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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 Commission File Number 0-12591
Cardinal Health, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0958666
---- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (614) 717-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No_______
The number of Registrant's Common Shares outstanding at the close of
business on October 25, 1996 was as follows:
Common Shares, without par value: 66,794,095
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information: --------
----------------------
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Earnings for the Three Months Ended
September 30, 1996 and 1995........................................................ 3
Consolidated Balance Sheets at September 30, 1996 and June 30, 1996................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995........................................................ 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 7
Part II. Other Information:
------------------
Item 1. Legal Proceedings.................................................................. 9
Item 6. Exhibits and Reports on Form 8-K................................................... 10
</TABLE>
* Items deleted are inapplicable.
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<TABLE>
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Three Months Ended September 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Net revenues $ 2,428,225 $ 2,096,845
Cost of products sold 2,245,962 1,932,799
----------------- -----------------
Gross margin 182,263 164,046
Selling, general and administrative expenses 111,644 107,358
----------------- -----------------
Operating earnings 70,619 56,688
Other income (expense):
Interest expense (6,559) (4,623)
Other, net -- primarily interest income 2,587 2,420
----------------- -----------------
Earnings before income taxes 66,647 54,485
Provision for income taxes 26,850 22,569
----------------- -----------------
Net earnings $ 39,797 $ 31,916
================= =================
Net earnings per Common Share:
Primary $ 0.61 $ 0.49
Fully diluted $ 0.61 $ 0.49
Weighted average number of Common
Shares outstanding:
Primary 65,236 64,628
Fully diluted 65,373 64,711
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
September 30, June 30,
1996 1996
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 110,513 $ 287,802
Marketable securities available-for-sale 57,735 54,335
Trade receivables 604,947 564,881
Current portion of net investment in sales-type leases 37,477 37,953
Merchandise inventories 1,548,623 1,238,238
Prepaid expenses and other 54,766 56,568
--------------- ----------------
Total current assets 2,414,061 2,239,777
--------------- ----------------
Property and equipment, at cost 276,775 265,584
Accumulated depreciation and amortization (117,176) (112,122)
--------------- ----------------
Property and equipment, net 159,599 153,462
Other assets:
Net investment in sales-type leases, less current portion 108,666 111,604
Goodwill and other intangibles 91,946 92,428
Other 69,458 83,824
--------------- ----------------
Total $ 2,843,730 $ 2,681,095
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 104,561 $ 106,007
Accounts payable 1,235,904 1,126,065
Other accrued liabilities 132,796 153,585
--------------- ----------------
Total current liabilities 1,473,261 1,385,657
--------------- ----------------
Long-term obligations, less current portion 263,655 265,144
Deferred income taxes and other liabilities 114,258 99,584
Shareholders' equity:
Common Shares, without par value 508,466 484,446
Retained earnings 493,573 455,690
Common Shares in treasury, at cost (5,846) (5,426)
Other (3,637) (4,000)
--------------- ----------------
Total shareholders' equity 992,556 930,710
--------------- ----------------
Total $ 2,843,730 $ 2,681,095
=============== ================
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Three Months Ended September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 39,797 $ 31,916
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 8,523 7,129
Provision for bad debts 1,870 1,623
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (41,936) (54,858)
Increase in merchandise inventories (310,385) (51,215)
Increase (decrease) in net investment in sales-type leases 3,414 (10,441)
Increase in accounts payable 109,839 75,125
Other operating items, net 9,563 30,713
--------------- ---------------
Net cash provided by (used in) operating activities (179,315) 29,992
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired -- (26,982)
Proceeds from sale of property and equipment 1,167 --
Additions to property and equipment (14,487) (12,145)
Purchase of marketable securities available-for-sale (3,400) (25,485)
Proceeds from sale of marketable securities available-for-sale -- 27,922
--------------- ---------------
Net cash used in investing activities (16,720) (36,690)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity -- 16,800
Reduction of long-term obligations (2,935) (1,513)
Proceeds from issuance of Common Shares 19,120 2,763
Tax benefit of stock options 4,900 --
Dividends paid on Common Shares (1,919) (2,346)
Purchase of treasury shares (420) (164)
--------------- ---------------
Net cash provided by financing activities 18,746 15,540
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (177,289) 8,842
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 287,802 64,589
--------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 110,513 $ 73,431
=============== ===============
See notes to consolidated financial statements.
</TABLE>
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The consolidated financial statements of the Company include the
accounts of all majority-owned subsidiaries and all significant
intercompany amounts have been eliminated. The consolidated financial
statements contained herein have been restated to give retroactive
effect to the mergers with Medicine Shoppe International, Inc.
("Medicine Shoppe") on November 13, 1995 and Pyxis Corporation
("Pyxis") on May 7, 1996. Such business combinations were accounted
for under the pooling-of-interests method (see Note 3).
These consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments necessary for a fair presentation have been included. All
such adjustments are of a normal and recurring nature.
The consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and
related notes contained in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1996.
Note 2. Net earnings per Common Share are based on the weighted average
number of Common Shares outstanding during each period and the
dilutive effect of stock options from the date of grant, computed
using the treasury stock method.
Note 3. As a result of the mergers with Medicine Shoppe and Pyxis in fiscal
1996, the Company recorded costs totaling $67.3 million ($47.8
million, net of tax). During the three months ended September 30,
1996, the Company paid approximately $2.8 million related to these
costs, and has paid an aggregate amount of approximately $24.9 million
through September 30, 1996. The Company's current estimates of the
merger costs ultimately to be incurred are not materially different
from the amounts originally recorded. If additional costs are
incurred, such items will be expensed in subsequent periods.
Note 4. On July 24, 1996, the Company announced that it had entered into a
definitive merger agreement with PCI Services, Inc. ("PCI"). The merger
was approved by PCI shareholders and completed on October 11, 1996. The
merger will be accounted for as a pooling-of-interests. In the merger,
the Company issued approximately 2,092,000 Common Shares to PCI
shareholders and PCI's outstanding stock options were converted into
options to purchase approximately 153,000 Common Shares. The Company
expects to record a one-time charge to reflect transaction and other
costs incurred as a result of the PCI merger in the second quarter of
fiscal 1997. If the merger had been consummated as of September 30,
1996, the impact on the Company's revenue, net income and earnings per
share for the periods disclosed herein would not have been significant.
Note 5. On October 29, 1996, the Board of Directors of the Company declared
a three-for-two stock split which will be effected as a stock dividend
and distributed on December 16, 1996 to shareholders of record on
December 2, 1996. The effect of the split will be reflected in the
financial statements in the second quarter of fiscal 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below has been prepared to
give retroactive effect to the pooling-of-interests business combinations with
Medicine Shoppe on November 13, 1995 and Pyxis on May 7, 1996 (see Note 3 of
"Notes to Consolidated Financial Statements"). This discussion and analysis is
concerned with material changes in financial condition and results of operations
for the Company's consolidated balance sheets as of September 30, 1996 and June
30, 1996, and for the consolidated statements of earnings for the three months
ended September 30, 1996 and 1995.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
materially differ from those projected or implied. The most significant of such
risks, uncertainties and other factors are described in Exhibit 99.01 to this
Form 10-Q.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased 16% for the first quarter of fiscal
1997 primarily due to internal revenue growth from pharmaceutical distribution
activities, including the addition of new customers, increased sales to existing
customers and price increases. Specifically contributing to the first quarter
increase was the expansion of the Company's existing relationship with its
largest customer, Kmart Corporation ("Kmart"), as well as opportunities created
by the deterioration of the financial condition of a major competitor.
Gross Margin. As a percentage of net revenues, gross margin for the
three months ended September 30, 1996, decreased to 7.51% from 7.82% for the
comparative quarter. The decrease in gross margin is primarily due to the shift
in net revenues mix caused by significant increases in the relatively lower
margin pharmaceutical distribution activities (see "Net Revenues" above). The
impact of this shift was partially offset by the impact of increased
merchandising and marketing programs with customers and suppliers. The gross
margin continues to be affected by 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.
Selling, General and Administration Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.60% for
the three months ended September 30, 1996 from 5.12% for the prior period. The
improvement reflects economies associated with the Company's revenue growth from
pharmaceutical distribution activities, as well as significant productivity
gains resulting from cost control efforts and the consolidation and selective
automation of distribution facilities.
Interest Expense. The increase in interest expense of $1.9 million in the
first quarter of fiscal 1997 compared to fiscal 1996 is due to the Company's
issuance of $150 million, 6% Notes due 2006, in a public offering in January
1996.
Provision for Income Taxes. The Company's effective tax rate decreased from
the comparative quarter primarily due to the impact of income earned on
tax-exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $940.8 million at September 30, 1996 from
$854.1 million at June 30, 1996. This increase included additional investments
in merchandise inventories and trade receivables of $310.4 million and $40.1
million, respectively. Offsetting the increase in working capital was a decrease
in cash and equivalents of $177.3 million and an increase in accounts payable of
$109.8 million. Increases in merchandise inventories and accounts payable
reflects the higher level of current and anticipated business volume in
pharmaceutical distribution activities, including inventories required by the
new pharmaceutical services agreement with Kmart. The increase in trade
receivables is consistent with the Company's net revenues growth (see "Net
Revenues" above). The change in cash and equivalents is due to the timing of
inventory purchases and related payments.
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Property and equipment, at cost increased by $11.2 million from June 30,
1996. The property acquired included increased investment in management
information systems and customer support systems, as well as the construction
and automation of distribution facilities.
Shareholders' equity increased to $992.6 million at September 30, 1996 from
$930.7 million at June 30, 1996, primarily due to net earnings of $39.8 million
and issuances of Common Shares resulting from stock option exercises and the
related tax benefits in the amount of $24.0 million during the first quarter of
fiscal 1997.
OTHER
On July 24, 1996, the Company announced that it had entered into a
definitive merger agreement with PCI Services, Inc. ("PCI"). The merger was
approved by PCI shareholders and completed on October 11, 1996. The merger will
be accounted for as a pooling-of-interests. In the merger, the Company issued
approximately 2,092,000 Common Shares to PCI shareholders and PCI's outstanding
stock options were converted into options to purchase approximately 153,000
Common Shares. The Company expects to record a one-time charge to reflect
transaction and other costs incurred as a result of the PCI merger in the second
quarter of fiscal 1997 (see Note 4 of "Notes to Consolidated Financial
Statements").
On October 29, 1996, the Board of Directors of the Company declared a
three-for-two stock split which will be effected as a stock dividend and
distributed on December 16, 1996 to shareholders of record on December 2, 1996.
The effect of the split will be reflected in the financial statements in the
second quarter of fiscal 1997.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), as well as other pharmaceutical wholesalers, were each named as
defendants in a series of purported class action antitrust 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 (the "Brand Name Prescription Drug Litigation"). 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 by using a chargeback pricing system. In
addition to the Federal court cases described above, the Company and Whitmire
have also been named as defendants in a series of state court cases alleging
similar claims under various state laws regarding the sale of brand name
prescription drugs. These lawsuits are described in "Item 1 - Legal Proceedings"
of Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, which was filed with the Securities and Exchange Commission and
is incorporated herein by reference. On November 9, 1995, the Company, along
with the other wholesaler defendants, filed a motion for summary judgment in the
Brand Name Prescription Drug Litigation. On April 4, 1996, summary judgment was
granted in favor of the Company and the other wholesaler defendants. The
plaintiffs have appealed this decision. The Company believes that the
allegations against the Company and Whitmire in such litigation are without
merit, and it intends to contest such allegations vigorously. The Company does
not believe that the outcome of these lawsuits will have a material adverse
effect on the Company's financial condition or results of operations.
The Company also becomes involved from time to time in ordinary routine
litigation incidental to its business, none of which is expected to have a
material adverse effect on the Company's financial condition or results of
operations.
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Item 6: Exhibits and Reports on Form 8-K:
(a) Listing of Exhibits:
Exhibit 10.01 Employment Agreement dated July 23, 1996, among
PCI Services, Inc., Daniel F. Gerner, and the
Registrant.*
Exhibit 10.02 Employment Agreement dated August 26, 1995, among
Medicine Shoppe International, Inc., David A.
Abrahamson, and the Registrant.*
Exhibit 10.03 Pharmaceutical Services Agreement, dated as of
August 1, 1996, between Kmart Corporation and Cardinal
Health.
Exhibit 11.01 Computation of Per Share Earnings.
Exhibit 27.01 Financial Data Schedule.
Exhibit 99.01 Statement Regarding Forward-Looking Information.
----------
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: November 6, 1996 By: /s/ Robert D. Walter
--------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ David Bearman
-----------------
David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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10.01
[CONFORMED COPY]
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, dated and effective as of this 23rd day of
July, 1996, by and among PCI Services, Inc., a corporation organized and
existing under the laws of the state of Delaware (hereinafter "Employer"),
Cardinal Health, Inc., a corporation organized and existing under the laws of
the state of Ohio (hereinafter "Cardinal"), and Daniel F. Gerner (hereinafter
"Employee"), an individual residing at 1025 Riverton Road, Moorestown, NJ 08057.
WHEREAS, Employer has entered into an Agreement and Plan of
Merger dated as of July 23, 1996 (hereinafter the "Merger Agreement") pursuant
to which a subsidiary of Cardinal will merge with and into Employer, with
Employer as the surviving corporation, and Employer will become a wholly owned
subsidiary of Cardinal (hereinafter the "Transaction"; references herein to
"Employer" refer to Employer both before and after the Transaction); and
WHEREAS, Cardinal, Employer and Employee desire to set forth
in a written agreement the terms and conditions under which Employee will
continue to render services to Employer after the consummation of the
Transaction;
NOW, THEREFORE, the parties hereto, in consideration of the
mutual covenants herein contained, and other good and valuable consideration,
the receipt and sufficiency
<PAGE> 2
of which is hereby acknowledged, and intending to be legally bound hereby, agree
as follows:
1. TERM AND DUTIES.
----------------
(a) This Agreement shall become effective at the "Effective
Time" as defined in the Merger Agreement if, but only if, the Transaction is
consummated. Employer shall employ Employee under this Employment Agreement as
President of Employer, and to render such services as are appurtenant thereto,
for a term (hereinafter the "Term") beginning at the Effective Time and ending
on the third anniversary of the Effective Time. During the Term, Employee shall
perform such executive duties of a responsible nature as shall be in all
material respects in conformance with the directions and policies established
and promulgated by Employer and consistent with his position.
(b) During the Term, Employee shall report to Richard S.
Sauter, or to such other senior executive officer of Employer or Cardinal as
shall be designated from time to time by the Board of Directors of Employer
(hereinafter the "Board"), and shall devote his best efforts and full business
time to the performance of his duties and to advance Employer's interests.
(c) During the Term, Employee shall not, without
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the prior written consent of Employer, be engaged in any other business activity
whether or not such business activity is pursued for gain, profit, or other
pecuniary advantage; but this shall not be construed as preventing Employee from
investing his assets in such form or manner as will not require the performance
of services by Employee in the operation of the affairs of the enterprises or
companies in which said investments are made. Employee may participate in
appropriate community activities not inconsistent with his duties and position
as an Executive of Employer. In all cases, Employee's activities in this regard
shall comply with policies of general application as to participation on Boards
of Directors of non-profit and for-profit corporations, as such policies are
established by Employer from time to time.
2. COMPENSATION.
-------------
(a) As compensation for Employee's services hereunder during
the Term, Employer shall pay to Employee an annual salary (hereinafter the "Base
Salary") during the Term, payable in installments at such times as Company
customarily pays its other executive employees. The Base Salary shall be paid at
the rate of three hundred fifteen thousand ($315,000) dollars per year for the
calendar year 1996. During the Term,
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the Base Salary shall be reviewed annually for possible increase in accordance
with the Company's normal payroll practices for management personnel, and shall
not be decreased after any such increase. Any increase in the Base Salary shall
not limit, expand or reduce any other obligation of the Company under this
Agreement.
(b) The Board, after consultation with the management of
Employer (including Employee), shall annually establish, for each fiscal year of
Employer during the Term after the fiscal year ending September 30, 1996, the
amount of pre-tax net income of Employer which the Board expects Employer to
earn for such fiscal year (hereinafter "Targeted Pre-Tax Net Income"). The
Targeted Pre-Tax Net Income for Employer's fiscal year ending September 30, 1996
shall be the amount established as such under Employer's current Annual Bonus
Program. During the Term, for each of Employer's most recently completed fiscal
years (each a "Most Recent Fiscal Year") beginning with Employer's fiscal year
ending September 30, 1996, Employee shall be entitled to receive as incentive
compensation a bonus (hereinafter the "Annual Bonus") equal to Employee's Base
Salary as of the end of such Most Recent Fiscal Year multiplied by a percentage
determined by comparing Employer's actual Pre-Tax Net Income (hereinafter the
"Actual Pre-Tax Net Income") for the Most Recent Fiscal Year to the Targeted
Pre-Tax Net Income for such fiscal year:
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<TABLE>
<CAPTION>
If Actual Pre-Tax Net Income
for the Most Recent Fiscal Year Then the Annual Bonus
compared to Targeted Pre-Tax as a percentage of Base
Net Income for such fiscal year is: Salary shall be:
- ----------------------------------- ----------------
<C> <C>
less than 90% 0% of Base Salary
90% to less than 100% 20% of Base Salary
100% to less than 110% 40% of Base Salary
110% to less than 120% 53% of Base Salary
120% or greater 60% of Base Salary
</TABLE>
Any Annual Bonus due to Employee pursuant to this subparagraph 2(b) shall be
paid to Employee in accordance with the standard terms of Employer's bonus plan
for executives, as in effect from time to time. As used herein, "Pre-Tax Net
Income" means income before income tax expense computed in accordance with
generally accepted accounting principles consistently applied. Alternatively, if
Employee and Employer mutually agree, the Annual Bonus for any fiscal year
during the Term shall be determined pursuant to Cardinal's standard Management
Incentive Plan as in effect from time to time.
(c) During the Term, Employee shall be entitled to receive
such fringe benefits as are applicable to all similarly situated senior
executives of Employer; PROVIDED,
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HOWEVER, that Employer may at any time and from time to time add to, reduce,
eliminate or otherwise modify these fringe benefits as long as Employee is
provided with those fringe benefits which are applicable to all similarly
situated senior executives of Employer. Without limiting the generality of the
foregoing: (i) Employee shall be entitled to four (4) weeks of vacation during
each year during the Term; and (ii) during the Term, Employer shall lease a
luxury automobile of such type as is selected by Employee (hereinafter the
"Automobile"), comparable to the automobile provided by Employer as of the date
of this Agreement, for Employee's exclusive business and personal use, shall
replace the Automobile every two (2) years, shall pay or reimburse Employee for
all lease payments, operating, maintenance and repair costs, and shall maintain
and pay for liability, collision and comprehensive insurance covering the
Automobile, in such amounts and on such terms as provided by Employer as of the
date of this Agreement.
(d) Employee shall be granted, as of the Effective Time, 4,250
shares of restricted Cardinal Stock (hereinafter the "Restricted Stock"), which
shall vest in three equal installments (but rounded to the nearest whole share)
on each of the first, second and the third anniversary of the Effective Time;
PROVIDED, that all Restricted Stock that has not previously vested shall vest
upon the occurrence of a Change
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<PAGE> 7
of Control (as defined hereinafter); and PROVIDED, further, that if Employee
violates any of the covenants set forth in subparagraph 4(b) or if his
employment is terminated by Employer for Cause, he shall forfeit all Restricted
Stock that has not previously vested. The Restricted Stock shall otherwise be
subject to the standard terms and conditions applicable to restricted stock
under the Cardinal Equity Incentive Plan.
(e) In consideration of his services in connection with the
completion of the Transaction and the noncompetition covenant set forth in
subparagraph 4(b) hereinafter, Employee shall be entitled to receive a fee
(hereinafter the "Incentive/Noncompetition Fee") consisting of an initial
installment of five hundred thousand ($500,000) dollars to be paid on the
January 15 next following the Effective Time and three additional installments
of four hundred thousand ($400,000) dollars each to be paid on each of the first
three anniversaries of such date; PROVIDED, HOWEVER, that Employee shall forfeit
all rights to receive any unpaid installments of the Incentive Fee if he
violates any of the covenants set forth in subparagraph 4(b) hereinafter.
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(f) In recognition of Employee's services to Employer before
the date of this Agreement, beginning upon the first to occur of (i) the later
of the termination of Employee's employment with or consulting services to
Employer for any reason other than Disability or death and the Employee's
attainment of age 60, and (ii) the termination of Employee's employment with
Employer because of Disability (as defined hereinafter), Employer shall pay
Employee two hundred forty thousand ($240,000) dollars per year for the
remainder of his life. Following Employee's death (whether before or after such
payments begin), payments of two hundred forty thousand ($240,000) dollars per
year shall be made to Employee's surviving spouse, if any, from the date of
Employee's death until the death of such spouse. All payments under this
subparagraph 2(f) shall be made in installments, not less frequently than
monthly. Notwithstanding any other provision of this Agreement, if Employee
terminates his employment with Employer during the Term without Good Reason, or
voluntarily terminates his services to Employer as a consultant before the end
of the Consulting Period, no payments shall be made to Employee or his spouse
under this subparagraph 2(f).
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3. EXPENSES.
---------
During the Term, Employee is authorized to incur reasonable
expenses for conducting and promoting the business of Employer, including
expenses for travel and similar items, subject to limitations and restrictions
set by Employer from time to time. Employer will reimburse Employee for such
expenses, on a monthly or other regular basis, upon the presentation by Employee
of an itemized account of such expenditures, consistent with procedures
established by Employer, together with such receipts or other evidence as shall
be required for tax or accounting purposes.
4. DISCLOSURE OF INFORMATION/RESTRICTIVE COVENANT.
-----------------------------------------------
(a) Employee recognizes and acknowledges that (i) all plans,
systems, methods, designs, procedures, books and records known to Employee,
relating to the operations, personnel and practices of Employer or of any
subsidiary or other affiliate of Employer (including, without limitation,
Cardinal) (hereinafter an "Affiliate") (whether instituted or commenced prior or
subsequent to the date hereof and whether or not initially instituted or
commenced by Employer or by an Affiliate), or (ii) all other records, documents
and information concerning the business activities, practices and
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procedures of Employer or any Affiliate and any name or style under which
Employer or any Affiliate shall be operated during the Term and the Consulting
Period, or shall have been operated prior hereto, and (iii) any logo or other
descriptive or illustrative form thereof, utilized by Employer or any Affiliate,
as they may exist from time to time, constitute and will constitute valuable,
special and unique assets of the businesses of Employer and the Affiliates, and
Employee may have access to confidential information and/or trade secrets
related to the businesses of Employer and the Affiliates. Except as required in
the course of the services hereunder, Employee therefore covenants and agrees
that he will not ever, at any time without Employer's prior consent, directly or
indirectly disclose to any third party or use for his own benefit any part of
such confidential information, to the extent such information has theretofore
remained confidential (except for unauthorized disclosures by Employee) and
except as otherwise ordered by a court of competent jurisdiction, or use or
permit to be used any such name, style, logo or form, to or by any person, firm,
corporation, association, or other entity for any reason or purpose whatsoever.
(b) Presently the businesses of Employer and its subsidiaries
are international in scope, and the parties hereto understand and agree that it
is their intention to maintain Employer's business activities, operations,
markets
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<PAGE> 11
and marketing activities and of corporations and entities controlled by Employer
throughout the world, and further that the businesses of Employer and its
subsidiaries will continue in the future to be international in scope.
Therefore, the parties expressly agree that during the "Noncompetition Period"
(as hereinafter defined), Employee will not, anywhere in the world, (i) own
directly or indirectly, manage, operate, control, be employed by, participate
in, or be connected in any manner with the ownership, management, operation or
control of, any business which shall deal with or provide services, or engage in
activities, at any time now or hereafter engaged in by Employer or any of its
subsidiaries, nor (ii) solicit or attempt to solicit customers of Employer or
any of its subsidiaries, or other persons or entities with or through whom
Employer or any of its subsidiaries has done business, for the purpose of
providing such services or engaging in such activities or in any other way
interfere with or detract from the business and opportunities of Employer or any
of its subsidiaries, including by way of example and without limiting the
generality of the foregoing, by inducing an employee to leave the employ of
Employer or one of its subsidiaries, or by inducing a consultant or other
independent contractor to sever that person's relations with Employer or
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<PAGE> 12
one of its subsidiaries; provided, however, that the foregoing provisions of
this subparagraph 4(b) shall not prohibit Employee during the period of such
restriction from accepting employment, or acting as a consultant, in the
pharmaceutical industry, provided that Employee's activities therein, to the
extent that they relate to packaging, shall not relate in any manner to contract
packaging or other similar services by independent packagers. The
"Noncompetition Period" means the longer of (A) the period during which the
Employee is employed by Employer or any of the Affiliates plus the period ending
on the later of the third anniversary of the date such employment terminates and
(B) the sixth anniversary of the Effective Time.
(c) Employee acknowledges that the restrictions contained in
this paragraph are reasonable and necessary in view of the nature of the
businesses of Employer and the Affiliates in order to protect the legitimate
interests of Employer and the Affiliates, and that any violation thereof would
result in irreparable injury to Employer and the Affiliates. Therefore, Employee
agrees that, in the event of a breach or threatened breach by Employee of the
provisions of subparagraph 4(a) or 4(b), Employer and the Affiliates shall be
entitled to obtain from any court of competent jurisdiction, preliminary and
permanent injunctive relief restraining Employee from any violation of the
foregoing.
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<PAGE> 13
(d) Nothing herein shall be construed as prohibiting Employer
and the Affiliates from pursuing any other remedies available to Employer and
the Affiliates for such breach or threatened breach, including recovery of
damages from Employee, and an equitable accounting of all earnings, profits and
other benefits arising from such violation.
(e) Employer, Cardinal and Employee acknowledge their
intention that Employer and the Affiliates shall have the broadest possible
protection of the value of the businesses of Employer and the Affiliates in the
trade area set forth above consistent with public policy, and it will not
violate the intent of parties if any Court should determine that, consistent
with established precedent of the forum state, the public policy of such state
requires a more limited restriction in geographical area or duration of
Employee's covenant not to compete, contained in an appropriate decree.
5. TERMINATION.
------------
(a) Employee's employment may be terminated by Employer under
any of the following circumstances:
(i) Upon the death of Employee; or
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<PAGE> 14
(ii) Upon the "Disability" of Employee, defined as the
inability of Employee to perform services as an employee hereunder on a
full-time basis by reason of physical or mental incapacity, sickness or
infirmity that continues for more than twelve (12) months or for
periods aggregating more than twelve (12) months during any twenty-four
(24) month period; provided, however, that a determination of
Executive's Disability shall be subject to the certification of a
qualified physician agreed to by the Company and the Executive or, in
the event of Executive's incapacity to designate a physician, the
Executive's legal representative; or
(iii) For "Cause," defined as any act of fraud or intentional
misrepresentation or embezzlement, misappropriation or conversion of
assets of Employer or any Affiliate (as hereinafter defined), or the
intentional and repeated violation of the written policies or
procedures of Employer;
(iv) for any other reason (a termination without "Cause").
(b) Employee's employment may be terminated by Employee for
"Good Reason," defined as a termination within 30 days after and as a result of
(i) the assignment to Employee of duties inconsistent in any material respect
with subparagraph 1(a) of this Agreement, other than actions that are not taken
in bad faith and are remedied by Employer within ten business days after receipt
of notice thereof from Employee; (ii) any material failure by Employer to comply
with any provision of subparagraph 2 of this Agreement other than failures that
are not taken in bad faith and are remedied by Employer within ten business days
after receipt of notice thereof from Employee; or (iii) a change in Employee's
principal place of employment with Employer to a location be-
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<PAGE> 15
yond 25 miles from Broad and Market Streets, Philadelphia, Pennsylvania,
without Employee's consent.
(c) If, during the Term, Employee's employment is terminated
by Employer without Cause or by Employee for Good Reason, Employee shall not be
entitled to any compensation provided for under this Agreement except as
provided in subparagraphs 2(d), 2(e) and 2(f) and Section 7 and in the following
sentence. Employer (i) shall continue to pay Employee the Base Salary, at the
rate then in effect, for and with respect to the remainder of the Term
(hereinafter the "Continuation Period") (in the same manner as specified in
subparagraph 2(a) hereof); (ii) Pay the Annual Bonuses for each fiscal year
ending during the Continuation Period, in the same manner as specified in
subparagraph 2(b) hereof, except that the amount of each such Annual Bonus (the
"Bonus Amount") shall be 50% of the Annual Bonus most recently paid to Employee
before such termination; and (iii) shall continue to provide Employee with group
health benefits on the terms and conditions applicable to active employees of
Employer (hereinafter the "Group Health Benefits") during the Continuation
Period; PROVIDED, that (x) if the Group Health Benefits cannot be provided to
nonemployees under the terms of the applicable plans or applicable law, Employer
shall provide Employee with
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<PAGE> 16
substitute benefits that are comparable and equal in value to such benefits, and
(y) during any period when Employee is eligible to receive any such benefits
under another employer-provided plan or a government plan, the Group Health
Benefits or substitute benefits provided by Employer under this clause (iii) may
be made secondary to those provided under such other plan.
(d) OTHER TERMINATIONS. If, during the Term, Employee's
employment is terminated for any reason other than by Employer without Cause or
by Employee for Good Reason, Employee shall not be entitled to any compensation
provided for under this Agreement, other than (i) Base Salary through the
Termination Date, (ii) benefits under any long-term disability insurance
coverage in the case of termination because of Disability, (iii) the amounts
provided for in subparagraphs 2(d), 2(e) and 2(f) and Section 7 in accordance
therewith, and (iv) vested benefits, if any, required to be paid or provided by
law.
(e) CHANGE OF CONTROL PROVISION. For purposes of this
subparagraph 5(e), a "Change of Control" shall have occurred in the event that
during the Term, Cardinal ceases to own, directly or indirectly, more than 50
percent of the combined voting power of Employer's then-outstanding securities
entitled to vote generally in the election of directors. If (i) at any time
after a Change of Control, Employer terminates Employee's employment
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<PAGE> 17
without Cause or (ii) within one year after a Change of Control, Employee
terminates his own employment for any reason or no reason, then the provisions
of this subparagraph 5(e) shall apply instead of the provisions of subparagraphs
5(c) and (d), and:
(A) Employer shall pay to Employee in a lump sum in
cash within 30 days after the date of such termination the
aggregate of the following amounts:
(I) to the extent not theretofore
paid, the Base Salary, at the rate
in effect on the date of such
termination, through the date of
such termination; and
(II) the product of (x) three and
(y) the Base Salary plus the Bonus
Amount; provided that the payment
under this subsection II shall be
reduced to the extent required so
that such payment shall not be a
parachute payment within the meaning
of Section 280G(b) of the Internal
Revenue Code of 1986, as amended
(hereinafter the "Code"), and the
regulations promulgated thereunder,
or successor provisions of similar
import, excluding for this purpose
any payment under subsection (I)
above and any payments under
subparagraph 2(e) hereof, as
determined by Employer.
(B) Employer shall (i) pay the amounts provided for
in subparagraphs 2(d), 2(e) and 2(f) and Section 7 in
accordance therewith and (ii) continue to provide Employee
with Group Health Benefits for the remainder of the Term;
PROVIDED, that (x) if the Group Health Benefits cannot be
provided to nonemployees under the terms of the applicable
plans or applicable law, Employer shall provide Employee with
substitute benefits that are comparable and equal in value to
such benefits, and (y) during any period when Employee is
eligible to receive any such benefits under another
employer-provided plan or a government plan, the Group Health
Benefits or substitute benefits provided by
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<PAGE> 18
Employer under this clause (ii) may be made secondary to
those provided under such other plan.
6. INSURANCE.
----------
Employer shall have the right to purchase such policies of
insurance on the life of Employee as may be determined by Employer in its sole
discretion, and as may be available, at the sole cost and expense of Employer,
and naming Employer as owner and beneficiary, and Employee shall cooperate in
the placement thereof.
7. CONSULTING SERVICES.
--------------------
(a) For purposes of this Agreement, the "Consulting Period"
shall mean the period of seven years beginning on the earlier of the third
anniversary of the Effective Time and a termination of Employee's employment
following a Change of Control pursuant to Section 5(e). From the day after the
third anniversary of the Effective Time (hereinafter the "Consulting Period"),
Employee shall serve Employer as a nonemployee consultant under the terms and
conditions set forth in this Section 7. During the Consulting Period, Employee
shall make himself available at such times and places as Employee shall select
(including by telephone if Employee so determines) to render such services as
may reasonably be requested from time to time by the Board and/or the Chief
Executive Officer of the Company.
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<PAGE> 19
(b) From and after the beginning of the Consulting Period,
Employee shall cease to be entitled to receive any compensation and benefits
under this Agreement other than the amounts provided for in subparagraphs 2(d),
2(e) and 2(f) in accordance therewith and the compensation provided for in this
subparagraph 7(b). In consideration of Employee's services as consultant, during
the Consulting Period, the Company shall pay the Executive a monthly consulting
fee (hereinafter the "Consulting Fee") of eighteen thousand seven hundred fifty
($18,750) dollars, payable in arrears. If Employee dies during the Consulting
Period, Employer shall pay Employee's estate the Consulting Fee through the end
of the Consulting Period and the amounts provided for in subparagraphs 2(d),
2(e) and 2(f) in accordance therewith, and Employer shall have no other
obligations under this Agreement. If Employee's employment with Employer
terminates before the beginning of the Consulting Period because of Employee's
Disability or death, Employer shall pay Employee or Employee's estate the
Consulting Fee from the date of Employee's Disability or death through the
seventh anniversary thereof.
8. NOTICE.
-------
(a) Each notice, demand, request, consent, report,
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<PAGE> 20
approval or communication (hereinafter "Notice") which is or may be required to
be given by any party to any other party in connection with this Agreement and
the transactions contemplated hereby, shall be in writing, and given by
facsimile, personal delivery, receipted delivery services, or by certified mail,
return receipt requested, prepaid and properly addressed to the party to be
served as shown in subparagraph 8(b) hereinafter.
(b) Notices shall be effective on the date sent via facsimile,
the date delivered personally or by receipted delivery service, or three (3)
days after the date mailed:
If to Employer: PCI Services, Inc.
3001 Red Lion Road
Philadelphia, PA 19114-1123
Attn:
Facsimile:
If to Employee: At his residence address most
recently filed with Employer.
In each case, with Cardinal Health, Inc.
a copy to: 5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
If to Cardinal: Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
(c) Each party may designate by Notice to the
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<PAGE> 21
others in writing, given in the foregoing manner, a new address to which any
Notice may thereafter be so given, served or sent.
9. WAIVER OF BREACH.
-----------------
The waiver by either party of a breach of any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach.
10. ASSIGNMENT.
----------
The rights and obligations of Employer under this Agreement
shall inure to the benefit of and shall be binding upon the successors and
assigns of Employer, but the rights and obligations of Employee are personal and
may not be assigned or delegated without Employer's prior written consent.
11. ENTIRE AGREEMENT; EFFECT IF NO TRANSACTION.
------------------------------------------
As of the Effective Time, this Agreement shall constitute the
entire agreement of the parties with respect to the subject matter hereof and
shall supercede all prior agreements with respect thereto, including without
limitation the Employment Agreement between Employer and Employee dated
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<PAGE> 22
August 27, 1991 and the Executive Employment Agreement dated February 7, 1996.
This Agreement shall not be changed orally, but only by an agreement in writing
executed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. Notwithstanding any other
provision of this Agreement, this Agreement shall be null and void and of no
effect if the Transaction is not consummated.
12. LAW APPLICABLE.
---------------
This Agreement, and all covenants contained herein, shall be
governed in all respects, whether as to validity, construction, capacity,
performance or otherwise, by the laws of the Commonwealth of Pennsylvania in
which it has a situs. Each of the covenants contained in paragraph 4 of this
Agreement shall be construed as a separate covenant in each of the separate
cities and counties of the United States in which Employer is presently engaged
in business. To the extent that any such covenant shall be unenforceable in any
one or more of such cities or countries, such declaration shall not affect this
covenant with respect to any other city or county, as each of said covenants
shall be construed to be severable and independent. In the event any provision
of this Agreement shall be held invalid by a court with jurisdiction over the
parties to this Agreement, such provision shall be deleted from the Agreement,
which shall then be construed to give
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<PAGE> 23
effect to the remaining provisions thereof.
13. PARAGRAPH HEADINGS.
-------------------
The paragraph headings contained in this Agreement are for
convenience only and in no manner shall be construed as part of this Agreement.
14. COUNTERPARTS.
-------------
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
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<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
Corporate Seal Employer:
PCI SERVICES, INC.
By: /s/ Richard S. Sauter
------------------------------
Richard S. Sauter
Vice Chairman of the Board and
Chief Executive Officer
Attest: /s/
-------------------------------
Cardinal:
CARDINAL HEALTH, INC.
By: /s/ George H. Bennett
-------------------------------
George H. Bennett
Executive Vice President
and General Counsel
Employee:
/s/ Daniel F. Gerner
-------------------------------
DANIEL F. GERNER
/s/
- ---------------------------
Witness
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<PAGE> 1
10.02
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and among Medicine Shoppe International, Inc., a
Delaware corporation (the "Company"), David A. Abrahamson (the "Executive"), and
Cardinal Health, Inc. ("Cardinal"), dated as of the 26th day of August, 1995.
WHEREAS, the Company intends to enter into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which a subsidiary of
Cardinal will merge with and into the Company, with the Company as the surviving
corporation, and the Company will become a wholly owned subsidiary of Cardinal
(the "Transaction") (and references herein to the "Company" refer to the Company
both before and after the Transaction); and
WHEREAS, it is a condition to the execution of the Merger
Agreement that the Company enter into an employment agreement with the Executive
and a condition to the consummation of the Transaction that such agreement be in
full force and effect; and
WHEREAS, Cardinal desires to obtain for itself, through its
future ownership of the Company, the benefit of the Executive's services as set
forth in this Agreement; and
WHEREAS, the Company and the Executive desire to
<PAGE> 2
set forth in a written agreement the terms and conditions under which the
Executive will continue to be employed by the Company after the consummation of
the Transaction;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. EMPLOYMENT PERIOD. Upon the consummation of the
Transaction, the Company shall employ the Executive, and the Executive hereby
accepts such employment, on the terms and conditions set forth in this
Agreement, for the period commencing on the Effective Time (as that term is
defined in the Merger Agreement) and ending on the fifth anniversary of the
Effective Time (the "Employment Period").
2. POSITION AND DUTIES. (a) During the Employment Period, the
Executive shall be employed by the Company as its President and Chief Executive
Officer with the responsibilities customarily assigned to such positions and
with such other responsibilities of an executive nature as may be determined
from time to time by the Company's Board of Directors (the "Board") or its
lawfully designated representative.
(b) During the Employment Period, the Executive shall devote
his full time and attention to the business and affairs of the Company, and
shall use his best efforts to
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<PAGE> 3
promote and establish the business of the Company and to carry out faithfully
and efficiently the responsibilities assigned to him under this Agreement. It
shall not be considered a violation of the foregoing for the Executive to (i)
serve on corporate boards with the approval of Cardinal, (ii) serve on civic or
charitable boards or committees, (iii) deliver lectures or fulfill speaking
engagements and (iv) manage personal investments, so long as such activities do
not interfere with the performance of the Executive's responsibilities under
this Agreement.
(c) During the Employment Period, the Executive's services
shall be performed primarily at the Company's current office location or any
other location within 30 miles thereof specified by the Board from time to time.
Travel in connection with the business of the Company may be reasonably
requested by the Board or its lawfully designated representative from time to
time.
3. COMPENSATION. (a) BASE SALARY. During the Employment
Period, the Company shall pay the Executive an annual base salary (the "Annual
Base Salary") in an amount not less than $256,520, payable in accordance with
the Company's payroll practices for management personnel, as in effect from time
to time (but not less frequently than
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<PAGE> 4
monthly). During the Employment Period, the Annual Base Salary shall be reviewed
for possible increase at least annually in accordance with Cardinal's normal
payroll practices for management personnel. Any increase in the Annual Base
Salary shall not limit, expand or reduce any other obligation of the Company
under this Agreement.
(b) ANNUAL BONUS. In addition to the Annual Base Salary,
during the Employment Period the Executive shall be eligible to receive annual
bonuses (each, regardless of whether for a 12-month period or a different
period, an "Annual Bonus") pursuant to this Section 3(b). For the period ending
September 30, 1996, the Annual Bonus shall be determined in accordance with
Exhibit A hereto. Thereafter during the Employment Period, the Annual Bonus
shall be determined pursuant to Cardinal's standard Management Incentive Plan as
in effect from time to time, or any successor thereto (the "MIP"), with an MIP
potential equal to 60 percent of the Annual Base Salary; PROVIDED, that the
first Annual Bonus for which the Executive shall be eligible under the MIP shall
be for the period October 1, 1996 through June 30, 1997, and for that period he
shall receive an Annual Bonus equal to 75 percent of the amount he would
otherwise have received, had he participated in the MIP for a full period of
twelve months. Notwithstanding the
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<PAGE> 5
foregoing, if the President of Cardinal and the Executive mutually agree that it
would be preferable to do so, (i) the terms of the Annual Bonus for the period
ending September 30, 1996 may be amended, including without limitation by
shortening the performance period and/or determining the amount thereof in a
manner differing from that set forth on Exhibit A hereto, and/or (ii) the
Executive's transition to the MIP may occur sooner than October 1, 1996.
(c) OTHER BENEFITS. During the Employment Period, the
Executive shall be entitled to participate in the group health, life, disability
insurance, retirement savings and other employee benefit plans (collectively,
"Group Plans") generally offered to the Company's employees in accordance with
the standard terms and conditions of such plans as in effect from time to time,
which plans shall be substantially equivalent in the aggregate to either (A) the
Company's Group Plans as in effect on the date of this Agreement or (B) the
Group Plans maintained from time to time by Cardinal and in which the management
personnel of Cardinal generally participate. In addition, the Executive shall be
eligible to participate in Cardinal's Stock Incentive Plan or any successor
thereto (the "Cardinal Stock Plan"), although except as provided in Section 8(d)
hereof, the actual awards and benefits, if any, to be granted to the
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<PAGE> 6
Executive thereunder shall be in the sole discretion of the Compensation and
Personnel Committee of Cardinal's Board of Directors. The Employee shall at all
times comply with Cardinal's policies on option exercises and the selling and
buying of Cardinal stock.
(d) EXPENSES. The Company shall reimburse the Executive for
all reasonable business expenses incurred by the Executive in the performance of
his services hereunder for the Company, which expenses shall be substantiated to
the reasonable satisfaction of the Company, in a manner similar to that
applicable to other management personnel of the Company, and the Executive shall
provide all necessary records to reflect the reasonable business expenses
incurred.
(e) VACATION. During the Employment Period, the Executive
shall be entitled to annual paid vacations as provided in the Company's vacation
policy as in effect prior to the Effective Time, as it may be revised thereafter
from time to time.
(f) CLUB MEMBERSHIP. During the Employment Period, the
Company shall pay the cost of the Executive's membership in the St. Louis Club.
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<PAGE> 7
(g) The Executive shall be entitled to receive any bonus
earned for the fiscal year of the Company ending September 30, 1995 pursuant to
the terms of the Employment Agreement dated as of October 1, 1994, between the
Company and the Executive (the "Prior Agreement"), and the provisions of the
Prior Agreement relating to such bonus shall remain in effect following the
Effective Time to the extent such bonus has not previously been paid to the
Executive.
4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. The Company shall be entitled to terminate the
Executive's employment because of the Executive's Disability during the
Employment Period. "Disability" means the illness or disability of the Executive
which prevents or hampers the performance of his obligations hereunder, and
which continues for a consecutive period of one hundred and twenty (120) days or
longer or an aggregate period of one hundred and eighty (180) days or longer, in
either instance during the Employment Period. A termination of the Executive's
employment by the Company for Disability shall be communicated to the Executive
by written notice, and shall be effective upon receipt of such notice by the
Execu-
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<PAGE> 8
tive (the "Disability Effective Date").
(b) BY THE COMPANY. (i) The Company may terminate the
Executive's employment during the Employment Period for Cause or without Cause.
"Cause" shall mean (A) fraud, misappropriation, embezzlement or material
misconduct on the part of the Executive, (B) the Executive's (x) failure to
substantially perform his duties for the Company when and to the extent
requested by the Board or its lawfully designated representative to do so and
(y) failure to correct same within five (5) business days after notice from the
Board or its lawfully designated representative requesting the Executive to do
so, or (C) the Executive's breach of any material provision of this Agreement.
(ii) A termination of the Executive's employment by the
Company without Cause shall be effected by giving the Executive written notice
of the termination.
(c) GOOD REASON. (i) The Executive may terminate
employment for Good Reason or without Good Reason. "Good Reason" means:
(A) the assignment to the Executive of duties
inconsistent in any material respect with Section 2(a) of this
Agreement, other than any such action that is remedied by the
Company within five (5) business days after receipt of notice
thereof from the Executive;
(B) any failure by the Company to comply
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<PAGE> 9
with any provision of Section 3 of this Agreement other than
any such failure that is remedied by the Company within five
(5) business days after receipt of notice thereof from the
Executive; or
(C) any requirement by the Company that the
Executive's services be rendered primarily at a location or
locations not complying with the provisions of Section 2(c) of
this Agreement, other than any such requirement that is
remedied by the Company within five (5) business days after
receipt of notice thereof from the Executive.
(ii) A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the tenth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given); PROVIDED,
that such a termination of employment shall not become effective if the Company
shall have substantially corrected the circumstance giving rise to the Notice of
Termination within such 30-day period.
(iii) A termination of the Executive's employment
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<PAGE> 10
by the Executive without Good Reason shall be effected by giving the Company
written notice of the termination.
(d) DATE OF TERMINATION. The "Date of Termination" means the
date of the Executive's death, the Disability Effective Date, the date on which
the termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, the date on which the Company gives the
Executive notice of a termination of employment without Cause, or the date on
which the Executive gives the Company notice of a termination of employment
without Good Reason, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) DEATH,
DISABILITY, CAUSE; WITHOUT GOOD REASON. If, during the Employment Period, the
Executive's employment is terminated because of death, Disability, for Cause, or
by the Executive without Good Reason, then except as provided in Section 8, the
Executive shall not be entitled to any compensation provided for under this
Agreement, other than Annual Base Salary through the Termination Date, benefits
under any long-term disability insurance coverage in the case of termination
because of Disability, and (without limiting the provisions of Section 6 hereof)
vested
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<PAGE> 11
benefits, if any, required to be paid or provided by law.
(b) WITHOUT CAUSE; GOOD REASON. If, during the Employment
Period, the Executive's employment is terminated by the Company without Cause or
by the Executive for Good Reason, the Executive shall not be entitled to any
compensation provided for under this Agreement except as set forth in the
following sentence. The Company (i) shall continue to pay the Executive his
Annual Base Salary, at the rate then in effect, for and with respect to the
unexpired portion of the Employment Period (in the same manner as specified in
Section 3(a) hereof) and (ii) shall continue the group health benefits provided
for in Section 3(c) during the unexpired portion of the Employment Period (in
the same manner as specified therein); PROVIDED, that (x) if any such benefits
cannot be provided to nonemployees under the terms of the applicable plans or
applicable law, the Company shall provide the Executive with substitute benefits
that are comparable and equal in value to such benefits, and (y) during any
period when the Executive is eligible to receive any such benefits under another
employer-provided plan, the benefits provided by the Company under this
paragraph may be made secondary to those provided under such other plan.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this
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<PAGE> 12
Agreement shall prevent or limit the Executive's continuing or future
participation in any plan, program, policy or practice provided by the Company,
Cardinal or any of the Affiliated Companies for which the Executive may qualify,
nor, subject to Section 10(f), shall anything in this Agreement limit or
otherwise affect such rights as the Executive may have under any contract or
agreement with the Company, Cardinal or any of the Affiliated Companies. Vested
benefits and other amounts that the Executive is otherwise entitled to receive
under any plan, policy, practice or program of, or any contract or agreement
with, the Company, Cardinal or any of the Affiliated Companies on or after the
Date of Termination shall be payable in accordance with such plan, policy,
practice, program, contract or agreement, as the case may be, except as
explicitly modified by this Agreement.
7. MITIGATION. Following any termination of the Executive's
employment that gives rise to a right to payments and benefits described in
Section 5(b) above, the Executive shall use reasonable efforts to obtain other
employment or self-employment, of a nature comparable to the employment provided
for in this Agreement, and if the Executive does engage in any other employment
or self-employment, the payments of Annual Base Salary that the
-12-
<PAGE> 13
Company is obligated to make pursuant to Section 5(b) above shall be reduced
(but not below zero) by the amount of the Executive's remuneration from such
other employment or self-employment, as and when earned or vested (regardless of
when paid or received).
8. CONFIDENTIAL INFORMATION; NO-RAID; NONCOMPETITION;
INVENTIONS. (a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company, Cardinal and the Affiliated Companies all secret or confidential
information, knowledge or data relating to the Company, Cardinal or any of the
Affiliated Companies and their respective businesses (including, without
limitation, any proprietary and not publicly available information concerning
any processes, methods, trade secrets, research, secret data, costs or names of
users or purchasers of their respective products or services, business methods,
operating procedures or programs or methods of promotion and sale) that the
Executive obtains during the Executive's employment by the Company, Cardinal or
any of the Affiliated Companies and that is not public knowledge (other than as
a result of the Executive's violation of this of Section 8(a)) ("Confidential
Information"). For the purposes of this Section 8(a), information shall not be
deemed to be publicly available merely because it is embraced by general
disclosures or
-13-
<PAGE> 14
because individual features or combinations thereof are publicly available. The
Executive shall not communicate, divulge or disseminate Confidential Information
at any time during or after the Executive's employment with the Company,
Cardinal or any of the Affiliated Companies, except with the prior written
consent of the Company, Cardinal or such Affiliated Company, as applicable, or
as otherwise required by law or legal process. All records, files, memoranda,
reports, customer lists, drawings, plans, documents and the like that the
Executive uses, prepares or comes into contact with during the course of his
employment shall remain the sole property of the Company, Cardinal and/or one or
more of the Affiliated Companies, as applicable, and shall be turned over to the
Company, Cardinal or such Affiliated Company, as applicable, upon termination of
the Executive's employment.
(b) The Executive agrees that he will not, at any time during
or after the Executive's employment with the Company, Cardinal or any of the
Affiliated Companies, without the prior written consent of the Company, Cardinal
or such Affiliated Company, as applicable, directly or indirectly employ, or
solicit the employment of (whether as an employee, officer, director, agent,
consultant or independent contractor), any person who was or is at any
-14-
<PAGE> 15
time during the previous twelve (12) months an employee, representative, officer
or director of the Company, Cardinal or any of the Affiliated Companies (except
for such employment by the Company, Cardinal or any of the Affiliated
Companies).
(c) During the Noncompetition Period (as defined below), the
Executive shall not, without the prior written consent of the Board, engage in
or become associated with a Competitive Activity. For purposes of this Section
8(c): (i) the "Noncompetition Period" means the Initial Noncompetition Period
(as defined in clause (ii) of this sentence) plus the applicable Additional
Noncompetition Period (as defined in clause (iii) of this sentence); (ii) the
"Initial Noncompetition Period" means the period during which the Executive is
employed by the Company, Cardinal, or any of the Affiliated Companies; (iii) the
Additional Noncompetition Period means (A) in the case of a termination of the
Executive's employment by the Company for Cause, the period beginning on the
last day of the Initial Noncompetition Period and ending on the third
anniversary thereof, (B) in the case of a termination of the Executive's
employment by the Executive without Good Reason, the period beginning on the
last day of the Initial Noncompetition Period and ending on the fifth
anniversary thereof, (C) in
-15-
<PAGE> 16
the case of a termination of the Executive's employment by the Company without
Cause or by the Executive for Good Reason, the period beginning on the last day
of the Initial Noncompetition Period and ending on the later of the first
anniversary thereof or the first anniversary of the first date on which the
Executive no longer is receiving any compensation or benefits pursuant to
Section 5(b) hereof, plus any subsequent period during which the Executive
receives any compensation or benefits pursuant to Section 5(b) hereof, and (D)
in the case of any other termination of the Executive's employment, the period
beginning on the last day of the Initial Noncompetition Period and ending on the
later of the first anniversary thereof or the sixth anniversary of the Effective
Time; (iv) a "Competitive Activity" means any business or other endeavor, in the
United States or Canada or any other country, of a kind then being conducted by
the Company, Cardinal or any of the Affiliated Companies in such country; and
(v) the Executive shall be considered to have become "associated with a
Competitive Activity" if he becomes directly or indirectly involved as an owner,
principal, employee, officer, director, independent contractor, representative,
stockholder, financial backer, agent, partner, advisor, lender, or in any other
individual or representative capacity with any indi-
-16-
<PAGE> 17
vidual, partnership, corporation or other organization that is engaged in a
Competitive Activity. Notwithstanding the foregoing, the Executive may make and
retain investments during the Employment Period in not more than five percent
of the equity of any entity engaged in a Competitive Activity, if such equity
is listed on a national securities exchange or regularly traded in an
over-the-counter market. Should this provision be unenforceable in any
jurisdiction because it is deemed too broad, as to time, area, subject matter,
or otherwise, this provision shall be deemed modified to the extent necessary
to be enforceable in such jurisdiction. The parties acknowledge that after the
end of the Initial Noncompetition Period, nothing contained in this Section
8(c) shall prevent the Executive from owning or operating a pharmacy or similar
type of business, or in any way working for a business engaged primarily in
franchising (other than franchising of pharmacies or other businesses in which
the Company, Cardinal or any of the Affiliated Companies is engaged), so long
as such activity is not in competition with the Company, Cardinal or any
of the Affiliated Companies.
(d) In consideration for the Executive's agreeing to be bound
by the provisions of Section 8(c), he shall be
-17-
<PAGE> 18
granted, as of the Effective Time, (i) options (the "Options") to purchase
10,000 shares of common stock of Cardinal (the "Cardinal Stock"), and (ii) 5,000
shares of restricted Cardinal Stock (the "Restricted Stock"), in each case
pursuant to the Cardinal Stock Plan. The Options shall have a per-share exercise
price equal to the last sale price of a share of the Cardinal Stock on the New
York Stock Exchange on the day during which the Effective Time occurs or, if no
such sales take place on such day, on the most recent prior day on which such
sales take place. In addition, the Options shall have a term of ten years from
the Effective Time, shall vest and become exercisable on the third anniversary
of the Effective Time, and shall otherwise be subject to the standard terms and
conditions applicable to option grants under the Cardinal Stock Plan. The
Restricted Stock shall vest and become exercisable on the third anniversary of
the Effective Time, and shall otherwise be subject to the standard terms and
conditions applicable to restricted stock grants under the Cardinal Stock Plan.
(e) All plans, discoveries and improvements, whether
patentable or unpatentable, made or devised by the Executive, whether by himself
or jointly with others, from the date of the Executive's initial employment by
the Company and continuing until the end of the Employment
-18-
<PAGE> 19
Period and any subsequent period when the Executive is employed by the Company,
Cardinal or any of the Affiliated Companies, relating or pertaining in any way
to his employment with or the business of the Company, Cardinal or any of the
Affiliated Companies, shall be promptly disclosed in writing to the Board and
are hereby transferred to and shall redound to the benefit of the Company, and
shall become and remain its sole and exclusive property. The Executive agrees to
execute any assignments to the Company or its nominee, of his entire right,
title and interest in and to any such discoveries and improvements and to
execute any other instruments and documents requisite or desirable in applying
for and obtaining patents or copyrights, at the expense of the Company, with
respect thereto in the United States and in all foreign countries, that may be
required by the Company. The Executive further agrees, during and after the
Employment Period, to cooperate to the extent and in the manner required by the
Company, in the prosecution or defense of any patent or copyright claims or any
litigation, or other proceeding involving any trade secrets, processes,
discoveries or improvements covered by this Agreement, but all necessary
expenses thereof shall be paid by the Company.
(f) The Executive acknowledges and agrees that the Company's
remedy at law for any breach of the
-19-
<PAGE> 20
Executive's obligations under this Section 8 would be inadequate and agrees and
consents that temporary and permanent injunctive relief may be granted in any
proceeding which may be brought to enforce any provision of such Section without
the necessity of proof of actual damage. With respect to any provision of this
Section 8 finally determined by a court of competent jurisdiction to be
unenforceable, the Executive and the Company hereby agree that such court shall
have jurisdiction to reform this Agreement or any provision hereof so that it is
enforceable to the maximum extent permitted by law, and the parties agree to
abide by such court's determination.
9. SUCCESSORS. (a) This Agreement is personal to the
Executive, and he may not assign any interest herein in any manner whatsoever.
Any purported assignment by the Executive shall be void.
(b) In addition to assignments by operation of law, the
Company shall have the right to assign this Agreement to any person, firm or
corporation, controlling, controlled by or under common control with the Company
(including without limitation Cardinal or any of the Affiliated Companies), or
acquiring substantially all of its assets, but such assignment shall not release
the Company from its
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<PAGE> 21
obligations under this Agreement.
10. MISCELLANEOUS. (a) The provisions of Sections 5, 6, 7, 8,
9 and 10 of this Agreement shall survive any expiration or termination of this
Agreement.
(b) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(c) All notices, requests, consents and other communications
required or provided under this Agreement shall be in writing and shall be
deemed sufficient if delivered by facsimile, overnight courier, or certified or
registered mail, return receipt requested, postage prepaid, and shall be
effective upon delivery as follows:
IF TO THE EXECUTIVE:
--------------------
David A. Abrahamson
200 S. Brentwood Boulevard
Apartment 21A
St. Louis, Missouri 63105
Facsimile:
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<PAGE> 22
IF TO THE COMPANY:
------------------
Medicine Shoppe International, Inc.
101 S. Hanley Road, Suite 1600
St. Louis, Missouri 63105
Attention: Assistant Secretary
Facsimile:
(with a copy to Cardinal)
IF TO CARDINAL:
---------------
Cardinal Health, Inc.
655 Metro Place South, Suite 925
Dublin, Ohio 43017
Attention: General Counsel
Facsimile: (614) 761-8919
Either party may change the address and/or facsimile number to which notices are
to be sent to that party by giving written notice of such change of address to
the other party in the same manner above provided for giving notice.
(d) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective, but only to the extent of such prohibition or unenforceability,
without invalidating the other provisions hereof or without affecting the
validity or unforceability of such provision in any other jurisdiction.
-22-
<PAGE> 23
(e) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(f) As of the Effective Time, except as specifically provided
in Section 3(g) hereof, this Agreement shall constitute the entire agreement
between the parties relative to the subject matter contained herein, superceding
all prior agreements, including without limitation the Prior Agreement. No
promises, covenants or representations of any character or nature other than
those expressly stated herein have been made to induce either party to enter
into this Agreement. This Agreement shall not be modified, waived or discharged
except in writing duly signed by each of the parties or their authorized
assignees.
(g) The Executive's or the Company's failure to insist upon
strict compliance with any provision of, or to assert any right under, this
Agreement shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement except to the extent any
other party hereto is materially prejudiced by such failure.
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<PAGE> 24
(h) The term "Affiliated Companies" means all companies
controlled by, controlling or under common control with Cardinal, other than the
Company.
11. GUARANTEE. Cardinal hereby irrevocably, absolutely and
unconditionally guarantees the payment by the Company of all compensation that
the Company is obligated to pay to the Executive under Sections 3, 5 and 8 of
this Agreement.
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<PAGE> 25
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and each of the Company and Cardinal has caused this Agreement
to be executed in its name on its behalf, all as of the day and year first above
written.
/S/ DAVID A. ABRAHAMSON
------------------------------
David A. Abrahamson
MEDICINE SHOPPE INTERNATIONAL, INC.
By /S/ DONALD P. GALLOP
------------------------------
Donald P. Gallop
Chairman of Executive
Committee
CARDINAL HEALTH, INC.
By/S/ GEORGE H. BENNETT, JR.
------------------------------
George H. Bennett, Jr.
Executive Vice President
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<PAGE> 26
EXHIBIT A
ANNUAL BONUS
------------
The Annual Bonus for the fiscal year ending
September 30, 1996 shall be determined as follows:
<TABLE>
<CAPTION>
Percentage Increase of Percentage of Target
"Earnings From Operations" Bonus to be paid
Over Fiscal Year Ending based on Actual Aggregate
September 30, 1995 Earnings Performance Amount of Bonus
------------------ -------------------- ---------------
<S> <C> <C>
Below 9% 0 -0-
9% 60% $ 77,076
10% 70% $ 89,922
11% 80% $102,768
12% 90% $115,614
13% 95% $122,037
14% 100% $128,460
15% 110% $141,306
16% 120% $154,152
17% 135% $173,421
For each additional 1% +15% for each $ 19,269
additional
percentage point
</TABLE>
The determination of the "Earnings From Operations" shall be
based upon the Company's unaudited financial statements for the period ending
September 30, 1996, prepared in accordance with generally accepted accounting
principles, consistently applied, but excluding such unusual or nonrecurring
items as may be determined by the Board, which determination shall be conclusive
upon the parties hereto.
Any Annual Bonus due hereunder shall be paid by the Company
on or before January 28, 1997.
<PAGE> 1
10.03
PHARMACEUTICAL
SERVICES AGREEMENT
------------------
This agreement is made as of August 1, 1996, between Kmart Corporation,
whose principal address is 3100 West Big Beaver Road, Troy, Michigan 48084
(hereinafter, "Kmart") and Cardinal Health* (consisting of those corporate
entities defined as such on the signature page), whose principal business
address is 5555 Glendon Court, Dublin, Ohio 43016 (collectively, "Cardinal
Health").
BACKGROUND INFORMATION
----------------------
A. Kmart is engaged in the business of selling consumer products,
including prescription pharmaceutical products, at retail locations located
throughout the United States.
B. Cardinal Health is a distributor of pharmaceutical and related
health care products to chain and independent drug stores, hospitals, alternate
care centers, and other customers located throughout the United States.
C. On January 28, 1994, Kmart and Whitmire Distribution Corporation (a
corporation which was subsequently acquired by Cardinal Health on February 7,
1994) entered into a Merchandise Agreement (the "Current Agreement") pursuant to
which Cardinal Health serves as the primary wholesale supplier of pharmaceutical
and related products to most of Kmart's stores.
D. Kmart and Cardinal Health now desire to expand the primary wholesale
supply relationship to all of Kmart's stores, including those stores hereafter
acquired or opened during the term of this Agreement (the "Stores"), and
establish certain advertising, inventory management, repackaging, and joint
marketing initiatives with respect to Kmart's pharmacy operations. A complete
listing of the existing Kmart Stores is included in the Item D Disclosure
Schedule.
STATEMENT OF AGREEMENT
----------------------
Cardinal Health and Kmart (the "Parties") acknowledge the accuracy of
the above Background Information and hereby agree as follows:
Section 1. SUPPLY OF MERCHANDISE. Upon the terms and conditions
described in this Agreement, Kmart will: (a) obtain from Cardinal Health
pursuant to the consignment provisions contained herein and in the Purchase and
Consignment Agreement (as defined below), all prescription pharmaceutical
products ("Rx Products"), including all Rx Products purchased from the
manufacturer in bulk or larger quantity containers and repackaged for the Stores
into smaller quantity containers (the "Repackaged Drug
<PAGE> 2
Products") for sale to customers of the Stores; and (b) at Kmart's option,
purchase from Cardinal Health certain non-prescription products ("Non Rx
Products") routinely stocked by Cardinal Health and ordered from time-to-time
by the Stores, including vials, syringes, insulin, and other over-the-counter
merchandise and supplies.
Cardinal Health will exercise all reasonable efforts to provide each
Kmart Store with the following average monthly Service Level per Store,
calculated in accordance with the standards and procedures described in the
Section 1 Disclosure Schedule: (a) (i) 96% or better for all Rx Products prior
to implementation of an automated replenishment inventory system and (ii) 98% or
better for all Rx Products after implementation of an automated replenishment
inventory system, and (b) 99% or better for the 200 Rx Product SKU's set forth
in the Section 1 Disclosure Schedule, both before and after implementation of an
automated replenishment inventory system. The Service Level guaranty will become
effective for any new Store 60 days after the opening of such new Store. If the
average Cardinal Health Service Level for any Store should fall below the levels
set forth above for any 30 calendar day period (despite the reasonable efforts
of Cardinal Health), then Kmart will be entitled to payment from Cardinal Health
of an amount equal to 0.1% multiplied by the total Rx Products dispensed and
paid for by that Kmart Store during the 30 calendar days in which the Service
Level was below the specified level. Payment will be made within 10 business
days after the end of the effected 30 day period and will constitute Kmart's
sole remedy for such failure to meet the Service Level guaranty for that Store.
Cardinal Health will provide Kmart with a Service Level report at the end of
each month by distribution center (each report to provide a statement of service
on a Store-by-Store basis) and upon reasonable demand of Kmart up to 12
company-wide Service Level reports per contract year.
Section 2. ADVERTISING INITIATIVES.
(a) INITIAL ADVERTISING PROGRAM FUNDS. Cardinal Health will
deliver payment to Kmart in the dollar amount ("Initial Advertising Program
Funds") set forth in the Section 2 Disclosure Schedule within 5 days of the
execution of this Agreement. The Initial Advertising Program Funds will be used
by Kmart for implementation of an advertising campaign to promote Kmart's
pharmacy program. If this Agreement is terminated prior to the fifth anniversary
of the Commencement Date other than termination by Kmart for cause pursuant to
the procedures outlined in Section 20, then Kmart will promptly refund to
Cardinal Health a portion of the Initial Advertising Program Funds on the terms
and subject to the conditions described in the Section 2 Disclosure Schedule.
(b) SUPPLEMENTAL ADVERTISING SUPPORT. Cardinal Health will
also contribute supplemental advertising support (the "Supplemental Advertising
Support") for ongoing development of the Kmart pharmacy program. The
Supplemental Advertising Support will be paid in such amounts and subject to the
conditions and parameters described in the Section 2 Disclosure Schedule based
upon incremental increases in the Store's purchase volume in selected markets
above certain benchmarks.
-2-
<PAGE> 3
Section 3. CONSIGNMENT. Effective as of August 1, 1996 (the
"Consignment Effective Date"), Cardinal Health will purchase from Kmart the Rx
Products (whether or not previously purchased from Cardinal Health) then held by
Kmart as inventory at the Stores (except those Stores located in Puerto Rico),
as well as the Repackaged Drug Product repackaged by Prestige Packaging, Inc.
for Kmart and located at certain of Cardinal Health's distribution centers, on
the Consignment Effective Date on the terms and subject to the conditions
described in the purchase and consignment agreement between the Parties having
the same date as this Agreement (the "Purchase and Consignment Agreement").
The purchase price (the "Purchase Price") for the sale and assignment
of such purchased inventory (the "Consignment Date Rx Inventory") will be an
amount equal to the Agreed Value (as defined below) of the Stores' total
merchantable inventory of Rx Products on the Consignment Effective Date,
exclusive of any Rx Products with an expiration date prior to the Consignment
Effective Date. The amount of any accounts receivable (excluding those subject
to reasonable disputes) associated with Rx Products or Non Rx Products based on
a reconciliation agreed to by the Parties from Kmart to Cardinal Health on the
Consignment Effective Date will be credited against the Purchase Price and
reduce the amount actually paid by Cardinal Health to Kmart. The "Agreed Value"
of the Consignment Date Rx Inventory will mean the total value thereof
determined by a physical count of the Consignment Date Rx Inventory, with each
unit of inventory being valued based upon the manufacturer's published wholesale
acquisition cost or the Kmart contract cost, as applicable, for such unit as of
July 15, 1996 from Cardinal Health, except inventory in those 250 Stores (the
"Sample Stores") having Telxon devices with NDC level of inventory capabilities
which will be valued based upon the manufacturer's published wholesale
acquisition cost or the Kmart contract cost, as applicable, for such unit as of
July 31, 1996 (or such other amount applicable to any Specially Priced
Merchandise as defined in Section 7 below). The physical count of the
Consignment Date Rx Inventory will be conducted by Kmart or its representatives,
with the assistance and participation of Cardinal Health. The Purchase Price
(less applicable credits as detailed above) will be paid by wire transfer from
Cardinal Health to Kmart (pursuant to written wire instructions to be delivered
to Cardinal Health by Kmart) no later than the later of: (a) 5 business days
following completion of the physical inventory, or (b) the date on which all
conditions to Cardinal Health's obligations under the Purchase and Consignment
Agreement have been satisfied or waived by Cardinal Health.
Section 4. TITLE TO CONSIGNED INVENTORY. Prior to and after delivery of
consigned inventory to the Kmart Stores under the terms of this Agreement
(including Rx Product inventory sold by Kmart to Cardinal Health on the
Consignment Effective Date), title to such consigned inventory will be held by
RedKey, Inc. until such time as such inventory is dispensed by Kmart and RedKey,
Inc. will be the owner of all such consigned inventory until such time as such
inventory is dispensed by Kmart.
-3-
<PAGE> 4
Section 5. DELIVERY/ORDER SUBMISSION PROCEDURES.
(a) PRIOR TO CONSIGNMENT EFFECTIVE DATE. Prior to the
Consignment Effective Date, each of the Stores will develop and place orders for
Rx Products (including Repackaged Drug Products) and, if applicable, Non Rx
Products (collectively, "Merchandise") directly with the applicable servicing
facility of Cardinal Health. Orders transmitted to Cardinal Health no later than
8:00 p.m. will be delivered no later than 12:00 noon the next business day,
Monday thru Friday, or as otherwise established by mutual agreement in writing
of the Kmart Pharmacy District Managers and the applicable servicing facility;
provided, however, unless otherwise agreed in writing, Cardinal Health shall not
require a Store to place orders prior to 7:00 p.m. to receive deliveries by
12:00 noon the next business day. All orders will be electronically transmitted
via Telxon or other electronic order entry system reasonably acceptable to
Cardinal Health.
(b) AFTER CONSIGNMENT EFFECTIVE DATE. After the Consignment
Effective Date and prior to such time as the Parties have implemented the
Central Inventory Management Program (defined below), replenishment orders for
the Rx Products will continue to be initiated by the Stores, consistent with
the procedures described in Section 5(a) and subject to the review of Cardinal
Health. It is understood and agreed between the Parties that the inventory of
Rx Products held at the Stores will be managed at a level designed to achieve
an average 11 inventory "turns" determined in accordance with generally
accepted accounting principles (the "Inventory Turns Target") during each of
the first three contract years of this Agreement. For purpose of this
Agreement, inventory turns will be calculated on an aggregate basis each
contract year based upon the average daily consigned inventory during such
year, compared against sales of consigned inventory during the same period. If
for any of the first three contract years, the actual inventory turns achieved
is less than the Inventory Turns Target, then Kmart will pay Cardinal Health a
service charge of 10% on such excess inventory within 5 business days of
Cardinal Health's invoice for same. If for any of the first three contract
years, the actual inventory turns achieved is greater than the Inventory Turns
Target, then Cardinal Health will pay Kmart an inventory reduction bonus of 10%
on such reduction in inventory within 5 business days of Kmart's invoice for
same. On or before the third anniversary of the Commencement Date, the Parties
will mutually implement a central inventory management program (the "Central
Inventory Management Program") pursuant to which Cardinal Health will assume
responsibility for managing the ordering process and the consigned pharmacy
inventories for the Stores. Once the Central Inventory Management Program has
been implemented the Inventory Turns Target will be discontinued, and no
further adjustments (other than a pro-rata adjustment through the date of such
implementation) will be made by or to either Kmart or Cardinal Health. If the
Central Inventory Management Program is not implemented by the third
anniversary of the Commencement Date, then the Inventory Turns Target in the
fourth and fifth contract years will be 12 (and the related service charge and
inventory reduction bonus calculations will continue as described above).
-4-
<PAGE> 5
All Non Rx Products will continue to be ordered and delivered as set
forth in Section 5(a), above, both before and after the Consignment Effective
Date, but nothing contained in this Agreement will require Kmart to purchase
Non Rx Products from Cardinal Health.
Section 6. PUERTO RICO. Notwithstanding anything contained in this
Agreement to the contrary, all Merchandise to be delivered to Stores located in
Puerto Rico will continue to be ordered and delivered as set forth in Section
5(a), above, and paid for as set forth in Section 8(a), below, both before and
after the Consignment Effective Date. The purchase price for all Merchandise
delivered to Stores located in Puerto Rico will be as described in Section 7
below consistent with the Pricing Matrix (as defined below). Cardinal Health
will deliver all Merchandise to Stores located in Puerto Rico FOB Cardinal
Health's distribution facility located in New Orleans, Louisiana (or such other
facility as may be designated by Cardinal Health). Title to such Merchandise
will pass to Kmart upon delivery to Kmart's designated freight forwarder.
Section 7. PURCHASE PRICE. The purchase price for Rx Products purchased
under this Agreement will be an amount equal to Cardinal's Cost less the
percentage of Cardinal's Cost shown in the pricing matrix described in the
Section 7 Disclosure Schedule (the "Pricing Matrix"), which amount is net of the
prompt payment discount provided in Section 8 of this Agreement. As used herein,
(a) prior to the Consignment Effective Date, the term "Cardinal's Cost" means
the manufacturer's published wholesale acquisition cost ("WAC") on the date the
Merchandise is ordered by the Stores, and (b) from and after the Consignment
Effective Date, the term "Cardinal's Cost" means the manufacturer's published
WAC on the date the Rx Products is dispensed by the Stores. Manufacturer
off-invoice quantity discounts and promotional allowances made available to
Cardinal Health will be included in the Kmart price. Distribution allowances due
a retailer and made available to Kmart for product placement in Kmart Stores
will be paid directly to Kmart by the applicable vendor or by Cardinal Health
should the vendor credit Cardinal Health for Kmart's distribution or placement
allowances.
The purchase price for Non Rx Products purchased under this Agreement
will be equal to Cardinal's Cost plus the percentage of Cardinal's Cost shown in
the Pricing Matrix. As used herein, the term Cardinal's Cost for Non Rx Products
means WAC on the date the Non Rx Products are ordered by the Stores.
The purchase price for selected Merchandise, including but not limited
to Repackaged Drug Products, multisource pharmaceuticals, private label
products, medical surgical supplies, home health care/durable medical equipment,
contract price items, certain antibiotics, Merchandise acquired from vendors not
offering customary cash discount or other terms reasonably acceptable to
Cardinal Health, and other slow moving, specialty, and Non Rx Products will not
be based upon the cost pricing described in the Pricing Matrix, but will instead
be net-billed in accordance with the terms, conditions and special programs
established by Cardinal Health (including applicable mark-up) for such
Merchandise. Merchandise described in this paragraph is sometimes referred to as
"Specially Priced Merchandise".
-5-
<PAGE> 6
Kmart will maintain a table of the purchase prices (the "Pricing
Table") for Rx Products determined in accordance with the provisions of this
Section 7 and the Section 7 Disclosure Schedule, which table will be updated and
supplemented from time to time to reflect actual increases or decreases in the
applicable purchase price. All changes to the Pricing Table will be initiated by
Cardinal Health, subject to review and verification by Kmart. Changes in the
purchase price for any Rx Product will not be effective in the Pricing Table
until the actual effective date of the change. Kmart will promptly input into
the Pricing Table all valid changes to the applicable purchase prices.
Section 8. PAYMENT TERMS.
(a) PRIOR TO CONSIGNMENT EFFECTIVE DATE. Prior to the
Consignment Effective Date, Cardinal Health will produce and transmit to Kmart
on a weekly basis a consolidated statement with line item detail on tape for all
Store purchases invoiced by Cardinal Health during the preceding seven days. For
purchases invoiced Friday through Thursday, Cardinal Health will issue its
statement on the next succeeding Friday and payment of such statement must be
received by Cardinal Health no later than noon (Dublin, Ohio time) on the second
Monday following such Friday (such second Monday, the "Non Consigned Merchandise
Prompt Payment Date") in good funds transferred via ACH electronic funds
transfer to such bank account as Cardinal Health may from time to time designate
in writing to Kmart or other payment method agreed to by the Parties. Should
such second Monday be a bank holiday, payment must be so received by noon
(Dublin, Ohio time) on the following Tuesday. (For example, for purchases
Friday, May 7 through Thursday, May 13, the statement would be issued Friday,
May 14, and payment must be received via ACH electronic funds transfer or other
payment method agreed to by the Parties no later than noon (Dublin, Ohio time)
on Monday, May 24. If Monday, May 24 is a bank holiday, the payment must be
received via ACH electronic funds transfer or other payment method agreed to by
the Parties no later than noon (Dublin, Ohio time) on Tuesday, May 25.)
(b) AFTER CONSIGNMENT EFFECTIVE DATE. From and after the
Consignment Effective Date, the Rx Products will be paid for by Kmart in good
and usable funds on the second banking day following the sale or dispensing of
Rx Products by the Stores based on the dispensing data received at Kmart's
Headquarters from the Stores (such second banking day, the "Consigned
Merchandise Prompt Payment Date" and, together with the Non Consigned
Merchandise Prompt Payment Date, the "Prompt Payment Date"). In order to
facilitate proper accounting and record-keeping, the Parties will establish
procedures to document the product movement at the time of delivery.
Physical inventories will be conducted by Kmart at Kmart's expense,
with the participation of Cardinal Health and its representatives, as follows:
(i) as of October 31, 1996, with respect to each of the Sample Stores; (ii) as
of each July 31 during the term of the Agreement, with respect to all Stores;
and (iii) as of conversion to auto replenishment, with respect to each Store
implementing such conversion. Kmart will conduct cycle
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counts on a limited number of items between physical inventories to confirm the
integrity of the system, at such times and frequency as may be reasonably
approved by the Parties. If consigned product is damaged or lost by casualty or
shrinkage (due to theft or other unexplained loss), then Kmart will treat such
product as having been sold or dispensed and the Parties will include the amount
due to Cardinal Health for such product in calculating any net underpayment or
overpayment below.
Promptly following the end of each contract quarter, the Parties will
calculate a reconciliation of the ending consigned inventory. This
reconciliation will be determined as a function of beginning consigned
inventory, plus net consigned product delivered to the Stores during the
reconciliation period, less payments made by Kmart to Cardinal Health during the
reconciliation period, and subject to an inflation factor to reflect the
agreement of the Parties that Cardinal is entitled to all price inflation on the
consigned inventory. For purposes of this calculation, the inflation factor will
be calculated comparing the price at the beginning of the period against the
price at the end of the period and applying the difference against the
dispensing volume per item. This weighted average will be applied against the
computed balance of consigned inventory as of the end of the reconciliation
period. If a quarterly reconciliation reflects a shortage or overage in the
consigned inventory (as compared to the amount of consigned inventory delivered
by Cardinal Health but not yet paid for), then such amount will be calculated
and carried forward to the following contract quarter. As of the end of each
contract year, an aggregate reconciliation for the year will be calculated by
Cardinal Health and confirmed by Kmart (netting all quarterly shortages and
overages for such contract year), and any net overpayments or underpayments
determined to be owed based upon such reconciliation will be paid by/to the
applicable Party promptly following completion of such reconciliation.
All Non Rx Products will continue to be paid for as set forth in
Section 8(a) above both prior to and after the Consignment Effective Date.
(c) METHOD OF PAYMENT. All payments for Merchandise will be
made by Kmart via ACH electronic funds transfer or other method agreed to by the
Parties so as to provide Cardinal Health with good and usable funds on or before
the applicable due date as defined below. Kmart will receive a 2% prompt payment
cash discount on all payments received by Cardinal Health by the applicable
Prompt Payment Date. Cardinal Health retains the right to make appropriate
adjustments to the Pricing Matrix, refuse orders, and/or suspend its supply
relationship as to all or any part of the orders placed under this Agreement if
Kmart fails to make payments to Cardinal Health in accordance with the
provisions of this Agreement (other than for any invoice which is disputed in
good faith and in a reasonably timely fashion).
Section 9. REPACKAGED DRUG PRODUCTS. During the term of this Agreement,
Cardinal Health will make available to Kmart its full line of Repackaged Drug
Products, and Kmart will obtain from Cardinal Health pursuant to the consignment
provisions contained herein and in the Purchase and Consignment Agreement all
Repackaged Drug Products for the
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Stores. Kmart will participate in Cardinal Health's automatic substitution
program to facilitate maximum savings associated with the repackaging program.
The initial net price list (i.e., net of anticipated Repackaged Drug
Product volume discounts) to Kmart for consigned Repackaged Drug Products is
included in the Section 9 Disclosure Schedule, which schedule may be adjusted
from time to time by Cardinal Health with prior notice to Kmart based upon
additions and deletions of repackaged items and changes in Cardinal's Cost for
the Rx Products in proportion to such change in Cardinal's Cost (as adjusted
from time to time, the "Repackaged Drug Product Price List"). Cardinal Health
will pay volume discounts on Kmart's purchases of Repackaged Drug Product as
specified in the Section 9 Disclosure Schedule. In no event will Cardinal
Health's price (net of discounts) for Repackaged Drug Products to Kmart fail to
reflect a price less than Cardinal Health's standard ProfitPak(R) price.
Section 10. HEALTHTOUCH(R). Cardinal Health will provide to Kmart
without additional charge the use of fifty Healthtouch units for a six-month
test period commencing as of a date and in Stores mutually selected by the
Parties. During the test period, Kmart will not be responsible for any damage to
the Healthtouch units from any cause. The purpose of the test period is to
determine the revenue-generating potential from advertisements placed on the
Healthtouch units located in the Stores. During the test period, the Parties
will cooperate with each other to evaluate the advertising revenue and
incremental sales potential of the Healthtouch units located in the Stores. If
the Parties agree to extend the Healthtouch project following the test period
then, as part of such extended program (the "Extended Healthtouch Project"),
they will also develop a fee-sharing arrangement designed to provide Kmart with
35% of net profits (i.e., after equipment, in-Store maintenance, repair, monthly
service, and paper costs, and other charges) generated from the advertising
revenues associated with Healthtouch units placed in the Stores.
Upon termination of: (a) the test period, if no Expanded Healthtouch
Project is initiated; (b) the Expanded Healthtouch Project; or (c) this
Agreement for any reason, Kmart will, upon request, promptly make the
Healthtouch kiosks available to Cardinal Health for pickup. Kmart will not be
responsible for any Healthtouch kiosk not removed by Cardinal Health within 30
days of such termination.
Section 11. AUTO REPLENISHMENT SYSTEM AND DATA INTERCHANGE. Following
the Commencement Date, the Parties will cooperate in the development and
installation of an auto replenishment software system for all of the Stores,
which software system will satisfy all requirements necessary to timely
implement the Central Inventory Management Program in a manner reasonably
acceptable to the Parties. Such software system will be mutually selected by
Kmart and Cardinal Health. The costs associated with the development and
installation of such software system will be shared equally by Kmart and
Cardinal Health.
Both prior to and after installation of the automated replenishment
system, Kmart will provide, and Cardinal Health and Kmart will share equally in
all costs associated with,
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a mutually agreed upon electronic data communications connection to Cardinal
Health, to support and facilitate a timely exchange of the dispensing data
required to support this Agreement (not to include any patient specific data)
including but not limited to transmission of daily dispensing data on a daily
basis. Both parties will use all reasonable efforts to maintain the
availability, security, and privacy of this communications link and the data
exchanged. Cardinal Health will provide item catalog and pricing information to
Kmart in a mutually agreed upon electronic data interchange format. This item
catalog will serve as the source for product cost information used to determine
the payment amounts due to Cardinal Health. Kmart will make available to
Cardinal Health information necessary to reconcile dispensing activity with the
payment made to Cardinal Health. This information will be made available in
mutually agreed upon electronic data interchange format.
Section 12. CARDINALCHOICE-HQ(TM). Cardinal Health will provide at one
Kmart location, at no additional cost to Kmart, its CardinalCHOICE-HQ Corporate
System software.
Section 13. ADDITIONAL SERVICES. Cardinal Health will provide, at no
additional cost to Kmart, the following additional services to each Store:
(a) a Telxon order entry device for use by the Store for the
ordering of Merchandise from Cardinal Health (250 stores will
receive Telxon devices with special physical inventory
capabilities). Cardinal Health will be responsible for
maintenance of the Telxon devises resulting from normal use
and wear;
(b) a hard copy standardized chain-wide merchandise catalogue
to be delivered to each Kmart Store 60 days from the
Commencement Date and provided to all Kmart Stores on a
quarterly basis;
(c) product stickers with each item ordered, with color coding
within 90 days of the Commencement Date;
(d) controlled substance report listing all DEA scheduled
pharmaceuticals delivered during the reporting month;
(e) touch tone stock check;
(f) inventory listing sheets;
(g) one set of Mylar shelf labels with capability to sort in
store layout sequence listing the Rx Products by either
generic or brand name;
(h) telephone customer service Monday through Friday
(excluding holidays) at all Cardinal Health distribution
centers; and
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(i) customized reports upon request by Kmart headquarters as
agreed from time to time between Kmart and Cardinal Health.
Section 14. GENERIC ALLIANCE. Cardinal Health is currently establishing
an enhanced generic formulary and related automatic substitution program for
multisource pharmaceuticals (the "Generic Alliance") with a number of its
customers other than Kmart. The Generic Alliance will combine the expertise,
experience, and purchasing volume of the respective participants in order to
achieve improved pricing and discounts on generic drugs from pharmaceutical
suppliers. Kmart agrees to participate in the Generic Alliance (and the Parties
will share the savings arising from such program) in the manner outlined in the
Section 14 Disclosure Schedule. Cardinal Health reserves the right to determine
which third parties other than Kmart may participate in the Generic Alliance and
inclusion of Kmart in the Generic Alliance will not preclude any other customer
of Cardinal Health from participating in the Generic Alliance.
Section 15. JOINT MARKETING INITIATIVES. During the term of this
Agreement, the Parties will endeavor to develop other joint marketing
initiatives to improve the sales and profitability of the Kmart pharmacy
operations, including expansion of market share incentives with branded
manufacturers, DUR programs, patient micro marketing programs, autodistribution
and rapid stocking for new products, and prescription/OTC companion sales
programs. Specific terms of these programs, including applicable gain-sharing
allocations, will be set forth in separate program materials to be mutually
developed by the Parties.
To ensure mutual benefits of the Joint Marketing Initiatives, Kmart
agrees that, during the term of this Agreement, Kmart will not, directly or
indirectly, participate in any similar or competitive programs or initiatives,
either independently or with any third party (other than Cardinal Health),
except for those specific initiatives listed in the Section 15 Disclosure
Schedule with which Kmart is involved as of the Commencement Date.
Notwithstanding the foregoing, if Kmart should provide notice (the "Initiative
Notice") to Cardinal Health in writing of Kmart's proposed participation in any
joint marketing initiative (including a list of the third parties involved and
a summary of the terms and conditions of such initiative) prior to such time as
Cardinal Health has proposed a similar vendor specific competitive program or
initiative to Kmart, then Kmart may participate in such other program or
initiative with the vendor specified in the Initiative Notice on the terms and
conditions described in the Initiative Notice.
Section 16. REPLENISHMENT ERRORS/OUTDATES/RETURNS OF NON RX PRODUCTS.
(a) NON RX PRODUCTS. The Parties recognize and acknowledge
that the arrangements described in this Agreement could result in products
ordered in error, mispicks, shortages, etc. and that Non Rx Products may need to
be returned to Cardinal Health. Therefore, both prior to and after the
implementation of the Central Inventory Management Program, Cardinal Health will
accept Non Rx Products (including outdated
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Non Rx Product, which must be processed via a third party returned goods
company) for return from Kmart Stores in accordance with the Cardinal Health
Return Goods Policy for Non-Consigned Inventory set forth in the Section 16
Disclosure Schedule and manufacturer return goods policies in effect from time
to time during the term of this Agreement.
(b) RX PRODUCTS. Consigned Rx Products are owned by an
affiliate of Cardinal Health pursuant to this Agreement and the Purchase and
Consignment Agreement. In order to assure that the Rx Products located in the
Stores comply with applicable requirements concerning expiration dating, the
Parties have agreed to procedures pursuant to which consigned Rx Products may be
processed back through the Cardinal Health distribution centers. These
procedures (the "Pharmacy Procedures") will be separately agreed upon by the
Parties. It is understood and agreed that Kmart will be solely responsible (both
prior to and following implementation of the Central Inventory Management
Program) for all of the following ("Category 1 Products"): (a) any item which
has been used or opened, is partially complete, or is without all original
packaging, labeling, inserts, or operating manuals; (b) product that is
stickered, marked, damaged, or defaced; (c) any sterile or refrigerated
merchandise that was not properly stored and protected at all times; and (d) any
low stability products which are unusually sensitive to temperature and handling
conditions. Notwithstanding anything to the contrary contained elsewhere in this
Agreement, Cardinal Health will not be required to process Category 1 Products
back through its distribution centers, and Category 1 Products will instead be
treated as having been sold or dispensed by Kmart and will be paid for in
accordance with the procedures set forth in the last paragraph of this Section
16(b).
On a contract quarterly basis, Kmart Stores will inspect Rx Products on
site and remove those unopened packages which are not anticipated to be used
within 3 months (based on previous demand history) and have dating less than 9
months. If Cardinal Health is able to add such Rx Products to its warehouse
inventory for sale in the normal course of its business, it will do so. To
clarify the foregoing, "in the normal course of its business", the only
procedure Cardinal Health performs to add Rx Products back to its warehouse
inventory for sale is to transport such products from the loading dock of the
applicable Cardinal Health distribution center to the warehouse shelves of such
distribution center. It is understood and agreed by the Parties that if
stability testing or any other procedure would be required to permit such
product to be returned to Cardinal Health's warehouse inventory for sale
pursuant to the Prescription Drug Marketing Act of 1987 or other applicable
regulatory requirements, then Cardinal Health shall not be required to perform
these procedures and shall instead treat such product as Unmerchantable Products
under the procedures described below. For Rx Products which Cardinal Health is
unable to add to its warehouse inventory in the normal course of its business as
described above (the "Unmerchantable Products"), Cardinal Health will arrange
for a third party to process such Rx Products directly to the applicable
manufacturer, and Cardinal Health will retain all manufacturer credits
associated with such Rx Products, net of any third party fees (the "Manufacturer
Credits"). Kmart will pay to Cardinal Health a 5% handling fee for any Rx
Products processed back through the
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Cardinal Health distribution centers or to a third party processor (the
"Processing Amount") in the manner described below.
The aggregate purchase price for all Unmerchantable Products processed
back through the Cardinal Health distribution centers or to the designated third
party processor will be calculated as of the last day of each contract quarter
(the "Quarterly Stock Rotation Amount"), subject to verification by both
Parties. Kmart will pay Cardinal Health a fee associated with all Unmerchantable
Products (the "Stock Rotation Fee") in good and usable funds on or before the
10th business day immediately following completion of the quarterly
reconciliation process for each contract quarter as follows:
(A) for all Category 1 Products, both prior to and following implementation of
the Central Inventory Management Program, the Processing Amount plus the
difference (the "Difference") between (i) the sum of the Quarterly Stock
Rotation Amount and (ii) the aggregate amount of the Manufacturer Credits for
such Rx Products; and
(B) for all other Unmerchantable Products,
(i) for periods prior to implementation of the Central Inventory
Management Program, the Processing Amount plus (a) for the first
$150,000 of the Difference, one-half (1/2) of the Difference and (b)
the entire Difference above $150,000; and
(ii) for periods after implementation of the Central Inventory
Management Program, the Processing Amount plus one-half (1/2) of the
Difference.
Following termination of this Agreement, the Parties will continue to process
any Unmerchantable Products for which processing began prior to termination of
the Agreement and Kmart will remit to Cardinal Health any portion of the Stock
Rotation Fee attributable to such Unmerchantable Products which has not
previously been recovered by Cardinal Health during the term of this Agreement.
Section 17. RESPONSIBILITY FOR MERCHANDISE/REGULATORY COMPLIANCE.
Cardinal Health will deliver all Non Rx Products to the Stores FOB destination,
freight prepaid, and Cardinal Health will bear all risk of loss or damage to
such Non Rx Products while in transit. Upon and following delivery of
Merchandise to the Stores, and whether before or after the Consignment Effective
Date and notwithstanding consignment, Kmart will bear all risk of loss or damage
to all Merchandise, including without limitation loss or damage resulting from
theft or other diversion, fire or other casualty loss.
Cardinal Health will be responsible for and comply with all applicable
federal, state, DEA, and other laws and regulations associated with the
distribution of Merchandise, including without limitation special procedures for
controlled substances, dangerous drugs, and other prescription drugs
(collectively, "Rx Compliance") prior to delivery of Merchandise to the Stores.
Notwithstanding consignment, Kmart will be responsible for and comply with all
Rx Compliance at all times from and after delivery of
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Merchandise to the Stores, including without limitation all Rx Compliance
associated with the storage and handling of consigned Rx Products at the Stores
and the dispensing of Rx Products to its customers.
Section 18. INDEMNIFICATION. Each Party will indemnify, defend, and
hold the other harmless against and from those claims, liabilities, or expenses
(including reasonable attorneys fees) directly attributable to the breach by
that Party of its obligations under this Agreement. Notwithstanding the
foregoing, neither Party will be liable to the other for any incidental,
consequential, punitive or exemplary damages arising in connection with this
Agreement, even if each has been advised of the possibility of such damages and
without regard to the nature of the claim or the underlying theory or cause of
action (whether in contract, tort, or otherwise).
Section 19. MANUFACTURER STANDARDS. Cardinal Health will stock all Rx
Products requested by Kmart for which at least 3 shipping units per month per
Cardinal Health distribution facility are purchased by all Cardinal Health
customers serviced by each distribution center. Notwithstanding the foregoing,
Cardinal Health reserves the right at all times to determine what Merchandise it
will stock in its distribution facilities based upon product quality,
manufacturer indemnity policies, Kmart's past and future merchandise
requirements, and other standards reasonably determined by it, and Cardinal
Health may delete from its available inventory Merchandise which fails to comply
with these standards. Cardinal Health will exercise all reasonable efforts to
provide prior notice to the Stores prior to deleting items previously purchased
by those Stores.
Section 20. TERM. The term of this Agreement will commence as of August
1, 1996 (the "Commencement Date") and will continue thereafter until the fifth
anniversary of such date, with the option to extend the term for successive
additional periods of one year each upon the mutual written consent of the
Parties. Promptly following the termination of this Agreement, Kmart will (a)
return to Cardinal Health all order entry devices, and other hardware or
equipment provided by Cardinal Health and not purchased and paid for by Kmart
and (b) make the Healthtouch kiosks available to Cardinal Health for pickup.
Either Party may effect an early termination of this Agreement for cause: (a) by
giving written notice to the other Party of the occurrence of a material breach
of this Agreement (which notice shall specify the nature of such breach) and the
failure of the other Party to cure or commence in good faith the cure of such
breach within 60 days of receipt of such notice; or (b) by notifying the other
Party of its election to immediately terminate the Agreement following the other
Party's involvement as the debtor in any federal or state bankruptcy or
insolvency proceeding.
Notwithstanding the above, either Party reserves the right, at any time
from and after the second anniversary of the Commencement Date, to effect an
early termination of this Agreement without cause. In order to effect such an
early termination, a Party shall be required to give written notice to the other
not less than 180 days prior to the effective date of the early termination
(which notice may not be initiated by either Party prior to the second
anniversary of the Commencement Date). Notwithstanding the foregoing, an early
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termination by either Party shall not be effective unless the Early Termination
Fee as described in the Section 20 Disclosure Schedule is paid on or before the
effective date of the termination. In the event either Party shall elect to
terminate this Agreement without cause as set forth herein, the other Party will
not be entitled to recover any damages or penalty other than the fees expressly
provided herein.
No termination of this Agreement (including at the end of the term as
stated above) will be effective until such time as Kmart has paid all amounts
owed to Cardinal Health upon such termination, including (if applicable) the
Early Termination Fee, the reimbursement of any unamortized portion of the
Initial Advertising Program Funds, the payment for all Merchandise previously
purchased by Kmart and the payment for, or the delivery back to Cardinal Health
of, all Merchandise delivered to or held by Kmart on consignment as described in
the Purchase and Consignment Agreement, which amounts will automatically become
due and payable on or before the effective date of the termination (unless
previously due and payable), whether with or without cause.
Section 21. TAXES/REPORTING OBLIGATIONS. Kmart will be responsible for
any sales, use, excise, gross receipts, or other federal, state, or local taxes
or other assessments (other than any tax based solely on the net income of
Cardinal Health or the value of the consigned inventory) and related interest
and penalties in connection with or arising out of the transactions contemplated
by this Agreement. Cardinal Health will be responsible for any personal property
or inventory tax on its consigned inventory located at the Stores, and Kmart
will be responsible for any personal property or inventory tax on non-consigned
inventory located at the Stores. If either Party pays any such amounts which the
other Party is obligated to pay under this section, then prompt reimbursement in
an amount equal to the amount so paid is required.
If and to the extent any discounts, credits, rebates, or other purchase
incentives are paid or applied by Cardinal Health with respect to Merchandise
purchased under this Agreement, then applicable provisions of the
Medicare/Medicaid and state health care fraud and abuse/anti-kickback laws
(collectively, "fraud and abuse laws") may require disclosure of the applicable
price reduction on Kmart's claims or cost reports for reimbursement from
governmental or other third parties. Kmart agrees to comply with all applicable
provisions of the fraud and abuse laws.
Section 22. RECORDS AND AUDIT. Each Party will maintain records
pertaining to its performance under this Agreement and as required by applicable
FDA requirements. Not more than twice in any twelve-month period during the term
of this Agreement, any renewal term and for a period of one year following
termination, and following 30 days advance written notice to the other Party,
each Party will have the right to appoint one or more of its employees and/or
its designated independent certified public accountants to review and audit
relevant records for the purpose of verifying compliance with the terms of this
Agreement. Any such review/audit will be subject to a confidentiality agreement
signed by the Party conducting the review/audit and its employee(s) and
designated certified public accountants who will have access to the information
prior to beginning the
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review/audit. Any material error(s) discovered by such audit will be submitted
to the Party being audited for verification and, if and when determined to
constitute a material error, the Party being audited will correct such error
within 10 days and also reimburse the Party conducting the review/audit for the
reasonable out-of-pocket costs of the audit.
Section 23. KMART ACQUISITION OF PHARMACIES. The Parties acknowledge
that during the term of this Agreement Kmart may purchase independent retail
pharmacies (each an "Acquired Pharmacy") and integrate the Acquired Pharmacies
into the Kmart Stores. Cardinal Health will (subject to receipt of documentation
from Kmart evidencing unencumbered title, in form and content comparable to the
Purchase and Consignment Agreement and reasonably acceptable to Cardinal Health)
purchase the Rx Products owned by each Acquired Pharmacy promptly following the
time of any such acquisition, which Rx Products will become part of the
Consigned Inventory and subject to the Purchase and Consignment Agreement. The
purchase price for the Rx Products purchased from any Acquired Pharmacy will be
an amount equal to Cardinal's Cost less the percentage of Cardinal's Cost
specified in the Pricing Matrix (or such other cost applicable to any Specially
Priced Merchandise). For purposes of this Section 23, Cardinal's Cost means the
manufacturer's published WAC on the date of Cardinal Health's purchase of the Rx
Products located at the Acquired Pharmacy. All Rx Products purchased from any
Acquired Pharmacy will be dispensed at Kmart Stores; no such Rx Products may be
returned to Cardinal Health. Kmart will give Cardinal Health written notice as
far in advance as reasonably practicable in the event that Kmart proposes to
acquire any Chain Pharmacy (defined below) or any independent pharmacies in
excess of a total of 60 per year. In the event Kmart's intends to acquire in
excess of 60 pharmacies per year, Cardinal Health may, as to any or all of the
inventory held by such pharmacy in excess of 60: (a) decline to purchase such
inventory; (b) modify the consignment terms with respect to such inventory; or
(c) purchase such inventory as described above. For purposes of this Agreement,
"Chain Pharmacy" means any 10 or more pharmacies having common ownership.
Section 24. FORCE MAJEURE. Each Party's obligations under this
Agreement (exclusive of payment obligations) will be excused if and to the
extent that any delay or failure to perform such obligations is due to fire or
other casualty, product or material shortages, strikes or labor disputes,
transportation delays, manufacturer out-of-stock or delivery disruptions, acts
of God, seasonal supply disruptions, or other causes beyond the reasonable
control of that Party, but only during the duration of such condition.
Section 25. RELATIONSHIP OF THE PARTIES. The relationship among the
Parties is and shall be that of independent contractors. This Agreement does not
establish or create a partnership or joint venture among the Parties.
Section 26. NOTICES. Any notice or other communication required or
desired to be given to any Party under this Agreement shall be in writing and
shall be deemed given when (a) deposited in the United States mail, first-class
postage prepaid, and addressed to that Party at the address for such Party set
forth below; (b) the next business day
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immediately following delivery to Federal Express, Airborne, or any other
similar express delivery service for next-day delivery to that Party at that
address; or (c) sent by facsimile transmission, with electronic confirmation, to
that Party at its facsimile number set forth below. Any Party may change its
address or facsimile number for notices under this Agreement by giving the other
Party notice of such change.
Notices to Kmart shall be addressed to the following:
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
Attention: General Counsel
Facsimile Number: 810-643-1054
Notice to Cardinal Health shall be addressed to the following:
Cardinal Health
5555 Glendon Court
Dublin, Ohio 43016
Attention: General Counsel
Facsimile Number: 614-717-8919
Section 27. ENTIRE AGREEMENT. This Agreement, the Disclosure Schedules
hereto, the Purchase and Consignment Agreement, the Schedules and Exhibits
thereto, and the other agreements and schedules referenced in the foregoing
documents constitute the entire agreement and understanding of the Parties with
respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements, proposals, and understanding between the Parties
relative to the subject matter hereof, including without limitation the Current
Agreement.
Section 28. AMENDMENTS. No changes to this Agreement will be made or be
binding on any Party unless made in writing and signed by each Party to this
Agreement.
Section 29. WAIVER. Neither Party's failure to enforce any provision of
this Agreement will be considered a waiver of any future right to enforce such
provision.
Section 30. SEVERABILITY. The intention of the Parties is to comply
fully with all laws and public policies, and this Agreement shall be construed
consistently with all laws and public policies to the extent possible. If and to
the extent that any court of competent jurisdiction determines that it is
impossible to construe any provision of this Agreement consistently with any law
or public policy and consequently holds that provision to be invalid, such
holding shall in no way affect the validity of the other provisions of this
Agreement, which shall remain in full force and effect.
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Section 31. SUCCESSORS. Neither Party shall have the right to assign
this Agreement or any of such Party's rights or obligations under this Agreement
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Cardinal Health may assign
and reassign its rights and responsibilities under this Agreement among various
subsidiaries of Cardinal Health, Inc. Subject to the preceding sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
and against the respective successors and assigns of the Parties.
Section 32. CONFIDENTIAL TREATMENT OF TERMS. The terms of the various
advertising, inventory management, repackaging, joint marketing initiatives, and
other programs referred to in this Agreement have been specially designed by
Cardinal Health for its supply relationship with Kmart, and may not be publicly
disclosed by Kmart or directly or indirectly communicated with any third party
without the prior written consent of Cardinal Health.
Section 33. SOFTWARE PROTECTION. The CardinalCHOICE-HQ and Healthtouch
software (collectively, "Cardinal Health Software") being provided to Kmart in
connection with this Agreement are and will at all times remain the sole
property of Cardinal Health, and are subject to the terms and conditions of the
standard user license agreements for such software (copies of which user license
agreements have been previously provided to Kmart). Upon termination of this
Agreement for any reason, Kmart's license to use the Cardinal Health Software
will automatically expire and Kmart will promptly return to Cardinal Health the
original and any copies of the Cardinal Health Software.
Section 34. MANAGED CARE INITIATIVES. The Parties will jointly develop
initiatives designed to improve Kmart's access to third party plans, including
the development of improved marketing strategies and capabilities material, the
development of an expanded provider network, utilization of Cardinal Health's
affiliated PBM system, future managed care agreements, etc. Specific terms of
these initiatives, including performance-based revenue sharing arrangements,
will be set forth in separate program materials to be mutually developed by the
Parties.
Section 35. REPRESENTATIONS AND WARRANTIES.
(a) Cardinal Health hereby represents and warrants that
(i) each of its affiliated subsidiaries listed on the signature page hereto is
a corporation duly incorporated, validly existing and in good standing under
the laws of the state listed as the state of incorporation for that subsidiary
on the signature page hereto, (ii) each of its affiliated companies listed on
the signature page hereto has the full right, power and legal authority to
enter into and perform their respective obligations under this Agreement, (iii)
the officer executing this Agreement on behalf of the affiliates listed on the
signature page hereto has full corporate power and authority to execute this
Agreement on behalf of each of those companies, and (iv) assuming the due
authorization, execution and delivery of this
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<PAGE> 18
Agreement by Kmart, this Agreement constitutes the legal, valid and binding
agreement of each of its affiliated companies listed on the signature page
hereto, enforceable against such affiliated companies in accordance with its
terms, except as enforceability may be limited by (x) applicable bankruptcy,
insolvency and other similar laws affecting the rights of creditors generally
and (y) general principles of equity.
(b) Kmart hereby represents and warrants that (i) Kmart Corporation is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of Michigan, (ii) it has the full right, power and legal
authority to enter into and perform its obligations under this Agreement, (ii)
the officer executing this Agreement on behalf of Kmart has full corporate power
and authority to execute this Agreement on behalf of Kmart, and (iv) assuming
the due authorization, execution and delivery of this Agreement by Cardinal
Health, this Agreement constitutes the legal, valid and binding agreement of
Kmart, enforceable against Kmart in accordance with its terms, except as
enforceability may be limited by (x) applicable bankruptcy, insolvency and other
similar laws affecting the rights of creditors generally and (y) general
principles of equity.
Kmart Cardinal Health*
By:__________________________ By:_________________________
Print Name:___________________ Print Name:__________________
Title:_________________________ Title:________________________
*The term "Cardinal Health" shall include the following affiliated companies:
RedKey, Inc., an Ohio corporation (Dublin, Ohio); Cardinal Syracuse, Inc., a New
York corporation (Syracuse, New York); Marmac Distributors, Inc., a Connecticut
corporation (Hartford, Connecticut); James W. Daly, Inc., a Massachusetts
corporation (Peabody, Massachusetts); Ohio Valley-Clarksburg, Inc., a Delaware
corporation (Wheeling, West Virginia); Chapman Drug Company, a Tennessee
corporation (Knoxville, Tennessee); Cardinal Florida, Inc., a Florida
corporation (Lakeland, Florida); Cardinal Mississippi, Inc. a Mississippi
corporation (Richland, Mississippi); Solomons Company, a Georgia corporation
(Savannah, Georgia); Whitmire Distribution Corporation, a Delaware corporation
(Folsom, California); Humiston-Keeling, Inc., an Illinois corporation (Calumet
City, Illinois); Behrens Inc., a Texas corporation (Waco, Texas); National
PharmPak Services, Inc., an Ohio corporation (Zanesville, Ohio); Renlar Systems,
Inc., a Kentucky corporation (Lexington, Kentucky); Medical Strategies, Inc., a
Massachusetts corporation (Dublin, Ohio); Cardinal Health Systems, Inc., an Ohio
corporation (Dublin, Ohio) and any other subsidiary of Cardinal Health, Inc., an
Ohio corporation ("CHI"), as may be designated by CHI.
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<PAGE> 1
<TABLE>
Exhibit 11.01
CARDINAL HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Three Months Ended September 30,
1996 1995
----------------- -----------------
<S> <C> <C>
PRIMARY:
Net earnings $ 39,797 $ 31,916
================= =================
Average shares outstanding 64,379 63,157
Dilutive effect of stock options 857 1,471
----------------- -----------------
Weighted average number of Common
Shares outstanding 65,236 64,628
================= =================
Primary earnings per Common Share $ 0.61 $ 0.49
================= =================
FULLY DILUTED:
Net earnings $ 39,797 $ 31,916
================= =================
Average shares outstanding 64,379 63,157
Dilutive effect of stock options 994 1,554
----------------- -----------------
Weighted average number of Common
Shares outstanding 65,373 64,711
================= =================
Fully diluted earnings per Common Share $ 0.61 $ 0.49
================= =================
</TABLE>
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 110,513
<SECURITIES> 57,735
<RECEIVABLES> 648,820
<ALLOWANCES> (43,873)
<INVENTORY> 1,548,623
<CURRENT-ASSETS> 2,414,061
<PP&E> 276,775
<DEPRECIATION> (117,176)
<TOTAL-ASSETS> 2,843,730
<CURRENT-LIABILITIES> 1,473,261
<BONDS> 263,655
<COMMON> 508,466
0
0
<OTHER-SE> 484,090
<TOTAL-LIABILITY-AND-EQUITY> 2,843,730
<SALES> 2,428,225
<TOTAL-REVENUES> 2,428,225
<CGS> 2,245,962
<TOTAL-COSTS> 2,245,962
<OTHER-EXPENSES> 111,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,599)
<INCOME-PRETAX> 66,647
<INCOME-TAX> 26,850
<INCOME-CONTINUING> 39,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,797
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
<PAGE> 1
Exhibit 99.01
CARDINAL HEALTH, INC.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" (as defined in the Act). The Form
10-Q to which this exhibit is attached, the Company's Annual Report to
Shareholders, any Form 10-K or any Form 8-K of the Company, or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current view (as of the
date such forward-looking statement is made) with respect to future events and
financial performance. These forward-looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ
materially from those made in such statements. These uncertainties and other
factors include, but are not limited to, uncertainties relating to general
economic conditions; the loss of one or more key customer or supplier
relationships, including pharmaceutical manufacturers for which alternative
supplies may not be available; the malfunction or failure of the Company's
information systems; the costs and difficulties related to the integration of
recently acquired businesses; changes in the distribution or outsourcing pattern
for pharmaceutical products, including any increase in direct distribution or
decrease in contract packaging by pharmaceutical manufacturers; changes in, or
failure to comply with, government regulations; the costs and other effects of
legal and administrative proceedings; injury to person or property resulting
from the Company's repackaging or pharmacy management services; competitive
factors in the Company's healthcare service businesses, including pricing
pressures; the continued financial viability and success of the Company's
customers, suppliers, and franchisees; technological developments and products
offered by competitors; failure to retain or continue to attract senior
management or key personnel; risks associated with international operations,
including fluctuations in currency exchange ratios; successful challenges to the
validity of the Company's patents, copyrights and/or trademarks; difficulties or
delays in the development, production and marketing of new products and
services; strikes or other labor disruptions; labor and employee benefit costs;
pharmaceutical manufacturers' pricing policies and overall drug price inflation;
changes in hospital buying groups or hospital buying practices; and other
factors referenced in the Form 10-Q to which this exhibit is attached or other
filings or written or oral statements made by or on behalf of the Company. The
words "believe", "expect", "anticipate", "project", and similar expressions
identify "forward-looking statements", which speak only as of the date the
statement was made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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