-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LUBiFBfSh9xL7MDGbLi8JOwbplyhMMoYaFUdahl3Gq5NRgcMzPixmnSxdorOW/Q3 kEfvlTJn6hfwbdMrSCy4Iw== 0000950152-98-000074.txt : 19980108 0000950152-98-000074.hdr.sgml : 19980108 ACCESSION NUMBER: 0000950152-98-000074 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980107 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDINAL HEALTH INC CENTRAL INDEX KEY: 0000721371 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 310958666 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11373 FILM NUMBER: 98502252 BUSINESS ADDRESS: STREET 1: 5555 GLENDON COURT CITY: DUBLIN STATE: OH ZIP: 43016 BUSINESS PHONE: 6147618700 MAIL ADDRESS: STREET 1: 5555 GLEDNON COURT CITY: DUBLIN STATE: OH ZIP: 43016 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 10-K/A 1 CARDINAL HEALTH, INC. 10-K/AMENDMENT NO. 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-12591 CARDINAL HEALTH, INC. (Exact name of Registrant as specified in its charter) OHIO 31-0958666 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5555 GLENDON COURT, DUBLIN, OHIO 43016 (Address of principal executive offices) (Zip Code) (614) 717-5000 Registrant's telephone number, including area code Securities Registered Pursuant to Section 12(b) of the Act: COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE (Title of Class) (Name of each exchange on which registered) Securities Registered Pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant as of September 12, 1997 was approximately $7,060,251,484. The number of Registrant's Common Shares outstanding as of September 12, 1997, was as follows: Common shares, without par value: 109,202,649 -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996 are incorporated by reference into Part I of this Annual Report on Form 10-K. Portions of the Registrant's Definitive Proxy Statement dated October 13, 1997, for its 1997 Annual Meeting of Shareholders and filed with the Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K. 2 TABLE OF CONTENTS*
ITEM PAGE - ---- ---- Forward-looking Statements................................................................ 3 PART II 6. Selected Financial Data................................................................... 3 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 4 8. Financial Statements and Supplementary Data............................................... 8 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 32 Signatures................................................................................ 36
* Items omitted from this Form 10-K/A (Amendment No. 1) are included in the Company's Annual Report on Form 10-K, as filed on September 29, 1997 (the "Form 10-K"). 2 3 Portions of the Company's Annual Report on Form 10-K, as amended by this Form 10-K/A (Amendment No. 1), include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to materially differ from those projected or implied. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.01 to the Form 10-K. ITEM 6: SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company was prepared giving retroactive effect to the business combinations with Whitmire Distribution Corporation ("Whitmire") on February 7, 1994, Medicine Shoppe International, Inc. ("Medicine Shoppe") on November 13, 1995, Pyxis Corporation ("Pyxis") on May 7, 1996, PCI Services, Inc. ("PCI) on October 11, 1996 and Owen Healthcare Inc. ("Owen") on March 18, 1997, all of which were accounted for as pooling-of-interests transactions. The consolidated financial data includes all purchase transactions that occurred during these periods. See "Item 1: Business" in the Form 10-K for additional information regarding such combinations. On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. As a result, for the fiscal year ended March 31, 1993, the information presented is derived from consolidated financial statements which combine data from Cardinal, Medicine Shoppe and Pyxis for the fiscal year ended March 31, 1993 with data from Whitmire for the fiscal year ended July 3, 1993, PCI for the fiscal year ended September 30, 1993 and Owen for the fiscal year ended November 30, 1992. For the fiscal years ended June 30, 1996, 1995 and 1994, the information presented is derived from consolidated financial statements which combine data from Cardinal, Whitmire, Medicine Shoppe and Pyxis for the fiscal years ended June 30, 1996, 1995 and 1994 with data from PCI for the fiscal years ended September 30, 1996, 1995 and 1994, respectively and Owen for the fiscal years ending November 30, 1995, 1994 and 1993, respectively. For the fiscal year ended June 30, 1997, the information presented is derived from the consolidated financial statements which combine Cardinal for the fiscal year ended June 30, 1997 with PCI's financial results for the nine months ended June 30, 1997 and Owen's financial results for the period of June 1, 1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in order to change Owen's November 30, fiscal year end to June 30 ). See Note 1 of "Notes to Consolidated Financial Statements" for a further discussion of the periods combined for the fiscal year ended June 30, 1997. The selected consolidated financial data below should be read in conjunction with the Company's consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 4 Amounts herein have been restated. Reference is made to Note 17 of "Notes to Consolidated Financial Statements" for a further discussion of the restatements. CARDINAL HEALTH, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (AS RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ----------------------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, MARCH 31, 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- Earnings Statement Data: Net revenues $10,968,042 $9,407,591 $8,472,302 $6,374,734 $5,102,513 Earnings before cumulative effect of change in accounting principle $ 184,599 $ 127,240 $ 146,587 $ 88,884 $ 73,124 Cumulative effect change in accounting principle (10,000) ----------- ---------- ---------- ---------- ---------- Net earnings $ 184,599 $ 127,240 $ 146,587 $ 88,884 $ 63,124 =========== ========== ========== ========== ========== Primary earnings per Common Share: Before cumulative effect of change in accounting principle $ 1.69 $ 1.20 $ 1.41 $ .91 $ .83 Cumulative effect of change in accounting principle (.11) ----------- ---------- ---------- ---------- ---------- Net $ 1.69 $ 1.20 $ 1.41 $ .91 $ .72 =========== ========== ========== ========== ========== Fully diluted earnings per Common Share: Before cumulative effect of change in accounting principle $ 1.69 $ 1.19 $ 1.40 $ .90 $ .80 Cumulative effect of change in accounting principle (.10) ----------- ---------- ---------- ---------- ---------- Net $ 1.69 $ 1.19 $ 1.40 $ .90 $ .70 =========== ========== ========== ========== ========== Balance Sheet Data: Total assets $ 3,091,750 $2,959,401 $2,363,752 $1,789,455 $1,411,323 Long-term obligations 277,766 320,327 267,677 247,715 305,337 Redeemable preferred stock 20,400 Shareholders' equity 1,334,730 1,095,225 866,474 617,464 444,291 Cash dividends declared per Common Share $ 0.095 $ 0.08 $ 0.08 $ 0.07 $ 0.05
Net earnings and cash dividends per Common Share have been adjusted to reflect all stock dividends and stock splits. Amounts reflect business combinations in fiscal 1997, 1996, 1995 and 1994. Fiscal 1997, 1996 and 1994 amounts reflect the impact of merger related costs. See Note 2 of "Notes to Consolidated Financial Statements" for a further discussion of merger related costs affecting fiscal 1997 and 1996. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis has been prepared giving retroactive effect to the pooling-of-interests business combinations with Medicine Shoppe on November 13, 1995, Pyxis on May 7, 1996, PCI on October 11, 1996 and Owen on March 18, 1997 (see Note 2 of "Notes to Consolidated Financial Statements"). The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K/A (Amendment No. 1). Subsequent to the issuance of the Company's fiscal 1997 financial statements and the filing of the Form 10-K with the Securities and Exchange Commission (the "Commission") and following discussions with the Staff of the Commission resulting from the Staff's review of the Company's financial statements in connection with the Company's Registration Statement on Form S-4 relating to the MediQual transaction, the Company determined: (1) to retroactively restate the fiscal 1996 and 1995 financial statements to reflect the pooling-of-interests transaction with PCI (as opposed to the prior presentation which did not include a retroactive restatement for the PCI Merger); (2) that certain merger related costs originally recorded in the period in which the merger was consummated should be recorded when such cost was incurred; (3) that certain restructuring and other costs (which were previously reported as merger related or unusual items) should be reclassified as part of selling, general and administrative expenses; (4) that the recognition of certain manufacturers' incentives should be deferred as a reduction of the inventory value until the sale of such inventory; and (5) that a specific income tax reserve which was no longer required should be eliminated with a credit to the provision for income taxes in 1997. As a result, the Company's fiscal 1997, 1996 and 1995 financial statements have been restated from amounts 4 5 previously reported. See Note 17 of "Notes to Consolidated Financial Statements" for a further discussion of the restatements. RESULTS OF OPERATIONS NET REVENUES. Net revenues for fiscal 1997 increased 17%, as compared to the prior year, primarily due to growth in the Company's pharmaceutical distribution and pharmacy management service businesses. The increase resulted mostly from internal growth generated primarily by the addition of new customers, and, to a lesser extent, increased volume from existing customers and price increases. Expansion of the Company's relationship with Kmart Corporation ("Kmart") and opportunities created by the deterioration of the financial condition of a major pharmaceutical distribution competitor also contributed to the increases during fiscal 1997. Net revenues in fiscal 1996 increased 11% compared with fiscal 1995 primarily due to internal growth from pharmaceutical wholesaling activities, mostly due to the addition of new customers, and, to a lesser extent, increased sales to existing customers and price increases. GROSS MARGIN. For fiscal 1997 and 1996, gross margin as a percentage of net revenues was 8.20% and 8.61%, respectively. The change in gross margin for the year is primarily due to the shift in net revenue mix caused by significant increases in the relatively lower margin pharmaceutical distribution activities. The impact of this shift was partially offset by increased merchandising and marketing programs with customers and suppliers. The Company's gross margin continues to be affected by the combination of a highly competitive environment and a greater mix of high volume customers, where a lower cost of service and better asset management enable the Company to offer lower selling margins and still achieve higher operating margins relative to other customer business. The gross margin ratio increased to 8.61% for fiscal 1996 from 8.18% in fiscal 1995. This increase was primarily due to the gross margin generated from the acquisition of a pharmacy management operation in fiscal 1996 (see Note 2 of "Notes to Consolidated Financial Statements"). Pharmacy management operations generally provide a higher gross margin than pharmaceutical wholesaling activities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net revenues improved to 4.70% in fiscal 1997 compared to 5.47% in fiscal 1996. The improvements in fiscal 1997 reflect the economies associated with the Company's revenue growth, as well as significant productivity gains resulting from continued cost control efforts and the consolidation and selective automation of operating facilities. Additionally, certain expenses recorded in fiscal 1996 (as discussed below) did not recur in fiscal 1997. Selling, general and administrative expenses as a percentage of net revenues increased to 5.47% in fiscal 1996 compared to 5.06% in fiscal 1995 due to the inclusion of pharmacy management services in fiscal 1996 operations (see "Gross Margin" above) and the recording of certain employee severance, asset impairments and lease exit costs, totaling $4.2 million. This increase was partially offset by economies associated with the Company's revenue growth from pharmaceutical wholesaling activities, as well as productivity gains resulting in part from warehouse consolidations and management information system enhancements. MERGER RELATED COSTS. During fiscal 1997, the Company recorded merger related charges associated with the PCI and Owen mergers ($46.2 million) and additional integration costs related to the Pyxis and Medicine Shoppe mergers ($4.7 million). During fiscal 1996, the Company recorded charges to reflect the estimated Medicine Shoppe and Pyxis merger related costs. See further discussion in Note 2 of "Notes to Consolidated Financial Statements." The Company classifies costs associated with a merger transaction as "merger related costs". It should be noted that the amounts presented may not be comparable to similarly titled amounts reported by other companies. 5 6 The following is a summary of the merger related costs incurred by the Company in the last two fiscal years:
Fiscal Year Ended ----------------------- June 30, June 30, 1997 1996 (restated) (restated) ---------- ---------- (In thousands, except per share amounts) Transaction and Employee Related Costs: Transaction Costs $(14,500) $(21,315) PCI Vested Retirement Benefits and Incentive Fees (7,600) -- Pyxis Stay Bonuses -- (7,600) Employee Severance/Termination (4,400) (2,540) Other (600) (300) -------- -------- Total Transaction and Employee Related Costs (27,100) (31,755) -------- -------- Other Merger Related Costs: Asset Impairments (13,200) (400) Exit and Restructuring Costs (2,250) (15,600) Duplicate Facilities Elimination (1,700) -- Integration and Efficiency Implementation (6,679) (1,445) -------- -------- Total Other (23,829) (17,445) -------- -------- Total Merger Related Costs (50,929) (49,200) Tax Effect 14,372 12,280 -------- -------- Effect on Net Earnings $(36,557) $(36,920) ======== ======== Effect on Fully Diluted Earnings Per Share $ (0.34) $ (0.34) ======== ========
The effects of the merger related costs are included in the reported net earnings of $184.6 million in fiscal 1997 and $127.2 million in fiscal 1996 and in the reported fully diluted earnings per common share of $1.69 in fiscal 1997 and $1.19 in fiscal 1996. The Company estimates that it will incur additional merger related costs for Medicine Shoppe, Pyxis, PCI, and Owen totaling approximately $11.7 million ($7.0 million, net of tax) in future periods (primarily fiscal 1998) in order to properly integrate operations and implement efficiencies with regard to, among other things, information systems, customer systems, marketing programs and administrative functions. Such amounts will be charged to expense when incurred. Asset impairments in fiscal 1997 include the write-off of a patent ($7.4 million) and the write down of certain operating assets ($3.2 million) related to MediTROL (a wholly owned subsidiary of Owen) as a result of management's decision to merge the operations of MediTROL into Pyxis and phase-out production of the separate MediTROL product line. Exit and restructuring costs in fiscal 1996 include $15.6 million related to cancellation of a long term contract with a financing company related to the servicing of the accounts receivable from Pyxis customers at the time of the Pyxis Merger (see further discussion in Note 3 of "Notes to Consolidated Financial Statements"). The Company's trend with regard to acquisitions has been to expand its role as a provider of services to the healthcare industry. This trend has resulted in both expansion of its pharmaceutical distribution business and diversification into related service areas which (a) complement the Company's core pharmaceutical distribution business; (b) provide opportunities for the Company to develop synergies with, and thus strengthen the acquired business; and (c) generally generate higher margins as a percentage of net revenues than pharmaceutical distribution. As the healthcare industry continues to change, the Company is constantly evaluating acquisition candidates in pharmaceutical distribution, as well as related sectors of the healthcare industry that would expand its role as a service provider; however, there can be no assurance that it will be able to successfully pursue any such opportunity or 6 7 consummate any such transaction. If a transaction was consummated, additional merger related costs would be incurred by the Company. INTEREST EXPENSE. Interest expense for fiscal 1997 decreased by $2.6 million compared to the prior year. This decrease is attributable to the extinguishment of the Company's $100 million 8% Notes on March 1, 1997 and lower interest rates during fiscal 1997 compared to fiscal 1996. In addition, various outstanding debt instruments utilized by PCI prior to the merger were extinguished after the merger was consummated. Partially offsetting this decrease in fiscal 1997 is the impact of the issuance of $150 million 6% Notes due 2006, in a public offering in January 1996. Growth in the Company's business and the resultant need for additional working capital led to the Company's issuance of $150 million 6% Notes due 2006, in a public offering in January 1996. This caused the increase in interest expense of $6.7 million in fiscal 1996, as compared to fiscal 1995 (see "Liquidity and Capital Resources"). PROVISION FOR INCOME TAXES. The Company's provision for income taxes relative to pretax earnings was 41%, 44%, and 41% for fiscal years 1997, 1996, and 1995, respectively. The fluctuation in the tax rate is primarily due to certain nondeductible costs associated with the business combinations in fiscal 1997 and 1996 (see Note 7 of "Notes to Consolidated Financial Statements"). LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $1,097.7 million at June 30, 1997 from $942.0 million at June 30, 1996. This increase included additional investments in merchandise inventories and trade receivables of $164.1 million and $40.3 million, respectively, and a decrease in accounts payable of $10.8 million. Offsetting the increases in working capital were decreases in cash and equivalents, and marketable securities available-for-sale of $69.0 million and $54.3 million, respectively. Increases in merchandise inventories reflect the higher level of business volume in pharmaceutical distribution activities, including higher inventories required by the Company's new pharmaceutical services agreement with Kmart. The increase in trade receivables is consistent with the Company's revenue growth (see "Net Revenues" above). The change in cash and equivalents, marketable securities available-for-sale and accounts payable is due to the timing of inventory purchases and related payments. The Company redeemed $100 million of long-term debt during fiscal 1997 and currently has the capacity to issue $400 million of additional long-term debt pursuant to shelf debt registration statements filed with the Securities and Exchange Commission (see Note 5 of "Notes to Consolidated Financial Statements"). The Company does not currently have any specific plans to issue additional debt under these facilities. Property and equipment, at cost, increased by $65.6 million in fiscal 1997. The increase in property and equipment included additional investments in management information systems and customer support systems, as well as upgrades to distribution facilities. The Company has several operating lease agreements for the construction of new facilities. See further discussion in Note 9 of "Notes to Consolidated Financial Statements". Shareholders' equity increased to $1,334.7 million at June 30, 1997 from $1,095.2 million at June 30, 1996, primarily due to net earnings of $184.6 million and the investment of $61.4 million by employees of the Company through various stock ownership plans. The Company has line-of-credit agreements with various bank sources aggregating $374 million, of which $95 million is represented by committed line-of-credit agreements and the balance is uncommitted. The Company had $22.2 million outstanding under these lines at June 30, 1997. The Company believes that it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements, including those related to pending business combinations. See "Other" below. OTHER PENDING BUSINESS COMBINATIONS. On May 27, 1997, the Company announced that it had entered into a definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant to which MediQual will become a wholly-owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting purposes. In connection with the merger, the Company estimates that it will issue approximately 0.6 million Common Shares. The merger is expected to be completed in the first quarter of calendar 1998, subject to satisfaction of certain conditions, including approval by shareholders of MediQual. 7 8 On August 23, 1997, the Company signed a definitive merger agreement with Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and medical-surgical supplies, pursuant to which Bergen will become a wholly owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting purposes. Under the terms of the proposed merger, shareholders of Bergen will receive .775 of a Company Common Share in exchange for each outstanding common share of Bergen. The Company will issue approximately 40 million Common Shares in the transaction and will also assume approximately $386 million in long-term debt. The Company will record merger-related charges to reflect transaction and other costs incurred as a result of the proposed transaction with Bergen. Since the merger has not yet been consummated and transition plans are currently being developed, the amount of this charge cannot be estimated at this time. Merger related costs incurred prior to consummation will be deferred and expensed upon consummation. The merger is expected to be completed by the end of the third quarter of fiscal 1998, subject to the satisfaction of certain conditions, including approvals by the stockholders of Bergen and the Company's shareholders, and the receipt of certain regulatory approvals. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which will require retroactive adoption in the Company's fiscal quarter ending December 31, 1997. The new standard simplifies the computation of earnings per share and requires the presentation of basic and diluted earnings per share. In light of the present capital structure, the impact of adopting SFAS 128 will not be significant. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which will require adoption no later than the Company's fiscal quarter ending September 30, 1998. This new statement defines comprehensive income as "all changes in equity during a period, with the exception of stock issuances and dividends." The new pronouncement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. In June 1997, FASB also issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), " Disclosures about Segments of an Enterprise and Related Information," which will require adoption no later than fiscal 1999. SFAS 131 requires companies to define and report financial and descriptive information about its operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is presently evaluating the applicability of SFAS 130 and 131 to its operations. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Reports Financial Statements: Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated) Consolidated Balance Sheets at June 30, 1997 and 1996 (as restated) Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated) Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated) Notes to Consolidated Financial Statements (as restated) 8 9 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of Cardinal Health, Inc.: We have audited the accompanying consolidated balance sheets of Cardinal Health, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We did not audit the financial statements of Owen Healthcare, Inc. ("Owen") and of Pyxis Corporation ("Pyxis"), both wholly owned subsidiaries of Cardinal Health, Inc., for the years ended June 30, 1996 and 1995. The combined financial statement amounts of Owen and Pyxis represent approximately 13% of consolidated total assets at June 30, 1996 and represent combined revenues and net income of approximately 6% and 6%, and 34% and 28%, respectively, of consolidated amounts for each of the two years in the period ended June 30, 1996. These statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Owen and Pyxis, is based solely on the reports of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Health, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 17 to the Consolidated Financial Statements, the accompanying financial statements and financial statement schedule have been restated. DELOITTE & TOUCHE LLP Columbus, Ohio August 12, 1997, except for Note 16 as to which the date is August 23, 1997 and Note 17 as to which the date is December 30, 1997 9 10 Report of Ernst & Young LLP, Independent Auditors Board of Directors Cardinal Health, Inc. We have audited the consolidated balance sheets of Pyxis Corporation as of June 30, 1996, and the related consolidated statements of income, shareholder's equity, and cash flows for each of the two years in the period ended June 30, 1996 (not included herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pyxis Corporation at June 30, 1996, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30,1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California August 2, 1996 10 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Owen Healthcare, Inc. In our opinion, the consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows of Owen Healthcare, Inc. and its subsidiaries (not presented separately herein) present fairly, in all material respects, the financial position of Owen Healthcare, Inc. and its subsidiaries (Owen) at November 30, 1995, and the results of their operations and their cash flows for each of the two years in the period ended November 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Owen's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Houston, Texas January 30, 1997 11 12 Cardinal HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (AS RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30, ---------------------------------------------- 1997 1996 1995 ---------------------------------------------- Net revenues $ 10,968,042 $ 9,407,591 $ 8,472,302 Cost of products sold 10,068,384 8,597,878 7,779,030 ------------ ----------- ----------- Gross margin 899,658 809,713 693,272 Selling, general and administrative expenses 515,551 514,879 428,343 Merger related costs: Transaction and employee related costs (27,100) (31,755) -- Other (23,829) (17,445) -- ------------ ----------- ----------- Operating earnings 333,178 245,634 264,929 Other income (expense): Interest expense (27,974) (30,611) (23,948) Other, net--primarily interest income 5,876 12,479 8,283 ------------ ----------- ----------- Earnings before income taxes 311,080 227,502 249,264 Provision for income taxes 126,481 100,262 102,677 ------------ ----------- ----------- Net earnings $ 184,599 $ 127,240 $ 146,587 ============ =========== =========== Earnings per Common Share: Primary $ 1.69 $ 1.20 $ 1.41 Fully diluted $ 1.69 $ 1.19 $ 1.40 Weighted average number of Common Shares outstanding: Primary 109,118 106,091 103,659 Fully diluted 109,172 107,001 104,849
The accompanying notes are an integral part of these statements. 12 13 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AS RESTATED) (IN THOUSANDS)
JUNE 30, JUNE 30, 1997 1996 ----------- ----------- ASSETS Current assets: Cash and equivalents $ 243,061 $ 312,030 Marketable securities available-for-sale -- 54,335 Trade receivables, net 672,164 631,866 Current portion of net investment in sales-type leases 40,997 37,953 Merchandise inventories 1,436,220 1,272,112 Prepaid expenses and other 94,668 66,647 ----------- ----------- Total current assets 2,487,110 2,374,943 ----------- ----------- Property and equipment, at cost: Land, buildings and improvements 110,552 84,239 Machinery and equipment 305,822 271,487 Furniture and fixtures 61,046 56,055 ----------- ----------- Total 477,420 411,781 Accumulated depreciation and amortization (199,949) (161,222) ----------- ----------- Property and equipment, net 277,471 250,559 Other assets: Net investment in sales-type leases, less current portion 118,563 109,804 Goodwill and other intangibles 122,104 133,624 Other 86,502 90,471 ----------- ----------- Total $ 3,091,750 $ 2,959,401 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ 22,159 $ 866 Current portion of long-term obligations 6,158 112,777 Accounts payable 1,135,951 1,146,729 Other accrued liabilities 225,165 172,531 ----------- ----------- Total current liabilities 1,389,433 1,432,903 ----------- ----------- Long-term obligations, less current portion 277,766 320,327 Deferred income taxes and other liabilities 89,821 110,946 Shareholders' equity: Common Shares, without par value 645,051 589,476 Retained earnings 701,896 520,666 Common Shares in treasury, at cost (6,373) (11,522) Other (5,844) (3,395) ----------- ----------- Total shareholders' equity 1,334,730 1,095,225 ----------- ----------- Total $ 3,091,750 $ 2,959,401 =========== ===========
The accompanying notes are an integral part of these statements. 13 14 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (AS RESTATED) (IN THOUSANDS)
COMMON SHARES ------------------ TREASURY SHARES TOTAL SHARES RETAINED ---------------- ADJUSTMENT SHAREHOLDERS' ISSUED AMOUNT EARNINGS SHARES AMOUNT FOR ESOP OTHER EQUITY ------- --------- --------- ------- ------- ---------- ------- ------------- BALANCE, JUNE 30, 1994 65,690 $ 395,520 $ 259,039 (1,297) $(14,444) $(17,736) $(4,915) $ 617,464 Net earnings 146,587 146,587 Employee stock plans activity, including tax benefits of $22,236 1,684 27,605 6 45 839 28,489 Treasury shares acquired and shares retired (186) (300) (4,805) (65) (1,567) (6,672) Change in unrealized loss on marketable securities available-for-sale, net of tax 825 825 Dividends paid (9,107) (9,107) Foreign currency translation adjustment 1,002 1,002 Adjustment for ESOP (3,560) (3,560) Acquisition of subsidiaries (See Note 2) 1,784 11,650 9,328 20,978 Shares issued in connection with stock offering 1,867 70,468 70,468 ------- --------- --------- ------- -------- -------- ------- ---------- BALANCE, JUNE 30, 1995 70,839 504,943 401,042 (1,356) (15,966) (21,296) (2,249) 866,474 Net earnings 127,240 127,240 Employee stock plans activity, including tax benefits of $11,168 1,015 29,754 134 922 (1,173) 29,503 Treasury shares acquired and shares retired (240) (5,662) 170 3,522 307 (1,833) Change in unrealized loss on marketable securities available-for-sale, net of tax 446 446 Dividends paid (7,616) (7,616) Foreign currency translation adjustment (726) (726) Adjustment for ESOP 21,296 21,296 Shares issued in connection with stock offering 2,069 50,654 50,654 Conversion of subordinated debt, net 1,071 9,787 9,787 ------- --------- --------- ------- -------- -------- ------- ---------- BALANCE, JUNE 30, 1996 74,754 589,476 520,666 (1,052) (11,522) 0 (3,395) 1,095,225 Net earnings 184,599 184,599 Employee stock plans activity, including tax benefits of $18,459 1,655 62,483 (1,098) 61,385 Treasury shares acquired and shares retired (748) (7,051) 728 5,076 (1,975) Dividends paid (9,045) (9,045) Foreign currency translation adjustment (1,351) (1,351) 3-for-2 stock split effected as a stock dividend and cash paid in lieu of fractional shares 33,411 (30) (30) Adjustment for change in fiscal year of an acquired subsidiary (See Note 1) 143 5,706 84 73 5,922 ------- --------- --------- ------- -------- -------- ------- ---------- BALANCE, JUNE 30, 1997 109,072 $ 645,051 $ 701,896 (240) $ (6,373) $ 0 $(5,844) $1,334,730 ======= ========= ========= ======= ======== ======== ======= ==========
The accompanying notes are an integral part of these statements. 14 15 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED) (IN THOUSANDS)
FISCAL YEAR ENDED JUNE 30, ----------------------------------- 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 184,599 $ 127,240 $ 146,587 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 51,368 48,566 36,381 Provision for deferred income taxes 11,217 23,602 47,310 Provision for bad debts 8,073 12,496 14,780 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade receivables (46,971) (64,880) (144,416) Increase in merchandise inventories (164,108) (156,224) (160,134) Increase in net investment in sales-type leases (11,803) (34,125) (40,584) Increase (decrease) in accounts payable (10,778) 161,611 160,067 Increase (decrease) in accrued other 20,039 34,077 (23,457) Other operating items, net (9,358) (23,736) 12,276 --------- --------- --------- Net cash provided by operating activities 32,278 128,627 48,810 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired -- (53,722) (19,632) Proceeds from sale of property and equipment 2,986 1,833 1,905 Additions to property and equipment (76,089) (107,843) (80,154) Purchase of marketable securities available-for-sale (3,400) (163,719) (169,599) Proceeds from sale of marketable securities available-for-sale 57,735 218,019 143,501 --------- --------- --------- Net cash used in investing activities (18,768) (105,432) (123,979) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowing activity 3,347 (4,139) (22,500) Reduction of long-term obligations (134,479) (40,888) (11,147) Proceeds from long-term obligations, net of issuance costs -- 187,873 16,393 Proceeds from issuance of Common Shares 41,244 69,991 75,818 Tax benefit of stock options 18,459 11,168 22,236 Dividends on common shares and cash paid in lieu of fractional shares (9,075) (7,616) (9,107) Purchase of treasury shares (1,975) (1,833) (6,672) --------- --------- --------- Net cash (used in) provided by financing activities (82,479) 214,556 65,021 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (68,969) 237,751 (10,148) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 312,030 74,279 84,427 --------- --------- --------- CASH AND EQUIVALENTS AT END OF YEAR $ 243,061 $ 312,030 $ 74,279 ========= ========= =========
The accompanying notes are an integral part of these statements. 15 16 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cardinal Health, Inc. and subsidiaries (the "Company") is a provider of services to the healthcare industry offering an array of value-added pharmaceutical distribution services and pharmaceutical-related products and services to a broad base of customers. The Company distributes a broad line of pharmaceuticals, surgical and hospital supplies, therapeutic plasma and other specialty pharmaceutical products, health and beauty care products, and other items typically sold by hospitals, retail drug stores, and other healthcare providers. The Company also operates a variety of related healthcare service businesses, including Pyxis Corporation ("Pyxis") (which develops, manufactures, leases, sells and services point-of-use pharmacy systems which automate the distribution and management of medications and supplies in hospitals and other healthcare facilities); Medicine Shoppe International, Inc. ("Medicine Shoppe") (a franchisor of apothecary-style retail pharmacies); PCI Services, Inc. ("PCI") (an international provider of integrated packaging services to pharmaceutical manufacturers); and Owen Healthcare, Inc. ("Owen") (a provider of pharmacy management and information services to hospitals). See "Basis of Presentation" below. The Company is currently operating in one business segment, primarily in the continental United States. BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries and all significant intercompany accounts and transactions have been eliminated. In addition, the consolidated financial statements give retroactive effect to the mergers with Medicine Shoppe on November 13, 1995, Pyxis on May 7, 1996, PCI on October 11, 1996 and Owen on March 18, 1997 (see Note 2). Such business combinations were accounted for under the pooling-of-interests method. The term "Cardinal" as used in this footnote refers to Cardinal Health, Inc. and subsidiaries prior to the PCI Merger and the Owen Merger. On October 11, 1996, Cardinal completed a merger with PCI (the "PCI Merger"). The PCI Merger was accounted for as a pooling-of-interests. Cardinal issued approximately 3.1 million Common Shares to PCI shareholders and PCI's outstanding stock options were converted into options to purchase approximately 0.2 million Common Shares. Cardinal's fiscal year end is June 30 and PCI's fiscal year end was September 30. For fiscal years ended June 30, 1996 and 1995, the consolidated financial statements combine Cardinal's fiscal year ended June 30, 1996 and 1995 with the financial results for PCI's fiscal years ended September 30, 1996 and 1995, respectively. For the fiscal year ended June 30, 1997, the consolidated financial statements combine Cardinal's fiscal year ended June 30, 1997 with PCI's financial results for the nine month period ended June 30, 1997. PCI's financial results for the three month period ended September 30, 1996 have been excluded from the consolidated financial statements for the fiscal year ended June 30, 1997 because that three month period was included in the consolidated financial statements for the fiscal year ended June 30, 1996. During the three months ended September 30, 1996, PCI's net revenues and net loss were approximately $39.4 million and ($1.2 million), respectively. On March 18, 1997, Cardinal completed a merger with Owen (the "Owen Merger"). Cardinal issued approximately 7.7 million Common Shares to Owen shareholders and Owen's outstanding stock options were converted into options to purchase approximately 0.7 million Common Shares. Cardinal's fiscal year end is June 30 and Owen's fiscal year end was November 30. For fiscal years ended June 30, 1996 and 1995, the consolidated financial statements combine Cardinal's fiscal year ended June 30, 1996 and 1995 with the financial results for Owen's fiscal years ended November 30, 1995 and 1994, respectively. For the fiscal year ended June 30, 1997, the consolidated financial statements combine Cardinal's fiscal year ended June 30, 1997 with Owen's financial results for the period of June 1, 1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in order to change Owen's November 30 fiscal year end to June 30). Due to the change in Owen's fiscal year from November 30 to conform with Cardinal's June 30 fiscal year end, Owen's results of operations for the periods from December 1, 1995 through May 31, 1996 and the month of December 1996 will not be included in the combined results of operations but are reflected as an adjustment in the Consolidated Statements of Shareholders' Equity. Owen's net revenues and net earnings for these periods were $260.1 million and $5.7 million, respectively. Owen's cash flows from operating and financing activities for these periods were $0.9 million and $0.7 million, respectively, while cash flows used in investing activities were $5.6 million. 16 17 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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 cash equivalents approximates their fair value. MARKETABLE SECURITIES AVAILABLE-FOR-SALE As of June 30, 1996, the Company has classified its investment in municipal bonds and U.S. Treasury obligations as available-for-sale. The fair value of the marketable securities approximates the adjusted book value determined on a specific identification basis at June 30, 1996. Gross and net realized and unrealized holding gains and losses were not material in any period presented in the accompanying financial statements. RECEIVABLES Trade receivables are primarily comprised of amounts owed to the Company through its pharmaceutical wholesaling activities and are presented net of an allowance for doubtful accounts of $ 35.0 million and $36.8 million at June 30, 1997 and 1996, respectively. The Company provides financing to various customers. Such financing arrangements range from one year to ten years, at interest rates which generally fluctuate with the prime rate. The financings may be collateralized, guaranteed by third parties or unsecured. Finance notes and accrued interest receivable are $52.5 million and $59.1 million at June 30, 1997 and 1996, respectively (the current portion was $12.1 million and $14.8 million, respectively), and are included in other assets. These amounts are reported net of an allowance for doubtful accounts of $8.2 million and $9.1 million at June 30, 1997 and 1996, respectively. MERCHANDISE INVENTORIES Substantially all merchandise inventories (87% in 1997 and 80% in 1996) are stated at lower of cost, using the last-in, first-out (LIFO) method, or market. If the Company had used the first-in, first-out (FIFO) method of inventory valuation, which approximates current replacement cost, inventories would have been higher than reported at June 30, 1997, by $69.6 million and at June 30, 1996, by $76.3 million. The Company continues to consolidate locations, automate selected distribution facilities and invest in management information systems which achieve efficiencies in inventory management processes. As a result of the facility and related inventory consolidations, and the operational efficiencies achieved in fiscal 1997 and 1996, the Company had partial inventory liquidations in certain LIFO pools which reduced the LIFO provision by approximately $2 million and $7 million, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization for financial reporting purposes are computed using the straight-line method over the estimated useful lives of the assets which range from three to forty years, including capital lease assets which are amortized over the terms of their respective leases. Amortization of capital lease assets is included in depreciation and amortization expense. Certain software costs related to internally developed or purchased software are capitalized and amortized using the straight-line method over the useful lives, not exceeding five years. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles primarily represent intangible assets related to the excess of cost over net assets of subsidiaries acquired. Intangible assets are being amortized using the straight-line method over lives which range 17 18 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) from ten to forty years. Accumulated amortization was $20.3 million and $28.5 million at June 30, 1997 and 1996, respectively. At each balance sheet date, a determination is made by management to ascertain whether there is an indication that the intangible assets may have been impaired based on undiscounted operating cash flows. REVENUE RECOGNITION The Company records distribution revenues when merchandise is shipped to its customers and the Company has no further obligation to provide services related to such merchandise. The Company also arranges for bulk deliveries to be made to customer warehouses which are excluded from net revenues and totaled $2.5 billion, $2.2 billion and $1.8 billion in fiscal 1997, 1996 and 1995, respectively. The service fees related to bulk deliveries are included in net revenues and were not significant in any of the fiscal years presented. Revenues are recognized from sales-type leases of point-of-use pharmacy systems when the systems are delivered, and the customer accepts the system, and the lease becomes noncancellable. Unearned income on sales-type leases is recognized using the interest method. Sales of point-of-use pharmacy systems are recognized upon delivery and customer acceptance. Revenues for systems installed under operating lease arrangements are recognized over the lease term as it becomes receivable according to the provisions of the lease. The revenue from such operating leases is not significant. The Company earns franchise and origination fees from its apothecary-style pharmacy franchisees. Franchise fees represent monthly fees based upon franchisees' sales and are recognized as revenues when they are earned. Origination fees from signing new franchise agreements are recognized as revenues when the new franchise store is opened. Master franchise origination fees are recognized as revenues when all significant conditions relating to the master franchise agreement have been satisfied by the Company. Pharmacy management revenue is recognized as the related services are rendered according to the contracts established. A fee is charged under such contracts through a monthly management fee arrangement, a capitated fee arrangement or a portion of the hospital charges to patients. Under certain contracts, fees for management services are guaranteed by the Company not to exceed stipulated amounts or have other risk-sharing provisions. Revenues include the estimated effects of such contractual guarantees and risk-sharing provisions. Packaging revenues are recognized from services provided upon the completion of such services. EARNINGS PER COMMON SHARE Primary and fully diluted earnings per Common Share are computed using the treasury stock method and are based on the weighted average number of Common Shares outstanding during each period and the dilutive effect of stock options from the date of grant. Additionally, fully diluted earnings per share for all periods prior to the conversion include the effect of the shares assumed to be issued upon conversion of the convertible subordinated notes (see Note 5). Excluding dividends paid by all entities with which the Company has merged, the Company paid cash dividends per Common Share of $0.09 for the fiscal year ended June 30, 1997 and $0.08 for each of the fiscal years ended June 30, 1996 and 1995. STOCK SPLITS On October 29, 1996, the Company declared a three-for-two stock split which was effected as a stock dividend and distributed on December 16, 1996 to shareholders of record on December 2, 1996. All share and per share amounts included in the consolidated financial statements, except the Consolidated Statements of Shareholders' Equity, have been adjusted to retroactively reflect this stock split. 18 19 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) NEW ACCOUNTING PRONOUNCEMENT In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the Company adopted at the beginning of fiscal 1997. SFAS 121 requires impairment losses to be recorded on long-lived assets used in operations when an indication of impairment is present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses accounting for long-lived assets that are expected to be disposed of. The impact of adopting SFAS 121 has had an immaterial effect on the Company's financial condition and results of operations. 2. BUSINESS COMBINATIONS On March 18, 1997, the Company completed the Owen Merger. The Owen Merger was accounted for as a pooling-of-interests business combination and the Company issued approximately 7.7 million Common Shares to Owen shareholders and Owen's outstanding stock options were converted into options to purchase approximately 0.7 million Common Shares. During fiscal 1997, the Company recorded costs of approximately $31.1 million ($22.4 million, net of tax) related to the Owen Merger. These costs include $13.1 million for transaction and employee related costs associated with the merger, $13.2 million for asset impairments ($10.6 million of which related to MediTROL, as further discussed below), and $4.8 million related to other integration activities, including the elimination of duplicate facilities and certain exit and restructuring costs. At the time of the Owen Merger, Owen had a wholly-owned subsidiary, MediTROL, that manufactured, marketed, sold and serviced point-of-use medication distribution systems similar to Pyxis. Upon consummation of the Owen Merger, management committed to merge the operations of MediTROL into Pyxis, and phase-out production of the separate MediTROL product line. As a result of this decision, a MediTROL patent ($7.4 million) and certain other operating assets ($3.2 million) were written off as impaired. On October 11, 1996, the Company completed the PCI Merger. The PCI Merger was accounted for as a pooling-of-interests business combination and the Company issued approximately 3.1 million Common Shares to PCI shareholders and PCI's outstanding stock options were converted into options to purchase approximately 0.2 million Common Shares. During fiscal 1997, the Company recorded costs totaling approximately $15.1 million ($11.4 million, net of tax) related to the PCI Merger. These costs include $13.8 million for transaction and employee related costs associated with the PCI Merger, (including $7.6 million for retirement benefits and incentive fees to two executives of PCI, which vested and became payable upon consummation of the merger) and $1.3 million related to other integration activities, including exit costs. The table below presents a reconciliation of net revenues and net earnings as reported in the accompanying consolidated financial statements with those previously reported by the Company. The term "Cardinal" as used in this footnote refers to Cardinal Health, Inc. and subsidiaries prior to the PCI Merger and Owen Merger.
(In Thousands) Cardinal PCI Owen Combined (restated) (restated) ---------- -------- -------- ---------- Fiscal year ended June 30, 1995: Net revenues $8,022,108 $129,785 $320,409 $8,472,302 Net earnings $ 136,034 $ 5,572 $ 4,981 $ 146,587 Fiscal Year Ended June 30, 1996: Net revenues $8,862,425 $161,171 $383,995 $9,407,591 Net earnings $ 115,014 $ 6,456 $ 5,770 $ 127,240
19 20 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) Adjustments affecting net earnings and shareholders' equity resulting from the merger to adopt the same accounting practices were not material for the periods presented herein. On May 7, 1996, the Company completed a merger with Pyxis (the "Pyxis Merger"). The Pyxis Merger was accounted for as a pooling-of-interests business combination, and the Company issued approximately 22.6 million Common Shares to Pyxis shareholders. In addition, Pyxis' outstanding stock options were converted into options to purchase approximately 2.3 million additional Common Shares. During fiscal 1996, the Company recorded costs totaling approximately $42.0 million ($30.6 million, net of tax) related to the Pyxis Merger. These costs include $25.4 million for transaction and employee related costs associated with the merger (including $7.6 million for vested stay bonuses covering substantially all Pyxis employees), $15.6 million related to certain exit and lease termination costs (related to cancellation of a long term contract with a financing company related to the servicing of the accounts receivable from Pyxis customers at the time of the Pyxis Merger, see Note 3), and $1.0 million related to asset impairments and other integration activities. Additional merger-related costs totaling approximately $0.5 million ($0.3 million, net of tax) were recorded in fiscal 1997 related to integrating the operations of the companies. On November 13, 1995, the Company completed a merger with Medicine Shoppe (the "Medicine Shoppe Merger"). The Medicine Shoppe Merger was accounted for as a pooling-of-interests business combination and the Company issued approximately 9.6 million Common Shares to Medicine Shoppe shareholders. In addition, Medicine Shoppe's outstanding stock options were converted into options to purchase approximately 0.2 million Common Shares. During fiscal 1996, the Company recorded costs totaling approximately $7.2 million ($6.4 million, net of tax) related to the Medicine Shoppe Merger. These costs include $6.3 million for transaction and employee related costs associated with the Medicine Shoppe Merger and $0.9 million related to other integration activities. Additional merger-related costs totaling approximately $4.2 million ($2.5 million, net of tax) were recorded in fiscal 1997 related to integrating the operations of the companies. The effect of the various merger related costs recorded in fiscal 1997 was to reduce reported net earnings by $36.6 million to $184.6 million and to reduce reported fully diluted earnings per common share by $.34 per share to $1.69 per share. The effect of the various merger related costs recorded in fiscal 1996 was to reduce reported net earnings by $36.9 million to $127.2 million and to reduce reported fully diluted earnings per common share by $.34 per share to $1.19 per share. Certain merger related costs are based upon estimates, and actual amounts paid may ultimately differ from these estimates. If additional costs are incurred, such items will be expensed as incurred. The Company has estimated that it will incur additional merger related costs for Medicine Shoppe, Pyxis, PCI, and Owen totaling approximately $11.7 million ($7.0 million, net of tax) in future periods (primarily fiscal 1998) in order to properly integrate operations and implement efficiencies with regard to, among other things, information systems, customer systems, marketing programs and administrative functions. Such amounts will be charged to expense when incurred. During fiscal 1996, the Company completed three business combinations which were accounted for under the purchase method of accounting. These business combinations were primarily related to the Company's point-of-use pharmacy systems and pharmacy management services. The aggregate purchase price, which was paid primarily in cash, including fees and expenses, was $58.8 million. Liabilities of the operations assumed were approximately $41.7 million, consisting primarily of debt of $29.7 million. Had the purchases occurred at the beginning of fiscal 1995, operating results for fiscal 1996 and 1995 on a pro forma basis would not have been significantly different. On July 18, 1994, the Company issued approximately 1.4 million Common Shares in a merger transaction for all of the common shares of Behrens Inc. ("Behrens"), a pharmaceutical wholesaler based in Waco, Texas. The transaction was accounted for as a pooling-of-interests business combination. The historical cost of Behrens assets combined was approximately $25.4 million, and the total liabilities assumed (including total debt of approximately $1.3 million ) were approximately $15.6 million. Because the impact of the Behrens merger, on both an historical and pro forma basis, was not significant, prior periods have not been restated. 20 21 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) During fiscal 1995, the Company completed two business combinations which were accounted for under the purchase method of accounting. These business combinations were primarily related to the Company's drug distribution and point-of-use pharmacy systems. The aggregate purchase price was $54.5 million ($8.9 million was assumed debt), which included approximately 0.8 million Common Shares valued at $11.2 million. Liabilities of the operations assumed were approximately $98.9 million, consisting of $1.7 million of debt. Had the purchases occurred at the beginning of fiscal 1995, operating results for fiscal 1995 on a pro forma basis would not have been significantly different. 3. 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 thousands):
June 30, June 30, 1997 1996 --------- --------- Future minimum lease payments receivable $ 190,918 $ 176,963 Unguaranteed residual values 1,333 1,457 Unearned income (27,817) (25,637) Allowance for uncollectible minimum lease payments receivable (4,874) (5,026) --------- --------- Net investment in sales-type leases $ 159,560 $ 147,757 Less: current portion 40,997 37,953 --------- --------- Net investment in sales-type leases, less current portion $ 118,563 $ 109,804 ========= =========
Future minimum lease payments to be received pursuant to sales-type leases are as follows at June 30, 1997 (in thousands):
1998 $ 52,381 1999 51,720 2000 41,788 2001 28,246 2002 15,813 Thereafter 970 -------- Total $190,918 ========
Lease Related Financing Arrangements Prior to the Pyxis Merger, Pyxis had financed its working capital needs through the sale of certain lease receivables to a non-bank financing company. In March 1994, Pyxis entered into a five-year financing and servicing agreement with the financing company, whereby the financing company agreed to purchase a minimum of $500 million of Pyxis' lease receivables under certain conditions, provided that the total investment in the lease receivables at any one time did not exceed $350 million. As of June 30, 1997, $203 million of lease receivables were owned by the financing company. The aggregate lease receivables sold under this arrangement totaled approximately $312 million and $233 million at June 30, 1997 and 1996, respectively. As a result of the Pyxis Merger, the Company entered into negotiations with the financing company to amend and terminate this arrangement. In June 1997, the agreement with the financing company was amended to modify financing levels over the remaining term of the agreement and to terminate the lease portfolio servicing responsibilities of the financing company. The Company made provision for the estimated costs associated with the exiting of this arrangement at the time of the Pyxis Merger. 21 22 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) 4. NOTES PAYABLE, BANKS The Company has entered into various unsecured, uncommitted line-of-credit arrangements which allow for borrowings up to $279 million at June 30, 1997, at various money market rates. At June 30, 1997, $22.2 million, at a weighted average interest rate of 6.26%, was outstanding under such arrangements and $.9 million, at a weighted average interest rate of 5% was outstanding as of June 30, 1996. In addition, the Company has revolving credit agreements, which have a maturity of less than one year, with seven banks. These credit agreements are renewable on a quarterly basis and allow the Company to borrow up to $95 million (none of which was in use at June 30, 1997). The Company is required to pay a commitment fee at the annual rate of .125% on the average daily unused amounts of the total credit allowed under the revolving credit agreements. The total available but unused lines of credit at June 30, 1997 were $352 million. 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (in thousands):
June 30, June 30, 1997 1996 -------- -------- Notes; 6.0% due 2006 $150,000 $150,000 Notes; 6.5% due 2004 100,000 100,000 Notes; 8% paid in 1997 -- 100,000 Other obligations; interest averaging 6.38% in 1997 and 7.33% in 1996, due in varying installments through 2011 33,924 83,104 -------- -------- Total $283,924 $433,104 Less: current portion 6,158 112,777 -------- -------- Long-term obligations, less current portion $277,766 $320,327 ======== ========
On January 23, 1996, the Company sold $150 million of 6% Notes due 2006 (the "6% Notes") in a public offering. The 6% Notes represent unsecured obligations of the Company, are not redeemable prior to maturity and are not subject to a sinking fund. Issuance costs of approximately $1.3 million incurred in connection with the offering are being amortized on a straight-line basis over the period the 6% Notes will be outstanding. During fiscal 1996, holders of the $10 million, 9.53% convertible subordinated notes due 2002, originally issued by Owen, converted the notes into the equivalent of approximately 1.1 million Common Shares. Additionally, Owen repaid $34.8 million of debt with proceeds from an Owen common stock offering. If the previously mentioned conversion and retirement of debt had occurred at the beginning of all periods presented, the changes to primary earnings per share would be less than 3%. The 6.5% Notes represent unsecured obligations of the Company, are not redeemable prior to maturity and are not subject to a sinking fund. Issuance costs of approximately $860,000 incurred in connection with these Notes are being amortized on a straight-line basis over the period the 6.5% Notes will be outstanding. The 8% Notes represented unsecured obligations of the Company, were not redeemable prior to their maturity on March 1, 1997 and were not subject to a sinking fund. Certain long-term obligations are collateralized by property and equipment of the Company with an aggregate book value of approximately $33.5 million at June 30, 1997. 22 23 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) Maturities of long-term obligations for future fiscal years are as follows (in thousands):
1998 $ 6,158 1999 6,706 2000 3,985 2001 3,016 2002 1,890 Thereafter 262,169 -------- Total $283,924 ========
The Company filed a shelf debt registration statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on April 21, 1997. The registration increases the Company's shelf debt capacity by $350 million to a total of $400 million. No securities have been sold under this registration statement. 6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and equivalents, marketable securities, trade receivables, accounts payables, notes payable--banks and other accrued liabilities at June 30, 1997 and 1996, approximate their fair value because of the short-term maturities of these items. The estimated fair value of the Company's long-term obligations was $270.1 million and $398.7 million as compared to the carrying amounts of $283.9 million and $433.1 million at June 30, 1997 and 1996, respectively. The fair value of the Company's long-term obligations is estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for debt of the same remaining maturities. 7. INCOME TAXES The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended ------------------------------ June 30, June 30, June 30, 1997 1996 1995 -------- -------- -------- Current: Federal $101,877 $ 67,397 $ 48,946 State 13,387 9,263 6,421 -------- -------- -------- Total 115,264 76,660 55,367 Deferred 11,217 23,602 47,310 -------- -------- -------- Total provision $126,481 $100,262 $102,677 ======== ======== ========
23 24 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) A reconciliation of the provision based on the Federal statutory income tax rate to the Company's income tax provision is as follows:
Fiscal Year Ended --------------------------------------- June 30, June 30, June 30, 1997 1996 1995 -------- -------- -------- Provision at Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of Federal benefit 4.3 4.7 4.9 Nondeductible expenses 2.4 3.9 0.1 Other (1.0) 0.5 1.2 ---- ---- ---- Effective income tax rate 40.7% 44.1% 41.2% ==== ==== ====
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. Amounts for fiscal 1996 have been reclassified to conform to the fiscal 1997 presentation. The components of the deferred income tax assets and liabilities are as follows (in thousands):
June 30, June 30, 1997 1996 --------- --------- Deferred income tax assets: Allowance for doubtful accounts $ 18,669 $ 19,239 Accrued liabilities 35,179 20,108 Net operating loss carryforwards 30,978 36,438 Other 38,285 48,952 --------- --------- Total deferred income tax assets 123,111 124,737 Valuation allowance for deferred income tax assets (2,696) (4,423) --------- --------- Net deferred income tax assets 120,415 120,314 --------- --------- Deferred income tax liabilities: Inventory basis differences (58,077) (55,431) Property related (63,171) (58,557) Revenues on lease contracts (89,101) (91,996) Other (13,128) (11,296) --------- --------- Total deferred income tax liabilities (223,477) (217,280) --------- --------- Net deferred income tax liabilities $(103,062) $ (96,966) ========= =========
The above amounts are classified in the consolidated balance sheets as follows (in thousands):
June 30, June 30, 1997 1996 --------- -------- Other current assets (liabilities) $ (27,696) 558 Deferred income taxes and other liabilities (75,366) (97,524) --------- -------- Net deferred income tax liabilities $(103,062) $(96,966) ========= ========
The Company had Federal net operating loss carryforwards of $91 million as of June 30, 1997 and 1996. Also at June 30, 1997 and 1996, the Company had state net operating loss carryforwards of $56 million and $68.2 million, respectively. A valuation allowance of $2.7 million and $4.4 million at June 30, 1997 and 1996, respectively, has been provided for the state net operating loss carryforwards, as utilization of such carryforwards within the applicable statutory periods is uncertain. In addition, use of the Company's net operating loss carryforwards will be limited due 24 25 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) to the Pyxis Merger and the carryforwards are also only available to offset future taxable income of Pyxis. However, with the exception of the valuation allowance described above, the Company anticipates that no limitations will apply. The Federal net operating loss carryforwards begin expiring in 2001 and the state net operating loss carryforwards began expiring in 1994. 8. EMPLOYEE RETIREMENT BENEFIT PLANS Substantially all of the Company's 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, 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. Qualified union employees are covered by multiemployer defined benefit pension plans under the provisions of collective bargaining agreements. Benefits under these plans are generally based on the employee's years of service and average compensation at retirement. The total expense for employee retirement benefit plans was as follows (in thousands):
Fiscal Year Ended ------------------------------------ June 30, June 30, June 30, 1997 1996 1995 -------- -------- ------- Defined contribution plans $10,765 $ 9,132 $6,929 Multiemployer plans 947 1,216 1,088 ESOP compensation -- 257 533 ------- ------- ------ Total $11,712 $10,605 $8,550 ======= ======= ======
Prior to the Owen Merger, Owen established an Employee Stock Ownership Plan (ESOP). Costs for the ESOP debt service were recognized for additional contributions to satisfy ESOP obligations and plan operating expenses. As of January 2, 1996, contributions to the ESOP were suspended and all participants became fully vested. 9. COMMITMENTS AND CONTINGENT LIABILITIES The future minimum rental payments for operating leases having initial or remaining noncancelable lease terms in excess of one year at June 30, 1997, are as follows (in thousands):
1998 $17,083 1999 12,626 2000 7,655 2001 6,339 2002 5,601 Thereafter 22,341 ------- Total $71,645 =======
Rental expense relating to operating leases was approximately $23 million, $23.4 million and $17.9 million in fiscal 1997, 1996, and 1995, respectively. Sublease rental income was not material for any period presented herein. The Company has entered into operating lease agreements with several banks for the construction of various new facilities. The initial terms of the lease agreements extend through April 2003, with optional five year renewal periods. In the event of termination, the Company is required to either purchase the facility or vacate the property and make reimbursement for a portion of the uncompensated price of the property cost. The instruments provide for maximum fundings of $159 million, which is the total estimated cost of the construction projects. As of June 30, 1997, the amount expended was $32.5 million. Currently, the Company's minimum annual lease payments under the agreements are approximately $2.2 million. 25 26 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) As of June 30, 1997, amounts outstanding on customer notes receivable sold with full recourse to a commercial bank totaled approximately $12.9 million. The Company also has outstanding guarantees of indebtedness and financial assistance commitments which totaled approximately $3 million at June 30, 1997. The Company becomes involved from time-to-time in litigation incidental to its business. In addition, in November 1993, Cardinal, Whitmire, five other pharmaceutical wholesalers, and twenty-four pharmaceutical manufacturers were named as defendants in a series of purported class action antitrust lawsuits alleging violations of various antitrust laws associated with the chargeback pricing system. The Company believes that the allegations set forth against Cardinal and Whitmire in these lawsuits are without merit. Although the ultimate resolution of litigation cannot be forecast with certainty, the Company does not believe that the outcome of any pending litigation would have a material adverse effect on the Company's financial statements. 10. SHAREHOLDERS' EQUITY At June 30, 1997, the Company's authorized capital shares consisted of (a) 150,000,000 Class A common shares, without par value; (b) 5,000,000 Class B common shares, without par value; and (c) 500,000 non-voting preferred shares without par value. At June 30, 1996, the Company's authorized capital shares consisted of (a) 100,000,000 Class A common shares, without par value; (b) 5,000,000 Class B common shares, without par value; and (c) 500,000 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, 1997 and 1996. On September 26, 1994, approximately 12.1 million of the Company's Common Shares were sold pursuant to a public offering. Approximately 2.8 million Common Shares were sold by the Company, and approximately 9.3 million Common Shares (the "Existing Shares") were sold by certain shareholders of the Company. The Company did not receive any of the proceeds from the sale of the Existing Shares. 11. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company's trade receivables, finance notes and accrued interest receivable, and lease receivables are exposed to a concentration of credit risk with customers in the retail and healthcare sectors. Credit risk can be affected by changes in reimbursement and other economic pressures impacting the acute care portion of the healthcare industry. However, the 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. During fiscal 1997, the Company's two largest customers individually accounted for 13% of net revenues and 62% of bulk deliveries, respectively. During fiscal 1996, the Company's two largest customers individually accounted for 11% of net revenues and 70% of bulk deliveries, respectively. During fiscal 1995, the Company's two largest customers individually accounted for 10% of net revenues and 82% of bulk deliveries, respectively. Trade receivables due from these two customers aggregated approximately 23% and 22% of total trade receivables at June 30, 1997 and 1996, respectively. 12. STOCK OPTIONS AND RESTRICTED SHARES The Company maintains 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. 26 27 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) The Company accounts for the Plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the Plans been determined consistent with the Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced by $2.3 million and $.02 per share, respectively, for fiscal 1997 and $6.4 million and $.07 per share, respectively, for fiscal 1996. Because the SFAS 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The following summarizes all stock option transactions for the Company (excluding Whitmire, see below) under the Plans from June 30, 1994, through June 30, 1997, giving retroactive effect to conversions of options in connection with merger transactions and stock splits (in thousands, except per share amounts):
Fiscal 1997 Fiscal 1996 Fiscal 1995 --------------------------- ----------------------------- ----------------------------- Weighted Weighted Weighted average average average Options exercise price Options exercise price Options exercise price ---------- ---------------- ----------- ---------------- ------------ ---------------- Outstanding, beginning of year 6,432 $24.15 5,737 $20.98 4,675 $18.22 Granted 840 54.88 1,382 36.82 1,196 31.04 Exercised (2,284) 19.87 (527) 21.10 (92) 9.43 Canceled (240) 27.27 (160) 29.93 (42) 25.19 --------------------------- ---------------------------- ----------------------------- Outstanding, end of year 4,748 $ 31.49 6,432 $24.15 5,737 $20.98 =========================== ============================ ============================= Exercisable, end of year 2,718 $23.15 4,076 $20.89 1,816 $10.25 --------------------------- ---------------------------- -----------------------------
The weighted average fair value of options granted during fiscal 1997 and 1996 was $14.48 and $14.50, respectively. The fair value of the options granted were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for grants in both fiscal 1997 and 1996: risk free interest rate of 6.23%, expected life of 3 years, expected volatility of .25% and dividend yield of .17%. Information relative to stock options outstanding as of June 30, 1997 (in thousands, except per share amounts):
Options Outstanding Options Exercisable ----------------------------------------------------- ------------------------------ Weighted average remaining Weighted Weighted average Range of contractual average exercise price exercise prices Options life in years exercise price Options - ------------------------------------------------------------------------ ------------------------------ $ .08-$23.07 1,737 4.99 $15.35 1,584 $15.30 $23.27-$39.92 1,905 7.76 33.11 842 30.20 $40.00-$63.00 1,106 8.84 54.02 292 45.39 ----------------------------------------------------- ------------------------------ 4,748 7.00 $31.49 2,718 $23.15 ===================================================== ==============================
As of June 30, 1997, there remained approximately 1.5 million additional shares available to be issued pursuant to the Plans. In connection with the Whitmire Merger, outstanding Whitmire stock options granted to current or former Whitmire officers or employees were automatically converted into options ("Cardinal Exchange Options") to purchase an aggregate of approximately 2.6 million additional Common Shares. Under the terms of their original issuance, the 27 28 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) exercise price for substantially all of the Cardinal Exchange Options is remitted to certain former investors of Whitmire. Cardinal Exchange Options to purchase 0.3 million and 1.9 million Common Shares, with an average option price of $1.37 and $1.01 were exercised in fiscal 1996 and 1995, respectively. At June 30, 1996, all Cardinal Exchange Options had been exercised. The market value of restricted shares awarded by the Company is recorded in the "Other" component of shareholders' equity in the accompanying balance sheets. The compensation awards are amortized to expense over the period in which participants perform services, generally one to six years. As of June 30, 1997, approximately 0.7 million restricted shares had been issued, of which approximately 0.2 million shares remained restricted and subject to forfeiture and approximately 67,000 shares had been forfeited. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED, AS RESTATED) The following selected quarterly financial data (in thousands, except per share amounts) for fiscal 1997 and 1996 has been restated to reflect the pooling-of-interests business combinations in Note 2 and for the items discussed in Note 17:
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ----------- ---------- ---------- Fiscal 1997: Net revenues $2,535,476 $2,816,406 $2,825,500 $2,790,660 Gross margin 193,828 223,858 246,658 235,314 Selling, general and administrative expenses 124,156 127,413 131,502 132,480 Operating earnings 69,514 78,429 84,274 100,961 Net earnings 39,326 41,326 42,181 61,766 Net earnings per Common Share: Primary $ .37 $ .38 $ .38 $ .56 Fully diluted .37 .38 .38 .56 - ------------------------------------------------------------------------------------------ Fiscal 1996: Net revenues $2,224,610 $2,327,269 $2,394,705 $2,461,007 Gross margin 186,095 198,739 214,004 210,875 Selling, general and administrative expenses 123,640 123,302 128,737 139,200 Operating earnings 62,455 68,333 85,267 29,579 Net earnings 34,752 36,828 46,786 8,874 Net earnings per Common Share: Primary $ .33 $ .35 $ .44 $ .08 Fully diluted .33 .35 .44 .07
28 29 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) Amounts previously reported by the Company are presented below and differ from the above selected quarterly financial data solely due to the items discussed in Note 17. See Note 17 for further discussion.
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- --------- Fiscal 1997: Net revenues $2,535,476 $2,816,406 $2,825,500 $2,790,660 Gross margin 197,128 223,558 243,658 240,614 Selling, general and administrative expenses 124,156 127,313 129,702 132,446 Operating earnings 72,972 78,886 74,352 108,168 Net earnings 41,401 41,600 36,228 61,890 Net earnings per Common Share: Primary $ .39 $ .38 $ .33 $ .56 Fully diluted .39 .38 .33 .56 - ------------------------------------------------------------------------------------------ Fiscal 1996: Net revenues $2,187,518 $2,284,993 $2,352,254 $2,421,655 Gross margin 177,420 188,473 203,587 203,754 Selling, general and administrative expenses 116,899 117,323 122,382 122,836 Operating earnings 60,521 53,598 81,205 31,220 Net earnings 33,775 28,154 44,691 11,014 Net earnings per Common Share: Primary $ .33 $ .28 $ .43 $ .10 Fully diluted .33 .28 .43 .10
As more fully discussed in Note 2, merger related costs were recorded in various quarters in fiscal 1997 and 1996. The following table summarizes the impact of such costs on net earnings and fully diluted earnings per share in the quarters in which they were recorded:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------- -------------- ------------- ------------- Fiscal 1997: Net earnings $ (95) $(13,053) $(22,285) $ (1,124) Fully diluted net earnings per Common Share $ -- $ (.12) $ (.20) $ (.02) - ----------------------------------------------------------------------------------------------------- Fiscal 1996: Net earnings $ -- $ (6,709) $ -- $(30,211) Fully diluted net earnings per Common Share $ -- $ (.06) $ -- $ (.28)
14. SUPPLEMENTAL CASH FLOW INFORMATION Income tax and interest payments for the fiscal years ended June 30, 1997, 1996 and 1995 were as follows (in thousands):
Fiscal Year Ended ----------------------------- June 30, June 30, June 30, 1997 1996 1995 -------- -------- -------- Interest paid $30,487 $25,263 $24,893 Income taxes paid $83,639 $67,831 $28,564
See Notes 2 and 5 for additional information regarding non cash investing and financing activities. 29 30 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) 15. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, FASB issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which will require retroactive adoption in the Company's fiscal quarter ending December 31, 1997. The new standard simplifies the computation of earnings per share and requires the presentation of basic and diluted earnings per share. In light of the present capital structure, the impact of adopting SFAS 128 will not be significant. In June 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which will require adoption no later than the Company's fiscal quarter ending September 30, 1998. This new statement defines comprehensive income as "all changes in equity during a period, with the exception of stock issuances and dividends." The new pronouncement establishes standards for reporting and display of comprehensive income and its components in the financial statements. In June 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), " Disclosures about Segments of an Enterprise and Related Information," which will require adoption no later than fiscal 1999. SFAS 131 requires companies to define and report financial and descriptive information about its operating segments. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The Company is presently evaluating the applicability of SFAS 130 and 131 to its operations. 16. PENDING MERGERS On May 27, 1997, the Company announced that it had entered into a definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant to which MediQual will become a wholly owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting purposes. The Company will record merger-related charges to reflect transaction and other costs incurred as a result of the merger. The amount of this charge is not expected to be significant. In connection with the merger, the Company estimates that it will issue approximately 0.6 million Common Shares. The merger is expected to be completed in the first quarter of calendar 1998, subject to satisfaction of certain conditions, including approval by shareholders of MediQual. On August 23, 1997, the Company signed a definitive merger agreement with Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and medical-surgical supplies, pursuant to which Bergen will become a wholly owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting purposes. Under the terms of the proposed merger, shareholders of Bergen will receive .775 of a Company Common Share in exchange for each outstanding common share of Bergen. The Company will issue approximately 40 million Common Shares in the transaction and will also assume approximately $386 million in long-term debt. The Company will record merger-related charges to reflect transaction and other costs incurred as a result of the proposed transaction with Bergen. Since the merger has not yet been consummated and transition plans are currently being developed, the amount of this charge cannot be estimated at this time. Merger related costs incurred prior to consummation will be deferred and expensed upon consummation. The merger is expected to be completed by the end of the third quarter of fiscal 1998, subject to the satisfaction of certain conditions, including approvals by the stockholders of Bergen and the Company's shareholders, and the receipt of certain regulatory approvals. 17. RESTATEMENT Subsequent to the issuance of the Company's fiscal 1997 financial statements and the filing of the Form 10-K with the Securities and Exchange Commission (the "Commission"), and following discussions with the Staff of the Commission resulting from the Staff's review of the Company's financial statements in connection with the Company's Registration Statement on Form S-4 relating to the MediQual transaction, the Company determined: (1) to retroactively restate the fiscal 1996 and 1995 financial statements to reflect the pooling-of-interests transaction with PCI (as opposed to the prior presentation which did not include a retroactive restatement for the PCI Merger); (2) that certain merger related costs originally recorded in the period in which the merger was consummated should be 30 31 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED) recorded when such cost was incurred; (3) that certain restructuring and other costs (which were previously reported as merger-related or unusual items) should be reclassified as part of selling, general and administrative expenses; (4) that the recognition of certain manufacturers' incentives should be deferred as a reduction of the inventory value until the sale of such inventory; and (5) that a specific income tax reserve which was no longer required should be eliminated with a credit to the provision for income taxes in 1997. As a result, the Company's fiscal 1997, 1996 and 1995 financial statements have been restated from amounts previously reported. The effect of these items on the accompanying financial statements is summarized as follows:
1997 1996 1995 1997 Previously 1996 Previously 1995 Previously As Restated Reported As Restated Reported As Restated Reported ----------- ----------- ---------- ---------- ---------- ---------- Net revenues $10,968,042 $10,968,042 $9,407,591 $9,246,420 $8,472,302 $8,342,517 Cost of products sold 10,068,384 10,063,084 8,597,878 8,473,186 7,779,030 7,673,044 ----------- ----------- ---------- ---------- ---------- ---------- Gross margin 899,658 904,958 809,713 773,234 693,272 669,473 Selling, general and administrative expenses (515,551) (513,617) (514,879) (479,440) (428,343) (413,630) Merger related costs: Transaction and employee-related costs (27,100) (31,200) (31,755) (36,700) Other (23,829) (25,763) (17,445) (30,550) ----------- ----------- ---------- ---------- ---------- ---------- Operating earnings 333,178 334,378 245,634 226,544 264,929 255,843 Other income (expense): Interest expense (27,974) (27,974) (30,611) (26,903) (23,948) (22,110) Other, net-primarily interest income 5,876 5,876 12,479 12,422 8,283 8,386 ----------- ----------- ---------- ---------- ---------- ---------- Earnings before income taxes 311,080 312,280 227,502 212,063 249,264 242,119 Provision for income taxes 126,481 131,161 100,262 94,429 102,677 99,604 ----------- ----------- ---------- ---------- ---------- ---------- Net earnings $ 184,599 $ 181,119 $ 127,240 $ 117,634 $ 146,587 $ 142,515 =========== =========== ========== ========== ========== ========== Earnings per Common Share Primary $ 1.69 $ 1.66 $ 1.20 $ 1.14 $ 1.41 $ 1.42 Fully diluted $ 1.69 $ 1.66 $ 1.19 $ 1.14 $ 1.40 $ 1.40 Total assets $ 3,091,750 $ 3,108,546 $2,959,401 $2,825,175 $2,363,752 $2,264,726 Shareholders' equity $ 1,334,730 $ 1,332,200 $1,095,225 $1,035,838 $ 866,474 $ 817,038 Weighted Average Shares Outstanding: Primary 109,118 109,118 106,091 102,922 103,659 100,566 Fully diluted 109,172 109,172 107,001 103,832 104,849 101,756
31 32 PART IV ITEM 14: 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............................................................. 9 Financial Statements: Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated)................................................ 12 Consolidated Balance Sheets at June 30, 1997 and 1996 (as restated)....................... 13 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated).................................... 14 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1997, 1996 and 1995 (as restated)................................................ 15 Notes to Consolidated Financial Statements (as restated).................................. 16
(a)(2) The following Supplemental Schedule is included in this report:
PAGE ---- Schedule II - Valuation and Qualifying Accounts (as restated)............................. 37
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 - ------- ------------------- 2.01 Amended and Restated Agreement and Plan of Merger dated as of July 7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and Registrant (1) 2.02 Agreement and Plan of Merger dated as of August 23, 1997, among the Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (11) 3.01 Amended and Restated Articles of Incorporation of the Registrant, as amended. (2) 3.02 Restated Code of Regulations of the Registrant, as amended. (3) 4.01 Specimen Certificate for the Registrant's Class A Common Shares. (14) 4.02 Indenture between the Registrant and Bank One, Indianapolis, NA relating to the Registrant's 6 1/2% Notes Due 2004 and 6% Notes Due 2006. (3) 4.03 Indenture between the Registrant and Bank One, Columbus, NA, Trustee dated as of April 18, 1997 (as of the date hereof, no securities have been issued pursuant to the Indenture). (4)
32 33
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- Other long-term debt agreements of the Registrant are not filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K and the Registrant agrees to furnish copies of such agreements to the SEC upon its request. 10.01 Stock Incentive Plan of the Registrant, as amended. (7) * 10.02 Directors' Stock Option Plan of the Registrant, as amended and restated. (7) 10.03 Equity Incentive Plan of the Registrant, as amended * 10.04 1990 Stock Option Plan of Medicine Shoppe International, Inc. (9)* 10.05 Employee Incentive Stock Option Plan of Medicine Shoppe International, Inc. (9)* 10.06 Executive Choice Plan of Medicine Shoppe International, Inc. (9)* 10.07 PCI Services, Inc. Stock Option Plan, as amended (8)* 10.08 Employment Agreement dated August 26, 1995, among Medicine Shoppe, David A. Abrahamson and the Registrant. (10)* 10.09 Employment Agreement dated July 23, 1996, among PCI Services, Inc., Daniel F. Gerner, and the Registrant. (12)* 10.10 Form of Indemnification Agreement between the Registrant and individual directors. 10.11 Form of Indemnification Agreement between the Registrant and individual officers. * 10.12 Split Dollar Agreement dated April 16, 1993, among the Registrant, Robert D. Walter, and Bank One Ohio Trust Company, NA, Trustee U/A dated April 16, 1993 FBO Robert D. Walter. (7)* 10.13 Lease for portions of the Registrant's Columbus Investment Property dated July 7, 1958, as amended. (5) 10.14 Cardinal Health, Inc. Incentive Deferred Compensation Plan, Amended and Restated Effective July 1, 1997. (15)* 10.15 Cardinal Health, Inc. Performance-Based Incentive Compensation Plan. (13)* 10.16 Shareholders Agreement dated July 13, 1984, as amended. (6) 10.17 Master Agreement and related documents, dated as of July 16, 1996 among the Registrant and/or its subsidiaries, SunTrust Banks, Inc., PNC Leasing Corp. and SunTrust Bank, Atlanta. (10) 10.18 Vendor Program Agreement dated as of October 10, 1991 by and between General Electric Capital Corporation and Pyxis Corporation, as amended on December 13, 1991, January 15, 1993, March 10, 1994, and June 23, 1997. (10, except for Rider 5, which was filed as an exhibit to the Annual Report on Form 10-K referenced in note 14, below) 10.19 Participation Agreement and related documents, dated as of June 23, 1997, among the Registrant and certain of its subsidiaries, Bank of Montreal and BMO Leasing (U.S.), Inc. (14) 10.20 Pharmaceutical Services Agreement, dated as of August 1, 1996, between Kmart Corporation and Cardinal Health. (12) 11.01 Statement concerning computation of per share earnings (as restated). 21.01 List of subsidiaries of the Registrant. (14)
33 34
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 23.01 Consent of Deloitte & Touche LLP. 23.02 Consent of Ernst & Young LLP. 23.03 Consent of Price Waterhouse LLP. 27.01 Financial Data Table (as restated) 99.01 Statement Regarding Forward-Looking Information. (14)
- -------------- (1) Filed as an annex to the Registrant's Registration Statement on Form S-4 (No. 333-30889) and incorporated herein by reference. (2) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996 (No. 0-12591) and incorporated herein by reference. (3) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (No. 0-12591) and incorporated herein by reference. (4) Included as an exhibit to the Registrant's Current Report on Form 8-K filed with the SEC on April 21, 1997, and incorporated herein by reference. (5) Included as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-84444) 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 March 31, 1993 (No. 0-12592) and incorporated herein by reference. (7) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (No. 0-12591) 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. 333-11803-01) and incorporated herein by reference. (9) Included as an exhibit to the Registrant's Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (No. 33-63283-01) and incorporated herein by reference. (10) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (No. 0-12591) and incorporated herein by reference. (11) Included as an exhibit to the Registrant's current report on Form 8-K/A filed with the SEC on August 27, 1997, and incorporated herein by reference. (12) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (No. 0-12591) and incorporated herein by reference. 34 35 (13) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (No. 0-12591) and incorporated herein by reference. (14) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1997 (No. 0-12591) filed with the Commission on September 29, 1997, and incorporated herein by reference. (15) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (No. 0-12591) filed with the Commission on November 14, 1997 and incorporated herein by reference. * Management contract or compensation plan or arrangement. (b) Reports on Form 8-K: On April 21, 1997, the Company filed a Report on Form 8-K under Item 7 which filed as an exhibit an Indenture dated as of April 18, 1997, between the Company and Bank One Columbus, NA, Trustee. On June 10, 1997, the Company filed a Report on Form 8-K under Item 5 announcing that it was filing under Item 7 restated consolidated financial statements of the Company giving effect to the merger with Owen. 35 36 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. CARDINAL HEALTH, INC. January 7, 1998 By: /s/ DAVID BEARMAN David Bearman Executive Vice President and Chief Financial Officer (principal financial officer) By: /s/ RICHARD J. MILLER Richard J. Miller Vice President, Controller and Principal Accounting Officer 36 37 CARDINAL HEALTH, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (AS RESTATED) (3) (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------------- ------------- --------------------------- -------------- ---------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD - -------------------------------------------------- ------------- ------------- ------------- -------------- ---------------- Fiscal Year 1997: Accounts receivable $36,803 $ 8,073 $ 410 $(10,334) $34,952 Finance notes receivable 9,081 -- -- (902) 8,179 Net investment in sales-type leases 5,026 -- -- (152) 4,874 ------- ------- ------ -------- ------- $50,910 $ 8,073 $ 410 $(11,388) $48,005 ======= ======= ====== ======== ======= Fiscal Year 1996: Accounts receivable $34,606 $ 9,720 $1,452 $ (8,975) $36,803 Finance notes receivable 9,274 650 -- (843) 9,081 Net investment in sales-type leases 2,900 2,126 -- -- 5,026 ------- ------- ------ -------- ------- $46,780 $12,496 $1,452 $ (9,818) $50,910 ======= ======= ====== ======== ======= Fiscal Year 1995: Accounts receivable $27,181 $12,861 $2,025 $ (7,461) $34,606 Finance notes receivable 8,661 1,766 -- (1,153) 9,274 Net investment in sales-type leases 2,747 153 -- -- 2,900 ------- ------- ------ -------- ------- $38,589 $14,780 $2,025 $ (8,614) $46,780 ======= ======= ====== ======== =======
1 During fiscal 1997, 1996 and 1995 recoveries of amounts provided for or written off in prior years were $410,000, $332,000 and $197,000, respectively. Increases in the reserves as a result of acquisitions accounted for as purchases were $1,120,000 and $1,828,000 in fiscal 1996 and 1995, respectfully. 2 Write-off of uncollectible accounts. 3 Amounts herein have been restated retroactively to reflect the merger with PCI Services, Inc. See Note 17 of "Notes to the Consolidated Financial Statements". 37 EX-10.03 2 EXHIBIT 10.03 1 EXHIBIT 10.03 [LOGO] CARDINAL HEALTH, INC. EQUITY INCENTIVE PLAN SECTION 1. PURPOSE. The purpose of the Cardinal Health, Inc. Equity Incentive Plan (the "Plan") is to assist Cardinal Health, Inc. ("CAH") and its subsidiaries (CAH and its subsidiaries, collectively, the "Company") in attracting and retaining capable employees and directors. The Plan provides for long and short term incentives to employees by encouraging and enabling them to participate in the Company's future prosperity and growth. The Plan provides for equity ownership opportunities and appropriate incentives to better match the interests of employees and directors with those of shareholders. These objectives will be promoted through the granting to employees of equity-based awards (the "awards") including (i) Incentive Stock Options ("ISOs"), which are intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) options which are not intended to so qualify ("NQSOs") (ISOs and NQSOs are referred to together hereinafter as "Stock Options"); (iii) Restricted Shares; (iv) Performance Shares; (v) Performance Share Units and (vi) Incentive Compensation Restricted Shares. Members of CAH's Board of Directors (the "Board") who do not serve as employees of the Company ("Outside Directors") shall receive NQSOs from the Plan only as provided herein. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Compensation and Personnel Committee (the "Committee") of the Board which shall have the power and authority to grant to eligible employees Stock Options, Restricted Shares, Performance Shares, Performance Share Units and Incentive Compensation Restricted Shares. In particular, the Committee shall have the authority to: (i) select employees of the Company as recipients of awards; (ii) determine the number and type of awards to be granted; (iii) determine the terms and conditions, not inconsistent with the terms hereof, of any award; (iv) adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; (v) interpret the terms and provisions of the Plan and 2 any award granted and any agreements relating thereto; and (vi) take any other actions the Committee considers appropriate in connection with, and otherwise supervise the administration of, the Plan. All decisions made by the Committee pursuant to the provisions hereof shall be made in the Committee's sole discretion and shall be final and binding on all persons. Members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee may designate persons other than its members to carry out its responsibilities under such conditions and limitations as it may set, other than its authority with regard to awards granted to persons subject to Section 16 of the Exchange Act ("Reporting Persons"). SECTION 3. ELIGIBILITY. Employees of the Company and its subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or subsidiary, in each case as determined by the Committee, are eligible to be granted awards. The participants under the Plan who are not Outside Directors shall be selected from time to time by the Committee, in its sole discretion, from among those eligible. In addition, Outside Directors are eligible to receive NQSOs as set forth in Section 9 ("Outside Director Options"), and may not receive any other awards under this Plan. Members of the Committee are eligible to receive Outside Director Options. SECTION 4. SHARES SUBJECT TO PLAN. The total number of the Company's common shares, without par value, ("Shares") reserved and available for distribution pursuant to awards hereunder shall be 2,000,000 Shares, no more than 50% of which shall be granted in the form of Restricted Shares, Incentive Compensation Restricted Shares, Performance Shares and Performance Share Units. Such Shares may consist, in whole or in part, of authorized and unissued Shares or treasury Shares. The maximum number of Shares with respect to which Stock Options, Performance Shares and Performance Share Units may be granted to any single participant during any single fiscal year of the Company shall be 250,000 Shares. If any Shares that have previously been the subject of a Stock Option cease to be the subject of a Stock Option or Outside Director Option (other than by reason of exercise), or if any such Shares that are subject to any Restricted Share (including any Incentive Compensation Restricted Share) or Performance Share award granted hereunder are forfeited by the holder, or if any such Stock Option or other award otherwise terminates without a payment being made to the participant in the form of Shares, or if any Shares (whether or not restricted) previously distributed under the Plan are returned to the Company in connection with the exercise of an award (including in payment of the exercise price or tax withholding), such Shares shall again be available for distribution in connection with future awards under the Plan. 2 3 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 CAH 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 Shares reserved for issuance under the Plan, the limitation on the number of Shares available under the Plan for issuance of Restricted Shares, Incentive Compensation Restricted Shares, Performance Shares and Performance Share Units, the limitations on the number of Shares subject to Stock Options or Performance Shares or Performance Share Units granted to any single participant, the number and exercise price of Shares subject to outstanding Stock Options, the purchase price for Restricted Shares, the financial Performance Goals, if any, of the Shares the subject of a Performance Share or Performance Share Unit award, the number of Shares subject to a Performance Share or Performance Share Unit award or granted by a Restricted Share or Incentive Compensation Restricted Share award, and any other characteristics or terms of the awards or Plan limitations as the Committee shall deem necessary or appropriate to reflect equitably the effects of such changes, shall be appropriately substituted for new shares or adjusted, as determined by the Committee in its discretion. Any such adjustments made to NQSOs shall also be made to Outside Director Options. If any recapitalization, reorganization, reclassification, consolidation, merger of CAH or the Company or any sale of all or substantially all of CAH's or the Company's assets to another person or entity or other transaction which is effected in such a way that holders of Shares are entitled to receive (either directly or upon subsequent liquidation) stock, securities, or assets with respect to or in exchange for Shares (each an "Organic Change") shall occur, in lieu of the Shares issuable upon exercise of a Stock Option or Outside Director Option or pursuant to any other award under the Plan, the Stock Option or Outside Director Option shall thereafter be exercisable for and other awards shall be issuable in such shares of stock, securities or assets (including cash) as may be issued or payable with respect to or in exchange for the number of Shares immediately theretofore acquirable pursuant to such award had such Organic Change not taken place (whether or not such Stock Option or Outside Director Option is then exercisable or other awards are then vested) after giving effect to any adjustments otherwise required or permitted under this Plan. SECTION 5. STOCK OPTIONS. References to Stock Options in this Section 5 shall not apply to Outside Director Options. Stock Options may be granted alone or in addition to other awards granted under the Plan. Any Stock Options granted under the Plan shall be in such form as the Committee may from time to time approve and the provisions of Stock Option awards need not be the same with respect to each optionee. Stock Options granted under the Plan may be either ISOs or NQSOs. The Committee may grant to any optionee ISOs, NQSOs or both types of Stock Options. 3 4 Anything in the Plan to the contrary notwithstanding, without the consent of the optionee(s) affected, no provision of this Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code or to disqualify any ISO under such Section 422. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions not inconsistent with the terms of the Plan as the Committee deems appropriate. Each Stock Option grant shall be evidenced by an agreement executed on behalf of the Company by an officer designated by the Committee and accepted by the optionee. Such agreement shall describe the Stock Options and state that such Stock Options are subject to all the terms and provisions of the Plan and shall contain such other terms and provisions, not inconsistent with the Plan, as the Committee may approve. (a) Exercise Price. The exercise price per Share issuable upon exercise of a Stock Option shall be no less than the fair market value per share on the date the Stock Option is granted; provided, that if the optionee, at the time an ISO is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of CAH or any subsidiary, the exercise price shall be at least 110% of the fair market value of the Shares subject to the ISO on the date of grant. Fair market value on the date of grant shall be determined by the Committee in good faith. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted. (c) Exercise of Stock Options. Stock Options shall become exercisable at such time or times and subject to such terms and conditions (including, without limitation, installment or cliff exercise provisions) as shall be determined by the Committee. The Committee shall have the authority, in its discretion, to accelerate the time at which a Stock Option shall be exercisable whenever it may determine that such action is appropriate by reason of changes in applicable tax or other law or other changes in circumstances occurring after the award of such Stock Options. (d) Method of Exercise. Stock Options may be exercised in whole or in part by giving written notice of exercise to the Company specifying the number of Shares to be purchased. Payment in full of the exercise price shall be paid in cash, or such other instrument as may be permitted in accordance with rules or procedures adopted by the Committee. If approved by the Committee, payment in full or in part may also be made: (i) by delivering Shares already owned by the optionee having a total fair market value on the date of such delivery equal to the option exercise price; (ii) by the delivery of cash on the extension of credit by a broker-dealer to whom the optionee has submitted a notice of exercise or an irrevocable election to effect such extension of credit; or (iii) by any 4 5 combination of the foregoing. No Shares shall be transferred until full payment therefor has been made. (e) Transferability of Stock Options. Except as otherwise provided hereunder, Stock Options shall be transferable by the optionee only with prior approval of the Committee and only in compliance with the restrictions imposed under Section 16(b) of the Exchange Act and Section 422 of the Code, if applicable. Any attempted transfer without Committee approval shall be null and void. Unless Committee approval of the transfer shall have been obtained, all Stock Options shall be exercisable during the optionee's lifetime only by the optionee or the optionee's legal representative. Without limiting the generality of the foregoing, the Committee may, in the manner established by the Committee, provide for the irrevocable transfer, without payment of consideration, of any Stock Option other than any ISO by an optionee to a member of the optionee's family or to a trust or partnership whose beneficiaries are members of the optionee's family. In such case, the Stock Option shall be exercisable only by such transferee. For purposes of this provision, an optionee's "family" shall include the optionee's spouse, children, grandchildren, nieces and nephews. (f) Termination by Death. If an optionee's employment by or service to the Company terminates by reason of death, then, unless otherwise determined by the Committee within five days of such death, each Stock Option held by such optionee shall thereafter be exercisable in full and any unvested portion thereof shall immediately vest. Each Stock Option held by such optionee may thereafter be exercised by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at or after grant or death) from the date of death or until the expiration of the stated term of such Stock Option, whichever period is shorter. (g) Termination by Reason of Retirement. If an optionee's employment by or service to the Company terminates by reason of retirement, then, unless otherwise determined by the Committee within sixty days of such retirement each Stock Option held by such optionee may thereafter be exercised by the optionee for a period of ninety days (or such other period as the Committee may specify at or after grant or retirement) from the date of such termination of employment or service, or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided, however, that, if the optionee dies within such ninety day period (or such other period), any unexercised Stock Option held by such optionee shall thereafter be exercisable, in full, for a period of one year (or such other period as the Committee may specify at or after grant or death) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of retirement, if an ISO is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such ISO shall thereafter be treated as an NQSO. For purposes of the Plan, retirement shall mean voluntary termination of employment by a participant from the Company after attaining age 55 and having at least three years of service with the Company. 5 6 (h) Other Termination of Employment. If an optionee's employment by or service to the Company terminates for any reason other than death or retirement, any Stock Option held by such optionee which has not vested on such date of termination will automatically terminate on the date of such termination. Unless otherwise determined by the Committee at or after grant or termination, the optionee will have ninety days (or such other period as the Committee may specify at or after grant or termination) from the date of termination to exercise any and all Stock Options that are then exercisable on the date of termination; provided, however, that if the termination was for Cause, any and all Stock Options held by that optionee may be immediately canceled by the Committee. For purposes of the Plan, "Cause" means on account of any act of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any subsidiary, or the intentional and repeated violation of the written policies or procedures of the Company. (i) Effect of Termination of Optionee on Transferee. Except as otherwise permitted by the Committee in its absolute discretion, no Stock Option held by a transferee of an optionee pursuant to the fourth sentence of Section 5(e) shall remain exercisable for any period of time longer than would otherwise be permitted under Sections 5(f), 5(g) or 5(h) without specification of other periods by the Committee as provided in those Sections. (j) ISO Limitations. To the extent required for "incentive stock option" status under Section 422 of the Code, the aggregate fair market value (determined as of the time of grant) of the Shares with respect to which ISOs are exercisable for the first time by the optionee during any calendar year under the Plan and any other stock option plan of the Company and its affiliates, shall not exceed $100,000. SECTION 6. RESTRICTED SHARES. Restricted Shares may be granted alone or in addition to other awards granted under the Plan. Any Restricted Shares granted under the Plan shall be subject to the following restrictions and conditions, and shall contain such additional terms and conditions not inconsistent with the terms of the Plan as the Committee deems appropriate. The provisions of Restricted Share awards need not be the same with respect to each recipient. (a) Price. The purchase price for Restricted Shares shall be any price set by the Committee and may be zero. Payment in full of the purchase price, if any, shall be made in cash, or such other instrument as may be permitted in accordance with rules or procedures adopted by the Committee. If approved by the Committee, payment in full or part may also be made: (i) by delivering Shares already owned by the grantee having a total fair market value on the date of such delivery equal to the Restricted Share price; (ii) by the delivery of cash on the extension of credit by a broker-dealer or an irrevocable election to effect such extension of credit; or (iii) by any combination of the foregoing. 6 7 (b) Restricted Share Award Agreement. Each Restricted Share grant shall be evidenced by an agreement executed on behalf of the Company by an officer designated by the Committee. Such Restricted Share Award Agreement shall describe the Restricted Shares and state that such Restricted Shares are subject to all the terms and provisions of the Plan and shall contain such other terms and provisions, consistent with the Plan, as the Committee may approve. At the time the Restricted Shares are awarded, the Committee may determine that such Shares shall, after vesting, be further restricted as to transferability or be subject to repurchase by the Company upon occurrence of certain events determined by the Committee, in its sole discretion, and specified in the Restricted Share Award Agreement. Awards of Restricted Shares must be accepted by a grantee thereof within a period of 30 days (or such other period as the Committee may specify at grant) after the award date by executing the Restricted Share Award Agreement and paying the price, if any, required under Section 6(a). The prospective recipient of a Restricted Share award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. (c) Share Restrictions. Subject to the provisions of this Plan and the applicable Restricted Share Award Agreement, during a period set by the Committee commencing with the date of such award and ending on such date as determined by the Committee at grant (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Shares awarded under the Plan. In no event shall more than 10% of the Shares authorized for issuance under this Plan (as adjusted as provided in Section 4) be granted in the form of Restricted Shares having a restriction period of less than 3 years. The Committee shall have the authority, in its absolute discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect to any Restricted Shares or to remove any or all restrictions after the grant of such Restricted Shares, provided, however, that such discretion shall be exercised subject to the limitations set forth in the preceding sentence, excluding discretion exercised in connection with a Grantee's termination of employment from the Company. Unless otherwise determined by the Committee at or after grant or termination, if a participant's employment by or service to the Company terminates during the Restriction Period, all Restricted Shares held by such participant still subject to restriction shall be forfeited by the participant. (d) Stock Certificate and Legends. Each participant receiving a Restricted Share award shall be issued a stock certificate in respect of such Restricted Shares. Such certificate shall be registered in the name of such participant. The Committee may require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Shares award, the participant shall have delivered a stock power, endorsed in blank, relating to the Shares covered by such award. 7 8 (e) Shareholder Rights. Except as provided in this Section 6, the recipient shall have, with respect to the Restricted Shares covered by any award, all of the rights of a shareholder of the Company, including the right to vote the Shares, and the right to receive any dividends or other distributions, with respect to the Shares, but subject, however, to those restrictions placed on such Shares pursuant to this Plan and as specified by the Committee in the Restricted Share Award Agreement. (f) Expiration of Restriction Period. If and when the Restriction Period expires without a prior forfeiture of the Restricted Shares subject to such Restriction Period, unrestricted certificates for such shares shall be delivered to the participant. SECTION 7. PERFORMANCE SHARES AND PERFORMANCE SHARE UNITS. Subject to the terms and conditions described herein, Performance Shares and Performance Share Units may be granted to eligible participants at any time and from time to time as determined by the Committee. (a) Price. The purchase price for Performance Shares and Performance Share Units shall be zero unless otherwise specified by the Committee. (b) Performance Share Agreement. Subject to the provisions of this Plan, all the terms and conditions of an award of Performance Shares or Performance Share Units shall be determined by the Committee in its discretion. Each Performance Share and Performance Share Unit shall be evidenced by an agreement executed by the recipient of the Performance Share or Performance Share Unit and on behalf of the Company by an officer designated by the Committee. Such Performance Share or Performance Share Unit Award Agreement shall describe the Performance Share or Performance Share Unit and state that such Performance Share or Performance Share Unit is subject to all the terms and provisions of the Plan and shall contain such other terms and provisions, not inconsistent with the Plan, as the Committee may approve. Award of Performance Shares and Performance Share Units must be accepted by a grantee thereof within a period of 60 days (or such other period as the Committee may specify at grant) after the award date by executing the Performance Share or Performance Share Unit Award Agreement, and paying the price, if any, as required under Section 7(a). (c) Performance Periods. Any time period (the "Performance Period") relating to a Performance Share or Performance Share Unit award shall be at least one year in length. No more than two Performance Periods may begin in any one fiscal year of the Company. (d) Performance Goals. Performance Shares and Performance Share Units shall be earned based upon the financial performance of the Company or an operating group of the Company during a Performance Period. As to each Performance Period, within such time as established by Section 162(m) of the Code, the Committee will establish in writing targets for one of the following performance measures of the Company (and/or an operating group of the Company, if applicable) over the Performance Period 8 9 ("Performance Goals"): (i) earnings, (ii) return on capital, or (iii) any Performance Goal approved by the shareholders of the Company in accordance with Section 162(m) of the Code. The Performance Goals, depending on the extent to which they are satisfied, will determine the number of Performance Shares or Performance Share Units, if any, that will be earned by each participant. Attainment of the Performance Goals will be calculated from the consolidated financial statements of the Company but shall exclude (i) the effects of changes in federal income tax rates, (ii) the effects of unusual, non-recurring and extraordinary items as defined by Generally Accepted Accounting Principles ("GAAP"), and (iii) the cumulative effect of changes in accounting principles in accordance with GAAP. The Performance Goals may vary for different Performance Periods and need not be the same for each participant receiving an award for a Performance Period. The Committee may, in its absolute discretion, subject to the limitations of Section 11, vary the terms and conditions of any Performance Share or Performance Share Unit award, including, without limitation, the Performance Period and Performance Goals, without shareholder approval, as applied to any recipient who is not a "covered employee" with respect to the Company as defined in Section 162(m) of the Code. In the event applicable tax or securities laws change to permit the Committee discretion to alter the governing performance measures as they pertain to covered employees without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. (e) Earning of Performance Shares. Performance Shares shall be issued to each recipient thereof on the later of such time as the Performance Goals are established or the first day of the applicable Performance Period. The number of Performance Shares awarded at such time shall be calculated based upon the assumption that the Performance Goals for the applicable Performance Period will be satisfied to the fullest extent. The Company, or its designated agent, shall hold all Performance Shares issued to recipients prior to completion of the Performance Period. Participants shall be entitled to all dividends and other distributions earned in respect of such Performance Shares and shall be entitled to vote such Performance Shares during the period from the initial award date to the final adjustment of the Performance Shares. After the applicable Performance Period shall have ended, the Committee shall certify in writing the extent to which the established Performance Goals have been achieved. Subsequently, the number of Performance Shares, if any, earned by the recipient over the Performance Period shall be determined as a function of the extent to which the Performance Goals for such Performance Period were achieved. If the Performance Goals are not satisfied to the fullest extent, a recipient may earn less than the number of Performance Shares originally awarded, or no Performance Shares at all. In addition, whether or not the Performance Goals are satisfied to the fullest extent, the Committee may exercise negative discretion to reduce the number of Performance Shares or Performance Share Units to be issued if, in the Committee's sole judgment, such negative discretion is appropriate in order to act in the best interest of the Company and its shareholders. The factors to be taken into account by the Committee when exercising negative discretion include, but are not limited to, the achievement of measurable individual performance objectives established by the Committee and communicated to the participant no later than the ninetieth day of the 9 10 Performance Period, and competitive pay practices. Performance Shares shall be paid in the form of Shares. Unrestricted certificates representing such number of Shares as equals the number of Performance Shares earned under the award shall be delivered to the participant as soon as practicable after the end of the applicable Performance Period. (f) Earning of Performance Share Units. An account documenting Performance Share Units awarded shall be established for each recipient thereof on the later of such time as the Performance Goals are established or the first day of the applicable Performance Period. The number of Performance Share Units credited to a recipient's account at such time shall be calculated based upon the assumption that the Performance Goals for the applicable Performance Period will be satisfied to the fullest extent. After the applicable Performance Period shall have ended, the Committee shall certify in writing the extent to which the established Performance Goals have been achieved. Subsequently, the number of Performance Share Units, if any, earned by the recipient over the Performance Period shall be determined as a function of the extent to which the Performance Goals for such Performance Period were achieved, adjusted, if applicable, in accordance with the negative discretion of the Committee. A recipient may earn less than the number of Performance Share Units originally awarded, or no Performance Share Units at all. Performance Share Units shall be paid in the form of Company check, the amount of which shall be calculated by multiplying the fair market value per Share on the last day of the Performance Period by the number of Performance Share Units, as adjusted pursuant to the last paragraph of Section 4. (g) Termination of Employment or Service Due to Death or at the Request of the Company Without Cause. In the event the employment by or service of a participant is terminated by reason of death, or by the Company without Cause during a Performance Period, unless determined otherwise by the Committee, the participant or his legal representative, as applicable, shall receive a prorated payout with respect to the Performance Shares and Performance Share Units relating to such Performance Period. The prorated payout shall be based upon the length of time that the participant held the Performance Shares or Performance Share Units during the Performance Period and the progress toward achievement of the established Performance Goals. Distribution of earned Performance Shares and Performance Share Units, if any, shall be made at the same time payments are made to participants who did not terminate employment during the applicable Performance Period. (h) Termination of Employment or Service for Other Reasons. In the event that a participant's employment or service terminates for any reason other than those reasons set forth in paragraph (g) of this Section 7, all Performance Shares and Performance Share Units shall be forfeited by the participant to the Company, except as otherwise determined by the Committee. (i) Nontransferability. Except as otherwise provided herein, no Performance Share or Performance Share Unit may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated. Further, a participant's rights under the Plan shall be 10 11 exercisable during the participant's lifetime only by the participant or the participant's legal representative. SECTION 8. INCENTIVE COMPENSATION RESTRICTED SHARES. Each employee participating in this Plan who also participates in the Company's Management Incentive Plan (the "Incentive Compensation Plan") may be eligible, in the Committee's sole discretion, to elect to receive all or a portion of the annual incentive compensation ("Incentive Compensation") payable to the employee under the Incentive Compensation Plan in the form of Incentive Compensation Restricted Shares. To elect the payout of all or a portion of annual Incentive Compensation in Incentive Compensation Restricted Shares, an employee must complete and submit to the Committee an Incentive Compensation Restricted Shares Election Form after the Committee has determined the factor set forth in Section 8(c)(B) and the vesting schedule of the Incentive Compensation Restricted Shares, but in any event, prior to the date established by the Committee for election of such deferral. The Incentive Compensation Restricted Shares shall be evidenced by an Incentive Compensation Restricted Shares Agreement executed on behalf of the Company by an officer designated by the Committee and accepted by the employee. Such agreement shall describe the Incentive Compensation Restricted Shares and state that such Incentive Compensation Restricted Shares are subject to all terms and provisions, not inconsistent with the Plan, as the Committee may approve. Terms and conditions of Incentive Compensation Restricted Shares shall include the following: (a) Deferral Election. Within such limits as the Committee may establish, any portion of annual Incentive Compensation can be elected for payout in Incentive Compensation Restricted Shares, in a dollar amount or as a percentage of total Incentive Compensation, or as a percentage of total Incentive Compensation with a stated maximum dollar amount. (b) Issuance of Incentive Compensation Restricted Shares. Incentive Compensation Restricted Shares will be issued on the same date that cash payouts are made under the Incentive Compensation Plan, based on the fair market value of the Shares on the date of the issuance. (c) Number of Shares. The number of Incentive Compensation Restricted Shares granted to an employee will equal the product of (A) that number of Shares as have an aggregate fair market value equal to the dollar amount of the annual Incentive Compensation to be received in the form of Incentive Compensation Restricted Shares multiplied by (B) a factor greater than or equal to 1.00, but less than or equal to 1.30, as determined by the Committee prior to the date established by the Committee for the deferral election to be made. (d) Termination of Employment Due to Death, Disability or Retirement or at the Request of the Company Without Cause. If the employee's employment is terminated by reason of death, disability or retirement or by the Company without Cause, all of the 11 12 restrictions applicable to unvested Incentive Compensation Restricted Shares shall be waived and all Incentive Compensation Restricted Shares shall be immediately vested. If the employee's employment is terminated for any other reason, the Incentive Compensation Restricted Shares held by that employee will be forfeited as of the date of such termination; provided, however, that the Committee may, in its sole discretion, provide that such Incentive Compensation Restricted Shares will not so terminate. In such event, such Incentive Compensation Restricted Shares will vest in accordance with the vesting schedule set forth in the Incentive Compensation Restricted Shares Agreement or on such accelerated basis as the Committee may determine at or after grant or termination of employment. (e) Application of Section 6. Except to the extent inconsistent with this Section 8, the provisions of Section 6 and all other provisions of the Plan pertaining to Restricted Shares shall be applicable to Incentive Compensation Restricted Shares. SECTION 9. OUTSIDE DIRECTOR OPTIONS. (a) Administration. Outside Directors shall be eligible to participate in the Plan only as expressly set forth in this Section 9. The Committee shall have no power to determine which Outside Directors will receive Outside Director Options, the amount of such Outside Director Options, or the terms of such Outside Director Options to the extent provided in subsections (b) through (i) below. None of the provisions of Section 5 applicable to Stock Options shall be applicable to Outside Director Options. (b) Eligibility and Grant. Outside Director Options shall be NQSOs. All Outside Director Options shall be evidenced by a written agreement, which shall be dated as of the date on which an Outside Director Option is granted, signed by an officer of the Company authorized by the Committee, and signed by the Outside Director. Such agreement shall describe the Outside Director Options and state that such Outside Director Options are subject to all terms and provisions of the Plan. (c) Vesting. All Outside Director Options shall be fully vested on the date of grant. (d) Number of Shares. Each individual first elected or appointed to serve as a director of the Company at or after adjournment of the Company's annual meeting of shareholders (an "Annual Meeting") in 1995 who is an Outside Director shall, upon such election or appointment, automatically be granted options for that number of Shares having a fair market value of $100,000. In addition, commencing immediately after the adjournment of the Annual Meeting in 1995 and continuing on an annual basis, immediately following the adjournment of each succeeding Annual Meeting thereafter during the term of this Plan each Outside Director whose term did not expire at that Annual Meeting and who has then served as a director of the Company for a consecutive period of time which includes each of the last three Annual Meetings (i.e., including the Annual Meeting then just adjourned) shall automatically be granted additional Outside 12 13 Director Options for that number of Shares having a fair market value of $50,000. For purposes of this Section 9, fair market value means the last sale price of the Shares on the applicable date (or, if no sale of Shares occurs on such date, on the next preceding date on which a sale occurred) as reported on the New York Stock Exchange Composite Tape. (e) Exercise Price. The exercise price per Share purchasable under an Outside Director Option shall be equal to the fair market value on the day the Outside Director Option is granted. (f) Maximum Term. Each Outside Director Option shall be exercisable for ten years from the date of grant; provided, however, that in the event an Outside Director's service to the Company is terminated for Cause, each Outside Director Option held by that Outside Director on the date of termination shall be canceled effective as of such termination date. (g) Transferability of Outside Director Options. Outside Director Options shall be transferable to the maximum extent permissible under Rule 16b-3, as amended from time to time. (h) Method of Exercise. Outside Director Options may be exercised in whole or in part by giving written notice of exercise to the Company specifying the number of Shares to be purchased. No Shares shall be transferred until full payment therefor has been made. Payment for exercise of an Outside Director Option may be made (i) in cash, (ii) by delivery of Shares already owned by the Outside Director, (iii) by delivery of cash on the extension of credit by a broker-dealer to whom the Outside Director has submitted a notice of exercise or an irrevocable election to effect such extension of credit, or (iv) by any combination of the foregoing. (i) Termination of Option. Except as otherwise provided herein, if an Outside Director ceases to be a member of the Board for any reason, then all Outside Director Options or any unexercised portion of such Outside Director Options which otherwise are exerciseable shall terminate unless such Outside Director Options are exercised within six months after the date such Outside Director ceases to be a member of the Board (but in no event after expiration of the original term of such Outside Director Options); provided that if such Outside Director ceases to be a member of the Board by reason of such Outside Director's death, the six-month period shall instead be a one-year period. (j) Applicability of Other Provisions to Outside Director Options. Except for Section 5 and except to the extent inconsistent with the provisions of this Section 9, all other terms applicable to Stock Options set forth in other sections of this Plan are applicable to Outside Director Options. 13 14 SECTION 10. CHANGE OF CONTROL PROVISIONS. (a) Impact of Event. In the event of a "Change of Control" as defined in Section 10(b), the following acceleration and valuation provisions shall apply: (i) On the date that such Change of Control is determined to have occurred, any or all Stock Options awarded under this Plan not previously exercisable and vested shall become fully exercisable and vested. (ii) The restrictions applicable to any or all Restricted Shares, Incentive Compensation Restricted Shares, Performance Shares and Performance Share Units shall lapse and such shares and awards shall be fully vested. (b) Definition of "Change of Control". For purposes of Section 10(a), a "Change of Control" shall mean: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (x) the then outstanding common shares of CAH (the "outstanding CAH Common Shares") or (y) the combined voting power of the then outstanding voting securities of CAH entitled to vote generally in the election of directors (the "Outstanding CAH Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from CAH or any corporation controlled by CAH, (B) any acquisition by CAH or any corporation controlled by CAH, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by CAH or any corporation controlled by CAH or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (x), (y) and (z) of subsection (iii) of this Section 10(b); or (ii) individuals who, as of the Effective Date of this Plan, constitute the Board of CAH (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of CAH; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by CAH'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 solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) approval by the shareholders of CAH of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the 14 15 Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (x) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding CAH Common Shares and Outstanding CAH Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% (or such lower percentage as may be determined by the Board of Directors of CAH prior to such Business Combination) 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 CAH 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 CAH Common Shares and Outstanding CAH Voting Securities, as the case may be, (y) 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, 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 (z) 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 CAH of a complete liquidation or dissolution of CAH. SECTION 11. AMENDMENTS AND TERMINATION. The Board may amend, alter or discontinue the Plan; provided, however, no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee, participant or transferee pursuant to Section 5(e) under any award theretofore granted, without the optionee's, participant's or transferee's consent, or which, without the approval of CAH's shareholders, would: (a) except as expressly provided in the Plan, increase the total number of Shares reserved for purposes of the Plan; (b) change the class of individuals eligible to participate in the Plan; (c) extend the maximum option period of Stock Options or Outside Director Options; or 15 16 (d) increase materially the benefits under the Plan. The Committee may amend the terms of any award theretofore granted (except an Outside Director Option), prospectively or retroactively; provided no such amendment shall impair the rights of any holder without the holder's consent; provided, further, no Stock Option may be amended so as to decrease the exercise price of such Stock Option to reflect a decrease in the fair market value of the underlying stock. The provisions regarding Outside Director Options pursuant to Section 9 above shall not in any case be amended more often than once in any six-month period other than to comply with changes in the Code or ERISA, or the rules thereunder. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in applicable tax and securities laws and accounting rules, as well as other developments. SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments or deliveries of Shares not yet made by the Company to a participant, optionee or transferee, nothing contained herein shall give any such participant, optionee or transferee any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments hereunder consistent with the foregoing. SECTION 13. GENERAL PROVISIONS. (a) Share Transfer and Distribution. The Committee may require each person purchasing Shares pursuant to a Stock Option, Outside Director Option, Performance Share, Restricted Share or Incentive Compensation Restricted Share award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the Shares without a view to the distribution thereof. Any certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All Shares or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any certificates evidencing such Shares to make appropriate reference to such restrictions. The Company shall not be required to deliver any Shares or other securities under the Plan prior to such registration or other qualification of such Shares or other securities 16 17 under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. (b) Additional Arrangements. Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for its employees, consultants or Outside Directors. (c) No Right to Award or Employment. No person shall have any claim or right to be granted an award under this Plan and the grant of an award shall not confer upon any participant any right to be retained as an employee or director of CAH or any subsidiary, nor shall it interfere in any way with the right of CAH or any subsidiary to terminate the employment or service as a director of any of the Plan's participants at any time. (d) Tax Withholding. The Company shall have the right to require the grantee of Restricted Shares, Incentive Compensation Restricted Shares, Performance Shares or Performance Share Units or other person receiving such Shares to pay the Company the amount of any taxes which the Company is required to withhold with respect to such Shares or, in lieu thereof, to retain, or sell without notice, a sufficient number of Shares held by it to cover the amount required to be withheld. The Company shall have the right to deduct from all dividends paid with respect to Restricted Shares, Incentive Compensation Restricted Shares, and Performance Shares the amount of any taxes which the Company is required to withhold with respect to such dividend payments. The Company shall also have the right to require an optionee to pay to the Company the amount of any taxes which the Company is required to withhold with respect to the receipt by the optionee of Shares pursuant to the exercise of a Stock Option, or, in lieu thereof, to retain, or sell without notice, a number of Shares sufficient to cover the amount required to be withheld. (e) Beneficiaries. The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. (f) Laws Governing. The Plan and all awards made and action taken thereunder shall be governed by and construed in accordance with the laws of the State of Ohio, except to the extent superseded by federal law. (g) Government Regulation. Notwithstanding any provisions of the Plan or any agreement made pursuant to the Plan, the Company's obligations under the Plan and such agreement shall be subject to all applicable laws, rules and regulations and to such approvals as may be required by any governmental or regulatory agencies. 17 18 SECTION 14. EFFECTIVE DATE OF PLAN. The Plan shall be effective on the date (the "Effective Date") it is approved by the shareholders of CAH. No grants shall be made under this Plan prior to the Effective Date. SECTION 15. TERM OF PLAN. No award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date of the Plan, but awards granted prior to such tenth anniversary may extend beyond that date. SECTION 16. INDEMNIFICATION. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award granted under the Plan. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under or in connection with this Plan or any award granted under this Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him, except a judgment based upon a finding of bad faith, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company's Articles of Incorporation or Code of Regulations, contained in any indemnification agreements, as a matter of law, or otherwise, or any power that the Company may have to indemnify him or hold him harmless. SECTION 17. SAVINGS CLAUSE. In case any one or more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed so as to foster the intent of this Plan. This Plan is intended to comply in all respects with applicable law and regulation, including Code Section 422 and, with respect to Reporting Persons, Rule 16b-3. In case any one or more of the provisions of this Plan shall be held to violate or be unenforceable in any respect under Code Section 422 or Rule 16b-3, then to the extent permissible by 18 19 law, any provision which could be deemed to violate or be unenforceable under Code Section 422 or Rule 16b-3 shall first be construed, interpreted, or revised retroactively to permit the Plan to be in compliance with Code Section 422 and Rule 16b-3. Notwithstanding anything in this Plan to the contrary, the Committee, in its sole and absolute discretion, may bifurcate this Plan so as to restrict, limit or condition the use of any provision of this Plan to participants who are Reporting Persons or covered employees as defined under Code Section 162(m) without so restricting, limiting or conditioning this Plan with respect to other participants. 19 20 AMENDMENT TO SECTION 9(d) OF THE CARDINAL HEALTH, INC. EQUITY INCENTIVE PLAN Adopted by Board of Directors on 8/13/97 Approved by Shareholders on 11/5/97 (d) Number of Shares. Each individual first elected or appointed to serve as a director of the Company at or after adjournment of the Company's annual meeting of shareholders (an "Annual Meeting") in 1997 who is an Outside Director shall, upon such election or appointment, automatically be granted options for that number of Shares having a fair market value of $150,000 (each an "Initial Grant"). In addition, commencing immediately after the adjournment of the Annual Meeting in 1997 and continuing on an annual basis, immediately following the adjournment of each succeeding Annual Meeting thereafter during the term of this Plan each Outside Director whose term did not expire at that Annual Meeting and who has then served as a director of the Company for a consecutive period of time which includes each of the last three Annual Meetings (i.e., including the Annual Meeting then just adjourned) shall automatically be granted additional Outside Director Options for that number of Shares having a fair market value of $100,000 (each an "Annual Grant"). Beginning on July 1, 2000 and on every third July 1 thereafter, the dollar value of the Initial Grants and Annual Grants shall automatically be increased under this Plan by a percentage equal to that percentage by which the fair market value per Share has increased in the immediately preceding three-year period, not to exceed a 45% aggregate increase over any such three-year period. For purposes of this Section 9, fair market value means the last sale price of the Shares on the applicable date (or, if no sale of Shares occurs on such date, on the next preceding date on which a sale occurred) as reported on the New York Stock Exchange Composite Tape. EX-10.10 3 EXHIBIT 10.10 1 EXHIBIT 10.10 INDEMNIFICATION AGREEMENT This agreement is made November 5, 1997, 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 2 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 of -2- 3 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- 4 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 intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company. -4- 5 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. 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 -5- 6 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 ___________________________ Robert D. Walter Chairman and Chief Executive Officer DIRECTOR: _______________________________ Printed Name __________________ -6- EX-10.11 4 EXHIBIT 10.11 1 EXHIBIT 10.11 INDEMNIFICATION AGREEMENT This agreement is made November 5, 1997, 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: 2 (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 -2- 3 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 (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 -3- 4 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: (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. -4- 5 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 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 -5- 6 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 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 ____________________________ Its ___________________________ OFFICER: Printed Name __________________ -6- EX-11.01 5 EXHIBIT 11.01 1 EXHIBIT 11.01 CARDINAL HEALTH, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (AS RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ------------------------------ JUNE 30, JUNE 30, JUNE 30, 1997 1996 1995 -------- -------- -------- PRIMARY: Net earnings $184,599 $127,240 $146,587 ======== ======== ======== Average shares outstanding 107,152 103,872 100,398 Dilutive effect of stock options 1,966 2,219 3,261 -------- -------- -------- Weighted average number of Common Shares outstanding 109,118 106,091 103,659 ======== ======== ======== Primary earnings per Common Share $ 1.69 $ 1.20 $ 1.41 ======== ======== ======== FULLY DILUTED: Net earnings $184,599 $127,240 $146,587 9.53% convertible debenture interest, net of income tax effect -- 270 394 -------- -------- -------- Fully diluted net earnings available $184,599 $127,510 $146,981 ======== ======== ======== Average shares outstanding 107,152 103,872 100,398 Dilutive effect of stock options 2,020 2,412 3,380 Assumed converison of 9.53% convertible debentures -- 717 1,071 -------- -------- -------- Weighted average number of Common Shares outstanding 109,172 107,001 104,849 ======== ======== ======== Fully diluted earnings per Common Share $ 1.69 $ 1.19 $ 1.40 ======== ======== ========
See Note 17 of "Notes to Consolidated Financial Statements" for a discussion of the restatement. EX-23.01 6 EXHIBIT 23.01 1 Exhibit 23.01 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-57223 and No. 333-24483 of Cardinal Health, Inc. on Form S-3 and Registration Statements No. 33-20895, No. 33-38201, No. 33-38022, No. 33-42357, No. 33-52535, No. 33-52537, No. 33-52539, No. 33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01, No. 333-21631-01 and No. 333-21631-02 of Cardinal Health, Inc. on Form S-8 of our report dated August 12, 1997 (except for Note 16 as to which the date is August 24, 1997 and Note 17 as to which the date is December 30, 1997) (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 17), appearing in the Annual Report on Form 10-K/A of Cardinal Health, Inc., for the year ended June 30, 1997. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Columbus, Ohio January 2, 1998 EX-23.02 7 EXHIBIT 23.02 1 Exhibit 23.02 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-57223 and No. 333-24483 of Cardinal Health, Inc. on Form S-3 and Registration Statements No. 33-20895, No. 33-38021, No. 33-38022, No. 33-42357, No. 33-52535, No. 33-52537, No. 33-52539, No. 33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01, No. 333-21631-01, and No. 333-21631-02 of Cardinal Health, Inc. on Form S-8 of our report dated August 2, 1996 with respect to the financial statements of Pyxis Corporation (not presented), appearing in the Annual Report on Form 10-KA of Cardinal Health, Inc., for the year ended June 30, 1997. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP San Diego, California December 30, 1997 EX-23.03 8 EXHIBIT 23.03 1 Exhibit 23.03 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Numbers 33-20895, 33-38021, 33-38022, 33-42357, 33-52535, 33-52537, 33-52539, 33-63283-01, 33-64337, 333-01927-01, 333-11803-01, 333-21631-01 and 333-21631-02) and in the Prospectuses constituting part of the Registration Statements on Form S-3 (Numbers 33-57223 and 333-24483) of Cardinal Health, Inc. of our report dated January 30, 1997 related to the financial statements of Owen Healthcare, Inc. which appears on page 11 of this Form 10-K/A. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP HOUSTON, TEXAS DECEMBER 30, 1997 EX-27.1 9 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-K/A (AMENDMENT NO. 1) FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 1 243,061 0 707,116 (34,952) 1,436,220 2,487,110 477,420 (199,949) 3,091,750 1,389,433 277,766 0 0 645,051 689,679 3,091,750 10,968,042 10,968,042 10,068,384 10,068,384 515,551 0 (27,974) 311,080 126,481 184,599 0 0 0 184,599 1.69 1.69
EX-27.2 10 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-K/A (AMENDMENT NO. 1) FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 312,030 54,335 668,669 (36,803) 1,272,112 2,374,943 411,781 (161,222) 2,959,401 1,432,903 320,327 0 0 589,476 505,749 2,959,401 9,407,591 9,407,591 8,597,878 8,597,878 514,879 0 (30,611) 227,502 100,262 127,240 0 0 0 127,240 1.20 1.19
EX-27.3 11 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-K/A (AMENDMENT NO. 1) FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 1 74,279 0 608,141 (34,606) 1,112,958 1,945,734 311,986 (134,942) 2,363,752 1,139,535 267,677 0 0 504,943 361,531 2,363,752 8,472,302 8,472,302 7,779,030 7,779,030 428,343 0 (23,948) 249,264 102,677 146,587 0 0 0 146,587 1.41 1.40
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