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<SEC-DOCUMENT>0000950152-99-007328.txt : 19990903
<SEC-HEADER>0000950152-99-007328.hdr.sgml : 19990903
ACCESSION NUMBER: 0000950152-99-007328
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 21
CONFORMED PERIOD OF REPORT: 19990630
FILED AS OF DATE: 19990902
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CARDINAL HEALTH INC
CENTRAL INDEX KEY: 0000721371
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]
IRS NUMBER: 310958666
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-11373
FILM NUMBER: 99705389
BUSINESS ADDRESS:
STREET 1: 5555 GLENDON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
BUSINESS PHONE: 6147175000
MAIL ADDRESS:
STREET 1: 5555 GLEDNON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
FORMER COMPANY:
FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>CARDINAL HEALTH, INC. 10-K
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12591
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
(614) 757-5000
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 23, 1999 was approximately $16,623,130,558.
The number of Registrant's Common Shares outstanding as of August 23, 1999,
was as follows: Common shares, without par value: 274,190,381.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
1999 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
Information Regarding Forward-Looking Statements.............................................................. 3
PART I
1. Business...................................................................................................... 3
2. Properties.................................................................................................... 7
3. Legal Proceedings............................................................................................. 7
4. Submission of Matters to a Vote of Security Holders........................................................... 8
Executive Officers of the Company............................................................................. 8
PART II
5. Market for the Registrant's Common Shares and Related Shareholder Matters..................................... 10
6. Selected Financial Data....................................................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12
7a. Quantitative and Qualitative Disclosures About Market Risk.................................................... 18
8. Financial Statements and Supplementary Data................................................................... 19
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 48
PART III
10. Directors and Executive Officers of the Registrant............................................................ 48
11. Executive Compensation........................................................................................ 48
12. Security Ownership of Certain Beneficial Owners and Management................................................ 48
13. Certain Relationships and Related Transactions................................................................ 48
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 49
Signatures.................................................................................................... 53
</TABLE>
2
<PAGE> 3
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) 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 projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is structured as
a holding company conducting business through a number of separate operating
subsidiaries. These operating subsidiaries are sometimes collectively referred
to as the "Cardinal Health" companies. As used in this report, the "Registrant"
and the "Company" refer to Cardinal Health, Inc. and its subsidiaries, unless
the context requires otherwise. Except as otherwise specified, information in
this report is provided as of June 30, 1999. The Company is a leading
health-care service provider which offers a broad array of complementary
products and health-care services to health-care providers and manufacturers to
help them improve the efficiency and quality of health-care. These services and
products include pharmaceutical distribution, pharmaceutical services, and
medical-surgical products.
BUSINESS SEGMENTS
A description of the Company's three reporting industry segments is as
follows(1):
1. PHARMACEUTICAL DISTRIBUTION
Cardinal Distribution, the Company's pharmaceutical distribution business,
is one of the country's leading wholesale distributors of pharmaceutical and
related health-care products to independent and chain drugstores, hospitals,
alternate care centers and the pharmacy departments of supermarkets and mass
merchandisers located throughout the continental United States. As a
full-service wholesale distributor, Cardinal Distribution complements its
distribution activities by offering a broad range of value-added support
services to assist the Company's customers and suppliers in maintaining and
improving their sales volumes. These support services include computerized order
entry and order confirmation systems, generic sourcing programs, product
movement and management reports, consultation on store operation and
merchandising, and customer training. The Company's proprietary software systems
feature customized databases specially designed to help its customers order more
efficiently, contain costs, and monitor their purchases.
The Company also operates several specialty health-care distribution
businesses which offer value-added services to the Company's customers and
suppliers while providing the Company with additional opportunities for growth
and profitability. For example, the Company operates a pharmaceutical
repackaging and distribution program for both independent and chain drugstore
customers and serves as a distributor of therapeutic plasma products, oncology
products and other specialty pharmaceuticals to hospitals, clinics and other
managed care facilities on a nationwide basis through the utilization of
telemarketing and direct mail programs. These specialty distribution activities
are part of the Company's strategy to develop diversified products and services
to enhance the profitability of its business and that of its customers and
suppliers.
2. PHARMACEUTICAL SERVICES
The Company, within the Pharmaceutical Services segment, operates a variety
of related health-care service businesses, including Pyxis Corporation ("Pyxis")
(which develops, manufactures, leases, sells and services point-of-use pharmacy
systems which automate the distribution and management of medications and
supplies in hospitals and other health-care facilities); Medicine Shoppe
International, Inc. ("Medicine Shoppe") (a franchisor of apothecary-style retail
pharmacies); PCI
- --------
1 For additional information concerning the Company's industry segments, see
Note 13 of "Notes to Consolidated Financial Statements."
3
<PAGE> 4
Services, Inc. ("PCI") (an international provider of integrated packaging
services to pharmaceutical manufacturers); Owen Healthcare, Inc. ("Owen") (a
provider of pharmacy management and information services to hospitals); the
Cardinal Information group of companies ("CIC") (which develop and provide
clinical information systems and customer transaction systems); R.P. Scherer
Corporation ("Scherer") (an international developer and manufacturer of drug
delivery systems); and Cardinal OneSource(SM) (a group established to market
Cardinal businesses together to assist pharmaceutical companies manufacture,
develop, package, launch and market products). The Company also provides
reimbursement-consulting services to pharmaceutical, biotechnology and medical
products companies through its Comprehensive Reimbursement Consultants, Inc.
("CRC") subsidiary.
3. MEDICAL-SURGICAL PRODUCTS
The Company's subsidiary, Allegiance Corporation ("Allegiance"), is a
provider of non-pharmaceutical health-care products and cost-saving services for
hospitals and other health-care providers. Allegiance offers a broad range of
medical and laboratory products, representing more than 2,800 suppliers in
addition to its own line of surgical and respiratory therapy products. It also
manufactures sterile and non-sterile procedure kits, single-use surgical drapes,
gowns and apparel, medical and surgical gloves, fluid suction and collection
systems, respiratory therapy products, surgical instruments, instrument
reprocessing products, special procedure products and other products. Allegiance
assists its customers in reducing costs while improving the quality of patient
care in a variety of ways, including supply-chain management, instrument repair
and other professional consulting services.
ACQUISITIONS
Over the last five years, the Company has completed the following business
combinations. On July 1, 1994, the Company purchased Humiston-Keeling, Inc., a
Calumet City, Illinois-based pharmaceutical wholesaler serving customers located
primarily in the upper Midwest region of the United States. On July 18, 1994,
the Company completed a merger transaction with Behrens Inc., a Waco,
Texas-based pharmaceutical wholesaler servicing customers located primarily in
Texas and adjoining states. On November 13, 1995, the Company completed a merger
transaction with Medicine Shoppe, a St. Louis, Missouri-based franchisor of
independent, apothecary-style retail pharmacies in the United States and abroad.
On May 7, 1996, the Company completed a merger transaction with Pyxis, a San
Diego, California-based designer, manufacturer, marketer and servicer of unique
point-of-use systems which automate the distribution, management and control of
medications and supplies in hospitals and other health-care facilities. On
October 11, 1996, the Company completed a merger transaction with PCI, a
Philadelphia, Pennsylvania-based provider of diversified packaging services to
the pharmaceutical industry in the United States and abroad. On March 18, 1997,
the Company completed a merger transaction with Owen, a Houston, Texas-based
provider of pharmacy management and information services to hospitals. On
February 18, 1998, the Company completed a merger transaction with MediQual
Systems, Inc., a Westborough, Massachusetts-based supplier of clinical
information management systems and services to the health-care industry. On
August 7, 1998, the Company completed a merger transaction with Scherer, a
Basking Ridge, New Jersey-based international developer and manufacturer of drug
delivery systems. On February 3, 1999, the Company completed a merger
transaction with Allegiance, a McGaw Park, Illinois-based distributor and
manufacturer of medical and laboratory products and a provider of cost-saving
services. On August 5, 1999, the Company announced that it signed a definitive
merger agreement with privately-owned Automatic Liquid Packaging, Inc., a
Woodstock, Illinois-based custom manufacturer of sterile liquid pharmaceuticals
and other health-care products. The Company has also completed a number of
smaller acquisition transactions during the last five years, including the
acquisition of Comprehensive Reimbursement Consultants, Inc., Pharmacists: prn,
Inc., The Enright Group, Inc., Pharmaceutical Packaging Specialties, Inc., and
Pacific Surgical Innovations, Inc.
The Company continually evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
health-care operations and services in all three reporting industry segments.
For additional information concerning the transactions described above, see
Notes 1, 2, and 18 of "Notes to Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMERS AND SUPPLIERS
The Company distributes pharmaceuticals, health- and beauty-care products,
and related products and services to hospitals, independent and chain
drugstores, alternate care centers, and pharmacy departments of supermarkets and
mass merchandisers located throughout the United States. In addition, the
Company markets Pyxis' automated dispensing systems to hospitals and alternate
care centers in the United States and abroad. Through Medicine Shoppe, the
Company franchises retail pharmacies in the United States and abroad. Owen
provides pharmacy management and information services to hospitals throughout
the United States. PCI provides integrated packaging services to pharmaceutical
manufacturers located in the United States and abroad. Scherer develops drug
delivery systems for pharmaceutical manufacturers located in the United States
and abroad. Allegiance distributes non-pharmaceutical health-care products and
provides cost-saving services to hospitals and other health-care providers in
the United States and abroad. The Company's largest retail distribution customer
in its Pharmaceutical Distribution segment accounted for approximately 8.3% of
the Company's operating revenues (by dollar volume) for fiscal year 1999, and
its largest retail bulk distribution customer accounted for approximately 57% of
all bulk orders in the
4
<PAGE> 5
Pharmaceutical Distribution segment. The Pharmaceutical Distribution segment
could be adversely affected if the business of either of such customers were
lost. The members of the two largest group purchasing organizations (each, a
"GPO") having business arrangements with the Company, VHA, Inc. and Premier,
Inc., accounted for approximately 11.4%, and 12.8%, respectively, of the
Company's operating revenues (by dollar volume) in fiscal 1999 through the
Company's Pharmaceutical Distribution and Medical-Surgical Products segments.
Each of these two segments could be adversely affected if the business
arrangements with either of such GPO customers were lost, although the loss of
the business arrangement with either such GPO would not necessarily mean the
loss of sales from all members of the GPO.
The Company obtains its products from many different suppliers, the largest
of which accounted for approximately 3.3% (by dollar volume) of its operating
revenue in fiscal 1999. The Company's five largest suppliers accounted for
approximately 15.9% (by dollar volume) of its operating revenue during fiscal
1999 and the Company's relationships with its suppliers are generally very good.
The Company's arrangements with its pharmaceutical suppliers typically may be
canceled by either the Company or the supplier upon 30 to 90 days prior notice,
although many of these arrangements are not governed by formal agreements. The
loss of certain suppliers could adversely affect the Company's business if
alternative sources of supply were unavailable.
While the Company's operations may show quarterly fluctuations, the Company
does not consider its business to be seasonal in nature on a consolidated basis.
COMPETITION
The Company's markets are highly competitive. As a pharmaceutical
wholesaler, the Company competes directly with numerous other national and
regional wholesalers, direct selling manufacturers, self-warehousing chains, and
specialty distributors on the basis of price, breadth of product lines,
marketing programs, and support services. The Company's pharmaceutical
wholesaling operations have narrow profit margins and, accordingly, the
Company's earnings depend significantly on its ability to distribute a large
volume and variety of products efficiently and to provide quality support
services. As a marketer of automated pharmaceutical dispensing systems through
Pyxis, the Company competes based upon price, its installed base of systems,
relationships with customers, customer service and support capabilities, patents
and other intellectual property, and its ability to interface with customer
information systems. Actual and potential competitors to the Pyxis system
include both existing domestic and foreign companies, as well as emerging
companies that supply products for specialized markets and other outside service
providers. With its Owen subsidiary, the Company competes with both national and
regional hospital pharmacy management firms, and self-managed hospitals and
hospital systems on the basis of price, its established base of business, the
effective use of information systems, the development of clinical programs, and
the quality of the services it provides to its customers. Several smaller
franchisors compete with Medicine Shoppe in the franchising of pharmacies, with
competition being based primarily upon price, benefits offered to both the
pharmacist and the customer, access to third party programs, and the reputation
of the franchise; Medicine Shoppe also needs to be competitive with a
pharmacist's ongoing option to remain self-employed at his or her current
position rather than becoming a franchisee. Through PCI, the Company competes
with companies that provide many types of packaging services and those that
provide one or a few types of packaging services, based primarily upon quality,
variety of available packaging services, customer service, responsiveness and
price. Through Scherer, the Company's drug delivery technologies compete with a
growing number of new drug delivery technologies and with continued refinements
to existing delivery technologies of both pharmaceutical companies and companies
formed to develop new technologies. Through Allegiance, the Company has
substantial competition in all of its non-pharmaceutical health-care product and
service markets, with competition focusing primarily on price, service and
product performance.
EMPLOYEES
As of August 23, 1999, the Company had approximately 36,000 employees, of
which approximately 1,400 are subject to collective bargaining agreements.
Overall, the Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, certain of which
have been registered, and also holds common law rights in various trademarks and
service marks. There can be no assurance that the Company will obtain the
registrations for trademarks and service marks for which it has applied.
The Company holds patents relating to certain aspects of its automated
pharmaceutical dispensing systems, automated medication management systems,
medication packaging, medical devices, processes, products and drug delivery
systems.
5
<PAGE> 6
The Company has a number of pending patent applications in the United States and
certain foreign countries, and intends to pursue additional patents as
appropriate.
The Company also owns certain software, including software used for
pharmaceutical purchasing and inventory control, which is copyrighted and
subject to the protection of applicable copyright laws.
No assurances can be given that any intellectual property rights of the
Company will provide meaningful protection against competitive products or
otherwise be commercially valuable or that the Company will be successful in
obtaining additional patents or enforcing its proprietary rights against others.
REGULATORY MATTERS
The Company, as a distributor of prescription pharmaceuticals (including
certain controlled substances), an operator of pharmacy operations, a
pharmaceutical packager and a manufacturer of drug delivery systems and surgical
and respiratory care products, is required to register for permits and/or
licenses with, and comply with operating and security standards of, the United
States Drug Enforcement Administration, the Food and Drug Administration (the
"FDA") and various state boards of pharmacy or comparable agencies. In addition,
the Company is subject to requirements of the Controlled Substances Act and the
Prescription Drug Marketing Act of 1987, which requires each state to regulate
the purchase and distribution of prescription drugs under prescribed minimum
standards. The Company is not currently required to register or submit
pre-market notifications to the FDA for its automated pharmaceutical dispensing
systems. There can be no assurance, however, that FDA policy in this regard will
not change. In its capacity as a distributor of prescription pharmaceuticals,
the Company is also subject to Medicare, Medicaid and state health care fraud
and abuse and anti-kickback laws and regulations.
Through its Medicine Shoppe subsidiary, the Company is subject to laws
adopted by certain states which regulate franchise operations and the
franchisor-franchisee relationship, and similar legislation is proposed or
pending in additional states. The most common provisions of such laws establish
restrictions on the ability of franchisors to terminate or to refuse to renew
franchise agreements. Federal Trade Commission rules also require franchisors to
make certain disclosures to prospective franchisees prior to the offer or sale
of franchises.
Owen's pharmacy operations and its pharmacies are subject to comprehensive
regulation by state and federal authorities, including state boards of pharmacy
and federal authorities with responsibility for monitoring the storage,
handling, and dispensing of narcotics and other controlled substances. Owen's
contractual arrangements with pharmaceutical manufacturers and health-care
providers also subject it to certain provisions of the federal Social Security
Act which (a) prohibit financial arrangements between providers of health-care
services to government health-care program (including Medicare and Medicaid)
beneficiaries and potential referral sources that are designed to induce patient
referrals or the purchasing, leasing, ordering or arranging for any good,
service or item paid for by such government programs, and (b) impose a number of
restrictions upon referring physicians and providers of designated health
services under Medicare and Medicaid programs.
Services and products provided by the Company's information businesses
include health-care data and other drug-related information gathered and
assessed for the benefit of health-care clients. Greater scrutiny is being
placed on a federal and state level regarding how such information should be
handled and identifying the appropriate parties to do so. Future changes in
regulations and/or legislation may affect how some of these information services
or products are provided.
The Company's PCI operations in the United Kingdom and Germany are subject
to state and local certification requirements, including compliance with the
Good Manufacturing Practices adopted by the European Community. Products
manufactured or sold by the Company's Allegiance and Scherer operations are
subject to regulation by the FDA, as well as by other federal and state
agencies, including those governing Medicare and Medicaid issues. The FDA
regulates the introduction and advertising of new medical products and related
manufacturing procedures, labeling, and record keeping. Product regulatory laws
also exist in most other countries where PCI, Allegiance and Scherer conduct
business.
The Company is also subject to various federal, state and local laws,
regulations and recommendations, both in the United States and abroad, relating
to safe working conditions, laboratory and manufacturing practices, and the use
and disposal of hazardous or potentially hazardous substances. The Company's
environmental policies mandate compliance with all applicable regulatory
requirements concerning environmental quality and contemplate, among other
things, appropriate capital expenditures for environmental protection for each
of its businesses.
6
<PAGE> 7
ITEM 2: PROPERTIES
In the United States, the Company has 23 principal pharmaceutical
distribution facilities and three specialty distribution facilities utilized by
the Pharmaceutical Distribution segment. In the U.S., the Company also has one
Pyxis assembly operation, two PCI packaging facilities, two PCI printing
facilities, one Scherer pharmaceutical manufacturing facility, one Scherer
health and nutritional products manufacturing facility, and one paintball
manufacturing facility in the Pharmaceutical Services segment. Domestically, the
Company also has 48 medical-surgical distribution facilities and 11
medical-surgical manufacturing facilities utilized by the Medical-Surgical
Products segment. The Company's domestic facilities are located in a total of 33
states.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Services segment, 14 Scherer manufacturing facilities which are
located in the United Kingdom, France, Germany, Italy, Australia, Japan,
Argentina, Brazil and Canada. The Company also has three PCI packaging
facilities which are located in the United Kingdom and Germany, and two PCI
printing facilities which are located in Puerto Rico. The Company owns, leases
or operates through its Medical-Surgical Products segment, 13 medical-surgical
distribution facilities located in Canada and the Netherlands, and 16
medical-surgical manufacturing facilities located in the Netherlands, Malaysia,
Mexico, the Dominican Republic, Germany and France. The Company's international
facilities are located in a total of 14 countries.
The Company owns 77 of the domestic and international facilities described
above, and the balance are leased. The Company's principal executive offices are
located in a leased four-story building located at 7000 Cardinal Place in
Dublin, Ohio.
The Company considers its operating properties to be in satisfactory
condition and adequate to meet its present needs. However, the Company expects
to make further additions, improvements and consolidations of its properties as
the Company's business continues to expand.
For certain financial information regarding the Company's facilities, see
Notes 5 and 9 of "Notes to Consolidated Financial Statements".
ITEM 3: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action lawsuits which were later consolidated and transferred by the
Judicial Panel for Multi-District Litigation to the United States District Court
for the Northern District of Illinois. Subsequent to the consolidation, a new
consolidated complaint was filed which included allegations that the wholesaler
defendants, including the Company and Whitmire, conspired with manufacturers to
inflate prices using a chargeback pricing system. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
$1,000,000 or 1% of any judgment against the wholesalers and the manufacturers,
whichever is less, and provided for a reimbursement mechanism for legal fees and
expenses. The trial of the class action lawsuit began on September 23, 1998. On
November 19, 1998, after the close of plaintiffs' case-in-chief, both the
wholesaler defendants and the manufacturer defendants moved for judgment as a
matter of law in their favor. On November 30, 1998, the Court granted both of
these motions and ordered judgment as a matter of law in favor of both the
wholesaler defendants and the manufacturer defendants. On January 25, 1999, the
class plaintiffs filed a notice of appeal of the District Court's decision with
the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of
Appeals for the Seventh Circuit issued its decision, which, in part, affirmed
the dismissal of the wholesaler defendants, including the Company and Whitmire.
On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the
Court of Appeals for the Seventh Circuit. In addition to the federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of related antitrust lawsuits brought by chain drug stores and
independent pharmacies who opted out of the federal class action lawsuits, and
in a series of state court cases alleging similar claims under various state
laws regarding the sale of brand name prescription drugs. The Judgment Sharing
Agreement mentioned above also covers these litigation matters.
On September 30, 1996, Baxter International, Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their 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. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, assumed the defense of litigation involving
claims related to the Allegiance Business from Baxter Healthcare Corporation
("BHC"), including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves described below. Allegiance will be
defending and indemnifying BHC, as contemplated by the agreements between Baxter
and Allegiance, for all expenses and potential liabilities associated with
claims pertaining to the litigation assumed by Allegiance. As of June 30, 1999,
there were approximately 430 lawsuits involving BHC and/or Allegiance containing
allegations of sensitization to natural rubber latex products. Since none of
these cases has proceeded to a hearing on the merits, the Company is unable to
evaluate the extent of any potential liability, and unable to estimate any
potential loss. Because of the increase in claims filed and the ongoing defense
costs that will be incurred, the Company believes it is probable that it will
continue to incur significant expenses related to the defense of cases involving
natural rubber latex gloves.
The Company also becomes involved from time-to-time in other litigation
(including environmental matters) incidental to its business. Although the
ultimate resolution of the litigation referenced in this Item 3 cannot be
forecast with certainty,
7
<PAGE> 8
the Company does not believe that the outcome of these lawsuits will have a
material adverse effect on the Company's consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows (information provided as of
August 23, 1999):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------- --- --------------------------------------------
<S> <C> <C>
Robert D. Walter 54 Chairman and Chief Executive Officer
John C. Kane 59 President and Chief Operating Officer
Joseph F. Damico 45 Executive Vice President; Group President -
Allegiance Corporation
George L. Fotiades 45 Executive Vice President; Group President -
R.P. Scherer Corporation
James F. Millar 51 Executive Vice President; Group President -
Cardinal Distribution
Carl A. Spalding 54 Executive Vice President; Group President -
Healthcare Product Services
Stephen S. Thomas 44 Executive Vice President; Group President -
Pharmacy Automation and Information
Systems and International Operations
Steven Alan Bennett 46 Executive Vice President, General Counsel and
Secretary
Richard J. Miller 42 Corporate Vice President and Chief Financial
Officer
Michael E. Beaulieu 41 Corporate Vice President, Controller and
Principal Accounting Officer
</TABLE>
Unless indicated to the contrary, the business experience summaries
provided below for the Company's executive officers describe positions held by
the named individuals during the last five years but exclude other positions
held with subsidiaries of the Company.
ROBERT D. WALTER has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979. Mr. Walter also
serves as a director of Bank One Corporation, CBS, Inc. and Infinity
Broadcasting Corporation.
JOHN C. KANE has been a Director of the Company since August 1993 and has
been the Company's President and Chief Operating Officer since joining the
Company in February 1993. Mr. Kane also serves as a director of Connetics
Corporation.
JOSEPH F. DAMICO has been an Executive Vice President and Group
President-Allegiance Corporation, of the Company since February 1999, and
President of Allegiance since June 1996. From 1992 to September 1996, he was a
Corporate Vice President of Baxter.
GEORGE L. FOTIADES has been an Executive Vice President and Group
President-R.P. Scherer Corporation, of the Company since August 1998, and
President of Scherer since January 1998. Previously, Mr. Fotiades served as
Group President, Americas and Asia Pacific, of
8
<PAGE> 9
Scherer from June 1996 to January 1998. Prior to that, Mr. Fotiades was employed
by Warner-Lambert Company (a pharmaceutical and consumer health products
manufacturer), where he served most recently as President, Warner Wellcome
Consumer Healthcare division.
JAMES F. MILLAR has been an Executive Vice President of the Company since
February 1994, and was named as Group President of the Company's Cardinal
Distribution pharmaceutical wholesaling business in June 1996.
CARL A. SPALDING joined the Company in June 1998, as an Executive Vice
President and Group President - Healthcare Product Services. Prior to that, Mr.
Spalding served as a corporate officer of Abbott Laboratories (a pharmaceutical
and health-care manufacturer), where he served most recently as Vice President
of Pediatric Products of the Ross Laboratories Division.
STEPHEN S. THOMAS was named Executive Vice President and Group President -
Pharmacy Automation and Information Systems and International Operations of the
Company on July 1, 1999. Mr. Thomas joined the Company in October 1997, as an
Executive Vice President and President of Pyxis. Prior to that, Mr. Thomas
served as President of Datapro Information Services Group, a division of
McGraw-Hill Companies.
STEVEN ALAN BENNETT joined the Company in January 1999, as Executive Vice
President, General Counsel and Secretary. Previously, Mr. Bennett served as
Senior Vice President and General Counsel of Bank One Corporation, since August
1994.
RICHARD J. MILLER has been the Company's Corporate Vice President and Chief
Financial Officer since March 1999 and served as the Company's Acting Chief
Financial Officer since August 1998. From August 1995 through March 1999, Mr.
Miller served as the Company's Controller. Upon joining the Company in July
1994, and until August 1995, he served as Vice President, Auditing.
MICHAEL E. BEAULIEU has been the Company's Corporate Vice President and
Controller since April 1999. From August 1996 through April 1999 Mr. Beaulieu
served as Senior Vice President - Finance of Cardinal Distribution. Prior to
that, Mr. Beaulieu served as Vice President - Accounting of Cardinal
Distribution, since August 1994.
9
<PAGE> 10
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." The following table reflects the range of the reported high and
low last sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared thereon for the
fiscal years ended June 30, 1999 and 1998. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
<S> <C> <C> <C>
Fiscal 1998:
Quarter Ended
September 30, 1997 $47.38 $36.42 $0.0167
December 31, 1997 51.88 45.75 0.0167
March 31, 1998 58.80 46.67 0.0200
June 30, 1998 64.17 57.08 0.0200
Fiscal 1999:
Quarter Ended
September 30, 1998 $71.00 $55.67 $0.0250
December 31, 1998 75.88 54.83 0.0250
March 31, 1999 80.50 66.00 0.0250
June 30, 1999 71.88 56.88 0.0250
Through August 23, 1999 $69.94 $60.88 $0.0250
</TABLE>
As of August 23, 1999, there were approximately 26,000 shareholders of
record of the Company's Common Shares.
The Company anticipates that it will continue to pay quarterly cash
dividends in the future. However, the payment and amount of future dividends
remain within the discretion of the Company's Board of Directors and will depend
upon the Company's future earnings, financial condition, capital requirements
and other factors.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company was
prepared giving retroactive effect to the business combinations with Medicine
Shoppe on November 13, 1995; Pyxis on May 7, 1996; PCI on October 11, 1996; Owen
on March 18, 1997; MediQual on February 18, 1998; Scherer on August 7, 1998; and
Allegiance on February 3, 1999, all of which were accounted for as
pooling-of-interests transactions (see Note 2 of "Notes to Consolidated
Financial Statements"). On May 21, 1999 the Company completed a merger
transaction with Pacific Surgical Innovations, Inc. ("PSI"). The impact of the
merger transaction with PSI, on a historical basis, was not significant.
Accordingly, prior period financial statements have not been restated. The
consolidated financial data includes all purchase transactions that occurred
during these periods.
For the fiscal years ended June 30, 1996 and 1995, the information
presented is derived from consolidated financial statements which combine data
from Cardinal for the fiscal years ended June 30, 1996 and 1995 with data from
PCI for the fiscal years ended September 30, 1996 and 1995, respectively, Owen
for the fiscal years ended November 30, 1995 and 1994, respectively, MediQual
for the fiscal years ended December 31, 1995 and 1994, respectively, Scherer for
the fiscal years ended March 31, 1996 and 1995, respectively, and Allegiance for
the fiscal years ended December 31, 1996 and 1995, respectively.
For the fiscal year ended June 30, 1997, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1997 with PCI's financial results for the nine
months ended June 30, 1997, Owen's financial results for the period of June 1,
1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in
order to change Owen's November 30 fiscal year end to June 30), MediQual's
financial results for the fiscal year ended December 31, 1996, Scherer's
financial results for the fiscal year ended March 31, 1997, and Allegiance's
financial results for the fiscal year ended December 31, 1997.
10
<PAGE> 11
For the fiscal year ended June 30, 1998, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1998 with Scherer's financial results for the
fiscal year ended March 31, 1998.
The selected consolidated financial data below should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
At or for the Fiscal Year Ended June 30, (1)
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EARNINGS DATA:
Revenue:
Operating revenue $21,480.6 $18,004.0 $15,924.8 $14,383.9 $13,943.0
Bulk deliveries to
customer warehouses 3,553.0 2,991.4 2,469.1 2,178.5 1,779.5
--------- --------- --------- --------- ---------
Total revenue $25,033.6 $20,995.4 $18,393.9 $16,562.4 $15,722.5
Net earnings (loss) $ 456.3 $ 425.1 $ 334.8 $ (321.2) $ 464.3
Earnings (loss) per
Common Share: (2)
Basic $ 1.68 $ 1.57 $ 1.26 $ (1.24) $ 1.84
Diluted $ 1.64 $ 1.53 $ 1.23 $ (1.24) $ 1.78
Cash dividends declared
per Common Share (2) $ 0.10 $ 0.07 $ 0.06 $ 0.05 $ 0.05
BALANCE SHEET DATA:
Total assets $ 8,289.0 $ 7,478.0 $ 6,521.8 $ 6,469.8 $ 6,517.3
Long-term obligations,
less current portion $ 1,223.9 $ 1,330.0 $ 1,320.9 $ 1,592.8 $ 451.5
Shareholders' equity $ 3,463.0 $ 2,954.9 $ 2,627.0 $ 2,222.5 $ 3,718.1
</TABLE>
(1) Amounts reflect business combinations in all periods presented. Fiscal
1999, 1998, 1997 and 1996 amounts reflect the impact of merger-related
costs and other special charges. Fiscal 1996 amounts reflect the impact of
the write-down of goodwill of $550.0 million ($550.0 million, net of tax)
due to the change by Allegiance in its method of assessing goodwill. In
addition, fiscal 1996 amounts reflect the impact of merger-related charges
and facility rationalizations of $178.5 million ($122.8 million, net of
tax). See Note 2 of "Notes to Consolidated Financial Statements" for a
further discussion of merger-related costs and other special charges
affecting fiscal 1999, 1998 and 1997.
(2) Net earnings and cash dividends per Common Share have been adjusted to
retroactively reflect all stock dividends and stock splits through June 30,
1999.
11
<PAGE> 12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis has been prepared giving retroactive
effect to the pooling-of-interests business combinations with PCI Services, Inc.
("PCI") on October 11, 1996, Owen Healthcare, Inc. ("Owen") on March 18, 1997,
MediQual Systems, Inc. ("MediQual") on February 18, 1998, R.P. Scherer
Corporation ("Scherer") on August 7, 1998 and Allegiance Corporation
("Allegiance") on February 3, 1999. On May 21, 1999 the Company completed a
merger transaction with Pacific Surgical Innovations, Inc. ("PSI"). The impact
of the merger transaction with PSI, on a historical basis, was not significant.
Accordingly, prior period financial statements have not been restated for the
merger transaction with PSI.
The discussion and analysis presented below should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 10-K. See "Information Regarding Forward-Looking Statements".
GENERAL
- -------
The Company operates within three operating business segments:
Pharmaceutical Distribution, Pharmaceutical Services, and Medical-Surgical
Products. See Note 13 of "Notes to Consolidated Financial Statements" for
a description of these segments.
RESULTS OF OPERATIONS
- ---------------------
OPERATING REVENUE. Operating revenue for fiscal 1999 increased 19% as compared
to the prior year due to strong operating revenue growth in all three of the
Company's business segments. The majority of the overall operating revenue
increase (approximately 82% for the year ended June 30, 1999) came from existing
customers in the form of increased volume and pharmaceutical price increases.
The remainder of the growth came from the addition of new customers.
The Pharmaceutical Distribution segment's operating revenue (representing
69% of total 1999 operating revenue, including approximately $297.4 million sold
to Owen, eliminated in consolidation) grew at a rate of 25% during the fiscal
year ended June 30, 1999 primarily due to strong sales to pharmacy chain stores
and through the Company's specialty distribution businesses.
The Pharmaceutical Services segment's operating revenue (representing 10%
of total 1999 operating revenue) grew at a rate of 15% during fiscal 1999,
primarily on the strength of the Company's pharmacy automation and
pharmaceutical-packaging businesses. The Company's pharmacy automation business
continued to see solid growth in the U.S. hospital sector and increased demand
from non-acute care customers. The pharmaceutical-packaging business' growth in
fiscal 1999 was attributable to a mix of new customers and an increase in volume
from existing customers.
The Medical-Surgical Products segment's operating revenue (representing 21%
of total 1999 operating revenue) for fiscal year 1999 grew 6% over the prior
year primarily due to strong sales of self-manufactured surgical products and
"best value" distributed supplies.
Operating revenue for fiscal 1998 increased 13% as compared to the prior
year primarily due to the strength of the Pharmaceutical Distribution and
Services segments. Pharmaceutical Distribution segment's (representing 66% of
total 1998 operating revenue) operating revenue (including approximately $196
million sold to Owen, eliminated in consolidation) grew at a rate of 19% during
the fiscal year ended June 30, 1998. Pharmaceutical Services segment's
(representing 10% of total 1998 operating revenue) operating revenue grew at
a rate of 16% during the fiscal year ended June 30, 1998, primarily on the
strength of the Company's pharmacy automation and pharmacy management
businesses. The Medical-Surgical Products segment's operating revenue
(representing 24% of total 1998 operating revenue) for fiscal year 1998 grew
2% over the prior year. The majority of the overall operating revenue increase
(approximately 80% for the year ended June 30, 1998) came from existing
customers in the form of increased volume and pharmaceutical prices. The
remainder of the growth came from the addition of new customers.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
earnings.
12
<PAGE> 13
GROSS MARGIN. For fiscal 1999 and 1998, overall gross margin as a percentage of
operating revenue was 12.03% and 12.33%, respectively.
The Pharmaceutical Distribution segment's gross margin as a percentage of
operating revenue decreased from 5.58% in fiscal 1998 to 5.29% in fiscal 1999.
The decrease is primarily due to the impact of lower selling margins, as a
result of a highly competitive market and a greater mix of high volume
customers, where a lower cost of distribution and better asset management enable
the Company to offer lower selling margins to its customers.
The Pharmaceutical Services segment's gross margin as a percentage of
operating revenue was 33.50% and 32.70% in fiscal 1999 and 1998, respectively.
Operating revenue growth in the Pharmaceutical Services segment has been greater
in the relatively higher margin pharmacy automation and pharmaceutical-packaging
businesses than it has been in the lower margin pharmacy management business.
The Medical-Surgical Products segment's gross margin as a percentage of
operating revenue was 23.29% in fiscal 1999 compared to 21.62% in fiscal 1998.
The increase is primarily the result of improvements in the Company's product
mix, including the growth of self-manufactured product sales in both domestic
and international markets as well as the impact of manufacturing and other
cost efficiencies.
For fiscal 1998 and 1997, gross margin as a percentage of operating revenue
was 12.33% and 12.68%, respectively.
The Pharmaceutical Distribution segment's gross margin as a percentage of
operating revenue decreased from 5.82% in fiscal 1997 to 5.58% in fiscal 1998.
The decrease was primarily due to the impact of lower selling margins, as a
result of a highly competitive market and a greater mix of high volume
customers, where a lower cost of distribution and better asset management
enabled the Company to offer lower selling margins to its customers.
The Pharmaceutical Services segment's gross margin as a percentage of
operating revenue was 32.70% and 32.88% in fiscal 1998 and 1997, respectively.
Operating revenue growth was greater in the relatively lower margin pharmacy
management and pharmaceutical-packaging businesses than it was in the higher
margin pharmacy franchising business.
The Medical-Surgical Products segment's gross margin as a percentage of
operating revenue was 21.62% in fiscal 1998 compared to 20.99% in fiscal 1997.
The increase was primarily the result of improvements in the Company's product
mix, including the growth of manufactured product sales in both domestic and
international markets as well as the impact of manufacturing and other cost
efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of operating revenue declined to 7.28%
for fiscal 1999 compared to 7.72% in fiscal 1998. The improvements during fiscal
1999 reflect economies associated with the Company's revenue growth, in addition
to significant productivity gains resulting from continued cost control efforts
in all three segments and the continuation of consolidation and selective
automation of operating facilities in the Pharmaceutical Distribution and
Pharmaceutical Services segments. Pharmaceutical Distribution and Pharmaceutical
Services segments' selling, general and administrative expenses as a percentage
of operating revenue were 2.63% and 16.80% in fiscal 1999, respectively,
compared to 2.94% and 16.90% in fiscal 1998, respectively. Offsetting these
improvements was an increase in the selling, general and administrative expenses
as a percentage of operating revenue in the Medical-Surgical Products segment
which increased from 16.07% in fiscal 1998 to 16.86% in fiscal 1999. This
increase is primarily due to the acquisitions of businesses having a higher
selling, general and administrative rate than the Medical-Surgical Products
segment's normal rate during fiscal 1999. These acquisitions were accounted for
under the purchase method of accounting. As such, historical financial
statements have not been restated. The 13% growth in selling, general and
administrative expenses experienced in fiscal year 1999, compared to fiscal 1998
was due primarily to increases in personnel costs and depreciation expense, and
compares favorably to the 19% growth in operating revenue during fiscal 1999.
Selling, general and administrative expenses as a percentage of operating
revenue improved to 7.72% in fiscal 1998 compared to 8.19% in fiscal 1997. The
improvements in fiscal 1998 reflect the economies associated with the Company's
revenue growth, as well as significant productivity gains resulting from
continued cost control efforts and the consolidation and selective automation of
operating facilities. The 7% growth in selling, general and administrative
expenses experienced in the fiscal year 1998, compared to fiscal 1997 was due
primarily to increases in personnel costs and depreciation expense, and compares
favorably to the 13% growth in operating revenues during fiscal 1998.
13
<PAGE> 14
SPECIAL CHARGES
Merger-Related Charges. Costs of effecting mergers and subsequently integrating
the operations of the various merged companies are recorded as merger-related
costs when incurred. During fiscal 1999, merger-related costs totaling $146.6
million ($117.6 million, net of tax) were recorded. Of this amount,
approximately $95.4 million related to transaction and employee-related costs,
and $36.1 million related to business restructuring and asset impairment costs
associated with the Company's merger transactions with Scherer and Allegiance.
As part of the business restructuring, the Company is currently closing certain
facilities. As such, the Company has incurred employee-related and asset
impairment costs, as well as, exit costs, related to the termination of
contracts and lease agreements. In addition, the Company recorded costs of $4.0
million related to the write down of impaired inventory related to a previous
merger and of $1.1 million related to severance costs for restructuring
associated with the change in management that resulted from the merger
transaction with Owen. The Company also recorded costs of $13.7 million related
to integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.7 million credit, to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 17 of "Notes to Consolidated
Financial Statements"). This adjustment relates primarily to services provided
by third parties engaged by the Company in connection with the terminated Bergen
transaction. The cost of such services was estimated and recorded in the prior
periods when the services were performed. Actual billings were less than the
estimate originally recorded, resulting in a reduction of the current period
merger-related costs.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual merger
transaction ($2.3 million) and in connection with the proposed merger
transaction with Bergen ($33.4 million) which was terminated subsequent to
year-end (see Note 17 of "Notes to Consolidated Financial Statements").
Additional costs related to asset impairments ($3.8 million) and integrating the
operations of companies that previously merged with the Company ($9.6 million)
were incurred and recorded during fiscal 1998. During fiscal 1997, the Company
recorded merger-related charges associated with the PCI and Owen merger
transactions ($46.2 million) and additional integration costs related to the
Pyxis and Medicine Shoppe mergers ($4.7 million). See further discussion in Note
2 of "Notes to Consolidated Financial Statements." The Company classifies costs
associated with a merger transaction as "merger-related costs." It should be
noted that the amounts presented may not be comparable to similarly titled
amounts reported by other companies.
Other Special Charges. During fiscal 1998, the Company recorded a special charge
of $8.6 million related to the rationalization of its pharmaceutical
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs, including approximately $2.0 million
incurred in connection with the settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer, along with its joint venture partner,
converted the legal ownership structure of Scherer's 51% owned subsidiary in
Germany from a corporation to a partnership. As a result of this change in tax
status, the Company's tax basis in the German subsidiary was adjusted, resulting
in a one-time tax refund of approximately $4.6 million, as well as a reduction
in the cash taxes to be paid in the current and future years. Combined, these
factors reduced fiscal 1998 income tax expense by $11.7 million.
The following is a summary of the special charges incurred by the Company
in the last three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
----------------------------
1999 1998 1997
------ ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C>
MERGER-RELATED COSTS:
- ---------------------
Transaction and employee-related costs:
Transaction costs $(52.9) $(35.7) $(14.5)
PCI vested retirement benefits and
incentive fee -- -- (7.6)
Employee severance/termination (39.5) -- (4.4)
Other (0.4) -- (0.6)
------ ------ ------
Total transaction and employee-related costs (92.8) (35.7) (27.1)
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
-------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Other merger-related costs:
Asset impairments (16.8) (3.8) (13.2)
Exit and restructuring costs (23.3) -- (2.2)
Duplicate facilities elimination -- -- (1.7)
Integration and efficiency implementation (13.7) (9.7) (6.7)
------- ------ ------
Total other merger-related costs (53.8) (13.5) (23.8)
------- ------ ------
Total merger-related costs $(146.6) $(49.2) $(50.9)
------- ------ ------
OTHER SPECIAL CHARGES:
- ----------------------
Facilities closures $ -- $ (6.1) $ --
Employee severance -- (2.5) --
------- ------ ------
Total other special charges -- (8.6) --
------- ------ ------
TOTAL SPECIAL CHARGES (146.6) (57.8) (50.9)
- ---------------------
Tax effect of special charges 29.0 22.0 14.3
Tax benefit for change in tax status -- 11.7 --
------- ------ ------
Effect on net earnings $(117.6) $(24.1) $(36.6)
======= ====== ======
Effect on diluted earnings per share $ (0.42) $(0.09) $(0.13)
======= ====== ======
</TABLE>
The effects of the merger-related costs and other special charges are
included in the reported net earnings of $456.3 million in fiscal 1999, $425.1
million in fiscal 1998 and $334.8 million in fiscal 1997 and in the reported
diluted earnings per Common Share of $1.64 in fiscal 1999, $1.53 in fiscal 1998
and $1.23 in fiscal 1997.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions it has completed to date
totaling approximately $100.0 million ($61.2 million, net of tax) in future
periods in order to properly integrate operations, of which a portion represents
facility rationalizations, and implement efficiencies with regard to, among
other things, information systems, customer systems, marketing programs and
administrative functions. Such amounts will be charged to expense when incurred.
Asset impairments in fiscal 1997 include the write-off of a patent ($7.4
million) and the write-down of certain operating assets ($3.2 million) related
to MediTROL, Inc. ("MediTROL," a subsidiary acquired by the Company in the Owen
merger transaction) as a result of management's decision to merge the operations
of MediTROL into Pyxis and phase-out production of the separate MediTROL product
line.
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted
in expansion into service areas which (a) complement the Company's core
pharmaceutical distribution business; (b) provide opportunities for the Company
to develop synergies with, and thus strengthen, the acquired business; and (c)
generally generate higher margins as a percentage of operating revenue than
pharmaceutical distribution. As the healthcare industry continues to change,
the Company is constantly evaluating merger or acquisition candidates in
pharmaceutical distribution, as well as related sectors of the healthcare
industry that would expand its role as a service provider; however, there can be
no assurance that it will be able to successfully pursue any such opportunity or
consummate any such transaction, if pursued. If additional transactions are
entered into or consummated, the Company would incur additional merger-related
costs.
INTEREST EXPENSE. The increase in interest expense of $4.9 million during
fiscal 1999 compared to fiscal 1998 is primarily due to the Company's issuance
of $150 million of 6.25% Notes due 2008, in a public offering in July 1998 (see
"Liquidity and Capital Resources"). The effect of the issuance of the 6.25%
Notes during fiscal 1999 has been partially offset by a decrease in other debt
instruments with higher interest rates.
The $12.7 million decrease in interest expense in fiscal 1998 compared to
fiscal 1997 is primarily due to the paydown of the Company's $100 million of 8%
Notes on March 1, 1997 and a reduction in the overall interest rate on total
debt outstanding during fiscal 1998 compared to fiscal 1997.
15
<PAGE> 16
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 39.9%, 35.6% and 38.0% for fiscal years 1999,
1998 and 1997, respectively. The fluctuation in the tax rate is primarily due to
the impact of recording certain non-deductible merger-related costs during
various periods as well as fluctuating state and foreign effective tax rates as
a result of the Company's business mix for all three fiscal years. Also, a
change in tax status of a 51% owned German subsidiary resulted in a lower tax
provision during fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $2.2 billion at June 30, 1999 from $2.1
billion at June 30, 1998. This increase resulted from additional investments in
inventories and trade receivables of $323.3 million and $154.0 million,
respectively. Offsetting the increases in working capital was an increase in
accounts payable of $218.1 million and a decrease in cash of $208.1 million.
Increases in inventories reflect the higher level of business volume in
pharmaceutical distribution activities, especially in the fourth quarter of
fiscal 1999 when distribution revenue grew 21% over the same period in the prior
year. The increase in trade receivables is consistent with the Company's revenue
growth (see "Operating Revenue" above). The change in accounts payable and cash
is due primarily to the timing of inventory purchases and related payments.
On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008,
the proceeds of which were used for working capital needs due to growth in the
Company's business. The Company currently has the capacity to issue $250 million
of additional debt securities pursuant to a shelf registration statement filed
with the Securities and Exchange Commission (see Note 5 of "Notes to
Consolidated Financial Statements").
Property and equipment, at cost, increased by $146.6 million at June 30,
1999 compared to June 30, 1998. The increase was primarily due to ongoing plant
expansion and manufacturing equipment purchases and additional investments made
for management information systems and upgrades to distribution facilities.
The Company has several operating lease agreements for the construction of
new facilities. See further discussion in Note 9 of "Notes to Consolidated
Financial Statements."
Shareholders' equity increased to $3.5 billion at June 30, 1999 from $3.0
billion at June 30, 1998, primarily due to net earnings of $456.3 million and
the investment of $131.6 million by employees of the Company through various
stock incentive plans, offset by the retirement of $40.1 million of Allegiance
treasury shares.
The Company has line-of-credit agreements with various bank sources
aggregating $175.8 million. The Company had $28.6 million outstanding under
these lines at June 30, 1999. In addition, the Company has a commercial paper
program, providing for the issuance of up to $750 million in aggregate maturity
value of commercial paper. The Company had $49.2 million outstanding under this
program at June 30, 1999. The Company has an unsecured bank credit facility,
which provides for up to an aggregate of $1.0 billion in borrowings of which
$150.0 million is part of a multi-currency allocation and $250.0 million
represents a 364-day facility. As of June 30, 1999, $80.7 million of borrowings
were outstanding under the multi-currency allocation portion of the facility.
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.
See Notes 1 and 6 to the consolidated financial statements for information
regarding the use of financial instruments and derivatives thereof, including
foreign currency hedging instruments. As a matter of policy, the Company does
not engage in "speculative" transactions involving derivative financial
instruments.
OTHER
- -----
PENDING BUSINESS COMBINATIONS. On August 5, 1999, the Company announced
that it had entered into a definitive merger agreement with Automatic Liquid
Packaging, Inc. ("ALP"), pursuant to which ALP will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be accounted
for as a pooling-of-interests for financial reporting purposes. The merger is
expected to be completed in the first quarter of fiscal 2000, subject to
satisfaction of certain conditions, including regulatory clearances.
On July 12, 1999, the Company completed the purchase of MedSurg Industries,
Inc., for $31.8 million. The acquisition was accounted for as a purchase.
TERMINATION AGREEMENT. On August 24, 1997, the Company and Bergen announced
that they had entered into a definitive merger agreement, as amended, pursuant
to which a wholly owned subsidiary of the Company would be merged with and into
Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United States
District Court for the
16
<PAGE> 17
District of Columbia granted the Federal Trade Commission's request for a
preliminary injunction to halt the proposed merger. On August 7, 1998, the
Company and Bergen jointly terminated the Bergen Merger Agreement and, in
accordance with the terms of the Bergen Merger Agreement, the Company reimbursed
Bergen for $7.0 million of transaction costs. Additionally, the termination of
the Bergen Merger Agreement caused the costs incurred by the Company (that would
not have been deductible had the merger been consummated) to become tax
deductible for federal income tax purposes, resulting in a tax benefit of $12.2
million. The obligation to reimburse Bergen and the additional tax benefit were
recorded in the fourth quarter of the fiscal year ended June 30, 1998. (See Note
17 of "Notes to Consolidated Financial Statements").
YEAR 2000 PROJECT. The Company utilizes computer technologies in each of
its businesses to effectively carry out its day-to-day operations. Computer
technologies include both information technology in the form of hardware and
software, as well as embedded technology in the Company's facilities and
equipment. Similar to most companies, the Company must determine whether its
systems are capable of recognizing and processing date sensitive information
properly in the year 2000. The Company is utilizing a multi-phased concurrent
approach to address this issue.
The first of two project segments, "Mitigation and Validation", included
specific awareness, assessment, remediation, validation and implementation
phases. The Company has substantially completed all of these phases of this
project segment. The Company has corrected, replaced, mitigated, or retired the
vast majority of those business critical systems which were not year 2000 ready
in order to ensure the Company's ability to continue to meet its internal needs
and those of its suppliers and customers. The Company expects that all-remaining
Mitigation and Validation issues will be fully completed on or before September
30, 1999. This process includes the multiple testing of critical systems to
ensure that year 2000 readiness has been accomplished.
The second project segment, "Business Protection", also includes several
phases - business dependency and risk assessment, contingency planning, and
situation management planning. The Company has made significant and substantial
progress with this segment and expects to substantially complete the business
dependency and risk assessment phase by August 31, 1999 and the remaining two
phases by September 30, 1999.
The Company currently believes it will be able to modify, replace, or
mitigate its affected systems in time to avoid any material detrimental impact
on its operations. If the Company determines that it is unable to remediate and
properly test affected systems on a timely basis, the Company intends to develop
appropriate contingency plans for any such mission-critical systems at the time
such determination is made. While the Company is not presently aware of any
significant probability that its systems will not be properly remediated on a
timely basis, there can be no assurances that all year 2000 remediation
processes will be completed and properly tested before the year 2000, or that
contingency plans will sufficiently mitigate the risk of a year 2000 readiness
problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $27.0 million, including costs incurred to date.
Significant portions of these costs were not incremental costs, but rather
represented the redeployment of existing resources. This reallocation of
resources is not expected to have a significant impact on the day-to-day
operations of the Company. Since the initiation of the year 2000 project, the
Company estimates that it has incurred costs of approximately $20.0 million of
which approximately $6.2 million represented incremental costs. The anticipated
impact and costs of the project, as well as the date, on which the Company
expects to complete the project, are based on management's best estimates using
information currently available and numerous assumptions about future events.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Based on its current
estimates and information currently available, the Company does not anticipate
that the costs associated with this project will have a material adverse effect
on the Company's consolidated financial statements.
The Company has formally communicated with its significant suppliers,
customers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces
as the year 2000 approaches. The Company is in the process of developing
appropriate contingency plans in the event that a significant exposure is
identified relative to the dependencies on third-party systems. Although the
Company is not presently aware of any such significant exposure, there can be no
guarantee that the systems of third parties on which the Company relies or with
which the Company interfaces will be converted in a timely manner, or that a
failure to properly convert by a third party would not have a material adverse
effect on the Company.
The potential risks associated with the year 2000 issues include, but are
not limited to: temporary disruption of the Company's operations, loss of
communication services and loss of other utility services. The Company believes
that the most reasonably likely worst-case year 2000 scenario would be a loss of
communication services which could result in
17
<PAGE> 18
problems with receiving, processing, tracking and billing customer orders;
problems receiving, processing and tracking orders placed with suppliers; and
problems with banks and other financial institutions. Currently, as part of the
Company's normal business contingency planning, a plan has been developed for
business disruptions due to natural disasters and power failures. The Company is
in the process of enhancing these contingency plans to include provisions for
year 2000 issues, although it will not be possible to develop contingency plans
for all potential disruption. Although the Company anticipates that minimal
business disruption will occur as a result of the year 2000 issues, based upon
currently available information, incomplete or untimely resolution of year 2000
issues by either the Company or significant suppliers, customers and critical
business partners could have a material adverse impact on the Company's
consolidated financial statements.
THE EURO CONVERSION. On January 1, 1999, certain member countries of the
European Union irrevocably fixed the conversion rates between their national
currencies and a common currency, the "Euro", which became their legal currency
on that date. The participating countries' former national currencies will
continue to exist as denominations of the Euro until January 1, 2002. The
Company has addressed the business implications of conversion to the Euro,
including the need to adapt internal systems to accommodate Euro-denominated
transactions, the competitive implications of cross-border price transparency,
and other strategic implications. The Company does not expect the conversion to
the Euro to have a material impact on its consolidated financial statements.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS. As of September 30, 1998,
the Company adopted, on a retroactive basis, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires the presentation of comprehensive income and its components in a full
set of general-purpose financial statements. The Company's comprehensive income
consists of net earnings and foreign currency translation adjustments.
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 requires companies to define and report financial
and descriptive information about its operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers (See Note 13 of "Notes to Consolidated Financial
Statements").
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises employers' disclosures about pension
and other postretirement benefit plans. The new statement does not change the
existing method of expense recognition. There was no effect on financial
position or net income as a result of adopting SFAS 132. (See Note 8 of "Notes
to Consolidated Financial Statements").
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." This new
statement requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair value. As
amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," the provisions of SFAS 133 will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2001.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S.
interest rates, changes in foreign currency exchange rates as measured against
the U.S. dollar and changes in commodity prices.
Interest Rates. The Company utilizes a mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposures to changes in
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 2000, although there can be no
assurances that interest rates will not significantly change.
18
<PAGE> 19
As of June 30, 1999, the Company had total long-term obligations outstanding of
$1,235.5 million of which $1,008.0 million represented Notes and Debentures with
fixed interest rates and maturity dates beginning in fiscal 2004. As of June 30,
1998, the Company had total long-term obligations outstanding of $1,337.3
million of which $898.9 million represented Notes and Debentures with fixed
interest rates and maturity dates beginning in fiscal 2004. The average interest
rate related to these obligations was 6.8% and 7.0% as of June 30, 1999 and
1998, respectively. The majority of the remaining outstanding long-term
obligations and credit facilities have variable interest rates that fluctuate
with the LIBOR or prime rates. As of June 30, 1999 and 1998, the fair value of
the total long-term obligations was $1,233.3 million and $1,365.3 million,
respectively. Maturities of long-term obligations for future fiscal years are:
2000 - $11.6 million; 2001 - $117.6 million; 2002 - $3.1 million; 2003 - $ 2.1
million; 2004 - $273.9 million and 2005 and thereafter - $827.2 million.
The Company periodically enters into interest rate swap agreements when
existing conditions and market situations dictate. The Company does not
enter into interest rate swap agreements for trading or speculative purposes.
The impact of interest rate swaps is not significant. See Note 6 of "Notes to
Consolidated Financial Statements".
Foreign Exchange. The Company conducts business in several major
international currencies. The Company periodically uses financial instruments,
principally foreign currency options to attempt to manage the impact of foreign
exchange rate changes on earnings. In addition, the Company periodically enters
into forward foreign currency exchange contracts to hedge certain exposures
related to selected transactions that are relatively certain as to both timing
and amount and to hedge a portion of the production costs expected to be
denominated in foreign currency. The purpose of entering into these hedge
transactions is to minimize the impact of foreign currency fluctuations on the
results of operations and cash flows. Gains and losses on the hedging activities
are recognized concurrently with the gains and losses from the underlying
transactions. The Company does not enter into forward exchange contracts or
foreign currency options for trading purposes.
In addition, the Company uses commodity contracts to hedge raw material
costs expected to be denominated in foreign currency. These contracts generally
cover a one-year period and all gains and losses are deferred and recognized in
cost of goods sold with the underlying product costs.
As of June 30, 1999, the Company did not have any material foreign currency
options or forward exchange contracts outstanding. As of June 30, 1998, the
Company's foreign currency options consisted of the option to exchange German
marks at a fixed exchange rate of 1.722 German marks per U.S. dollar and British
pound sterling at a fixed exchanged rate of $1.6242 per pound sterling. The
notional principal amount under these foreign currency option contracts was
approximately $3 million and its related fair value was $0.1 million at June 30,
1998. In addition, as of June 30, 1998, the Company's forward exchange contracts
consisted of forward contracts to sell German marks and U.S. dollars for British
pound sterling at a fixed exchange rate of 3.05679 German mark per British pound
sterling and $1.67 per pound sterling. The notional principal amount under these
foreign exchange contracts was approximately $35.6 million and its related fair
value was $(0.4) million at June 30, 1998. As of June 30, 1998, the notional
amount of the commodity hedge contracts was $14.2 million and the related fair
market value of these contracts was $(1.7) million. As of June 30, 1999, the
notional amount of the commodity hedge contracts was $9.6 million and the
related fair market value of these contracts was $(0.3) million. The unrealized
gains or losses on these options or contracts represent hedges of foreign
exchange gains and losses on a portion of the Company's foreign earnings, cash
flows and selected transactions. As a result, the Company does not expect future
gains and losses on these contracts to have a material impact on the Company's
consolidated financial statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1999, 1998 and 1997
Consolidated Balance Sheets at June 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Fiscal Years Ended June
30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc:
We have audited the accompanying consolidated balance sheets of Cardinal Health,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Allegiance Corporation ("Allegiance"), a wholly owned subsidiary
of Cardinal Health, Inc., as of June 30, 1999 and 1998, and for the years ended
June 30, 1999 and 1998 and December 31, 1997. We also did not audit the
financial statements of R.P. Scherer Corporation ("Scherer"), a wholly owned
subsidiary of Cardinal Health, Inc., as of June 30, 1999 and March 31, 1998, and
for the years ended June 30, 1999 and March 31, 1998 and 1997. The combined
financial statements of Allegiance and Scherer represent approximately 45% and
47% of consolidated total assets at June 30, 1999 and 1998, respectively, and
represent combined revenues and net income of approximately 25%, 28%, and 31%
and 37%, 42% and 44%, respectively, of consolidated amounts for each of the
three years in the period ended June 30, 1999. These statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for Allegiance and Scherer, is
based solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999
in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 10, 1999
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statements of financial position
of R.P. SCHERER CORPORATION (a Delaware corporation and a wholly-owned
subsidiary of Cardinal Health, Inc.) and subsidiaries as of June 30, 1999 and
March 31, 1998 and the related consolidated statements of income, comprehensive
income, cash flows and shareholders' equity for the year ended June 30, 1999 and
the years ended March 31, 1998 and 1997 (not presented separately herein). These
financial statements and the schedule referred to below are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of June 30, 1999 and March 31, 1998, and the results of their
operations and their cash flows for the year ended June 30, 1999 and for the
years ended March 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation allowances is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements
(not presented separately herein). This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Detroit, Michigan,
August 9, 1999
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders of Allegiance Corporation
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of equity of Allegiance Corporation,
a wholly-owned subsidiary of Cardinal Health Inc., and its subsidiaries (not
presented separately herein) present fairly, in all material respects, the
financial position of Allegiance Corporation and its subsidiaries at June 30,
1999 and 1998, and the results of their operations and their cash flows for the
years ended June 30, 1999 and 1998 and for the year ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allegiance Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
July 29, 1999
22
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Stockholders of Allegiance Corporation
Our audits of the consolidated financial statements of Allegiance Corporation
and its subsidiaries referred to in our report dated July 29, 1999 appearing on
page 22 of the Cardinal Health, Inc. 1999 Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule II - Valuation and
Qualifying Accounts ("Financial Statement Schedule") of Allegiance Corporation
and its subsidiaries (not presented separately herein). In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 29, 1999
23
<PAGE> 24
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Revenue:
Operating revenue $21,480.6 $18,004.0 $15,924.8
Bulk deliveries to customer warehouses 3,553.0 2,991.4 2,469.1
--------- --------- ---------
Total revenue 25,033.6 20,995.4 18,393.9
Cost of products sold:
Operating cost of products sold 18,892.2 15,783.4 13,904.8
Cost of products sold - bulk deliveries 3,553.0 2,991.4 2,469.1
Merger-related costs 4.0 -- --
--------- --------- ---------
Total cost of products sold 22,449.2 18,774.8 16,373.9
Gross margin 2,584.4 2,220.6 2,020.0
Selling, general and administrative expenses 1,564.8 1,390.3 1,304.3
Special charges:
Merger-related costs (142.6) (49.2) (50.9)
Other special charges -- (8.6) --
--------- --------- ---------
Total special charges (142.6) (57.8) (50.9)
Operating earnings 877.0 772.5 664.8
Other income (expense):
Interest expense (99.4) (94.5) (107.2)
Other, net (includes minority interests) (18.4) (18.3) (17.9)
--------- --------- ---------
Earnings before income taxes 759.2 659.7 539.7
Provision for income taxes 302.9 234.6 204.9
--------- --------- ---------
Net earnings $ 456.3 $ 425.1 $ 334.8
========= ========= =========
Net earnings per Common Share:
Basic $ 1.68 $ 1.57 $ 1.26
Diluted $ 1.64 $ 1.53 $ 1.23
Weighted average number of
Common Shares outstanding:
Basic 271.6 271.2 265.8
Diluted 279.0 277.9 272.0
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 25
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 165.2 $ 373.3
Trade receivables, net 1,590.3 1,436.3
Current portion of net investment in sales-type leases 152.5 91.4
Inventories 2,931.4 2,608.1
Prepaid expenses and other 307.2 277.0
-------- --------
Total current assets 5,146.6 4,786.1
-------- --------
Property and equipment, at cost:
Land, buildings and improvements 700.3 761.6
Machinery and equipment 1,970.3 1,735.7
Furniture and fixtures 77.7 104.4
-------- --------
Total 2,748.3 2,601.7
Accumulated depreciation and amortization (1,207.8) (1,134.0)
-------- --------
Property and equipment, net 1,540.5 1,467.7
Other assets:
Net investment in sales-type leases, less current portion 454.3 233.1
Goodwill and other intangibles, net 942.1 850.5
Other 205.5 140.6
-------- --------
Total $8,289.0 $7,478.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 28.6 $ 24.7
Current portion of long-term obligations 11.6 7.3
Accounts payable 2,360.8 2,142.7
Other accrued liabilities 558.0 550.7
-------- --------
Total current liabilities 2,959.0 2,725.4
-------- --------
Long-term obligations, less current portion 1,223.9 1,330.0
Deferred income taxes and other liabilities 643.1 467.7
Shareholders' equity:
Common Shares, without par value 1,090.0 1,063.6
Retained earnings 2,439.1 2,006.9
Common Shares in treasury, at cost (17.2) (82.3)
Cumulative foreign currency adjustment (44.0) (27.9)
Other (4.9) (5.4)
-------- --------
Total shareholders' equity 3,463.0 2,954.9
-------- --------
Total $8,289.0 $7,478.0
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 26
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<CAPTION>
COMMON SHARES CUMULATIVE
------------------ TREASURY SHARES FOREIGN TOTAL
SHARES RETAINED ------------------ CURRENCY SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT ADJUSTMENT OTHER EQUITY
------ -------- -------- ------ -------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 132.1 $ 897.8 $1,343.1 (1.1) $ (11.6) $ (3.8) $(3.0) $2,222.5
Comprehensive income:
Net earnings 334.8 334.8
Foreign currency translation adjustments (8.7) (8.7)
--------
Total comprehensive income 326.1
Employee stock plans activity,
including tax benefits of $21.0 3.5 123.4 (0.6) 10.6 (1.1) 132.9
Treasury shares acquired and shares retired (0.7) (7.1) 0.9 (30.7) (37.8)
Dividends paid (32.0) (32.0)
Stock split effected as a stock dividend
and cash paid in lieu of fractional shares 33.4
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) 0.2 5.7 0.1 0.1 6.0
Stock issued for acquisitions and other 0.1 10.5 (1.2) 9.3
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1997 168.4 $1,024.8 $1,651.6 (0.7) $ (31.6) $(12.5) $(5.3) $2,627.0
Comprehensive income:
Net earnings 425.1 425.1
Foreign currency translation adjustments (16.0) (16.0)
--------
Total comprehensive income 409.1
Employee stock plans activity,
including tax benefits of $35.2 2.0 65.0 (0.3) 29.0 (0.4) 93.6
Treasury shares acquired and shares retired (0.4) (25.4) (0.8) (104.9) (130.3)
Dividends paid (34.8) (34.8)
Other adjustments (0.5) (0.5)
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) (0.1) (0.8) (35.0) 0.4 25.2 0.6 0.8 (9.2)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1998 169.9 $1,063.6 $2,006.9 (1.4) $ (82.3) $(27.9) $(5.4) $2,954.9
Comprehensive income:
Net earnings 456.3 456.3
Foreign currency translation adjustments (17.0) (17.0)
--------
Total comprehensive income 439.3
Employee stock plans activity,
including tax benefits of $55.8 2.7 99.7 (0.7) 34.8 (2.9) 131.6
Treasury shares acquired and shares retired (1.7) (73.8) 1.7 30.3 3.4 (40.1)
Dividends paid (31.9) (31.9)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 103.1 (0.3) (0.3)
Adjustment for change in fiscal year
of an acquired subidiary (see Note 1) 0.1 0.5 8.6 0.9 10.0
Stock issued for acquisitions and other 0.2 (0.5) (0.5)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1999 274.3 $1,090.0 $2,439.1 (0.4) $ (17.2) $(44.0) $(4.9) $3,463.0
===== ======== ======== ==== ======= ====== ===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 27
<TABLE>
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 456.3 $ 425.1 $ 334.8
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 233.5 214.5 209.1
Provision for deferred income taxes 132.4 90.1 32.9
Provision for bad debts 29.5 15.5 8.6
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (214.1) (204.9) (15.3)
Increase in inventories (318.5) (473.7) (106.6)
Increase in net investment in sales-type leases (282.3) (103.3) (5.1)
Increase (decrease) in accounts payable 230.5 523.3 (33.2)
Other operating items, net 78.4 65.5 63.8
------- ------- -------
Net cash provided by operating activities 345.7 552.1 489.0
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (147.5) (45.8) (43.7)
Proceeds from asset dispositions 57.8 10.7 21.0
Additions to property and equipment (319.9) (278.8) (227.9)
Purchase of marketable securities available for sale -- -- (3.4)
Proceeds from sale of marketable securities available for sale -- -- 57.7
Other -- (4.7) 2.5
------- ------- -------
Net cash used in investing activities (409.6) (318.6) (193.8)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity (207.4) (89.2) (185.4)
Reduction of long-term obligations (118.5) (49.1) (277.8)
Proceeds from long-term obligations, net of issuance costs 223.7 111.4 94.7
Proceeds from issuance of Common Shares 62.0 59.1 108.2
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (56.7) (51.4) (40.0)
Purchase of treasury shares (40.1) (130.7) (37.7)
Other (4.8) (10.8) (10.8)
------- ------- -------
Net cash used in financing activities (141.8) (160.7) (348.8)
------- ------- -------
EFFECT OF CURRENCY TRANSLATION
ON CASH AND EQUIVALENTS (2.4) (1.6) (1.2)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (208.1) 71.2 (54.8)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 373.3 302.1 356.9
------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 165.2 $ 373.3 $ 302.1
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company currently conducts its business within three business
segments; Pharmaceutical Distribution, Pharmaceutical Services and
Medical-Surgical Products.
The Pharmaceutical Distribution segment distributes a broad line of
pharmaceuticals, therapeutic plasma and other specialty pharmaceutical products,
health and beauty care products, and other items typically sold by hospitals,
retail drug stores, and other healthcare providers.
The Company, within the Pharmaceutical Services segment, operates a variety of
related healthcare service and manufacturing businesses, including Pyxis
Corporation ("Pyxis") (which develops, manufactures, leases, sells and services
point-of-use pharmacy systems which automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities); Medicine
Shoppe International, Inc. ("Medicine Shoppe") (a franchisor of apothecary-style
retail pharmacies); PCI Services, Inc. ("PCI") (an international provider of
integrated packaging services to pharmaceutical manufacturers); Owen Healthcare,
Inc. ("Owen") (a provider of pharmacy management and information services to
hospitals); the Cardinal Information group of companies ("CIC") (a developer and
provider of clinical information systems); and R.P. Scherer Corporation
("Scherer") (an international developer and manufacturer of drug delivery
systems).
The Medical-Surgical Products segment primarily encompasses Allegiance
Corporation ("Allegiance"). Allegiance is a distributor and manufacturer of
medical, surgical and respiratory therapy products, and a provider of
distribution and cost-saving services. See "Basis of Presentation" below.
BASIS OF PRESENTATION. The consolidated financial statements of the Company
include the accounts of all majority-owned subsidiaries and all significant
intercompany accounts and transactions have been eliminated. In addition, the
consolidated financial statements give retroactive effect to the mergers with
PCI on October 11, 1996; Owen on March 18, 1997; MediQual Systems, Inc.
("MediQual") on February 18, 1998; Scherer on August 7, 1998; and Allegiance on
February 3, 1999 (see Note 2). Such business combinations were accounted for
under the pooling-of-interests method.
The Company's fiscal year end is June 30 and Owen's, MediQual's, Scherer's
and Allegiance's fiscal year ends were November 30, December 31, March 31, and
December 31, respectively. For the fiscal year ended June 30, 1997, the
consolidated financial statements combine the Company's fiscal year ended June
30, 1997 with Owen's financial results for the period of June 1, 1996 to June
30, 1997 (excluding Owen's financial results for December 1996 in order to
change Owen's November 30 fiscal year end to June 30) and with the financial
results for MediQual's fiscal year ended December 31, 1996, Scherer's fiscal
year ended March 31, 1997, and Allegiance's fiscal year ended December 31, 1997.
For the fiscal year ended June 30, 1998, the consolidated financial statements
combine the Company's fiscal year ended June 30, 1998 with Scherer's fiscal year
ended March 31, 1998.
Due to the change in Owen's fiscal year from November 30 to conform with
the Company's June 30 fiscal year end, Owen's results of operations for the
month of December 1996 are not included in the combined results of operations
but are reflected as an adjustment in the Consolidated Statements of
Shareholders' Equity. As a result of changing MediQual's fiscal year end from
December 31 to June 30, the results of operations for the six months ended June
30, 1997 are not included in the combined results of operations but are
reflected as an adjustment in the Consolidated Statements of Shareholders'
Equity. MediQual's total revenue and net earnings for this period were $6.0
million and $1.7 million, respectively. MediQual's cash flows from operating
activities for this period were $1.2 million, while cash flows used in investing
and financing activities were $0.3 million and $0.1 million, respectively. Due
to the change in Scherer's fiscal year end from March 31 to conform with the
Company's June 30 fiscal year end, Scherer's results of operations for the three
months ended June 30, 1998 are not included in the combined results of
operations but are reflected as an adjustment in the Consolidated Statements of
Shareholders' Equity. Scherer's net revenue and net earnings for this period
were $161.6 million and $8.6 million, respectively. Scherer's cash flows from
operating and financing activities for this period were $12.6 million and $32.6
million, respectively, while cash flows used in investing activities were $12.2
million. As a result of changing Allegiance's fiscal year end from December 31
to June 30, the results of operations for the six months ended December 31, 1997
are included in the combined results of operations for both the fiscal years
ended June 30, 1997 and 1998 and are reflected as an adjustment in the
Consolidated Statements of Shareholders' Equity. Allegiance's total revenue and
net earnings for this period were $2.2 billion and $47.9 million, respectively.
Allegiance's cash flows from operating
28
<PAGE> 29
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
activities for this period were $147.2 million, while cash flows used in
investing and financing activities were $63.7 million and $83.8 million,
respectively.
On May 21, 1999, the Company completed a merger with Pacific Surgical
Innovations, Inc. ("PSI"). The merger transaction with PSI was accounted for as
a pooling-of-interests. Because the impact of the merger transaction with PSI
was not significant on a historical basis, prior period financial statements
have not been restated. PSI's financial information for all periods, beginning
with May 21, 1999, has been included in the Company's consolidated financial
results for fiscal 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
CASH EQUIVALENTS. The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
cash equivalents approximates their fair value. Cash payments for interest were
$105.5 million, $97.4 million and $111.4 million and cash payments for income
taxes were $79.5 million, $146.9 million and $116.8 million for fiscal 1999,
1998 and 1997, respectively. See Notes 2 and 5 for additional information
regarding non-cash investing and financing activities.
RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the
Company through its pharmaceutical and other healthcare distribution activities
and are presented net of an allowance for doubtful accounts of $53.6 million and
$64.6 million at June 30, 1999 and 1998, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates, which
generally fluctuate with the prime rate. The financings may be collateralized,
guaranteed by third parties or unsecured. Finance notes and accrued interest
receivable are $19.8 million and $66.6 million at June 30, 1999 and 1998,
respectively (the current portions are $9.2 million and $29.4 million,
respectively), and are included in other assets. These amounts are reported net
of an allowance for doubtful accounts of $4.9 million and $6.4 million at June
30, 1999 and 1998, respectively.
During fiscal 1999, the Company formed Medicine Shoppe Capital Corporation
("MSCC") and Pyxis Capital Corporation ("PCC"), as wholly owned subsidiaries of
Medicine Shoppe and Pyxis, respectively. MSCC and PCC were incorporated for the
sole purpose of buying receivables and selling those receivables to certain
financial institutions or to other investors. They are designed to be special
purpose, bankruptcy remote entities. Although consolidated to the extent
required by generally accepted accounting principles, MSCC and PCC are separate
corporations from the Company, Medicine Shoppe and Pyxis, they each maintain
separate financial statements, and their assets will be available first and
foremost to satisfy the claims of their creditors.
INVENTORIES. A majority of inventories (approximately 60% in 1999 and 1998) are
stated at lower of cost, using the last-in, first-out ("LIFO") method, or market
and are primarily merchandise inventories. The remaining inventory is primarily
stated at the lower of cost using the first-in, first-out ("FIFO") method or
market. If the Company had used the FIFO method of inventory valuation, which
approximates current replacement cost, inventories would have been higher than
the LIFO method reported at June 30, 1999 and 1998 by $50.4 million and $54.4
million, respectively.
The Company continues to consolidate locations, automate selected
distribution facilities and invest in management information systems to achieve
efficiencies in inventory management processes. As a result of the facility and
related inventory consolidations, and the operational efficiencies achieved in
fiscal 1999 and 1998, the Company had partial inventory liquidations in certain
LIFO pools which reduced the LIFO provision by approximately $0.1 million and
$2.3 million, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
and amortization for financial reporting purposes are computed using the
straight-line method over the estimated useful lives of the assets which range
from one to fifty years, including capital lease assets which are amortized over
the terms of their respective leases. Amortization of capital lease assets is
included in depreciation and amortization expense. At each balance sheet date,
the Company assesses the recoverability of its long-lived property, based on a
review of projected undiscounted cash flows associated with these assets.
29
<PAGE> 30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles primarily
represent intangible assets related to the excess of cost over net assets of
subsidiaries acquired. Intangible assets are being amortized using the
straight-line method over lives that range from ten to forty years. Accumulated
amortization was $599.9 million and $529.8 million at June 30, 1999 and 1998,
respectively. At each balance sheet date, a determination is made by management
to ascertain whether there is an indication that the intangible assets may have
been impaired based on a review of projected undiscounted operating cash flows
for each subsidiary, except Allegiance. Allegiance assesses goodwill impairment
based upon a fair value approach.
REVENUE RECOGNITION. The Company records distribution revenue when merchandise
is shipped to its customers and the Company has no further obligation to provide
services related to such merchandise. Along with other companies in the drug
distribution industry, the Company reports as revenue bulk deliveries made to
customers' warehouses, whereby the Company acts as an intermediary in the
ordering and subsequent delivery of pharmaceutical products. Fluctuations in
bulk deliveries result largely from circumstances that are beyond the control of
the Company, including consolidation within the customers' industry, decisions
by customers to either begin or discontinue warehousing activities, and changes
in policy by manufacturers related to selling directly to the customers. Due to
the insignificant margins generated through bulk deliveries, fluctuations in
their amount do not have a significant impact on earnings.
Revenue is recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, the customer accepts the system, and the
lease becomes noncancellable. Unearned income on sales-type leases is recognized
using the interest method. Sales of point-of-use pharmacy systems are recognized
upon delivery and customer acceptance. Revenue for systems installed under
operating lease arrangements is recognized over the lease term as such amounts
become receivable according to the provisions of the lease.
The Company earns franchise and origination fees from its apothecary-style
pharmacy franchisees. Franchise fees represent monthly fees based upon
franchisees' sales and are recognized as revenue when they are earned.
Origination fees from signing new franchise agreements are recognized as revenue
when the new franchise store is opened.
Pharmacy management and other service revenue are recognized as the related
services are rendered according to the contracts established. A fee is charged
under such contracts through a monthly management fee arrangement, a capitated
fee arrangement or a portion of the hospital charges to patients. Under certain
contracts, fees for management services are guaranteed by the Company not to
exceed stipulated amounts or have other risk-sharing provisions. Revenue is
adjusted to reflect the estimated effects of such contractual guarantees and
risk-sharing provisions.
Packaging revenue is recognized from services provided upon the completion
of such services.
Clinical information system license revenue is recognized upon shipment of
the system to the customer. The portion of the license fee related to system
maintenance is deferred and recognized over the annual maintenance period.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenue related to option, milestone and exclusivity fees
are recognized when earned and all obligations of performance have been
completed.
TRANSLATION OF FOREIGN CURRENCIES. The financial position and the results of
operations of the Company's foreign operations, excluding the Company's
Malaysian and Mexican manufacturing operations which are denominated in U.S.
dollars, are measured using the local currencies of the countries in which they
operate and are translated into U.S. dollars. Although the effects of foreign
currency fluctuations are mitigated by the fact that expenses of foreign
subsidiaries are generally incurred in the same currencies in which sales are
generated, the reported results of operations of the Company's foreign
subsidiaries are affected by changes in foreign currency exchange rates and, as
compared to prior periods, will be higher or lower depending upon a weakening or
strengthening of the U.S. dollar. In addition, the net assets of foreign
subsidiaries are translated into U.S. dollars at the foreign currency exchange
rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the relative
strengthening or weakening of the U.S. dollar versus relevant foreign
currencies.
DERIVATIVE FINANCIAL INSTRUMENT RISK. The Company uses derivative financial
instruments to minimize the impact of foreign exchange rate changes on earnings
and cash flows. The Company also periodically enters into foreign currency
exchange contracts to hedge certain exposures related to selected transactions
that are relatively certain as to both timing and amount. The Company does not
use derivative financial instruments for trading or speculative purposes (see
Note 6 for further discussion).
30
<PAGE> 31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with the
development of new products and manufacturing methods are charged to expense as
incurred. Research and development expenses, net of customer reimbursements,
were $49.7 million, $45.7 million and $35.4 million in fiscal 1999, 1998 and
1997, respectively. Customer reimbursements in the amount of $11.8 million,
$13.0 million and $8.0 million were received for the fiscal years ended June 30,
1999, 1998 and 1997, respectively.
INCOME TAXES. No provision is made for U.S. income taxes on earnings of foreign
subsidiary companies which the Company controls but does not include in the
consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings.
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options outstanding,
computed using the treasury stock method.
Excluding dividends paid by all entities with which the Company has merged,
the Company paid cash dividends per Common Share of $0.095, $0.070 and $0.060
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
STOCK SPLITS. On August 12, 1998, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on October 30, 1998
to shareholders of record on October 9, 1998. All share and per share amounts
included in the consolidated financial statements, except the Consolidated
Statements of Shareholders' Equity, have been adjusted to retroactively reflect
these stock splits.
ALLEGIANCE SPIN-OFF. On September 30, 1996 (the "Distribution Date"), Baxter
International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and
its subsidiaries their U.S. healthcare distribution business, surgical and
respiratory therapy business and healthcare cost-saving business, as well as
certain foreign operations (the "Allegiance Business") in connection with a
spin-off of the Allegiance Business by Baxter. The spin-off occurred on the
Distribution Date through a distribution of Allegiance common stock to Baxter
stockholders (the "Distribution") based on a distribution ratio of one
Allegiance share for each five Baxter shares held. The Distribution of
approximately 68.4 million equivalent Company Common Shares of Allegiance common
stock was made to Baxter stockholders of record on September 26, 1996.
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
Business Combinations and Merger-Related Costs. On February 3, 1999, the Company
completed a merger transaction with Allegiance that was accounted for as a
pooling-of-interests transaction. The Company issued approximately 70.7 million
Common Shares to Allegiance stockholders and Allegiance's outstanding stock
options were converted into options to purchase approximately 10.3 million
Company Common Shares. In addition, on August 7, 1998, the Company completed a
merger transaction with Scherer that was accounted for as a
pooling-of-interests. The Company issued approximately 34.2 million Common
Shares to Scherer stockholders and Scherer's outstanding stock options were
converted into options to purchase approximately 3.5 million Common Shares. The
Company recorded a merger-related charge to reflect transaction and other costs
incurred as a result of these merger transactions in fiscal 1999. Additional
merger-related costs associated with integrating the separate companies and
instituting efficiencies are charged to expense in subsequent periods when
incurred.
On May 21, 1999, the Company completed a merger transaction with PSI. The
Company issued approximately 233,000 Common Shares to PSI shareholders. The
historical cost of PSI's assets combined was approximately $3.9 million and the
total liabilities assumed were approximately $3.0 million. The impact of the
merger transaction with PSI, on a historical basis, is not significant.
Accordingly, prior period historical financial statements have not been restated
for the PSI Merger. PSI's financial results have been included in the
consolidated financial results of the Company since May 21, 1999.
During the fiscal 1999, merger-related costs totaling $146.6 million
($117.6 million, net of tax) were recorded. Of this amount, approximately $95.4
million related to transaction and employee-related costs, and $36.1 million
related to business restructuring and asset impairment costs associated with the
Company's merger transactions with Scherer and Allegiance. As part of the
business restructuring, the Company is currently closing certain facilities. As
such, the Company has incurred employee-related costs associated with the
elimination of approximately 360 positions, asset impairment costs and exit
costs
31
<PAGE> 32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to the termination of contracts and lease agreements. In addition, the
Company recorded costs of $4.0 million related to the write down of impaired
inventory related to a previous merger and of $1.1 million related to severance
costs for a restructuring associated with the change in management that resulted
from the merger with Owen. The Company recorded costs of $13.7 million related
to integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.7 million credit to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 17). This adjustment relates
primarily to services provided by third parties engaged by the Company in
connection with the terminated Bergen transaction. The cost of such services was
estimated and recorded in the prior periods when the services were performed.
Actual billings were less than the estimate originally recorded, resulting in a
reduction of the current period merger-related costs.
On February 18, 1998, the Company completed a merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 860,000 Common Shares to
MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 36,000 Common Shares of the Company.
The table below presents a reconciliation of total revenue and net earnings
available for Common Shares as reported in the accompanying consolidated
financial statements with those previously reported by the Company. The term
"Cardinal Health" as used herein refers to Cardinal Health, Inc. and
subsidiaries prior to the MediQual, Scherer and Allegiance mergers. See Note 1
for periods combined.
<TABLE>
<CAPTION>
(in millions) Cardinal
Health Scherer MediQual Allegiance Combined
--------- ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal year ended June 30, 1997
Total revenue $13,437.2 $588.7 $11.0 $4,357.0 $18,393.9
Net earnings $ 184.6 $ 57.0 $ 2.3 $ 90.9 $ 334.8
Fiscal year ended June 30, 1998
Total revenue $15,918.1 $620.8 $ 7.9 $4,448.6 $20,995.4
Net earnings $ 247.1 $ 69.7 $ 1.4 $ 106.9 $ 425.1
</TABLE>
Adjustments affecting net earnings and shareholders' equity resulting from
the MediQual, Scherer and Allegiance mergers to adopt the same accounting
practices were not material for any periods presented herein. There were no
material intercompany transactions.
In addition to the merger transactions described above, during fiscal 1999,
the Company completed several individually immaterial acquisitions, which were
accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's med/surg distribution,
point-of-use pharmacy systems and pharmaceutical-packaging services. The
aggregate purchase price, which was paid primarily in cash, including fees and
expenses, was approximately $160.8 million. Liabilities of the operations
assumed were approximately $18.9 million, consisting of debt of $3.2 million.
Had the acquisitions taken place July 1, 1998, consolidated results would not
have been materially different from reported results.
During fiscal 1998, the Company made a number of individually immaterial
acquisitions for an aggregate purchase price of $47.8 million and exchanged
nonmonetary assets with a value of approximately $10.5 million to acquire an
interest in Source Medical Corporation, a new venture in Canada. All of these
acquisitions were accounted for as purchase transactions. Had the acquisitions
taken place July 1, 1997, consolidated results would not have been materially
different from reported results.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual Merger ($2.3
million) and transaction costs incurred in connection with the proposed merger
transaction with Bergen ($33.4 million) which was terminated subsequent to June
30, 1998 (see Note 17). In accordance with the terms of the Agreement and Plan
of Merger between the Company, a wholly owned subsidiary of the Company, and
Bergen, as amended, its termination required the Company to reimburse Bergen for
$7.0 million of transaction costs upon termination of such Agreement (See Note
17). Additional merger-related costs, related to asset impairments ($3.8
million)
32
<PAGE> 33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and integrating the operations of companies that previously merged with the
Company ($9.6 million), were incurred and recorded during fiscal 1998.
On March 18, 1997, the Company completed a merger transaction with Owen
(the "Owen Merger"). The Owen Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 11.6 million Common
Shares to Owen shareholders and Owen's outstanding stock options were converted
into options to purchase approximately 1.0 million Common Shares. During fiscal
1997, the Company recorded costs of approximately $31.1 million ($22.4 million,
net of tax) related to the Owen Merger. These costs include $13.1 million for
transaction and employee-related costs associated with the merger, $13.2 million
for asset impairments ($10.6 million of which related to MediTROL, as discussed
below), and $4.8 million related to other integration activities, including the
elimination of duplicate facilities and certain exit and restructuring costs. At
the time of the Owen Merger, Owen had a wholly owned subsidiary, MediTROL, that
manufactured, marketed, sold and serviced point-of-use medication distribution
systems similar to Pyxis. Upon consummation of the Owen Merger, management
committed to merge the operations of MediTROL into Pyxis, and phase-out
production of the separate MediTROL product line. As a result of this decision,
a MediTROL patent ($7.4 million) and certain other operating assets ($3.2
million) were written off as impaired.
On October 11, 1996, the Company completed a merger transaction with PCI
(the "PCI Merger"). The PCI Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 4.7 million Common
Shares to PCI shareholders and PCI's outstanding stock options were converted
into options to purchase approximately 0.3 million Common Shares. During fiscal
1997, the Company recorded costs totaling approximately $15.1 million ($11.4
million, net of tax) related to the PCI Merger. These costs include $13.8
million for transaction and employee-related costs associated with the PCI
Merger (including $7.6 million for retirement benefits and incentive fees to two
executives of PCI, which vested and became payable upon consummation of the
merger) and $1.3 million related to other integration activities, including exit
costs.
During fiscal 1997, the Company made individually immaterial acquisitions,
accounted for under the purchase method of accounting, totaling $71.4 million.
Had these acquisitions taken place July 1, 1996, consolidated results would not
have been materially different from reported results.
In addition to the merger-related costs recorded in fiscal 1997 for the
Owen Merger and the PCI Merger (as discussed above), the Company recorded $4.7
million ($2.8 million, net of tax) related to integrating the operations of
companies that previously merged with the Company.
Other Special Items. During fiscal 1998, the Company recorded a special charge
of $8.6 million ($5.2 million, net of tax) related to the rationalization of its
pharmaceutical distribution operations. Approximately $6.1 million related to
asset impairments and lease exit costs resulting primarily from the Company's
decision to accelerate the consolidation of a number of distribution facilities
and the relocation to more modern facilities for certain others. The remaining
amount related to employee severance costs, including approximately $2.0 million
incurred in connection with the final settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
The net effect of the various merger-related costs and other special items
recorded during fiscal 1999 was to reduce reported net earnings by $117.6
million to $456.3 million and to reduce reported diluted earnings per Common
Share by $0.42 per share to $1.64 per share. The fiscal 1998 effect of various
merger-related charges and other special items was to reduce reported net
earnings by $24.1 million to $425.1 million and to reduce reported diluted
earnings per Common Share by $0.09 per share to $1.53 per share. The effect of
the various merger-related costs recorded in fiscal 1997 was to reduce reported
net earnings by $36.6 million to $334.8 million and to reduce reported diluted
earnings per Common Share by $0.13 per share to $1.23 per share.
Certain merger-related costs are based upon estimates, and actual amounts
paid may ultimately differ from these estimates. If additional costs are
incurred, such items will be expensed as incurred.
33
<PAGE> 34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring Program. In fiscal 1993, Baxter (see Note 1) announced a
restructuring plan designed in part to make Allegiance more efficient and
responsive in addressing the changes in the U.S. healthcare system. Charges
totaling $560.0 million were recorded to cover costs associated with these
restructuring initiatives. During fiscal 1999, 1998 and 1997, the Company had
cash outflows related to the restructuring program of $6.6 million, $15.8
million and $15.6 million, respectively, and noncash charges against the
restructuring program of $7.4 million, $9.1 million and $0.9 million,
respectively. Prior to fiscal 1997, the total cash outflows and noncash charges
related to the restructuring program were $242.4 million and $251.5 million,
respectively. During the fiscal year ended June 30, 1999, $7.9 million of
unnecessary restructuring reserves were reversed. The reversal of unnecessary
reserves was principally the result of facility closures and consolidations
being finalized at costs lower than originally anticipated.
The cash outflows pertain primarily to employee-related costs for
severance, outplacement assistance, relocation, implementation teams and
facility consolidations. Since the inception of the restructuring program,
approximately 2,500 positions have been eliminated. As of June 30, 1999 and
1998, the remaining restructuring reserve balance was $2.8 million and $24.7
million, respectively, both of which are classified as current liabilities. The
remaining expenditures to be charged against the restructuring program are
expected to occur in fiscal 2000, as implementation projects are completed as
planned.
3. LEASES
Sales-Type Leases. The Company's sales-type leases are for terms generally
ranging up to five years. Lease receivables are generally collateralized by the
underlying equipment. The components of the Company's net investment in
sales-type leases are as follows (in millions):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Future minimum lease payments receivable $ 717.7 $387.5
Unguaranteed residual values 1.0 1.3
Unearned income (100.1) (55.5)
Allowance for uncollectible minimum lease
payments receivable (11.8) (8.8)
------- ------
Net investment in sales-type leases 606.8 324.5
Less: current portion 152.5 91.4
------- ------
Net investment in sales-type leases, less
current portion $ 454.3 $233.1
======= ======
</TABLE>
Future minimum lease payments to be received pursuant to sales-type leases
during the next five years are: 2000 -$169.5 million, 2001 - $166.0 million,
2002 - $151.5 million, 2003 - $132.1 million, 2004 - $83.7 million and 2005 and
thereafter - $14.9 million.
Lease Related Financing Arrangements. Pyxis has previously financed its working
capital needs through the sale of certain lease receivables to a non-bank
financing company. As of June 30, 1999, $68.9 million of lease receivables were
owned by the financing company. In June 1998, the agreement with the financing
company was amended to terminate Pyxis' obligation to sell lease receivables to
the financing company. Due to Pyxis customers upgrading the Pyxis machines or
expanding the number of units being leased under the original lease agreements
that have been sold to the financing company, Pyxis has been converting the
original lease agreements with customers to an updated lease agreement. Pyxis
has been maintaining these revised leases and not selling them to the financing
company to replace the original lease receivables. As such, during fiscal 1999,
Pyxis has entered into an agreement with the financing company to pay the
financing company the remaining portion of the original lease receivables
outstanding at the time of revision over the original terms. The future minimum
payments for these notes at June 30, 1999 are 2000 - $39.5 million; 2001 - $26.9
million; 2002 - $14.0 million; and 2003 - $3.1 million.
4. NOTES PAYABLE, BANKS
The Company has entered into various unsecured, uncommitted line-of-credit
arrangements that allow for borrowings up to $177.8 million at June 30, 1999, at
various money market rates. At June 30, 1999, $28.6 million, at a weighted
average interest rate of 6.4%, was outstanding under such arrangements and $24.7
million, at a weighted average interest rate of 7.2% was outstanding at June 30,
1998. The total available but unused lines of credit at June 30, 1999 was $149.2
million.
34
<PAGE> 35
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
Long-term obligations consist of the following (in millions):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
6.0% Notes due 2006 $ 150.0 $ 150.0
6.25% Notes due 2008 150.0 --
6.5% Notes due 2004 100.0 100.0
6.75% Notes due 2004 99.7 100.0
7.3% Notes due 2006 183.2 199.6
7.8% Debentures due 2016 125.2 149.4
7.0% Debentures due 2026 (7 year put option in 2003) 199.9 199.9
Borrowings under credit facilities 132.2 248.8
Commercial paper 49.2 142.0
Other obligations; interest averaging 6.7% in
1999 and 6.1% in 1998, due in varying
installments through 2020 46.1 47.6
-------- --------
Total 1,235.5 1,337.3
Less: current portion 11.6 7.3
-------- --------
Long-term obligations, less current portion $1,223.9 $1,330.0
======== ========
</TABLE>
The 6%, 6.25% and 6.5% Notes represent unsecured obligations of the
Company, and the 6.75% Notes represent unsecured obligations of Scherer which
are guaranteed by the Company. The 7.3% Notes and the 7.8% and 7.0% Debentures
represent unsecured obligations of Allegiance which are guaranteed by the
Company. These obligations are not redeemable prior to maturity and are not
subject to a sinking fund.
During fiscal 1999, the Company established an unsecured bank credit
facility, which expires in March 2004. The credit facility provides for up to an
aggregate of $1.0 billion in borrowings of which $150.0 million is part of a
multi-currency allocation and $250.0 million represents a 364-day facility.
Interest rates on outstanding borrowings are at LIBOR plus 0.25%. As of June 30,
1999, $80.7 million of borrowings were outstanding under the multi-currency
allocation portion of the facility. The amounts outstanding under the short-term
portion of the credit facility will be classified as long-term debt, as amounts
are supported by a long-term credit facility, and will be refinanced. The
agreement requires the Company to maintain a minimum net worth of $2.55 billion.
The Company has a commercial paper program, providing for the issuance of
up to $750.0 million in aggregate maturity value of commercial paper. Commercial
paper with an aggregate maturity value of $49.2 million and $142.0 million was
outstanding as of June 30, 1999 and 1998, respectively with an effective
interest rate of 4.82%.
During fiscal 1999, the Company terminated its unsecured revolving credit
agreement (originally expiring 2001) and its unsecured bank credit facility
(originally expiring 2002) which provided up to an aggregate of $900.0 million
and $175.0 million in borrowings, respectively. As of June 30, 1998, $51.3
million was outstanding under the $175.0 million facility and no amounts were
outstanding under the $900.0 million facility.
The Company maintains other short-term credit facilities. At June 30, 1999
and 1998, $51.5 million and $197.5 million, respectively, was outstanding under
these uncommitted facilities. The effective interest rate as of June 30, 1999
was 6.00%. The amounts outstanding under the commercial paper program and
short-term credit facilities have been classified as long-term debt, as amounts
are supported by a long-term credit facility and will continue to be refinanced.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $28.7 million at
June 30, 1999. Maturities of long-term obligations for future fiscal years are
2000 -$11.6 million; 2001 - $111.7 million; 2002 - $3.1 million; 2003- $2.2
million; 2004 - $278.8 million and 2005 and thereafter - $828.1 million.
At June 30, 1999, the Company has the capacity to issue $250 million of
additional long-term debt pursuant to a shelf debt registration statement filed
with the Securities and Exchange Commission.
35
<PAGE> 36
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
Interest Rate Management. The Company has entered into an interest rate
swap agreement that matures November 2002 to hedge against variable interest
rates. The Company exchanged its variable rate position related to a lease
agreement for a fixed rate of 7.08%. The Company recognizes in income the
periodic net cash settlements under the swap agreement as it accrues.
Foreign Exchange Risk Management. The Company in fiscal 1998 purchased
various foreign currency options which expired as of June 30, 1999 to partially
protect the Company from the risk that fluctuations in the foreign currency
rates that could have an adverse effect on foreign subsidiaries' earnings. In
addition during fiscal 1998, the Company had foreign currency forward and option
contracts that hedged a portion of anticipated production costs expected to be
denominated in foreign currency. When the dollar strengthens against foreign
currencies, the decline in the value of the foreign currency cash flows is
partially offset by the recognition of gains in value of purchased currency
options. Conversely, when the dollar weakens against foreign currencies, the
increase in the value of foreign currency cash flows is reduced only by the
recognition of the premium paid to acquire the options. Market value gains,
losses and premiums on these contracts are recognized as income upon occurrence.
The fair value is based upon the estimated amount the Company would receive to
terminate the options. Net expense during fiscal 1999 was not material. Net
expense during fiscal 1998 was $11.6 million related to these foreign currency
forward contracts and options.
In addition, the Company periodically enters into forward foreign currency
exchange contracts to hedge certain exposures related to identifiable foreign
currency transactions that are relatively certain as to both timing and amount.
Gains and losses on the forward contracts are recognized concurrently with the
gains and losses from the underlying transactions.
The Company also uses commodity contracts to hedge raw material costs
expected to be denominated in foreign currency. These contracts generally cover
a one-year period and all gains and losses are deferred and recognized in cost
of goods sold with the underlying product costs. The contracts qualify as hedges
for accounting purposes in accordance with the criteria established in SFAS No.
80 "Accounting for Futures Contracts." Cash flows resulting from these commodity
contracts are classified in the same category as the items being hedged.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
Fair Value of Financial Instruments. The carrying amounts of cash and
equivalents, trade receivables, accounts payables, notes payable-banks and other
accrued liabilities at June 30, 1999 and 1998, approximate their fair value
because of the short-term maturities of these items.
The estimated fair value of the Company's long-term obligations was
$1,240.0 million and $1,365.3 million as compared to the carrying amounts of
$1,235.5 million and $1,337.3 million at June 30, 1999 and 1998, respectively.
The fair value of long-term insurance receivables and long-term litigation
liabilities at June 30, 1999 were $52.2 million and $31.7 million compared to
the carrying amounts of $57.3 million and $34.1 million, respectively. At June
30, 1998, the Company did not have balances related to these long-term
receivables and long-term liabilities. The fair value of the Company's long-term
obligations and other items is estimated based on either the quoted market
prices for the same or similar issues and the current interest rates offered for
debt of the same remaining maturities or estimated discounted cash flows.
The following is a summary of the fair value of the Company's derivative
instruments, based upon the estimated amount that the Company would receive or
(pay) to terminate the contracts at the reporting date. The fair values are
based on quoted market prices for the same or similar instruments.
<TABLE>
<CAPTION>
(in millions) Fiscal Year ended June 30,
1999 1998
------------------------ -----------------------
Notional Fair Notional Fair
Amount Value (Loss) Amount Value (Loss)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Foreign currency exchange contract $ -- $ -- $35.6 $(0.4)
Foreign currency options -- -- 3.0 0.1
Commodity contracts 9.6 (0.3) 14.2 (1.7)
Interest Rate Swaps 20.0 (0.7) 8.3 (1.0)
</TABLE>
36
<PAGE> 37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
Consolidated income before taxes (in millions):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
U.S. Based Operations $684.8 $550.6 $437.4
Non-U.S. Based Operations 74.4 109.1 102.3
------ ------ ------
$759.2 $659.7 $539.7
====== ====== ======
</TABLE>
The provision for income taxes consists of the following (in millions):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $122.5 $106.1 $131.9
State 26.3 22.6 21.3
Foreign 21.7 15.8 18.8
------ ------ ------
Total 170.5 144.5 172.0
Deferred 132.4 90.1 32.9
------ ------ ------
Total provision $302.9 $234.6 $204.9
====== ====== ======
</TABLE>
A reconciliation of the provision based on the Federal statutory income tax
rate to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 3.9 4.1 3.9
Foreign tax rates (3.0) (4.8) (3.8)
Nondeductible expenses 4.5 1.5 2.5
Other (0.5) (0.2) 0.4
---- ---- ----
Effective income tax rate 39.9% 35.6% 38.0%
==== ==== ====
</TABLE>
Provision has not been made for U.S. or additional foreign taxes on $343.2
million of undistributed earnings of foreign subsidiaries because those earnings
are considered to be permanently reinvested in the operations of those
subsidiaries. It is not practical to estimate the amount of tax that might be
payable on the eventual remittance of such earnings.
37
<PAGE> 38
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in millions):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Receivable basis difference $ 27.8 $ 21.6
Accrued liabilities 101.0 156.7
Net operating loss carryforwards 9.1 48.7
Foreign tax and other credit carryforwards 16.5 --
Other 35.0 26.5
------- -------
Total deferred income tax assets 189.4 253.5
Valuation allowance for deferred income tax assets (7.0) (21.7)
------- -------
Net deferred income tax assets 182.4 231.8
------- -------
Deferred income tax liabilities:
Inventory basis differences (138.9) (90.0)
Property-related (218.9) (237.0)
Revenues on lease contracts (165.9) (111.0)
Other 2.7 --
------- -------
Total deferred income tax liabilities (521.0) (438.0)
------- -------
Net deferred income tax liabilities $(338.6) $(206.2)
======= =======
</TABLE>
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Other current assets $ 82.5 $ 133.3
Deferred income taxes and other liabilities (421.1) (339.5)
------- -------
Net deferred income tax liabilities $(338.6) $(206.2)
======= =======
</TABLE>
The Company had Federal net operating loss carryforwards of $3.3 million
and state net operating loss carryforwards of $186.3 million as of June 30,
1999. At June 30, 1999, the Company did not have any foreign tax credit and
capital loss carryforwards. A valuation allowance of $7.0 million at June 30,
1999 has been provided for the state net operating loss, foreign tax credit and
capital loss carryforwards, as utilization of such carryforwards within the
applicable statutory periods is uncertain. The Company's Federal tax operating
loss carryforwards and a portion of the state net operating loss carryforwards
are subject to a change in ownership limitation calculation under Internal
Revenue Code Section 382. After application of the valuation allowance described
above, the Company anticipates no limitations will apply with respect to
utilization of these assets. The Federal net operating loss carryforward begins
expiring in 2000 and the state net operating loss carryforward expires through
2013. Expiring state net operating loss carryforwards and the required valuation
allowances have been adjusted annually.
Under a tax-sharing agreement with Baxter, Allegiance will pay for
increases and be reimbursed for decreases to the net deferred tax assets
transferred on the Distribution Date. Such increases or decreases may result
from audit adjustments to Baxter's prior period tax returns.
38
<PAGE> 39
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including
defined benefit and defined contribution plans. Substantially all of the
Company's domestic non-union employees are eligible to be enrolled in
Company-sponsored contributory profit sharing and retirement savings plans which
include features under Section 401(k) of the Internal Revenue Code, and provide
for Company matching and profit sharing contributions. The Company's
contributions to the plans are determined by the Board of Directors subject to
certain minimum requirements as specified in the plans.
Qualified domestic union employees are covered by multi-employer defined
benefit pension plans under the provisions of collective bargaining agreements.
Benefits under these plans are generally based on the employee's years of
service and average compensation at retirement. Certain Allegiance employees who
participated in Baxter-sponsored defined benefit plans prior to the Distribution
(see Note 1) are eligible to receive a contribution to their qualified 401(k)
account in an amount ranging from 2 to 8 percent of their annual compensation,
depending on years of service. This transitional benefit will be provided to
eligible employees through 2003.
The total expense for employee retirement benefit plans (excluding defined
benefit plans (see below)) was as follows (in millions):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Defined contribution plans $44.3 $37.9 $34.4
Multi-employer plans 0.5 0.5 0.9
----- ----- -----
Total $44.8 $38.4 $35.3
===== ===== =====
</TABLE>
Defined Benefit Plans. The Company has several defined benefit plans
covering substantially all salaried and hourly Scherer employees. The Company's
domestic defined benefit plans provide defined benefits based on years of
service and level of compensation. Foreign subsidiaries provide for pension
benefits in accordance with local customs or law. The Company funds its pension
plans at amounts required by the applicable regulations.
Effective July 1, 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits". In accordance
with SFAS 132, the following tables provide a reconciliation of the change in
benefit obligation, the change in plan assets and the net amount recognized in
the consolidated balance sheets (based on measurement date of March 31, in
millions):
<TABLE>
<CAPTION>
Pension Benefits
-------------------
June 30,
1999 1998
----- -----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of year $86.7 $73.0
Service cost 6.5 4.9
Interest cost 6.7 5.4
Plan participant contributions 0.7 --
Amendments 0.2 --
Actuarial loss 4.6 7.7
Benefits paid (3.7) (2.1)
Translation adjustment (3.0) (2.2)
----- -----
Benefit obligation at end of year $98.7 $86.7
----- -----
</TABLE>
39
<PAGE> 40
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30,
1999 1998
------ ------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at
beginning of year $ 42.2 $ 34.5
Actual return on plan assets 12.2 4.4
Employer contributions 4.9 4.3
Plan participant contributions 0.7 --
Benefits paid (2.6) (1.3)
Translation adjustment (1.7) 0.3
------ ------
Fair value of plan assets
at end of year $ 55.7 $ 42.2
====== ======
Funded status $(43.0) $(44.5)
Unrecognized net actuarial loss 7.5 12.7
Unrecognized net transition
(asset) obligation (2.0) 0.3
Unrecognized prior service cost 0.2 (0.1)
------ ------
Net amount recognized $(37.3) $(31.6)
====== ======
Amounts recognized in the
Consolidated Balance Sheet:
Prepaid benefit cost $ 1.6 $ 1.8
Accrued benefit liability (38.9) (33.4)
------ ------
Net amount recognized $(37.3) $(31.6)
====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $89.4 million, $85.1 million and $47.8 million,
respectively, as of June 30, 1999 and $85.4 million, $75.8 million and $40.6
million, respectively, as of June 30, 1998.
Components of the Company's net periodic benefit costs are as follows (in
millions):
<TABLE>
<CAPTION>
Pension Benefits
----------------------------------
For the Fiscal Year Ended June 30,
----------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Components of net periodic
Benefit cost:
Service cost $ 6.5 $ 4.9 $ 4.5
Interest cost 6.7 5.4 5.2
Expected return on plan assets (6.9) (5.1) (4.1)
Amortization of actuarial loss 1.9 1.0 1.2
Amortization of transition
(asset)/obligation -- 0.1 (0.2)
Amortization of prior service cost 0.3 -- --
----- ----- -----
Net amount recognized $ 8.5 $ 6.3 $ 6.6
===== ===== =====
</TABLE>
For fiscal 1999 and 1998, the weighted - average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.4% and 7.5%, expected return on plan assets
of 6.2% and 10.1% and rate of compensation increase of 3.7% and 4.6%,
respectively.
40
<PAGE> 41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms in excess of one year at June 30, 1999 are:
2000 - $42.8 million; 2001 - $27.3 million; 2002 - $18.5 million; 2003 - $15.3
million; 2004 - $13.0 million and 2005 and thereafter - $32.8 million. Rental
expense relating to operating leases was approximately $69.6 million, $64.8
million and $68.2 million in fiscal 1999, 1998, and 1997, respectively. Sublease
rental income was not material for any period presented herein.
The Company has entered into operating lease agreements with several banks
for the construction of various new facilities. The initial terms of the lease
agreements extend through May 2004, with optional five-year renewal periods.
In the event of termination, the Company is required to either purchase the
facility or vacate the property and make reimbursement for a portion of the
uncompensated price of the property cost. The instruments provide for maximum
fundings of $286.2 million, which is the total estimated cost of the
construction projects. As of June 30, 1999, the amount expended was $176.8
million. Currently, the Company's minimum annual lease payments under the
agreements are approximately $11.5 million.
As of June 30, 1999, the Company has capital expenditure commitments
related primarily to plant expansions and facility acquisitions of approximately
$119.3 million.
As of June 30, 1999, amounts outstanding on customer notes receivable sold
with full recourse to a commercial bank totaled approximately $9.6 million. The
Company also has outstanding guarantees of indebtedness and financial assistance
commitments that totaled approximately $3.0 million at June 30, 1999.
The Company becomes involved from time-to-time in litigation incidental to
its business. In November 1993, Cardinal, five other pharmaceutical wholesalers,
and twenty-four pharmaceutical manufacturers were named as defendants in a
series of purported class action antitrust lawsuits alleging violations of
various antitrust laws associated with the chargeback pricing system. The trial
of this matter began on September 23, 1998. On November 19, 1998, after the
close of plaintiffs' case-in-chief, both the wholesaler defendants and the
manufacturer defendants moved for a judgment as a matter of law in their favor.
On November 30, 1998, the Court granted both of these motions and ordered
judgment as a matter of law in favor of both the wholesaler and the manufacturer
defendants. On January 25, 1999, the class plaintiffs filed a notice of appeal
of the District Court's decision with the Court of Appeals for the Seventh
Circuit. On July 13, 1999, the Court of Appeals for the Seventh Circuit issued
its decision, which, in part, affirmed the dismissal of the wholesaler
defendants, including the Company. On July 27, 1999, the class plaintiffs filed
a Petition for Rehearing with the Court of Appeals for the Seventh Circuit. The
Company believes that the allegations set forth against Cardinal in these
lawsuits are without merit.
Allegiance assumed the defense of litigation involving claims related to
the Allegiance Business from Baxter (see Note 1), including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex
gloves. Since none of the cases involving natural rubber latex gloves has
proceeded to a hearing on merits, the Company is unable to evaluate the extent
of any potential liability, and unable to estimate any potential loss. The
Company believes a substantial portion of any potential liability and defense
costs, excluding defense costs already reserved, related to natural latex gloves
cases and claims will be covered by insurance, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency.
Although the ultimate resolution of litigation cannot be forecast with
certainty, the Company does not believe that the outcome of any pending
litigation would have a material adverse effect on the Company's consolidated
financial statements.
10. SHAREHOLDERS' EQUITY
At June 30, 1999, the Company's authorized capital shares consisted of (a)
500,000,000 Class A common shares, without par value; (b) 5,000,000 Class B
common shares, without par value; and (c) 500,000 non-voting preferred shares
without par value. At June 30, 1998, the Company's authorized capital shares
consisted of (a) 300,000,000 Class A common shares, without par value; (b)
5,000,000 B common shares, without par value; and (c) 500,000 non-voting
preferred shares without par value. The Class A common shares and Class B common
shares are collectively referred to as Common Shares. Holders of Class A and
Class B common shares are entitled to share equally in any dividends declared by
the Company's Board of Directors and to participate equally in all distributions
of assets upon liquidation. Generally, the holders of Class A common shares are
entitled to one vote per share and the holders of Class B common shares are
entitled to one-fifth of one
41
<PAGE> 42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vote per share on proposals presented to shareholders for vote. Under certain
circumstances, the holders of Class B common shares are entitled to vote as a
separate class. Only Class A common shares were outstanding as of June 30, 1999
and 1998.
11. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company invests cash in deposits with major banks throughout the world
and in high quality short-term liquid instruments. Such investments are made
only in instruments issued or enhanced by high quality institutions. These
investments mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be affected
by changes in reimbursement and other economic pressures impacting the acute
care portion of the healthcare industry. However, such credit risk is limited
due to supporting collateral and the diversity of the customer base, including
its wide geographic dispersion. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains reserves for credit losses.
Such losses historically have been within the Company's expectations.
During fiscal 1999, the Company's two largest customers individually
accounted for 11% and 13% of operating revenue, respectively. During fiscal
1998, the same two customers individually accounted for 14% and 11% of operating
revenue, respectively. During fiscal 1997, the same two customers individually
accounted for 13% and 10% of operating revenue, respectively. These two
customers are serviced primarily through the Pharmaceutical Distribution and
Medical-Surgical Products segments. During fiscal 1999, one customer accounted
for 57% of bulk deliveries. During fiscal years 1998 and 1997, one customer
accounted for 62% of bulk deliveries.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. Options granted generally vest
over two or three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
Company's net income and diluted earnings per Common Share would have been
reduced by $83.1 million and $0.30 per share, respectively, for fiscal 1999,
$33.6 million and $0.12 per share, respectively, for fiscal 1998, and $19.2
million and $0.07 per share, respectively, for fiscal 1997. During fiscal 1999,
stock option grants under the previous Allegiance and Scherer plans vested
immediately on the merger date. These accelerated grants increased the fiscal
1999 pro forma effect on net income and diluted earnings per Common Share by
$32.9 million and $0.12 per share, respectively. Because the SFAS 123 method of
accounting has not been applied to options granted prior to July 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1996 through June 30, 1999, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per share amounts):
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 21.1 $23.96 20.1 $19.25 21.7 $16.50
Granted 3.4 69.61 6.3 43.70 6.2 24.84
Exercised (3.6) 16.80 (3.7) 14.62 (6.7) 15.81
Canceled (0.6) 45.60 (0.9) 21.46 (1.1) 17.07
Change in fiscal year -- -- (0.7) 28.26 -- --
------------------- ------------------- -------------------
Outstanding, end of year 20.3 $34.51 21.1 $23.96 20.1 $19.25
=================== =================== ===================
Exercisable, end of year 14.3 $23.84 6.6 $15.45 8.7 $13.98
------------------- ------------------- -------------------
</TABLE>
42
<PAGE> 43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Giving retroactive effect to conversion of stock options related to mergers
and stock splits, the weighted average fair value of options granted during
fiscal 1999, 1998 and 1997 was $22.55, $14.19 and $9.57, respectively.
The fair values of the options granted to Company employees and directors
were estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants in the respective periods:
<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.72% 5.53% 6.23%
Expected Life 4 years 3 years 3 years
Expected Volatility 30% 27% 25%
Dividend Yield 0.18% 0.16% 0.17%
</TABLE>
Information relative to stock options outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Weighted
average
remaining Weighted Weighted
Range of Options contractual life average Options average
exercise prices (in millions) in years exercise price (in millions) exercise price
- --------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.05-$17.15 5.6 6.21 $14.20 5.5 $14.21
$17.22-$37.79 5.5 6.31 24.18 5.3 23.71
$38.06-$54.46 5.2 8.18 41.98 3.5 39.13
$55.67-$79.56 4.0 8.98 67.68 -- --
---------------------------------------------- ------------------------------
20.3 7.28 $34.51 14.3 $23.84
============================================== ==============================
</TABLE>
As of June 30, 1999, there remained approximately 0.8 million additional
shares available to be issued pursuant to the Plans.
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying consolidated
balance sheets. The compensation awards are amortized to expense over the period
in which participants perform services, generally one to seven years. As of June
30, 1999, approximately 0.3 million shares remained restricted and subject to
forfeiture.
Prior to the Allegiance Merger, Allegiance had an employee stock purchase
plan under which the sale of 4.0 million of Allegiance's common stock had been
authorized. The purchase price was the lower of 85 percent of the closing market
price on the date of subscription or 85 percent of the closing market price on
the date of purchase. Under this plan, Allegiance sold to its employees 0.6
million shares at an average price per share of $23.33 in fiscal 1999 and 1.2
million shares at an average price per share of $10.88 in fiscal 1998. At June
30, 1998, subscriptions of 0.7 million were outstanding. The weighted average
fair value of the purchase rights was $3.32. Subsequent to the Allegiance
Merger, all outstanding subscriptions were canceled.
On May 2, 1997, Allegiance received $54.8 million in cash from 141 members
of its management who purchased approximately 3.0 million equivalent Cardinal
Common Shares. Allegiance granted one-day options for the shares, which were
immediately exercised. This Shared Investment Plan was designed to align
management and stockholders interests.
13. SEGMENT INFORMATION
As of June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires companies to define and report financial
and descriptive information about its operating segments. The Company is
organized based on the products and services it offers. Under this
organizational structure, the Company operates in three business segments:
Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical
Products.
43
<PAGE> 44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Pharmaceutical Distribution segment involves the distribution of a
broad line of pharmaceuticals, health and beauty care products, therapeutic
plasma and other specialty pharmaceutical products and other items typically
sold by hospitals, retail drug stores and other healthcare providers.
The Pharmaceutical Services segment provides services to the healthcare
industry through the design of unique drug delivery systems, comprehensive
packaging services, integrated pharmacy management, reimbursement services,
clinical information system services and pharmacy automation equipment.
The Medical-Surgical Products segment involves the manufacture of medical,
surgical and laboratory products and the distribution of these products to
hospitals, physician offices, surgery centers and other healthcare providers.
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 table includes revenue, operating
earnings, capital expenditures, and depreciation and amortization expense for
the fiscal years ended June 30, 1999, 1998 and 1997 and assets as of June 30,
1999, 1998 and 1997 for each segment and reconciling items necessary to total to
amounts reported in the consolidated financial statements:
<TABLE>
<CAPTION>
(in millions) Net Revenue
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Operating revenue:
Pharmaceutical Distribution $14,977.0 $11,938.7 $10,019.2
Pharmaceutical Services 2,081.5 1,812.4 1,558.7
Medical-Surgical Products 4,719.5 4,448.7 4,357.1
Inter-segment (1) (297.4) (195.8) (10.2)
---------------------------------------
Total operating revenue $21,480.6 $18,004.0 $15,924.8
Bulk Deliveries to Customer Warehouses:
Pharmaceutical Distribution 3,553.0 2,991.4 2,469.1
---------------------------------------
Total Net Revenue $25,033.6 $20,995.4 $18,393.9
- -----------------------------------------------------------------------------------
<CAPTION>
Operating Earnings
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Pharmaceutical Distribution $ 398.4 $ 315.5 $ 252.5
Pharmaceutical Services 347.7 286.4 236.1
Medical-Surgical Products 303.4 246.8 224.5
Corporate (2) (172.5) (76.2) (48.3)
---------------------------------------
Total operating earnings $ 877.0 $ 772.5 $ 664.8
- -----------------------------------------------------------------------------------
<CAPTION>
Depreciation and Amortization
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Pharmaceutical Distribution $ 28.0 $ 23.2 $ 20.5
Pharmaceutical Services 71.9 55.4 56.3
Medical-Surgical Products 119.9 122.8 126.0
Corporate (2) 13.7 13.1 6.3
---------------------------------------
Total depreciation and amortization $ 233.5 $ 214.5 $ 209.1
- -----------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Capital Expenditures
----------------------------------
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Pharmaceutical Distribution $ 61.9 $ 54.7 $ 44.8
Pharmaceutical Services 150.0 143.9 98.8
Medical-Surgical Products 108.0 80.2 84.3
----------------------------------
Total capital expenditures $ 319.9 $ 278.8 $ 227.9
- --------------------------------------------------------------------
<CAPTION>
Assets
----------------------------------
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Pharmaceutical Distribution $3,223.6 $2,698.3 $2,172.5
Pharmaceutical Services 2,176.2 1,684.7 1,358.1
Medical-Surgical Products 2,823.7 2,694.9 2,696.6
Corporate (3) 65.5 400.1 294.6
----------------------------------
Total assets $8,289.0 $7,478.0 $6,521.8
- --------------------------------------------------------------------
</TABLE>
(1) Inter-segment - revenue consists primarily of the elimination of
inter-segment activity - primarily sales from Pharmaceutical Distribution
to Pharmaceutical Services. Sales from one segment to another are priced at
the equivalent external customer selling prices.
(2) Corporate - operating earnings primarily consists of special charges of
$146.6 million, $57.8 million and $50.9 million for fiscal 1999, 1998 and
1997 and unallocated corporate depreciation and amortization and
administrative expenses.
(3) Corporate - assets include primarily corporate cash and cash equivalents,
corporate property, plant and equipment, net, unallocated deferred taxes
and the elimination of investment in subsidiaries.
The following table presents revenue and long-lived assets by geographic area
(in millions):
<TABLE>
<CAPTION>
Revenue Long-Lived Assets
------------------------------------- ---------------------
For The Fiscal Year Ended June 30, As of June 30,
------------------------------------- ---------------------
1999 1998 1997 1999 1998
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
United States $24,121.6 $20,255.7 $17,646.1 $1,080.7 $1,010.3
International 912.0 739.7 747.8 459.8 457.4
--------- --------- --------- -------- --------
Total $25,033.6 $20,995.4 $18,393.9 $1,540.5 $1,467.7
========= ========= ========= ======== ========
</TABLE>
Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
45
<PAGE> 46
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 1999 and 1998 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenue:
Operating revenue $4,999.2 $5,269.4 $5,558.7 $5,653.3
Bulk deliveries to customer warehouses 781.7 999.8 874.7 896.8
-------- -------- -------- --------
Total revenue $5,780.9 $6,269.2 $6,433.4 $6,550.1
Gross margin $ 583.0 $ 644.1 $ 667.3 $ 690.0
Selling, general and administrative
expenses $ 368.6 $ 398.0 $ 393.2 $ 405.0
Net earnings $ 90.8 $ 134.1 $ 81.9 $ 149.5
Comprehensive income $ 89.0 $ 138.2 $ 62.1 $ 150.0
Net earnings per Common Share:
Basic $ 0.34 $ 0.50 $ 0.30 $ 0.54
Diluted $ 0.33 $ 0.48 $ 0.29 $ 0.53
- ---------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1998
Revenue:
Operating revenue $4,107.3 $4,416.0 $4,643.6 $4,837.1
Bulk deliveries to customer warehouses $ 681.2 750.6 720.1 839.5
-------- -------- -------- --------
Total revenue $4,788.5 $5,166.6 $5,363.7 $5,676.6
Gross margin $ 505.7 $ 539.2 $ 572.7 $ 603.0
Selling, general and administrative
expenses $ 331.4 $ 341.4 $ 348.2 $ 369.3
Net earnings $ 92.3 $ 105.3 $ 109.2 $ 118.3
Comprehensive income $ 90.7 $ 99.7 $ 102.7 $ 116.0
Net earnings per Common Share:
Basic $ 0.34 $ 0.39 $ 0.40 $ 0.44
Diluted $ 0.33 $ 0.38 $ 0.39 $ 0.43
- ---------------------------------------------------------------------------------------------------
</TABLE>
As more fully discussed in Note 2, merger-related costs and other special
charges were recorded in various quarters in fiscal 1999 and 1998. The following
table summarizes the impact of such costs on net earnings and diluted earnings
per share in the quarters in which they were recorded (in millions, except per
share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1999:
Net earnings $(27.8) $ (1.9) $(74.2) $(13.7)
Diluted net
earnings per Common Share $(0.10) $(0.01) $(0.27) $(0.05)
- ------------------------------------------------------------------------------
Fiscal 1998:
Net earnings $ (1.3) $ (1.9) $(12.0) $ (8.9)
Diluted net
earnings per Common Share $(0.01) $(0.01) $(0.05) $(0.03)
- ------------------------------------------------------------------------------
</TABLE>
15. RELATED PARTY TRANSACTIONS
Certain foreign subsidiaries purchase gelatin materials and the Company's
German subsidiary leases plant facilities, purchases other services and receives
loans from time-to-time from a German company which is also the minority partner
of the Company's German and certain other European subsidiaries. Gelatin
purchases, at prices comparable to estimated market
46
<PAGE> 47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prices, amounted to $28.0 million, $25.0 million and $24.6 million for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively. Rental payments
amounted to $8.4 million, $4.8 million and $5.4 million and purchased services
amounted to $9.4 million, $5.2 million and $5.5 million for each of the
respective fiscal years.
16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This new statement requires companies to recognize all derivatives
as either assets or liabilities in the balance sheet and measure such
instruments at fair value. As amended by Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
the provisions of SFAS 133 will require adoption no later than the beginning of
the Company's fiscal year ending June 30, 2001.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
17. TERMINATED MERGER AGREEMENT
On August 24, 1997, the Company and Bergen announced that they had entered
into a definitive merger agreement (as subsequently amended by the parties on
March 16, 1998), pursuant to which a wholly owned subsidiary of the Company
would be merged with and into Bergen (the "Bergen Merger Agreement"). On March
9, 1998, the FTC filed a complaint in the United States District Court for the
District of Columbia seeking a preliminary injunction to halt the proposed
merger. On July 31, 1998, the District Court granted the FTC's request for an
injunction to halt the proposed merger. On August 7, 1998, the Company and
Bergen jointly terminated the Bergen Merger Agreement. In accordance with the
terms of the Bergen Merger Agreement, the Company was required to reimburse
Bergen for $7.0 million of transaction costs upon termination of the Bergen
Merger Agreement. Additionally, the termination of the Bergen Merger Agreement
will cause the costs incurred by the Company (that would not have been
deductible had the merger been consummated) to become tax deductible, resulting
in a tax benefit of $12.2 million. The obligation to reimburse Bergen and the
additional tax benefit are reflected in the consolidated financial statements in
the fourth quarter of the fiscal year ended June 30, 1998.
18. SUBSEQUENT EVENTS
On August 5, 1999, the Company announced that it had entered into a
definitive merger agreement with Automatic Liquid Packaging, Inc. ("ALP"),
pursuant to which ALP will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. Upon consummation of the merger, the Company
will record a merger-related charge to reflect transaction and other costs
incurred as a result of the merger. The merger is expected to be completed in
the first quarter of fiscal 2000, subject to satisfaction of certain conditions,
including regulatory clearances.
On July 12, 1999, the Company completed the purchase of MedSurg Industries,
Inc., for $31.8 million. The acquisition was accounted for as a purchase.
47
<PAGE> 48
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Cardinal Health, Inc. ("Cardinal") and R. P. Scherer Corporation
("Scherer") completed a merger on August 7, 1998. Cardinal and Allegiance
Corporation ("Allegiance") completed a merger on February 3, 1999. Cardinal has
historically engaged Deloitte & Touche LLP ("D&T") as its certifying accountant
while Scherer has historically engaged Arthur Andersen LLP ("AA") and Allegiance
has historically engaged PricewaterhouseCoopers LLP ("PWC") as their certifying
accountants.
For Cardinal's fiscal year ended June 30, 1999, these certifying accountant
relationships were left intact, with D&T serving as the principal certifying
accountant, with reference in its audit opinion to work performed on Scherer by
AA and Allegiance by PWC. This was done to provide management with sufficient
time to conduct a diligent process to select one firm as the certifying
accountant for the merged entity.
Selection of AA as the certifying accountant was recommended to and
approved by the Cardinal Health, Inc. Audit Committee on August 30, 1999.
The reports of D&T on the financial statements of Cardinal and PWC on the
financial statements of Allegiance for the past two fiscal years contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
In connection with their audits for the two most recent fiscal years and
through August 30, 1999, there have been no disagreements with D&T or PWC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of D&T or PWC would have caused them to make reference thereto in
their reports on the financial statements for such years. In addition, there
were no reportable events (as defined in SEC Regulation S-K, Item 304(a)(1)(v))
during the two most recent fiscal years and through August 30, 1999.
Cardinal has requested that D&T and PWC each furnish it with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of D&T's letter dated September 2, 1999 is filed as Exhibit
16.01 to this Form 10-K. A copy of PWC's letter dated September 1, 1999 is filed
as Exhibit 16.02 to this Form 10-K.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3) to Form 10-K, the information
called for in this Item 10 relating to Directors is incorporated herein by
reference to the Company's Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission (the "SEC"), pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to the Company's Annual Meeting of
Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS."
Certain information relating to Executive Officers of the Company appears at
pages 8 and 9 of this Form 10-K, which is hereby incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 11 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"EXECUTIVE COMPENSATION" (other than information set forth under the caption
"Compensation Committee Report").
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 12 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 13 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the Exchange Act, relating to the Company's Annual Meeting under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
48
<PAGE> 49
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8 of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports......................................... 20
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1999, 1998 and 1997........................................ 24
Consolidated Balance Sheets at June 30, 1999 and 1998................. 25
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1999, 1998 and 1997............................ 26
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 1999, 1998 and 1997........................................ 27
Notes to Consolidated Financial Statements............................ 28
</TABLE>
(a)(2) The following Supplemental Schedule is included in this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts....................... 54
</TABLE>
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in notes thereto.
49
<PAGE> 50
(a)(3) Exhibits required by Item 601 of Regulation S-K:
Exhibit Exhibit Description
------- -------------------
Number
------
2.01 Agreement and Plan of Merger, dated as of August 4, 1999, among the
Registrant, Flower Merger Corp., Automatic Liquid Packaging, Inc.
("ALP") and the Stockholders of ALP (the "Stockholders"), including
form of Escrow Agreement by and among the Registrant, ALP, Gerhard
H. Weiler, Bank One Trust Company, NA, as escrow agent, and the
Stockholders.
3.01 Amended and Restated Articles of Incorporation of the Registrant,
as amended (1)
3.02 Restated Code of Regulations, as amended (1)
4.01 Specimen Certificate for the Registrant's Class A common shares (4)
4.02 Indenture dated as of May 1, 1993 between the Registrant and Bank
One, Indianapolis, NA, Trustee, relating to the Registrant's 6 1/2%
Notes Due 2004 and 6% Notes Due 2006 (2)
4.03 Indenture dated as of April 18, 1997 between the Registrant and Bank
One, Columbus, NA, Trustee, relating to the Registrant's 6 1/4 %
Notes due 2008 (3)
4.04 Indenture dated as of October 1, 1996 between Allegiance Corporation
and PNC Bank, Kentucky, Inc. ("PNC"), Trustee; and First
Supplemental Indenture dated as of February 3, 1999 by and among
Allegiance Corporation, the Company and Chase Manhattan Trust
Company National Association (as successor in interest to PNC),
Trustee (4)
4.05 Indenture dated January 1, 1994 between R.P. Scherer International
Corporation and Comerica Bank; First Supplemental Indenture by and
among R.P. Scherer International Corporation, R.P. Scherer
Corporation and Comerica Bank dated February 28, 1995; and Second
Supplemental Indenture by and among R.P. Scherer Corporation, the
Registrant and Comerica Bank dated as of August 7, 1998 (5)
4.06 Form of Warrant Certificate to Purchase Company Common Shares (6)
10.01 Stock Incentive Plan of the Registrant, as amended (7)*
10.02 Directors' Stock Option Plan of the Registrant, as amended and
restated (7)*
10.03 Amended and Restated Equity Incentive Plan of the Registrant*
10.04 Form of Nonqualified Stock Option Agreement, as amended*
10.05 Form of Restricted Shares Agreement, as amended*
10.06 Form of Directors' Stock Option Agreement, as amended*
10.07 Allegiance Corporation 1996 Incentive Compensation Program (8)*
10.08 Allegiance Corporation 1998 Incentive Compensation Program (8)*
10.09 Allegiance Corporation 1996 Outside Director Incentive Corporation
Plan (8)*
10.10 R.P. Scherer Corporation 1997 Stock Option Plan (9)*
10.11 R.P. Scherer Corporation 1990 Nonqualified Performance Stock
Option Plans (9)*
<PAGE> 51
10.12 Cardinal Health, Inc. Performance-Based Incentive Compensation
Plan (10)*
10.13 Cardinal Health, Inc. Incentive Deferred Compensation Plan,
Amended and Restated Effective July 1, 1997 (11)*
10.14 Employment Agreement dated October 11, 1993, among Whitmire, Melburn
G. Whitmire and the Registrant, as amended effective November 14,
1995 (16)*
10.15 Amendment to Change in Control Agreement, dated as of October 8,
1998, by and among the Company, Allegiance Corporation and Joseph F.
Damico (12)*
10.16 Employment Agreement dated May 12, 1998, between the Registrant
and James F. Millar (5)*
10.17 Amended and Restated Employment Agreement dated May 17, 1998, among
Scherer, George L. Fotiades and the Registrant (5)*
10.18 Resignation and Release Agreement, dated as of June 30, 1999, by and
between the Registrant, Allegiance and Lester B. Knight*
10.19 Form of Indemnification Agreement between the Registrant and
individual Directors (13)*
10.20 Form of Indemnification Agreement between the Registrant and
individual Officers (13)*
10.21 Split Dollar Agreement dated April 16, 1993, among the Registrant,
Robert D. Walter, and Bank One Ohio Trust Company, NA, Trustee U/A
dated April 16, 1993 FBO Robert D. Walter (7)*
10.22 364-Day Credit Agreement dated as of March 31, 1999 among the
Registrant, certain subsidiaries of the Registrant, certain lenders,
The First National Bank of Chicago, as Administrative Agent, Bank of
America NT & SA, as Syndication Agent, Citibank, N.A., as
Co-Documentation Agent, and Credit Suisse First Boston, as
Co-Documentation Agent
10.23 Master Agreement and related documents, dated as of July 16, 1996
among the Registrant and/or its subsidiaries, SunTrust Banks, Inc.,
PNC Leasing Corp. and SunTrust Bank, Atlanta, as amended (14, except
for the Omnibus Amendment which is included in this Annual Report on
Form 10-K)
10.24 Participation Agreement and related documents, dated as of June 23,
1997, among the Registrant and certain of its subsidiaries, Bank of
Montreal and BMO Leasing (U.S.), Inc. (15, except for Amendments No.
1 and 2, which are included in this Annual Report on Form 10-K)
10.25 Vendor Program Agreement dated as of October 10, 1991 by and between
General Electric Capital Corporation and Pyxis Corporation, as
amended on December 13, 1991, January 15, 1993, March 10, 1994, June
23, 1997 and June 1, 1998 (5), (14) and (15)
10.26 Pharmaceutical Services Agreement, dated as of August 1, 1996, as
amended, between Kmart Corporation and Cardinal Distribution (17,
except for Amendment No. 1, which is included in this Annual Report
on Form 10-K)
10.27 Form of Commercial Paper Dealer Agreement 4(2) Program between The
Company, as Issuer, and certain entities, each as Dealer, concerning
notes to be issued pursuant to Issuing and Paying Agency Agreement
between the Issuer and The First National Bank of Chicago, as
Issuing and Paying Agent
10.28 Partnership Agreement of R.P. Scherer GMBH & Co. KG (5)
10.29 Five-year Credit Agreement dated as of March 31, 1999 among the
Registrant, certain
<PAGE> 52
subsidiaries of the Registrant, certain lenders, The First National
Bank of Chicago, as Administrative Agent, Bank of America NT &SA, as
Syndication Agent, Citibank, N.A., as Co-Documentation Agent, and
Credit Suisse First Boston, as Co-Documentation Agent
16.01 Letter of Deloitte & Touche LLP required by Item 304 of Regulation
S-K
16.02 Letter of PricewaterhouseCoopers LLP required by Item 304 of
Regulation S-K
21.01 List of subsidiaries of the Registrant
23.01 Consent of Deloitte & Touche LLP
23.02 Consent of Arthur Andersen LLP
23.03 Consent of PricewaterhouseCoopers LLP
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information
- ------------------
(1) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed November 24, 1998 (File No. 0-12591) and incorporated herein by
reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (File No. 0-12591) and incorporated
herein by reference.
(3) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed April 21, 1997 (File No. 0-12591) and incorporated herein by
reference.
(4) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-74761) and incorporated herein by reference.
(5) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (File No. 0-12591) and
incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-30889) and incorporated herein by reference.
(7) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 (File No. 0-12591) and
incorporated herein by reference.
(8) Included as an exhibit to the Registrant's Post-Effective Amendment No.
1 on Form S-8 to Form S-4 Registration Statement (No. 333-68819-01) and
incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Post-effective Amendment No.
1 on Form S-8 to Form S-4 Registration Statement (No. 333-56655) and
incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 0-12591) and incorporated
herein by reference.
<PAGE> 53
(11) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No. 0-12591) and
incorporated herein by reference.
(12) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-68819) and incorporated herein by reference.
(13) Included as an exhibit to the Company's Amendment No. 1 to Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1997 (File No.
0-12591) and incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal ended June 30, 1996 (File No. 0-12591) and incorporated
herein by reference.
(15) Included as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (File No. 0-12591) and
incorporated herein by reference.
(16) Included as exhibits to the Registrant's Quarterly Reports on Form 10-Q
for the quarters ended December 31, 1993 and December 31, 1995 (File No.
0-12591) and incorporated herein by reference.
(17) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (File No. 0-124\591) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K
None
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDINAL HEALTH, INC.
September 2, 1999 By: /s/ Robert D. Walter
-----------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ Robert D. Walter Chairman, Chief Executive September 2, 1999
- --------------------------- Officer and Director (principal
Robert D. Walter executive officer)
/s/ Richard J. Miller Corporate Vice President and September 2, 1999
- --------------------------- Chief Financial Officer
Richard J. Miller (principal financial officer)
/s/ Michael E. Beaulieu Corporate Vice President, September 2, 1999
- --------------------------- Controller and Principal
Michael E. Beaulieu Accounting Officer
/s/ John C. Kane President, Chief Operating September 2, 1999
- --------------------------- Officer and Director
John C. Kane
/s/ Silas S. Cathcart Director September 2, 1999
- ---------------------------
Silas S. Cathcart
/s/ John F. Finn Director September 2, 1999
- ---------------------------
John F. Finn
/s/ Robert L. Gerbig Director September 2, 1999
- ---------------------------
Robert L. Gerbig
/s/ John F. Havens Director September 2, 1999
- ---------------------------
John F. Havens
/s/ Regina E. Herzlinger Director September 2, 1999
- ---------------------------
Regina E. Herzlinger
/s/ J. Michael Losh Director September 2, 1999
- ---------------------------
J. Michael Losh
/s/ George R. Manser Director September 2, 1999
- ---------------------------
George R. Manser
/s/ John B. McCoy Director September 2, 1999
- ---------------------------
John B. McCoy
/s/ Michael D. O'Halleran Director September 2, 1999
- ---------------------------
Michael D. O'Halleran
/s/ Jerry E. Robertson Director September 2, 1999
- ---------------------------
Jerry E. Robertson
/s/ Melburn G. Whitmire Director September 2, 1999
- ---------------------------
Melburn G. Whitmire
</TABLE>
52
<PAGE> 55
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO CHANGE BALANCE AT
BEGINNING COSTS AND OTHER IN FISCAL END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS (2) YEAR (3) OF YEAR
- ---------------------------------------- ---------- ---------- ------------ -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1999:
Accounts receivable $64.6 $29.0 $1.3 $(41.3) $ -- $53.6
Finance notes receivable 6.4 -- -- (1.5) -- 4.9
Net investment in sales-type leases 8.8 0.5 2.7 (0.2) -- 11.8
----- ----- ---- ------ ---- -----
$79.8 $29.5 $4.0 $(43.0) $ -- $70.3
===== ===== ==== ====== ==== =====
Fiscal Year 1998:
Accounts receivable $62.8 $19.0 $3.3 $(20.5) $ -- $64.6
Finance notes receivable 8.2 0.1 0.1 (2.0) -- 6.4
Net investment in sales-type leases 4.7 4.2 -- (3.7) 3.6 8.8
----- ----- ---- ------ ---- -----
$75.7 $23.3 $3.4 $(26.2) $3.6 $79.8
===== ===== ==== ====== ==== =====
Fiscal Year 1997:
Accounts receivable $68.2 $10.0 $0.4 $(15.8) -- $62.8
Finance notes receivable 9.1 -- -- (0.9) -- 8.2
Net investment in sales-type leases 8.7 -- -- (4.0) -- 4.7
----- ----- ---- ------ ---- -----
$86.0 $10.0 $0.4 $(20.7) $ -- $75.7
===== ===== ==== ====== ==== =====
</TABLE>
(1) During fiscal 1999, 1998 and 1997 recoveries of amounts provided for or
written off in prior years were $4.0 million, $3.4 million, and $0.4
million, respectively.
(2) Write-off of uncollectible accounts.
(3) Change in fiscal year of acquired subsidiary.
54
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.01
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 2.01
<TEXT>
<PAGE> 1
Exhibit 2.01
AGREEMENT AND PLAN OF MERGER
AMONG
CARDINAL HEALTH, INC.
("Cardinal"),
FLOWER MERGER CORP.
a wholly owned direct subsidiary of Cardinal
("Subcorp"),
AUTOMATIC LIQUID PACKAGING, INC.
("ALP")
and the
STOCKHOLDERS OF ALP
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. THE MERGER............................................................................................2
SECTION 1.1 The Merger..................................................................................2
SECTION 1.2 Effective Time..............................................................................2
SECTION 1.3 Effects of the Merger.......................................................................2
SECTION 1.4 Articles of Incorporation and By-laws.......................................................2
SECTION 1.5 Directors and Officers......................................................................2
SECTION 1.6 Additional Actions..........................................................................2
ARTICLE II. CONVERSION OF SECURITIES.............................................................................3
SECTION 2.1 Conversion of Capital Stock.................................................................3
SECTION 2.2 Exchange Ratios; Fractional Shares..........................................................3
SECTION 2.3 Exchange of Certificates....................................................................4
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF RED AND SUBCORP...................................................7
SECTION 3.1 Organization and Standing...................................................................7
SECTION 3.2 Corporate Power and Authority...............................................................7
SECTION 3.3 Capitalization of Cardinal and Subcorp......................................................7
SECTION 3.4 Conflicts, Consents and Approval............................................................8
SECTION 3.5 Brokerage and Finder's Fees.................................................................9
SECTION 3.6 Cardinal SEC Documents......................................................................9
SECTION 3.7 Absence of Certain Events...................................................................9
SECTION 3.8 Accounting Matters..........................................................................9
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ALP...............................................................10
SECTION 4.1 Organization and Standing..................................................................10
SECTION 4.2 Subsidiaries...............................................................................10
SECTION 4.3 Corporate Power and Authority..............................................................10
SECTION 4.4 Capitalization of ALP......................................................................10
SECTION 4.5 Conflicts; Consents and Approvals..........................................................11
SECTION 4.6 Absence of Certain Changes.................................................................12
SECTION 4.7 Officers, Employees and Compensation.......................................................13
SECTION 4.8 Financial Statements.......................................................................13
SECTION 4.9 Taxes......................................................................................14
SECTION 4.10 Compliance with Law; FDA Matters..........................................................16
SECTION 4.11 Intellectual Property.....................................................................17
SECTION 4.12 Title to and Condition of Properties......................................................19
SECTION 4.13 Environmental Matters.....................................................................20
SECTION 4.14 Litigation................................................................................21
SECTION 4.15 Brokerage and Finder's Fees...............................................................21
SECTION 4.16 Accounting Matters........................................................................21
SECTION 4.17 Employee Benefit Plans....................................................................22
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 4.18 Contracts.................................................................................24
SECTION 4.19 Accounts Receivable; Inventories..........................................................25
SECTION 4.20 Labor Matters.............................................................................25
SECTION 4.21 Undisclosed Liabilities...................................................................26
SECTION 4.22 Operation of ALP's Business; Relationships................................................26
SECTION 4.23 Product Warranties and Liabilities........................................................26
SECTION 4.24 Board Recommendation......................................................................27
SECTION 4.25 IBCA and State Takeover Laws..............................................................27
SECTION 4.26 Insurance.................................................................................27
SECTION 4.27 Books of Account; Records.................................................................27
SECTION 4.28 Investment Representation.................................................................27
SECTION 4.29 No Other Representations and Warranties...................................................28
ARTICLE V. COVENANTS OF THE PARTIES.............................................................................28
SECTION 5.1 Mutual Covenants...........................................................................28
SECTION 5.2 Covenants of Cardinal......................................................................29
SECTION 5.3 Covenants of ALP and the ALP Stockholders..................................................30
ARTICLE VI. CONDITIONS..........................................................................................35
SECTION 6.1 Mutual Conditions..........................................................................35
SECTION 6.2 Conditions to Obligations of ALP...........................................................36
SECTION 6.3 Conditions to Obligations of Cardinal and Subcorp..........................................36
ARTICLE VII. TERMINATION AND AMENDMENT..........................................................................39
SECTION 7.1 Termination................................................................................39
SECTION 7.2 Effect of Termination......................................................................39
SECTION 7.3 Amendment..................................................................................39
SECTION 7.4 Extension; Waiver..........................................................................40
ARTICLE VIII. INDEMNIFICATION...................................................................................40
SECTION 8.1 Survival of Representations, Warranties and Agreements.....................................40
SECTION 8.2 Indemnification............................................................................40
SECTION 8.3 Limitations on Indemnification.............................................................41
SECTION 8.4 Procedure for Indemnification with Respect to Third Party Claims...........................42
SECTION 8.5 Procedure For Indemnification with Respect to Non-Third Party Claims.......................43
SECTION 8.6 ALP Stockholders Representative............................................................44
SECTION 8.7 Valuation of Shares Released from Escrow...................................................44
SECTION 8.8 Termination of ALP's Warranties............................................................44
ARTICLE IX. MISCELLANEOUS.......................................................................................45
SECTION 9.1 Notices....................................................................................45
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
SECTION 9.2 Interpretation.............................................................................45
SECTION 9.3 Counterparts...............................................................................46
SECTION 9.4 Entire Agreement...........................................................................46
SECTION 9.5 Third Party Beneficiaries..................................................................46
SECTION 9.6 Governing Law..............................................................................46
SECTION 9.7 Consent to Jurisdiction; Venue.............................................................46
SECTION 9.8 Specific Performance.......................................................................46
SECTION 9.9 Assignment.................................................................................47
SECTION 9.10 Expenses..................................................................................47
</TABLE>
EXHIBITS
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Affiliate Letter
Exhibit C - Form of Consulting Agreement
Exhibit D - Form of Opinion of Baker & Hostetler LLP
Exhibit E - Form of Opinion of Schwartz & Freeman
Exhibit F - Form of Release
Exhibit G - Form of Agreement between ALP and
Weiler Engineering, Inc.
Exhibit H-1 through H-5 - Forms of Other Ancillary Agreements
-iii-
<PAGE> 5
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made
and entered into as of August 4, 1999, by and among Cardinal Health, Inc., an
Ohio corporation ("Cardinal"), Flower Merger Corp., an Illinois corporation and
a wholly owned subsidiary of Cardinal ("Subcorp"), Automatic Liquid Packaging,
Inc., an Illinois corporation ("ALP"), and all of the Stockholders of ALP (the
"ALP Stockholders").
PRELIMINARY STATEMENTS:
A. Cardinal desires to acquire the liquid packaging business
and other businesses operated by ALP through the merger of Subcorp with and into
ALP, with ALP as the surviving corporation (the "Merger"), pursuant to which
each share of ALP Common Stock (as defined in Section 4.4) outstanding at the
Effective Time (as defined in Section 1.2) will be converted into the right to
receive Cardinal Common Shares (as defined in Section 3.3) as more fully
provided herein.
B. ALP desires to combine its packaging business and personal
care product businesses with the healthcare service businesses operated by
Cardinal and for the ALP Stockholders to have a continuing equity interest in
the combined businesses.
C. The ALP Stockholders own all of the outstanding capital
stock of ALP, and Cardinal is unwilling to enter into this Agreement without the
agreements of the ALP Stockholders set forth herein.
D. The parties intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"), by reason of Section 368(a)(2)(E)
thereof.
E. The parties intend that the Merger be accounted for as a
pooling-of-interests for financial reporting purposes.
F. The respective Boards of Directors of Cardinal, Subcorp and
ALP have determined the Merger, in the manner contemplated herein, to be
desirable and in the best interests of their respective shareholders and, by
resolutions duly adopted, have approved and adopted this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of these premises and the
mutual and dependent promises hereinafter set forth, the parties hereto,
intending to be legally bound, agree as follows:
<PAGE> 6
ARTICLE I. THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions
hereof and in accordance with the provisions of the Illinois Business
Corporation Act of 1983, as amended (the "IBCA"), Subcorp shall be merged with
and into ALP at the Effective Time (as defined in Section 1.2). As a result of
the Merger, the separate corporate existence of Subcorp shall cease and ALP
shall continue its existence under the laws of the State of Illinois. ALP, in
its capacity as the corporation surviving the Merger, is hereinafter sometimes
referred to as the "Surviving Corporation."
SECTION 1.2 EFFECTIVE TIME. The Merger shall be consummated by filing
with the Secretary of State of the State of Illinois (the "Illinois Secretary of
State") articles of merger (the "Certificate of Merger") in such form as is
required by and executed in accordance with the IBCA. The Merger shall become
effective (the "Effective Time") when the Certificate of Merger has been filed
with the Illinois Secretary of State or at such later time as shall be specified
in the Certificate of Merger. Prior to the filing referred to in this Section
1.2, a closing (the "Closing") shall be held at the offices of Cardinal, 7000
Cardinal Place, Dublin, Ohio 43017, or such other place as the parties may agree
on a date (the "Closing Date") specified by Cardinal, which date shall be within
ten business days following the date upon which all conditions set forth in
Article VI hereof have been satisfied or waived.
SECTION 1.3 EFFECTS OF THE MERGER. The Merger shall have the effects
set forth in Section 5/11.50 of the IBCA.
SECTION 1.4 ARTICLES OF INCORPORATION AND BY-LAWS. The Certificate of
Merger shall provide that at the Effective Time (i) the Articles of
Incorporation of the Surviving Corporation as in effect immediately prior to the
Effective Time shall be amended as of the Effective Time so as to contain the
provisions, and only the provisions, contained immediately prior thereto in the
Articles of Incorporation of Subcorp, except for Article FIRST thereof which
shall continue to read "The name of the corporation is Automatic Liquid
Packaging, Inc." and (ii) the By-laws of Subcorp in effect immediately prior to
the Effective Time shall be the By-laws of the Surviving Corporation; in each
case until amended in accordance with applicable law.
SECTION 1.5 DIRECTORS AND OFFICERS. From and after the Effective Time,
the officers of ALP shall be the officers of the Surviving Corporation and the
directors of Subcorp shall be the directors of the Surviving Corporation, in
each case until their respective successors are duly elected and qualified. On
the Closing Date, ALP shall deliver to Cardinal evidence satisfactory to
Cardinal of the resignations of the directors of ALP, such resignations to be
effective as of the Effective Time.
SECTION 1.6 ADDITIONAL ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any further
deeds, assignments or assurances in law or any other acts are reasonably
necessary or desirable to (a) vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its right, title or interest in, to or under any of
the rights, properties or assets of ALP, or (b) otherwise carry out the
provisions of this Agreement, ALP shall execute and deliver all such deeds,
assignments or assurances in law
-2-
<PAGE> 7
and to take all acts necessary, proper or desirable to vest, perfect or confirm
title to and possession of such rights, properties or assets in the Surviving
Corporation and otherwise to carry out the provisions of this Agreement, and the
officers and directors of the Surviving Corporation are authorized in the name
of ALP or otherwise to take any and all such action.
ARTICLE II. CONVERSION OF SECURITIES
SECTION 2.1 CONVERSION OF CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of Cardinal, Subcorp or
ALP:
(a) Each share of common stock, $.01 par value, of Subcorp issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock, $0.01 par value, of the Surviving Corporation. Such newly
issued shares shall thereafter constitute all of the issued and outstanding
capital stock of the Surviving Corporation.
(b) Each share of ALP Common Stock issued and outstanding immediately prior
to the Effective Time shall be converted into and represent a number of Cardinal
Common Shares equal to the Exchange Ratio (as defined in Section 2.2).
(c) Each share of capital stock of ALP held in the treasury of ALP shall be
cancelled and retired and no payment shall be made in respect thereof.
(d) Notwithstanding anything in this Section 2.1 to the contrary, Cardinal
shall retain a number of Cardinal Common Shares otherwise issuable to the ALP
Stockholders in the Merger, from such ALP Stockholders on a proportionate basis
(based on the respective numbers of Cardinal Common Shares into which their ALP
Common Stock will be convertible upon the Effective Time), equal to 10% of the
aggregate number of Cardinal Common Shares which would be issuable to the ALP
Stockholders on the Closing Date if Cardinal Common Shares were not to be issued
into escrow pursuant to this Section 2.1(d) (the "Retained Shares"), by
withholding the Retained Shares from the Cardinal Common Shares issuable in the
Merger and depositing such Retained Shares in escrow pursuant to an escrow
agreement in substantially the form attached hereto as Exhibit A (the "Escrow
Agreement"). The escrow created by the Escrow Agreement shall be for the purpose
of providing for the payment of certain indemnification obligations pursuant to
Article VIII hereof, all in accordance with the terms and conditions contained
herein and in the Escrow Agreement.
SECTION 2.2 EXCHANGE RATIOS; FRACTIONAL SHARES.
(a) The "Exchange Ratio" (rounded to the nearest ten-thousandth of a share)
shall be equal to the quotient obtained by dividing (i) the quotient obtained by
dividing (A) the Aggregate Consideration (as defined below) by (B) the Average
Share Price (as defined below) by (ii) the number of shares of ALP Common Stock
issued and outstanding immediately prior to the Effective Time; provided,
however, that if the Average Share Price is less than $67.00, then the Average
Share Price shall be deemed to be equal to $67.00, and if the Average Share
Price is greater than $79.00, then the Average Share Price shall be deemed to be
equal to $79.00.
-3-
<PAGE> 8
For purposes of this Section 2.2(a), (x) "Average Share Price"
shall mean the average of the closing prices of Cardinal Common Shares as
reported on the New York Stock Exchange ("NYSE") Composite Tape on each of the
last ten (10) trading days ending on the third business day preceding the
Closing Date, and (y) "Aggregate Consideration" shall mean the sum of (I) $375
million and (II) the amount of cash and marketable securities in excess of $5
million on the balance sheet of ALP included in the July 31, 1999 Interim
Statements (net of unrealized gains or losses incurred as a result of the
liquidation of any security prior to the Closing or existing as of the Closing)
minus (III) the following amounts to be paid at or in connection with the
Closing: (1) the amount or amounts to be paid pursuant to the Feltes Agreement
(as defined in Section 6.3(q)); (2) all bonuses, severance payments, transaction
fees and other compensation payable pursuant to Section 5.3(b)(vii) of the ALP
Disclosure Schedule; (3) any amounts paid or payable to Weiler Engineering, Inc.
in connection with the settlement of deposit accounts; (4) any amounts paid by
ALP for any so-called "tail coverage" for its product liability insurance; and
(5) any other expenditures of cash between July 31, 1999 and the Closing that
are outside the usual and ordinary course of business; provided, however, that
if the Closing Date is after September 30, 1999, the date of the balance sheet
referred to in clause (II) and the date in clause (III)(5) shall be a date that
is the last day of the month that is two months prior to the month in which the
Closing Date occurs.
(b) No certificates for fractional Cardinal Common Shares shall be issued
as a result of the conversion provided for in Section 2.1. To the extent that an
outstanding share of ALP Common Stock would otherwise have become a fractional
Cardinal Common Share, the holder thereof, upon presentation of such fractional
interest represented by an appropriate certificate for ALP Common Stock to the
Exchange Agent pursuant to Section 2.3, shall be entitled to receive a cash
payment therefor in an amount equal to the value (determined with reference to
the closing price of Cardinal Common Shares as reported on the NYSE Composite
Tape on the last full trading day immediately prior to the Effective Time) of
such fractional interest. Such payment with respect to fractional shares is
merely intended to provide a mechanical rounding off of, and is not a separately
bargained for, consideration. If more than one certificate representing shares
of ALP Common Stock shall be surrendered for the account of the same holder, the
number of Cardinal Common Shares for which certificates have been surrendered
shall be computed on the basis of the aggregate number of shares represented by
the certificates so surrendered. In the event that prior to the Effective Time,
Cardinal shall declare a stock dividend or other distribution payable in
Cardinal Common Shares or securities convertible into Cardinal Common Shares, or
effect a stock split, reclassification, combination or other change with respect
to Cardinal Common Shares, the exchange ratios set forth in this Section 2.2
shall be adjusted to reflect such dividend, distribution, stock split,
reclassification, combination or other change.
SECTION 2.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Promptly following the Effective Time, Cardinal shall
deposit with First Chicago Trust Company, a division of EquiServe, Limited
Partnership or such other exchange agent as may be designated by Cardinal (the
"Exchange Agent"), for the benefit of the ALP Stockholders, for exchange in
accordance with this Section 2.3, certificates representing Cardinal Common
Shares issuable pursuant to Section 2.1 in exchange for outstanding shares of
ALP Common Stock (other than Retained Shares) and shall from time to time
deposit cash in an amount reasonably expected to be paid pursuant to Section 2.2
(such Cardinal Common Shares
-4-
<PAGE> 9
and cash, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund").
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates (the "Certificates") which immediately prior to the Effective Time
represented outstanding shares of ALP Common Stock whose shares were converted
into the right to receive Cardinal Common Shares pursuant to Section 2.1 a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Cardinal may reasonably specify and (ii) instructions for
effecting the surrender of the Certificates in exchange for certificates
representing Cardinal Common Shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with a duly executed letter of
transmittal, the holder of such Certificate shall be entitled to receive in
exchange therefor (x) a certificate representing that number of Cardinal Common
Shares which such holder has the right to receive pursuant to Section 2.1 and
(y) a check representing the amount of cash in lieu of fractional shares, if
any, and unpaid dividends and distributions with respect to such Cardinal Common
Shares, if any, which such holder has the right to receive pursuant to the
provisions of this Article II, after giving effect to any required withholding
tax, and the shares represented by the Certificate so surrendered shall
forthwith be cancelled. Cardinal will use its reasonable efforts to cause the
Exchange Agent to send such certificate and check within three business days of
its receipt of a Certificate and a duly executed letter of transmittal. No
interest will be paid or accrued on the cash in lieu of fractional shares, if
any, and unpaid dividends and distributions with respect to such Cardinal Common
Shares, if any, payable to holders of shares of ALP Common Stock. In the event
of a transfer of ownership of shares of ALP Common Stock which is not registered
on the transfer records of ALP, a certificate representing the proper number of
Cardinal Common Shares, together with a check for the cash to be paid in lieu of
fractional shares, if any, and unpaid dividends and distributions with respect
to such Cardinal Common Shares, if any, may be issued to such transferee if the
Certificate representing such shares of ALP Common Stock held by such transferee
is presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.3, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon surrender a certificate representing
Cardinal Common Shares and cash in lieu of fractional shares, if any, and unpaid
dividends and distributions with respect to such Cardinal Common Shares, if any,
as provided in this Article II. Notwithstanding the foregoing, Cardinal shall
make available at the Closing certificates for Cardinal Common Shares to be
issued in the Merger to any ALP Stockholder who delivers to Cardinal
certificates representing ALP Common Stock and a duly executed letter of
transmittal at least three business days before the Closing Date.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Notwithstanding any
other provisions of this Agreement, no dividends or other distributions declared
or made after the Effective Time with respect to Cardinal Common Shares having a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate, and no cash payment in lieu of fractional shares
shall be paid to any such holder, until the holder shall surrender such
Certificate as provided in this Section 2.3. Until such Certificate has been
surrendered as provided in this
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Section 2.3, Cardinal shall deposit the amount of any dividends or other
distributions with the Exchange Agent. Subject to the effect of Applicable Laws
(as defined in Section 4.10), following surrender of any such Certificate, the
Exchange Agent shall pay to the holder of the certificates representing whole
Cardinal Common Shares issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole Cardinal Common Shares and not paid, less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date
subsequent to surrender, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole Cardinal Common
Shares, less the amount of any withholding taxes which may be required thereon.
(d) NO FURTHER OWNERSHIP RIGHTS IN ALP COMMON STOCK. All Cardinal Common
Shares issued upon surrender of Certificates in accordance with the terms hereof
(including any cash paid pursuant to this Article II) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of ALP
Common Stock represented thereby, and there shall be no further registration of
transfers on the stock transfer books of ALP of shares of ALP Common Stock
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be cancelled and exchanged as provided in this Section 2.3.
Certificates surrendered for exchange by any ALP Affiliate (as defined in
Section 5.3(e)) shall not be exchanged until Cardinal has received written
undertakings from such person in the form attached hereto as EXHIBIT B (an
"Affiliate Letter").
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the ALP Stockholders for one year after the Effective
Time shall be delivered to Cardinal, upon demand thereby, and holders of shares
of ALP Common Stock who have not theretofore complied with this Section 2.3
shall thereafter look only to Cardinal for payment of any claim to Cardinal
Common Shares, cash in lieu of fractional shares thereof, or dividends or
distributions, if any, in respect thereof.
(f) NO LIABILITY. None of Cardinal, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any shares of ALP
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to seven years after the Effective Time of the Merger (or
immediately prior to such earlier date on which any cash, any cash in lieu of
fractional shares or any dividends or distributions with respect to whole shares
of ALP Common Stock in respect of such Certificate would otherwise escheat to or
become the property of any Governmental Authority (as defined in Section 3.4)),
any such cash, dividends or distributions in respect of such Certificate shall,
to the extent permitted by Applicable Laws, become the property of Cardinal,
free and clear of all claims or interest of any person previously entitled
thereto.
(g) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Cardinal, on a daily basis. Any
interest and other
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income resulting from such investments shall be paid to Cardinal upon
termination of the Exchange Fund pursuant to Section 2.3(e).
ARTICLE III. REPRESENTATIONS AND WARRANTIES
OF RED AND SUBCORP
In order to induce ALP to enter into this Agreement, Cardinal and
Subcorp hereby represent and warrant to ALP that the statements contained in
this Article III are true, correct and complete as of the date hereof and shall
be true, correct and complete as of the Closing Date.
SECTION 3.1 ORGANIZATION AND STANDING. Each of Cardinal and Subcorp is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation with full power and authority (corporate and
other) to own, lease, use and operate its properties and to conduct its business
as and where now owned, leased, used, operated and conducted. Each of Cardinal
and Subcorp is duly qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it or the property
it owns, leases or operates, makes such qualification necessary, except where
the failure to be so qualified or in good standing in such jurisdiction would
not have a Material Adverse Effect (as defined in Section 9.2) on Cardinal.
Cardinal is not in default in the performance, observance or fulfillment of any
provision of its Articles of Incorporation, as amended and restated (the
"Cardinal Articles"), or Code of Regulations, as amended and restated (the
"Cardinal Code of Regulations"), and Subcorp is not in default in the
performance, observance or fulfillment of any provisions of its Articles of
Incorporation or By-laws. Subcorp is a new corporation formed solely for the
purpose of effectuating this transaction.
SECTION 3.2 CORPORATE POWER AND AUTHORITY. Each of Cardinal and Subcorp
has all requisite corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of each of Cardinal and Subcorp. This Agreement has been duly executed and
delivered by each of Cardinal and Subcorp, and constitutes the legal, valid and
binding obligation of each of Subcorp and Cardinal enforceable against each of
them in accordance with its terms.
SECTION 3.3 CAPITALIZATION OF CARDINAL AND SUBCORP.
(a) As of June 30, 1999, Cardinal's authorized capital stock consisted
solely of (a) 500,000,000 common shares, without par value ("Cardinal Common
Shares"), of which (i) 273,925,971 shares were issued and outstanding, (ii)
332,863 shares were issued and held in treasury (which does not include the
shares reserved for issuance as set forth in clause (a)(iii) below) and (iii)
20,168,653 shares were reserved for issuance upon the exercise or conversion of
options, warrants or convertible securities granted or issuable by Cardinal, (b)
5,000,000 Class B common shares, without par value, none of which was issued and
outstanding or reserved for issuance, and (c) 500,000 Non-Voting Preferred
Shares, without par value, none of which was issued and outstanding or reserved
for issuance. Each outstanding Cardinal Common Share is, and all Cardinal Common
Shares to be issued in connection with the Merger will be, duly
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authorized and validly issued, fully paid and nonassessable, and each
outstanding share of Cardinal capital stock has not been, and all Cardinal
Common Shares to be issued in connection with the Merger will not be, issued in
violation of any preemptive or similar rights. As of June 30, 1999, other than
as set forth in the first sentence hereof or in Section 3.3, there are no
outstanding subscriptions, options, warrants, puts, calls, agreements, claims or
other commitments or rights of any type relating to the issuance, sale or
transfer by Cardinal of any equity securities of Cardinal, nor are there
outstanding any securities which are convertible into or exchangeable for any
shares of capital stock of Cardinal.
(b) Subcorp's authorized capital stock consists solely of 1,000 shares of
Common Stock, .01 par value ("Subcorp Common Stock"), of which, as of the date
hereof, 100 were issued and outstanding and none were reserved for issuance. As
of the date hereof, all of the outstanding shares of Subcorp Common Stock are
owned free and clear of any liens, claims or encumbrances by Cardinal.
SECTION 3.4 CONFLICTS, CONSENTS AND APPROVAL. Neither the execution and
delivery of this Agreement by Cardinal or Subcorp nor the consummation of the
transactions contemplated hereby will:
(a) conflict with, or result in a breach of any provision of, the Cardinal
Articles or Cardinal Code of Regulations or the Articles of Incorporation or
By-laws of Subcorp;
(b) violate, or conflict with, or result in a breach of any provision of,
or constitute a default (or an event which, with the giving of notice, the
passage of time or otherwise, would constitute a default) under, or entitle any
party (with the giving of notice, the passage of time or otherwise) to
terminate, accelerate, modify or call a default under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of Cardinal or any of its subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, contract, undertaking, agreement, lease or other instrument or
obligation to which Cardinal or any of its subsidiaries is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Cardinal or any of its subsidiaries or their respective
properties or assets; or
(d) require any action or consent or approval of, or review by, or
registration or filing by Cardinal or any of its affiliates with, any third
party or any local, domestic, foreign or multi-national court, arbitral
tribunal, administrative agency or commission or other governmental or
regulatory body, agency, instrumentality or authority (a "Governmental
Authority"), other than (i) authorization for inclusion of the Cardinal Common
Shares to be issued in the Merger and the transactions contemplated hereby on
the NYSE, subject to official notice of issuance, (ii) actions required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the "HSR Act"), or (iii) registrations
or other actions required under federal and state securities laws as are
contemplated by this Agreement;
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except in the case of (b), (c) and (d) for any of the foregoing that would not,
individually or in the aggregate, have a Material Adverse Effect on Cardinal or
upon the ability of Cardinal or Subcorp to consummate the transactions
contemplated hereby.
SECTION 3.5 BROKERAGE AND FINDER'S FEES. Neither Cardinal nor any of
its shareholders, directors, officers or employees has incurred, or will incur,
on behalf of Cardinal, any brokerage, finder's or similar fee in connection with
the transactions contemplated by this Agreement.
SECTION 3.6 CARDINAL SEC DOCUMENTS. Cardinal has timely filed with the
Commission all forms, reports, schedules, statements and other documents
required to be filed by it since July 1, 1998 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") or the Securities Act of 1933, as
amended (the "Securities Act") (such documents, as supplemented and amended
since the time of filing, collectively, the "Cardinal SEC Documents"). The
Cardinal SEC Documents, including, without limitation, any financial statements
or schedules included therein, at the time filed (and, in the case of
registration statements and proxy statements, on the dates of effectiveness and
the dates of mailing, respectively) (a) did not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (b) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be. The financial statements of Cardinal
included in the Cardinal SEC Documents at the time filed (and, in the case of
registration statements and proxy statements on the dates of effectiveness and
the dates of mailing, respectively) complied as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the Commission with respect thereto, were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto or,
in the case of unaudited statements, as permitted by Form 10-Q of the
Commission), and fairly present (subject in the case of unaudited statements to
normal, recurring audit adjustments) the consolidated financial position of
Cardinal and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
SECTION 3.7 ABSENCE OF CERTAIN EVENTS. Except as otherwise disclosed in
the Cardinal SEC Documents, since March 31, 1999 there has not been any event,
circumstance or condition that has had or is reasonably likely to have a
Material Adverse Effect on Cardinal and its Subsidiaries taken as one
enterprise.
SECTION 3.8 ACCOUNTING MATTERS. Neither Cardinal nor any of its
affiliates has taken or agreed to take any action that (without giving effect to
any actions taken or agreed to be taken by ALP or any of its affiliates) would
(a) prevent Cardinal from accounting for the business combination to be effected
by the Merger as a pooling-of-interests for financial reporting purposes or (b)
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code.
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ALP
In order to induce Subcorp and Cardinal to enter into this Agreement,
ALP hereby represents and warrants to Cardinal and Subcorp that the statements
contained in this Article IV are true, correct and complete as of the date
hereof and shall be true, correct and complete as of the Closing Date.
SECTION 4.1 ORGANIZATION AND STANDING. ALP is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Illinois with full power and authority (corporate and other) to own, lease, use
and operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. ALP is duly qualified to do business and
in good standing in each jurisdiction listed in Section 4.1 of the disclosure
schedule delivered by ALP to Cardinal and dated the date hereof (the "ALP
Disclosure Schedule"), is not qualified to do business in any other jurisdiction
and neither the nature of the business conducted by it nor the property it owns,
leases or operates requires it to qualify to do business as a foreign
corporation in any other jurisdiction, except where the failure to be so
qualified or in good standing in such jurisdiction would not have a Material
Adverse Effect on ALP. ALP is not in default in the performance, observance or
fulfillment of any provision of its Articles of Incorporation (the "ALP
Articles"), or its By-laws, as in effect on the date hereof (the "ALP By-laws").
ALP has heretofore furnished to Cardinal a complete and correct copy of the ALP
Articles and the ALP By-laws.
SECTION 4.2 SUBSIDIARIES. ALP does not own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, joint
venture or other entity or enterprise. ALP is not subject to any obligation or
requirement to provide funds to or make any investment (in the form of a loan,
capital contribution or otherwise) in any such entity.
SECTION 4.3 CORPORATE POWER AND AUTHORITY. ALP has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of ALP, including
the authorization and adoption of the Merger and the transactions contemplated
hereby by ALP's Board of Directors and the ALP Stockholders. This Agreement has
been duly executed and delivered by ALP and the ALP Stockholders and constitutes
the legal, valid and binding obligation of ALP and the ALP Stockholders,
enforceable against ALP and the ALP Stockholders in accordance with its terms.
The Employment Agreements (as defined in Section 6.3(j)) have been duly executed
and delivered by the parties thereto and constitute the legal, valid and binding
obligations of the parties thereto, enforceable against such parties in
accordance with their respective terms. The Ancillary Agreements (as defined in
Section 5.3(h)), when duly executed by the parties thereto, will constitute the
legal, valid and binding obligations of the parties thereto, enforceable against
such parties in accordance with their respective terms.
SECTION 4.4 CAPITALIZATION OF ALP. As of June 30, 1999, ALP's
authorized capital stock consisted solely of 5,000,000 shares of common stock,
no par value ("ALP Common Stock"), of which (i) 1,519,835 shares were issued and
outstanding and (ii) no shares were issued and held in treasury. Each
outstanding share of ALP Common Stock is duly
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authorized and validly issued, fully paid and nonassessable, and has not been
issued in violation of any preemptive or similar rights. Except as set forth in
Section 4.4 of the ALP Disclosure Schedule, there are no outstanding
subscriptions, options, warrants, puts, calls, agreements, understandings,
claims or other commitments or rights of any type relating to the issuance, sale
or transfer of any securities of ALP by ALP or, to the knowledge of ALP, any
other person or entity, nor are there outstanding any securities which are
convertible into or exchangeable for any shares of ALP Common Stock, and ALP has
no obligation of any kind to issue any additional securities or to pay for
securities of ALP or any predecessor. The issuance and sale of all of the shares
of ALP Common Stock have been in compliance with federal and state securities
laws. Section 4.4 of the ALP Disclosure Schedule contains a correct and complete
list of the names and addresses of (x) the holders of all the outstanding ALP
Common Stock, (y) the spouses of each married ALP Stockholder and (z) any other
person having a beneficial or other interest in any ALP Common Stock. Such
Section 4.4 also states the number of shares of ALP Common stock owned
beneficially and of record by each ALP Stockholder. Except as set forth in
Section 4.4 of the ALP Disclosure Schedule, ALP has not agreed to register any
securities under the Securities Act or under any state securities law or granted
registration rights to any person or entity.
SECTION 4.5 CONFLICTS; CONSENTS AND APPROVALS. Neither the execution
and delivery of this Agreement by ALP nor the consummation of the transactions
contemplated hereby will:
(a) conflict with, or result in a breach of any provision of, the ALP
Articles or the ALP By-laws;
(b) violate, or conflict with, or result in a breach of any provision of,
or constitute a default (or an event which, with the giving of notice, the
passage of time or otherwise, would constitute a default) under, or entitle any
party (with the giving of notice, the passage of time or otherwise) to
terminate, accelerate, modify or call a default under, or result in the creation
of any material lien, security interest, charge or encumbrance upon any of the
properties or assets of ALP under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, contract,
undertaking, agreement, lease or other instrument or obligation to which ALP or
any ALP Stockholder is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to ALP or any ALP Stockholder; or
(d) require any action or consent or approval of, or review by, or
registration or filing by ALP, any ALP Stockholder or any of their respective
affiliates with, any third party or any Governmental Authority, other than (i)
actions required by the HSR Act, (ii) registrations or other actions required
under federal and state securities laws, (iii) consents or approvals of any
Governmental Authority set forth in Section 4.5 of the ALP Disclosure Schedule,
and (iv) filing of the Certificate of Merger with the Illinois Secretary of
State;
except in the case of clause (b) or (d) for any of the foregoing that are set
forth in Section 4.5 of the ALP Disclosure Schedule, and in the case of clauses
(b) through (d) for any of the foregoing that would not, individually or in the
aggregate, have a Material Adverse Effect on ALP.
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SECTION 4.6 ABSENCE OF CERTAIN CHANGES. Except as expressly provided
for or permitted under Section 5.3(b) of this Agreement, except as provided in
any agreement to be executed in connection with the Closing, or as set forth in
Section 4.6 of the ALP Disclosure Schedule, since March 31, 1999 there has not
been:
(a) Any material adverse change in the business, operations, assets,
properties, customer base, prospects, rights or condition (financial or
otherwise) of ALP or any occurrence, circumstance, or combination thereof which
reasonably could be expected to result in any such material adverse change,
including, without limitation, any material adverse change relating to ALP's
relationship with any material customer.
(b) Any declaration, setting aside or payment of any dividend or any
distribution (in cash or in kind) to any stockholder of ALP, or any direct or
indirect redemption, purchase or other acquisition by ALP of any of its capital
stock or any options, warrants, rights or agreements to purchase or acquire such
stock;
(c) Any increase in amounts payable by ALP to or for the benefit of, or
committed to be paid by ALP to or for the benefit of, any stockholder, director,
officer or other consultant, agent or employee of ALP whose total annual
compensation exceeds $100,000 or any relatives of such person, or any increase
in any benefits granted under any bonus, stock option, profit-sharing, pension,
retirement, severance, deferred compensation, group health, insurance, or other
direct or indirect benefit plan, payment or arrangement made to, with or for the
benefit of any such person;
(d) Any material transaction entered into or carried out by ALP other than
in the ordinary and usual course of business consistent with past practices;
(e) Any material borrowing or agreement to borrow funds by ALP, any
incurring by ALP of any other obligation or liability (contingent or otherwise),
except liabilities incurred in the usual and ordinary course of ALP's business
(consistent with past practices), or any endorsement, assumption or guarantee of
payment or performance of any loan or obligation of any other person by ALP;
(f) Any material change in ALP's method of doing business or any change in
its accounting principles or practices or its method of application of such
principles or practices;
(g) Any material mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or with respect
to the property or assets of ALP;
(h) Any sale, lease or other disposition of, or any agreement to sell,
lease or otherwise dispose of any of the properties or assets of ALP, other than
sales, leases or other dispositions in the usual and ordinary course of business
for fair equivalent value to persons other than directors, officers,
stockholders, or other affiliates of ALP;
(i) Any purchase of or any agreement to purchase assets (other than
purchases (including purchases of inventory) in the ordinary course of business
consistent with past practices) for an amount in excess of $150,000 for any one
purchase or $400,000 for all such
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purchases made by ALP or any lease or any agreement to lease, as lessee, any
capital assets with payments over the term thereof to be made by ALP exceeding
an aggregate of $400,000;
(j) Any loan or advance made by ALP to any person other than loans made to
ALP's customers in the ordinary course of business consistent with past
practices not exceeding $50,000, in the aggregate, to any customer;
(k) Any modification, waiver, change, amendment, release, rescission or
termination of, or accord and satisfaction with respect to, any material term,
condition or provision of any contract, agreement, license or other instrument
to which ALP is a party, other than any satisfaction by performance in
accordance with the terms thereof in the usual and ordinary course of business;
or
(l) Any labor dispute or disturbance adversely affecting the business
operations, prospects or condition (financial or otherwise) of ALP, including,
without limitation, the filing of any petition or charge of unfair labor
practice with any governmental or regulatory authority, efforts to effect a
union representation election, actual or threatened employee strike, work
stoppage or slow down.
SECTION 4.7 OFFICERS, EMPLOYEES AND COMPENSATION. Section 4.7 of the
ALP Disclosure Schedule sets forth the names of all directors and officers of
ALP, the total salary, bonus, fringe benefits and perquisites each received from
ALP in the year ended December 31, 1998, and any changes to the foregoing which
have occurred subsequent to December 31, 1998. Section 4.7 of the ALP Disclosure
Schedule also lists and describes the current compensation of the ten most
highly compensated managers of ALP and any other employee of ALP whose total
current salary and bonus exceeds $100,000. Except as disclosed in Section 4.7 of
the ALP Disclosure Schedule, there are no other forms of compensation paid to
any such director, officer or employee of ALP. Except as disclosed in Section
4.7 of the ALP Disclosure Schedule, the amounts accrued on the books and records
of ALP for vacation pay, sick pay, and all commissions and other fees payable to
agents, salesmen and representatives will be adequate to cover ALP's liabilities
for all such items. Except as set forth in Section 4.7 of the ALP Disclosure
Schedule, ALP has not become obligated, directly or indirectly, to any
stockholder, director or officer of ALP or any person related to such person by
blood or marriage, except for current liability for such compensation. Except as
set forth in Section 4.7 of the ALP Disclosure Schedule, to the Knowledge of
ALP, no stockholder, director, officer, agent or employee of ALP or any person
related to such person by blood or marriage holds any position or office with or
has any material financial interest, direct or indirect, in any supplier,
customer or account of, or other outside business which has material
transactions with, ALP. ALP has no agreement or understanding with any
stockholder, director, officer, employee or representative of ALP which would
influence any such person not to become associated with Cardinal from and after
the Closing or from serving ALP after the Closing in a capacity similar to the
capacity presently held.
SECTION 4.8 FINANCIAL STATEMENTS.
(a) ALP has furnished to Cardinal the balance sheet of ALP as of December
31, 1998, and the related statements of income, changes in stockholders' equity,
and cash flows for
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the nine-month period then ended, including, in each case, the related notes
(collectively, the "Compilation Statements"), which are accompanied by the
compilation report of Altschuler, Melvoin and Glasser LLP. ALP has also
furnished to Cardinal the balance sheet of ALP as of March 31, 1999 and the
related statements of income, changes in stockholders' equity, and cash flows
for the three-month period then ended (the "March 31 Statements"). The
Compilation Statements and the March 31 Statements, which have been initialed
for identification by the president of ALP, have been prepared from and are in
accordance with the books and records of ALP, and have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis (except for the absence of footnotes and except for normal year-end
adjustments in the case of the March 31 Statements), and fairly present the
financial condition of ALP as of the date stated and the results of operations
of ALP for the period then ended in accordance with such practices except as
described in Section 4.8 of the ALP Disclosure Schedule.
(b) When delivered in accordance with Section 5.3(f), the balance sheet for
ALP as of the end of each calendar month after the date hereof, and the related
statements of income, changes in stockholders' equity, and cash flows for the
period beginning January 1, 1999 and then ended, including the related notes
(the "Interim Statements"), shall have been prepared from and in accordance with
the books and records of ALP and in accordance with generally accepted
accounting principles applied on a basis consistent with that used in the
Compilation Statements, and shall fairly present the financial condition of ALP
as of such date and the results of operations of ALP for such period in
accordance with such practices, subject to normal year-end adjustments.
SECTION 4.9 TAXES.
(a) ALP has duly filed all federal, state, local and foreign income,
franchise, excise, real and personal property and other Tax Returns (as defined
below in Section 4.9(f))and reports (including, but not limited to, those filed
on a consolidated, combined or unitary basis) required to have been filed by ALP
prior to the date hereof. All of the foregoing Tax Returns and reports are true
and correct, and ALP has paid or, prior to the Effective Time, will pay all
Taxes (as defined below in Section 4.9(f)), interest and penalties required to
be paid in respect of the periods covered by such returns or reports or
otherwise due to any federal, state, foreign, local or other taxing authority.
The unpaid Taxes of ALP do not, as of the date hereof and as of the Closing
Date, exceed the reserve for Tax liability (as distinguished from any reserve
for deferred Taxes established to reflect timing differences between book and
Tax income) set forth on the face of the balance sheet of ALP included in the
March 31 Statements (as distinguished from in any notes thereto). ALP will not
have any liability for any Taxes in excess of the amounts so paid or reserves so
established and ALP is not delinquent in the payment of any material Tax,
assessment or governmental charge and it has not requested or filed any document
having the effect of causing any extension of time within which to file any
returns in respect of any fiscal year which have not since been filed. Except as
disclosed in Section 4.9 of the ALP Disclosure Schedule, no deficiencies for any
Tax, assessment or governmental charge have been proposed in writing, asserted
or assessed (tentatively or definitely), in each case, by any taxing authority,
against ALP for which there are not adequate reserves. Except as set forth in
Section 4.9 of the ALP Disclosure Schedule, ALP is not the subject of any Tax
audit. As of the date of this Agreement, there are no pending requests for
waivers of the time to assess any such Tax, other
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than those made in the ordinary course and for which payment has been made or
there are adequate reserves. With respect to any taxable period ended prior to
March 31, 1996, all federal income Tax Returns including ALP have been audited
by the Internal Revenue Service or are closed by the applicable statute of
limitations. ALP has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency. There are no liens with respect to Taxes upon any of the properties
or assets, real or personal, tangible or intangible of ALP (other than liens for
Taxes not yet due). No claim has ever been made by an authority in a
jurisdiction where ALP does not file Tax Returns that ALP is or may be subject
to taxation by that jurisdiction. ALP has not filed an election under Section
341(f) of the Code to be treated as a consenting corporation. As of the date of
this Agreement, ALP has not previously undergone an "Ownership Change" as
defined by Section 382(g) of the Code which would limit the amount of pre-change
losses, credits and recognition of built-in losses to offset post change income.
(b) ALP is not obligated by any contract, agreement or other arrangement to
indemnify any other person with respect to Taxes. ALP is not now and has not
during the last four years been a party to or bound by any agreement or
arrangement (whether or not written and including, without limitation, any
arrangement required or permitted by law) binding ALP which (i) requires ALP to
make any Tax payment to or for the account of any other person, (ii) affords any
other person the benefit of any net operating loss, net capital loss, investment
Tax credit, foreign Tax credit, charitable deduction or any other credit or Tax
attribute which could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes) of ALP, (iii) requires or
permits the transfer or assignment of income, revenues, receipts or gains to
ALP, from any other person, or (iv) otherwise requires ALP to indemnify any
other person in respect of Taxes.
(c) Section 4.9(c) of the ALP Disclosure Schedule sets forth (i) a list of
all jurisdictions (whether foreign or domestic) to which any material Tax is or
has been properly payable by ALP, (ii) all sales for which gain has been
reported under the installment method of accounting for Tax purposes and for
which gain has to be recognized for Tax purposes by ALP subsequent to the
Closing Date, (iii) all rulings or determinations obtained by ALP from any
Governmental Authority responsible for the imposition of any Tax that may affect
ALP subsequent to the Closing Date, (iv) all ALP returns with respect to which
the applicable period for assessment under Applicable Law, after giving effect
to extensions or waivers, has not expired, (v) any material intercompany items
(as described in Treasury Regulations Section 1.1502-13(b)(2) or in similar
state or local income Tax provisions) resulting from any intercompany
transaction to which ALP is a party, (vi) a list of all pending Tax audits or
inquiries, and (vii) any Tax reserves included in the "Deferred Taxes" or
similar line item in ALP's financial statements included in the ALP Disclosure
Schedule, separately identified and itemized by dollar amount.
(d) Except as disclosed in Section 4.9(d) of the ALP Disclosure Schedule,
ALP has withheld and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, shareholder or other third party.
(e) ALP is now and has been at all times since April 1, 1998 an S
Corporation for federal income tax purposes within the meaning of Section
1361(a) of the Code pursuant to a
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valid election to be an S Corporation filed by ALP prior to June 15, 1998.
Section 4.9(e) of the ALP Disclosure Schedule sets forth each jurisdiction in
which a valid S corporation election for ALP is in effect or ALP is otherwise
treated as an S corporation for state or local tax purposes and the date
beginning with such election or treatment has been continuously in effect.
(f) For purposes of this Agreement, the following terms have the
definitions given below:
"Tax Returns" means returns, reports and forms required to be filed
with any Governmental Authority of the United States or any other jurisdiction
responsible for the imposition or collection of Taxes.
"Tax" or "Taxes" means (i) all taxes (whether federal, state, local or
foreign) based upon or measured by income and any other tax whatsoever,
including, without limitation, gross receipts, profits, sales, use, occupation,
value added, ad valorem, transfer, franchise, withholding, payroll, employment,
excise, or property taxes, together with any interest or penalties imposed with
respect thereto and (ii) any obligations under any agreements or arrangements
with respect to any taxes described in clause (i) above.
SECTION 4.10 COMPLIANCE WITH LAW; FDA MATTERS.
(a) Except as set forth in Section 4.10 of the ALP Disclosure Schedule, ALP
is in compliance with, and at all times since January 1, 1995 has been in
compliance with, all applicable laws, statutes, orders, rules, regulations,
policies or guidelines promulgated, or judgments, decisions or orders entered by
any Governmental Authority (collectively, "Applicable Laws") relating to ALP or
its business or properties, including, without limitation, the Food, Drug and
Cosmetic Act and similar state laws, any federal or state Pharmacy Practice
Acts, the Occupational Safety and Health Act and the regulations promulgated
thereunder ("OSHA"), the Securities Act, the Exchange Act, any state or federal
laws respecting rights of privacy and all rules of professional conduct
applicable to ALP or by which any of its properties are bound or subject. ALP
has heretofore made available to Cardinal copies of all material correspondence
from and to all Governmental Authority and inspectors.
(b) Except as set forth in Section 4.10 of the ALP Disclosure Schedule,
since January 1, 1998 ALP has not received any written communication (including,
any warning letter) or is otherwise aware of any action or proceeding pending
or, to ALP's Knowledge, threatened, including, without limitation, warning
letter, prosecution, injunction, seizure, civil fine or recall, alleging that it
is not in compliance with any and all applicable laws, regulations or orders
implemented by the Food and Drug Administration, or implemented by the relevant
state, local or international agency responsible for regulating the
pharmaceutical industry, including but not limited to, allegations related to
(i) drug development establishments operated by ALP or (ii) drug or product
license applications submitted directly by ALP or, to ALP's Knowledge, by a
customer of ALP that includes data generated by ALP. To ALP's Knowledge, no
employee of ALP is or has been the subject of any similar pending or threatened
action or proceeding.
(c) To ALP's Knowledge, all consultants utilized by ALP to generate
information to be submitted to the Food and Drug Administration, or any
equivalent state, local or international
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<PAGE> 21
agency, including, but not limited to, contract research organizations,
pre-clinical testing laboratories, clinical investigators and institutional
review boards, have complied with all applicable Food and Drug Administration
requirements, as well as the applicable requirements of relevant state, local
and international agencies with regard to the development of data to be utilized
by ALP as part of the relevant drug or product approval process.
(d) Neither ALP nor, to ALP's Knowledge, any employee of ALP, has received
any correspondence from the Food and Drug Administration or is aware of any
action or proceeding, pending or, to the best of ALP's knowledge, threatened,
against ALP or any such employee regarding any debarment action or investigation
undertaken pursuant to the Generic Drug Enforcement Act of 1992, 21 U.S.C.
Section 335a, or any other similar regulation of the Food and Drug
Administration.
(e) Neither ALP nor, to ALP's Knowledge, any employee of ALP, has been the
subject, officially or otherwise, of any investigation by the Food and Drug
Administration pursuant to its Fraud, Untrue, Statements of Material Facts,
Bribery, and Illegal Gratuities Final Policy (also known as the Application
Integrity Policy).
(f) To ALP's Knowledge, no data generated by ALP that has been provided to
customers of ALP is the subject, either pending or threatened, of any regulatory
or other action by the Food and Drug Administration or by any state, local or
international regulatory entity relating to the truthfulness or scientific
adequacy of such data.
(g) Except as set forth on Section 4.10(g) of the ALP Disclosure Schedule,
ALP has not made any drug or product license applications or related filings
with the Food and Drug Administration during the past five years.
SECTION 4.11 INTELLECTUAL PROPERTY.
(a) Set forth in Section 4.11 of the ALP Disclosure Schedule is a true and
complete list of (i) all of ALP's foreign and domestic patents, patent
applications, invention disclosures, trademarks, service marks, tradenames,
copyrights (and any registrations or applications for registration for any of
the foregoing) and all material design rights, and (ii) all material agreements
to which ALP is a party which concern any of the Intellectual Property
("Intellectual Property" shall mean all intellectual property or other
proprietary rights of every kind, including, without limitation, all domestic or
foreign patents, patent applications, inventions (whether or not patentable),
processes, products, technologies, discoveries, copyrightable and copyrighted
works, apparatus, trade secrets, trademarks and trademark applications and
registrations, service marks and service mark applications and registrations,
trade names, trade dress, copyright applications and registrations, design
rights, customer lists, marketing and customer information, mask works rights,
know-how, licenses, technical information (whether confidential or otherwise),
software, hardware, systems, databases, models, methodologies and all
documentation thereof owned, licensed or used by ALP). Other than the
Intellectual Property set forth in Section
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4.11 of the ALP Disclosure Schedule, no name, patent, invention, trade secret,
proprietary right, computer software, trademark, trade name, service mark, logo,
copyright, franchise, license, sublicense, or other such right is necessary for
the operation of the business of ALP in substantially the same manner as such
business is presently or proposed to be conducted. Except as set forth in
Section 4.11 of the ALP Disclosure Schedule, (A) ALP owns, free and clear of any
liens, claims or encumbrances, or has the right to use under valid licenses as
it is currently being used by ALP, the Intellectual Property and has the
exclusive right to bring actions for the infringement thereof; (B) all of the
patents, trademark registrations, service mark registrations, tradename
registrations, design right registrations, and copyright registrations included
in the Intellectual Property are valid; (C) the Intellectual Property does not
infringe and has not infringed any now existing or subsequently issued domestic
or foreign patent, trademark, service mark, tradename, copyright, design right
or other intellectual property or proprietary right; (D) no person or entity has
asserted in writing to ALP that, with respect to the Intellectual Property, ALP
or a licensee of ALP is infringing or has infringed any domestic or foreign
patent, trademark, service mark, tradename, copyright or design right, or has
misappropriated or improperly used or disclosed any trade secret, confidential
information or know-how; (E) the Intellectual Property, and its use or
operation, do not infringe, and have not infringed, any foreign or domestic
patent, trademark, service mark, tradename, copyright or contractual right of
any entity, and have not involved the misappropriation or improper use or
disclosure of any trade secrets, confidential information or know-how of any
entity; (F) all working requirements and all fees, annuities, and other payments
which are due from ALP on or before the Effective Time for any of the
Intellectual Property, including, without limitation, all foreign or domestic
patents, patent applications, trademark registrations, service mark
registrations, tradename registrations, copyright registrations and any
applications for any of the preceding, have been met or paid; (G) the claims
made in the foreign or domestic patents and patent applications that are a part
of the Intellectual Property are not dominated by claims of patents owned by
other persons or entities; (H) to ALP's Knowledge, the making, using, selling,
manufacturing, marketing, licensing, reproduction, distribution, or publishing
of any process, service, machine, manufacture, composition of matter, or
material pursuant to any part of the Intellectual Property, does not and will
not infringe any domestic or foreign patent, trademark, service mark, tradename,
copyright or other intellectual property right; (I) to ALP's Knowledge, no
unexpired foreign or domestic patents or patent applications exist that are
adverse to the material interests of ALP; (J) the Intellectual Property is not
the subject of any pending Action (as defined in Section 4.14); (K) no part of
the Intellectual Property was obtained through inequitable conduct or fraud in
the United States Patent and Trademark Office or any foreign governmental
entity; (L) to ALP's Knowledge, there has occurred no (1) prior act that would
adversely affect, void or invalidate any of the Intellectual Property or (2)
conduct or use by ALP or any third party that would adversely affect, void or
invalidate any of the Intellectual Property; (M) the execution, delivery and
performance of this Agreement by ALP, and the consummation of the transactions
contemplated thereby, will not breach, violate or conflict with any instrument
or agreement governing or contained within any of the Intellectual Property,
will not cause the forfeiture or termination or give rise to a right of
forfeiture or termination of any of the Intellectual Property or in any way
impair the right of Cardinal or Subcorp to use, sell, offer to sell, license or
dispose of, or to bring any action for the infringement of, any Intellectual
Property; (N) there are no royalties, honoraria, fees or other payments payable
to any third party by reason of the ownership, use, license, sale or disposition
of the Intellectual Property; (O) no part of the source or object code,
algorithms or structure included in any of the Intellectual Property is copied
from, based upon or derived from any source or object code, algorithm or
structure included in any computer software product owned by any third party nor
does any substantial similarity of any of such source or object code, algorithms
or structure to any computer software product owned by any third party result
from
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<PAGE> 23
such source or object code, algorithms or structure being copied from, based
upon or derived from any computer software product owned by any third party; and
(P) to ALP's Knowledge, no software included in the Intellectual Property
contains any "Self-Help Code," i.e., any back door, time bomb, drop dead device,
or other software routine designed to disable a computer program automatically
with the passage of time or under the positive control of any unauthorized
person, or, to ALP's Knowledge, any "Unauthorized Code," i.e., any virus, Trojan
horse, worm, or other software routines or hardware components designed to
permit unauthorized access, disable, erase, or otherwise harm software,
hardware, or data or to perform any other such actions.
(b) ALP has taken all steps that are reasonably necessary and appropriate
to safeguard and maintain the secrecy and confidentiality of all trade secrets
contained in the Intellectual Property (including, without limitation, entering
into appropriate confidentiality, nondisclosure and non-competition agreements
with all officers, directors, employees and third-party consultants of ALP).
(c) ALP has taken all steps that are reasonably necessary and appropriate
to safeguard and maintain all copyrights and patents contained in the
Intellectual Property, including, without limitation, entering into appropriate
assignments with all current and former officers, directors, employees and third
party consultants of ALP.
SECTION 4.12 TITLE TO AND CONDITION OF PROPERTIES.
(a) Except as set forth in Section 4.12(a) of the ALP Disclosure Schedule,
ALP has good, valid and indefeasible title to all of its material assets and
properties of every kind, nature and description, tangible or intangible,
wherever located, which constitute all of the property now used in and necessary
for the conduct of its business as presently conducted (including, without
limitation, all material property and assets shown or reflected on the
Compilation Statements or the Interim Statements, when delivered, except assets
sold in the ordinary course of business). Except as set forth in Section 4.12(a)
of the ALP Disclosure Schedule, all such properties are owned free and clear of
all mortgages, pledges, liens, security interests, encumbrances and restrictions
of any nature whatsoever, including, without limitation, (a) rights or claims of
parties in possession; (b) easements or claims of easements; (c) encroachments,
overlaps, boundary line or water drainage disputes or any other matters; (d) any
lien or right to a lien for services, labor or material furnished; (e) special
tax or other assessments; (f) options to purchase, leases, tenancies, or land
contracts; (g) contracts, covenants, or reservations which restrict the use of
such properties and (h) violations of any Applicable Laws applicable to such
properties. All such properties are usable for their current uses without
violating any Applicable Laws, or any applicable private restriction, and such
uses are legal conforming uses. Except as set forth in Section 4.12(a) of the
ALP Disclosure Schedule, no financing statement under the Uniform Commercial
Code or similar law naming ALP or any of its predecessors is on file in any
jurisdiction in which ALP owns property or does business, and ALP is not a party
to or bound under any material agreement or legal obligation authorizing any
party to file any such financing statement. Section 4.12(a) of the ALP
Disclosure Schedule contains a complete and accurate list of the location of all
real property which is or has been owned, leased or operated by ALP during the
last five (5) years and describes the nature of ALP's interest or prior interest
in that real property. With respect to any real property leased by ALP, ALP has
an insurable leasehold interest in that real property.
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<PAGE> 24
(b) Except as set forth in Section 4.12(b) of the ALP Disclosure Schedule,
all real property, plants and structures and all machinery and equipment and
tangible personal property owned, leased or used by ALP and material to the
operation of its business are suitable for the purpose or purposes for which
they are being used (including substantial compliance with all Applicable Laws)
and are in good condition and repair, ordinary wear and tear excepted. Section
4.12(b) of the ALP Disclosure Schedule lists, and ALP has furnished or made
available to Cardinal, copies of all engineering, geologic and environmental
reports prepared by or for ALP or with respect to the real property owned,
leased or used by ALP within the past five (5) years.
SECTION 4.13 ENVIRONMENTAL MATTERS.
(a) As used herein, the term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, petroleum, pollutants, contaminants, or industrial, toxic or
hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(b) There are, with respect to ALP or its predecessor, no past or present
violations of Environmental Laws, releases of any material into the environment,
actions, activities, circumstances, conditions, events, incidents, or
contractual obligations which may give rise to any common law environmental
liability or any liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 or any other Environmental Law and ALP
has not received any written notice with respect to any of the foregoing, nor is
any Action pending or, to ALP's Knowledge, threatened in writing in connection
with any of the foregoing.
(c) No Hazardous Materials were or are contained on or about any real
property currently or previously owned or leased by ALP or predecessors and no
Hazardous Materials were released on or about any real property previously owned
or leased by ALP or its predecessors during the period the property was owned or
leased by ALP or its predecessors, except in the normal course of ALP's
business. To the extent ALP or its predecessors currently uses or previously
used real property which ALP or predecessors never owned or leased, no Hazardous
Materials were or are contained on or about the portion of such property
currently or previously used by ALP or its predecessors and no Hazardous
Materials were released on or about any such portion of property previously used
by ALP or its predecessors during the period the property was used by ALP or its
predecessors, except in the normal course of ALP's business which is otherwise
in compliance with all applicable Environmental Laws.
(d) Except as set forth in Section 4.13(d) of the ALP Disclosure Schedule,
there are no underground storage tanks on or under any real property currently
or previously owned, leased or used by ALP.
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(e) ALP has obtained all permits, licenses and other authorizations
("Environmental Permits") required under the Environmental Laws relating to the
real property owned, leased or used by ALP and ALP's use thereof. The
Environmental Permits are in full force and effect and ALP is and has been in
compliance with them since the dates of their issuance. Section 4.13 of the ALP
Disclosure Schedule lists, and ALP has furnished or made available to Cardinal,
copies of all Environmental Permits.
(f) Except as set forth in Section 4.13(f), no asbestos-containing
materials are located on the real property owned, leased or used by ALP.
(g) ALP has not received any written notice from any Governmental Authority
or private entity advising or asserting that (i) any real property owned, leased
or used by ALP, (ii) any real property previously owned, leased or used by ALP,
or (iii) ALP are the subject of any Action relating to the environmental
condition of such property or ALP. No such property is listed in CERCLAS, the
federal National Priorities List or any similar state or federal lists of
suspected contaminated property and no off-site disposal location currently or
formerly used by ALP or its predecessors is so listed.
SECTION 4.14 LITIGATION. Except as set forth in Section 4.14 of the ALP
Disclosure Schedule, there is no suit, claim, action, or proceeding (an
"Action") pending or, to ALP's Knowledge, threatened against ALP or any officer
or director of ALP alleging damages in excess of $100,000. ALP is not subject to
any outstanding order, writ, injunction or decree which, individually or in the
aggregate, insofar as can be reasonably foreseen, could have a Material Adverse
Effect on ALP or a Material Adverse Effect on the ability of ALP to consummate
the transactions contemplated hereby. Except as set forth in Section 4.14 of the
ALP Disclosure Schedule, since December 31, 1996, (i) there has not been any
Action asserted, or to ALP's Knowledge, threatened against ALP relating to ALP's
method of doing business or its relationship with past, existing or future users
or purchasers of any goods or services of ALP and (ii) ALP has not been subject
to any outstanding order, writ, injunction or decree relating to ALP's method of
doing business or its relationship with past, existing or future customers,
lessees, users, purchasers or licensees of any Intellectual Property, goods or
services of ALP.
SECTION 4.15 BROKERAGE AND FINDER'S FEES. Neither ALP nor, to ALP's
Knowledge, any stockholder, director, officer or employee thereof, has incurred
or will incur on behalf of ALP, any brokerage, finder's or similar fee in
connection with the transactions contemplated by this Agreement.
SECTION 4.16 ACCOUNTING MATTERS. Neither ALP nor any of its affiliates
has taken or agreed to take any action that (without giving effect to any
actions taken or agreed to be taken by Cardinal or any of its affiliates) would
(a) prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code or (b) to ALP's Knowledge, prevent
Cardinal from accounting for the business combination to be effected by the
Merger as a pooling-of-interests for financial reporting purposes.
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SECTION 4.17 EMPLOYEE BENEFIT PLANS.
(a) For purposes of this Section 4.17, the following terms have the
definitions given below:
"Controlled Group Liability" means any and all liabilities under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the
Code, (iv) the continuation coverage requirements of section 601 et seq. of
ERISA and Section 4980B of the Code and the portability and nondiscrimination
requirements of Section 701 ET SEQ. of ERISA and Section 9801 ET SEQ. of the
Code, (v) Section 4975 of the Code and (vi) corresponding or similar provisions
of foreign laws or regulations, in each case other than pursuant to the Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means, with respect to any entity, trade or business,
any other entity, trade or business that is or was a member of a group described
in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA
that includes the first entity, trade or business, or that is or was a member of
the same "controlled group" as the first entity, trade or business pursuant to
Section 4001(a)(14) of ERISA.
"Plans" means all employee benefit plans, programs, policies,
practices, and other arrangements providing benefits to any employee or former
employee or beneficiary or dependent thereof, whether or not written, and
whether covering one person or more than one person, sponsored or maintained by
ALP or any ERISA Affiliate or to which ALP or any ERISA Affiliate contributes or
is obligated to contribute. Without limiting the generality of the foregoing,
the term "Plans" includes all employee welfare benefit plans within the meaning
of Section 3(1) of ERISA and all employee pension benefit plans within the
meaning of Section 3(2) of ERISA.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as
those terms are defined in Part I of Subtitle E of Title IV of ERISA.
(b) Section 4.17(b) of the ALP Disclosure Schedule lists all Plans
sponsored, maintained or contributed to, or required to be contributed to, by
ALP or by any ERISA Affiliate within the last six (6) years. With respect to
each Plan, ALP has made available to Cardinal a true, correct and complete copy
of: (i) each writing constituting a part of such Plan, including, without
limitation, all plan documents and amendments thereto, benefit schedules, trust
agreements, and insurance contracts and other funding vehicles; (ii) the three
(3) most recent Annual Reports (Form 5500 Series) and accompanying schedules, if
any; (iii) the current summary plan description, if any; (iv) the most recent
annual financial report, if any; (v) the most recent determination letter from
the Internal Revenue Service, if any; and (vi) the most recent
actuarial/valuation, if any. Neither ALP nor any ERISA Affiliate has any plan or
commitment to create any additional Plan or to modify or change any existing
Plan that would affect any employee or terminated employee of ALP or any ERISA
Affiliate.
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(c) The Internal Revenue Service has issued a favorable determination
letter with respect to each Plan that is intended to be a "qualified plan"
within the meaning of Section 401(a) of the Code (a "Qualified Plan"), and, to
ALP's Knowledge, except as set forth in Section 4.17(c) of the ALP Disclosure
Schedule, there are no existing circumstances nor any events that have occurred
that could adversely affect the qualified status of any Qualified Plan or the
related trust.
(d) Except as set forth in Section 4.17(d) of the ALP Disclosure Schedule,
all contributions required to be made to any Plan by Applicable Laws or by any
plan document or other contractual undertaking, and all premiums due or payable
with respect to insurance policies funding any Plan, for any period through the
date hereof have been timely made or paid in full and through the Closing Date
will be timely made or paid in full or, to the extent not required to be made or
paid on or before the date hereof or the Closing Date, as applicable, have been
or will be fully reflected in the Compilation Statements and the Interim
Statements.
(e) Except as set forth in Section 4.17(e) of the ALP Disclosure Schedule,
ALP and all ERISA Affiliates have complied and are in compliance with all
provisions of ERISA, the Code and all laws and regulations applicable to the
Plans. Each Plan has been operated in compliance with its terms and in
accordance with all Applicable Laws. There is not now, and there are no
existing, circumstances that could give rise to, any requirement for the posting
of security with respect to a Plan or the imposition of any lien on the assets
of ALP or any ERISA Affiliate under ERISA or the Code. Each Plan includes
provisions which effectively reserve the rights of the sponsor of the Plan to
amend or terminate the Plan.
(f) No Plan is subject to Title IV or Section 302 of ERISA or Section 412
or 4971 of the Code. No Plan is a "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA (a "Multiemployer Plan") or a plan that has two or
more contributing sponsors at least two of whom are not under common control,
within the meaning of Section 4063 of ERISA (a "Multiple Employer Plan"), nor
has ALP or any of its respective ERISA Affiliates, at any time within five years
before the date hereof, contributed to or been obligated to contribute to any
Multiemployer Plan or Multiple Employer Plan.
(g) Except as set forth in Section 4.17(g) of the ALP Disclosure Schedule,
there does not now exist, and there are no existing, circumstances that could
result in, any Controlled Group Liability that would be a liability of ALP
following the Closing. Without limiting the generality of the foregoing, neither
ALP nor any of its ERISA Affiliates has engaged in any transaction described in
Section 4069 of ERISA or any transaction that constitutes a withdrawal under
Section 4201 ET SEQ. of ERISA.
(h) Except as set forth in Section 4.17(h) of the ALP Disclosure Schedule
and except for health continuation coverage as required by Section 4980B of the
Code or Part 6 of Title I of ERISA, ALP has no liability for life, health,
medical or other welfare benefits to former employees or beneficiaries or
dependents thereof.
(i) Except as set forth in Section 4.17(i) of the ALP Disclosure Schedule,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will result in, cause the accelerated vesting
or delivery of, or increase the
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amount or value of, any payment or benefit to any employee, officer, director or
consultant of ALP, and Section 4.17(i) of the ALP Disclosure Schedule specifies
the amount of any such payment or benefit. Without limiting the generality of
the foregoing and except as set forth in Section 4.17(i) of the ALP Disclosure
Schedule, no amount paid or payable by ALP in connection with the transactions
contemplated hereby either solely as a result thereof or as a result of such
transactions in conjunction with any other events will be an "excess parachute
payment" within the meaning of Section 280G of the Code.
(j) There are no pending or, to ALP's Knowledge, threatened claims (other
than claims for benefits in the ordinary course), lawsuits or arbitrations which
have been asserted or instituted against the Plans, any fiduciaries thereof with
respect to their duties to the Plans or the assets of any of the trusts under
any of the Plans which could reasonably be expected to result in any material
liability of ALP.
SECTION 4.18 CONTRACTS.
(a) Section 4.18(a) of the ALP Disclosure Schedule lists all written or
oral contracts, agreements, guarantees, leases and executory commitments (each a
"Contract") to which ALP is a party and which fall within any of the following
categories: (i) Contracts not entered into in the ordinary course of ALP's
business, (ii) joint venture, partnership and similar agreements, (iii)
Contracts which are service contracts or equipment leases involving payments by
ALP of more than $100,000 per year, (iv) Contracts containing covenants
purporting to limit the freedom of ALP to compete in any line of business in any
geographic area or to hire any individual or group of individuals, including,
without limitation, Contracts with any customers granting the customer any
exclusive rights, (v) Contracts which after the Effective Time would have the
effect of limiting the freedom of Cardinal or its subsidiaries (other than ALP)
to compete in any line of business in any geographic area or to hire any
individual or group of individuals, including any Contracts with distributors
granting any exclusive rights, (vi) Contracts which contain minimum purchase
conditions or requirements or other terms that restrict or limit the purchasing
relationships of ALP or its affiliates, or any customer, licensee or lessee
thereof, (vii) Contracts relating to any outstanding commitment for capital
expenditures in excess of $100,000, (viii) Contracts relating to the lease or
sublease of or sale or purchase of real or personal property involving any
annual expense or price in excess of $100,000 and not cancelable by ALP (without
premium or penalty) within ninety days, (ix) Contracts with any labor
organization, (x) indentures, mortgages, promissory notes, loan agreements,
guarantees of amounts in excess of $100,000, letters of credit or other
agreements or instruments of ALP or commitments for the borrowing or the lending
of amounts in excess of $100,000 by ALP or providing for the creation of any
charge, security interest, encumbrance or lien upon any of the assets of ALP,
(xi) Contracts which are fixed price, capitation or other risk sharing
agreements with customers not cancelable by ALP (without premium or penalty)
within one month; (xii) Contracts involving annual revenues or expenditures to
the business of ALP in excess of 3.0% of ALP's annual revenues, (xiii) Contracts
providing for "earn-outs" or other contingent payments involving more than
$100,000 over the term of the Contract and (xiv) Contracts with or for the
benefit of any affiliate (as such term is defined in Rule 12b-2 promulgated
under the Exchange Act) of ALP or immediate family member thereof. All such
Contracts are valid and binding obligations of ALP and, to ALP's Knowledge, the
valid and binding obligation of each other party thereto. Except as set forth in
Section 4.18(a) of the ALP Disclosure Schedule, neither ALP nor, to ALP's
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Knowledge, any other party thereto is in violation of or in default in respect
of, nor has there occurred an event or condition which with the passage of time
or giving of notice (or both) would constitute a default under or permit the
termination of, any Contract.
(b) Except as set forth in Section 4.18 of the ALP Disclosure Schedule or
as contemplated by the transactions contemplated hereby, there are no Contracts
or other transactions between ALP, on the one hand, and any (i) officer or
director of ALP, (ii) record or beneficial owner of any securities of ALP or
(iii) affiliate of any such officer, director or beneficial owner, on the other
hand.
(c) Except as set forth in Section 4.18 of the ALP Disclosure Schedule, no
consent, permission, waiver or approval is required to be obtained, and no
penalty, assessment or special payment is required to paid to, any third party
or governmental authority in order to preserve for ALP after the Merger the
benefits of the Contracts.
SECTION 4.19 ACCOUNTS RECEIVABLE; INVENTORIES.
(a) All accounts and notes receivable (including lease and finance notes
receivable) and accrued interest receivable of ALP have arisen in the ordinary
course of business and the accounts receivable reserves reflected on the balance
sheet included in the Compilation Statements and the Interim Statements (which
reserves shall not exceed $50,000) will be as of the date thereof established in
accordance with generally accepted accounting principles consistently applied.
All such accounts and notes receivable outstanding as of the Closing will be
collected in full (subject only to the aforementioned reserves) within 180 days
of the Closing.
(b) The inventories reflected on the balance sheet included in the
Compilation Statements and the Interim Statement have been (or will be) valued
in accordance with generally accepted accounting principles consistently
applied. Physical adjustments since the date of the Compilation Statements have
been correctly recorded in the ordinary course of business. Such inventories (i)
are carried at an amount not in excess of the lower of cost or net realizable
value, and (ii) do not include any inventory which is obsolete, surplus or not
usable or saleable in the lawful and ordinary course of business of ALP as
heretofore conducted, in each case net of reserves provided therefor. Such
inventories consist of items of quality and quantity that are adequate for the
conduct of the business of ALP and inventory levels are not in excess of normal
operating requirements of ALP.
SECTION 4.20 LABOR MATTERS. Except as set forth in Section 4.20 of the
ALP Disclosure Schedule, ALP does not have any labor contracts, collective
bargaining agreements or employment or consulting agreements (except for
employment or consulting agreements that provide for annual payments of not more
than $50,000) with any persons employed by ALP or any persons otherwise
performing services primarily for ALP (the "ALP Business Personnel"). ALP has
not engaged in any unfair labor practice with respect to ALP Business Personnel,
and there is no unfair labor practice complaint pending or, to the knowledge of
ALP, threatened, against ALP with respect to ALP Business Personnel. There is no
labor strike, dispute, slowdown or stoppage pending or, to ALP's Knowledge,
threatened against ALP, and ALP has not experienced any labor strike, dispute,
slowdown or stoppage or other labor difficulty involving its employees since
December 31, 1996.
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SECTION 4.21 UNDISCLOSED LIABILITIES. Except (i) as and to the extent
disclosed or reserved against on the balance sheet of ALP as of March 31, 1999
included in the Interim Statements, (ii) as incurred after the date thereof in
the ordinary course of business consistent with prior practice and not
prohibited by this Agreement and which in any event are not material, (iii) as
set forth in Section 4.21 of the ALP Disclosure Schedule, or (iv) as provided in
any Contract disclosed in Section 4.18(a) of the ALP Disclosure Schedule
(excluding any liability for a breach of any such Contract), ALP does not have
any liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due,
that, individually or in the aggregate, could have a Material Adverse Effect on
ALP.
SECTION 4.22 OPERATION OF ALP'S BUSINESS; RELATIONSHIPS.
(a) Since January 1, 1999 through the date of this Agreement, ALP has not
engaged in any transaction which, if done after execution of this Agreement,
would violate Section 5.3(b) hereof except as set forth in Section 4.22 of the
ALP Disclosure Schedule. Section 4.22 of the ALP Disclosure Schedule describes
each termination or non-renewal that has occurred with respect to any Contract
with any customer or supplier from January 1, 1999 to the date of this
Agreement.
(b) The relationships of ALP with its customers and suppliers are
satisfactory, and, to ALP's Knowledge, the execution of this Agreement, the
consummation of the Merger and the other transactions contemplated hereby will
not materially adversely affect the relationships of ALP with such customers or
suppliers.
(c) No product produced by ALP or produced for ALP by a third party has
been recalled voluntarily or involuntarily since January 1, 1996, no such recall
is being considered by ALP, and, to ALP's Knowledge, no such recall is being
considered by or has been requested or ordered by any ALP customer, Governmental
Authority or consumer group.
(d) ALP is in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "ALP Permits"), and there is no Action pending or, to ALP's
Knowledge, threatened regarding any of the ALP Permits. ALP is not in conflict
with, or in default or violation of any of the ALP Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on ALP. Except as
set forth in Section 4.22(d) of the ALP Disclosure Schedule, during the period
commencing on January 1, 1997 and ending on the date hereof, ALP has not
received any written notification with respect to possible conflicts, defaults
or violations of Applicable Laws, except for notices relating to possible
conflicts, defaults or violations, which conflicts, defaults or violations could
not have a Material Adverse Effect on ALP. Except as set forth in Section
4.22(d) of the ALP Disclosure Schedule, no consent, approval, registration or
filing with any third party or Governmental Authority pursuant to any ALP
Permits is required as a result of the transactions contemplated by this
Agreement.
SECTION 4.23 PRODUCT WARRANTIES AND LIABILITIES. Section 4.23 of the
ALP Disclosure Schedule lists all forms of warranties, guarantees or assurances
of its products and
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services that are in effect or proposed to be used by it. Section 4.23 of the
ALP Disclosure Schedule sets forth a description of each pending or, to ALP's
Knowledge, threatened Action under any warranty or guaranty against ALP. ALP has
not incurred, nor, to ALP's Knowledge, is there any basis for alleging, any
liability, damage, loss, cost or expense as a result of any defect or other
deficiency (whether of design, materials, workmanship, labeling instructions or
otherwise) ("Product Liability") with respect to any product sold or services
rendered by or on behalf of ALP (including any licensee thereof) after December
31, 1995 and prior to the Effective Time which would have a Material Adverse
Effect on ALP, whether such Product Liability is incurred by reason of any
express or implied warranty (including, without limitation, any warranty of
merchantability or fitness), any doctrine of common law (tort, contract or
other), any statutory provision or otherwise and irrespective of whether such
Product Liability is covered by insurance.
SECTION 4.24 BOARD RECOMMENDATION. The Board of Directors of ALP, at a
meeting duly called and held, has by unanimous vote of those directors present
(who constituted 100% of the directors then in office) (i) determined that this
Agreement and the transactions contemplated hereby, including the Merger, are
fair to and in the best interests of the stockholders of ALP, and (ii)
recommended that the holders of the shares of ALP Common Stock approve this
Agreement and the transactions contemplated herein, including the Merger (the
"ALP Board Recommendation").
SECTION 4.25 IBCA AND STATE TAKEOVER LAWS. Prior to the date hereof,
the Board of Directors of ALP has taken all action necessary to exempt under or
make the following not subject to any state takeover law or other state law that
purports to limit or restrict business combinations or the ability to acquire or
vote shares: (i) the execution of this Agreement, (ii) the Merger and (iii) the
other transactions contemplated hereby.
SECTION 4.26 INSURANCE. ALP is presently insured, and during each of
the past five calendar years has been insured, against such risks as companies
engaged in a similar business would, in accordance with good business practice,
customarily be insured. Except as set forth in Section 4.26 of the ALP
Disclosure Schedule, the policies of fire, theft, liability, professional
practice and other insurance currently maintained with respect to the assets or
businesses of the Company may be continued by ALP without modification or
premium increase after the Effective Time and for the duration of their current
terms which terms expire as set forth in Section 4.26 of the ALP Disclosure
Schedule.
SECTION 4.27 BOOKS OF ACCOUNT; RECORDS. ALP's general ledgers, stock
record books, minute books and other material records relating to the assets,
properties, contracts and outstanding legal obligations of ALP are, in all
material respects, complete and correct, and have been maintained in accordance
with good business practices and the matters contained therein are appropriate
and accurately reflected in the Compilation Statements and the Interim
Statements.
SECTION 4.28 INVESTMENT REPRESENTATION. Each ALP Stockholder (a) is
either an "accredited investor" (as such term is defined in Regulation D of the
Securities Act) or, alone or with his or her purchaser representative(s), has
such knowledge and experience in financial and business matters that he or she
is capable of evaluating the merits and risks of an investment in
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Cardinal Common Shares and (b) received from ALP a copy of the Prospectus (as
defined in Section 5.2(a)) and each of the documents incorporated by reference
therein.
SECTION 4.29 NO OTHER REPRESENTATIONS AND WARRANTIES. Except as
expressly set forth in this Article IV, ALP makes no representations and
warranties, express or implied, at law or in equity, in respect of ALP or any of
its assets, liabilities or operations.
ARTICLE V. COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the period from and
after the execution of this Agreement:
SECTION 5.1 MUTUAL COVENANTS.
(a) GENERAL. Each of the parties shall use its reasonable efforts to take
all action and to do all things necessary, proper or advisable to consummate the
Merger and the transactions contemplated by this Agreement (including, without
limitation, using its reasonable efforts to cause the conditions set forth in
Article VI for which they are responsible to be satisfied as soon as reasonably
practicable and to prepare, execute and deliver such further instruments and
take or cause to be taken such other and further action as any other party
hereto shall reasonably request).
(b) HSR ACT. As soon as practicable, and in any event no later than fifteen
business days after the date hereof, each of the parties hereto will file any
Notification and Report Forms and related material required to be filed by it
with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the HSR Act with respect to the Merger, will
use its reasonable efforts to obtain an early termination of the applicable
waiting period, and shall promptly make any further filings pursuant thereto
that may be necessary, proper or advisable. Cardinal and ALP agree to cooperate
with respect to, and shall cause each of their respective subsidiaries to
cooperate with respect to, and agree to use all reasonable efforts to contest
and resist, any Action, including legislative, administrative or judicial
Action, and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) (an "Order") of any Governmental Authority that is in effect and that
restricts, prevents or prohibits the consummation of the Merger or any other
transactions contemplated by this Agreement, including, without limitation, by
pursuing all available avenues of administrative and judicial appeal and all
available legislative action. Upon the terms and subject to the conditions set
forth in this Agreement, in connection with the HSR Act, each of ALP and
Cardinal agrees to take, or cause to be taken, all actions, and to do, or cause
to be done, and to assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including the obtaining of all necessary actions
or nonactions, waivers, consents and approvals from Governmental Authorities and
the making of all necessary registrations and filings (including filings with
Governmental Authorities, if any) and the taking of all reasonable steps as may
be necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Authority; provided, however, that a party shall
not be
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obligated to take any action pursuant to the foregoing if the taking of such
action or the obtaining of any waiver, consent, approval or exemption is
reasonably likely (x) to impact in a materially adverse manner the economic or
business benefits of the transactions contemplated by this Agreement so as to
render inadvisable the consummation of the Merger or (y) to result in an Order
(i) prohibiting or limiting the ownership or operation by Cardinal of any
material portion of the business or assets of ALP or compelling Cardinal to
dispose of or hold separate any of the business or assets of Cardinal or any
material portion of the business or assets of ALP as a result of the Merger or
any of the other transactions contemplated by this Agreement, (ii) imposing
limitations on the ability of Cardinal to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of ALP, including, without
limitation, the right to vote such capital stock on all matters properly
presented to the ALP Stockholders, or (iii) prohibiting Cardinal from
effectively controlling in any material respect the business or operations of
ALP.
(c) OTHER GOVERNMENTAL MATTERS. Each of the parties shall use its
reasonable efforts to take any additional action that may be necessary, proper
or advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any Governmental Authority that it may
be required to give, make or obtain.
(d) POOLING-OF-INTERESTS. Each of the parties agrees that it shall not, and
shall not permit any of its subsidiaries to, take any actions (regardless of
whether such action would otherwise be permitted or not prohibited hereunder)
that would, or would be reasonably likely to, prevent Cardinal from accounting,
and shall use its reasonable best efforts (including, without limitation,
providing appropriate representation letters to Cardinal's accountants in
addition to the representation letter provided by ALP to Cardinal's accountants
on the date hereof) to allow Cardinal to account, for the Merger in accordance
with the pooling-of-interests method of accounting under the requirements of
Opinion No. 16 "Business Combinations" of the Accounting Principles Board of the
American Institute of Certified Public Accountants, as amended by applicable
pronouncements by the Financial Accounting Standards Board, and all related
published rules, regulations and policies of the Commission ("APB No. 16"), and
to obtain a letter, in form and substance reasonably satisfactory to Cardinal,
from Deloitte & Touche LLP dated the Closing Date stating that they concur with
management's conclusion that the Merger will qualify as a transaction to be
accounted for by Cardinal in accordance with the pooling-of-interests method of
accounting under the requirements of APB No. 16.
(e) TAX-FREE TREATMENT. Each of the parties shall use all reasonable
efforts to cause the Merger to constitute a tax-free "reorganization" under
Section 368(a) of the Code.
(f) PUBLIC ANNOUNCEMENTS. Unless otherwise required by Applicable Laws or
requirements of the NYSE (and in that event only if time does not permit), at
all times prior to the earlier of the Effective Time or termination of this
Agreement pursuant to Section 7.1, Cardinal and ALP shall consult with each
other before issuing any press release with respect to the Merger and shall not
issue any such press release prior to such consultation.
SECTION 5.2 COVENANTS OF CARDINAL.
(a) SECURITIES LAWS. Assuming the accuracy of the statements made in
Sections 4.28 and 5.3(a), (i) the issuance of Cardinal Common Shares to the ALP
Stockholders in the Merger
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shall be registered under the Securities Act pursuant to Cardinal's Registration
Statement on Form S-4 (Commission File No. 333-74761) and the Prospectus
included therein dated April 7, 1999 (the "Prospectus") and (ii) the Cardinal
Common Shares issued in the Merger will be freely transferable under the
Securities Act of 1933 by the ALP Stockholders to whom they are issued, subject
to the provisions of Rule 145 thereunder. Cardinal shall use all reasonable
efforts to keep the Registration Statement effective until the Closing.
(b) NOTIFICATION OF CERTAIN MATTERS. Cardinal shall give prompt notice to
ALP of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any Cardinal or Subcorp representation or
warranty contained in this Agreement to be untrue or inaccurate at or prior to
the Effective Time and (ii) any material failure of Cardinal to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.2(b) shall not limit or otherwise affect the remedies available
hereunder to ALP.
(c) NYSE LISTING. Cardinal shall use its reasonable efforts to cause the
Cardinal Common Shares issuable pursuant to the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
(d) CONTINUITY OF BUSINESS ENTERPRISE; CONTINUITY OF INTERESTS. It is the
present intention of Cardinal and Subcorp to continue at least one significant
historic business of ALP, or to use at least a significant portion of ALP's
historic business assets in a business, in each case within the meaning of Reg.
Section 1.368-1(d) promulgated pursuant to the Code. Neither Cardinal nor any
"related person" within the meaning of Reg. Section 1.368-1(e)(3) has any plan
or intent to redeem, in connection with the transactions contemplated by this
Agreement, any Cardinal Common Shares issued to the ALP Stockholders in the
Merger or take any other action which might violate the "continuity of interest"
provisions of Reg. Section 1.368-1(e), except any reacquisition of Cardinal
Common Shares pursuant to Article VIII of this Agreement or the Escrow
Agreement.
(e) DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. For a period of
six years from and after the Effective Time, Cardinal shall cause the Surviving
Corporation to indemnify and hold harmless the former officers and directors of
ALP in respect of acts or omissions occurring prior to the Effective Time (so
long as such acts or omissions do not constitute Indemnifiable Claims of
Cardinal under Article VIII) to the fullest extent permitted or provided under
the ALP Articles and ALP By-laws. Cardinal shall, for a period of six years,
cause ALP to maintain the current policies of directors, and officers' liability
insurance and fiduciary liability insurance maintained by ALP (provided that
Cardinal may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are, in the aggregate, no less
advantageous to the insured and provided that ALP shall not be required to spend
each year more than 125% of the current annual premium for such current
policies) with respect to claims arising from facts or events that occurred at
or before the Effective Time.
SECTION 5.3 COVENANTS OF ALP AND THE ALP STOCKHOLDERS.
(a) PROSPECTUS DELIVERY. ALP acknowledges receipt from Cardinal of 15
copies of the Prospectus and all of the documents incorporated by reference
therein. ALP sent or delivered
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the Prospectus and such incorporated documents to each of the ALP Stockholders
at least 20 business days prior to the date hereof.
(b) CONDUCT OF ALP'S OPERATIONS. During the period from the date of this
Agreement to the Effective Time, ALP shall, and the ALP Stockholders shall take
all actions as may be necessary to cause ALP to, conduct its operations only in
the ordinary course, except as expressly contemplated by this Agreement and the
transactions contemplated hereby, and to use all reasonable efforts to maintain
and preserve its business organization and its material rights and franchises
and to retain the services of its officers and key employees and maintain
relationships with customers, suppliers, lessees, licensees and other third
parties, and to maintain all of its operating assets in their current condition
(normal wear and tear excepted), to the end that their goodwill and ongoing
business shall not be impaired in any material respect. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, ALP shall not, except as otherwise expressly contemplated
by this Agreement or as set forth in Section 5.3(b) of the ALP Disclosure
Schedule, without the prior written consent of Cardinal:
(i) do or effect any of the following actions with respect to its
securities: (A) adjust, split, combine or reclassify its capital stock, (B)
make, declare or pay any dividend or distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of ALP Common
Stock or any securities or obligations convertible into or exchangeable for
any shares of ALP Common Stock, (C) grant any person any right or option to
acquire any shares of ALP Common Stock, (D) issue, deliver or sell or agree
to issue, deliver or sell any additional shares of ALP Common Stock or any
securities or obligations convertible into or exchangeable or exercisable
for any shares of ALP Common Stock or such securities, or (E) enter into
any agreement, understanding or arrangement with respect to the sale or
voting of ALP Common Stock;
(ii) directly or indirectly sell, transfer, lease, pledge, mortgage,
encumber or otherwise dispose of any of its material property or assets,
other than in the ordinary course of business;
(iii) make or propose any changes in the ALP Articles or the ALP
By-laws;
(iv) merge or consolidate with any other person or acquire the assets
(other than the acquisition of inventory, supplies and equipment in the
ordinary course of business) or capital stock of any other person, or enter
into any confidentiality agreement with any person in contemplation of any
of the foregoing;
(v) incur, create, assume or otherwise become liable for any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise
as an accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity, other than in the ordinary
course of business consistent with past practice not in excess of $100,000
in the aggregate;
(vi) create any subsidiaries;
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(vii) enter into or modify any employment, severance, termination or
similar agreements or arrangements with, or grant any bonuses, salary
increases, severance or termination pay to, any officer, director,
consultant or employee or otherwise increase the compensation or benefits
provided to any officer, director, consultant or employee other than salary
increases granted in the ordinary course of business consistent with past
practice to employees who are not officers or directors of ALP, and except
as may be required by Applicable Law or a binding written contract in
effect on the date of this Agreement;
(viii) enter into, adopt or amend any employee benefit or similar
plan;
(ix) change its method of doing business or change any method or
principle of accounting in a manner that is inconsistent with past
practice;
(x) settle any Actions, whether now pending or hereafter made or
brought involving an amount in excess of $100,000, or settle the Action
entitled Vital Pharma, Inc. v. Automatic Liquid Packaging, Inc., case no.
99-8163-CIV-HURLEY (S.D. Flor. - West Palm Beach Division) without the
prior written consent of Cardinal, which will not be unreasonably withheld;
(xi) write up, write down or write off the book value of any assets,
individually or in the aggregate, in excess of $100,000, except for
depreciation and amortization in accordance with generally accepted
accounting principles consistently applied;
(xii) modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to, any Contract set forth in
Section 4.18(a) of the ALP Disclosure Schedule, any other material Contract
to which ALP is a party or any confidentiality agreement to which ALP is a
party;
(xiii) incur or commit to any capital expenditures, obligations or
liabilities in respect thereof which in the aggregate exceed or would
exceed $100,000;
(xiv) make any material changes or modifications to any pricing policy
or investment policy or enter into any new management agreements or leases
on terms different from those in effect in the ordinary and usual course of
business, consistent with past practice;
(xv) pay (or agree to become obligated to pay) any professional fees
and expenses in excess of the amount set forth in Section 4.21 of the ALP
Disclosure Schedule;
(xvi) take any action to exempt or make not subject to any other state
takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares, any person or entity
(other than Cardinal or its subsidiaries) or any action taken thereby,
which person, entity or action would have otherwise been subject to the
restrictive provisions thereof and not exempt therefrom;
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(xvii) take any action that could result in the representations and
warranties set forth in Article IV becoming false or inaccurate in any
material respect;
(xviii) enter into or carry out any other material transaction other
than in the ordinary and usual course of business;
(xix) agree in writing or otherwise to take any of the foregoing
actions.
(c) INTELLECTUAL PROPERTY MATTERS. Except as provided in Section 5.3(c) of
the ALP Disclosure Schedule, ALP shall use all reasonable efforts to preserve
its ownership rights to the Intellectual Property free and clear of any liens,
claims or encumbrances and shall use its best efforts to assert, contest and
prosecute any infringement of any issued foreign or domestic patent, trademark,
service mark, tradename or copyright that forms a part of the Intellectual
Property or any misappropriation or disclosure of any trade secret, confidential
information or know-how that forms a part of the Intellectual Property.
(d) NO SOLICITATION. ALP and each of the ALP Stockholders agree that,
during the term of this Agreement, ALP and each ALP Stockholder shall not, and
shall not authorize or permit any of ALP's directors, officers, employees,
agents or representatives to, directly or indirectly, solicit, initiate,
encourage or facilitate, or furnish or disclose non-public information in
furtherance of, any inquiries or the making of any proposal with respect to any
recapitalization, merger, consolidation or other business combination involving
ALP, or acquisition of any capital stock of ALP or any material portion of the
assets of ALP, or any combination of the foregoing (a "Competing Transaction"),
or negotiate, explore or otherwise engage in discussions with any person (other
than Cardinal, Subcorp or their respective directors, officers, employees,
agents and representatives) with respect to any Competing Transaction or enter
into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement. Neither the Board of Directors of ALP nor any
committee thereof shall (i) withdraw or modify, or propose publicly to withdraw
or modify, in a manner adverse to Cardinal, the ALP Board Recommendation, (ii)
approve or recommend, or propose publicly to approve or recommend, any Competing
Transaction or (iii) cause ALP to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement (each, an
"Acquisition Agreement") related to any Competing Transaction or proposal for a
Competing Transaction. From and after the execution of this Agreement, ALP and
each ALP Stockholder shall immediately advise Cardinal in writing of the
receipt, directly or indirectly, of any inquiries, discussions, negotiations or
proposals relating to a Competing Transaction (including the specific terms
thereof and the identity of the other party or parties involved) and promptly
furnish to Cardinal a copy of any such proposal or inquiry in addition to any
information provided to or by any third party relating thereto.
(e) AFFILIATES OF ALP. ALP has obtained from each person who may be at the
Effective Time or was on the date hereof an "affiliate" of ALP for purposes of
Rule 145 under the Securities Act (each, an "ALP Affiliate") an Affiliate Letter
in the form of Exhibit B hereto. On the date hereof, ALP has (after consultation
with outside counsel for ALP) provided Cardinal with a letter specifying all of
the persons or entities who may be deemed to be "affiliates" of ALP under the
preceding sentence.
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(f) ACCESS; FINANCIAL STATEMENTS. ALP shall permit representatives of
Cardinal to have appropriate access at all reasonable times to ALP's premises,
properties, books, records, contracts, tax records, documents, customers and
suppliers. ALP shall deliver to Cardinal Interim Statements within 20 days
following the end of each calendar month, beginning with Interim Statements for
July 1999.
(g) NOTIFICATION OF CERTAIN MATTERS. ALP shall give prompt notice to
Cardinal of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any ALP representation or warranty contained
in this Agreement to be untrue or inaccurate at or prior to the Effective Time
and (ii) any material failure of ALP to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
5.3(g) shall not limit or otherwise affect the remedies available hereunder to
Cardinal.
(h) OTHER AGREEMENTS. ALP shall use all reasonable efforts to cause the
individual set forth in Section 5.3(h)(i) of the ALP Disclosure Schedule to
enter into a Consulting Agreement with ALP substantially in the form attached
hereto. The individuals set forth on Section 5.3(h)(ii) of the ALP Disclosure
Schedule shall enter into the agreements substantially in the form attached
hereto as Exhibits H-1 through H-5. (The agreements referred to in this Section
5.3(h) are hereinafter sometimes referred to collectively as the "Ancillary
Agreements.")
(i) TERMINATION OF AGREEMENTS. ALP shall cause prior to Closing the
termination of, and the waiver or satisfaction of all remaining obligations or
liabilities, contingent or otherwise, of ALP under, the agreements or plans
listed in Section 5.3(i) of the ALP Disclosure Schedule.
(j) CERTAIN TAX MATTERS.
(i) For each taxable period of ALP that ends before the Closing Date,
the ALP Stockholders shall cause to be timely prepared, submitted to
Cardinal for review and filed with the appropriate authorities (with copies
provided to Cardinal) all tax returns of ALP and shall cause to be paid by
the parties responsible therefor all taxes when due. Cardinal shall cause
to be prepared and filed all tax returns for ALP for tax periods not
described in the foregoing sentence of this Section 5.3(j)(i) and ALP shall
pay all taxes required to be paid for such periods.
(ii) The ALP Stockholders, ALP and Cardinal reasonably and in good
faith shall cooperate with each other in preparing and filing all tax
returns, including maintaining and making available to each other all
records necessary in connection with the preparation and filing of such tax
returns.
(iii) The ALP Stockholders shall be responsible for causing to be
filed any amended tax returns of ALP for taxable periods ending prior to
the Closing Date which are required as a result of an examination or
adjustments made by taxing authorities, and for causing to be paid by the
parties responsible therefor when due any taxes resulting therefrom. Any
such amended returns shall be furnished to Cardinal for approval (which
approval shall not be unreasonably withheld), signature and filing at least
ten (10) business days prior to the due date for the filing of such amended
returns.
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(iv) If a claim is made by any taxing authority:
(A) For any taxable period ending before the Closing Date, ALP
Stockholders shall control the proceedings taken in
connection with such claim; and
(B) For any taxable period ending on or after the Closing Date,
Cardinal shall control the proceedings taken in connection
with such claim.
Subject to the foregoing clauses (A) and (B), the parties
reasonably and in good faith shall cooperate with each other in the
contesting of any tax claim, and shall keep each other fully apprised
of the status of such claims. Notwithstanding any of the foregoing to
the contrary, Cardinal shall not without the prior written approval of
the ALP Stockholders Representative (as defined in Section 8.6) (1)
agree to an extension of the statute of limitations with respect to
any taxable period of ALP ending before the Closing Date or (2) amend
any tax return of ALP for any taxable period of ALP ending before the
Closing Date.
(v) Notwithstanding any other provision of this Agreement to the
contrary, as provided in Section 8.2(a), the ALP Stockholders shall
jointly and severally indemnify Cardinal and ALP, and hold them
harmless from and against, all liability of ALP for federal income
taxes and all interest, penalties and other costs and expenses related
thereto (including reasonable attorneys' fees) attributable to the
failure of ALP to be an "S" corporation within the meaning of Section
1361(a)(1) of the Code at all times during each taxable year included
in the period beginning April 1, 1998, and ending on the day before
the Closing Date, and for state, local and foreign income or franchise
taxes and all interest, penalties and other costs and expenses related
thereto (including reasonable attorneys' fees) attributable to any
such failure of ALP to be an S corporation under the comparable
provisions of the laws of such jurisdictions.
(k) INJUNCTIVE RELIEF. ALP acknowledges and agrees that Cardinal's and
Subcorp's remedies at law for any violation or attempted violation of any of
ALP's obligations under this Article V would be inadequate and incomplete, and
agree that in the event of any such violation or attempted violation, Cardinal
and Subcorp (or either of them) shall be entitled to a temporary restraining
order, temporary and permanent injunctions, and other equitable relief, without
the necessity of posting any bond or proving any actual damage, in addition to
all other rights and remedies which may be available to Cardinal and Subcorp
from time to time.
ARTICLE VI. CONDITIONS
SECTION 6.1 MUTUAL CONDITIONS. The obligations of the parties hereto to
consummate the Merger shall be subject to fulfillment of the following
conditions:
(a) NO ADVERSE PROCEEDING. No temporary restraining order, preliminary or
permanent injunction or other order or decree which prevents the consummation of
the Merger
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shall have been issued and remain in effect, and no statute, rule or regulation
shall have been enacted by any Governmental Authority which prevents the
consummation of the Merger.
(b) HSR ACT. Any applicable waiting periods applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated.
(c) SECURITIES AND EXCHANGE COMMISSION. On the Closing Date and at the
Effective Time, no stop order or similar restraining order shall have been
threatened by the Commission or entered by the Commission or any state
securities administrator prohibiting the Merger.
(d) NO GOVERNMENT ACTION. No Action shall be instituted by any Governmental
Authority which seeks to prevent consummation of the Merger or seeking material
damages in connection with the transactions contemplated hereby which continues
to be outstanding.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF ALP. The obligations of ALP to
consummate the Merger and the transactions contemplated hereby shall be subject
to the fulfillment of the following conditions unless waived by ALP:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of each of Cardinal and Subcorp set forth in Article III shall be
true and correct in all material respects on the date hereof and on and as of
the Closing Date as though made on and as of the Closing Date, except that
representations and warranties made as of a specified date need be true and
correct only as of the specified date and, except that representations and
warranties that are qualified by concepts of materiality or Material Adverse
Effect shall be true and correct in all respects on the date hereof and on and
as of the Closing Date.
(b) PERFORMANCE OF AGREEMENT. Each of Cardinal and Subcorp shall have
performed in all material respects each obligation and agreement and shall have
complied in all material respects with each covenant to be performed and
complied with by it hereunder at or prior to the Effective Time.
(c) CERTIFICATES. Each of Cardinal and Subcorp shall have furnished ALP
with a certificate dated the Closing Date signed on behalf of it by the
Chairman, President or any Vice President to the effect that the conditions set
forth in Sections 6.2(a) and (b) have been satisfied.
(d) OPINION OF COUNSEL. ALP shall have received the legal opinion, dated
the Closing Date, of Baker & Hostetler LLP substantially in the form attached
hereto as EXHIBIT D.
(e) NYSE AUTHORIZATION. The Cardinal Common Shares to be issued in the
Merger and the transactions contemplated hereby shall have been authorized for
inclusion on the NYSE, subject to official notice of issuance.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF CARDINAL AND SUBCORP. The
obligations of Cardinal and Subcorp to consummate the Merger and the other
transactions contemplated hereby shall be subject to the fulfillment of the
following conditions unless waived by each of Cardinal and Subcorp:
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(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of ALP and the ALP Stockholders set forth in Article IV shall be true
and correct in all material respects on the date hereof and on and as of the
Closing Date as though made on and as of the Closing Date, except that
representations and warranties made as of a specified date need be true and
correct only as of the specified date and except that representations and
warranties qualified by concepts of materiality or Material Adverse Effect shall
be true and correct in all respects on the date hereof and on and as of the
Closing Date.
(b) PERFORMANCE OF AGREEMENT. ALP and the ALP Stockholders shall have
performed in all material respects each obligation and agreement and shall have
complied in all material respects with each covenant to be performed and
complied with by it hereunder at or prior to the Effective Time.
(c) CERTIFICATE. ALP shall have furnished Cardinal with a certificate dated
the Closing Date signed on its behalf by its Chairman, President or any Vice
President, and each ALP Stockholder shall have furnished Cardinal with a
certificate dated the Closing Date, to the effect that the conditions set forth
in Sections 6.3(a) and (b) have been satisfied.
(d) OPINION OF COUNSEL. Cardinal shall have received the legal opinion,
dated the Closing Date, of Schwartz & Freeman, substantially in the form
attached hereto as EXHIBIT E.
(e) POOLING LETTER. Cardinal shall have received a letter, in form and
substance reasonably satisfactory to Cardinal, from Deloitte & Touche LLP dated
the date of the Effective Time stating that they concur with management's
conclusion that the Merger will qualify as a transaction to be accounted for by
Cardinal in accordance with the pooling-of-interests method of accounting under
the requirements of APB No. 16.
(f) AFFILIATE LETTERS. Each ALP Affiliate shall have executed and delivered
to Cardinal an Affiliate Letter in accordance with Section 5.3(e).
(g) CONSENTS AND APPROVALS. ALP shall have received all customer, vendor,
lessee, licensee, licensor and other third party consents and approvals listed
on Section 6.3(g) of the ALP Disclosure Schedule.
(h) ESCROW AGREEMENT. ALP, Cardinal, the Escrow Agent and all of the ALP
Stockholders shall have executed and delivered the Escrow Agreement.
(i) STOCKHOLDERS RELEASE. Each of the ALP Stockholders shall have executed
and delivered to Buyer a Release, dated as of the Effective Time, in the form of
EXHIBIT F attached hereto.
(j) CERTAIN AGREEMENTS. The Ancillary Agreements referenced in Section
5.3(h) of the Agreement shall have been executed and delivered by all the
parties thereto, and the Employment Agreements dated the date hereof between ALP
and each of Frank N. Leo and Gregory J. Lapkoff (the "Employment Agreements")
shall remain in full force and effect according to their terms as of the
Closing.
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(k) TERMINATION OF CERTAIN AGREEMENTS. As of or prior to the Closing, the
agreements and plans listed in Section 5.3(i) of the ALP Disclosure Schedule
shall have been effectively terminated and all of ALP's obligations and
liabilities, contingent or otherwise, thereunder shall have been satisfied or
irrevocably waived by the other parties thereto or the participants therein.
(l) PROSPECTUS. The Prospectus, including the documents incorporated by
reference therein, shall not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(m) WEILER ENGINEERING AGREEMENT. The Agreement between ALP and Weiler
Engineering, Inc. ("Weiler Engineering") in the form attached hereto as EXHIBIT
G shall have been executed and delivered by the parties thereto on or prior to
the Effective Time.
(n) NO NOTICE FROM CUSTOMERS. Neither ALP nor any ALP Stockholder shall
have received notice from any of ALP's three largest customers (based on net
revenue for calendar year 1998) that it has terminated or intends to terminate
its relationship with ALP.
(o) NET WORTH. The shareholders' equity of ALP as reflected in the July 31,
1999 Interim Statements shall equal or exceed $110,000,000.
(p) REAL ESTATE MATTERS. With respect to each parcel of real property owned
by ALP, ALP shall have obtained and delivered to Cardinal (i) a title insurance
policy in an amount reasonably determined by Cardinal (the "Policy") based on a
title commitment for an ALTA Form B Owners Policy of Title Insurance issued by a
title insurance company selected by Cardinal, which Policy shall be in form and
content satisfactory to Cardinal and (ii) current surveys prepared by a surveyor
selected by Cardinal, which surveys (y) shall conform to Minimum Standard Detail
Requirements for ALTA/ACSM Title Surveys and (z) shall not disclose any survey
defect or encroachment from or onto any of such real property.
(q) TERMINATION AND RELEASE. The Termination and Release Agreement dated
August 3, 1999, among John Feltes, individually and as trustee, Barbara Feltes,
individually and as trustee (collectively, "Feltes"), and ALP (the "Feltes
Agreement") pursuant to which Feltes releases all claims against ALP, except as
provided in Section 5(b) thereof, shall be in full force and effect, and ALP
shall have paid all amounts required to be paid thereunder.
(r) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall not have been any change in the assets, liabilities, business, prospects,
results of operations or financial condition of ALP which would constitute a
Material Adverse Effect or any event, occurrence or development which would have
a material adverse effect on the ability of ALP to consummate the transactions
contemplated hereby.
(s) PLAN AMENDMENT. ALP shall have amended the Automatic Liquid Packaging,
Inc. Employees 401(k) Savings Plan (the "ALP Plan") to adopt a non-standardized
prototype plan document as an amendment and restatement effective as of January
1, 1997, of the ALP Plan.
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ARTICLE VII. TERMINATION AND AMENDMENT
SECTION 7.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval and adoption of
this Agreement by the ALP Stockholders:
(a) by mutual consent of Cardinal and ALP;
(b) by either Cardinal or ALP if any permanent injunction or other order of
a court or other competent Governmental Authority preventing the consummation of
the Merger shall have become final and nonappealable;
(c) by either Cardinal or ALP if the Merger shall not have been consummated
before December 31, 1999, unless extended by the Boards of Directors of both
Cardinal and ALP (provided that the right to terminate this Agreement under this
Section 7.1(c) shall not be available to any party whose failure or whose
affiliate's failure to perform any material covenant or obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date);
(d) by Cardinal if the Board of Directors of ALP shall withdraw, modify or
change the ALP Board Recommendation in a manner adverse to Cardinal, or if the
Board of Directors of ALP shall have refused to affirm the ALP Board
Recommendation within two business days of any written request from Cardinal;
(e) by ALP if the Board of Directors of Cardinal shall withdraw, modify or
change its approval of this Agreement and the transactions contemplated hereby
in a manner adverse to ALP, or if the Board of Directors of Cardinal shall have
refused to affirm such approval within two business days of any written request
from ALP;
(f) by Cardinal if at any time the representations and warranties of ALP
set forth in Section 4.16 shall not be true and correct or Cardinal shall have
been advised that the condition set forth in Section 6.3(e) cannot be satisfied.
SECTION 7.2 EFFECT OF TERMINATION. In the event of the termination of
this Agreement pursuant to Section 7.1, this Agreement, except for the
provisions of this Section 7.2 and Section 9.10, shall become void and have no
effect, without any liability on the part of any party or its directors,
officers or stockholders. Notwithstanding the foregoing, nothing in this Section
7.2 shall relieve any party to this Agreement of liability for a material breach
of any provision of this Agreement.
SECTION 7.3 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors;
provided, however, that no amendment shall be made which by law requires further
approval or authorization by the ALP Stockholders without such further approval
or authorization. Notwithstanding the foregoing, this Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
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SECTION 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time,
Cardinal (with respect to ALP) and ALP (with respect to Cardinal and Subcorp) by
action taken or authorized by their respective Boards of Directors, may, to the
extent legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of such party, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE VIII. INDEMNIFICATION
SECTION 8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) Subject to the limitations set forth in Section 8.3, below, and
notwithstanding any investigation conducted at any time with regard thereto by
or on behalf of Cardinal or ALP, all representations, warranties, covenants and
agreements of ALP or Cardinal in this Agreement and in any other documents
executed or delivered by ALP or Cardinal pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement (the "Additional
Documents") shall survive the execution, delivery and performance of this
Agreement and the Additional Documents. All representations and warranties of
ALP or Cardinal set forth in this Agreement and in the Additional Documents
shall be deemed to have been made again by ALP or Cardinal, as the case may be,
at and as of the Effective Time (except for representations and warranties made
as of a specified date, which shall be deemed to have been made only as of the
specified date). This Section 8.1 shall not limit any covenant or agreement of
the parties hereto which by its terms contemplates performance after the
Effective Time or after the termination of this Agreement.
(b) As used in this Article VIII, any reference to a representation,
warranty or covenant contained in any section of this Agreement shall include
the section of the Disclosure Schedule relating to such section.
SECTION 8.2 INDEMNIFICATION.
(a) Subject to the limitations set forth in Sections 8.3 and 8.8 below, the
ALP Stockholders, jointly and severally, shall indemnify and hold harmless
Cardinal from and against any and all losses, liabilities, damages, demands,
claims, suits, actions, judgments or causes of action, assessments, costs and
expenses, including, without limitation, interest, penalties, attorneys' fees,
any and all expenses incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation (collectively,
"Damages"), asserted against, resulting to, imposed upon, or incurred or
suffered by Cardinal, directly or indirectly, as a result of or arising from (i)
any inaccuracy in or breach or nonfulfillment of, or any alleged inaccuracy in
or breach or nonfulfillment of, any of the representations, warranties,
covenants or agreements made by ALP or any ALP Stockholder in this Agreement or
the Additional Documents, whether or not arising out of a third-party claim, or
any claim or other occurrence or circumstance that is or was inconsistent with
any such representations, warranties, covenants or agreements, (ii) any product
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shipped or manufactured by, or any services provided by, ALP prior to the
Effective Time, (iii) the installation or operation of any machinery or
equipment sold by Weiler Engineering to or through ALP (whether used and
operated by ALP or sold to third parties) or any engineering or technical
support services provided by Weiler Engineering to ALP or any customers of ALP,
(iv) any liabilities to any party under the Feltes Agreement (other than
liabilities for salary continuation payments expressly provided for therein), or
any other liability whatsoever to Feltes (including, without limitation, under
the Founding Officers Agreement (as defined in the ALP Disclosure Schedule
(collectively, "Feltes Liabilities"), (v) any inaccuracy in or breach of, or any
alleged inaccuracy in or breach of, the representation and warranty made by ALP
in Section 4.17(g), without regard to any disclosures regarding or limitations
on such representation or warranty in any Section of the ALP Disclosure Schedule
(collectively, "Controlled Group Liabilities"), and (vi) any liabilities of the
type described in Section 5.3(j)(v) (collectively, "Indemnifiable Claims" when
used in the context of Cardinal as the Indemnified Party as defined in Section
8.3(c)).
(b) Subject to the limitations set forth in Section 8.3 and 8.8, Cardinal
hereby covenants and agrees to indemnify and hold harmless the ALP Stockholders,
from and after the Effective Time, from and against any and all Damages,
asserted against, resulting to, imposed upon, or incurred or suffered by ALP or
the ALP Stockholders, directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of, or any alleged inaccuracy in or
breach or nonfulfillment of, any of the representations and warranties made by
Cardinal in this Agreement (collectively, "Indemnifiable Claims" when used in
the context of ALP or the ALP Stockholders as the Indemnified Party).
(c) For purposes of this Article VIII, all Damages shall be computed (i)
net of any insurance coverage which reduces the Damages that would otherwise be
sustained; provided that in all cases the timing of the receipt or realization
of insurance proceeds shall be taken into account in determining the amount of
reduction of Damages and (ii) net of the present value of the reasonably
expected tax savings to the Indemnified Party of the Damages paid or incurred
grossed-up by the reasonably expected tax cost of the amount that but for this
subparagraph would be received by the Indemnified Party in satisfaction of the
Indemnifiable Claim.
(d) Cardinal shall be deemed to have suffered Damages arising out of or
resulting from the matters referred to in Section 8.2(a) if the same shall be
suffered by any parent, subsidiary or affiliate of Cardinal, including, without
limitation, the Surviving Corporation after the Effective Time.
SECTION 8.3 LIMITATIONS ON INDEMNIFICATION. Rights to indemnification
under this Article VIII are subject to the following limitations:
(a) Neither Cardinal nor ALP nor the ALP Stockholders shall be entitled to
indemnification hereunder with respect to an Indemnifiable Claim (or, if more
than one such Indemnifiable Claim is asserted, with respect to all such
Indemnifiable Claims) unless the aggregate amount of Damages with respect to
such Indemnifiable Claim or Claims exceeds $750,000 (the "Threshold"), in which
event Cardinal shall be entitled to indemnification hereunder from the ALP
Stockholders and the ALP Stockholders shall be entitled to indemnification from
Cardinal for Damages with respect to all Indemnifiable Claims in excess of
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the Threshold up to the amount equal to fifteen percent (15%) of the Aggregate
Consideration (the "Cap"); provided, however, that any Damages with respect to
an Indemnifiable Claim arising from any Controlled Group Liability or any Feltes
Liability shall not be subject to or applied toward the Threshold and Cardinal
shall be entitled to indemnification for the entire amount of said Damages up to
the amount of the Cap. In addition, Cardinal's right to indemnification and the
ALP Stockholders' responsibility for any Damages relating to any Feltes
Liability shall not apply to the Cap until, and then only to the extent that,
the amount of Damages arising from the Feltes Liability for which the ALP
Stockholders have indemnified Cardinal exceeds an amount equal to five percent
(5%) of the Aggregate Consideration.
(b) The obligation of indemnity with respect to the representations and
warranties set forth in Article III and in Article IV shall terminate on the
earlier of (i) the date on which Cardinal's audited financial statements for the
first fiscal year ending after the Effective Time are issued and (ii) the first
anniversary of the Effective Time.
(c) The foregoing provisions of this Section 8.3 notwithstanding, if, prior
to the termination of any obligation to indemnify, written notice of a claimed
breach or other occurrence or matter giving rise to a claim of indemnification
is given by the Party seeking indemnification (the "Indemnified Party") to the
Party from whom indemnification is sought (the "Indemnifying Party"), or a suit
or action based upon a claimed breach is commenced against the Indemnifying
Party, the Indemnified Party shall not be precluded from pursuing such claimed
breach, occurrence, other matter, or suit or action, or from recovering from the
Indemnifying Party (whether through the courts or otherwise) on the claim, suit
or action, by reason of the termination otherwise provided for above.
SECTION 8.4 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO THIRD PARTY
CLAIMS.
(a) If the Indemnified Party determines to seek indemnification under this
Article VIII with respect to Indemnifiable Claims resulting from the assertion
of liability by third parties, it shall give notice to the Indemnifying Party
within 60 days of the Indemnified Party's becoming aware of any such
Indemnifiable Claim, which notice shall set forth such material information with
respect to such Indemnifiable Claim as is then reasonably available to the
Indemnified Party. If any such liability is asserted against the Indemnified
Party and the Indemnified Party notifies the Indemnifying Party of such
liability, the Indemnifying Party shall be entitled, if it so elects by written
notice delivered to the Indemnified Party within 15 days after receiving the
Indemnified Party's notice, to assume the defense of such asserted liability
with counsel reasonably satisfactory to the Indemnified Party unless the
Indemnifying Party fails to provide reasonable assurance to the Indemnified
Party of its financial capacity to assume such defense. If the Indemnifying
Party elects to assume the defense of such asserted liability, the claims made
by such third party shall be conclusively established as being within the scope
of and subject to the indemnification provisions of this Agreement.
Notwithstanding the foregoing: (i) the Indemnified Party shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be payable by the Indemnified Party; (ii) the Indemnified Party
shall not have any obligation to give any notice of any assertion of liability
by a third party unless such assertion is in writing; and (iii) the rights of
the Indemnified Party to be indemnified in respect of Indemnifiable Claims
resulting from the assertion of liability by third parties shall not be
adversely affected by its failure to give notice pursuant to the foregoing
provisions unless,
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and, if so, only to the extent that, the Indemnifying Party is materially
prejudiced by such failure. With respect to any assertion of liability by a
third party that results in an Indemnifiable Claim, the Parties shall make
available to each other all relevant information in their possession which is
material to any such assertion.
(b) In the event that the Indemnifying Party fails to assume the defense of
the Indemnified Party against any such Indemnifiable Claim, within 15 days after
receipt of the Indemnified Party's notice of such Indemnifiable Claim, the
Indemnified Party shall have the right to defend, compromise or settle such
Indemnifiable Claim on behalf, for the account, and at the risk of the
Indemnifying Party.
(c) Notwithstanding anything in this Section 8.4 to the contrary, (i) if
there is a reasonable probability that an Indemnifiable Claim may materially and
adversely affect the Indemnified Party, its corporate parent, if any, its
subsidiaries or affiliates, including, without limitation, the Surviving
Corporation after the Effective Time if Cardinal is the Indemnified Party, other
than as a result of money damages or other money payments, then the Indemnified
Party shall have the right, at the cost and expense of the Indemnifying Party,
to defend, compromise or settle such Indemnifiable Claim; and (ii) the
Indemnifying Party shall not, without the Indemnified Party's prior written
consent, settle or compromise any Indemnifiable Claim or consent to entry of any
judgment in respect of any Indemnifiable Claim unless such settlement,
compromise or consent (A) includes as an unconditional term the giving by the
claimant or the plaintiff to the Indemnified Party (and its corporate parent, if
any, its subsidiaries and affiliates including, without limitation, the
Surviving Corporation after the Effective Time if Cardinal is the Indemnified
Party) a release from all liability in respect of such Indemnifiable Claim and
(B) does not include a finding or admission by ALP or Cardinal of any violation
of Applicable Laws or any violation of the rights of any person.
SECTION 8.5 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO NON-THIRD
PARTY CLAIMS. In the event that the Indemnified Party asserts the existence of
an Indemnifiable Claim giving rise to Damages (but excluding Indemnifiable
Claims resulting from the assertion of liability by third parties, but including
a dispute among the parties as to whether a third-party claim is subject to
indemnification under this Article VIII), it shall give written notice to the
Indemnifying Party specifying the nature and amount of the Indemnifiable Claim
asserted. If the Indemnifying Party, within 20 business days after the mailing
of such notice by the Indemnified Party, has not given written notice to the
Indemnified Party announcing its intent to contest such assertion by the
Indemnified Party, such assertion shall be deemed accepted and the amount of
Indemnifiable Claim shall be deemed a valid Indemnifiable Claim. In the event,
however, that the Indemnifying Party contests the assertion of an Indemnifiable
Claim by giving such written notice to the Indemnified Party within such 20-day
period, then if the Parties, acting in good faith, cannot reach agreement with
respect to such Indemnifiable Claim within 30 business days after receipt by the
Indemnified Party of such notice, the contested assertion of the claim shall be
referred to arbitration in Columbus, Ohio, in accordance with the then-current
rules of the American Arbitration Association. The determination made in
accordance with such rules shall be delivered in writing to the Parties and
shall be final and binding and conclusive on the Parties and the amount of the
Indemnifiable Claim, if any, determined to exist shall be a valid Indemnifiable
Claim. Each Party shall pay its own legal, accounting and other fees in
connection with such a contest; provided that if the contested claim is referred
to and ultimately
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determined by arbitration, the legal, auditing and other fees of the prevailing
Party and the fees and expenses of any arbitrator shall be borne by the
nonprevailing Party.
SECTION 8.6 ALP STOCKHOLDERS REPRESENTATIVE. The ALP Stockholders
hereby irrevocably appoint Gerhard H. Weiler (the "ALP Stockholders
Representative") to act on behalf of the ALP Stockholders with respect to all
matters relating to this Article VIII and the Escrow Agreement, including,
without limitation, in considering and certifying the amount of any
indemnification hereunder, in communicating with the ALP Stockholders, in
appointing a successor Escrow Agent under the Escrow Agreement, in considering
and acting with respect to any amendment or termination of this Agreement, and
generally in performing all acts expressly required or permitted to be performed
by the ALP Stockholders Representative pursuant hereto and pursuant to the
Escrow Agreement. Cardinal and the Escrow Agent shall have the right to deal
exclusively with the ALP Stockholders Representative with respect to all matters
under the Escrow Agreement and neither Cardinal nor the Escrow Agent shall have
any liability to any ALP Stockholder for any acts or omissions of the ALP
Stockholders Representative, or any acts or omissions taken or not taken by
Cardinal or the Escrow Agent at the direction of the ALP Stockholders
Representative, including, but not limited to (i) any acts or omissions relating
to the voting of any Retained Shares or (ii) the transferring or the failure to
transfer any shares or funds released from escrow. Upon any distribution of
Cardinal Common Shares or other funds to the ALP Stockholders Representative (or
to one or more of the ALP Stockholders upon written instruction of the ALP
Stockholders Representative) in accordance with the Agreement, the Escrow Agent
and Cardinal shall be deemed to have fully satisfied any and all obligations to
the ALP Stockholders under this Agreement and the Escrow Agreement with respect
to the amount of such distribution. The ALP Stockholders Representative will
have no liability to ALP or the ALP Stockholders with respect to actions taken
or omitted to be taken in his capacity as ALP Stockholders Representative,
except with respect to any liability resulting primarily from the ALP
Stockholders Representative's gross negligence or willful misconduct. The ALP
Stockholders Representative shall be entitled to rely upon any directions
received from holders (the "Majority Holders") of a majority of the ALP Common
Stock.
SECTION 8.7 VALUATION OF SHARES RELEASED FROM ESCROW. For purposes of
determining the number of Retained Shares which shall be necessary to satisfy an
Indemnifiable Claim against the ALP Stockholders, each Escrowed Share (as
defined in the Escrow Agreement) shall be deemed to have a value equal to the
last reported sale price of Cardinal Common Shares on the New York Stock
Exchange on the trading day immediately preceding the Closing Date (subject to
equitable adjustment for stock splits, reclassifications, combinations,
reorganizations or other similar changes). Indemnifiable Claims against the ALP
Stockholders shall be made first against the Retained Shares. After all of the
Retained Shares have been used to satisfy such Indemnifiable Claims, Cardinal
shall be entitled to make additional Indemnifiable Claims directly against the
ALP Stockholders.
SECTION 8.8 TERMINATION OF ALP'S WARRANTIES. Notwithstanding any
provisions of this Agreement to the contrary: (a) all representations,
warranties and covenants made by ALP in this Agreement or the Additional
Documents shall terminate as to ALP (but only as to ALP, and not as to the ALP
Stockholders) as of the Closing; and (b) after the Closing, ALP shall not have
any obligation or liability to any ALP Stockholder as a direct or indirect
result of any
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misrepresentation, breach of covenant or other occurrence or circumstance for
which the ALP Stockholders have or may have liability to Cardinal under this
Agreement.
ARTICLE IX. MISCELLANEOUS
SECTION 9.1 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or dispatched by a nationally recognized
overnight courier service to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Cardinal or Subcorp:
Cardinal Health, Inc.
7000 Cardinal Place
Dublin, Ohio 43017
Attention: General Counsel
Telecopy No.: (614) 757-6948
with a copy to:
John M. Gherlein, Esq.
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3485
Telecopy No.: (216) 696-0740
(b) if to ALP:
Automatic Liquid Packaging, Inc.
2200 Lake Shore Drive
Woodstock, Illinois 60098
Attention: Gerhard H. Weiler
Telecopy No.: (815) 338-5504
with a copy to
Stuart Duhl, Esq.
Schwartz & Freeman
401 North Michigan Avenue, Suite 1900
Chicago, Illinois 60611
Telecopy No.: (312) 222-0818
SECTION 9.2 INTERPRETATION. When a reference is made in this Agreement
to an Article or Section, such reference shall be to an Article or Section of
this Agreement unless otherwise indicated. The headings and the table of
contents contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. For the
purposes of any provision of this Agreement, a "Material Adverse Effect" with
respect to any party shall mean a material adverse effect on the assets,
liabilities, results of operations, prospects or condition (financial or
otherwise) of such party and its subsidiaries taken
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as a whole. For purposes of this Agreement, a "subsidiary" of any person means
another person, an amount of the voting securities or other voting ownership or
voting partnership interests of which is sufficient to elect at least a majority
of its Board of Directors or other governing body (or, if there are no such
voting securities or interests, 50% or more of the equity interests of which) is
owned directly or indirectly by such first person. For the purposes of this
Agreement, the "Knowledge" of ALP shall mean the actual knowledge of facts,
matters or circumstances of the officers and directors of ALP, or in the absence
of such knowledge, the actual knowledge that such individuals would have had if
they had undertaken a reasonable investigation of the fact, matter or
circumstance in question.
SECTION 9.3 COUNTERPARTS. This Agreement may be executed in
counterparts, which together shall constitute one and the same Agreement. The
parties may execute more than one copy of the Agreement, each of which shall
constitute an original.
SECTION 9.4 ENTIRE AGREEMENT. This Agreement (including the documents
and the instruments referred to herein), constitutes the entire agreement among
the parties and supersede all prior agreements and understandings, agreements or
representations by or among the parties, written and oral, with respect to the
subject matter hereof and thereof.
SECTION 9.5 THIRD PARTY BENEFICIARIES. Nothing in this Agreement,
express or implied, is intended or shall be construed to create any third party
beneficiaries.
SECTION 9.6 GOVERNING LAW. Except to the extent that the laws of the
jurisdiction of organization of any party hereto, or any other jurisdiction, are
mandatorily applicable to the Merger or to matters arising under or in
connection with this Agreement, this Agreement shall be governed by the laws of
the State of Ohio, without regard to principles of conflicts of laws. All
actions and proceedings arising out of or relating to this Agreement shall be
heard and determined in any Ohio state or federal court sitting in the City of
Columbus.
SECTION 9.7 CONSENT TO JURISDICTION; VENUE.
(a) Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the state courts of Ohio and to the jurisdiction of the United
States District Court for the Southern District of Ohio, for the purpose of any
action or proceeding arising out of or relating to this Agreement and each of
the parties hereto irrevocably agrees that all claims in respect to such action
or proceeding may be heard and determined exclusively in any Ohio state or
federal court sitting in the City of Columbus. Each of the parties hereto agrees
that a final judgment in any action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
(b) Each of the parties hereto irrevocably consents to the service of any
summons and complaint and any other process in any other action or proceeding
relating to the Merger, on behalf of itself or its property, by the personal
delivery of copies of such process to such party. Nothing in this Section 9.7
shall affect the right of any party hereto to serve legal process in any other
manner permitted by law.
SECTION 9.8 SPECIFIC PERFORMANCE. The transactions contemplated by this
Agreement are unique. Accordingly, each of the parties acknowledges and agrees
that, in
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<PAGE> 51
addition to all other remedies to which it may be entitled, each of the parties
hereto is entitled to a decree of specific performance, provided such party is
not in material default hereunder.
SECTION 9.9 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
SECTION 9.10 EXPENSES. Subject to the provisions of Section 7.2,
Cardinal shall be responsible for all costs and expenses incurred by Cardinal
and Subcorp in connection with this Agreement and the transactions contemplated
hereby and ALP, both before and after the Effective Time, shall be responsible
for such reasonable costs and expenses incurred by the ALP Stockholders in
connection with this Agreement and the transactions contemplated hereby, subject
to Section 5.3(b)(xv).
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[Signature page to Agreement and Plan of Merger.]
IN WITNESS WHEREOF, Cardinal, Subcorp, ALP and the ALP
Stockholders have signed this Agreement as of the date first written above.
CARDINAL HEALTH, INC.
By: /s/ John C. Kane
-----------------------------------
Name: John C. Kane
---------------------------
Title: President and COO
---------------------------
FLOWER MERGER CORP.
By: /s/ John C. Kane
-----------------------------------
Name: John C. Kane
---------------------------
Title: President
---------------------------
AUTOMATIC LIQUID PACKAGING, INC.
By: /s/ Gerhard H. Weiler
-----------------------------------
Name:
---------------------------
Title:
---------------------------
THE ALP STOCKHOLDERS
/s/ Gerhard H. Weiler
------------------------------------
Gerhard H. Weiler, as the ALP Stockholders
Representative and as Trustee of the Gerhard H.
Weiler Dec. of Trust dated 9/3/93
/s/ Patricia Weiler
------------------------------------
Patricia Weiler
/s/ Lisa Hoffman
------------------------------------
Lisa Hoffman
<PAGE> 53
[Signature page to Agreement and Plan of Merger.]
/s/ Amy Weiler
------------------------------------
Amy Weiler
/s/ Siegfried Weiler
------------------------------------
Siegfried Weiler
/s/ Ruth Weiler
------------------------------------
Ruth Weiler
/s/ Kurt A. Weiler
------------------------------------
Kurt A. Weiler, individually and as Trustee
of the Kurt A. Weiler Gift Trust
/s/ Anita W. Reiche
------------------------------------
Anita W. Reiche, individually and as
Trustee of the Anita W. Reiche Gift Trust
/s/ Carol J. Zolp
------------------------------------
Carol J. Zolp
/s/ Lori Brockrogge
------------------------------------
Lori Brockrogge
/s/ Frank N. Leo
------------------------------------
Frank N. Leo
/s/ Stanley Nowak
------------------------------------
Stanley Nowak
/s/ Arjun Ramrakhyani
------------------------------------
Arjun Ramrakhyani
<PAGE> 54
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EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement is made and entered into as of
_____________ ___, 1999, by and among Cardinal Health, Inc., an Ohio corporation
("Cardinal"), Automatic Liquid Packaging, Inc., an Illinois corporation ("ALP"),
Gerhard H. Weiler (the "ALP Stockholders Representative"), Bank One Trust
Company, NA, a national banking association, as escrow agent (the "Escrow
Agent"), and the undersigned stockholders of ALP ("ALP Stockholders").
PRELIMINARY STATEMENTS:
A. Cardinal, ALP, Flower Merger Corp., an Illinois corporation
("Subcorp"), and the ALP Stockholders have entered into an Agreement and Plan of
Merger dated as of August ___, 1999 (the "Merger Agreement"), providing for,
among other things, Cardinal's acquisition of the businesses operated by ALP
through the merger of Subcorp with and into ALP, with ALP as the surviving
corporation, in accordance with the terms and conditions of the Merger
Agreement.
B. Capitalized terms used but not otherwise defined herein
shall have the respective meanings given them in the Merger Agreement.
C. Pursuant to the Merger Agreement, the ALP Stockholders are
obligated to indemnify Cardinal for certain damages.
D. To facilitate such indemnification, the Merger Agreement
provides for the deposit into escrow of a portion of the Cardinal Common Shares
otherwise to be issued to the ALP Stockholders in the Merger in order to secure
the indemnification obligations of the ALP Stockholders.
E. Cardinal and the ALP Stockholders desire to secure the
services of the Escrow Agent, and the Escrow Agent is willing to provide such
services, pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
SECTION I
APPOINTMENT OF ESCROW AGENT; RESIGNATION AND SUCCESSOR
1.1 Appointment of Escrow Agent. The Escrow Agent is hereby
appointed, and accepts its appointment and designation as, Escrow Agent pursuant
to the terms and conditions of this Agreement.
<PAGE> 55
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1.2 Resignation of Escrow Agent; Appointment of Successor. The
Escrow Agent acting at any time hereunder may resign at any time by giving at
least 30 days' prior written notice of resignation to Cardinal and the ALP
Stockholders Representative, such resignation to be effective on the date
specified in such notice. Upon receipt of such notice, Cardinal shall, unless
otherwise agreed between Cardinal and the ALP Stockholders Representative,
appoint a bank or trust company with a combined capital and surplus of at least
$100 million as successor Escrow Agent, by a written instrument delivered to
such Escrow Agent and the ALP Stockholders Representative, whereupon such
successor Escrow Agent shall succeed to all the rights and obligations of the
retiring Escrow Agent as of the effective date of resignation as if originally
named herein. Upon such assignment of this Escrow Agreement, the retiring Escrow
Agent shall duly transfer and deliver the Escrow Deposit at the time held by the
retiring Escrow Agent, provided that, if no successor Escrow Agent shall have
been appointed on the effective date of resignation of the resigning Escrow
Agent hereunder, the resigning Escrow Agent may pay the Escrow Deposit into a
court of competent jurisdiction.
SECTION II
ESCROW ARRANGEMENTS
2.1 Liability Secured by the Escrow Deposit. This Escrow
Agreement has been executed and delivered and the Escrow Account (as defined in
Section 2.2(d)) is hereby established to facilitate any indemnification which
may be owed to Cardinal pursuant to Article VIII of the Merger Agreement. The
Escrow Deposit (as defined below), including any Additional Property (as defined
below), deposited into the Escrow Account in respect of such shares (hereinafter
referred to collectively as the "Escrowed Amount"), will be available to satisfy
claims of Cardinal in accordance with Section 3.1 hereof.
2.2 Delivery of the Escrowed Shares; etc. (a) On the Closing
Date, Cardinal shall issue instructions to its transfer agent directing it to
issue and deliver to the Escrow Agent certificates bearing any appropriate
legends registered in the name of the "Escrow Agent under Escrow Agreement,
dated ____________ __, 1999, by and among Cardinal Health, Inc., an Ohio
corporation, Automatic Liquid Packaging, Inc., an Illinois corporation, ALP
Stockholders Representative, Bank One Trust Company, NA, a national banking
association, and the ALP Stockholders," for the applicable number of Cardinal
Common Shares determined in accordance with Section 2.1(d) of the Merger
Agreement (such Shares, together with any additional Cardinal Common Shares
distributed in an extraordinary dividend with respect thereof pursuant to any
stock split (or deposited with respect to any such stock split shares), and any
cash deposited into the Escrow Account pursuant to Section 2.2(b), collectively,
the "Escrowed Shares"). From time to time, Cardinal shall also deliver to the
Escrow Agent for deposit into the Escrow Account all Cardinal Common Shares
distributed pursuant to any stock dividend, reclassification of shares or other
transaction to which such shares may be subject, and any other securities, cash
or other property distributed in an extraordinary dividend with respect of the
Escrowed Shares (whether by way of liquidation, merger, exchange, spin-off or
otherwise), any investments or securities permitted by this Agreement and any
interest received thereon (collectively, the "Additional Property"). (The
Escrowed Shares, together with the Additional Property, shall constitute the
"Escrow Deposit.") From time to time, Cardinal shall also deliver to the Escrow
Agent for
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prompt distribution to the ALP Stockholders all cash dividends on the Escrowed
Shares, such distributions to be made pro rata to the ALP Stockholders in
accordance with their respective ownership as reflected on the then current
ownership Certificate (as hereinafter defined). Notwithstanding any other
provision of this Agreement to the contrary, whenever Escrowed Shares are to be
distributed pursuant to this Agreement, except for distributions made pursuant
to Section 2.2(b), there shall be distributed to the party entitled to such
Escrowed Shares, concurrently with the delivery of such Escrowed Shares, the
Additional Property relating thereto. The parties agree that all such
distributions of Additional Property and cash dividends made to the ALP
Stockholders in respect of such Escrowed Shares, including, without limitation,
all such interest and all other income earned on such shares, shall be interest
and income of the ALP Stockholders and shall be reported for federal, state and
local tax purposes as for the accounts of the ALP Stockholders, pro rata in
accordance with their respective ownership as reflected on the then current
Ownership Certificate.
(b) Subject to applicable state and federal securities laws,
each ALP Stockholder, at any time and from time to time during the term of this
Agreement, shall have the right to require the ALP Stockholders Representative
to sell up to the number of Escrowed Shares owned by such ALP Stockholder as
reflected in the Ownership Certificate, and the proceeds of any such sale shall
be deposited in and become part of the Escrow Deposit. Upon any such sale, the
Escrow Agent shall open a separate subaccount for such ALP Stockholder and the
proceeds of such sale shall be reflected on the Ownership Certificate as owned
by and allocable to such ALP Stockholder and shall be treated as Escrowed Shares
for purposes of this Agreement. As provided in Section 8.7 of the Merger
Agreement, for purposes of determining the number of Escrowed Shares which shall
be necessary to satisfy an Indemnifiable Claim against the ALP Stockholders,
each Escrowed Share is deemed to have a value equal to the last reported sale
price of Cardinal Common Shares on the New York Stock Exchange on the trading
day immediately preceding the Closing Date. Accordingly, the proceeds from the
sale of an Escrowed Share sold pursuant to this Section 2.2(b) shall be deemed
to have a value equal to the last reported sale price of a Cardinal Common Share
on the New York Stock Exchange on the trading day immediately preceding the
Closing Date. For example, if such last reported sale price on the trading day
immediately preceding the Closing is $73.00 and an Escrowed Share is sold out of
escrow for $83.00, the $83.00 in cash proceeds shall be deemed to have a value
of $73.00 for purposes of satisfying an Indemnifiable Claim. Similarly, if
Escrowed Shares are sold for $63.00, the $63.00 proceeds shall be deemed to have
a value of $73.00 in satisfying any Indemnifiable Claim. Upon receipt of the
proceeds of the sale of Escrowed Shares as described above, together with a
certified Form W-9 and such other information as the Escrow Agent may reasonably
require, the Escrow Agent shall release such Substituted Shares to the ALP
Stockholders Representative on behalf of such ALP Stockholder.
(c) On the Closing Date, the ALP Stockholders Representative
shall deliver to the Escrow Agent a written certificate setting forth the
respective ownership interests of each ALP Stockholder with respect to the
Escrowed Shares (as the same may be amended from time to time in accordance with
the next sentence, the "Ownership Certificate"). The Ownership Certificate may
be amended from time to time by written certificate executed by the ALP
Stockholders Representative and delivered to the Escrow Agent.
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(d) The Escrow Agent shall hold the Escrow Deposit in an
escrow account (the "Escrow Account") for the benefit of the ALP Stockholders
and Cardinal. The Escrow Deposit shall not be subject to any lien or attachment
of any creditor or any party thereto, and shall be used solely for the purposes
and subject to the conditions set forth in this Agreement and the Merger
Agreement.
2.3 Investment of the Escrow Deposit. Except for the sale of
the Escrowed Shares pursuant to Section 2.2(b) and the release of the Escrow
Deposit pursuant to Section 3 hereof, the Escrow Agent shall not sell or
transfer any of the Escrowed Shares. The Escrow Agent is hereby authorized and
directed to invest any cash contained in the Escrow Deposit in the following
obligations (collectively, the "Permitted Investments"):
(a) obligations of, or fully guaranteed as to timely payment
of principal and interest by, the United States of America;
(b) such money market funds as are agreed to from time to time
by Cardinal and the ALP Stockholders Representative; and
(c) certificates of deposit with any bank or trust company
organized under the laws of the United States of America or any agency or
instrumentality thereof or under the laws of any state thereof which has a
combined capital and surplus of at least $100,000,000.
Subject to the foregoing limitations, the Escrow Agent shall
invest any such cash in accordance with written instructions delivered to it by
the ALP Stockholders Representative from time to time. Except as provided above,
the Escrow Agent shall have no power or duty to invest the Escrow Deposit or to
make substitutions therefor or to sell, transfer or otherwise dispose of
investments acquired hereunder.
2.4 Right to Vote the Escrowed Shares. The ALP Stockholders
Representative, on behalf of and at the direction of the ALP Stockholders, shall
have the right to direct the Escrow Agent in a writing signed by the ALP
Stockholders Representative to exercise the voting rights pertaining to all or a
portion of the Escrowed Shares that remain in the Escrow Account. The Escrow
Agent shall comply with any such directions. In the absence of direction from an
ALP Stockholder, the Escrowed Shares allocable to such ALP Stockholder shall not
be voted.
SECTION III
RELEASE OF THE ESCROW DEPOSIT
3.1 Distributions for Indemnification. (a) At any time prior
to the earlier of (x) the date on which Cardinal's audited financial statements
for the first fiscal year ending after the Effective Time are issued and (y) the
first anniversary of the Effective Time (the "Escrow Date"), Cardinal may
deliver to the Escrow Agent (with a copy to the ALP Stockholders Representative)
a certificate (a "Notice of Claim") (i) stating that Cardinal believes that it
may be entitled to indemnification pursuant to Article VIII of the Merger
Agreement (an "Indemnification Obligation"), (ii) stating the aggregate amount
(the "Claim Amount") of such
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Indemnification Obligation (or, in the case of an unliquidated or uncertain
Indemnification Obligation, a good faith and reasonable estimate thereof), and
(iii) specifying in reasonable detail the nature of such Indemnification
Obligation. Any Notice of Claim delivered pursuant to this Section 3.1 with
respect to any unliquidated Indemnification Obligation may be supplemented by a
later Notice of Claim specifying in greater detail the applicable Claim Amount
or any other items set forth therein. Upon delivery of any such Notice of Claim,
the Escrow Agent shall, within three business days of receipt thereof, deliver a
written notice together with a copy of such Notice of Claim to the ALP
Stockholders Representative.
(b) If the ALP Stockholders Representative shall object on
behalf of the ALP Stockholders to the Indemnification Obligation or the Claim
Amount specified in such Notice of Claim, the ALP Stockholders Representative
shall, within twenty business days after delivery of the written notice
containing a copy of any such Notice of Claim, deliver to the Escrow Agent a
certificate (a "Reply Certificate") (x) specifying each such objection, and (y)
specifying in reasonable detail the nature and basis for such objection. Within
three business days after delivery to the Escrow Agent of a Reply Certificate,
the Escrow Agent shall deliver a copy of such Reply Certificate to Cardinal.
Cardinal and the ALP Stockholders Representative shall negotiate in good faith
for a period of 30 business days after delivery of such Reply Certificate to
Cardinal to reach a written resolution of any objections raised in a Reply
Certificate.
(c) If no Reply Certificate is delivered with respect to any
Notice of Claim, then the ALP Stockholders Representative shall be deemed to
have delivered a Payment Authorization (as defined below) acknowledging
Cardinal's right to receive the Claim Amount specified in such Notice of Claim
with respect to the applicable Indemnification Obligation and the Escrow Agent
shall transfer to Cardinal a portion of the Escrowed Amount in an amount equal
to such Claim Amount, all in accordance with the procedures set forth in Section
3.1(e).
(d) If the Escrow Agent receives a Reply Certificate in a
timely manner with respect to any Notice of Claim, the Claim Amount referred to
in such Notice of Claim shall be held by the Escrow Agent and shall not be
released to Cardinal except upon Cardinal's delivery to the Escrow Agent of
either (i) joint written instructions signed by an authorized officer of
Cardinal and by the ALP Stockholders Representative directing the Escrow Agent
to release the Claim Amount (or any other amount mutually agreed upon by such
parties) or (ii) a final, non-appealable judgment of the arbitrators in the
arbitration proceeding referred to in Section 8.5 of the Merger Agreement
relating to the Indemnification Obligation referred to in such Notice of Claim
demonstrating that Cardinal is entitled to indemnification for such Claim Amount
from the ALP Stockholders pursuant to the Merger Agreement (either of (i) or
(ii) being a "Payment Authorization"), at which date the portion of the amount
due to Cardinal determined pursuant to (i) or (ii) above shall promptly be paid
to Cardinal in accordance with the procedures set forth herein.
(e) As soon as practicable following receipt by the Escrow
Agent of a Payment Authorization, the Escrow Agent shall pay from the Escrowed
Amount to Cardinal as follows, in the following order of priority, to the extent
required to make such payment:
First, the Escrow Agent shall transfer, deliver and assign to
Cardinal such number of Escrowed Shares (excluding cash
constituting Escrowed Shares
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pursuant to Section 2.2(b)) (rounded up or down to the nearest
whole share in the case of the Escrowed Shares that are not
cash) as shall have a value equal to the amount required to
make or complete such payment, it being understood and agreed
that such non-cash Escrowed Shares shall be valued for such
purpose as set forth in Section 8.7 of the Merger Agreement,
together with the Additional Property related thereto;
Second, to the extent of any insufficiency, the Escrow Agent
shall utilize any cash not part of the Escrowed Shares
included in the Escrowed Amount then held in the Escrow
Deposit; and
Third, to the extent of any insufficiency, the Escrow Agent
shall sell securities or investments included in the Escrowed
Amount, other than the Escrowed Shares, then held in the
Escrow Deposit for cash and utilize such cash to make up such
insufficiency.
To the extent the Escrowed Shares allocable to any ALP Stockholder consist of
Cardinal Common Shares and cash pursuant to Section 2.2(b), any delivery of
Escrowed Shares pursuant to this Section 3.1(e) shall consist first of Cardinal
Common Shares and then, if necessary, cash valued as provided in Section 2.2(b).
To the extent the Escrow Agent is required to transfer, deliver and assign to
Cardinal any Escrowed Shares included in the Escrowed Amount, Cardinal shall
assist and cooperate in a reasonable manner with the Escrow Agent to facilitate
such transfer, delivery and assignment. In the event the Escrowed Amount shall
be insufficient to pay the amount expressly set forth in such Payment
Authorization, the Escrow Agent shall deliver to Cardinal the entire remaining
Escrowed Amount and then deliver to Cardinal and to the ALP Stockholders
Representative a written notification setting forth the amount by which such
Payment Authorization exceeds the amount of the Escrowed Amount so paid.
(f) To the extent that any payment pursuant to Section 3.1(e)
hereof shall be made in cash, the Escrow Agent shall pay all such amount to
Cardinal by wire transfer to the bank account or accounts designated by Cardinal
to the Escrow Agent in writing not less than one business day prior to the date
of such payment.
(g) Notwithstanding anything to the contrary in this
Agreement, in no event shall Cardinal be entitled to receive any amounts from
the Escrow Deposit in excess of the amount of the Escrowed Amount.
3.2 Release upon the Escrow Date. (a) On the Escrow Date, the
Escrow Agent shall distribute the Escrow Deposit to the ALP Stockholders and
shall terminate the Escrow Account, unless (i) the Escrow Agent shall have
received a Notice of Claim from Cardinal prior to the Escrow Date with respect
to an indemnification claim (an "Unresolved Claim") for which the Escrow Agent
has not received a subsequent Payment Authorization or written notification
signed by Cardinal and the ALP Stockholder's Representative, informing the
Escrow Agent of the termination or other resolution of such claim or claims
(each, a "Claim Termination Notice"). If on the Escrow Date there shall exist
any Unresolved Claim, then (i) the Escrow Agent shall retain the Escrow Deposit
in the Escrow Account in an amount sufficient for the payment of all Claim
Amounts with respect to all such Unresolved Claims (but not in excess of the
remainder of
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the Escrowed Amount), and (ii) the Escrow Agent shall release to the ALP
Stockholders the portion of the Escrow Deposit in the Escrow Account not
otherwise retained in accordance with clause (i). For all purposes of this
Section 3.2(a), the Escrowed Shares (other than the cash which may be a part
thereof) shall be valued as set forth in Section 8.7 of the Merger Agreement.
(b) Upon the resolution of any Unresolved Claim, the Escrow
Agent shall (A) release any portion of the Escrow Deposit retained in respect of
such Unresolved Claim (x) to Cardinal in accordance with any Payment
Authorization received by the Escrow Agent in respect of such Unresolved Claim
or (y) to the ALP Stockholders in accordance with any Claim Termination Notice
received by the Escrow Agent in respect of such Unresolved Claim and, if no
other Unresolved Claims remain outstanding, (B) release the remainder of the
Escrow Deposit to the ALP Stockholders. For purposes of this Section 3.2(b), the
Escrowed Shares shall be valued as set forth in Section 8.7 of the Merger
Agreement.
(c) Any distribution to the ALP Stockholders pursuant to this
Section 3.2 shall be made by the Escrow Agent to the ALP Stockholders based on
their respective interests in the Escrowed Shares and the cash and other
investments constituting the Escrow Deposit (as reflected in the then most
recent version of the Ownership Certificate), subject to any written
instructions of the ALP Stockholders Representative (including, without
limitation, any instructions as to the liquidation of the Escrow Account
(including instructions to sell a number of Escrowed Shares necessary to permit
the payment of cash in lieu of fractional Cardinal Common Shares) and/or the
transfer of the Escrowed Shares to the transfer agent of Cardinal). No
certificate for fractional Cardinal Common Shares shall be distributed to ALP
Stockholders. The Escrow Agent shall sign such stock powers or other documents
of transfer as are necessary to transfer any remaining Escrowed Shares included
within the Escrow Deposit in accordance with such instructions (the "Released
Shares").
SECTION IV
ESCROW AGENT
4.1 Fees. For its services hereunder, the Escrow Agent shall
receive (i) $1,250 upon its receipt of the Escrow Deposit at the Closing (which
shall constitute the fee for initiating the transaction and the fee for the
first year of the Agreement), (ii) commencing on the first anniversary of the
date hereof and then annually thereafter, $2,500 for each calendar year until it
has delivered all of the Escrow Deposit pursuant to Section III (prorated for
partial years), and (iii) the transaction fees set forth on Schedule 1 attached
hereto. The Escrow Agent shall be reimbursed for all reasonable out-of-pocket
expenses incurred by the Escrow Agent necessary to perform such services (other
than taxes imposed in respect of the receipt of the fees referred to in the
preceding sentence). The fees, expenses and reimbursements referred to in the
foregoing two sentences shall be paid by Cardinal.
4.2 Responsibilities of Escrow Agent. The Escrow Agent's
acceptance of its duties under this Agreement is subject to the following terms
and conditions, which the parties hereto agree shall govern and control with
respect to its rights, duties, liabilities and immunities:
-7-
<PAGE> 61
(a) Except as to its due execution and delivery of the
Agreement, it makes no representation and has no responsibility as to the
validity of this Agreement or of any other instrument referred to herein, or as
to the correctness of any statement contained herein, and it shall not be
required to inquire as to the performance of any obligation under the Merger
Agreement.
(b) The Escrow Agent shall be protected in acting upon any
written notice, request, waiver, consent, receipt or other paper or document,
not only as to its due execution and the validity and effectiveness of its
provisions, but also as to the truth of any information therein contained, which
it in good faith believes to be genuine and what it purports to be.
(c) The Escrow Agent shall not be liable for any error of
judgment, or for any act done or step taken or omitted by it in good faith, or
for any mistake of fact or law, or for anything which it may do or refrain from
doing in connection therewith, except its own gross negligence or misconduct.
(d) The Escrow Agent may consult with competent and
responsible legal counsel selected by it, and it shall not be liable for any
action taken or omitted by it in good faith in accordance with the advice of
such counsel.
(e) The Escrow Agent shall have no discretion whatsoever with
respect to the management, disposition or investment of the Escrow Account and
is not a trustee or fiduciary to Cardinal or the ALP Stockholders. Cardinal and
the ALP Stockholders Representative acknowledge and agree that all investments
made pursuant to this section shall be for the account and risk of Cardinal and
the ALP Stockholders and any losses associated with investments shall be borne
solely by Cardinal and the ALP Stockholders.
(f) Cardinal and the ALP Stockholders agree to jointly and
severally indemnify and hold the Escrow Agent and its directors, employees,
officers, agents, successors and assigns (collectively, the "Indemnified
Parties") harmless from and against any and all losses, claims, damages,
liabilities and expenses (collectively, "Damages"), including, without
limitation, reasonable costs of investigation and counsel fees and expenses
which may be imposed on the Escrow Agent or incurred by it in connection with
its acceptance of this appointment as the Escrow Agent hereunder or the
performance of its duties hereunder. Such indemnity includes, without
limitation, Damages incurred in connection with any litigation (whether at the
trial or appellate levels) arising from this Escrow Agreement or involving the
subject matter hereof. The indemnification provisions contained in this
paragraph are in addition to any other rights any of the Indemnified Parties may
have by law or otherwise and shall survive the termination of this Agreement or
the resignation or removal of the Escrow Agent. Notwithstanding any provision to
the contrary in this Escrow Agreement, Cardinal and the ALP Stockholders shall
have no liability to the Indemnified Parties with respect to any Damages that
result, directly or indirectly, from the gross negligence or misconduct of the
Escrow Agent. Any obligation of the ALP Stockholders pursuant to this Section
shall be satisfied only by the deduction from the Escrow Deposit by the ALP
Stockholders Representative of the amount of such obligations.
-8-
<PAGE> 62
FINAL
(g) The Escrow Agent shall have no duties or responsibilities
except those expressly set forth herein, and it shall not be bound by any
modification of this Agreement unless in writing and signed by all parties
hereto or their respective successors in interest.
(h) The Escrow Agent shall have no responsibility in respect
of the validity or sufficiency of this Escrow Agreement or of the terms hereof.
The recitals of facts in this Escrow Agreement shall be taken as the statements
of Cardinal and the ALP Stockholders, and the Escrow Agent assumes no
responsibility for the correctness of the same.
(i) The Escrow Agent shall be protected in acting upon any
notice, resolution, request, consent, order, certificate, report, opinion, bond
or other paper or document reasonably believed by it to be genuine and to have
been signed and presented by the proper party or parties. Whenever the Escrow
Agent shall deem it necessary or desirable that a matter be proved or
established prior to taking or suffering any action under this Escrow Agreement,
such matter may be deemed conclusively proved and established by a certificate
signed by Cardinal and the ALP Stockholders Representative (on behalf of the ALP
Stockholders), and such certificate shall be full warranty for any action taken
or suffered in good faith under the provisions of this Escrow Agreement.
(j) In the event of a dispute between the parties hereto
sufficient in the discretion of Escrow Agent to justify its doing so, Escrow
Agent shall be entitled at the expense of the Escrow Deposit to tender the
Escrow Deposit into the registry or custody of any court of competent
jurisdiction, to initiate such legal proceedings at the expense of the Escrow
Deposit as it deems appropriate, and thereupon to be discharged from all further
duties and liabilities under this Agreement. Any such legal action may be
brought in any such court as Escrow Agent shall determine to have jurisdiction
over the Escrow Deposit. The filing of any such legal proceedings shall not
deprive Escrow Agent of its compensation hereunder earned prior to such filing.
(k) Except as specifically set forth above, the Escrow Agent
does not have any interest in the Escrow Deposit but is serving as escrow agent
only and having only possession thereof. This Section 4.2(k) shall survive
notwithstanding any termination of this Agreement or the resignation of the
Escrow Agent.
SECTION V
CERTAIN TRANSACTIONS
5.1 Merger and Other Exchange Transactions. In the event of
any consolidation or merger of Cardinal with or into any other corporation or in
the event of any other transaction upon which the holders of Cardinal Common
Shares are entitled to receive cash, shares of stock, securities or other
property in exchange for their Cardinal Common Shares, the Escrow Agent, if and
to the extent directed to do so by Cardinal, shall present such Escrowed Shares
which are Cardinal Common Shares for such exchange, conversion or otherwise. Any
such cash, shares of stock, securities or other property received from such
exchange, conversion or otherwise shall be deposited in the Escrow Account and
shall be disbursed in accordance with the terms of this Escrow Agreement to
Cardinal and/or the ALP Stockholders entitled thereto.
-9-
<PAGE> 63
FINAL
5.2 Merger, etc. of Cardinal. Nothing contained in this Escrow
Agreement shall prevent any merger, liquidation or consolidation of Cardinal
with or into another corporation or corporations, or successive consolidations
or mergers in which Cardinal or its successor or successors shall be a party or
parties, or any sale or other conveyance of all or substantially all of the
property of Cardinal to another corporation.
SECTION VI
MISCELLANEOUS
6.1 ALP Stockholders Representative. The ALP Stockholders, by
executing this Agreement, hereby irrevocably appoint the ALP Stockholders
Representative to act on behalf of the ALP Stockholders with respect to all
matters relating to this Agreement and Article VIII of the Merger Agreement,
including without limitation, in considering and certifying the amount of any
indemnification hereunder, in communicating with the ALP Stockholders, in
appointing a successor Escrow Agent hereunder, in considering and acting with
respect to any amendment or termination of this Agreement, and generally in
performing all acts expressly required or permitted to be performed by the ALP
Stockholders Representative pursuant hereto and pursuant to the Merger
Agreement. Cardinal and the Escrow Agent shall have the right to deal
exclusively with the ALP Stockholders Representative with respect to all matters
under this Agreement and neither Cardinal nor the Escrow Agent shall have any
liability to any ALP Stockholders for any acts or omissions of the ALP
Stockholders Representative, or any acts or omissions taken or not taken by
Cardinal or the Escrow Agent at the direction of the ALP Stockholders
Representative, including, but not limited to (i) any acts or omissions relating
to the voting of any Escrowed Shares or (ii) the transferring of or the failure
to transfer any shares or funds released from escrow. Upon any distribution of
Escrowed Shares or other funds to the ALP Stockholders Representative (or to one
or more of the ALP Stockholders upon written instruction of the ALP Stockholders
Representative) in accordance with this Agreement, the Escrow Agent and Cardinal
shall be deemed to have fully satisfied any and all obligations to the ALP
Stockholders under this Agreement and the Merger Agreement with respect to the
amount of such distribution. The ALP Stockholders Representative agrees to vote
the Escrowed Shares based on the directions or instructions of the ALP
Stockholders based on their respective ownership interests in the Escrowed
Shares reflected in the most recent Ownership Certificate.
6.2 Amendment and Termination. This Agreement may be amended
or terminated by the written agreement of the parties hereto, or shall terminate
automatically at such time as all securities and funds from the Escrow Deposit
have been paid or distributed in accordance with the terms of this Agreement and
the Escrow Agent has received all fees as described in Section 4.1 hereto.
Notwithstanding the foregoing, all provisions concerning the indemnification of
the Escrow Agent shall survive any termination of this Agreement.
6.3 Notices. All notices, requests, demands, letters, waivers
and other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed, certified or registered mail with postage prepaid, (c)
sent by next-day or overnight mail or delivery or (d) sent by fax, as follows:
-10-
<PAGE> 64
FINAL
To ALP:
Automatic Liquid Packaging, Inc.
2200 Lake Shore Drive
Woodstock, Illinois 60098
Attention: Gerhard H. Weiler
Telecopy No.:________________
With a copy to:
Stuart Duhl, Esq.
Schwartz & Freeman
401 North Michigan Avenue, Suite 1900
Chicago, Illinois 60611
Telecopy No.: (312) 222-0818
To Cardinal:
Cardinal Health, Inc.
7000 Cardinal Place
Dublin, Ohio 43017
Attention: General Counsel
Telecopy No.: (614) 757-6948
With a copy to:
John M. Gherlein, Esq.
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3485
Telecopy No.: (216) 696-0740
To the Escrow Agent:
Bank One Trust Company, NA
Corporate Trust Department
100 East Broad Street, OH1-0181
Columbus, Ohio 43271-0181
Attention: Michael Dockman
Telecopy No.: (614) 248-5195
-11-
<PAGE> 65
FINAL
To the ALP Stockholders Representative:
___________________________________
___________________________________
___________________________________
Attention:_________________________
Telecopy No.:______________________
or to such other Person or address as any party shall specify by notice in
writing to the party entitled to notice. All such notices, requests, demands,
letters, waivers and other communications shall be deemed to have been received
(w) if by personal delivery on the day after such delivery, (x) if by certified
or registered mail, on the fifth Business Day after the mailing thereof, (y) if
by next-day or overnight mail or delivery, on the day delivered or (z) if by
fax, on the next day following the day on which such fax was sent, provided that
a copy is also sent by certified, registered or overnight mail.
6.4 Governing Law. This Agreement shall be construed,
performed and enforced in accordance with the laws of the State of Ohio.
6.5 Miscellaneous. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. The
headings in this Agreement are for convenience of reference only and shall not
define or limit the provisions hereof. This Agreement may be executed in several
counterparts, each of which is an original but all of which together shall
constitute one instrument.
-12-
<PAGE> 66
[Signature page to Escrow Agreement.]
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
CARDINAL HEALTH, INC.
By: _____________________________________
Name: _______________________________
Title: ______________________________
FLOWER MERGER CORP.
By: _____________________________________
Name: _______________________________
Title: ______________________________
AUTOMATIC LIQUID PACKAGING, INC.
By: _____________________________________
Name: _______________________________
Title: ______________________________
BANK ONE TRUST COMPANY, NA
By: _____________________________________
Name: _______________________________
Title: ______________________________
THE ALP STOCKHOLDERS
__________________________________________
Gerhard H. Weiler, as the ALP Stockholders
Representative and as Trustee of the
Gerhard H. Weiler Dec. of Trust dated
9/3/93
-13-
<PAGE> 67
[Signature page to Escrow Agreement.]
__________________________________________
Patricia Weiler
__________________________________________
Lisa Hoffman
__________________________________________
Amy Weiler
__________________________________________
Siegfried Weiler
__________________________________________
Ruth Weiler
__________________________________________
Kurt A. Weiler, individually and as
Trustee of the Kurt A. Weiler Gift Trust
__________________________________________
Anita W. Reiche, individually and as
Trustee of the Anita W. Reiche Gift Trust
__________________________________________
Carol J. Zolp
__________________________________________
Lori Brockrogge
__________________________________________
Frank N. Leo
__________________________________________
Stanley Nowak
-14-
<PAGE> 68
[Signature page to Escrow Agreement.]
__________________________________________
Arjun Ramrakhyan
-15-
<PAGE> 69
SCHEDULE 1
ESCROW AGENT FEES AND EXPENSES
Acceptance Fee: $1,250
Administrative Fee: $2,500 per year
Transaction Fees: $ 20 per deposit
$ 25 per wire transfer
$ 10 per check
Sub-Account: $ 250 per sub-account
(if applicable)
Tax Reporting fee: $ 250 per year (if applicable)
Extraordinary Fee: $ 150 per hour; minimum
increments of one hour.
Out-of-Pocket Expenses: Pass-through
The fees quoted in this schedule apply to services ordinarily rendered in
administering an escrow account and are subject to reasonable adjustment when
the Escrow Agent is called upon to undertake unusual duties or as changes in the
law, procedures or the cost of doing business demand. The extraordinary fee rate
in effect ($150/hour) will apply at the time services are provided.
Unless otherwise agreed upon, the Acceptance Fee and the first year
Administration Fee are payable upon the execution of the Agreement whether or
not the escrow account is funded. In the event the escrow is not funded, the
Acceptance Fee and all related expenses will not be refunded. Annual
Administration fees cover a full year in advance, or any part thereof, and thus
are nor pro-rated in the year of termination.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.03
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.03
<TEXT>
<PAGE> 1
Exhibit 10.03
CARDINAL HEALTH, INC.
AMENDED AND RESTATED
EQUITY INCENTIVE PLAN
SECTION 1 | PURPOSE
The purpose of the Cardinal Health, Inc. Equity Incentive Plan (the "Plan") is
to assist Cardinal Health, Inc. ("CAH") and its subsidiaries (CAH and its
subsidiaries, collectively, the "Company") in attracting and retaining capable
employees and directors. The Plan provides for long and short term incentives to
employees by encouraging and enabling them to participate in the Company's
future prosperity and growth. The Plan provides for equity ownership
opportunities and appropriate incentives to better match the interests of
employees and directors with those of shareholders.
These objectives will be promoted through the granting to employees of
equity-based awards (the "awards") in consideration for services to be rendered
after the grants. The types of awards will include (i) Incentive Stock Options
("ISOs"), which are intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) options which are not
intended to so qualify ("NQSOs") (ISOs and NQSOs are referred to together
hereinafter as "Stock Options"); (iii) Restricted Shares; (iv) Performance
Shares; (v) Performance Share Units and (vi) Incentive Compensation Restricted
Shares. Members of CAH's Board of Directors (the "Board") who do not serve as
employees of the Company ("Outside Directors") shall receive NQSOs from the Plan
only as provided herein.
SECTION 2 | ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee (the
"Committee") of the Board which shall have the power and authority to grant to
eligible employees Stock Options, Restricted Shares, Performance Shares,
Performance Share Units and Incentive Compensation Restricted Shares. In
particular, the Committee shall have the authority to: (i) select employees of
the Company as recipients of awards; (ii) determine the number and type of
awards to be granted; (iii) determine the terms and conditions, not inconsistent
with the terms hereof, of any award; (iv) adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; (v) interpret the terms and provisions of the
Plan and any award granted and any agreements relating thereto; and (vi) take
any other actions the Committee considers appropriate in connection with, and
otherwise supervise the administration of, the Plan. All decisions made by the
Committee pursuant to the provisions hereof shall be made in the Committee's
sole discretion and shall be final and binding on all persons.
The Committee may designate persons other than its members to carry out its
responsibilities under such conditions and limitations as it may set, except to
the extent that such delegation is prohibited by law or would cause an award
intended to be exempt
<PAGE> 2
from the limitation on deductibility under Section 162(m) of the Code, or from
the short-swing profit recovery rules of Section 16(b) of the Exchange Act, to
fail to be so exempt.
SECTION 3 | ELIGIBILITY
Employees of the Company and its subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and/or subsidiary, in each case as determined by the Committee, are
eligible to be granted awards. The participants under the Plan who are not
Outside Directors shall be selected from time to time by the Committee, in its
sole discretion, from among those eligible. In addition, Outside Directors are
eligible to receive NQSOs as set forth in Section 9 ("Outside Director
Options"), and may not receive any other awards under this Plan. Members of the
Committee are eligible to receive Outside Director Options.
SECTION 4 | SHARES SUBJECT TO PLAN
The total number of the Company's common shares, without par value ("Shares"),
reserved and available for distribution pursuant to awards (including without
limitation Outside Director Options) hereunder ("Available Shares") shall be an
amount equal to the sum of (a) 1.5% of the total outstanding Shares as of the
last day of the Company's immediately preceding fiscal year, plus (b) the number
of Shares available for grant under the Plan as of November 23, 1998, plus (c)
any Shares related to awards that, in whole or in part, expire or are
unexercised, forfeited, terminated, surrendered, canceled, settled in such a
manner that all or some of the Shares covered by an award are not issued to a
participant, or returned to the Company in payment of the exercise price or tax
withholding obligations in connection with outstanding awards, plus (d) any
unused portion of the Shares available under section (a) above for the
immediately preceding two fiscal years (but not prior to the Company's fiscal
year ending June 30, 1999) as a result of not being made subject to a grant or
award in such preceding two fiscal years. Notwithstanding the foregoing, for the
Company's fiscal year ending June 30, 1999, the number of total outstanding
Shares in section (a), above, shall be calculated as of November 23, 1998,
rather than June 30, 1998 (the last day of the immediately preceding fiscal
year). No more than fifty(50)% of the Available Shares shall be granted in the
form of Restricted Shares, Incentive Compensation Restricted Shares, Performance
Shares and Performance Share Units. The Available Shares may consist, in whole
or in part, of authorized but unissued Shares, treasury Shares, or previously
issued Shares re-acquired by the Company, including Shares purchased on the open
market. The maximum number of Shares with respect to which Stock Options,
Performance Shares and Performance Share Units may be granted to any single
participant during any single fiscal year of the Company shall be 375,000
Shares. The number of Shares with respect to which ISOs may be granted shall not
exceed 3,000,000. Any of the Shares delivered upon the assumption of or in
substitution for outstanding grants made by a company or division acquired by
the Company shall not decrease the number of Shares available for grant under
the Plan, except to the extent otherwise provided by applicable law or
regulation.
2
<PAGE> 3
In the event of any stock dividend, stock split, share combination, corporate
separation or division (including, but not limited to, split-up, spin-off,
split-off or distribution to CAH shareholders other than a normal cash
dividend), or partial or complete liquidation, or any other corporate
transaction or event having any effect similar to any of the foregoing, then the
aggregate number of Shares reserved for issuance under the Plan, the limitation
on the number of Shares available under the Plan for issuance of Restricted
Shares, Incentive Compensation Restricted Shares, Performance Shares and
Performance Share Units, the limitation on the number of Shares subject to ISOs,
the limitations on the number of Shares subject to Stock Options or Performance
Shares or Performance Share Units granted to any single participant, the number
and exercise price of Shares subject to outstanding Stock Options, the purchase
price for Restricted Shares, the financial Performance Goals, if any, of the
Shares the subject of a Performance Share or Performance Share Unit award, the
number of Shares subject to a Performance Share or Performance Share Unit award
or granted by a Restricted Share or Incentive Compensation Restricted Share
award, and any other characteristics or terms of the awards or Plan limitations
as the Committee shall deem necessary or appropriate to reflect equitably the
effects of such changes, shall be appropriately substituted for new shares or
adjusted, as determined by the Committee in its discretion. Any such adjustments
made to NQSOs shall also be made to Outside Director Options.
If any recapitalization, reorganization, reclassification, consolidation, merger
of CAH or the Company or any sale of all or substantially all of CAH's or the
Company's assets to another person or entity or other transaction which is
effected in such a way that holders of Shares are entitled to receive (either
directly or upon subsequent liquidation) stock, securities, or assets with
respect to or in exchange for Shares (each an "Organic Change") shall occur, in
lieu of the Shares issuable upon exercise of a Stock Option or Outside Director
Option or pursuant to any other award under the Plan, the Stock Option or
Outside Director Option shall thereafter be exercisable for and other awards
shall be issuable in such shares of stock, securities or assets (including cash)
as may be issued or payable with respect to or in exchange for the number of
Shares immediately theretofore acquirable pursuant to such award had such
Organic Change not taken place (whether or not such Stock Option or Outside
Director Option is then exercisable or other awards are then vested) after
giving effect to any adjustments otherwise required or permitted under this
Plan.
SECTION 5 | STOCK OPTIONS
References to Stock Options in this Section 5 shall not apply to Outside
Director Options. Stock Options may be granted alone or in addition to other
awards granted under the Plan. Any Stock Options granted under the Plan shall be
in such form as the Committee may from time to time approve and the provisions
of Stock Option awards need not be the same with respect to each optionee. Stock
Options granted under the Plan may be either ISOs or NQSOs. The Committee may
grant to any optionee ISOs, NQSOs or both types of Stock Options.
3
<PAGE> 4
Anything in the Plan to the contrary notwithstanding, without the consent of the
optionee(s) affected, no provision of this Plan relating to ISOs shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code or to disqualify any ISO under such Section 422.
Stock Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions not
inconsistent with the terms of the Plan as the Committee deems appropriate. Each
Stock Option grant shall be evidenced by an agreement executed on behalf of the
Company by an officer designated by the Committee and accepted by the optionee.
Such agreement shall describe the Stock Options and state that such Stock
Options are subject to all the terms and provisions of the Plan and shall
contain such other terms and provisions, not inconsistent with the Plan, as the
Committee may approve.
(a) Exercise Price. The exercise price per Share issuable upon exercise of a
Stock Option shall be no less than the fair market value per share on the date
the Stock Option is granted; provided, that if the optionee, at the time an ISO
is granted, owns stock possessing more than ten (10)% of the total combined
voting power of all classes of stock of CAH or any subsidiary, the exercise
price shall be at least 110% of the fair market value of the Shares subject to
the ISO on the date of grant. Fair market value on the date of grant shall be
determined by the Committee in good faith.
(b) Option Term. The term of each Stock Option shall be fixed by the Committee,
but no Stock Option shall be exercisable more than ten years after the date such
Stock Option is granted.
(c) Exercise of Stock Options. Stock Options shall become exercisable at such
time or times and subject to such terms and conditions (including, without
limitation, installment or cliff exercise provisions) as shall be determined by
the Committee. The Committee shall have the authority, in its discretion, to
accelerate the time at which a Stock Option shall be exercisable whenever it may
determine that such action is appropriate by reason of changes in applicable tax
or other law or other changes in circumstances occurring after the award of such
Stock Options.
(d) Method of Exercise. Stock Options may be exercised in whole or in part by
giving written notice of exercise to the Company specifying the number of Shares
to be purchased. Payment in full of the exercise price shall be paid in cash, or
such other instrument as may be permitted in accordance with rules or procedures
adopted by the Committee. If approved by the Committee, payment in full or in
part may also be made: (i) by delivering Shares already owned by the optionee
having a total fair market value on the date of such delivery equal to the
option exercise price; (ii) by attestation of ownership of such already-owned
Shares in such form as the Committee may prescribe; (iii) by the delivery of
cash on the extension of credit by a broker-dealer to whom the optionee has
submitted a notice of exercise or an irrevocable election to effect such
extension of credit;
4
<PAGE> 5
or (iv) by any combination of the foregoing. No Shares shall be transferred
until full payment therefor has been made.
(e) Transferability of Stock Options. Except as otherwise provided hereunder,
Stock Options shall be transferable by the optionee only with prior approval of
the Committee and only in compliance with the restrictions imposed under Section
422 of the Code, if applicable. Any attempted transfer without Committee
approval shall be null and void. Unless Committee approval of the transfer shall
have been obtained, all Stock Options shall be exercisable during the optionee's
lifetime only by the optionee or the optionee's legal representative. Without
limiting the generality of the foregoing, the Committee may, in the manner
established by the Committee, provide for the irrevocable transfer, without
payment of consideration, of any Stock Option other than any ISO by an optionee
to a member of the optionee's family or to a family entity. In such case, the
Stock Option shall be exercisable only by such transferee. For purposes of this
provision: (i) an optionee's "family" shall include the optionee's child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse,
sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including through adoptive
relationships, and any person sharing the optionee's household (other than a
tenant or employee); (ii) a "family entity" shall include a trust in which the
foregoing persons have more than fifty percent of the beneficial interest, a
foundation in which the foregoing persons (or the optionee) control the
management of assets, and any other entity in which the foregoing persons (or
the optionee) own more than fifty percent of the voting interests; and (iii)
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 family members (or the optionee) in exchange
for an interest in that entity shall be considered to be a transfer for
consideration.
(f) Termination by Death. If an optionee's employment by or service to the
Company terminates by reason of death, then, unless otherwise determined by the
Committee within sixty days of such death, each Stock Option held by such
optionee shall be exercisable in full from and after, and any unvested portion
thereof shall vest upon, the sixtieth day after such death. Each Stock Option
held by such optionee may thereafter be exercised by the legal representative of
the estate or by the legatee of the optionee under the will of the optionee, for
a period of one year (or such other period as the Committee may specify at or
after grant or death) from the date of death or until the expiration of the
stated term of such Stock Option, whichever period is shorter.
(g) Termination by Reason of Retirement. If an optionee's employment by or
service to the Company terminates by reason of retirement, then, unless
otherwise determined by the Committee within sixty days of such retirement, any
unexercised portion of the Stock Option will vest in accordance with its terms,
and may thereafter be exercised until the earlier of (the "Exercise Period") the
fifth anniversary of the date of such retirement or the expiration of the stated
term of the Stock Option; PROVIDED, that any vesting that would otherwise occur
during the sixty-day period beginning immediately after such retirement shall
not occur until the end of such sixty-day period; and PROVIDED, further, that if
the optionee has at least fifteen years of service with the Company at the time
of retirement,
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the Exercise Period shall last until the expiration of the stated term of the
Option. Notwithstanding the foregoing, if the optionee dies after retirement but
before the expiration of the Exercise Period, unless otherwise determined by the
Committee within 60 days of such death, any unexercised portion of the Stock
Option shall be exercisable in full, and any unvested portion thereof shall vest
upon, and the Stock Option may be exercised from and after, the sixtieth day
after such death, for a period of one year (or such other period as the
Committee may specify at or after grant or death) from the date of death or
until the expiration of the Exercise Period, whichever period is shorter. In the
event of termination of employment by reason of retirement, if an ISO is
exercised after the expiration of the exercise periods that apply for purposes
of Section 422 of the Code, such ISO shall thereafter be treated as an NQSO. For
purposes of the Plan, unless otherwise determined by the Committee within the
parameters set forth below, retirement shall mean voluntary termination of
employment by a participant from the Company after attaining age fifty-five (55)
and having (i) at least ten (10) years of service with the Company, including
service with a subsidiary of the Company prior to the time that such subsidiary
became a subsidiary of the Company, and (ii) at least five years of continuous
service with the Company, excluding service with a subsidiary of the Company
prior to the time that such subsidiary became a subsidiary of the Company. The
Committee discretion described above shall in no event result in a definition of
retirement that is more beneficial to the participant than voluntary termination
of employment from the Company after attaining age fifty-five (55) and having at
least three (3) years of service with the Company.
(h) Other Termination of Employment. If an optionee's employment by or service
to the Company terminates for any reason other than death or retirement, any
Stock Option held by such optionee which has not vested on such date of
termination will automatically terminate on the date of such termination. Unless
otherwise determined by the Committee at or after grant or termination, the
optionee (or a transferee) will have ninety(90) days (or such other period as
the Committee may specify at or after grant or termination) from the date of
termination to exercise any and all Stock Options that are then exercisable on
the date of termination; provided, however, that if the termination was for
Cause, any and all Stock Options held by that optionee may be immediately
canceled by the Committee. For purposes of the Plan, "Cause" means on account of
any act of fraud or intentional misrepresentation or embezzlement,
misappropriation or conversion of assets of the Company or any subsidiary, or
the intentional and repeated violation of the written policies or procedures of
the Company.
(i) Effect of Termination of Optionee on Transferee. Except as otherwise
permitted by the Committee in its absolute discretion, no Stock Option held by a
transferee of an optionee pursuant to the fourth sentence of Section 5(e) shall
remain exercisable for any period of time longer than would otherwise be
permitted under Sections 5(f), 5(g) or 5(h) without specification of other
periods by the Committee as provided in those Sections.
(j) ISO Limitations. To the extent required for "incentive stock option" status
under Section 422 of the Code, the aggregate fair market value (determined as of
the time of grant) of the Shares with respect to which ISOs are exercisable for
the first time by the
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optionee during any calendar year under the Plan and any other stock option plan
of the Company and its affiliates, shall not exceed $100,000.
SECTION 6 | RESTRICTED SHARES
Restricted Shares may be granted alone or in addition to other awards granted
under the Plan. Any Restricted Shares granted under the Plan shall be subject to
the following restrictions and conditions, and shall contain such additional
terms and conditions not inconsistent with the terms of the Plan as the
Committee deems appropriate. The provisions of Restricted Share awards need not
be the same with respect to each recipient.
(a) Price. The purchase price for Restricted Shares shall be any price set by
the Committee and may be zero. Payment in full of the purchase price, if any,
shall be made in cash, or such other instrument as may be permitted in
accordance with rules or procedures adopted by the Committee. If approved by the
Committee, payment in full or part may also be made: (i) by delivering Shares
already owned by the grantee having a total fair market value on the date of
such delivery equal to the Restricted Share price; (ii) by the delivery of cash
on the extension of credit by a broker-dealer or an irrevocable election to
effect such extension of credit; or (iii) by any combination of the foregoing.
(b) Restricted Share Award Agreement. Each Restricted Share grant shall be
evidenced by an agreement executed on behalf of the Company by an officer
designated by the Committee. Such Restricted Share Award Agreement shall
describe the Restricted Shares and state that such Restricted Shares are subject
to all the terms and provisions of the Plan and shall contain such other terms
and provisions, consistent with the Plan, as the Committee may approve. At the
time the Restricted Shares are awarded, the Committee may determine that such
Shares shall, after vesting, be further restricted as to transferability or be
subject to repurchase by the Company upon occurrence of certain events
determined by the Committee, in its sole discretion, and specified in the
Restricted Share Award Agreement. Awards of Restricted Shares must be accepted
by a grantee thereof within a period of thirty(30) days (or such other period as
the Committee may specify at grant) after the award date by executing the
Restricted Share Award Agreement and paying the price, if any, required under
Section 6(a).The prospective recipient of a Restricted Share award shall not
have any rights with respect to such award, unless and until such recipient has
executed an agreement evidencing the award and has delivered a fully executed
copy thereof to the Company, and has otherwise complied with the applicable
terms and conditions of such award.
(c) Share Restrictions. Subject to the provisions of this Plan and the
applicable Restricted Share Award Agreement, during a period set by the
Committee commencing with the date of such award and ending on such date as
determined by the Committee at grant (the "Restriction Period"), the participant
shall not be permitted to sell, transfer, pledge, assign or otherwise encumber
shares of Restricted Shares awarded under the Plan. In no event shall more than
ten(10)% of the Shares authorized for issuance under this Plan (as adjusted as
provided in Section 4) be granted in the form of Restricted Shares having a
restriction period of less than three(3) years. The Committee shall have the
authority, in its
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absolute discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect to any Restricted Shares or to remove any
or all restrictions after the grant of such Restricted Shares, provided,
however, that such discretion shall be exercised subject to the limitations set
forth in the preceding sentence, excluding discretion exercised in connection
with a Grantee's termination of employment from the Company. Unless otherwise
determined by the Committee at or after grant or termination, if a participant's
employment by or service to the Company terminates during the Restriction
Period, all Restricted Shares held by such participant still subject to
restriction shall be forfeited by the participant.
(d) Stock Certificate and Legends. Each participant receiving a Restricted Share
award shall be issued a stock certificate in respect of such Restricted Shares.
Such certificate shall be registered in the name of such participant. The
Committee may require that the stock certificates evidencing such shares be held
in custody by the Company until the restrictions thereon shall have lapsed, and
that, as a condition of any Restricted Shares award, the participant shall have
delivered a stock power, endorsed in blank, relating to the Shares covered by
such award.
(e) Shareholder Rights. Except as provided in this Section 6, the recipient
shall have, with respect to the Restricted Shares covered by any award, all of
the rights of a shareholder of the Company, including the right to vote the
Shares, and the right to receive any dividends or other distributions, with
respect to the Shares, but subject, however, to those restrictions placed on
such Shares pursuant to this Plan and as specified by the Committee in the
Restricted Share Award Agreement.
(f) Expiration of Restriction Period. If and when the Restriction Period
expires without a prior forfeiture of the Restricted Shares subject to such
Restriction Period, unrestricted certificates for such shares shall be
delivered to the participant.
SECTION 7 | PERFORMANCE SHARES AND PERFORMANCE SHARE UNITS
Subject to the terms and conditions described herein, Performance Shares and
Performance Share Units may be granted to eligible participants at any time and
from time to time as determined by the Committee.
(a) Price. The purchase price for Performance Shares and Performance Share Units
shall be zero unless otherwise specified by the Committee.
(b) Performance Share Agreement. Subject to the provisions of this Plan, all the
terms and conditions of an award of Performance Shares or Performance Share
Units shall be determined by the Committee in its discretion. Each Performance
Share and Performance Share Unit shall be evidenced by an agreement executed by
the recipient of the Performance Share or Performance Share Unit and on behalf
of the Company by an officer designated by the Committee. Such Performance Share
or Performance Share Unit Award Agreement shall describe the Performance Share
or Performance Share Unit and state that such Performance Share or Performance
Share Unit is subject to all the terms and
<PAGE> 9
provisions of the Plan and shall contain such other terms and provisions, not
inconsistent with the Plan, as the Committee may approve. Award of Performance
Shares and Performance Share Units must be accepted by a grantee thereof within
a period of sixty(60) days (or such other period as the Committee may specify at
grant) after the award date by executing the Performance Share or Performance
Share Unit Award Agreement, and paying the price, if any, as required under
Section 7(a).
(c) Performance Periods. Any time period (the "Performance Period") relating to
a Performance Share or Performance Share Unit award shall be at least one year
in length. No more than two Performance Periods may begin in any one fiscal year
of the Company.
(d) Performance Goals. Performance Shares and Performance Share
Units shall be earned based upon the financial performance of the Company or an
operating group of the Company during a Performance Period. As to each
Performance Period, within such time as established by Section 162(m) of the
Code, the Committee will establish in writing targets for one of the following
performance measures of the Company (and/or an operating group of the Company,
if applicable) over the Performance Period ("Performance Goals"): (i) earnings,
(ii) return on capital, or (iii) any Performance Goal approved by the
shareholders of the Company in accordance with Section 162(m) of the Code. The
Performance Goals, depending on the extent to which they are satisfied, will
determine the number of Performance Shares or Performance Share Units, if any,
that will be earned by each participant. Attainment of the Performance Goals
will be calculated from the consolidated financial statements of the Company but
shall exclude (i) the effects of changes in federal income tax rates, (ii) the
effects of unusual, non-recurring and extraordinary items as defined by
Generally Accepted Accounting Principles ("GAAP"), and (iii) the cumulative
effect of changes in accounting principles in accordance with GAAP. The
Performance Goals may vary for different Performance Periods and need not be the
same for each participant receiving an award for a Performance Period. The
Committee may, in its absolute discretion, subject to the limitations of Section
11, vary the terms and conditions of any Performance Share or Performance Share
Unit award, including, without limitation, the Performance Period and
Performance Goals, without shareholder approval, as applied to any recipient who
is not a "covered employee" with respect to the Company as defined in Section
162(m) of the Code. In the event applicable tax or securities laws change to
permit the Committee discretion to alter the governing performance measures as
they pertain to covered employees without obtaining shareholder approval of such
changes, the Committee shall have sole discretion to make such changes without
obtaining shareholder approval.
(e) Earning of Performance Shares. Performance Shares shall be issued to each
recipient thereof on the later of such time as the Performance Goals are
established or the first day of the applicable Performance Period. The number of
Performance Shares awarded at such time shall be calculated based upon the
assumption that the Performance Goals for the applicable Performance Period will
be satisfied to the fullest extent. The Company, or its designated agent, shall
hold all Performance Shares issued to recipients prior to completion of the
Performance Period. Participants shall be entitled to all dividends and other
distributions earned in respect of such Performance Shares; PROVIDED,
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that a Participant's right to any dividends paid in the form of Shares and any
extraordinary dividends shall be subject to the same Performance Goals as the
Performance Shares with respect to which they are paid or distributed.
Participants shall also be entitled to vote their Performance Shares during the
period from the initial award date to the final adjustment of the Performance
Shares. After the applicable Performance Period shall have ended, the Committee
shall certify in writing the extent to which the established Performance Goals
have been achieved. Subsequently, the number of Performance Shares, if any,
earned by the recipient over the Performance Period shall be determined as a
function of the extent to which the Performance Goals for such Performance
Period were achieved. If the Performance Goals are not satisfied to the fullest
extent, a recipient may earn less than the number of Performance Shares
originally awarded, or no Performance Shares at all. In addition, whether or not
the Performance Goals are satisfied to the fullest extent, the Committee may
exercise negative discretion to reduce the number of Performance Shares or
Performance Share Units to be issued if, in the Committee's sole judgment, such
negative discretion is appropriate in order to act in the best interest of the
Company and its shareholders. The factors to be taken into account by the
Committee when exercising negative discretion include, but are not limited to,
the achievement of measurable individual performance objectives established by
the Committee and communicated to the participant no later than the ninetieth
day of the Performance Period, and competitive pay practices. Performance Shares
shall be paid in the form of Shares. Unrestricted certificates representing such
number of Shares as equals the number of Performance Shares earned under the
award shall be delivered to the participant as soon as practicable after the end
of the applicable Performance Period.
(f) Earning of Performance Share Units. An account documenting Performance Share
Units awarded shall be established for each recipient thereof on the later of
such time as the Performance Goals are established or the first day of the
applicable Performance Period. The number of Performance Share Units credited to
a recipient's account at such time shall be calculated based upon the assumption
that the Performance Goals for the applicable Performance Period will be
satisfied to the fullest extent. After the applicable Performance Period shall
have ended, the Committee shall certify in writing the extent to which the
established Performance Goals have been achieved. Subsequently, the number of
Performance Share Units, if any, earned by the recipient over the Performance
Period shall be determined as a function of the extent to which the Performance
Goals for such Performance Period were achieved, adjusted, if applicable, in
accordance with the negative discretion of the Committee. A recipient may earn
less than the number of Performance Share Units originally awarded, or no
Performance Share Units at all. Performance Share Units shall be paid in the
form of Company check, the amount of which shall be calculated by multiplying
the fair market value per Share on the last day of the Performance Period by the
number of Performance Share Units, as adjusted pursuant to the last paragraph of
Section 4.
(g) Termination of Employment or Service Due to Death or at the Request of the
Company Without Cause. In the event the employment by or service of a
participant is terminated by reason of death, or by the Company without Cause
during a Performance Period, unless determined otherwise by the Committee, the
participant or his legal
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representative, as applicable, shall receive a prorated payout with respect to
the Performance Shares and Performance Share Units relating to such Performance
Period. The prorated payout shall be based upon the length of time that the
participant held the Performance Shares or Performance Share Units during the
Performance Period and the progress toward achievement of the established
Performance Goals. Distribution of earned Performance Shares and Performance
Share Units, if any, shall be made at the same time payments are made to
participants who did not terminate employment during the applicable Performance
Period.
(h) Termination of Employment or Service for Other Reasons. In the event
that a participant's employment or service terminates for any reason other than
those reasons set forth in paragraph (g) of this Section 7, all Performance
Shares and Performance Share Units shall be forfeited by the participant to the
Company, except as otherwise determined by the Committee.
(i) Nontransferability. Except as otherwise provided herein, no Performance
Share or Performance Share Unit may be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated. Further, a participant's rights under the
Plan shall be exercisable during the participant's lifetime only by the
participant or the participant's legal representative.
SECTION 8 | INCENTIVE COMPENSATION RESTRICTED SHARES
Each employee participating in this Plan who also participates in the Company's
Management Incentive Plan (the "Incentive Compensation Plan") may be eligible,
in the Committee's sole discretion, to elect to receive all or a portion of the
annual incentive compensation ("Incentive Compensation") payable to the employee
under the Incentive Compensation Plan in the form of Incentive Compensation
Restricted Shares. To elect the payout of all or a portion of annual Incentive
Compensation in Incentive Compensation Restricted Shares, an employee must
complete and submit to the Committee an Incentive Compensation Restricted Shares
Election Form after the Committee has determined the factor set forth in Section
8(c)(B) and the vesting schedule of the Incentive Compensation Restricted
Shares, but in any event, prior to the date established by the Committee for
election of such deferral. The Incentive Compensation Restricted Shares shall be
evidenced by an Incentive Compensation Restricted Shares Agreement executed on
behalf of the Company by an officer designated by the Committee and accepted by
the employee. Such agreement shall describe the Incentive Compensation
Restricted Shares and state that such Incentive Compensation Restricted Shares
are subject to all terms and provisions, not inconsistent with the Plan, as the
Committee may approve. Terms and conditions of Incentive Compensation Restricted
Shares shall include the following:
(a) Deferral Election. Within such limits as the Committee may establish, any
portion of annual Incentive Compensation can be elected for payout in Incentive
Compensation Restricted Shares, in a dollar amount or as a percentage of total
Incentive Compensation, or as a percentage of total Incentive Compensation with
a stated maximum dollar amount.
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(b) Issuance of Incentive Compensation Restricted Shares. Incentive Compensation
Restricted Shares will be issued on the same date that cash payouts are made
under the Incentive Compensation Plan, based on the fair market value of the
Shares on the date of the issuance.
(c) Number of Shares. The number of Incentive Compensation Restricted Shares
granted to an employee will equal the product of (A) that number of Shares as
have an aggregate fair market value equal to the dollar amount of the annual
Incentive Compensation to be received in the form of Incentive Compensation
Restricted Shares multiplied by (B) a factor greater than or equal to 1.00, but
less than or equal to 1.30, as determined by the Committee prior to the date
established by the Committee for the deferral election to be made.
(d) Termination of Employment Due to Death, Disability or Retirement or at the
Request of the Company Without Cause. If the employee's employment is terminated
by reason of death, disability or retirement or by the Company without Cause,
all of the restrictions applicable to unvested Incentive Compensation Restricted
Shares shall be waived and all Incentive Compensation Restricted Shares shall be
immediately vested. If the employee's employment is terminated for any other
reason, the Incentive Compensation Restricted Shares held by that employee will
be forfeited as of the date of such termination; provided, however, that the
Committee may, in its sole discretion, provide that such Incentive Compensation
Restricted Shares will not so terminate. In such event, such Incentive
Compensation Restricted Shares will vest in accordance with the vesting schedule
set forth in the Incentive Compensation Restricted Shares Agreement or on such
accelerated basis as the Committee may determine at or after grant or
termination of employment.
(e) Application of Section 6. Except to the extent inconsistent with this
Section 8, the provisions of Section 6 and all other provisions of the Plan
pertaining to Restricted Shares shall be applicable to Incentive Compensation
Restricted Shares.
SECTION 9 | OUTSIDE DIRECTOR OPTIONS
(a) Administration. Outside Directors shall be eligible to participate in the
Plan only as expressly set forth in this Section 9. The Committee shall have no
power to determine which Outside Directors will receive Outside Director
Options, the amount of such Outside Director Options, or the terms of such
Outside Director Options to the extent provided in subsections (b) through (i)
below. None of the provisions of Section 5 applicable to Stock Options shall be
applicable to Outside Director Options.
(b) Eligibility and Grant. Outside Director Options shall be NQSOs. All Outside
Director Options shall be evidenced by a written agreement, which shall be dated
as of the date on which an Outside Director Option is granted, signed by an
officer of the Company authorized by the Committee, and signed by the Outside
Director. Such agreement shall describe the Outside Director Options and state
that such Outside Director Options are subject to all terms and provisions of
the Plan.
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(c) Vesting. All Outside Director Options shall be fully vested on the
date of grant.
(d) Number of Shares. Each individual first elected or appointed to serve as a
director of the Company at or after adjournment of the Company's annual meeting
of shareholders (an "Annual Meeting") in 1997 who is an Outside Director shall,
upon such election or appointment, automatically be granted options for that
number of Shares having a fair market value of $150,000 (each an "Initial
Grant"). In addition, commencing immediately after the adjournment of the Annual
Meeting in 1997 and continuing on an annual basis, immediately following the
adjournment of each succeeding Annual Meeting thereafter during the term of this
Plan each Outside Director whose term did not expire at that Annual Meeting and
who has then served as a director of the Company for a consecutive period of
time which includes each of the last three Annual Meetings (i.e., including the
Annual Meeting then just adjourned) shall automatically be granted additional
Outside Director Options for th