-----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, NKcxYtMUEvz34an/PSrJdjGXMfBWPmCki8DsKOtDQH7DX8GIwqdSBNNrVMQr1sFC P/Cu4Hhw0LgI5rpfmShfwg== 0000950152-04-001209.txt : 20040217 0000950152-04-001209.hdr.sgml : 20040216 20040217161916 ACCESSION NUMBER: 0000950152-04-001209 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 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: 04608976 BUSINESS ADDRESS: STREET 1: 7000 CARDINAL PLACE CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147573033 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 l05659ae10vq.txt CARDINAL HEALTH, INC. 10-Q/QTR END 12-31-2003 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 December 31, 2003 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] The number of Registrant's Common Shares outstanding at the close of business on January 31, 2004 was as follows: Common Shares, without par value: 435,008,787 CARDINAL HEALTH, INC. AND SUBSIDIARIES Index *
Page No. -------- Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2003 and 2002 (unaudited)....................................... 3 Condensed Consolidated Balance Sheets at December 31, 2003 and June 30, 2003 (unaudited).......................................................... 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2003 and 2002 (unaudited)............................................. 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................................................ 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 27 Item 4. Controls and Procedures............................................................ 27 Part II. Other Information: Item 1. Legal Proceedings.................................................................. 27 Item 4. Submission of Matters to a Vote of Security Holders................................ 28 Item 6. Exhibits and Reports on Form 8-K................................................... 29
* 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 COMMON SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 ------------- ------------- ----------- -------------- Operating revenue $ 14,093.6 $ 12,706.3 $ 27,381.9 $ 24,122.9 Operating cost of products sold 12,922.9 11,626.8 25,128.0 22,036.5 ------------- ------------- ----------- -------------- Operating gross margin 1,170.7 1,079.5 2,253.9 2,086.4 Bulk deliveries to customer warehouses and other 2,256.8 1,384.7 4,357.2 3,054.2 Cost of products sold - bulk deliveries and other 2,256.8 1,384.7 4,357.2 3,054.2 ------------- ------------- ----------- -------------- Bulk gross margin - - - - Selling, general and administrative expenses 586.9 526.2 1,134.5 1,046.9 Special items - merger charges 7.8 22.0 16.4 33.4 - other (11.3) (59.6) (6.7) (52.3) ------------- ------------- ----------- -------------- Operating earnings 587.3 590.9 1,109.7 1,058.4 Interest expense and other 19.4 31.5 47.4 62.1 ------------- ------------- ----------- -------------- Earnings before income taxes and discontinued operations 567.9 559.4 1,062.3 996.3 Provision for income taxes 187.0 191.9 351.0 340.5 ------------- ------------- ----------- -------------- Earnings from continuing operations 380.9 367.5 711.3 655.8 Loss from discontinued operations (net of tax of $3.1 and $4.2, respectively, for the three and six months ended December 31, 2003) (5.1) - (6.9) - ------------- ------------- ----------- -------------- Net earnings $ 375.8 $ 367.5 $ 704.4 $ 655.8 ============= ============= =========== ============== Basic earnings per Common Share: Continuing operations $ 0.88 $ 0.83 $ 1.63 $ 1.48 Discontinued operations (0.01) - (0.02) - ------------- ------------- ----------- -------------- Net basic earnings per Common Share $ 0.87 $ 0.83 $ 1.61 $ 1.48 ============= ============= =========== ============== Diluted earnings per Common Share: Continuing operations $ 0.87 $ 0.82 $ 1.61 $ 1.45 Discontinued operations (0.01) - (0.02) - ------------- ------------- ----------- -------------- Net diluted earnings per Common Share $ 0.86 $ 0.82 $ 1.59 $ 1.45 ============= ============= =========== ============== Weighted average number of Common Shares outstanding: Basic 433.2 442.0 436.8 444.1 Diluted 439.0 450.0 442.8 452.1 Cash dividends declared per Common Share $ 0.030 $ 0.025 $ 0.060 $ 0.050
See notes to condensed consolidated financial statements. Page 3 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS)
DECEMBER 31, JUNE 30, 2003 2003 --------------- ---------------- ASSETS Current assets: Cash and equivalents $ 544.3 $ 1,724.0 Trade receivables, net 3,369.3 2,784.4 Current portion of net investment in sales-type leases 192.2 171.8 Inventories 8,543.8 7,623.3 Prepaid expenses and other 736.8 776.0 Assets held for sale from discontinued operations 151.8 170.1 --------------- ---------------- Total current assets 13,538.2 13,249.6 --------------- ---------------- Property and equipment, at cost 3,945.4 3,755.3 Accumulated depreciation and amortization (1,768.1) (1,665.8) --------------- ---------------- Property and equipment, net 2,177.3 2,089.5 Other assets: Net investment in sales-type leases, less current portion 515.0 557.3 Goodwill and other intangibles, net 2,897.7 2,332.3 Other 390.3 292.7 --------------- ---------------- Total $ 19,518.5 $ 18,521.4 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ 1.5 $ - Current portion of long-term obligations 251.7 228.7 Accounts payable 6,349.0 5,288.4 Other accrued liabilities 1,791.1 1,733.0 Liabilities from discontinued operations 72.0 64.3 --------------- ---------------- Total current liabilities 8,465.3 7,314.4 --------------- ---------------- Long-term obligations, less current portion 2,472.4 2,471.9 Deferred income taxes and other liabilities 988.5 977.0 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 - 469.5 million shares and 467.2 million shares at December 31, 2003 and June 30, 2003, respectively 2,486.6 2,403.7 Retained earnings 7,195.3 6,517.3 Common Shares in treasury, at cost, 35.5 million shares and 18.8 million shares at December 31, 2003 and June 30, 2003, respectively (2,113.3) (1,135.8) Other comprehensive income/(loss) 30.7 (19.2) Other (7.0) (7.9) ---------------- ---------------- Total shareholders' equity 7,592.3 7,758.1 ---------------- ---------------- Total $ 19,518.5 $ 18,521.4 ================ ================
See notes to condensed consolidated financial statements. Page 4 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
SIX MONTHS ENDED DECEMBER 31, 2003 2002 -------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Earnings from continuing operations $ 711.3 $ 655.8 Adjustments to reconcile earnings from continuing operations to net cash from operating activities: Depreciation and amortization 143.2 126.5 Provision for bad debts (2.7) 10.5 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade receivables (488.3) (327.8) Increase in inventories (861.3) (952.3) Decrease in net investment in sales-type leases 22.0 136.2 Increase in accounts payable 964.3 590.0 Other accrued liabilities and operating items, net 59.9 120.0 -------------- --------------- Net cash provided by operating activities 548.4 358.9 -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired and proceeds from divestitures (499.1) (7.8) Proceeds from sale of property, equipment and other assets 5.2 33.8 Additions to property and equipment (164.1) (172.3) -------------- --------------- Net cash used in investing activities (658.0) (146.3) -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in commercial paper and short-term debt 0.6 (0.7) Reduction of long-term obligations (202.8) (13.1) Proceeds from long-term obligations, net of issuance costs 78.5 6.1 Proceeds from issuance of Common Shares 80.0 77.0 Purchase of treasury shares (1,000.0) (642.7) Dividends on Common Shares (26.4) (22.3) -------------- --------------- Net cash used in financing activities (1,070.1) (595.7) -------------- --------------- NET DECREASE IN CASH AND EQUIVALENTS (1,179.7) (383.1) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,724.0 1,382.0 -------------- --------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 544.3 $ 998.9 ============== ===============
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 inter-company 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, 2003 (the "2003 Form 10-K"). Without limiting the generality of the foregoing, Note 1 of the "Notes to Consolidated Financial Statements" from the 2003 Form 10-K is specifically incorporated herein by reference. RECENT FINANCIAL ACCOUNTING STANDARDS. In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." The revision relates to employers' disclosures about pension plans and other postretirement benefit plans. It does not alter the measurement or recognition provisions of the original Statement 132. It requires additional disclosures regarding assets, obligations, cash flows and net periodic benefit costs of pension plans and other defined benefit postretirement plans. Excluding certain disclosure requirements, the revised Statement is effective for financial statements with fiscal years ended after December 15, 2003. Interim period disclosures are effective for interim periods beginning after December 15, 2003. In December 2003, the FASB issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities." This Interpretation defines when a business enterprise must consolidate a variable interest entity. The Interpretation provisions are effective for variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. The Interpretation provisions apply to all other types of variable interest entities for financial statement periods ending after March 15, 2004. The Company does not have any material unconsolidated variable interest entities as of December 31, 2003, that would require consolidation. See Note 4 in the "Notes to Consolidated Financial Statements" in the 2003 Form 10-K for discussion of the Company's special purpose accounts receivable and financing entity which is included in the consolidated financial statements. Adoption of the subsequent provisions of the Interpretation are not expected to have a material impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies the financial accounting and reporting requirements, as were originally established in SFAS No. 133, for derivative instruments and hedging activities. SFAS No. 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, excluding certain implementation issues that have been effective prior to this date under SFAS No. 133. The adoption of SFAS No. 149 did not have a material effect on the Company's financial position or results of operations. ACCOUNTING FOR STOCK-BASED COMPENSATION. At December 31, 2003, the Company maintained several stock incentive plans for the benefit of certain employees. The Company accounts for these plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Except for costs related to restricted stock and restricted stock units, no compensation expense has been recognized in net earnings, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. The following tables illustrate the effect on net earnings and earnings per Common Share after adjusting for anticipated plan changes if the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation": Page 6
For the Three Months For the Six Months Ended Ended (in millions) December 31, December 31, 2003 2002 2003 2002 ----------------------------- ---------------------------- Net earnings, as reported $ 375.8 $ 367.5 $ 704.4 $ 655.8 Stock based employee compensation expense included in net earnings, net of related tax effects 0.5 0.4 0.9 0.9 Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (27.1) (22.5) (48.9) (40.2) ----------------------------- ---------------------------- Pro forma net earnings $ 349.2 $ 345.4 $ 656.4 $ 616.5 ============================= ============================
For the Three Months For the Six Months Ended Ended December 31, December 31, 2003 2002 2003 2002 ---------------------- --------------------- Basic earnings per Common Share: As reported $ 0.87 $ 0.83 $ 1.61 $ 1.48 Pro forma basic earnings per Common Share $ 0.81 $ 0.78 $ 1.50 $ 1.39 Diluted earnings per Common Share: As reported $ 0.86 $ 0.82 $ 1.59 $ 1.45 Pro forma diluted earnings per Common Share $ 0.80 $ 0.77 $ 1.48 $ 1.36
2. EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Basic earnings per Common Share ("Basic EPS") 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 ("Diluted EPS") is similar to the computation for Basic EPS, 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 Common Shares used to compute Basic EPS and Diluted EPS for the three and six months ended December 31, 2003 and 2002:
For the Three Months Ended For the Six Months Ended December 31, December 31, (in millions) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------- Weighted-average shares - basic 433.2 442.0 436.8 444.1 Effect of dilutive securities: Employee stock options 5.8 8.0 6.0 8.0 - ----------------------------------------------------------------------------------------------------------- Weighted-average shares - diluted 439.0 450.0 442.8 452.1 ===========================================================================================================
The potentially dilutive employee stock options that were antidilutive for the three months ended December 31, 2003 and 2002, were 32.5 million and 21.5 million, respectively, and for the six months ended December 31, 2003 and 2002, were 32.5 million and 21.7 million, respectively. On August 1, 2003, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $1.0 billion. Pursuant to this authorization, the Company repurchased approximately 17.0 million Common Shares having an aggregate cost of approximately $1.0 billion. The average price paid per share was $58.65. This repurchase was completed during the first quarter of fiscal 2004, and the repurchased shares were placed into treasury shares to be used for general corporate purposes. Page 7 3. COMPREHENSIVE INCOME The following is a summary of the Company's comprehensive income for the three and six months ended December 31, 2003 and 2002:
For the Three Months Ended For the Six Months Ended December 31, December 31, (in millions) 2003 2002 2003 2002 ----------- ------------ ----------- ------------ Net earnings $ 375.8 $ 367.5 $ 704.4 $ 655.8 Foreign currency translation adjustment 58.8 19.6 49.9 28.2 Net unrealized gain/(loss) on derivative instruments (3.2) (2.9) - 12.4 ----------- ------------ ----------- ------------ Total comprehensive income $ 431.4 $ 384.2 754.3 $ 696.4 =========== ============ =========== ============
4. BUSINESS COMBINATION COSTS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS The following is a summary of the special items for the three and six months ended December 31, 2003 and 2002.
Three Months Ended Six Months Ended Special Items Expense/(Income) December 31, December 31, - ------------------------------------------------------------------------------------------------------------ (in millions) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------ Merger-Related Costs: Employee-related costs $ 5.5 $ 11.8 $ 7.1 $ 15.0 Pharmaceutical distribution center consolidation 0.1 4.7 0.1 9.8 Asset impairments & other exit costs 0.2 1.5 0.4 2.0 Purchase acquisition foreign exchange rate hedge (3.0) - (3.0) - Other integration costs 5.0 4.0 11.8 6.6 - ------------------------------------------------------------------------------------------------------------ Total merger-related costs $ 7.8 $ 22.0 $ 16.4 $ 33.4 - ------------------------------------------------------------------------------------------------------------ Other Special Items: Employee-related costs $ 0.7 $ 1.4 $ 1.6 $ 1.4 Manufacturing facility closures & restructurings 0.4 11.0 6.2 21.2 Litigation settlements (24.2) (89.9) (26.9) (92.8) Asset impairments & other 11.8 17.9 12.4 17.9 - ------------------------------------------------------------------------------------------------------------ Total other special items $ (11.3) $ (59.6) $ (6.7) $ (52.3) - ------------------------------------------------------------------------------------------------------------ Total special items $ (3.5) $ (37.6) $ 9.7 $ (18.9) Tax effect of special items 0.2 15.5 (4.3) 12.4 - ------------------------------------------------------------------------------------------------------------ Net effect of special items $ (3.3) $ (22.1) $ 5.4 $ (6.5) ============================================================================================================ Net (increase)/decrease in Diluted EPS $ (0.01) $ (0.05) $ 0.01 $ (0.01) ============================================================================================================
MERGER-RELATED COSTS Costs of integrating the operations of various merged companies are recorded as merger-related costs when incurred. The merger-related costs recognized during the three and six months ended December 31, 2003, were primarily a result of the acquisition of Syncor International Corporation ("Syncor"). The merger-related costs recognized during the three and six months ended December 31, 2002, were primarily a result of the acquisitions of Bindley Western Industries, Inc. ("Bindley") and R.P. Scherer Corporation ("Scherer"). The following paragraphs provide additional detail regarding the types of merger-related costs incurred by the Company. EMPLOYEE-RELATED COSTS. During the periods shown in the table above, the Company incurred employee-related costs associated with certain merger and acquisition transactions. For the three and six months ended December 31, 2003, the employee-related costs of $5.5 million and $7.1 million, respectively, consisted primarily of retention bonuses and severance paid as a result of the Syncor acquisition. The Syncor acquisition is expected to result in approximately 150 employees being terminated, of which approximately 100 employees had been terminated as of December 31, 2003. For the three months ended December 31, 2002, $8.8 million related to an approved plan to curtail certain defined benefit pension plans within the Pharmaceutical Technologies and Services segment. The remaining employee-related costs for the three and six months ended December 31, 2002, primarily related to Page 8 amortization expense of non-compete agreements associated with the Bindley and Allegiance Corporation ("Allegiance") merger transactions. PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During the three and six months ended December 31, 2003, the Company incurred charges of $0.1 million associated with its plan to close and consolidate Bindley distribution centers, Bindley's corporate office and one of the Company's data centers as a result of the acquisition of Bindley, as compared to $4.7 million and $9.8 million, respectively, for the comparable periods in fiscal 2003. During the three and six months ended December 31, 2002, the Company incurred employee-related costs of $2.3 million and $3.2 million, respectively, primarily from the termination of approximately 1,250 employees due to the distribution center closures. The remaining merger-related items recorded during the three and six months ended December 31, 2002, primarily related to exit costs to consolidate and close the various facilities mentioned above, including asset impairment charges, inventory move costs, contract and lease termination costs and duplicate salary costs incurred during the shutdown periods. ASSET IMPAIRMENTS & OTHER EXIT COSTS. During the three and six months ended December 31, 2003, the Company incurred asset impairments and other exit costs of $0.2 million and $0.4 million, respectively, as compared to $1.5 million and $2.0 million, respectively, during the comparable periods in fiscal 2003. The asset impairment costs incurred during the three and six months ended December 31, 2003, related primarily to the integration of acquired companies into the Company's overall information technology system structure. Also, exit costs associated with plans to consolidate operations as a result of the Syncor acquisition were incurred during the three and six months ended December 31, 2003. Costs during the three and six months ended December 31, 2002, primarily related to asset impairments and lease terminations incurred internationally as a result of the Scherer acquisition, as well as expenses incurred to relocate physical assets due to the closure and consolidation of Bergen Brunswig Medical Corporation ("BBMC") facilities. PURCHASE ACQUISITION FOREIGN EXCHANGE RATE HEDGE. During the three months ended December 31, 2003, the Company recorded income of approximately $3.0 million related to two foreign currency hedges purchased in connection with The Intercare Group, plc ("Intercare") acquisition (see Note 10 for additional information regarding this acquisition). The Company paid premiums of approximately $1.1 million to purchase two hedges protecting against foreign currency fluctuations associated with the Intercare purchase price. These hedges settled during the quarter ended December 31, 2003, and resulted in a gain for the Company of approximately $4.1 million. OTHER INTEGRATION COSTS. The Company incurred other integration costs during the three and six months ended December 31, 2003, of $5.0 million and $11.8 million, respectively, as compared to $4.0 million and $6.6 million, respectively, during the comparable periods in fiscal 2003. The costs included in this category generally relate to expenses incurred to integrate the merged or acquired company's operations and systems into the Company's pre-existing operations and systems. These costs include, but are not limited to, the integration of information systems, employee benefits and compensation, accounting/finance, tax, treasury, internal audit, risk management, compliance, administrative services, sales and marketing and others. OTHER SPECIAL ITEMS EMPLOYEE-RELATED COSTS. During the three and six months ended December 31, 2003 and 2002, the Company recorded employee-related costs associated with certain restructuring plans executed by the Company. The following paragraphs provide additional details regarding these restructuring plans. During the three months ended December 31, 2003, the Company recorded $0.7 million of employee-related costs associated with a European restructuring plan within the Oral Technologies business, a business unit within the Pharmaceutical Technologies and Services segment. The charges primarily represent severance accrued upon communication of terms to employees. The restructuring plan was completed by December 31, 2003, and resulted in the termination of approximately 50 employees. As previously discussed in the Company's Form 10-Q for the fiscal quarter ended September 30, 2003, and incorporated herein by reference, the Company incurred employee-related costs of $0.9 million related to a realignment plan implemented within the Healthcare Marketing Services business, a business unit within the Pharmaceutical Technologies and Services segment. During the three and six months ended December 31, 2002, the Company incurred $1.4 million of employee-related costs associated with the restructuring of certain operations within the Pharmaceutical Distribution and Provider Services segment. The charges primarily represent severance accrued upon communication of terms to Page 9 employees. The restructuring plan was completed by June 30, 2003, and resulted in the termination of approximately 30 employees. MANUFACTURING FACILITY CLOSURES & RESTRUCTURINGS. During the three and six months ended December 31, 2003, the Company recorded a total of $0.4 million and $6.2 million, respectively, as special items related to the closure and/or restructuring of certain manufacturing facilities, as compared to $11.0 million and $21.2 million, respectively, during the comparable periods in fiscal 2003. These closure and/or restructuring activities occurred within the Medical Products and Services and the Pharmaceutical Technologies and Services segments. During fiscal 2003 and 2004, the Company initiated plans to close and/or restructure certain manufacturing facilities within the Medical Products and Services segment. In connection with the implementation of these plans, the Company incurred costs totaling $0.4 million and $5.3 million, respectively, during the three and six months ended December 31, 2003, as compared to $5.9 million and $16.2 million, respectively, during the comparable periods in fiscal 2003. These charges included asset impairment costs of $0.4 million and $1.9 million, respectively, during the three and six months ended December 31, 2003, as compared to $1.4 million and $8.9 million, respectively, during the comparable periods in fiscal 2003. The restructuring charges during the six months ended December 31, 2003, also included employee-related costs of $2.8 million, as compared to $3.3 million and $4.6 million, respectively, during the three and six months ended December 31, 2002, the majority of which represent severance accrued upon communication of terms to employees. The remaining charges during the three and six months ended December 31, 2003 and 2002, primarily related to exit costs incurred to relocate physical assets. Some of the restructuring plans were completed during fiscal 2003, while other plans will be completed throughout fiscal 2004 and 2005. These restructuring plans will result in the termination of approximately 1,600 employees, of which approximately 1,075 employees had been terminated as of December 31, 2003. During the first quarter of fiscal 2004, the Company recorded charges of $0.9 million which represents the remaining lease obligations for a facility that was vacated as a result of a restructuring plan completed during fiscal 2003 within the Pharmaceutical Technologies and Services segment. During the three and six months ended December 31, 2002, the Company incurred costs of $5.0 million related to plans to close and/or restructure certain manufacturing facilities within the Pharmaceutical Technologies and Services segment. In connection with the implementation of these plans, the Company incurred asset impairment charges, severance costs and exit costs, primarily related to dismantling machinery and equipment and transferring certain technologies to other existing facilities within the Company. As a result of these restructuring plans, the Company terminated approximately 75 employees. These restructuring plans were substantially completed during fiscal 2003 and the first half of fiscal 2004. LITIGATION SETTLEMENTS. During the three and six months ended December 31, 2003, the Company recorded income from litigation settlements of $24.2 million and $26.9 million, respectively, as special items, as compared to $89.9 million and $92.8 million, respectively, during the comparable periods in fiscal 2003. The $24.2 million recorded during the three months ended December 31, 2003, resulted from the settlement of antitrust claims alleging that certain pharmaceutical drug manufacturers took improper actions to delay or prevent generic drug competition. The remaining settlements during the six months ended December 31, 2003, and all the settlements during the three and six months ended December 31, 2002, resulted from the recovery of antitrust claims against certain vitamin manufacturers for amounts overcharged in prior years. The total recovery of antitrust claims against certain vitamin manufacturers through December 31, 2003 was $140.9 million (net of attorney fees, payments due to other interested parties and expenses withheld). While the Company continues to have pending claims with smaller vitamin manufacturers, the total amount of future recovery is not currently estimable, but the Company believes it is not likely to be a material amount. ASSET IMPAIRMENTS & OTHER. During the three and six months ended December 31, 2003, the Company incurred asset impairments and other charges of $11.8 million and $12.4 million, respectively, as compared to $17.9 million during the comparable periods in fiscal 2003. During the three months ended December 31, 2003 and 2002, $10.9 million and $10.1 million, respectively, related to asset impairment charges resulting from the Company's decision to exit certain North American commodity operations in its Pharmaceutical Technologies and Services segment. The remaining charges of $1.5 million during the six months ended December 31, 2003, related to a plan to restructure the Company's delivery of information technology infrastructure services. The remaining $7.8 million during the six months ended December 31, 2002, related to a one-time writeoff of design, tooling and development costs. Page 10 ACCRUAL ROLLFORWARD The following table summarizes the activity related to the liabilities associated with the Company's special items during the six months ended December 31, 2003.
For the Six Months Ended (in millions) December 31, 2003 ----------------- Balance at June 30, 2003 $ 45.7 Additions(1) 36.6 Payments (45.6) ------ Balance at December 31, 2003 $ 36.7 ======
(1) Amount represents items that have been either expensed as incurred or accrued according to generally accepted accounting principles. This amount does not include litigation settlement income of $26.9 million recorded as a special item during the six months ended December 31, 2003. Also, in connection with the restructuring and integration plans related to Syncor, the Company accrued, as part of its acquisition adjustments, a liability of $15.1 million related to employee termination and relocation costs and $10.4 million related to closing of duplicate facilities. As of December 31, 2003, the Company paid $11.1 million of employee-related costs and $0.5 million associated with the facility closures. SUMMARY Certain merger, acquisition and restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recorded amounts exceed costs, such changes in estimates will be recorded in special items when incurred. The Company estimates it will incur additional costs in future periods associated with various mergers, acquisitions and restructuring activities totaling approximately $70 million (approximately $45 million net of tax). This estimate is subject to adjustment pending resolution of Syncor acquisition-related litigation contingencies. The Company believes it will incur these costs to properly integrate and rationalize operations, a portion of which represents facility rationalizations and implementing efficiencies regarding information systems, customer systems, marketing programs and administrative functions, among other things. Such amounts will be expensed when incurred. 5. SEGMENT INFORMATION The Company's operations are principally managed on a products and services basis and are comprised of four reportable business segments: Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Automation and Information Services. During the first quarter of fiscal 2004, the Company transferred its Consulting and Services business, previously included within the Medical Products and Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment. Also during the first quarter of fiscal 2004, the Company transferred its clinical information business, previously included within the Automation and Information Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment. These transfers were done to better align business operations. Prior period financial results have not been restated as each of these businesses is not significant within the respective segments, and, therefore, the transfers did not have a material impact on each segment's growth rates. The Company has not made any material changes in the segments reported or the measurement basis of segment profit or loss from the information provided in the 2003 Form 10-K. The Pharmaceutical Distribution and Provider Services segment involves the distribution of a broad line of pharmaceuticals, health care, and other specialty pharmaceutical products and other items typically sold by hospitals, retail drug stores and other health care providers. In addition, this segment provides services to the health care industry through integrated pharmacy management, temporary pharmacy staffing, as well as franchising of apothecary-style retail pharmacies. The Medical Products and Services segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products as well as products not manufactured internally to hospitals, physician offices, surgery centers and other health care providers. The Pharmaceutical Technologies and Services segment provides services to the health care industry through the development and manufacture 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, radiopharmaceutical manufacturing and distribution, pharmaceutical development and analytical science expertise, as well as medical education, marketing and contract sales services. During the three months ended December 31, 2003, the Company completed its acquisition of Intercare. The results of Intercare's operations for Page 11 the period following the completion of the transaction have been included within this segment for the quarter ended December 31, 2003. See Note 10 for additional information regarding the Intercare acquisition. The Automation and Information Services segment provides services to hospitals and other health care providers, focusing on meeting customer needs through unique and proprietary automation and information products and services. In addition, this segment markets point-of-use supply systems in the non-health care market. The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Information about interest income and expense and income taxes is not provided on a segment level. In addition, special charges are not allocated to the segments. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The following tables include revenue and operating earnings for the three and six months ended December 31, 2003 and 2002, for each segment and reconciling items necessary to agree to amounts reported in the condensed consolidated financial statements:
NET REVENUE For the Three Months Ended For the Six Months Ended (in millions) December 31, December 31, 2003 2002 2003 2002 ----------------------------- ----------------------------- Operating revenue: Pharmaceutical Distribution and Provider Services $ 11,414.5 $ 10,505.4 $ 22,238.4 $ 19,823.7 Medical Products and Services 1,839.2 1,638.8 3,572.4 3,234.3 Pharmaceutical Technologies and Services 658.9 416.1 1,265.4 803.3 Automation and Information Services 187.4 164.5 330.1 298.3 Corporate (1) (6.4) (18.5) (24.4) (36.8) ----------------------------- ----------------------------- Total operating revenue 14,093.6 12,706.3 27,381.9 24,122.9 ============================= ============================= Bulk deliveries to customer warehouses and other: Pharmaceutical Distribution and Provider Services 2,208.5 1,336.9 4,268.0 2,967.7 Pharmaceutical Technologies and Services 48.3 47.8 89.2 86.5 ----------------------------- ----------------------------- Total bulk deliveries to customer warehouses and other $ 2,256.8 $ 1,384.7 $ 4,357.2 $ 3,054.2 ============================= =============================
OPERATING EARNINGS For the Three Months Ended For the Six Months Ended (in millions) December 31, December 31, 2003 2002 2003 2002 ----------------------------- ----------------------------- Operating earnings: Pharmaceutical Distribution and Provider Services $ 271.0 $ 295.0 $ 537.0 $ 556.8 Medical Products and Services 160.2 143.6 310.4 282.3 Pharmaceutical Technologies and Services 112.9 85.1 219.9 157.8 Automation and Information Services 79.6 69.3 132.6 115.5 Corporate (2) (36.4) (2.1) (90.2) (54.0) ----------------------------- ----------------------------- Total operating earnings $ 587.3 $ 590.9 $ 1,109.7 $ 1,058.4 ============================= =============================
(1) Corporate operating revenue primarily consists of foreign currency translation adjustments and the elimination of intersegment revenues. (2) Corporate operating earnings include special items of $3.5 million and $37.6 million in the three-month periods ended December 31, 2003 and 2002, respectively, and ($9.7) million and $18.9 million for the six-month periods ended December 31, 2003 and 2002, respectively. See Note 4 for further discussion of the Company's special items. Corporate operating earnings also include unallocated corporate administrative expenses and investment spending. Page 12 6. LEGAL PROCEEDINGS Latex Litigation On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. health care distribution business, surgical and respiratory therapy business and health care 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 December 31, 2003, there were 102 lawsuits pending against BHC and/or Allegiance involving allegations of sensitization to natural rubber latex products and some of these cases were proceeding to trial. The total dollar amount of potential damages cannot be reasonably quantified. Some plaintiffs plead damages in extreme excess of what they reasonably can expect to recover, some plead a modest amount and some do not include a request for any specific dollar amount. Not including cases that ask for no specific damages, the damage requests per action have ranged from $10,000 to $240 million. All of these cases name multiple defendants, in addition to Baxter/Allegiance. The average number of defendants per case exceeds 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 834 cases. During the fiscal year ended June 30, 2002, Allegiance began settling some of these lawsuits with greater frequency. As of December 31, 2003, Allegiance had resolved more than eighty-five percent of these cases. About twenty percent of the lawsuits that have been resolved were concluded without any liability to Baxter/Allegiance. No individual claim has been settled for a material amount, 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 or results of operations, and could be in the range of $0 to $20 million, net of insurance proceeds (with the range reflecting the Company's reasonable estimation of potential insurance coverage, and defense and indemnity costs). The Company believes a substantial 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. Shareholder Litigation against Cardinal Health On November 8, 2002, a complaint was filed by a purported shareholder against the Company and its directors in the Court of Common Pleas, Delaware County, Ohio, as a purported derivative action. On or about March 21, 2003, after the Company filed a Motion to Dismiss the complaint, an amended complaint was filed alleging breach of fiduciary duties and corporate waste in connection with the alleged failure by the Board of Directors of the Company to (a) renegotiate or terminate the Company's proposed acquisition of Syncor and (b) determine the propriety of indemnifying Monty Fu, the former Chairman of Syncor. The Company filed a Motion to Dismiss the amended complaint and the plaintiffs subsequently filed a second amended complaint which added three new individual defendants and includes new allegations that the Company improperly recognized revenue in December 2000 and September 2001 related to settlements with certain vitamins manufacturers. The Company filed a Motion to Dismiss the second amended complaint and, on November 20, 2003, the Court denied the motion. The Company believes the allegations made in the second amended complaint, as with the original complaint, are without merit and intends to vigorously defend this action. The Company currently does not believe that the impact of this lawsuit, if any, will have a material adverse effect on the Company's financial position, liquidity or results of operations. The Company currently believes that there will be some insurance coverage available under the Company's directors' and officers' liability insurance policies in effect at the time this action was filed. Page 13 Shareholder Litigation against Syncor Eleven purported class action lawsuits have been filed against Syncor and certain of its officers and directors, asserting claims under the federal securities laws (collectively referred to as the "federal securities actions"). All of these actions were filed in the United States District Court for the Central District of California. The federal securities actions purport to be brought on behalf of all purchasers of Syncor shares during various periods, beginning as early as March 30, 2000, and ending as late as November 5, 2002 and allege, among other things, that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act, by issuing a series of press releases and public filings disclosing significant sales growth in Syncor's international business, but omitting mention of certain allegedly improper payments to Syncor's foreign customers, thereby artificially inflating the price of Syncor shares. A lead plaintiff has been appointed by the court in the federal securities actions and a consolidated amended complaint was filed May 19, 2003, naming Syncor and 12 individuals, all former Syncor officers, directors and/or employees, as defendants. Syncor filed a Motion to Dismiss the consolidated amended complaint on August 1, 2003 and on December 12, 2003, the Court granted the motion to dismiss without prejudice. A second amended consolidated class action complaint was filed on January 28, 2004, naming Syncor and 14 individuals, all former Syncor officers, directors and/or employees, as defendants. On November 14, 2002, two additional actions were filed by individual stockholders of Syncor in the Court of Chancery of the State of Delaware (the "Delaware actions") against seven of Syncor's nine directors (the "director defendants"). The complaints in each of the Delaware actions were identical and alleged that the director defendants breached certain fiduciary duties to Syncor by failing to maintain adequate controls, practices and procedures to ensure that Syncor's employees and representatives did not engage in improper and unlawful conduct. Both complaints asserted a single derivative claim, for and on behalf of Syncor, seeking to recover all of the costs and expenses that Syncor incurred as a result of the allegedly improper payments (including the costs of the federal securities actions described above), and a single purported class action claim seeking to recover damages on behalf of all holders of Syncor shares in the amount of any losses sustained if consideration received in the merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff in one of the two Delaware actions filed an amended complaint adding as defendants the Company, its subsidiary Mudhen Merger Corporation and the remaining two Syncor directors, who are hereafter included in the term "director defendants." These cases have been consolidated under the caption "In re: Syncor International Corp. Shareholders Litigation" (the "consolidated Delaware action"). On August 14, 2003, the Company filed a Motion to Dismiss the operative complaint in the consolidated Delaware action. At the end of September 2003, plaintiffs in the consolidated Delaware actions moved the court to file a second amended complaint. Monty Fu is the only defendant in the proposed second amended complaint attached to this motion. On November 18, 2002, two additional actions were filed by individual stockholders of Syncor in the Superior Court of California for the County of Los Angeles (the "California actions") against the director defendants. The complaints in the California actions allege that the director defendants breached certain fiduciary duties to Syncor by failing to maintain adequate controls, practices and procedures to ensure that Syncor's employees and representatives did not engage in improper and unlawful conduct. Both complaints asserted a single derivative claim, for and on behalf of Syncor, seeking to recover costs and expenses that Syncor incurred as a result of the allegedly improper payments. An amended complaint was filed on December 6, 2002 in one of the cases, purporting to allege direct claims on behalf of a class of shareholders. The defendants' motion for a stay of the California actions pending the resolution of the Delaware actions (discussed above) was granted on April 30, 2003. A proposed class action complaint was filed on April 8, 2003, against the Company, Syncor and certain officers and employees of the Company by a purported participant in the Syncor Employees' Savings and Stock Ownership Plan (the "Syncor ESSOP"). A related proposed class action complaint was filed on September 11, 2003, against the Company, Syncor and certain individual defendants. Another related proposed class action complaint, captioned Thompson v. Syncor International Corp., et al, was filed on January 14, 2004, against the Company, Syncor and certain individual defendants. These related suits allege that the defendants breached certain fiduciary duties owed under the Employee Retirement Income Security Act ("ERISA"). It is expected that these related suits will be consolidated. In addition, the United States Department of Labor is conducting an investigation of the Syncor ESSOP with respect to its compliance with ERISA requirements. The Company has responded to a subpoena received from the Department of Labor and intends to fully cooperate in its investigation. Each of the actions described under the heading "Shareholder Litigation against Syncor" is in its early stages and it is impossible to predict the outcome of these proceedings or their impact on Syncor or the Company. However, the Company currently does not believe that the impact of these actions will have a material adverse effect on the Company's financial position, liquidity or results of operations. The Company and Syncor believe the Page 14 allegations made in the complaints described above are without merit and intend to vigorously defend such actions and have been informed that the individual director and officer defendants deny liability for the claims asserted in these actions, believe they have meritorious defenses and intend to vigorously defend such actions. The Company and Syncor currently believe that a portion of any liability will be covered by insurance policies that the Company and Syncor have with financially viable insurance companies, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. DuPont Litigation On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont") filed a lawsuit against the Company and others in the United States District Court for the Middle District of Tennessee. The complaint alleges various causes of action against the Company relating to the production and sale of surgical drapes and gowns by the Company's Medical Products and Services segment. DuPont's claims generally fall into the categories of breach of contract, false advertising and patent infringement. The complaint does not request a specific amount of damages. The Company believes that the claims made in the complaint are without merit and it intends to vigorously defend this action. Although this action is in its early stages and it is impossible to accurately predict the outcome of the proceedings or their impact on the Company, the Company believes that it is owed a defense and indemnity from its codefendants with respect to DuPont's claim for patent infringement. The Company currently does not believe that the impact of this lawsuit, if any, will have a material adverse effect on the Company's financial position, liquidity or results of operations. Informal Inquiry by the Securities and Exchange Commission On October 9, 2003, the Company announced that it had received a request for information from the Securities and Exchange Commission in connection with an informal inquiry. The request seeks historical financial and related information, including information pertaining to the accounting treatment of $22 million recovered from vitamin manufacturers who were found to have overcharged the Company. The Company intends to cooperate fully and provide all information required to satisfy the request. Other Matters For information relating to antitrust claims against certain vitamins manufacturers, and antitrust claims against certain pharmaceutical manufacturers, see the Litigation Settlements discussion in Note 4. 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 financial position, liquidity or results of operations. Page 15 7. GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the six months ended December 31, 2003, were as follows:
Pharmaceutical Medical Automation Distribution Products Pharmaceutical and and Provider and Technologies Information (in millions) Services Services and Services Services Total - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2003 $ 96.1 $ 694.7 $1,423.2 $50.7 $2,264.7 Goodwill acquired - net of purchase price adjustments, foreign currency translation adjustments and other(1) 62.6 1.0 511.7 - 575.3 Goodwill related to the divestiture of businesses - - (4.3) - (4.3) Transfer(2) 31.6 (31.6) - - - - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $190.3 $ 664.1 $1,930.6 $50.7 $2,835.7 ===================================================================================================================
(1) During the second quarter of fiscal 2004, the Company completed the acquisitions of Intercare and Medicap Pharmacies, Inc. ("Medicap"), resulting in preliminary goodwill allocations of $481.8 million and $62.5 million, respectively. See Note 10 for additional information regarding these acquisitions. During the six months ended December 31, 2003, the Company also finalized the Syncor purchase price allocation resulting in a goodwill reduction of $6.9 million. The remaining amounts represent goodwill acquired from immaterial acquisitions, purchase price adjustments from prior period acquisitions and foreign currency translation adjustments. (2) During the first quarter of fiscal 2004, the Company transferred its Consulting and Services business, previously reported within the Medical Products and Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment to better align business operations. This transfer resulted in approximately $31.6 million of goodwill being reclassed between the segments. The purchase price allocations for the Intercare and Medicap acquisitions are not yet finalized and are subject to adjustment as the Company assesses the value of acquired intangible assets and certain other matters. As indicated in Note 1 above, the preliminary purchase price allocations resulted in goodwill of $481.8 million and $62.5 million, respectively. Initial valuations relating to acquired intangible assets have not been completed; therefore, all excess purchase price has been allocated to goodwill resulting in no amortization expense during the quarter ended December 31, 2003, for identified intangibles from these acquisitions. However, due to the short period of time between the acquisition dates and quarter-end, the impact of not amortizing identified intangibles would not be material. 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 June 30 and December 31, 2003, was as follows:
Gross Accumulated Net (in millions) Intangible Amortization Intangible - --------------------------------------------------------------------------------------- June 30, 2003 Trademarks and patents $ 48.1 $20.8 $27.3 Non-compete agreements 27.3 21.9 5.4 Other 49.6 14.7 34.9 - --------------------------------------------------------------------------------------- Total $125.0 $57.4 $67.6 - --------------------------------------------------------------------------------------- December 31, 2003 Trademarks and patents $ 48.5 $22.2 $26.3 Non-compete agreements 29.2 24.3 4.9 Other 47.1 16.3 30.8 - --------------------------------------------------------------------------------------- Total $124.8 $62.8 $62.0 - ---------------------------------------------------------------------------------------
See discussion above for information regarding intangible assets acquired from the Intercare and Medicap transactions. Page 16 Amortization expense for the three months ended December 31, 2003 and 2002, was $2.4 million and $0.9 million, respectively, and for the six months ended December 31, 2003 and 2002 was $4.7 million and $1.7 million, respectively. Amortization expense for each of the next five fiscal years is estimated to be:
(in millions) 2004 2005 2006 2007 2008 - -------------------------------------------------------------------------------------------- Amortization expense $9.4 $8.9 $8.5 $7.8 $4.9
8. GUARANTEES The Company has contingent commitments related to certain operating lease agreements. These operating leases consist of certain real estate and equipment used in the operations of the Company. In the event of termination of these operating leases, which range in length from one to ten years, the Company guarantees reimbursement for a portion of any unrecovered property cost. At December 31, 2003, the maximum amount the Company could be required to reimburse was $386.8 million. Based upon current information, the Company believes that the proceeds from the sale of properties under these operating lease agreements would exceed its payment obligation. In accordance with FASB Interpretation No. 45, the Company has a liability of $4.6 million recorded as of December 31, 2003, related to these agreements. In the ordinary course of business, the Company, from time to time, agrees to indemnify certain other parties under agreements with the Company, including under acquisition agreements, customer agreements and intellectual property licensing agreements. Such indemnification obligations vary in scope and, when defined, in duration. Generally, a maximum obligation is not explicitly stated and, therefore, the overall maximum amount of the liability under such indemnification obligations, if any, cannot be reasonably estimated. Historically, the Company has not, individually or in the aggregate, made payments under these indemnification obligations in any material amounts. In certain circumstances, the Company believes that its existing insurance arrangements, subject to the general deduction and exclusion provisions, would cover portions of the liability that may arise from these indemnification obligations. In addition, the Company believes that the likelihood of material liability being triggered under these indemnification obligations is not significant. In the ordinary course of business, the Company, from time to time, enters into agreements that obligate the Company to make fixed payments upon the occurrence of certain events. Such obligations primarily relate to obligations arising under acquisition transactions, where the Company has agreed to make payments based upon the achievement of certain financial performance measures by the acquired company. Generally, the obligation is capped at an explicit amount. The Company's aggregate exposure for these obligations, assuming the achievement of all financial performance measures, is not material. Any potential payment for these obligations would be treated as an adjustment to the purchase price of the related entity and would have no impact on the Company's results of operations. 9. DISCONTINUED OPERATIONS In connection with the acquisition of Syncor, the Company acquired certain operations of Syncor that were or will be discontinued. Prior to the acquisition, Syncor announced the discontinuation of certain operations including the medical imaging business and certain overseas operations. The Company is continuing with these plans and has added additional international and non-core domestic businesses to the discontinued operations. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the net assets and results of operations of these businesses are presented as discontinued operations. The Company is currently overseeing the planned sale of the discontinued operations and is actively marketing these businesses. The Company expects to sell substantially all of the remaining discontinued operations by the end of the third quarter of fiscal 2004. The net assets for the discontinued operations are included within the Pharmaceutical Technologies and Services segment. Page 17 The results of discontinued operations for the three and six months ended December 31, 2003 and 2002, are summarized as follows:
Three Six Months Ended Months Ended December 31, December 31, (in millions) 2003 2002 2003 2002 ----------------------------------- -------------------------------------- Revenue $24.7 $ - $50.9 $ - Loss before income taxes (8.2) - (11.1) - Income tax benefit 3.1 - 4.2 - ----------------------------------- -------------------------------------- Loss from discontinued operations $(5.1) $ - $(6.9) $ - =================================== ======================================
Interest expense allocated to discontinued operations for the three and six months ended December 31, 2003, was $0.1 million. Interest expense was allocated to the discontinued operations based upon a ratio of the net assets of discontinued operations versus the overall net assets of Syncor. At December 31 and June 30, 2003, the major components of assets and liabilities of the discontinued operations were as follows:
December 31, June 30, (in millions) 2003 2003 ------------- ------------- Current assets $ 43.6 $ 49.9 Property and equipment, net 51.8 63.2 Other assets 56.4 57.0 ------------- ------------- Total assets $ 151.8 $ 170.1 ============= ============= Current liabilities $ 50.7 $ 35.6 Long term debt and other 21.3 28.7 ------------- ------------- Total liabilities $ 72.0 $ 64.3 ============= =============
Cash flows generated from the discontinued operations are immaterial to the Company and, therefore, are not disclosed separately. 10. ACQUISITIONS Intercare Group, plc During December 2003, the Company completed the purchase of Intercare, a leading European pharmaceutical products and services company. The acquisition expands the Company's global reach by increasing its scale of proprietary sterile manufacturing and broadening its participation in the fast-growing European generic (including manufacturing capabilities) and injectible product market. The cash transaction was valued at approximately $570 million, including the repayment of approximately $150 million in Intercare debt. The results of Intercare's operations for the period following the completion of the transaction have been reported within the Company's Pharmaceutical Technologies and Services segment for the quarter ended December 31, 2003. See Note 7 for discussion of Intercare's preliminary purchase price allocation. Medicap Pharmacies, Inc. During December 2003, Medicine Shoppe International, Inc. ("Medicine Shoppe"), a wholly-owned subsidiary of the Company, completed the acquisition of Medicap, a franchisor of 181 pharmacies across 34 states. This acquisition will add to the geographic reach of the Company's existing franchise pharmacy operations. Page 18 The cash transaction was valued at approximately $69 million, including the repayment of approximately $10 million in Medicap debt. The results of Medicap's operations for the period following the completion of the transaction have been reported within the Company's Pharmaceutical Distribution and Provider Services segment. See Note 7 for discussion of Medicap's preliminary purchase price allocation. Supplemental pro forma results of operations are not disclosed as the impact to the Company of the acquisitions of Intercare and Medicap during the three and six months ended December 31, 2003, individually and in the aggregate, were not material. 11. OFF-BALANCE SHEET TRANSACTIONS During the six months ended December 31, 2003 and 2002, the Company entered into two separate agreements to transfer ownership of certain equipment lease receivables, plus security interests in the related equipment, to the leasing subsidiary of a bank in the amounts of $164.2 million and $200.0 million, respectively. An immaterial gain was recognized from each of these transactions, which was classified as operating revenue within the Company's results of operations. In order to qualify for sale treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," the Company formed two wholly-owned, special purpose, bankruptcy-remote entities (the "SPEs") of Pyxis Corporation, a wholly-owned subsidiary of the Company, and the SPEs formed two wholly-owned, qualified special purpose entities (the "QSPEs") to effectuate the removal of the lease receivables from the Company's consolidated financial statements. In accordance with SFAS No. 140, the Company consolidates the SPEs and does not consolidate the QSPEs. Both the SPEs and QSPEs are separate legal entities that maintain separate financial statements from the Company and Pyxis. The assets of the SPEs and QSPEs are available first and foremost to satisfy the claims of their respective creditors. Page 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The discussion and analysis presented below is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of December 31, 2003, and June 30, 2003, and the condensed consolidated statements of earnings for the three and six-month periods ended December 31, 2003 and 2002. This discussion and analysis should be read together with management's discussion and analysis included in the 2003 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 beginning on page 8 of the 2003 Form 10-K and are incorporated herein by reference. The Company disclaims any obligation to update any forward-looking statement. EXECUTIVE-LEVEL OVERVIEW The following summarizes the Company's results of operations for the three and six-month periods ended December 31, 2003.
Three Months Ended Six Months Ended (in millions, except per Common Share December 31, December 31, ----------------------------------- ----------------------------------- amounts) Growth (1) 2003 2002 Growth (1) 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Operating revenue 11% $14,093.6 $12,706.3 14% $27,381.9 $24,122.9 Operating earnings (1)% $ 587.3 $ 590.9 5% $ 1,109.7 $ 1,058.4 Earnings from continuing operations 4% $ 380.9 $ 367.5 8% $ 711.3 $ 655.8 Net earnings 2% $ 375.8 $ 367.5 7% $ 704.4 $ 655.8 Diluted earnings per Common Share 5% $ 0.86 $ 0.82 10% $ 1.59 $ 1.45
(1) Growth is calculated as the change (increase or decrease) for the three and six months ended December 31, 2003, compared to the three and six months ended December 31, 2002. The results of operations during the three and six months ended December 31, 2003, reflect the breadth of products and services the Company offers and the increasing demand for the Company's diverse portfolio of products and services, which led to strong revenue growth in every segment of the Company. The Company continues to experience strong demand for integrated solutions from health care providers. These solutions include products and services from multiple lines of businesses within the Company. These unique agreements currently represent more than $6 billion of annual sales. The Company has four operating business segments: Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Automation and Information Services. The Company generated strong operating earnings within its Medical Products and Services, Pharmaceutical Technologies and Services and Automation and Information Services segments. These three segments now comprise over one-half of the Company's operating earnings. The strong performances within those three segments was offset by reduced earnings within the Pharmaceutical Distribution and Provider Services segment, as further discussed below. The Company's Pharmaceutical Distribution and Provider Services segment is in transition in its business model from a "buy and hold," inventory accumulation model to a "just-in-time," fee-for-service model. Historically, one way the Company obtained value from manufacturers was by buying inventories from them, holding those inventories and generating margins on the subsequent sale of that inventory after pharmaceutical prices increased. The Company is currently working with its pharmaceutical manufacturing vendors to transition towards a "just-in-time," fee-for-service business model where the Page 20 Company will be compensated for the many services it provides the manufacturer. The Company has incurred mismatches in its vendor margins period over period while this transition is occurring. The Company anticipates this business model transition to continue through the remainder of the current fiscal year as well as into fiscal 2005. However, the Company believes that the most severe of the vendor margin mismatches occurred in the quarter ended December 31, 2003, causing this segment to experience an 8% decline in operating earnings during that quarter. The Company does not expect this trend to continue. As the transition occurs, future periods should gradually evolve to reflect the new model, under which earnings growth should more closely approximate revenue growth. This transition to a new business model has also affected the Company's operating revenues. While the overall demand for the Company's products has not changed, how the Company fills certain orders has changed. The previous "buy and hold" model resulted in the Company holding large quantities of inventories and filling certain "bulk" orders through the Company's inventory on-hand. These types of sales were classified as "Bulk from Stock" and were reported within operating revenue. With the transition to this new business model, the Company will hold less inventory, and therefore will not fill these orders from its own stock with the same frequency, but rather will act more as a pass-through entity and record the revenue within its "Bulk Deliveries to Customer Warehouses" line within the income statement. The Company and certain pharmaceutical and medical-surgical product manufacturers are in discussions regarding the risks of counterfeit products in the supply chain and the manufacturers' concerns regarding the impact of secondary market distribution on counterfeiting. The Company continues to work with its suppliers to help minimize the risks associated with counterfeit products in the supply chain. The Medicare Prescription Drug, Improvement, and Modernization Act (the "Medicare Act") was passed by Congress and enacted by President Bush on December 8, 2003. The Medicare Act is the largest expansion of the Medicare program since its inception and provides participants with voluntary prescription drug benefits effective in 2006 with an interim drug discount card. The Medicare Act also includes provisions relating to medication management programs, generic substitution and provider reimbursement. Based upon current information, the Company believes the Medicare Act may create additional volume demand and provide incentives for additional utilization of generic drugs, both of which have potentially positive implications for the Company's pharmaceutical distribution business. During the three months ended December 31, 2003, the Company completed acquisitions of Intercare and Medicap. The Company's trend with regard to acquisitions has been to expand its role as a provider of services to the health care industry. This trend has resulted in expansion into service areas which (a) complement the Company's existing operations, and (b) provide opportunities for the Company to develop synergies with, and thus strengthen, the acquired business. As the health care industry continues to change, the Company continually evaluates possible candidates for merger or acquisition and intends to continue to seek opportunities to expand its role as a provider of services to the health care industry through all its reporting segments. There can be no assurance that it will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or consummated, the Company would incur additional merger and acquisition related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful. Page 21 GENERAL The following discussions provide details regarding the results of operations of the Company's four operating business segments. See Note 5 in "Notes to Condensed Consolidated Financial Statements" for a description of these segments. RESULTS OF OPERATIONS Operating Revenue
Three Months Ended Six Months Ended December 31, December 31, -------------------------------- -------------------------------- Percent of Total Percent of Total Operating Revenues Operating Revenues -------------------------------- -------------------------------- Growth (1) 2003 2002 Growth (1) 2003 2002 - ----------------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 9% 81% 83% 12% 81% 82% Medical Products and Services 12% 13% 13% 10% 13% 14% Pharmaceutical Technologies and Services 58% 5% 3% 58% 5% 3% Automation and Information Services 14% 1% 1% 11% 1% 1% Total Company 11% 100% 100% 14% 100% 100% - -----------------------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the operating revenue for the three and six months ended December 31, 2003, compared to the three and six months ended December 31, 2002. TOTAL COMPANY. Total operating revenue for the three and six months ended December 31, 2003, increased 11% and 14%, respectively, compared to the same periods of the prior year. These increases resulted from a higher sales volume across each of the Company's segments; revenue growth from existing customers; addition of new customers, some of which resulted from new corporate agreements with health care providers that integrate the Company's diverse offerings; addition of new products; and pharmaceutical price increases. The Company's revenue growth was adversely impacted by the decline in "Bulk from Stock" sales, as was described within the "Executive-Level Overview" section. PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. This segment's operating revenue growth of 9% and 12%, respectively, during the three and six months ended December 31, 2003, resulted from strong sales to customers within this segment's core pharmaceutical distribution business. "Store Door Sales" (sales in which the Company breaks down bulk pharmaceuticals to customize orders for delivery directly to the health care providers) within the pharmaceutical distribution business showed particular strength, increasing 23% and 25% during the three and six months ended December 31, 2003. The increase in "Store Door Sales" was primarily due to increased sales volume to new and existing customers and pharmaceutical price increases. This segment's growth was dampened by the impact of declining "Bulk from Stock" sales, as was described within the "Executive-Level Overview" section. To fully gauge downstream customer demand within pharmaceutical distribution, three types of sales should be aggregated. These sales types are "Store Door Sales" and "Bulk from Stock" (reported in total as operating revenues) and "Bulk Deliveries to Customer Warehouses." Revenue growth from these total sales activities was 15% and 17% during the three and six months ended December 31, 2003, as compared to the comparable periods a year ago. MEDICAL PRODUCTS AND SERVICES. This segment's operating revenue growth of 12% and 10%, respectively, during the three and six months ended December 31, 2003, resulted from increased sales momentum from new and existing contracts within the distribution business, as well as increased sales from new self-manufactured products. New contracts drove an increase in sales of both distributed and self-manufactured products, with sales from the distribution business showing particular strength during the three and six months ended December 31, 2003. Sales of new self-manufactured products, including product enhancements to the Company's existing surgeon gloves, bone-cement delivery systems, thermal therapy products and procedure-based delivery systems, contributed to this segment's revenue growth. This segment's revenue growth has been well above industry averages during the current fiscal year. PHARMACEUTICAL TECHNOLOGIES AND SERVICES. This segment's operating revenue growth of 58% during the three and six months ended December 31, 2003, resulted from particularly strong demand within the packaging services, Page 22 oral technologies and nuclear pharmacy businesses. Packaging services generated solid growth from both organic and new business, in particular new packaging business of AstraZeneca's Crestor(TM). The oral technologies business also contributed solid growth, with Lilly's Zyprexa(R) Zydis, an anti-psychotic drug, and Wyeth's Advil(R) Liquigels showing particular strength. Increased sales within the nuclear pharmacy business also contributed to this segment's growth. This segment's revenue growth benefited from the inclusion of Syncor, an acquisition that was completed on January 1, 2003. Syncor's results of operations are not included in the prior period numbers. This segment's revenue growth was partially dampened by a delay in the startup of commercial manufacturing of key sterile products from signed contracts, now slated for the third quarter of fiscal 2004. AUTOMATION AND INFORMATION SERVICES. This segment's operating revenue growth of 14% and 11%, respectively, during the three and six months ended December 31, 2003, reflected healthy demand in all product categories, with particular sales strength from the medication product lines (such as Pyxis MedStation(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 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 net 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 various contracts. These contracts provide for the customer to reimburse the Company for these expenses. Due to the Company not generating any margin from these reimbursements, fluctuations in their amount have no impact on the Company's net earnings. Operating Earnings
Three Months Ended Six Months Ended December 31, December 31, -------------------------------- -------------------------------- Percent of Total Percent of Total Operating Earnings Operating Earnings -------------------------------- -------------------------------- Growth (1) 2003 2002 Growth (1) 2003 2002 - ----------------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services (8%) 43% 50% (4%) 45% 50% Medical Products and Services 12% 26% 24% 10% 26% 26% Pharmaceutical Technologies and Services 33% 18% 14% 39% 18% 14% Automation and Information Services 15% 13% 12% 15% 11% 10% Total Company (2) (1%) 100% 100% 5% 100% 100% - -----------------------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the operating earnings for the three and six-month periods ended December 31, 2003, compared to the three and six-month periods ended December 31, 2002. (2) The Company's overall operating earnings growth/(decline) of (1%) and 5%, respectively, during the three and six-month periods ended December 31, 2003, includes the effect of special items. Special items are not allocated to the segments. See Note 4 in "Notes to Condensed Consolidated Financial Statements" for further information regarding the Company's special items. TOTAL COMPANY. Total operating earnings for the three months ended December 31, 2003, decreased 1% compared to the same period of the prior year, while operating earnings for the six months ended December 31, 2003, increased 5% compared to the same period of the prior year. The overall decrease during the three months ended December 31, 2003, resulted primarily from the impact of the Company's special items, which totaled income of $3.5 million during the three months ended December 31, 2003, as compared to income of $37.6 million during the same period a year ago. The impact of the special items was partially offset by the Company's revenue growth of 11% during the quarter, which yielded an 8% increase in gross margin primarily due to the continued dampening effect of reduced vendor margins and competitive customer pricing pressures within the Pharmaceutical Distribution Page 23 and Provider Services segment driven by changes to its business model. These changes are discussed further within the "Executive-Level Overview" section. The 5% operating earnings growth during the six months ended December 31, 2003, resulted primarily from the Company's revenue growth of 14% during the same time period, which yielded a gross margin increase of 8%. These increases were partially offset by the impact of the Company's special items, which totaled expense of $9.7 million during the six months ended December 31, 2003, as compared to income of $18.9 million during the same period a year ago. The growth rates for the three and six months ended December 31, 2003, were positively impacted by the inclusion of Syncor, whose results of operations are not included in the prior period numbers since the acquisition of Syncor was completed January 1, 2003. These growth rates also reflect the increased contributions from the Company's operating segments outside of the Pharmaceutical Distribution and Provider Services segment, which generate higher gross margins and operating earnings (as a percentage of operating revenue). These segments now account for over one-half of the Company's operating earnings. The Company continues to leverage its expense structure through disciplined expense control, and the productivity benefits resulting from scale associated with revenue growth and previous investments in automation and technology. Selling, general and administrative expenses as a percentage of revenue were 4.16% and 4.14%, respectively, during the three and six months ended December 31, 2003, as compared to 4.14% and 4.34%, respectively, for the same periods a year ago. The overall increase in operating expenses was primarily a result of the additional expenses resulting from the Syncor acquisition, higher personnel costs associated with the overall business growth and an increase in depreciation and amortization costs. Additionally, the Company continues to invest in research and development and strategic initiatives that will benefit future periods, which are charged against current operating earnings as incurred. The increase in the Company's expenses for the three and six months ended December 31, 2003, was partially offset by adjustments of certain trade receivable reserves due to changes in customer-specific credit exposures as well as improvements in customer credit, billing and collection processes yielding significant reductions in past due and uncollectible accounts. PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. This segment's operating earnings declines of 8% and 4%, respectively, during the three and six months ended December 31, 2003, resulted from reduced vendor margins, as further discussed within the "Executive-Level Overview," and competitive pricing pressures. These declines were partially offset by this segment's revenue growth of 9% and 12% during the three and six months ended December 31, 2003, as well as strong expense productivity throughout the segment. MEDICAL PRODUCTS AND SERVICES. This segment's operating earnings growth of 12% and 10%, respectively, during the three and six months ended December 31, 2003, resulted primarily from this segment's overall revenue growth of 12% and 10%, respectively, during the comparable periods, led by sales momentum in distribution contracts. The gross margin impact of the increased mix of distributed products, as well as increases in raw material costs, principally plastic resin and natural rubber latex, were offset by productivity improvements and strong expense controls. PHARMACEUTICAL TECHNOLOGIES AND SERVICES. This segment's operating earnings growth of 33% and 39%, respectively, during the three and six months ended December 31, 2003, resulted from this segment's overall revenue growth of 58% during the comparable periods, as well as from manufacturing efficiencies and strong expense productivity within each of the businesses in the segment. This segment's operating earnings growth also benefited from the inclusion of Syncor, an acquisition that was completed on January 1, 2003. Syncor's results of operations are not included in the prior period numbers. Since Syncor's operating earnings as a percentage of operating revenue is less than the other business units within this segment, its inclusion had a deleveraging effect on operating earnings growth in comparison to revenue growth. Also, as disclosed in this segment's operating revenue discussion, this segment's operating earnings growth was dampened by a delay in the startup of commercial manufacturing of certain sterile products. AUTOMATION AND INFORMATION SERVICES. This segment's operating earnings growth of 15% during the three and six months ended December 31, 2003, resulted from revenue growth of 14% and 11%, respectively, during the comparable periods, combined with operational improvements, strong expense productivity and a reduction in receivable reserves due to improvements in customer-specific credit matters, as well as general improvements in customer credit, billing and collection procedures, which have resulted in significant reductions in past due and uncollectible accounts. Page 24 Special Charges See Note 4, which is incorporated herein by reference, in "Notes to Condensed Consolidated Financial Statements" for detail of the Company's special items during the three and six months ended December 31, 2003 and 2002. Interest Expense and Other The decrease in interest expense and other of $12.1 million and $14.7 million, respectively, during the three and six months ended December 31, 2003, compared to the same periods in the prior fiscal year, resulted from lower interest rates. The Company also recorded a net gain of approximately $8.9 million related to the sale of a non-strategic business during the second quarter of fiscal 2004. Provision for Income Taxes The Company's provision for income taxes relative to earnings before income taxes and discontinued operations was 32.9% and 33.0% for the three and six months ended December 31, 2003, respectively, as compared to 34.3% and 34.2% for the three and six months ended December 31, 2002. Fluctuations in the effective tax rate are primarily due to changes within state and foreign effective tax rates resulting from the Company's business mix and changes in the tax impact of special items, which may have unique tax implications depending on the nature of the item. Loss from Discontinued Operations See Note 9 in the "Notes to Condensed Consolidated Financial Statements" for information on the Company's discontinued operations. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents decreased to $544.3 million at December 31, 2003, from $1,724.0 million at June 30, 2003. The decrease in cash and equivalents during this period was primarily driven by the repurchase of the Company's shares and the completion of certain strategic acquisitions, partially offset by strong operating cash flows. Each of these drivers is discussed in further detail below. Operating cash flow increased 53% during the six months ended December 31, 2003, as compared to the same period a year ago. Operating cash flow was primarily driven by strong earnings from continuing operations, an increase in accounts payable, and the sale of certain sales-type leases during the second quarter of fiscal 2004, as further discussed below. These factors were partially offset by increases in the Company's inventories and trade receivables. The increase in accounts payable is primarily related to the timing of payments related to the Company's increase in inventories during the six months ended December 31, 2003. The increase in inventories was primarily due to continuing increase in customer demand and normal seasonal inventory buying activities. The increase in trade receivables was primarily attributed to sales activity during the first two quarters of fiscal 2004. The Company used cash of $658.0 million in investing activities, primarily driven by capital deployment through strategic acquisitions and fixed asset additions. The Company has funded these strategic acquisitions and capital expenditures primarily through internal resources as a result of its strong operating cash flows. For information regarding the acquisitions of Intercare and Medicap, see Note 10 in the "Notes to Condensed Consolidated Financial Statements." The Company used cash of $1,070.1 million in financing activities, primarily due to the repurchase of its Common Shares, as further discussed below. During the three months ended December 31, 2003 and 2002, the Company sold certain sales-type leases and received proceeds of approximately $164.2 million and $200.0 million, respectively, related to the sales. See Note 11 in the "Notes to Condensed Consolidated Financial Statements" for further information related to this sale. Shareholders' equity declined by $165.8 million at December 31, 2003, as compared to June 30, 2003. Shareholders' equity decreased during this time period primarily due to the repurchase of Common Shares of $1.0 billion and dividends paid of $26.4 million. These decreases were partially offset by net earnings of $704.4 million and the investment of $80.0 million by employees of the Company through various employee stock benefit plans. On August 1, 2003, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $1.0 billion. Pursuant to this authorization, the Company repurchased approximately 17.0 million Common Shares having an aggregate cost of approximately $1.0 billion. The average price paid per share Page 25 was $58.65. This repurchase was completed during the first quarter of fiscal 2004, and the repurchased shares were placed into treasury shares to be 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 See Note 1 in the "Notes to Condensed Consolidated Financial Statements" for a discussion of recent financial accounting standards. RECENT DEVELOPMENTS On February 3, 2004, the Company announced organizational changes resulting in the promotion of George L. Fotiades to President and Chief Operating Officer of the Company, with all operations of the Company reporting to Mr. Fotiades. In connection with this change, the Company entered into a new three-year employment agreement with Mr. Fotiades effective as of February 1, 2004. In addition, effective as of February 1, 2004, the Company entered into an amended and restated employment agreement with Robert D. Walter, its Chairman and Chief Executive Officer, which amended and restated agreement, among other things, extended the "Initial Term" under Mr. Walter's employment agreement from June 30, 2004 through February 1, 2007. Page 26 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that there has been no material change in the quantitative and qualitative market risks from those discussed in the 2003 Form 10-K. ITEM 4: CONTROLS AND PROCEDURES The Company carried out an evaluation, as required by Exchange Act Rule 13a-15(b), under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer, and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. The Company's management, including the Company's Chief Executive Officer and the Executive Vice President and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures and its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. The Company monitors its disclosure controls and procedures and internal controls on an ongoing basis and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and procedures and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. During the three-month period ended December 31, 2003, there have been no changes to internal controls that have materially affected, or are reasonably likely to materially affect, the Company's financial reporting. 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, many of which are more fully described in Part I, Item 3, of the 2003 Form 10-K, and the Form 10-Q for the fiscal quarter ended September 30, 2003, and are incorporated herein by reference. To the extent any such statements constitute "forward looking statements," reference is made to Exhibit 99.01 of this Form 10-Q and beginning on page 8 of the 2003 Form 10-K. Reference is also made to Note 6 in the "Notes to Condensed Consolidated Financial Statements" included herein for additional information regarding various other pending legal proceedings relating to the Company. 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 pending in the United States District Court for the District of Columbia (where it was transferred). As of December 31, 2003, Scherer has entered into settlement agreements with the majority of the Page 27 defendants in consideration of payments of approximately $140.9 million, net of attorney fees, payments due to other interested parties and expenses withheld prior to the disbursement of the funds to Scherer. While the Company still has pending claims with smaller vitamin manufacturers and cannot predict the outcome of the claims against those defendants, the total amount of any future recovery will not likely represent a material amount. Antitrust Litigation against Pharmaceutical Manufacturers During the past five years, numerous class action lawsuits have been filed against certain prescription drug manufacturers alleging that the prescription drug manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drug competition against the manufacturer's brand name drug. The Company has not been a name plaintiff in any of the class actions, but has been a member of the direct purchasers class (i.e. those purchasers who purchase directly from these drug manufacturers). None of the class actions have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement fund. Currently, there are several such class actions pending in which the company is a class member. See Note 4 in the "Notes to Condensed Consolidated Financial Statements" for a discussion of recoveries to date. The Company is unable at this time to estimate definitively future recoveries, if any, it will receive as a result of those class actions. Other Matters The Company also becomes involved from time-to-time in other litigation incidental to its business, including, without limitation, inclusion of certain of its subsidiaries as a potentially responsible party for environmental clean-up costs. 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 financial position, liquidity or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's 2003 Annual Meeting of Shareholders was held on November 5, 2003. (b) Proxies were solicited by the Company pursuant to Regulation 14A under the Securities Exchange Act of 1934; there was no solicitation in opposition to the nominees as listed in the proxy statement; and all director nominees were elected to the class indicated in the proxy statement pursuant to the vote of the Company's shareholders. (c) Matters voted upon at the Annual Meeting were as follows: (i) Election of Dave Bing, John F. Finn, John F. Havens, David W. Raisbeck, and Robert D. Walter. The results of the shareholder vote were as follows: Mr. Bing -- 376,097,955 for, 6,816,733 against, 2,705,242 withheld, and 0 broker non-votes; Mr. Finn -- 376,158,034 for, 6,756,654 against, 2,645,163 withheld, and 0 broker non-votes; Mr. Havens -- 377,079,984 for, 5,834,704 against, 1,723,213 withheld, and 0 broker non-votes; Mr. Raisbeck -- 376,072,862 for, 6,841,826 against, 2,730,335 withheld, and 0 broker non-votes; and Mr. Walter -- 373,495,801 for, 9,418,887 against, 5,307,396 withheld, and 0 broker non-votes. Page 28 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Listing of Exhibits: Exhibit Number Exhibit Description 10.01 Form of Nonqualified Stock Option Agreement under the Amended and Restated Equity Incentive Plan, as amended 10.02 Form of Restricted Share Units Agreement under the Amended and Restated Equity Incentive Plan, as amended 10.03 Form of Directors' Stock Option Agreement under the Amended and Restated Equity Incentive Plan, as amended 10.04 Form of Directors' Stock Option Agreement under the Outside Directors Equity Incentive Plan 10.05 Employment Agreement, dated and effective as of November 5, 2003, between the Registrant and Ronald K. Labrum 10.06 First Amendment to the Registrant's Deferred Compensation Plan 31.01 Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.02 Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.01 Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.02 Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.01 Statement Regarding Forward-Looking Information (1) - -------------- (1) Included as an exhibit to the Registrant's Annual Report on Form 10-K filed September 29, 2003 (File No. 1-11373) and incorporated herein by reference. (b) Reports on Form 8-K: On February 6, 2004, the Company filed a Current Report on Form 8-K under Item 5 which filed as exhibits the Amended and Restated Employment Agreement, effective as of February 1, 2004, between the Company and Robert D. Walter, and the Employment Agreement, effective as of February 1, 2004, between the Company and George L. Fotiades. Page 29 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: February 17, 2004 /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 30 EX-10.01 3 l05659aexv10w01.txt EXHIBIT 10.01 Exhibit 10.01 CARDINAL HEALTH, INC. NONQUALIFIED STOCK OPTION AGREEMENT Dollars at Work*: Grant Date: Exercise Price: Grant Vesting Date: Grant Expiration Date: Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted to [employee name] ("Grantee"), an option (the "Option") to purchase [# of shares] common shares, without par value, of the Company (the "Shares") for a total purchase price of , (i.e., the equivalent of [stock price] for each full Share). The Option has been granted under the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended (the "Plan"), and will include and be subject to all provisions of the Plan, which are incorporated herein by reference, and will be subject to the provisions of this agreement. Capitalized terms used in this agreement which are not specifically defined will have the meanings ascribed to such terms in the Plan. This Option shall be exercisable at any time on or after and prior to . By: -------------------- Robert D. Walter Chairman and CEO * Dollars at Work and total purchase price may vary due to rounding (up to the dollar amount of one full Share). 1. Method of Exercise and Payment of Price. (a) Method of Exercise. At any time when the Option is exercisable under the Plan and this agreement, the Option may be exercised from time to time by written notice to the Company which will: (i) state the number of Shares with respect to which the Option is being exercised; and (ii) if the Option is being exercised by anyone other than Grantee, be accompanied by proof satisfactory to counsel for the Company of the right of such person or persons to exercise the Option under the Plan and all applicable laws and regulations. (b) Payment of Price. The full exercise price for the Option shall be paid to the Company as provided in the Plan. 2. Transferability. The Option shall be transferable (I) at Grantee's death, by Grantee by will or pursuant to the laws of descent and distribution, and (II) by Grantee during Grantee's lifetime, without payment of consideration, to (a) the spouse, former spouse, parents, stepparents, grandparents, parents-in-law, siblings, siblings-in-law, children, stepchildren, children-in-law, grandchildren, nieces or nephews of Grantee, or any other persons sharing Grantee's household (other than tenants or employees) (collectively, "Family Members"), (b) a trust or trusts for the primary benefit of Grantee or such Family Members, (c) a foundation in which Grantee or such Family Members control the management of assets, or (d) a partnership in which Grantee or such Family Members are the majority or controlling partners; provided, however, that subsequent transfers of the transferred Option shall be prohibited, except (X) if the transferee is an individual, at the transferee's death by the transferee by will or pursuant to the laws of descent and distribution, and (Y) without payment of consideration to the individuals or entities listed in subparagraphs II(a), (b) or (c), above, with respect to the original Grantee. The Human Resources and Compensation Committee of the Board of Directors of the Company (the "Committee") may, in its discretion, permit transfers to other persons and entities as permitted by the Plan. Neither a transfer under a domestic relations order in settlement of marital property rights nor a transfer to an entity in which more than 50% of the voting interests are owned by Grantee or Family Members in exchange for an interest in that entity shall be considered to be a transfer for consideration. Within 10 days of any transfer, Grantee shall notify the Stock Option Administrator of the Company in writing of the transfer. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer and, except as otherwise provided in the Plan or this agreement, references to the original Grantee shall be deemed to refer to the transferee. The events of termination of employment of Grantee provided in paragraph 3 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods, specified in paragraph 3. The Company shall have no obligation to notify any transferee of Grantee's 2 termination of employment with the Company for any reason. The conduct prohibited of Grantee in paragraphs 5 and 6 hereof shall continue to be prohibited of Grantee following transfer to the same extent as immediately prior to transfer and the Option (or its economic value, as applicable) shall be subject to forfeiture by the transferee and recoupment from Grantee to the same extent as would have been the case of Grantee had the Option not been transferred. Grantee shall remain subject to the recoupment provisions of paragraphs 5 and 6 of this agreement and tax withholding provisions of Section 13(d) of the Plan following transfer of the Option. 3. Termination of Relationship. (a) Termination by Death. If 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 60 days of such death, any unvested portion of the Option shall vest upon and become exercisable in full from and after the 60th day after such death. The Option may thereafter be exercised by any transferee of Grantee, if applicable, or by the legal representative of the estate or by the legatee of Grantee under the will of Grantee 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 Grant Expiration Date, whichever period is shorter. (b) Termination by Reason of Retirement or Disability. If Grantee's employment by the Cardinal Group terminates prior to the Grant Vesting Date by reason of retirement or disability (each as defined in the Plan), then, unless otherwise determined by the Committee within 60 days of such retirement or disability, a Ratable Portion (defined below) of the Option will vest on the Grant Vesting Date. Such "Ratable Portion" shall be an amount equal to the number of Shares the subject of the Option, multiplied by a fraction the numerator of which shall be the number of full months between the Grant Date and the date of retirement or disability, and the denominator of which shall be the number of full months from the Grant Date to the Grant Vesting Date. The Option may be exercised after the Grant Vesting Date by Grantee (or any transferee, if applicable) until the earlier of the fifth anniversary of the date of such retirement or disability or the Grant Expiration Date (the "Exercise Period"); provided, however, that any vesting that would otherwise occur during the 60-day period beginning immediately after such retirement or disability shall not occur until the end of such 60-day period. If Grantee has at least 15 years of service with the Cardinal Group at the time of retirement, the Option may be exercised after the Grant Vesting Date by Grantee (or any transferee, if applicable) until the Grant Expiration Date. Notwithstanding the foregoing, if Grantee dies after retirement or disability but before the expiration of the Exercise Period, unless otherwise determined by the Committee within 60 days of such death, the Ratable Portion of the Option shall vest upon the 60th day after such death, 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 Grantee under the will of Grantee from and after the 60th day after such death, for a period of one year (or such other period as the Committee may 3 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) Other Termination of Employment. If Grantee's employment by the Cardinal Group terminates for any reason other than death, retirement or disability (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, Grantee (or any transferee, if applicable) will have 90 days (or such other period as the Committee may specify at or after grant or termination) from the date of termination or until the Grant Expiration Date, whichever period is shorter, to exercise any portion of the Option that is then vested and exercisable on the date of termination; provided, however, that if the termination was for Cause, as determined by the Committee, the Option may be immediately canceled by the Committee (whether then held by Grantee or any transferee). 4. Restrictions on Exercise. The Option is subject to all restrictions in this agreement and/or in the Plan. As a condition of any exercise of the Option, the Company may require Grantee or his or her transferee or successor to make any representation and warranty to comply with any applicable law or regulation or to confirm any factual matters (including Grantee's compliance with the terms of paragraphs 5 and 6 of this agreement or any employment or severance agreement between any member of the Cardinal Group and Grantee) reasonably requested by the Company. 5. Triggering Conduct/Competitor Triggering Conduct. As used in this agreement, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the performance of duties assigned by the Cardinal Group any confidential information, trade secrets or other business sensitive information or material concerning the Cardinal Group; violation of Company policies, including conduct which would constitute a breach of any of the Certificates of Compliance with Company Policies and/or the Certificates of Compliance with Company Business Ethics Policies signed by Grantee; directly or indirectly employing, contacting concerning employment, or participating in any way in the recruitment for employment of (whether as an employee, officer, director, agent, consultant or independent contractor), any person who was or is an employee, representative, officer or director of the Cardinal Group at any time within the 12 months prior to the termination of Grantee's employment with the Cardinal Group; any action by Grantee and/or his or her representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers, potential customers, vendors and/or suppliers that were known to Grantee; and breaching any provision of any employment or severance agreement with a member of the Cardinal Group. As used in this agreement, "Competitor Triggering Conduct" shall include, either during Grantee's employment or within one year following Grantee's termination of employment with the Cardinal Group, accepting employment with or serving as a consultant or advisor or in any other capacity to an entity that is in competition with the business conducted by any member of the 4 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 Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period referenced in the definition of "Competitor Triggering Conduct" set forth in paragraph 5 above, then: (a) the Option (or any part thereof that has not been exercised) shall immediately and automatically terminate, be forfeited, and shall cease to be exercisable at any time; and (b) Grantee shall, within 30 days following written notice from the Company, pay the Company an amount equal to the gross option gain realized or obtained by Grantee or any transferee resulting from the exercise of such Option, measured at the date of exercise (i.e., the difference between the market value of the Shares underlying the Option on the exercise date and the exercise price paid for such Shares underlying the Option), with respect to any portion of the Option that has already been exercised at any time within three years prior to the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages only in Competitor Triggering Conduct, then the Look-Back Period shall be shortened to exclude any period more than one year prior to Grantee's termination of employment with the Cardinal Group, but including any period between the time of Grantee's termination and engagement in Competitor Triggering Conduct. Grantee may be released from Grantee's obligations under this paragraph 6 only if the Committee (or its duly appointed designee) determines, in writing and in its sole discretion, that such action is in the best interests of the Company. Nothing in this paragraph 6 constitutes a so-called "noncompete" covenant. This paragraph 6 does, however, prohibit certain conduct while Grantee is associated with the Cardinal Group and thereafter and does provide for the forfeiture or repayment of the benefits granted by this agreement under certain circumstances, including, but not limited to, Grantee's acceptance of employment with a Competitor. Grantee agrees to provide the Company with at least 10 days written notice prior to directly or indirectly accepting employment with or serving as a consultant or advisor or in any other capacity to a Competitor, and further agrees to inform any such new employer, before accepting employment, of the terms of this paragraph 6 and Grantee's continuing obligations contained herein. No provisions of this agreement shall diminish, negate or otherwise impact any separate noncompete or other agreement to which Grantee may be a party, including, but not limited to, any of the Certificates of Compliance with Company Policies and/or the Certificates of Compliance with Company Business Ethics Policies; provided, however, that to the extent that any provisions 5 contained in any other agreement are inconsistent in any manner with the restrictions and covenants of Grantee contained in this agreement, the provisions of this agreement shall take precedence and such other inconsistent provisions shall be null and void. Grantee acknowledges and agrees that the restrictions contained in this agreement are being made for the benefit of the Company in consideration of Grantee's receipt of the Option, in consideration of employment, in consideration of exposing Grantee to the Company's business operations and confidential information, and for other good and valuable consideration, the adequacy of which consideration is hereby expressly confirmed. Grantee further acknowledges that the receipt of the Option and execution of this agreement are voluntary actions on the part of Grantee and that the Company is unwilling to provide the Option to Grantee without including the restrictions and covenants of Grantee contained in this agreement. Further, the parties agree and acknowledge that the provisions contained in paragraphs 5 and 6 are ancillary to, or part of, an otherwise enforceable agreement at the time the agreement is made. 7. Right of Set-Off. By accepting this Option, Grantee consents to a deduction from, and set-off against, any amounts owed to Grantee by any member of the Cardinal Group from time to time (including, but not limited to, amounts owed to Grantee as wages, severance payments or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by 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 paragraphs 5 and 6 of this agreement are reasonable in nature, are fundamental for the protection of the Company's legitimate business and proprietary interests, and do not adversely affect Grantee's ability to earn a living in any capacity that does not violate such covenants. The parties further agree that in the event of any violation by Grantee of any such covenants, the Company will suffer immediate and irreparable injury for which there is no adequate remedy at law. In the event of any violation or attempted violations of the restrictions and covenants of Grantee contained in this agreement, the Cardinal Group shall be entitled to specific performance and injunctive relief or other equitable relief, including the issuance ex parte of a temporary restraining order, without any showing of irreparable harm or damage, such irreparable harm being acknowledged and admitted by Grantee, and Grantee hereby waives any requirement for the securing or posting of any bond in connection with such remedy, without prejudice to the rights and remedies afforded the Cardinal Group hereunder or by law. In the event that it becomes necessary for the Cardinal Group to institute legal proceedings under this agreement, Grantee shall be responsible to the Company for all 6 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. 10. Prompt Acceptance of Agreement. The Option grant evidenced by this agreement shall, at the discretion of the Committee, be forfeited if this agreement is not executed by Grantee and returned to the Company within 90 days of the Grant Date set forth on the first page of this agreement. 7 ACCEPTANCE OF AGREEMENT Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either been previously delivered or is provided with this agreement, and represents that he or she is familiar with and understands all provisions of the Plan and this agreement; and (b) voluntarily and knowingly accepts this agreement and the Option granted to him or her under this agreement subject to all provisions of the Plan and this agreement. Grantee further acknowledges receiving a copy of the Company's most recent Annual Report and other communications routinely distributed to the Company's shareholders and a copy of the Plan Description dated November 17, 2003 pertaining to the Plan. _____________________________________ Signature _____________________________________ Print Name _____________________________________ Grantee's Social Security Number _____________________________________ Date 8 EX-10.02 4 l05659aexv10w02.txt EXHIBIT 10.02 Exhibit 10.02 RESTRICTED SHARE UNITS AGREEMENT Cardinal Health, Inc, an Ohio corporation (the "Company"), hereby grants to [employee name] ("Grantee") [# of Units] Restricted Share Units (the "Restricted Share Units" or "Award"), representing an unfunded unsecured promise of the Company to deliver common shares, without par value, of the Company (the "Common Shares") to Grantee as set forth herein. The Restricted Share Units are being granted pursuant to the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended (the "Plan"), and shall be subject to all provisions of the Plan, which are hereby incorporated herein by reference, and shall be subject to all provisions of this agreement. Capitalized terms used herein that are not specifically defined herein shall have the meanings ascribed to such terms in the Plan. 1. VESTING. Subject to the provisions set forth elsewhere in this agreement, the Restricted Share Units shall vest in full (100%) on (the "Vesting Date"). 2. PURCHASE PRICE. The purchase price of the Restricted Share Units shall be $ . 3. TRANSFERABILITY. The Restricted Share Units shall not be transferable, except as otherwise provided in Section 4 of this agreement. 4. TERMINATION OF SERVICE. Unless otherwise determined by the Committee at or after grant or termination, and except as set forth below, if Grantee's Continuous Service to the Company and its subsidiaries (collectively, the "Cardinal Group") terminates prior to the Vesting Date, all of the Restricted Share Units that have not vested shall be forfeited by Grantee. If Grantee's Continuous Service terminates prior to the vesting of all of the Restricted Share Units by reason of Grantee's death or total or partial disability, then the restrictions with respect to a ratable portion of the Restricted Share Units shall lapse and such shares shall not be forfeited. Such ratable portion shall be determined with respect to this award of Restricted Share Units as an amount equal to the number of Restricted Share Units awarded to Grantee multiplied by a fraction, the numerator of which is the number of whole calendar months between the date of this grant (the "Grant Date") and the date of such death or disability and the denominator of which is the number of whole calendar months between the Grant Date and the Vesting Date. For purposes of this agreement, the term "Continuous Service" shall mean the absence of any interruption or termination of service as an employee or director of any entity within the Cardinal Group. 5. TRIGGERING CONDUCT/COMPETITOR TRIGGERING CONDUCT. As used in this agreement, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the performance of duties assigned by the Cardinal Group any confidential information, trade secrets or other business sensitive information or material concerning the Cardinal Group; violation of Company policies, including conduct which would constitute a breach of any of the Certificates of Compliance with Company Policies and/or the Certificates of Compliance with Company Business Ethics Policies signed by Grantee; directly or indirectly employing, contacting concerning employment, or participating in any way in the recruitment for employment of (whether as an employee, officer, director, agent, consultant or independent contractor), any person who was or is an employee, representative, officer or director of the Cardinal Group at any time within the 12 months prior to the termination of Grantee's employment with the Cardinal Group; any action by Grantee and/or his or her representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers, potential customers, vendors and/or suppliers that were known to Grantee; and breaching any provision of any employment or severance agreement with a member of the Cardinal Group. As used in this agreement, "Competitor Triggering Conduct" shall include, either during Grantee's employment or within one year following Grantee's termination of employment with the Cardinal Group, accepting employment with or serving as a consultant or advisor or in any other capacity to an entity that is in competition with the business conducted by any member of the Cardinal Group (a "Competitor"), including, but not limited to, employment or another business relationship with any Competitor if Grantee has been introduced to trade secrets, confidential information or business sensitive information during Grantee's 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 Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period referenced in the definition of "Competitor Triggering Conduct" set forth in paragraph 5 above, then: (a) the Restricted Share Units (or any part thereof that have not vested) shall immediately and automatically terminate, be forfeited, and shall cease to vest at any time; and (b) Grantee shall, within 30 days following written notice from the Company, pay to the Company an amount equal to the gross gain realized or obtained by Grantee resulting from the vesting of such Restricted Share Units, measured at the date of vesting (i.e., the market value of the Restricted Share Units on the vesting date), with respect to any portion of the Restricted Share Units that has already vested at any time within three years prior to the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages only in Competitor Triggering Conduct, then the Look-Back Period shall be shortened to exclude any period more than one year prior to Grantee's termination of employment with the Cardinal Group, but including any period between the time of Grantee's termination and engagement in Competitor Triggering Conduct. Grantee may be released from Grantee's obligations under this paragraph 6 only if the Committee (or its duly appointed designee) determines, in writing and in its sole discretion, that such action is in the best interests of the Company. Nothing in this paragraph 6 constitutes a so-called "noncompete" covenant. This paragraph 6 does, however, prohibit certain conduct while Grantee is associated with the Cardinal Group and thereafter and does provide for the forfeiture or repayment of the benefits granted by this agreement under certain circumstances, including, but not limited to, Grantee's acceptance of employment with a Competitor. Grantee agrees to provide the Company with at least 10 days written notice prior to directly or indirectly accepting employment with or serving as a consultant or advisor or in any other capacity to a Competitor, and further agrees to inform any such new employer, before accepting employment, of the terms 2 of this paragraph 6 and Grantee's continuing obligations contained herein. No provision of this agreement shall diminish, negate or otherwise impact any separate noncompete or other agreement to which Grantee may be a party, including, but not limited to, any of the Certificates of Compliance with Company Policies and/or the Certificates of Compliance with Company Business Ethics Policies; provided, however, that to the extent that any provisions contained in any other agreement are inconsistent in any manner with the restrictions and covenants of Grantee contained in this agreement, the provisions of this agreement shall take precedence and such other inconsistent provisions shall be null and void. Grantee acknowledges and agrees that the provisions contained in this agreement are being made for the benefit of the Company in consideration of Grantee's receipt of the Restricted Share Units, 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 Restricted Share Units and execution of this agreement are voluntary actions on the part of Grantee and that the Company is unwilling to provide the Restricted Share Units to Grantee without including the restrictions and covenants of Grantee contained in this agreement. Further, the parties agree and acknowledge that the provisions contained in paragraphs 5 and 6 are ancillary to, or part of, an otherwise enforceable agreement at the time the agreement is made. 7. PAYMENT. Subject to the provisions of paragraphs 5 and 6 of the agreement, on the one year anniversary of the first date on which Grantee ceases to be a reporting person pursuant to Section 16 of the Securities Exchange Act, as amended, or on such earlier date as may be approved by the Chairman of the Company as to all or any portion of the Restricted Share Units, Grantee shall be entitled to receive from the Company (without any payment on behalf of Grantee other than as described in paragraph 11) the Common Shares represented by this Award. 8. DIVIDENDS. Grantee shall not receive cash dividends on the Restricted Share Units but instead shall receive a cash payment from the Company on each cash dividend payment date with respect to the Common Shares with a record date between the Grant Date and the earlier of the termination or forfeiture of this grant in accordance with the terms hereof or the payment described in paragraph 7 hereof, such cash payment to be in an amount equal to the dividends that would have been paid on the Common Shares represented by the Restricted Share Units. 9. RIGHT OF SET-OFF. By accepting these Restricted Share Units, Grantee consents to a deduction from, and set-off against, any amounts owed to Grantee by any member of the Cardinal Group from time to time (including, but not limited to, amounts owed to Grantee as wages, severance payments or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by Grantee under this agreement. 10. NO SHAREHOLDER RIGHTS. Grantee shall have no rights of a shareholder with respect to the Restricted Share Units, including, without limitation, Grantee shall not have the right to vote the Common Shares represented by the Restricted Share Units. 3 11. WITHHOLDING TAX. The Company shall have the right to require Grantee to pay to the Company the amount of any taxes which the Company is required to withhold with respect to the Restricted Share Units (including the amount of any taxes which the Company is required to withhold with respect to the cash payments described in paragraph 8 hereof) or, in lieu thereof, to retain, or sell without notice, a sufficient number of Common Shares to cover the amount required to be withheld. In the case of any amounts withheld for taxes pursuant to this provision in the form of Common Shares, the amount withheld shall not exceed the minimum required by applicable law and regulations. 12. 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 Restricted Share Units and benefits granted herein would not be granted without the governance of this agreement by the laws of the State of Ohio. In addition, all legal actions or proceedings relating to this agreement shall be brought in state or federal courts located in Franklin County, Ohio, and the parties executing this agreement hereby consent to the personal jurisdiction of such courts. Grantee acknowledges that the covenants contained in paragraphs 5 and 6 of this agreement are reasonable in nature, are fundamental for the protection of the Company's legitimate business and proprietary interests, and do not adversely affect Grantee's ability to earn a living in any capacity that does not violate such covenants. The parties further agree that in the event of any violation by Grantee of any such covenants, the Company will suffer immediate and irreparable injury for which there is no adequate remedy at law. In the event of any violation or attempted violations of the restrictions and covenants of Grantee contained in this agreement, the Cardinal Group shall be entitled to specific performance and injunctive relief or other equitable relief, including the issuance ex parte of a temporary restraining order, without any showing of irreparable harm or damage, such irreparable harm being acknowledged and admitted by Grantee, and Grantee hereby waives any requirement for the securing or posting of any bond in connection with such remedy, without prejudice to the rights and remedies afforded the Cardinal Group hereunder or by law. In the event that it becomes necessary for the Cardinal Group to institute legal proceedings under this agreement, Grantee shall be responsible to the Company for all costs and reasonable legal fees incurred by the Company with regard to such proceedings. Any provision of this agreement which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such provision, without invalidating or rendering unenforceable the remaining provisions of this agreement. CARDINAL HEALTH, INC. DATE OF GRANT: By: _______________________________ 4 ACCEPTANCE OF AGREEMENT Grantee hereby: (a) acknowledges that he or she has received a copy of the Plan, a copy of the Company's most recent Annual Report and other communications routinely distributed to the Company's shareholders, and a copy of the Plan Description dated November 17, 2003 pertaining to the Plan; (b) accepts this agreement and the Restricted Share Units granted to him or her under this agreement subject to all provisions of the Plan and this agreement; (c) represents and warrants to the Company that he or she is purchasing the Restricted Share Units for his or her own account, for investment, and not with a view to or any present intention of selling or distributing the Restricted Share Units either now or at any specific or determinable future time or period or upon the occurrence or nonoccurrence of any predetermined or reasonably foreseeable event; and (d) agrees that no transfer of the Common Shares delivered in respect of the Restricted Share Units shall be made unless the Common Shares have been duly registered under all applicable Federal and state securities laws pursuant to a then-effective registration which contemplates the proposed transfer or unless the Company has received a written opinion of, or satisfactory to, its legal counsel that the proposed transfer is exempt from such registration. ________________________________ Grantee's Signature ________________________________ Grantee's Social Security Number ________________________________ Date 5 EX-10.03 5 l05659aexv10w03.txt EXHIBIT 10.03 Exhibit 10.03 DIRECTORS' STOCK OPTION AGREEMENT UNDER THE AMENDED AND RESTATED EQUITY INCENTIVE PLAN Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted to [director name] (the "Grantee"), an option (the "Option") to purchase [# of shares] Common Shares, without par value (the "Shares"), of the Company for a total purchase price (the "Option Price") 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 following 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 and prior to . Section 1. Method of Exercise. At any time when the Option is exercisable under the Plan, the Option shall be exercisable from time to time by written notice to the Company (the date such notice is received by the Company, the "Exercise Date") which shall: (a) state that the Option is thereby being exercised, the number of Shares with respect to which the Option is being exercised, each person in whose name any certificates for the Shares should be registered and his or her address and social security number; (b) be signed by the person or persons entitled to exercise the Option and, 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; and (c) contain such representations, warranties and agreements with respect to the investment intent of such person or persons in form and substance satisfactory to counsel for the Company. Section 2. Payment of Exercise Price. The full exercise price for the Option shall be paid to the Company: (i) in cash, (ii) by delivery of Shares with a fair market value equal to the total exercise price at the time of exercise, (iii) by attestation of ownership of such already-owned Shares, (iv) by delivery of cash on the extension of credit by a broker-dealer to whom the Grantee (or other person authorized to exercise the Option) has submitted a notice of exercise or an irrevocable election to effect such extension of credit, or (v) by a combination of the preceding methods. Any Shares delivered or attested to in payment of an exercise price shall be valued as of the Exercise Date. Section 3. 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) (collectively, "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, however, that subsequent transfers of the transferred Option shall be prohibited, except (X) if the transferee is an individual, at the transferee's death by the transferee by will or pursuant to the laws of descent and distribution, and (Y) without payment of consideration to the individuals or entities listed in Subsections II(a), (b), or (c), above, with respect to the original Grantee. 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 Grantee's termination from the Board of Directors of the Company (the "Board") provided in Section 4 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 Section 4. The conduct prohibited of Grantee in Section 6 hereof shall continue to be prohibited of Grantee following transfer to the same extent as immediately prior to transfer and the Option (or its economic value, as applicable) shall be subject to forfeiture by the transferee and recoupment from the Grantee to the same extent as would have been the case of the Grantee had the Option not been transferred. The Company shall have no obligation to notify any transferee of the Option of the Grantee's termination as a member of the Board for any reason. The Grantee shall remain subject to the recoupment provisions of Section 6 of this agreement and tax withholding provisions of Section 13(d) of the Plan following transfer of the Option. Section 4. Termination of Relationship. If a Grantee ceases to be a member of the Board for any reason other than for cause, then all Options or any unexercised portion of such Options which otherwise are exercisable by such Grantee (or any transferee) shall remain exercisable until expiration of the original term of such Option. Section 5. Termination for Cause. Notwithstanding any provision to the contrary in the Plan or in this agreement, upon the discharge of the Grantee as a director of the Company for Cause (as defined in the Plan), all unexercised Options awarded to such Grantee (whether then held by Grantee or any transferee) shall immediately lapse and be of no further force or effect. Section 6. Special Forfeiture/Repayment Rules. For so long as Grantee continues as a Director of the Company and for three years following Grantee's termination as a Director of the Company, Grantee agrees not to engage in Triggering Conduct. If Grantee engages in Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period set forth in the definition of such conduct below, 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 to 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 Shares underlying the Option on the exercise date and the exercise price paid for such Shares underlying the Option), with respect to any portion of the Option that has already been exercised at any time within three years prior to the Triggering Conduct (the "Look-Back Period"), less $1.00. If Grantee engages only in Competitor Triggering Conduct, then the Look-Back Period shall be shortened to exclude any period more than one year prior to Grantee's termination of service as a 2 Director of the Company, but including any period between the time of Grantee's termination and the time Grantee engaged in Competitor Triggering Conduct. As used herein, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the performance of duties as a Director of the Company any confidential information, trade secrets or other business sensitive information or material concerning the Company or its subsidiaries (collectively, the "Cardinal Group"); violation of Company policies, including conduct which would constitute a breach of the then-most recent version of the Certificate 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 of (whether as an employee, officer, director, agent, consultant or independent contractor), any person who was or is an employee, representative, officer, or director of the Cardinal Group at any time within the twelve months prior to the termination of service with the Cardinal Group; any action by Grantee and/or Grantee's representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers, potential customers, vendors and/or suppliers that were known to Grantee; and breaching any provision of any benefit or severance agreement with a member of the Cardinal Group. As used herein, "Competitor Triggering Conduct" shall include, either during or within one year following Grantee's termination of service as a Director of the Company, accepting employment with or serving as a consultant, advisor, or 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 service as a Director of the Company 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. For purposes of this agreement, the nature and extent of Grantee's activities disclosed to and reviewed by, if any, the Company's Nominating and Governance Committee (the "Nominating Committee") prior to the date of Grantee's termination of service shall not, unless specified to the contrary by the Nominating Committee in a written notice given to Grantee, be deemed to be Competitor Triggering Conduct. The Committee shall resolve in good faith any disputes concerning whether particular conduct constitutes Triggering Conduct or Competitor Triggering Conduct, and any such determination by the Committee shall be conclusive and binding on all interested persons. The Grantee may be released from Grantee's obligations under this Section 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 Section 6 constitutes a so-called "noncompete" covenant. However, this Section 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 Section 6 and of the Grantee's continuing obligations contained herein. No provision 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 the then-most recent version of the Certificate of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies; provided, however, that to the extent that any provisions contained in any other agreement are inconsistent with the restrictions and covenants of 3 Grantee contained in this agreement, the provisions of this agreement shall take precedence and such other inconsistent provisions shall be null and void. Grantee acknowledges and agrees that the restrictions contained in this Section 6 are being made for the benefit of the Company in consideration of Grantee's receipt of the Option, in consideration of exposing Grantee to the Company's business operations and confidential information, and for other good and valuable consideration, the adequacy of which consideration is hereby expressly confirmed. Grantee further acknowledges that the receipt of the Option and execution of this agreement are voluntary actions on the part of Grantee, and that the Company is unwilling to provide the Option to Grantee without including the restrictions and covenants of Grantee contained in this agreement. Further, the parties agree and acknowledge that the provisions contained in this Section 6 are ancillary to or part of an otherwise enforceable agreement at the time the agreement is made. Section 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 Director fees, severance payments, or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by the Grantee under this agreement. Section 8. Restrictions on Exercise. The Option is subject to all restrictions in this agreement or in the Plan. As a condition of any exercise of the Option, the Company may require the Grantee or his or her transferee or successor to make such representation and warranties and to enter into such agreements as are necessary to comply with any applicable law or regulation or to confirm any factual matters reasonably requested by counsel for the Company. Section 9. Governing Law/Venue. This agreement shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of laws, 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 the 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 Section 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 the restrictions and covenants of Grantee contained in 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. 4 Section 10. 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. CARDINAL HEALTH, INC. DATE OF GRANT: By: _________________________________ 5 ACCEPTANCE OF AGREEMENT The Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either been previously delivered or is attached to this Agreement, and represents that he/she is familiar with all provisions of the Plan; and (b) accepts this Agreement and the Option granted to him/her 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 to Shareholders and communications routinely distributed to the Company's shareholders and a copy of the Plan Description dated November 17, 2003, pertaining to the Plan. _____________________________________ Grantee Signature _____________________________________ Social Security Number 6 EX-10.04 6 l05659aexv10w04.txt EXHIBIT 10.04 Exhibit 10.04 DIRECTORS' STOCK OPTION AGREEMENT UNDER THE OUTSIDE DIRECTORS EQUITY INCENTIVE PLAN Cardinal Health, Inc., an Ohio corporation (the "Company"), has granted to [director name] (the "Grantee"), an option (the "Option") to purchase [# of shares] Common Shares, without par value (the "Shares"), of the Company for a total purchase price (the "Option Price") of (i.e., the equivalent of [stock price] for each full Share). The Option has been granted pursuant to the Cardinal Health, Inc. Outside Directors Equity Incentive Plan (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 following 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 and prior to . Section 1. Method of Exercise. At any time when the Option is exercisable under the Plan, the Option shall be exercisable from time to time by written notice to the Company (the date such notice is received by the Company, the "Exercise Date") which shall: (a) state that the Option is thereby being exercised, the number of Shares with respect to which the Option is being exercised, each person in whose name any certificates for the Shares should be registered and his or her address and social security number; (b) be signed by the person or persons entitled to exercise the Option and, 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; and (c) contain such representations, warranties and agreements with respect to the investment intent of such person or persons in form and substance satisfactory to counsel for the Company. Section 2. Payment of Exercise Price. The full exercise price for the Option shall be paid to the Company: (i) in cash, (ii) by delivery of Shares with a fair market value equal to the total exercise price at the time of exercise, (iii) by attestation of ownership of such already-owned Shares, (iv) by delivery of cash on the extension of credit by a broker-dealer to whom the Grantee (or other person authorized to exercise the Option) has submitted a notice of exercise or an irrevocable election to effect such extension of credit, or (v) by a combination of the preceding methods. Any Shares delivered or attested to in payment of an exercise price shall be valued as of the Exercise Date. Section 3. 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) (collectively, "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, however, that subsequent transfers of the transferred Option shall be prohibited, except (X) if the transferee is an individual, at the transferee's death by the transferee by will or pursuant to the laws of descent and distribution, and (Y) without payment of consideration to the individuals or entities listed in Subsections II(a), (b), or (c), above, with respect to the original Grantee. 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 Grantee's termination from the Board of Directors of the Company (the "Board") provided in Section 4 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 Section 4. The conduct prohibited of Grantee in Section 6 hereof shall continue to be prohibited of Grantee following transfer to the same extent as immediately prior to transfer and the Option (or its economic value, as applicable) shall be subject to forfeiture by the transferee and recoupment from the Grantee to the same extent as would have been the case of the Grantee had the Option not been transferred. The Company shall have no obligation to notify any transferee of the Option of the Grantee's termination as a member of the Board for any reason. The Grantee shall remain subject to the recoupment provisions of Section 6 of this agreement and tax withholding provisions of Section 9(d) of the Plan following transfer of the Option. Section 4. Termination of Relationship. If a Grantee ceases to be a member of the Board for any reason other than for Cause (as defined in Section 5 below), then all Options or any unexercised portion of such Options which otherwise are exercisable by such Grantee (or any transferee) shall remain exercisable until expiration of the original term of such Option. Section 5. Termination for Cause. Notwithstanding any provision to the contrary in the Plan or in this agreement, upon the discharge of the Grantee as a director of the Company for Cause (as defined below), all unexercised Options awarded to such Grantee (whether then held by Grantee or any transferee) shall immediately lapse and be of no further force or effect. For purposes of this agreement, "Cause" means on account of any act of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any subsidiary, or the intentional and repeated violation of the written policies or procedures of the Company. Section 6. Special Forfeiture/Repayment Rules. For so long as Grantee continues as a Director of the Company and for three years following Grantee's termination as a Director of the Company, Grantee agrees not to engage in Triggering Conduct. If Grantee engages in Triggering Conduct during the time period set forth in the preceding sentence or in Competitor Triggering Conduct during the time period set forth in the definition of such conduct below, 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 to 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 Shares underlying the Option on the exercise date and the exercise price paid for such Shares underlying the Option), with respect to any portion of the Option that has already 2 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 service as a Director of the Company, but including any period between the time of Grantee's termination and the time Grantee engaged in Competitor Triggering Conduct. As used herein, "Triggering Conduct" shall include disclosing or using in any capacity other than as necessary in the performance of duties as a Director of the Company any confidential information, trade secrets or other business sensitive information or material concerning the Company or its subsidiaries (collectively, the "Cardinal Group"); violation of Company policies, including conduct which would constitute a breach of the then-most recent version of the Certificate 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 of (whether as an employee, officer, director, agent, consultant or independent contractor), any person who was or is an employee, representative, officer, or director of the Cardinal Group at any time within the twelve months prior to the termination of service with the Cardinal Group; any action by Grantee and/or Grantee's representatives that either does or could reasonably be expected to undermine, diminish or otherwise damage the relationship between the Cardinal Group and any of its customers, potential customers, vendors and/or suppliers that were known to Grantee; and breaching any provision of any benefit or severance agreement with a member of the Cardinal Group. As used herein, "Competitor Triggering Conduct" shall include, either during or within one year following Grantee's termination of service as a Director of the Company, accepting employment with or serving as a consultant, advisor, or 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 service as a Director of the Company 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. For purposes of this agreement, the nature and extent of Grantee's activities disclosed to and reviewed by, if any, the Company's Nominating and Governance Committee (the "Nominating Committee") prior to the date of Grantee's termination of service shall not, unless specified to the contrary by the Nominating Committee in a written notice given to Grantee, be deemed to be Competitor Triggering Conduct. The Committee shall resolve in good faith any disputes concerning whether particular conduct constitutes Triggering Conduct or Competitor Triggering Conduct, and any such determination by the Committee shall be conclusive and binding on all interested persons. The Grantee may be released from Grantee's obligations under this Section 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 Section 6 constitutes a so-called "noncompete" covenant. However, this Section 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 Section 6 and of the Grantee's continuing obligations contained herein. No provision 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 3 then-most recent version of the Certificate of Compliance with Company Policies and/or Certificate of Compliance with Company Business Ethics Policies; provided, however, that to the extent that any provisions contained in any other agreement are inconsistent with the restrictions and covenants of Grantee contained in this agreement, the provisions of this agreement shall take precedence and such other inconsistent provisions shall be null and void. Grantee acknowledges and agrees that the restrictions contained in this Section 6 are being made for the benefit of the Company in consideration of Grantee's receipt of the Option, in consideration of exposing Grantee to the Company's business operations and confidential information, and for other good and valuable consideration, the adequacy of which consideration is hereby expressly confirmed. Grantee further acknowledges that the receipt of the Option and execution of this agreement are voluntary actions on the part of Grantee, and that the Company is unwilling to provide the Option to Grantee without including the restrictions and covenants of Grantee contained in this agreement. Further, the parties agree and acknowledge that the provisions contained in this Section 6 are ancillary to or part of an otherwise enforceable agreement at the time the agreement is made. Section 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 Director fees, severance payments, or other fringe benefits) to the extent of the amounts owed to the Cardinal Group by the Grantee under this agreement. Section 8. Restrictions on Exercise. The Option is subject to all restrictions in this agreement or in the Plan. As a condition of any exercise of the Option, the Company may require the Grantee or his or her transferee or successor to make such representation and warranties and to enter into such agreements as are necessary to comply with any applicable law or regulation or to confirm any factual matters reasonably requested by counsel for the Company. Section 9. Governing Law/Venue. This agreement shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of laws, 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 the 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 Section 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 the restrictions and covenants of Grantee contained in 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 4 objectives intended by such provision, without invalidating or rendering unenforceable the remaining provisions of this agreement. Section 10. 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. CARDINAL HEALTH, INC. DATE OF GRANT: By: _____________________________________ 5 ACCEPTANCE OF AGREEMENT The Grantee hereby: (a) acknowledges receiving a copy of the Plan, which has either been previously delivered or is attached to this Agreement, and represents that he/she is familiar with all provisions of the Plan; and (b) accepts this Agreement and the Option granted to him/her 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 to Shareholders and communications routinely distributed to the Company's shareholders and a copy of the Plan Description dated November 5, 2003, pertaining to the Plan. _________________________________________ Grantee Signature _________________________________________ Social Security Number 6 EX-10.05 7 l05659aexv10w05.txt EXHIBIT 10.05 Exhibit 10.05 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated and effective as of November 5, 2003 (the "Effective Date") is made and entered into by and between Cardinal Health, Inc., an Ohio corporation (the "Company"), and Ronald K. Labrum (the "Executive"). WHEREAS, the Company and the Executive desire to set forth in a written agreement the terms and conditions under which the Executive will render services to the Company 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. 2. POSITION AND DUTIES. (a) During the Employment Period, the Executive shall serve as Executive Vice President & Group President - Medical Products and Services, with the duties and responsibilities customarily assigned to such position, and such other duties and responsibilities as President and Chief Executive Officer - Healthcare Products and Services 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 President and Chief Executive Officer - Healthcare Products and Services, (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 McGaw Park, Illinois; provided, however, that, during the Employment Period, the Company may require that the Executive relocate and that the Executive's services be - 1 - performed primarily at another Company office. In the event that the Executive elects, by a written notice to the Company, not to so relocate, he shall not be eligible to receive the severance benefits provided under Section 4(c) of 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 $480,000, 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 ninety percent (90%) of the Base Salary. (c) OPTION GRANT. As of November 17, 2003, the Company shall grant the Executive an option to purchase 25,000 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"). (d) RESTRICTED SHARE UNITS GRANT. As of November 17, 2003, the Company shall grant the Executive an option to purchase 5,000 Restricted Share Units, without par value of the Company (the "Units") pursuant to the terms and conditions set forth in the Restricted Share Units Agreement attached to this Agreement as Exhibit B (the "Restricted Share Units Agreement"). (e) 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 of the Company from time to time. (f) 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. (g) RELOCATION BENEFITS. In the event that the Company requires that the Executive's services be performed primarily at a location other than Company's office located in McGaw Park, Illinois and the Executive agrees to such relocation, the Company shall provide the Executive with relocation benefits in connection with the relocation of himself, his family and his possessions from McGaw Park, Illinois to the new location. 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 - 2 - 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; (F) the Executive's willful and continued failure for a significant period of time to perform Executive's duties; or (G) the Executive's refusal to relocate after a request by the Company that the Executive perform his primary services at a location other than McGaw Park, Illinois; 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 therefore, 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, 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 one 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 twelve (12) month period immediately following the Date of Termination; and (ii) provide the vested benefits. if any, required to be paid or provided by law. 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, 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. - 3 - (e) TERMINATION AFTER A CHANGE OF CONTROL. In the event that during the Employment Period (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, 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 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 twelve (12) 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 - 4 - 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 Non-Competition Period (as defined in this Section 5(e)), 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. The "Non-Competition Period" means the period of Executive's employment with the Cardinal Group and the additional period that ends twelve (12) months after the Executive's Date of Termination. (e) NO COMPETITION - EMPLOYMENT BY COMPETITOR. During the Non-Competition 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. (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 - 5 - 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 secret, processes, discoveries or improvements covered by this Agreement, but all necessary expenses thereof shall be paid by the Company. (h) ACKNOWLEDGEMENT AND ENFORCEMENT. (i) The Executive acknowledges and agrees that: (A) the purpose of the foregoing covenants, including without limitation the non-competition covenants of Sections 5(e) and (f), 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 an amount equal to the gross option gain realized or obtained by the Executive or any transferee resulting from the exercise of any stock options granted to the Executive by the Cardinal Group within three years before a violation of Section 5(b), 5(c), 5(h) or 5(i) or within one year before a violation of Section 5 (d) or 5(e), 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 therefore). 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, - 6 - 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. (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. 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, the "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. - 7 - 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. (h) SURVIVAL. The obligations under this Agreement of the Executive and the Company that by their nature and terms require (or may require) satisfaction after the end of the Employment Period shall survive such event and shall remain binding upon such parties. - 8 - IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization of the Executive Committee 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/ Ronald K. Labrum ----------------------------------------- Ronald K. Labrum CARDINAL HEALTH, INC. By: /s/ Robert D. Walter ------------------------------------- Robert D. Walter Chief Executive Officer - 9 - EXHIBIT A (the "Option Agreement") [See the Form of Nonqualified Stock Option Agreement under the Amended and Restated Equity Incentive Plan, as amended, which was filed as Exhibit 10.01 to the Form 10-Q for the fiscal quarter ended December 31, 2003] - 10 - EXHIBIT B (the "Restricted Share Units Agreement") [See the Form of Restricted Share Units Agreement under the Amended and Restated Equity Incentive Plan, as amended, which was filed as Exhibit 10.02 to the Form 10-Q for the fiscal quarter ended December 31, 2003] - 11 - EX-10.06 8 l05659aexv10w06.txt EXHIBIT 10.06 Exhibit 10.06 FIRST AMENDMENT TO THE CARDINAL HEALTH, INC. DEFERRED COMPENSATION PLAN BACKGROUND INFORMATION A. Cardinal Health, Inc. ("Cardinal Health") established and maintains the Cardinal Health, Inc. Deferred Compensation Plan (the "Shadow Plan") for the benefit of selected highly compensated and management employees and their beneficiaries. B. The Cardinal Health, Inc. Employee Benefits Policy Committee (the "Committee") oversees the administration of the Shadow Plan and is authorized to amend the Shadow Plan. C. The Committee desires to amend the Shadow Plan to conform its terms to the general executive compensation strategy of Cardinal Health and change the plan year of the Shadow Plan to mirror the plan year of the qualified retirement plans of Cardinal Health. D. Section 7.1 of the Shadow Plan permits the amendment of the Shadow Plan at any time. AMENDMENT OF THE SHADOW PLAN 1. Section 1.1(0) of the Shadow Plan shall be amended to read as follows: Plan Year. Beginning January 1, 2003, the Plan Year is the calendar year. Prior to January 1, 2003, the Plan Year was fiscal year of the Plan beginning July 1 and ending June 30. A short Plan Year was designated from July 1, 2002 to December 31, 2002. 2. The fourth and fifth sentences of Section 3.7 of the Shadow Plan shall be amended and replaced by the following: Effective October 1, 2002, no Reporting Person may elect to invest future contributions in his Account in Shares. 3. All other provisions of the Plan shall remain in full force and effect. CARDINAL HEALTH, INC. By: /s/ Carole Watkins ------------------------------------- Carole Watkins, Executive VP, Human Resources Date: 12/27/02 ------------------------------------ EX-31.01 9 l05659aexv31w01.txt EXHIBIT 31.01 Exhibit 31.01 I, Robert D. Walter, certify that: 1. I have reviewed this Form 10-Q of Cardinal Health, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 17, 2004 /s/ Robert D. Walter ------------------------------------ Robert D. Walter Chairman and Chief Executive Officer EX-31.02 10 l05659aexv31w02.txt EXHIBIT 31.02 Exhibit 31.02 I, Richard J. Miller, certify that: 1. I have reviewed this Form 10-Q of Cardinal Health, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 17, 2004 /s/ Richard J. Miller ----------------------------------------- Richard J. Miller Executive Vice President and Chief Financial Officer EX-32.01 11 l05659aexv32w01.txt EXHIBIT 32.01 Exhibit 32.01 I, Robert D. Walter, Chairman and Chief Executive Officer, of Cardinal Health, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly report on Form 10-Q for the fiscal quarter ended December 31, 2003, (the "Periodic Report") containing the financial statements of the Company, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m), and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 17, 2004 /s/ Robert D. Walter ------------------------- Robert D. Walter Chairman, and Chief Executive Officer EX-32.02 12 l05659aexv32w02.txt EXHIBIT 32.02 Exhibit 32.02 I, Richard J. Miller, Executive Vice President and Chief Financial Officer, of Cardinal Health, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly report on Form 10-Q for the fiscal quarter ended December 31, 2003, (the "Periodic Report") containing the financial statements of the Company, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m), and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 17, 2004 /s/ Richard J. Miller ----------------------------- Richard J. Miller Executive Vice President, and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----