr. R. Walter holds the controlling interest and is the sole
manager.
(4) Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include outstanding
options to purchase Common Shares which are exercisable within 60 days
of October 25, 2004, as follows: Mr. R. Walter - 1,624,517 shares; Mr.
Fotiades - 502,643 shares; Mr. Labrum - 293,688 shares; Mr. Rucci -
184,207 shares (such options being held in a trust of which Mr. Rucci
is trustee and the sole beneficiary during his life); Mr. Thomas - 0
shares; and Mr. Miller - 220,328 shares.
116
(5) Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include restricted
share units as of October 25, 2004, as follows: Mr. R. Walter - 264,644
shares; Mr. Fotiades - 26,362 shares; Mr. Labrum - 12,000 shares; Mr.
Rucci - 35,620 shares; Mr. Thomas - 31,039 shares; and Mr. Miller -
8,325 shares. Such restricted share units are not deemed to be
"beneficially owned" under the SEC rules, but are included in the table
above for the convenience of the reader.
(6) Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include Common Shares
in the Company's Employee Stock Purchase Plan as of October 25, 2004,
as follows: Mr. R. Walter - 2,386 shares; Mr. Fotiades - 0 shares; Mr.
Labrum - 2,376 shares; Mr. Rucci - 0 shares; Mr. Thomas - 709 shares;
and Mr. Miller - 1,946 shares.
(7) Common Shares and the percent of class listed as being beneficially
owned by the listed Company directors (except for Mr. R. Walter)
include outstanding options to purchase Common Shares which are
exercisable within 60 days of October 25, 2004, as follows: Mr. Bing -
22,217 shares; Mr. Conrades - 20,284 shares; Mr. Finn - 26,408 shares;
Mr. Gerbig - 26,408 shares; Mr. Havens - 33,226 shares; Mr. Losh -
26,488 shares; Mr. McCoy - 29,540 shares; Mr. Notebaert - 20,284
shares; Mr. O'Halleran - 18,595 shares; Mr. Raisbeck - 12,220 shares;
Dr. Spaulding - 12,211 shares; and Mr. M. Walter - 12,211 shares.
(8) Includes 38,872 Common Shares held in trust for the benefit of Mr. M.
Walter; 1,112,663 Common Shares beneficially owned by Mr. M. Walter
through a limited liability company; 100,000 Common Shares held in Mr.
M. Walter's grantor retained annuity trust; 3,150 Common Shares held in
trusts for the benefit of Mr. M. Walter's children; and 705 Common
Shares held by Mr. M. Walter's spouse.
(9) Mr. Miller resigned as Executive Vice President and Chief Financial
Officer of the Company effective July 25, 2004. Includes Common Shares
beneficially owned by Mr. Miller as of July 25, 2004, except as
otherwise indicated in footnotes (4), (5) and (6) above.
(10) Includes 34,137 Common Shares held in trust for the benefit of Mr.
McCoy, 6,436 Common Shares held in trust for the benefit of Mr. McCoy's
son and 50,773 Common Shares held in the aggregate in Mr. McCoy's two
grantor retained annuity trusts.
(11) Includes Common Share units held under the Company's Directors Deferred
Compensation Plan as follows: Mr. Bing - 2,926 share units; Mr.
Conrades - 1,210 share units; Mr. Finn - 3,651 share units; Mr. Havens
- 3,033 share units; Mr. McCoy - 3,489 share units; Mr. Notebaert -
3,033 share units; Mr. Raisbeck - 1,675 share units; Dr. Spaulding -
1,248 share units; and Mr. Losh - 3,129 share units. Such Common Share
units are not deemed to be "beneficially owned" under the SEC rules,
but are included in the table above for the convenience of the reader.
Mr. Losh's participation in this Plan was suspended as of July 26,
2004, the effective date of his appointment, on an interim basis, as
Chief Financial Officer of the Company.
(12) Includes 26,034 Common Shares held in trust for the benefit of Mr.
Havens' spouse and children.
(13) Includes 1,032 Common Shares held by Mr. Finn's spouse.
(14) Includes 1,500 Common Shares held in trust for the benefit of Mr.
Losh's daughters.
(15) Mr. Thomas ceased serving as Executive Vice President and Group
President - Automation and Information Services of the Company
effective May 15, 2004, and ceased his employment with the Company
effective June 14, 2004. Includes Common Shares beneficially owned by
Mr. Thomas as of June 14, 2004, except as otherwise indicated in
footnotes (4), (5) and (6) above.
(16) Common Shares and percent of class listed as being beneficially owned
by all executive officers and directors as a group include (i)
outstanding options to purchase an aggregate of 3,583,767 Common Shares
which are exercisable within 60 days of October 25, 2004, (ii) 380,001
restricted share units held by all executive officers as a group; and
(iii) 23,394 Common Share units held by all directors as a group under
the Company's Directors Deferred Compensation Plan. The restricted
share units and Common Share units are not deemed to be "beneficially
owned" under the SEC rules, but are included in the table above for the
convenience of the reader.
Information with respect to equity compensation plans of the
Company appears in Note 14 of "Notes to Consolidated Financial Statements" and
is incorporated herein by reference.
117
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A property which includes parts of the Company's former Columbus food
distribution center was previously leased by the Company from a limited
partnership, the limited partners of which include four adult children of Mr.
Havens, one individually and the other three through separate trusts. The lease
expired in accordance with its terms in February 2004. Prior to expiration of
the lease, the rent payable by the Company to the limited partnership was
$92,000 per annum (approximately $0.72 per sq. ft.), which amount is
substantially below fair market value for the rental property. From July 1, 2003
through February 28, 2004 (the expiration date of the lease), the Company paid
base rent to the partnership in the amount of approximately $61,000. During
fiscal 2004, the Company had subleased the property to a third party for
approximately $223,000, generating a gross profit net of real estate taxes of
approximately $112,000 for the Company. The Company and the partnership have
entered into a joint listing agreement offering both the formerly-leased
property (owned by the partnership) and the adjoining property (owned by the
Company) for sale as a single parcel. The listing agreement calls for allocation
of proceeds of any eventual sale of the joint parcel in proportion to the
relative square footage of the respective parcels (which results in an
allocation of proceeds of approximately 67% for the partnership and 33% for the
Company).
The Company owns a 28.7% equity interest in ArcLight Systems, LLC
("ArcLight"). In April 2002, ArcLight subleased office space from inChord
Communications, Inc. ("inChord") for a term expiring on June 30, 2008. Mr. M.
Walter is a director and minority shareholder of inChord, and his two brothers
own substantially all of the remainder of inChord. In December 2003, in
connection with the sale of certain of ArcLight's assets, the sublease was
assigned by Arclight to an unaffiliated third party. As a result of the
assignment, ArcLight has no further obligations under the sublease. During
fiscal 2004 ArcLight paid base rent to inChord of approximately $81,000 with
respect to periods prior to the assignment.
inChord and its subsidiaries also perform health care marketing and
recruiting services on behalf of the Company and its subsidiaries from time to
time in the ordinary course of business and on arm's-length terms. During fiscal
2004, the Company paid inChord approximately $87,000 for time and services
rendered on the Company's behalf.
In October 2003, the Company and inChord entered into a joint marketing
program ("RxPedite") designed to promote a comprehensive package of product
commercialization services to pharmaceutical manufacturers. This program
provides a mechanism for the parties to share the joint costs of the RxPedite
marketing effort, and is terminable by either party at any time. During fiscal
2004, the Company's share of co-marketing expenses incurred in connection with
the RxPedite program was approximately $201,000.
Mr. M. Walter and his two brothers own a majority of BoundTree Medical
Products, Inc. ("BMP"), a company engaged in the pre-hospital emergency medical
supply business. Mr. M. Walter also is an officer and director of BMP. During
fiscal 2004, BMP and its affiliates purchased approximately $2,751,000 of
product from the Company and its subsidiaries in the ordinary course of business
and on arm's-length terms. This amount represented less than 3% of BMP's
consolidated gross revenues for its last full fiscal year.
Ms. Beth E. Simonetti, Senior Vice President - Shared Services of the
Company, is the sister-in-law of Ms. Carole S. Watkins, Executive Vice President
- Human Resources of the Company. There is no current reporting relationship
between Ms. Simonetti and Ms. Watkins.
Pursuant to the Company's Restated Code of Regulations, as amended, and
certain indemnification agreements, the Company is obligated to advance legal
fees under certain circumstances to current and former employees, including
executive officers and directors, subject to limitations of the Ohio Revised
Code. As part of that obligation, the Company has advanced legal fees relating
to the representation of its directors by counsel in connection with various
derivative actions against the Company and its directors, and relating to the
representation of certain of its officers by counsel in connection with the SEC
investigation and related investigations described under "Item 3: Legal
Proceedings" of this Form 10-K, under the headings "Derivative Actions" and "SEC
Investigation and U.S. Attorney Inquiry," respectively. The Company has advanced
a total of approximately $1.4 million relating to these matters since July 1,
2003.
The description of the Losh Agreement under "Item 11: Executive
Compensation," under the heading "Employment Agreements and Other Arrangements"
is incorporated herein by reference.
118
PART IV
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES. Audit fees include fees paid by the Company to Ernst &
Young related to the annual audit of the Company's consolidated financial
statements, the review of financial statements included in the Company's
Quarterly Reports on Form 10-Q, statutory audits of various international
subsidiaries, and additional procedures implemented as a result of the Audit
Committee's internal review commenced in April 2004 that is ongoing. Audit fees
also include fees for services performed by Ernst & Young that are closely
related to the audit and in many cases could only be provided by the Company's
independent accountant, such as comfort letters and consents related to SEC
registration statements. The aggregate fees billed to the Company by Ernst &
Young for audit services rendered to the Company and its subsidiaries for fiscal
2003 and 2004 totaled $3,797,895 and $8,015,584, respectively.
AUDIT-RELATED FEES. Audit-related services include due diligence
services related to mergers and acquisitions, audit-related research and
assistance, document production and employee benefit plan audits. The aggregate
fees billed to the Company by Ernst & Young for audit-related services rendered
to the Company and its subsidiaries for fiscal 2003 and 2004 totaled $3,193,960
and $2,927,687, respectively.
TAX FEES. Tax fees include tax compliance and other tax-related
services. The aggregate fees billed to the Company by Ernst & Young for tax
services rendered to the Company and its subsidiaries for fiscal 2003 and 2004
totaled $1,916,880 and $2,053,411, respectively.
ALL OTHER FEES. The aggregate fees billed to the Company by Ernst &
Young for all other services rendered to the Company and its subsidiaries for
such matters as litigation assistance and internal audit services for fiscal
2003 and 2004 totaled $14,500 and $289,986, respectively.
AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY
Under the Sarbanes-Oxley Act of 2002 (the "Act"), the Audit Committee
is responsible for the appointment, compensation and oversight of the work of
the independent accountants. As part of this responsibility, the Audit Committee
is required to pre-approve the audit and permissible non-audit services
performed by the independent accountants in order to assure that such services
do not impair the accountants' independence from the Company. To implement these
provisions of the Act, the SEC has issued rules specifying the types of services
that the independent accountants may not provide to their audit client, as well
as the audit committee's administration of the engagement of the independent
accountants. Accordingly, the Audit Committee has adopted an Audit and Non-Audit
Services Pre-Approval Policy (the "Policy") which sets forth the procedures and
the conditions under which services proposed to be performed by the independent
accountants must be pre-approved.
Pursuant to the Policy, certain proposed services may be pre-approved
on a periodic basis so long as the services do not exceed certain pre-determined
cost levels. If not pre-approved on a periodic basis, proposed services must
otherwise be separately pre-approved prior to being performed by the independent
accountants. In addition, any proposed services that were pre-approved on a
periodic basis but later exceed the pre-determined cost level would require
separate pre-approval of the incremental amounts by the Audit Committee.
The Audit Committee has delegated pre-approval authority to the
Chairman of the Audit Committee for proposed services to be performed by the
independent accountants for up to $500,000. Pursuant to such Policy, in the
event the Chairman pre-approves services, the Chairman is required to report
decisions to the full Audit Committee at its next regularly-scheduled meeting.
Proposed services equal to or exceeding $500,000 require full Audit Committee
approval.
119
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8 of this report:
PAGE
----
Independent Auditors' Reports.............................................................................. 47
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 2004, 2003 and 2002................ 48
Consolidated Balance Sheets at June 30, 2004 and 2003...................................................... 49
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 2004, 2003 and 2002.... 50
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2004, 2003 and 2002.............. 51
Notes to Consolidated Financial Statements................................................................. 52
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts............................................................ 128
All other schedules not listed above have been omitted as not applicable
or because the required information is included in the Consolidated Financial
Statements or in notes thereto.
(a)(3) Exhibits required by Item 601 of Regulation S-K:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.01 Amended and Restated Articles of Incorporation, as amended
3.02 Restated Code of Regulations, as amended (14)
4.01 Specimen Certificate for the Registrant's Common Shares (17)
4.02 Indenture, dated as of May 1, 1993, between the Registrant and Bank One, Indianapolis,
NA, Trustee, relating to the Registrant's 6 1/2% Notes Due 2004 and 6% Notes Due 2006 (1)
4.03 Indenture, dated as of April 18, 1997, between the Registrant and Bank One, Columbus, NA,
Trustee, relating to the Registrant's 6 1/4% Notes Due 2008, 6 3/4% Notes Due 2011, 4.45%
Notes Due 2005 and 4.00% Notes Due 2015 (2)
4.04 Indenture, dated as of October 1, 1996, between Allegiance Corporation and PNC Bank, Kentucky,
Inc. ("PNC"), Trustee; and First Supplemental Indenture, dated as of February 3, 1999, by and
among Allegiance Corporation, the Registrant and Chase Manhattan Trust Company, National
Association (as successor in interest to PNC), Trustee (3)
4.05 Indenture, dated as of January 1, 1994, between R.P. Scherer International Corporation and
Comerica Bank, Trustee; First Supplemental Indenture, dated as of February 28, 1995, by and
among R.P. Scherer International Corporation, R.P. Scherer Corporation and Comerica Bank,
Trustee; and Second Supplemental Indenture, dated as of August 7, 1998, by and among
R.P. Scherer Corporation, the Registrant and NBD Bank (4)
4.06 Form of Warrant Certificate to Purchase the Registrant's Common Shares (5)
4.07 Form of Debt Securities (16)
10.01 Pharmaceutical Services Agreement, dated as of August 1, 1996, between the Registrant and
Kmart Corporation, as amended (Confidential treatment has been requested for confidential
commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act,
with respect to the last amendment filed) (9), (15) and (19)
120
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.02 Wholesale Supply Agreement, dated January 1, 2004, between the Registrant and CVS Pharmacy,
Inc. (Confidential treatment has been requested for confidential commercial and financial
information, pursuant to Rule 24b-2 under the Exchange Act)
10.03 First Amendment to Wholesale Supply Agreement, dated May 26, 2004, between the Registrant
and CVS Pharmacy, Inc. (Confidential treatment has been requested for confidential
commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act)
10.04 Second Amendment to Wholesale Supply Agreement, dated June 2, 2004, between the Registrant
and CVS Pharmacy, Inc. (Confidential treatment has been requested for confidential
commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act)
10.05 Prime Vendor Agreement, dated as of July 1, 2001, between the Registrant and Express
Scripts, Inc., as amended on January 15, 2003 (Confidential treatment has been requested
for confidential commercial and financial information, pursuant to Rule 24b-2 under the
Exchange Act) (20)
10.06 Second Amendment to Prime Vendor Agreement, dated as of November 19, 2003, between the
Registrant and Express Scripts, Inc. (Confidential treatment has been requested for
confidential commercial and financial information, pursuant to Rule 24b-2 under the
Exchange Act)
10.07 Third Amendment to Prime Vendor Agreement, dated as of April 9, 2004, between the
Registrant and Express Scripts, Inc. (Confidential treatment has been requested for
confidential commercial and financial information, pursuant to Rule 24b-2 under the
Exchange Act)
10.08 Form of Commercial Paper Dealer Agreement 4(2) Program, dated as of August 26, 1999,
between the Registrant, as Issuer, and certain entities, each as Dealer, concerning notes
to be issued pursuant to Issuing and Paying Agency Agreement, dated as of June 28, 1999,
between the Issuer and The First National Bank of Chicago, as Issuing and Paying Agent (15)
10.09 Five-year Credit Agreement, dated as of March 27, 2003, between the Registrant, certain
subsidiaries of the Registrant, certain lenders, Bank One, NA, as Administrative Agent,
Bank of America N.A., as Syndication Agent, Wachovia Bank, National Association, as
Syndication Agent, Barclays Bank PLC, as Documentation Agent, Credit Suisse First Boston,
as Documentation Agent, Deutsche Bank Securities, Inc., as Documentation Agent, and Banc
One Capital Markets, Inc., as Lead Arranger and Book Manager (20)
10.10 First Amendment to Credit Agreement, Agency Agreement and Amendment to Guaranty, dated as
of March 24, 2004, between the Registrant, certain subsidiaries of the Registrant,
certain lenders, Bank One, NA and Wachovia Bank, National Association (23)
10.11 Five-year Credit Agreement, dated as of March 23, 2004, between the Registrant, certain
subsidiaries of the Registrant, certain lenders, Wachovia Bank, National Association, as
Administrative Agent, Bank One, NA, as Syndication Agent, Bank of America N.A., as
Syndication Agent, Barclays Bank PLC, as Documentation Agent, Deutsche Bank Securities,
Inc., as Documentation Agent, Wachovia Capital Markets, LLC, as Lead Arranger and Book
Manager, and Banc One Capital Markets, Inc., as Lead Arranger and Book Manager(23)
10.12 Partnership Agreement of R.P. Scherer GmbH & Co. KG (4)
10.13 Stock Incentive Plan, as amended (6)*
10.14 Directors' Stock Option Plan, as amended and restated (6)*
10.15 Amended and Restated Equity Incentive Plan, as amended (15) and (17)*
10.16 Form of Nonqualified Stock Option Agreement under the Amended and Restated Equity
Incentive Plan, as amended (21)*
121
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.17 Form of Restricted Share Units Agreement under the Amended and Restated Equity Incentive
Plan, as amended (21)*
10.18 Form of Directors' Stock Option Agreement under the Amended and Restated Equity Incentive
Plan, as amended (21)*
10.19 Outside Directors Equity Incentive Plan (11)*
10.20 Form of Directors' Stock Option Agreement under the Outside Directors Equity Incentive
Plan (21)*
10.21 Broadly-based Equity Incentive Plan, as amended (18)
10.22 Deferred Compensation Plan, as amended and restated (10)*
10.23 First Amendment to Deferred Compensation Plan (21)*
10.24 Second Amendment to Deferred Compensation Plan*
10.25 Directors Deferred Compensation Plan, as amended and restated*
10.26 Global Employee Stock Purchase Plan
10.27 Performance-Based Incentive Compensation Plan, as amended (13)*
10.28 R.P. Scherer Corporation 1997 Stock Option Plan (8)*
10.29 R.P. Scherer Corporation 1990 Nonqualified Performance Stock Option Plans, as amended (8)*
10.30 Allegiance Corporation 1996 Incentive Compensation Program (7)*
10.31 Allegiance Corporation 1998 Incentive Compensation Program (7)*
10.32 Allegiance Corporation 1996 Outside Director Incentive Compensation Plan (7)*
10.33 Amended and Restated Employment Agreement, effective as of February 1, 2004, between
the Registrant and Robert D. Walter (22)*
10.34 Employment Agreement, effective as of February 1, 2004, between the Registrant and
George L. Fotiades (22)*
10.35 Employment Agreement, dated and effective as of February 5, 2003, between the Registrant
and Stephen S. Thomas (19)*
10.36 Employment Agreement, dated and effective as of November 5, 2003, between the Registrant
and Ronald K. Labrum (21)*
10.37 Employment Agreement, dated and effective as of July 26, 2004, between the Registrant and
J. Michael Losh*
10.38 Form of Indemnification Agreement between the Registrant and individual Directors*
10.39 Form of Indemnification Agreement between the Registrant and individual Officers*
10.40 Restricted Share Units Agreement, dated October 15, 2001, between the Registrant and
Robert D. Walter (18)*
10.41 Nonqualified Stock Option Agreement, dated November 19, 2001, between the Registrant and
Robert D. Walter (10)*
122
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.42 Restricted Share Units Agreement, dated November 20, 2001, between the Registrant and
Robert D. Walter (10)*
10.43 Restricted Share Units Agreement, dated December 31, 2001, between the Registrant and
Robert D. Walter (18)*
10.44 Restricted Share Units Agreement, dated December 31, 2001, between the Registrant and
George L. Fotiades (10)*
10.45 Restricted Share Units Agreement, dated December 31, 2001, between the Registrant and
Stephen S. Thomas (10)*
10.46 Form of Restricted Share Units Agreement, dated December 31, 2001, between the Registrant
and each of Messrs. Miller and Rucci (10)*
10.47 Restricted Share Units Agreement, dated February 1, 2002, between the Registrant and
Robert D. Walter (18)*
10.48 Restricted Share Units Agreement, dated February 1, 2002, between the Registrant and
Robert D. Walter (18)*
10.49 Restricted Share Units Agreement, dated April 2002, between the Registrant and Stephen
S. Thomas (18)*
18.01 Letter Regarding Change in Accounting Principle (14)
18.02 Letter Regarding Change in Accounting Principle
21.01 List of Subsidiaries of the Registrant
23.01 Consent of Ernst and Young LLP
31.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.02 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.01 Statement Regarding Forward-Looking Information
99.02 Special Code Section 401(a)(9) Amendment to the Cardinal Health Profit Sharing, Retirement
and Savings Plan
99.03 First Amendment to the Cardinal Health Profit Sharing, Retirement and Savings Plan (Amended
and Restated Effective as of July 1, 1998) (Revised as of 2002)
99.04 First Amendment to the Cardinal Health Profit Sharing, Retirement and Savings Plan (As
amended and restated July 1, 2002)
99.05 Second Amendment to the Cardinal Health Profit Sharing, Retirement and Savings Plan (As
amended and restated July 1, 2002)
99.06 Cardinal Health, Inc. Employee Stock Purchase Plan, as amended
* Management contract or compensation plan or arrangement.
(1) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (File No. 1-11373) and incorporated
herein by reference.
123
(2) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed April 21, 1997 (File No. 1-11373) and incorporated herein by
reference.
(3) Included as an exhibit to the Registrant's Registration Statement on Form
S-4 (No. 333-74761) and incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (File No. 1-11373) and incorporated
herein by reference.
(5) Included as an exhibit to the Registrant's Registration Statement on Form
S-4 (No. 333-30889) and incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1994 (File No. 1-11373) and incorporated
herein by reference.
(7) Included as an exhibit to the Registrant's Post-Effective Amendment No. 1
on Form S-8 to Form S-4 Registration Statement (No. 333-68819) and
incorporated herein by reference.
(8) Included as an exhibit to the Registrant's Post-effective Amendment No. 1
on Form S-8 to Form S-4 Registration Statement (No. 333-56655) and
incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (File No. 1-11373) and
incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001 (File No. 1-11373) and
incorporated herein by reference.
(11) Included as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 333-38192) and incorporated herein by reference.
(12) Included as an exhibit to the Company's Post-Effective Amendment No. 1 of
Form S-8 to Form S-4 Registration Statement (No. 333-53394) and
incorporated herein by reference.
(13) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 (File No. 1-11373) and
incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 (File No. 1-11373) and
incorporated herein by reference.
(15) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999 (File No. 1-11373) and incorporated
herein by reference.
(16) Included as an exhibit to the Registrant's Registration Statement on Form
S-3 (No. 333-62944) and incorporated herein by reference.
(17) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001 (File No. 1-11373) and incorporated
herein by reference.
(18) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002 (File No. 1-11373) and incorporated
herein by reference.
(19) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2002 (File No. 1-11373) and
incorporated herein by reference.
(20) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003 (File No. 1-11373) and incorporated
herein by reference.
124
(21) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2003 (File No. 1-11373) and
incorporated herein by reference.
(22) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed February 6, 2004 (File No. 1-11373) and incorporated herein by
reference.
(23) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed October 20, 2004 (File No 1-11373) and incorporated herein by
reference.
(b) Reports on Form 8-K:
On May 17, 2004, the Company filed a Current Report on Form 8-K under Item
5 which filed as an exhibit a press release providing a chronology and
supplemental information on the SEC matter. On May 19, 2004, the Company filed a
Current Report on Form 8-K under Items 5 and 7 which filed as an exhibit a press
release announcing the Company's proposed acquisition of ALARIS Medical Systems,
Inc.
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 26, 2004.
CARDINAL HEALTH, INC.
By:/s/ ROBERT D. WALTER
------------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
126
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on October 26, 2004.
SIGNATURE TITLE
--------- -----
/s/ ROBERT D. WALTER Chairman, Chief Executive Officer and
--------------------------------- Director (principal executive officer)
Robert D. Walter
/s/ J. MICHAEL LOSH Chief Financial Officer and Director
--------------------------------- (principal financial officer and
J. Michael Losh principal accounting officer)
/s/ DAVE BING Director
---------------------------------
Dave Bing
/s/ GEORGE H. CONRADES Director
---------------------------------
George H. Conrades
/s/ JOHN F. FINN Director
---------------------------------
John F. Finn
/s/ ROBERT L. GERBIG Director
---------------------------------
Robert L. Gerbig
/s/ JOHN F. HAVENS Director
---------------------------------
John F. Havens
/s/ JOHN B. MCCOY Director
---------------------------------
John B. McCoy
/s/ RICHARD C. NOTEBAERT Director
---------------------------------
Richard C. Notebaert
/s/ MICHAEL D. O'HALLERAN Director
---------------------------------
Michael D. O'Halleran
/s/ DAVID W. RAISBECK Director
---------------------------------
David W. Raisbeck
/s/ JEAN G. SPAULDING Director
---------------------------------
Jean G. Spaulding
/s/ MATTHEW D. WALTER Director
---------------------------------
Matthew D. Walter
127
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) (2) DEDUCTIONS (3) OF PERIOD
----------------------------------------- ----------- ------------- ------------------ -------------- ----------
Fiscal Year 2004:
Accounts receivable $ 121.3 $ 6.4 $ 12.8 $ (21.4) $ 119.1
Finance notes receivable 4.5 0.3 1.5 (2.2) 4.1
Net investment in sales-type leases 17.8 (5.2) 2.2 0.9 15.7
----------- ------------ ------------ ------------- ----------
$ 143.6 $ 1.5 $ 16.5 $ (22.7) $ 138.9
=========== ============ ============ ============= ==========
Fiscal Year 2003 (Restated):
Accounts receivable (4) $ 122.9 $ 19.1 $ 5.9 $ (26.6) $ 121.3
Finance notes receivable 4.7 0.6 0.6 (1.4) 4.5
Net investment in sales-type leases 16.0 2.5 - (0.7) 17.8
----------- ------------ ------------ ------------- ----------
$ 143.6 $ 22.2 $ 6.5 $ (28.7) $ 143.6
=========== ============ ============ ============= ==========
Fiscal Year 2002 (Restated):
Accounts receivable (4) $ 136.7 $ 37.6 $ 0.2 $ (51.6) $ 122.9
Finance notes receivable 4.8 1.7 0.3 (2.1) 4.7
Net investment in sales-type leases 16.1 3.3 - (3.4) 16.0
----------- ------------ ------------ ------------- ----------
$ 157.6 $ 42.6 $ 0.5 $ (57.1) $ 143.6
=========== ============ ============ ============= ==========
(1) During fiscal 2004, 2003 and 2002 recoveries of amounts provided for or
written off in prior years were $3.8 million, $2.4 million and $1.5
million, respectively.
(2) In fiscal 2004 and 2003, $13.9 million and $7.1 million, respectively,
relates to the beginning balance for acquisitions accounted for as
purchase transactions.
(3) Write-off of uncollectible accounts.
(4) Amounts have been restated to include trade receivable valuation reserves
related to service charges and pricing, not previously included within
this schedule.
128
Exhibit 3.01
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CARDINAL DISTRIBUTION, INC.
These constitute the amended and restated articles of incorporation
of Cardinal Distribution, Inc., a corporation for profit formed under
the Ohio General Corporation Law, which amended and restated articles
of incorporation supersede the previously existing articles of incorporation
of the corporation, as heretofore amended:
FIRST: The name of the corporation shall be "Cardinal Dis-
tribution, Inc."
SECOND: The place in Ohio where the principal office of the
corporation is to be located is the City of Columbus, Franklin County.
THIRD: The purpose or purposes for which the corporation
is formed are to engage in any lawful act or activity for which corpora-
tions may be formed under Sections 1701.01 to 1701.98, inclusive, of
the Ohio Revised Code and any amendments heretofore or hereafter made
thereto.
FOURTH: Section 1. AUTHORIZED SHARES. The maximum aggregate
number of shares which the corporation is authorized to have outstanding
is 10,500,000, consisting of 10,000,000 common shares without par value
and 500,000 nonvoting preferred shares without par value.
Section 2. ISSUANCE OF PREFERRED SHARES. The board of directors
is authorized at any time, and from time to time, to provide for the
issuance of nonvoting preferred shares in one or more series, and to
determine to the extent permitted by law the designations, preferences,
limitations, and relative or other rights of the nonvoting preferred
shares or any series thereof. For each series, the board of directors
shall determine, by resolution or resolutions adopted prior to
issuance of any shares thereof, the designations, preferences, limitations,
and relative or other rights thereof, including but not limited to
the following relative rights and preferences, as to which there may
be variations among different series:
(a) the division of such shares into series and the designation
and authorized number of shares of each series,
(b) the dividend rate,
(c) the dates of payment of dividends and the dates from which
they are cumulative,
(d) liquidation price,
(e) redemption rights and price,
(f) sinking fund requirements,
(g) conversion rights, and
(h) restrictions on the issuance of such shares.
Prior to the issuance of any shares of a series, but after
adoption by the board of directors of the resolution establishing such
series, the appropriate officers of the corporation shall file such
documents with the State of Ohio as may be required by law including,
without limitation, an amendment to these Articles of Incorporation.
Section 3. COMMON SHARES. Each common share shall entitle
the holder thereof to one vote, in person or by proxy, at any and all
meetings of the shareholders of the corporation, on all propositions
before such meetings. Subject to the preferences of any outstanding
preferred shares, each common share shall be entitled to participate
equally in such dividends as may be declared by the board of directors
out of funds legally available therefor, and to participate equally
in all distributions of assets upon liquidation.
FIFTH: The amount of stated capital with which the corporation
will begin business shall be not less than five hundred dollars ($500).
SIXTH: The board of directors may fix and determine, and
vary, the amount of working capital of the corporation; determine whether
any (and, if any, what part) of the surplus, however created or arising,
shall be used or disposed of or declared in dividends or paid to share-
holders; and, without action by the shareholders, use and apply such
surplus, or any part thereof, or such part of the stated capital of
the corporation as is permitted under the laws of the State of Ohio,
at any time or from time to time, in the purchase or acquisition of
shares of any class, voting-trust certificates for shares, bonds, deben-
tures, notes, scrip, warrants, obligations, evidence of indebtedness
of the corporation, or other securities of the corporation, to such
extent or amount and in such manner and upon such terms as the board
of directors shall deem expedient and without regard to any provisions
which may hereafter be contained in the corporation's articles of incor-
poration with respect to the redemption of shares of any class at the
option of the corporation.
SEVENTH: Every statute of the State of Ohio hereafter enacted,
whereby rights or privileges of the shareholders of a corporation organ-
-2-
ized under the Ohio General Corporation Law are increased, diminished,
or in any way affected, or whereby effect is given to any action author-
ized, ratified, or approved by less than all the shareholders of any
such corporation, shall apply to the corporation and shall bind every
shareholder to the same extent as if such statute had been in force
at the date of the filing of these articles of incorporation.
EIGHTH: A director or officer of the corporation shall not
be disqualified by his office from dealing or contracting with the
corporation as a vendor, purchaser, employee, agent, or otherwise.
No transaction or contract or act of the corporation shall be void
or voidable or in any way affected or invalidated by reason of the
fact that any director or officer, or any firm of which any director
or officer is a shareholder, director, or trustee, or any trust of
which any director or officer is a trustee or beneficiary, is in any
way interested in such transaction or contract or act. No director
or officer shall be accountable or responsible to the corporation for
or in respect to any transaction or contract or act of the corporation
or for any gains or profits directly or indirectly realized by him
by reason of the fact that he or any firm of which he is a member or
any corporation of which he is a shareholder, director, or trustee,
or any trust of which he is a trustee or beneficiary, is interested
in such transaction or contract or act; provided the fact that such
director or officer or such firm or corporation or such trust is so
interested shall have been disclosed or shall have been known to the
board of directors or such members thereof as shall be present at any
meeting of the board of directors at which action upon such contract
or transaction or act shall have been taken. Any director may be counted
in determining the existence of a quorum at any meeting of the board
of directors which shall authorize or take action in respect to any
such contract or transaction or act, and may vote thereat to authorize,
ratify, or approve any such contract or transaction or act, and any
officer of the corporation may take any action within the scope of
his authority respecting such contract or transaction or act with like
force and effect as if he or any firm of which he is a member, or any
corporation of which he is a shareholder, director, or trustee, or
any trust of which he is a trustee or beneficiary, were not interested
in such transaction or contract or act. Without limiting or qualifying
the foregoing, if in any judicial or other inquiry, suit, cause, or
proceeding, the question of whether a director or officer of the corpora-
tion has acted in good faith is material, then notwithstanding any
statute or rule of law or of equity to the contrary (if any there be),
his good faith shall be presumed, in the absence of proof to the contrary
by clear and convincing evidence.
NINTH: No holder of shares of any class of the corporation
shall be entitled as such, as a matter of right, to subscribe for or
purchase shares of any class, now or hereafter authorized, or to purchase
or to subscribe for securities convertible into or exchangeable for
shares of the corporation, or to which shall appertain or be attached
-3-
any warrants or rights entitling the holder thereto to subscribe for
or purchase shares, except such rights of subscription or purchase,
if any, at such price or prices, and upon such terms and conditions
as the board of directors in its discretion may from time to time deter-
mine.
TENTH: Except as otherwise provided in these Articles of
Incorporation or the Code of Regulations of the corporation, notwithstand-
ing any provision of any statute of the State of Ohio, now or hereafter
in force, requiring for any purpose the vote, consent, waiver, or release
of the holders of shares entitling them to exercise two-thirds or any
other proportion of the voting power of the corporation or of any class
or classes of shares thereof, any action may be taken by the vote of
the holders of shares entitling them to exercise a majority of the
voting power of the corporation, or of such class or classes, unless
the proportion designated by such statute cannot be altered by these
articles.
-4-
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
CARDINAL DISTRIBUTION, INC.
Robert D. Walter and Michael E. Moritz hereby certify that they are the
duly elected and acting chairman and secretary, respectively, of Cardinal
Distribution, Inc., an Ohio corporation (the "Company"), and further certify
that the following is a true copy of a resolution amending the Company's
Amended and Restated Articles of Incorporation duly adopted by the affirmative
vote of the holders of shares of the Company entitling them to exercise a
majority of the voting power of the Company at the annual meeting of
shareholders duly held on August 30, 1989:
RESOLVED, That the Amended and Restated Articles of
Incorporation of the Company be amended by deleting ARTICLE
FOURTH thereof in its entirety and by substituting in lieu
thereof the following ARTICLE FOURTH:
FOURTH: Section 1. AUTHORIZED SHARES. The
maximum aggregate number of shares which the
corporation is authorized to have outstanding is
20,500,000, consisting of 20,000,000 common shares
without par value and 500,000 nonvoting preferred
shares without par value.
Section 2. ISSUANCE OF PREFERRED SHARES.
The board of directors is authorized at any time,
and from time to time, to provide for the issuance
of nonvoting preferred shares in one or more
series, and to determine to the extent permitted
by law the designations, preferences, limitations,
and relative or other rights of the nonvoting
preferred shares or any series thereof. For each
series, the board of directors shall determine, by
resolution or resolutions adopted prior to the
issuance of any shares thereof, the designations,
preferences, limitations, and relative or other
rights thereof, including but not limited to the
following relative rights and preferences, as to
which there may be variations among different
series:
(a) the division of such shares into series
and the designation and authorized
number of shares of each series,
(b) the dividend rate,
(c) the dates of payment of dividends and
the dates from which they are
cumulative,
(d) liquidation price,
(e) redemption rights and price,
(f) sinking fund requirements,
(g) conversion rights, and
(h) restrictions on the issuance
of such shares.
Prior to the issuance of any shares of a series,
but after adoption by the board of directors of
the resolution establishing such series, the
appropriate officers of the corporation shall file
such documents with the State of Ohio as may be
required by law including, without limitation, an
amendment to these Articles of Incorporation.
Section 3. COMMON SHARES. Each common share
shall entitle the holder thereof to one vote, in
person or by proxy, at any and all meetings of the
shareholders of the corporation, on all
propositions before such meetings. Subject to the
preferences of any outstanding preferred shares,
each common share shall be entitled to participate
equally in such dividends as may be declared by
the board of directors out of funds legally
available therefor, and to participate equally in
all distributions of assets upon liquidation.
August 30, 1989 CARDINAL DISTRIBUTION, INC.
By /s/ ROBERT D. WALTER
------------------------------
Robert D. Walter, Chairman
By /s/ MICHAEL E. MORITZ
------------------------------
Michael E. Moritz, Secretary
-2-
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
CARDINAL DISTRIBUTION, INC.
Robert D. Walter and George H. Bennett, Jr. hereby certify that they
are the duly elected and acting chairman and assistant secretary,
respectively, of Cardinal Distribution, Inc., an Ohio corporation (the
"Company"), and further certify that the following is a true copy of a
resolution amending the Company's Amended and Restated Articles of
Incorporation duly adopted by the affirmative vote of the holders of shares of
the Company entitling them to exercise a majority of the voting power of the
Company at the annual meeting of shareholders duly held on August 15, 1991:
REVOLVED, that Article FOURTH of the Company's Amended and
Restated Articles of Incorporation be, and the same hereby is,
deleted in its entirety and there is substituting the following:
FOURTH: Section 1. AUTHORIZED SHARES. The
maximum aggregate number of shares which the
corporation is authorized to have outstanding
is 40,500,000 consisting of 40,000,000 common
shares without par value and 500,000 nonvoting
preferred shares without par value.
Section 2. ISSUANCE OF PREFERRED SHARES. The
board of directors is authorized at any time,
and from time to time, to provide for the
issuance of nonvoting preferred shares in one
or more series, and to determine to the extent
permitted by law the designations, preferences,
limitations, and relative or other rights of
the nonvoting preferred shares or any other
series thereof. For each series, the board of
directors shall determine, by resolution or
resolutions adopted prior to the issuance of any
shares thereof, the designations, preferences,
limitations, and relative or other rights thereof,
including but not limited to the following
relative rights and preferences, as to which
there may be variations among different series:
(a) the division of such shares into
series and the designation and
authorized number of shares of
each series,
(b) the divided rate,
(c) the dates of payment of dividends and
the dates from which they are cumulative,
(d) liquidation price,
(e) redemption rights and price,
(f) sinking fund requirements,
(g) conversion rights, and
(h) restrictions on the issuance of such shares.
Prior to the issuance of any shares of a series, but after
adoption by the board of directors of the resolution
establishing such series, the appropriate officers of the
corporation shall file such documents with the State of Ohio
as may be required by law including, without limitation, an
amendment to these Articles of Incorporation.
Section 3. COMMON SHARES. Each common share shall
entitle the holder thereof to one vote, in person or by proxy,
at any and all meetings of the shareholders of the corporation,
on all propositions before such meetings. Subject to the
preferences of any outstanding preferred shares, each common
share shall be entitled to participate equally in such dividends
as may be declared by the board of directors out of funds
legally available therefor, and to participate equally in all
distributions of assets upon liquidation.
August 15, 1991 CARDINAL DISTRIBUTION, INC.
By /s/ ROBERT D. WALTER
---------------------------
Robert D. Walter, Chairman
By /s/ GEORGE H. BENNETT, JR.
---------------------------
George H. Bennett, Jr., Assistant
Secretary
-2-
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED
OF
CARDINAL DISTRIBUTION, INC.
ROBERT D. WALTER, Chairman, and MICHAEL E. MORITZ, Secretary, of Cardinal
Distribution, Inc., an Ohio corporation (the "Company"), do hereby certify that
a meeting of the shareholders of the Company was duly called and held on January
27, 1994, at which meeting a quorum of the shareholders was present in person or
by proxy, and by the affirmative vote of the holders of shares entitling them to
exercise a majority of the voting power of the Company on a proposal to amend
the Company's Amended and Restated Articles of Incorporation, as amended, the
resolutions attached hereto as Exhibit A were duly adopted.
IN WITNESS WHEREOF, Robert D. Walter, Chairman, and Michael E. Moritz,
Secretary, of Cardinal Distribution, Inc., acting for and on its behalf, do
hereunto subscribe their names this 1st day of February, 1994.
/s/ Robert D. Walter
--------------------------------
Robert D. Walter, Chairman
/s/ Michael E. Moritz
--------------------------------
Michael E. Moritz, Secretary
EXHIBIT A
TO
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED
OF
CARDINAL DISTRIBUTION, INC.
Resolved, that Article FIRST, of the Amended and Restated Articles of
Incorporation, as amended, of Cardinal Distribution, Inc. be, and the same
hereby is, deleted in its entirety and there is substituted therefor the
following:
FIRST: The name of the corporation shall be "Cardinal Health, Inc."
Resolved, that Article FOURTH of the Amended and Restated Articles of
Incorporation, as amended, of Cardinal Distribution, Inc. be, and the same
hereby is, deleted in its entirety and there is substituted therefor the
following:
FOURTH: Section 1. AUTHORIZED SHARES. The maximum aggregate
number of shares which the corporation is authorized to have
outstanding is 65,500,000, consisting of 60,000,000 common shares,
without par value ("Class A Common Shares"), 5,000,000 Class B common
shares, without par value ("Class B Common Shares") (the Class A Common
Shares and the Class B Common Shares are sometimes referred to herein
collectively as the "Common Shares"), and 500,000 nonvoting preferred
shares, without par value.
Section 2. ISSUANCE OF PREFERRED SHARES. The board of directors
is authorized at any time, and from time to time, to provide for the
issuance of nonvoting preferred shares in one or more series, and to
determine to the extent permitted by law the designations, preferences,
limitations, and relative or other rights of the nonvoting preferred
shares or any series thereof. For each series, the board of directors
shall determine, by resolution or resolutions adopted prior to the
issuance of any shares thereof, the designations, preferences,
limitations, and relative or other rights thereof, including but not
limited to the following relative rights and preferences, as to which
there may be variations among different series:
(a) the division of such shares into series and the
designation and authorized number of shares of each series,
(b) the dividend rate,
(c) the dates of payment of dividends and the dates from which
they are cumulative,
(d) liquidation price,
(e) redemption rights and price,
(f) sinking fund requirements,
(g) conversion rights, and
(h) restrictions on the issuance of such shares.
Prior to the issuance of any shares of a series, but after adoption by
the board of directors of the resolution establishing such series, the
appropriate officers of the corporation shall file such documents with
the State of Ohio as may be required by law including, without
limitation, an amendment to these Articles of Incorporation.
Section 3. COMMON SHARES.
All common shares shall be identical and will entitle the holders
thereof to the same rights and privileges, except as otherwise provided
herein.
A. VOTING RIGHTS.
1. CLASS A COMMON SHARES. Except as set forth herein or as
otherwise required by law, each outstanding Class A Common Share shall
entitle the holder thereof to one vote, in person or by
proxy, at any and all meetings of the shareholders of the corporation,
on all propositions before such meetings.
2. CLASS B COMMON STOCK. Except as set forth herein or as
otherwise required by law, each outstanding Class B Common Share shall
entitle the holder thereof to one-fifth (1/5) of one vote, in person
or by proxy, at any and all meetings of shareholders of the corporation,
on all propositions before such meetings. Notwithstanding the
foregoing, holders of the Class B Common Shares shall be entitled to
vote as a separate class on any amendment to this paragraph 2 of this
Section A, on the issuance in the aggregate by the corporation of
additional Class B Common Shares in excess of the number of Class B
Common Shares held by Chemical Equity Associates and its Affiliates or
issuable pursuant to Section 3(c) hereof and on any amendment, repeal
or modification of any provision of these Articles that adversely
affects the powers, preferences or special rights of the holders of the
Class B Common Shares.
B. DIVIDENDS; LIQUIDATION. Subject to the preferences of any
preferred shares, each Common Share shall be entitled to participate equally in
such dividends as may be declared by its board of directors out of funds
legally available therefor or to participate equally in all distributions of
assets upon liquidation; provided, that in the case of dividends payable in
Common Shares of the Corporation, or options, warrants or rights to acquire
such Common Shares, or securities convertible into or exchangeable for such
Common Shares, the shares, options, warrants, rights or securities so payable
shall be payable in shares of, or options, warrants or rights to acquire, or
securities convertible into or exchangeable for, Common Shares of the same
class upon which the dividend or distribution is being paid.
C. CONVERSION.
1. CONVERSION OF CLASS A COMMON SHARES. Any Regulated Shareholder
(defined below) shall be entitled to convert, at any time and from time
to time, any or all of the Class A Common Shares held by such
shareholder into the same number of Class B Common Shares.
2. CONVERSION OF CLASS B COMMON SHARES. Each holder of Class B
Common Shares may convert such shares into Class A Common Shares if
such holder reasonably believes that such converted shares will be
transferred within fifteen (15) days pursuant to a Conversion Event
(defined below) and such holder agrees not to vote any such Class A
Common Shares prior to such Conversion Event and undertakes to
promptly convert such shares back into Class B Common Shares if such
shares are not transferred pursuant to a Conversion Event. Each
Regulated Shareholder may provide for further restrictions or
limitations upon the conversion of any Class B Common Shares by
providing the corporation with signed, written instructions specifying
such additional restrictions and legending such shares as to the
existence of such restrictions.
3. CONVERSION PROCEDURE. Each conversion of Common Shares of the
corporation into shares of another class of Common Shares of the
Corporation shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (the "Converting
Shares") at the principal office of the corporation (or such other
office or agency of the corporation as the corporation may designate
by written notice to the holders of common shares) at any time during
its usual business hours, together with written notice by the holder
of such Converting Shares, stating that such holder desires to convert
the Converting Shares, or a stated number of the shares represented by
such certificate or certificates, into an equal number of shares of the
class into which such shares may be converted (the "Converted Shares").
Such notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted
Shares are to be issued and shall include instructions for the delivery
thereof. Promptly after such surrender and the receipt of such written
notice, the corporation will issue and deliver in accordance with the
surrendering holder's instructions the certificate or certificates
evidencing the Converted Shares issuable upon such conversion, and the
corporation will deliver to the converting holder a certificate
representing any shares which were represented by the certificate or
certificates that were delivered to the corporation with such
conversion, but which were not converted.
-2-
Such conversion shall be deemed to have been effected as of the
close of business on the date on which such certificate or certificates
shall have been surrendered and such notice shall have been received by
the corporation, and at such time the rights of the holder of the
Converting Shares as such holder shall cease and the person or persons
in whose name or names the certificate or certificates for the
Converted Shares are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the Converted Shares.
Upon issuance of shares in accordance with this Section C, such
Converted Shares shall be deemed to be duly authorized, validly issued,
fully paid and non-assessable.
Each holder of Class B Common Shares shall be entitled to convert
Class B Common Shares in connection with any Conversion Event if such
holder reasonably believes that such Conversion Event will be
consummated, and a written request for conversion from any holder of
Class B Common Shares to the corporation stating such holder's
reasonable belief that a Conversion Event shall occur shall be
conclusive and shall obligate the corporation to effect such
conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. The corporation will not cancel
the Class B Common Shares so converted before the 15th day following
such Conversion Event and will reserve such shares until such 15th day
for reissuance in compliance with the next sentence. If any Class B
Common Shares are converted into Class A Common Shares in connection
with a Conversion Event and such Class A Common Shares are not
actually distributed, disposed of or sold pursuant to such Conversion
Event, such Class A Common Shares shall be promptly converted back
into the same number of Class B Common Shares.
4. STOCK SPLITS; ADJUSTMENTS. If the Corporation shall in any
manner subdivide (by stock split, stock dividend or otherwise) or
combine (by reverse stock split or otherwise) the outstanding Class A
Common Shares or the Class B Common Shares, then the outstanding
shares of each other class of common shares shall be subdivided or
combined, as the case may be, to the same extent, share and share
alike, and effective provision shall be made for the protection of the
conversion rights hereunder.
In the case of any reorganization, reclassification or change of
shares of the Class A Common Shares or Class B Common Shares (other
than a change in par value or from par to no par value as a result of
a subdivision or combination), or in case of any consolidation of the
corporation with one or more corporations or a merger of the
corporation with another corporation (other than a consolidation or
merger in which the corporation is the resulting or surviving
corporation and which does not result in any reclassification or
change of outstanding Class A Common Shares or Class B Common Shares),
each holder of Class A Common Shares or Class B Common Shares shall
have the right at any time thereafter, so long as the conversion right
hereunder with respect to such share would exist had such event not
occurred, to convert such share into the kind and amount of shares of
stock and other securities and properties (including cash) receivable
upon such reorganization, reclassification, change, consolidation or
merger by a holder of the number of Class A Common Shares or Class B
Common Shares into which such Class A Common Shares or Class B Common
Shares, as the case may be, might have been converted immediately
prior to such reorganization, reclassification, change, consolidation
or merger. In the event of any such reorganization, reclassification,
change, consolidation or merger which will have the effect of causing
any Regulated Shareholder's direct or indirect ownership of shares of
capital stock of the resulting or surviving corporation immediately
following such transaction to equal or exceed 5% of the voting power
thereof (calculated as if all such Regulated Shareholder's Class B
Common Shares were converted to Class A Common Shares immediately prior
to consummation of such transaction) then provision shall be made in
the certificate of incorporation of the resulting or surviving
corporation for the protection of the conversion rights of Class A
Common Shares and Class B Common Shares that shall be applicable, as
nearly as reasonably may be, to any such other shares of stock and
other securities and property deliverable upon conversion of such
Class A Common Shares or Class B Common Shares into which such Class
A Common Shares or Class B Common Shares might have been converted
prior to such event.
-3-
5. RESERVATION OF SHARES. The Corporation shall at all times
reserve and keep available out of its authorized but unissued Class A
Common Shares and Class B Common Shares or its treasury shares, for
the purpose of issuance upon the conversion of Class A Common Shares
and Class B Common Shares, such number of shares of such class as are
then issuable upon the conversion of all outstanding shares of Class A
Common Shares and Class B Common Shares which may be converted.
6. NO CHARGE. The issuance of certificates for shares of any class
of common shares upon conversion of shares of any other class of common
shares shall be made without charge to the holders of such shares for
any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related
issuance of common shares; provided, however, that the Corporation
shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the common
shares converted.
D. As used herein, the following terms shall have the meanings shown
below:
1. "AFFILIATES" shall mean with respect to any Person, any other
person, directly or indirectly controlling, controlled by or under
common control with such Person. For the purpose of the above
definition, the term "control" (including with correlative meaning,
the terms "controlling", "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
2. "CONVERSION EVENT" shall mean (a) any public offering or public
sale of securities of the Corporation (including a public offering
registered under the Securities Act of 1933 and a public sale pursuant
to Rule 144 of the Securities and Exchange Commission or any similar
rule then in force), (b) any sale of securities of the corporation to
a person or group of persons (within the meaning of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) if, after such sale,
such person or group of persons in the aggregate would own or control
securities which possess in the aggregate the ordinary voting power to
elect a majority of the corporation's directors (provided that such
sale has been approved by the corporation's Board of Directors or a
committee thereof), (c) any sale of securities of the corporation to a
person or group of persons (within the meaning of the 1934 Act) if,
after such sale, such person or group of persons in the aggregate would
own or control securities of the corporation (excluding any Class B
Common Shares being converted and disposed of in connection with such
Conversion Event) which possess in the aggregate the ordinary voting
power to elect a majority of the corporation's directors, (d) any sale
of securities of the corporation to a person or group of persons
(within the meaning of the 1934 Act) if, after such sale, such person
or group of persons would not, in the aggregate, own, control or have
the right to acquire more than two percent (2%) of the outstanding
securities or any class of voting securities of the corporation (for
purposes of this clause, treating Class A Common Stock and Class B
Common Stock as a single class), and (e) a merger, consolidation or
similar transaction involving the corporation if, after such
transaction, a person or group of persons (within the meaning of the
1934 Act) in the aggregate would own or control securities which
possess in the aggregate the ordinary voting power to elect a majority
of the surviving corporation's directors (provided that the
transaction has been approved by the corporation's Board of Directors
or a committee thereof).
3. "PERSON" or "PERSON" shall mean an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization
or a government or any department or agency thereof.
4. "REGULATED SHAREHOLDER" shall mean Chemical Equity Associates
and its Affiliates.
-4-
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,
OF
CARDINAL HEALTH, INC.
Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of
Cardinal Health, Inc., an Ohio corporation (the "Company"), do hereby certify
that a meeting of the shareholders of the Company was duly called and held on
November 14, 1995, at which meeting a quorum of the shareholders was present in
person or by proxy, and by the affirmative vote of holders of shares entitling
them to exercise a majority of the voting power of the Company on a proposal to
amend the Company's Amended and Restated Articles of Incorporation, as amended,
the following resolution was duly adopted:
Resolved, that Section 1 of Article FOURTH of the Amended and Restated
Articles of Incorporation, as amended, of Cardinal Health, Inc. be,
and the same hereby is, deleted in its entirety and there is
substituted therefor the following:
FOURTH: Section 1. Authorized Shares. The maximum aggregate number
of shares which the corporation is authorized to have outstanding is
105,500,000, consisting of 100,000,000 common shares, without par
value ("Class A Common Shares"), 5,000,000 Class B common shares,
without par value ("Class B Common Shares") (the Class A Common Shares
and the Class B Common Shares are sometimes referred to herein
collectively as the "Common Shares"), and 500,000 nonvoting preferred
shares, without par value.
IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett,
Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do
hereunto subscribe their names this 14th day of November, 1995.
/s/ ROBERT D. WALTER
------------------------------
Robert D. Walter, Chairman
/s/ GEORGE H. BENNETT, JR.
------------------------------
George H. Bennett, Jr.
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,
OF
CARDINAL HEALTH, INC.
Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of
Cardinal Health, Inc., an Ohio corporation (the "Company"), do hereby certify
that a meeting of the shareholders of the Company was duly called and held on
October 29, 1996, at which meeting a quorum of the shareholders was present in
person or by proxy, and by the affirmative vote of holders of shares entitling
them to exercise a majority of the voting power of the Company on a proposal to
amend the Company's Amended and Restated Articles of Incorporation, as
amended, the following resolution was duly adopted;
Resolved, that Section 1 of Article FOURTH of the Amended and Restated
Articles of Incorporation, as amended, of Cardinal Health, Inc. be,
and the same hereby is, deleted in its entirety and there is
substituted therefor the following:
FOURTH: Section 1. Authorized Shares. The maximum aggregate number
of shares which the corporation is authorized to have outstanding is
155,500,000, consisting of 150,000,000 common shares, without par
value ("Class A Common Shares"), 5,000,000 Class B common shares,
without par value ("Class B Common Shares") (the Class A Common Shares
and the Class B Common Shares are sometimes referred to herein
collectively as the "Common Shares"), and 500,000 nonvoting preferred
shares, without par value.
IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett,
Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do
hereunto subscribe their names this 29th day of October, 1996.
/s/ ROBERT D. WALTER
-----------------------------------
Robert D. Walter, Chairman
/s/ GEORGE H. BENNETT, JR.
-------------------------------------
George H. Bennett, Jr., Secretary
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,
OF
CARDINAL HEALTH, INC.
Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of
Cardinal Health, Inc., an Ohio corporation (the "Company"), do hereby certify
that a meeting of the shareholders of the Company was duly called and held on
February 20, 1998, at which meeting a quorum of the shareholders was present in
person or by proxy, and by the affirmative vote of holders of shares entitling
them to exercise a majority of the voting power of the Company on a proposal to
amend the Company's Amended and Restated Articles of Incorporation, as amended,
the following resolution was duly adopted:
Resolved, that Section 1 of Article FOURTH of the Amended and Restated
Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and
the same hereby is, deleted in its entirety and there is substituted
therefor the following:
FOURTH: Section 1. Authorized Shares. The maximum aggregate number of
shares which the corporation is authorized to have outstanding is
305,500,000 consisting of 300,000,000 common shares, without par value
("Class A Common Shares"), 5,000,000 Class B common shares, without par
value ("Class B Common Shares") (the Class A Common Shares and the
Class B Common Shares are sometimes referred to herein collectively as
the "Common Shares"), and 500,000 nonvoting preferred shares, without
par value.
IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett,
Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do
hereunto subscribe their names this 20th day of February, 1998.
/s/ ROBERT D. WALTER
------------------------------
Robert D. Walter, Chairman
/s/ GEORGE H. BENNETT, JR.
------------------------------
George H. Bennett, Jr., Secretary
CERTIFICATE OF AMENDMENT
TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,
OF
CARDINAL HEALTH, INC.
Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of
Cardinal Health, Inc., an Ohio corporation (the "Company"), do hereby certify
that a meeting of the shareholders of the Company was duly called and held on
November 23, 1998, at which meeting a quorum of the shareholders was present in
person or by proxy, and by the affirmative vote of holders of shares entitling
them to exercise a majority of the voting power of the Company on a proposal to
amend the Company's Amended and Restated Articles of Incorporation, as amended,
the following resolution was duly adopted:
Resolved, that Section 1 of Article FOURTH of the Amended and Restated
Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and
the same hereby is, deleted in its entirety and there is substituted
therefor the following:
FOURTH: Section 1. Authorized Shares. The maximum aggregate number of
shares which the corporation is authorized to have outstanding is
505,500,000 consisting of 500,000,000 common shares, without par value
("Class A Common Shares"), 5,000,000 Class B common shares, without par
value ("Class B Common Shares") (the Class A Common Shares and the
Class B Common Shares are sometimes referred to herein collectively as
the "Common Shares"), and 500,000 nonvoting preferred shares, without
par value.
IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett,
Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do
hereunto subscribe their names this 23rd day of November, 1998.
/s/ Robert D. Walter
---------------------------------
Robert D. Walter, Chairman
/s/ George H. Bennett, Jr.
---------------------------------
George H. Bennett, Jr., Secretary
CERTIFICATE OF AMENDMENT
TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,
OF CARDINAL HEALTH, INC.
Steven Alan Bennett, Executive Vice President, Chief Legal Officer and
Secretary, of Cardinal Health, Inc., an Ohio corporation (the "Company"), does
hereby certify that a meeting of the shareholders of the Company was duly called
and held on November 1, 2000, at which meeting a quorum of the shareholders was
present in person or by proxy, and by the affirmative vote of holders of shares
entitling them to exercise a majority of the voting power of the Company on a
proposal to amend the Company's Amended and Restated Articles of Incorporation,
as amended, the following resolution was duly adopted:
Resolved, that Section 1 of Article FOURTH of the Amended and Restated
Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and
the same hereby is, deleted in its entirety and there is substituted
therefor the following:
FOURTH: Section 1. Authorized Shares. The maximum aggregate number of
shares which the corporation is authorized to have outstanding is
755,500,000 consisting of 750,000,000 common shares, without par value
("Class A Common Shares"), 5,000,000 Class B common shares, without par
value ("Class B Common Shares") (the Class A Common Shares and the
Class B Common Shares are sometimes referred to herein collectively as
the "Common Shares"), and 500,000 nonvoting preferred shares, without
par value.
IN WITNESS WHEREOF, Steven Alan Bennett, Executive Vice President,
Chief Legal Officer and Secretary, of Cardinal Health, Inc., acting for and on
its behalf, does hereunto subscribe his name this 1st day of November, 2000.
/s/ Steven Alan Bennett
-----------------------------------
Steven Alan Bennett
Executive Vice President, Chief Legal
Officer and Secretary
Exhibit 10.02
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
January 1, 2004
WHOLESALE SUPPLY AGREEMENT
This letter will confirm the agreement ("AGREEMENT") between Cardinal Health*
("CARDINAL") and CVS Pharmacy Inc. ("CVS") under which CVS will purchase certain
pharmaceutical and other products from Cardinal on the following terms and
conditions:
SECTION 1. DESIGNATION AS [***].
(a) Retail Pharmacies. During the term of this Agreement, CVS will
designate Cardinal as [***] operated by CVS (collectively, the
"PHARMACIES" and individually, a "PHARMACY") subject to Section 1(a)
Disclosure Schedule. A list of the Pharmacies (the "[***]") will be
provided by CVS to Cardinal from time to time during the term of this
Agreement.
(b) Distribution Centers. During the term of this Agreement, CVS will
designate Cardinal as [***] operated by CVS ("CVS PHARMACY DCS") subject
to Section 1(b) Disclosure Schedule. A comprehensive list [***] as of
January 1, 2004 (the date of this agreement) (the "Total DC List") is
set forth in the Section 1(b) Disclosure Schedule.
(c) [***]. This Agreement [***] purchases which are made by CVS on
behalf of the CVS [***].
(d) CVS Commitment. This Agreement pertains only [***] to Pharmacies.
SECTION 2. SALE OF MERCHANDISE AND [***].
(a) Primary Requirements. [***] and the CVS Pharmacy [***] purchase from
Cardinal during the term of this Agreement its [***] (as defined in the
Section 2(a) Disclosure Schedule) of pharmaceutical products ("RX
PRODUCTS"), which consist of purchases of Rx Products for (a) [***]
("[***] PURCHASES"); and (b) [***] ("[***] PURCHASES"). CVS may purchase
from Cardinal, at CVS' discretion, [***] its health and beauty aids, home
health care products and other inventory carried by Cardinal ("[***]
PURCHASES"). For purposes of this Agreement, the term "[***]" with respect
to a period means all purchases of Merchandise [***] by CVS (and in some
circumstances, either the CVS Pharmacy [***]) from Cardinal during that
period, [***]. For purposes of this Agreement, the term "MERCHANDISE" will
mean the Rx Products (and [***] Purchases, with respect to the Pharmacies
only).
1
Notwithstanding anything in this Agreement to the contrary, CVS retains
the right [***] Rx Products [***].
(b) [***]. The Section 2(b) Disclosure Schedule describes the terms by
which CVS will make its [***] through Cardinal.
(c) Discontinued Merchandise. Cardinal will [***], subject to such
credit considerations concerning the applicable manufacturer as Cardinal
may reasonably consider appropriate (including but not limited to,
potential insolvency or outstanding balance owed to Cardinal without
legitimate reason for dispute). CVS [***] detailed in Section 2(c)
Disclosure Schedule will be purchased from each of Cardinal's distribution
centers servicing CVS Pharmacies per month. If Cardinal notifies CVS that
[***], then Cardinal [***]. If Cardinal [***], CVS will [***]. Cardinal
will use reasonable efforts to ensure that [***], which may include, but
not be limited to, [***]. Alternatively, Cardinal and CVS may mutually
agree to [***].
(d) Generally. CVS will be liable for any payment owed to Cardinal from
any [***] for purchases made hereunder. [***] to determine what
Merchandise it will carry based upon product quality, manufacturer
indemnity, insurance, and other policies, and other standards determined
by it, and may [***] items of Merchandise with limited or no movement
activity [***]. Notwithstanding the foregoing, Cardinal's decision [***]
for reasons other than product quality (relative to FDA instructions),
manufacturer indemnity, and insurability shall not excuse Cardinal from
complying with the [***] in Section 2(b) Disclosure Schedule and Section 9
Disclosure Schedule. Both parties agree that Cardinal's inability to
provide CVS with the [***] Section 2(b) Disclosure Schedule and Section 9
Disclosure Schedule represents a material breach of this Agreement.
(e) Representation of Status. Cardinal represents that it is, and will
continue to be during the term of this Agreement, [***].
SECTION 3. PURCHASE PRICE. As further described in Sections 3(a) and 3(b)
Disclosure Schedules, CVS will pay a purchase price ("COST OF GOODS") for
products purchased under this Agreement as follows:
(a) [***] Purchases and [***] Purchases. CVS will pay a Cost of Goods
for Merchandise in an amount equal to Cardinal's Cost plus the percentage
set forth in the Section 3(a) Disclosure Schedule. The term "CARDINAL'S
COST" as used herein means [***] for Merchandise as of the date [***],
adjusted to reflect [***].
By way of illustration only and not as a limitation, the [***]. In the
event that a [***] Cardinal would [***] (Pharmacies and CVS Pharmacy
[***], if applicable). Notwithstanding the foregoing, Cardinal will not
[***] without CVS' expressed written consent. It will be Cardinal's sole
responsibility to notify in writing [***] (with copy to CVS subject to
Section 13) [***].
2
As set forth in Section 3(a) Disclosure Schedule, the purchase price for
selected Merchandise, including but not limited to, [***] will not be
based upon Cardinal's [***] described above but will instead be [***] for
such Merchandise. Merchandise described in this paragraph is sometimes
referred to as [***]. CVS may, but will have no obligation to, [***].
(b) [***]. CVS will pay a purchase price for all [***] in an amount
equal to the cost set forth on the Section 3(b) Disclosure Schedule.
(c) Cost of Goods [***]. CVS' Cost of Goods for [***] Purchases and
[***] Purchases will be subject to [***] as described in the Section 3(c)
Disclosure Schedule.
(d) Generally. Each party hereto acknowledges and agrees that its
obligation to pay the purchase price for all [***] and other amounts due
or to become due under this Agreement will not be [***] for any reason,
except as further described in this Agreement.
Each party acknowledges and agrees that its obligation to pay the other
amounts due under this Agreement or become due under this Agreement will
[***] for any reason, except as further described in this Agreement. If a
party to this Agreement that is obligated to pay monies hereunder (the
"Payor") fails to pay the other party (the "Payee") amounts due under this
Agreement (which Payee reasonably believes it is due), [***] amounts due
Payor. Any [***] incorrectly or improperly recognized (i.e., excluding
legitimately disputed amounts) by Payee will be paid to Payor as soon as
possible and in any event no later than [***] following notification from
Payor of such [***] provided Payee agrees that [***] was [***]. Payee
agrees to pay when due any amounts not in dispute.
CVS and Cardinal commit to work with each other to mutually resolve any
disputed amounts.
Furthermore, it is both parties intention that all Agreement components
and [***] stand on their own; there will be [***].
SECTION 4. PAYMENT TERMS.
(a) [***] Purchases and [***] Purchases. CVS will cause Cardinal to
receive payment in full and remittance by [***] for all [***] Purchases
and [***] Purchases according to the schedule set forth in the Section 4
Disclosure Schedule subject to the terms and conditions of this Agreement.
(b) [***]. CVS will cause Cardinal to receive payment in full [***]
according to the schedule set forth in the Section 4 Disclosure Schedule
subject to the terms and conditions of this Agreement.
(c) [***]. All payments made by CVS to Cardinal under this Agreement
will be [***], so as to provide Cardinal with good funds immediately
available to
3
Cardinal on the date such payment is due according to the schedule set
forth in the Section 4 Disclosure Schedule. In the event [***] temporarily
interrupted or cannot be utilized, CVS and Cardinal will seek alternative
payment methods to ensure that Cardinal receives good funds as soon as
practical. To the extent that a specific payment is unnecessarily delayed
due to an issue [***], CVS agrees to work with Cardinal to make such
payment as expeditiously as possible. As indicated in Section 4 Disclosure
Schedule, CVS and Cardinal may mutually agree to a payment arrangement
that is reflective of a change in normal terms to accommodate for [***]
due to the fact that [***].
(d) Generally. If Cardinal reasonably believes that CVS [***], then
Cardinal has the right to request that CVS provide it with information
within [***] from the date CVS receives the request (i.e., if CVS receives
Cardinal's request at 3:00 p.m. [***] (as applicable), in reasonable
detail, [***], and that may resolve any such [***] by Cardinal. In
addition, CVS agrees to [***] Cardinal in the event CVS [***] with respect
to its [***], including, but not limited to an [***]. If Cardinal has
requested such information or CVS has notified Cardinal as set forth above
and Cardinal and CVS cannot [***] any such issues pursuant to a reasonable
solution, then Cardinal may (i) [***] thereafter to the [***] of CVS'
[***] during the immediately preceding [***]; (ii) [***], and (iii) in the
event that [***] (as defined below), give CVS notice of the [***] under
this Agreement by 10:00 a.m. Eastern Standard Time on a business day and
require [***] of payment of such amount by [***] by 2:00 p.m. Eastern
Standard Time on the [***]. As used within this paragraph, a "[***]" shall
mean [***]. [***], the parties will meet every approximate [***] following
the execution of such action to review [***], and to reasonably consider
reinstating the [***] of such action. [***], then CVS may choose to [***]
if it finds Cardinal's [***] unacceptable. If the Agreement is [***]
pursuant to this Section 4(d), the Agreement shall [***] (unless mutually
agreed upon in writing by the parties) until [***] of the [***].
If CVS reasonably believes that Cardinal has suffered [***] that has
materially, adversely affected (or will imminently materially, adversely
affect) Cardinal's [***] any term or condition of this Agreement or
Cardinal's [***] due CVS, then CVS has the right to request that Cardinal
provide it with information within [***] from the date Cardinal receives
the request (i.e., if Cardinal receives CVS' request at 3:00 p.m. [***]
that further [***] (as applicable), in reasonable detail, [***], and that
may resolve any such concerns raised by CVS. In addition, Cardinal agrees
to [***] CVS in the event Cardinal believes it [***] with respect to its
[***], including an [***], that has materially, adversely effected (or
will imminently materially, adversely affect) Cardinal's ability to [***],
or Cardinal's [***]. If CVS has requested such information or Cardinal has
notified CVS as set forth above, then CVS may (i) [***] of any [***] or
any [***] CVS, (ii) [***], and (iii) in the event that Cardinal is in
[***] (as defined below), give Cardinal notice of the [***] under this
Agreement by 10:00 a.m. Eastern Standard Time on a business day and
require [***] of payment of such amount by [***] by 2:00 p.m. Eastern
Standard Time on the [***]. As used within this paragraph, a "[***]" shall
mean [***]. If any of the [***], the parties will meet every approximate
4
[***] following the execution of such action to review [***], and to
reasonably consider reinstating the [***] of such action. [***], then
Cardinal may choose to [***] written notice if it finds CVS' [***]
unacceptable. If the Agreement is [***] pursuant to this Section 4(d), the
Agreement shall [***] (unless mutually agreed upon in writing by the
parties) until [***] of the [***].
(e) [***]. As an inducement for Cardinal to supply Merchandise and
provide services to [***] CVS, whether [***], CVS Corporation [***] from
CVS to Cardinal under this Agreement.
SECTION 5. DELIVERY/ORDER SUBMISSION PROCEDURES. Cardinal will deliver the
Merchandise [***] and exercise its [***] provide an efficient delivery schedule
designed to meet the [***] Cardinal and the Pharmacies. All deliveries will be
accompanied by an invoice and all delivery costs ([***]) absorbed by Cardinal.
Cardinal will deliver Merchandise to [***] or other Pharmacies mutually agreed
upon by the parties from time to time) as [***] (exclusive of holidays, etc.).
Any additional deliveries will constitute emergency deliveries, which if
required, will [***] at Cardinal's [***] for such deliveries. Delivery schedules
and purchase order deadlines may be reviewed and changed from time to time
[***]. Delivery of [***] will be subject to the terms and conditions set forth
in the Section 2(b) Disclosure Schedule.
The [***] will submit all orders, except for orders for [***], for all
Merchandise to Cardinal via [***] (to be provided by Cardinal) or other [***].
Any such equipment supplied by Cardinal will be returned to Cardinal by CVS upon
the expiration or termination of this Agreement for any reason, [***],
Cardinal's proprietary rights are threatened. In the event that [***]
temporarily interrupted for reasons beyond the control of CVS or Cardinal, CVS
may place [***] parties will [***] to rectify the problem.
DEA Form 222 may be [***] Cardinal distribution center, or other mutually agreed
upon method. Schedule II orders will be delivered within [***] of Cardinal's
receipt of the signed original DEA Form 222. CVS acknowledges that if CVS gives
the DEA Form 222s to the delivery driver, [***] the DEA Form 222 to the
applicable Cardinal distribution center. Notwithstanding the foregoing, no
Schedule II orders will be delivered other than in compliance with DEA
regulations.
Additionally, CII orders must be shipped [***] and courier must be [***] when
order is received and checked in by CVS, CVS reserves the right to refuse any
CII order that contains any [***].
SECTION 6. OTHER SERVICES.
(a) CardinalCHOICE-HQ(TM). Cardinal will license [***]
CardinalCHOICE-HQ(TM) software systems to CVS' headquarters on the terms
set forth in the Section 6(a) Disclosure Schedule. Such licensing will be
pursuant to the terms and conditions of [***]. In addition, Cardinal will
provide CVS with the related hardware as described in the Section 6(a)
Disclosure Schedule, pursuant to [***].
5
Cardinal [***] to all CVS locations ([***], and support locations) access
to Cardinal.com.
(b) Management Information Services. Cardinal will provide to CVS those
programs and services described in the Base Service Package set forth in
Section 6(b) Disclosure Schedule on the terms and conditions described in
that schedule.
(c) [***]. Cardinal will make available to the Pharmacies participation
in Cardinal's [***] program, [***].
(d) [***].
(i) CVS will [***] a Pharmacy [***] with the necessary skill set to
act as a liaison between Cardinal and CVS. During the term of this
Agreement and for a [***] period thereafter, Cardinal will not
directly or indirectly employ, engage, or otherwise solicit for
employment or engagement such employee, or induce or encourage such
employee to terminate or otherwise modify such employee's
relationship with CVS. Furthermore, [***] as detailed in Section
6(d) Disclosure Schedules. [***] shall keep any and all information
disclosed by Cardinal confidential pursuant to Section 17.
(ii) Cardinal will also [***] a Pharmacy employee with the necessary
skill set to act as a liaison between Cardinal and CVS and work on
matters related to this Agreement. This employee will [***] to CVS
[***] basis and perform [***] on average. CVS and Cardinal will
mutually agree on the appropriate candidate to fill this position as
it becomes necessary from time to time. During the term of this
Agreement and for a [***] period thereafter, CVS will not directly
or indirectly employ, engage, or otherwise solicit for employment or
engagement such employee, or induce or encourage such employee to
terminate or otherwise modify such employee's relationship with
Cardinal. The Cardinal Employee shall keep any and all information
disclosed by CVS confidential pursuant to Section 17.
(e) [***]. CVS will [***] as it relates to CVS' Authorized [***], as
more fully described in the Section 6(e) Disclosure Schedule.
SECTION 7 CVS [***] AND [***] PROGRAM.
(a) Cardinal understands that CVS has established [***], which includes
items CVS stocks in [***] and certain other products as CVS designates
(the "[***]"). Whenever a Pharmacy orders a [***] Cardinal will [***] the
corresponding [***] if applicable. [***] be defined as a [***] as detailed
by First Data Bank's (FDB) NDDF Plus(TM) data dictionary. A [***] will
have the following values assigned to the NDC level by FDB:
- [***]
6
- [***]
All drug products classified with a [***] and [***] will be considered
[***]. In the event CVS, for [***] purposes, decides to elect certain
items as [***]; CVS will furnish Cardinal with notification and the drug
shall be [***] as instructed by CVS.
Cardinal will regularly update its files to ensure all [***] set forth
above is refreshed expeditiously to ensure [***] reflects current
marketplace conditions.
As stated above, whenever a Pharmacy orders a [***] Cardinal will [***] to
the corresponding [***] item if applicable. [***] will be [***] on the
[***] or as specifically directed by CVS. In addition, the program will
ensure the [***] is shipped to the store in a [***] to or [***] the [***],
unless otherwise specifically directed by CVS.
For example; [***]. CVS' required [***] is further defined in Section 7(a)
Disclosure Schedule.
CVS will have the ability to [***]. For example, [***]. Although the
[***]. In addition, [***].
Cardinal will also [***].
For example, [***].
If the item ordered [***] have a corresponding item on the [***] or if the
item is unavailable, Cardinal will [***] such item with the corresponding
[***], if any, from the [***] (the "[***]") in the [***] ordered.
In the event that the [***] item is [***], then Cardinal will [***] the
item with the [***] corresponding item under the [***] (the "[***]") in
the [***] ordered. If a corresponding item [***], Cardinal will ship the
item as [***]. Notwithstanding anything in the foregoing to the contrary,
CVS reserves the right to [***] Cardinal from [***] from the [***] for
corresponding items on the [***].
CVS has provided Cardinal with [***] as of January 1, 2004 (the date of
this Agreement). As items on the [***] change from time to time, CVS [***]
with electronic notice of such changes including the proposed effective
date of such change. As it pertains to [***] only, Cardinal will [***],
and have available for [***] within [***] of receipt of such notice. In
the event that [***] level of any product being deleted from the [***],
then Cardinal will [***] and Cardinal and CVS will mutually agree upon
[***]. In addition, CVS will provide Cardinal [***], in an [***], with a
list setting forth all items on [***] as of the end of the previous month.
Cardinal will use the information on such files to verify its records of
[***] and notify CVS of any discrepancies so that such discrepancies may
be reconciled and corrected.
7
Cardinal will [***] upon request by CVS. [***] are defined as items for
which either the [***] in FDB are not [***]. This definition specifically
excludes items for which Cardinal has been notified by CVS to designate in
a manner regardless of the [***]. In cases where an existing [***] or
changed and a [***], Cardinal will seek approval from CVS prior to any
[***] to said new item.
Cardinal will accommodate [***].
CVS may in the future decide to institute an [***] similar to the [***].
Cardinal will support any [***] as designed by CVS. [***] will be based
entirely on the [***].
Any and all [***] and ([***]) must be in accordance with the most recent
First Data Bank data that is available. Cardinal [***] and [***] data
[***] and [***] will not be passed to CVS. CVS may instruct Cardinal to
[***], specifically as it relates to [***].
(b) CVS will be [***] to a [***] (in the form of a [***]) based on the
[***] of [***] Rx Products purchased by the Pharmacies as described in the
Section 7(b) Disclosure Schedule.
SECTION 8. CONTRACT ADMINISTRATION.
Cardinal will [***] subject to their continued validity in accordance with
applicable laws and subject to such [***] concerning the applicable [***].
Notwithstanding the foregoing, [***] shall not excuse Cardinal from complying
with the [***] detailed in Section 9 Disclosure Schedule or extending the
applicable [***] to CVS (i.e., [***]). Cardinal will begin [***] within the
later of: (i) [***] after Cardinal has received a copy of the [***] from CVS, or
(ii) the [***] date of the [***] by Cardinal directly from [***] must be
forwarded to CVS within [***] for CVS' written approval [***].
SECTION 9. [***].
Cardinal will provide CVS with the [***] in the Section 9 Disclosure Schedule
and Section 2(b) Disclosure Schedules.
SECTION 10. [***] POLICY.
(a) Cardinal will accept [***] in accordance with the [***] process as
detailed in Section 10(a) Disclosure Schedule. Set forth in the Section
2(b) Disclosure Schedule [***].
(b) As it relates to [***] CVS and Cardinal will work in accordance with
the [***] set forth in the Section 10(b) Disclosure Schedule.
8
(c) As it relates to [***], CVS shall use commercially reasonable
efforts to immediately [***] (whether alleged or verified) to Cardinal for
[***]. Cardinal will [***] CVS at CVS' [***] for any and all [***]
Cardinal by CVS and all other [***] incurred by CVS as it pertains to
[***] and Cardinal's instructions related to [***].
SECTION 11. TERM.
(a) The term of this Agreement will begin on [***] (the "COMMENCEMENT
DATE"), and will continue for [***] thereafter (the "INITIAL TERM"). This
Agreement may be renewed for successive renewal periods of one (1) year
each upon mutual written agreement of the parties. In the event either
party desires not to renew the Agreement at the expiration of the Initial
Term or any renewal term, that party shall provide the other party with
[***] written notice prior to the expiration of the then current term. In
the event such notification is not provided with at least the [***] notice
or if no notice is given, the then current term shall be extended for a
period of [***] after the expiration of such term to provide for an
adequate transition period. Any reference in this Agreement to the "term
of this Agreement" will include the Initial Term and any renewal term.
(b) Either party may effect an [***] of this Agreement [***] giving
written notice to the other party, provided such party has first given
written notice to the other party of the occurrence of a material breach
of this Agreement (which notice will specify the nature of such breach)
and the other party has failed to cure such breach within [***] following
its receipt of such notice or, in the event such breach is not capable of
being cured in such [***] period, the breaching party's failure to
diligently prosecute such cure thereafter. Notwithstanding the foregoing,
any failure to make any payment when due under this Agreement or any
failure by the other party to perform as described within this Agreement
which negatively impacts the other party's ability to perform their
respective business functions, such period in which to [***] will be
[***].
(c) Either party will have the [***] upon notice to the other party
following the commencement of any [***] with respect to such other party
or its assets, the [***] by such other party, or the [***] by or for such
other party.
(d) CVS' and [***] to each other which have accrued to date of
termination or expiration will survive termination or expiration of this
Agreement as shall all other obligations which by their nature extend
beyond the term of the agreement, including but not limited to the
obligation in Sections 16, 17, and 18. CVS and Cardinal will mutually
agree on the transition of services provided by the other.
(e) Upon termination of this Agreement for any reason, CVS' rights as a
licensee of CardinalCHOICE-HQ(TM) software and other Cardinal software
will automatically expire, and CVS will (upon request) [***] software and
any related hardware not purchased by CVS to [***]. Upon termination of
this Agreement
9
for any reason, Cardinal [***] provide CVS with access to CVS' historical
purchase data.
(f) This Agreement will supersede and replace that certain Wholesale
Supply Agreement dated August 16, 2000 by and between Cardinal and CVS
(the "ORIGINAL AGREEMENT"), and all extensions thereof. Upon commencement
of this Agreement, the Original Agreement will terminate and be of no
further force or effect whatsoever.
(g) For purposes of this Agreement the term "PROGRAM YEAR" means the
twelve (12) month period beginning on January 1st and ending on December
31st, except for the final Program Year, which will be a six (6) month
period beginning January 1st and ending [***].
(h) In addition to all other [***] rights set forth in this Agreement,
either party shall have the right to [***] this Agreement for [***] with
[***] advance written notice [***] as described in the Section 11(h)
Disclosure Schedule.
SECTION 12. [***].
CVS and Cardinal will implement a [***] as described in the Section 12
Disclosure Schedule.
SECTION 13. NOTICES.
All notices required or permitted under this Agreement will be in writing to the
other party at the address set forth below (or such other address as that party
may give to the other party by written notice hereunder) and will be [***].
If to:
CVS Pharmacy, INC. CARDINAL HEALTH
One CVS Drive 7000 Cardinal Place
Woonsocket, RI 02895 Dublin, Ohio 43017
Attn: Vice President, Attn: Senior Vice President,
Pharmacy Merchandising Retail Sales and Marketing
Telecopy: (401) 769-9473 Telecopy: (614) 757-8787
with copy to: with copy to:
General Counsel Chief Legal Officer at the same address
at the same address Telecopy: (614) 757-8919
Telecopy: (401) 765-7887
10
SECTION 14. TAXES/COMPLIANCE WITH LAWS.
[***] any sales, use, excise, gross receipts, or other federal, state, or local
taxes or other assessments ([***]) and related interest and penalties in
connection with or arising out of the transactions contemplated by this
Agreement. [***].
If and to the extent any [***] or applied by Cardinal with respect to the
Merchandise and/or [***] purchased under this Agreement, then applicable
provisions of the Medicare/Medicaid and state health care fraud and
abuse/anti-kickback laws (collectively, "fraud and abuse laws") may require
disclosure of the applicable price reduction on CVS' claim or cost reports for
reimbursement from governmental or other third parties. [***] applicable
provisions of the fraud and abuse laws and [***] for any failure on [***].
[***] that all of the Pharmacies are properly and completely licensed in
compliance with all applicable state and federal laws, regulations, rules and
orders. [***] will be provided in the form of a schedule listing all of the
Pharmacies, and their respective [***] Cardinal with an updated good faith
schedule no later than [***] which will include information for the [***].
SECTION 15. FORCE MAJEURE.
One or more of Cardinal's or CVS' obligations under this Agreement will be
excused if, but only if, and to the extent that any delay or failure to perform
such obligations is due to fire or other casualty, validated (by Cardinal and
CVS) product or material shortages, strikes or labor disputes, transportation
delays, validated (by Cardinal and CVS) manufacturer out-of-stocks or delivery
disruptions, acts of God, validated (by Cardinal and CVS)seasonal supply
disruptions, or other causes beyond the reasonable control of Cardinal or CVS (a
"FORCE MAJEURE EVENT"). [***] in the Section 3(a) Disclosure Schedule shall be
[***] the event of force majeure.
SECTION 16. RECORDS AND AUDIT.
(a) Cardinal will maintain records pertaining to the Merchandise
purchased by CVS under this Agreement as required by applicable federal,
state and local laws, rules and regulations. Not more than [***] and
following [***] advance written notice to Cardinal, or as required by
administrative ruling or court order, CVS will have the right to appoint
one or more of its agents or employees to review [***] for the sole
purpose of verifying compliance with the [***] of this Agreement or
compliance with any other material terms of this Agreement. Any such
review will be [***] of historical information as of the date such review
begins, except if Cardinal is required by applicable law to maintain
records pertaining to the Merchandise purchased by CVS under this
Agreement for a [***] months, then Cardinal will also allow CVS to access
such information. The information will be subject to [***] the information
prior to beginning the review. Notwithstanding the foregoing, [***].
Further, with respect to [***] which must remain [***] relating to such
[***] through an employee [***] deemed reasonably [***] to
11
verify compliance with the [***] of such [***]. Such [***] complied with
the [***] otherwise disclose to [***].
(b) CVS will maintain records pertaining to the Merchandise purchased
all Pharmacies and CVS Pharmacy DCs, whether now or hereafter owned,
managed or operated by CVS, under this Agreement as required by applicable
federal, state and local laws, rules and regulations. Not more than [***]
or as required by administrative ruling or court order, and following
[***] advance written notice to CVS, Cardinal will have the right to
appoint one or more of its employees or agents to review [***] Rx Products
for the sole purposes of verifying that [***] CVS Pharmacy DC [***] from
Cardinal, as further described in the Section 2(a) Disclosure Schedule or
compliance with any other material terms of this Agreement. Any such
review will be of [***] historical information as of the date such review
begins, except if CVS is required by applicable law to maintain records
pertaining to the Merchandise purchased by CVS under this Agreement for a
[***], then CVS will allow Cardinal to access such information also. The
information will be subject to [***] the information prior to beginning
the review. Notwithstanding the foregoing, [***] and Cardinal. Further,
with respect to [***] which must remain [***] through an employee to
verify compliance with the [***]. Such [***] of this Agreement, but [***]
otherwise disclose to [***].
SECTION 17. CONFIDENTIALITY.
Each party acknowledges that as a result of this Agreement, that party and its
employees and agents, will learn confidential information of the other party
(including, but not limited to, the information Cardinal provides to CVS
pursuant to the [***] set forth in the Section 12 Disclosure Schedule). Neither
party will disclose any confidential information of the other party to any
person or entity, or use, or permit any person or entity to use, any of such
confidential information, excepting only: [***] is provided only on an aggregate
or "blinded" basis and not identified specifically as CVS information other than
as otherwise contemplated or described in this Agreement. The specific material
terms of this Agreement will be deemed to be confidential information of each
party. Each party will be responsible for any breach of this confidentiality
provision by its representatives.
The obligations of confidentiality hereunder will survive the termination of
this Agreement for a period of two (2) years. Upon termination of this Agreement
(for any reason) each party will promptly: (i) return to the other party all
documentation and other materials (including copies of original documentation or
other materials) containing any confidential information of the other party; or
(ii) certify to the other party, pursuant to a certificate in form and substance
reasonably satisfactory to the other party, as to the destruction of all such
documentation and other materials. Notwithstanding the foregoing, each party may
keep one copy of any documentation containing confidential information of the
other party, provided that such copy will be retained and used solely by the
legal department of that party.
12
SECTION 18. INDEMNITY.
Cardinal will indemnify and hold harmless CVS and all future parent
corporations, subsidiaries and affiliates and each of their officers, directors,
employees and representatives (collectively referred to in this paragraph as
CVS) from and against [***] in accordance with this Agreement or in accordance
with applicable law, it being understood, however, that other [***] than as
specifically stated in this paragraph. In addition, Cardinal will [***] to CVS
(on a non-exclusive basis) any [***] and [***]. Notwithstanding anything to the
contrary herein, Cardinal reserves its own rights [***].
CVS will indemnify and hold harmless Cardinal and all future parent
corporations, subsidiaries and affiliates and each of their officers, directors,
employees and representatives (collectively referred to in this paragraph as
Cardinal) from and against [***], it being understood, however, that [***] is
being provided other than as specifically stated in this paragraph. The parties
agree that neither CVS nor Cardinal will be obligated under this section 18 with
respect to any claim that results solely from the [***] of the other party.
SECTION 19. INSURANCE.
Cardinal and CVS agree to maintain the insurance as set forth in the Section 19
Disclosure Schedule.
SECTION 20. ENTIRE AGREEMENT; SUCCESSORS.
This Agreement, together with the Disclosure Schedules referenced herein,
constitutes the entire Agreement and understanding of the parties with respect
to the subject matter hereof, and supersedes all prior and contemporaneous
agreements, proposals, and understandings between the parties relative to the
subject matter hereof. [***] If all or substantially all of the stock or assets
of CVS Corporation are acquired by an unrelated third party (which expressly
excludes a merger where CVS Corporation is the surviving entity), then Cardinal
[***], by providing written notice to CVS of its [***] to the intended [***].
Further, if all or substantially all of the stock or assets of Cardinal Health,
Inc. are acquired by an unrelated third party (which expressly excludes a merger
where Cardinal Health, Inc. is the surviving entity), then CVS [***] this [***],
by providing written notice to Cardinal of its [***] to the intended [***]. This
Agreement will be binding on, and inure to the benefit of, and be enforceable by
and against the respective successors and assigns of each party to this
Agreement.
SECTION 21. AMENDMENTS.
No changes to this Agreement will be made or be binding on any party unless made
in writing and signed by each party to this Agreement.
13
SECTION 22. WAIVER.
Neither party's failure to enforce any provision of this Agreement will be
considered a waiver of any future right to enforce such provision.
SECTION 23. GOVERNING LAW.
This Agreement will be governed by the laws of the State of Ohio, without regard
to choice of law principles.
SECTION 24. RELATIONSHIP OF THE PARTIES.
The relationship of the parties is and will be that of independent contractors.
This Agreement does not establish or create a partnership or joint venture among
the parties.
SECTION 25. SEVERABILITY.
The intention of the parties is to fully comply with all applicable laws and
public policies, and this Agreement will be construed consistently with all such
laws and policies to the extent possible. If and to the extent that a court of
competent jurisdiction determines that it is impossible to so construe any
provision of this Agreement and consequently holds that provision to be invalid,
such holding will in no way affect the validity of the other provisions of this
Agreement, which will remain in full force and effect.
SECTION 26. ANNOUNCEMENTS.
CVS will not issue any press release or other public announcement, verbally or
in writing, referring to Cardinal or any entity which is controlled by or under
common control with Cardinal Health, Inc., without Cardinal's prior written
consent and advice of counsel. CVS will provide Cardinal's Executive Vice
President, Retail Sales and Marketing, 7000 Cardinal Place, Dublin, Ohio 43017,
with a written copy of any such press release or other public announcement [***]
prior to CVS' intent to issue such release or announcement. CVS is responsible
for confirming in writing that Cardinal's Executive Vice President, Retail Sales
and Marketing has received any such proposed press release. Any such press
release or other public announcement proposed by CVS will be subject to
Cardinal's revision and final approval. Nothing contained herein will limit the
right of CVS to issue a press release if, in the opinion of CVS' counsel, such
press release is required pursuant to state or federal securities laws, rules or
regulations.
Cardinal will not issue any press release or other public announcement, verbally
or in writing, referring to CVS or any entity which is controlled by or under
common control with CVS Pharmacy, Inc., without CVS' prior written consent and
advice of counsel. Cardinal will provide CVS' Vice President of Pharmacy
Merchandising and Director of Corporate Communications, One CVS Drive,
Woonsocket, Rhode Island 02895, with a written copy of any such press release or
other public announcement [***] prior to Cardinal's intent to issue such release
or announcement. Cardinal is responsible for confirming in writing that CVS'
Vice President of Pharmacy Merchandising and Director
14
of Corporate Communications has received any such proposed press release. Any
such press release or other public announcement proposed by Cardinal will be
subject to CVS' revision and final approval. Nothing contained herein will limit
the right of Cardinal to issue a press release if, in the opinion of Cardinal's
counsel, such press release is required pursuant to state or federal securities
laws, rules or regulations.
SECTION 27. AUTHORIZED SIGNATORIES.
All signatories to this Agreement represent that they are authorized by their
respective companies to execute and deliver this Agreement on behalf of their
respective companies, and to bind such companies to the terms herein.
Accepted and Agreed to by:
Cardinal Health*
By: /s/ Mark W. Parrish
--------------------------------
Its: Group President
-------------------------------
Date: May 17, 2004
------------------------------
CVS Pharmacy, INC.
By: /s/ Matthew J. Leonard
--------------------------------
Its: VP Pharmacy Merchandising
-------------------------------
Date: June 1, 2004
------------------------------
[***]
*The term "CARDINAL HEALTH" means the following pharmaceutical distribution
companies: Cardinal Health 106, Inc. (formerly known as James W. Daly, Inc.), a
Massachusetts corporation (Peabody, Massachusetts); Cardinal Health 103, Inc.
(formerly known as Cardinal Southeast, Inc.), a Mississippi corporation
(Madison, Mississippi); Cardinal Health 110, Inc. (formerly known as Whitmire
Distribution Corporation), a Delaware corporation (Folsom, California) and any
other subsidiary of Cardinal Health, Inc., an Ohio corporation ("CHI"), as may
be designated by CHI.
15
SECTION 1(a) DISCLOSURE SCHEDULE
DETERMINATION OF PHARMACIES THAT WILL DESIGNATE CARDINAL AS [***]
As of the Commencement Date, and throughout the term of this Agreement, CVS will
designate Cardinal as [***].
In the event CVS [***] representing: (a) [***] of CVS' Pharmacies as of [***],
then CVS [***] Cardinal [***] pursuant to the terms and conditions of this
Agreement in a timeframe so as not to compromise CVS' business operations; or
(b) [***] of CVS' Pharmacies as of [***], then CVS [***] Cardinal [***] at CVS'
sole discretion (in which case Cardinal and CVS will [***]).
In no event will CVS [***] which may exist related to any retail pharmacies CVS
[***].
[***]
Upon [***], as often as quarterly, CVS will provide [***] from Cardinal, as
further described in the Section 2(a) Disclosure Schedule.
16
SECTION 1(b) DISCLOSURE SCHEDULE
[***]
TOTAL DC LIST
CVS New York, Inc. CVS D.S., Inc.
Three Berry Drive 10017 Kingston Pike
Lumberton, NJ 08048 Knoxville, TN 37922
CVS Pharmacy, Inc. CVS IN Distribution, Inc.
150 Industrial Drive 7590 Empire Drive
North Smithfield, RI 02896 Indianapolis, IN 46219
CVS Texas Distribution L.P.
700 CVS Drive
Ennis, TX 75119
(expected open date TBD)
As CVS [***] to support Pharmacies [***] or additional Pharmacies [***] of the
Pharmacies [***], CVS will [***] such [***] pursuant to the terms and conditions
of this Agreement.
[***]
CVS will keep the [***] and notify Cardinal of anticipated additions to or
deletions from the [***] at least thirty (30) days prior to such addition or
deletion. If such addition or deletion could not have been reasonably foreseen
[***], CVS will notify Cardinal as soon as possible thereafter. In no event will
Cardinal [***] pursuant to the terms of this Agreement until [***] after CVS
first notified Cardinal that the [***].
If CVS [***], CVS may [***] in a timeframe so as not to compromise CVS' business
operations. In no event will CVS [***].
17
SECTION 2(a) DISCLOSURE SCHEDULE
[***]
The term "[***]" means:
(a) with respect to the [***], Cardinal will [***] Rx Products [***].
Furthermore, CVS will [***] (as described in the Section 3(a) Disclosure
Schedule).
(b) with respect to [***], CVS will [***] Rx Products [***] in and subject
to Section 12 Disclosure Schedule, excluding [***].
Notwithstanding anything in this Agreement to the contrary, CVS retains the
right to [***] Rx Products which are [***].
18
SECTION 2(b) DISCLOSURE SCHEDULE
[***] -- TERMS AND CONDITIONS
A. ORDERING/DELIVERY.
All CVS [***] for [***] Rx Products (except for [***]) will be [***]. All orders
referenced in this Section 2(b) Disclosure Schedule are intended to refer to
[***] will be handled through [***] located at its corporate headquarters or
such other departments designated by [***]. All references [***] Section 2(b)
Disclosure Schedule are to [***] or other such designated department. [***] will
be generated by specified manufacturer and will include the NDC number, complete
product description and to which [***]. Quantities ordered will [***].
[***], at its option, [***] described in Section 12 Disclosure Schedule with
[***]. The price for such product from [***] will be equal to the [***] as of
[***]. Within [***] of receipt of the order for product, Cardinal will [***] to
the [***] Payment for such product [***] will be due at [***] of [***] or [***]
(by [***] as [***] and detailed in Section 12 Disclosure Schedule). Cardinal
will [***] with respect to [***] and [***] subject to Section 12 Disclosure
Schedule.
B. RECEIVING AND SHIPPING DISCREPANCIES.
1. GENERALLY.
In the event a discrepancy in quantity arises with respect to any
shipment, the applicable [***] notify Cardinal of the discrepancy within
[***] of the receipt date of the shipment, and will pay the undisputed
amount of any such shipment, in accordance with the [***] within this
disclosure schedule. In turn, Cardinal may [***] relative to the disputed
quantity or pricing.
If CVS [***] and CVS [***] to CVS, then CVS will [***] in the amount of
[***]. Cardinal may, at its sole discretion, correspondingly [***]. and
will make such documentation, upon request, available to [***] the
requesting party. Cardinal and CVS will [***] are not supported [***].
2. [***].
[***] is defined as one of the following scenarios:
[***] [***]
Each [***] will provide the applicable [***], which will be transmitted
electronically or via facsimile) of all inbound receiving [***]
discrepancies within. The WDN must be [***] associate with a copy to [***]
Department. Cardinal will use all reasonable efforts to respond to a WDN
within [***] of receipt of each such WDN. [***] CVS
19
will process a [***] (subject to Section 2(b) Disclosure Schedule) for the
value of the discrepancy. Cardinal may request and CVS will provide
additional written documentation in support of [***]. If Cardinal, through
its own review, has documentation which refutes CVS' claim, then CVS and
Cardinal shall review such documentation and any necessary adjustment will
be made. Discrepancies that remain unresolved [***] following the date of
the WDN will be presented to senior management at both Cardinal and CVS,
for resolution.
3. [***].
[***] is defined as one or more of the following scenarios:
[***] [***]
[***] department will provide Cardinal with notice of all [***] on or
before the [***] for the applicable invoice. Prior to submitting such
notice to Cardinal, CVS agrees to re-verify the CVS [***] of the [***].
The written notice for [***] will take the form of [***] which will be
generated and provided to Cardinal by [***] (the "ADN"). This ADN will
include the purchase order number, items involved, quantities, amounts and
nature of the exception. [***] (subject to Section 2(b) Disclosure
Schedule) for the value of the discrepancy. Cardinal may request and CVS
will provide additional written documentation in support [***]. If
Cardinal, through its own review, has documentation which refutes CVS'
claim, then CVS and Cardinal shall review such documentation and any
necessary adjustment will be made. Cardinal and CVS will use all
reasonable efforts to resolve the [***] discrepancies within [***] of
receipt from CVS of the fully completed ADN. Discrepancies that remain
unresolved [***] following the date of the ADN will be presented to senior
management at both Cardinal and CVS for resolution.
4. [***].
a. [***].
[***] by reason of overage, wrong item, unapproved, short-dated or
damage relating to [***] (subject to Section 12 Disclosure Schedule) to
the applicable Cardinal servicing division within [***] of physical
receipt of the product. CVS will label the product [***], attach a
completed WDN, and [***]. CVS will process [***] due Cardinal in the [***]
of the [***] subject to Section 2(b) Disclosure Schedule.
b. [***].
[***] by reason of overage, wrong item, unapproved, short-dated or damage
relating to replenishment [***] and [***] (subject to Section 12
Disclosure Schedule) [***], within [***] of physical receipt of the
product. In addition, if CVS [***] a [***] or [***] relating to [***] of
such [***] (that arises while such [***]), then CVS will [***] such [***].
CVS will provide the applicable Cardinal servicing division with a
20
completed WDN. CVS will [***] Cardinal in the [***] of the [***] subject
to Section 2(b) Disclosure Schedule
c. [***].
[***] resulting from [***] (subject to Section 12 Disclosure Schedule)
[***]. CVS will [***] from [***] CVS owes Cardinal with respect to such
[***] subject to Section 12 Disclosure Schedule.
[***] (but not related to [***]) or [***]to CVS' [***], or [***] to the
[***], as CVS [***].
[***] will be handled on an [***] with a process to be mutually agreed
upon by both CVS and Cardinal.
C. CVS [***] DISCREPANCIES
The following provisions apply to [***].
1. [***].
A [***] is defined as one of the following scenarios:
[***] [***]
The Cardinal [***] CVS DC Pharmacy DC with a WDN [***] receiving
discrepancies between physical product and the accompanying CVS packing
list. Cardinal will use its reasonable efforts to notify CVS within [***]
of physical receipt of product; however, in order to [***] CVS, [***] will
be [***] which could [***] of [***] up to an [***] (except for [***],
which Cardinal will [***] notify CVS of physical receipt within [***]).
The WDN must be transmitted directly to the [***] associate with a copy to
CVS' corporate purchasing department. CVS will use all reasonable efforts
to respond to a WDN within [***] of receipt of each such WDN; however, in
order to [***] such notification may be delayed, but not to exceed [***]
will communicate the [***] and corresponding resolution to their
respective [***] departments. CVS will [***] Cardinal (subject to Section
2(b) Disclosure Schedule) for the value of the discrepancy. Cardinal may
request and CVS will provide additional written documentation in support
[***]. If Cardinal, through its own review, has documentation which
refutes CVS' claim, then CVS and Cardinal shall review such documentation
and any necessary adjustment will be made. Discrepancies that remain
unresolved [***] following the date of the WDN will be presented to senior
management at CVS and Cardinal distribution centers, for resolution.
21
2. [***].
[***] is defined as one or more of the following scenarios:
[***] [***]
As a result of the [***] of a [***] (in an [***]) created by CVS, Cardinal
will [***] that exist between the [***]. Prior to submitting [***] report
to CVS, Cardinal [***] to re-[***] the Cardinal DC's claim of the [***].
The [***] for will take the form of a standard exception report (in a form
mutually agreed to by both Cardinal and CVS) which will be generated and
[***]. The ADN must include the CVS packing list, items involved,
quantities received by [***], pricing and nature of the exception. CVS
will [***] (subject to Section 2(b) Disclosure Schedule) for the [***].
Cardinal may request and CVS will provide additional written documentation
in support of [***]. If Cardinal, through its own review, has
documentation which refutes CVS' claim, then CVS and Cardinal shall review
such documentation and any necessary adjustment will be made. Cardinal and
CVS will use all reasonable efforts to resolve the [***] within [***] of
receipt from CVS of the fully completed ADN. Discrepancies that remain
unresolved [***] following the date of the ADN will be presented to senior
management at both Cardinal and CVS for resolution.
The process relating to [***] is described in the Section 10(b) Disclosure
Schedule. The following process applies to all other [***]. If CVS then will
[***]. Cardinal may, at its sole discretion, correspondingly [***] Cardinal owes
to such [***]. CVS and Cardinal will be responsible to maintain detailed support
documentation for any [***] and will make such documentation, upon request,
available to the requesting party. Cardinal and CVS will not allow [***] if such
[***] are [***] by detailed documentation. The following terms and conditions
apply to the [***]:
a. CVS will [***] which CVS reasonably believes are [***].
Cardinal may, at its sole discretion, correspondingly [***] owes to such [***].
b. CVS and Cardinal will [***] of their [***]. CVS will or [***]
to [***] to for [***]. From time to time, CVS may identify a need to process a
[***] for which Cardinal has a [***], in these cases, CVS will process [***] to
Cardinal for [***] CVS. Upon request, CVS will provide Cardinal with
documentation [***] to substantiate each [***]. This documentation may exclude
[***] if such information is deemed to be confidential information, as
reasonably determined by CVS.
c. Cardinal, at its sole discretion, will [***] from the [***].
d. CVS and Cardinal will work together to mutually [***].
F. [***]
Cardinal and CVS recognize the importance of maintaining adequate inventory of
all CVS warehoused items, without compromising the [***] embedded in this
Agreement. To that end, Cardinal will provide CVS with a [***]. The [***] shall
be defined as the [***]. The [***] will be [***] using the following [***]:
[***]
This [***] is inclusive of any [***].
The [***] shall be maintained with the aggregate number of inventory days in
each of the [***] to not exceed [***]. Execution of the [***] detailed in
Section 12 Disclosure Schedule will not [***] CVS' [***], or CVS' [***] to [***]
Rx Products.
With respect to the [***] (as defined in Section 12 Disclosure Schedule) if CVS
[***] Cardinal that the aggregate [***] to the [***] during any [***] is less
than [***], then Cardinal will [***] to [***] with CVS to [***] its [***]
commitments.
Additionally, Cardinal commits to [***] by [***] that will lead to a [***] at
CVS Pharmacy DCs and Pharmacies.
23
SECTION 2(c) DISCLOSURE SCHEDULE
[***] MERCHANDISE
As of January 1, 2004, Cardinal is [***] on CVS' behalf.
SECTION 3(a) DISCLOSURE SCHEDULE
PHARMACIES PURCHASE PRICE
[***]
During the term of this Agreement [***] through [***], the Pharmacies' aggregate
purchases of [***] (collectively referred to herein as the "[***]").
During Cardinal's quarterly business review, Cardinal will provide CVS with
purchasing information to substantiate the [***] performance.
COST OF GOODS FOR [***]
CVS will pay to Cardinal a Cost of Goods for [***] as follows [***]:
Rx Products (FDB branded) [***]%
[***] [***]
[***] [***]
Home Health Care/DME [***]
HBC/OTC [***]
[***] [***]
For the purpose of this Agreement "[***]" shall mean CVS will [***] (i.e. a
[***]) for all Merchandise for which a purchase order has been issued as of the
date the Merchandise was [***].
CII orders must be shipped [***]. CVS reserves the [***] any CII order that
[***] any [***].
All Merchandise being delivered from Cardinal to CVS Pharmacies must have at
least [***]. Under no circumstances will Merchandise be delivered to Pharmacies
with [***] without expressed written approval by CVS' Vice President of Pharmacy
Merchandising for each occurrence. Furthermore, Cardinal represents that it is,
and will continue to be during the term of this Agreement, an industry leader in
implementation of processes, practices and safeguards to prevent the
distribution of Merchandise will [***] to Pharmacies.
24
The foregoing Cost of Goods does not apply to Merchandise which is subject to a
[***], which will instead be [***] at the [***] for the Pharmacies. Cardinal
[***] the Cost of Goods of [***]of Merchandise in the event that the [***] of
such item [***] which [***] the [***] effective on the Commencement Date with
respect to such item. The [***] to the [***] for such item [***].
SECTION 3(b) DISCLOSURE SCHEDULE
COST OF GOODS [***]
CVS will [***] to Cardinal its [***] with respect to all [***]. [***] means the
[***] for [***]. CVS will [***] and the [***] (except as set forth in the
Section 12 Disclosure Schedule) on its [***] at the time the [***] Cardinal's
[***].
25
SECTION 3(c) DISCLOSURE SCHEDULE
[***]
Pharmacies will be eligible for the following Cost of Goods [***] based upon the
[***]:
If CVS' [***] during a calendar quarter is less than [***] will be mutually
determined [***].
At the end of each calendar quarter, Cardinal and CVS will evaluate CVS' [***]
during such quarter (i.e., Purchases and [***] Purchases only) of all Pharmacies
[***] will be faxed and subsequently mailed in hard copy form to CVS' Manager of
Wholesaler Programs.
The [***] will be [***] as follows: Cardinal and CVS will [***]. Utilizing this
calculation Cardinal and CVS will [***]to 1 for the [***].
For example, during a calendar quarter, CVS' [***] then CVS' [***] Cardinal's
Cost [***]. Conversely, if CVS' [***] during a calendar quarter, then CVS' [***]
Cardinal's Cost [***].
In addition, if CVS [***] CVS' qualified monthly purchases per Pharmacy [***],
then CVS may elect to [***], and [***] following the date of [***] only. If CVS
[***] Cardinal [***] Cardinal [***] or CVS [***] to [***] such [***] of the
[***], then such [***].
The [***] is a "[***]" as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). [***] and any other "[***]"
received by CVS from Cardinal under any state or federal program which provides
cost or charge-based reimbursement to CVS for the Merchandise purchased by CVS
under this Agreement.
26
SECTION 4 DISCLOSURE SCHEDULE
PAYMENT TERMS
[***] PURCHASES AND [***] PURCHASES.
(i) Payment Term. Not later than the [***], CVS will cause Cardinal to
[***] for all Merchandise delivered and services performed [***].
(ii) Form of Remittance. Each payment by CVS to Cardinal will be
accompanied by a remittance in a form deemed acceptable to Cardinal and
CVS ([***]).
(iii) [***]. At the end of each calendar quarter, Cardinal will evaluate
[***] based on [***] in accordance with the table set forth below,
adjusted to reflect legitimately disputed amounts (such as duplicative
invoices and incorrect billing information). CVS and Cardinal acknowledge
that CVS' Cost of Goods is based upon [***] days sales outstanding. CVS
will pay Cardinal [***]% (an effective annual percentage rate of [***]%)
that CVS' [***] (i.e., where CVS' [***] are greater than [***]), up to
[***] days, calculated in accordance with the formula set forth below. CVS
will pay Cardinal a penalty for [***]% (an effective annual percentage
rate of [***]%) per [***], from the first day, that CVS' [***] in excess
of [***] (i.e., where CVS' [***] are greater than [***]). Cardinal will
pay CVS [***] amount equal to [***] (an effective annual percentage rate
of [***]%) per [***] CVS' [***] (i.e., where CVS' [***] are less than
[***]). Notwithstanding the foregoing, [***] either by CVS or Cardinal in
the event that CVS' [***] are greater than [***] but equal to or less than
[***] (i.e., [***]).
Cardinal will deliver to CVS an analysis of CVS' [***] in aggregate
format, or other mutually acceptable format, on a weekly basis for
informational purposes [***] (i.e., to assist CVS in managing its[***]).
If the above calculation indicates[***], then CVS will pay Cardinal such
amounts within for [***] such amounts. If the above calculation indicates
that[***], then Cardinal will [***] in the form of [***] within [***] days
following the end of the applicable quarter.
The parties may, but will not be obligated to, agree to a [***] whereby [***].
In such event, [***] (other than that to which the parties mutually agree)
[***].
[***]
CVS will cause Cardinal to receive payment in full for all [***] that are [***]
not later than [***] prior to the date upon which Cardinal [***]. If payment is
due on Saturday, CVS will cause Cardinal to receive payment in full on the[***],
and if payment is due on
27
Sunday, CVS will cause Cardinal to receive payment in full[***]. CVS will cause
Cardinal to receive payment in full for [***] that are [***] not later than
[***] after the date of the invoice (invoice date will equal ship date) for such
product.
Notwithstanding the above paragraph, Cardinal and CVS agree to [***] for [***]
in order to [***] of CVS [***] as detailed in Section 12 Disclosure Schedule.
Cardinal and CVS agree and acknowledge that [***]. Accordingly, in the event
Cardinal or CVS [***], Cardinal or CVS will [***], and the [***]. If the problem
is not cured to Cardinal's or CVS' satisfaction, then such party will [***], as
further described below, that applies [***]. Notwithstanding the foregoing, CVS
or Cardinal will [***]. Any [***] or [***] by Cardinal or CVS to [***]. Cardinal
and CVS will work together in obtaining full value for such [***] as further set
forth in the [***] described in Section 2(b) Disclosure Schedule. Further, CVS
and Cardinal will be responsible to maintain detailed support documentation
[***] and will make such documentation, upon request, available to the
requesting party. Cardinal and CVS will not [***] if such [***] are not
supported by detailed documentation.
With respect to [***], CVS will [***] or [***].
With respect to all [***], or [***] CVS, Cardinal will [***].
The parties may, but will not be obligated to, agree to a [***] whereby [***].
In such event, [***] (other than that to which the parties mutually agree), as
long as payments are made when due in accordance with the agreed upon schedule.
Cardinal [***] to all CVS' locations ([***], and support locations)
Cardinal.com. CVS may access Cardinal.com, a healthcare internet web portal,
[***], during the term of this Agreement. Cardinal will assist in the
transitioning of CVS locations to Cardinal.com by [***] to their [***] and as
needed [***].
[***] CVS Pharmacies to be [***] or.
29
SECTION 6(b) DISCLOSURE SCHEDULE
BASE SERVICE PACKAGE
PROGRAMS & SERVICES FREQUENCY
[***] [***]
REPORTS FREQUENCY
[***] [***]
BASE PACKAGE FEE: [***]
[***]
SECTION 6(d) DISCLOSURE SCHEDULE
EMPLOYEE [***]
[***] of a CVS [***] Manager ("EMPLOYEE") who will serve as an intermediary
between Cardinal and CVS specifically related to the management of the Store Rx
Purchases. It is understood that the Employee shall be [***] and that the
Employee's [***] and [***] shall be the [***] for all claims and liabilities,
whether alleged or actual, relating to the Employee.
Cardinal will [***] of this Employee pursuant to the schedule defined below:
[***] [***]
SECTION 6(e) DISCLOSURE SCHEDULE
[***] PROGRAM
The [***] program allows CVS Pharmacies to purchase selected[***]. These Rx
Products have been acquired from a division of Cardinal Health registered with
the Food and Drug Administration ("FDA"), that [***] from a larger quantity or
bulk containers into smaller quantities. [***] into FDA approved [***] are
driven by the difference [***] smaller package size. Depending on [***],
Cardinal establishes a [***] that is applied to the smaller equivalent package
size. CVS' [***] is also factored [***] to further [***]. For example:
30
[***]
In order to maximize overall efficiency and profitability Cardinal will [***]
any [***] item which [***] the CVS Authorized [***] as amended from time to time
by CVS. CVS' Authorized [***] as of execution of this Agreement is detailed
below. Cardinal will also [***] items and detailed within Section 6(e)
Disclosure Schedule.
As part of this program, Cardinal will invoice CVS' Pharmacies at [***] for such
Rx Product as of CVS' PO date for all [***] items purchased by Pharmacies. Then
on a monthly basis [***] in the form of a [***] so that CVS receives such [***]
within [***] from the close of said month. The [***] will be mailed in hard copy
form to CVS' Manager of Wholesaler Programs Cardinal will provide CVS with [***]
equal to the [***] related to all [***] items. Such [***] will be accompanied by
a report detailing CVS' [***] for said [***]. The accompanying report will
include but not be limited to: label name, manufacturer, CVS item number, NDC,
quantity, [***]
CVS AUTHORIZED [***]
[***]
[***]
ITEM
LABEL NAME MANUFACTURER NUMBER NDC
[***]
[***] [***] [***] [***] [***]
[***]
[***]
31
SECTION 7(a) DISCLOSURE SCHEDULE
[***]
[***]
[***]
[***]
[***]
[***]
32
SECTION 7(b) DISCLOSURE SCHEDULE
[***] FOR THE PHARMACIES
CVS will be [***] for the following [***] Rx Product [***]:
[***] [***]
----- -----
[***] [***]
Cardinal will provide CVS with a monthly report detailing the Pharmacies' [***]
Rx Products [***]. At the end of each Program Year, Cardinal and CVS will [***]
Rx Products [***] during such Program Year. The [***] will be [***] (as set
forth in the table above) of CVS' [***] Rx Products by the Pharmacies during the
applicable Program Year. The [***], if any, will be [***] in the [***] so that
[***] from the close of said Program Year. The [***] will be faxed and
subsequently mailed in hard copy form to CVS' Manager of Wholesaler Programs. In
the event that the [***] will [***] for any reason, Cardinal will use reasonable
efforts to give CVS notice no later than [***] prior to the end of the
then-current Program Year.
The [***] is a "[***] " as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). [***] and any other "[***] "
received by CVS from Cardinal under any state or federal program which provides
cost or charge-based reimbursement to CVS for the Merchandise purchased by CVS
under this Agreement.
33
SECTION 9 DISCLOSURE SCHEDULE
PHARMACIES [***]
Cardinal will exercise best efforts to provide the Pharmacies with the following
[***] (as defined within this disclosure schedule), calculated [***] as
described below: (a) [***] adjusted with respect to [***] Rx Products; (b) [***]
adjusted with respect to [***]; (c) [***] adjusted with respect to [***]; and
(d) [***] with respect to [***] (the "[***]").
[***]
For purposes of this Agreement, "[***] for during [***] will be calculated using
the following formula:
[***] Rx Products [***].
[***] submitted to Cardinal will be included in the [***], including, but not
limited to: [***].
The following items of merchandise are excluded from the [***] and in aggregate
constitute all "AUTHORIZED ADJUSTMENTS":
1. [***] - [***] will [***] upon agreement between Cardinal and CVS
that [***]. Cardinal will verbally communicate any [***] for which
an adjustment [***] is requested to CVS' Assistant Category [***],
in the event that person is unavailable, Cardinal will notify the
Director, Category [***]. Notification to CVS should only be made
after Cardinal has [***] such product [***] on its own. Upon
notification from Cardinal, CVS will [***] or [***]. Upon CVS [***],
the [***] will be considered an Authorized Adjustment. [***].
2. CVS [***]- CVS may specifically request that [***]; CVS' Assistant
Category [***] will notify Cardinal in writing of these items. In
addition, [***]; if the Pharmacy specifically requests (phone in
orders without a documented detailed specific request by CVS will
[***] Authorized Adjustment) Cardinal [***], then said item will be
considered an Authorized Adjustment. Cardinal will provide CVS on a
monthly basis a report by item of the number of store [***] to
include but not be limited to: CVS store number, NDC, item
description, date, and quantity. Reports should be provided no later
than five (5) days following the close of the respective month.
3. [***] - an adjustment to the [***] will be [***] or CVS' [***] as
provided from time to time, which [***]. Adjustment amount will only
be for the [***].
For example, if [***].
4. [***]- CVS [***] in CVS commits to the timely notification of all
such changes in an electronic format; in addition, on a monthly
basis CVS will provide an
34
updated complete [***]. Cardinal will make available to CVS [***]
within [***] from notification. [***] will be adjusted for the
[***]following CVS notification, during which Cardinal may [***] CVS
stores [***] if applicable.
Cardinal's [***] commitment for CVS will become effective as of [***], however,
CVS will not be eligible for [***] until [***].
Both Cardinal and CVS agree the achievement of the [***] on a monthly basis
represents a material aspect of this Agreement. Failure by Cardinal to maintain
a monthly [***] of [***] with respect to the [***] (which includes [***] Rx
Products [***]) (a "[***]") will [***] CVS [***] for its [***] (as defined
herein). For purposes of this Schedule 9 Disclosure Schedule, the term "[***]"
means [***]. CVS will calculate and present [***], if any, to Cardinal before
processing any [***] related to any [***] to CVS in connection with [***].
For example, if the [***] is calculated at [***] for any given month, [***].
Cardinal and CVS agree to meet at CVS' Support Center as necessary to review the
[***] performance and to [***] in order to [***] defined within this Section 9
Disclosure Schedule.
[***]
Cardinal recognizes [***] can have on CVS' ability [***] their customers.
Therefore, both Cardinal and CVS agree that the [***]. To that end, Cardinal and
CVS will mutually agree to terms that will reflect the significance of [***].
The terms will be specific towards each party's responsibilities, the
calculation of [***], and remedies [***]. CVS and Cardinal agree that the
arrived at structure of the [***].
35
SECTION 10(a) DISCLOSURE SCHEDULE
PHARMACIES MERCHANTABLE PRODUCT [***]
GENERAL POLICY.
The parties acknowledge that [***]. Product in "merchantable condition" (as
defined below) may generally be returned to Cardinal from which the product was
originally purchased if the return is made within the timeframes and subject to
the terms and conditions described below: [***].
RETURN MADE WITHIN: NORMAL CREDIT AMOUNT:
[***] Days from Invoice Date [***] of original invoice amount paid by
customer. This policy [***].
More than [***] Days [***] of [***] or other "cost" paid by
customer (i.e., not including any [***].
Merchandise will be considered to be in "MERCHANTABLE CONDITION" except for the
following:
A. Any item which has been [***], is without all original packaging,
labeling, inserts, or operating manuals, or that is stickered, marked,
[***], or otherwise [***].
B. [***] outdated, or [***] and items purchased on a [***].
C. [***] and is specially assured that such merchandise was properly stored
and protected at all times and such merchandise is returned separately in
a package marked as such and accompanied by a separate credit request
form.
D. In order for CVS to achieve compliance [***], CVS will return product (in
Merchantable Condition) to Cardinal [***] in the CVS Pharmacy DCs ([***]
Rx Products [***]). Further, CVS agrees that Cardinal may [***] in the CVS
Pharmacy DCs, as indicated in the CVS monthly on-hand inventory electronic
report provided to Cardinal by CVS.
CONTROLLED SUBSTANCES.
Credit for the return of controlled substances requires a separate Merchandise
Return Authorization Form ("MRA FORM") and must comply with all federal and
state procedures and requirements in addition to the terms and conditions
described herein.
SHORTS AND DAMAGED MERCHANDISE.
Claims of order shortages (i.e., invoiced but not received), order errors and
damage must be reported within [***] from the applicable invoice date.
Controlled substance shortage claims must be reported immediately per DEA
requirements.
36
[***]
CVS Pharmacy returns in dollars [***] of qualified monthly purchases of all of
the Pharmacies (in dollars, each calendar month) excluding [***]. Because [***]
to Cardinal if such [***] (excluding [***]), CVS and Cardinal mutually agree
that Cardinal will [***] of those items which are included in the CVS monthly
on-hand inventory electronic report provided to Cardinal by CVS. This [***] is
designed to [***]. CVS and Cardinal may agree from time to time to implement a
[***] in cases where CVS Pharmacies are [***]. The parties will agree to the
[***] on an individual basis. [***].
[***] AND CARDINAL CREDIT REQUEST FORM.
Prior to returning any product to Cardinal, each customer must [***] verifying
that all returned merchandise has been kept [***]. All requests for credit must
be submitted [***]. A fully completed [***] must accompany [***]. A fully
completed form includes, but is not limited to, the following information: the
invoice number and invoice date for the merchandise to be returned. All return
credit memos will have corresponding reference numbers that will provide CVS
with a complete audit trail for reconciliation.
[***]
[***] must be placed in a proper shipping container and, for merchandise valued
at more than [***] when the product is picked up. All MRAs will be reviewed by
Cardinal for compliance with the [***] within this Section 10(a) Disclosure
Schedule. Cardinal will process credits within [***] of receipt of merchantable
product from CVS. In instance were credit has not been received for product
[***] to Cardinal for which Cardinal has no record of said [***].
MONTHLY REPORTING.
Cardinal will provide an electronic report on a monthly basis, which will detail
(1) [***], (2) [***], (3) information relating to returns in excess of [***],
and (4) [***].
OTHER RESTRICTIONS.
This policy is further subject to modification as may be deemed necessary to
comply with applicable federal and/or state regulations, FDA guidelines, and
state law.
37
SECTION 10(b) DISCLOSURE SCHEDULE
[***]
The process relating to [***] is described in the Section 2(b) Disclosure
Schedule. The following process applies to [***]"
GENERAL POLICY.
The following process applies to [***]. If CVS [***] and CVS reasonably believes
[***] (as determined by [***]), then CVS and Cardinal will follow the process
detailed below to [***]. CVS and Cardinal will [***].
Instead of [***], CVS will [***] as in effect from time to time will be the
basis of valuing all of [***].
Product may be returned to [***] (a) with which [***], (b) are not either [***],
or (c) which do not have [***]. If CVS elects to [***]. CVS may decide at its
own discretion the most efficient process to [***] to [***], if applicable. Any
[***] selected by CVS must enter into a confidentiality agreement, in a form
mutually acceptable to Cardinal and CVS, prior to accepting [***].
[***]
CVS and Cardinal will [***] under this policy to its selected [***], if
applicable. [***] will [***]. CVS will instruct the [***] to provide [***] on
behalf of CVS.
CVS will instruct each [***] by CVS and is returned through a [***], and to
[***] prepared by the [***]. CVS and Cardinal acknowledge that CVS will handle,
[***] manufacturer or supplier with which [***].
CVS will pay [***] for all of such [***] fees relating [***] hereunder,
including, but not limited to, [***] delivery and [***], reporting, EDI
transactions, which will be [***].
CVS' account will be adjusted in accordance with the following procedure:
1) Once per week, Cardinal will [***]. Cardinal will [***] and will provide said
information to CVS upon request in a mutually acceptable electronic format.
2) Cardinal will [***] received by Cardinal which has been [***]. CVS may [***].
Cardinal may, at its sole discretion, correspondingly [***].
3) In addition, Cardinal [***]. CVS and Cardinal recognize that this general
process will vary [***] with respect to the methods as well as the associated
timelines. That being said, CVS [***]. CVS will use all reasonable means to
expeditiously resolve identified issues to the satisfaction of all associated
parties. For [***], Cardinal will [***].
38
4) At the end of each calendar week, Cardinal will [***] and CVS will [***].
This [***] will consist of [***] from the following detailed transactions
completed in the current calendar week: [***] Cardinal will [***]. Accordingly,
Cardinal will [***]. Cardinal may not [***]. CVS, at its discretion, may notify
Cardinal in writing in order to change either of the [***] detailed in the
preceding sentence. Cardinal will not [***]. Furthermore, CVS stipulates [***].
Therefore, Cardinal may [***]. In addition, upon Cardinal's request (as often as
monthly), CVS will provide Cardinal on a confidential basis (subject to Section
17 of this Agreement) a report that summarizes [***]. Cardinal will not contact
any manufacturer related to the information contained in [***]. In return for
Cardinal's strict confidentiality as it pertains to [***], CVS will [***] listed
in the [***]. Any [***] memo identified in the [***] shall be [***]. CVS will
not be financially responsible if Cardinal takes actions that are not consistent
with this Section 10 (b) Disclosure Schedule.
The [***] will not be subject to Section 16 of this Agreement; instead the
following audit process will apply. Not more than once in any [***] period, and
following [***] advance written notice to CVS, Cardinal will have the right to
appoint an agent(s) (as further described below) to review those relevant
records applicable to such [***]. Said audit will be strictly limited to
verifying the following: 1) [***], and 2) that [***]. No other terms or
conditions contained within the [***] or any other information gained through
such audit process shall be disclosed to Cardinal. Cardinal may only review
records relating to the [***] through an employee of one of the top national
accounting firms deemed reasonably acceptable to CVS (i.e., not a Cardinal
employee). Any such review will be limited to [***] of historical information as
of the date such review begins. The information will be subject to a
confidentiality agreement prepared by CVS and signed by Cardinal and its
agent(s) who will have access to the information prior to beginning the review.
Notwithstanding the foregoing, Cardinal may only appoint agents who are
employees of one of the top national accounting firms, as may be deemed
reasonably acceptable to CVS.
In addition, the parties hereby acknowledge and agree that upon reasonable
written request from Cardinal, CVS shall deliver to Cardinal a [***]. The [***]
provided will indicate that: (i) CVS has [***], (ii) CVS will [***] and (iii)
Cardinal has, and will have, [***] contained in the [***] so long as Cardinal
does not take actions that are inconsistent with the provisions of this
Disclosure Schedule.
If Cardinal believes it will be harmed due to [***], then Cardinal may at its
option [***]. This resolution process will be executed so that the related
transactions [***]. With that being said, CVS will work with Cardinal to resolve
all [***] to the mutual satisfaction of both parties.
5) As long as CVS causes the [***] (if applicable) to transmit to Cardinal
information required by Cardinal [***] acceptable to Cardinal, then Cardinal
will [***]. However, due to the excessive labor expenses Cardinal will incur if
the information is not transmitted in an [***] acceptable to Cardinal, including
but not limited to [***], CVS will [***]. In addition, Cardinal will use its
reasonable efforts to notify CVS promptly if the [***] is unable to deliver the
required information in [***].
39
With the weekly credit information, Cardinal will [***]. As well, as often as
monthly, Cardinal will provide CVS with [***]. Cardinal [***].
If Cardinal [***], Cardinal will [***].
[***]
If Cardinal is unable to execute the process detailed within this disclosure
schedule with [***] for any reason, then CVS may [***] in accordance with the
financial process established within this disclosure schedule. Cardinal may, at
its sole discretion, correspondingly [***] according to its [***] to the
applicable manufacturer or supplier. With that being said, CVS will work with
Cardinal to resolve [***] to the mutual satisfaction of both parties.
[***]
CVS currently [***]. In the event that [***] (Pharmacies and CVS Pharmacy DCs,
if applicable). Notwithstanding the foregoing, Cardinal will not [***]. It will
be [***] sole responsibility [***] (with copy to [***] subject to Section 13)
[***] that CVS utilizes its [***].
Cardinal and CVS may mutually agree to modify this [***] in writing from time to
time, except where required by law (in which case, Cardinal or CVS may modify
this [***] without mutual agreement).
40
SECTION 11(h) DISCLOSURE SCHEDULE
[***]
[***] Agreement [***] to Section 11(h) [***] the expiration of the Initial Term,
then [***] within [***] after the date of [***], an amount equal to [***] (the
"[***]").
In the event [***] this Agreement [***] pursuant to Section 11(h) [***] the
expiration of the Initial Term, then [***] an amount equal to [***] within [***]
after the date of [***] (the "[***]").
The parties hereby acknowledge and agree that the amount of the [***]
represents, among other factors, [***] during the Initial Term of this
Agreement. The parties hereby acknowledge and agree that the amount of the
[***], among other factors, a [***] during the Initial Term of this Agreement.
Furthermore, the parties acknowledge and agree that the [***] negotiated in good
faith and [***]. Finally, upon [***] of this Agreement for any reason, CVS will
work with Cardinal in accordance with a reasonable schedule agreed to by the
parties so that all outstanding amounts due and owing to Cardinal are paid [***]
date and all outstanding issues are resolved.
41
SECTION 12 DISCLOSURE SCHEDULE
[***]
The goal of the [***] is to [***] under which Cardinal will [***] which are or
become part of this Agreement. The parties agree and acknowledge that this [***]
is part of this Agreement, and is not a separate or distinct agreement.
Notwithstanding anything in this Agreement to the contrary, the [***].
The [***] is designed to [***]. CVS will [***].
As part of the [***], Cardinal will [***] (in addition to [***]) for the
respective [***] during the term of this Agreement. The [***] will be faxed and
subsequently mailed in hard copy form to CVS' Manager of Wholesaler Programs.
Additionally, Cardinal will [***] with the [***] detailed in Section 2(b)
Disclosure Schedule [***]. In return for [***] and the [***], Cardinal [***]
through certain [***] as described below.
[***] as of the execution of this Agreement with the exception of [***] (as
detailed in and subject to Section 12 Disclosure Schedule) . Cardinal will
[***]. In return for [***] from [***] until [***], by [***], Cardinal will
[***]. The timing of [***].
CVS will not be required to [***] sole determination. The [***] Exhibit below
details [***] CVS will [***] to Section 12 Disclosure Schedule) and the
corresponding [***] to be amended in writing pursuant to Section 13 upon mutual
agreement of CVS and Cardinal. While CVS and Cardinal may both agree that it is
in the best interest of both parties to [***] and will occur at [***].
CVS is under no obligation to [***] at its sole discretion. With that said, CVS
and Cardinal may [***] sole discretion. So that Cardinal and CVS can [***],
Cardinal will provide to CVS in an electronic format a detailed weekly report
detailing said [***] The [***] will include but not be limited to the following
elements as it pertains to Cardinal [***]. As it pertains to [***] Report only,
Cardinal will [***]. All other data elements will be updated [***] and
immediately sent to CVS [***] accurately representing Cardinal's [***] available
to CVS as of the creation of the [***].
[***]
For all of [***] etc, CVS will [***] within [***] of the end of each CVS fiscal
quarter in the form of [***] (in addition to [***]) [***] during the term of
this Agreement. [***]. CVS and Cardinal will agree with [***].
For example; [***], then Cardinal will [***].
Further terms and conditions of the [***] are as follows:
42
1) CVS and Cardinal will [***] within [***]of the respective CVS fiscal
month's end or as soon as practical.
2) The [***] will not be applied [***]. The [***] will be automatically
applied [***].
3) CVS contract pricing on [***].
4) The [***] is based on the assumption that Cardinal will not [***].
5) Cardinal will not [***]. However, Cardinal will [***]:
a. [***].
b. [***].
c. [***].
6) At the start of this Agreement, Cardinal will [***]. To that end,
CVS and Cardinal have agreed that [***] under this Agreement.
7) [***] For example, if [***].
8) For all [***].
9) If CVS [***], then Cardinal will not [***].
10) If CVS [***] (as defined below) [***], then Cardinal will not [***].
[***]
As a function of the [***], Cardinal will [***] as defined below. Through the
[***], Cardinal will [***] as further defined below. Notwithstanding anything
else in this Agreement to the contrary, Cardinal will [***].
The "[***]" for the [***] are limited to:
[***]
[***]
[***].
Further terms and conditions of the [***] are as follows:
1) CVS will [***]; CVS will not be required to [***].
2) CVS [***]to include but not limited to:
[***]
3) [***]In the event that [***] (Pharmacies and CVS Pharmacy DCs, if
applicable). Notwithstanding the foregoing, Cardinal will [***]. It will
be [***] sole responsibility to notify [***] in writing (with copy to
[***] subject to Section 13) [***] related to [***].
43
4) CVS will only accept product [***] to CVS Pharmacy DCs that has at least
[***]. All products shipped with less than [***] will be considered
"[***]". On an exception basis, CVS will [***] with at least [***].
However, both parties agree that no more than [***]. In addition, upon CVS
request (as often as monthly), Cardinal will provide CVS a [***]. The
[***] will contain all [***] and will [***] (both CVS and Cardinal agree
that the [***] will be made available to CVS no later than September 1,
2004). Notwithstanding anything in this Agreement to the contrary, at no
time will Cardinal ship [***] with less than [***] to CVS Pharmacy DCs.
With that said, CVS will [***].
Additional terms and conditions of the [***] are as follows:
1. Term - The [***] will commence as of [***], and terminate upon [***].
2. [***] - Cardinal will [***]
3. [***] - If Cardinal's [***], and if CVS is [***] then CVS will, upon
request by Cardinal, [***]. With respect to the foregoing [***], CVS will
[***]. CVS will [***].
(a) [***]. On the same day as CVS receives a shipment of [***]
ordered as part of a [***] related to this [***], CVS will [***].
Cardinal will [***]. CVS will [***] and CVS will [***] based on the
applicable payment terms. CVS will [***] and Cardinal will [***].
The process outlined in the Section 2(b) Disclosure Schedule will
apply to any discrepancies.
(b) [***]. As it pertains to [***] purchases only, on the same
day as CVS receives the shipment of [***]
As it pertains to the payment of [***], Cardinal will receive an invoice
from the applicable manufacturer for the [***], and Cardinal will [***],
based on the applicable payment terms. As the [***] for such [***] in
accordance with the terms of this Agreement. The process outlined in the
Section 2(b) Disclosure Schedule will apply to any discrepancies.
4. Purchase Information - CVS will provide Cardinal with [***] on behalf of
the CVS Pharmacy DCs pursuant to the [***]. Such information will include
details regarding all [***] and other information reasonably required by
Cardinal to administer the [***]. To assist Cardinal with [***], CVS will
provide Cardinal with information reasonably requested by Cardinal
including but not limited to [***], and a change in CVS Pharmacy DC that
services a particular Pharmacy.
5. Limitations - All [***]. All [***]. CVS will not [***] (outside of this
[***]) on behalf of the Pharmacies [***]. It is understood and agreed that
Cardinal will not [***]. Furthermore, the parties acknowledge and agree
that all information associated with the [***] is confidential information
subject to the provisions of Section 17 of this Agreement.
44
6. Records, Audit and Confidentiality - The [***] is subject to the record
keeping and audit provisions set forth in Section 16 of this Agreement.
Cardinal may [***]. Cardinal will notify CVS in writing (subject to
Section 13) prior to the [***] Further, Cardinal will use reasonable
efforts to [***]CVS if needed.
7. [***] - All payments for invoicing under the [***] will be made [***].
8. Waiver - [***]
9. [***] Relating to the [***] - CVS and Cardinal acknowledge that either
party may from time to time may, in good faith,[***]. In the event that
either party [***], each party agrees to use all reasonable efforts to
resolve all such [***] as expeditiously as possible on a fair and
equitable basis. To that end, Cardinal and CVS will assemble a panel
consisting of [***] (the "EXECUTIVE COMMITTEE") to resolve [***] and
address other issues as they may determine. With respect to [***], a copy
of the terms of this Agreement, as amended from time to time, agreed upon
facts and [***], and a concise summary of the basis for each side's
contentions will be provided to the executives who will review the same,
confer, and attempt to reach a mutual resolution of the issue within [***]
following either party's receipt of notice of [***].
[***] EXHIBIT.
[***] [***]
----- -----
[***] [***]
45
SECTION 19 DISCLOSURE SCHEDULE
INSURANCE
During the term of the Agreement, CVS and Cardinal will each maintain commercial
general liability insurance having a limit of not less than $[***], pursuant to
one or more insurance policies with reputable insurance carriers. Upon request,
each party will deliver to the other certificates evidencing such insurance.
Cardinal's certificate of insurance to CVS will reflect that CVS [***]. Neither
party will cause nor permit such insurance to be canceled or modified (exclusive
of appropriate replacement policies) to materially reduce its scope or limits of
coverage during the term of the Agreement.
46
Exhibit 10.03
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
FIRST AMENDMENT TO
WHOLESALE SUPPLY AGREEMENT[GRAPHIC OMITTED]
This first amendment ("FIRST AMENDMENT") dated May 26, 2004 amends the Wholesale
Supply Agreement dated January 1, 2004 ("AGREEMENT") between CVS and Cardinal
Health. CVS and Cardinal Health ("PARTIES") desire to enter into this First
Amendment to amend Sections 1(a), 1(b), 3(c), 6(d), 7(b), 10(a), and 12
Disclosure Schedules all as more particularly set forth below.
The Parties agree as follows:
1. Effective Date of Amendment. This First Amendment shall be effective
[***]. In the event that the [***] does not close on or [***],
then this First Amendment shall become null and void and shall be of
no force or effect.
2. Scope. Notwithstanding anything else in the Agreement or this First
Amendment, in no event will CVS be required to designate [***] as a
[***] as a CVS [***] under the Agreement, if such [***] to [***] by
CVS for any reason, or which, [***] by CVS would or could, in CVS'
reasonable business judgment, [***], or [***].
3. Disclosure Schedules. The Agreement is amended by deleting therefrom
the following disclosure schedules in their entirety:
attached to this First Amendment and incorporated into this First
Amendment and into the Agreement by this reference, which shall be
attached by the Parties to their respective copies of the Agreement.
4. Generally. It is the Parties' intent for the Agreement and this
Amendment ([***]) to be applied and construed as a single
instrument. The Agreement, as modified by this First Amendment,
remains in full force and effect and constitutes the entire
agreement among the Parties regarding this subject matter and
supersedes all prior or contemporaneous writings and understandings
among the Parties with respect thereto. This First Amendment will be
binding on the Parties and their successor and assigns. If any term
or provision of this First Amendment is determined to be illegal or
unenforceable by a court of competent jurisdiction, the remaining
terms and provisions of this First Amendment and the Agreement will
remain in full force and effect. Only a subsequent writing signed by
both Parties may amend this First Amendment or further amend the
Agreement.
CVS Pharmacy, Inc Cardinal Health*
By: /s/ Matthew J. Leonard By: /s/ Michael J. Bender
---------------------------- ----------------------------------
Print Name: Matthew J. Leonard Print Name: Michael J. Bender
-------------------- --------------------------
Title: VP Pharmacy Merchandising Title: EVP, Retail Sales and Marketing
------------------------- -------------------------------
*The term "CARDINAL HEALTH" means the following pharmaceutical distribution
companies: Cardinal Health 106, Inc. (formerly known as James W. Daly, Inc.), a
Massachusetts corporation (Peabody, Massachusetts); Cardinal Health 103, Inc.
(formerly known as Cardinal Southeast, Inc.), a Mississippi corporation
(Madison, Mississippi); Cardinal Health 110, Inc. (formerly known as Whitmire
Distribution Corporation), a Delaware corporation (Folsom, California) and any
other subsidiary of Cardinal Health, Inc., an Ohio corporation ("CHI"), as may
be designated by CHI.
Executed First Amendment 7-26-04 2
SECTION 1(A) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
DETERMINATION OF PHARMACIES THAT WILL DESIGNATE CARDINAL AS
[***]
As of the Commencement Date, and throughout the term of this Agreement, CVS will
designate Cardinal as [***]. Furthermore, CVS will designate Cardinal [***]
which are located in the States of [***] and which Cardinal was designated as
the [***] (approximately [***]), and which remain open and continue to operate
[***].
In the event CVS [***] representing: (a) [***] of CVS' Pharmacies as of [***],
then CVS will designate Cardinal as [***] pursuant to the terms and conditions
of this Agreement in a timeframe so as not to compromise CVS' business
operations; or (b) [***] of CVS' Pharmacies as of [***], then CVS [***] Cardinal
[***] at CVS' sole discretion (in which case Cardinal and CVS will [***]).
In no event will CVS [***] which may exist related to any retail pharmacies CVS
[***].
[***]
Upon [***], as often as quarterly, CVS will provide [***] from
Cardinal, as further described in the Section 2(a) Disclosure Schedule.
Executed First Amendment 7-26-04 3
SECTION 1(B) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
[***]
TOTAL DC LIST
CVS New York, Inc. CVS D.S., Inc.
Three Berry Drive 10017 Kingston Pike
Lumberton, NJ 08048 Knoxville, TN 37922
CVS Pharmacy, Inc. CVS IN Distribution, Inc.
150 Industrial Drive 7590 Empire Drive
North Smithfield, RI 02896 Indianapolis, IN 46219
CVS Texas Distribution L.P. CVS Garland TX Distribution, L.P.
700 CVS Drive 4409 Action Street
Ennis, TX 75119 Garland TX 75042
(expected open date TBD)
CVS Conroe TX Distribution, L.P. CVS Orlando FL Distribution, L.L.C.
Name TBD Name TBD
100 Trade Center Blvd. 8201 Chancellor Drive
Conroe TX 77385 Orlando FL 32809
As CVS [***] to support Pharmacies [***] or additional Pharmacies [***] of the
Pharmacies [***], CVS will [***] such pursuant to the terms and conditions of
this Agreement.
[***]
CVS will keep the [***] and notify Cardinal of anticipated additions to or
deletions from one [***] at least thirty (30) days prior to such addition or
deletion. If such addition or deletion could not have been reasonably foreseen
[***], CVS will notify Cardinal as soon as possible thereafter. In no event will
Cardinal [***] pursuant to the terms of this Agreement until [***] after CVS
first notified Cardinal that the [***].
If CVS [***], CVS may [***] Cardinal as the [***] to such [***] in a timeframe
so as not to compromise CVS' business operations. In no event will CVS [***].
Executed First Amendment 7-26-04 4
SECTION 3(A) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
PHARMACIES PURCHASE PRICE
PHARMACY [***].
During the term of this Agreement (through, the Pharmacies' aggregate purchases
of [***] (collectively referred to herein as the "[***]").
During Cardinal's quarterly business review, Cardinal will provide CVS with
purchasing information to substantiate the [***] performance.
Cost of Goods for [***]
CVS will pay to Cardinal a Cost of Goods for [***] as follows:
Rx Products (FDB branded) [***]%
[***] [***]
[***] [***]
Home Health Care/DME [***]
HBC/OTC [***]
[***] [***]
For the purpose of this Agreement [***] shall mean CVS will [***] (i.e. a [***])
for all Merchandise for which a purchase order has been issued as of the date
the Merchandise was [***].
CII orders must be shipped [***]. CVS reserves the [***] any CII order that
[***] any [***].
All Merchandise being delivered from Cardinal to CVS Pharmacies must have at
least [***]. Under no circumstances will Merchandise be delivered to Pharmacies
with less than [***] without expressed written approval by CVS' Vice President
of Pharmacy Merchandising for each occurrence. Furthermore, Cardinal represents
that it is, and will continue to be during the term of this Agreement, an
industry leader in implementation of processes, practices and safeguards to
prevent the distribution of Merchandise will [***] to Pharmacies.
The foregoing Cost of Goods does not apply to Merchandise which is subject to a
[***], which will instead be [***] at the [***] for the Pharmacies. Cardinal
[***] the Cost of Goods of [***] of Merchandise in the event that the [***] of
such item [***] which the effective on the Commencement Date with respect to
such item. The [***] to the Cost of Goods for such item [***].
Executed First Amendment 7-26-04 5
SECTION 3(C) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
[***]
Pharmacies will be eligible for the following Cost of Goods [***] based upon the
[***]:
If CVS' [***] during a calendar quarter is less than [***] will be mutually
determined [***]. At the end of each calendar quarter, Cardinal and CVS will
evaluate CVS' [***] during such quarter (i.e., [***] Purchases and [***]
Purchases only) of all Pharmacies [***] will be faxed and subsequently mailed in
hard copy form to CVS' Manager of Wholesaler Programs.
The [***] will be [***] as follows: Cardinal and CVS will [***]. Utilizing this
calculation Cardinal and CVS will [***] to [***] for the [***].
For example, during a calendar quarter, CVS' [***], then CVS' [***] Cardinal's
Cost [***] Conversely, if CVS' [***] during a calendar quarter, then CVS' [***]
Cardinal's Cost [***].
In addition, if CVS [***] CVS' qualified monthly purchases per Pharmacy [***],
then CVS may elect to [***], and [***] following the date of [***] only. If CVS
[***] Cardinal [***] Cardinal [***] or CVS [***] of the [***], then such [***].
Regardless of whether the [***] are included or excluded in the determination of
the [***], said [***]. To that end, it has been agreed that the [***] will not
be included in the determination of the [***] volume category only, until [***].
However, the [***] and [***] of such Pharmacies will [***] (Pharmacies excluding
[***]).
The [***] is a "[***]" as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). [***] and any other [***]
received by CVS from Cardinal under any state or federal program which provides
cost or charge-based reimbursement to CVS for the Merchandise purchased by CVS
under this Agreement.
Executed First Amendment 7-26-04 6
SECTION 6(d) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
EMPLOYEE [***]
[***] of a CVS Manager ("Employee") who will serve as an intermediary between
Cardinal and CVS specifically related to the management of the Store Rx
Purchases. It is understood that the Employee shall be [***] and that the
Employee's [***] and [***] shall be the [***] for all claims and liabilities,
whether alleged or actual, relating to the Employee.
Cardinal will [***] of this Employee pursuant to the schedule defined below:
[***] [***]
Executed First Amendment 7-26-04 7
SECTION 7(B) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
[***] FOR THE PHARMACIES
CVS will be [***] for the following [***] Rx Product [***]:
Cardinal will provide CVS with a monthly report detailing the Pharmacies' [***]
Rx Products [***] At the end of each Program Year, Cardinal and CVS will [***]
during such Program Year. The [***] will be [***] (as set forth in the table
above) of CVS' [***] Rx Products by the Pharmacies during the applicable Program
Year. The [***], if any, will be [***] in the [***] so that [***] from the close
of said Program Year. The [***] will be faxed and subsequently mailed in hard
copy form to CVS' Manager of Wholesaler Programs. In the event that the [***]
will [***] for any reason, Cardinal will use reasonable efforts to give CVS
notice no later than [***] prior to the end of the then-current Program Year.
The "[***]" is a [***] as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). [***] and any other "[***]"
received by CVS from Cardinal under any state or federal program which provides
cost or charge-based reimbursement to CVS for the Merchandise purchased by CVS
under this Agreement.
Executed First Amendment 7-26-04 8
SECTION 9 DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
PHARMACIES [***]
Cardinal will exercise best efforts to provide the Pharmacies with the following
[***] (as defined within this disclosure schedule), calculated [***] as
described below: (a) [***] adjusted with respect to [***] Rx Products; (b) [***]
adjusted with respect to [***]; (c) [***] adjusted with respect to [***]; and
(d) [***] with respect to [***] (the "[***]").
[***]
For purposes of this Agreement, "[***]" for [***] during [***] will be
calculated using the following formula:
[***].
[***] submitted to Cardinal will be included in the [***] including, but not
limited to: [***].
The following items of merchandise are excluded from the [***] and in aggregate
constitute all "AUTHORIZED ADJUSTMENTS":
1. [***] - [***] will [***] upon agreement between Cardinal and CVS
that [***]. Cardinal will verbally communicate any [***] for which
an adjustment [***] is requested to CVS' Assistant Category [***],
in the event that person is unavailable, Cardinal will notify the
Director, Category [***]. Notification to CVS should only be made
after Cardinal has [***] such product [***] on its own. Upon
notification from Cardinal, CVS will [***] or [***]. Upon CVS [***]
an Authorized Adjustment. [***].
2. CVS [***] - CVS may specifically request that [***]; CVS' Assistant
Category [***] will notify Cardinal in writing of these items. In
addition, [***]; if the Pharmacy specifically requests (phone in
orders without a documented detailed specific request by CVS will
[***] Authorized Adjustment) Cardinal [***], then said item will be
considered an Authorized Adjustment. Cardinal will provide CVS on a
monthly basis a report by item of the number of store [***] to
include but not be limited to: CVS store number, NDC, item
description, date, and quantity. Reports should be provided no later
than five (5) days following the close of the respective month.
3. [***] - an adjustment to the [***] will be [***] or CVS' [***] as
provided from time to time, which [***] Adjustment amount will only
be for the [***].
For example, if [***]
4. [***] - CVS [***] in [***]. CVS commits to the timely notification
of all such changes in an electronic format; in addition, on a
monthly basis CVS will provide an updated complete [***]. Cardinal
will make available to CVS [***] within [***] will be adjusted
Executed First Amendment 7-26-04 9
for the [***] following CVS notification, during which Cardinal may
[***] CVS stores [***] if applicable.
Cardinal's [***] commitment for CVS will become effective as of [***], however,
CVS will not be eligible for [***] until [***]. As it relates to the [***] only,
CVS will not be eligible for [***] until [***]. As an inducement for CVS to make
the preceding concession, Cardinal will [***].
Both Cardinal and CVS agree the achievement of the [***] on a monthly basis
represents a material aspect of this Agreement. Failure by Cardinal to maintain
a monthly [***] with respect to the [***] (which includes [***] Rx Products
[***]) (a "[***]") will [***] CVS [***] for its [***] (as defined herein). For
purposes of this Schedule 9 Disclosure Schedule, the term "[***]" means [***].
CVS will calculate and present [***], if any, to Cardinal before processing any
[***] related to any [***] to CVS in connection with [***].
For example, if the [***] is calculated at [***] for any given month, [***].
Cardinal and CVS agree to meet at CVS' Support Center as necessary to review the
[***] performance and to [***] in order to [***] defined within this Section 9
Disclosure Schedule.
[***]
Cardinal recognizes [***] can have on CVS' ability [***] their customers.
Therefore, both Cardinal and CVS agree that the [***]. To that end, Cardinal and
CVS will mutually agree to terms that will reflect the significance of [***].
The terms will be specific towards each party's responsibilities, the
calculation of [***], and remedies [***]. CVS and Cardinal agree that the
arrived at structure of the [***]
Executed First Amendment 7-26-04 10
SECTION 10(A) DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
PHARMACIES MERCHANTABLE PRODUCT [***]
GENERAL POLICY.
The parties acknowledge that [***]. Product in "merchantable condition" (as
defined below) may generally be returned to Cardinal from which the product was
originally purchased if the return is made within the timeframes and subject to
the terms and conditions described below: [***].
RETURN MADE WITHIN: NORMAL CREDIT AMOUNT:
[***] Days from Invoice Date [***] of original invoice amount paid by
customer. This policy [***].
[***] Days [***] of [***] or other "cost" paid by
customer (i.e., not including any [***] to
[***]) [***]
Merchandise will be considered to be in "MERCHANTABLE CONDITION" except for the
following:
A. Any item which has been [***], is without all original packaging,
labeling, inserts, or operating manuals, or that is stickered, marked,
[***], or otherwise [***].
B. [***] outdated, or [***] and items purchased on a [***].
C. [***] and is specially assured that such merchandise was properly stored
and protected at all times and such merchandise is returned separately in
a package marked as such and accompanied by a separate credit request
form.
D. In order for CVS to achieve compliance [***], CVS will return product (in
Merchantable Condition) to Cardinal [***] in the CVS Pharmacy DCs
(excluding [***] Rx Products [***]). Further, CVS agrees that Cardinal may
[***] in the CVS Pharmacy DCs, as indicated in the CVS monthly on-hand
inventory electronic report provided to Cardinal by CVS.
CONTROLLED SUBSTANCES.
Credit for the return of controlled substances requires a separate Merchandise
Return Authorization Form ("MRA FORM") and must comply with all federal and
state procedures and requirements in addition to the terms and conditions
described herein.
SHORTS AND DAMAGED MERCHANDISE.
Claims of order shortages (i.e., invoiced but not received), order errors and
damage must be reported within [***] from the applicable invoice date.
Controlled substance shortage claims must be reported immediately per DEA
requirements.
Executed First Amendment 7-26-04 11
[***]
CVS Pharmacy returns in dollars [***] of qualified monthly purchases of all of
the Pharmacies (in dollars, each calendar month) excluding [***]. Because [***]
to Cardinal if such [***] (excluding [***]), CVS and Cardinal mutually agree
that Cardinal will [***] of those items which are included in the CVS monthly
on-hand inventory electronic report provided to Cardinal by CVS. This "[***]" is
designed to [***]. CVS and Cardinal may agree from time to time to implement a
[***] in cases where CVS Pharmacies are [***]. The parties will agree [***].
Cardinal will fully participate in assisting CVS with a [***] associated with
the [***] under this initiative will be valued at [***] and will have at least
[***].
[***] AND CARDINAL CREDIT REQUEST FORM.
Prior to returning any product to Cardinal, each customer must [***] verifying
that all returned merchandise has been kept [***]. All requests for credit must
be submitted [***]. A fully completed [***] must accompany [***]. A fully
completed form includes, but is not limited to, the following information: the
invoice number and invoice date for the merchandise to be returned. All return
credit memos will have corresponding reference numbers that will provide CVS
with a complete audit trail for reconciliation.
[***]
[***] must be placed in a proper shipping container and, for merchandise valued
at more than [***] when the product is picked up. All MRAs will be reviewed by
Cardinal for compliance with the [***] within this Section 10(a) Disclosure
Schedule. Cardinal will process credits within [***] of receipt of merchantable
product from CVS. In instance were credit has not been received for product
returned to Cardinal for which Cardinal has no record of said Monthly Reporting.
MONTHLY REPORTING.
Cardinal will provide an electronic report on a monthly basis, which will detail
(1) [***], (2) [***] and [***], (3) [***] returns in excess of [***] (4) [***].
OTHER RESTRICTIONS.
This policy is further subject to modification as may be deemed necessary to
comply with applicable federal and/or state regulations, FDA guidelines, and
state law.
Executed First Amendment 7-26-04 12
SECTION 12 DISCLOSURE SCHEDULE
AMENDED MAY 26, 2004
[***]
The goal of the [***] is to [***] under which Cardinal will [***] which are or
become part of this Agreement. The parties agree and acknowledge that this [***]
is part of this Agreement, and is not a separate or distinct agreement.
Notwithstanding anything in this Agreement to the contrary, the [***].
The [***] is designed to [***]. CVS will [***].
As part of the [***], Cardinal will [***] (in addition to [***]) for the
respective [***] during the term of this Agreement. The [***] will be faxed and
subsequently mailed in hard copy form to CVS' Manager of Wholesaler Programs.
Additionally, Cardinal will [***] with the [***] detailed in Section 2(b)
Disclosure Schedule [***]. In return for [***] and the [***], Cardinal will
[***] through certain [***] as defined below.
[***] as of the execution of this Agreement with the exception of [***] (as
detailed in and subject to Section 12 Disclosure Schedule). Cardinal will [***].
In return for from until [***], by [***], Cardinal will [***]. The timing of
[***].
CVS will not be required to [***] sole determination. The [***] Exhibit below
details [***] CVS will [***] (subject to Section 12 Disclosure Schedule) and the
corresponding [***] to be amended in writing pursuant to Section 13 upon mutual
agreement of CVS and Cardinal. While CVS and Cardinal may both agree that it is
in the best interest of both parties to and will occur at [***].
CVS is under no obligation to [***] at its sole discretion. With that said, CVS
and Cardinal may [***] sole discretion. So that Cardinal and CVS can [***],
Cardinal will provide to CVS in an electronic format a detailed weekly report
detailing said [***]. The [***] will include but not be limited to the following
elements as it pertains to Cardinal [***]. As it pertains to [***] Report only,
Cardinal will [***]. All other data elements will be updated [***] immediately
sent to CVS [***] accurately representing Cardinal's [***] available to CVS as
of the creation of the [***].
[***]
For all of CVS [***] ([***], etc), CVS will [***] within [***] of the end of
each CVS fiscal quarter in the form of [***] (in addition to [***]) for [***]
during the term of this Agreement. [***]. CVS and Cardinal will agree with
[***]. For example; [***] then Cardinal will [***]. Further terms and conditions
of the [***] are as follows:
1) CVS and Cardinal will [***] within [***] of the respective CVS
fiscal month's end or as soon as practical.
Executed First Amendment 7-26-04 13
2) The [***] will not be applied [***]. The [***] will be automatically
applied [***].
3) CVS contract pricing on [***].
4) The [***] is based on the assumption that Cardinal will not [***].
5) Cardinal will not [***]. However, Cardinal will [***]
a. [***].
b. [***].
c. [***].
6) At the start of this Agreement, Cardinal will [***]. To that end,
CVS and Cardinal have agreed that [***] under this Agreement.
7) [***] For example, if [***].
8) For all [***].
9) If CVS [***] then Cardinal will not [***].
10) If CVS (as defined below) then Cardinal will not [***].
[***]
As a function of the [***], Cardinal will [***] as defined below. Through the
[***] Cardinal will [***] as further defined below. Notwithstanding anything
else in this Agreement to the contrary, Cardinal will not [***]. The [***] for
the [***] are limited to:
[***]
[***]
[***]
Further terms and conditions of the [***] are as follows:
1) CVS will [***]; CVS will not be required to [***].
2) CVS [***] to include but not limited to:
[***]
[***]
[***]
[***]
3) [***]. In the event that [***] (Pharmacies and CVS Pharmacy DCs, if
applicable). Notwithstanding the foregoing, Cardinal will [***]. It will
be [***] sole responsibility to notify [***] in writing (with copy to
[***] subject to Section 13) related to.
Executed First Amendment 7-26-04 14
4) CVS will only accept product [***] to CVS Pharmacy DCs that has at least
[***]. All products shipped with less than [***] will be considered
"[***]". On an exception basis, CVS will [***] with at least [***].
However, both parties agree that no more than [***]. In addition, upon CVS
request (as often as monthly), Cardinal will provide CVS a [***]. The
[***] will contain all [***] and will [***] (both CVS and Cardinal agree
that the [***] will be made available to CVS no later than September 1,
2004). Notwithstanding anything in this Agreement to the contrary, at no
time will Cardinal ship [***] with less than [***] to CVS Pharmacy DCs.
With that said, CVS will [***].
Additional terms and conditions of the [***] are as follows:
1. Term - The [***] will commence as of [***], and terminate upon [***].
2. [***] - Cardinal will [***].
3. [***] - If Cardinal's [***], and if CVS is [***], then CVS will, upon
request by Cardinal, [***]. With respect to the foregoing [***], CVS will
[***]. CVS will [***].
(a) [***]. On the same day as CVS receives a shipment of [***]
ordered as part of a [***] related to this [***], CVS will [***].
Cardinal will [***] CVS will [***], and CVS will [***], based on the
applicable payment terms. CVS will [***], and Cardinal will [***].
The process outlined in the Section 2(b) Disclosure Schedule will
apply to any discrepancies.
(b) [***]. As it pertains to [***] purchases only, on the same
day as CVS receives the shipment of [***].
As it pertains to the payment of [***], Cardinal will receive an invoice
from the applicable manufacturer for the [***], and Cardinal will [***],
based on the applicable payment terms. As the [***] for such [***] in
accordance with the terms of this Agreement. The process outlined in the
Section 2(b) Disclosure Schedule will apply to any discrepancies.
4. Purchase Information - CVS will provide Cardinal with [***] on behalf of
the CVS Pharmacy DCs pursuant to the [***]. Such information will include
details regarding all [***] and other information reasonably required by
Cardinal to administer the [***]. To assist Cardinal with [***], CVS will
provide Cardinal with information reasonably requested by Cardinal
including but not limited to [***], and a change in CVS Pharmacy DC that
services a particular Pharmacy.
5. Limitations - All [***]. All [***]. CVS will not [***] (outside of this
[***]) on behalf of the Pharmacies [***]. It is understood and agreed that
Cardinal will not [***]. Furthermore, the parties acknowledge and agree
that all information associated with the [***] is confidential information
subject to the provisions of Section 17 of this Agreement.
6. Records, Audit and Confidentiality - The [***] is subject to the record
keeping and audit provisions set forth in Section 16 of this Agreement.
Cardinal may [***]. Cardinal will
Executed First Amendment 7-26-04 15
notify CVS in writing (subject to Section 13) prior to the [***]. Further,
Cardinal will use reasonable efforts to [***] CVS if needed.
7. [***] All payments for invoicing under the [***] will be made [***].
8. Waiver - [***].
9. [***] Relating to the [***] - CVS and Cardinal acknowledge that either
party may from time to time may, in good faith, [***]. In the event that
either party [***], each party agrees to use all reasonable efforts to
resolve all such [***] expeditiously as possible on a fair and equitable
basis. To that end, Cardinal and CVS will assemble a panel consisting of
[***] (the "EXECUTIVE COMMITTEE") to resolve [***] and address other
issues as they may determine. With respect to [***], a copy of the terms
of this Agreement, as amended from time to time, agreed upon facts and
[***], and a concise summary of the basis for each side's contentions will
be provided to the executives who will review the same, confer, and
attempt to reach a mutual resolution of the issue within [***] following
either party's receipt of notice of [***].
[***] EXHIBIT.
[***] [***]
[***]
Executed First Amendment 7-26-04 16
Exhibit 10.04
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
SECOND AMENDMENT TO
WHOLESALE SUPPLY AGREEMENT
This second amendment ("SECOND AMENDMENT") dated June 2, 2004 amends the
Wholesale Supply Agreement dated January 1, 2004 ("AGREEMENT") and subsequently
amended on May 26, 2004 between CVS and Cardinal Health. CVS and Cardinal Health
("PARTIES") desire to enter into this Second Amendment to amend Section 1 and
Section 12 Disclosure Schedule [***].
The Parties agree as follows:
1. Effective Date of Amendment. This Second Amendment shall be effective
as of [***]. In the event that the [***] does not [***], then this
Second Amendment shall become null and void and shall be of no force
or effect. Furthermore, CVS reserves the right to provide Cardinal
with notification ("NOTICE") before the close of the [***] that CVS
has determined in its sole discretion that it will not undertake the
wholesale supply arrangement as described in the Second Amendment in
which case this Second Amendment shall become null and void and shall
be of no force or effect.
2. Scope. Notwithstanding anything else in the Agreement, as amended, in
no event will CVS, at any time, be obligated to designate [***] by CVS
or its affiliates for any reason, or which, [***] by CVS or its
affiliates in its business judgment, [***], or [***].
3. Disclosure Schedules. The Agreement is amended by deleting therefrom
the following disclosure schedules in their entirety:
"Section 1", and
"Section 12 Disclosure Schedule"
and replacing them with the following new Disclosure Schedules:
"Section 1", and
"Section 12 Disclosure Schedule"
attached to this Second Amendment and incorporated into this Second
Amendment and into the Agreement by this reference, which shall be
attached by the Parties to their respective copies of the Agreement.
4. Generally. It is the Parties' intent for the Agreement and this
Amendment [***] to be applied and construed as a single instrument.
The Agreement, as modified by this Second Amendment, remains in full
force and effect and constitutes the entire agreement
among the Parties regarding this subject matter and supersedes all
prior or contemporaneous writings and understandings among the Parties
with respect thereto. This Second Amendment will be binding on the
Parties and their successor and assigns. If any term or provision of
this Second Amendment is determined to be illegal or unenforceable by
a court of competent jurisdiction, the remaining terms and provisions
of this Second Amendment and the Agreement will remain in full force
and effect. Only a subsequent writing signed by both Parties may amend
this Second Amendment or further amend the Agreement.
CVS Pharmacy, Inc Cardinal Health*
By: /s/ Matthew J. Leonard By: /s/ Michael J. Bender
---------------------------- ----------------------------------
Print Name: Matthew J. Leonard Print Name: Michael J. Bender
-------------------- --------------------------
Title: VP Pharmacy Merchandising Title: EVP, Retail Sales and Marketing
------------------------- -------------------------------
*The term "CARDINAL HEALTH" means the following pharmaceutical distribution
companies: Cardinal Health 106, Inc. (formerly known as James W. Daly, Inc.), a
Massachusetts corporation (Peabody, Massachusetts); Cardinal Health 103, Inc.
(formerly known as Cardinal Southeast, Inc.), a Mississippi corporation
(Madison, Mississippi); Cardinal Health 110, Inc. (formerly known as Whitmire
Distribution Corporation), a Delaware corporation (Folsom, California) and any
other subsidiary of Cardinal Health, Inc., an Ohio corporation ("CHI"), as may
be designated by CHI.
Cc: Tina Egan, Assistant General Counsel CVS
Paul Williams, General Counsel Cardinal Health
2
SECTION 1
AMENDED JUNE 2, 2004
SECTION 1. DESIGNATION AS [***].
(a) Retail Pharmacies. During the term of this Agreement, CVS will
designate Cardinal as [***] operated by CVS (collectively, the
"PHARMACIES" and individually, a "PHARMACY") subject to Section 1(a)
Disclosure Schedule. A list of the Pharmacies (the "[***]") will be
provided by CVS to Cardinal from time to time during the term of this
Agreement.
(b) Distribution Centers. During the term of this Agreement, CVS will
designate Cardinal as [***] operated by CVS ("CVS PHARMACY DCS")
subject to Section 1(b) Disclosure Schedule. A comprehensive list [***]
as of January 1, 2004 (the date of this agreement) (the "Total DC
List") is set forth in the Section 1(b) Disclosure Schedule.
(c) [***]. This Agreement [***] purchases which are made by CVS on
behalf of the CVS [***] In return [***] as described in the Section 12
Disclosure Schedule, CVS will [***] from a CVS Pharmacy DC being
serviced by Cardinal for a period of [***]. If at anytime after [***],
CVS [***] from a CVS Pharmacy DC being serviced by Cardinal, then s
described in the Section 12 Disclosure Schedule will [***]. If CVS
[***] from a CVS Pharmacy DC being serviced by Cardinal after the
[***], then the [***] as described in the Section 12 Disclosure
Schedule will for as long as CVS [***] from a CVS Pharmacy DC being
serviced by Cardinal.
This Agreement specifically excludes [***] on behalf of the [***].
As it concerns [***], in the event either party desires not to [***]
from a [***] being serviced by Cardinal at the expiration of the First
Term or any renewal term, that party shall provide the other party with
at least [***] notice prior to the expiration of the then current term.
In the event such notification is not provided with at least the [***]
notice or if no notice is given, the then current term shall be [***]
for a period of [***] after the expiration of such term to provide for
[***].
(d) CVS Commitment. This Agreement pertains only to [***] Pharmacies.
3
SECTION 12 DISCLOSURE SCHEDULE
AMENDED JUNE 2, 2004
[***]
The goal of the [***] is to [***] under which Cardinal will [***] which are or
become part of this Agreement. The parties agree and acknowledge that this [***]
is part of this Agreement, and is not a separate or distinct agreement.
Notwithstanding anything in this Agreement to the contrary, the [***].
The [***] is designed to [***]. CVS will [***].
As part of the [***], Cardinal will [***] (in addition to [***] for the
respective [***] during the term of this Agreement. The [***] will be faxed and
subsequently mailed in hard copy form to CVS' Manager of Wholesaler Programs.
Additionally, Cardinal will [***] with the [***] detailed in Section 2(b)
Disclosure Schedule [***]. In return for [***] and the [***], Cardinal will
[***] through certain [***] as defined below.
[***] as of the execution of this Agreement with the exception of [***] (as
detailed in and subject to Section 12 Disclosure Schedule). Cardinal will
[***]. In return for [***] from [***] until [***] by [***], Cardinal will
[***]"). The timing of [***].
CVS will not be required to [***] sole determination. The [***] Exhibit below
details [***] CVS will [***] (subject to Section 12 Disclosure Schedule) and the
corresponding [***] to be amended in writing pursuant to Section 13 upon mutual
agreement of CVS and Cardinal. While CVS and Cardinal may both agree that it is
in the best interest of both parties to [***] and will occur at [***].
CVS is under no obligation to [***] at its sole discretion. With that said, CVS
and Cardinal may [***] sole discretion. So that Cardinal and CVS can [***],
Cardinal will provide to CVS in an electronic format a detailed weekly report
detailing said [***]. The [***] will include but not be limited to the following
elements as it pertains to Cardinal [***]. As it pertains to [***] Report only,
Cardinal will [***]. All other data elements will be updated [***] and
immediately sent to CVS [***] accurately representing Cardinal's [***] available
to CVS as of the creation of the [***].
[***]
For all of [***] etc, CVS will [***] within [***] of the end of each CVS fiscal
quarter in the form of [***] (in addition to [***]) [***] during the term of
this Agreement. [***]. CVS and Cardinal will agree with [***].
For example; [***], then Cardinal will [***].
Further terms and conditions of the [***] are as follows:
4
1) CVS and Cardinal will [***]; within [***] of the respective CVS fiscal
month's end or as soon as practical.
2) The [***] will not be applied [***]. The [***] will be automatically
applied [***].
3) CVS contract pricing on [***].
4) The [***] is based on the assumption that Cardinal will not [***].
5) Cardinal will not [***]. However, Cardinal will [***].
a. [***].
b. [***].
c. [***].
6) At the start of this Agreement, Cardinal will [***]. To that end, CVS
and Cardinal have agreed that [***] under this Agreement.
7) [***] For example, if [***].
8) For all [***].
9) If CVS [***] then Cardinal will not [***].
10) If CVS [***] (as defined below) [***], then Cardinal will not [***].
[***]
As a function of the [***] Cardinal will [***] as defined below. Through the
[***], Cardinal will [***] as further defined below. Notwithstanding anything
else in this Agreement to the contrary, Cardinal will [***].
The "[***]" for the [***] are limited to:
[***].
[***].
[***].
Further terms and conditions of the [***] are as follows:
1) CVS will [***]; CVS will not be required to [***].
2) CVS [***] to include but not limited to:
[***]
[***]
[***]
[***]
5
3) [***] In the event that [***] (Pharmacies and CVS Pharmacy DCs, if
applicable). Notwithstanding the foregoing, Cardinal will [***] It will be
[***] sole responsibility to notify [***] in writing (with copy to [***]
subject to Section 13) [***] related to [***].
4) CVS will only accept product [***] to CVS Pharmacy DCs that has at least
[***]. All products shipped with less than [***] will be considered
"[***]". On an exception basis, CVS will [***] with at least [***].
However, both parties agree that no more than [***]. In addition, upon CVS
request (as often as monthly), Cardinal will provide CVS [***]. The [***]
will contain all [***] and will [***] (both CVS and Cardinal agree that the
[***] will be made available to CVS no later than September 1, 2004).
Notwithstanding anything in this Agreement to the contrary, at no time will
Cardinal ship [***] with less than [***] to CVS Pharmacy DCs. With that
said, CVS will [***].
Additional terms and conditions of the [***] are as follows:
1. Term - The [***] will commence as of [***], and terminate upon [***].
2. [***] - Cardinal will [***].
3. [***] - If Cardinal's [***], and if CVS is [***], then CVS will, upon
request by Cardinal, [***]. With respect to the foregoing [***], CVS will
[***]. CVS will [***].
(a) [***] On the same day as CVS receives a shipment of [***]
ordered as part of a [***] related to this [***], CVS will [***].
Cardinal will [***]. CVS will [***], and CVS will [***] based on the
applicable payment terms. CVS will [***], and Cardinal will [***].
The process outlined in the Section 2(b) Disclosure Schedule will
apply to any discrepancies.
(b) [***] As it pertains to [***] purchases only, on the same day
as CVS receives the shipment of [***].
As it pertains to the payment of [***], Cardinal will receive an invoice
from the applicable manufacturer for the ordered Rx Product, and Cardinal
will [***], based on the applicable payment terms. As the [***] for such
[***] in accordance with the terms of this Agreement. The process outlined
in the Section 2(b) Disclosure Schedule will apply to any discrepancies.
4. Purchase Information - CVS will provide Cardinal with [***] on behalf of
the CVS Pharmacy DCs pursuant to the [***]. Such information will include
details regarding all [***] and other information reasonably required by
Cardinal to administer the [***]. To assist Cardinal with [***] CVS will
provide Cardinal with information reasonably requested by Cardinal
including but not limited to [***], and a change in CVS Pharmacy DC that
services a particular Pharmacy.
5. Limitations - All [***]. All [***]. CVS will not [***] (outside of this
[***]) on behalf of the Pharmacies. It is understood and agreed that
Cardinal will not [***]. Furthermore, the parties acknowledge and agree
that all information
6
associated with the [***] is confidential information subject to the
provisions of Section 17 of this Agreement.
6. Records, Audit and Confidentiality - The [***] is subject to the record
keeping and audit provisions set forth in Section 16 of this Agreement.
Cardinal may [***]. Cardinal will notify CVS in writing (subject to Section
13) prior to the [***]. Further, Cardinal will use reasonable efforts to
[***] CVS if needed.
7. [***] - All payments for invoicing under the [***] will be made via [***].
8. Waiver - [***]
9. [***] Relating to the [***] - CVS and Cardinal acknowledge that either
party may from time to time may, in good faith, [***]. In the event that
either party [***], each party agrees to use all reasonable efforts to
resolve all such [***] as expeditiously as possible on a fair and equitable
basis. To that end, Cardinal and CVS will assemble a panel consisting of
[***] (the "EXECUTIVE COMMITTEE") to resolve [***] and address other issues
as they may determine. With respect to [***], a copy of the terms of this
Agreement, as amended from time to time, agreed upon facts and [***], and a
concise summary of the basis for each side's contentions will be provided
to the executives who will review the same, confer, and attempt to reach a
mutual resolution of the issue within [***] following either party's
receipt of notice of [***].
7
[***] EXHIBIT.
[***] [***]
[***] [***]
8
Exhibit 10.06
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
SECOND AMENDMENT TO
PRIME VENDOR AGREEMENT
THIS SECOND AMENDMENT TO PRIME VENDOR AGREEMENT ("SECOND AMENDMENT") is
among Cardinal Health*, formerly known as Cardinal Distribution, ("CARDINAL"),
and Express Scripts, Inc. ("BUYER").
WHEREAS, Cardinal and Buyer executed a Prime Vendor Agreement, dated
July 1, 2001 (the "AGREEMENT"), and executed a First Amendment to Prime Vendor
Agreement, dated January ___, 2003 ("FIRST AMENDMENT").
WHEREAS, the parties desire to further amend the Agreement, as amended,
to reflect the terms of a new returned goods policy for unmerchantable product.
NOW THEREFORE, in consideration of the foregoing recitals, the parties
hereby agree as follows:
1. RETURNED GOODS POLICY FOR UNMERCHANTABLE PRODUCT. Attached as EXHIBIT A
and incorporated herein by reference is a returned goods policy for
unmerchantable product, which describes a return process whereby Cardinal will
assist Buyer in receiving value for certain unmerchantable product.
2. MISCELLANEOUS. Capitalized terms not defined herein will have the same
meaning ascribed to them in the Agreement, as amended by the First Amendment, it
being the intent of the parties that the Agreement, as amended by the First
Amendment, and this Second Amendment will be applied and construed as a single
instrument. The Agreement, as amended by the First Amendment and as modified by
this Second Amendment, constitutes the entire agreement between Cardinal and
Buyer regarding the subject matter of the Agreement, as amended by the First
Amendment, and this Second Amendment and supersedes all prior or contemporaneous
writings and understandings between the parties regarding the same. This Second
Amendment will be binding upon the parties, their heirs, legal representatives,
successors and assigns. The terms and provisions of this Second Amendment are
severable. If any term or provision of this Second Amendment is determined to be
illegal or unenforceable by a court of competent jurisdiction, the remaining
terms and provisions of this Second Amendment and the Agreement, as amended by
the First Amendment will remain in full force and effect. This Second Amendment
may only be amended in a writing signed by Cardinal and Buyer.
3. EFFECTIVE DATE. This Second Amendment shall be effective as of the date
of full execution ("EFFECTIVE DATE"). Except as otherwise amended herein, the
terms and conditions of the Restated Agreement shall remain in full force and
effect.
CARDINAL HEALTH* EXPRESS SCRIPTS, INC.
BY: /s/ John E. Grimm BY: /s/ George Paz
------------------------------- -----------------------------
NAME: John E. Grimm NAME: George Paz
------------------------------- -----------------------------
TITLE: SVP, Alternate Care TITLE: President
------------------------------- -----------------------------
DATE: 11-19-03 DATE: 11/12/03
------------------------------- -----------------------------
*The term "CARDINAL HEALTH" means the following pharmaceutical distribution
companies including: Cardinal Health 106, Inc. (formerly known as James W. Daly,
Inc.), a Massachusetts corporation (Peabody, Massachusetts); Cardinal Health
103, Inc. (formerly known as Cardinal Southeast, Inc.), a Mississippi
corporation (Madison, Mississippi); Cardinal Health 110, Inc. (formerly known as
Whitmire Distribution Corporation), a Delaware corporation (Folsom, California)
and any other subsidiary of Cardinal Health, Inc., an Ohio corporation ("CHI"),
as may be designated by CHI.
EXHIBIT A
RETURNED GOODS POLICY FOR UNMERCHANTABLE PRODUCT
Cardinal and Buyer have agreed to pursue a return process whereby Cardinal will
assist Buyer in receiving value for certain unmerchantable Product. Product
which may not be returned pursuant to Cardinal's Standard Returned Goods Policy
may be returned to an authorized manufacturer through a third party pursuant to
this policy. Products which are "UNMERCHANTABLE" include, but are not limited
to, those items which Cardinal determines are not in "merchantable condition"
(as defined in Cardinal's Returned Goods Policy), and the following:
A. Any item which has been used or opened, is a partial dispensing unit or unit
of sale, is without all original packaging, labeling, inserts or operating
manuals, or that is stickered, marked, damaged, defaced or otherwise cannot
readily be resold by Cardinal for any reason.
B. Short-dated (less than seven (7) months expiration dating), outdated, or
seasonal product and items purchased on a "special order" basis, including
non-stock and drop ship items.
C. Any sterile or refrigerated Merchandise, unless Cardinal is specially assured
that such Merchandise was properly stored and protected at all times and such
Merchandise is returned separately in a package marked as such and accompanied
by a separate credit request form.
D. Any low stability product, including Epogen(TM), Eminase(TM), or other
products which are usually sensitive to temperature and handling conditions.
E. Any product not intended for return to a wholesaler in accordance with the
return policies of the applicable manufacturer.
Product in "unmerchantable condition" may generally be returned to vendors (a)
with which Cardinal has a current relationship, (b) are not either insolvent or
subject to a petition in bankruptcy, or (c) which do not have an outstanding
balance due Cardinal at the date on which such Product is submitted for return
(each such vendor, an "ACTIVE MANUFACTURER"). Unmerchantable Product may only be
returned through a third party return processor ("THIRD PARTY") in accordance
with the terms and conditions described in this policy. Cardinal will provide
the Third Party selected by Buyer with a current list of all Active
Manufacturers. Any Third Party selected by Buyer must enter into a
Confidentiality Agreement, in a form acceptable to Cardinal, prior to accepting
any returns from Buyer.
PROCEDURES FOR RETURNS
Buyer and Cardinal will notify each Active Manufacturer of their relationship as
customer/wholesaler. Buyer will send all returns of unmerchantable Product to
its selected Third Party. The amount identified by the Third Party as the amount
to which Buyer is entitled in exchange for the return will be determined in
accordance with the return policy of the applicable Active Manufacturer as
described in the Third Party's database, which will reflect Buyer's cost of
goods purchased through Cardinal. Buyer will instruct the Third Party to provide
Cardinal with documentation (either in paper or electronic format) to
substantiate each debit memo submitted to Active Manufacturers on behalf of
Buyer.
Buyer will instruct each Active Manufacturer to issue any and all credits to
Cardinal for Merchandise that was purchased by Buyer from Cardinal and is
returned through a Third Party in unmerchantable condition, and to reference the
debit memo number corresponding to the debit memo prepared by the Third Party.
Buyer and Cardinal acknowledge that Buyer will handle, without Cardinal's
involvement, all matters relating to returns to manufacturers with which Buyer
has a direct contracting relationship (whether or not such manufacturer is an
Active Manufacturer).
Buyer will pay the Third Party directly for all of such Third Party's fees. In
addition, Buyer will reimburse Cardinal for all costs billed by the Third Party
to Cardinal that relate to Buyer's returns hereunder, including, but not limited
to, processing fees, postage, delivery and destruction fees.
2
Cardinal will be paid [***]% of the net returns received by Cardinal from all
Active Manufacturers as a processing fee (the "PROCESSING FEE") in accordance
with the following procedure:
(1) Cardinal will adjust Buyer's account upon the earlier of receipt of
an actual credit from an Active Manufacturer, or within sixty (60) days
following the date of a debit memo submitted to an Active Manufacturer. Buyer
will not deduct from any UNAUTHORIZED amounts owed to Cardinal, any UNAUTHORIZED
amounts relating to the return of Merchandise through a Third Party.
(2) Each calendar month, Cardinal will (a) track credits due Buyer's
account in the amount received by Cardinal from each Active Manufacturer during
such month for Buyer returns (or, if not received within sixty (60) days, the
amount anticipated to be received as shown on the debit memo), and (b) adjust
previously made credits to Buyer's account to reflect actual credits authorized
to Cardinal for returned Product, so that a net credit may be determined.
(3) Within five (5) business days after the end of the previous
calendar month, Cardinal will credit Buyer's account with the net amount due
Buyer for all Third Party Returns activities during the previous month, less the
Processing Fee.
With the monthly credit, Cardinal will provide Buyer with a report of all Active
Manufacturer credits and debit memos posted during such month. Cardinal will not
perform a detail line reconciliation of the amounts authorized by Active
Manufacturers as compared to the original debit memo.
Notwithstanding the foregoing, if the applicable Active Manufacturer (a) is in a
debit balance in Cardinal's accounts payable system, or (b) is subject to a
petition in bankruptcy or is deemed insolvent, then no credit will be issued to
Buyer, and the credit will accrue to Cardinal's benefit, until such time as the
Active Manufacturer is no longer in a debit balance, bankruptcy proceeding or
insolvent. In addition, the Third Party will be exclusively responsible for
resolving discrepancies relating to returned Product through such Third Party.
To the extent that Buyer desires to return Product to a supplier which is not an
approved Active Manufacturer, Cardinal will credit Buyer's account only after
Cardinal receives payment either through check, money order or wire transfer. If
check, wire transfer or any other payment method is employed which does not
guarantee Cardinal immediately available funds, Cardinal will credit Buyer's
account only upon receiving such funds in Cardinal's account. Buyer may not
offset payments due from Buyer to Cardinal for Product purchases against any
amounts Buyer deems are due and owing pursuant to this Third Party Returned
Goods Policy.
Cardinal may modify this Third Party Returned Goods Policy in its reasonable
discretion from time to time. The Buyer is to be notified within thirty (30)
days of a modification and such modification is subject to mutual agreement.
3
Exhibit 10.07
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
THIRD AMENDMENT TO
PRIME VENDOR AGREEMENT
THIS THIRD AMENDMENT TO PRIME VENDOR AGREEMENT ("THIRD AMENDMENT") is
among Cardinal Health*, formerly known as Cardinal Distribution, ("CARDINAL"),
and Express Scripts, Inc. ("BUYER").
WHEREAS, Cardinal and Buyer executed a Prime Vendor Agreement, dated
July 1, 2001, executed a First Amendment to Prime Vendor Agreement, dated
January 15, 2003 ("FIRST AMENDMENT"), and a Second Amendment to Prime Vendor
Agreement, dated November 19, 2003 ("SECOND AMENDMENT"), (collectively, the
"AGREEMENT").
WHEREAS, the parties desire to further amend the Agreement as further
set forth herein.
NOW THEREFORE, in consideration of the foregoing recitals, the parties
hereby agree as follows:
1. SECTION 2, SALE OF MERCHANDISE. The following language shall be deleted
in its entirety from the definition of Primary Requirements as set forth in
Section 2, Sale of Merchandise, as amended by the First Amendment: "and
Monthly".
2. SECTION 3, PURCHASE PRICE. The second paragraph of Section 3 shall be
amended to add "[***]" to the definition of [***].
3. SECTION 5, PAYMENT TERMS. Section 5(a)(i), as amended by the First
Amendment, shall be deleted in its entirety and replaced with the following:
"The payment terms applicable to Buyer for all DIRECT STORE DELIVERY
PURCHASES shall be [***] calculated pursuant to either of the options set
forth below. Buyer will notify Cardinal of its desire to switch from one
option to the other no less than thirty (30) days prior to the effective
date of such change, unless otherwise agreed to in writing by Buyer and
Cardinal. In the event a payment due date falls on a Saturday, that payment
due date will become the preceding Friday. In the event a payment due date
falls on a Sunday, that payment due date will become the following Monday.
In the event a due date falls on a Monday holiday, invoices due on Sunday
and Monday will be due on Tuesday. In the event a due date falls on a
Tuesday through Friday holiday, payment will be due the preceding day.
OPTION 1
The payment terms applicable to Buyer for all DIRECT STORE DELIVERY
PURCHASES shall be [***] as follows: Buyer will cause Cardinal to
receive payment in full: (1) by the [***] of each calendar month of
the amount due for all invoiced Merchandise delivered and services
provided during the first (1st) [***] of such calendar month; (2) by
the [***] of each calendar month, of the amount due for all invoiced
Merchandise delivered and services provided during the [***] through
the [***] of such calendar month; and (3) by the [***] of each
calendar month, of the amount due for all invoiced Merchandise
delivered and services provided during the period beginning on the
[***] day of the preceding calendar month and ending on the last day
of such preceding calendar month.
OPTION 2
The payment terms applicable to Buyer for all DIRECT STORE DELIVERY
PURCHASES shall be [***] as follows: Buyer will cause Cardinal to
receive payment in full: (1) by the [***] of each calendar month of
the amount due for all invoiced Merchandise delivered and services
provided from and including the [***] calendar day of each calendar
month through and including the [***] of each calendar month; (2) by
the [***] of each calendar month of the amount due for all invoiced
Merchandise delivered and services provided from and including the
[***] calendar day of each calendar month through and including the
[***] calendar day of each calendar month; (3) by the last Business
Day (as hereinafter defined) of each calendar month of the amount due
for all invoiced Merchandise delivered and services provided from and
including the [***] calendar day of each calendar month through and
including the [***] calendar day of each calendar month; (4) by the
[***] day of each calendar month of the amount due for all invoiced
Merchandise delivered and services provided from and including the
[***] calendar day of each preceding calendar month through and
including the [***] calendar day of each preceding calendar month; (5)
by the [***] day of each calendar month of the amount due for all
invoiced Merchandise delivered and services provided from and
including the [***] of each preceding calendar month through and
including the [***] of the each calendar [***].
For purposes of this Agreement, the term "Business Day" shall be defined as
Monday through Friday, with the exception of the following holidays: New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day."
4. SECTION 5, PAYMENT TERMS. The first sentence of the third paragraph of
Section 5(b) shall be deleted in its entirety and replaced with the following:
"All payments for invoiced Merchandise delivered and services provided by
Cardinal will be made to the applicable servicing division specified in
Cardinal's invoice (or as otherwise specified by Cardinal) by electronic funds
transfer or other method acceptable to Cardinal so as to provide Cardinal with
good funds by the due date; provided, however, if Option 2 (as set forth in
Section 5(a)(i)) is chosen by Buyer, then Buyer will have the option to make the
payment due on the last Business Day of the month via check (instead of
ACH/electronic funds transfer) as long as the check is delivered to Cardinal on
the last Business Day of the month at the address designated by Cardinal for
these payments."
5. SECTION 6, ORDERING AND DELIVERY. The third sentence of Section 6,
Ordering and Delivery, as amended by the First Amendment shall be deleted in its
entirety and replaced with the following:
2
"Pharmacies having Qualified Monthly Purchases in excess of $[***] (except
Pharmacies located outside of the contiguous United States or other
Pharmacies mutually agreed upon by the parties from time to time) will have
two delivery options:
OPTION 1
[***] In addition, Pharmacies may receive [***] deliveries; provided,
however, such deliveries will be at a charge equal to Cardinal's cost for
such delivery.
OPTION 2
[***].
All [***] deliveries will be subject to the order cut-off times at the
applicable servicing distribution center."
5. SECTION 12, SERVICE LEVEL. Section 12, Service Level, as amended by the
First Amendment, shall be further amended as follows: all references to the
average monthly service level on Rx Products (excluding Buyer's Top [***] Items
(as defined in the First Amendment)) shall be changed from [***] percent
([***]%) to [***] percent ([***]%), and all references to the average monthly
service level on Buyer's Top [***] Items shall be changed from [***] percent
([***]%) to [***] percent ([***]%).
6. SECTION 13, RETURNED GOODS POLICY. The second paragraph and items 1-6 of
Section 13 related to the annual inventory clean-ups shall be deleted in their
entirety. The following paragraph shall be added to Section 13 of the Agreement,
as if fully rewritten therein:
"Subject to the requirements of the Cardinal Returns Policy, Buyer may
return Merchandise for up to [***] from the date of purchase for [***]% of
original invoice amount paid by Buyer (i.e., Buyer's contract or other
"cost" plus the applicable mark-up or less the applicable mark down),
provided: (i) [***]; (ii) [***]; (iii) [***]; (iv) [***]; (v) and [***].
After [***] months from the date of purchase, Merchandise may not be
returned; provided, however, this [***] limitation shall not apply for
[***]."
In addition, the following paragraph shall be added to Section 13, as if
fully rewritten therein:
"Unless otherwise notified by the servicing distribution center, returned
goods will be processed within five (5) Business Days of receipt of the
returned goods at the Cardinal distribution center, and credit for those
returned goods will be issued within three (3) Business Days following
processing."
3
7. SECTION 14, TERM. The initial term of the Agreement shall be extended
[***].
8. NEW SECTION 30, GENERIC PURCHASE REQUIREMENT. The following paragraph
shall be added to the Agreement as a new Section 30, titled "Generic Purchase
Requirement":
"During calendar years 2004 and 2005, calculated on a quarterly basis,
Buyer will use commercially reasonable efforts to cause not less than
[***]% of Buyer's total Qualified Purchases from Cardinal to be generic Rx
Products. During calendar year 2006 and the initial six (6) months of
calendar year 2007, calculated on a quarterly basis, Buyer will use
commercially reasonable efforts to cause not less than [***]% of Buyer's
total Qualified Purchases from Cardinal to be generic Rx Products. The
foregoing requirements shall be referred to as the "Generic Purchase
Requirements." To support Buyer's achievement of the Generic Purchase
Requirements, Cardinal will use commercially reasonable efforts to make
generic Rx Products available to Buyer at prices that are equal to or
better than those prices that Buyer can obtain directly from the generic Rx
Product manufacturers. Pricing for Buyer's purchases of generic Rx Products
shall be pursuant to Cardinal's Mail Order Preferred Source program.
If Buyer does not achieve the Generic Purchase Requirements, Cardinal and
Buyer will meet to review Buyer's purchases of generic Rx Products and
develop a strategy to support Buyer's achievement of the Generic Purchase
Requirements during the quarter following the quarter in which the Generic
Purchase Requirements were not met. If, during such following quarter,
Buyer does not achieve the Generic Purchase Requirements, Buyer shall be
considered in breach of the then current agreement between Buyer and
Cardinal, pursuant to Section 14 of this Agreement, and Buyer shall have
[***]([***]) days to cure such breach to the reasonable satisfaction of
Cardinal. In the event that Buyer does not cure such breach within such
[***] ([***]) day period, Cardinal may terminate this Agreement immediately
in accordance with Section 14 hereof."
9. NEW SECTION 31, EDI INITIATIVES. The following sentence shall be added
to the Agreement as a new Section 31, titled "EDI Initiatives":
"Cardinal will support mutually agreed upon Buyer standards, policies and
service level agreements for all existing business-to-business processes
and new initiatives. These processes and initiatives include, but are not
limited to, EDI, VAN, Direct Connect, Collaborative Commerce, and adding
new transactions (e.g., 832). Buyer will work closely with Cardinal to
ensure seamless connectivity and smooth processing of data between the two
parties is achieved."
10. EXHIBIT A, PHARMACIES. The following Pharmacies shall be deleted from
Exhibit A, as amended by the First Amendment:
Express Access Pharmacy, Inc.
dba Express Scripts, Inc.
767 Electronic Drive
Horsham, Pennsylvania 19020
4
Central Fill, Inc.
721 Ridgedale Avenue
East Hanover, New Jersey 07936
11. EXHIBIT B, PRICING MATRIX. Section 1 of Exhibit B, Pricing Matrix, as
amended by the First Amendment, shall be deleted in its entirety and replaced
with Section 1 of Exhibit A attached to this Amendment.
12. EXHIBIT D, DEDICATED RESOURCES. The Dedicated Resource section of
Exhibit D shall be amended to provide [***] Cardinal employees who will be
dedicated to servicing Buyer's account and will act as a liaison between Buyer
and Cardinal in order to enhance Buyer-Cardinal relations. The Cardinal
employees will be based in the St. Louis, Bensalem and Tempe Pharmacies.
13. MISCELLANEOUS. Capitalized terms not defined herein will have the same
meaning ascribed to them in the Agreement, it being the intent of the parties
that the Agreement and this Third Amendment will be applied and construed as a
single instrument. The Agreement, as modified by this Third Amendment,
constitutes the entire agreement between Cardinal and Buyer regarding the
subject matter of the Agreement and this Third Amendment and supersedes all
prior or contemporaneous writings and understandings between the parties
regarding the same. This Third Amendment will be binding upon the parties, their
heirs, legal representatives, successors and assigns. The terms and provisions
of this Third Amendment are severable. If any term or provision of this Third
Amendment is determined to be illegal or unenforceable by a court of competent
jurisdiction, the remaining terms and provisions of this Third Amendment and the
Agreement will remain in full force and effect. This Third Amendment may only be
amended in a writing signed by Cardinal and Buyer.
14. EFFECTIVE DATE. This Third Amendment shall be effective as of January
1, 2004 ("EFFECTIVE DATE"). Except as otherwise amended herein, the terms and
conditions of the Agreement shall remain in full force and effect.
CARDINAL HEALTH* EXPRESS SCRIPTS, INC.
BY: /s/ Mark W. Parrish BY: /s/ Barrett Toan
------------------------------- -----------------------------
NAME: Mark W. Parrish NAME: Barrett Toan
------------------------------- -----------------------------
TITLE: Group President TITLE: CEO
------------------------------- -----------------------------
DATE: 4/9/04 DATE: 3-30-04
------------------------------- -----------------------------
*The term "CARDINAL HEALTH" means the following pharmaceutical distribution
companies including: Cardinal Health 106, Inc. (formerly known as James W. Daly,
Inc.), a Massachusetts corporation (Peabody, Massachusetts); Cardinal Health
103, Inc. (formerly known as Cardinal Southeast, Inc.), a Mississippi
corporation (Madison, Mississippi); Cardinal Health 110, Inc. (formerly known as
Whitmire Distribution Corporation), a Delaware corporation (Folsom, California)
and any other subsidiary of Cardinal Health, Inc., an Ohio corporation ("CHI"),
as may be designated by CHI.
5
EXHIBIT A
1. [***] The [***] has been established based upon [***]:
(a) [***] (as defined in Section 2 of this Agreement) and Generic Purchase
Requirements (as defined in Section 8 of the Third Amendment) [***];
(b) [***] Dollars ($[***]).
(collectively referred to herein as the "[***]"). If, for any reason, [***]
Dollars ($[***]) [***]%. [***], beginning on the Commencement Date of this
Agreement.
Subject to the [***] of this Agreement regarding [***] (that is [***]
or subject to a Manufacturer Contract) for [***]:
Buyer's pricing will be reviewed on a [***] basis and any [***] based
on [***] during such [***]; provided, however, that such [***]. [***] of the
[***]. In all instances, [***]. For example, [***].
The pricing set forth above [***] (as hereinafter defined) [***]. [***]
that include, but are not limited to, [***]. In the event that [***] during the
term of this Agreement [***], or in the event the [***], then [***]. In such
event, [***]. If the [***]; provided, however, [***] to [***] shall be the
pricing in effect as of the date of the notice to Buyer hereunder.
ANNUAL DISCOUNT. Within seven (7) calendar days of January 1, 2004, 2005 and
2006, provided Buyer is in compliance with the terms and conditions of this
Agreement, Buyer will be eligible to receive a discount in an amount equal to
[***] Dollars ($[***]) to be applied to Buyer's purchases of Merchandise under
this Agreement during such month. The discount will be provided in the form of a
credit memo. This discount constitutes a "discount or other reduction in price,"
as such terms are defined under the Medicare/Medicaid Anti-Kickback Statute, on
the Merchandise purchased by Buyer under the terms of this Agreement. Cardinal
and Buyer agree to use their best efforts to comply with any and all
requirements imposed on sellers and buyers, respectively, under 42 U.S.C.
Section 1320a-7b(b)(3)(A) and the "safe harbor" regulations regarding discounts
or other reductions in price set forth in 42 C.F.R. Section 1001.952(h). In this
regard, Buyer may have an obligation to accurately report, as may be required,
under any state or federal program which provides cost or charge based
reimbursement for the products or services covered by this Agreement, or as
otherwise requested or required by any governmental agency, the net cost
actually paid by Buyer.
7
Exhibit 10.24
SECOND AMENDMENT
TO THE
CARDINAL HEALTH, INC.
DEFERRED COMPENSATION PLAN
(As amended and restated January 1, 2002)
BACKGROUND INFORMATION
A. Cardinal Health, Inc. ("Cardinal Health") established and maintains
the Cardinal Health, Inc. Deferred Compensation Plan (the "Shadow
Plan") for the benefit of selected highly compensated and management
employees and their beneficiaries.
B. The Cardinal Health, Inc. Employee Benefits Policy Committee (the
"Policy Committee") oversees the administration of the Shadow Plan
and is authorized to amend the Shadow Plan.
C. The Policy Committee desires to amend the Shadow Plan to restrict
dividend reinvestments in the Cardinal Stock Account of Reporting
Persons who had established such Accounts prior to their becoming
Reporting Persons and make other changes with respect to Reporting
Persons' Accounts under the Shadow Plan.
D. Section 7.1 of the Shadow Plan permits the amendment of the Shadow
Plan at any time.
AMENDMENT OF THE SHADOW PLAN
1. The fifth sentence of the first paragraph of Section 3.6 of the Shadow Plan
shall be replaced by the following sentences:
In no event shall a Participant who is a Reporting Person be
permitted to change any amounts invested in any other investment
alternative to a Cardinal Stock Account. In addition, a Participant who is
a Reporting Person shall not be permitted to change any investment in a
Cardinal Stock Account (as defined below) to any other investment
alternative, except that a Participant who becomes a Reporting Person
after commencing participation in the Shadow Plan and who has an
investment in a Cardinal Stock Account may make a one-time election to
direct all or a portion of the investment in a Cardinal Stock Account into
an alternate investment option available under the Plan. A Participant who
ceases to be a Reporting Person may again change investments into or out
of a Cardinal Stock Account without regard to the above restrictions.
2. The first paragraph of Section 3.7 of the Shadow Plan shall be amended to add
the following sentences to the end thereof:
A Participant who ceases to be a Reporting Person may again elect to
invest future contributions in his Account in Shares subject to this
Section 3.7.
3. The third paragraph of Section 3.7 of the Shadow Plan shall be amended to
read as follows:
In the case of the Cardinal Stock Account (if any) of a Participant
other than a Reporting Person (as of the Dividend Payment Date), the
earnings (or losses) credited to such
account shall consist solely of dividend equivalent credits pursuant to
this paragraph. Whenever a dividend or other distribution is made with
respect to the Shares, then the Cardinal Stock Account of a Participant
who is not a Reporting Person (as of the Dividend Payment Date) shall be
credited, on the payment date for such dividend or other distribution (the
"Dividend Payment Date"), with a number of additional Shares having a
Value, as of the Dividend Payment Date, based upon the number of Shares
deemed to be held in the Participant's Cardinal Stock Account as of the
record date for such dividend or other distribution (the "Dividend Record
Date"), if such Shares were outstanding. If such dividend or other
distribution is in the form of cash, the number of Shares so credited
shall be a number of Shares (and fractions thereof) having a Value, as of
the Dividend Payment Date, equal to the amount of cash that would have
been distributed with respect to the Shares deemed to be held in the
Participant's Cardinal Stock Account as of the Dividend Record Date, if
such Shares were outstanding. If such dividend or other distribution is in
the form of Shares, the number of Shares so credited shall equal the
number of such Shares (and fractions thereof) that would have been
distributed with respect to the Shares deemed to be held in the
Participant's Cardinal Stock Account as of the Dividend Record Date, if
such Shares were outstanding. If such dividend or other distribution is in
the form of property other than cash or Shares, the number of Shares so
credited shall be a number of Shares (and fractions thereof) having a
Value, as of the Dividend Payment Date, equal to the value of the property
that would have been distributed with respect to the Shares deemed to be
held in the Participant's Cardinal Stock Account as of the Dividend Record
Date, if such Shares were outstanding. The value of such property shall be
its fair market value as of the Dividend Payment Date, determined by the
Board based upon market trading if available and otherwise based upon such
factors as the Board deems appropriate.
With respect to a Participant who is a Reporting Person on the
Dividend Payment Date, the cash value of the dividend or other
distribution shall be invested in an alternate investment option under the
Plan, as determined by the Committee in its sole discretion. To the extent
that the dividend or other distribution is made in a form other than cash,
the Shares or other property shall be liquidated to cash as soon as
administratively practicable and thereafter invested as indicated herein.
4. All other provisions of the Shadow Plan shall remain in full force and
effect.
CARDINAL HEALTH, INC.
By: /s/ Susan Nelson
----------------------------------------
Susan Nelson, Vice President, Benefits
Date: 5/25/04
Exhibit 10.25
CARDINAL HEALTH, INC.
DIRECTORS DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED EFFECTIVE MAY 1, 2004
CARDINAL HEALTH, INC.
DIRECTORS DEFERRED COMPENSATION PLAN
(THE "PLAN")
I
PURPOSE
Cardinal Health, Inc. and its affiliates (collectively, the "Company") is
willing to provide nonemployee members of its Board of Directors (the "Board")
with the opportunity to defer the payment of their Board fees for retirement
savings purposes. The Company's goal is to retain and reward its Board members
by helping them to accumulate benefits for a comfortable retirement. The Plan
was originally effective as of January 1, 2000.
II
ELIGIBILITY
All members of the Board are eligible to participate in the Plan. If you
elect to participate in the Plan, you will sign a Directors Deferred
Compensation Agreement which details the requirements you must satisfy to be
eligible to receive this supplemental retirement benefit from the Company.
III
DEFERRED COMPENSATION ACCUMULATIONS
A. UNFUNDED NATURE OF PLAN
The Plan is considered to be an "unfunded" arrangement as amounts
generally will not be set aside or held by the Company in a trust, escrow, or
similar account or fiduciary relationship on your behalf. Each participant's
rights to benefits under the Plan are equivalent to the rights of any unsecured
general creditor of the Company. However, the Company may open accounts with one
or more investment companies selected by the Chairman, in his discretion, and
may invest funds subject to this Plan in those investment companies. The Company
also may establish a deferred compensation trust (rabbi or otherwise) in
connection with the Plan. Each participant may be permitted to direct how the
portion of the Company's funds allocable to him or her is invested from among
the available alternatives, if such investment accounts are established. The
Company currently expects any such alternatives to be similar to those available
under its tax-qualified retirement plan for employees, but is not obligated to
make these or any other particular investment options available. If a
participant is permitted to direct how the portion of the Company's funds
allocable to him or her is invested among the available alternatives, the
participant may be permitted to change such direction from time to time;
provided, however, that in no event shall a participant who is a current Board
member or who has been a Board member during the last six (6) months be
permitted to change any investment in a Cardinal Stock Account (as defined
below) to any other investment alternative or change any investment in any other
investment alternative to a Cardinal Stock Account, except, in either case, as
to future director's fees to be earned as provided below under the heading
"Election to Defer into Common Shares". After a participant's board membership
has been terminated for at least six (6) months, a participant may elect to
change his or her investment in a Cardinal Stock Account to any other investment
alternative or change
1
his or her investment in any other investment alternative to a Cardinal Stock
Account without regard to the restrictions set forth in the preceding sentence.
All investments shall at all times continue to be a part of the Company's
general assets.
B. ACCUMULATIONS
To measure the amount of the Company's obligations to a participant in
this Plan, the Company will maintain a bookkeeping record or account of each
participant's "Accumulations".
You may elect (within 30 days of when you first become eligible to
participate in the Plan for your initial calendar year of participation or, for
subsequent calendar years, not later than the December 31 prior to each such
year) to defer payment of a portion or all of your director's fees to be earned
during the balance of the current or next calendar year, as applicable, as a
credit to your Accumulations. Once made, any such election (including without
limitation the percentage of director's fees to be deferred) shall be
irrevocable for all director's fees earned during the calendar year for which
the election is made. If you desire, your election can continue in effect from
year to year until you change it, but any change will be effective only as of
the January 1 of the calendar year following the calendar year in which you
change your election. The minimum amount you may defer is 20% and the maximum is
100% of all fees expected to be paid to you as a director of the Company.
C. ELECTION TO DEFER INTO COMMON SHARES
Subject to the provisions of this Article III, whenever you make a
deferral election pursuant to the preceding paragraph, you may also elect to
have all or a portion of the deferred fees to be deemed invested in common
shares, without par value ("Common Shares"), of the Company (such deferred fees,
the "Share Election Fees"). On the date when your Share Election Fees would
otherwise be payable to you (if you had not elected to defer such payment) (the
"Payment Date"), the Company will credit to a separate account (your "Cardinal
Stock Account") a number of hypothetical Common Shares (and fractions thereof)
having a Value equal to the Share Election Fees. For purposes of this Plan, the
"Value" of a Common Share on a particular day shall mean the closing price of a
Common Share on the New York Stock Exchange on that day (or, if there is no
trading of the Common Shares on that day, on the most recent previous date on
which trading occurred). Any election made pursuant to this paragraph shall be
irrevocable for all director's fees earned during the calendar year for which
the election is made. Any election made pursuant to this paragraph shall remain
in effect for fees payable in subsequent calendar years unless you deliver a
written notice to the Secretary of the Company setting forth a different
deferral election, which shall be applied to future calendar years until further
written notice is received by the Secretary of the Company pursuant to this
section. Notwithstanding the foregoing, if any deferral election into Common
Shares would make a transaction between the Company and any other entity
ineligible for pooling-of-interests accounting under APB No. 16 that but for the
nature of such deferral would otherwise be eligible for such accounting
treatment, such deferral election shall be treated as a deferral election into
the other available funds pro-rata.
If any recapitalization, reorganization, reclassification, consolidation,
merger of Cardinal Health, Inc. ("Cardinal") or the Company or any sale of all
or substantially all of Cardinal's or the Company's assets to another person or
entity or other transaction which is effected in such a way that holders of
Common Shares are entitled to receive (either directly or upon subsequent
liquidation) stock, securities, or assets with respect to or in exchange for
Common Shares (each an "Organic Change") shall occur, then your Cardinal Stock
Account (if any) shall be adjusted so as to contain such shares of stock,
securities or assets (including cash) as would have been issued or payable with
respect to or in exchange for the number of Common Shares credited thereto
immediately before such Organic Change, if such
2
Common Shares had been outstanding. If the assets held in your Cardinal Stock
Account immediately after such adjustment are not equity securities, then you
shall be permitted to re-direct the investment thereof into the other investment
choices then available under this Plan.
D. EARNINGS (OR LOSSES)
At least once each calendar year while you have a credit balance in your
Accumulations, the Company will credit your Accumulations with earnings (or
losses), if any, for the period since the last such crediting and determine the
value of your Accumulations at that time. The earnings (or losses) shall be
credited on the basis of the earnings (or losses) allocable to your directed
investments. The Company also reserves the right to adjust the earnings (or
losses) credited to your Accumulations and to determine the value of your
Accumulations as of any date by adjusting such earnings (or losses) or such fair
market value for the Company's tax and other costs of providing this Plan.
In the case of your Cardinal Stock Account (if any), the earnings (or
losses) credited to such account shall consist solely of dividend equivalent
credits pursuant to this paragraph. Whenever a dividend or other distribution is
made with respect to the Common Shares, then the cash value of such dividend or
other distribution shall be credited, on the payment date for such dividend or
other distribution (the "Dividend Payment Date"), to an alternative investment
option under the Plan, as determined by the Committee in its sole discretion.
Such cash value shall be based upon the number of Common Shares deemed to be
held in your Cardinal Stock Account as of the record date for such dividend or
other distribution (the "Dividend Record Date"), if such Common Shares were
outstanding. If such dividend or other distribution is in the form of cash, the
cash value so credited shall be equal to the amount of cash that would have been
distributed with respect to the Common Shares deemed to be held in your Cardinal
Stock Account as of the Dividend Record Date, if such Common Shares were
outstanding. If such dividend or other distribution is in the form of Common
Shares, the cash value so credited shall be equal to the value, as of the
Dividend Payment Date, of the number of such Common Shares (and fractions
thereof) that would have been distributed with respect to the Common Shares
deemed to be held in your Cardinal Stock Account as of the Dividend Record Date,
if such Common Shares were outstanding. If such dividend or other distribution
is in the form of property other than cash or Common Shares, the cash value so
credited shall be equal to the value, as of the Dividend Payment Date, of the
property that would have been distributed with respect to the Common Shares
deemed to be held in your Cardinal Stock Account as of the Dividend Record Date,
if such Common Shares were outstanding. The value of such property shall be its
fair market value as of the Dividend Payment Date, determined by the Board based
upon market trading if available and otherwise based upon such factors as the
Board deems appropriate.
Under the federal income tax rules in effect as of the adoption of this
Plan, the amounts credited to your Accumulations, including earnings, will not
be taxable income to you in the year they are credited to your account. You, or
your beneficiaries in the event of your death, will generally be taxed on these
amounts and the credited earnings only if and when benefits are actually paid to
you or your beneficiaries.
3
IV
BENEFITS
A. VESTING
All contributions to the Plan will always be 100% "vested". This means you
will always be entitled to receive benefits from your Accumulations.
B. PAYMENT OF BENEFITS
1. RETIREMENT BENEFITS. You will be eligible to receive retirement
benefits under the Plan upon your retirement from the Board after
attaining age 65. Retirement benefits will generally be paid as an
annual benefit payable for 10 years. The amount of your benefit will
equal the amount necessary to amortize your total Accumulations over
the 10-year period. The amount payable each year will either be
based on an approximately equal amortization of principal plus
actual earnings (or less actual losses) or an amortization based on
an assumed interest rate declared by the Company from time to time
during the period of distribution. You must give the Company at
least 30 days advance written notice of your intention to retire and
receive retirement benefits. Actual benefit payments will begin on
the first day of the second month following your satisfaction of all
requirements for payment.
2. DISABILITY BENEFITS. If you become totally disabled before
satisfying the requirements for retirement benefits, you will be
eligible to receive payment of the amounts credited to your
Accumulations as an annual benefit payable for 10 years. The amount
of the benefit will be determined in the same manner as retirement
benefits. For this purpose, "total disability" means a physical or
mental condition which totally and presumably permanently prevents
you from engaging in your usual occupation or any occupation for
which you are qualified by reason of training, education, or
experience. It is up to the Company to determine whether you qualify
as being totally disabled and the Company may require you to submit
to periodic medical examinations to confirm that you are, and
continue to be, totally disabled. If your disability ends, your
disability benefit payments will stop. However, you could continue
to qualify for benefits under another provision of the Plan.
3. DEATH BENEFITS. In the event of your death while receiving benefit
payments under the Plan, the Company will pay the beneficiary or
beneficiaries designated by you any remaining payments due under the
terms of your Deferred Compensation Agreement, using the same method
of distribution in effect to you at the date of your death. In the
event of death prior to beginning to receive benefits under the
Deferred Compensation Agreement, the Company will pay benefits to
your beneficiary or beneficiaries, beginning as soon as practicable
after your death. In this case, benefits will generally be paid as
an annual benefit payable for 10 years computed in the same manner
as retirement benefits. The Company will provide you with the form
for designating your beneficiary or beneficiaries. If you fail to
make a beneficiary designation, or if your designated beneficiary
predeceases you or cannot be located, any death benefits will be
paid to your estate.
4
4. OTHER TERMINATION OF BOARD MEMBERSHIP. If your membership on the
Board terminates for any reason other than retirement, death, or
total disability, then your Accumulations will be paid to you as an
annual benefit payable for 10 years computed in the same manner as
retirement benefits, beginning as soon as administratively
practicable after your term of office ends.
5. PAYMENT ALTERNATIVES. At the Company's election, or upon your
request, benefits may be paid in a lump sum or over a shorter or
longer period of time than the 10 years generally called for, as
described above. However, no request by you or your beneficiaries
for a different payment method will be binding on the Company, and
any accelerated or deferred payment of benefits shall be made only
in the sole discretion of the Company. In addition, the Company may
alter the payment method in effect from time to time in its
discretion. If the payment method is altered, the amount you or your
beneficiaries will receive will be computed under one of the
alternative methods for determining payment amounts provided for
under the normal form of distribution for your Accumulations,
determined by the Company in its discretion.
6. CHANGE IN CONTROL. If a Change in Control occurs, and your
membership on the Board terminates within the 2-year period
immediately following a Change in Control, then you shall be
entitled to receive your Accumulations in a single lump sum within
30 days of your termination of office, notwithstanding any other
provision of this Plan or your Directors Deferred Compensation
Agreement. Also, following a Change in Control, the Company's
discretion to alter the payment methodology (described in Subsection
5, above) is limited to accelerating your benefits; the Company
cannot, after a Change in Control, defer the commencement of
payments or extend the period of distribution beyond the normal
periods described in the preceding Subsections.
For purposes of the Plan, a "Change of Control" means: (i) the
acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act") (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of twenty-five percent (25%) or more of either (A) the then
outstanding Shares of the Company (the "Outstanding Shares") or (B)
the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (I) any acquisition
directly from the Company or any corporation controlled by the
Company, (II) any acquisition by the Company or any corporation
controlled by the Company, (III) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (IV) any
acquisition by any corporation that is a Non-Control Acquisition (as
defined in Subsection (iii) of this Section); or (ii) individuals
who, as of the Effective Date of this Plan, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual
becoming a director subsequent to the Effective Date whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened
5
solicitation of proxies or consents by or on behalf of a Person
other than the Board; or (iii) consummation of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition by
the Company of assets or shares of another corporation (a "Business
Combination"), unless, such Business Combination is a Non-Control
Acquisition. A "Non-Control Acquisition" shall mean a Business
Combination where: (A) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Shares and Outstanding Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns
the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership immediately
prior to such Business Combination of the Outstanding Shares and
Outstanding Voting Securities, as the case may be, (B) no Person
(excluding any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, twenty-five
percent (25%) or more of, respectively, the then outstanding shares
of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination (including any
ownership that existed in the Company or the company being acquired,
if any) and (C) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or (iv) approval by the
shareholders of the Company of a complete liquidation or dissolution
of the Company.
V
MISCELLANEOUS PROVISIONS
A. NO RIGHT TO COMPANY ASSETS
As explained previously, this Plan is an unfunded arrangement and the
agreement you will enter into with the Company does not create a trust of any
kind or a fiduciary relationship between the Company and you, your designated
beneficiaries or any other person. To the extent you, your designated
beneficiaries, or any other person acquires a right to receive payments from the
Company under this Plan or your Directors Deferred Compensation Agreement, that
right is no greater than the right of any unsecured general creditor of the
Company.
6
B. GENERAL RESTRICTIONS
Notwithstanding any other provision of this Plan or any Directors Deferred
Compensation Agreement, the Company shall not be required to issue or deliver
any certificate or certificates for Common Shares under this Plan prior to
fulfillment of all of the following conditions:
(i) Listing or approval for listing upon official notice of issuance of
such shares on the New York Stock Exchange, Inc., or such other
securities exchange as may at the time be a market for the Common
Shares;
(ii) Any registration or other qualification of such shares under any
state or federal law or regulation, or the maintaining in effect of
any such registration or other qualification which the Chairman
shall, in his absolute discretion upon the advice of counsel, deem
necessary or advisable; and
(iii) Obtaining any other consent, approval, or permit from any state or
federal governmental agency which the Chairman shall, in his
absolute discretion after receiving the advise of counsel, determine
to be necessary or advisable.
Nothing contained in this Plan shall prevent the Company from adopting
other or additional compensation arrangements for the participants.
C. COMMON SHARES AVAILABLE
The maximum aggregate number of Common Shares which may be credited to
Cardinal Stock Accounts pursuant to this Plan is 60,000. Common Shares issuable
under the Plan may be taken from authorized but unissued shares, treasury
shares, shares held in a trust for purposes of the Plan, or purchased on the
open market. No single participant may acquire under the Plan more than 30,000
Common Shares.
In the event of any stock dividend, stock split, share combination,
corporate separation or division (including, but not limited to, split-up,
spin-off, split-off or distribution to Cardinal's shareholders other than a
normal cash dividend), or partial or complete liquidation, or any other
corporate transaction or event having any effect similar to any of the
foregoing, then the aggregate number of Common Shares reserved for issuance
under the Plan shall be appropriately substituted for new shares or adjusted, as
determined by the Compensation and Personnel Subcommittee in its sole
discretion.
D. MODIFICATION OR REVOCATION
Your Directors Deferred Compensation Agreement will continue in effect
until revoked, terminated, or all benefits are paid. However, the Directors
Deferred Compensation Agreement and this Plan may be amended or revoked at any
time, in whole or in part, by the Company in its sole discretion. Unless you
agree otherwise, you will still be entitled to the benefit, if any, that you
have earned through the date of any amendment or revocation. Such benefits will
be payable at the times and in the amounts provided for in the Directors
Deferred Compensation Agreement, or the Company may elect to accelerate
distribution and immediately pay all amounts due.
7
E. RIGHTS PRESERVED
Nothing in the Directors Deferred Compensation Agreement or this Plan
gives any director the right to continue to hold such office. The relationship
between you and the Company shall continue to be determined by the applicable
provisions of the governing documents of the Company and by applicable law.
F. CONTROLLING DOCUMENTS
This is merely a summary of the key provisions of the Directors Deferred
Compensation Agreement currently in use by the Company. In the event of any
conflict between the provisions of this Plan and the Directors Deferred
Compensation Agreement, the Directors Deferred Compensation Agreement shall in
all cases control.
8
Exhibit 10.26
CARDINAL HEALTH, INC.
GLOBAL EMPLOYEE STOCK PURCHASE PLAN
SECTION 1 - PURPOSE
The Cardinal Health, Inc. Employee Stock Purchase Plan is adopted
and established by Cardinal Health, Inc., an Ohio corporation, on the date set
forth below, effective as of July 1, 2000, for the general benefit of the
Employees of the Company and of certain of its Subsidiaries. The purpose of the
Plan is to facilitate the purchase of Shares by Eligible Employees.
SECTION 2 - DEFINITIONS
a. "ACT" shall mean the Securities Act of 1933, as amended.
b. "ADMINISTRATOR" shall mean the Board of Directors of the Company, a
designated committee thereof, or the person(s) or entity delegated the
responsibility of administering the Plan, which initially shall be the
Cardinal Health, Inc. Profit Sharing and Retirement Savings Plan
Committee.
c. "AGENT" shall mean the bank, brokerage firm, financial institution, or
other entity or person(s) engaged, retained or appointed to act as the
agent of the Employer and of the Participants under the Plan, which
initially shall be Merrill Lynch, Pierce, Fenner, & Smith, Inc.
d. "BOARD" shall mean the Board of Directors of the Company.
e. "CLOSING VALUE" shall mean, as of a particular date, the value of a Share
determined by the closing sales price for such Share (or the closing bid,
if no sales were reported) as quoted on The New York Stock Exchange for
the last market trading day prior to the date of determination, as
reported in The Wall Street Journal or such other source as the
Administrator deems reliable.
f. "CODE" shall mean the Internal Revenue Code of 1986, as amended and
currently in effect, or any successor body of federal tax law.
g. "COMPANY" shall mean Cardinal Health, Inc., including any successor
thereto.
h. "COMPENSATION", unless otherwise required by local law, shall mean wages,
salaries, fees for professional services and other amounts received for
personal services actually rendered in the course of employment with the
Employer (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips and bonuses) including amounts
excludible from the Employee's gross income under Code Section 402(a)(8)
(relating to a Code Section 401(k) arrangement), Code Section 402(h)
(relating to a Simplified Employee Pension), Code Section 125 (relating to
a cafeteria plan) or Code Section 403(b) (relating to a tax-sheltered
annuity) and compensation paid by the Employer to an Employee through
another person under the common paymaster provisions of Code Sections
3121(s) and 3306(p) or under applicable savings or pension plans of
Employer of the Employee. Compensation does not include, unless otherwise
required by local law: (1) amounts realized from the exercise or sale of a
non-qualified stock option, or (2) amounts realized when restricted stock
(or property) held by an Employee either becomes freely transferable or is
no longer subject to a substantial risk of forfeiture or becomes fully
owned by the Employee, or (3) amounts realized from the exercise, sale,
exchange, or other disposition of stock acquired under a qualified or
incentive stock option, (4) moving allowances, automobile allowances,
tuition reimbursement, financial/tax planning reimbursement, lunch
vouchers, house allowances, and other allowances that receive special tax
benefits,
Page 1
other extraordinary compensation, including tax "gross-up" payments, and
imputed income from other employer-provided benefits, and (5) other
amounts that receive special tax benefits, such as premiums for group term
life insurance or contributions made by the Employer (whether or not under
salary reduction agreement) or mandatory payments made by the Employer to
the Employee under the applicable law of the jurisdiction in which the
Employer of this Employee is located or the Employee is employed or
resides.
i. "DESIGNATED SUBSIDIARIES" shall mean all Subsidiaries whose Employees have
been designated by the Administrator, in its sole discretion, as eligible
to participate in the Plan.
j. "ELIGIBLE EMPLOYEE" shall mean an Employee of the Designated Subsidiary
who is designated to participate in the Plan at the sole discretion of the
Designated Subsidiary; provided, however, that such discretion shall not
be exercised in violation of the applicable labor or other laws relating
to discrimination based on gender, race, disability, age, national or
social origin, political opinion, union membership or religious belief, or
collective bargaining or other negotiated agreements.
k. "EMPLOYEE" shall mean individual who is a regular full time or part time
Employee of the Employer for at least 30 days. An Employee may work either
full time or part time work schedule and is normally included in the
authorized staffing target and budget. Employee also includes the Employee
who has been hired on a temporary contract but who is expected to fill a
permanent staffing need and who is classified as a "PRN" or "on-call
Employee". The Employee shall not include unionized Employee as defined by
the regular practices of the Employer participating in the Plan to the
extent permissible under local law.
l. "EMPLOYER" means, individually and collectively, the Company and the
Designated Subsidiaries.
m. "ENROLLMENT PERIOD" shall mean the period immediately preceding the
Offering Period that is designated by the Administrator in its discretion
as the period during which an Eligible Employee may elect to participate
in the Plan.
n. "OFFERING PERIOD" shall mean the period during which Participants in the
Plan authorize payroll deductions or provide alternative contributions to
fund the purchase of Shares on their behalf under the Plan pursuant to the
options granted to them hereunder or the period during which participants
in the Plan provide alternative contributions. Alternative contributions
for the purpose of this Plan shall mean payment of contributions through
personal checks of the Participants or such other means of contributing to
the Plan as authorized by the Administrator.
o. "PARTICIPANT" shall mean any Eligible Employee who has elected to
participate in the Plan for an Offering Period by authorizing payroll
deductions or by making alternative contributions and following all
applicable procedures established by the Administrator during the
Enrollment Period for such Offering Period.
p. "PLAN" shall mean this Cardinal Health, Inc. Global Employee Stock
Purchase Plan as amended from time to time.
q. "PLAN ACCOUNT" shall mean the individual account established for each
Participant for purposes of accounting for and/or holding each
Participant's payroll deductions, alternative contributions, Shares, etc.
r. "PLAN YEAR" shall mean the fiscal year of the Company.
s. "PURCHASE PRICE" shall mean, for each Share purchased in accordance with
Section 4 hereof, an amount equal to the lesser of (1) eighty-five percent
(85%) of the Closing Value of a Share on the first Trading Day of each
Offering Period (which for Plan purposes shall be deemed to be the date
the option to purchase such Shares was granted to each Eligible Employee
who is, or elects to become, a Participant); or (2) eighty-five percent
(85%) of the Closing Value of such Share on the last Trading Day of the
Offering Period (which for Plan purposes shall be deemed to be the date
each such option to purchase such Shares was exercised).
Page 2
t. "SHARES" means the Class A common shares, without par value, of the
Company.
u. "SUBSIDIARY" shall mean a corporation or other entity, domestic or
foreign, of which not less than fifty percent (50%) of the voting shares
are held by the Company or a Subsidiary (except for the U.K. in which this
term shall mean a corporation or other entity, domestic or foreign, of
which more than fifty percent (50%) ownership of the voting shares are
held by the Company or a Subsidiary) whether or not such corporation or
other entity now exists or is hereafter organized or acquired by the
Company or a Subsidiary (or as otherwise may be defined in Code Section
424).
v. "TRADING DAY" shall mean a day on which The New York Stock Exchange is
open for trading.
SECTION 3 - ELIGIBLE EMPLOYEES
a. In General. Participation in the Plan is voluntary. All
Eligible Employees of an Employer are eligible to participate in the Plan. All
Eligible Employees granted options to purchase Shares hereunder shall have the
same rights and privileges as every other such Eligible Employee, and only
Eligible Employees of an Employer satisfying the applicable requirements of the
Plan will be entitled to be granted options hereunder.
b. Limitations on Rights. An Employee who otherwise is an
Eligible Employee shall not be entitled to purchase Shares under the Plan if
such purchase would cause such Eligible Employee to own Shares (including any
Shares which would be owned if such Eligible Employee purchased all of the
Shares made available for purchase by such Eligible Employee under all options
or rights then held by such Eligible Employee, whether or not then exercisable)
representing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or any Subsidiary.
SECTION 4 - ENROLLMENT AND OFFERING PERIODS
a. Enrolling in the Plan. To participate in the Plan, an Eligible
Employee must enroll in the Plan. Enrollment for a given Offering Period will
take place during the Enrollment Period for such Offering Period. The
Administrator shall designate the initial Enrollment Period and each subsequent
Enrollment Period and the Offering Period to which each Enrollment Period
relates. Participation in the Plan with respect to any one or more of the
Offering Periods shall neither limit nor require participation in the Plan for
any other Offering Period.
b. The Offering Period. Any Employee who is an Eligible Employee
and who desires to be granted options to purchase Shares hereunder must enroll
in accordance with the procedures established by the Administrator during an
Enrollment Period. Such authorization shall be effective for the Offering Period
immediately following such Enrollment Period. The duration of an Offering Period
shall be determined by the Administrator prior to the Enrollment Period and
shall commence on the first day (or the first Trading Day) of the Offering
Period and end on the last day (or the last Trading Day) of the Offering Period;
provided, however, that if the Administrator terminates the Plan during an
Offering Period, pursuant to its authority in Section 17 of the Plan, such
Offering Period shall be deemed to end on the date the Plan is terminated. The
termination of the Plan and the Offering Period shall end the Participant's
rights to contribute amounts to the Plan or continue participation in the
Offering Period. The date of termination of the Plan shall be deemed to be the
final day of the Offering Period for purposes of determining the Purchase Price
under the Offering Period and all amounts contributed during the Offering Period
will be used as of such termination date to purchase Shares in accordance with
the provisions of Section 9 of this Plan.
The Administrator may designate one or more Offering Periods during
each Plan Year during the term of this Plan. On the first day (or the First
Trading Day) of each Offering Period, each Participant shall be granted an
option to purchase Shares under the Plan. Each option granted hereunder shall
expire at the end of the Offering Period for which it was granted. In no event
may an option granted hereunder be exercised after the expiration of 27 months
from the date of grant.
Page 3
c. Changing Enrollment. The offering of Shares pursuant to
options granted under the Plan shall occur only during an Offering Period and
shall be made only to Participants. Once an Eligible Employee is enrolled in the
Plan, the Administrator or Employer will inform the Agent of such fact. Once
enrolled, a Participant shall continue to participate in the Plan for each
successive Offering Period (s) until he or she terminates his or her
participation by revoking his or her payroll deduction authorization or by
revoking his or her alternative contribution authorization or not contributing
his or her alternative contributions or ceases to be an Eligible Employee. Once
a Participant has elected to participate under the Plan, that Participant's
payroll deduction authorization or alternative contribution authorization shall
apply to all subsequent Offering Periods unless and until the Participant ceases
to be an Eligible Employee, or modifies or terminates said authorization. If a
Participant desires to change his or her rate of contribution, he or she may do
so effective for the next Offering Period by following the procedures
established by the Administrator during the Enrollment Period immediately
preceding such Offering Period.
SECTION 5 - TERM OF PLAN
This Plan shall be in effect from July 1, 2000, until it is
terminated by action of the Board.
SECTION 6 - NUMBER OF SHARES TO BE MADE AVAILABLE
Subject to adjustment as provided in Section 16 hereof, the total
number of Shares made available for purchase by Participants granted options
which are exercised under Section 9 hereof is 3 million, which may consist of
authorized but unissued shares, treasury shares, or shares purchased by the Plan
in the open market. The provisions of Section 9 b. shall control in the event
the number of Shares covered by options which are exercised for any Offering
Period exceeds the number of Shares available for sale under the Plan. If all of
the Shares authorized for sale under the Plan have been sold, the Plan shall
either be continued through additional authorizations of Shares made by the
Board (such authorizations must, however, comply with Section 17 hereof), or
shall be terminated in accordance with Section 17 hereof.
SECTION 7 - USE OF FUNDS
All payroll deductions or alternative contributions received or held
by an Employer under the Plan will be used to purchase Shares in accordance with
the provisions of this Plan. Any amounts held by an Employer or other party
holding amounts in connection with or as a result of payroll withholding or
alternative contribution made pursuant to the Plan and pending the purchase of
Shares hereunder shall be considered a non-interest-bearing, unsecured
indebtedness extended to the Employer or other party by the Participants, unless
otherwise required under applicable local law or securities regulatory body
requirements of the country in which the Employer of the Employee is located or
the Employee is employed or resides, as the case may be. Administrative expenses
of the Plan shall be allocated to each Participant's Plan Account unless such
expenses are paid by the Employer.
SECTION 8 - AMOUNT OF CONTRIBUTION; METHOD OF PAYMENT
a. Payroll Withholding or Payroll Deduction or Alternative
Contributions. Except as otherwise specifically provided herein, the Purchase
Price will be payable by each Participant by means of payroll withholding. The
withholding or alternative contributions shall be in increments of one percent
(1%). Unless otherwise authorized by the Administrator, the minimum withholding
or alternative contributions permitted shall be an amount equal to one percent
(1%) of a Participant's Compensation and the maximum withholding or alternative
contributions shall be an amount equal to fifteen percent (15%) of a
Participant's Compensation. In any event, the total withholding or alternative
contributions permitted to be made by any Participant for a calendar year shall
be limited to the sum of legal currency equivalent of U.S. $21,250. The actual
percentage of Compensation to be deducted or contributed shall be specified by a
Participant in his or her authorization to participate in the Plan. Unless
otherwise authorized by the Administrator, Participants may not deposit any
separate cash payments into their Plan Accounts.
b. Application of Withholding Rules. Payroll withholding will
commence with the first payroll issued during the Offering Period and will,
except as otherwise provided herein, continue with each payroll
Page 4
throughout the entire Offering Period, except for pay periods for which such
Participant receives no compensation (e.g., uncompensated personal leave, leave
of absence). A pay period which ends at such time that it is administratively
impracticable to credit any payroll for such pay period to the then-current
Offering Period will be credited in its entirety to the immediately subsequent
Offering Period. A pay period which overlaps Offering Periods will be credited
in its entirety to the Offering Period in which it is paid. Alternative
contributions will be made in accordance with the procedure established by the
Administrator. Payroll withholding or alternative contributions shall be
retained by the Employer or other party, designated by the Administrator or the
Employer as the case may be, until applied to the purchase of Shares as
described in Section 9 hereof and the satisfaction of any related federal,
state, local or other tax withholding obligations (including any employment tax
obligations).
At the time the Shares are purchased, or at the time some or all of
the Shares issued under the Plan are disposed of, Participants must make
adequate provision for the Employer's federal, state, local or other tax
withholding obligations (including employment taxes), if any, which arise upon
the purchase or disposition of the Shares. At any time, the Employer may
withhold from each Participant's Compensation the amount necessary for the
Employer to meet applicable withholding obligations, including any withholding
required to make available to the Employer any tax deductions or benefits
attributable to the sale or early disposition of Shares by the Participant. Each
Participant, as a condition of participating under the Plan, agrees to bear
responsibility for all federal, state, local and other income taxes required to
be withheld from his or her Compensation as well as the Participant's portion of
FICA (both the OASDI and Medicare components), and other applicable social
security or similar such taxes, with respect to any Compensation arising on
account of the purchase or disposition of Shares. The Employer may increase
income and/or employment tax withholding on a Participant's Compensation after
the purchase or disposition of Shares in order to comply with federal, state,
local and other tax laws, and each Participant agrees to sign any and all
appropriate documents to facilitate such withholding.
SECTION 9 - PURCHASING, TRANSFERRING SHARES
a. Maintenance of Plan Account. Upon the exercise of a
Participant's initial option to purchase Shares under the Plan, the Agent shall
establish a Plan Account in the name of such Participant. At the close of each
Offering Period, the aggregate amount deducted during such Offering Period by
the Employer from a Participant's Compensation, or alternative contributions
made to the Plan by the Participant (and credited to an account maintained by
the Employer or other party for bookkeeping purposes) will be communicated by
the Employer to the Agent and shall thereupon be credited by the Agent to such
Participant's Plan Account (unless the Participant has given notice to the
Administrator of his or her revocation of authorization prior to the date such
communication is made). As of the last day of each Offering Period, or as soon
thereafter as is administratively practicable, each Participant's option to
purchase Shares will be exercised automatically for him or her by the Agent with
respect to those amounts reported to the Agent by the Administrator or Employer
as creditable to that Participant's Plan Account. On the date of exercise, the
amount then credited to the Participant's Plan Account for the purpose of
purchasing Shares hereunder will be divided by the Purchase Price and there
shall be transferred to the Participant's Plan Account by the Agent the number
of whole and/or fractional shares which results, as permitted by local law.
The Agent shall hold in its name, or in the name of its nominee, all
Shares so purchased and allocated. No certificate will be issued to a
Participant for Shares held in his or her Plan Account unless he or she so
requests in writing or unless such Participant's active participation in the
Plan is terminated due to death, disability, separation from service or
retirement. Participation in the Plan, purchase, ownership and sale of Shares
under the Plan, is subject to risk of fluctuation in Shares' price and currency
exchange.
b. Insufficient Number of Available Shares. In the event the
number of Shares covered by options which are exercised for any Offering Period
exceeds the number of Shares available for sale under the Plan, the number of
Shares actually available for sale hereunder shall be limited to the remaining
number of Shares authorized for sale under the Plan and shall be allocated by
the Agent among the Participants in proportion to each Participant's
Compensation during the Offering Period over the total Compensation of all
Participants during the Offering Period. Any excess amounts withheld and
credited to Participants' Plan Accounts then shall be returned to the
Participants as soon as is administratively practicable.
Page 5
c. Handling Excess Shares. In the event that the number of Shares
which would be credited to any Participant's Plan Account in any Offering Period
exceeds the limit specified in Section 3 b. hereof, such Participant's Plan
Account shall be credited with the maximum number of Shares permissible, and the
remaining amounts will be refunded in cash as soon as administratively
practicable.
d. Status Reports. Statements of each Participant's Plan Account
shall be given to Participants at least annually.
SECTION 10 - DIVIDENDS AND OTHER DISTRIBUTIONS
a. Reinvestment of Dividends. Subject to applicable law, cash
dividends and other cash distributions received by the Agent on Shares held in
its custody hereunder will be credited to the Plan Accounts of individual
Participants in accordance with such Participants' interests in the Shares with
respect to which such dividends or distributions are paid or made, and will be
applied, as soon as practical after the receipt thereof by the Agent, to the
purchase in the open market at prevailing market prices of the number of whole
Shares capable of being purchased with such funds (after deduction of any bank
service fees, brokerage charges, transfer taxes, and any other transaction fee,
expense or cost payable in connection with the purchase of such Shares and not
otherwise paid by the Employer and subject to the Company's obligation to
withhold federal, state, or other local taxes ).
b. Shares to Be Held in Agent's Name. All purchases of Shares
made pursuant to this Section will be made in the name of the Agent or its
nominee, shall be held as provided in Section 9 hereof, and shall be transferred
and credited to the Plan Account(s) of the individual Participant(s) to which
such dividends or other distributions were credited. Dividends paid in the form
of Shares will be allocated by the Agent, as and when received, with respect to
Shares held in its custody hereunder to the Plan Accounts of individual
Participants in accordance with such Participants' interests in such Shares with
respect to which such dividends were paid. Property, other than Shares or cash,
received by the Agent as a distribution on Shares held in its custody hereunder,
shall be sold by the Agent for the accounts of the Participants, and the Agent
shall treat the proceeds of such sale in the same manner as cash dividends
received by the Agent on Shares held in its custody hereunder.
c. Tax Responsibilities. The automatic reinvestment of dividends
under the Plan will not relieve a Participant (or Eligible Employee with a Plan
Account) of any income or other tax that may be due on or with respect to such
dividends. The Agent shall report to each Participant (or Eligible Employee with
a Plan Account) the amount of dividends credited to his or her Plan Account.
SECTION 11 - VOTING OF SHARES
A Participant shall have no interest or voting right in the Shares
covered by his or her option until such option has been exercised. Shares held
for a Participant (or Eligible Employee with a Plan Account) in his or her Plan
Account will be voted in accordance with the Participant's (or Eligible
Employee's) express directions. In the absence of any such directions, such
Shares will not be voted.
SECTION 12 - IN-SERVICE DISTRIBUTION OR SALE OF SHARES
a. Sale of Shares. Subject to the provisions of Section 19
hereof, a Participant may at any time, and without withdrawing from the Plan, by
giving notice to the Agent, direct the Agent to sell all or part of the Shares
held on behalf of the Participant. Upon receipt of such a notice, the Agent
shall, as soon as practicable after receipt of such notice, sell such Shares in
the marketplace at the prevailing market price and transmit the net proceeds of
such sale (less any bank service fees, brokerage charges, transfer taxes, and
any other transaction fee, expense or cost) to the Participant.
b. In-Service Share Distributions. A Participant may, without
withdrawing from the Plan, request that a certificate for all or part of the
whole number of Shares held in his or her Plan Account be sent to him or her
after the relevant Shares have been purchased and allocated subject to the
requirement that such Shares be held in the Participant's Plan Account for a
period of at least 24 months after the date of exercise, as described in
Page 6
Section 9 a., above. All such requests must be submitted in writing to the
Agent. No certificate for a fractional Share will be issued; the fair value of
fractional Shares on the date of withdrawal of all Shares credited to a
Participant's Plan Account shall be paid in cash to such Participant. The Plan
may impose a reasonable charge, to be paid by the Participant, for each stock
certificate so issued prior to the date active participation in the Plan ceases;
such charge shall be paid by the Participant to the Administrator or Employer
prior to the date any distribution of a certificate evidencing ownership of such
Shares occurs.
SECTION 13 - CESSATION OF ACTIVE PARTICIPATION
A Participant may at any time, by giving notice to the Administrator
or Employer, revoke his or her authorization for payroll deduction or
alternative contributions for the Offering Period in which such revocation is
made. A Participant who revokes authorization or does not make alternative
contributions for payroll deduction may not again participate under the Plan
until the next Offering Period immediately subsequent to the Offering Period
during which the Participant revoked payroll deduction authorization or did not
make alternative contributions with respect thereto.
SECTION 14 - SEPARATION FROM EMPLOYMENT
Separation from employment for any reason, including death,
disability, termination or retirement shall be deemed to be a cessation of
active participation in the Plan as described under Section 13 hereof.
SECTION 15 - ASSIGNMENT
Neither payroll deductions nor alternative contributions credited to
a Participant's Plan Account nor any rights to purchase Shares under the Plan
may be assigned, alienated, transferred, pledged, or otherwise disposed of in
any way by a Participant other than by will or the laws of descent and
distribution. Any such assignment, alienation, transfer, pledge, or other
disposition shall be without effect, except that the Administrator may treat
such act as an election to withdraw from the Plan. A Participant's right to
purchase Shares under this Plan may be exercisable during the Participant's
lifetime only by the Participant. A Participant's Plan Account shall be payable
to the Participant's estate upon his or her death.
SECTION 16 - ADJUSTMENT OF AND CHANGES IN SHARES
If at any time after the effective date of the Plan the Company
shall subdivide or reclassify the Shares which have been or may be optioned
under the Plan, or shall declare thereon any stock split or dividend payable in
Shares, or shall alter the capital structure of the Shares or the Company in any
similar manner, then the number and class of shares held in the Plan and which
may thereafter be optioned (in the aggregate and to any Participant) shall be
adjusted accordingly, and in the case of each option outstanding at the time of
any such action, the number and class of shares which may thereafter be
purchased pursuant to such option and the Purchase Price shall be adjusted
accordingly, as necessary to preserve the rights of the holder(s) of such Shares
and option(s).
SECTION 17 - AMENDMENT OR TERMINATION OF THE PLAN
The Board shall have the right, at any time, to amend, modify or
terminate the Plan without notice; provided, however, that no Participant's
existing options shall be adversely affected by any such amendment, modification
or termination, except to comply with applicable law, stock exchange rules or
accounting rules. Notwithstanding the foregoing, the Board shall have the right
to terminate the Plan with respect to all future payroll deductions and related
purchases at any time. Such termination of the Plan shall also terminate any
current Offering Period in accordance with Section 4 of the Plan.
Designations of participating corporations may be made from time to
time from among a group of corporations consisting of the Employer, its parent
and its Subsidiaries (including corporations that become Subsidiaries or a
parent after the adoption and approval of the Plan).
Page 7
The Company may amend or modify the Plan or make regulations for the
operation of the Plan that are not inconsistent with these rules to apply to
Employees and Participants who are employed or resident outside of the United
States of America in accordance with the relevant law. "Relevant law" shall mean
the applicable law of the jurisdiction in which the Employer of the Employee is
located or where the Employee is employed or resides and the securities
regulatory body requirements and the taxation requirements of that same
jurisdiction.
SECTION 18 - ADMINISTRATION
a. Administration. The Plan shall be administered by the
Administrator. The Administrator shall be responsible for the administration of
all matters under the Plan which have not been delegated to the Agent. The
Administrator shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Any rule or regulation
adopted by the Administrator shall remain in full force and effect unless and
until altered, amended or repealed by the Administrator.
b. Specific Responsibilities. The Administrator's
responsibilities shall include, but shall not be limited to:
(1) interpreting the Plan (including issues relating to the
definition and application of "Compensation");
(2) identifying and compiling a list of persons who are
Eligible Employees for an Offering Period;
(3) identifying those Eligible Employees not entitled to be
granted options or other rights for an Offering Period on
account of the limitations described in Section 3 b. hereof;
and
(4) providing to Participants upon request Company financial
statements which are publicly available.
The Administrator may from time to time adopt rules and regulations for carrying
out the terms of the Plan. Interpretation or construction of any provision of
the Plan by the Administrator shall be final and conclusive on all persons,
absent specific and contrary action taken by the Board. Any interpretation or
construction of any provision of the Plan by the Board shall be final and
conclusive.
SECTION 19 - SECURITIES LAW AND OTHER RESTRICTIONS
Notwithstanding any provision of the Plan to the contrary, no
payroll deductions or alternative contributions shall take place and no Shares
may be purchased under the Plan until a registration statement has been filed
and become effective with respect to the issuance of the Shares covered by the
Plan under the Act and any other required action has been taken under any other
applicable law of the jurisdiction in which the Employer of the Employee is
located or the Employee is employed or resides. Prior to the effectiveness of
such registration statement, Shares subject to purchase under the Plan may be
offered to Eligible Employees only pursuant to an exemption from the
registration requirements of the Act and pursuant to any other action that is
required under any other applicable law of the jurisdiction in which the
Employer of the Employee is located or the Employee is employed or resides.
SECTION 20 - NO INDEPENDENT EMPLOYEE'S RIGHTS
Nothing in the Plan shall be construed to be a contract of
employment between an Employer or its parent or any Subsidiary and any Employee,
or any group or category of Employees (whether for a definite or specific
duration or otherwise), or to prevent the Employer, its parent or any Subsidiary
from terminating any Employee's employment at any time, without notice or
recompense to the extent permissible under local law.
Page 8
Nothing in this Plan shall be construed as conferring any rights of a
shareholder in any Employee or any other person until the option to purchase
shares granted to the Employee hereunder has been exercised.
SECTION 21 - APPLICABLE LAW
The Plan shall be construed, administered and governed in all
respects under the laws of the State of Ohio to the extent such laws are not
preempted or controlled by federal law.
SECTION 22 - MERGER OR CONSOLIDATION
If the Company shall at any time merge into or consolidate with
another corporation or business entity, each Participant will thereafter be
entitled to receive at the end of the Offering Period (during which such merger
or consolidation occurs) the securities or property which a holder of Shares was
entitled to upon and at the time of such merger or consolidation. A sale of all
or substantially all of the assets of the Company shall be deemed a merger or
consolidation for the foregoing purposes.
Page 9
Exhibit 10.37
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective as of July 26, 2004 (the
"Effective Date"), is made and entered into by and between Cardinal Health,
Inc., an Ohio corporation (the "Company"), and J. Michael Losh (the
"Executive").
WHEREAS, the Company and the Executive desire to set forth in a
written agreement the terms and conditions under which the Executive will render
services to the Company as interim Chief Financial Officer from and after the
Effective Date.
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, agree as follows:
1. EMPLOYMENT PERIOD. The Company shall employ, or shall cause one
of its subsidiaries or affiliates to employ, the Executive, and the Executive
shall serve the Company, on the terms and conditions set forth in this
Agreement, during the one-year period beginning on the Effective Date and ending
on the first (1st) anniversary of the Effective Date, unless prior to such date
the employment of the Executive terminates in accordance with Section 4 of this
Agreement (such period, the "Employment Period"). This Agreement shall not
impact the Executive's continued service as a member of the Company's Board of
Directors.
2. POSITION AND DUTIES. (a) During the Employment Period, the
Executive shall serve as the interim Chief Financial Officer of the Company,
with the duties and responsibilities customarily assigned to such position, and
such other duties and responsibilities as the Chief Executive Officer of the
Company shall from time to time assign to the Executive.
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled under the practices
and policies of the Company as in effect from time to time, the Executive shall
devote the Executive's full business attention and time to the business and
affairs of the Company, and shall use the Executive's reasonable best efforts to
carry out such responsibilities faithfully and efficiently. It shall not be
considered a violation of the foregoing for the Executive to (A) continue to
serve on the corporate boards or committees on which he is serving as of the
Effective Date in the same capacity, in which he is serving as of the Effective
Date and, with the prior written consent of the Chief Executive Officer of the
Company, additional corporate boards or committees, (B) serve on civic or
charitable boards or committees, (C) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (D) manage personal
investments, so long as such activities under clauses (C) and (D) do not
materially interfere with the performance of the Executive's responsibilities as
an employee of the Company in accordance with this Agreement.
(c) As of the Effective Date, the Executive's services shall be
performed primarily at the Company's corporate headquarters in Dublin, Ohio.
3. COMPENSATION. (a) OPTION GRANT. As compensation for the
Executive's services hereunder, as of July 27, 2004, the Company shall grant the
Executive an option to purchase 210,000 common shares, without par value, of the
Company (the "Option") pursuant to the terms and conditions set forth in the
Nonqualified Stock Option Agreement attached to this Agreement as Exhibit A (the
"Option Agreement"). The exercise price per common share of the Option shall be
equal to the closing price of the common shares of the Company on the New York
Stock Exchange on July 27, 2004. The Executive acknowledges and agrees that he
will not be eligible to receive annual grants of options to purchase common
shares of the Company during the Company's fiscal 2005 year, unless any such
grant is authorized by the Human Resources and Compensation Subcommittee of the
Board of Directors of the Company. During the Employment Period, the Executive
will not be eligible to receive compensation payable solely to non-employee
directors of the Company.
(a) EMPLOYEE BENEFITS. During the Employment Period, the Executive
shall be entitled to receive life insurance, travel accident insurance and
accidental death and disability insurance at no cost to the Executive as well as
vacation to the same extent as, and on the same terms and conditions as, other
similarly situated executives of the Company from time to time.
(b) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive during the
Employment Period in carrying out the Executive's duties under this Agreement
(including travel and living expenses for him and his spouse in the Columbus,
Ohio living area), provided that the Executive complies with the policies,
practices and procedures of the Company then applicable to the Executive for
submission of expense reports, receipts, or similar documentation of such
expenses.
4. EMPLOYMENT TERMINATION. The Executive or the Company may
terminate the Executive's employment during the Employment Period for any reason
upon 30 days advanced written notice to the Company or to the Executive, as
applicable (the date on which the Executive ceases to be an employee of the
Company shall be referred to as the "Date of Termination").
5. COVENANTS. (a) INTRODUCTION. The parties acknowledge that the
provisions and covenants contained in this Section 5 are ancillary and material
to this Agreement and the Option Agreement and that the limitations contained
herein are reasonable in geographic and temporal scope and do not impose a
greater restriction or restraint than is necessary to protect the goodwill and
other legitimate business interests of the Company. The parties also acknowledge
and agree that the provisions of this Section 5 do not adversely affect the
Executive's ability to earn a living in any capacity that does not violate the
covenants contained herein. The parties further acknowledge and agree that the
provisions of Section 11(a) below are accurate and necessary because (i) this
Agreement is entered into in
-2-
the State of Ohio, (ii) Ohio has a substantial relationship to the parties and
to this transaction, (iii) Ohio is the headquarters state of the Company, which
has operations nationwide and has a compelling interest in having its employees
treated uniformly within the United States, (iv) the use of Ohio law provides
certainty to the parties in any covenant litigation in the United States, and
(v) enforcement of the provision of this Section 5 would not violate any
fundamental public policy of Ohio or any other jurisdiction.
(b) CONFIDENTIAL INFORMATION. The Executive shall hold in a
fiduciary capacity for the benefit of the Company and all of its subsidiaries,
partnerships, joint ventures, limited liability companies, and other affiliates
(collectively, the "Cardinal Group"), all secret or confidential information,
knowledge or data relating to the Cardinal Group and its businesses (including,
without limitation, any proprietary and not publicly available information
concerning any processes, methods, trade secrets, research, secret data, costs,
names of users or purchasers of their respective products or services, business
methods, operating procedures or programs or methods of promotion and sale) that
the Executive has obtained or obtains during the Executive's employment by the
Cardinal Group and that is not public knowledge (other than as a result of the
Executive's violation of this Section 5(b)) ("Confidential Information"). For
the purposes of this Section 5(b), information shall not be deemed to be
publicly available merely because it is embraced by general disclosures or
because individual features or combinations thereof are publicly available. The
Executive shall not communicate, divulge or disseminate Confidential Information
at any time during or after the Executive's employment with the Cardinal Group,
except with the prior written consent of the Cardinal Group, as applicable, or
as otherwise required by law or legal process. All records, files, memoranda,
reports, customer lists, drawings, plans, documents and the like that the
Executive uses, prepares or comes into contact with during the course of the
Executive's employment shall remain the sole property of the Company and/or the
Cardinal Group, as applicable, and shall be turned over to the applicable
Cardinal Group company upon termination of the Executive's employment.
(c) NON-RECRUITMENT OF EMPLOYER'S EMPLOYEES, ETC. Executive shall
not, at any time during the Restricted Period (as defined in this Section 5(c)),
without the prior written consent of Cardinal Health, Inc., directly or
indirectly, contact, solicit, recruit, or employ (whether as an employee,
officer, director, agent, consultant or independent contractor) any person who
was or is at any time during the previous twenty four months an employee,
representative, officer or director of the Cardinal Group. Further, during the
Restricted Period, Executive shall not take any action that could reasonably be
expected to have the effect of encouraging or inducing any employee,
representative, officer or director of the Cardinal Group to cease their
relationship with the Cardinal Group for any reason. This provision does not
apply to recruitment of employees within or for the Cardinal Group. The
"Restricted Period" means the period of Executive's employment with the Cardinal
Group and the additional period that ends 24 months after the Executive's Date
of Termination.
(d) NO COMPETITION--SOLICITATION OF BUSINESS. During the Restricted
Period, the Executive shall not (either directly or indirectly or as an officer,
agent, employee, partner
-3-
or director of any other company, partnership or entity) solicit, service, or
accept on behalf of any competitor of the Cardinal Group the business of (i) any
customer of the Cardinal Group at the time of the Executive's employment or Date
of Termination, or (ii) potential customer of the Cardinal Group which the
Executive knew to be an identified, prospective purchaser of services or
products of the Cardinal Group.
(e) NO COMPETITION--EMPLOYMENT BY COMPETITOR. During the Restricted
Period, the Executive shall not invest in (other than in a publicly traded
company with a maximum investment of no more than 1% of outstanding shares),
counsel, advise, or be otherwise engaged or employed by, any entity or
enterprise that competes with the Cardinal Group, by developing, manufacturing
or selling any product or service of a type, respectively, developed,
manufactured or sold by the Cardinal Group. It shall not be considered a
violation of the foregoing for the Executive to continue to serve on the
corporate boards or committees on which he is serving as of the Effective Date
and, with the prior written consent of the Chief Executive Officer of the
Company, additional corporate boards or committees.
(f) NO DISPARAGEMENT. (i) The Executive shall at all times refrain
from taking actions or making statements, written or oral, that (A) denigrate,
disparage or defame the goodwill or reputation of the Cardinal Group or any of
its trustees, officers, security holders, partners, agents or former or current
employees and directors, or (B) are intended to, or may be reasonably expected
to, adversely affect the morale of the employees of the Cardinal Group. The
Executive further agrees not to make any negative statements to third parties
relating to the Executive's employment or any aspect of the businesses of the
Cardinal Group and not to make any statements to third parties about the
circumstances of the termination of the Executive's employment, or about the
Cardinal Group or its trustees, officers, security holders, partners, agents or
former or current employees and directors, except as may be required by a court
or governmental body.
(ii) The Executive further agrees that, following termination
of employment for any reason, the Executive shall assist and cooperate with the
Company with regard to any matter or project in which the Executive was involved
during the Executive's employment with the Company, including but not limited to
any litigation that may be pending or arise after such termination of
employment. Further, the Executive agrees to notify the Company at the earliest
opportunity of any contact that is made by any third parties concerning any such
matter or project. The Company shall not unreasonably request such cooperation
of Executive and shall compensate the Executive for any lost wages or expenses
associated with such cooperation and assistance.
(g) ACKNOWLEDGMENT AND ENFORCEMENT. (i) The Executive acknowledges
and agrees that: (A) the purpose of the foregoing covenants, including without
limitation the noncompetition covenants of Sections 5(d) and (e), is to protect
the goodwill, trade secrets and other Confidential Information of the Company;
(B) because of the nature of the business in which the Cardinal Group is engaged
and because of the nature of the Confidential Information to which the Executive
has access, the Company would suffer irreparable harm
-4-
and it would be impractical and excessively difficult to determine the actual
damages of the Cardinal Group in the event the Executive breached any of the
covenants of this Section 5; and (C) remedies at law (such as monetary damages)
for any breach of the Executive's obligations under this Section 5 would be
inadequate. The Executive therefore agrees and consents that if the Executive
commits any breach of a covenant under this Section 5 or threatens to commit any
such breach, the Company shall have the right (in addition to, and not in lieu
of, any other right or remedy that may be available to it) to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage.
(ii) In addition, in the event of a violation of this Section
5, the Company shall have the right to require the Executive to pay to the
Company all or any portion of the Clawback Amount (as defined below) within 30
days following written notice by the Company to the Executive (the "Company
Notice") that it is imposing such requirement. The "Clawback Amount" means: if
the Executive has exercised any stock options granted to the Executive by the
Cardinal Group under the Cardinal Health, Inc. Equity Incentive Plan within
three years before a violation of Section 5(b), 5(c) or 5(f) or within one year
before a violation of Section 5(d) or 5(e), an amount equal to the gross option
gain realized or obtained by the Executive or any transferee resulting from the
exercise of such stock option, measured at the date of exercise (i.e., the
difference between the fair market value of the purchased stock on the date of
exercise and the exercise price paid by the Executive therefor).
In addition to the foregoing, in the event of a violation of this Section 5, all
outstanding stock options granted to the Executive by the Cardinal Group (or any
part thereof) under the Cardinal Health, Inc. Equity Incentive Plan that have
not been exercised shall immediately and automatically terminate, be forfeited,
and cease to be exercisable at any time.
(iii) With respect to any provision of this Section 5 finally
determined by a court of competent jurisdiction to be unenforceable, the
Executive and the Company hereby agree that such court shall have jurisdiction
to reform this Agreement or any provision hereof so that it is enforceable to
the maximum extent permitted by law, and the parties agree to abide by such
court's determination. If any of the covenants of this Section 5 are determined
to be wholly or partially unenforceable in any jurisdiction, such determination
shall not be a bar to or in any way diminish the Company's right to enforce any
such covenant in any other jurisdiction.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Cardinal Group for which the
Executive may qualify, nor shall anything in this Agreement limit or otherwise
affect such rights as the Executive may have under any contract or agreement
with the Cardinal Group. Vested benefits and other amounts that the Executive is
otherwise entitled to receive under any plan, policy, practice or program of, or
any contract or agreement with, the Cardinal Group on or after the Date of
Termination
-5-
shall be payable in accordance with such plan, policy, practice, program,
contract or agreement, as the case may be, except as explicitly modified by this
Agreement.
7. NO MITIGATION. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and such amounts shall not be reduced, regardless of whether the Executive
obtains other employment.
8. NOTICES. (a) METHODS. Each notice, demand, request, consent,
report, approval or communication (hereinafter, "Notice") which is or may be
required to be given by any party to any other party in connection with this
Agreement, shall be in writing, and given by facsimile, personal delivery,
receipted delivery services, or by certified mail, return receipt requested,
prepaid and properly addressed to the party to be served as shown in Section
8(b) below.
(b) ADDRESSES. Notices shall be effective on the date sent via
facsimile, the date delivered personally or by receipted delivery service, or
three days after the date mailed:
If to the Company: Cardinal Health, Inc.
7000 Cardinal Place
Dublin, OH 43017
Attn.: Chief Legal Officer
Facsimile: (614) 757-6948
If to the Executive: At the Executive's residence address
most recently on the books and
records of the Company.
(c) CHANGES. Each party may designate by Notice to the other in
writing, given in the foregoing manner, a new address to which any Notice may
thereafter be so given, served or sent.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof.
10. SUCCESSORS. (a) EXECUTIVE. This Agreement is personal to the
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
( b) THE COMPANY. This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns.
-6-
(c) The Company may assign this Agreement to any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company that expressly
agrees to assume and perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
assignment had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be
governed by, and construed in accordance with, the laws of Ohio, without
reference to principles of conflict of laws. In addition, all legal actions or
proceedings relating to this Agreement shall be brought in state or federal
courts located in Franklin County, Ohio, and the parties executing this
Agreement hereby consent to the personal jurisdiction of such courts. This
Agreement may not be amended or modified except by a written agreement executed
by the parties hereto or their respective successors and legal representatives.
(b) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement. If any provision of this Agreement shall
be held invalid or unenforceable in part, the remaining portion of such
provision, together with all other provisions of this Agreement, shall remain
valid and enforceable and continue in full force and effect to the fullest
extent consistent with law.
(c) TAX WITHHOLDING. Notwithstanding any other provision of this
Agreement, the Company may withhold from amounts payable under this Agreement
all federal, state, local and foreign taxes that are required to be withheld by
applicable laws or regulations.
(d) NO WAIVER. The Executive's or the Company's failure to insist
upon strict compliance with any provision of, or to assert any right under, this
Agreement shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement.
(e) WARRANTY. The Executive hereby warrants that the Executive is
free to enter into this Agreement and to perform the services described herein.
(f) HEADINGS. The Section headings contained in this Agreement are
for convenience only and in no manner shall be construed as part of this
Agreement.
(g) COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument
-7-
(h) SURVIVAL. The obligations under this Agreement of the Executive
and the Company that by their nature and terms require (or may require)
satisfaction after the end of the Employment Period shall survive such event and
shall remain binding upon such parties.
-8-
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization of the Human Resources and Compensation Subcommittee of its
Board of Directors, the Company has caused this Agreement to be executed in its
name on its behalf, all as of the day and year first above written.
EXECUTIVE
/s/ J. Michael Losh
------------------------------------
J. Michael Losh
CARDINAL HEALTH, INC.
By /s/ Robert D. Walter
--------------------------------
Robert D. Walter
Chief Executive Officer
-9-
EXHIBIT A
CARDINAL HEALTH, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Grant Date: July 27, 2004
Exercise Price:
Grant Vesting Date: July 27, 2007
Grant Expiration Date: July 27, 2014
Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted to J.
Michael Losh ("Grantee"), an option (the "Option") to purchase 210,000 common
shares, without par value, of the Company (the "Shares") for a total purchase
price of , (i.e., the equivalent of [stock price] for each full Share). The
Option has been granted under the Cardinal Health, Inc. Amended and Restated
Equity Incentive Plan, as amended (the "Plan"), and will include and be subject
to all provisions of the Plan, which are incorporated herein by reference, and
will be subject to the provisions of this agreement. Capitalized terms used in
this agreement which are not specifically defined will have the meanings
ascribed to such terms in the Plan. Subject to the terms of this agreement, this
Option shall be exercisable at any time on or after July 27, 2007 and prior to
July 27, 2014.
By:
Robert D. Walter
Chairman and CEO
1. Method of Exercise and Payment of Price.
(a) Method of Exercise. At any time when the Option is exercisable under the
Plan and this agreement, the Option may be exercised from time to time by
written notice to the Company which will:
(i) state the number of Shares with respect to which the Option is
being exercised; and
(ii) if the Option is being exercised by anyone other than Grantee, be
accompanied by proof satisfactory to counsel for the Company of the right of
such person or persons to exercise the Option under the Plan and all applicable
laws and regulations.
(b) Payment of Price. The full exercise price for the Option shall be paid to
the Company as provided in the Plan.
2. Transferability. The Option shall be transferable (I) at Grantee's death, by
Grantee by will or pursuant to the laws of descent and distribution, and (II) by
Grantee during Grantee's lifetime, without payment of consideration, to (a) the
spouse, former spouse, parents, stepparents, grandparents, parents-in-law,
siblings, siblings-in-law, children, stepchildren, children-in-law,
grandchildren, nieces or nephews of Grantee, or any other persons sharing
Grantee's household (other than tenants or employees) (collectively, "Family
Members"), (b) a trust or trusts for the primary benefit of Grantee or such
Family Members, (c) a foundation in which Grantee or such Family Members control
the management of assets, or (d) a partnership in which Grantee or such Family
Members are the majority or controlling partners; provided, however, that
subsequent transfers of the transferred Option shall be prohibited, except (X)
if the transferee is an individual, at the transferee's death by the transferee
by will or pursuant to the laws of descent and distribution, and (Y) without
payment of consideration to the individuals or entities listed in subparagraphs
II(a), (b) or (c), above, with respect to the original Grantee. The Human
Resources and Compensation Committee of the Board of Directors of the Company
(the "Committee") may, in its discretion, permit transfers to other persons and
entities as permitted by the Plan. Neither a transfer under a domestic relations
order in settlement of marital property rights nor a transfer to an entity in
which more than 50% of the voting interests are owned by Grantee or Family
Members in exchange for an interest in that entity shall be considered to be a
transfer for consideration. Within 10 days of any transfer, Grantee shall notify
the Stock Option Administrator of the Company in writing of the transfer.
Following transfer, the Option shall continue to be subject to the same terms
and conditions as were applicable immediately prior to transfer and, except as
otherwise provided in the Plan or this agreement, references to the original
Grantee shall be deemed to refer to the transferee. The events of termination of
services of Grantee provided in paragraph 3 hereof shall continue to be applied
with respect to the original Grantee, following which the Option shall be
exercisable by the transferee for the periods specified in paragraph 3. The
Company shall have no obligation to notify any transferee of Grantee's
termination of
2
employment with the Company for any reason. The conduct prohibited of Grantee in
paragraphs 5 and 6 hereof shall continue to be prohibited of Grantee following
transfer to the same extent as immediately prior to transfer and the Option (or
its economic value, as applicable) shall be subject to forfeiture by the
transferee and recoupment from Grantee to the same extent as would have been the
case of Grantee had the Option not been transferred. Grantee shall remain
subject to the recoupment provisions of paragraphs 5 and 6 of this agreement and
tax withholding provisions of Section 13(d) of the Plan following transfer of
the Option.
3. Termination of Relationship.
(a) Termination by Death or Disability. If Grantee's provision of services to
the Company and its subsidiaries (collectively, the "Cardinal Group") terminates
by reason of death or disability (as defined in the Plan), then, any unvested
portion of the Option shall vest upon Grantee's termination of provision of
services and become exercisable in full through the Grant Expiration Date (the
"Exercise Period"). The Option may following Grantee's death be exercised by any
transferee of Grantee, if applicable, or by the legal representative of the
estate or by the legatee of Grantee under the will of Grantee. Grantee's
services as a member of the Board of Directors of the Company will be treated as
the provision of services under this agreement.
(b) Voluntary Termination of Services Prior to the Grant Vesting Date or For
Cause. If Grantee's provision of services to the Cardinal Group terminates prior
to the Grant Vesting Date as a result of Grantee's voluntary termination of
services (subject to Section 10 of the Plan regarding acceleration of the
vesting of the Option upon a Change of Control) or terminates at any time for
Cause, the Option will automatically terminate on the date of such termination.
If the vesting of the Option is accelerated upon a Change of Control, the Option
will remain exercisable through the expiration of the Exercise Period.
(c) Other Termination of Services. If Grantee's provision of services to the
Cardinal Group terminates for any reason other than pursuant to the terminations
described in paragraphs 3(a) and (b) above, then (i) if such termination is
prior to the Grant Vesting Date, any unvested portion of the Option shall vest
upon Grantee's termination of provision services and (ii) following any such
termination of provision of services, the Option shall become exercisable in
full through the expiration of the Exercise Period. Notwithstanding the
foregoing, if Grantee dies after the Option vests but before the expiration of
the Exercise Period, the Option may be exercised by any transferee of the
Option, if applicable, or by the legal representative of the estate or by the
legatee of Grantee under the will of Grantee following Grantee's death, through
the expiration of the Exercise Period.
4. Restrictions on Exercise. The Option is subject to all restrictions in this
agreement and/or in the Plan. As a condition of any exercise of the Option, the
Company may require Grantee or his or her transferee or successor to make any
representation and
3
warranty to comply with any applicable law or regulation or to confirm any
factual matters (including Grantee's compliance with the terms of paragraphs 5
and 6 of this agreement or any employment or severance agreement between any
member of the Cardinal Group and Grantee) reasonably requested by the Company.
5. Triggering Conduct/Competitor Triggering Conduct. As used in this agreement,
"Triggering Conduct" shall include disclosing or using in any capacity other
than as necessary in the performance of duties assigned by the Cardinal Group
any confidential information, trade secrets or other business sensitive
information or material concerning the Cardinal Group; violation of Company
policies, including conduct which would constitute a breach of any of the
Certificates of Compliance with Company Policies and/or the Certificates of
Compliance with Company Business Ethics Policies signed by Grantee; directly or
indirectly employing, contacting concerning employment, or participating in any
way in the recruitment for employment of (whether as an employee, officer,
director, agent, consultant or independent contractor), any person who was or is
an employee, representative, officer or director of the Cardinal Group at any
time within the 12 months prior to the termination of Grantee's provision of
services to the Cardinal Group; any action by Grantee and/or his or her
representatives that either does or could reasonably be expected to undermine,
diminish or otherwise damage the relationship between the Cardinal Group and any
of its customers, potential customers, vendors and/or suppliers that were known
to Grantee; and breaching any provision of any employment or severance agreement
with a member of the Cardinal Group. As used in this agreement, "Competitor
Triggering Conduct" shall include, either during Grantee's provision of services
or within one year following Grantee's termination of provision of services to
the Cardinal Group, accepting employment with or serving as a consultant or
advisor or in any other capacity to an entity that is in competition with the
business conducted by any member of the Cardinal Group (a "Competitor"),
including, but not limited to, employment or another business relationship with
any Competitor if Grantee has been introduced to trade secrets, confidential
information or business sensitive information during Grantee's provision of
services to the Cardinal Group and such information would aid the Competitor
because the threat of disclosure of such information is so great that, for
purposes of this agreement, it must be assumed that such disclosure would occur.
6. Special Forfeiture/Repayment Rules. For so long as Grantee continues to
provide services to the Cardinal Group and for three years following Grantee's
termination of provision of services to the Cardinal Group regardless of the
reason, Grantee agrees not to engage in Triggering Conduct. If Grantee engages
in Triggering Conduct during the time period set forth in the preceding sentence
or in Competitor Triggering Conduct during the time period referenced in the
definition of "Competitor Triggering Conduct" set forth in paragraph 5 above,
then:
(a) the Option (or any part thereof that has not been exercised) shall
immediately and automatically terminate, be forfeited, and shall cease to be
exercisable at any time; and
4
(b) Grantee shall, within 30 days following written notice from the Company, pay
the Company an amount equal to the gross option gain realized or obtained by
Grantee or any transferee resulting from the exercise of such Option, measured
at the date of exercise (i.e., the difference between the market value of the
Shares underlying the Option on the exercise date and the exercise price paid
for such Shares underlying the Option), with respect to any portion of the
Option that has already been exercised at any time within three years prior to
the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages
only in Competitor Triggering Conduct, then the Look-Back Period shall be
shortened to exclude any period more than one year prior to Grantee's
termination of employment with the Cardinal Group, but including any period
between the time of Grantee's termination and engagement in Competitor
Triggering Conduct. Grantee may be released from Grantee's obligations under
this paragraph 6 only if the Committee (or its duly appointed designee)
determines, in writing and in its sole discretion, that such action is in the
best interests of the Company. Nothing in this paragraph 6 constitutes a
so-called "noncompete" covenant. This paragraph 6 does, however, prohibit
certain conduct while Grantee is associated with the Cardinal Group and
thereafter and does provide for the forfeiture or repayment of the benefits
granted by this agreement under certain circumstances, including, but not
limited to, Grantee's acceptance of employment with a Competitor. Grantee agrees
to provide the Company with at least 10 days written notice prior to directly or
indirectly accepting employment with or serving as a consultant or advisor or in
any other capacity to a Competitor, and further agrees to inform any such new
employer, before accepting employment, of the terms of this paragraph 6 and
Grantee's continuing obligations contained herein. No provisions of this
agreement shall diminish, negate or otherwise impact any separate noncompete or
other agreement to which Grantee may be a party, including, but not limited to,
any of the Certificates of Compliance with Company Policies and/or the
Certificates of Compliance with Company Business Ethics Policies; provided,
however, that to the extent that any provisions contained in any other agreement
are inconsistent in any manner with the restrictions and covenants of Grantee
contained in this agreement, the provisions of this agreement shall take
precedence and such other inconsistent provisions shall be null and void.
Grantee acknowledges and agrees that the restrictions contained in this
agreement are being made for the benefit of the Company in consideration of
Grantee's receipt of the Option, in consideration of employment, in
consideration of exposing Grantee to the Company's business operations and
confidential information, and for other good and valuable consideration, the
adequacy of which consideration is hereby expressly confirmed. Grantee further
acknowledges that the receipt of the Option and execution of this agreement are
voluntary actions on the part of Grantee and that the Company is unwilling to
provide the Option to Grantee without including the restrictions and covenants
of Grantee contained in this agreement. Further, the parties agree and
acknowledge that the provisions contained in paragraphs 5 and 6 are ancillary
to, or part of, an otherwise enforceable agreement at the time the agreement is
made.
7. Governing Law/Venue. This agreement shall be governed by the laws of the
State of Ohio, without regard to principles of conflicts of law, except to the
extent superceded by the laws of the United States of America. The parties agree
and acknowledge that the
5
laws of the State of Ohio bear a substantial relationship to the parties and/or
this agreement and that the Option and benefits granted herein would not be
granted without the governance of this agreement by the laws of the State of
Ohio. In addition, all legal actions or proceedings relating to this agreement
shall be brought in state or federal courts located in Franklin County, Ohio and
the parties executing this agreement hereby consent to the personal jurisdiction
of such courts. Grantee acknowledges that the covenants contained in paragraphs
5 and 6 of this agreement are reasonable in nature, are fundamental for the
protection of the Company's legitimate business and proprietary interests, and
do not adversely affect Grantee's ability to earn a living in any capacity that
does not violate such covenants. The parties further agree that in the event of
any violation by Grantee of any such covenants, the Company will suffer
immediate and irreparable injury for which there is no adequate remedy at law.
In the event of any violation or attempted violations of the restrictions and
covenants of Grantee contained in this agreement, the Cardinal Group shall be
entitled to specific performance and injunctive relief or other equitable
relief, including the issuance ex parte of a temporary restraining order,
without any showing of irreparable harm or damage, such irreparable harm being
acknowledged and admitted by Grantee, and Grantee hereby waives any requirement
for the securing or posting of any bond in connection with such remedy, without
prejudice to the rights and remedies afforded the Cardinal Group hereunder or by
law. In the event that it becomes necessary for the Cardinal Group to institute
legal proceedings under this agreement, Grantee shall be responsible to the
Company for all costs and reasonable legal fees incurred by the Company with
regard to such proceedings. Any provision of this agreement which is determined
by a court of competent jurisdiction to be invalid or unenforceable should be
construed or limited in a manner that is valid and enforceable and that comes
closest to the business objectives intended by such provision, without
invalidating or rendering unenforceable the remaining provisions of this
agreement.
8. Action by the Committee. The parties agree that the interpretation of this
agreement shall rest exclusively and completely within the good faith province
and discretion of the Committee. The parties agree to be bound by the decisions
of the Committee with regard to the interpretation of this agreement and with
regard to any and all matters set forth in this agreement. The Committee may
delegate its functions under this agreement to an officer of the Cardinal Group
designated by the Committee (hereinafter the "designee"). In fulfilling its
responsibilities hereunder, the Committee or its designee may rely upon
documents, written statements of the parties or such other material as the
Committee or its designee deems appropriate. The parties agree that there is no
right to be heard or to appear before the Committee or its designee and that any
decision of the Committee or its designee relating to this agreement, including
without limitation whether particular conduct constitutes Triggering Conduct or
Competitor Triggering Conduct, shall be final and binding unless such decision
is arbitrary and capricious.
9. Prompt Acceptance of Agreement. The Option grant evidenced by this agreement
shall, at the discretion of the Committee, be forfeited if this agreement is not
executed by
6
Grantee and returned to the Company within 90 days of the Grant Date set forth
on the first page of this agreement.
10. Electronic Delivery. The Company may, in its sole discretion, decide to
deliver any documents related to the Option grant under and participation in the
Plan or future options that may be granted under the Plan by electronic means or
to request Grantee's consent to participate in the Plan by electronic means.
Grantee hereby consents to receive such documents by electronic delivery and, if
requested, to participate in the Plan through an on-line or electronic system
established and maintained by the Company or another third party designated by
the Company.
7
ACCEPTANCE OF AGREEMENT
Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either
been previously delivered or is provided with this agreement, and represents
that he or she is familiar with and understands all provisions of the Plan and
this agreement; and (b) voluntarily and knowingly accepts this agreement and the
Option granted to him or her under this agreement subject to all provisions of
the Plan and this agreement. Grantee further acknowledges receiving a copy of
the Company's most recent Annual Report and other communications routinely
distributed to the Company's shareholders and a copy of the Plan Description
dated November 17, 2003 pertaining to the Plan.
Signature
Print Name
Grantee's Social Security Number
Date
8
Exhibit 10.38
INDEMNIFICATION AGREEMENT
This agreement is made on ____________, at Dublin, Ohio, between
Cardinal Health, Inc., an Ohio corporation (the "Company"), and ____________
(the "Director").
Background Information
A. The Director is a member of the Company's Board of Directors (the "Board")
and, in that capacity, is performing valuable services for the Company.
B. The shareholders of the Company have adopted a Restated Code of Regulations,
as amended (the "Regulations"), providing for indemnification of the directors
of the Company in accordance with Section 1701.13 of the Ohio Revised Code (the
"Statute"). The Regulations and the Statute specifically provide that they are
not exclusive, and contemplate that contracts may be entered into between the
Company and directors with respect to indemnification of directors.
C. The Company and Director recognize the substantial cost of carrying directors
and officers liability insurance ("D&O Insurance") and that the Company may
elect not to carry D&O Insurance from time to time.
D. The Company and Director further recognize that officers and directors may be
exposed to certain risks not covered by D&O Insurance.
E. These factors with respect to the coverage and cost to the Company of D&O
Insurance and issues concerning the scope of indemnity under the Statute and
Regulations generally have raised questions concerning the adequacy and
reliability of the protection presently afforded to directors.
F. In order to address such issues and induce the Director to continue to serve
as a member of the Board, the Company has determined to enter into this
agreement with the Director.
Statement of Agreement
In consideration of the Director's continued service as a member of the
Board after the date of this agreement, the Company and the Director hereby
agree as follows:
Section 1. Indemnity of Director. Subject only to the limitations set
forth in Section 2, below, the Company shall indemnify the Director to the full
extent not otherwise prohibited by the Statute or other applicable law,
including without limitation indemnity:
(a) Against any and all costs and expenses (including legal,
expert, and other professional fees and expenses), judgments, damages,
fines (including excise taxes with respect to employee benefit plans),
penalties, and amounts paid
in settlement actually and reasonably incurred by the Director
(collectively, "Expenses"), in connection with any threatened, pending,
or completed action, suit or proceeding, or arbitration or other
alternative dispute resolution mechanism (whether civil, criminal,
administrative, or investigative and including without limitation an
action by or in the right of the Company) (each a "Proceeding") to
which the Director is or at any time becomes a party, or is threatened
to be made a party as a result, directly or indirectly, of serving at
any time: (i) as a director, officer, employee, or agent of the
Company; or (ii) at the request of the Company as a director, officer,
employee, trustee, fiduciary, manager, member, or agent of a
corporation, partnership, trust, limited liability company, employee
benefit plan, or other enterprise or entity; and
(b) Otherwise to the fullest extent that the Director may be
indemnified by the Company under the Regulations and the Statute,
including without limitation the non-exclusivity provisions thereof.
Section 2. Limitations on Indemnity. No indemnity pursuant to Section 1
shall be paid by the Company:
(a) Except to the extent that the aggregate amount of losses
to be indemnified exceed the aggregate amount of such losses for which
the Director is actually paid or reimbursed pursuant to D&O Insurance,
if any, which may be purchased and maintained by the Company or any of
its subsidiaries;
(b) On account of any Proceeding in which judgment is rendered
against the Director for an accounting of profits made from the
purchase or sale of securities of the Company pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended;
(c) On account of the Director's conduct which is determined
(pursuant to the Statute) to have been knowingly fraudulent,
deliberately dishonest, or willful misconduct, except to the extent
such indemnity is otherwise permitted under the Statute;
(d) With respect to any remuneration paid to the Director
determined, by a court having jurisdiction in the matter in a final
adjudication from which there is no further right of appeal, to have
been in violation of law;
(e) If it shall have been determined by a court having
jurisdiction in the matter, in a final adjudication from which there is
no further right of appeal, that indemnification is not lawful;
(f) On account of the Director's conduct to the extent it
relates to any matter that occurred prior to the time such individual
became a director of the Company; provided, however, that this
limitation shall not apply to the extent such matter occurred while the
Director was a director, officer, employee or agent
-2-
of the Company or its subsidiaries (other than prior to the time such
entity became a subsidiary of the Company); or
(g) With respect to Proceedings initiated or brought
voluntarily by the Director and not by way of defense, except pursuant
to Section 8 with respect to proceedings brought to enforce rights or
to collect money due under this agreement; provided however that
indemnity may be provided by the Company in specific cases if the Board
finds it to be appropriate.
In no event shall the Company be obligated to indemnify the Director
pursuant to this agreement to the extent such indemnification is prohibited by
applicable law.
Section 3. Advancement of Expenses. Subject to Section 7 of this
agreement, the Expenses incurred by the Director in connection with any
Proceeding shall be promptly reimbursed or paid by the Company as they become
due; provided the Director submits a written request to the Company for such
payment together with reasonable supporting documentation for such Expenses; and
provided further that the Director, at the request of the Company, submits to
the Company an undertaking to the effect stated in Section 7, below, and to
reasonably cooperate with the Company concerning such Proceeding.
Section 4. Insurance and Self Insurance. The Company shall not be
required to maintain D&O Insurance in effect if and to the extent that such
insurance is not reasonably available or if, in the reasonable business judgment
of the Board, either (a) the premium cost of such insurance is disproportionate
to the amount of coverage, or (b) the coverage provided by such insurance is so
limited by exclusions that there is insufficient benefit from such insurance. To
the extent the Company determines not to maintain D&O Insurance, the Company
shall be deemed to be self-insured within the meaning of Section 1701.13(E)(7)
of the Statute and shall, in addition to the Director's other rights hereunder,
provide protection to the Director similar to that which otherwise would have
been available to the Director under such insurance.
Section 5. Continuation of Obligations. All obligations of the Company
under this agreement shall apply retroactively beginning on the date the
Director commenced as, and shall continue during the period that the Director
remains, a director of the Company or is, as described above, a director,
officer, employee, trustee, fiduciary, manager, member, or agent of another
corporation, partnership, limited liability company, trust, employee benefit
plan, or other enterprise and shall continue thereafter as long as the Director
may be subject to any possible claim or any threatened, pending or completed
Proceeding as a result, directly or indirectly, of being such a director,
officer, employee, trustee, fiduciary, manager, member, or agent.
Section 6. Notification and Defense of Claim. Promptly after receipt
by the Director of notice of the commencement of any Proceeding, if a claim is
to be made against the Company under this agreement, the Director shall notify
the Company of the commencement thereof, but the delay or omission to so notify
the Company shall not relieve the Company from any liability which it may have
to the Director under this agreement, except to the extent the Company is
materially prejudiced by such delay or
-3-
omission. With respect to any such Proceeding of which the Director notifies
the Company of the commencement:
(a) The Company shall be entitled to participate therein at
its own expense;
(b) The Company shall be entitled to assume the defense
thereof, jointly with any other indemnifying party similarly notified,
with counsel selected by the Company and approved by the Director,
which approval shall not unreasonably be withheld. After notice from
the Company to the Director of the Company's election to assume such
defense, the Company shall not be liable to the Director under this
agreement for any legal or other Expenses subsequently incurred by the
Director in connection with the defense thereof except as otherwise
provided below. The Director shall have the right to employ his own
counsel in such Proceeding, but the fees and expenses of such counsel
incurred after notice from the Company of its assumption of such
defense shall be the expenses of the Director unless (i) the employment
of such counsel by the Director has been authorized by the Company,
(ii) the Director, upon the advice of counsel, shall have reasonably
concluded that there may be a conflict of interest between the Company
and the Director in the conduct of such defense, or (iii) the Company
has not in fact employed counsel to assume such defense, in any of
which cases the fees and expenses of such counsel shall be the expense
of the Company. The Company shall not be entitled to assume the defense
of any Proceeding brought by or on behalf of the Company or as to which
the Director, upon the advice of counsel, shall have made the
conclusion described in (ii), above. In the event the Company assumes
the defense of any Proceeding as provided in this Section 6(b), the
Company may defend or settle such Proceeding as it deems appropriate;
provided, however, the Company shall not settle any Proceeding in any
manner which would impose any penalty or limitation on the Director
without the Director's written consent, which consent shall not be
unreasonably withheld.
(c) The Company shall not be required to indemnify the
Director under this agreement for any amounts paid in settlement of any
Proceeding without the Company's written consent, which consent shall
not be unreasonably withheld.
(d) The Director shall cooperate with the Company in all ways
reasonably requested by it in connection with the Company fulfilling
its obligations under this agreement.
Section 7. Repayment of Expenses. The Director shall reimburse the
Company for all Expenses paid by the Company pursuant to Section 3 of this
agreement or otherwise in defending any Proceeding against the Director if and
only to the extent that a determination shall have been made by a court in a
final adjudication from which there is no further right of appeal that it has
been shown by clear and convincing evidence that the Director's action or
failure to act involved an act or omission undertaken with deliberate
-4-
intent to cause injury to the Company or undertaken with reckless disregard
for the best interests of the Company.
Section 8. Enforcement. The Company expressly confirms that it has
entered into this agreement and has assumed the obligations of this agreement in
order to induce the Director to continue as a director of the Company and
acknowledges that the Director is relying upon this agreement in continuing in
that capacity. If the Director is required to bring an action to enforce rights
or to collect money due under this agreement, the Company shall reimburse the
Director for all of the Director's reasonable fees and expenses (including
legal, expert, and other professional fees and expenses) in bringing and
pursuing such action, unless the court determines that each of the material
assertions made by the Director as a basis for such action were not made in good
faith or were frivolous. The Company shall have the burden of proving that
indemnification is not required under this agreement, unless a prior
determination has been made by the shareholders of the Company or a court of
competent jurisdiction that indemnification is not required hereunder.
Section 9. Rights Not Exclusive. The indemnification provided by this
agreement shall not be deemed exclusive of any other rights to which the
Director may be entitled under the Company's articles of incorporation,
Regulations, any vote of the shareholders or disinterested directors of the
Company, the Statute, or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
Section 10. Separability. Each of the provisions of this agreement is
a separate and distinct agreement and independent of the others so that, if any
provisions of this agreement shall be held to be invalid and unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions of this agreement.
Section 11. Modification to Applicable Law. In the event there is a
change, after the date of this agreement, in any applicable law (including
without limitation the Statute) which: (a) expands the right of an Ohio
corporation to indemnify a member of its board of directors or an officer, such
change shall be automatically included within the scope of the Director's rights
and Company's obligations under this agreement; or (b) narrows the right of an
Ohio corporation to indemnify a member of its board of directors or an officer,
such change, to the extent not otherwise required by such law, shall have no
effect on this agreement or the parties' rights and obligations hereunder.
Section 12. Partial Indemnity. If the Director is entitled under any
provision of this agreement to indemnity by the Company for some or a portion of
the Expenses actually or reasonably incurred by him in the investigation,
defense, appeal, or settlement of any Proceeding, but not for the total amount
thereof, the Company shall nevertheless indemnify the Director for the portion
of such Expenses to which the Director is entitled.
Section 13. Governing Law. This agreement shall be interpreted and
enforced in accordance with the laws of the State of Ohio, without regard to
choice of law principles.
-5-
Section 14. Successors. This agreement shall be binding upon, inure to
the benefit of, and be enforceable by and against the Director and the Company
and their respective heirs, successors, and assigns. The Company shall require
any successor or assign (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely, and unconditionally to assume and
agree to perform this agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place.
Section 15. Prior Agreements. This agreement shall supersede any other
agreements entered into prior to the date of this agreement between the Company
and the Director concerning the subject matter of this agreement.
Section 16. Consent to Jurisdiction. The Company and the Director each
hereby irrevocably consents to the jurisdiction of the courts of the State of
Ohio for all purposes in connection with any action or proceeding which arises
out of or relates to this agreement and hereby waives any objections or defenses
relating to jurisdiction with respect to any lawsuit or other legal proceeding
initiated in or transferred to such courts.
CARDINAL HEALTH, INC.
By
DIRECTOR:
-6-
Exhibit 10.39
INDEMNIFICATION AGREEMENT
This agreement is made ____________, at Dublin, Ohio, between Cardinal
Health, Inc., an Ohio corporation (the "Company"), and _________ (the
"Officer").
Background Information
A. The Officer is an officer and employee of the Company and/or one or more of
its subsidiaries and, in that capacity, is performing valuable services for the
Company.
B. The shareholders of the Company have adopted a Restated Code of Regulations,
as amended (the "Regulations"), providing for indemnification of the officers of
the Company in accordance with Section 1701.13 of the Ohio Revised Code (the
"Statute"). The Regulations and the Statute specifically provide that they are
not exclusive, and contemplate that contracts may be entered into between the
Company and officers with respect to indemnification of officers.
C. The Company and Officer recognize the substantial cost of carrying directors
and officers liability insurance ("D&O Insurance") and that the Company may
elect not to carry D&O Insurance from time to time.
D. The Company and Officer further recognize that officers and directors may be
exposed to certain risks not covered by D&O Insurance.
E. These factors with respect to the coverage and cost to the Company of D&O
Insurance and issues concerning the scope of indemnity under the Statute and
Regulations generally have raised questions concerning the adequacy and
reliability of the protection presently afforded to officers.
F. In order to address such issues and induce the Officer to continue to serve
as an officer and employee of the Company or one of its subsidiaries, the
Company has determined to enter into this agreement with the Officer.
Statement of Agreement
In consideration of the Officer's continued service as an officer of
the Company or one of its subsidiaries after the date of this agreement, the
Company and the Officer hereby agree as follows:
Section 1. Indemnity of Officer. Subject only to the limitations set
forth in Section 2, below, the Company shall indemnify the Officer to the full
extent not otherwise prohibited by the Statute or other applicable law,
including without limitation indemnity:
(a) Against any and all costs and expenses (including legal,
expert, and other professional fees and expenses), judgments, damages,
fines (including excise taxes with respect to employee benefit plans),
penalties, and amounts paid
in settlement actually and reasonably incurred by the Officer
(collectively, "Expenses"), in connection with any threatened, pending,
or completed action, suit or proceeding, or arbitration or other
alternative dispute resolution mechanism (whether civil, criminal,
administrative, or investigative and including without limitation an
action by or in the right of the Company) (each a "Proceeding") to
which the Officer is or at any time becomes a party, or is threatened
to be made a party, as a result, directly or indirectly, of serving at
any time: (i) as an officer, employee, or agent of the Company; or (ii)
at the request of the Company as a director, officer, employee,
trustee, fiduciary, manager, member, or agent of a corporation,
partnership, trust, limited liability company, employee benefit plan,
or other enterprise or entity; and
(b) Otherwise to the fullest extent that the Officer may be
indemnified by the Company under the Regulations and the Statute,
including without limitation the non-exclusivity provisions thereof.
Section 2. Limitations on Indemnity. No indemnity pursuant to Section 1
shall be paid by the Company:
(a) Except to the extent that the aggregate amount of losses
to be indemnified exceed the aggregate amount of such losses for which
the Officer is actually paid or reimbursed pursuant to D&O Insurance,
if any, which may be purchased and maintained by the Company or any of
its subsidiaries;
(b) On account of any Proceeding in which judgment is rendered
against the Officer for an accounting of profits made from the purchase
or sale of securities of the Company pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934, as amended;
(c) On account of the Officer's conduct which is determined
(pursuant to the Statute) to have been knowingly fraudulent,
deliberately dishonest, or willful misconduct, except to the extent
such indemnity is otherwise permitted under the Statute;
(d) With respect to any remuneration paid to the Officer
determined, by a court having jurisdiction in the matter in a final
adjudication from which there is no further right of appeal, to have
been in violation of law;
(e) If it shall have been determined by a court having
jurisdiction in the matter, in a final adjudication from which there is
no further right of appeal, that indemnification is not lawful;
(f) On account of the Officer's conduct to the extent it
relates to any matter that occurred prior to the time such individual
became an officer of the Company; provided, however, that this
limitation shall not apply to the extent such matter occurred while the
Officer was an officer, employee or agent of the Company or its
subsidiaries (other than prior to the time such entity became a
subsidiary of the Company); or
-2-
(g) With respect to Proceedings initiated or brought
voluntarily by the Officer and not by way of defense, except pursuant
to Section 8 with respect to proceedings brought to enforce rights or
to collect money due under this agreement; provided however that
indemnity may be provided by the Company in specific cases if the Board
finds it to be appropriate.
In no event shall the Company be obligated to indemnify the Officer
pursuant to this agreement to the extent such indemnification is prohibited by
applicable law.
Section 3. Advancement of Expenses. Subject to Section 7 of this
agreement, the Expenses incurred by the Officer in connection with any
Proceeding shall be promptly reimbursed or paid by the Company as they become
due; provided the Officer submits a written request to the Company for such
payment together with reasonable supporting documentation for such Expenses; and
provided further that the Officer, at the request of the Company, submits to the
Company an undertaking to the effect stated in Section 7, below.
Section 4. Insurance and Self Insurance. The Company shall not be
required to maintain D&O Insurance in effect if and to the extent that such
insurance is not reasonably available or if, in the reasonable business judgment
of the Board, either (a) the premium cost of such insurance is disproportionate
to the amount of coverage, or (b) the coverage provided by such insurance is so
limited by exclusions that there is insufficient benefit from such insurance. To
the extent the Company determines not to maintain D&O Insurance, the Company
shall be deemed to be self-insured within the meaning of Section 1701.13(E)(7)
of the Statute and shall, in addition to the Officer's other rights hereunder,
provide protection to the Officer similar to that which otherwise would have
been available to the Officer under such insurance.
Section 5. Continuation of Obligations. All obligations of the Company
under this agreement shall apply retroactively beginning on the date the Officer
commenced as, and shall continue during the period that the Officer remains, an
officer, employee, or agent of the Company or is, as described above, a
director, officer, employee, trustee, fiduciary, manager, member, or agent of
another corporation, partnership, limited liability company, trust, employee
benefit plan, or other enterprise and shall continue thereafter as long as the
Officer may be subject to any possible claim or any threatened, pending or
completed Proceeding as a result, directly or indirectly, of being such a
director, officer, employee, trustee, fiduciary, manager, member, or agent.
Section 6. Notification and Defense of Claim. Promptly after receipt by
the Officer of notice of the commencement of any Proceeding, if a claim is to be
made against the Company under this agreement, the Officer shall notify the
Company of the commencement thereof, but the delay or omission to so notify the
Company shall not relieve the Company from any liability which it may have to
the Officer under this agreement, except to the extent the Company is materially
prejudiced by such delay or omission. With respect to any such Proceeding of
which the Officer notifies the Company of the commencement:
-3-
(a) The Company shall be entitled to participate therein at
its own expense;
(b) The Company shall be entitled to assume the defense
thereof, jointly with any other indemnifying party similarly notified,
with counsel selected by the Company and approved by the Officer, which
approval shall not unreasonably be withheld. After notice from the
Company to the Officer of the Company's election to assume such
defense, the Company shall not be liable to the Officer under this
agreement for any legal or other Expenses subsequently incurred by the
Officer in connection with the defense thereof except as otherwise
provided below. The Officer shall have the right to employ his own
counsel in such Proceeding, but the fees and expenses of such counsel
incurred after notice from the Company of its assumption of such
defense shall be the expenses of the Officer unless (i) the employment
of such counsel by the Officer has been authorized by the Company, (ii)
the Officer, upon the advice of counsel, shall have reasonably
concluded that there may be a conflict of interest between the Company
and the Officer in the conduct of such defense, or (iii) the Company
has not in fact employed counsel to assume such defense, in any of
which cases the fees and expenses of such counsel shall be the expense
of the Company. The Company shall not be entitled to assume the defense
of any Proceeding brought by or on behalf of the Company or as to which
the Officer, upon the advice of counsel, shall have made the conclusion
described in (ii), above. In the event the Company assumes the defense
of any Proceeding as provided in this Section 6(b), the Company may
defend or settle such Proceeding as it deems appropriate; provided,
however, the Company shall not settle any Proceeding in any manner
which would impose any penalty or limitation on the Officer without the
Officer's written consent, which consent shall not be unreasonably
withheld.
(c) The Company shall not be required to indemnify the Officer
under this agreement for any amounts paid in settlement of any
Proceeding without the Company's written consent, which consent shall
not be unreasonably withheld.
(d) The Officer shall cooperate with the Company in all ways
reasonably requested by it in connection with the Company fulfilling
its obligations under this agreement.
Section 7. Repayment of Expenses. The Officer shall reimburse the
Company for all Expenses paid by the Company pursuant to Section 3 of this
agreement or otherwise in defending any Proceeding against the Officer if and
only to the extent that a determination shall have been made by a court in a
final adjudication from which there is no further right of appeal that the
Officer is not entitled to indemnification by the Company for such Expenses
under the Statute, the Regulations, this agreement, or otherwise.
Section 8. Enforcement. The Company expressly confirms that it has
entered into this agreement and has assumed the obligations of this agreement in
order to induce the Officer to continue as an officer and employee of the
Company and acknowledges that the Officer is relying upon this agreement in
continuing in that capacity. If the Officer is
-4-
required to bring an action to enforce rights or to collect money due under this
agreement, the Company shall reimburse the Officer for all of the Officer's
reasonable fees and expenses (including legal, expert, and other professional
fees and expenses) in bringing and pursuing such action, unless the court
determines that each of the material assertions made by the Officer as a basis
for such action were not made in good faith or were frivolous. The Company shall
have the burden of proving that indemnification is not required under this
agreement, unless a prior determination has been made by the shareholders of the
Company or a court of competent jurisdiction that indemnification is not
required hereunder.
Section 9. Rights Not Exclusive. The indemnification provided by this
agreement shall not be deemed exclusive of any other rights to which the Officer
may be entitled under the Company's articles of incorporation, Regulations, any
vote of the shareholders or disinterested directors of the Company, the Statute,
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
Section 10. Separability. Each of the provisions of this agreement is a
separate and distinct agreement and independent of the others so that, if any
provisions of this agreement shall be held to be invalid and unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions of this agreement.
Section 11. Modification to Applicable Law. In the event there is a
change, after the date of this agreement, in any applicable law (including
without limitation the Statute) which: (a) expands the right of an Ohio
corporation to indemnify a member of its board of directors or an officer, such
change shall be automatically included within the scope of the Officer's rights
and Company's obligations under this agreement; or (b) narrows the right of an
Ohio corporation to indemnify a member of its board of directors or an officer,
such change, to the extent not otherwise required by such law, shall have no
effect on this agreement or the parties' rights and obligations hereunder.
Section 12. Partial Indemnity. If the Officer is entitled under any
provision of this agreement to indemnity by the Company for some or a portion of
the Expenses actually or reasonably incurred by him in the investigation,
defense, appeal, or settlement of any Proceeding, but not for the total amount
thereof, the Company shall nevertheless indemnify the Officer for the portion of
such Expenses to which the Officer is entitled.
Section 13. Governing Law. This agreement shall be interpreted and
enforced in accordance with the laws of the State of Ohio, without regard to
choice of law principles.
Section 14. Successors. This agreement shall be binding upon, inure to
the benefit of, and be enforceable by and against the Officer and the Company
and their respective heirs, successors, and assigns. The Company shall require
any successor or assign (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely, and unconditionally to assume and
agree to perform this agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place.
-5-
Section 15. Prior Agreements. This agreement shall supersede any other
agreements entered into prior to the date of this agreement between the Company
and the Officer concerning the subject matter of this agreement.
Section 16. Consent to Jurisdiction. The Company and the Officer each
hereby irrevocably consents to the jurisdiction of the courts of the State of
Ohio for all purposes in connection with any action or proceeding which arises
out of or relates to this agreement and hereby waives any objections or defenses
relating to jurisdiction with respect to any lawsuit or other legal proceeding
initiated in or transferred to such courts.
CARDINAL HEALTH, INC.
By
OFFICER:
-6-
Exhibit 18.02
October 25, 2004
J. Michael Losh
Chief Financial Officer
Cardinal Health, Inc.
7000 Cardinal Place
Dublin, Ohio 43017
Dear Mr. Losh:
Note 16 of the Notes to the Consolidated Financial Statements of Cardinal
Health, Inc. and subsidiaries included in its Form 10-K for the fiscal year
ended June 30, 2004 describes a change in the method of accounting for cash
discounts from recognizing cash discounts as a reduction of cost of products
sold upon payment of vendor invoices to recording cash discounts as a component
of inventory cost. We conclude that such change in the method of accounting is
to an acceptable alternative method, which, based on your business judgment to
make this change and for the stated reason, is preferable in your circumstances.
Very truly yours,
/s/ Ernst & Young LLP
.
.
.
Exhibit 21.01
SUBSIDIARIES OF THE REGISTRANT
AS AT 06/30/04
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Abilene Nuclear, LLC Delaware
o 80% Scela, Inc.
Academy of Managed Care Medicine, L.L.C. Delaware
ALARIS Medical Systems, Inc. Delaware
ALARIS Consent Corporation Delaware
ALARIS Release Corporation Delaware
ALARIS Medical U.K. Limited United Kingdom
ALARIS Medical Espana, S.L. Spain
ALARIS Medical Holland B.V. Netherlands
ALARIS Medical France S.A. France
ALARIS Medical Norway A/S Norway
ALARIS Medical Italia S.P.A. Italy
ALARIS Medical New Zealand Limited New Zealand
ALARIS Medical Australia Pty Limited Australia
ALARIS Medical Nordic AB Sweden
ALARIS Medical Systems Deutschland, GmbH Germany
ALARIS Medical Canada Ltd. Canada
ALARIS Medical Systems, S.A. Proprietary Limited South Africa
ALARIS Medical Systems Foreign Sales Corporation Barbados
ALARIS Medical Luxembourg I S.a.r.l. Luxembourg
ALARIS Medical Luxembourg II S.a.r.l. Luxembourg
ALARIS Medical Luxembourg I S.a.r.l., S.C.S. Luxembourg
ALARIS Medical (Suisse) 1, S.a.r.l. Switzerland
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
ALARIS Medical (Suisse) 2, S.a.r.l. Switzerland
ALARIS Medical Cayman Islands Cayman Islands
Alcon - Building Branch Puerto Rico
Allcaps Weichgelatinkapseln GmbH & Co. KG Germany
Allcaps Weichgelatinkapseln Verwaltungs GmbH Germany
Allegiance (BVI) Holdings Co. Ltd. British Virgin Islands
Allegiance Corporation Delaware
Allegiance Healthcare (Labuan) Pte. Ltd. Malaysia
Allegiance Healthcare Deutschland Holding GmbH Germany
Allegiance Healthcare Distribution GmbH Austria
Allegiance Healthcare Holding B.V. Netherlands
Allegiance Healthcare International GmbH Austria
Allegiance K. K. Japan
Allegiance Labuan Holdings Pte. Ltd. Malaysia
Anem-IX S.A.R.L. France
API (Suppliers) Limited United Kingdom
Arclight Systems LLC Delaware
Armand Scott, LLC Delaware
Aurum Pharmaceuticals Limited United Kingdom
Bauer Branch Dominican Republic
Beckloff Associates, Inc. Kansas
C. International, Inc. Ohio
Cardal II, LLC Delaware
Cardal, Inc. Ohio
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Distribution Holding Corporation - I Nevada
Cardinal Distribution Holding Corporation - II Nevada
Cardinal Health (Bermuda) 224 Ltd. Bermuda
Cardinal Health 100, Inc. Indiana
(f/k/a Bindley Western Industries, Inc.)
Cardinal Health 101, Inc. Delaware
(f/k/a Cardinal Health Provider Pharmacy Services, Inc.)
Cardinal Health 102, Inc. Ohio
(f/k/a Cardinal Health Staffing Network, Inc.)
Cardinal Health 103, Inc. Mississippi
(f/k/a Cardinal Southeast, Inc.)
Cardinal Health 104 LP Ohio
(f/k/a Cardinal Distribution LP)
Cardinal Health 105, Inc. Ohio
(f/k/a CORD Logistics, Inc.)
Cardinal Health 106, Inc. Massachusetts
(f/k/a James W. Daly, Inc.)
Cardinal Health 107, Inc. Ohio
(f/k/a National Pharmpak Services, Inc.)
Cardinal Health 108, Inc. Tennessee
(f/k/a National Specialty Services, Inc.)
Cardinal Health 109, Inc. Texas
(f/k/a Owen Healthcare, Inc.)
Cardinal Health 110, Inc. Delaware
(f/k/a Whitmire Distribution Corporation)
Cardinal Health 111, LLC Delaware
Cardinal Health 112, LLC Delaware
Cardinal Health 2, Inc. Nevada
(f/k/a The Griffin Group, Inc.)
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health 200, Inc. Delaware
(f/k/a Allegiance Healthcare Corporation)
Cardinal Health 201, Inc. Delaware
(f/k/a Allegiance Healthcare International, Inc.)
Cardinal Health 222 (Thailand) Ltd. Thailand
(f/k/a Allegiance Healthcare (Thailand) Ltd.)
Cardinal Health 3, Inc. Nevada
(f/k/a Red Wing Data Corporation)
Cardinal Health 301, Inc. Delaware
(f/k/a Pyxis Corporation)
Cardinal Health 302, LLC Delaware
Cardinal Health 400, Inc. Illinois
(f/k/a Automatic Liquid Packaging, Inc.)
Cardinal Health 406, LLC Delaware
Cardinal Health 409, Inc. Delaware
(f/k/a R.P. Scherer Corporation)
Cardinal Health 411, Inc. Ohio
(f/k/a RedKey, Inc.)
Cardinal Health 414, Inc. Delaware
(f/k/a Syncor International Corporation)
Cardinal Health 415, Inc. Delaware
(f/k/a Syncor Management Corporation)
Cardinal Health 416, Inc. Delaware
(f/k/a PCI Services II, Inc.)
Cardinal Health 417, Inc. Delaware
(f/k/a PCI Services III, Inc.)
Cardinal Health 418, Inc. Delaware
(f/k/a Syncor Pharmaceuticals, Inc.)
Cardinal Health 419, LLC Delaware
(f/k/a Syncor Radiation Management, LLC)
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health 420, LLC Delaware
(f/k/a Syncor Advanced Isotopes, LLC)
Cardinal Health 421 Limited Partnership Scotland
Cardinal Health 421, Inc. Delaware
(f/k/a RPS Technical Services, Inc.)
Cardinal Health 422, Inc. Alabama
(f/k/a Central Source, Inc.)
Cardinal Health 422 Limited Ireland
Cardinal Health 5, LLC Delaware
Cardinal Health 6, Inc. Nevada
(f/k/a Physicians Purchasing, Inc.)
Cardinal Health Argentina 400 S.A.I.C. Argentina
(f/k/a R.P. Scherer Argentina S.A.I.C.)
Cardinal Health Australia 200 Pty Ltd Australia
(f/k/a Allegiance Healthcare Pty Ltd)
Cardinal Health Australia 300 Pty Ltd Australia
(f/k/a Axiom Healthcare Services Pty. Ltd.)
Cardinal Health Australia 401 Pty Ltd Australia
(f/k/a R.P. Scherer Holdings Pty. Ltd.)
Cardinal Health Belgium 202 S.P.R.L. Belgium
(f/k/a Allegiance S.P.R.L.)
Cardinal Health Brasil 402 Ltda. Brazil
(f/k/a R.P. Scherer do Brasil Encapsulacoes, Ltda.)
Cardinal Health Canada 204, Inc. Canada
(f/k/a Allegiance Healthcare Canada Inc.)
Cardinal Health Canada 301, Inc. Canada
(f/k/a H.E.N. Inc.)
Cardinal Health Canada 302, Inc. Canada
(f/k/a Pyxis Healthcare Systems, Inc.)
Cardinal Health Canada 403, Inc. Canada
(f/k/a R.P. Scherer Canada Inc.)
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health Capital Corporation Ohio
Cardinal Health Corporate Solutions, LLC Nevada
(f/k/a Cardinal Health 4, LLC)
Cardinal Health D.R. 203 Ltd. Bermuda
(f/k/a Allegiance International Manufacturing (Bermuda) Ltd.)
Cardinal Health Finance United Kingdom
Cardinal Health France 205 S.A.S. France
(f/k/a Allegiance Sante S.A.S.)
Cardinal Health France 404 S.A. France
(f/k/a R.P. Scherer S.A.)
o Cardinal Health 409, Inc. (f/k/a R.P. Scherer Corporation) -
684,664 shares - 99.7083%
o F&F Holding GmbH - 1,000 shares - 0.1456%
Cardinal Health Funding, LLC Nevada
Cardinal Health GbR Germany
Cardinal Health Germany 206 GmbH Germany
(f/k/a Allegiance Healthcare Deutschland GmbH)
Cardinal Health Germany 405 GmbH Germany
(f/k/a Cardinal Health Germany GmbH)
Cardinal Health Germany Holdings GmbH Germany
Cardinal Health Holding GmbH Germany
Cardinal Health Holding International, Inc. New Jersey
Cardinal Health Holding Pty Ltd Australia
Cardinal Health Holdings Limited United Kingdom
Cardinal Health International Ventures, Ltd. Barbados
Cardinal Health Ireland 406 Ltd. Ireland
(f/k/a Cardinal Health Technologies Ltd.)
Cardinal Health Ireland 419 Limited Ireland
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health Italy 208 S.r.l. Italy
(f/k/a Allegiance Medica S.R.L.)
Cardinal Health Italy 407 S.p.A. Italy
(f/k/a R.P. Scherer S.p.A.)
Cardinal Health Japan 408 K.K. Japan
(f/k/a R.P. Scherer K.K.)
Cardinal Health Lease Funding 2002A, LLC Delaware
Cardinal Health Lease Funding 2002AQ, LLC Delaware
Cardinal Health Lease Funding 2003A, LLC Delaware
Cardinal Health Lease Funding 2003AQ, LLC Delaware
Cardinal Health Lease Funding 2003B, LLC Delaware
Cardinal Health Lease Funding 2003BQ, LLC Delaware
Cardinal Health Lease Funding 2004A, LLC Delaware
Cardinal Health Lease Funding 2004AQ, LLC Delaware
Cardinal Health Luxembourg 420 S.a.r.l. Luxembourg
Cardinal Health Malaysia 211 Sdn. Bhd. Malaysia
(f/k/a Allegiance Healthcare Sdn. Bhd.)
Cardinal Health Malta 212 Limited Malta
(f/k/a Eurovac Limited)
Cardinal Health Mexico 213 S.A. de C.V. Mexico
(f/k/a Allegiance De Mexico, S.A. de C.V.)
Cardinal Health N.Z. 217 Limited New Zealand
(f/k/a Cardinal Health (N.Z.) Limited)
Cardinal Health Netherlands 214 B.V. Netherlands
(f/k/a Allegiance B.V.)
Cardinal Health Netherlands Financing C.V. Netherlands
Cardinal Health Netherlands Holding B.V. Netherlands
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health P.R. 218, Inc. Puerto Rico
(f/k/a Allegiance PRO, Inc.)
Cardinal Health P.R. 409 B.V. Netherlands
(f/k/a Cardinal Health Manufacturing Services B. V.)
Cardinal Health P.R. 410, Inc. Puerto Rico
(f/k/a PCI Services I, Inc.)
Cardinal Health PTS, LLC Delaware
Cardinal Health Singapore 225 Pte. Ltd. Singapore
Cardinal Health Singapore 303 Pte. Ltd. Singapore
Cardinal Health Spain 219 S.L. Spain
(f/k/a Allegiance S.L.)
Cardinal Health Sweden 220 AB Sweden
(f/k/a Allegiance AB)
Cardinal Health Switzerland 221 GmbH Switzerland
(f/k/a Allegiance Healthcare GmbH)
Cardinal Health Switzerland 412 GmbH Switzerland
(f/k/a Cardinal Health (Europe) GmbH)
Cardinal Health Switzerland 413 AG Switzerland
(f/k/a R.P. Scherer (Europe) AG)
Cardinal Health Systems, Inc. Ohio
Cardinal Health Technologies Switzerland GmbH Switzerland
Cardinal Health Technologies, LLC Nevada
Cardinal Health Trading (Shanghai) Co. Ltd. China
Cardinal Health U.K. 223 Limited United Kingdom
(f/k/a Allegiance Healthcare Limited)
Cardinal Health U.K. 414 Limited United Kingdom
(f/k/a R.P. Scherer Limited)
Cardinal Health U.K. 415 Limited United Kingdom
(f/k/a R.P. Scherer Holdings Limited)
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Cardinal Health U.K. 416 Limited United Kingdom
(f/k/a Scherer DDS Limited)
-Cardinal Health U.K. 417 Limited United Kingdom
(f/k/a Unipack, Ltd.)
Cardinal Health U.K. 418 Limited United Kingdom
Cardinal.com Holdings, Inc. Nevada
Cascade Development, Inc. Nevada
Caseview (P.L.) Limited United Kingdom
CCB, Inc. Iowa
CDI Investments, Inc. Delaware
Centralia Pharmacy, Inc. Illinois
Centricity, LLC Delaware
(f/k/a Boron LePore, Inc.)
Cirmex de Chihuahua S.A. de C.V. Mexico
Cirpro de Delicias S.A. de C.V. Mexico
CMI Net, Inc. Delaware
Comprehensive Medical Imaging-Anaheim Hills, Inc. Delaware
Comprehensive Medical Imaging-Apple Valley, Inc. Delaware
Comprehensive Medical Imaging-Boynton Beach, Inc. Delaware
Comprehensive Medical Imaging-Downey, Inc. Delaware
Comprehensive Medical Imaging-Encino, Inc. Delaware
Comprehensive Medical Imaging-Fort Lauderdale, Inc. Delaware
Comprehensive Medical Imaging-Hesperia, Inc. Delaware
Comprehensive Medical Imaging-Huntington Beach, Inc. Delaware
Comprehensive Medical Imaging-Palm Beach Gardens, Inc. Delaware
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Comprehensive Medical Imaging-Palm Springs, Inc. Delaware
Comprehensive Medical Imaging-Rancho Cucamonga, Inc. Delaware
Comprehensive Medical Imaging-Rancho Mirage, Inc. Delaware
Comprehensive Medical Imaging-Salisbury, Inc. Delaware
Comprehensive Medical Imaging-Santa Maria, Inc. Delaware
Comprehensive Medical Imaging-Sherman Oaks, Inc. Delaware
Comprehensive Medical Imaging-Tempe, Inc. Delaware
Comprehensive Medical Imaging-Van Nuys, Inc. Delaware
Comprehensive Medical Imaging-Victorville, Inc. Delaware
Comprehensive Medical Imaging-Westlake Village, Inc. Delaware
Comprehensive OPEN MRI-Carmichael, Inc. Delaware
Comprehensive OPEN MRI-Folsom, Inc. Delaware
Comprehensive OPEN MRI-Fullerton, Inc. Delaware
Comprehensive OPEN MRI-Laguna Hills, Inc. Delaware
Comprehensive OPEN MRI-Sacramento, Inc. Delaware
Consumer2Patient, LLC. Delaware
Converters Branch Dominican Republic
Convertors de Mexico S.A. de C.V. Mexico
Corona Regional Medical Imaging, LLC Delaware
CR Medicap, Inc. Iowa
Craig Generics Limited United Kingdom
Crossject S.A. France
Cytokine Pharmasciences Delaware
o ALARIS Medical Systems, Inc. - 5.6%
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Daniels Pharmaceuticals Limited United Kingdom
Desert PET, LLC California
Diagnostic Purchasing Group, Inc. Delaware
Dover Communications, LLC Delaware
(f/k/a BLP-Dover Acquisition Corp.)
DuQuoin Pharmacy, Inc. Illinois
Dutch American Manufacturers (D.A.M.) B.V. Netherlands
East Iowa Pharmacies, Inc. Iowa
EGIS Holdings, Inc. Delaware
Ellipticare, LLC Delaware
EPIC Insurance Company Vermont
Eurochem Limited United Kingdom
European Pharmaceuticals Group Ltd. United Kingdom
Europharm of Worthing Limited United Kingdom
F&F Holding GmbH Germany
Federa France France
Federa Limoges France
Federa S.A. Belgium
Freeman Pharmaceuticals Limited United Kingdom
GCP Innovative Dynamics, LLC Kansas
Glacier Guaranty Corporation Vermont
Glamorgan Pharmaceuticals Limited United Kingdom
Global Healthcare Exchange, LLC Delaware
Grand Avenue Pharmacy, Inc. Iowa
Griffin Capital, LLC Nevada
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Griffin Group Document Management Services, Inc. Nevada
(f/k/a Supplyline Holdings, Inc.)
Herd Mundy Richardson (Holdings) Limited United Kingdom
Herd Mundy Richardson Limited United Kingdom
Homecare (North-West) Limited United Kingdom
IMI Diagnostic Center, Inc. Delaware
IMI of Boca Raton, Inc. Delaware
IMI of Miami, Inc. Delaware
IMI of North Miami Beach, Inc. Delaware
IMI-NET, Inc. Delaware
Impharm Nationwide Limited United Kingdom
InGel Technologies Ltd. United Kingdom
Inland Empire Regional PET Center, LLC California
InteCardia-Tennessee East Catheterization, LLC North Carolina
o 75% Syncor Cardiology Services, LLC
InteCardia-Tennessee East Diagnostic, LLC North Carolina
Intercare Holdings Limited United Kingdom
Intercare Investments Limited United Kingdom
Intercare Pharmaceuticals Distribution Limited United Kingdom
(f/k/a Europharm of Worthing Limited)
Intercare Properties Plc United Kingdom
International Capsule Company S.r.l. Italy
International Medical Products B.V. Netherlands
(f/k/a Mepro Medische Produkten B.V.)
Iowa Falls Pharmacy, Inc. Iowa
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
IPD Group Limited United Kingdom
(f/k/a European Pharmaceuticals Group Limited)
IVAC Overseas Holdings, Inc. Delaware
JRG, Ltd. Iowa
Killilea Development Company, Ltd. Ohio
Lake Charles Pharmaceutical and Medical Equipment Supply Company, L.L.C. Louisiana
o A Louisiana limited liability company formed by Owen Shared
Services, Inc. and Lake Charles Memorial Hospital, Inc.
LCO Sante France
Leader Drugstores, Inc. Delaware
Liberty Communications Network, LLC Delaware
(f/k/a BLP-Liberty Acquisition Corp.)
Macarthy Group Limited United Kingdom
Macarthy Group Trustees Limited United Kingdom
Macarthy Limited United Kingdom
Macarthy's Laboratories Limited United Kingdom
Cardinal Health MPB, Inc. Missouri
(f/k/a Managed Pharmacy Benefits, Inc.)
Martindale Pharmaceuticals Limited United Kingdom
Medcon S.A. Luxembourg
Medesta Associates, LLC Delaware
Medical Diagnostic Leasing, Inc. Delaware
Medical Education Systems, LLC Delaware
Medical Media Communications, LLC Delaware
Medicap Pharmacies Incorporated Iowa
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Medicine Shoppe Capital Corporation Nevada
Medicine Shoppe International, Inc. Delaware
Medicine Shoppe Internet, Inc. Missouri
Medihealth Solutions, Inc. Iowa
MediQual Systems, Inc. Delaware
Midland Pharmacies, Inc. Iowa
Moresville, Limited United Kingdom
MRI Equipment Partners, Ltd. Texas
o 59.16% Comprehensive Medical Imaging, Inc.
Multi-Medica S.A. Belgium
Multipharm Limited United Kingdom
Nationwide Ostomy Supplies Limited United Kingdom
NewHealthCo LLC Delaware
OnPointe Medical Communications, LLC Delaware
Owen Shared Services, Inc. Texas
PCI Holdings (UK) Co. United Kingdom
Pharmaceutical and Diagnostic Services, Inc. Utah
o 50% Cardinal Health 414, Inc.
Pharmacy Operations of New York, Inc. New York
Pharmacy Operations, Inc. Delaware
Pharmapar S.A. Belgium
Phillipi Holdings, Inc. Ohio
Physicians Purchasing, Inc. Nevada
Pinnacle Intellectual Property Services International, Inc. Nevada
Pinnacle Intellectual Property Services, Inc. Nevada
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
PlastiMedical S.p.A. Italy
Poweshiek Pharmacy, Inc. Iowa
Practicome Solutions, LLC Delaware
Princeton Diagnostic Isotopes, Inc. West Virginia
Productos Urologos de Mexico S.A. de C.V. Mexico
Pyxis Funding II, LLC Delaware
Pyxis Funding, LLC Delaware
Quiroproductos de Cuauhtemoc S.A. de C.V. Mexico
R.P. Scherer (Spain) S.A. Spain
R.P. Scherer DDS B.V. Netherlands
R.P. Scherer Egypt Egypt
R.P. Scherer GmbH & Co. KG Germany
o F & F Holdings GmbH - 50.94%
o R.P. Scherer Verwaltungs GmbH - 0.11%
R.P. Scherer Holdings II Limited United Kingdom
R.P. Scherer Technologies, Inc. Nevada
R.P. Scherer Verwaltungs GmbH Germany
o F & F Holdings GmbH - 51%
Radiopharmacy of Boise, Inc. Delaware
Radiopharmacy of Northern California, Inc. California
Ransdell Surgical, Inc. Kentucky
RBP Pharma S.A. France
River Medical, Inc. Delaware
Riverside MRI, JV Texas
RxealTIME, Inc. Nevada
RxPedite, LLC Ohio
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Santa Cruz Comprehensive Imaging LLC Delaware
o 57% Cardinal Health 414, Inc.
Scela, Inc. Delaware
SFO S.A. France
Sierra Radiopharmacy, LLC Nevada
o 51% Cardinal Health 414, Inc.
Simolo (GL) Limited United Kingdom
Sistemas Medicos ALARIS, S.A. de C.V. Mexico
SOS Medical System S.A.R.L. France
Source Medical Corporation Canada
o Allegiance Healthcare Canada Inc. controls with 50% of common
shares & 100% of preferred share (1 share)
SRx, Inc. Iowa
STI Deutschland GmbH Surgical Technologies Germany
International
Strategic Implications International, LLC Delaware
Supplyline Technologies Limited Ireland
Surgical Technologies B.V. Netherlands
Surgi-Tech Europa Divisione Surgi-Tech Italia SRL Italy
Syncor Belgium SPRL Belgium
Syncor Cardiology Services, LLC Delaware
Syncor Diagnostics Dallas, LLC Texas
Syncor Diagnostics Encino, LLC California
Syncor Diagnostics Fullerton LLC California
Syncor Diagnostics Laguna Hills LLC California
Syncor Diagnostics Plano, LLC Texas
SUBSIDIARY NAME STATE / JURISDICTION OF INCORPORATION
--------------- -------------------------------------
Syncor Financing Corporation Delaware
Syncor Italy s.r.l. Italy
Syncor Midland, Inc. Texas
The Intercare Group Limited United Kingdom
Toledo Pharmacy Co. Iowa
Top Shot Publishers Limited Ireland
Venture Laminate Limited Ireland
Venture Packaging Limited Ireland
Veramic S.A. Belgium
Virginia Imaging Center, LLC Virginia
o 90% Syncor Cardiology Services, LLC
Vistant Corporation Delaware
Vistant Holdings, Inc. Nevada
Wardwood, Inc. Iowa
West Texas Nuclear Pharmacy Partners Texas
o Syncor Midland, Inc. (50%)
Wholesale (PI) Limited United Kingdom
Yorkshire Pharmacy, Inc. Nebraska
Exhibit 23.01
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements No.
333-101907, No. 333-62944, No. 333-24483, No. 333-46482, No. 33-62198 and No.
33-57223 of Cardinal Health, Inc. on Form S-3, Registration Statements No.
333-62938 and No. 333-74761 of Cardinal Health, Inc. on Form S-4, and
Registration Statements No. 33-20895, No. 33-38022, No. 33-52537, No. 33-38021,
No. 33-52539, No. 333-42357, No. 333-52535, No. 33-64337, No. 333-72727, No.
333-91849, No. 33-63283, No. 33-63283-01, No. 333-01927-01, No. 333-11803-01,
No. 333-21631-01, No. 333-21631-02, No. 333-30889-01, No. 333-56655-01, No.
333-71727, No. 333-68819-01, No. 333-90417, No. 333-90423, No. 333-90415, No.
333-92841, No. 333-38198, No. 333-38190, No. 333-38192, No. 333-56006, No.
333-56008, No. 333-56010, No. 333-53394, No. 333-91598, No. 333-91600, No.
333-102369 and No. 333-100564 of Cardinal Health, Inc. on Form S-8, of our
report dated September 27, 2004, with respect to the consolidated financial
statements and schedule of Cardinal Health, Inc. and subsidiaries included in
this Annual Report (Form 10-K) for the Fiscal Year Ended June 30, 2004.
/s/ Ernst & Young LLP
Columbus, Ohio
October 25, 2004
Exhibit 31.01
I, Robert D. Walter, certify that:
1. I have reviewed this Form 10-K of Cardinal Health, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: October 26, 2004
/s/ Robert D. Walter
-------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
Exhibit 31.02
I, J. Michael Losh, certify that:
1. I have reviewed this Form 10-K of Cardinal Health, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: October 26, 2004
/s/ J. Michael Losh
-----------------------
J. Michael Losh
Chief Financial Officer
Exhibit 32.01
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert D. Walter, Chairman and Chief Executive Officer of Cardinal
Health, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K for the fiscal year ended June 30, 2004
(the "Periodic Report"), containing the financial statements of the
Company, which this statement accompanies, fully complies with the
requirements of Section 13(a)* or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)), and
(2) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
* Except to the extent that Exchange Act Rule 13a-15(a), if applicable
to this certification, is ever deemed violated with respect to the
matters described in Item 9a of the Periodic Report.
Dated: October 26, 2004
/s/ Robert D. Walter
--------------------------------
Robert D. Walter
Chairman and
Chief Executive Officer
Exhibit 32.02
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Michael Losh, Chief Financial Officer of Cardinal Health, Inc.
(the "Company"), certify, pursuant to 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K for the fiscal year ended June 30, 2004
(the "Periodic Report"), containing the financial statements of the
Company, which this statement accompanies, fully complies with the
requirements of Section 13(a)* or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)), and
(2) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
* Except to the extent that Exchange Act Rule 13a-15(a), if applicable
to this certification, is ever deemed violated with respect to the
matters described in Item 9a of the Periodic Report.
Dated: October 26, 2004
/s/ J. Michael Losh
------------------------------
J. Michael Losh
Chief Financial Officer
Exhibit 99.01
The Private Securities Litigation Reform Act of 1995, as amended (the "Act"),
provides a "safe harbor" for "forward-looking statements" (as defined in the
Act). The Company's filings with the Securities and Exchange Commission (the
"SEC"), including its Annual Report on Form 10-K, Annual Report to Shareholders,
Forms 10-Q and Forms 8-K (along with any exhibits to such filings as well as any
amendments to such filings), press releases, other written or oral statements
made by or on behalf of the Company, may include, reference or incorporate by
reference forward-looking statements which reflect the Company's current view
(as of the date such forward-looking statement is made) with respect to future
events, prospects, projections and/or financial performance. These
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those contemplated,
projected, anticipated or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to:
- uncertainties relating to general economic, political, business, industry,
regulatory and market conditions;
- the loss of one or more key customer or supplier relationships, such as
pharmaceutical and medical/surgical manufacturers for which alternative
supplies may not be available or easily replaceable, or unfavorable
changes to the terms of those relationships, or changes in customer mix;
- changes in manufacturers' pricing, selling, inventory, distribution or
supply policies or practices, including policies concerning price
inflation;
- uncertainties related to the timing, negotiation and likelihood of success
of the Company's Pharmaceutical Distribution business model transition
with respect to how the Company is compensated for the logistical, capital
and administrative services that it provides to pharmaceutical
manufacturers, and the continued dependence until such transition is
completed, if ever, upon pharmaceutical price inflation, which price
inflation is often unpredictable;
- changes in the distribution or outsourcing pattern for pharmaceutical and
medical/surgical products and services, including an increase in direct
distribution or a decrease in contract packaging by pharmaceutical
manufacturers;
- potential liabilities associated with warranties of the Company's
information systems, and the malfunction or failure of the Company's
information systems or those of third parties with whom the Company do
business, such as malfunctions or failures associated with date-related
issues, incompatible software, improper coding and disruption to
internet-related operations;
- the costs, difficulties, and uncertainties related to the integration of
recently acquired businesses, including liabilities related to the
operations or activities of such businesses prior to their acquisition;
- changes to the presentation of financial results and position resulting
from adoption of new accounting principles or upon the advice of the
Company's independent accountants or the staff of the SEC;
- weaknesses in internal controls and procedures under Section 404 of the
Sarbanes-Oxley Act of 2002;
- difficulties and costs associated with enhancing the Company's accounting
systems and internal controls and complying with financial reporting
requirements;
- changes in government regulations or the Company's failure to comply
with those regulations or other applicable laws;
- the results, effects or timing of any inquiry or investigation by any
regulatory authority and any related legal and administrative proceedings,
which may include the institution of administrative, civil injunctive or
criminal proceedings against the Company and/or current or former Company
officers or employees, the imposition of fines and penalties, suspensions
or debarments from government contracting, and/or other remedies and
sanctions;
- the costs and effects of commercial disputes, shareholder claims,
derivative claims or other legal proceedings;
- downgrades of the Company's credit ratings, and the potential that such
downgrades could negatively impact the Company's access to capital;
- increased costs for the raw materials used by the Company's manufacturing
businesses or shortages in these raw materials;
- the risks of counterfeit products in the supply chain;
- the possible adverse effects on the Company of the importation of
pharmaceuticals and/or other health care products;
- injury to person or property resulting from the Company's manufacturing,
packaging, repackaging, drug delivery system development and
manufacturing, information systems, or pharmacy management services;
- competitive factors in the Company's healthcare service businesses,
including pricing pressures;
- unforeseen changes in the Company's existing agency and distribution
arrangements;
- the continued financial viability and success of the Company's customers,
suppliers, and franchisees;
- difficulties encountered by the Company's competitors, whether or not the
Company faces the same or similar issues;
- technological developments and products offered by competitors;
- failure to retain or continue to attract senior management or key
personnel;
- uncertainties related to transitions in senior management positions;
- risks associated with international operations, including fluctuations in
currency exchange ratios;
- costs associated with protecting the Company's trade secrets and enforcing
its patent, copyright and trademark rights, and successful challenges to
the validity of its patents, copyrights or trademarks;
- difficulties or delays in the development, production, manufacturing, and
marketing of new products and services, including difficulties or delays
associated with obtaining requisite regulatory consents or approvals
associated with those activities;
- strikes or other labor disruptions;
- labor, pension and employee benefit costs;
- changes in hospital buying groups or hospital buying practices; and
- other factors described in the Company's Annual Report on Form 10-K or
Quarterly Reports on Form 10-Q or the other documents the Company files
with the SEC including, but not limited to the section entitled "Risk
Factors That May Affect Future Results" in the Company's Annual Report on
Form 10-K.
The words "believe," "expect," "anticipate," "project," and similar expressions
generally identify "forward-looking statements," which speak only as of the date
the statement was made. The Company undertakes no obligation (nor does it
intend) to publicly update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise, except to the extent
required under applicable law.
EXHIBIT 99.02
SPECIAL CODE SECTION 401(a)(9) AMENDMENT
TO THE
CARDINAL HEALTH PROFIT SHARING,
RETIREMENT AND SAVINGS PLAN
BACKGROUND INFORMATION
A. Cardinal Health, Inc. (the "Company") maintains the Cardinal Health
Profit Sharing, Retirement and Savings Plan (the "Plan") for the
benefit of its eligible employees and their beneficiaries.
B. The Company desires to amend the Plan to comply with the requirements
of Section 401(a)(9) of the Internal Revenue Code of 1986, as amended
(the "Code") and the final and temporary regulations issued thereunder
and intends this Special Amendment as good faith compliance with the
requirements of the model plan amendment issued in Rev. Proc. 2002-29
and the guidance issued thereunder.
C. Section 13.02 of the Plan permits the Company to amend the Plan at any
time.
AMENDMENT OF THE PLAN
The Plan is hereby amended as set forth below effective January 1,
2003, unless some later effective date is specified.
1. A new Article VI.A. referencing the minimum distribution requirements
is hereby added to the Plan to read in its entirety as follows:
ARTICLE VI.A.
REVISED MINIMUM REQUIRED DISTRIBUTIONS
Section 6A.01. EFFECTIVE DATES. The provisions of this Article VI.A.
will apply for purposes of determining the required minimum distributions for
calendar years beginning on or after January 1, 2003.
Section 6A.02. DEFINITIONS. For purposes of this Article VI.A., the
following definitions shall apply:
A. "Designated Beneficiary" is the individual who is designated as the
beneficiary under Plan Section 1.03 and is the Designated Beneficiary under Code
Section 401(a)(9) and Section 1.401(a)(9)-1, Q&A-4 of the Treasury Regulations.
B. "Distribution Calendar Year" is a calendar year for which a minimum
distribution is required. For distributions beginning before the Participant's
death, the first Distribution Calendar Year is the calendar year immediately
preceding the calendar year which contains the participant's Required Beginning
Date. For distributions beginning after the Participant's death, the first
Distribution Calendar Year is the calendar year in which the distributions are
required to begin under Section 6.03.B. The required minimum distribution for
the Participant's first Distribution Calendar Year will be made on or before the
Participant's Required Beginning Date. The required minimum distribution for
other Distribution Calendar Years, including the required minimum distribution
for the Distribution Calendar Year in which the Participant's Required Beginning
Date occurs, will be made on or before December 31 of that Distribution Calendar
Year.
C. "Life Expectancy" is a beneficiary's life expectancy as computed by
use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury
Regulations.
D. "RMD Account Balance" is the account balance as of the last
valuation date in the calendar year immediately preceding the Distribution
Calendar Year (the "VALUATION CALENDAR YEAR") increased by the amount of any
contributions made and allocated or forfeitures allocated to the account balance
as of dates in the Valuation Calendar Year after the valuation date and
decreased by distributions made in the Valuation Calendar Year after the
valuation date. The account balance for the Valuation Calendar Year includes any
amounts rolled over or transferred to the Plan either in the Valuation Calendar
Year or in the Distribution Calendar Year if distributed or transferred in the
Valuation Calendar Year.
E. "Special Election" is a provision of the Plan included in this
Article which supersedes the general presumptions set forth in Code Section
401(a)(9) and the Treasury Regulations thereunder. To the extent that this
Article does not include any provisions for Special Elections, the default
provisions of Code Section 401(a)(9), as set forth below shall apply.
Section 6A.03. TIME AND MANNER OF DISTRIBUTION. Subject to any Special
Election set forth in this Article, the following rules shall apply:
A. Required Beginning Date. The Participant's entire interest will be
distributed, or begin to be distributed, to the Participant no later than the
Participant's Required Beginning Date.
B. Death of Participant Before Distributions Begin. If the Participant
dies before distributions begin, the Participant's entire interest will be
distributed, or begin to be distributed, no later than as follows:
-2-
(i) If the Participant's surviving spouse is the Participant's sole
Designated Beneficiary, then, except as provided herein, distributions to the
surviving spouse will begin by December 31 of the calendar year immediately
following the calendar year in which the Participant died, or by December 31 of
the calendar year in which the Participant would have attained age 70 1/2, if
later.
(ii) If the Participant's surviving spouse is not the Participant's
sole Designated Beneficiary, then, except as provided herein, distributions to
the Designated Beneficiary will begin by December 31 of the calendar year
immediately following the calendar year in which the Participant died.
(iii) If there is no Designated Beneficiary as of September 30 of the
year following the year of the Participant's death, the Participant's entire
interest will be distributed by December 31 of the calendar year containing the
fifth anniversary of the Participant's death.
(iv) If the Participant's surviving spouse is the Participant's sole
Designated Beneficiary and the surviving spouse dies after the Participant but
before distributions to the surviving spouse begin, this Section 6A.03.B., other
than Section 6A.03.B.(i)], will apply as if the surviving spouse were the
Participant.
For purposes of this Section 6A.03.B. and Section 6A.05., unless Section
6A.03.B.(iv) applies, distributions are considered to begin on the Participant's
Required Beginning Date. If Section 6A.03.B.(iv) applies, distributions are
considered to begin on the date distributions are required to begin to the
surviving spouse under Section 6A.03.B.(i). If distributions under an annuity
purchased from an insurance company irrevocably commence to the Participant
before the Participant's Required Beginning Date (or to the Participant's
surviving spouse before the date distributions are required to begin to the
surviving spouse under Section 6A.03.B.(i)), the date distributions are
considered to begin is the date distributions actually commence.
C. Forms of Distribution. Unless the Participant's interest is
distributed in the form of an annuity purchased from an insurance company or in
a single sum on or before the Required Beginning Date, as of the first
Distribution Calendar Year distributions will be made in accordance with
Sections 6A.04. and 6A.05. of this Article VI.A. If the Participant's interest
is distributed in the form of an annuity purchased from an insurance company,
distributions thereunder will be made in accordance with Code Section 401(a)(9)
and the Treasury Regulations.
Section 6A.04. REQUIRED MINIMUM DISTRIBUTIONS DURING PARTICIPANT'S
LIFETIME. Subject to any Special Election set forth in this Article, the
following rules shall apply:
A. Amount of Required Minimum Distributions for Each Distribution
Calendar Year. During the Participant's lifetime, the minimum amount that will
be distributed for each Distribution Calendar Year is the lesser of:
-3-
(i) the quotient obtained by dividing the RMD Account Balance by the
distribution period in the Uniform Lifetime Table set forth in Treasury
Regulations Section 1.401(a)(9)-9, using the Participant's age as of the
Participant's birthday in the Distribution Calendar Year; or
(ii) if the Participant's sole Designated Beneficiary for the
Distribution Calendar Year is the Participant's spouse, the quotient obtained by
dividing the RMD Account Balance by the number in the Joint and Last Survivor
Table set forth in Treasury Regulations Section 1.401(a)(9)-9, using the
Participant's and the Spouse's attained ages as of the Participant's and
spouse's birthdays in the Distribution Calendar Year.
B. Lifetime Required Minimum Distributions Continue Through Year of
Participant's Death. Required minimum distributions will be determined under
this Section 6A.04 beginning with the first Distribution Calendar Year and up to
and including the Distribution Calendar Year that includes the Participant's
date of death.
Section 6A.05. REQUIRED MINIMUM DISTRIBUTIONS AFTER PARTICIPANT'S
DEATH. Subject to any Special Election set forth in this Article, the following
rules shall apply:
A. Death On or After Date Distributions Begin.
(i). Participant Survived by Designated Beneficiary. If the Participant
dies on or after the date distributions begin and there is a Designated
Beneficiary, the minimum amount that will be distributed for each Distribution
Calendar Year after the year of the Participant's death is the quotient obtained
by dividing the RMD Account Balance by the longer of the remaining Life
Expectancy of the Participant or the remaining Life Expectancy of the
Participant's Designated Beneficiary, determined as follows:
(1) The Participant's remaining Life Expectancy is calculated
using the age of the Participant in the year of death, reduced by one for each
subsequent year.
(2) If the Participant's surviving spouse is the Participant's
sole Designated Beneficiary, the remaining Life Expectancy of the surviving
spouse is calculated for each Distribution Calendar Year after the year of the
Participant's death using the surviving spouse's age as of the spouse's birthday
in that year. For Distribution Calendar Years after the year of the surviving
spouse's death, the remaining Life Expectancy of the surviving spouse is
calculated using the age of the surviving spouse as of the spouse's birthday in
the calendar year of the spouse's death, reduced by one for each subsequent
calendar year.
(3) If the Participant's surviving spouse is not the
Participant's sole Designated Beneficiary, the Designated Beneficiary's
remaining Life Expectancy is calculated using the age of the Beneficiary in the
year following the year of the Participant's death, reduced by one for each
subsequent year.
-4-
(ii). No Designated Beneficiary. If the Participant dies on or after
the date distributions begin and there is no Designated Beneficiary as of
September 30 of the year after the year of the Participant's death, the minimum
amount that will be distributed for each Distribution Calendar Year after the
year of the Participant's death is the quotient obtained by dividing the RMD
Account Balance by the Participant's remaining Life Expectancy calculated using
the age of the Participant in the year of death, reduced by one for each
subsequent year.
B. Death Before Date Distributions Begin.
(i) Participant Survived by Designated Beneficiary. Except as provided
herein, if the Participant dies before the date distributions begin and there is
a Designated Beneficiary, the minimum amount that will be distributed for each
Distribution Calendar Year after the year of the Participant's death is the
quotient obtained by dividing the Participant's Account Balance by the remaining
Life Expectancy of the Participant's Designated Beneficiary, determined as
provided in Section 6A.05.A.
(ii) No Designated Beneficiary. If the Participant dies before the date
distributions begin and there is no Designated Beneficiary as of September 30 of
the year following the year of the Participant's death, distribution of the
Participant's entire interest will be completed by December 31 of the calendar
year containing the fifth anniversary of the Participant's death.
(iii) Death of Surviving Spouse Before Distributions to Surviving
Spouse are Required to Begin. If the Participant dies before the date
distributions begin, the Participant's surviving spouse is the Participant's
sole Designated Beneficiary, and the surviving spouse dies before distributions
are required to being to the surviving spouse under Section 6A.03.B.(i), this
Section 6A.05.B. will apply as if the surviving spouse were the Participant.
Section 6A.06 EARLY EFFECTIVE DATE AND GENERAL RULES
A. Coordination with Minimum Distribution Requirements Previously in
Effect. If Plan Section 6A.01 above specifies an effective date of this Article
VI.A. that is earlier than January 1, 2003, required minimum distributions for
2002 under this Article VI.A. will be determined as follows:
(i) If the total amount of 2002 required minimum distributions under
the Plan made to the Distributee prior to the effective date of this Article
VI.A. equals or exceeds the required minimum distributions determined under this
Article VI.A., then no additional distributions will be required to be made for
2002 on or after such date to the Distributee.
(ii) If the total amount of 2002 required minimum distributions under
the Plan made to the Distributee prior to the effective date of this Article
VI.A. is less than the amount determined under this Article VI.A., then required
minimum distributions for 2002 on and after such date will be determined so that
the total amount of required minimum distributions for 2002 made to the
Distributee will be the amount determined under this Article VI.A.
-5-
B. Precedence. The requirements of this Article VI.A. will supersede
any contrary provisions of the Plan.
C. Requirements of Treasury Regulations Incorporated. All distributions
required under this Article VI.A. will be determined and made in accordance with
the Treasury Regulations under Code Section 401(a)(9).
D. TEFRA Section 242(b)(2) Elections. Notwithstanding the other
provisions of this Article VI.A., distributions may be made under a designation
made before January 1, 1984, in accordance with section 242(b)(2) of the Tax
Equity and Fiscal Responsibility Act ("TEFRA") and the provisions of the Plan
that relate to TEFRA Section 242(b)(2).
2. All other Plan provisions remain in full force and effect.
FIRST AMENDMENT
TO THE
CARDINAL HEALTH PROFIT SHARING,
RETIREMENT AND SAVINGS PLAN
(AMENDED AND RESTATED EFFECTIVE AS OF JULY 1, 1998)
(REVISED AS OF 2002)
BACKGROUND INFORMATION
A. Cardinal Health, Inc., an Ohio corporation (the "Corporation"),
maintains a profit sharing plan known as the Cardinal Health Profit
Sharing, Retirement and Savings Plan (the "Plan") for the benefit of
its employees and their beneficiaries.
B. Pursuant to Section 13.02 of the Plan, the Corporation may amend the
Plan at any time.
C. The Cardinal Health Profit Sharing, Retirement and Savings Plan
Committee (the "Committee") assists in the administration of the Plan
and is empowered to amend the Plan on behalf of the Corporation by
action of a majority of its members then in office.
D. The Committee desires to amend the Plan to clarify the appropriate
effective date for the change in the definition of the "Required
Beginning Date" pursuant Section 401(a)(9) of the Internal Revenue Code
of 1986, as amended (the "Code") in order to satisfy the review of the
Plan by the Internal Revenue Service for a favorable determination.
AMENDMENT TO THE PLAN
1. A new Section 3.11.C. is hereby added to the Plan to read as follows:
Coordination of Excess Elective Deferrals and Excess Compensation
Deferrals. In accordance with Treas. Reg. Section 1.401(k)-1(f)(5)(i),
the amount of Excess Compensation Deferrals to be distributed or
re-characterized shall be reduced by Excess Elective Deferrals
previously distributed for the taxable year ending in the same Plan
Year and Excess Elective Deferrals shall be reduced by Excess
Compensation Deferrals previously distributed or re-characterized for
the Plan Year beginning in such taxable year.
2. The definition of "Required Beginning Date" in Section 6.03.B. of the Plan
shall be amended to add the introductory phrase "On and after January 1, 1999,"
to the first sentence of such section.
3. All other provisions of the Plan shall remain in full force and effect.
Dated October 20, 2003. CARDINAL HEALTH, INC.
By: /s/ Susan Nelson
--------------------------------
Its:
--------------------------------
EXHIBIT 99.04
FIRST AMENDMENT
TO THE
CARDINAL HEALTH PROFIT SHARING,
RETIREMENT AND SAVINGS PLAN
(As amended and restated July 1, 2002)
BACKGROUND INFORMATION
A. Cardinal Health, Inc. ("Cardinal Health") established and maintains the
Cardinal Health Profit Sharing, Retirement and Savings Plan (the
"Plan") for the benefit of participants and their beneficiaries.
B. The Cardinal Health, Inc. Employee Benefits Policy Committee (the
"Committee") oversees the administration of the Plan and is authorized
to amend the Plan.
C. The Committee desires to amend the Plan to reflect (1) use of
forfeiture amounts from a current plan year to fund contributions
attributable to a prior or future plan year; (2) changes to the
provisions relating to participant direction of investments; (3)
certain recent corporate acquisitions, which will become participating
employers; (4) the merger of certain acquired plans with and into the
Cardinal Health Plan; and (5) special eligibility, full vesting and
additional employer contributions to former employees of Cardinal
Health 409, Inc. whose employment with Cardinal Health was terminated
as part of the divestiture of the paintball manufacturing division.
D. Section 13.02 of the Plan permits the amendment of the Plan at any
time.
AMENDMENT OF THE PLAN
1. Section 3.17 of the Plan is hereby amended in its entirety to read as
follows:
Section 3.17 ALLOCATION OF FORFEITURES. Subject to any restoration
allocation required under Section 5.05, the Committee shall allocate
and use all or a portion of the amount of a Participant's benefit
forfeited under the Plan either to pay reasonable expenses of the Plan
(to the extent not paid by the Employer) or to reduce its Profit
Sharing Contribution, Special Contribution, Matching Contribution
and/or other contributions payable under the Plan for the Plan Year in
which the forfeiture occurs or any prior or future Plan Year, as
determined by the Committee.
2. Section 9.05 of the Plan is hereby amended in its entirety to read as
follows:
Section 9.05. PARTICIPANT DIRECTION OF INVESTMENT. The Committee and
the Trustee shall establish rules governing the administration of
Investment Funds and procedures for Participant direction of
investment, including rules governing the timing, frequency and manner
of making investment elections. The Committee and the Employer reserve
the right to change the investment options available under the Plan and
rules governing investment designations from time to time. Nothing in
this or any other
provision of the Plan shall require the Trustee, the Employer or the
Committee to implement Participant investment directions or changes in
such directions, or to establish any procedures, other than on an
administratively practicable basis, as determined by the Employer in
its discretion.
Each Participant shall, in accordance with procedures established by
the Committee and the Trustee, direct that his Account and
contributions thereto be invested and reinvested in any one or more of
the Investment Funds. The investment of any such monies shall be
subject to such restrictions as the Committee may determine, in its
sole discretion, to be advisable or necessary under the circumstances.
Moreover, in accordance with procedures established by the Trustee and
agreed to by the Committee, Participants may, when administratively
practicable, be permitted to change their current and prospective
investment designations through telephone, "on-line" or similar
instructions to the Trustee or its authorized agent on a frequency
established under such procedures, as in effect from time to time.
The exercise of investment direction by a Participant will not cause
the Participant to be a fiduciary solely by reason of such exercise,
and neither the Trustee nor any other fiduciary of this Plan will be
liable for any loss or any breach that results from the exercise of
investment direction by the Participant. The investment designation
procedures established under the Plan shall be and are intended to be
in compliance with the requirements of ERISA Section 404(c) and the
regulations thereunder.
In no event shall Participants be permitted to direct that such
Accounts and/or such additional contributions be invested in the
Employer Common Stock Fund until Cardinal Health, Inc., the Plan, the
Trustee and all other relevant parties have fully complied with such
requirements, including, but not limited to, federal and state
securities laws, as the Committee has determined to be applicable. The
Committee may restrict the ability of any person covered under Section
16 of the Securities Exchange Act of 1934, as amended, or any other
corporate insider of the Employer to direct the investment of his
Account in the Employer Common Stock Fund. Notwithstanding any
provision to the contrary, the Committee may, in its sole discretion
and where the terms of any relevant investment contracts, regulated
investment companies or pooled or group trusts so require, impose
special terms, conditions and restrictions upon a Participant's right
to direct the investment in, or transfer into or out of, such
contracts, companies or trusts.
3. Section 9.06 of the Plan is amended in its entirety to read as follows:
Section 9.06. CHANGE OF INVESTMENT DESIGNATIONS. Each Participant who
is entitled to direct the investment of additional contributions to be
allocated to his Account in accordance with Section 9.05 hereof may
select how such additional contributions are to be invested. Such
investment directions shall be made in accordance with applicable rules
or procedures established by the Trustee and the Committee.
Each Participant may prospectively re-elect how those amounts then held
in his Account are to be reinvested in the various Investment Funds
until otherwise changed or modified. Such investment directions shall
be made in accordance with applicable rules or procedures established
by the Trustee and the Committee.
Notwithstanding the foregoing to the contrary, the Committee may, in
its sole discretion and where the terms of any relevant investment
contracts, regulated investment companies or pooled or group trusts so
require, or where ERISA fiduciary obligations and considerations so
merit, impose special terms, conditions and restrictions upon a
Participant's right to direct the investment in, or transfer into or
out of, such contracts, companies or trusts. In addition, with respect
to Shares held under the Plan that were previously maintained under the
Owen Healthcare, Inc. Employee Stock Ownership Plan (the "ESOP
Shares"), no more than 25% of the original number of ESOP Shares of any
Participant transferred to this Plan may be exchanged, sold or
distributed in any calendar quarter. This restriction on the
disposition of ESOP Shares shall expire on July 1, 2001.
4. Schedule II to the Plan, Schedule of Merging Plans, is hereby amended
by the addition of the following merging plans as of the dates to be
determined by the Corporate Benefits Department of Cardinal Health.
Beckloff Associates, Inc. 401(k) Profit Sharing Plan
Snowden Pencer Inc. 401(k) Profit Sharing Plan
5. Appendix A to the Plan, Participating Employers, is hereby amended by
the addition of the following participating employers (in appropriate
alphabetical order) as of the dates set forth herein.
Beckloff Associates, LLC July 1, 2004
Medicap Pharmacies Incorporated July 1, 2004
Snowden Pencer, Inc. July 1, 2004
6. A new Appendix N is hereby added to the Plan to reflect special
eligibility, vesting and contributions for former employees of Cardinal
Health 409, Inc. whose employment was terminated as a result of the
divestiture of the paintball manufacturing division in the form
attached to this Second Amendment as Exhibit A.
7. All other provisions of the Plan shall remain in full force and effect.
CARDINAL HEALTH, INC.
By: /s/ Susan Nelson
--------------------------------------
Susan Nelson, Vice President, Benefits
Date: 5/25/04
--------------------------------------
EXHIBIT 99.05
SECOND AMENDMENT
TO THE
CARDINAL HEALTH PROFIT SHARING,
RETIREMENT AND SAVINGS PLAN
(As amended and restated July 1, 2002)
BACKGROUND INFORMATION
A. Cardinal Health, Inc. ("Cardinal Health") established and maintains the
Cardinal Health Profit Sharing, Retirement and Savings Plan (the
"Plan") for the benefit of participants and their beneficiaries.
B. The Cardinal Health, Inc. Employee Benefits Policy Committee (the
"Committee") oversees the administration of the Plan and is authorized
to amend the Plan.
C. The Committee desires to amend the Plan to permit the determination of
the amount of contributions to be allocated to certain defined groups
of employees as profit sharing contributions.
D. The Committee also desires to reflect the participation of certain
affiliates of Cardinal Health 414, Inc. in the Plan effective as of
July 1, 2004.
E. Section 13.02 of the Plan permits the amendment of the Plan at any
time.
AMENDMENT OF THE PLAN
1. A new sentence is hereby inserted as the fifth sentence of Section 3.02
of the Plan to read as follows:
Effective as of January 1, 2004, the amount of Profit Sharing
Contributions to be allocated to Eligible Employees under the Plan, if
any, shall be determined separately (including separately within each
QSLOB, if applicable) for two classes of employees consisting of (1)
Employees who are eligible to receive stock options from Cardinal
Health (as referenced in the Cardinal Health HRIS (PeopleSoft) System)
and (2) all other employees.
2. Appendix A to the Plan, Participating Employers, is hereby amended by
the addition of the following participating employers (in appropriate
alphabetical order) as of the dates set forth herein.
Abilene Nuclear, LLC July 1, 2004
Pharmaceutical & Diagnostic, Inc. July 1, 2004
West Texas Nuclear Pharmacy Partners July 1, 2004
3. All other provisions of the Plan shall remain in full force and effect.
CARDINAL HEALTH, INC. EMPLOYEE
BENEFITS POLICY COMMITTEE
By: /s/ Susan Nelson
-------------------------------------
Susan Nelson, Secretary
Date: June 29, 2004
-------------------------------------
EXHIBIT 99.06
Cardinal Health, Inc.
Employee Stock Purchase Plan
SECTION 1 -- PURPOSE
The Cardinal Health, Inc. Employee Stock Purchase Plan is adopted and
established by Cardinal Health, Inc., an Ohio corporation, on the date set forth
below, effective as of January 3, 2000, for the general benefit of the Employees
of the Company and of certain of its Subsidiaries. The purpose of the Plan is to
facilitate the purchase of Shares by Eligible Employees.
SECTION 2 -- DEFINITIONS
a. "ACT" shall mean the Securities Act of 1933, as amended.
b. "ADMINISTRATOR" shall mean the Board of Directors of the Company, a
designated committee thereof, or the person(s) or entity delegated the
responsibility of administering the Plan, which initially shall be the Cardinal
Health, Inc. Profit Sharing and Retirement Savings Plan Committee.
c. "AGENT" shall mean the bank, brokerage firm, financial institution, or other
entity or person(s) engaged, retained or appointed to act as the agent of the
Employer and of the Participants under the Plan, which initially shall be
Merrill Lynch, Pierce, Fenner, & Smith, Inc.
d. "BOARD" shall mean the Board of Directors of the Company.
e. "CLOSING VALUE" shall mean, as of a particular date, the value of a Share
determined by the closing sales price for such Share (or the closing bid, if no
sales were reported) as quoted on The New York Stock Exchange for the last
market trading day prior to the date of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable.
f. "CODE" shall mean the Internal Revenue Code of 1986, as amended and currently
in effect, or any successor body of federal tax law.
g. "COMPANY" shall mean Cardinal Health, Inc., including any successor thereto.
h. "COMPENSATION" shall mean wages, salaries, fees for professional service and
other amounts received for personal services actually rendered in the course of
employment with the Employer (including, but not limited to, commissions paid
salesmen, compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips and bonuses) including amounts
excludible from the Employee's gross income under Code Section 402(a)(8)
(relating to a Code Section 401(k) arrangement), Code Section 402(h) (relating
to a Simplified Employee Pension), Code Section 125 (relating to a cafeteria
plan) or Code Section 403(b) (relating to a tax-sheltered annuity) and
compensation paid by the Employer to an Employee through another person under
the common paymaster provisions of Code Sections 3121(s) and 3306(P).
Compensation does not include: (1) amounts realized from
the exercise of a non-qualified stock option, or when restricted stock (or
property) held by an Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture, (2) amounts realized from the sale,
exchange, or other disposition of stock acquired under a qualified stock option,
(3) moving allowances, automobile allowances, tuition reimbursement,
financial/tax planning reimbursement, other extraordinary compensation,
including tax "gross-up" payments, and imputed income from other
employer-provided benefits, and (4) other amounts that receive special tax
benefits, such as premiums for group term life insurance or contributions made
by the Employer (whether or not under salary reduction agreement) towards the
purchase of an annuity contract described in Code Section 403(b) (whether or not
the contributions are excludible from the gross income of the Employee), other
than amounts described above.
i. "DESIGNATED SUBSIDIARIES" shall mean all Subsidiaries whose Employees have
been designated by the Administrator, in its sole discretion, as eligible to
participate in the Plan.
j. "ELIGIBLE EMPLOYEE" means any Employee who (1) has worked as an employee of
an Employer for at least thirty (30) days and (2) is customarily employed for at
least five (5) months each calendar year or who is classified as a "PRN" or
on-call Employee.
k. "EMPLOYEE" means any person who performs services as a common law employee of
an Employer, and does not include "leased employees," as that term is defined
under Code Section 414(n), or other individuals providing services to an
Employer in a capacity as an independent contractor.
l. "EMPLOYER" means, individually and collectively, the Company and the
Designated Subsidiaries.
m. "ENROLLMENT PERIOD" shall mean the period immediately preceding the Offering
Period that is designated by the Administrator in its discretion as the period
during which an Eligible Employee may elect to participate in the Plan.
n. "OFFERING PERIOD" shall mean the period during which Participants in the Plan
authorize payroll deductions to fund the purchase of Shares on their behalf
under the Plan pursuant to the options granted to them hereunder.
o. "PARTICIPANT" means any Eligible Employee who has elected to participate in
the Plan for an Offering Period by authorizing payroll deductions and following
all applicable procedures established by the Administrator during the Enrollment
Period for such Offering Period.
p. "PLAN" shall mean this Cardinal Health, Inc. Employee Stock Purchase Plan.
q. "PLAN ACCOUNT" shall mean the individual account established by the Agent for
each Participant for purposes of accounting for and/or holding each
Participant's payroll deductions, Shares, etc.
r. "PLAN YEAR" shall mean the fiscal year of the Company.
2
s. "PURCHASE PRICE" shall mean, for each Share purchased in accordance with
Section 4 hereof, an amount equal to the lesser of (1) eighty-five percent (85%)
of the Closing Value of a Share on the first Trading Day of each Offering Period
(which for Plan purposes shall be deemed to be the date the option to purchase
such Shares was granted to each Eligible Employee who is, or elects to become, a
Participant); or (2) eighty-five percent (85%) of the Closing Value of such
Share on the last Trading Day of the Offering Period, (which for Plan purposes
shall be deemed to be the date each such option to purchase such Shares was
exercised).
t. "SHARES" means the Class A common shares, without par value, of the Company.
u. "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not less
than fifty percent (50%) of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary (or as otherwise may be defined in j
Code Section 424).
v. "TRADING DAY" shall mean a day on which national stock exchanges and The New
York Stock Exchange are open for trading.
SECTION 3 -- ELIGIBLE EMPLOYEES
a. IN GENERAL. Participation in the Plan is voluntary. All Eligible Employees of
an Employer are eligible to participate in the Plan. All Eligible Employees
granted options to purchase Shares hereunder shall have the same rights and
privileges as every other such Eligible Employee, and only Eligible Employees of
an Employer satisfying the applicable requirements of the Plan will be entitled
to be granted options hereunder.
b. LIMITATIONS ON RIGHTS. An Employee who otherwise is an Eligible Employee
shall not be entitled to purchase Shares under the Plan: (1) if such purchase
would cause such Eligible Employee to own Shares (including any Shares which
would be owned if such Eligible Employee purchased all of the Shares made
available for purchase by such Eligible Employee under all options or rights
then held by such Eligible Employee, whether or not then exercisable)
representing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or any Subsidiary; or (2) to the
extent that such purchase would cause such Eligible Employee to have options or
rights to purchase more than $25,000 of Shares under the Plan (and under all
other employee stock purchase plans of the Company and its Subsidiary
corporations which qualify for treatment under Section 423 of the Code) for any
calendar year in which such rights are outstanding (based on the Closing Value
of such Shares, determined as of the date such rights are granted. For purposes
of clause (l) of this subsection b, the attribution rules set forth in Section
424(d) of the Code and related regulations shall apply.
SECTION 4 -- ENROLLMENT AND OFFERING PERIODS
a. ENROLLING IN THE PLAN. To participate in the Plan, an Eligible Employee must
enroll in the Plan. Enrollment for a given Offering Period will take place
during the Enrollment Period for such Offering Period. The Administrator shall
designate the initial Enrollment Period and each
3
subsequent Enrollment Period and the Offering Period to which each Enrollment
Period relates. Participation in the Plan with respect to anyone or more of the
Offering Periods shall neither limit nor require participation in the Plan for
any other Offering Period.
b. THE OFFERING PERIOD. Any Employee who is an Eligible Employee and who desires
to be granted options to purchase Shares hereunder must enroll in accordance
with the procedures established by the Administrator during an Enrollment
Period. Such authorization shall be effective for the Offering Period
immediately following such Enrollment Period. The duration of an Offering Period
shall be determined by the Administrator prior to the Enrollment Period and
shall commence on the first day (or the First Trading Day) of the Offering
Period and end on the last day (or the last Trading Day) of the Offering Period;
provided, however, that if the Administrator terminates the Plan during an
Offering Period, pursuant to its authority in Section 17 of the Plan, such
Offering Period shall be deemed to end on the date the Plan is terminated. The
termination of the Plan and the Offering Period shall end the Participant's
rights to contribute amounts to the Plan or continue participation in the
Offering Period. The date of termination of the Plan shall be deemed to be the
final day of the Offering Period for purposes of determining the Purchase Price
under the Offering Period and all amounts contributed during the Offering Period
will be used as of such termination date to purchase Shares in accordance with
the general provisions of Section 9.
The Administrator may designate one or more Offering Periods during each Plan
Year during the term of this Plan. On the first day (or the First Trading Day)
of each Offering Period, each Participant shall be granted an option to purchase
Shares under the Plan. Each option granted hereunder shall expire at the end of
the Offering Period for which it was granted. In no event may an option granted
hereunder be exercised after the expiration of 27 months from the date of grant.
c. CHANGING ENROLLMENT. The offering of Shares pursuant to options granted
hereunder the Plan shall occur only during an Offering Period and shall be made
only to Participants. Once an Eligible Employee is enrolled in the Plan, the
Administrator or Employer will inform the Agent of such fact. Once enrolled, a
Participant shall continue to participate in the Plan for each succeeding
Offering Period until he or she terminates his or her participation by revoking
his or her payroll deduction authorization or ceases to be an Eligible Employee.
Once a Participant has elected to participate under the Plan, that Participant's
payroll deduction authorization shall apply to all subsequent Offering Periods
unless and until the Participant ceases to be an Eligible Employee, or modifies
or terminates said authorization. If a Participant desires to change his or her
rate of contribution, he or she may do so effective for the next Offering Period
by following the procedures established by the Administrator during the
Enrollment Period immediately preceding such Offering Period.
SECTION 5 -- TERM OF PLAN
This Plan shall be in effect from January 3, 2000, until it is terminated by
action of the Board.
4
SECTION 6 -- NUMBER OF SHARES TO BE MADE AVAILABLE
Subject to adjustment as provided in Section 16 hereof, the total number of
Shares made available for purchase by Participants granted options which are
exercised under Section 9 hereof is 5,000,000, which may consist of authorized
but unissued shares, treasury shares, or shares purchased by the Plan in the
open market. The provisions of Section 9b shall control in the event the number
of Shares covered by options which are exercised for any Offering Period exceeds
the number of Shares available for sale under the Plan. If all of the Shares
authorized for sale under the Plan have been sold, the Plan shall either be
continued through additional authorizations of Shares made by the Board (such
authorizations must, however, comply with Section 17 hereof), or shall be
terminated in accordance with Section 17 hereof.
SECTION 7 -- USE OF FUNDS
All payroll deductions received or held by an Employer under the Plan may be
used by the Employer for any corporate purpose, and the Employer shall not be
obligated to segregate such payroll deductions. Any amounts held by an Employer
or other party holding amounts in connection with or as a result of payroll
withholding made pursuant to the Plan and pending the purchase of Shares
hereunder shall be considered a non-interest-bearing, unsecured indebtedness
extended to the Employer or other party by the Participants. Administrative
expenses of the Plan shall be allocated to each Participant's Plan Account
unless such expenses are paid by the Employer.
SECTION 8 -- AMOUNT OF CONTRIBUTION
METHOD OF PAYMENT
a. PAYROLL WITHHOLDING. Except as otherwise specifically provided herein, the
Purchase Price will be payable by each Participant by means of payroll
withholding. The withholding shall be in increments of one percent (1%). The
minimum withholding permitted shall be an amount equal to one percent (1%) of a
Participant's Compensation and the maximum withholding shall be an amount equal
to fifteen percent (15%) of a Participant's Compensation. In any event, the
total withholding permitted to be made by any Participant for a calendar year
shall be limited to the sum of $21,250. The actual percentage of Compensation
to be deducted shall be specified by a Participant in his or her authorization
for payroll withholding. Participants may not deposit any separate cash payments
into their Plan Accounts.
b. APPLICATION OF WITHHOLDING RULES. Payroll withholding will commence with the
first paycheck issued during the Offering Period and will, except as otherwise
provided herein, continue with each paycheck throughout the entire Offering
Period, except for pay periods for which such Participant receives no
compensation (e.g., uncompensated personal leave, leave of absence). A pay
period which ends at such time that it is administratively impracticable to
credit any paycheck for such pay period to the then-current Offering Period will
be credited in its entirety to the immediately subsequent Offering Period. A pay
period which overlaps Offering Periods will be credited in its entirety to the
Offering Period in which it is paid. Payroll withholding shall be retained by
the Employer or other party responsible for making such
5
payment to the Participant, until applied to the purchase of Shares as described
in Section 9 and the satisfaction of any related federal, state or local
withholding obligations (including any employment tax obligations).
At the time the Shares are purchased, or at the time some or all of the Shares
issued under the Plan are disposed of, Participants must make adequate provision
for the Employer's federal, state, local or other tax withholding obligations
(including employment taxes), if any, which arise upon the purchase or
disposition of the Shares. At anytime, the Employer may, but shall not be
obligated to, withhold from each Participant's Compensation the amount necessary
for the Employer to meet applicable withholding obligations, including any
withholding required to make available to the Employer any tax deductions or
benefits attributable to the sale or early disposition of Shares by the
Participant. Each Participant, as a condition of participating under the Plan,
agrees to bear responsibility for all federal, state, and local income taxes
required to be withheld from his or her Compensation as well as the
Participant's portion of FICA (both the OASDI and Medicare components) with
respect to any Compensation arising on account of the purchase or disposition of
Shares. The Employer may increase income and/or employment tax withholding on a
Participant's Compensation after the purchase or disposition of Shares in order
to comply with federal, state and local tax laws, and each Participant agrees to
sign any and all appropriate documents to facilitate such withholding.
SECTION 9 -- PURCHASING, TRANSFERRING SHARES
a. MAINTENANCE OF PLAN ACCOUNT. Upon the exercise of a Participant's initial
option to purchase Shares under the Plan, the Agent shall establish a Plan
Account in the name of such Participant. At the close of each Offering Period,
the aggregate amount deducted during such Offering Period by the Employer from a
Participant's Compensation (and credited to a non-interest-bearing account
maintained by the Employer or other party for bookkeeping purposes) will be
communicated by the Employer to the Agent and shall thereupon be credited by the
Agent to such Participant's Account (unless the Participant has given notice to
the Administrator of his or her revocation of authorization prior to the date
such communication is made). As of the last day of each Offering Period, or as
soon thereafter as is administratively practicable, each Participant's option to
purchase Shares will be exercised automatically for him or her by the Agent with
respect to those amounts reported to the Agent by the Administrator or Employer
as creditable to that Participant's Plan Account. On the date of exercise, the
amount then credited to the Participant's Plan Account for the purpose of
purchasing Shares hereunder will be divided by the Purchase Price and there
shall be transferred to the Participants Plan Account by the Agent the number of
full and fractional shares which results.
The Agent shall hold in its name, or in the name of its nominee, all Shares so
purchased and allocated. No certificate will be issued to a Participant for
Shares held in his or her Plan Account unless he or she so requests in writing
or unless such Participant's active participation in the Plan is terminated due
to death, disability, separation from service or retirement. Notwithstanding any
provision herein to the contrary, no certificates shall be issued for Shares
until such Shares have been held in the Participant's Plan Account for a period
of at least 24 months following the date of exercise of the option to purchase
such Shares.
6
b. INSUFFICIENT NUMBER OF AVAILABLE SHARES. In the event the number of Shares
covered by options which are exercised for any Offering Period exceeds the
number of Shares available for sale under the Plan, the number of Shares
actually available for sale hereunder shall be limited to the remaining number
of Shares authorized for sale under the Plan and shall be allocated by the Agent
among the Participants in proportion to each Participant's Compensation during
the Offering Period over the total Compensation of all Participants during the
Offering Period. Any excess amounts withheld and credited to Participants'
Accounts then shall be returned to the Participants as soon as is
administratively practicable.
c. HANDLING EXCESS SHARES. In the event that the number of Shares which would be
credited to any Participant's Plan Account in any Offering Period exceeds the
limit specified in Section 3b hereof, such Participant's Account shall be
credited with the maximum number of Shares permissible, and the remaining
amounts will be refunded in cash as soon as administratively practicable.
d. STATUS REPORTS. Statements of each Participant's Plan Account shall be given
to participating Employees at least annually.
SECTION 10 -- DIVIDENDS AND OTHER DISTRIBUTIONS
a. REINVESTMENT OF DIVIDENDS. Cash dividends and other cash distributions
received by the Agent on Shares held in its custody hereunder will be credited
to the Plan Accounts of individual Participants in accordance with such
Participants' interests in the Shares with respect to which such dividends or
distributions are paid or made, and will be applied, as soon as practical after
the receipt thereof by the Agent, to the purchase in the open market at
prevailing market prices of the number of whole Shares capable of being
purchased with such funds (after deduction of any bank service fees, brokerage
charges, transfer taxes, and any other transaction fee, expense or cost payable
in connection with the purchase of such Shares and not otherwise paid by the
Employer).
b. SHARES TO BE HELD IN AGENT'S NAME. All purchases of Shares made pursuant to
this Section will be made in the name of the Agent or its nominee, shall be held
as provided in Section 9 hereof, and shall be transferred and credited to the
Plan Account(s) of the individual Participant(s) to which such dividends or
other distributions were credited. Dividends paid in the form of Shares will be
allocated by the Agent, as and when received, with respect to Shares held in its
custody hereunder to the Plan Accounts of individual Participants in accordance
with such Participants' interests in such Shares with respect to which such
dividends were paid. Property, other than Shares or cash, received by the Agent
as a distribution on Shares held in its custody hereunder, shall be sold by the
Agent for the accounts of the Participants, and the Agent shall treat the
proceeds of such sale in the same manner as cash dividends received by the Agent
on Shares held in its custody hereunder.
c. TAX RESPONSIBILITIES. The automatic reinvestment of dividends under the Plan
will not relieve a Participant (or Eligible Employee with a Plan Account) of any
income or other tax that may be due on or with respect to such dividends. The
Agent shall report to each Participant (or
7
Eligible Employee with a Plan Account) the amount of dividends credited to his
or her Plan Account.
SECTION 11 -- VOTING OF SHARES
A Participant shall have no interest or voting right in the Shares covered by
his or her option until such option has been exercised. Shares held for a
Participant (or Eligible Employee with a Plan Account) in his or her Plan
Account will be voted in accordance with the Participant's (or Eligible
Employee's) express directions. In the absence of any such directions, such
Shares will not be voted.
SECTION 12 -- IN-SERVICE DISTRIBUTION OR SALE OF SHARES
a. SALE OF SHARES. Subject to the provisions of Section 19, a Participant may at
anytime, and without withdrawing from the Plan, by giving notice to the Agent,
direct the Agent to sell all or part of the Shares held on behalf of the
Participant. Upon receipt of such a notice, the Agent shall, as soon as
practicable after receipt of such notice, sell such Shares in the marketplace at
the prevailing market price and transmit the net proceeds of such sale (less any
bank service fees, brokerage charges, transfer taxes, and any other transaction
fee, expense or cost) to the Participant.
b. IN-SERVICE SHARE DISTRIBUTIONS. A Participant may, without withdrawing from
the Plan, request that a certificate for all or part of the full Shares held in
his or her Plan Account be sent to him or her after the relevant Shares have
been purchased and allocated subject to the requirement that such Shares be held
in the Participant's Plan Account for a period of at least 24-months after the
date of exercise, as described in section 9a, above. All such requests must be
submitted in writing to the Agent. No certificate for a fractional Share will be
issued; the fair value of fractional Shares on the date of withdrawal of all
Shares credited to a Participant's Plan Account shall be paid in cash to such
Participant. The Plan may impose a reasonable charge, to be paid by the
Participant, for each stock certificate so issued prior to the date active
participation in the Plan ceases; such charge shall be paid by the Participant
to the Administrator or Employer prior to the date any distribution of a
certificate evidencing ownership of such Shares occurs.
SECTION 13 -- CESSATION OF ACTIVE PARTICIPATION
A Participant may at anytime, by giving notice to the Administrator or Employer,
revoke his or her authorization for payroll deduction for the Offering Period in
which such revocation is made. A Participant who revokes authorization for
payroll deduction may not again participate under the Plan until the next
Offering Period immediately subsequent to the Offering Period during which the
Participant revoked payroll deduction authorization with respect thereto.
SECTION 14 -- SEPARATION FROM EMPLOYMENT
Separation from employment for any reason, including death, disability,
termination or retirement shall be treated automatically as a withdrawal from
the Plan.
8
SECTION 15 -- ASSIGNMENT
Neither payroll deductions credited to a Participant's Plan Account nor any
rights with regard to options or Shares held under the Plan may be assigned,
alienated, transferred, pledged, or otherwise disposed of in any way by a
Participant other than by will or the laws of descent and distribution. Any such
assignment, alienation, transfer, pledge, or other disposition shall be without
effect, except that the Administrator may treat such act as an election to
withdraw from the Plan. A Participant's right to purchase Shares under this plan
may be exercisable during the Participant's lifetime only by the Participant. A
Participant's Plan Account shall be payable to the Participant's estate upon his
or her death.
SECTION 16 -- ADJUSTMENT OF AND CHANGES IN SHARES
If at anytime after the effective date of the Plan the Company shall subdivide
or reclassify the Shares which have been or may be optioned under the Plan, or
shall declare thereon any stock split or dividend payable in Shares, or shall
alter the capital structure of the Shares or the Company in any similar manner,
then the number and class of shares held in the Plan and which may thereafter be
optioned (in the aggregate and to any Participant) shall be adjusted
accordingly, and in the case of each option outstanding at the time of any such
action, the number and class of shares which may thereafter be purchased
pursuant to such option and the Purchase Price shall be adjusted accordingly, as
necessary to preserve the rights of the holder(s) of such Shares and options(s).
SECTION 17 -- AMENDMENT OR TERMINATION OF THE PLAN
The Board shall have the right, at anytime, to amend, modify or terminate the
Plan without notice; provided, however, that no Participant's existing options
shall be adversely affected by any such amendment, modification or termination,
except to comply with applicable law, stock exchange rules or accounting rules.
Notwithstanding the foregoing, the Board shall have the right to terminate the
Plan with respect to all future payroll deductions and related purchases at
anytime. Such termination of the Plan shall also terminate any current Offering
Period in accordance with Section 4 of the Plan.
Designations of participating corporations may be made from time to time among a
group of corporations consisting of the Employer, its parent and its
Subsidiaries (including corporations that become Subsidiaries or a parent after
the adoption and approval of the Plan).
SECTION 18 -- ADMINISTRATION
a. ADMINISTRATION. The Plan shall be administered by the Administrator. The
Administrator shall be responsible for the administration of all matters under
the Plan which have not been delegated to the Agent. The Administrator shall
have full and exclusive discretionary authority to construe, interpret and apply
the terms of the Plan, to determine eligibility and to adjudicate all disputed
claims filed under the Plan. Any rule or regulation adopted by the Administrator
shall remain in full force and effect unless and until altered, amended or
repealed by the Administrator.
9
b. SPECIFIC RESPONSIBILITIES. The Administrator's responsibilities shall
include, but shall not be limited to:
(1) interpreting the Plan (including issues relating to the definition and
application of "Compensation");
(2) identifying and compiling a list of persons who are Eligible Employees
for an Offering Period; and
(3) identifying those Eligible Employees not entitled to be granted
options or other rights for an Offering Period on account of the
limitations described in Section 3b hereof.
The Administrator may from time to time adopt rules and regulations for carrying
out the terms of the Plan. Interpretation or construction of any provision of
the Plan by the Administrator shall be final and conclusive on all persons,
absent specific and contrary action taken by the Board. Any interpretation or
construction of any provision of the Plan by the Board shall be final and
conclusive.
SECTION 19 -- SECURITIES LAW RESTRICTIONS
Notwithstanding any provision of the Plan to the contrary, no payroll deductions
shall take place and no Shares may be purchased under the Plan until a
registration statement has been filed and become effective with respect to the
issuance of the Shares covered by the Plan under the Act. Prior to the
effectiveness of such registration statement, Shares subject to purchase under
the Plan may be offered to Eligible Employees only pursuant to an exemption from
the registration requirements of the Act.
SECTION 20 -- NO INDEPENDENT EMPLOYEE'S RIGHTS
Nothing in the Plan shall be construed to be a contract of employment between an
Employer or Subsidiary and any Employee, or any group or category of Employees
(whether for a definite or specific duration or otherwise), or to prevent the
Employer, its parent or any Subsidiary from terminating any Employee's
employment at anytime, without notice or recompense. No Employee shall have any
rights as a share holder until the option to purchase Shares, granted to him or
her hereunder, has been exercised.
SECTION 21 -- APPLICABLE LAW
The Plan shall be construed, administered and governed in all respects under the
laws of the State of Ohio to the extent such laws are not preempted or
controlled by federal law.
SECTION 22 -- MERGER OR CONSOLIDATION
If the Company shall at any time merge into or consolidate with another
corporation or business entity, each Participant will thereafter be entitled to
receive at the end of the Offering Period (during which such merger or
consolidation occurs) the securities or property which a holder of Shares was
entitled to upon and at the time of such merger or consolidation. A sale of all
or substantially all of the assets of the Company shall be deemed a merger or
consolidation for the foregoing purposes.
Next Section
Previous Section