-----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, KEezc7/dYlATmVZ4ZP1Hvral+sov7y3tV5k+l2WJFWuuYFTvxDVU1Ktn2dMHb6WW lOpi7cxEn+LkNdl7uMnD/g== 0000950152-02-008522.txt : 20021118 0000950152-02-008522.hdr.sgml : 20021118 20021114184644 ACCESSION NUMBER: 0000950152-02-008522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11373 FILM NUMBER: 02827667 BUSINESS ADDRESS: STREET 1: 7000 CARDINAL PLACE CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147575000 MAIL ADDRESS: STREET 1: 7000 CARDINAL PLACE CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 10-Q 1 l96924ae10vq.txt CARDINAL HEALTH, INC. 10-Q/QTR END 9-30-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended September 30, 2002 Commission File Number 1-11373 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.) 7000 CARDINAL PLACE, DUBLIN, OHIO 43017 (Address of principal executive offices and zip code) (614) 757-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Registrant's Common Shares outstanding at the close of business on October 31, 2002 was as follows: Common Shares, without par value: 442,502,027 ----------- Page 1 CARDINAL HEALTH, INC. AND SUBSIDIARIES Index *
Page No. ------- Part I. FINANCIAL INFORMATION: Item 1. Financial Statements: Condensed Consolidated Statements of Earnings for the Three Months Ended September 30, 2002 and 2001 (unaudited)...................................... 3 Condensed Consolidated Balance Sheets at September 30, 2002 and June 30, 2002 (unaudited).......................................................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2002 and 2001 (unaudited)............................................ 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................................................ 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 20 Item 4. Controls and Procedures............................................................ 20 Part II. OTHER INFORMATION: Item 1. Legal Proceedings.................................................................. 20 Item 5. Other Information.................................................................. 21 Item 6. Exhibits and Reports on Form 8-K................................................... 21
* Items not listed are inapplicable. Page 2 PART I. FINANCIAL INFORMATION CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, 2002 2001 -------------- --------------- Operating revenue $ 11,416.6 $ 9,865.4 Operating cost of products sold 10,409.7 8,950.7 -------------- --------------- Operating gross margin 1,006.9 914.7 Bulk deliveries to customer warehouses and other 1,669.5 1,908.0 Cost of products sold - bulk deliveries and other 1,669.5 1,908.0 -------------- --------------- Bulk gross margin - - Selling, general and administrative expenses 520.7 502.4 Special charges 18.7 12.3 -------------- --------------- Operating earnings 467.5 400.0 Interest expense and other 30.6 28.6 -------------- --------------- Earnings before income taxes 436.9 371.4 Provision for income taxes 148.6 125.0 -------------- --------------- Earnings before cumulative effect of change in accounting 288.3 246.4 Cumulative effect of change in accounting (See Note 7) - 70.1 -------------- --------------- Net earnings $ 288.3 $ 176.3 ============== =============== Basic earnings per Common Share: Before cumulative effect of change in accounting $ 0.65 $ 0.55 Cumulative effect of change in accounting - (0.16) -------------- --------------- Net basic earnings per Common Share $ 0.65 $ 0.39 ============== =============== Diluted earnings per Common Share: Before cumulative effect of change in accounting $ 0.64 $ 0.53 Cumulative effect of change in accounting - (0.15) -------------- --------------- Net diluted earnings per Common Share $ 0.64 $ 0.38 ============== =============== Weighted average number of Common Shares outstanding: Basic 446.2 449.6 Diluted 454.2 460.6 Cash dividends declared per Common Share $ 0.025 $ 0.025
See notes to condensed consolidated financial statements. Page 3 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS)
SEPTEMBER 30, JUNE 30, 2002 2002 ---------------- ----------------- ASSETS Current assets: Cash and equivalents $ 945.6 $ 1,382.0 Trade receivables, net 2,554.8 2,295.4 Current portion of net investment in sales-type leases 190.6 218.3 Inventories 7,250.2 7,361.0 Prepaid expenses and other 670.3 649.9 ---------------- ----------------- Total current assets 11,611.5 11,906.6 ---------------- ----------------- Property and equipment, at cost 3,480.7 3,509.3 Accumulated depreciation and amortization (1,593.4) (1,614.9) ---------------- ----------------- Property and equipment, net 1,887.3 1,894.4 Other assets: Net investment in sales-type leases, less current portion 644.8 618.6 Goodwill and other intangibles 1,567.9 1,544.1 Other 523.7 474.3 ---------------- ----------------- Total $ 16,235.2 $ 16,438.0 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ - $ 0.8 Current portion of long-term obligations 17.4 17.4 Accounts payable 5,299.8 5,504.5 Other accrued liabilities 1,320.9 1,287.7 ---------------- ----------------- Total current liabilities 6,638.1 6,810.4 ---------------- ----------------- Long-term obligations, less current portion 2,237.8 2,207.0 Deferred income taxes and other liabilities 1,005.6 1,027.6 Shareholders' equity: Preferred Stock, without par value Authorized - 0.5 million shares, Issued - none - - Common Shares, without par value Authorized - 755.0 million shares, Issued - 461.8 million shares and 461.0 million shares at September 30, 2002 and June 30, 2002, respectively 2,137.4 2,105.2 Retained earnings 5,433.2 5,156.1 Common Shares in treasury, at cost, 18.4 million shares and 12.2 million shares at September 30, 2002 and June 30, 2002, respectively (1,110.2) (737.0) Other comprehensive loss (97.0) (120.9) Other (9.7) (10.4) ---------------- ----------------- Total shareholders' equity 6,353.7 6,393.0 ---------------- ----------------- Total $ 16,235.2 $ 16,438.0 ================ =================
See notes to condensed consolidated financial statements. Page 4 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30, 2002 2001 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Earnings before cumulative effect of change in accounting $ 288.3 $ 246.4 Adjustments to reconcile earnings before cumulative effect of change in accounting to net cash from operating activities: Depreciation and amortization 62.2 61.2 Provision for bad debts 5.6 9.3 Change in operating assets and liabilities, net of effects from acquisitions: (Increase)/decrease in trade receivables (264.9) 151.7 (Increase)/decrease in inventories 110.8 (1,411.0) Decrease in net investment in sales-type leases 1.5 186.0 Increase/(decrease) in accounts payable (204.7) 342.9 Other operating items, net (12.9) (67.2) --------------- ---------------- Net cash used in operating activities (14.1) (480.7) --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired (5.4) - Proceeds from sale of property and equipment 16.3 9.6 Additions to property and equipment (70.5) (58.3) --------------- ---------------- Net cash used in investing activities (59.6) (48.7) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in commercial paper and short-term debt (0.7) 405.1 Reduction of long-term obligations (3.0) (13.4) Proceeds from long-term obligations, net of issuance costs 2.2 36.2 Proceeds from issuance of Common Shares 42.7 50.6 Purchase of treasury shares (392.7) - Dividends on Common Shares (11.2) (11.2) --------------- ---------------- Net cash provided by/(used in) financing activities (362.7) 467.3 --------------- ---------------- NET DECREASE IN CASH AND EQUIVALENTS (436.4) (62.1) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,382.0 934.1 --------------- ---------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 945.6 $ 872.0 =============== ================
See notes to condensed consolidated financial statements. Page 5 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The condensed consolidated financial statements of Cardinal Health, Inc. (the "Company") include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim reporting. In the opinion of management, all adjustments necessary for a fair presentation have been included. Except as disclosed elsewhere herein, all such adjustments are of a normal and recurring nature. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 (the "2002 Form 10-K"). Without limiting the generality of the foregoing, Note 1 of the "Notes to Consolidated Financial Statements" from the 2002 Form 10-K is specifically incorporated herein by reference. RECENT FINANCIAL ACCOUNTING STANDARDS. In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities that are initiated after December 31, 2002. This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity, other than those associated with a business combination, be recognized when the liability is incurred instead of recognizing the liability at the date of an entity's commitment to an exit plan as was required in Issue 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. The adoption of this statement is not anticipated to have a material effect on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective for fiscal years beginning or transactions occurring after May 15, 2002. This statement clarifies several accounting issues including the classification of gains and losses from the early extinguishment of debt and lease modifications that should be accounted for in a manner similar to a sales-leaseback transaction. The adoption of this statement during the quarter did not have a material effect on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and provides a single accounting model for the disposal of long-lived assets from continuing and discontinued operations. The adoption of this statement during the quarter did not have a material effect on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement during the quarter did not have a material effect on the Company's financial position or results of operations. Page 6 2. EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Basic earnings per Common Share ("Basic") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share is similar to the computation for Basic, except that the denominator is increased by the dilutive effect of stock options outstanding, computed using the treasury stock method. The following table reconciles the number of shares used to compute basic and diluted earnings per share for the quarters ended September 30, 2002 and 2001: (in millions) 2002 2001 - ------------------------------------------------------------------------------- Weighted-average shares - basic 446.2 449.6 Effect of dilutive securities: Employee stock options 8.0 11.0 - ------------------------------------------------------------------------------- Weighted-average shares - diluted 454.2 460.6 =============================================================================== The potentially dilutive employee stock options that were antidilutive for the quarters ended September 30, 2002 and 2001 were 13.6 million and 0.1 million, respectively. On August 7, 2002, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. As of September 30, 2002, 3.4 million Common Shares having an aggregate cost of approximately $219.8 million had been repurchased through this plan. The repurchased shares will be treasury shares used for general corporate purposes. In September 2001, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. This program expired by its terms in August 2002. The Company repurchased approximately 3.2 million Common Shares having an aggregate cost of approximately $191.7 million during the quarter ended September 30, 2002. The cumulative amount repurchased under this program was approximately 8.3 million Common Shares having an aggregate cost of approximately $500 million. The repurchased shares will be treasury shares used for general corporate purposes. 3. COMPREHENSIVE INCOME The following is a summary of the Company's comprehensive income for the three months ended September 30, 2002 and 2001:
For the Three Months Ended (in millions) September 30, -------------------------------------- 2002 2001 -------------------------------------- Net earnings $ 288.3 $ 176.3 Foreign currency translation adjustments 8.6 14.3 Unrealized gain on investment - 2.2 Reclassification adjustment for investment losses included in net income - 3.2 Net unrealized gain/(loss) on derivative instruments 15.3 (6.5) ------------------- ----------------- Total comprehensive income $ 312.2 $ 189.5 =================== =================
Page 7 4. MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS The following is a summary of the special charges for the three-month periods ended September 30, 2002 and 2001.
Special Charges Three Months Ended September 30, - ------------------------------------------------------------------------------------------------- (in millions) 2002 2001 - ------------------------------------------------------------------------------------------------- Merger-Related Costs: Employee-related costs $ (3.2) $ (4.1) Pharmaceutical distribution center consolidation (5.1) (0.3) Other exit costs (0.5) (2.3) Other integration costs (2.6) (5.6) - ------------------------------------------------------------------------------------------------- Total merger-related costs $ (11.4) $ (12.3) - ------------------------------------------------------------------------------------------------- Other Special Charges: Manufacturing facility closures $ (10.2) $ - Litigation settlements 2.9 - - ------------------------------------------------------------------------------------------------- Total other special charges $ (7.3) $ - - ------------------------------------------------------------------------------------------------- Total special charges $ (18.7) $ (12.3) Tax effect of special charges 3.1 4.7 - ------------------------------------------------------------------------------------------------- Net effect of special charges $ (15.6) $ (7.6) =================================================================================================
MERGER-RELATED COSTS Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. The merger-related costs currently being recognized are primarily a result of the merger or acquisition transactions with Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig Medical Corporation ("BBMC"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation ("Scherer"). EMPLOYEE-RELATED COSTS. During the above-stated periods, the Company incurred employee-related costs associated with certain of its merger transactions. For the three months ended September 30, 2002 and 2001, $2.5 million related to amortization expense of noncompete agreements primarily associated with the Bindley and Allegiance merger transactions. The remaining employee-related costs for the three months ended September 30, 2002 primarily related to retention bonuses associated with certain of the Company's smaller acquisitions. The remaining employee-related costs for the three months ended September 30, 2001 primarily related to payroll taxes from stock option exercises from plans converted at the time of the Bindley, Allegiance and Scherer mergers, as well as severance related to a change in control agreement associated with the Allegiance merger. The total severance payout exceeded the amount accrued at the time of the agreement resulting in additional expense. PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. In connection with the merger transaction with Bindley, the Company anticipates closing and consolidating a total of 16 Bindley distribution centers, Bindley's corporate office, and one of the Company's data centers. These closures will result in the termination of approximately 1,050 employees. As of September 30, 2002, a total of 15 Bindley distribution centers have been closed, and the majority of the 1,050 employees have been terminated. During the first quarter of fiscal 2003 and 2002, the Company recorded charges of $5.1 million and $0.3 million, respectively, primarily associated with the consolidations and closures noted above. The Company incurred employee-related costs of $0.9 million in the first quarter of fiscal 2003, primarily from the termination of employees due to the distribution center closures. Exit costs related to the termination of contracts and lease agreements of the distribution centers were incurred during the first quarter of fiscal 2003 of $1.7 million. Also, asset impairment charges of $1.1 million were incurred during the first quarter of fiscal 2003. In addition, during the first quarter of fiscal 2003, the Company incurred costs associated with the consolidation of one of the Company's data centers of $1.4 million, primarily related to duplicate salaries incurred during the consolidation period. During the first quarter of fiscal 2002, the Company incurred charges of $0.3 million primarily related to costs associated with moving inventory and other assets during the consolidation of distribution centers. The Company anticipates completing the distribution center and data center consolidations by December 31, 2002. The Company anticipates completing the corporate office consolidation by June 30, 2003. Page 8 OTHER EXIT COSTS. Other exit costs related primarily to costs associated with lease terminations, moving expenses, and asset impairments as a direct result of the merger transactions with BBMC, Allegiance and Scherer. OTHER INTEGRATION COSTS. Other integration costs, which primarily relate to the Bindley, BBMC, and Allegiance transactions, included charges directly related to the integration of operations of the transactions noted, such as consulting costs related to information systems and employee benefit integration, as well as relocation and travel costs directly associated with the integrations. OTHER SPECIAL CHARGES MANUFACTURING FACILITY CLOSURES. During the first quarter of fiscal 2003, the Company recorded a special charge of $10.2 million related to the closure of a manufacturing facility within the Medical-Surgical Products and Services segment. Asset impairment charges of $7.5 million were incurred during the quarter. Also, exit costs of $1.4 million were incurred, primarily related to dismantling and moving machinery and equipment. The remaining $1.3 million related to severance costs associated with the termination of approximately 200 employees during the quarter. The closure is expected to be completed by December 31, 2002. LITIGATION SETTLEMENTS. During the first quarter of fiscal 2003, the Company recorded income from litigation settlements of $2.9 million. These settlements resulted from the recovery of antitrust claims against certain vitamin manufacturers for amounts overcharged in prior years. The total recovery through September 30, 2002 was $38.2 million, of which $35.3 million had previously been recorded ($10.0 million in the second quarter of fiscal 2001, $12.0 million in the first quarter of fiscal 2002, and $13.3 million in the fourth quarter of fiscal 2002). The amounts previously recorded in the second quarter of fiscal 2001 and the first quarter of fiscal 2002 were reflected as a reduction of cost of goods sold, which is consistent with the classification of the original overcharge, and were based on the minimum amounts estimated to be recoverable based on the facts and circumstances available at the time they were recorded. While the Company still has pending claims against other manufacturers, the total amount of any future recovery is not currently estimable. Any future recoveries will be recorded as a special item in the period when a settlement is reached. ACCRUAL ROLLFORWARD The following table summarizes the activity related to the liabilities associated with the Company's special charges during the quarter ended September 30, 2002. For the Three Months Ended ($ in millions) September 30, 2002 - ---------------------------------------------------------------- Balance at June 30, 2002 $64.7 Additions(1) 18.7 Payments (32.6) ---------------------- Balance at September 30, 2002 $50.8 ====================== (1) Amount represents items that have been either expensed as incurred or accrued according to generally accepted accounting principles. SUMMARY The net effect of the various special charges recorded during the three months ended September 30, 2002 and 2001 was to reduce earnings before cumulative effect of change in accounting by $15.6 million to $288.3 million and by $7.6 million to $246.4 million, respectively, and to reduce reported diluted earnings per Common Share before cumulative effect of change in accounting by $0.03 per share to $0.64 per share and by $0.02 per share to $0.53 per share, respectively. 5. SEGMENT INFORMATION The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates within four operating business segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. The Company has not made any significant changes in the segments reported or the basis of measurement of segment profit or loss from the information provided in the 2002 Form 10-K. The Pharmaceutical Distribution and Provider Services segment involves the distribution of a broad line of pharmaceuticals, healthcare, radiopharmaceuticals, and other specialty pharmaceutical products and other Page 9 items typically sold by hospitals, retail drug stores and other healthcare providers. In addition, this segment provides services to the healthcare industry through integrated pharmacy management, temporary pharmacy staffing, as well as franchising of apothecary-style retail pharmacies. The Medical-Surgical Products and Services segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products as well as products not manufactured internally to hospitals, physician offices, surgery centers and other healthcare providers. The Pharmaceutical Technologies and Services segment provides services to the healthcare industry through the design of proprietary drug delivery systems including softgel capsules, controlled release forms, Zydis(R) fast dissolving wafers, and advanced sterile delivery technologies. It also provides comprehensive packaging, pharmaceutical development and analytical science expertise, as well as medical education, marketing and contract sales services. The Automation and Information Services segment provides services to hospitals and other healthcare providers through pharmacy automation equipment and clinical information system services. The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Special charges are not allocated to the segments. The following table includes revenue and operating earnings for the three-month periods ended September 30, 2002 and 2001 for each segment and reconciling items necessary to equal amounts reported in the condensed consolidated financial statements:
For the Three Months Ended September 30, ---------------------------------- (in millions) Net Revenue ---------------------------------- 2002 2001 ---------------- ---------------- Operating revenue: Pharmaceutical Distribution and Provider Services $9,351.5 $7,960.7 Medical-Surgical Products and Services 1,595.5 1,509.5 Pharmaceutical Technologies and Services 354.1 300.7 Automation and Information Services 133.8 108.3 Corporate (1) (18.3) (13.8) ---------------- ---------------- Total operating revenue 11,416.6 9,865.4 Bulk deliveries to customer warehouses and other: Pharmaceutical Distribution and Provider Services 1,630.8 1,908.0 Pharmaceutical Technologies and Services (2) 38.7 - ---------------- ---------------- Total bulk deliveries to customer warehouses and other 1,669.5 1,908.0 Total net revenue $13,086.1 $11,773.4 ================ ================
Operating Earnings ---------------------------------- 2002 2001 ---------------- ---------------- Operating earnings: Pharmaceutical Distribution and Provider Services $267.5 $221.8 Medical-Surgical Products and Services 138.7 126.5 Pharmaceutical Technologies and Services 67.0 57.7 Automation and Information Services 46.2 29.8 Corporate (3) (51.9) (35.8) ---------------- ---------------- Total operating earnings $467.5 $400.0 ================ ================
(1) Corporate operating revenue primarily consists of foreign currency translation adjustments. (2) During the three months ended September 30, 2002, the Company began classifying out-of-pocket expenses received through its recently acquired sales and marketing services' business within the bulk deliveries to customer warehouses and other line item. The customer is contractually required to reimburse the Company for these expenses. The Company does not generate any margin from these reimbursements. (3) Corporate operating earnings include special charges of $18.7 million and $12.3 million in the three-month periods ended September 30, 2002 and 2001, respectively, and unallocated corporate administrative Page 10 expenses and investment spending. In addition, during the first quarter of fiscal 2003, the Company began expanding the use of its shared service center, which previously supported the Medical-Surgical Products and Services segment, to benefit and support company-wide initiatives and other business segments. Accordingly, the cost of the shared service center, which was previously reported within the Medical-Surgical Products and Services segment, has been classified within Corporate earnings for the first quarter of fiscal 2003 to be consistent with internal segment reporting. The cost of these services for the first quarter of fiscal 2003 was approximately $4.8 million. 6. LEGAL PROCEEDINGS On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off, Allegiance, which merged with a subsidiary of the Company on February 3, 1999, agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare Corporation ("BHC"), as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims arising from the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. The Company is not a party to any of the lawsuits and has not agreed to pay any settlements to the plaintiffs. As of September 30, 2002, there were 368 lawsuits against BHC and/or Allegiance involving allegations of sensitization to natural rubber latex products. Some of the cases are now proceeding to trial. The total dollar amount of potential damages cannot be reasonably quantified. Some plaintiffs plead damages in extreme excess of what they reasonably can expect to recover, some plead a modest amount, and some do not include a request for any specific dollar amount. Not including cases that ask for no specific damages, the damage requests per action have ranged from $10,000 to $240 million. All of these cases name multiple defendants, in addition to Baxter/Allegiance. The average number of defendants per case exceeds twenty-five. Based on the significant differences in the range of damages sought and based on the multiple number of defendants in these lawsuits, Allegiance cannot reasonably quantify the total amount of possible/probable damages. Therefore, Allegiance and the Company do not believe that these numbers should be considered as an indication of either reasonably possible or probable liability. Since the inception of this litigation, Baxter/Allegiance have been named as a defendant in approximately 800 cases. As of September 30, 2002, fewer than half of those lawsuits remain pending. Nearly half of the lawsuits that have been resolved were concluded without any liability to Baxter/Allegiance. During the fiscal year ended June 30, 2002, Allegiance began settling some of these lawsuits with greater frequency. No individual claim has been settled for a material amount, nor have all the settled claims, in the aggregate, comprised a material amount. Due to the number of claims filed and the ongoing defense costs that will be incurred, Allegiance believes it is probable that it will incur substantial legal fees related to the resolution of the cases still pending. Although the Company continues to believe that it cannot reasonably estimate the potential cost to settle these lawsuits, the Company believes that the impact of such lawsuits upon Allegiance will be immaterial to the Company's financial position, liquidity and results of operations, and could be in the range of $0 to $20 million, net of insurance proceeds (with the top end of the range reflecting virtually no insurance coverage, which the Company believes is an unlikely scenario given the insurance coverage in place). The Company believes a substantial portion of any liability will be covered by insurance policies Allegiance has with financially viable insurance companies, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company and Allegiance continue to believe that insurance recovery is probable. The Company also becomes involved from time-to-time in other litigation incidental to its business, including, without limitation, inclusion of certain of its subsidiaries as a potentially responsible party for environmental clean-up costs. Although the ultimate resolution of the litigation referenced herein cannot be forecast with certainty, the Company intends to vigorously defend itself and does not currently believe that the outcome of any pending litigation will have a material adverse effect on the Company's consolidated financial statements. 7. CHANGE IN ACCOUNTING In the first quarter of fiscal 2002, the method of recognizing revenue for pharmacy automation equipment was changed from recognizing revenue when the units were delivered to the customer to recognizing revenue when the units are installed at the customer site. Management believes that the change in accounting will provide for a more objectively determinable method of revenue recognition. In addition, the Company has implemented other changes to better service its customers and leverage operational efficiencies. The Company recorded a cumulative effect of change in accounting of $70.1 million (net of tax of $44.6 million) in the consolidated statement of earnings during the first quarter of fiscal 2002. The after tax dilutive impact of the cumulative effect was $0.15 per diluted share. Page 11 8. GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the quarter ended September 30, 2002, were as follows:
Medical- Pharmaceutical Surgical Automation Distribution Products Pharmaceutical and And Provider and Technologies Information (in millions) Services Services and Services Services Total - ----------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $159.8 $675.4 $639.4 $50.7 $1,525.3 Goodwill acquired, net of purchase price adjustments and other 5.1 3.2 3.5 - 11.8 - ----------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2002 $164.9 $678.6 $642.9 $50.7 $1,537.1 =======================================================================================================================
All intangible assets for the periods presented are subject to amortization. Intangible assets are being amortized using the straight-line method over periods that range from five to forty years. The detail of other intangible assets by class as of September 30 and June 30, 2002 was as follows:
Gross Accumulated Net (in millions) Intangible Amortization Intangible - ------------------------------------------------ ------------------- ---------------------- ---------------- June 30, 2002 Trademarks and patents $28.7 $20.0 $8.7 Non-compete agreements 21.3 20.0 1.3 Other 17.7 8.9 8.8 - ------------------------------------------------ ------------------- ---------------------- ---------------- Total $67.7 $48.9 $18.8 - ------------------------------------------------ ------------------- ---------------------- ---------------- September 30, 2002 Trademarks and patents $33.8 $19.7 $14.1 Non-compete agreements 26.5 20.5 6.0 Other 20.1 9.4 10.7 - ------------------------------------------------ ------------------- ---------------------- ---------------- Total $80.4 $49.6 $30.8 - ------------------------------------------------ ------------------- ---------------------- ----------------
There were no significant acquisitions of other intangible assets for the periods presented. Amortization expense for the quarters ended September 30, 2002 and 2001 was $0.8 million and $0.9 million, respectively. Amortization expense for each of the next five fiscal years is estimated to be:
------------------------------------------------------------------ 2003 2004 2005 2006 2007 ------------------------------------------------------------------ Amortization expense $ 3.1 $ 2.6 $ 2.1 $ 1.9 $ 1.8
9. PENDING TRANSACTION On June 14, 2002, the Company announced that it had entered into a definitive agreement to acquire Syncor International Corporation ("Syncor"), a Woodland Hills, California-based company, which is a leading provider of nuclear pharmacy services. The proposed acquisition of Syncor is a stock-for-stock merger transaction. Under the terms of the merger agreement, dated June 14, 2002, each Syncor share will be converted into 0.52 of a Common Share at the completion of the proposed acquisition. Based on the closing sale price of a Common Share as of November 13, 2002 and the exchange ratio contained in the merger agreement, dated June 14, 2002, the value of the Common Shares to be received by all of the Syncor stockholders in connection with the merger would be approximately $950 million. Page 12 On November 6, 2002, Syncor announced that a special committee of outside directors, together with outside counsel, has been investigating the propriety of certain payments made by foreign subsidiaries. These improper payments that had been made in foreign countries by subsidiaries of Syncor were discovered by the Company during its ongoing due diligence investigation of Syncor and promptly reported to Syncor. On November 6th, Syncor also announced that in order to provide additional time to complete the investigation of its foreign operations and make any appropriate disclosures to stockholders, it has postponed until Friday, December 6, 2002, its special meeting of stockholders to vote on the pending merger with the Company. Following Syncor's November 6th announcement, the Company indicated that it will continue to carefully monitor the Syncor situation and assess the results of the Syncor special committee's ongoing investigation as well as the results of the Company's continuing due diligence review. The Company intends to use all appropriate resources and spend the time necessary to complete its ongoing comprehensive due diligence review in a deliberate manner. The Company intends to fully comply with its obligations under the merger agreement. The Company notes that its acquisition of Syncor is subject to the satisfaction or waiver of a number of conditions set forth in the merger agreement, dated June 14, 2002, between the parties. Following Syncor's November 6th announcement, the Company indicated publicly that it has not yet concluded whether those conditions will be satisfied. There can be no assurance that the transaction involving the acquisition of Syncor by the Company will be completed. On November 8, 2002, a complaint was filed by a purported shareholder against the Company and its directors in the Court of Common Pleas, Delaware County, Ohio, as a purported derivative action alleging breach of fiduciary duties and corporate waste in connection with the alleged failure by the Board of Directors of the Company to renegotiate or terminate the Company's proposed acquisition of Syncor. Among other matters, the complaint requests that the transaction with Syncor be enjoined and that damages be awarded against defendants in an unspecified amount. The Company believes the allegations made in the complaint are without merit and intends to vigorously defend itself. Page 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of September 30, 2002 and June 30, 2002, and for the condensed consolidated statements of earnings for the three-month periods ended September 30, 2002 and 2001. This discussion and analysis should be read together with management's discussion and analysis included in the 2002 Form 10-K. Portions of management's discussion and analysis presented below include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify "forward-looking statements", which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those made, projected or implied. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.01 to this Form 10-Q and on page 8 of the 2002 Form 10-K and are incorporated herein by reference. The Company disclaims any obligation to update any forward-looking statement. GENERAL The Company operates within four operating business segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. See Note 5 of "Notes to Condensed Consolidated Financial Statements" for a description of these segments. RESULTS OF OPERATIONS
Operating Revenue Percent of Total Operating Revenues ------------------------------- Three months ended September 30, Growth (1) 2002 2001 - -------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 17% 82% 81% Medical-Surgical Products and Services 6% 14% 15% Pharmaceutical Technologies and Services 18% 3% 3% Automation and Information Services 24% 1% 1% Total Company 16% 100% 100% - --------------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the operating revenue for the three-month period ended September 30, 2002 as a percentage of the operating revenue for the three-month period ended September 30, 2001. Total operating revenue for the three months ended September 30, 2002 increased 16% compared to the same period of the prior year. This increase is a result of a higher sales volume across various customer segments; pharmaceutical price increases averaging approximately 5%; addition of new products; and the addition of new customers, some of which was a result of new corporate agreements with healthcare providers. In addition, acquisitions accounted for approximately 1% of the overall growth. The Pharmaceutical Distribution and Provider Services segment's operating revenue growth during the first quarter of fiscal 2003 resulted from strong sales to all customer segments, especially alternate site and chain pharmacies, which yielded growth of approximately 25% and 19%, respectively. In addition, pharmaceutical price increases, which averaged approximately 5%, contributed to the growth in this segment. The Medical-Surgical Products and Services segment's operating revenue growth during the first quarter of fiscal 2003 resulted from an increase in sales of distributed products. The addition of several new contracts as well as increased demand for certain self-manufactured products, particularly custom sterile kits and the proprietary Procedure Based Delivery Systems, contributed to this segment's growth. Page 14 The Pharmaceutical Technologies and Services segment's operating revenue growth during the first quarter of fiscal 2003 resulted particularly from strong demand for sterile manufacturing, development and analytical services, and sales and marketing services. Products that showed particular strength included Lilly's Zyprexa(R) , an anti-psychotic, Abbott's Kaletra(R) , an AIDS product, as well as the broader line of sterile products. The completion of the acquisitions of Magellan Laboratories Incorporated ("Magellan") and Boron, LePore & Associates, Inc. ("BLP") during the fourth quarter of fiscal 2002 contributed to the growth in the first quarter of fiscal 2003. Magellan and BLP contributed 14% of the overall growth for this segment. The Automation and Information Services segment's operating revenue growth during the first quarter of fiscal 2003 resulted from strong sales in the patient safety and supply management product lines, such as MEDSTATION SN(R) and SUPPLYSTATION(R). Bulk Deliveries to Customer Warehouses and Other The Pharmaceutical Distribution and Provider Services segment reports bulk deliveries made to customers' warehouses as revenue. These sales involve the Company acting as an intermediary in the ordering and subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries result largely from circumstances that the Company cannot control, including consolidation within the customers' industries, decisions by customers to either begin or discontinue warehousing activities, and changes in policies by manufacturers related to selling directly to customers. Due to the lack of margin generated through bulk deliveries, fluctuations in their amount have no significant impact on the Company's earnings. The Pharmaceutical Technologies and Services segment records out-of-pocket reimbursements received through its sales and marketing services' business as revenue. These out-of-pocket expenses, which generally include travel expenses and other incidental costs, are incurred to fulfill the services required by the contract. Within these contracts, the customer agrees to reimburse the Company for the expenses. Due to the Company not generating any margin from these reimbursements, fluctuations in their amount have no impact on earnings. Gross Margin Three Months Ended September 30, - --------------------------------------------------------------------------- (As a percentage of operating revenue) 2002 2001 - --------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 4.92% 5.21% Medical-Surgical Products and Services 20.91% 21.42% Pharmaceutical Technologies and Services 34.21% 33.82% Automation and Information Services 70.86% 66.92% Total Company 8.82% 9.27% - --------------------------------------------------------------------------- The overall gross margin as a percentage of operating revenue decreased during the first quarter of fiscal 2003 compared to the same period of the prior year. This decrease resulted primarily from a greater mix of relatively lower margin pharmaceutical distribution operating revenues in the first quarter of fiscal 2003 (82% of operating revenues in the quarter ended September 30, 2002 as compared to 81% of operating revenues for the same period last fiscal year), as well as a greater mix of relatively lower margin distribution products within the Medical-Surgical Products and Services segment. These decreases were partially offset by increases within the Pharmaceutical Technologies and Services and Automation and Information Services segments. The increase within the Pharmaceutical Technologies and Services segment can be primarily attributed to the mix of business within that segment. The increase within the Automation and Information Services segment occurred primarily due to changes within the segment's product mix as well as productivity improvements. The Pharmaceutical Distribution and Provider Services segment's gross margin as a percentage of operating revenue decreased during the first quarter of fiscal 2003. This decrease was primarily due to a greater mix of high volume customers where a lower cost of distribution and better asset management enabled the Company to offer lower selling margins to its customers. Operating revenue generated from sales to chain pharmacy and alternate site customers increased to 47% and 20%, respectively, of the total operating revenue for this segment during the first quarter of fiscal 2003, up from 46% and 19%, respectively, for the same period in the prior year. The decrease in selling margins was partially offset by higher vendor margins from favorable price increases and manufacturer marketing programs. There can be no assurance that vendor programs that occurred in the current quarter will recur in the same form or at the same levels in the future. Page 15 The Medical-Surgical Products and Services segment's gross margin as a percentage of operating revenue decreased during the first quarter of fiscal 2003. This decrease resulted primarily from the accelerated growth within the relatively lower margin distribution business of this segment, which grew at a slightly faster pace as compared to the relatively higher margin self-manufacturing business. Increased price competition within the segment's self-manufacturing business, specifically related to certain group purchasing organization contracts, also contributed to the decline. The Pharmaceutical Technologies and Services segment's gross margin as a percentage of operating revenue increased during the first quarter of fiscal 2003. This resulted primarily from a change within the business mix and product mix of the segment, which included an increase in the higher margin development and analytical services and sales and marketing services businesses, mainly from the acquisitions of Magellan and BLP. The gross margin in this segment was negatively impacted by certain items that occurred in fiscal year 2002 that did not recur in fiscal year 2003, namely the recording of pricing adjustments related to the minimum recovery expected to be received for claims against vitamin manufacturers for amounts overcharged in prior years (see Note 4 of "Notes to Condensed Consolidated Financial Statements"). These pricing adjustments were recorded as a reduction of cost of goods sold, consistent with the classification of the original overcharge, and were based on the minimum amounts estimated to be recoverable based on the facts and circumstances available at the time they were recorded. The amount recorded for these pricing adjustments was $12.0 million in the first quarter of fiscal 2002. The Automation and Information Services segment's gross margin as a percentage of operating revenue increased during the first quarter of fiscal 2003. This increase resulted from increased sales within the relatively higher margin MEDSTATION(R) and newer version supply control products as well as productivity gains realized from the operational improvements implemented early last fiscal year. Selling, General and Administrative Expenses Three Months Ended September 30, - -------------------------------------------------------------------------------- (As a percentage of operating revenue) 2002 2001 - -------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 2.06% 2.42% Medical-Surgical Products and Services 12.21% 13.03% Pharmaceutical Technologies and Services 15.28% 14.62% Automation and Information Services 36.35% 39.43% Total Company 4.56% 5.09% - -------------------------------------------------------------------------------- Selling, general and administrative expenses as a percentage of operating revenue decreased during the first quarter of fiscal 2003 as compared to the same period of fiscal 2002. This decrease reflects economies of scale associated with the Company's revenue growth. Significant productivity gains resulting from continued cost control efforts and the continuation of consolidation and selective automation of operating facilities contributed to the improvement. The Company is continuing to take advantage of synergies from recent acquisitions to decrease selling, general and administrative expenses as a percentage of operating revenue. Also, the Company is realizing efficiencies from the restructuring within the Medical-Surgical Products and Services segment, which was initiated in the fourth quarter of fiscal 2002. Partially offsetting the improvements in fiscal 2003 was an increase in selling, general and administrative expenses as a percentage of operating revenue for the Pharmaceutical Technologies and Services segment. This increase was primarily a result of a change within the business mix of this segment. Selling, general and administrative expenses grew 4% during the first quarter of fiscal 2003 as compared to the same period in fiscal 2002. This increase is primarily attributed to the acquisitions of Magellan and BLP. The overall increase of selling, general and administrative expenses compares favorably to the 16% growth in the Company's operating revenue for the same period. Page 16 Special Charges The following is a summary of the special charges for the three-month periods ended September 30, 2002 and 2001.
Special Charges Three Months Ended September 30, - ---------------------------------------------------------------------------------------- (in millions) 2002 2001 - ---------------------------------------------------------------------------------------- Merger-Related Costs: Employee-related costs $ (3.2) $ (4.1) Pharmaceutical distribution center consolidation (5.1) (0.3) Other exit costs (0.5) (2.3) Other integration costs (2.6) (5.6) - ---------------------------------------------------------------------------------------- Total merger-related costs $ (11.4) $ (12.3) - ---------------------------------------------------------------------------------------- Other Special Charges: Manufacturing facility closures $ (10.2) $ - Litigation settlements 2.9 - - ---------------------------------------------------------------------------------------- Total other special charges $ (7.3) $ - - ---------------------------------------------------------------------------------------- Total special charges $ (18.7) $ (12.3) Tax effect of special charges 3.1 4.7 - ---------------------------------------------------------------------------------------- Net effect of special charges $ (15.6) $ (7.6) ========================================================================================
MERGER-RELATED COSTS Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. The merger-related costs currently being recognized are primarily a result of the merger or acquisition transactions with Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig Medical Corporation ("BBMC"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation ("Scherer"). EMPLOYEE-RELATED COSTS. During the above-stated periods, the Company incurred employee-related costs associated with certain of its merger transactions. For the three months ended September 30, 2002 and 2001, $2.5 million relates to amortization expense of noncompete agreements primarily associated with the Bindley and Allegiance merger transactions. The remaining employee-related costs for the three months ended September 30, 2002 primarily related to retention bonuses associated with certain of the Company's smaller acquisitions. The remaining employee-related costs for the three months ended September 30, 2001 primarily related to payroll taxes from stock option exercises from plans converted at the time of the Bindley, Allegiance and Scherer mergers, as well as severance related to a change in control agreement associated with the Allegiance merger. The total severance payout exceeded the amount accrued at the time of the agreement resulting in additional expense. PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. In connection with the merger transaction with Bindley, the Company anticipates closing and consolidating a total of 16 Bindley distribution centers, Bindley's corporate office, and one of the Company's data centers. These closures will result in the termination of approximately 1,050 employees. As of September 30, 2002, a total of 15 Bindley distribution centers have been closed, and the majority of the 1,050 employees have been terminated. During the first quarter of fiscal 2003 and 2002, the Company recorded charges of $5.1 million and $0.3 million, respectively, primarily associated with the consolidations and closures noted above. The Company incurred employee-related costs of $0.9 million in the first quarter of fiscal 2003, primarily from the termination of employees due to the distribution center closures. Exit costs related to the termination of contracts and lease agreements of the distribution centers were incurred during the first quarter of fiscal 2003 of $1.7 million. Also, asset impairment charges of $1.1 million were incurred during the first quarter of fiscal 2003. In addition, during the first quarter of fiscal 2003, the Company incurred costs associated with the consolidation of one of the Company's data centers of $1.4 million, primarily related to duplicate salaries incurred during the consolidation period. During the first quarter of fiscal 2002, the Company incurred charges of $0.3 million primarily related to costs associated with moving inventory and other assets during the consolidation of distribution centers. The Company anticipates completing the distribution center and data center consolidations by December 31, 2002. The Company anticipates completing the corporate office consolidation by June 30, 2003. Page 17 OTHER EXIT COSTS. Other exit costs related primarily to costs associated with lease terminations, moving expenses, and asset impairments as a direct result of the merger transactions with BBMC, Allegiance and Scherer. OTHER INTEGRATION COSTS. Other integration costs, which primarily relate to the Bindley, BBMC, and Allegiance transactions, included charges directly related to the integration of operations of the transactions noted, such as consulting costs related to information systems and employee benefit integration, as well as relocation and travel costs directly associated with the integrations. OTHER SPECIAL CHARGES MANUFACTURING FACILITY CLOSURES. During the first quarter of fiscal 2003, the Company recorded a special charge of $10.2 million related to the closure of a manufacturing facility within the Medical-Surgical Products and Services segment. Asset impairment charges of $7.5 million were incurred during the quarter. Also, exit costs of $1.4 million were incurred, primarily related to dismantling and moving machinery and equipment. The remaining $1.3 million related to severance costs associated with the termination of approximately 200 employees during the quarter. The closure is expected to be completed by December 31, 2002. LITIGATION SETTLEMENTS. During the first quarter of fiscal 2003, the Company recorded income from litigation settlements of $2.9 million. These settlements resulted from the recovery of antitrust claims against certain vitamin manufacturers for amounts overcharged in prior years. The total recovery through September 30, 2002 was $38.2 million, of which $35.3 million had previously been recorded ($10.0 million in the second quarter of fiscal 2001, $12.0 million in the first quarter of fiscal 2002, and $13.3 million in the fourth quarter of fiscal 2002). The amounts previously recorded in the second quarter of fiscal 2001 and the first quarter of fiscal 2002 were reflected as a reduction of cost of goods sold, which is consistent with the classification of the original overcharge, and were based on the minimum amounts estimated to be recoverable based on the facts and circumstances available at the time they were recorded. While the Company still has pending claims against other manufacturers, the total amount of any future recovery is not currently estimable. Any future recoveries will be recorded as a special item in the period when a settlement is reached. SUMMARY The net effect of the various special charges recorded during the three months ended September 30, 2002 and 2001 was to reduce earnings before cumulative effect of change in accounting by $15.6 million to $288.3 million and by $7.6 million to $246.4 million, respectively, and to reduce reported diluted earnings per Common Share before cumulative effect of change in accounting by $0.03 per share to $0.64 per share and by $0.02 per share to $0.53 per share, respectively. The Company estimates that in future periods it will incur additional merger-related costs, restructuring costs and integration expenses associated with the various mergers and acquisitions it has completed to date (primarily related to the Bindley merger and the acquisitions of Magellan and BLP) of approximately $76.8 million ($49.5 million, net of tax). These costs are expected to be incurred primarily in fiscal 2003 and 2004 and relate to the exit of contractual arrangements, employee-related costs, and costs to properly integrate operations and implement efficiencies. Such amounts will be charged to expense when incurred. PROVISION FOR INCOME TAXES The Company's provision for income taxes relative to pre-tax earnings was 34.0% and 33.7% for the first quarters of fiscal 2003 and 2002, respectively. Fluctuations in the effective tax rate are primarily due to the impact of recording certain non-deductible special charges during various periods as well as fluctuating state and foreign effective tax rates as a result of the Company's business mix. The provision for income taxes excluding the impact of special charges was 33.3% and 33.8% for the quarters ended September 30, 2002 and 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased to $5.0 billion at September 30, 2002 from $5.1 billion at June 30, 2002. This decrease in working capital resulted primarily from decreases in cash and equivalents and inventories of $436.4 million and $110.8 million, respectively. Partially offsetting the decreases of cash and equivalents and inventories was an increase in trade receivables of $259.4 million and a decrease in accounts payable of $204.7 million. The decrease in cash and equivalents was primarily attributed to the repurchase of Common Shares, resulting in a total cash outlay of $392.7 million. The decrease in inventories is partially due to a shift from branded pharmaceuticals to generic pharmaceuticals during the first quarter of fiscal 2003. Also, the achievement of synergies from the Bindley merger contributed to the inventory decline. The increase in trade receivables is consistent with the Company's Page 18 revenue growth for the same time period. The change in accounts payable is due primarily to the timing of inventory purchases and related payments. Shareholders' equity declined by $39.3 million at September 30, 2002, as compared to June 30, 2002. Shareholders' equity decreased during the quarter primarily due to the repurchase of Common Shares of $392.7 million and dividends of $11.2 million. These decreases were partially offset by net earnings of $288.3 million and the investment of $42.7 million by employees of the Company through various employee stock benefit plans. On August 7, 2002, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. As of September 30, 2002, 3.4 million Common Shares having an aggregate cost of approximately $219.8 million had been repurchased through this plan. The repurchased shares will be treasury shares used for general corporate purposes. In September 2001, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. This program expired by its terms in August 2002. The Company repurchased approximately 3.2 million Common Shares having an aggregate cost of approximately $191.7 million during the quarter ended September 30, 2002. The cumulative amount repurchased under this program was approximately 8.3 million Common Shares, having an aggregate cost of approximately $500 million. The repurchased shares will be treasury shares used for general corporate purposes. 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 business combinations. OTHER For information relating to the Company's pending transaction with Syncor, including recent developments with respect to such pending transaction, see Note 9, "Pending Transaction", incorporated by reference herein. For information on recent developments relating to the Company's relationship with Kmart, see Item 5, "Other Information", incorporated by reference herein. Page 19 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes there has been no material change in the quantitative and qualitative market risks from that discussed in the 2002 Form 10-K. ITEM 4: CONTROLS AND PROCEDURES Within 90 days prior to this filing, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2002. To date, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002. Management expects to continue reviewing the Company's disclosure controls and procedures on an ongoing basis, looking for opportunities to strengthen them where appropriate. PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The discussion below is limited to an update of material developments that have occurred in the various judicial proceedings, which are more fully described in Part I, Item 3, of the 2002 Form 10-K, and are incorporated herein by reference. The following disclosure should be read together with the disclosure set forth in the 2002 Form 10-K, and to the extent any such statements constitute "forward looking statements" reference is made to Exhibit 99.01 of this Form 10-Q and page 8 of the 2002 Form 10-K. Latex Litigation On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off, Allegiance, which merged with a subsidiary of the Company on February 3, 1999, agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare Corporation ("BHC"), as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims arising from the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. The Company is not a party to any of the lawsuits and has not agreed to pay any settlements to the plaintiffs. As of September 30, 2002, there were 368 lawsuits against BHC and/or Allegiance involving allegations of sensitization to natural rubber latex products. Some of the cases are now proceeding to trial. The total dollar amount of potential damages cannot be reasonably quantified. Some plaintiffs plead damages in extreme excess of what they reasonably can expect to recover, some plead a modest amount, and some do not include a request for any specific dollar amount. Not including cases that ask for no specific damages, the damage requests per action have ranged from $10,000 to $240 million. All of these cases name multiple defendants, in addition to Baxter/Allegiance. The average number of defendants per case exceeds twenty-five. Based on the significant differences in the range of damages sought and based on the multiple number of defendants in these lawsuits, Allegiance cannot reasonably quantify the total amount of possible/probable damages. Therefore, Allegiance and the Company do not believe that these numbers should be considered as an indication of either reasonably possible or probable liability. Since the inception of this litigation, Baxter/Allegiance have been named as a defendant in approximately 800 cases. As of September 30, 2002, fewer than half of those lawsuits remain pending. Nearly half of the lawsuits that have been resolved were concluded without any liability to Baxter/Allegiance. During the fiscal year ended June 30, 2002, Allegiance began settling some of these lawsuits with greater frequency. No individual claim has been settled for a material amount, nor have all the settled claims, in the aggregate, comprised a material amount. Due to the number of claims filed and the ongoing defense costs that will be incurred, Allegiance believes it is probable that it will incur substantial legal fees related to the resolution of the cases still pending. Although the Company continues to believe that it cannot reasonably estimate the potential cost to settle these lawsuits, the Company believes that the impact of such lawsuits upon Allegiance will be immaterial to the Company's financial position, liquidity and results of operations, and could be in the range of $0 to $20 million, net of insurance proceeds (with the top end of the range reflecting virtually no insurance coverage, which the Company believes is an Page 20 unlikely scenario given the insurance coverage in place). The Company believes a substantial portion of any liability will be covered by insurance policies Allegiance has with financially viable insurance companies, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company and Allegiance continue to believe that insurance recovery is probable. Vitamins Litigation On May 17, 2000, Scherer, which was acquired by the Company in August 1998, filed a civil antitrust lawsuit in the United States District Court for the District of Illinois against certain of its raw material suppliers and other alleged co-conspirators alleging that the defendants unlawfully conspired to fix vitamin prices and allocate vitamin production volume and vitamin customers in violation of U.S. antitrust laws. The complaint seeks monetary damages and injunctive relief. After the lawsuit was filed, it was consolidated for pre-trial purposes with other similar cases. The case is scheduled for trial in the United States District Court for the District of Columbia (where it was transferred) in March 2003. Scherer has entered into settlement agreements with certain defendants. As of September 30, 2002, Scherer has received settlement payments of approximately $38.2 million, net of attorney fees and expenses that were withheld prior to the disbursement of the funds to Scherer. At the present time, management cannot predict the outcome of this lawsuit, nor the estimated damages and potential recovery, if any. The Company also becomes involved from time-to-time in other litigation incidental to its business, including, without limitation, inclusion of certain of its subsidiaries as a potentially responsible party for environmental clean-up costs. Although the ultimate resolution of the litigation referenced herein cannot be forecast with certainty, the Company intends to vigorously defend itself and does not currently believe that the outcome of any pending litigation will have a material adverse effect on the Company's consolidated financial statements. ITEM 5: OTHER INFORMATION: On January 22, 2002, Kmart Corporation ("Kmart") filed for Chapter 11 bankruptcy court protection. Cardinal Distribution, the most significant business within the Pharmaceutical Distribution and Provider Services segment, has serviced Kmart for more than ten years and has continued to service approximately 1,400 of its stores nationwide since the inception of the bankruptcy case. On October 30, 2002, Kmart and Cardinal Distribution extended and amended their supply agreement, and the bankruptcy court authorized Kmart's post-petition assumption of the agreement. Sales to Kmart represent approximately 5% of the Company's total operating revenue, but earnings from these sales are an even smaller percentage of the Company's total operating earnings. Due to a unique consignment arrangement in which the Company still owns the related pharmaceutical inventories, it has significantly limited its credit exposure to Kmart. The Company is monitoring this Chapter 11 proceeding closely, and does not anticipate any material impact on its consolidated financial position and results of operations due to this bankruptcy filing. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Listing of Exhibits: Exhibit Exhibit Description Number ------------------- ------- 10.01 Employment Agreement, dated November 13, 2002, between the Registrant and James F. Miller* 10.02 Employment Agreement, dated November 13, 2002, between the Registrant and George L. Fotiades* 99.01 Statement Regarding Forward-Looking Information (1) - --------- (1) Included as an exhibit to the Registrant's Annual Report on Form 10-K filed September 30, 2002 (File No. 1-11373) and incorporated herein by reference. * Management contract or compensation plan or arrangement. (b) Reports on Form 8-K: On October 22, 2002, the Company filed a Current Report on Form 8-K under Item 5 which filed as an exhibit the press release announcing the Company's results for the quarter ended September 30, 2002. On November 6, 2002, the Company filed a Current Report on Form 8-K under Item 5, which filed as exhibits the press release announcing that the Company's Board of Directors declared a regular quarterly dividend of $0.025 per Common Share, without par value, payable on January 15, 2003 to shareholders of record on January 1, 2003, and the press release of the Company relating to the proposed acquisition of Syncor International Corporation. Page 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARDINAL HEALTH, INC. Date: November 14, 2002 /s/ Robert D. Walter -------------------------------------- Robert D. Walter Chairman and Chief Executive Officer /s/ Richard J. Miller -------------------------------------- Richard J. Miller Executive Vice President and Chief Financial Officer Page 22 CERTIFICATIONS I, Robert D. Walter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cardinal Health, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert D. Walter ------------------------------ Robert D. Walter Chairman and Chief Executive Officer Page 23 I, Richard J. Miller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cardinal Health, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Richard J. Miller ------------------------- Richard J. Miller Executive Vice President, and Chief Financial Officer Page 24 EX-10.01 3 l96924aexv10w01.txt EXHIBIT 10.01 Exhibit 10.01 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated and effective as of November 13, 2002 (the "Effective Date") is made and entered into by and between Cardinal Health, Inc., an Ohio corporation (the "Company"), and James F. Millar (the "Executive"). WHEREAS, the Company and the Executive are parties to that certain Employment Agreement dated as of February 9, 2000 (the "Prior Agreement"); and WHEREAS, the Company and the Executive desire to set forth in a written agreement the terms and conditions under which the Executive will render services to the Company that will replace and supercede the Prior Agreement from and after the Effective Date. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, agree as follows: 1. EMPLOYMENT PERIOD. The Company shall employ, or shall cause one of its subsidiaries or affiliates to employ, the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, during the three-year period beginning on the Effective Date and ending on the third (3rd) anniversary of the Effective Date, unless prior to such date the employment of the Executive is terminated in accordance with Section 4 of this Agreement (such period, the "Employment Period"). For purposes of this Agreement, any reference to the "Company" shall mean, where appropriate, the actual Cardinal subsidiary or affiliate that employs the Executive. If the Executive's employment is terminated by the Company without Cause (as defined in Section 4 of this Agreement) prior to January 31, 2003, the Executive may, at his option, immediately change his status to that of a consulting employee. In such event, the Executive shall become a consulting employee without experiencing any break in Executive's status as an employee of the Company. The Executive's ability to serve as a consulting employee is conditioned upon his continued observance of Section 5 of this Agreement. In such event, the Executive's service as a consulting employee (and in all other capacities) shall terminate on January 31, 2003 (the period during which the Executive serves as a consulting employee, if any, the "Part-Time Period"). The Employment Period may be extended by mutual written agreement of the parties. The parties hereto agree and acknowledge that the Prior Agreement is and shall be considered terminated and superceded by this Agreement from and after the Effective Date. 2. POSITION AND DUTIES. (a) During the Employment Period, the Executive shall serve as President and Chief Executive Officer - Healthcare Products and Services, with the duties and responsibilities customarily assigned to such position, and such other duties and responsibilities as the Chief Executive Officer of the Company shall from time to time assign to the Executive; PROVIDED that the Company may change the Executive's title, duties and responsibilities (including reporting responsibilities) at any time without violating this provision, so long as the Executive remains in an executive position. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled under the practices and policies of the Company as in effect from time to time, the Executive shall devote the Executive's full business attention and time to the business and affairs of the Company and shall use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate boards or committees with the prior consent of the Chief Executive Officer of the Company, (B) serve on civic or charitable boards or committees, (C) deliver lectures, fulfill speaking engagements or teach at educational institutions and (D) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (c) The Executive's services shall be performed primarily at the Company's principal place of business in Dublin, Ohio. 3. COMPENSATION. (a) SALARY. During the Employment Period, as compensation for the Executive's services hereunder, the Company shall pay to the Executive an annual base salary (the "Base Salary") at the rate of not less than $680,000, payable at such times and intervals as the Company customarily pays the base salaries of its other executive employees; PROVIDED that the Base Salary may be reduced as part of a reduction that applies proportionately to all employees who are otherwise similar to the Executive with respect to amount of compensation and level of managerial responsibility before such reduction. In the event that there occurs a Part-Time Period, as compensation for the Executive's services as a consulting employee hereunder and in lieu of the Base Salary, the Company shall pay to the Executive an annual base salary at the rate of $50,000 (the "Consulting Base Salary"), payable at such times and intervals as the Company customarily pays the base salaries of its executive employees. (b) ANNUAL BONUS. In addition to the Base Salary, during the Employment Period the Executive shall be eligible to receive an annual bonus (an "Annual Bonus") determined and paid at the sole discretion of the Company pursuant to the terms and conditions of the Company bonus plan for which the Executive is then eligible, as such plan is in effect from time to time, or any successor thereto (the "Bonus Plan"). The parties hereto agree and acknowledge that the Executive's Annual Bonus target under this Agreement shall be equal to one hundred and thirty percent (130%) of the Base Salary. In the event that there occurs a Part-Time Period, in lieu of the Annual Bonus but in addition to the Consulting Base Salary, -2- during the Part-Time Period the Executive shall be eligible to receive a bonus determined and paid at the sole discretion of the Company, in such amount, if any, as the Company may determine, in its sole discretion. (c) OPTION GRANT. As of November 18, 2002, the Company shall grant the Executive an option to purchase 320,000 common shares, without par value, of the Company (the "Option") pursuant to the terms and conditions set forth in the Nonqualified Stock Option Agreement attached to this Agreement as Exhibit A (the "Option Agreement"). The Executive acknowledges and agrees that he will not be eligible to receive annual grants of options to purchase common shares of the Company during the Company's fiscal 2003, 2004 and 2005 years, unless any such grant is authorized by the Human Resources and Compensation Subcommittee of the Board of Directors of the Company. (d) EMPLOYEE BENEFITS. During the Employment Period, the Executive shall be entitled to receive employee benefits (including, without limitation, medical, life insurance and other welfare benefits and benefits under retirement and savings plans) and vacation to the same extent as, and on the same terms and conditions as, other similarly situated executives (or consulting employees, in the event of a Part-Time Period) of the Company from time to time. (e) EXPENSES. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive during the Employment Period in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company then applicable to the Executive for submission of expense reports, receipts, or similar documentation of such expenses. (f) RETIREMENT. If the Executive's employment with the Company has not terminated before January 31, 2003, thereafter, the Executive will be eligible for "retirement," in each case within the meaning of the Company's various stock option plans; PROVIDED, HOWEVER, that the parties hereto agree and acknowledge that in the event of the Executive's retirement on or after November 18, 2003, a pro-rata portion of the Option granted pursuant to Section 3(c) of this Agreement (pro-rated as set forth in Section 3(b)of the Option Agreement) shall vest and become exercisable on the Vesting Date set forth on page 1 of the Option Agreement and shall remain exercisable thereafter for the remainder of the term of the Option. Nothing in this Agreement shall limit the ability of the Executive to be eligible for such retirement for other reasons or at other times, including at an earlier time, upon the then applicable terms and conditions. 4. EMPLOYMENT TERMINATION. (a) TERMINATION BY THE COMPANY. During the Employment Period, the Executive's employment may be terminated by the Company under any of the following circumstances: (i) upon the inability of the Executive to perform the essential functions of his position with or without reasonable accommodation, which inability continues for a consecutive period of 120 days or longer or an aggregate period of 180 days or longer ("Incapacity"), in either instance during the Employment Period; (ii) for -3- "Cause," defined as (A) any willful or grossly negligent conduct by Executive that demonstrably and materially injures the Company; (B) any act by the Executive of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any subsidiary; (C) the Executive being convicted of, confessing to, or becoming the subject of proceedings that provide a reasonable basis for the Company to believe the Executive has engaged in, a felony or any crime involving dishonesty or moral turpitude; (D) the Executive's intentional and repeated violation of the written policies or procedures of the Company; (E) the Executive violating any provision of Section 5 of this Agreement; or (F) the Executive's willful and continued failure for a significant period of time to perform Executive's duties; and (iii) for any other reason (a termination without "Cause"). The Company shall give the Executive notice of termination specifying which of the foregoing provisions is applicable and (in the case of clause (i) or (ii)) the factual basis therefor, and the termination shall be effective upon the 30th day after such notice is given (hereinafter, the date on which the Executive ceases to be an employee of the Company for any reason (including, without limitation, by action of the Executive and retirement), whether or not during the Employment Period, is referred to as the "Date of Termination"). (b) TERMINATION BY THE EXECUTIVE. The Executive may terminate his employment during the Employment Period for any reason upon 30 days advanced written notice to the Company. (c) CONSEQUENCES OF TERMINATION BY THE COMPANY WITHOUT CAUSE. In the event the Executive's employment is terminated by the Company without Cause prior to January 31, 2003, the Executive shall be entitled to change his status to that of a consulting employee as set forth in Section 1 hereof. In the event the Executive is terminated by the Company without Cause after attaining age 55, the Executive will be deemed to have "retired" for purposes of outstanding options held by the Executive under the Company's Amended and Restated Equity Incentive Plan, except with respect to the Option granted under the Option Agreement. In addition to such rights, and not in lieu thereof (i) if the Executive is terminated without Cause during the Employment Period, or, (ii) if, in the event of the expiration of the Employment Period, the Executive continues employment with the Company beyond the date of the expiration of the Employment Period (hereinafter defined as the Executive's period of "Employment Continuation"), and under such circumstances the Executive is terminated without Cause during the Executive's Employment Continuation and prior to the fifth anniversary of the Effective Date, then in either case, the Executive shall not be entitled to any further compensation or benefits provided for under this Agreement except (x) as provided in the Option Agreement and (y) as provided in the following sentence. Under such circumstance, the Company shall: (i) pay to the Executive an amount equal to two times the sum of (x) the Executive's Base Salary, at the rate in effect on the day immediately prior to the Date of Termination and (y) the Executive's Annual Bonus target for the fiscal year of the Company in which the Date of Termination occurs, such amount to be paid monthly in equal -4- installments over the twenty-four (24) month period immediately following the Date of Termination; and (ii) provide the vested benefits, if any, required to be paid or provided by law. For the avoidance of doubt, in the event of the Executive's termination without Cause during the Executive's Employment Continuation, the Executive shall only receive severance benefits pursuant to this Section 4(c) if he does not receive severance benefits upon or after the expiration of the Employment Period under this Agreement or otherwise. In addition, notwithstanding anything in the Option Agreement to the contrary, in the event that the Company terminates the Executive without Cause during the Employment Period following a change in corporate structure or personnel of the Company (or similar event) which results in the Executive ceasing to report directly to Robert D. Walter prior to such termination, the entire Option shall vest and become exercisable on the Vesting Date set forth on page 1 of the Option Agreement, and shall remain exercisable thereafter for the remainder of the term of the Option. Notwithstanding the foregoing, the Company's obligations to the Executive under this Section 4(c) shall immediately terminate, and the Executive shall not be entitled to any further compensation or benefits provided for under this Agreement or the Option Agreement in the event that the Executive violates any of the provisions of Section 5 of this Agreement. (d) OTHER EMPLOYMENT TERMINATIONS. If, during the Employment Period, the Executive's employment is terminated for any reason other than by the Company without Cause, including, without limitation, termination by the Executive, the Executive's retirement, Incapacity, death, or termination by the Company for Cause (subject only to Section 4(e) of this Agreement), the Executive shall not be entitled to any compensation provided for under this Agreement, other than (i) the Base Salary or Consulting Base Salary, as applicable, through the Date of Termination; (ii) benefits under any long-term disability insurance coverage in the case of termination because of Incapacity; (iii) vested benefits, if any, required to be paid or provided by law; and (iv) the benefits provided for under the Option Agreement, if any. (e) TERMINATION AFTER A CHANGE OF CONTROL. In the event that during the Employment Period, or during the Executive's Employment Continuation but prior to the fifth anniversary of the Effective Date (i) the Executive's employment is terminated by the Company within one year after a "Change of Control" (as defined in the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended from time to time, or any successor plan thereto) for any reason other than because of the Executive's death, retirement, Incapacity or by the Company for Cause, or (ii) the Executive has experienced a material diminution of his duties under Section 2(a) of this Agreement, other than actions that are not taken in bad faith and are remedied by the Company within ten business days after receipt of written notice thereof from the Executive, and as a result the Executive terminates his employment within one year after a Change of Control (as so defined), then the Company shall pay to the Executive the severance payments and benefits as set forth in Section 4(c) of this Agreement. -5- 5. COVENANTS. (a) INTRODUCTION. The parties acknowledge that the provisions and covenants contained in this Section 5 are ancillary and material to this Agreement and the Option Agreement and that the limitations contained herein are reasonable in geographic and temporal scope and do not impose a greater restriction or restraint than is necessary to protect the goodwill and other legitimate business interests of the Company. The parties also acknowledge and agree that the provisions of this Section 5 do not adversely affect the Executive's ability to earn a living in any capacity that does not violate the covenants contained herein. The parties further acknowledge and agree that the provisions of Section 11(a) below are accurate and necessary because (i) this Agreement is entered into in the State of Ohio, (ii) Ohio has a substantial relationship to the parties and to this transaction, (iii) Ohio is the headquarters state of the Company, which has operations nationwide and has a compelling interest in having its employees treated uniformly within the United States, (iv) the use of Ohio law provides certainty to the parties in any covenant litigation in the United States, and (v) enforcement of the provision of this Section 5 would not violate any fundamental public policy of Ohio or any other jurisdiction. (b) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company and all of its subsidiaries, partnerships, joint ventures, limited liability companies, and other affiliates (collectively, the "Cardinal Group"), all secret or confidential information, knowledge or data relating to the Cardinal Group and its businesses (including, without limitation, any proprietary and not publicly available information concerning any processes, methods, trade secrets, research, secret data, costs, names of users or purchasers of their respective products or services, business methods, operating procedures or programs or methods of promotion and sale) that the Executive has obtained or obtains during the Executive's employment by the Cardinal Group and that is not public knowledge (other than as a result of the Executive's violation of this Section 5(b)) ("Confidential Information"). For the purposes of this Section 5(b), information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Cardinal Group, except with the prior written consent of the Cardinal Group, as applicable, or as otherwise required by law or legal process. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or the Cardinal Group, as applicable, and shall be turned over to the applicable Cardinal Group company upon termination of the Executive's employment. (c) NON-RECRUITMENT OF EMPLOYER'S EMPLOYEES, ETC. Executive shall not, at any time during the Restricted Period (as defined in this Section 5(c)), without the prior written consent of Cardinal Health, Inc., directly or indirectly, contact, solicit, recruit, or employ (whether as an employee, officer, director, agent, consultant or independent contractor) any person who was or is at any time during the previous twenty four months an -6- employee, representative, officer or director of the Cardinal Group. Further, during the Restricted Period, Executive shall not take any action that could reasonably be expected to have the effect of encouraging or inducing any employee, representative, officer or director of the Cardinal Group to cease their relationship with the Cardinal Group for any reason. This provision does not apply to recruitment of employees within or for the Cardinal Group. The "Restricted Period" means the period of Executive's employment with the Cardinal Group and the additional period that ends 24 months after the Executive's Date of Termination. (d) NO COMPETITION--SOLICITATION OF BUSINESS. During the Restricted Period, the Executive shall not (either directly or indirectly or as an officer, agent, employee, partner or director of any other company, partnership or entity) solicit, service, or accept on behalf of any competitor of the Cardinal Group the business of (i) any customer of the Cardinal Group at the time of the Executive's employment or Date of Termination, or (ii) potential customer of the Cardinal Group which the Executive knew to be an identified, prospective purchaser of services or products of the Cardinal Group. (e) NO COMPETITION--EMPLOYMENT BY COMPETITOR. During the Restricted Period, the Executive shall not invest in (other than in a publicly traded company with a maximum investment of no more than 1% of outstanding shares), counsel, advise, or be otherwise engaged or employed by, any entity or enterprise that competes with the Cardinal Group, by developing, manufacturing or selling any product or service of a type, respectively, developed, manufactured or sold by the Cardinal Group. (f) NO DISPARAGEMENT. (i) The Executive shall at all times refrain from taking actions or making statements, written or oral, that (A) denigrate, disparage or defame the goodwill or reputation of the Cardinal Group or any of its trustees, officers, security holders, partners, agents or former or current employees and directors, or (B) are intended to, or may be reasonably expected to, adversely affect the morale of the employees of the Cardinal Group. The Executive further agrees not to make any negative statements to third parties relating to the Executive's employment or any aspect of the businesses of the Cardinal Group and not to make any statements to third parties about the circumstances of the termination of the Executive's employment, or about the Cardinal Group or its trustees, officers, security holders, partners, agents or former or current employees and directors, except as may be required by a court or governmental body. (ii) The Executive further agrees that, following termination of employment for any reason, the Executive shall assist and cooperate with the Company with regard to any matter or project in which the Executive was involved during the Executive's employment with the Company, including but not limited to any litigation that may be pending or arise after such termination of employment. Further, the Executive agrees to notify the Company at the earliest opportunity of any contact that is made by any third parties concerning any such matter or project. The Company shall not unreasonably request such cooperation of Executive and shall compensate the Executive for any lost wages or expenses associated with such cooperation and assistance. -7- (g) INVENTIONS. All plans, discoveries and improvements, whether patentable or unpatentable, made or devised by the Executive, whether alone or jointly with others, from the date of the Executive's initial employment by the Company and continuing until the end of the Employment Period and any subsequent period when the Executive is employed by the Cardinal Group, relating or pertaining in any way to the Executive's employment with or the business of the Cardinal Group, shall be promptly disclosed in writing to the Chief Executive Officer and are hereby transferred to and shall redound to the benefit of the Company, and shall become and remain its sole and exclusive property. The Executive agrees to execute any assignments to the Company or its nominee, of the Executive's entire right, title and interest in and to any such discoveries and improvements and to execute any other instruments and documents requisite or desirable in applying for and obtaining patents, trademarks or copyrights, at the expense of the Company, with respect thereto in the United States and in all foreign countries, that may be required by the Company. The Executive further agrees, during and after the Employment Period, to cooperate to the extent and in the manner required by the Company, in the prosecution or defense of any patent or copyright claims or any litigation, or other proceeding involving any trade secrets, processes, discoveries or improvements covered by this Agreement, but all necessary expenses thereof shall be paid by the Company. (h) ACKNOWLEDGMENT AND ENFORCEMENT. (i) The Executive acknowledges and agrees that: (A) the purpose of the foregoing covenants, including without limitation the noncompetition covenants of Sections 5(d) and (e), is to protect the goodwill, trade secrets and other Confidential Information of the Company; (B) because of the nature of the business in which the Cardinal Group is engaged and because of the nature of the Confidential Information to which the Executive has access, the Company would suffer irreparable harm and it would be impractical and excessively difficult to determine the actual damages of the Cardinal Group in the event the Executive breached any of the covenants of this Section 5; and (C) remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 5 would be inadequate. The Executive therefore agrees and consents that if the Executive commits any breach of a covenant under this Section 5 or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. (ii) In addition, in the event of a violation of this Section 5, the Company shall have the right to require the Executive to pay to the Company all or any portion of the Clawback Amount (as defined below) within 30 days following written notice by the Company to the Executive (the "Company Notice") that it is imposing such requirement. The "Clawback Amount" means the sum of: A. the amount equal to the gross gain realized or obtained by the Executive resulting from the vesting of the restricted stock (the "Additional Incentive Shares") granted to the Executive pursuant to the Restricted Shares Agreement attached to the -8- Prior Agreement as Exhibit A, measured at the date of vesting (i.e., the market value of the Additional Incentive Shares on the vesting date); B. if (x) the Executive has sold or otherwise disposed of any of the Additional Incentive Shares, an amount equal to the excess of (I) the fair market value thereof on the date of the sale or disposition over (II) the fair market value thereof on the date such shares vested, and if (y) the Executive has not sold or otherwise disposed of the Additional Incentive Shares, an amount equal to the excess of (I) the fair market value thereof on the 30th day following the date of the Company Notice over (II) the fair market value thereof on the date such shares vested; and C. if the Executive has exercised any stock options granted to the Executive by the Cardinal Group (or any part thereof) within three years before a violation of Section 5(b), 5(c), 5(f) or 5(g) or within one year before a violation of Section 5(d) or 5(e), an amount equal to the gross option gain realized or obtained by the Executive or any transferee resulting from the exercise of such stock option, measured at the date of exercise (i.e., the difference between the fair market value of the purchased stock on the date of exercise and the exercise price paid by the Executive therefor). In addition to the foregoing, in the event of a violation of this Section 5, all outstanding stock options granted to the Executive by the Cardinal Group (or any part thereof) that have not been exercised shall immediately and automatically terminate, be forfeited, and cease to be exercisable at any time. (iii) With respect to any provision of this Section 5 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. If any of the covenants of this Section 5 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Cardinal Group for which the Executive may qualify, nor, subject to Section 9 below, shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Cardinal Group. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Cardinal Group on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. Notwithstanding the foregoing, the Executive waives all of the Executive's rights to receive severance payments and benefits under any severance plan, policy or practice of the -9- Cardinal Group or any entity merged with or into the Cardinal Group (or any part thereof) except to the extent provided for in this Agreement. 7. NO MITIGATION. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 8. NOTICES. (a) METHODS. Each notice, demand, request, consent, report, approval or communication (hereinafter, "Notice") which is or may be required to be given by any party to any other party in connection with this Agreement, shall be in writing, and given by facsimile, personal delivery, receipted delivery services, or by certified mail, return receipt requested, prepaid and properly addressed to the party to be served as shown in Section 8(b) below. (b) ADDRESSES. Notices shall be effective on the date sent via facsimile, the date delivered personally or by receipted delivery service, or three days after the date mailed: If to the Company: Cardinal Health, Inc. 7000 Cardinal Place Dublin, OH 43017 Attn.: Chief Legal Officer Facsimile: (614) 757-6948 If to the Executive: At the Executive's residence address most recently on the books and records of the Company. (c) CHANGES. Each party may designate by Notice to the other in writing, given in the foregoing manner, a new address to which any Notice may thereafter be so given, served or sent. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements with respect thereto, including, without limitation, the Prior Agreement. 10. SUCCESSORS. (a) EXECUTIVE. This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. -10- (b) THE COMPANY. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company may assign this Agreement to any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company that expressly agrees to assume and perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such assignment had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of Ohio, without reference to principles of conflict of laws. In addition, all legal actions or proceedings relating to this Agreement shall be brought in state or federal courts located in Franklin County, Ohio, and the parties executing this Agreement hereby consent to the personal jurisdiction of such courts. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (c) TAX WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (d) NO WAIVER. The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (e) WARRANTY. The Executive hereby warrants that the Executive is free to enter into this Agreement and to perform the services described herein. (f) HEADINGS. The Section headings contained in this Agreement are for convenience only and in no manner shall be construed as part of this Agreement. (g) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument -11- (h) SURVIVAL. The obligations under this Agreement of the Executive and the Company that by their nature and terms require (or may require) satisfaction after the end of the Employment Period shall survive such event and shall remain binding upon such parties. (i) EMPLOYMENT CONTINUATION PERIOD. The parties hereto agree and acknowledge that the Executive shall have no rights to any payments, benefits or otherwise under this Agreement during any period of the Executive's Employment Continuation other than as specifically set forth in Sections 4(c) and 4(e) of this Agreement. -12- IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization of the Human Resources and Compensation Subcommittee of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE /s/ James F. Millar ------------------------------ James F. Millar CARDINAL HEALTH, INC. By /s/ Robert D. Walter --------------------------- Robert D. Walter Chief Executive Officer -13- Exhibit A CARDINAL HEALTH, INC. NONQUALIFIED STOCK OPTION AGREEMENT Dollars at Work: $[ ] Grant Date: November 18, 2002 Exercise Price: $[ ] Vesting Date: November 18, 2005 Expiration Date: November 18, 2012 Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted James F. Millar ("Grantee"), an option (the "Option") to purchase 320,000 shares (the "Shares") of common stock in the Company for a total purchase price (typically known as Dollars at Work) of $[ ], (i.e., the equivalent of [stock price] for each full Share). The Option has been granted pursuant to the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended (the "Plan"), and shall include and be subject to all provisions of the Plan, which are hereby incorporated herein by reference, and shall be subject to the provisions of this agreement. Capitalized terms used herein which are not specifically defined herein shall have the meanings ascribed to such terms in the Plan. This option shall be exercisable at any time on or after November 18, 2005, (subject to Section 10 of the Plan with respect to acceleration of the vesting of the Option upon a Change of Control), and prior to November 18, 2012 (subject to the termination provisions of the Plan and this agreement). By:______________________________ Robert D. Walter Chairman and CEO -14- 1. METHOD OF EXERCISE AND PAYMENT OF PRICE (a) METHOD OF EXERCISE. At any time when the Option is exercisable under the Plan and this agreement, the Option shall be exercised from time to time by written notice to the Company which shall: (i) state the number of Shares with respect to which the Option is being exercised; and (ii) if the Option is being exercised by anyone other than the Grantee, be accompanied by proof satisfactory to counsel for the Company of the right of such person or persons to exercise the Option under the Plan and all applicable laws and regulations. (b) PAYMENT OF PRICE. The full exercise price for the Option shall be paid to the Company as provided in the Plan. 2. TRANSFERABILITY. The Option shall be transferable (I) at the Grantee's death, by the Grantee by will or pursuant to the laws of descent and distribution, and (II) by the Grantee during the Grantee's lifetime, without payment of consideration, to (a) the spouse, former spouse, parents, stepparents, grandparents, parents-in-law, siblings, siblings-in-law, children, stepchildren, children-in-law, grandchildren, nieces, or nephews of the Grantee, or any other persons sharing the Grantee's household (other than tenants or employees) ("Family Members"), (b) a trust or trusts for the primary benefit of the Grantee or such Family Members, (c) a foundation in which the Grantee or such Family Members control the management of assets, or (d) a partnership in which the Grantee or such Family Members are the majority or controlling partners, provided that subsequent transfers of the transferred Option shall be prohibited except (X) if the transferee is an individual, at the transferee's death by the transferee by will or pursuant to the laws of descent and distribution and (Y) without payment of consideration to the individuals or entities listed in subitems II(a), (b), or (c), above, with respect to the original Grantee. The Human Resources and Compensation Committee of the Board of Directors of the Company (the "Committee") may, in its discretion, permit transfers to other persons and entities as permitted by the Plan. Neither a transfer under a domestic relations order in settlement of marital property rights nor a transfer to an entity in which more than fifty percent of the voting interests are owned by the Grantee or Family Members in exchange for an interest in that entity shall be considered to be a transfer for consideration. Within ten days of any transfer, the Grantee shall notify the Stock Option Administrator of the Company in writing of the transfer. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer and, except as otherwise provided in the Plan or this agreement, references to the original Grantee shall be deemed to refer to the transferee. The events of termination of employment of the Grantee provided in item 3 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods, specified in item 3. The Company shall have no obligation to notify any transferee of the Grantee's termination of employment with the Company for any reason. The conduct prohibited of Grantee in items 5 and 6 hereof -15- shall continue to be prohibited of Grantee following transfer to the same extent as immediately prior to transfer and the Option (or its economic value, as applicable) shall be subject to forfeiture by the transferee and recoupment from the Grantee to the same extent as would have been the case of the Grantee had the Option not been transferred. The Grantee shall remain subject to the recoupment provisions of items 5 and 6 of this agreement and tax withholding provisions of Section 13(d) of the Plan following transfer of the Option. 3. TERMINATION OF RELATIONSHIP. (a) TERMINATION BY DEATH. If the Grantee's employment by the Company and its subsidiaries (collectively, the "Cardinal Group") terminates by reason of death, then, unless otherwise determined by the Committee within sixty days of such death, any unvested portion of the Option shall vest upon and become exercisable in full from and after the sixtieth day after such death. The Option may thereafter be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee 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 the Option, whichever period is shorter. (b) TERMINATION WITHOUT CAUSE OR BY REASON OF DISABILITY OR RETIREMENT. For purposes of this agreement, the period beginning on the date the Option first vests and the expiration of the term of the Option is referred to as the "Exercise Period." (i) RETIREMENT. In the event of the Grantee's retirement from the Cardinal Group from and after November 18, 2003, then, notwithstanding anything else in this agreement to the contrary, a pro-rata portion of the Option shall vest on the Vesting Date set forth on page 1 of this agreement as follows: (V) if the Grantee retires on or after November 18, 2003 but prior to May 18, 2004, the Option shall vest on the Vesting Date with respect to 33,000 Shares; (W) if the Grantee retires after May 18, 2004 but prior to November 18, 2004, the Option shall vest on the Vesting Date with respect to 67,000 Shares; (X) if the Grantee retires after November 18, 2004 but prior to May 18, 2005, the Option shall vest on the Vesting Date with respect to 120,000 Shares; (Y) if the Grantee retires after May 18, 2005 but prior to November 18, 2005, the Option shall vest on the Vesting Date with respect to 170,000 Shares; and (Z) if the Grantee retires on or after November 18, 2005, the Option will be fully vested; and, in each such case, the portion of the Option that is vested may thereafter be exercised by the Grantee (or any transferee, if applicable) until the expiration of the stated term of the Option. Notwithstanding the foregoing, if the Grantee dies after such retirement but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, the pro-rata portion of Shares with respect to the Option that would have vested pursuant to the immediately previous sentence on the Vesting Date based upon the date of the Grantee's retirement hereunder shall vest upon, and the Option may -16- be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee from and after, the sixtieth day after such death 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 Exercise Period, whichever period is shorter. (ii) DISABILITY. If Grantee's employment with the Cardinal Group is terminated due to disability (as defined in the Plan) or Incapacity (as defined in the Employment Agreement dated as of November 13, 2002 between the Company and Grantee (the "Employment Agreement"), then any unvested portion of the Option will vest on the Vesting Date indicated on the first page of this agreement and may thereafter be exercised by the Grantee (or any transferee, if applicable) until the expiration of the stated term of the Option. Notwithstanding the foregoing, if the Grantee dies after such disability or Incapacity but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, any unvested portion of the Option shall vest upon, and the Option may be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee from and after, the sixtieth day after such death 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 Exercise Period, whichever period is shorter. (iii) TERMINATION WITHOUT CAUSE. If the Grantee's employment by the Cardinal Group is terminated without Cause (as used in this agreement, "Cause" shall have the meaning set forth in the Employment Agreement), then any vested and unexercised portion of the Option may thereafter be exercised by the Grantee (or any transferee, if applicable) until the expiration of the Exercise Period, and any portion of the Option that is unvested as of the date of such termination shall be forfeited; PROVIDED, HOWEVER, that if such termination without Cause occurs after January 31, 2003, then a pro-rata portion of the Option shall vest on the Vesting Date set forth on page 1 of this agreement as follows: (V) if such termination occurs on or after November 18, 2003 but prior to May 18, 2004, the Option shall vest on the Vesting Date with respect to 33,000 Shares; (W) if such termination occurs after May 18, 2004 but prior to November 18, 2004, the Option shall vest on the Vesting Date with respect to 67,000 Shares; (X) if such termination occurs after November 18, 2004 but prior to May 18, 2005, the Option shall vest on the Vesting Date with respect to 120,000 Shares; (Y) if such termination occurs after May 18, 2005 but prior to November 18, 2005, the Option shall vest on the Vesting Date with respect to 170,000 Shares; and (Z) if such termination occurs on or after November 18, 2005, the Option will be fully vested; and PROVIDED, FURTHER, that if such termination occurs following a change in corporate structure or personnel of the -17- Company (or similar event) which results in the Executive ceasing to report directly to Robert D. Walter prior to such termination, the remaining unvested portion of the Option shall vest and become exercisable on the Vesting Date, and shall remain exercisable thereafter for the remainder of the Exercise Period. Notwithstanding the foregoing, if the Grantee dies after such termination without Cause but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, any unvested portion of the Option shall vest upon, and the Option may be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee from and after, the sixtieth day after such death 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 Exercise Period, whichever period is shorter. (c) TERMINATION BY THE CARDINAL GROUP FOR CAUSE. If the Grantee's employment by the Cardinal Group is terminated for Cause, all outstanding Options that have not been exercised shall immediately and automatically terminate, be forfeited, and cease to be exercisable at any time without regard to whether such Options are vested. (d) OTHER TERMINATION OF EMPLOYMENT. If the Grantee's employment by the Cardinal Group terminates for any reason other than death, retirement, disability, Incapacity or termination by the Company with or without Cause (subject to Section 10 of the Plan regarding acceleration of the vesting of the Option upon a Change of Control), any unexercised portion of the Option 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 Grantee (or any transferee, if applicable) will have ninety days (or such other period as the Committee may specify at or after grant or termination) from the date of termination or until the expiration of the stated term of the Option, whichever period is shorter, to exercise any portion of the Option that is then vested and exercisable on the date of termination. 4. RESTRICTIONS ON EXERCISE. The Option is subject to all restrictions in this agreement and/or in the Plan, and is subject to the covenants contained in Section 5 of the Employment Agreement. As a condition of any exercise of the Option, the Company may require the Grantee or his transferee or successor to make any representation and warranty to comply with any applicable law or regulation or to confirm any factual matters (including Grantee's compliance with the terms of items 5 and 6 of this agreement or any employment or severance agreement between any member of the Cardinal Group and the Grantee, including without limitation the terms of Section 5 of the Employment Agreement) reasonably requested by the Company. 5. TRIGGERING CONDUCT/COMPETITOR TRIGGERING CONDUCT. As used in this agreement, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the -18- performance of duties assigned by the Cardinal Group any confidential information, trade secrets or other business sensitive information or material concerning the Cardinal Group; violation of Company policies, including conduct which would constitute a breach of any of the Certificates of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies signed by the Grantee, directly or indirectly employing, contacting concerning employment or participating in any way in the recruitment for employment (whether as an employee, officer, director, agent, consultant or independent contractor) any person who was or is an employee, representative, officer or director of the Cardinal Group at any time within the twelve months prior to the termination of Grantee's employment with the Cardinal Group; any action by Grantee and/or his representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers and/or potential customers, vendors and/or suppliers that were known to Grantee, and breaching any provision of any employment or severance agreement with a member of the Cardinal Group, including, without limitation, the terms of Section 5 of the Employment Agreement. As used herein, "Competitor Triggering Conduct" shall include, either during Grantee's employment or within two years following Grantee's termination of employment with the Cardinal Group, accepting employment with or serving as a consultant, advisor, or in any other capacity to an entity that is in competition with the business conducted by any member of the Cardinal Group (a "Competitor"), including, but not limited to, employment or another business relationship with any Competitor if Grantee has been introduced to trade secrets, confidential information or business sensitive information during Grantee's employment with the Cardinal Group and such information would aid the Competitor because the threat of disclosure of such information is so great that, for purposes of this agreement, it must be assumed that such disclosure would occur. 6. SPECIAL FORFEITURE/REPAYMENT RULES For so long as Grantee continues as an employee with the Cardinal Group and for three years following Grantee's termination of employment with the Cardinal Group regardless of the reason, Grantee agrees not to engage in Triggering Conduct. If Grantee engages in such Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period set forth in Section 5 above, then: (a) the Option (or any part thereof that has not been exercised) shall immediately and automatically terminate, be forfeited, and shall cease to be exercisable at any time; and (b) the Grantee shall, within 30 days following written notice from the Company, pay the Company an amount equal to the gross option gain realized or obtained by the Grantee or any transferee resulting from the exercise of such Option, measured at the date of exercise (i.e., the difference between the market value of the Option Shares on the exercise date and the exercise price paid for such Option Shares), with respect to any portion of the Option that has already been exercised at any time within three years prior to the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages only in Competitor Triggering Conduct, then the Look-Back Period shall be shortened to exclude any period more than one year prior -19- to Grantee's termination of employment with the Cardinal Group, but including any period between the time of Grantee's termination and engagement in Competitor Triggering Conduct. The Grantee may be released from Grantee's obligations under this item 6 only if the Committee (or its duly appointed designee) determines, in writing and in its sole discretion, that such action is in the best interests of the Company. Nothing in this item 6 constitutes a so-called "noncompete" covenant. However, this item 6 does prohibit certain conduct while Grantee is associated with the Cardinal Group and thereafter and does provide for the forfeiture or repayment of the benefits granted by this agreement under certain circumstances, including but not limited to the Grantee's acceptance of employment with a Competitor. Grantee agrees to provide the Company with at least ten days written notice prior to directly or indirectly accepting employment with or serving as a consultant, advisor, or in any other capacity to a Competitor, and further agrees to inform any such new employer, before accepting employment, of the terms of this item 6 and the Grantee's continuing obligations contained herein. No provisions of this agreement shall diminish, negate, or otherwise impact any separate noncompete or other agreement to which Grantee may be a party, including but not limited to any of the Certificates of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies. Grantee acknowledges and agrees that the provisions contained in this item 6 are being made for the benefit of the Company in consideration of Grantee's receipt of the Option, in consideration of employment, in consideration of exposing Grantee to the Company's business operations and confidential information, and for other good and valuable consideration, the adequacy of which consideration is hereby expressly confirmed. Grantee further acknowledges that the receipt of the Option and execution of this agreement are voluntary actions on the part of Grantee, and that the Company is unwilling to provide the Option to Grantee without including this item 6. Further, the parties agree and acknowledge that the provisions contained in items 5 and 6 are material provisions to and part of an otherwise enforceable agreement at the time the agreement is made. 7. RIGHT OF SET-OFF. By accepting this Option, the Grantee consents to a deduction from and set-off against any amounts owed to the Grantee by any member of the Cardinal Group from time to time (including but not limited to amounts owed to the Grantee as wages, severance payments, or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by the Grantee under this agreement. 8. GOVERNING LAW/VENUE. This agreement shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of law, except to the extent superceded by the laws of the United States of America. The parties agree and acknowledge that the laws of the State of Ohio bear a substantial relationship to the parties and/or this agreement and that the Option and benefits granted herein would not be granted without the governance of this agreement by the laws of the State of Ohio. In addition, all legal actions or proceedings relating to this agreement shall be brought in state or federal courts located in Franklin County, Ohio, and the parties executing this agreement hereby consent to the personal jurisdiction of such courts. Grantee acknowledges that the covenants contained in items 5 and 6 of this agreement are reasonable in nature, are fundamental for the protection of the Company's legitimate business -20- and proprietary interests, and do not adversely affect the Grantee's ability to earn a living in any capacity that does not violate such covenants. The parties further agree that in the event of any violation by Grantee of any such covenants, the Company will suffer immediate and irreparable injury for which there is no adequate remedy at law. In the event of any violation or attempted violations of item 5 or 6 of this agreement, the Company shall be entitled to specific performance and injunctive relief or other equitable relief without any showing of irreparable harm or damage, and Grantee hereby waives any requirement for the securing or posting of any bond in connection with such remedy, without prejudice to the rights and remedies afforded the Company hereunder or by law. In the event that it becomes necessary for the Company to institute legal proceedings under this agreement, Grantee shall be responsible to the Company for all costs and reasonable legal fees incurred by the Company with regard to such proceedings. Any provision of this agreement which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such provision, without invalidating or rendering unenforceable the remaining provisions of this agreement. 9. ACTION BY THE COMMITTEE. The parties agree that the interpretation of this agreement shall rest exclusively and completely within the good faith province and discretion of the Committee. The parties agree to be bound by the decisions of the Committee with regard to the interpretation of this agreement and with regard to any and all matters set forth in this agreement. The Committee may delegate its functions under this agreement to an officer of the Cardinal Group designated by the Committee (hereinafter the "designee"). In fulfilling its responsibilities hereunder, the Committee or its designee may rely upon documents, written statements of the parties, or such other material as the Committee or its designee deems appropriate. The parties agree that there is no right to be heard or to appear before the Committee or its designee and that any decision of the Committee or its designee relating to this agreement, including without limitation whether particular conduct constitutes Triggering Conduct or Competitor Triggering Conduct, shall be final and binding unless such decision is arbitrary and capricious. -21- ACCEPTANCE OF AGREEMENT The Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either been previously delivered or is provided with this agreement, and represents that he is familiar with and understands all provisions of the Plan and this agreement; and (b) voluntarily and knowingly accepts this agreement and the Option granted to him under this agreement subject to all provisions of the Plan and this agreement. The Grantee further acknowledges receiving a copy of the Company's most recent Annual Report and other communications routinely distributed to the Company's shareholders and a copy of the Plan Description dated August 8, 2001 pertaining to the Plan. ---------------------------------- Signature ---------------------------------- Print Name ---------------------------------- Grantee's Social Security Number ---------------------------------- Date -22- EX-10.02 4 l96924aexv10w02.txt EXHIBIT 10.02 Exhibit 10.02 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated and effective as of November 13, 2002 (the "Effective Date") is made and entered into by and between Cardinal Health, Inc., an Ohio corporation (the "Company"), and George L. Fotiades (the "Executive"). WHEREAS, the Company and the Executive are parties to that certain Employment Agreement dated as of February 9, 2000 (the "Prior Agreement"); and WHEREAS, the Company and the Executive desire to set forth in a written agreement the terms and conditions under which the Executive will render services to the Company that will replace and supercede the Prior Agreement from and after the Effective Date. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, agree as follows: 1. EMPLOYMENT PERIOD. The Company shall employ, or shall cause one of its subsidiaries or affiliates to employ, the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, during the three-year period beginning on the Effective Date and ending on the third (3rd) anniversary of the Effective Date, unless prior to such date the employment of the Executive is terminated in accordance with Section 4 of this Agreement (such period, the "Employment Period"). For purposes of this Agreement, any reference to the "Company" shall mean, where appropriate, the actual Cardinal subsidiary or affiliate that employs the Executive. The Employment Period may be extended by mutual written agreement of the parties. The parties hereto agree and acknowledge that the Prior Agreement is and shall be considered terminated and superceded by this Agreement from and after the Effective Date. 2. POSITION AND DUTIES. (a) During the Employment Period, the Executive shall serve as President and Chief Executive Officer--Life Sciences Products and Services, with the duties and responsibilities customarily assigned to such position, and such other duties and responsibilities as the Chief Executive Officer of the Company shall from time to time assign to the Executive; PROVIDED that the Company may change the Executive's title, duties and responsibilities (including reporting responsibilities) at any time without violating this provision, so long as the Executive remains in an executive position. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled under the practices and policies of the Company as in effect from time to time, the Executive shall devote the Executive's full business attention and time to the business and affairs of the Company, and shall use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate boards or committees with the prior consent of the Chief Executive Officer of the Company, (B) serve on civic or charitable boards or committees, (C) deliver lectures, fulfill speaking engagements or teach at educational institutions and (D) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (c) As of the Effective Date, the Executive's services shall be performed primarily at the Company's offices located in Basking Ridge or Somerset, New Jersey; PROVIDED, HOWEVER, that, within a reasonable period of time after the Effective Date (such time period as mutually determined and agreed between the Company and the Executive), the Company's corporate headquarters in Dublin, Ohio will become the Executive's principal place of employment under this Agreement. 3. COMPENSATION. (a) SALARY. During the Employment Period, as compensation for the Executive's services hereunder, the Company shall pay to the Executive an annual base salary (the "Base Salary") at the rate of not less than $540,000, payable at such times and intervals as the Company customarily pays the base salaries of its other executive employees; PROVIDED that the Base Salary may be reduced as part of a reduction that applies proportionately to all employees who are otherwise similar to the Executive with respect to amount of compensation and level of managerial responsibility before such reduction. (b) ANNUAL BONUS. In addition to the Base Salary, during the Employment Period the Executive shall be eligible to receive an annual bonus (an "Annual Bonus") determined and paid at the sole discretion of the Company pursuant to the terms and conditions of the Company bonus plan for which the Executive is then eligible, as such plan is in effect from time to time, or any successor thereto (the "Bonus Plan"). The parties hereto agree and acknowledge that the Executive's Annual Bonus target under this Agreement shall be equal to one hundred and thirty percent (130%) of the Base Salary. (c) OPTION GRANT. As of November 18, 2002, the Company shall grant the Executive an option to purchase 250,000 common shares, without par value, of the Company (the "Option") pursuant to the terms and conditions set forth in the Nonqualified Stock Option Agreement attached to this Agreement as Exhibit A (the "Option Agreement"). The Executive acknowledges and agrees that he will not be eligible to receive annual grants of options to purchase common shares of the Company during the Company's fiscal 2003, 2004 and 2005 years, unless any such grant is authorized by the Human Resources and Compensation Subcommittee of the Board of Directors of the Company. (d) EMPLOYEE BENEFITS. During the Employment Period, the Executive shall be entitled to receive employee benefits (including, without limitation, medical, life insurance and other welfare benefits and benefits under retirement and savings plans) and vacation to -2- the same extent as, and on the same terms and conditions as, other similarly situated executives of the Company from time to time. (e) EXPENSES. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive during the Employment Period in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company then applicable to the Executive for submission of expense reports, receipts, or similar documentation of such expenses. (f) RELOCATION BENEFITS. The Company shall provide the Executive with relocation benefits in connection with the relocation of himself, his family and his possessions from New Jersey to the Dublin, Ohio area. Such relocation benefits shall be provided pursuant to the Company's standard relocation policy for similarly situated executives. 4. EMPLOYMENT TERMINATION. (a) TERMINATION BY THE COMPANY. During the Employment Period, the Executive's employment may be terminated by the Company under any of the following circumstances: (i) upon the inability of the Executive to perform the essential functions of his position with or without reasonable accommodation, which inability continues for a consecutive period of 120 days or longer or an aggregate period of 180 days or longer ("Incapacity"), in either instance during the Employment Period; (ii) for "Cause," defined as (A) any willful or grossly negligent conduct by Executive that demonstrably and materially injures the Company; (B) any act by the Executive of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any subsidiary; (C) the Executive being convicted of, confessing to, or becoming the subject of proceedings that provide a reasonable basis for the Company to believe the Executive has engaged in, a felony or any crime involving dishonesty or moral turpitude; (D) the Executive's intentional and repeated violation of the written policies or procedures of the Company; (E) the Executive violating any provision of Section 5 of this Agreement; or (F) the Executive's willful and continued failure for a significant period of time to perform Executive's duties; and (iii) for any other reason (a termination without "Cause"). The Company shall give the Executive notice of termination specifying which of the foregoing provisions is applicable and (in the case of clause (i) or (ii)) the factual basis therefor, and the termination shall be effective upon the 30th day after such notice is given (hereinafter, the date on which the Executive ceases to be an employee of the Company for any reason (including, without limitation, by action of the Executive), whether or not during the Employment Period, is referred to as the "Date of Termination"). (b) TERMINATION BY THE EXECUTIVE. The Executive may terminate his employment during the Employment Period for any reason upon 30 days advanced written notice to the Company. (c) CONSEQUENCES OF TERMINATION BY THE COMPANY WITHOUT CAUSE. (i) If the Executive is terminated by the Company without Cause during the Employment Period, -3- or, (ii) if, in the event of the expiration of the Employment Period, the Executive continues employment with the Company beyond the date of the expiration of the Employment Period (hereinafter defined as the Executive's period of "Employment Continuation"), and under such circumstances the Executive is terminated without Cause during the Executive's Employment Continuation and prior to the fifth anniversary of the Effective Date, then in either case, the Executive shall not be entitled to any further compensation or benefits provided for under this Agreement except (x) as provided in the Option Agreement and (y) as provided in the following sentence. Under such circumstance, the Company shall: (i) pay to the Executive an amount equal to two times the sum of (x) the Executive's Base Salary, at the rate in effect on the day immediately prior to the Date of Termination and (y) the Executive's Annual Bonus target for the fiscal year of the Company in which the Date of Termination occurs, such amount to be paid monthly in equal installments over the twenty-four (24) month period immediately following the Date of Termination; and (ii) provide the vested benefits, if any, required to be paid or provided by law. For the avoidance of doubt, in the event of the Executive's termination without Cause during the Executive's Employment Continuation, the Executive shall only receive severance benefits pursuant to this Section 4(c) if he does not receive severance benefits upon or after the expiration of the Employment Period under this Agreement or otherwise. In addition, notwithstanding anything in the Option Agreement to the contrary, in the event that the Company terminates the Executive without Cause during the Employment Period following a change in corporate structure or personnel of the Company (or similar event) which results in the Executive ceasing to report directly to Robert D. Walter prior to such termination, the entire Option shall vest and become exercisable on the Vesting Date set forth on page 1 of the Option Agreement, and shall remain exercisable thereafter for the remainder of the term of the Option. Notwithstanding the foregoing, the Company's obligations to the Executive under this Section 4(c) shall immediately terminate, and the Executive shall not be entitled to any further compensation or benefits provided for under this Agreement or the Option Agreement in the event that the Executive violates any of the provisions of Section 5 of this Agreement. (d) OTHER EMPLOYMENT TERMINATIONS. If, during the Employment Period, the Executive's employment is terminated for any reason other than by the Company without Cause, including, without limitation, termination by the Executive, the Executive's retirement, Incapacity, death, or termination by the Company for Cause (subject only to Section 4(e) of this Agreement), the Executive shall not be entitled to any compensation provided for under this Agreement, other than (i) the Base Salary through the Date of Termination; (ii) benefits under any long-term disability insurance coverage in the case of termination because of Incapacity; (iii) vested benefits, if any, required to be paid or provided by law; and (iv) the benefits provided for under the Option Agreement, if any. -4- (e) TERMINATION AFTER A CHANGE OF CONTROL. In the event that during the Employment Period, or during the Executive's Employment Continuation but prior to the fifth anniversary of the Effective Date (i) the Executive's employment is terminated by the Company within one year after a "Change of Control" (as defined in the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended from time to time, or any successor plan thereto) for any reason other than because of the Executive's death, retirement, Incapacity or by the Company for Cause, or (ii) the Executive has experienced a material diminution of his duties under Section 2(a) of this Agreement, other than actions that are not taken in bad faith and are remedied by the Company within ten business days after receipt of written notice thereof from the Executive, and as a result the Executive terminates his employment within one year after a Change of Control (as so defined), then the Company shall pay to the Executive the severance payments and benefits as set forth in Section 4(c) of this Agreement. 5. COVENANTS. (a) INTRODUCTION. The parties acknowledge that the provisions and covenants contained in this Section 5 are ancillary and material to this Agreement and the Option Agreement and that the limitations contained herein are reasonable in geographic and temporal scope and do not impose a greater restriction or restraint than is necessary to protect the goodwill and other legitimate business interests of the Company. The parties also acknowledge and agree that the provisions of this Section 5 do not adversely affect the Executive's ability to earn a living in any capacity that does not violate the covenants contained herein. The parties further acknowledge and agree that the provisions of Section 11(a) below are accurate and necessary because (i) this Agreement is entered into in the State of Ohio, (ii) Ohio has a substantial relationship to the parties and to this transaction, (iii) Ohio is the headquarters state of the Company, which has operations nationwide and has a compelling interest in having its employees treated uniformly within the United States, (iv) the use of Ohio law provides certainty to the parties in any covenant litigation in the United States, and (v) enforcement of the provision of this Section 5 would not violate any fundamental public policy of Ohio or any other jurisdiction. (b) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company and all of its subsidiaries, partnerships, joint ventures, limited liability companies, and other affiliates (collectively, the "Cardinal Group"), all secret or confidential information, knowledge or data relating to the Cardinal Group and its businesses (including, without limitation, any proprietary and not publicly available information concerning any processes, methods, trade secrets, research, secret data, costs, names of users or purchasers of their respective products or services, business methods, operating procedures or programs or methods of promotion and sale) that the Executive has obtained or obtains during the Executive's employment by the Cardinal Group and that is not public knowledge (other than as a result of the Executive's violation of this Section 5(b)) ("Confidential Information"). For the purposes of this Section 5(b), information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Cardinal Group, except with the prior written consent of the -5- Cardinal Group, as applicable, or as otherwise required by law or legal process. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or the Cardinal Group, as applicable, and shall be turned over to the applicable Cardinal Group company upon termination of the Executive's employment. (c) NON-RECRUITMENT OF EMPLOYER'S EMPLOYEES, ETC. Executive shall not, at any time during the Restricted Period (as defined in this Section 5(c)), without the prior written consent of Cardinal Health, Inc., directly or indirectly, contact, solicit, recruit, or employ (whether as an employee, officer, director, agent, consultant or independent contractor) any person who was or is at any time during the previous twenty four months an employee, representative, officer or director of the Cardinal Group. Further, during the Restricted Period, Executive shall not take any action that could reasonably be expected to have the effect of encouraging or inducing any employee, representative, officer or director of the Cardinal Group to cease their relationship with the Cardinal Group for any reason. This provision does not apply to recruitment of employees within or for the Cardinal Group. The "Restricted Period" means the period of Executive's employment with the Cardinal Group and the additional period that ends 24 months after the Executive's Date of Termination. (d) NO COMPETITION--SOLICITATION OF BUSINESS. During the Restricted Period, the Executive shall not (either directly or indirectly or as an officer, agent, employee, partner or director of any other company, partnership or entity) solicit, service, or accept on behalf of any competitor of the Cardinal Group the business of (i) any customer of the Cardinal Group at the time of the Executive's employment or Date of Termination, or (ii) potential customer of the Cardinal Group which the Executive knew to be an identified, prospective purchaser of services or products of the Cardinal Group. (e) NO COMPETITION--EMPLOYMENT BY COMPETITOR. During the Restricted Period, the Executive shall not invest in (other than in a publicly traded company with a maximum investment of no more than 1% of outstanding shares), counsel, advise, or be otherwise engaged or employed by, any entity or enterprise that competes with the Cardinal Group, by developing, manufacturing or selling any product or service of a type, respectively, developed, manufactured or sold by the Cardinal Group. (f) NO DISPARAGEMENT. (i) The Executive shall at all times refrain from taking actions or making statements, written or oral, that (A) denigrate, disparage or defame the goodwill or reputation of the Cardinal Group or any of its trustees, officers, security holders, partners, agents or former or current employees and directors, or (B) are intended to, or may be reasonably expected to, adversely affect the morale of the employees of the Cardinal Group. The Executive further agrees not to make any negative statements to third parties relating to the Executive's employment or any aspect of the businesses of the Cardinal Group and not to make any statements to third parties about the circumstances of the termination of the Executive's employment, or about the Cardinal Group or its trustees, officers, security -6- holders, partners, agents or former or current employees and directors, except as may be required by a court or governmental body. (ii) The Executive further agrees that, following termination of employment for any reason, the Executive shall assist and cooperate with the Company with regard to any matter or project in which the Executive was involved during the Executive's employment with the Company, including but not limited to any litigation that may be pending or arise after such termination of employment. Further, the Executive agrees to notify the Company at the earliest opportunity of any contact that is made by any third parties concerning any such matter or project. The Company shall not unreasonably request such cooperation of Executive and shall compensate the Executive for any lost wages or expenses associated with such cooperation and assistance. (g) INVENTIONS. All plans, discoveries and improvements, whether patentable or unpatentable, made or devised by the Executive, whether alone or jointly with others, from the date of the Executive's initial employment by the Company and continuing until the end of the Employment Period and any subsequent period when the Executive is employed by the Cardinal Group, relating or pertaining in any way to the Executive's employment with or the business of the Cardinal Group, shall be promptly disclosed in writing to the Chief Executive Officer and are hereby transferred to and shall redound to the benefit of the Company, and shall become and remain its sole and exclusive property. The Executive agrees to execute any assignments to the Company or its nominee, of the Executive's entire right, title and interest in and to any such discoveries and improvements and to execute any other instruments and documents requisite or desirable in applying for and obtaining patents, trademarks or copyrights, at the expense of the Company, with respect thereto in the United States and in all foreign countries, that may be required by the Company. The Executive further agrees, during and after the Employment Period, to cooperate to the extent and in the manner required by the Company, in the prosecution or defense of any patent or copyright claims or any litigation, or other proceeding involving any trade secrets, processes, discoveries or improvements covered by this Agreement, but all necessary expenses thereof shall be paid by the Company. (h) ACKNOWLEDGMENT AND ENFORCEMENT. (i) The Executive acknowledges and agrees that: (A) the purpose of the foregoing covenants, including without limitation the noncompetition covenants of Sections 5(d) and (e), is to protect the goodwill, trade secrets and other Confidential Information of the Company; (B) because of the nature of the business in which the Cardinal Group is engaged and because of the nature of the Confidential Information to which the Executive has access, the Company would suffer irreparable harm and it would be impractical and excessively difficult to determine the actual damages of the Cardinal Group in the event the Executive breached any of the covenants of this Section 5; and (C) remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 5 would be inadequate. The Executive therefore agrees and consents that if the Executive commits any breach of a covenant under this Section 5 or threatens to commit any such breach, the Company shall have the right (in addition to, and not -7- in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. (ii) In addition, in the event of a violation of this Section 5, the Company shall have the right to require the Executive to pay to the Company all or any portion of the Clawback Amount (as defined below) within 30 days following written notice by the Company to the Executive (the "Company Notice") that it is imposing such requirement. The "Clawback Amount" means the sum of: A. the amount equal to the gross gain realized or obtained by the Executive resulting from the vesting of the restricted stock (the "Additional Incentive Shares") granted to the Executive pursuant to the Restricted Shares Agreement attached to the Prior Agreement as Exhibit A, measured at the date of vesting (i.e., the market value of the Additional Incentive Shares on the vesting date); B. if (x) the Executive has sold or otherwise disposed of any of the Additional Incentive Shares, an amount equal to the excess of (I) the fair market value thereof on the date of the sale or disposition over (II) the fair market value thereof on the date such shares vested, and if (y) the Executive has not sold or otherwise disposed of the Additional Incentive Shares, an amount equal to the excess of (I) the fair market value thereof on the 30th day following the date of the Company Notice over (II) the fair market value thereof on the date such shares vested; and C. if the Executive has exercised any stock options granted to the Executive by the Cardinal Group under the Cardinal Health, Inc. Equity Incentive Plan within three years before a violation of Section 5(b), 5(c), 5(f) or 5(g) or within one year before a violation of Section 5(d) or 5(e), an amount equal to the gross option gain realized or obtained by the Executive or any transferee resulting from the exercise of such stock option, measured at the date of exercise (i.e., the difference between the fair market value of the purchased stock on the date of exercise and the exercise price paid by the Executive therefor). In addition to the foregoing, in the event of a violation of this Section 5, all outstanding stock options granted to the Executive by the Cardinal Group under the Cardinal Health, Inc. Equity Incentive Plan that have not been exercised shall immediately and automatically terminate, be forfeited, and cease to be exercisable at any time. (iii) With respect to any provision of this Section 5 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. If any of the covenants of this Section 5 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant -8- in any other jurisdiction. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Cardinal Group for which the Executive may qualify, nor, subject to Section 9 below, shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Cardinal Group. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Cardinal Group on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. Notwithstanding the foregoing, the Executive waives all of the Executive's rights to receive severance payments and benefits under any severance plan, policy or practice of the Cardinal Group or any entity merged with or into the Cardinal Group (or any part thereof) except to the extent provided for in this Agreement. 7. NO MITIGATION. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 8. NOTICES. (a) METHODS. Each notice, demand, request, consent, report, approval or communication (hereinafter, "Notice") which is or may be required to be given by any party to any other party in connection with this Agreement, shall be in writing, and given by facsimile, personal delivery, receipted delivery services, or by certified mail, return receipt requested, prepaid and properly addressed to the party to be served as shown in Section 8(b) below. (b) ADDRESSES. Notices shall be effective on the date sent via facsimile, the date delivered personally or by receipted delivery service, or three days after the date mailed: If to the Company: Cardinal Health, Inc. 7000 Cardinal Place Dublin, OH 43017 Attn.: Chief Legal Officer Facsimile: (614) 757-6948 If to the Executive: At the Executive's residence address most recently on the books and records of the Company. -9- (c) CHANGES. Each party may designate by Notice to the other in writing, given in the foregoing manner, a new address to which any Notice may thereafter be so given, served or sent. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements with respect thereto, including, without limitation, the Prior Agreement. 10. SUCCESSORS. (a) EXECUTIVE. This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) THE COMPANY. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company may assign this Agreement to any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company that expressly agrees to assume and perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such assignment had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of Ohio, without reference to principles of conflict of laws. In addition, all legal actions or proceedings relating to this Agreement shall be brought in state or federal courts located in Franklin County, Ohio, and the parties executing this Agreement hereby consent to the personal jurisdiction of such courts. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (c) TAX WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. -10- (d) NO WAIVER. The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (e) WARRANTY. The Executive hereby warrants that the Executive is free to enter into this Agreement and to perform the services described herein. (f) HEADINGS. The Section headings contained in this Agreement are for convenience only and in no manner shall be construed as part of this Agreement. (g) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument (h) SURVIVAL. The obligations under this Agreement of the Executive and the Company that by their nature and terms require (or may require) satisfaction after the end of the Employment Period shall survive such event and shall remain binding upon such parties. (i) EMPLOYMENT CONTINUATION PERIOD. The parties hereto agree and acknowledge that the Executive shall have no rights to any payments, benefits or otherwise under this Agreement during any period of the Executive's Employment Continuation other than as specifically set forth in Sections 4(c) and 4(e) of this Agreement. -11- IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization of the Human Resources and Compensation Subcommittee of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE /s/ George L. Fotiades ----------------------------------- George L. Fotiades CARDINAL HEALTH, INC. By /s/ Robert D. Walter -------------------------------- Robert D. Walter Chief Executive Officer -12- Exhibit A CARDINAL HEALTH, INC. NONQUALIFIED STOCK OPTION AGREEMENT Dollars at Work: $[ ] Grant Date: November 18, 2002 Exercise Price: $[ ] Vesting Date: November 18, 2005 Expiration Date: November 18, 2012 Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted George L. Fotiades ("Grantee"), an option (the "Option") to purchase 250,000 shares (the "Shares") of common stock in the Company for a total purchase price (typically known as Dollars at Work) of $[ ], (i.e., the equivalent of [stock price] for each full Share). The Option has been granted pursuant to the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended (the "Plan"), and shall include and be subject to all provisions of the Plan, which are hereby incorporated herein by reference, and shall be subject to the provisions of this agreement. Capitalized terms used herein which are not specifically defined herein shall have the meanings ascribed to such terms in the Plan. This option shall be exercisable at any time on or after November 18, 2005, (subject to Section 10 of the Plan with respect to acceleration of the vesting of the Option upon a Change of Control), and prior to November 18, 2012 (subject to the termination provisions of the Plan and this agreement). By:__________________________ Robert D. Walter Chairman and CEO -13- 1. METHOD OF EXERCISE AND PAYMENT OF PRICE (a) METHOD OF EXERCISE. At any time when the Option is exercisable under the Plan and this agreement, the Option shall be exercised from time to time by written notice to the Company which shall: (i) state the number of Shares with respect to which the Option is being exercised; and (ii) if the Option is being exercised by anyone other than the Grantee, be accompanied by proof satisfactory to counsel for the Company of the right of such person or persons to exercise the Option under the Plan and all applicable laws and regulations. (b) PAYMENT OF PRICE. The full exercise price for the Option shall be paid to the Company as provided in the Plan. 2. TRANSFERABILITY. The Option shall be transferable (I) at the Grantee's death, by the Grantee by will or pursuant to the laws of descent and distribution, and (II) by the Grantee during the Grantee's lifetime, without payment of consideration, to (a) the spouse, former spouse, parents, stepparents, grandparents, parents-in-law, siblings, siblings-in-law, children, stepchildren, children-in-law, grandchildren, nieces, or nephews of the Grantee, or any other persons sharing the Grantee's household (other than tenants or employees) ("Family Members"), (b) a trust or trusts for the primary benefit of the Grantee or such Family Members, (c) a foundation in which the Grantee or such Family Members control the management of assets, or (d) a partnership in which the Grantee or such Family Members are the majority or controlling partners, provided that subsequent transfers of the transferred Option shall be prohibited except (X) if the transferee is an individual, at the transferee's death by the transferee by will or pursuant to the laws of descent and distribution and (Y) without payment of consideration to the individuals or entities listed in subitems II(a), (b), or (c), above, with respect to the original Grantee. The Human Resources and Compensation Committee of the Board of Directors of the Company (the "Committee") may, in its discretion, permit transfers to other persons and entities as permitted by the Plan. Neither a transfer under a domestic relations order in settlement of marital property rights nor a transfer to an entity in which more than fifty percent of the voting interests are owned by the Grantee or Family Members in exchange for an interest in that entity shall be considered to be a transfer for consideration. Within ten days of any transfer, the Grantee shall notify the Stock Option Administrator of the Company in writing of the transfer. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer and, except as otherwise provided in the Plan or this agreement, references to the original Grantee shall be deemed to refer to the transferee. The events of termination of employment of the Grantee provided in item 3 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods, specified in item 3. The Company shall have no obligation to notify any transferee of the Grantee's termination of employment with the Company for any reason. The conduct prohibited of Grantee in items 5 and 6 hereof -14- shall continue to be prohibited of Grantee following transfer to the same extent as immediately prior to transfer and the Option (or its economic value, as applicable) shall be subject to forfeiture by the transferee and recoupment from the Grantee to the same extent as would have been the case of the Grantee had the Option not been transferred. The Grantee shall remain subject to the recoupment provisions of items 5 and 6 of this agreement and tax withholding provisions of Section 13(d) of the Plan following transfer of the Option. 3. TERMINATION OF RELATIONSHIP. (a) TERMINATION BY DEATH. If the Grantee's employment by the Company and its subsidiaries (collectively, the "Cardinal Group") terminates by reason of death, then, unless otherwise determined by the Committee within sixty days of such death, any unvested portion of the Option shall vest upon and become exercisable in full from and after the sixtieth day after such death. The Option may thereafter be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee 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 the Option, whichever period is shorter. (b) TERMINATION WITHOUT CAUSE OR BY REASON OF DISABILITY. For purposes of this agreement, the period beginning on the date the Option first vests and the expiration of the term of the Option is referred to as the "Exercise Period." (i) DISABILITY. If the Grantee's employment by the Cardinal Group terminates by reason of disability (as defined in the Plan) or Incapacity as defined in the Employment Agreement dated as of November 13, 2002 between the Company and Grantee (the "Employment Agreement"), then any unvested portion of the Option will vest in accordance with the terms indicated on the first page of this agreement and may thereafter be exercised by the Grantee (or any transferee, if applicable) until the earlier of the fifth anniversary of the date of such disability or Incapacity or the expiration of the stated term of the Option (the "Exercise Period"). Notwithstanding the foregoing, if the Grantee dies after such disability or Incapacity but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, any unvested portion of the Option shall vest upon, and the Option may be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee from and after, the sixtieth day after such death 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 Exercise Period, whichever period is shorter. (ii) TERMINATION WITHOUT CAUSE. If the Grantee's employment by the Cardinal Group is terminated without Cause (as used in this agreement, "Cause" shall -15- have the meaning set forth in the Employment Agreement), then any vested and unexercised portion of the Option may thereafter be exercised by the Grantee (or any transferee, if applicable) until the expiration of the Exercise Period, and any portion of the Option that is unvested as of the date of such termination shall be forfeited; PROVIDED, HOWEVER, that if such termination without Cause occurs following a change in corporate structure or personnel of the Company (or similar event) which results in the Executive ceasing to report directly to Robert D. Walter prior to such termination, the remaining unvested portion of the Option shall vest and become exercisable on the Vesting Date, and shall remain exercisable thereafter for the remainder of the Exercise Period. Notwithstanding the foregoing, if the Grantee dies after such termination without Cause but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, any unvested portion of the Option shall vest upon, and the Option may be exercised by any transferee of the Option, if applicable, or by the legal representative of the estate or by the legatee of the Grantee under the will of the Grantee from and after, the sixtieth day after such death 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 Exercise Period, whichever period is shorter. (c) TERMINATION BY THE CARDINAL GROUP FOR CAUSE. If the Grantee's employment by the Cardinal Group is terminated for Cause, all outstanding Options that have not been exercised shall immediately and automatically terminate, be forfeited, and cease to be exercisable at any time without regard to whether such Options are vested. (d) OTHER TERMINATION OF EMPLOYMENT. If the Grantee's employment by the Cardinal Group terminates for any reason (including, without limitation, Grantee's retirement) other than death, disability, Incapacity or termination by the Company with or without Cause (subject to Section 10 of the Plan regarding acceleration of the vesting of the Option upon a Change of Control), any unexercised portion of the Option 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 Grantee (or any transferee, if applicable) will have ninety days (or such other period as the Committee may specify at or after grant or termination) from the date of termination or until the expiration of the stated term of the Option, whichever period is shorter, to exercise any portion of the Option that is then vested and exercisable on the date of termination. 4. RESTRICTIONS ON EXERCISE. The Option is subject to all restrictions in this agreement and/or in the Plan, and is subject to the covenants contained in Section 5 of the Employment Agreement. As a condition of any exercise of the Option, the Company may require the Grantee or his transferee or successor to make any representation and warranty to comply with any applicable law or regulation or to confirm any factual matters (including Grantee's compliance with the terms of items 5 and 6 of this agreement or any employment or severance -16- agreement between any member of the Cardinal Group and the Grantee, including without limitation the terms of Section 5 of the Employment Agreement) reasonably requested by the Company. 5. TRIGGERING CONDUCT/COMPETITOR TRIGGERING CONDUCT. As used in this agreement, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the performance of duties assigned by the Cardinal Group any confidential information, trade secrets or other business sensitive information or material concerning the Cardinal Group; violation of Company policies, including conduct which would constitute a breach of any of the Certificates of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies signed by the Grantee, directly or indirectly employing, contacting concerning employment or participating in any way in the recruitment for employment (whether as an employee, officer, director, agent, consultant or independent contractor) any person who was or is an employee, representative, officer or director of the Cardinal Group at any time within the twelve months prior to the termination of Grantee's employment with the Cardinal Group; any action by Grantee and/or his representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers and/or potential customers, vendors and/or suppliers that were known to Grantee, and breaching any provision of any employment or severance agreement with a member of the Cardinal Group, including, without limitation, the terms of Section 5 of the Employment Agreement. As used herein, "Competitor Triggering Conduct" shall include, either during Grantee's employment or within two years following Grantee's termination of employment with the Cardinal Group, accepting employment with or serving as a consultant, advisor, or in any other capacity to an entity that is in competition with the business conducted by any member of the Cardinal Group (a "Competitor"), including, but not limited to, employment or another business relationship with any Competitor if Grantee has been introduced to trade secrets, confidential information or business sensitive information during Grantee's employment with the Cardinal Group and such information would aid the Competitor because the threat of disclosure of such information is so great that, for purposes of this agreement, it must be assumed that such disclosure would occur. 6. SPECIAL FORFEITURE/REPAYMENT RULES For so long as Grantee continues as an employee with the Cardinal Group and for three years following Grantee's termination of employment with the Cardinal Group regardless of the reason, Grantee agrees not to engage in Triggering Conduct. If Grantee engages in such Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period set forth in Section 5 above, then: (a) the Option (or any part thereof that has not been exercised) shall immediately and automatically terminate, be forfeited, and shall cease to be exercisable at any time; and (b) the Grantee shall, within 30 days following written notice from the Company, pay the Company an amount equal to the gross option gain realized or obtained by the Grantee or any -17- transferee resulting from the exercise of such Option, measured at the date of exercise (i.e., the difference between the market value of the Option Shares on the exercise date and the exercise price paid for such Option Shares), with respect to any portion of the Option that has already been exercised at any time within three years prior to the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages only in Competitor Triggering Conduct, then the Look-Back Period shall be shortened to exclude any period more than one year prior to Grantee's termination of employment with the Cardinal Group, but including any period between the time of Grantee's termination and engagement in Competitor Triggering Conduct. The Grantee may be released from Grantee's obligations under this item 6 only if the Committee (or its duly appointed designee) determines, in writing and in its sole discretion, that such action is in the best interests of the Company. Nothing in this item 6 constitutes a so-called "noncompete" covenant. However, this item 6 does prohibit certain conduct while Grantee is associated with the Cardinal Group and thereafter and does provide for the forfeiture or repayment of the benefits granted by this agreement under certain circumstances, including but not limited to the Grantee's acceptance of employment with a Competitor. Grantee agrees to provide the Company with at least ten days written notice prior to directly or indirectly accepting employment with or serving as a consultant, advisor, or in any other capacity to a Competitor, and further agrees to inform any such new employer, before accepting employment, of the terms of this item 6 and the Grantee's continuing obligations contained herein. No provisions of this agreement shall diminish, negate, or otherwise impact any separate noncompete or other agreement to which Grantee may be a party, including but not limited to any of the Certificates of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies. Grantee acknowledges and agrees that the provisions contained in this item 6 are being made for the benefit of the Company in consideration of Grantee's receipt of the Option, in consideration of employment, in consideration of exposing Grantee to the Company's business operations and confidential information, and for other good and valuable consideration, the adequacy of which consideration is hereby expressly confirmed. Grantee further acknowledges that the receipt of the Option and execution of this agreement are voluntary actions on the part of Grantee, and that the Company is unwilling to provide the Option to Grantee without including this item 6. Further, the parties agree and acknowledge that the provisions contained in items 5 and 6 are material provisions to and part of an otherwise enforceable agreement at the time the agreement is made. 7. RIGHT OF SET-OFF. By accepting this Option, the Grantee consents to a deduction from and set-off against any amounts owed to the Grantee by any member of the Cardinal Group from time to time (including but not limited to amounts owed to the Grantee as wages, severance payments, or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by the Grantee under this agreement. 8. GOVERNING LAW/VENUE. This agreement shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of law, except to the extent superceded by the laws of the United States of America. The parties agree and acknowledge that the laws of the State of Ohio bear a substantial relationship to the parties and/or this agreement and that the Option -18- and benefits granted herein would not be granted without the governance of this agreement by the laws of the State of Ohio. In addition, all legal actions or proceedings relating to this agreement shall be brought in state or federal courts located in Franklin County, Ohio, and the parties executing this agreement hereby consent to the personal jurisdiction of such courts. Grantee acknowledges that the covenants contained in items 5 and 6 of this agreement are reasonable in nature, are fundamental for the protection of the Company's legitimate business and proprietary interests, and do not adversely affect the Grantee's ability to earn a living in any capacity that does not violate such covenants. The parties further agree that in the event of any violation by Grantee of any such covenants, the Company will suffer immediate and irreparable injury for which there is no adequate remedy at law. In the event of any violation or attempted violations of item 5 or 6 of this agreement, the Company shall be entitled to specific performance and injunctive relief or other equitable relief without any showing of irreparable harm or damage, and Grantee hereby waives any requirement for the securing or posting of any bond in connection with such remedy, without prejudice to the rights and remedies afforded the Company hereunder or by law. In the event that it becomes necessary for the Company to institute legal proceedings under this agreement, Grantee shall be responsible to the Company for all costs and reasonable legal fees incurred by the Company with regard to such proceedings. Any provision of this agreement which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such provision, without invalidating or rendering unenforceable the remaining provisions of this agreement. 9. ACTION BY THE COMMITTEE. The parties agree that the interpretation of this agreement shall rest exclusively and completely within the good faith province and discretion of the Committee. The parties agree to be bound by the decisions of the Committee with regard to the interpretation of this agreement and with regard to any and all matters set forth in this agreement. The Committee may delegate its functions under this agreement to an officer of the Cardinal Group designated by the Committee (hereinafter the "designee"). In fulfilling its responsibilities hereunder, the Committee or its designee may rely upon documents, written statements of the parties, or such other material as the Committee or its designee deems appropriate. The parties agree that there is no right to be heard or to appear before the Committee or its designee and that any decision of the Committee or its designee relating to this agreement, including without limitation whether particular conduct constitutes Triggering Conduct or Competitor Triggering Conduct, shall be final and binding unless such decision is arbitrary and capricious. -19- ACCEPTANCE OF AGREEMENT The Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either been previously delivered or is provided with this agreement, and represents that he is familiar with and understands all provisions of the Plan and this agreement; and (b) voluntarily and knowingly accepts this agreement and the Option granted to him under this agreement subject to all provisions of the Plan and this agreement. The Grantee further acknowledges receiving a copy of the Company's most recent Annual Report and other communications routinely distributed to the Company's shareholders and a copy of the Plan Description dated August 8, 2001 pertaining to the Plan. ------------------------------------ Signature ------------------------------------ Print Name ------------------------------------ Grantee's Social Security Number ------------------------------------ Date -20- -----END PRIVACY-ENHANCED MESSAGE-----