<PAGE> 1
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, 1997 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 31, 1997 was as follows:
Common Shares, without par value: 109,345,550
------------------------------
<PAGE> 2
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
--------
Part I. Financial Information:
----------------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Statements of Earnings for the Three Months Ended
September 30, 1997 and 1996........................................................ 3
Consolidated Balance Sheets at September 30, 1997 and June 30, 1997................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996........................................................ 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
<FN>
* Items omitted are not applicable.
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
----------------- -----------------
<S> <C> <C>
Net revenues $ 2,869,971 $ 2,535,476
Cost of products sold 2,647,506 2,338,348
----------------- -----------------
Gross margin 222,465 197,128
Selling, general and administrative expenses 133,520 124,156
----------------- -----------------
Operating earnings 88,945 72,972
Other income (expense):
Interest expense (5,005) (6,606)
Other, net-- primarily interest income 4,962 2,837
----------------- -----------------
Earnings before income taxes 88,902 69,203
Provision for income taxes 34,672 27,802
----------------- -----------------
Net earnings $ 54,230 $ 41,401
================= =================
Earnings per Common Share:
Primary $ 0.49 $ 0.39
Fully diluted $ 0.49 $ 0.39
Weighted average number of Common Shares outstanding:
Primary 110,777 105,945
Fully diluted 110,940 106,150
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 4
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 180,515 $ 243,061
Trade receivables 691,063 672,164
Current portion of net investment in sales-type leases 57,387 40,720
Merchandise inventories 1,627,640 1,453,120
Prepaid expenses and other 111,648 94,668
--------------- ----------------
Total current assets 2,668,253 2,503,733
--------------- ----------------
Property and equipment, at cost 491,663 476,544
Accumulated depreciation and amortization (206,493) (199,869)
--------------- ----------------
Property and equipment, net 285,170 276,675
Other assets:
Net investment in sales-type leases, less current portion 120,507 119,532
Goodwill and other intangibles 120,948 122,104
Other 78,007 86,502
--------------- ----------------
Total $ 3,272,885 $ 3,108,546
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 22,329 $ 22,159
Current portion of long-term obligations 5,095 6,158
Accounts payable 1,239,463 1,135,951
Other accrued liabilities 243,383 244,491
--------------- ----------------
Total current liabilities 1,510,270 1,408,759
--------------- ----------------
Long-term obligations, less current portion 277,882 277,766
Deferred income taxes and other liabilities 89,580 89,821
Shareholders' equity:
Common Shares, without par value 656,596 645,051
Retained earnings 750,798 699,366
Common Shares in treasury, at cost (6,432) (6,373)
Other (5,809) (5,844)
--------------- ----------------
Total shareholders' equity 1,395,153 1,332,200
--------------- ----------------
Total $ 3,272,885 $ 3,108,546
=============== ================
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 5
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 54,230 $ 41,401
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 15,243 10,829
Provision for bad debts 3,057 2,013
Change in operating assets and liabilities
Increase in trade receivables (21,956) (46,348)
Increase in merchandise inventories (174,520) (319,777)
(Increase) decrease in net investment in sales-type leases (17,642) 3,414
Increase in accounts payable 103,512 114,570
Other operating items, net (10,168) 13,434
--------------- ---------------
Net cash used in operating activities (48,244) (180,464)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 315 1,324
Additions to property and equipment (20,783) (14,487)
Purchase of marketable securities available-for-sale -- (3,400)
--------------- ---------------
Net cash used in investing activities (20,468) (16,563)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 170 --
Reduction of long-term obligations (2,332) (2,936)
Proceeds from issuance of Common Shares 11,093 19,171
Tax benefit of stock options -- 5,075
Dividends paid on Common Shares (2,722) (1,919)
Purchase of treasury shares (43) (1,526)
--------------- ---------------
Net cash provided by financing activities 6,166 17,865
--------------- ---------------
NET DECREASE IN CASH AND EQUIVALENTS (62,546) (179,162)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 243,061 304,281
--------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 180,515 $ 125,119
=============== ===============
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 6
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. 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, 1997.
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. During the three months ended September 30, 1997, the Company
expended approximately $4.8 million related to the costs previously
recorded at the time of various mergers. The Company's current
estimates of the merger-related costs ultimately to be expended are
not materially different from the amounts originally recorded.
Note 4. On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"),
pursuant to which MediQual will become a wholly owned subsidiary of
the Company in a stock-for-stock merger expected to be accounted for
as a pooling-of-interests for financial reporting purposes. In
connection with the merger, the Company estimates that it will issue
approximately 0.6 million Common Shares. Upon consummation of the
merger, the Company will record a merger-related charge to reflect
transaction and other costs incurred as a result of the merger. The
amount of this charge is not expected to be significant. The merger is
expected to be completed by January 31, 1998, subject to the
satisfaction of certain conditions, including approval by shareholders
of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of
pharmaceuticals and medical-surgical supplies, pursuant to which
Bergen will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive a fixed
exchange ratio of .775 of a Company Common Share in exchange for each
outstanding common share of Bergen. The Company will issue
approximately 40 million Common Shares in the transaction and will
also assume approximately $418 million in long-term debt. Upon
consummation of the merger, the Company will record a merger-related
charge to reflect transaction and other costs incurred as a result of
the merger. Since the merger has not yet been consummated and
transition plans are currently being developed, the amount of this
charge cannot be estimated at this time. The merger is expected to be
completed by the end of the third quarter of fiscal 1998, subject to
the satisfaction of certain conditions, including approvals by the
stockholders of Bergen and the Company's shareholders, and the receipt
of certain regulatory approvals.
Note 5. In February 1997, the Financial Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which simplifies the computation of earnings per
share, and will require retroactive adoption in the quarter ending
December 31, 1997. Had the new standard been applied in the current
quarter, "basic" earnings per share (replaces primary) would have been
$.01 higher than primary and "diluted" earnings per share would have
been the same as fully diluted in the current presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", both of which will require
adoption in fiscal 1999. These new statements will not impact the
Company's financial statements, but may require additional
disclosures. The Company is presently evaluating the applicability of
SFAS No.'s 130 and 131 to its operations.
Page 6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below is concerned with
material changes in financial condition and results of operations for the
Company's consolidated balance sheets as of September 30, 1997 and June 30,
1997, and for the consolidated statements of earnings for the three months ended
September 30, 1997 and 1996. This should be read together with management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
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 the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and
are incorporated herein by reference. The Company disclaims any obligation to
update any forward-looking statement.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the first quarter of fiscal 1998 increased
13% as compared to the first quarter in fiscal 1997. Distribution businesses
(those whose primary operations involve the wholesale distribution of
pharmaceuticals, representing 91% of total revenues) grew at a rate of 11% while
Service businesses (those that provide services to the healthcare industry
through pharmacy franchising, pharmacy automation equipment, pharmacy
management, and pharmaceutical packaging) grew at a rate of 46% primarily on the
strength of the Company's pharmacy automation and pharmacy management
businesses. The majority of the revenue increase (approximately 65%) came from
existing customers in the form of increased volume and price increases.
The remainder of the growth came from the addition of new customers.
Gross Margin. For the three months ended September 30, 1997 and 1996, gross
margin as a percentage of net revenues was 7.75% and 7.77%, respectively. The
gross margin stability is a result of a higher mix of Services revenues in the
first quarter of fiscal 1998 versus the same period of a year ago (9% in fiscal
1998 versus 7% in fiscal 1997) offset by a decline in Distribution gross margin.
The Service businesses gross margin rate was 30.72% versus 34.29% last year. The
decrease is primarily a function of the relatively higher revenue growth
experienced in the pharmacy management operations, which have lower margins
relative to the other Service businesses. The Distribution gross margin declined
from 5.69% in the first quarter of fiscal 1997 to 5.43% in the current period.
This decline in Distribution gross margin continues to reflect a highly
competitive market and a greater mix of high volume customers, where a lower
cost of distribution and better asset management enable the Company to offer
lower selling margins to its customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.65% for
the three months ended September 30, 1997 from 4.89% for the prior period. The
improvement reflects economies associated with the Company's revenue growth, as
well as significant productivity gains resulting from continued cost control
efforts and the consolidation and selective automation of operating facilities.
Similar to gross margins, the shift in the current quarter to a greater mix of
Services business caused a higher level of expenses (Services have a 17.93%
ratio of expenses to revenues compared to Distribution with a ratio of 3.06%).
The 8% growth in selling, general and administrative expenses experienced in the
first quarter of fiscal 1998 was due primarily to increases in personnel costs
and depreciation expense.
Other Income (Expense). The decrease in interest expense of $1.6 million in
the first quarter of fiscal 1998 compared to fiscal 1997 is primarily due to
extinguishment of the Company's $100 million 8% Notes on March 1, 1997. The
increase in other income is due to higher investment income, in part due to
better asset management in the current quarter when only $63 million of cash was
used, compared to a use of $179 million in the first quarter of fiscal 1997.
Provision for Income Taxes. The Company's provision for income taxes
relative to pretax earnings was 39% and 40% for the three months ended September
30, 1997 and September 30, 1996, respectively. The decrease in the effective tax
rate is primarily due to a reduction in the state effective tax rate as a result
of the change in the Company's business mix.
Page 7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,158 million at September 30, 1997 from
$1,095 million at June 30, 1997. This increase included additional investments
in merchandise inventories and trade receivables of $174.5 million and $18.9
million, respectively. Offsetting the increases in working capital was a
decrease in cash and equivalents of $62.5 million and an increase in accounts
payable of $103.5 million. The increase in merchandise inventories reflects the
higher level of current and anticipated business volume in pharmaceutical
distribution activities. The increase in trade receivables is consistent with
the Company's net revenues growth (see "Net Revenues" above). The change in cash
and equivalents and accounts payable is due primarily to the timing of inventory
purchases and related payments.
Property and equipment, at cost, increased by $15.1 million from June 30,
1997. The property acquired included increased investment in management
information systems and customer support systems.
Shareholders' equity increased to $1,395.2 million at September 30, 1997
from $1,332.2 million at June 30, 1997, primarily due to net earnings of $54.2
million and the investment of $11.1 million by employees of the Company through
various stock incentive plans during the first quarter of fiscal 1998.
OTHER
On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant
to which MediQual will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. In connection with the merger, the Company
estimates that it will issue approximately 0.6 million Common Shares. Upon
consummation of the merger, the Company will record a merger-related charge to
reflect transaction and other costs incurred as a result of the merger. The
amount of this charge is not expected to be significant. The merger is expected
to be completed by January 31, 1998, subject to the satisfaction of certain
conditions, including approval by shareholders of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement with
Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and
medical-surgical supplies, pursuant to which Bergen will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be accounted
for as a pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive a fixed exchange
ratio of .775 of a Company Common Share in exchange for each outstanding common
share of Bergen. The Company will issue approximately 40 million Common Shares
in the transaction and will also assume approximately $418 million in long-term
debt. Upon consummation of the merger, the Company will record a merger-related
charge to reflect transaction and other costs incurred as a result of the
merger. Since the merger has not yet been consummated and transition plans are
currently being developed, the amount of this charge cannot be estimated at this
time. The merger is expected to be completed by the end of the third quarter of
fiscal 1998, subject to the satisfaction of certain conditions, including
approvals by the stockholders of Bergen and the Company's shareholders, and the
receipt of certain regulatory approvals.
The Company utilizes computer technologies throughout its business to
effectively carry out its day to day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the year 2000 approaches. The
Company has completed a preliminary assessment of its year 2000 requirements and
is currently correcting and replacing those systems which are not year 2000
compliant, in order to continue to meet its internal needs and those of its
customers. The Company believes it will be able to modify or replace its
affected systems in time to avoid any detrimental impact on its operations, and
expects this process to be substantially completed by the end of calendar year
1998. The Company is currently developing a complete cost estimate, but does not
anticipate that costs associated with this project will have a material adverse
effect on the Company's financial statements in future periods.
Page 8
<PAGE> 9
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 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 (which is now
a subsidiary of the Company), 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.
Effective October 26, 1994, the Company entered into a Judgment Sharing
Agreement in the Brand Name Prescription Drug Litigation with other wholesaler
and pharmaceutical manufacturer defendants. Under the Judgment Sharing
Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler
defendants for litigation costs incurred, up to an aggregate of $9 million; and
(b) if a judgment is entered against both manufacturers and wholesalers, the
total exposure for joint and several liability of the Company is limited to the
lesser of 1% of such judgment or one million dollars. In addition, the Company
has released any claims which it might have had against the manufacturers for
the claims presented by the plaintiffs in the Brand Name Prescription Drug
Litigation. The Judgment Sharing Agreement covers the federal court litigation
as well as the cases which have been filed in various state courts. On December
15, 1994, the plaintiffs filed a motion to declare the Judgment Sharing
Agreement unenforceable. On April 10, 1995, the court denied that motion and
ruled that the Judgment Sharing Agreement is valid and enforceable. The
plaintiffs filed a motion for reconsideration of the court's April 10, 1995
ruling, and the court denied that motion and reaffirmed its earlier decision on
April 24, 1995.
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 appealed this
decision. On August 15, 1997, the Court of Appeals for the Seventh Circuit,
along with other rulings, reversed the District Court's decision granting
summary judgment to the wholesaler defendants. On September 5, 1997, the
wholesaler defendants filed a motion for this decision to be reconsidered by the
Court of Appeals en banc. On October 8, 1997, the motion to reconsider was
denied by the Court of Appeals. The wholesaler defendants plan to seek review of
the Court of Appeals decision by the United States Supreme Court by writ of
certiorari. The Company continues to believe that the allegations against
Cardinal and Whitmire in such litigation are without merit, and it intends to
contest such allegations vigorously.
The Company also becomes involved from time to time in litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced herein cannot be forecast with certainty, the Company does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial statements.
Page 9
<PAGE> 10
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
2.01 Amended and Restated Agreement and Plan of Merger dated as of July
7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and
Registrant (1)
2.02 Amendment dated as of November 4, 1997 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant
2.03 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (2)
10.01 Cardinal Health, Inc. Incentive Deferred Compensation Plan, Amended
and Restated Effective July 1, 1997*
11.01 Computation of Per Share Earnings
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (3)
- ------------------
(1) Included as an annex to the Proxy Statement/Prospectus included in
the Registrant's Registration Statement on Form S-4 (No. 333-30889)
filed with the Commission on July 8, 1997, and incorporated herein
by reference.
(2) Included as an exhibit to the Registrant's Current Report on Form
8-K/A, Amendment No. 1 (No. 0-12591) filed with the Commission on
August 27, 1997, and incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997 (No. 0-12591) filed with the
Commission on September 29, 1997, and incorporated herein by
reference.
*Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
On August 26 and 27, 1997, the Company filed a report on Form 8-K and 8-K/A,
respectively, under Items 5 and 7 which reported, among other things, that it
had signed an Agreement and Plan of Merger, dated as of August 23, 1997, among
the Company, Bruin Merger Corporation and Bergen Brunswig Corporation.
Page 10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: November 14, 1997 By: /s/ John C. Kane
----------------
John C. Kane
President and Chief Operating Officer
By: /s/ David Bearman
-----------------
David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 11
<PAGE> 1
Exhibit 2.02
CARDINAL HEALTH, INC.
5555 Glendon Court
Dublin, OH 43016
November 4, 1997
MediQual Systems, Inc.
Suite 250
1900 West Park Drive
Westborough, MA 01581
Attention: Mr. Eric Kriss, President
Dear Eric:
Reference is made to the Amended and Restated Agreement and Plan of
Merger (the "Agreement") dated as of July 7, 1997, by and among Cardinal
Health, Inc., an Ohio corporation ("Cardinal"), Hub Merger Corp., a Delaware
corporation and a wholly owned subsidiary of Cardinal, and MediQual Systems,
Inc., a Delaware corporation ("MediQual").
Section 7.1(c) of the Agreement provides that the Agreement may be
terminated by either Cardinal or MediQual if the Merger (as defined in the
Agreement) shall not have been consummated before November 30, 1997 (the "Right
of Termination Date"), unless extended by the Boards of Directors of both
Cardinal and MediQual (provided that the right to terminate the Agreement is
not available to any party whose failure or whose affiliate's failure to
perform any material covenant or obligation under the Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before the
Right of Termination Date). As we have discussed, Cardinal and MediQual desire
to extend the Right of Termination Date to January 31, 1998. Accordingly, the
parties hereby extend the Right of Termination Date from November 30, 1997, to
January 31, 1998.
In consideration of the granting of such extension, the parties agree
that if MediQual exercises its right to terminate the Agreement pursuant to
Section 7.1(c) of the Agreement (as extended by the terms of this letter
agreement), Cardinal will, at MediQual's request and as MediQual's sole and
exclusive remedy, (i) reimburse MediQual for its reasonable out-of-pocket costs
incurred in connection with the negotiation, preparation, execution and
completion of the Agreement and related documentation, including reasonable
fees and expenses of its counsel and accountants, such reimbursement not to
exceed $300,000, (ii) reimburse MediQual for the actual out-of-pocket expenses
incurred by MediQual after the date hereof in
<PAGE> 2
MediQual Systems, Inc.
November 4, 1997
Page 2
preparation for the contemplated integration of Cardinal and MediQual, such
reimbursement to be limited to $5,000 for any single expenditure and $50,000
for all such expenditures, unless approved by Cardinal, and (iii) purchase from
MediQual, on terms and conditions mutually agreeable to the parties, healthcare
information products and services with an aggregate price of $500,000 during
the twelve-month period ending on the first anniversary of the date of
termination. In addition, this letter serves to make it clear that, for the
purpose of the parenthetical clause in Section 7.1(c) which is summarized
above, MediQual will not be deemed to have failed to perform a material
covenant or obligation under the Agreement (such as the obligation to convene a
stockholders' meeting to obtain approval of the Merger) if such failure results
from a precondition to such a material covenant or obligation, which
precondition is outside of MediQual's control, not being satisfied (such as the
Registration Statement (as defined in the Agreement) not being declared
effective so that MediQual is unable to distribute a Proxy Statement/Prospectus
(as defined in the Merger Agreement) in connection with such a stockholders'
meeting).
To the extent necessary, this letter shall constitute an amendment to
the Agreement. Each of Cardinal and MediQual represent to the other that its
Board of Directors (or a duly authorized committee thereof) has approved this
extension. Except as expressly provided herein, the Agreement shall remain in
full force and effect in accordance with its terms.
Very truly yours,
CARDINAL HEALTH, INC.
By: /s/ Brendan Ford
---------------------------------
Name: Brendan Ford
Title: Senior Vice President
Corporate Development
Accepted and agreed to this
12th day of November, 1997.
MEDIQUAL SYSTEMS, INC.
By: /s/ Eric Kriss
---------------------------------
Name: Eric Kriss
Title: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.01
CARDINAL HEALTH, INC.
INCENTIVE DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED EFFECTIVE
July 1, 1997
<PAGE> 2
CARDINAL HEALTH, INC.
INCENTIVE DEFERRED COMPENSATION PLAN
(THE "PLAN")
I
PURPOSE
-------
Cardinal Health, Inc. and its affiliates (collectively, the "Company")
is willing to provide supplemental retirement benefits out of its general assets
to certain key employees as an incentive for those individuals to continue their
relationship with the Company and to provide the benefits such individuals could
otherwise earn under the Cardinal Health, Inc. Profit Sharing and Retirement
Savings Plan (the "Qualified Plan") if certain federal law restrictions did not
apply. Only a select group of the Company's management or highly compensated
employees will be eligible to participate in this program. The Company's goal is
to retain and reward its key employees by helping them to accumulate benefits
for a comfortable retirement.
II
ELIGIBILITY
-----------
Selection of the Company employees eligible to participate in the Plan
is within the sole discretion of the Chairman of Cardinal Health, Inc. Only high
income or key management employees are eligible for selection by the Chairman.
If you fall into one of these groups and are chosen by the Chairman to
participate in the Plan, you will sign an Incentive Deferred Compensation
Agreement which details the requirements you must satisfy to be eligible to
receive this supplemental retirement benefit from the Company. The Chairman will
review and determine his selections each year. Thus, selection in one year does
not automatically confer a right to participate in succeeding years.
III
INCENTIVE DEFERRED COMPENSATION ACCUMULATIONS
---------------------------------------------
The benefits provided to participants under their Incentive Deferred
Compensation Agreements are paid from the Company's general assets. The program
is, therefore, considered to be an "unfunded" arrangement as amounts are not set
aside or held by the Company in a trust, escrow, or similar account or fiduciary
relationship on your behalf. Each participant's rights to benefits under the
Plan are equivalent to the rights of any unsecured general creditor of the
Company. However, the Company may open accounts with one or more investment
companies selected by the Chairman, in his discretion, including from among
those used as investment options under the Qualified Plan, and may invest funds
subject to this Plan in these mutual funds.
-1-
<PAGE> 3
Each participant may be permitted to direct how the portion of the Company's
funds allocable to him or her is invested from among the available options, if
such investment accounts are established. The Company currently expects any such
options to be similar to those available under the Qualified Plan, but is not
obligated to make these or any other particular investment options available.
All investments shall at all times continue to be a part of the Company's
general assets for all purposes.
To measure the amount of the Company's obligations to a participant in
this program, the Company will maintain a bookkeeping record or account of each
participant's "Accumulations". There are three basic components of each
participant's Accumulations:
First, the Company may credit to your Accumulations
each calendar year during which you are selected to
participate in the Plan an amount equal to 3% of your
compensation from the Company in excess of the compensation
limit applicable to the Qualified Plan under the Internal
Revenue Code (currently $160,000 per year) but not more than
$100,000 above such compensation limit (currently a maximum
of $260,000 per year). For this purpose, your compensation
includes salary, commission and bonus payments made for the
year, but does not include other cash or noncash
compensation, expense reimbursements or other benefits
provided by the Company, other than your own salary deferrals
into this Plan or the Qualified Plan. In addition, the
Company may make an additional profit sharing contribution to
the Plan for a year, in the Company's discretion, to be
credited to your Accumulations. One of the purposes of these
contributions is to make up the portion of automatic and
special profit sharing contributions to the Qualified Plan
that you are losing due to the capping of pay eligible for
consideration under the Qualified Plan under Internal Revenue
Code rules. All contributions under this provision to your
Accumulations, as adjusted for earnings or losses (described
below), are referred to as your "PROFIT SHARING VALUE."
Second, to encourage each participant to invest in
his or her own future, you may also elect to defer your
compensation from the Company. There are two types of
deferral elections that you may make under the Plan. You may
elect (within 30 days of when you first become eligible to
participate in the Plan for your initial year of
participation or, for subsequent years, not later than the
December 31 prior to each such year) to defer payment of a
portion of your compensation to be earned during the balance
of the current or next calendar year, as applicable, as a
credit to your Accumulations. Under special circumstances,
the Chairman may also determine, in his discretion, that you
may be periodically eligible to make a special election after
the beginning of the year to defer any compensation for the
remainder of the year which is not yet payable to you. Both
types of voluntary deferrals, adjusted for earnings or losses
as described below, are known as the "DEFERRAL VALUE." The
minimum amount you may defer under either type of election is
1% of your compensation. The Company may, in its
-2-
<PAGE> 4
discretion, establish and change from time to time a maximum
limitation on your deferral contributions. Also, who is
eligible to participate in the deferral portion of the Plan
is determined on a year to year basis by the Company. If you
were a participant one year but are not eligible in a
succeeding year, you will still be a participant, but will be
treated as "inactive."
Third, the Company will also match your deferral at
the same rate it is generally matching 401(k) deferrals under
the Qualified Plan for the period in question. Generally,
however, a matching contribution shall only apply to
deferrals with respect to your compensation up to $100,000
above the compensation limit applicable to the Qualified Plan
under the Internal Revenue Code (currently, a maximum of
$260,000 per year). Any "caps" on the match under the
Qualified Plan will also apply to this Plan, with the match
under this Plan being offset by the match to the Qualified
Plan to the extent duplicative. For example, if the Qualified
Plan match for the year is 75 cents on the dollar, up to the
first 3% of salary deferrals, and you are eligible to defer
5% of the first $160,000 of pay to the Qualified Plan (under
the special discrimination-testing rules of that plan), then
only the first 3% of deferrals from the portion of your
salary above $160,000 but less than $260,000 will be matched
under this Plan. In addition to this formula match, the
Company may make additional matching contributions for a
year, in its sole discretion. All amounts credited to your
Accumulations on a matching basis, adjusted for earnings or
losses as described below, are referred to as your "MATCHING
VALUE."
EARNINGS (OR LOSSES): At least once each calendar year while you have a
credit balance in your Accumulations, the Company will credit your Accumulations
with earnings (or losses), if any, for the period since the last such crediting
and determine the value of your Accumulations at that time. The earnings (or
losses) may either be credited on the basis of the earnings (or losses)
allocable to your directed portion of the Company investments, if any, or on the
basis of a hypothetical earnings rate, as determined by the Company in its sole
discretion. The Company also reserves the right to adjust the earnings (or
losses) credited to your Accumulations and to determine the value of your
Accumulations as of any date by adjusting such earnings (or losses) or such fair
market value for the Company's tax and other costs of providing this Plan.
These earnings will compensate for the postponement of the receipt of
the Accumulations and give you the benefit of tax-deferred growth of the
accumulating amounts. Under current federal income tax rules, the amounts
credited to your Accumulations, including earnings, will not be taxable income
to you in the year they are credited to your account. You, or your beneficiaries
in the event of your death, will generally be taxable on these amounts and the
credited earnings only if and when benefits are actually paid to you. Thus, this
program provides the opportunity to defer income and the payment of income
taxes.
-3-
<PAGE> 5
IV
BENEFITS
--------
A. Vesting
-------
If you participate in the deferral portion of the Plan, your
Deferral Value will always be 100% "vested". This means you will always
be entitled to receive benefits from this portion of your
Accumulations.
The portion of your Accumulations derived from the Profit
Sharing Value and the Matching Value will not be fully vested until you
complete 5 years of service for the Company. A "year of service" for
this purpose means a period of 12 consecutive calendar months during
which you were employed by the Company and worked at least 1,000 hours.
Years of service are calculated from the date you were first hired as
an employee by the Company, and anniversaries of that date. The
schedule for vesting is as follows:
Vested
Years of Service Percentage
---------------- ----------
Less than 2 None
2 but less than 3 25%
3 but less than 4 50%
4 but less than 5 75%
5 or more 100%
In addition, you also become 100% vested in your Accumulations
upon your death or if you become permanently disabled prior to
retirement or other termination of service with the Company, or upon a
"Change in Control," regardless of your years of service. "Change in
Control" means: (i) the purchase or other acquisition by any person,
entity or group of persons (within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable
successor provisions), directly or indirectly, which results in
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Act) of such person, entity or group of persons equalling 30
percent or more of either the outstanding common shares of Cardinal
Health, Inc. ("Cardinal") or the combined voting power of the
then-outstanding securities of Cardinal entitled to vote in the
election of directors of Cardinal, or (ii) the approval by the
shareholders of Cardinal of a reorganization, merger, or consolidation,
with respect to which in each case persons who were shareholders of
Cardinal immediately prior to such reorganization, merger or
consolidation do not (solely because of their common shares of Cardinal
owned immediately prior to such reorganization, merger, or
consolidation) immediately thereafter, own more than 50 percent of the
combined voting power entitled to vote in the election of directors of
the then-outstanding securities of the reorganized, merged or
-4-
<PAGE> 6
consolidated company, or (iii) a liquidation or dissolution of
Cardinal, or (iv) the sale of all or substantially all of Cardinal's
assets.
B. Forfeiture of Benefits
----------------------
If your employment with the Company terminates for any reason
other than death, disability, or a Change in Control prior to the time
you have completed 5 years of service, you will forfeit some or all
(based on the above schedule) rights to receive benefits under the
Plan, except that you will still be entitled to receive benefits based
on your Deferral Value.
C. Payment of Benefits.
--------------------
1. Retirement Benefits. You will be eligible to receive
retirement benefits under the plan upon your retirement after attaining
age 65 with five years of service. Retirement benefits will generally
be paid as a monthly benefit payable for 60 months. The amount of your
benefit will equal the amount necessary to amortize your total
Accumulations over the 60 month period. The amount payable each month
will either be based on an approximately equal amortization of
principal plus actual earnings (or less actual losses) or an
amortization based on an assumed interest rate declared by the Company
from time to time during the period of distribution. You must give the
Company at least 30 days advance written notice of your intention to
retire and receive retirement benefits. Actual benefit payments will
begin on the first day of the second month following your satisfaction
of all requirements for payment.
2. Disability Benefits. If you become totally disabled before
satisfying the requirements for retirement benefits, you will be
eligible to receive payment of the amounts credited to your
Accumulations as a monthly benefit commencing after six months of total
disability and payable for 60 months. The amount of the benefit will be
determined in the same manner as retirement benefits. For this purpose,
"total disability" means a physical or mental condition which totally
and presumably permanently prevents you from engaging in any
substantially gainful activity. It is up to the Company to determine
whether you qualify as being totally disabled and the Company may
require you to submit to periodic medical examinations to confirm that
you are, and continue to be, totally disabled. If your disability ends,
your disability benefit payments will stop. However, you could continue
to qualify for benefits under another provision of the Plan.
3. Death Benefits. In the event of your death while receiving
benefit payments under the Plan, the Company will pay the beneficiary
or beneficiaries designated by you any remaining payments due under the
terms of your Incentive Deferred Compensation Agreement, using the same
method of distribution in effect to you at the date of your death. In
the event of death prior to beginning to receive benefits under the
Incentive Deferred Compensation Agreement, the Company will pay any
vested benefits to your beneficiary or beneficiaries, beginning as soon
as practicable after your
-5-
<PAGE> 7
death. In this case, benefits will generally be paid as a monthly
benefit payable for 60 months computed in the same manner as retirement
benefits. The Company will provide you with the form for designating
your beneficiary or beneficiaries. If you fail to make a beneficiary
designation, or if your designated beneficiary predeceases you or
cannot be located, any death benefits will be paid to your estate.
4. Other Termination of Service. If your service with the
Company terminates for any reason other than retirement, death, or
total disability, then the vested portion of your Accumulations will be
paid to you as a monthly benefit payable for 60 months computed in the
same manner as retirement benefits, beginning as soon as
administratively practicable after your employment terminates.
5. Payment Alternatives. At the Company's election, or upon
your request, benefits may be paid in a lump sum or over a shorter or
longer period of time than the 60 months generally called for, as
described above. However, no request by you or your beneficiaries for a
different payment method will be binding on the Company, and any
accelerated or deferred payment of benefits shall be made only in the
sole discretion of the Company. In addition, the Company may alter the
payment method in effect from time to time in its discretion, for
example, in order to avoid the loss of a deduction under Code Section
162(m). If the payment method is altered, the amount you or your
beneficiaries will receive will be computed under one of the
alternative methods for determining payment amounts provided for under
the normal form of distribution for your Accumulations, determined by
the Company in its discretion.
6. Change in Control. If a Change in Control occurs, and your
employment with the Company (or its successor) terminates within two
years after the Change in Control occurred, then you shall be entitled
to receive your Accumulations in a single lump sum within 30 days of
your termination of employment, notwithstanding any other provision of
this Plan or your Incentive Deferred Compensation Agreement. Also,
following a Change in Control, the Company's discretion to alter the
payment methodology (described in Section 5, above) is limited to
accelerating your benefits; the Company cannot, after a Change in
Control, defer the commencement of payments or extend the period of
distribution beyond the normal periods described in the preceding
sections (1-4).
-6-
<PAGE> 8
V
MISCELLANEOUS PROVISIONS
------------------------
A. No Right to Company Assets.
---------------------------
As explained previously, this Incentive Deferred Compensation
Plan is an unfunded arrangement and the agreement you will enter into
with the Company does not create a trust or any kind of a fiduciary
relationship between the Company and you, your designated beneficiaries
or any other person. To the extent you, your designated beneficiaries,
or any other person acquires a right to receive payments from the
Company under the Incentive Deferred Compensation Agreement, that right
is no greater than the right of any unsecured general creditor of the
Company.
B. Modification or Revocation.
---------------------------
Your Incentive Deferred Compensation Agreement will continue
in effect until revoked, terminated, or all benefits are paid, even
during any period of time when you are an "inactive" participant
because you are not designated by the Company as eligible to accumulate
additional benefits. However, the Incentive Deferred Compensation
Agreement and this Plan may be amended or revoked at any time, in whole
or in part, by the Company in its sole discretion. Unless you agree
otherwise, you will still be entitled to the vested benefit, if any,
that you have earned through the date of any amendment or revocation.
Such benefits will be payable at the times and in the amounts provided
for in the Incentive Deferred Compensation Agreement, or the Company
may elect to accelerate distribution and pay all amounts due
immediately.
C. Rights Preserved.
-----------------
Nothing in the Incentive Deferred Compensation Agreement or
this Plan gives any employee the right to continued employment by the
Company. The relationship between you and the Company shall continue to
be "at will" and may be terminated at any time by the Company or you,
with or without cause, except as may be specifically set forth in any
separate written employment agreement between you and the Company.
D. Controlling Documents.
----------------------
This is merely a summary of the key provisions of the
Incentive Deferred Compensation Agreement currently in use by the
Company. In the event of any conflict between the provisions of this
Plan and the Incentive Deferred Compensation Agreement, the agreement
shall in all cases control.
The Company has executed this amended and restated Plan in Dublin, Ohio
on the date set forth below.
-7-
<PAGE> 9
Cardinal Health, Inc.
By: /s/ George H. Bennett, Jr.
-----------------------------
Its: Executive Vice President
----------------------------
Date: October 27, 1997
---------------------------
-8-
<PAGE> 1
Exhibit 11.01
CARDINAL HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
----------------- -----------------
<S> <C> <C>
PRIMARY:
Net earnings $ 54,230 $ 41,401
================= =================
Average shares outstanding 109,092 104,272
Dilutive effect of stock options 1,685 1,673
----------------- -----------------
Weighted average number of Common
Shares outstanding 110,777 105,945
================= =================
Primary earnings per Common Share $ 0.49 $ 0.39
================= =================
FULLY DILUTED:
Net earnings $ 54,230 $ 41,401
================= =================
Average shares outstanding 109,092 104,272
Dilutive effect of stock options 1,848 1,878
----------------- -----------------
Weighted average number of Common
Shares outstanding 110,940 106,150
================= =================
Fully diluted earnings per Common Share $ 0.49 $ 0.39
================= =================
</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> 182,854
<SECURITIES> 0
<RECEIVABLES> 694,887
<ALLOWANCES> (38,275)
<INVENTORY> 1,592,393
<CURRENT-ASSETS> 2,528,087
<PP&E> 289,892
<DEPRECIATION> (117,176)
<TOTAL-ASSETS> 2,995,824
<CURRENT-LIABILITIES> 1,508,503
<BONDS> 263,655
0
0
<COMMON> 582,840
<OTHER-SE> 521,489
<TOTAL-LIABILITY-AND-EQUITY> 2,995,824
<SALES> 2,535,476
<TOTAL-REVENUES> 2,535,476
<CGS> 2,338,348
<TOTAL-COSTS> 2,338,348
<OTHER-EXPENSES> 124,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,606)
<INCOME-PRETAX> 69,203
<INCOME-TAX> 27,802
<INCOME-CONTINUING> 41,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,401
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 180,515
<SECURITIES> 0
<RECEIVABLES> 727,869
<ALLOWANCES> (36,806)
<INVENTORY> 1,627,640
<CURRENT-ASSETS> 2,668,253
<PP&E> 491,663
<DEPRECIATION> (206,493)
<TOTAL-ASSETS> 3,272,885
<CURRENT-LIABILITIES> 1,510,270
<BONDS> 277,882
0
0
<COMMON> 656,596
<OTHER-SE> 738,557
<TOTAL-LIABILITY-AND-EQUITY> 3,272,885
<SALES> 2,869,971
<TOTAL-REVENUES> 2,869,971
<CGS> 2,647,506
<TOTAL-COSTS> 2,647,506
<OTHER-EXPENSES> 133,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,005)
<INCOME-PRETAX> 88,902
<INCOME-TAX> 34,672
<INCOME-CONTINUING> 54,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,230
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
