Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 2008

Commission File Number 1-11373

 

 

LOGO

Cardinal Health, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   31-0958666

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7000 CARDINAL PLACE, DUBLIN, OHIO 43017

(Address of principal executive offices and zip code)

(614) 757-5000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The number of Registrant’s Common Shares outstanding at the close of business on November 6, 2008 was as follows:

Common Shares, without par value: 359,612,429

 

 

 


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CARDINAL HEALTH, INC. AND SUBSIDIARIES

Index *

 

         Page No.

Part I.

  Financial Information:    3

Item 1.

  Financial Statements:    3
  Condensed Consolidated Statements of Earnings for the Three Months Ended September 30, 2008 and 2007 (unaudited)    3
  Condensed Consolidated Balance Sheets at September 30, 2008 and June 30, 2008 (unaudited)    4
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2008 and 2007 (unaudited)    5
  Notes to Condensed Consolidated Financial Statements    6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    23

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    32

Item 4.

  Controls and Procedures    32

Part II.

  Other Information:    34

Item 1.

  Legal Proceedings    34

Item 1A.

  Risk Factors    34

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    36

Item 5.

  Other Information    36

Item 6.

  Exhibits    37

 

* Items not listed are inapplicable.

 

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PART I. FINANCIAL INFORMATION— Item 1: Financial Statements

CARDINAL HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in millions, except per Common Share amounts)

 

     Three Months Ended
September 30,
 
     2008     2007  

Revenue

   $ 24,347.2     $ 21,973.4  

Cost of products sold

     22,982.7       20,631.2  
                  

Gross margin

     1,364.5       1,342.2  

Selling, general and administrative expenses

     882.2       830.1  

Impairments, (gain)/loss on sale of assets and other, net

     3.6       (0.2 )

Special items

 

– restructuring charges

     49.7       14.8  
 

– acquisition integration charges

     2.4       5.4  
 

– litigation and other

     0.3       2.3  
                  

Operating earnings

     426.3       489.8  

Interest expense and other

     62.4       42.9  
                  

Earnings before income taxes and discontinued operations

     363.9       446.9  

Provision for income taxes

     114.1       143.7  
                  

Earnings from continuing operations

     249.8       303.2  

Loss from discontinued operations (net of tax expense of $0.6 and $2.0 for the three months ended September 30, 2008 and 2007, respectively)

     (0.7 )     (1.4 )
                  

Net earnings

   $ 249.1     $ 301.8  
                  

Basic earnings per Common Share:

    

Continuing operations

   $ 0.70     $ 0.83  

Discontinued operations

     —         —    
                  

Net basic earnings per Common Share

   $ 0.70     $ 0.83  
                  

Diluted earnings per Common Share:

    

Continuing operations

   $ 0.69     $ 0.82  

Discontinued operations

     —         —    
                  

Net diluted earnings per Common Share

   $ 0.69     $ 0.82  
                  

Weighted average number of Common Shares outstanding:

    

Basic

     356.7       363.0  

Diluted

     361.1       370.2  

Cash dividends declared per Common Share

   $ 0.14     $ 0.12  

See notes to condensed consolidated financial statements.

 

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CARDINAL HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

     September 30,
2008
    June 30,
2008
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and equivalents

   $ 672.2     $ 1,291.3  

Trade receivables, net

     5,862.3       5,006.9  

Current portion of net investment in sales-type leases

     384.8       383.7  

Inventories

     7,692.1       6,768.8  

Prepaid expenses and other

     614.9       593.1  

Assets held for sale

     —         140.4  
                

Total current assets

     15,226.3       14,184.2  
                

Property and equipment, at cost

     3,619.2       3,732.8  

Accumulated depreciation and amortization

     (1,869.7 )     (1,995.6 )
                

Property and equipment, net

     1,749.5       1,737.2  

Other assets:

    

Net investment in sales-type leases, less current portion

     935.8       916.8  

Goodwill and other intangibles, net

     6,265.1       6,225.9  

Other

     468.4       384.1  
                

Total assets

   $ 24,645.1     $ 23,448.2  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term obligations and other short-term borrowings

   $ 166.5     $ 159.0  

Accounts payable

     9,354.6       8,311.8  

Other accrued liabilities

     1,902.6       1,889.7  

Liabilities from businesses held for sale and discontinued operations

     2.4       15.4  
                

Total current liabilities

     11,426.1       10,375.9  
                

Long-term obligations, less current portion

     3,597.0       3,687.4  

Deferred income taxes and other liabilities

     1,703.9       1,637.4  

Shareholders’ equity:

    

Preferred Shares, without par value: Authorized – 0.5 million shares, Issued–none

     —         —    

Common Shares, without par value: Authorized – 755.0 million shares, Issued – 364.5 million shares and 364.7 million shares at September 30, 2008 and June 30, 2008, respectively

     2,962.6       3,001.2  

Retained earnings

     5,215.2       5,016.2  

Common Shares in treasury, at cost, 5.0 million shares and 7.6 million shares at September 30, 2008 and June 30, 2008 , respectively

     (396.1 )     (480.7 )

Accumulated other comprehensive income

     136.4       210.8  
                

Total shareholders’ equity

     7,918.1       7,747.5  
                

Total liabilities and shareholders’ equity

   $ 24,645.1     $ 23,448.2  
                

See notes to condensed consolidated financial statements.

 

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CARDINAL HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)

 

     Three Months Ended
September 30,
 
     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net earnings

   $ 249.1     $ 301.8  

Loss from discontinued operations

     0.7       1.4  
                

Earnings from continuing operations

     249.8       303.2  

Adjustments to reconcile earnings from continuing operations to net cash provided by / (used in) operating activities:

    

Depreciation and amortization

     101.0       94.9  

Asset impairments and (gain) / loss on sale of assets, net

     3.6       (0.2 )

Equity compensation

     24.4       26.1  

Provision for bad debts

     12.6       5.0  

Change in operating assets and liabilities, net of effects from acquisitions:

    

Increase in trade receivables

     (782.4 )     (191.9 )

(Increase)/decrease in inventories

     (873.6 )     232.5  

Increase in net investment in sales-type leases

     (20.2 )     (24.1 )

Increase/(decrease) in accounts payable

     982.6       (63.2 )

Other accrued liabilities and operating items, net

     (49.8 )     56.9  
                

Net cash provided by / (used in) operating activities – continuing operations

     (352.0 )     439.2  

Net cash used in operating activities – discontinued operations

     (0.9 )     (30.4 )
                

Net cash provided by / (used in) operating activities

     (352.9 )     408.8  
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of subsidiaries, net of divestitures and cash acquired

     (6.1 )     (88.1 )

Net additions to property and equipment

     (88.6 )     (89.0 )

Sale of investment securities available for sale, net

     —         131.9  
                

Net cash used in investing activities – continuing operations

     (94.7 )     (45.2 )

Net cash used in investing activities – discontinued operations

     —         —    
                

Net cash used in investing activities

     (94.7 )     (45.2 )
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in commercial paper and short-term borrowings

     1.2       232.0  

Reduction of long-term obligations

     (152.6 )     (13.0 )

Proceeds from long-term obligations, net of issuance costs

     8.5       0.1  

Proceeds from issuance of Common Shares

     17.9       105.5  

Tax benefits from exercises of stock options

     3.3       11.6  

Dividends on Common Shares

     (49.8 )     (44.3 )

Purchase of Common Shares in treasury

     —         (674.7 )
                

Net cash used in financing activities – continuing operations

     (171.5 )     (382.8 )

Net cash used in financing activities – discontinued operations

     —         —    
                

Net cash used in financing activities

     (171.5 )     (382.8 )
                

NET DECREASE IN CASH AND EQUIVALENTS

     (619.1 )     (19.2 )

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     1,291.3       1,308.8  
                

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 672.2     $ 1,289.6  

See notes to condensed consolidated financial statements.

 

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CARDINAL HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries, and all significant inter-company amounts have been eliminated. References to the “Company” or “Cardinal Health” in these condensed consolidated financial statements shall be deemed to be references to Cardinal Health, Inc. and its majority-owned subsidiaries unless the context otherwise requires.

Effective the first quarter of fiscal 2009, the Company reorganized its businesses into three reportable segments — the Healthcare Supply Chain Services segment, the Clinical and Medical Products segment and the All Other segment — in order to reduce costs and align resources with the needs of each segment. The following indicates the changes from the fiscal 2008 reporting structure:

Healthcare Supply Chain Services. This reportable segment is comprised of all of the businesses formerly within the Healthcare Supply Chain Services – Pharmaceutical segment other than Medicine Shoppe and all of the businesses formerly within the Healthcare Supply Chain Services – Medical Segment.

Clinical and Medical Products. This reportable segment is comprised of all of the businesses formerly within the Clinical Technologies and Services segment other than the pharmacy services businesses (outsourced hospital pharmacy management services) and all of the businesses formerly within the Medical Products and Technologies segment other than the Tecomet (orthopedic implants and instruments) and Medsystems (enteral devices and airway management products) businesses, which were acquired by the Company through its acquisition of VIASYS Healthcare Inc. (“Viasys”).

All Other. This reportable segment is comprised of Medicine Shoppe and the pharmacy services business. It also included the Medsystems and Tecomet businesses until both of these businesses were sold during the first quarter of fiscal 2009. The Tecomet and Medsystems businesses were both classified as held for sale at June 30, 2008.

On September 29, 2008, the Company announced that it plans to spin off most of its clinical and medical products businesses from its remaining businesses through a pro rata distribution to the Company’s shareholders (the “Planned Spin-Off”). The Company will retain the surgical and exam gloves, drapes and apparel and fluid management businesses that are currently part of the Clinical and Medical Products segment. Completion of the Planned Spin-Off is subject to final approval by the Company’s Board of Directors, confirmation of the tax-free nature of the Planned Spin-Off and the effectiveness of a Form 10 registration statement that will be filed with the U.S. Securities and Exchange Commission (the “SEC”). While it is currently anticipated that the Planned Spin-Off will be completed by the middle of calendar 2009, there can be no assurance as to the timing or terms of the Planned Spin-Off should it be completed. See “Part II, Item 1A—Risk Factors” for certain risk factors relating to the Planned Spin-Off.

The condensed consolidated financial statements have been prepared in accordance with the SEC instructions to Quarterly Reports on Form 10-Q and include all of the information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Actual amounts may differ from these estimated amounts. In addition, operating results for the fiscal 2009 interim period presented are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2009.

These condensed consolidated financial statements are unaudited and are presented pursuant to the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) 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, 2008 (the “2008 Form 10-K”). Without limiting the generality of the foregoing, Note 1 of the “Notes to Consolidated Financial Statements” from the 2008 Form 10-K is specifically incorporated in this Form 10-Q by reference. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Except as disclosed elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature.

Recent Financial Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Refer to Note 8 for additional information regarding the Company’s adoption of this Statement.

 

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In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. This Statement requires balance sheet recognition of the funded status for all pension and postretirement benefit plans effective for fiscal years ending after December 15, 2006. This Statement also requires plan assets and benefit obligations to be measured as of a Company’s balance sheet date effective for fiscal years ending after December 15, 2008. There was no material impact on the Company’s financial position or results of operations upon adoption of this Statement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – including an amendment of FASB Statement No. 115.” This Statement creates a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain assets and liabilities, on an instrument-by-instrument basis. The Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Refer to Note 8 for additional information regarding the Company’s adoption of this Statement.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” These Statements provide guidance on the accounting and reporting for business combinations and minority interests in consolidated financial statements. These Statements are effective for fiscal years beginning after December 15, 2008. The Company is in the process of determining the impact of adopting these Statements; however, these Statements are expected to have a significant impact on the Company’s accounting and disclosure practices for future business combinations once adopted.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This Statement amends and expands the disclosure requirements of SFAS No. 133. This Statement is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company is in the process of determining the impact of adopting this Statement.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement reorganizes the GAAP hierarchy. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not believe the adoption of this Statement will have a material impact on the Company’s financial position or results of operations.

2. SPECIAL ITEMS

Special Items Policy

The Company classifies restructuring charges, acquisition integration charges and certain litigation and other items as special items. A restructuring activity is a program whereby the Company fundamentally changes its operations such as closing facilities, moving a product to another location or outsourcing the production of a product. Restructuring activities may also involve substantial re-alignment of the management structure of a business unit in response to changing market conditions. Restructuring charges are recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, a liability for a cost associated with an exit or disposal activity is recognized and measured initially at its fair value in the period in which it is incurred except for a liability for a one-time termination benefit recognized over its service period.

Acquisition integration charges include costs to integrate acquired companies. Upon acquisition, certain integration charges are included within the purchase price allocation in accordance with SFAS No. 141, “Business Combinations,” and other integration charges are recognized as special items as incurred.

The Company recognizes income from the favorable outcome of legal settlements, judgments or other resolution of legal and regulatory matters as special items on the consolidated financial statements when the associated cash or assets are received. Generally, expenses due to the unfavorable outcome of legal settlements, judgments or other resolution of legal and regulatory matters (“litigation settlement losses”) are charged to the segment to which the matter relates and, as a result, are classified as selling, general and administrative (“SG&A”) expenses on the Company’s consolidated financial statements. In certain circumstances, significant litigation settlement losses are classified in special items on the consolidated statement of earnings. Factors considered in determining whether a particular litigation settlement loss should be classified in special items include the size of settlement, the nature of the matter (i.e., significant matters that are infrequent, non-recurring or unusual in nature are classified as special items), the age of the matter and the pervasiveness of the matter to the entire organization. The Company also classifies legal fees and document preservation and production costs incurred in connection with the previously-disclosed SEC investigation and related Audit Committee internal review and related matters as special items. For information regarding these investigations, see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, as amended (the “2007 Form 10-K”).

 

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Special Items

The following is a summary of the special items for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions, except for Diluted EPS amounts)

   2008     2007  

Restructuring charges

   $ 49.7     $ 14.8  

Acquisition integration charges

     2.4       5.4  

Litigation, net

     0.3       0.8  

Other

     —         1.5  
                

Total special items

   $ 52.4     $ 22.5  

Tax effect of special items (1)

     (17.1 )     (7.7 )
                

Net earnings effect of special items

   $ 35.3     $ 14.8  
                

Net decrease in diluted earnings per Common Share

   $ 0.10     $ 0.04  
                

 

(1) The Company applies varying tax rates to its special items depending upon the tax jurisdiction where the item was incurred.

Restructuring Charges

During fiscal 2005, the Company launched a global restructuring program with a goal of increasing the value the Company provides its customers through better integration of existing businesses and improved efficiency from a more disciplined approach to procurement and resource allocation. The Company expects the program to be implemented in three phases and be substantially completed by the end of fiscal 2009.

The first phase of the program, announced in December 2004, focused on business consolidations and process improvements, including rationalizing facilities worldwide, reducing the Company’s global workforce, and rationalizing and discontinuing overlapping and under-performing product lines. The second phase of the program, announced in August 2005, focused on longer-term integration activities that enhance service to customers through improved integration across the Company’s segments and continued streamlining of internal operations. The third phase of the program, announced in April 2007, focused on moving the Company’s medical products distribution headquarters and certain corporate functions from Waukegan, Illinois to the Company’s corporate headquarters in Dublin, Ohio.

During fiscal 2009, the Company is undertaking a major restructuring of its segment operating structure. Effective July 1, 2008, the Company consolidated its businesses into two primary operating and reportable segments to reduce costs and align resources with the needs of each segment.

In addition to the restructuring programs discussed above, from time to time the Company incurs costs to implement smaller restructuring efforts for specific operations within its segments. The restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount, and aligning operations in the most strategic and cost-efficient structure.

The following table segregates the Company’s restructuring charges into the reportable segments affected by the restructuring projects for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008     2007  

Healthcare Supply Chain Services

    

Employee-related costs (1)

   $ 1.4     $ 2.3  

Facility exit and other costs (2)

     1.4       —    
                

Total Healthcare Supply Chain Services

   $ 2.8     $ 2.3  

Clinical and Medical Products

    

Employee-related costs (1)

     2.2       1.3  

Facility exit and other costs (2)

     (0.1 )     (0.6 )
                

Total Clinical and Medical Products

   $ 2.1     $ 0.7  

 

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     Three Months Ended
September 30,

(in millions)

   2008    2007

Related to multiple segments

     

Employee-related costs (1)

     43.9      10.0

Facility exit and other costs (2)

     0.9      1.8
             

Total related to multiple segments

   $ 44.8    $ 11.8
             

Total restructuring charges

   $ 49.7    $ 14.8
             

 

(1) Employee-related costs consist primarily of one-time termination benefits recognized in accordance with the provisions of SFAS No. 146. Outplacement services provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods are also included within this classification.
(2) Facility exit and other costs consist of accelerated depreciation, equipment relocation costs, project consulting fees and costs associated with restructuring the Company’s delivery of information technology infrastructure services.

The costs incurred within the Healthcare Supply Chain Services segment for the three months ended September 30, 2008 primarily related to the closure of a facility and planned headcount reductions within existing operations. The costs incurred within this segment for the three months ended September 30, 2007 primarily related to the realignment of business operations, the closure of a distribution center and planned headcount reductions within existing operations.

The costs incurred within the Clinical and Medical Products segment during the three months ended September 30, 2008 and 2007 primarily related to the closure of facilities and planned headcount reductions within existing operations.

The costs incurred related to projects that impacted multiple segments during the three months ended September 30, 2008 primarily related to the fiscal 2009 restructuring of the Company’s segment operating structure. The costs incurred related to projects that impacted multiple segments during the three months ended September 30, 2007 primarily related to the relocation of the Company’s medical products distribution headquarters and certain corporate functions from Waukegan, Illinois to the Company’s corporate headquarters in Dublin, Ohio.

The following table summarizes the year in which the project activities are expected to be completed, the expected headcount reductions and the actual headcount reductions as of September 30, 2008:

 

     Expected/Actual
Fiscal Year of
Completion
   Headcount Reduction
        Expected (1)    Actual

Healthcare Supply Chain Services

   2009    107    6

Clinical and Medical Products

   2011    408    183

Related to multiple segments (2)

   2009    860    748
            

Total expected headcount reductions

      1,375    937
            

 

(1) Represents projects that have been initiated as of September 30, 2008.
(2) Includes, among other restructuring projects, employees displaced as a result of the relocation of the medical products distribution headquarters and certain corporate functions from Waukegan, Illinois to the Company’s corporate headquarters in Dublin, Ohio. Most of this reduction is expected to be offset by the positions created at the corporate headquarters.

Acquisition Integration Charges

Costs of integrating operations of various acquired companies are recorded as acquisition integration charges when incurred. The acquisition integration charges incurred during the three months ended September 30, 2008 and 2007 were primarily a result of the acquisition of Viasys. During the periods noted above, the Company also incurred acquisition integration charges for numerous smaller acquisitions. The following table and paragraphs provide additional detail regarding the types of acquisition integration charges incurred by the Company for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,

(in millions)

   2008    2007

Acquisition integration charges:

     

Employee-related costs

   $ 2.3    $ 0.8

Other integration costs

     0.1      4.6
             

Total acquisition integration charges

   $ 2.4    $ 5.4
             

 

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Employee-Related Costs . These costs primarily consist of severance, stay bonuses, non-compete agreements and other forms of compensatory payouts made to employees as a direct result of acquisitions.

Other Integration Costs . Other integration costs generally relate to expenses incurred to integrate the acquired company’s operations and systems into the Company’s existing operations and systems. These costs include, but are not limited to, the integration of information systems, employee benefits and compensation, accounting, finance, tax, treasury, internal audit, risk management, compliance, administrative services, sales and marketing and other.

Litigation, net

The following table summarizes the Company’s net litigation costs included within special items during the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008    2007  

Litigation charges/(income):

     

Pharmaceutical manufacturer antitrust litigation

   $ —      $ (0.2 )

Other

     0.3      1.0  
               

Total litigation, net

   $ 0.3    $ 0.8  
               

Pharmaceutical Manufacturer Antitrust Litigation . The Company recognized income of $0.2 million during the three months ended September 30, 2007 resulting from settlement of class action antitrust claims alleging certain prescription drug manufacturers took improper actions to delay or prevent generic drug competition. The Company has not been a named plaintiff in any of these class actions, but has been a member of the direct purchasers’ class (i.e., those purchasers who purchase directly from these drug manufacturers). The total recovery of such claims through September 30, 2008 was $151.8 million (net of attorney fees, payments due to other interested parties and expenses withheld). The Company is unable at this time to estimate future recoveries, if any, it will receive as a result of these class actions.

Other Litigation . The Company recorded a reserve of $0.3 million during the three months ended September 30, 2008 with respect to the settlement of certain litigation matters in the Company’s Clinical and Medical Products segment. The Company recorded a reserve of $1.0 million during the three months ended September 30, 2007 with respect to the settlement of certain litigation matters in the Company’s Healthcare Supply Chain Services segment.

Other

During the three months ended September 30, 2007 the Company incurred costs within other special items totaling $1.5 million primarily related to estimated legal fees and document preservation and production costs incurred in connection with the SEC investigation and the related Audit Committee internal review and related matters. For information regarding this matter, see the 2007 Form 10-K.

Special Items Accrual Rollforward

The following table summarizes activity related to the liabilities associated with the Company’s special items during the three months ended September 30, 2008:

 

(in millions)

   Three Months Ended
September 30, 2008
 

Balance at June 30, 2008

   $ 97.8  

Additions (1)

     52.4  

Payments

     (46.1 )
        

Balance at September 30, 2008

   $ 104.1  
        

 

(1) Amount represents items that have been expensed as incurred or accrued in accordance with GAAP.

 

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Future Spend

Certain acquisition and restructuring charges are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized in special items when incurred.

The Company estimates it will incur additional costs in future periods associated with various acquisition integration and restructuring activities totaling approximately $85.8 million (approximately $55.1 million net of tax). These estimated costs are primarily associated with the integration of Viasys within the Clinical and Medical Products segment and do not include costs associated with the Planned Spin-Off. The Company expects to incur significant costs associated with the Planned Spin-Off during the remaining quarters of fiscal 2009.

3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

PTS Business

During the second quarter of fiscal 2007, the Company committed to plans to sell its former Pharmaceutical Technologies and Services segment, other than certain generic-focused businesses (the segment, excluding the certain generic-focused businesses that were not sold, is referred to as the “PTS Business”), thereby meeting the held for sale criteria set forth in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144 and Emerging Issues Task Force (“EITF”) Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations,” the net assets of the PTS Business are presented separately as held for sale and the operating results are presented within discontinued operations for all periods presented. During the fourth quarter of fiscal 2007, the Company completed the sale of the PTS Business to an affiliate of the Blackstone Group.

The Company incurred activity during the three months ended September 30, 2008 and 2007 as a result of changes in certain estimates made at the time of the sale, activity under a transition services agreement and other adjustments. The loss related to the PTS Business included in discontinued operations was $0.7 million and $1.4 million for the three months ended September 30, 2008 and 2007, respectively.

The liabilities of the PTS Business included in liabilities held for sale and discontinued operations were $2.4 million and $2.5 million as of September 30, 2008 and June 30, 2008, respectively. These amounts are included within Corporate.

Cash flows used in discontinued operations are presented separately on the Company’s condensed consolidated statements of cash flows.

Other

During the third quarter of fiscal 2008, the Company committed to plans to sell the Tecomet and Medsystems businesses within its All Other segment, thereby meeting the held for sale criteria set forth in SFAS No. 144. In accordance with SFAS No. 144 and EITF Issue No. 03-13, the net assets of these businesses are presented separately as held for sale on the Company’s condensed consolidated balance sheet at June 30, 2008. During the first quarter of fiscal 2009, the Company completed the sales of these businesses. The results of these businesses are reported within earnings from continuing operations on the Company’s condensed consolidated statements of earnings for the time periods prior to the sales.

At June 30, 2008, the major components of these businesses’ assets and liabilities held for sale were as follows:

 

(in millions)

   2008

Current assets

   $ 25.8

Property and equipment

     12.8

Other assets

     101.8
      

Total assets

   $ 140.4
      

Current liabilities

   $ 12.2

Long-term debt and other

     0.7
      

Total liabilities

   $ 12.9
      

4. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company accounts for purchased goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The following table summarizes the changes in the carrying amount of goodwill in total and by segment for the three months ended September 30, 2008:

 

(in millions)

   Healthcare Supply
Chain Services
   Clinical and Medical
Products
   All Other     Total

Balance at June 30, 2008

   $ 1,614.3    $ 3,439.1    $ 78.3     $ 5,131.7

Goodwill acquired—net of purchase price adjustments, foreign currency translation adjustments and other(1)(2)

     1.0      40.5      (0.6 )     40.9
                            

Balance at September 30, 2008

   $ 1,615.3    $ 3,479.6    $ 77.7     $ 5,172.6
                            

 

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(1) The increase within the Healthcare Supply Chain Services segment primarily related to adjustments to minor acquisitions of $16.1 million offset by foreign currency translation adjustments of $15.9 million.
(2) The increase within the Clinical and Medical Products segment primarily related to proposed tax assessments of $48.6 million partially offset by foreign currency translation adjustments of $8.1 million and purchase accounting adjustments for Enturia Inc. (“Enturia”) of $4.0 million.

The allocations of the purchase price related to the Enturia and other minor acquisitions are not yet finalized and are subject to adjustment as the Company completes the valuation analysis. The Company expects any future adjustments to the allocations of the purchase prices and potential future contingent payments to be recorded to goodwill.

Intangible assets with definite lives are amortized using the straight-line method over periods that range from three to forty years. The detail of other intangible assets by class as of June 30, 2008 and September 30, 2008 is as follows:

 

(in millions)

   Gross
Intangible
   Accumulated
Amortization
   Net
Intangible

June 30, 2008

        

Unamortized intangibles:

        

Trademarks and patents

   $ 372.2    $ 0.4    $ 371.8
                    

Total unamortized intangibles

   $ 372.2    $ 0.4    $ 371.8

Amortized intangibles:

        

Trademarks and patents

   $ 262.5    $ 83.7    $ 178.8

Non-compete agreements

     6.7      3.7      3.0

Customer relationships

     604.3      142.7      461.6

Other

     144.5      65.5      79.0
                    

Total amortized intangibles

   $ 1,018.0    $ 295.6    $ 722.4
                    

Total intangibles

   $ 1,390.2    $ 296.0    $ 1,094.2
                    

September 30, 2008

        

Unamortized intangibles:

        

Trademarks and patents

   $ 353.1    $ 0.4    $ 352.7
                    

Total unamortized intangibles

   $ 353.1    $ 0.4    $ 352.7

Amortized intangibles:

        

Trademarks and patents

   $ 286.3    $ 90.9    $ 195.4

Non-compete agreements

     8.3      4.0      4.3

Customer relationships

     613.9      158.1      455.8

Other

     148.0      63.7      84.3
                    

Total amortized intangibles

   $ 1,056.5    $ 316.7    $ 739.8
                    

Total intangibles

   $ 1,409.6    $ 317.1    $ 1,092.5
                    

There were no significant acquisitions of other intangible assets during the period presented. Amortization expense for the three months ended September 30, 2008 and 2007 was $23.0 million and $23.2 million, respectively.

 

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Amortization expense for each of the next five fiscal years is estimated to be:

 

(in millions)

   2009    2010    2011    2012    2013

Amortization expense

   $ 91.1    $ 88.5    $ 87.2    $ 79.3    $ 57.0

5. INCOME TAXES

Effective July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109” (“FIN No. 48”), resulting in a $139.3 million reduction of retained earnings. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The balance of unrecognized tax benefits and the amount of related interest and penalties were as follows as of September 30, 2008 and June 30, 2008:

 

(in millions)

   September 30,
2008
   June 30,
2008

Unrecognized tax benefits (1)

   $ 837.2    $ 762.9

Portion that, if recognized, would reduce tax expense and effective tax rate

     551.7      529.1

Accrued penalties and interest on unrecognized tax benefits

     221.5      195.4

 

(1) Includes a $46.3 million increase recorded through goodwill during the three months ended September 30, 2008.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, the Company is subject to audit by taxing authorities for fiscal years ending June 30, 2001 through the current fiscal year.

The Internal Revenue Service (“IRS”) currently has ongoing audits of fiscal years 2001 through 2005. During the three months ended December 31, 2007, the Company was notified that the IRS has transferred jurisdiction over fiscal years 2001 and 2002 from the Office of Appeals back to the Examinations level to reconsider previously-unadjusted specific issues. During the three months ended March 31, 2008, the Company received Notices of Proposed Adjustments (“NPAs”) from the IRS related to fiscal years 2001 through 2005 challenging deductions arising from the sale of trade receivables to a special purpose accounts receivable and financing entity as described in more detail in Note 10 of “Notes to Consolidated Financial Statements” in the 2008 Form 10-K. The amount of additional tax, excluding penalties and interest which may be significant, proposed by the IRS in these notices was $178.9 million. The Company disagrees with the proposed adjustments and intends to vigorously contest them. The Company anticipates that this transaction could be the subject of proposed adjustments by the IRS in tax audits of fiscal years 2006 to present. The Company believes that it is adequately reserved for the uncertain tax position relating to this arrangement; therefore, it has not adjusted the amount of previously recorded unrecognized tax benefits related to this issue.

During the three months ended September 30, 2008, the Company received an IRS Revenue Agent Report for tax years 2003 through 2005 which included the NPAs discussed above and new NPAs related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by the Company. The amount of additional tax proposed by the IRS in these notices total $598.1 million, excluding penalties and interest which may be significant. The Company disagrees with these proposed adjustments and intends to vigorously contest them.

It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the IRS or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues, or the expiration of applicable statutes of limitations. It is not possible to reasonably estimate the amount of such change in unrecognized tax benefits at this time.

The Company’s provision for income taxes as a percentage of pretax earnings from continuing operations (“effective tax rate”) was 31.4% for the three months ended September 30, 2008, as compared to 32.2% for the three months ended September 30, 2007. Generally, fluctuations in the effective tax rate are primarily due to changes within international and state effective tax rates resulting from the Company’s business mix, changes in the tax impact of special items and other discrete items, which may have unique tax consequences depending on the nature of the item.

 

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The effective tax rate for the three months ended September 30, 2008 was favorably impacted by $7.5 million as the result of discrete tax adjustments. There was a favorable tax adjustment of $19.5 million as the result of the release of a valuation allowance that had previously been established for capital losses for which the Company’s ability to utilize were uncertain. Also, there was an unfavorable tax adjustment of $9.2 million for accrued interest expense related to proposed tax assessments. The remaining unfavorable adjustment of $2.8 million is due to miscellaneous discrete tax items.

6. CONTINGENT LIABILITIES

Legal Proceedings

In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of its business. The Company accrues for contingencies related to litigation in accordance with SFAS No. 5, “Accounting for Contingencies,” which requires the Company to assess contingencies to determine the degree of probability and range of possible loss. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Shareholder/ERISA Litigation against Syncor

Eleven purported class action lawsuits were filed against Syncor International Corporation (“Syncor”) and certain of its officers and directors, asserting claims under the federal securities laws. All of these actions were filed in the United States District Court for the Central District of California, where they were consolidated into a single proceedings referred to as In re Syncor International Corp. Securities Litigation (the “Syncor federal securities litigation”). The lead plaintiff filed a third amended consolidated complaint on December 29, 2004. The Syncor federal securities litigation purported to be brought on behalf of all purchasers of Syncor shares during various periods, beginning as early as March 30, 2000 and ending as late as November 5, 2002, all prior to the Company’s acquisition of Syncor. The Syncor federal securities litigation alleged, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act by issuing a series of press releases and public filings disclosing significant sales growth in Syncor’s international business, but omitting mention of certain allegedly improper payments to Syncor’s foreign customers, thereby artificially inflating the price of Syncor shares. The consolidated complaint sought unspecified money damages and other unspecified relief against the defendants. Syncor filed a motion to dismiss the third amended consolidated complaint on January 31, 2005. On April 15, 2005, the District Court granted the motion to dismiss with prejudice and the lead plaintiff appealed this decision to the United States Court of Appeals for the Ninth Circuit. On June 12, 2007, the Court of Appeals entered an order reversing, in part, the District Court’s dismissal of the plaintiffs’ claims and remanding the case to the District Court. The order reversed the dismissal of the claims against Syncor and certain individual defendants, including its former Chairman and CEO, and affirmed the dismissal of all other defendants. On January 17, 2008, the defendants filed an answer to the third amended consolidated complaint. The defendants entered into a memorandum of understanding effective on June 27, 2008 to settle the Syncor federal securities litigation for a payment of $15.5 million. The substantial majority of the settlement payment will be funded by insurance. The defendants entered into a stipulation and agreement of settlement with counsel for the plaintiffs, which was filed with the District Court on August 27, 2008. On September 22, 2008, the District Court entered an Order preliminarily approving the settlement. Settlement of the Syncor federal securities litigation is subject to completion of certain conditions, including notice to the class of plaintiffs in the litigation and final court approval. The defendants in the Syncor federal securities litigation continue to deny the violations of law alleged in this action, and any settlement reached would be solely to eliminate the uncertainties, burden and expense of further protracted litigation. At this time, there can be no assurance that all of the conditions for settlement will be met.

A purported class action complaint, captioned Pilkington v. Cardinal Health, et al. , was filed on April 8, 2003 against the Company, Syncor and certain officers and employees of the Company by a purported participant in the Syncor Employee Savings and Stock Ownership Plan. A related purported class action complaint, captioned Donna Brown, et al. v. Syncor International Corp, et al. , was filed on September 11, 2003 against the Company, Syncor and certain individual defendants. Another related purported class action complaint, captioned Thompson v. Syncor International Corp., et al. , was filed on January 14, 2004 against the Company, Syncor and certain individual defendants. Each of these actions was brought in the United States District Court for the Central District of California. A consolidated complaint was filed on February 24, 2004 against Syncor and certain former Syncor officers, directors and/or employees alleging that the defendants breached certain fiduciary duties owed under the Employee Retirement Income Security Act (“ERISA”) based on the same underlying allegations of improper and unlawful conduct alleged in the federal securities litigation (the “Syncor ERISA litigation”). The consolidated complaint sought unspecified money damages and other unspecified relief against the defendants. On April 26, 2004, the defendants filed motions to dismiss the consolidated complaint. On August 24, 2004, the District Court granted in part and denied in part defendants’ motions to dismiss. The District Court dismissed, without

 

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prejudice, all claims against two individual defendants, all claims alleging co-fiduciary liability against all defendants, and all claims alleging that the individual defendants had conflicts of interest precluding them from properly exercising their fiduciary duties under ERISA. A claim for breach of the duty to prudently manage plan assets against Syncor was not dismissed, and a claim for breach of the alleged duty to “monitor” the performance of Syncor’s Plan Administrative Committee against defendants Monty Fu and Robert Funari was not dismissed. On January 10, 2006, Syncor and the other parties entered into a term sheet to settle the Syncor ERISA litigation for a cash payment of $4.0 million and payment of an additional amount not to exceed $4.0 million for litigation fees and expenses and reported the settlement to the District Court. Also on January 10, 2006, the District Court entered summary judgment in favor of all defendants on all remaining claims. Consistent with that ruling, on January 11, 2006, the District Court entered a final order dismissing this case and the lead plaintiff appealed this decision to the United States Court of Appeals for the Ninth Circuit. On February 19, 2008, the Court of Appeals entered an order reversing the District Court’s dismissal of the plaintiffs’ claims and remanded the case to the District Court to hold a hearing to review the fairness of the settlement agreement. On June 25, 2008, the parties submitted the settlement agreement to the District Court for preliminary approval. On July 29, 2008, the District Court preliminarily approved the $4.0 settlement amount, but ordered the parties to revise the attorneys’ fees to not exceed 33  1 / 3 % of the settlement amount. The Company recorded a reserve of $5.4 million for the fiscal year ended June 30, 2008 related to the Syncor ERISA litigation. On October 22, 2008, the District Court entered a final Order approving the settlement and dismissing all claims asserted in the Syncor ERISA litigation against the defendants. The defendants in the Syncor ERISA litigation continue to deny the violations of law alleged in the litigation, and the settlement reached was solely to eliminate the uncertainties, burden and expense of further protracted litigation.

ICU Litigation

Prior to the completion of the Company’s acquisition of ALARIS Medical Systems, Inc. (“Alaris”), on June 16, 2004, ICU Medical, Inc. (“ICU”) filed a patent infringement lawsuit against Alaris in the United States District Court for the Southern District of California. In the lawsuit, ICU claims that the Alaris SmartSite ® family of needle-free valves and systems infringes upon ICU patents. ICU seeks monetary damages plus permanent injunctive relief to prevent Alaris from selling SmartSite products. On July 30, 2004, the District Court denied ICU’s application for a preliminary injunction finding, among other things, that ICU had failed to show a substantial likelihood of success on the merits. During July and August 2006, the District Court granted summary judgment to Alaris on three of the four patents asserted by ICU and issued an order interpreting certain claims in certain patents in a manner that could impair ICU’s ability to enforce those patents against Alaris. On January 22, 2007, the District Court granted summary judgment in favor of Alaris on all of ICU’s remaining claims and declared certain of their patent claims invalid. The District Court has ordered ICU to pay Alaris approximately $5.0 million of attorneys’ fees and costs. On October 24, 2007, ICU appealed these decisions to the United States Court of Appeals for the Federal Circuit. The Company intends to continue to vigorously defend this action. It is currently not possible to estimate the amount of loss or range of possible loss that might result from an adverse judgment or settlement of this proceeding. The Company currently does not believe, however, that this proceeding will have a material adverse effect on the Company’s results of operations or financial condition.

State Attorneys General Investigation related to Repackaged Pharmaceuticals

In October 2005, the Company received a subpoena from the Attorney General’s Office of the State of Illinois. The subpoena stated that the Illinois Attorney General’s Office is examining whether the Company presented or caused to be presented false claims for payment to the Illinois Medicaid program relating to repackaged pharmaceuticals. The Company received a letter in May 2007 that was sent jointly from the Illinois and New York Attorney General’s Offices on behalf of a National Association of Medicaid Fraud Control Units team. The letter alleged that the Company has caused Medicaid reimbursements to be paid for repackaged pharmaceuticals without paying the required Medicaid rebate and alleges that certain of the Company’s repackaging business practices violate the Medicaid rebate statute. The letter requested the Company to change these business practices, asked for additional information and asserted potential theories for damages. The Company is cooperating with the state attorney general offices regarding this matter. The Company cannot currently predict the outcome of this investigation or its ultimate impact on the Company’s business, including whether changes to business practices will be required, and cannot estimate the amount of loss or range of possible loss.

DEA Matter

In a series of actions, the Drug Enforcement Administration (the “DEA”) of the U.S. Department of Justice suspended the licenses to distribute controlled substances held by three of the Company’s distribution centers. Specifically, the DEA issued an Order to Show Cause and Immediate Suspension (an “Order”), dated November 28, 2007, with respect to the Company’s Auburn, Washington distribution center; an Order, dated December 5, 2007, with respect to the Company’s Lakeland, Florida distribution center; and an Order, dated December 7, 2007, with respect to the Company’s Swedesboro, New Jersey distribution center. In each Order, the DEA asserts that the Company did not maintain effective controls against diversion of particular controlled substances into other than legitimate medical, scientific and industrial channels and specifically cites the Company’s sale of hydrocodone to pharmacies that have allegedly dispensed excessive amounts of the drug for illegitimate purposes. On December 26, 2007, an Administrative Law Judge handling the Orders granted the Company’s request to consolidate revocation hearings and stay the

 

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consolidated matter. The Company has taken steps to deliver controlled substances to customers of the distribution centers affected by the Orders using other Company distribution centers, in some cases on delayed delivery schedules. In addition, the DEA issued an Order to Show Cause, dated January 30, 2008, pertaining to the license to distribute controlled substances held by the Company’s Stafford, Texas distribution center (the “Stafford Order”). The Stafford Order did not suspend the facility’s license to distribute controlled substances. On March 5, 2008, the license revocation proceeding with respect to the Stafford Order was consolidated with the pending proceedings for the distribution centers affected by the Orders.

The Company has evaluated its controls against diversion of controlled substances on a company-wide basis and has enhanced these controls, including the following: establishing a new centralized supply chain security and anti-diversion function accountable to executive management, including the addition of new personnel; continuing implementation of technological enhancements to augment the Company’s controls against the diversion of controlled substances; enhancing employee training programs; and suspending the distribution of controlled substances to certain pharmacies based on the nature of activity in the pharmacies’ accounts. The Company continues to make additional modifications and enhancements to the Company’s anti-diversion processes. To provide an opportunity to re-assess anti-diversion controls and make any necessary improvements, in February 2008, the Company voluntarily discontinued controlled substance shipments from the Stafford distribution center to retail independent pharmacy customers. The Company resumed such shipments in September 2008.

On August 7, 2008, the Company and the DEA staff reached an oral agreement in principle to resolve the license suspensions and the Company recorded a reserve of $34.0 million for its fiscal year ended June 30, 2008 for this matter. On October 2, 2008, the Company, without admitting any wrongdoing, entered into settlement agreements with the DEA and seven U.S. Attorneys’ Offices resulting in reinstatement of the suspended licenses. Under the terms of the settlement agreement with the DEA, the Company agreed to, among other things, maintain a compliance program designed to detect and prevent diversion of controlled substances. As part of the settlements with the U.S. Attorneys’ Offices, the Company paid a total settlement amount of $34.0 million subsequent to the first quarter of fiscal 2009.

Other Matters

In addition to the matters described above, the Company also becomes involved from time-to-time in other litigation and regulatory matters incidental to its business, including, without limitation, personal injury claims, employment matters, commercial disputes, intellectual property matters, inclusion as a potentially responsible party for environmental clean-up costs, and litigation in connection with acquisitions and divestitures. The Company intends to vigorously defend itself against such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s consolidated financial statements.

From time to time, the Company receives subpoenas or requests for information from various government agencies, including from state attorneys general, the SEC and the U.S. Department of Justice relating to the business, accounting or disclosure practices of customers or suppliers. The Company generally responds to such subpoenas and requests in a timely and thorough manner. The responses sometimes require considerable time and effort, and can result in considerable costs being incurred by the Company. The Company expects to incur additional costs in the future in connection with existing and future requests. Such subpoenas and requests also can lead to the assertion of claims or the commencement of legal proceedings against the Company.

Also from time to time, the Company may determine that products manufactured or marketed by the Company may not meet Company specifications, published standards, or regulatory requirements. In such circumstances, the Company will investigate and take appropriate corrective action, such as withdrawal of the product from the market, correction of the product at the customer location, notice to the customer of revised labeling, and/or other actions. The Company has recalled, and/or conducted field alerts relating to, certain of its products from time to time. These activities can lead to costs to repair or replace affected products, temporary interruptions in product sales and action by regulators, and can impact reported results of operations. The Company does not believe that these activities have had or will have a material adverse effect on its business or results of operations.

See Note 5 for additional discussion of contingencies related to the Company’s income taxes.

7. GUARANTEES

The Company has contingent commitments related to a certain operating lease agreement. This operating lease consists of certain real estate used in the operations of the Company. In the event of termination of this operating lease, which matures in June 2013, the Company guarantees reimbursement for a portion of any unrecovered property cost. At September 30, 2008, the maximum amount the Company could be required to reimburse is $120.9 million. In accordance with FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” the Company has a liability of $2.3 million recorded as of September 30, 2008 related to this agreement.

 

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In the ordinary course of business, the Company from time to time agrees to indemnify certain other parties under agreements with the Company, including under acquisition and disposition agreements, customer agreements and intellectual property licensing agreements. Such indemnification obligations vary in scope and, when defined, in duration. In many cases, a maximum obligation is not explicitly stated and therefore the overall maximum amount of the liability under such indemnification obligations cannot be reasonably estimated. Where appropriate, such indemnification obligations are recorded as a liability. Historically, the Company has not, individually or in the aggregate, made payments under these indemnification obligations in any material amounts. In certain circumstances, the Company believes that its existing insurance arrangements, subject to the general deduction and exclusion provisions, would cover portions of the liability that may arise from these indemnification obligations. In addition, the Company believes that the likelihood of a material liability being triggered under these indemnification obligations is not significant.

In the ordinary course of business, the Company from time to time enters into agreements that obligate the Company to make fixed payments upon the occurrence of certain events. Such obligations primarily relate to obligations arising under acquisition transactions, where the Company has agreed to make payments based upon the achievement of certain financial performance measures by the acquired business. Generally, the obligation is capped at an explicit amount. The Company’s aggregate exposure for these obligations, assuming the achievement of all financial performance measures, is not material. Any potential payment for these obligations would be treated as an adjustment to the purchase price of the related entity and would have no impact on the Company’s results of operations.

In the ordinary course of business, the Healthcare Supply Chain Services segment, from time to time, extends loans to its customers which are subsequently sold to a bank. The bank services and administers these loans as well as any new loans the Company may direct. In order for the bank to purchase such loans, it requires the absolute and unconditional obligation of the Company to repurchase such loans upon the occurrence of certain events described in the agreement including, but not limited to, borrower payment default that exceeds 90 days, insolvency and bankruptcy. At September 30, 2008 and June 30, 2008, notes in the program subject to the guaranty of the Company totaled $42.1 million and $33.4 million, respectively.

8. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Additionally, SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

Level 1 – Observable prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

Effective July 1, 2008, the Company adopted the provision of SFAS No. 157. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position or results of operations. In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” which permits a one-year deferral for the implementation of SFAS No. 157 with regard to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to defer adoption of SFAS No. 157 for such items and is currently in the process of determining the impact of adopting the remaining portions of this Statement, which will be effective in fiscal 2010.

The following table presents the fair values for those assets and (liabilities) measured on a recurring basis as of September 30, 2008:

 

(in millions)

   Fair Value Measurements
     Level 1    Level 2    Level 3    Total

Foreign Currency Forward Contracts

   $ —      $ 40.6    $ —      $ 40.6

Interest Rate Swaps

     —        31.8      —        31.8
                           

Total

   $ —      $ 72.4    $ —      $ 72.4
                           

 

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The Company enters into interest rate swaps to manage its exposure to interest rate variations related to its borrowings and to lower its overall borrowing costs. The Company enters into foreign currency forward contracts to protect the value of existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenue and expenses. The fair value of the Company’s foreign currency forwards and interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the respective maturities.

Effective July 1, 2008, the Company also adopted the provisions of SFAS No. 159, “The Fair Value Option for financial assets and liabilities – including an amendment of FASB Statement No. 115.” This Statement provides entities with the option to measure many financial instruments and certain other items at fair value. Entities that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting date. The Company chose not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP. As such, the adoption of SFAS No. 159 did not have an impact on the Company’s financial position or results of operations.

9. EARNINGS PER SHARE AND SHAREHOLDERS’ EQUITY

Earnings per Share

Basic earnings per Common Share (“Basic EPS”) is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share (“Diluted EPS”) is similar to the computation for Basic EPS, except that the denominator is increased by the dilutive effect of vested and unvested stock options, restricted shares and restricted share units computed using the treasury stock method.

The following table reconciles the number of Common Shares used to compute Basic EPS and Diluted EPS for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,

(in millions)

   2008    2007

Weighted-average shares – basic

   356.7    363.0

Effect of dilutive securities:

     

Employee stock options, restricted shares and restricted share units

   4.4    7.2
         

Weighted-average shares – diluted

   361.1    370.2
         

The potentially dilutive securities that were antidilutive for the three months ended September 30, 2008 and 2007 were 24.9 million and 14.5 million, respectively.

The total number of Common Shares issued less the shares held in treasury is used to determine the Common Shares outstanding.

Shareholders’ Equity

During the three months ended September 30, 2008, the Company did not repurchase any of its Common Shares under its existing $2.0 billion share repurchase program announced on August 8, 2007. This repurchase authorization will expire on August 31, 2009. At September 30, 2008, approximately $1.3 billion remained from the $2.0 billion repurchase authorization.

10. COMPREHENSIVE INCOME

The following is a summary of the Company’s comprehensive income for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008     2007  

Net earnings

   $ 249.1     $ 301.8  

Foreign currency translation adjustments

     (83.3 )     32.6  

Net unrealized gain / (loss) on derivative instruments

     8.9       (7.5 )
                

Total comprehensive income

   $ 174.7     $ 326.9  
                

11. SEGMENT INFORMATION

The Company’s operations are principally managed on a products and services basis. As discussed in Note 1, effective the first quarter of fiscal 2009, the Company has reorganized its businesses into three reportable segments — the Healthcare Supply Chain

 

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Services segment, the Clinical and Medical Products segment and the All Other segment. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” all prior period segment information has been reclassified to conform to this new financial reporting presentation.

The Healthcare Supply Chain Services segment distributes pharmaceutical products, over-the-counter healthcare products and consumer health products and provides support services to retail customers, hospitals and alternate care providers in the United States and Puerto Rico. This segment also distributes medical and surgical products to hospitals, surgery centers, laboratories and physician offices in the United States, Canada and Puerto Rico and assembles and distributes sterile and non-sterile procedure kits. It provides services to branded pharmaceutical manufacturers and operates a pharmaceutical repackaging and distribution program for chain and independent pharmacy customers and alternate care customers. In addition, this segment operates centralized nuclear (radiopharmaceutical) pharmacies, provides third-party logistics support services, distributes therapeutic plasma to hospitals, clinics and other providers located in the United States and manufactures and markets generic pharmaceutical products for sale to hospitals, clinics and pharmacies in the United Kingdom. Lastly, this segment operates a pharmacy for specialty pharmaceuticals.

The Clinical and Medical Products segment develops, manufactures, leases and sells medical technology products for hospitals and other healthcare providers, including intravenous medication safety and infusion therapy delivery systems, software applications, needle-free disposables, patient monitoring equipment, dispensing systems that automate the distribution and management of medications and medical supplies in hospitals and other healthcare facilities, and ventilation equipment and related disposables. This segment also develops, manufactures and sources medical and surgical products and technologies for distribution to hospitals, physician offices, surgery centers and other healthcare providers. These medical and surgical products include single-use surgical drapes, gowns and apparel, exam and surgical gloves, fluid suction and collection systems, and reusable surgical instruments and biopsy needles.

The All Other segment franchises and operates apothecary-style retail pharmacies through its Medicine Shoppe International, Inc. and Medicap Pharmacies Incorporated franchise systems and provides pharmacy services to hospitals and other healthcare facilities. This segment also manufactured and sold orthopedic implants and instruments through its Tecomet business and enteral devices and airway management products through its Medsystems businesses until both of these businesses were sold in the first quarter of fiscal 2009. The Tecomet and Medsystems businesses were both classified as held for sale at June 30, 2008.

The following table includes revenue for each reportable segment and reconciling items necessary to agree to amounts reported in the condensed consolidated financial statements for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008     2007  

Revenue:

    

Healthcare Supply Chain Services (1)

   $ 23,418.4     $ 21,092.9  

Clinical and Medical Products (2)

     1,154.9       1,032.4  

All Other (3)

     273.0       293.8  
                

Total segment revenue

     24,846.3       22,419.1  

Corporate (4)

     (499.1 )     (445.7 )
                

Total consolidated revenue

   $ 24,347.2     $ 21,973.4  
                

 

(1) The Healthcare Supply Chain Services segment’s revenue is derived from two main product categories. These product categories and their respective contributions to revenue are as follows:

 

     Three Months Ended
September 30,
 
     2008     2007  

Product Category

    

Distribution of pharmaceutical, radiopharmaceutical and over-the-counter healthcare products

   90 %   90 %

Distribution of medical, surgical and laboratory products and medical procedure kits

   10 %   10 %
            

Total

   100 %   100 %
            

 

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(2) The Clinical and Medical Products segment’s revenue is derived from five main product categories. These product categories and their respective contributions to revenue are as follows:

 

     Three Months Ended
September 30,
 
     2008     2007  

Product Category

    

Infection prevention products

   30 %   28 %

Medication safety, data / analytics, and infusion delivery

systems

   21 %   22 %

Medication and medical supply dispensing systems

   20 %   20 %

Respiratory and Neurocare products

   18 %   19 %

Medical specialty products and other

   11 %   11 %
            

Total

   100 %   100 %
            

 

(3) The All Other segment’s revenue is derived from three main product categories. These product categories and their respective contributions to revenue are as follows:

 

     Three Months Ended
September 30,
 
     2008     2007  

Product Category

    

Pharmacy services

   77 %   75 %

Franchising and operating apothecary-style retail pharmacies

   17 %   18 %

Medical access and specialty products

   6 %   7 %
            

Total

   100 %   100 %
            

 

(4) Corporate revenue primarily consists of the elimination of inter-segment revenue.

The Company evaluates the performance of the segments based upon, among other things, segment profit. Segment profit is segment revenue less segment cost of products sold, less segment SG&A expenses. Segment SG&A expense includes equity compensation expense as well as allocated corporate expenses for shared functions, including corporate management, corporate finance, financial shared services, human resources, information technology, legal and legislative affairs and an integrated hospital sales organization. Corporate expenses are allocated to the segments based upon headcount, level of benefit provided and ratable allocation. Information about interest income and expense and income taxes is not provided at the segment level. In addition, special items and impairments, (gain)/loss on sale of assets and other, net are not allocated to the segments. See Note 2 for further discussion of the Company’s special items. The accounting policies of the segments are the same as those described in the summary of significant accounting policies included in the 2008 Form 10-K.

The following table includes segment profit by reportable segment and reconciling items necessary to agree to consolidated operating earnings in the condensed consolidated financial statements for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008     2007  

Segment profit:

    

Healthcare Supply Chain Services (1)

   $ 292.4     $ 347.3  

Clinical and Medical Products (1)

     166.7       145.2  

All Other (1)

     23.9       22.4  
                

Total segment profit

     483.0       514.9  

Corporate (1) (2)

     (56.7 )     (25.1 )
                

Total consolidated operating earnings

   $ 426.3     $ 489.8  
                

 

(1) Investment spending previously held at corporate has been allocated to the segments under the new segment structure. Prior period information has been reclassified to conform to this new presentation. See Note 17 in the 2008 Form 10-K for an explanation of investment spending.
(2) For the three months ended September 30, 2008 and 2007, Corporate includes among other things special items and impairments, (gain)/loss on sale of assets and other, net, which are not allocated to the segments, described below:

 

   

Special items — Corporate includes special items of $52.4 million and $22.5 million during the three months ended September 30, 2008 and 2007, respectively (see Note 2 for discussion of special items).

 

   

Impairments, (gain)/loss on sale of assets and other, net — Asset impairments and gains and losses from the sale of assets not eligible to be classified as special items or discontinued operations are retained at Corporate. Impairments, (gain)/loss on sale of assets and other, net were $3.6 million and $(0.2) million during the three months ended September 30, 2008 and 2007, respectively.

 

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The following table includes total assets by reportable segment and reconciling items necessary to agree to consolidated assets in the condensed consolidated financial statements as of September 30, 2008 and June 30, 2008:

 

(in millions)

   As of September 30,
2008
   As of June 30,
2008

Assets:

     

Healthcare Supply Chain Services

   $ 15,420.1    $ 13,389.7

Clinical and Medical Products

     8,030.8      8,269.5

All Other

     286.6      489.4

Corporate (1)

     907.6      1,299.6
             

Consolidated assets

   $ 24,645.1    $ 23,448.2
             

 

(1) The Corporate assets primarily include cash and equivalents, assets held for sale and discontinued operations and net property and equipment.

12. EMPLOYEE EQUITY PLANS

The Company maintains several stock incentive plans (collectively, the “Plans”) for the benefit of certain of its officers, directors and employees. Employee options granted under the Plans during fiscal 2007 and 2006 generally vest in equal annual installments over four years and are exercisable for periods up to seven years from the date of grant at a price equal to the fair market value of the Common Shares underlying the option at the date of grant. Employee options granted under the Plans during fiscal 2008 and fiscal 2009 generally vest in equal annual installments over three years and are exercisable for periods up to seven years from the date of grant at a price equal to the fair market value of the Common Shares underlying the option at the date of grant. Employee restricted shares and restricted share units granted under the Plans from fiscal 2006 through fiscal 2009 generally vest in equal installments over three years and entitle holders to dividends or cash dividend equivalents. Restricted shares and restricted share units that were awarded after August 1, 2006 accrue dividends or cash dividend equivalents that are payable upon vesting of the awards. The fair value of restricted shares and restricted share units is determined by the number of shares granted and the grant date market price of the Company’s Common Shares.

The compensation expense recognized for all equity-based awards is net of estimated forfeitures and is recognized using the straight-line method over the awards’ service periods. In accordance with SEC Staff Accounting Bulletin No. 107 “Share-Based Payment”, the Company classifies equity-based compensation within SG&A expenses to correspond with the same line item as the majority of the cash compensation paid to employees.

The following table illustrates the impact of equity-based compensation on reported amounts for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30, 2008
    Three Months Ended
September 30, 2007
 

(in millions, except per share amounts)

   As
Reported
   Impact of
Equity-Based
Compensation
    As
Reported
   Impact of
Equity-Based
Compensation
 

Operating earnings (1) (2)

   $ 426.3    $ (24.4 )   $ 489.8    $ (26.1 )

Earnings from continuing operations

   $ 249.8    $ (16.2 )   $ 303.2    $ (17.0 )

Net earnings

   $ 249.1    $ (16.2 )   $ 301.8    $ (17.0 )

Net basic earnings per Common Share

   $ 0.70    $ (0.05 )   $ 0.83    $ (0.05 )

Net diluted earnings per Common Share

   $ 0.69    $ (0.05 )   $ 0.82    $ (0.05 )

 

(1) The total equity-based compensation expense for the three months ended September 30, 2008 and 2007 includes gross stock appreciation rights (“SARs”) income of approximately $0.2 million and $3.9 million, respectively. The SARs were granted on March 3, 2005 and August 3, 2005 to the Company’s then Chairman and Chief Executive Officer. Equity-based compensation expense was recognized from the vesting of the August 3, 2005 SARs upon issuance with an exercise price below the then-current price of the Company’s Common Shares. In quarters subsequent to issuing the SARs, the fair value has been remeasured using a Black-Scholes model and will continue to be remeasured each quarter until the unexercised SARs are exercised. Any increase in fair value is recorded as equity-based compensation expense. Any decrease in the fair value of the SARs is only recognized as income to the extent of the expense previously recorded. Of the 1.0 million SARs granted, 0.6 million SARs were exercised in fiscal 2007 and 0.3 million SARs were exercised in fiscal 2008.
(2) The total equity-based compensation expense for the three months ended September 30, 2008 and 2007 also includes gross restricted share and restricted share unit expense of approximately $12.7 million and $10.9 million, respectively, gross employee option expense of approximately $8.5 million and $16.9 million, respectively, and gross employee stock purchase plan expense of approximately $3.4 million and $2.2 million, respectively.

 

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The following summarizes all stock option transactions for the Company under the Plans from July 1, 2008 through September 30, 2008:

 

(in millions, except per share amounts)

   Options
Outstanding
    Weighted Average
Exercise Price
per Common Share

Balance at June 30, 2008

   32.1     $ 58.81

Granted

   2.1       56.09

Exercised

   —         —  

Canceled

   (1.0 )     65.58
            

Balance at September 30, 2008

   33.2     $ 58.68
            

Exercisable at September 30, 2008

   26.9     $ 57.79
            

The weighted average fair value of stock options granted during the three months ended September 30, 2008 is $14.21.

12. SUBSEQUENT EVENTS

During fiscal 2001, the Company entered into an agreement to periodically sell trade receivables to a special purpose accounts receivable and financing entity (the “Accounts Receivable and Financing Entity”), which is exclusively engaged in purchasing trade receivables from, and making loans to, the Company. The Accounts Receivable and Financing Entity, which is consolidated by the Company as it is the primary beneficiary of the variable interest entity, issued preferred variable debt securities to parties not affiliated with the Company. On October 3, 2008, the Company repaid the remaining balance of $148.8 million for the preferred debt securities.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis presented below is concerned with material changes in financial condition and results of operations for the Company’s condensed consolidated balance sheets as of September 30, 2008 and June 30, 2008, and for the condensed consolidated statements of earnings for the three month periods ended September 30, 2008 and 2007. This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2008 Form 10-K.

Portions of this Form 10-Q (including information incorporated by reference) include “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “project,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in Exhibit 99.1 to this Form 10-Q and in the 2008 Form 10-K (under “Item 1A: Risk Factors”) and are incorporated in this Form 10-Q by reference. Except to the extent required by applicable law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Cardinal Health is a leading provider of products and services that help improve the safety and productivity of healthcare. The Company is one of the largest distributors of pharmaceuticals and medical supplies. Customers include hospitals and clinics, some of the largest drug store chains in the United States, and many other healthcare providers and retail outlets. The Company believes that its depth and breadth of products is unique in the industry and gives it a competitive advantage.

Continued demand for the Company’s products and services during the three months ended September 30, 2008 led to revenue of $24.3 billion, up 11% from the same period in the prior year. Operating earnings were approximately $426 million, a decline of 13% from the same period in the prior year. Operating earnings were favorably impacted by increased gross margin ($22 million) offset by increases in SG&A expenses ($52 million) and increases in restructuring charges ($35 million). Net earnings for the three months ended September 30, 2008 were $249 million and net diluted earnings per Common Share were $0.69.

Cash used in operating activities totaled $353 million during the three months ended September 30, 2008 primarily due to changes in the Company’s working capital. Cash used in investing activities was $95 million primarily due to capital spending ($89 million). Cash used in financing activities was $172 million primarily due to the Company’s repayment of long-term obligations ($153 million). Also during the three months ended September 30, 2008, the Company paid $50 million in dividends or $0.14 per share.

Planned Spin-Off of Clinical and Medical Products Businesses

On September 29, 2008, the Company announced that it plans to spin off most of its clinical and medical products businesses from its remaining businesses through a pro rata distribution to the Company’s shareholders (the “Planned Spin-Off”). The Company will retain the surgical and exam gloves, drapes and apparel and fluid management businesses that are currently part of the Clinical and Medical Products segment. Completion of the Planned Spin-Off is subject to final approval by the Company’s Board of Directors, confirmation of the tax-free nature of the Planned Spin-Off and the effectiveness of a Form 10 registration statement that will be filed with the SEC. While it is currently anticipated that the Planned Spin-Off will be completed by the middle of calendar 2009, there can be no assurance as to the timing or terms of the Planned Spin-Off should it be completed. See “Part II, Item 1A—Risk Factors” for certain risk factors relating to the Planned Spin-Off.

In connection with the Planned Spin-Off, the Company has announced that R. Kerry Clark will continue to lead the Company through the Planned Spin-Off and then retire as the Company’s Chairman and Chief Executive Officer. Following Mr. Clark’s retirement, George S. Barrett, Vice Chairman of Cardinal Health and Chief Executive Officer of Healthcare Supply Chain Services, is expected to become the Company’s Chairman and Chief Executive Officer. Jeffrey W. Henderson will remain the Company’s Chief Financial Officer. David L. Schlotterbeck, Vice Chairman of Cardinal Health and Chief Executive Officer of Clinical and Medical Products, is expected to become Chairman and Chief Executive Officer of the spin-off company.

Consolidated Results of Operations

The following summarizes the Company’s consolidated results of operations for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,

(in millions, except per Common Share amounts)

   Change (1)     2008    2007

Revenue

   11 %   $ 24,347.2    $ 21,973.4

Cost of products sold

   11 %     22,982.7      20,631.2
               

 

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     Three Months Ended
September 30,
 

(in millions, except per Common Share amounts)

   Change (1)     2008     2007  

Gross margin

   2 %     1,364.5       1,342.2  

Selling, general and administrative expenses

   6 %     882.2       830.1  

Impairments, (gain)/loss on sale of assets and other, net

   N.M.       3.6       (0.2 )

Special items

   N.M.       52.4       22.5  
                  

Operating earnings

   (13 )%     426.3       489.8  

Interest expense and other

   45 %     62.4       42.9  
                  

Earnings before income taxes and discontinued operations

   (19 )%     363.9       446.9  

Provision for income taxes

   (21 )%     114.1       143.7  
                  

Earnings from continuing operations

   (18 )%     249.8       303.2  

Loss from discontinued operations, net of tax

   N.M.       (0.7 )     (1.4 )
                  

Net earnings

   (17 )%   $ 249.1     $ 301.8  
                  

Net diluted earnings per Common Share

   (16 )%   $ 0.69     $ 0.82  
                  

 

(1) Change is calculated as the percentage increase or (decrease) for the three months ended September 30, 2008 compared to the same period in the prior year.

Revenue

Revenue for the three months ended September 30, 2008 increased $2.4 billion or 11% compared to the same period in the prior year. The increase was due to pharmaceutical price appreciation and increased volume from existing customers (the combined impact of pharmaceutical price appreciation and increased volume was $2.4 billion), the addition of new customers ($207 million) and the impact of acquisitions ($164 million). The Company uses the internal metric “pharmaceutical price appreciation index” to evaluate the impact of pharmaceutical and consumer product price appreciation on revenue from the pharmaceutical supply chain business. This metric is calculated using the change in the manufacturer’s published price at the beginning of the period as compared to the end of the period weighted by the units sold by the pharmaceutical supply chain business during the period. The pharmaceutical price appreciation index was 8.2% for the trailing twelve months ended September 30, 2008. Revenue was negatively impacted during the three months ended September 30, 2008 by the loss of customers ($445 million). Refer to “Segment Results of Operations” below for further discussion of the specific factors affecting revenue in each of the Company’s reportable segments.

Cost of Products Sold

Cost of products sold for the three months ended September 30, 2008 increased $2.4 billion or 11% compared to the same period in the prior year. The increase in cost of products sold was mainly due to the respective 11% increase in revenue for the three months ended September 30, 2008 compared to the same period in the prior year. See the “Gross Margin” discussion below for further discussion of additional factors impacting cost of products sold.

Gross Margin

Gross margin for the three months ended September 30, 2008 increased $22 million or 2% compared to the same period in the prior year. The increase in gross margin was primarily due to the respective 11% growth in revenue, which includes the impact of acquisitions ($36 million). Gross margin was negatively impacted by an increase in customer discounts within the Healthcare Supply Chain Services segment ($107 million) as a result of increased sales volumes and the repricing of certain customer contracts over the last 12 months. Refer to the “Segment Results of Operations” below for further discussion of the specific factors affecting gross margin in each of the Company’s reportable segments.

Due to the competitive markets in which the Company’s businesses operate, the Company expects competitive pricing pressures to continue; however, the Company expects the margin impact of these pricing pressures over the long-term will be mitigated through effective product sourcing, realization of synergies through integration of acquired businesses and continued focus on cost controls.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended September 30, 2008 increased $52 million or 6% compared to the same period in the prior year primarily in support of revenue growth, which includes the impact of acquisitions, net of divestitures ($16 million). Refer to “Segment Results of Operations” below for further discussion of the specific factors affecting SG&A expenses in each of the Company’s reportable segments.

The Company expects SG&A expenses to continue to increase compared to the prior year period in support of sales growth and new product and service offerings and as a result of the impact of acquisitions and increased investment in research and development and information technology projects; however the Company does expect to generate expense efficiencies through the integration of acquired companies and other cost controls. The Company also expects share-based and incentive compensation expense to increase

 

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in fiscal 2009. The expected increase to share-based compensation expense is due to changes to the standard vesting period for employee stock options; however, this increase is expected to be partially offset by increases in the Company’s forfeiture rates as a result of terminations related to the Company’s restructuring of the segment operating structure. Funding of the fiscal 2009 incentive compensation pool will be primarily driven by the performance of the Company versus its financial objectives, as determined by the Human Resources and Compensation Committee of the Company’s Board of Directors. Fiscal 2008 funding was impacted by below-target performance during the year.

Impairments, (Gain)/Loss on Sale of Assets and Other, Net

The Company recognized impairments, (gain)/loss on sale of assets and other, net of $4 million for the three months ended September 30, 2008.

Special Items

The following is a summary of the Company’s special items for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,

(in millions)

   2008    2007

Restructuring charges

   $ 49.7    $ 14.8

Acquisition integration charges

     2.4      5.4

Litigation and other

     0.3      2.3
             

Total special items

   $ 52.4    $ 22.5
             

During the three months ended September 30, 2008, the Company recognized restructuring charges of $50 million primarily related to the restructuring of its segment operating structure. During the three months ended September 30, 2007, the Company recognized restructuring charges of $15 million primarily related to the relocation of the Company’s medical products distribution headquarters and certain corporate functions from Waukegan, Illinois to the Company’s corporate headquarters in Dublin, Ohio. See Note 2 of “Notes to Condensed Consolidated Financial Statements” for additional detail of the Company’s special items during the three months ended September 30, 2008 and 2007.

Operating Earnings

Operating earnings decreased $64 million, or 13%, during the three months ended September 30, 2008 compared to the same period in the prior year. The decrease is primarily due to the increased SG&A expenses ($52 million) and increased restructuring charges ($35 million), partially offset by higher gross margin ($22 million).

Interest Expense and Other

Interest expense and other increased $20 million or 45% during the three months ended September 30, 2008 compared to the same period in the prior year primarily due to the unfavorable impact of foreign exchange and other items ($14 million) and decreased investment income ($11 million). The increase was partially offset by decreased interest expense ($8 million) due to decreased borrowing levels.

The Company expects higher interest expense and other for fiscal 2009 compared to the prior year due to the unfavorable impact of the higher cost of borrowing and lower investment returns, partially offset by lower borrowing needs. In addition, the favorable impact of foreign exchange that was experienced in fiscal 2008 is not expected to continue in fiscal 2009.

Provision for Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, the Company is subject to audit by taxing authorities for fiscal years ending June 30, 2001 through the current fiscal year.

During fiscal 2008, the Company received NPAs from the IRS related to fiscal years 2001 through 2005 challenging deductions arising from the sale of trade receivables to a special purpose accounts receivable and financing entity as described in more detail in Note 10 of “Notes to Consolidated Financial Statements” in the 2008 Form 10-K. The amount of additional tax, excluding penalties and interest which may be significant, proposed by the IRS in these notices was $179 million. Also during fiscal 2008, the Company received an IRS Revenue Agent Report for tax years 2003 through 2005 which included the NPAs discussed above and new NPAs related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by the Company. The amount of additional tax proposed by the IRS in these notices total $598 million, excluding penalties and interest which may be significant. The Company disagrees with these proposed adjustments and intends to vigorously contest them. If these matters are not resolved in the Company’s favor, it may adversely affect the Company’s results of operations and financial condition. See Note 5 of “Notes to Condensed Consolidated Financial Statements” for more information on these matters.

 

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The Company’s provision for income taxes as a percentage of pretax earnings from continuing operations (“effective tax rate”) was 31.4% for the three months ended September 30, 2008, as compared to 32.2% for the three months ended September 30, 2007. Generally, fluctuations in the effective tax rate are primarily due to changes within international and state effective tax rates resulting from the Company’s business mix, changes in the tax impact of special items and other discrete items, which may have unique tax consequences depending on the nature of the item.

The effective tax rate for the three months ended September 30, 2008 was favorably impacted by $8 million as the result of discrete tax adjustments. There was a favorable tax adjustment of $20 million as the result of the release of a valuation allowance that had previously been established for capital losses for which the Company’s ability to utilize were uncertain. Also, there was an unfavorable tax adjustment of $9 million for accrued interest expense related to proposed tax assessments. The remaining unfavorable adjustment of $3 million is due to miscellaneous discrete tax items.

See Note 5 in the “Notes to Condensed Consolidated Financial Statements” for additional information on the Company’s provision for income taxes and unrecognized tax benefits.

Loss from Discontinued Operations

See Note 3 in the “Notes to Condensed Consolidated Financial Statements” for information on the Company’s discontinued operations.

Segment Results of Operations

Reportable Segments

During the first quarter of fiscal 2009, the Company reorganized its businesses into three reportable segments — the Healthcare Supply Chain Services segment, the Clinical and Medical Products segment and the All Other segment — in order to reduce costs and align resources with the needs of each segment. The Company evaluates the performance of the individual segments based upon, among other things, segment profit. Segment profit is segment revenue less segment cost of products sold, less segment SG&A expenses. Segment SG&A expense includes equity compensation expense as well as allocated corporate expenses for shared functions, including corporate management, corporate finance, financial shared services, human resources, information technology, legal and legislative affairs and an integrated hospital sales organization. Information about interest income and expense and income taxes is not provided at the segment level. In addition, special items and impairments, (gain)/loss on sale of assets and other, net are not allocated to the segments. See Note 11 in the “Notes to Condensed Consolidated Financial Statements” for additional information on the Company’s reportable segments.

The following table summarizes segment revenue for the three months period ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions, except growth rates)

   Growth (1)     2008     2007  

Healthcare Supply Chain Services

   11 %   $ 23,418.4     $ 21,092.9  

Clinical and Medical Products

   12 %     1,154.9       1,032.4  

All Other

   (7 )%     273.0       293.8  
                  

Total segment revenue

   11 %     24,846.3       22,419.1  

Corporate (2)

   N.M.       (499.1 )     (445.7 )
                  

Total consolidated revenue

   11 %   $ 24,347.2     $ 21,973.4  
                  

 

 

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(1) Growth is calculated as the percentage increase or (decrease) for the three months ended September 30, 2008 as compared to the same period in the prior year.
(2) Corporate revenue primarily consists of the elimination of inter-segment revenue.

The following table summarizes segment profit for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions, except growth rates)

   Change (1)     2008     2007  

Healthcare Supply Chain Services (2)

   (16 )%   $ 292.4     $ 347.3  

Clinical and Medical Products (2)

   15 %     166.7       145.2  

All Other (2)

   7 %     23.9       22.4  
                  

Total segment profit

   (6 )%     483.0       514.9  

Corporate (2) (3)

   N.M.       (56.7 )     (25.1 )
                  

Consolidated operating earnings

   (13 )%   $ 426.3     $ 489.8  
                  

 

(1) Growth is calculated as the percentage increase or (decrease) for the three months ended September 30, 2008 as compared to the same period in the prior year.
(2) Investment spending previously held at Corporate has been allocated to the segments under the new segment structure. Prior period information has been reclassified to conform to this new presentation. See Note 17 in the 2008 Form 10-K for an explanation of investment spending.
(3) For the three months ended September 30, 2008 and 2007, Corporate includes special items and impairments, (gain)/loss on sale of assets and other, net, which are not allocated to the segments, described below:

 

   

Special items — Corporate includes special items of $52 million and $23 million during the three months ended September 30, 2008 and 2007, respectively, (see Note 2 of “Notes of Condensed Consolidated Financial Statements” for discussion of special items).

 

   

Impairments, (gain)/loss on sale of assets and other, net — Asset impairments and gains and losses from the sale of assets not eligible to be classified as special items or discontinued operations are retained at Corporate. Impairments, (gain)/loss on sale of assets and other, net were $4 million during the three months ended September 30, 2008.

Healthcare Supply Chain Services Performance

Healthcare Supply Chain Services revenue growth of $2.3 billion or 11% during the three month period ended September 30, 2008 as compared to the prior year period was primarily due to additional volume from existing customers and pharmaceutical price appreciation (the combined impact of pharmaceutical price appreciation and increased volume from existing customers was $2.4 billion). The pharmaceutical price appreciation index was 8.2% for the trailing twelve months ended September 30, 2008. Revenue was also positively impacted by the addition of new customers ($206 million). Negatively impacting growth in revenue was the loss of customers ($441 million). The DEA license suspensions and the Company’s controlled substance anti-diversion efforts resulted in non-bulk customer losses and adversely affected the Company’s ability to acquire new non-bulk customers. In October 2008, the Company entered into settlement agreements with the DEA and seven U.S. Attorneys’ offices resulting in reinstatement of the suspended licenses. The Company expects to resume controlled substance shipments from the distribution centers that were impacted by the license suspensions by the end of the second quarter of fiscal 2009.

Healthcare Supply Chain Services segment profit decreased $55 million or 16% during the three months ended September 30, 2008 compared to the same period in the prior year as a result of a $28 million decrease in gross margin and a $27 million increase in SG&A. The decline in gross margin was primarily due to increased customer discounts ($107 million) as a result of increased sales volume and the repricing of certain customer contracts within the last 12 months. The Company expects a certain level of continued customer discounting due to the competitive market in which it operates. Lost customer revenue from the DEA license suspensions and the Company’s controlled substance anti-diversion efforts also adversely affected gross margin during the three months ended September 30, 2008. Gross margin was positively impacted by increased sales volume resulting in increased manufacturer cash discounts ($45 million) and distribution service agreement fees and pharmaceutical price appreciation (combined impact of $16 million). While the rolling twelve month pharmaceutical price appreciation index increased over the prior year, price increases for products upon which the Company benefits from pharmaceutical price appreciation were lower in the first quarter of fiscal 2009 when compared to the prior year period. SG&A expenses increased primarily as a result of increased volume ($11 million) and the impact of acquisitions ($6 million).

The Company’s results could be adversely affected if sales of pharmaceutical products decline, competitive pricing pressure intensifies, the frequency of new generic pharmaceutical launches decreases, generic price deflation increases, or pharmaceutical price appreciation on branded products decreases. Alternatively, the Company’s results could benefit if sales of pharmaceutical products increase, the Company is able to increase its gross margin, the frequency of new generic pharmaceutical launches increases, generic price deflation decreases, or pharmaceutical price appreciation on branded products increases.

 

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Bulk and Non-Bulk Customers . The Healthcare Supply Chain Services segment differentiates between bulk and non-bulk customers with respect to the distribution of pharmaceutical, radiopharmaceutical and over-the-counter healthcare products because bulk customers generate significantly lower segment profit as a percentage of revenue than that generated by non-bulk customers. Hereinafter all references to bulk and non-bulk customers are confined to the product categories above. Bulk customers consist of customers’ centralized warehouse operations and customers’ mail order businesses. All other customers are classified as non-bulk customers (for example, retail stores, pharmacies, hospitals and alternate care sites). Bulk customers include the warehouse operations of retail chains whose retail stores are classified as non-bulk customers. A single retail chain pharmacy customer may be both a bulk customer with respect to its warehouse operations and a non-bulk customer with respect to its retail stores. Bulk customers have the ability to process large quantities of products in central locations and self-distribute these products to their individual retail stores or customers. Substantially all deliveries to bulk customers consist of product shipped in the same form as the product is received from the manufacturer, but a small portion of deliveries to bulk customers are broken down into smaller units prior to shipping. Non-bulk customers, on the other hand, require more complex servicing by the Company. These services, all of which are performed by the Company, include receiving inventory in large or full case quantities and breaking it down into smaller quantities, warehousing the product for a longer period of time, picking individual products specific to a customer’s order and delivering that smaller order to a customer location.

The Company tracks revenue by bulk and non-bulk customers in its financial systems. An internal analysis has been prepared to estimate segment profit from bulk and non-bulk customers by allocating segment expenses (total of segment cost of products sold and segment SG&A expenses) separately for bulk and non-bulk customers. The following table shows the allocation of segment expenses, segment profit and segment profit as a percentage of revenue for the three months ended September 30, 2008 and 2007:

 

(in millions)

   2008     2007  

Non-bulk customers:

    

Revenue from non-bulk customers

   $ 10,608     $ 10,236  

Segment expenses allocated to non-bulk customers(1)

     10,405       9,999  

Segment profit from non-bulk customers(1)

     203       237  

Segment profit from non-bulk customers as a percentage of revenue from non-bulk customers(1)

     1.9 %     2.3 %

Bulk customers:

    

Revenue from bulk customers

   $ 10,729     $ 8,940  

Segment expenses allocated to bulk customers(1)

     10,711       8,884  

Segment profit from bulk customers(1)

     18       56  

Segment profit from bulk customers as a percentage of revenue from bulk customers(1)

     0.2 %     0.6 %

 

(1) Amounts shown are estimates based upon the internal analysis described above. The preparation of this internal analysis required the use of complex and subjective estimates and allocations based upon assumptions, past experience and judgment that the Company believes are reasonable. The core pharmaceutical distribution operation (“Distribution”) services both bulk and non-bulk customers. Therefore, expenses associated with this operation were allocated between bulk and non-bulk customers as described below. The brokerage operation (“Brokerage”) only services bulk customers, therefore, expenses associated with Brokerage are allocated to bulk customers. The remaining operations (i.e., excluding Distribution) service non-bulk customers, therefore, expenses associated with these operations were allocated to non-bulk customers.

The following describes the allocation of the major components of cost of products sold for Distribution between bulk and non-bulk customers:

 

   

Cost of products sold for pharmaceutical products is determined by specifically tracking the manufacturer’s designated price of products, at the time the products are sold, by bulk and non-bulk customers. The manufacturer’s designated price is then reduced by other components impacting cost of products sold, including distribution service agreement fees, pharmaceutical price appreciation, manufacturer cash discounts and manufacturer rebates and incentives. In addition, other inventory charges and credits are added or subtracted, as appropriate, to arrive at cost of products sold. The Company used the following methods that it believes provide a reasonable correlation to allocate the remaining components of cost of products sold between bulk and non-bulk customers:

 

   

Distribution service agreement fees and pharmaceutical price appreciation are tracked by manufacturer. Therefore, the Company allocated the distribution service agreement fees and pharmaceutical price appreciation associated with each manufacturer among their products in proportion to sales of each product between bulk and non-bulk customers.

 

   

Manufacturer cash discounts are recognized as a reduction to cost of products sold when the related inventory is sold and were allocated in proportion to the manufacturer’s published price of the product sold to bulk and non-bulk customers.

 

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Manufacturers’ rebates and incentives are based on the individual agreements entered into with manufacturers related to specific products. Rebates and incentives were grouped by contract terms and then allocated in proportion to sales to bulk and non-bulk customers.

 

   

Other inventory charges and credits include charges for outdated and returned inventory items and fluctuation in inventory reserves. The Company estimated the portion of these inventory charges and credits attributable to each product and then allocated them to bulk and non-bulk customers in proportion to the sales of these products.

The Company used methods that it believes provide a reasonable correlation to allocate the SG&A expenses for Distribution between bulk and non-bulk customers as follows:

 

   

Warehouse expense includes labor-related expenses associated with receiving, shipping and handling the inventory as well as warehouse storage costs including insurance, taxes, supplies and other facility costs. Warehouse expense was allocated in proportion to the number of invoice line items filled for each bulk or non-bulk customer because the Company believes that there is a correlation between the number of different products ordered as reflected in invoice lines and the level of effort associated with receiving, shipping and handling that order (bulk customers typically order substantially larger quantities of products and therefore generate substantially fewer invoice lines which results in substantially less warehouse expense being allocated to bulk customers);

 

   

Delivery expense includes transportation costs associated with physically moving the product from the warehouse to the customer’s designated location. Delivery expense was allocated in proportion to the number of invoices generated for each bulk or non-bulk customer on the assumption that each invoice generates a delivery;

 

   

Sales expense includes personnel-related costs associated with sales and customer service activities (such activities are the same for both bulk and non-bulk customers). Sales expense was allocated in proportion to the number of invoices generated for each bulk or non-bulk customer because customer invoices are a reasonable estimate of the amount of customer service calls and sales effort; and

 

   

General and administrative expenses were allocated in proportion to the units of products sold to bulk or non-bulk customers. These expenses were allocated on the assumption that general and administrative expenses increase or decrease in direct relation to the volume of sales.

The internal analysis indicated segment expenses as a percentage of revenue were higher for bulk customers than for non-bulk customers because of higher segment cost of products sold partially offset by lower segment SG&A expenses. Bulk customers receive lower pricing on sales of the same products than non-bulk customers due to volume pricing in a competitive market and the lower costs related to the services provided by the Company. In addition, sales to bulk customers in aggregate generate higher segment cost of products sold as a percentage of revenue than sales to non-bulk customers because bulk customers’ orders consist almost entirely of higher cost branded products. The higher segment cost of products sold as a percentage of revenue for bulk customers is also driven by lower manufacturer distribution service agreement fees and branded pharmaceutical price appreciation and lower manufacturer cash discounts. Manufacturer distribution service agreement fees and manufacturer cash discounts are recognized as a reduction to segment cost of products sold and are lower as a percentage of revenue due to the mix of products sold. Pharmaceutical price appreciation increases customer pricing which, in turn, results in higher segment gross margin for sales of inventory that was on-hand at the time of the manufacturer’s price increase. Since products sold to bulk customers are generally held in inventory for a shorter time than products sold to non-bulk customers, there is less opportunity to realize the benefit of pharmaceutical price appreciation. Consequently, segment cost of products sold as a percentage of revenue for bulk customers is higher than for non-bulk customers and segment gross margin as a percentage of revenue is substantially lower for bulk customers than for non-bulk customers. Deliveries to bulk customers require substantially less services by the Company than deliveries to non-bulk customers. As such, segment SG&A expenses as a percentage of revenue from bulk customers are substantially lower than from non-bulk customers. These factors result in segment profit as a percentage of revenue being significantly lower for bulk customers than for non-bulk customers.

The Company defines bulk and non-bulk customers based on the way in which the Company operates its business and the services it performs for its customers. The Company is not aware of an industry standard regarding the definition of bulk customers and based solely on a review of the Annual Reports on Form 10-K of other national pharmaceutical wholesalers, the Company notes that other companies in comparable businesses may, or may not, use a different definition of bulk customers.

During the three months ended September 30, 2008, revenue from non-bulk customers increased $372 million compared to the prior year due to increased volume from existing customers, partially offset by the adverse impact from the DEA license suspensions and the Company’s controlled substance anti-diversion efforts. Segment profit from non-bulk customers decreased $34 million during the three months ended September 30, 2008 compared to the prior year due to an increase in customer discounts partially offset by an increase in manufacturer cash discounts related to sales volume growth.

During the three months ended September 30, 2008, revenue from bulk customers increased $1.8 billion compared to the prior year due to increased volume from existing customers and new customers. Segment profit from bulk customers decreased $38 million during the three months ended September 30, 2008 compared to the prior year due to increased customer discounts partially offset by increased manufacturer cash discounts related to sales volume growth.

 

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Clinical and Medical Products Performance

Clinical and Medical Products segment revenue grew $123 million or 12% during the three months ended September 30, 2008 compared to the prior year period. Revenue growth was favorably impacted by the Enturia acquisition ($47 million), international revenue growth ($45 million), which includes the net favorable impact of foreign exchange ($11 million), increased volume from existing customers ($24 million) and new products ($17 million).

Clinical and Medical Products segment profit increased $22 million or 15% during the three months ended September 30, 2008 compared to the prior year period. Gross margin increased segment profit by $56 million during the three months ended September 30, 2008 primarily as a result of revenue growth, the Enturia acquisition ($28 million) and international gross margin growth ($20 million), which includes the net favorable impact of foreign exchange ($3 million), offset by an increase in raw material costs ($18 million). Increases in SG&A expenses decreased segment profit by $34 million during the three months ended September 30, 2008 primarily from the impact of the Enturia acquisition ($14 million).

This segment expects to incur increased raw material costs until later in fiscal 2009 due to the higher price of resins and petroleum-based products that the segment uses to produce its products. Resin prices generally tend to lag the movement in oil prices by a few months. In addition, raw material contract terms are typically structured to adjust prices on a periodic basis. This has the effect of delaying the impact of decreasing oil prices. The Company also has observed certain hospitals delaying capital equipment purchase decisions, which it expects to have an adverse impact on the Clinical and Medical Products segment results for the second quarter of fiscal 2009.

All Other Performance

All Other segment revenue declined $21 million or 7% during the three months ended September 30, 2008 compared to the prior year period. The revenue decline was driven by lost customers and decreased utilization for existing customers (combined impact of $17 million) and the divestiture of the Medsystems business ($5 million).

All Other segment profit increased $2 million or 7% during the three months ended September 30, 2008 compared to the prior year period. A decline in gross margin decreased segment profit by $3 million and a decline in SG&A expenses increased segment profit by $5 million during the three months ended September 30, 2008.

Liquidity and Capital Resources

Sources and Uses of Cash

The following table summarizes the Company’s Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2008 and 2007:

 

     Three Months Ended
September 30,
 

(in millions)

   2008     2007  

Net cash provided by/(used in):

    

Operating activities

   $ (352.9 )   $ 408.8  

Investing activities

   $ (94.7 )   $ (45.2 )

Financing activities

   $ (171.5 )   $ (382.8 )

Operating activities .  Net cash used in operating activities during the three months ended September 30, 2008 totaled $353 million compared to net cash provided by operating activities during the three months ended September 30, 2007 of $409 million. The decrease in net cash from operating activities was primarily a result of an increase in working capital compared to the prior year period. The most significant changes in working capital were increased inventories ($874 million) and increased trade receivables ($782 million), partially offset by increased accounts payable ($983 million). These increases were due primarily to Healthcare Supply Chain Services revenue growth as well as the timing of inventory purchases, receipts and payments. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors during the regular course of business.

Investing activities .  Net cash used in investing activities of $95 million during the three months ended September 30, 2008 primarily reflected capital spending ($89 million).

Net cash used in investing activities of $45 million during the three months ended September 30, 2007 reflected capital spending ($89 million) and cash used to complete the Viasys acquisition ($88 million) within the Clinical and Medical Products segment. These uses of cash were partially offset by the net proceeds from the sale of short-term investments classified as available for sale ($132 million).

 

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Financing activities .  Net cash used in financing activities of $172 million during the three months ended September 30, 2008 reflected the Company’s repayment of long-term obligations ($153 million) and dividend payments to shareholders ($50 million). Cash provided by financing activities included proceeds received from shares issued under various employee stock plans ($18 million).

Net cash used in financing activities of $383 million during the three months ended September 30, 2007 reflected the Company’s repurchase of its Common Shares ($675 million) and dividend payments to shareholders ($44 million). Cash provided by financing activities included the net change in commercial paper and short-term borrowings ($232 million) and proceeds received from shares issued under various employee stock plans ($106 million). See “Capital Resources” below for further discussion of the Company’s financing activities.

Share Repurchase Program

During the three months ended September 30, 2008, the Company did not purchase any of its Common Shares under its existing $2.0 billion share repurchase program announced on August 8, 2007. This repurchase authorization will expire on August 31, 2009. At September 30, 2008, approximately $1.3 billion remained from the $2.0 billion repurchase authorization. The Company expects share repurchases for fiscal 2009 to approximately offset dilution from issuances of equity compensation.

See the table under “Part II, Item 2” for more information regarding these repurchases.

Capital Resources

The Company’s cash and equivalents balance was $672 million at September 30, 2008 compared to $1.3 billion at June 30, 2008. The cash balance at September 30, 2008 was affected by the repayment of $150 million of 6.25% notes due 2008 in July 2008 and by net cash used in operating activities of $353 million, which was driven by an increase in working capital as described above.

The Company’s cash and equivalents balance as of September 30, 2008 included $401 million of cash held by its subsidiaries outside of the United States. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject it to U.S. federal, state and local income tax. The U.S. parent of the Company may temporarily access cash held by foreign subsidiaries without subjecting it to U.S. federal income tax through intercompany loans. A notice issued by the IRS in October 2008 announced that the Treasury Department will issue regulations that will, for a temporary period, extend the permitted duration of such intercompany loans that qualify for suspended deemed dividend treatment under Section 956 of the Internal Revenue Code of 1986, as amended. Such intercompany loans from foreign subsidiaries to the U.S. parent must be repaid within 60 days from commencement and cannot exceed 180 cumulative days during the year. The position set forth in the notice will apply for the Company until June 30, 2010.

In addition to cash, the Company’s sources of liquidity include a $1.5 billion commercial paper program backed by a $1.5 billion revolving credit facility and a committed receivables sales facility program with the capacity to sell $850 million in receivables. The Company had no outstanding borrowings from the commercial paper program at September 30, 2008, but the Company has been able to access the commercial paper market during the quarter to a sufficient degree to meet liquidity needs. Due to general market conditions, however, market demand for the Company’s A-2, P-2 and F2-rated commercial paper has been limited to approximately $200 million to date and at higher rates and for shorter maturities than prevailed previously. The receivables sales facility program expires in mid-November 2008 and the Company expects to amend the facility to extend it for an additional 364 days before expiration.

During fiscal 2001, the Company entered into an agreement to periodically sell trade receivables to a special purpose accounts receivable and financing entity (the “Accounts Receivable and Financing Entity”), which is exclusively engaged in purchasing trade receivables from, and making loans to, the Company. The Accounts Receivable and Financing Entity, which is consolidated by the Company as it is the primary beneficiary of the variable interest entity, issued preferred variable debt securities to parties not affiliated with the Company. On October 3, 2008, the Company repaid the remaining balance of $149 million for the preferred debt securities.

The Company’s capital resources are more fully described in “Liquidity and Capital Resources” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 5, 10 and 19 of “Notes to Consolidated Financial Statements” in the 2008 Form 10-K.

The Company currently believes that, based upon existing cash, operating cash flows, available capital resources (as discussed above) and other available market transactions, it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, working capital needs, contractual obligations and current and projected debt service requirements, including those related to business combinations.

From time to time, the Company considers and engages in acquisition transactions in order to expand its role as a leading provider of products and services that improve the safety and productivity of healthcare. The Company evaluates possible candidates for acquisition and considers opportunities to expand its role as a provider of products and services to the healthcare industry through all its reportable segments. If additional transactions are entered into or consummated, the Company may need to enter into funding arrangements for such acquisitions.

 

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Debt Ratings/Covenants

The Company’s senior debt credit ratings from S&P, Moody’s and Fitch are BBB+, Baa2 and BBB+, respectively, and the commercial paper ratings are A-2, P-2 and F2, respectively. The S&P and Fitch rating outlooks are “stable.” With the announcement of the Planned Spin-Off, Moody’s changed its ratings outlook from “stable” to “review for possible downgrade.” It is possible that the Planned Spin-Off could be a factor causing or contributing to a determination by one or more of the rating agencies to lower the credit rating of the Company. Although it will not trigger an acceleration of any of the Company’s indebtedness, a ratings downgrade by any of the ratings agencies may eliminate or significantly diminish the Company’s ability to gain access to the commercial paper market, resulting in the need for the Company to utilize alternative sources of credit at rates that may be higher than would otherwise be available to the Company.

The Company’s various borrowing facilities and long-term debt are free of any financial covenants other than minimum net worth which cannot fall below $5.0 billion at any time. As of September 30, 2008, the Company was in compliance with this covenant. If the Planned Spin-Off occurs, the net worth of the Company is expected to fall below $5.0 billion; therefore, the terms of this covenant will be modified prior to the Planned Spin-Off.

Contractual Obligations

There have been no material changes, outside of the ordinary course of business, in the Company’s outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2008 Form 10-K.

Off-Balance Sheet Arrangements

See “Liquidity and Capital Resources — Capital Resources” above and Note 19 in “Notes to Consolidated Financial Statements” in the 2008 Form 10-K, which is incorporated herein by reference, for a discussion of off-balance sheet arrangements.

Recent Financial Accounting Standards

See Note 1 in “Notes to Condensed Consolidated Financial Statements” for a discussion of recent financial accounting standards.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

The Company believes that there has been no material change in the quantitative and qualitative market risks from those discussed in the 2008 Form 10-K. See “Part II, Item 1A—Risk Factors” for risk factors relating to disruptions in the financial markets.

 

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures .  The Company carried out an evaluation, as required by Rule 13a-15(e) under the Exchange Act, with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2008. Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and to provide that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting .  During fiscal 2008, the Company began processing selected financial transactions for its corporate functions and certain businesses within its Clinical and Medical Products and All Other segments on a newly implemented accounting software system. During the quarter ended September 30, 2008, the Company transitioned selected financial processes for certain businesses within its Healthcare Supply Chain Services segment, including its pharmaceutical supply chain, nuclear pharmacy and Canadian distribution businesses, to the new accounting software system. The Company will transition the majority of its remaining businesses to the new accounting software system later in fiscal 2009. This change of systems is designed to streamline and integrate the Company’s financial close and reporting processes by reducing the number of platforms used to record and report financial information, improving efficiency by reducing the amount of manual activity, and improving the control environment by reducing variability in the financial policies, processes and systems. The Company has made changes to its internal control over financial reporting in connection with this transition to the new accounting software system. During fiscal 2008, the Company established additional temporary compensating controls to support the Company’s internal control over financial reporting while the transition to the new accounting software system is in process. The Company expects to maintain certain of these additional

 

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temporary compensating controls until implementation of the new system is complete. Except for those made in connection with the new accounting software system, there were no other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls .  The Company’s management, including its principal executive officer and the principal financial officer, does not expect that the Company’s disclosure controls or its internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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PART II. OTHER INFORMATION

 

Item 1: Legal Proceedings

The legal proceedings described in Note 6 of “Notes to Condensed Consolidated Financial Statements” are incorporated in this Part II, Item 1 by reference.

 

Item 1A: Risk Factors

The information presented below sets forth material changes from the risk factors described in “Item 1A—Risk Factors” in the Company’s 2008 Form 10-K and should be read in conjunction with the risk factors and information described in the 2008 Form 10-K and the Company’s filings with the SEC since June 30, 2008.

Disruptions in the financial market may adversely affect the availability and cost of credit to the Company.

The Company’s ability to make scheduled payments or refinance its obligations with respect to indebtedness will depend on its operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond its control. Recent disruptions in the financial markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, decreased liquidity and higher costs in the commercial paper market and reduced markets for securitizations, may adversely affect the availability and cost of credit already arranged, and the availability, terms and cost of credit in the future, including the arrangements to renew or replace the Company’s receivables sales facility program, which expires in November 2008, and any financing necessary to consummate the Planned Spin-Off. There can be no assurances that recent government initiatives in response to the disruptions in the financial markets will stabilize the markets in general or increase liquidity and the availability of credit to the Company.

The financial soundness of the Company’s customers and vendors could affect its business and results of operations.

As a result of the disruptions in the financial markets and other macro-economic challenges currently affecting the economy of the United States and other parts of the world, the Company’s customers and vendors may experience cash flow concerns. As a result, customers may modify, delay or cancel plans to purchase the Company’s products and vendors may increase their prices, reduce their output or change terms of sales. Additionally, if customers’ or vendors’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to the Company and vendors may restrict credit or impose different payment terms. Any inability of current and/or potential customers to pay the Company for its products or any demands by vendors for different payment terms may adversely affect the Company’s earnings and cash flow.

The Company may be unable to complete the Planned Spin-Off.

There can be no assurance that the Planned Spin-Off will be completed in the manner and timeframe currently contemplated, or at all. The Company may determine not to move forward with the Planned Spin-Off for a number of reasons, including:

 

   

the Company’s ability to satisfy certain conditions precedent to the Planned Spin-Off, including final approval by the Company’s Board of Directors, receipt of confirmation of the tax-free nature of the Planned Spin-Off and the effectiveness of a Form 10 registration statement for the Planned Spin-Off expected to be filed with the SEC;

 

   

changes in business, political and economic conditions in the United States and in other countries in which the Company currently operates;

 

   

changes in governmental regulations and policies and actions of regulatory bodies;

 

   

changes in operating performance of the Company; and

 

   

the Company’s ability to obtain the financing necessary to consummate the Planned Spin-Off.

Increased demands on the Company’s management team as a result of preparing for and completing the Planned Spin-Off could distract management’s attention from operating the business.

Management currently estimates that the Planned Spin-Off will be completed by the middle of calendar 2009. The complexity of effecting the Planned Spin-Off will require a substantial amount of management and operational resources, as well as the use of several cross-functional project teams. The increased demands on the Company’s management team as a result of the Planned Spin-Off during this period could distract management’s attention from fulfilling its regular responsibilities, which could adversely affect the Company’s business.

 

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Table of Contents

The Company and the spin-off company may not achieve some or all of the expected benefits of the Planned Spin-Off.

Each of the Company and the spin-off company may not be able to achieve the full strategic and financial benefits expected to result from the Planned Spin-Off, or such benefits may be delayed. For example, there can be no assurance that analysts and investors will regard the corporate structures of each of the independent companies as more clear and simple than the current Company corporate structure or place a greater value on the sum of each of the independent companies as compared to the current Company. Furthermore, even if some or all of these benefits are achieved, they may not result in the creation of value for the shareholders of the Company or, after the Planned Spin-Off, the shareholders of the spin-off company.

The Company’s businesses will be less diversified because of the Planned Spin-Off, which may adversely affect the Company’s business and operating results and could result in a lower credit rating, which could also adversely affect the Company’s business.

The Company will have a different operational and financial profile because of the Planned Spin-Off. The Company’s current diversification of revenue sources, resulting from the clinical and medical products businesses that will be spun off and the Company’s other businesses, can have the effect of moderating operational volatility. Following the completion of the Planned Spin-Off, the Company’s diversification of revenue sources will diminish, and, as a result, the Company’s results of operations, cash flows, working capital and financing requirements may be subject to increased volatility.

Currently, the Company’s senior debt credit ratings from S&P, Moody’s and Fitch are BBB+, Baa2 and BBB+, respectively, and the commercial paper ratings are A-2, P-2 and F2, respectively. The S&P and Fitch rating outlooks are “stable.” With the announcement of the Planned Spin-Off, Moody’s changed its ratings outlook from “stable” to “review for possible downgrade.” It is possible that the Planned Spin-Off could be a factor causing or contributing to a determination by one or more of the rating agencies to lower the credit rating of the Company. Although it will not trigger an acceleration of any of the Company’s indebtedness, a ratings downgrade by any of the ratings agencies may eliminate or significantly diminish the Company’s ability to gain access to the commercial paper market, resulting in the need for the Company to utilize alternative sources of credit at rates that may be higher than would otherwise be available to the Company.

If, following the completion of the Planned Spin-Off, there is a determination that the Planned Spin-Off is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertaking underlying the IRS ruling or tax opinions are incorrect or for any other reason, then the Company and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.

The Planned Spin-Off is conditioned upon the Company’s receipt of a private letter ruling from the IRS and opinions of tax counsel confirming that the Planned Spin-Off will generally qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The ruling and opinions will rely on certain facts, assumptions, representations and undertakings from the Company and the new spin-off company regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, the Company and its shareholders may not be able to rely on the ruling or the opinions of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax counsel, the IRS could determine on audit that the Planned Spin-Off is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of the Company or the spin-off company after the Planned Spin-Off. If the Planned Spin-Off is determined to be taxable for U.S. federal income tax purposes, the Company and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in the 2008 Form 10-K (which could materially and adversely affect the Company’s results of operations, financial condition, liquidity, cash flows and/or future business prospects) and the developments disclosed in the Company’s filings with the SEC since the date of the 2008 Form 10-K that relate to the risks described in the 2008 Form 10-K. The risks described in the 2008 Form 10-K are not the only risks that the Company faces. The Company’s results of operations, financial condition, liquidity, cash flows and/or future business prospects could also be affected by additional risks and uncertainties not known to the Company at the time of the filing of this Form 10-Q or that the Company currently considers to be immaterial.

 

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Table of Contents
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases the Company made of its Common Shares during the quarter ended September 30, 2008:

Issuer Purchases of Equity Securities

 

Period

   Total Number
of Shares
Purchased (1)
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of
Publicly
Announced
Program (2)
   Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Program (2)

July 1-31, 2008

   6,309    $ 52.45    —      $ 1,250,377,214

August 1–31, 2008

   165,259      55.56    —        1,250,377,214

September 1–30, 2008

   43,240      49.58    —        1,250,377,214
                       

Total

   214,808    $ 54.27    —      $ 1,250,377,214
                       

 

(1) Includes 217, 139, and 585 Common Shares purchased in July, August and September 2008, respectively, through a rabbi trust as investments of participants in the Company’s Deferred Compensation Plan. Also includes 6,092, 165,120 and 42,655 restricted shares surrendered in July, August and September 2008, respectively, by employees upon vesting to meet tax withholding.
(2) During the three months ended September 30, 2008, the Company did not repurchase any of its Common Shares under its existing $2.0 billion share repurchase program announced on August 8, 2007. This repurchase authorization expires on August 31, 2009. At September 30, 2008, approximately $1.3 billion remains from the $2.0 billion repurchase authorization. The Company expects share repurchases for fiscal 2009 to approximately offset dilution from issuances of equity compensation.

 

Item 5: Other Information

The Cardinal Health, Inc. 2005 Long-Term Incentive Plan, which was approved by the Company’s shareholders on November 2, 2005, is an “omnibus” plan that authorizes the grant of stock options, stock appreciation rights, stock awards (including restricted stock and restricted stock units), other stock-based awards and cash awards. On November 5, 2008, at the Annual Meeting of Shareholders of the Company, the shareholders of the Company approved certain amendments to the Cardinal Health, Inc. 2005 Long-Term Incentive Plan (as amended and restated as of November 5, 2008) (the “Plan”). The amendments to the Plan that were approved by the shareholders include the following:

 

   

An increase to the maximum number of Common Shares reserved for the grant or settlement of awards under the Plan from 18,000,000 to 29,000,000 Common Shares;

 

   

An increase to the aggregate number of Common Shares that may be granted subject to stock awards and other stock-based awards from 6,000,000 to 11,000,000 Common Shares;

 

   

An increase to the aggregate number of shares that may be used for stock awards and other stock-based awards with no minimum vesting period from 600,000 to 1,100,000 Common Shares;

 

   

A new allowance of 1,000,000 Common Shares that may be used for stock options and stock appreciation rights with no minimum vesting period;

 

   

A new exception to the minimum vesting requirements in connection with a disaffiliation of a subsidiary or affiliate of the Company;

 

   

A change to the $7,500,000 annual limit on cash awards so that the limit is now based on the aggregate maximum value of the cash awards on the date of grant;

 

   

A strengthening of the provision that prohibits the Company from repricing outstanding stock options or stock appreciation rights;

 

   

A new provision that expressly authorizes the Plan’s administrator to require a participant to repay the value received from awards, or a portion thereof, upon the participant’s misconduct that causes or contributes to a restatement of the financial statements of the Company; and

 

   

A new set of provisions that require the Plan and any awards granted under the Plan to comply with Section 409A of the Internal Revenue Code of 1986, as amended.

 

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Table of Contents

The foregoing summary of the Plan is not complete and is qualified in its entirety by the provisions of the Plan, which is filed herewith as Exhibit 10.1.

 

Item 6: Exhibits

 

Exhibit

Number

  

Exhibit Description

  3.1    Amended and Restated Articles of Incorporation of Cardinal Health, Inc., as amended
  3.2    Cardinal Health, Inc. Restated Code of Regulations, as amended
10.1    Cardinal Health, Inc. 2005 Long-Term Incentive Plan (as amended and restated as of November 5, 2008)
10.2    Copy of resolutions adopted by the Human Resources and Compensation Committee of the Board of Directors on September 26, 2008 amending outstanding Nonqualified Stock Option Agreements under the Cardinal Health, Inc. 2005 Long-Term Incentive Plan, as amended, the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended, and the Cardinal Health, Inc. Broadly-based Equity Incentive Plan, as amended
10.3    Form of Restricted Share Units Agreement under the Cardinal Health, Inc. 2005 Long-Term Incentive Plan, as amended, for RSU grants to be made in connection with the Planned Spin-Off (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 29, 2008, File No. 1-11373)
10.4    First Amendment to Cardinal Health Deferred Compensation Plan, as amended and restated effective January 1, 2009
10.5    Amendment, dated as of September 26, 2008, to Employment Agreement, dated as of April 17, 2006, as amended on September 21, 2007, by and between Cardinal Health, Inc. and R. Kerry Clark (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 29, 2008, File No. 1-11373)
10.6    Form of Aircraft Time Sharing Agreement between Cardinal Health, Inc. and each of R. Kerry Clark, George S. Barrett and David L. Schlotterbeck
10.7    Third Amendment to Second Amended and Restated Employment Agreement, dated August 19, 2008, between Cardinal Health, Inc. and Robert D. Walter (incorporated by reference to Exhibit 10.17.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008, File No. 1-11373)
12.1    Computation of Ratio of Earnings to Fixed Charges
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1    Statement regarding Forward-Looking Information

 

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Table of Contents

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 7, 2008  

/s/ R. Kerry Clark

  R. Kerry Clark
  Chairman and Chief Executive Officer
 

/s/ Jeffrey W. Henderson

  Jeffrey W. Henderson
  Chief Financial Officer

 

38

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

CARDINAL DISTRIBUTION, INC.

These constitute the amended and restated articles of incorporation of Cardinal Distribution, Inc., a corporation for profit formed under the Ohio General Corporation Law, which amended and restated articles of incorporation supersede the previously existing articles of incorporation of the corporation, as heretofore amended:

FIRST: The name of the corporation shall be “Cardinal Distribution, Inc.”

SECOND: The place in Ohio where the principal office of the corporation is to be located is the City of Columbus, Franklin County.

THIRD: The purpose or purposes for which the corporation is formed are to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code and any amendments heretofore or hereafter made thereto.

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 10,500,000, consisting of 10,000,000 common shares without par value and 500,000 nonvoting preferred shares without par value.

Section 2. Issuance of Preferred Shares . The board of directors is authorized at any time, and from time to time, to provide for the issuance of nonvoting preferred shares in one or more series, and to determine to the extent permitted by law the designations, preferences, limitations, and relative or other rights of the nonvoting preferred shares or any series thereof. For each series, the board of directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations, and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series:

 

  (a) the division of such shares into series and the designation and authorized number of shares of each series,

 

  (b) the dividend rate,


  (c) the dates of payment of dividends and the dates from which they are cumulative,

 

  (d) liquidation price,

 

  (e) redemption rights and price,

 

  (f) sinking fund requirements,

 

  (g) conversion rights, and

 

  (h) restrictions on the issuance of such shares.

Prior to the issuance of any shares of a series, but after adoption by the board of directors of the resolution establishing such series, the appropriate officers of the corporation shall file such documents with the State of Ohio as may be required by law including, without limitation, an amendment to these Articles of Incorporation.

Section 3. Common Shares . Each common share shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of the corporation, on all propositions before such meetings. Subject to the preferences of any outstanding preferred shares, each common share shall be entitled to participate equally in such dividends as may be declared by the board of directors out of funds legally available therefor, and to participate equally in all distributions of assets upon liquidation.

FIFTH: The amount of stated capital with which the corporation will begin business shall be not less than five hundred dollars ($500).

SIXTH: The board of directors may fix and determine, and vary, the amount of working capital of the corporation; determine whether any (and, if any, what part) of the surplus, however created or arising, shall be used or disposed of or declared in dividends or paid to shareholders; and, without action by the shareholders, use and apply such surplus, or any part thereof, or such part of the stated capital of the corporation as is permitted under the laws of the State of Ohio, at any time or from time to time, in the purchase or acquisition of shares of any class, voting-trust certificates for shares, bonds, debentures, notes, scrip, warrants, obligations, evidence of indebtedness of the corporation, or other securities of the corporation, to such extent or amount and in such manner and upon such terms as the board of directors shall deem expedient and without regard to any provisions which may hereafter be contained in the corporation’s articles of incorporation with respect to the redemption of shares of any class at the option of the corporation.

SEVENTH: Every statute of the State of Ohio hereafter enacted, whereby rights or privileges of the shareholders of a corporation organ-

 

-2-


ized under the Ohio General Corporation Law are increased, diminished, or in any way affected, or whereby effect is given to any action authorized, ratified, or approved by less than all the shareholders of any such corporation, shall apply to the corporation and shall bind every shareholder to the same extent as if such statute had been in force at the date of the filing of these articles of incorporation.

EIGHTH: A director or officer of the corporation shall not be disqualified by his office from dealing or contracting with the corporation as a vendor, purchaser, employee, agent, or otherwise. No transaction or contract or act of the corporation shall be void or voidable or in any way affected or invalidated by reason of the fact that any director or officer, or any firm of which any director or officer is a shareholder, director, or trustee, or any trust of which any director or officer is a trustee or beneficiary, is in any way interested in such transaction or contract or act. No director or officer shall be accountable or responsible to the corporation for or in respect to any transaction or contract or act of the corporation or for any gains or profits directly or indirectly realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder, director, or trustee, or any trust of which he is a trustee or beneficiary, is interested in such transaction or contract or act; provided the fact that such director or officer or such firm or corporation or such trust is so interested shall have been disclosed or shall have been known to the board of directors or such members thereof as shall be present at any meeting of the board of directors at which action upon such contract or transaction or act shall have been taken. Any director may be counted in determining the existence of a quorum at any meeting of the board of directors which shall authorize or take action in respect to any such contract or transaction or act, and may vote thereat to authorize, ratify, or approve any such contract or transaction or act, and any officer of the corporation may take any action within the scope of his authority respecting such contract or transaction or act with like force and effect as if he or any firm of which he is a member, or any corporation of which he is a shareholder, director, or trustee, or any trust of which he is a trustee or beneficiary, were not interested in such transaction or contract or act. Without limiting or qualifying the foregoing, if in any judicial or other inquiry, suit, cause, or proceeding, the question of whether a director or officer of the corporation has acted in good faith is material, then notwithstanding any statute or rule of law or of equity to the contrary (if any there be), his good faith shall be presumed, in the absence of proof to the contrary by clear and convincing evidence.

NINTH: No holder of shares of any class of the corporation shall be entitled as such, as a matter of right, to subscribe for or purchase shares of any class, now or hereafter authorized, or to purchase or to subscribe for securities convertible into or exchangeable for shares of the corporation, or to which shall appertain or be attached

 

-3-


any warrants or rights entitling the holder thereto to subscribe for or purchase shares, except such rights of subscription or purchase, if any, at such price or prices, and upon such terms and conditions as the board of directors in its discretion may from time to time determine.

TENTH: Except as otherwise provided in these Articles of Incorporation or the Code of Regulations of the corporation, notwithstanding any provision of any statute of the State of Ohio, now or hereafter in force, requiring for any purpose the vote, consent, waiver, or release of the holders of shares entitling them to exercise two-thirds or any other proportion of the voting power of the corporation or of any class or classes of shares thereof, any action may be taken by the vote of the holders of shares entitling them to exercise a majority of the voting power of the corporation, or of such class or classes, unless the proportion designated by such statute cannot be altered by these articles.

 

-4-


CERTIFICATE OF AMENDMENT

TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF

CARDINAL DISTRIBUTION, INC.

Robert D. Walter and Michael E. Moritz hereby certify that they are the duly elected and acting chairman and secretary, respectively, of Cardinal Distribution, Inc., an Ohio corporation (the “Company”), and further certify that the following is a true copy of a resolution amending the Company’s Amended and Restated Articles of Incorporation duly adopted by the affirmative vote of the holders of shares of the Company entitling them to exercise a majority of the voting power of the Company at the annual meeting of shareholders duly held on August 30, 1989:

RESOLVED, That the Amended and Restated Articles of Incorporation of the Company be amended by deleting ARTICLE FOURTH thereof in its entirety and by substituting in lieu thereof the following ARTICLE FOURTH:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 20,500,000, consisting of 20,000,000 common shares without par value and 500,000 nonvoting preferred shares without par value.

Section 2. Issuance of Preferred Shares . The board of directors is authorized at any time, and from time to time, to provide for the issuance of nonvoting preferred shares in one or more series, and to determine to the extent permitted by law the designations, preferences, limitations, and relative or other rights of the nonvoting preferred shares or any series thereof. For each series, the board of directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations, and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series:

 

  (a) the division of such shares into series and the designation and authorized number of shares of each series,

 

  (b) the dividend rate,

 

  (c) the dates of payment of dividends and the dates from which they are cumulative,

 

  (d) liquidation price,


  (e) redemption rights and price,

 

  (f) sinking fund requirements,

 

  (g) conversion rights, and

 

  (h) restrictions on the issuance of such shares.

Prior to the issuance of any shares of a series, but after adoption by the board of directors of the resolution establishing such series, the appropriate officers of the corporation shall file such documents with the State of Ohio as may be required by law including, without limitation, an amendment to these Articles of Incorporation.

Section 3. Common Shares . Each common share shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of the corporation, on all propositions before such meetings. Subject to the preferences of any outstanding preferred shares, each common share shall be entitled to participate equally in such dividends as may be declared by the board of directors out of funds legally available therefor, and to participate equally in all distributions of assets upon liquidation.

 

August 30, 1989     CARDINAL DISTRIBUTION, INC.
    By:  

/s/ Robert D. Walter

      Robert D. Walter, Chairman
    By:  

/s/ Michael E. Moritz

      Michael E. Moritz, Secretary

 

-2-


CERTIFICATE OF AMENDMENT

TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF

CARDINAL DISTRIBUTION, INC.

Robert D. Walter and George H. Bennett, Jr. hereby certify that they are the duly elected and acting chairman and assistant secretary, respectively, of Cardinal Distribution, Inc., an Ohio corporation (the “Company”), and further certify that the following is a true copy of a resolution amending the Company’s Amended and Restated Articles of Incorporation duly adopted by the affirmative vote of the holders of shares of the Company entitling them to exercise a majority of the voting power of the Company at the annual meeting of shareholders duly held on August 15, 1991:

REVOLVED, that Article FOURTH of the Company’s Amended and Restated Articles of Incorporation be, and the same hereby is, deleted in its entirety and there is substituting the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 40,500,000 consisting of 40,000,000 common shares without par value and 500,000 nonvoting preferred shares without par value.

Section 2. Issuance of Preferred Shares . The board of directors is authorized at any time, and from time to time, to provide for the issuance of nonvoting preferred shares in one or more series, and to determine to the extent permitted by law the designations, preferences, limitations, and relative or other rights of the nonvoting preferred shares or any series thereof. For each series, the board of directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations, and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series:

 

  (a) the division of such shares into series and the designation and authorized number of shares of each series,

 

  (b) the divided rate,

 

  (c) the dates of payment of dividends and the dates from which they are cumulative,


  (d) liquidation price,

 

  (e) redemption rights and price,

 

  (f) sinking fund requirements,

 

  (g) conversion rights, and

 

  (h) restrictions on the issuance of such shares.

Prior to the issuance of any shares of a series, but after adoption by the board of directors of the resolution establishing such series, the appropriate officers of the corporation shall file such documents with the State of Ohio as may be required by law including, without limitation, an amendment to these Articles of Incorporation.

Section 3. Common Shares . Each common share shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of the corporation, on all propositions before such meetings. Subject to the preferences of any outstanding preferred shares, each common share shall be entitled to participate equally in such dividends as may be declared by the board of directors out of funds legally available therefor, and to participate equally in all distributions of assets upon liquidation.

 

August 15, 1991     CARDINAL DISTRIBUTION, INC.
    By:  

/s/ Robert D. Walter

      Robert D. Walter, Chairman
    By:  

/s/ George H. Bennett, Jr.

      George H. Bennett, Jr., Assistant Secretary


CERTIFICATE OF AMENDMENT

TO

AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED

OF

CARDINAL DISTRIBUTION, INC.

ROBERT D. WALTER, Chairman, and MICHAEL E. MORITZ, Secretary, of Cardinal Distribution, Inc., an Ohio corporation (the “Company”), do hereby certify that a meeting of the shareholders of the Company was duly called and held on January 27, 1994, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the resolutions attached hereto as Exhibit A were duly adopted.

IN WITNESS WHEREOF, Robert D. Walter, Chairman, and Michael E. Moritz, Secretary, of Cardinal Distribution, Inc., acting for and on its behalf, do hereunto subscribe their names this 1st day of February, 1994.

 

By:  

/s/ Robert D. Walter

  Robert D. Walter, Chairman
By:  

/s/ Michael E. Moritz

  Michael E. Moritz, Secretary


EXHIBIT A

TO

CERTIFICATE OF AMENDMENT

TO

AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED

OF

CARDINAL DISTRIBUTION, INC.

Resolved, that Article FIRST, of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Distribution, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FIRST: The name of the corporation shall be “Cardinal Health, Inc.”

Resolved, that Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Distribution, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 65,500,000, consisting of 60,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

Section 2. Issuance of Preferred Shares . The board of directors is authorized at any time, and from time to time, to provide for the issuance of nonvoting preferred shares in one or more series, and to determine to the extent permitted by law the designations, preferences, limitations, and relative or other rights of the nonvoting preferred shares or any series thereof. For each series, the board of directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations, and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series:

(a) the division of such shares into series and the designation and authorized number of shares of each series,

(b) the dividend rate,

(c) the dates of payment of dividends and the dates from which they are cumulative,

(d) liquidation price,

(e) redemption rights and price,

(f) sinking fund requirements,

(g) conversion rights, and

(h) restrictions on the issuance of such shares.

Prior to the issuance of any shares of a series, but after adoption by the board of directors of the resolution establishing such series, the appropriate officers of the corporation shall file such documents with the State of Ohio as may be required by law including, without limitation, an amendment to these Articles of Incorporation.

Section 3. Common Shares .

All common shares shall be identical and will entitle the holders thereof to the same rights and privileges, except as otherwise provided herein.

A. Voting Rights .

1. Class A Common Shares . Except as set forth herein or as otherwise required by law, each outstanding Class A Common Share shall entitle the holder thereof to one vote, in person or by


proxy, at any and all meetings of the shareholders of the corporation, on all propositions before such meetings.

2. Class B Common Stock . Except as set forth herein or as otherwise required by law, each outstanding Class B Common Share shall entitle the holder thereof to one-fifth (  1 / 5 ) of one vote, in person or by proxy, at any and all meetings of shareholders of the corporation, on all propositions before such meetings. Notwithstanding the foregoing, holders of the Class B Common Shares shall be entitled to vote as a separate class on any amendment to this paragraph 2 of this Section A, on the issuance in the aggregate by the corporation of additional Class B Common Shares in excess of the number of Class B Common Shares held by Chemical Equity Associates and its Affiliates or issuable pursuant to Section 3(c) hereof and on any amendment, repeal or modification of any provision of these Articles that adversely affects the powers, preferences or special rights of the holders of the Class B Common Shares.

B. Dividends; Liquidation . Subject to the preferences of any preferred shares, each Common Share shall be entitled to participate equally in such dividends as may be declared by its board of directors out of funds legally available therefor or to participate equally in all distributions of assets upon liquidation; provided, that in the case of dividends payable in Common Shares of the Corporation, or options, warrants or rights to acquire such Common Shares, or securities convertible into or exchangeable for such Common Shares, the shares, options, warrants, rights or securities so payable shall be payable in shares of, or options, warrants or rights to acquire, or securities convertible into or exchangeable for, Common Shares of the same class upon which the dividend or distribution is being paid.

C. Conversion .

1. Conversion of Class A Common Shares . Any Regulated Shareholder (defined below) shall be entitled to convert, at any time and from time to time, any or all of the Class A Common Shares held by such shareholder into the same number of Class B Common Shares.

2. Conversion of Class B Common Shares . Each holder of Class B Common Shares may convert such shares into Class A Common Shares if such holder reasonably believes that such converted shares will be transferred within fifteen (15) days pursuant to a Conversion Event (defined below) and such holder agrees not to vote any such Class A Common Shares prior to such Conversion Event and undertakes to promptly convert such shares back into Class B Common Shares if such shares are not transferred pursuant to a Conversion Event. Each Regulated Shareholder may provide for further restrictions or limitations upon the conversion of any Class B Common Shares by providing the corporation with signed, written instructions specifying such additional restrictions and legending such shares as to the existence of such restrictions.

3. Conversion Procedure . Each conversion of Common Shares of the corporation into shares of another class of Common Shares of the Corporation shall be effected by the surrender of the certificate or certificates representing the shares to be converted (the “Converting Shares”) at the principal office of the corporation (or such other office or agency of the corporation as the corporation may designate by written notice to the holders of common shares) at any time during its usual business hours, together with written notice by the holder of such Converting Shares, stating that such holder desires to convert the Converting Shares, or a stated number of the shares represented by such certificate or certificates, into an equal number of shares of the class into which such shares may be converted (the “Converted Shares”). Such notice shall also state the name or names (with addresses) and denominations in which the certificate or certificates for Converted Shares are to be issued and shall include instructions for the delivery thereof. Promptly after such surrender and the receipt of such written notice, the corporation will issue and deliver in accordance with the surrendering holder’s instructions the certificate or certificates evidencing the Converted Shares issuable upon such conversion, and the corporation will deliver to the converting holder a certificate representing any shares which were represented by the certificate or certificates that were delivered to the corporation in connection with such conversion, but which were not converted.


Such conversion shall be deemed to have been effected as of the close of business on the date on which such certificate or certificates shall have been surrendered and such notice shall have been received by the corporation, and at such time the rights of the holder of the Converting Shares as such holder shall cease and the person or persons in whose name or names the certificate or certificates for the Converted Shares are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the Converted Shares. Upon issuance of shares in accordance with this Section C, such Converted Shares shall be deemed to be duly authorized, validly issued, fully paid and non-assessable.

Each holder of Class B Common Shares shall be entitled to convert Class B Common Shares in connection with any Conversion Event if such holder reasonably believes that such Conversion Event will be consummated, and a written request for conversion from any holder of Class B Common Shares to the corporation stating such holder’s reasonable belief that a Conversion Event shall occur shall be conclusive and shall obligate the corporation to effect such conversion in a timely manner so as to enable each such holder to participate in such Conversion Event. The corporation will not cancel the Class B Common Shares so converted before the 15th day following such Conversion Event and will reserve such shares until such 15th day for reissuance in compliance with the next sentence. If any Class B Common Shares are converted into Class A Common Shares in connection with a Conversion Event and such Class A Common Shares are not actually distributed, disposed of or sold pursuant to such Conversion Event, such Class A Common Shares shall be promptly converted back into the same number of Class B Common Shares.

4. Stock Splits; Adjustments . If the Corporation shall in any manner subdivide (by stock split, stock dividend or otherwise) or combine (by reverse stock split or otherwise) the outstanding Class A Common Shares or the Class B Common Shares, then the outstanding shares of each other class of common shares shall be subdivided or combined, as the case may be, to the same extent, share and share alike, and effective provision shall be made for the protection of the conversion rights hereunder.

In the case of any reorganization, reclassification or change of shares of the Class A Common Shares or Class B Common Shares (other than a change in par value or from par to no par value as a result of a subdivision or combination), or in case of any consolidation of the corporation with one or more corporations or a merger of the corporation with another corporation (other than a consolidation or merger in which the corporation is the resulting or surviving corporation and which does not result in any reclassification or change of outstanding Class A Common Shares or Class B Common Shares), each holder of Class A Common Shares or Class B Common Shares shall have the right at any time thereafter, so long as the conversion right hereunder with respect to such share would exist had such event not occurred, to convert such share into the kind and amount of shares of stock and other securities and properties (including cash) receivable upon such reorganization, reclassification, change, consolidation or merger by a holder of the number of Class A Common Shares or Class B Common Shares into which such Class A Common Shares or Class B Common Shares, as the case may be, might have been converted immediately prior to such reorganization, reclassification, change, consolidation or merger. In the event of any such reorganization, reclassification, change, consolidation or merger which will have the effect of causing any Regulated Shareholder’s direct or indirect ownership of shares of capital stock of the resulting or surviving corporation immediately following such transaction to equal or exceed 5% of the voting power thereof (calculated as if all such Regulated Shareholder’s Class B Common Shares were converted to Class A Common Shares immediately prior to consummation of such transaction) then provision shall be made in the certificate of incorporation of the resulting or surviving corporation for the protection of the conversion rights of Class A Common Shares and Class B Common Shares that shall be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of such Class A Common Shares or Class B Common Shares into which such Class A Common Shares or Class B Common Shares might have been converted prior to such event.


5. Reservation of Shares . The Corporation shall at all times reserve and keep available out of its authorized but unissued Class A Common Shares and Class B Common Shares or its treasury shares, for the purpose of issuance upon the conversion of Class A Common Shares and Class B Common Shares, such number of shares of such class as are then issuable upon the conversion of all outstanding shares of Class A Common Shares and Class B Common Shares which may be converted.

6. No Charge . The issuance of certificates for shares of any class of common shares upon conversion of shares of any other class of common shares shall be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of common shares; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the common shares converted.

D. As used herein, the following terms shall have the meanings shown below:

1. “ Affiliates ” shall mean with respect to any Person, any other person, directly or indirectly controlling, controlled by or under common control with such Person. For the purpose of the above definition, the term “control” (including with correlative meaning, the terms “controlling”, “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

2. “ Conversion Event ” shall mean (a) any public offering or public sale of securities of the Corporation (including a public offering registered under the Securities Act of 1933 and a public sale pursuant to Rule 144 of the Securities and Exchange Commission or any similar rule then in force), (b) any sale of securities of the corporation to a person or group of persons (within the meaning of the Securities Exchange Act of 1934, as amended (the “1934 Act”)) if, after such sale, such person or group of persons in the aggregate would own or control securities which possess in the aggregate the ordinary voting power to elect a majority of the corporation’s directors (provided that such sale has been approved by the corporation’s Board of Directors or a committee thereof), (c) any sale of securities of the corporation to a person or group of persons (within the meaning of the 1934 Act) if, after such sale, such person or group of persons in the aggregate would own or control securities of the corporation (excluding any Class B Common Shares being converted and disposed of in connection with such Conversion Event) which possess in the aggregate the ordinary voting power to elect a majority of the corporation’s directors, (d) any sale of securities of the corporation to a person or group of persons (within the meaning of the 1934 Act) if, after such sale, such person or group of persons would not, in the aggregate, own, control or have the right to acquire more than two percent (2%) of the outstanding securities or any class of voting securities of the corporation (for purposes of this clause, treating Class A Common Stock and Class B Common Stock as a single class), and (e) a merger, consolidation or similar transaction involving the corporation if, after such transaction, a person or group of persons (within the meaning of the 1934 Act) in the aggregate would own or control securities which possess in the aggregate the ordinary voting power to elect a majority of the surviving corporation’s directors (provided that the transaction has been approved by the corporation’s Board of Directors or a committee thereof).

3. “ Person ” or “ person ” shall mean an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization or a government or any department or agency thereof.

4. “ Regulated Shareholder ” shall mean Chemical Equity Associates and its Affiliates.


CERTIFICATE OF AMENDMENT

TO

AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED, OF

CARDINAL HEALTH, INC.

Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), do hereby certify that a meeting of the shareholders of the Company was duly called and held on November 14, 1995, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolution was duly adopted:

Resolved, that Section 1 of Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 105,500,000, consisting of 100,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do hereunto subscribe their names this 14th day of November, 1995.

 

By:  

/s/ Robert D. Walter

  Robert D. Walter, Chairman
By:  

/s/ George H. Bennett, Jr.

  George H. Bennett, Jr.


CERTIFICATE OF AMENDMENT

TO

AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,

OF

CARDINAL HEALTH, INC.

Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), do hereby certify that a meeting of the shareholders of the Company was duly called and held on October 29, 1996, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolution was duly adopted;

Resolved, that Section 1 of Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 155,500,000, consisting of 150,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do hereunto subscribe their names this 29th day of October, 1996.

 

By:  

/s/ Robert D. Walter

  Robert D. Walter, Chairman
By:  

/s/ George H. Bennett, Jr.

  George H. Bennett, Jr., Secretary


CERTIFICATE OF AMENDMENT

TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,

OF

CARDINAL HEALTH, INC.

Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), do hereby certify that a meeting of the shareholders of the Company was duly called and held on February 20, 1998, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolution was duly adopted:

Resolved, that Section 1 of Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 305,500,000 consisting of 300,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do hereunto subscribe their names this 20th day of February, 1998.

 

By:  

/s/ Robert D. Walter

  Robert D. Walter, Chairman
By:  

/s/ George H. Bennett, Jr.

  George H. Bennett, Jr., Secretary


CERTIFICATE OF AMENDMENT

TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,

OF

CARDINAL HEALTH, INC.

Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), do hereby certify that a meeting of the shareholders of the Company was duly called and held on November 23, 1998, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolution was duly adopted:

Resolved, that Section 1 of Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 505,500,000 consisting of 500,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

IN WITNESS WHEREOF, Robert D. Walter, Chairman, and George H. Bennett, Jr., Secretary, of Cardinal Health, Inc., acting for and on its behalf, do hereunto subscribe their names this 23rd day of November, 1998.

 

By:  

/s/ Robert D. Walter

  Robert D. Walter, Chairman
By:  

/s/ George H. Bennett, Jr.

  George H. Bennett, Jr., Secretary


CERTIFICATE OF AMENDMENT

TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,

OF

CARDINAL HEALTH, INC.

Steven Alan Bennett, Executive Vice President, Chief Legal Officer and Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), does hereby certify that a meeting of the shareholders of the Company was duly called and held on November 1, 2000, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on a proposal to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolution was duly adopted:

Resolved, that Section 1 of Article FOURTH of the Amended and Restated Articles of Incorporation, as amended, of Cardinal Health, Inc. be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FOURTH: Section 1. Authorized Shares . The maximum aggregate number of shares which the corporation is authorized to have outstanding is 755,500,000 consisting of 750,000,000 common shares, without par value (“Class A Common Shares”), 5,000,000 Class B common shares, without par value (“Class B Common Shares”) (the Class A Common Shares and the Class B Common Shares are sometimes referred to herein collectively as the “Common Shares”), and 500,000 nonvoting preferred shares, without par value.

IN WITNESS WHEREOF, Steven Alan Bennett, Executive Vice President, Chief Legal Officer and Secretary, of Cardinal Health, Inc., acting for and on its behalf, does hereunto subscribe his name this 1st day of November, 2000.

 

By:  

/s/ Steven Alan Bennett

  Steven Alan Bennett
  Executive Vice President, Chief Legal Officer and Secretary


CERTIFICATE OF AMENDMENT

TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED,

OF

CARDINAL HEALTH, INC.

Ivan K. Fong, Chief Legal Officer and Secretary, of Cardinal Health, Inc., an Ohio corporation (the “Company”), does hereby certify that a meeting of the shareholders of the Company was duly called and held on November 5, 2008, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of holders of shares entitling them to exercise a majority of the voting power of the Company on proposals to amend the Company’s Amended and Restated Articles of Incorporation, as amended, the following resolutions were duly adopted:

RESOLVED, that the amendments to the Company’s Amended and Restated Articles of Incorporation, as amended, and Restated Code of Regulations to implement a majority voting standard for uncontested elections, as described in Proposal 3 of the Proxy Statement dated September 29, 2008, are hereby approved and adopted in all respects;

RESOLVED, that the amendments to the Company’s Amended and Restated Articles of Incorporation, as amended, and Restated Code of Regulations to eliminate cumulative voting, as described in Proposal 4 of the Proxy Statement dated September 29, 2008, are hereby approved and adopted in all respects; and

RESOLVED, that the amendment to the Company’s Amended and Restated Articles of Incorporation, as amended, to eliminate the reference to the minimum stated capital with which the Company may begin business and to state expressly that the Company’s common shares do not have stated capital, as described in Proposal 6 of the Proxy Statement dated September 29, 2008, is hereby approved and adopted in all respects;

And that, pursuant to such resolutions:

 

  (a) Article FIFTH of the Amended and Restated Articles of Incorporation, as amended, of the Company be, and the same hereby is, deleted in its entirety and there is substituted therefor the following:

FIFTH: The Common Shares do not have any stated capital.

 

  (b) a new Article ELEVENTH is added to the Amended and Restated Articles of Incorporation, as amended, of the Company in its entirety as follows:

ELEVENTH: At each meeting of shareholders for the election of directors at which a quorum is present, a nominee for election as a director in an uncontested election shall be elected to the board of directors if the number of votes cast for such nominee’s election exceeds the number of votes cast against such nominee’s election. For purposes of this Article Eleventh, abstentions will not be considered votes cast for or against a nominee at the shareholder meeting. In all director elections other than uncontested elections, the nominees receiving the greatest number of votes shall be elected.

For purposes of this Article, an “uncontested election” means any meeting of shareholders at which the number of nominees does not exceed the number of directors to be elected and with respect to which no shareholder has submitted notice of an intent to nominate a candidate for election at such meeting in accordance with the Company’s Amended and Restated Code of Regulations, as it may be amended from time to time, (the “Regulations”), or, if such a notice has been submitted with respect to such meeting, on or before the tenth day prior to the date that the Company files its definitive proxy statement relating to such meeting with the Securities and Exchange Commission


(regardless of whether or not it is thereafter revised or supplemented), each such notice with respect to such meeting has been (A) withdrawn by its respective submitting shareholder in writing to the secretary of the Company, (B) determined not to be a valid and effective notice of nomination (such determination to be made by the Board of Directors (or a designated committee thereof) pursuant to the Regulations, or, if challenged in court, by final court order) or (C) determined not to create a bona fide election contest by the Board of Directors (or a designated committee thereof).

 

  (c) a new Article TWELFTH is added to the Amended and Restated Articles of Incorporation, as amended, of the Company in its entirety as follows:

TWELFTH: No shareholder shall have the right to cumulate his or her voting power in the election of directors.

IN WITNESS WHEREOF , Ivan K. Fong, Chief Legal Officer and Secretary, of Cardinal Health, Inc., acting for and on its behalf, does hereunto subscribe his name this 5 th day of November, 2008.

 

/s/ Ivan K. Fong

Ivan K. Fong, Chief Legal Officer and Secretary

Exhibit 3.2

RESTATED CODE OF REGULATIONS

OF

CARDINAL HEALTH, INC.

ADOPTED JUNE 14, 1983

AMENDED SEPTEMBER 14, 1984

AMENDED JANUARY 27, 1994

AMENDED NOVEMBER 23, 1998

AMENDED NOVEMBER 7, 2001

AMENDED NOVEMBER 2, 2005

AMENDED NOVEMBER 7, 2007

AMENDED NOVEMBER 5, 2008


TABLE OF CONTENTS

 

         

Page

ARTICLE 1 Meetings of Shareholders    1

§1.1

   Annual Meeting    1

§1.2

   Special Meetings    1

§1.3

   Place of Meetings    1

§1.4

   Notice of Meetings    1

§1.5

   Notice of Shareholder Business and Nominations    1

§1.6

   Waiver of Notice    6

§1.7

   Quorum    6

§1.8

   Organization    6

§1.9

   Order of Business    6

§1.10

   Voting    6

§1.11

   Proxies    7

§1.12

   Inspectors of Elections    7

§1.13

   Record Date    7

§1.14

   List of Shareholders at Meeting    7

§1.15

   Action in Writing in Lieu of Meeting    7
ARTICLE 2 Board of Directors    8

§2.1

   General Powers of Board    8

§2.2

   Number of Directors    8

§2.3

   Compensation and Expenses    8

§2.4

   Election of Directors    8

§2.5

   Term of Office    8

§2.6

   Resignations    8

§2.7

   Removal of Directors    8

§2.8

   Vacancies    9

§2.9

   Organization of Meetings    9

§2.10

   Place of Meetings    9

§2.11

   Regular Meetings    9

§2.12

   Special Meetings    9

§2.13

   Notices of Meetings    9

§2.14

   Notice of Adjournment of Meeting    10

§2.15

   Quorum and Manner of Acting    10

§2.16

   Order of Business    10

§2.17

   Action in Writing in Lieu of Meeting    10

§2.18

   Executive and Other Committees    10
ARTICLE 3 Officers    11

§3.1

   Number and Titles    11

§3.2

   Election, Terms of Office, Qualifications, and Compensation    11

§3.3

   Additional Officers, Agents, Etc    11

 

i


§3.4

   Removal    11

§3.5

   Resignations    12

§3.6

   Vacancies    12

§3.7

   Powers, Authority, and Duties of Officers    12
ARTICLE 4 Shares and Their Transfer    12

§4.1

   Certificates for Shares    12

§4.2

   Transfer of Shares    12

§4.3

   Regulations    13

§4.4

   Lost, Destroyed or Stolen Certificates    13
ARTICLE 5 Examination of Books by Shareholders    13
ARTICLE 6 Indemnification and Insurance    13

§6.1

   Costs Incurred    13

§6.2

   Indemnification Procedure    14

§6.3

   Advance Payment of Costs    14

§6.4

   Non-Exclusive    14

§6.5

   Insurance    15

§6.6

   Survival    15

§6.7

   Successors    15
ARTICLE 7 Seal    15
ARTICLE 8 Fiscal Year    16
ARTICLE 9 Control Share Acquisitions    16
ARTICLE 10 Amendment of Regulations    16

 

ii


ARTICLE 1

Meetings of Shareholders

§1.1 Annual Meeting . The annual meeting of the shareholders, for the purpose of electing directors and transacting such other business as may come before the meeting, shall be held on such date and at such time during the first six months of each fiscal year of the Company as may be fixed by the board of directors and stated in the notice of the meeting.

§1.2 Special Meetings . A special meeting of the shareholders may be called by the chairman of the board, or the president, or a majority of the directors acting with or without a meeting, or the holders of shares entitling them to exercise twenty-five percent of the voting power of the Company entitled to be voted at the meeting. Upon delivery to the chairman, president, or secretary of a request in writing for a shareholders’ meeting by any persons entitled to call such meeting, the officer to whom the request is delivered shall give notice to the shareholders of such meeting. Any such request shall specify the purposes and the date and hour for such meeting. The date shall be at least 14 and not more than 65 days after delivery of the request. If such officer does not call the meeting within five days after any such request, the persons making the request may call the meeting by giving notice as provided in §1.4 or by causing it to be given by their designated representative.

§1.3 Place of Meetings . All meetings of shareholders shall be held at such place or places, within or without the State of Ohio, as may be fixed by the board of directors or, if not so fixed, as shall be specified in the notice of the meeting.

§1.4 Notice of Meetings . A notice of each annual or special meeting of shareholders shall be given to shareholders in accordance with and to the extent required by applicable law by the chairman, president or secretary, or, in case of their refusal or failure to do so, by the person or persons entitled to call such meeting. Except when expressly required by law, no publication of any notice of a shareholders meeting shall be required. If shares are transferred after notice has been given, notice need not be given to the transferee. A record date may be fixed for determining the shareholders entitled to notice of any meeting of shareholders, in accordance with the provisions of §1.13. Only the business provided for in such notice shall be considered at the meeting. Notice of the adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at the meeting.

§1.5 Notice of Shareholder Business and Nominations .

(a) Annual Meeting of Shareholders .

(i) Nominations of persons for election to the board of directors of the Company and the proposal of other business to be considered by the shareholders may be made at an annual meeting of shareholders (A) pursuant to the Company’s notice of meeting, (B) by or at the direction of the board of directors of the Company or (C) by any shareholder of the Company who (I) was a shareholder of record at the time of giving of notice provided for in this Section 1.5 and at the

 

1


time of the annual meeting, (II) is entitled to vote at the meeting and (III) complies with the notice procedures set forth in this Section 1.5 as to such business or nomination. In order to assure that shareholders and the Company have a reasonable opportunity to consider nominations and other business proposed to be brought before a meeting of shareholders and to allow for full information to be distributed to shareholders, clause (C) shall be the exclusive means for a shareholder to make nominations or submit other business (other than matters properly brought under Rule 14a-8 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and included in the Company’s notice of meeting) before an annual meeting of shareholders.

(ii) Without qualification, for any nominations or any other business to be properly brought before an annual meeting by a shareholder pursuant to Section 1.5(a)(i)(C), the shareholder must have given timely notice thereof in proper written form to the secretary and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder’s notice shall be delivered to the secretary at the principal executive offices of the Company not later than the close of business on the 70th day nor earlier than the close of business on the 130th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 130th day prior to such annual meeting and not later than the close of business on the later of the 70th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. In no event shall any adjournment of an annual meeting or the announcement thereof commence a new time period for the giving of a shareholder’s notice as described above. To be in proper written form, a shareholder’s notice (whether given pursuant to this Section 1.5(a)(ii) or Section 1.5(b)) to the secretary must:

(A) set forth, as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (I) the name and address of such shareholder, as they appear on the Company’s books, and the name and address of such beneficial owner, (II) the class and number of shares of the Company which are held of record by such shareholder as of the date of the notice, and a representation that the shareholder will notify the Company in writing within five business days after the record date for such meeting of the class and number of shares of the Company held of record on such record date, (III) the class and number of shares of the Company which are held of record or are beneficially owned (within the meaning of Section 13(d) of the Exchange Act) by such beneficial owner as of the date of the notice, and a representation that the shareholder will notify the Company in writing within five business days after the record date for such meeting of the class and number of shares of the Company beneficially owned by such shareholder and such beneficial

 

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owner on such record date, (IV) any other information relating to such shareholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, and (V) such shareholder’s and beneficial owner’s written consent to the public disclosure of information provided to the Company pursuant to this Section 1.5;

(B) set forth, as to the shareholder giving the notice or, if given on behalf of a beneficial owner, as to the beneficial owner on whose behalf the nomination or proposal is made (I) any agreements, arrangements or understandings entered into by the shareholder or beneficial owner, as appropriate, and its affiliates with respect to equity securities of the Company, including any put or call arrangements, derivative securities, short positions, borrowed shares or swap or similar arrangements, specifying in each case the effect of such agreements, arrangements or understandings on any voting or economic rights of equity securities of the Company, in each case as of the date of the notice and in each case describing any changes in voting or economic rights which may arise pursuant to the terms of such agreements, arrangements or understandings, (II) to the extent not covered in clause (I) above, any disclosures that would be required pursuant to Item 5 or Item 6 of Schedule 13D (regardless of whether the requirement to file a Schedule 13D is applicable to the shareholder or beneficial owner), and (III) a representation that the shareholder will notify the Company in writing within five business days after the record date for such meeting of the information set forth in clause (I) and (II) above as of such record date;

(C) if the notice relates to any business other than a nomination of a director or directors that the shareholder proposes to bring before the meeting, set forth (I) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, in such business and (II) a description of all agreements, arrangements and understandings between such shareholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such shareholder;

(D) set forth, as to each person, if any, whom the shareholder proposes to nominate for election or reelection to the board of directors of the Company (I) all information relating to such person that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a

 

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contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (II) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such shareholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his respective affiliates and associates, or others acting in concert therewith, on the other hand, including without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the shareholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate therewith or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant;

(E) set forth a representation that such shareholder intends to appear at the annual meeting to bring such nomination or other business before the annual meeting;

(F) set forth such other information as may reasonably be required by the board of directors of the Company as described in the Company’s proxy statement for the preceding year’s annual meeting; and

(G) be followed, within five business days after the record date for such meeting, by the written notice providing the information described in (A) and (B) above.

The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as an independent director of the Company or that could be material to a reasonable shareholder’s understanding of the independence, or lack thereof, of such nominee.

(b) Special Meetings of Shareholders . Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the notice of meeting and, other than nominations for election to the board of directors made in accordance with the following provisions, no shareholder may bring before a special meeting of shareholders any business other than the business specified by the shareholders calling such special meeting in accordance with these regulations. Nominations of persons for election to the board of directors of the Company may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Company’s notice of meeting (i) by or at the direction of the board of directors of the Company or (ii) provided that the board of directors of the Company has determined that

 

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directors shall be elected at such meeting, by any shareholder of the Company who (A) is a shareholder of record at the time of giving of notice provided for in this Section 1.5 and at the time of the special meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures set forth in this Section 1.5 as to such nomination. In the event the Company calls a special meeting of shareholders for the purpose of electing one or more directors to the board of directors of the Company, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Company’s notice of meeting, if the shareholder’s notice required by Section 1.5(a)(ii) with respect to any nomination shall be delivered to the secretary at the principal executive offices of the Company not earlier than the close of business on the 130th day prior to such special meeting and not later than the close of business on the later of the 70th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors of the Company to be elected at such meeting. In no event shall any adjournment of a special meeting or the announcement thereof commence a new time period for the giving of a shareholder’s notice as described above.

(c) General .

(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.5. Except as otherwise provided by law, the Articles of Incorporation of the Company or these regulations, the board of directors of the Company (or a designated committee thereof) shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.5 and, if any proposed nomination or business is not in compliance with this Section 1.5, to declare that such defective proposal or nomination shall be disregarded.

(ii) For purposes of this Section 1.5, “public announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

(iii) Notwithstanding the foregoing provisions of this Section 1.5, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.5; provided, however, that any references in this Section 1.5 to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to Section 1.5(a)(i)(C) or Section 1.5(b). Nothing in this Section 1.5 shall be deemed to affect any rights of shareholders to

 

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request inclusion of proposals in the Company’s proxy statement pursuant to Rule 14a-8 under the Exchange Act by satisfying the notice and other requirements of Rule 14a-8 in lieu of satisfying the requirements of this Section 1.5.

§1.6 Waiver of Notice . Any shareholder, either before or after any meeting, may waive any notice required by law, the articles, or these regulations. Waivers must be in writing and filed with or entered upon the records of the meeting. Notice of a meeting will be deemed to have been waived by any shareholder who attends the meeting either in person or by proxy, and who does not, before or at the commencement of the meeting, protest the lack of proper notice.

§1.7 Quorum . The holders of shares entitling them to exercise a majority of the voting power of the Company entitled to vote at a meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except when a greater number is required by law, the articles of incorporation, or these regulations. In the absence of a quorum at any meeting or any adjournment of the meeting, the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote may adjourn the meeting from time to time. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.

§1.8 Organization . At each shareholders meeting the chairman of the board, or, in the chairman’s absence, the president, or, in the absence of both of them, any vice president, or, in the absence of any vice president, a chairman chosen by the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote, shall act as chairman, and the secretary of the Company, or, in the secretary’s absence, any assistant secretary, or, in the absence of all of them, any person whom the chairman of the meeting appoints, shall act as secretary of the meeting.

§1.9 Order of Business . Unless otherwise determined by the board of directors of the Company prior to the meeting, the chairman of the meeting shall determine in his or her sole discretion the order of business of each shareholders meeting and the rules of procedure therefor, and shall have the authority to regulate the conduct of any such meeting as he or she deems appropriate. Notwithstanding the foregoing, the order of business fixed by the chairman of the meeting may be changed by the vote of the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote.

§1.10 Voting . Each holder of a share or shares of the class or classes entitled to vote by law or the articles of incorporation shall be entitled to one vote in person or by proxy for each such share registered in the holder’s name on the books of the Company. As provided in §1.12, a record date for determining which shareholders are entitled to vote at any meeting may be fixed. Shares of its own stock belonging to the Company shall not be voted directly or indirectly. Persons holding voting shares in a fiduciary capacity shall be entitled to vote the shares so held. A shareholder whose shares are pledged shall be entitled to vote the shares standing in his or her name on the books of the Company. Upon a demand by any shareholder present in person or by proxy at any meeting and entitled to vote, any vote shall be by ballot. Each ballot shall be signed by the shareholder or such shareholder’s proxy and shall state the number of shares voted by such shareholder. Otherwise, votes shall be made orally.

 

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§1.11 Proxies . Any shareholder who is entitled to attend or vote at a shareholders meeting shall be entitled to exercise such right and any other of his or her rights by proxy or proxies appointed by a writing signed by such shareholder, which need not be witnessed or acknowledged. Except as otherwise specifically provided in these regulations, actions taken by proxy shall be governed by the provisions of §1701.48, Ohio Revised Code, or any future statute of like tenor or effect, including the provisions relating to the sufficiency of the writing, duration of the validity of the proxy, power of substitution, revocation, and all other provisions.

§1.12 Inspectors of Elections . Inspectors of elections may be appointed and act as provided in §1701.50, Ohio Revised Code, or any future statute of like tenor or effect.

§1.13 Record Date . The board of directors may fix a record date for any lawful purpose, including without limitation the determination of shareholders entitled to: (a) receive notice of or to vote at any meeting, (b) receive payment of any dividend or other distribution, (c) receive or exercise rights of purchase of, subscription for, or exchange or conversion of, shares or other securities, subject to any contract right with respect thereto, or (d) participate in the execution of written consents, waivers, or releases. Any such record date shall not be more than sixty days preceding the date of such meeting, the date fixed for the payment of any dividend or other distribution, or the date fixed for the receipt or the exercise of rights, as the case may be.

§1.14 List of Shareholders at Meeting . Upon request of any shareholder at any meeting of shareholders, there shall be produced at the meeting an alphabetically arranged list, or classified lists, of the shareholders of record as of the applicable record date who are entitled to vote, showing their respective addresses and the number and classes of shares held by them.

§1.15 Action in Writing in Lieu of Meeting . Any action which may be authorized or be taken at a meeting of the shareholders may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all the shareholders who would be entitled to notice of a meeting of the shareholders held for that purpose.

 

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ARTICLE 2

Board of Directors

§2.1 General Powers of Board . The powers of the Company shall be exercised, its business and affairs shall be conducted, and its property shall be controlled by the board of directors, except as otherwise provided by law of Ohio, the articles, or these regulations.

§2.2 Number of Directors . The number of directors of the Company shall be thirteen (13). The number of directors may be increased or decreased by action of the board of directors upon the vote of a majority of the board; provided, however, that in no case shall the number of directors be fewer than nine (9) or more than sixteen (16) without an amendment to this §2.2 approved in the manner specified in Article 10 of these regulations; and provided further that no decrease in the number of directors shall have the effect of removing any director prior to the expiration of his or her term of office.

§2.3 Compensation and Expenses . The directors shall be entitled to such compensation, on a monthly or annual basis, or on the basis of meetings attended, or on both bases, as the board of directors may from time to time determine and establish. No director shall be precluded from serving the Company as an officer or in any other capacity, or from receiving compensation for so serving. Directors may be reimbursed for their reasonable expenses incurred in the performance of their duties, including the expense of traveling to and from meetings of the board, if such reimbursement is authorized by the board of directors.

§2.4 Election of Directors . The Company’s Amended and Restated Articles of Incorporation, as may be amended from time to time, sets forth voting standards applicable in the election of directors at each meeting of shareholders to elect directors.

§2.5 Term of Office . At the 2006 annual meeting of shareholders, the successors of the directors whose terms expire at that meeting shall be elected for a term expiring at the 2007 annual meeting of shareholders; at the 2007 annual meeting of shareholders, the successors of the directors whose terms expire at that meeting shall be elected for a term expiring at the 2008 annual meeting of shareholders; and at each annual meeting of shareholders thereafter, the directors shall be elected for terms expiring at the next annual meeting of shareholders; or, in each case, if the election of directors shall not be held at that annual meeting, until a special meeting of the shareholders for the purpose of electing directors is held as provided in §1.2, or the taking of action by all the shareholders in writing in lieu of either such meetings, and in any case until his or her successor is elected and qualified or until his or her earlier resignation, removal from office, or death.

§2.6 Resignations . Any director may resign by giving written notice to the chairman, the president, or the secretary of the Company. Such resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective.

§2.7 Removal of Directors . All the directors or any individual director may be removed from office, without assigning any cause, by the affirmative vote of the holders of record of not

 

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less than a majority of the shares having voting power of the Company with respect to the election of directors. In case of any such removal, a new director may be elected at the same meeting, if such election is properly brought before such meeting and the nomination of such director is properly made, in each case, in accordance with these regulations, for the unexpired term of each director removed. Any director may also be removed by the board of directors for any of the causes specified in §1701.58(B), Ohio Revised Code, or any future statute of like tenor or effect.

§2.8 Vacancies . A vacancy in the board of directors, including a vacancy created by an increase in the number of directors, may be filled only by: (a) majority vote of the remaining directors, even though they are less than a quorum or (b) the vote of shareholders required by the Company’s Amended and Restated Articles, as may be amended from time to time, to elect directors at any shareholders meeting if such election is properly brought before such meeting and the nomination of such director is properly made, in each case, in accordance with these regulations. Any directors chosen to fill a vacancy shall hold office for the unexpired term of office and until their successors are elected and qualified or until his or her earlier resignation, removal from office, or death.

§2.9 Organization of Meetings . At each meeting of the board of directors, the chairman of the board, or, in his or her absence, the president, or, in his or her absence, a chairman chosen by a majority of the directors present, shall act as chairman. The secretary of the Company, or, if the secretary shall not be present, any person whom the chairman of the meeting shall appoint, shall act as secretary of the meeting.

§2.10 Place of Meetings . Meetings of the board shall be held at such place or places, within or without the State of Ohio, as may from time to time be fixed by the board of directors or as shall be specified or fixed in the notice of the meeting.

§2.11 Regular Meetings . Regular meetings of the board will not be held unless this code of regulations shall be amended to provide therefor.

§2.12 Special Meetings . Special meetings of the board of directors shall be held whenever called by the chairman of the board, if any, or by the president, or by a number of directors equal to one-third of the total number of directors.

§2.13 Notices of Meetings . Unless waived before, at or after the meeting as hereinafter provided, notice of each board of directors meeting shall be given to each director in accordance with and to the extent required by applicable law by the chairman, the president, the secretary, an assistant secretary, or the persons calling such meeting in any of the following ways:

(a) By orally informing him of the meeting in person or by telephone not later than twelve hours before the date and time of the meeting.

(b) By delivering notice in writing, electronically or by other legally sufficient means not later than one day before the date of the meeting.

 

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(c) By mail, telegram or cablegram at least two days before the meeting addressed to him at the address furnished by him to the secretary of the Company, or to such other address as the person sending the notice shall know to be correct.

Unless otherwise required by the articles of incorporation, this code of regulations, or the laws of the State of Ohio, the notice of any meeting need not specify the purposes of the meeting. Notice of any meeting of the board may be waived by any director, either before, at, or after the meeting, in writing or by any other legally sufficient means.

§2.14 Notice of Adjournment of Meeting . Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at the meeting.

§2.15 Quorum and Manner of Acting . A majority of the number of directors fixed or established pursuant to §2.2 as of the time of any meeting of the board of directors must be present in person at such meeting in order to constitute a quorum for the transaction of business, provided that meetings of the directors may include participation by directors through any communications equipment if all directors participating can hear each other, and such participation in a meeting shall constitute presence at such meeting. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors. In the absence of a quorum, a majority of those present may adjourn a meeting from time to time until a quorum is present. Notice of an adjourned meeting need not be given. The directors shall act only as a board. Individual directors shall have no power as such.

§2.16 Order of Business . The order of business at meetings of the board shall be such as the chairman of the meeting may prescribe or follow, subject, however, to his or her being overruled with respect thereto by a majority of the members of the board present.

§2.17 Action in Writing in Lieu of Meeting . Any action which may be authorized or taken at a meeting of the directors may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all the directors.

§2.18 Executive and Other Committees . The directors may create and from time to time abolish or reconstitute an executive committee and any other committee or committees of directors each to consist of not less than three directors, and may delegate to any such committee or committees any or all of the authority of the directors, however conferred, other than that of filling vacancies in the board of directors or in any committee of directors. Each such committee shall serve at the pleasure of the directors, and shall act only in the intervals between meetings of the board of directors, and shall be subject to the control and direction of the board of directors. The directors may adopt or authorize the committees to adopt provisions with respect to the government of any such committee or committees which are not inconsistent with applicable law, the articles of incorporation of the Company, or these regulations. An act or authorization of any act by any such committee within the authority properly delegated to it by the directors shall be as effective for all purposes as the act or authorization of the directors. Any right, power, or authority conferred in these regulations to the “directors” or to the “board of directors” shall also be deemed conferred upon each committee or committees of directors to which any such right, power, or authority is delegated (expressly, or by general delegation, or by necessary implication) by the board of directors.

 

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ARTICLE 3

Officers

§3.1 Number and Titles . The officers of the Company shall be a chairman of the board, a president, one or more vice presidents, if needed, a secretary, one or more assistant secretaries, if needed, a treasurer, one or more assistant treasurers, if needed, and such other officers and assistant officers as the board may deem necessary. The board shall have the discretion to determine from time to time the number of vice presidents, if any, the Company shall have, whether or not assistant secretaries and assistant treasurers are needed, and, if so, the number of assistant secretaries and assistant treasurers the Company shall have. Furthermore, if there is more than one vice president, the board may, in its discretion, establish designations for the vice presidencies so as to distinguish among them as to their functions or their order, or both. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity if such instrument is required by law, the articles, or these regulations to be executed, acknowledged, or verified by two or more officers.

§3.2 Election, Terms of Office, Qualifications, and Compensation . The officers shall be elected by the board of directors. Each shall be elected for an indeterminate term and shall hold office during the pleasure of the board of directors. The board of directors may hold annual elections of officers; in that event, each such officer shall hold office until his or her successor is elected and qualified unless he or she is removed earlier by the board of directors. The chairman of the board shall be a director, but no other officer need be a director. The other qualifications of all officers shall be such as the board of directors may establish. The board of directors shall fix the compensation, if any, of each officer.

§3.3 Additional Officers, Agents, Etc . In addition to the officers mentioned in §3.1, the Company may have such other officers, agents, and committees as the board of directors may deem necessary and may appoint, each of whom or each member of which shall hold office for such period, have such authority, and perform such duties as may be provided in these regulations or as may, from time to time, be determined by the board. The board of directors may delegate to any officer or committee the power to appoint any subordinate officer, agents, or committees. In the absence of any officer, or for any other reason the board of directors may deem sufficient, the board of directors may delegate, for the time being, the powers and duties, or any of them, of such officer to any other officer, or to any director.

§3.4 Removal . Any officer may be removed, either with or without cause, at any time, by the board of directors at any meeting, the notices (or waivers of notices) of which shall have specified that such removal action was to be considered. Any officer appointed by an officer or committee to which the board shall have delegated the power of appointment may be removed, either with or without cause, by the committee or superior officer (including successors) who made the appointment, or by any committee or officer upon whom such power of removal may be conferred by the board of directors.

 

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§3.5 Resignations . Any officer may resign at any time by giving written notice to the board of directors, the chairman, the president, or the secretary. Any such resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

§3.6 Vacancies . A vacancy in any office because of death, resignation, removal, disqualification, or otherwise shall be filled in the manner prescribed for regular appointments or elections to such office.

§3.7 Powers, Authority, and Duties of Officers . Officers of the Company shall have the powers and authority conferred and the duties prescribed by law, in addition to those specified or provided for in these regulations and such other powers, authority, and duties as may be determined by the board of directors from time to time.

ARTICLE 4

Shares and Their Transfer

§4.1 Certificates for Shares . Every owner of one or more shares in the Company shall be entitled to a certificate or certificates, which shall be in such form as may be approved by the board of directors, certifying the number and class of shares in the Company owned by him. The certificates for the respective classes of such shares shall be numbered in the order in which they are issued and shall be signed in the name of the Company by the chairman or the president and the secretary; provided that, if such certificates are countersigned by a transfer agent or registrar, the signatures of such officers upon such certificates may be facsimiles, stamped, or printed. If an officer who has signed or whose facsimile signature has been used, stamped, or printed on any certificates ceases to be such officer because of death, resignation or other reason before such certificates are delivered by the Company, such certificates shall nevertheless be conclusively deemed to be valid if countersigned by any such transfer agent or registrar. A record shall be kept of the name of the owner or owners of the shares represented by each such certificate and the number of shares represented thereby, the date thereof, and in case of cancellation, the date of cancellation. Every certificate surrendered to the Company for exchange or transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificates until such existing certificates shall have been so cancelled, except in cases provided for in §4.4.

§4.2 Transfer of Shares . Any certificate for shares of the Company shall be transferable in person or by attorney upon the surrender of the certificate to the Company or any transfer agent for the Company (for the class of shares represented by the certificate surrendered) properly endorsed for transfer and accompanied by such assurances as the Company or its transfer agent may require as to the genuineness and effectiveness of each necessary endorsement. The person in whose name any shares stand on the books of the Company shall, to the full extent permitted by

 

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law, be conclusively deemed to be the unqualified owner and holder of the shares and entitled to exercise all rights of ownership for all purposes relating to the Company. Neither the Company nor any transfer agent of the Company shall be required to recognize any equitable interest in, or any claim to, any such shares on the part of any other person, whether disclosed on the certificate or any other way, nor shall they be required to see to the performance of any trust or other obligation.

§4.3 Regulations . The board of directors may make such rules and regulations as it may deem expedient or advisable, not inconsistent with these regulations, concerning the issue, transfer, and registration of certificates for shares. It may appoint one or more transfer agents or one or more registrars, or both, and may require all certificates for shares to bear the signature of either or both.

§4.4 Lost, Destroyed or Stolen Certificates . A new share certificate or certificates may be issued in place of any certificate theretofore issued by the Company which is alleged to have been lost, destroyed, or wrongfully taken upon: (a) the execution and delivery to the Company by the person claiming the certificate to have been lost, destroyed, or wrongfully taken of an affidavit of that fact in form satisfactory to the Company, specifying whether or not the certificate was endorsed at the time of such alleged loss, destruction or taking, and (b) the receipt by the Company of a surety bond, indemnity agreement, or any other assurances satisfactory to the Company and to all transfer agents and registrars of the class of shares represented by the certificate against any and all losses, damages, costs, expenses, liabilities or claims to which they or any of them may be subjected by reason of the issue and delivery of such new certificate or certificates or with respect to the original certificate.

ARTICLE 5

Examination of Books by Shareholders

The board of directors may make reasonable rules and regulations prescribing under what conditions the books, records, accounts, and documents of the Company, or any of them, shall be open to the inspection of the shareholders. No shareholder shall be denied any right which is conferred by §1701.37, Ohio Revised Code, or any other applicable law to inspect any book, record, account, or document of the Company. An original or duplicate stock ledger showing the names and addresses of the shareholders and the number and class of shares issued or transferred of record to or by them from time to time shall at all times during the usual hours for business be open to the examination of every shareholder at the principal office or place of business of the Company in the State of Ohio.

ARTICLE 6

Indemnification and Insurance

§6.1 Costs Incurred . The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or

 

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proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he or she is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding provided that: (a) he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company; (b) with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful; and (c) in any action or suit by or in the right of the Company, no indemnification shall be made with respect to any amounts paid in settlement or with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company unless and only to the extent that the Court of Common Pleas or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such other court shall deem proper. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, that he or she had reasonable cause to believe that his or her conduct was unlawful.

§6.2 Indemnification Procedure . Any indemnification under §6.1 shall be made by the Company only if and as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in §6.1. Such determination shall be made by one of the following methods: (a) by a majority vote of a quorum consisting of directors of the Company who were not and are not parties to or threatened with any such action, suit, or proceeding; or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel retained by the Company, other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Company or any person to be indemnified within the past five years; or (c) by the shareholders; or (d) by the Court of Common Pleas of Franklin County, Ohio, or the court in which such action, suit, or proceeding was brought.

§6.3 Advance Payment of Costs . Expenses, including attorneys’ fees, incurred in defending any action, suit, or proceeding referred to in §6.1 may be paid by the Company in advance of the final disposition of such action, suit, or proceeding as authorized by the directors in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount unless it shall ultimately be determined that he or she is entitled to be indemnified by the Company as authorized in this Article.

§6.4 Non-Exclusive . The indemnification authorized in this Article shall not be deemed exclusive of any other rights to which persons seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office.

 

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§6.5 Insurance . The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Company would have the power to indemnify him or her against such liability under this Article or under Chapter 1701, Ohio Revised Code.

§6.6 Survival . The indemnification authorized in this Article shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent.

§6.7 Successors . The indemnification authorized in this Article shall inure to the benefit of the heirs, executors, and administrators of any person entitled to indemnification under this Article.

ARTICLE 7

Seal

The board of directors may adopt and alter a corporate seal and use the same or a facsimile thereof, but failure to affix the corporate seal, if any, shall not affect the validity of any instrument.

 

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ARTICLE 8

Fiscal Year

The fiscal year of the Company shall be fixed and may be changed from time to time by the board of directors.

ARTICLE 9

Control Share Acquisitions

Section 1701.831, Ohio Revised Code, shall not apply to control share acquisitions of shares of the Company.

ARTICLE 10

Amendment of Regulations

These regulations may be amended or new regulations may be adopted: (a) at any meeting of the shareholders held for such purpose by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal; or (b) without a meeting of the shareholders, by the written consent of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal.

 

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Exhibit 10.1

Cardinal Health, Inc.

2005 Long-Term Incentive Plan,

(As Amended and Restated as of November 5, 2008)

 

1. Purpose of the Plan.

The purpose of this Plan is to encourage ownership in the Company by key personnel whose long-term employment is considered essential to the Company’s continued progress and, thereby, encourage such personnel to act in the shareholders’ interest and share in the Company’s success. The Plan also is intended to assist the Company in the recruitment of new employees.

 

2. Definitions.

As used herein, the following definitions shall apply:

 

  (a) Administrator ” means the Board, any Committee or such delegates as shall be administering the Plan in accordance with Section 4 of the Plan.

 

  (b) Affiliate ” means any Subsidiary or other entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant ownership interest as determined by the Administrator.

 

  (c) Applicable Law ” means the requirements relating to the administration of stock option plans under U.S. federal and state laws, any stock exchange or quotation system on which the Company has listed or submitted for quotation the Common Shares to the extent provided under the terms of the Company’s agreement with such exchange or quotation system and, with respect to Awards subject to the laws of any foreign jurisdiction where Awards are, or will be, granted under the Plan, the laws of such jurisdiction.

 

  (d) Award ” means a Cash Award, Stock Award, Option, Stock Appreciation Right or Other Stock-Based Award granted in accordance with the terms of the Plan.

 

  (e) Awardee ” means an Employee who has been granted an Award under the Plan.

 

  (f) Award Agreement ” means a Cash Award Agreement, Stock Award Agreement, Option Agreement, Stock Appreciation Right Agreement and/or Other Stock-Based Award Agreement, which may be in written or electronic format, in such form and with such terms as may be specified by the Administrator, evidencing the terms and conditions of an individual Award. Each Award Agreement is subject to the terms and conditions of the Plan.

 

  (g) Board ” means the Board of Directors of the Company.

 

  (h) Cash Award ” means a bonus opportunity awarded under Section 13 of the Plan pursuant to which a Participant may become entitled to receive an amount based on the satisfaction of such performance criteria as are specified in the agreement or, if no agreement is entered into with respect to the Cash Award, other documents evidencing the Award (the “Cash Award Agreement”).


  (i) Change of Control ” means any of the following:

 

  (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of either (x) the then outstanding Common Shares of the Company (the “Outstanding Company Common Shares”), or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company or any corporation controlled by the Company; (B) any acquisition by the Company or any corporation controlled by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation that is a Non-Control Acquisition (as defined in subsection (iii) of this Section 2(i)); or

 

  (ii) individuals who, as of the effective date of this Plan, constitute the Board of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of the Company; provided, however, that any individual becoming a Director subsequent to the effective date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

 

  (iii)

consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition by the Company of assets or shares of another corporation (a “Business Combination”), unless, such Business Combination is a Non-Control Acquisition. A “Non-Control Acquisition” shall mean a Business Combination where: (x) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the

 

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then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Shares and Outstanding Company Voting Securities, as the case may be; (y) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty-five percent (25%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination (including any ownership that existed in the Company or the company being acquired, if any); and (z) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

 

  (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

 

  (j) Code ” means the United States Internal Revenue Code of 1986, as amended.

 

  (k) Committee ” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan or the Human Resources and Compensation Committee of the Board.

 

  (l) Common Shares ” means the common shares, without par value, of the Company.

 

  (m) Company ” means Cardinal Health, Inc., an Ohio corporation, or, except as utilized in the definition of Change of Control, its successor.

 

  (n) Conversion Award ” has the meaning set forth in Section 4(b)(xii) of the Plan.

 

  (o) Director ” means a member of the Board.

 

  (p) Disability ,” unless the Administrator determines otherwise, has the meaning specified in the Company’s long-term disability plan applicable to the Participant at the time of the disability.

 

  (q) Disaffiliation ” means a Subsidiary’s or Affiliate’s ceasing to be a Subsidiary or Affiliate for any reason (including, without limitation, as a result of a public offering, or a spinoff or sale by the Company, of the stock of the Subsidiary or Affiliate) or a sale of a division of the Company and its Affiliates.

 

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  (r) Employee ” means a regular, active employee of the Company or any Affiliate, or a person who has agreed to commence serving as an employee of the Company or any Affiliate within 90 days of the Grant Date, including an Officer and/or Director who is also a regular, active employee of the Company or any Affiliate. The Administrator shall determine whether the Chairman of the Board qualifies as an “Employee.” For any and all purposes under the Plan, the term “Employee” shall not include a person hired as an independent contractor, leased employee, consultant or a person otherwise designated by the Administrator, the Company or an Affiliate at the time of hire as not eligible to participate in or receive benefits under the Plan or not on the payroll, even if such ineligible person is subsequently determined to be a common law employee of the Company or an Affiliate or otherwise an employee by any governmental or judicial authority. Unless otherwise determined by the Administrator in its sole discretion, for purposes of the Plan, an Employee shall be considered to have terminated employment and to have ceased to be an Employee if his or her employer ceases to be an Affiliate, even if he or she continues to be employed by such employer.

 

  (s) Exchange Act ” means the United States Securities Exchange Act of 1934, as amended.

 

  (t) Grant Date ” means, with respect to each Award, the date upon which an Award that is granted to an Awardee pursuant to this Plan becomes effective, which shall not be earlier than the date of action by the Administrator.

 

  (u) Incentive Stock Option ” means an Option that is identified in the Option Agreement as intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder, and that actually does so qualify.

 

  (v) Fair Market Value ” means the fair market value of the Common Shares as determined by the Administrator from time to time. Unless otherwise determined by the Administrator, the fair market value shall be the closing price for the Common Shares reported on a consolidated basis on the New York Stock Exchange on the relevant date or, if there were no sales on such date, the closing price on the nearest preceding date on which sales occurred.

 

  (w) Nonqualified Stock Option ” means an Option that is not an Incentive Stock Option.

 

  (x) Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

 

  (y)

Option ” means a right granted under Section 8 of the Plan to purchase a number of Shares or Stock Units at such exercise price, at such times, and on such other

 

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terms and conditions as are specified in the agreement or other documents evidencing the Award (the “Option Agreement”). Both Incentive Stock Options and Nonqualified Stock Options may be granted under the Plan.

 

  (z) Other Stock-Based Award ” means an Award granted pursuant to Section 12 of the Plan on such terms and conditions as are specified in the agreement or other documents evidencing the Award (the “Other Stock-Based Award Agreement”).

 

  (aa) Participant ” means the Awardee or any person (including any estate) to whom an Award has been assigned or transferred as permitted hereunder.

 

  (bb) Plan ” means this 2005 Long-Term Incentive Plan.

 

  (cc) Qualifying Performance Criteria ” shall have the meaning set forth in Section 14(b) of the Plan.

 

  (dd) Retirement ” means, unless the Administrator determines otherwise, Termination of Employment (other than by death or Disability and other than in the event of Termination for Cause) by a Participant from the Company and its Affiliates after attaining age 55 and having at least 10 years of continuous service with the Company and its Affiliates, including service with an Affiliate of the Company prior to the time that such Affiliate became an Affiliate of the Company.

 

  (ee) Securities Act ” means the United States Securities Act of 1933, as amended.

 

  (ff) Share ” means a Common Share, as adjusted in accordance with Section 16 of the Plan.

 

  (gg) Stock Appreciation Right ” means a right granted under Section 10 of the Plan on such terms and conditions as are specified in the agreement or other documents evidencing the Award (the “Stock Appreciation Right Agreement”).

 

  (hh) Stock Award ” means an award or issuance of Shares or Stock Units made under Section 11 of the Plan, the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to such conditions (including without limitation continued employment or performance conditions) and terms as are expressed in the agreement or other documents evidencing the Award (the “Stock Award Agreement”).

 

  (ii) Stock Unit ” means a bookkeeping entry representing an amount equivalent to the Fair Market Value of one Share, payable in cash, property or Shares. Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Administrator.

 

  (jj) Subsidiary ” means any company (other than the Company) in an unbroken chain of companies beginning with the Company, provided each company in the unbroken chain (other than the Company) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other companies in such chain.

 

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  (kk) Termination for Cause ” means, unless otherwise provided in an Award Agreement, Termination of Employment on account of any act of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any Affiliate, or the intentional and repeated violation of the written policies or procedures of the Company, provided that for an Employee who is party to an individual severance or employment agreement defining Cause, except as may be provided in such agreement, “Cause” shall have the meaning set forth in such agreement. For purposes of this Plan, a Participant’s Termination of Employment shall be deemed to be a Termination for Cause if, after the Participant’s employment has terminated, facts and circumstances are discovered that would have justified, in the opinion of the Committee, a Termination for Cause.

 

  (ll) Termination of Employment ” means ceasing to be an Employee; provided, however, that, unless otherwise determined by the Administrator, for purposes of this Plan, a Participant will not be deemed to have had a Termination of Employment if such Participant continues to be or becomes a Director or becomes an independent contractor, leased employee or consultant to the Company. Notwithstanding the foregoing, for Incentive Stock Option purposes, Termination of Employment will occur when the Awardee ceases to be an employee (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or one of its Subsidiaries.

 

3. Stock Subject to the Plan.

(a) Aggregate Limit . Subject to the provisions of Section 16(a) of the Plan, the maximum aggregate number of Shares which may be subject to Awards granted under the Plan is 29,000,000 Shares. The 29,000,000 maximum number of Shares described in the preceding sentence consists of 18,000,000 Shares that were approved in 2005 and 11,000,000 Shares that are being added as of this Amendment and Restatement. The aggregate number of Shares subject to Awards granted under this Plan shall not be reduced by Shares subject to Awards granted upon the assumption of, or in substitution for, awards granted by a business or entity that is acquired by, or whose assets are acquired by, the Company. The Shares issued pursuant to the Plan may be either Shares reacquired by the Company, including Shares purchased in the open market, or authorized but unissued Shares.

(b) Code Section 162(m) and 422 Limits . Subject to the provisions of Section 16(a) of the Plan, the aggregate number of Shares subject to Awards granted under this Plan during any fiscal year to any one Awardee shall not exceed 1,000,000. The aggregate maximum value as of the Grant Date of Cash Awards granted under this Plan during any fiscal year to any one Awardee on or after the date of this Amendment and Restatement becomes effective shall not exceed U.S. $7,500,000. Subject to the provisions of Section 16(a) of the Plan, the aggregate number of Shares that may be subject to all Incentive Stock Options granted under the Plan is 4,500,000 Shares. Notwithstanding anything to the contrary in the Plan, the limitations set forth

 

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in this Section 3(b) shall be subject to adjustment under Section 16(a) of the Plan only to the extent that such adjustment will not affect the status of any Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code.

(c) Stock Awards and Other Stock-Based Awards Limit . Subject to the provisions of Section 16(a) of the Plan, the aggregate number of Shares that may be granted subject to Stock Awards and Other Stock-Based Awards made under the Plan is 11,000,000 Shares.

(d) Share Counting Rules .

i. For purposes of this Section 3 of the Plan, the aggregate number of Shares subject to Awards granted under the Plan at any time shall not be reduced by Shares subject to Awards that have been canceled, expired, forfeited or settled in cash.

ii. The following Shares shall not become available for Awards under this Plan: (A) Shares subject to Awards that have been retained by the Company in payment or satisfaction of the purchase price of an Award or the tax withholding obligation of an Awardee; (B) Shares that have been delivered (either actually or constructively by attestation) to the Company in payment or satisfaction of the purchase price of an Award or the tax withholding obligation of an Awardee; or (C) Shares reserved for issuance upon a grant of Stock Appreciation Rights which are exercised and settled in Shares, to the extent the number of reserved Shares exceeds the number of Shares actually issued upon the exercise of the Stock Appreciation Rights.

 

4. Administration of the Plan.

(a) Procedure .

i. Multiple Administrative Bodies . The Plan shall be administered by the Board, a Committee designated by the Board to so administer this Plan and/or their respective delegates.

ii. Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, Awards to “covered employees” within the meaning of Section 162(m) of the Code or to Employees that the Committee determines may be “covered employees” in the future shall be made by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code. Notwithstanding any other provision of the Plan, the Administrator shall not have any discretion or authority to make changes to any Award that is intended to qualify as “performance-based compensation” to the extent that the existence of such discretion or authority would cause such Award not to so qualify.

iii. Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange Act (“Rule 16b-3”), Awards to Officers and Directors shall be made by the entire Board or a Committee of two or more “non-employee directors” within the meaning of Rule 16b-3.

 

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iv. Other Administration . Except to the extent prohibited by Applicable Law, the Board or a Committee may delegate to a Committee of one or more Directors or to authorized officers of the Company the power to approve Awards to persons eligible to receive Awards under the Plan who are not (A) subject to Section 16 of the Exchange Act or (B) at the time of such approval, “covered employees” under Section 162(m) of the Code.

v. Delegation of Authority for the Day-to-Day Administration of the Plan . Except to the extent prohibited by Applicable Law, the Administrator may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan. Such delegation may be revoked at any time.

(b) Powers of the Administrator . Subject to the provisions of the Plan and, in the case of a Committee or delegates acting as the Administrator, subject to the specific duties delegated to such Committee or delegates, the Administrator shall have the authority, in its discretion:

i. to select the Employees of the Company or its Affiliates to whom Awards are to be granted hereunder;

ii. to determine the number of Common Shares to be covered by each Award granted hereunder;

iii. to determine the type of Award to be granted to the selected Employees;

iv. to approve forms of Award Agreements;

v. to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions may include, but are not limited to, the exercise and/or purchase price, the time or times when an Award may be exercised (which may or may not be based on performance criteria), the vesting schedule, any vesting and/or exercisability provisions, terms regarding acceleration of Awards or waiver of forfeiture restrictions, the acceptable forms of consideration for payment for an Award, the term, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine and may be established at the time an Award is granted or thereafter;

vi. to correct administrative errors;

vii. to construe and interpret the terms of the Plan (including sub-plans and Plan addenda) and Awards granted pursuant to the Plan;

viii. to adopt rules and procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures. Without limiting the generality of the foregoing, the Administrator is specifically authorized (A) to adopt the rules and procedures regarding the conversion of local currency, the shift of tax liability from employer to employee (where legally permitted)

 

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and withholding procedures and handling of stock certificates which vary with local requirements, and (B) to adopt sub-plans and Plan addenda as the Administrator deems desirable, to accommodate foreign laws, regulations and practice;

ix. to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans and Plan addenda;

x. to modify or amend each Award, including, but not limited to, the acceleration of vesting and/or exercisability, provided, however, that any such modification or amendment (A) is subject to the minimum vesting provisions set forth in Sections 8(e), 11(a) and 12(a) of the Plan and the plan amendment provisions set forth in Section 17 of the Plan, and (B) may not impair any outstanding Award unless agreed to in writing by the Participant, except that such agreement shall not be required if the Administrator determines in its sole discretion that such modification or amendment either (Y) is required or advisable in order for the Company, the Plan or the Award to satisfy any Applicable Law or to meet the requirements of any accounting standard, or (Z) is not reasonably likely to significantly diminish the benefits provided under such Award, or that adequate compensation has been provided for any such diminishment;

xi. to allow or require Participants to satisfy withholding tax amounts by electing to have the Company withhold from the Shares to be issued upon exercise of a Nonqualified Stock Option or vesting of a Stock Award that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined in such manner and on such date that the Administrator shall determine or, in the absence of provision otherwise, on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may provide;

xii. to authorize conversion or substitution under the Plan of any or all stock options, stock appreciation rights or other stock awards held by awardees of an entity acquired by the Company (the “Conversion Awards”). Any conversion or substitution shall be effective as of the close of the merger or acquisition. The Conversion Awards may be Nonqualified Stock Options or Incentive Stock Options, as determined by the Administrator, with respect to options granted by the acquired entity;

xiii. to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

xiv. to impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or of other subsequent transfers by the Participant of any Shares issued as a result of or under an Award or upon the exercise of an Award, including without limitation, (A) restrictions under an insider trading policy, (B) restrictions as to the use of a specified brokerage firm for such resales or other transfers, and (C) institution of “blackout” periods on exercises of Awards;

 

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xv. to provide, either at the time an Award is granted or by subsequent action, that an Award shall contain as a term thereof, a right, either in tandem with the other rights under the Award or as an alternative thereto, of the Participant to receive, without payment to the Company, a number of Shares, cash or a combination thereof, the amount of which is determined by reference to the value of the Award; and

xvi. to make all other determinations deemed necessary or advisable for administering the Plan and any Award granted hereunder.

(c) Effect of Administrator’s Decision . All questions arising under the Plan or under any Award shall be decided by the Administrator in its total and absolute discretion. All decisions, determinations and interpretations by the Administrator regarding the Plan, any rules and regulations under the Plan and the terms and conditions of any Award granted hereunder, shall be final and binding on all Participants. The Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select.

 

5. Eligibility.

Awards may be granted only to Employees of the Company or any of its Affiliates. Awards may not be granted to a Director unless such Director otherwise qualifies as an Employee of the Company or one of its Affiliates.

 

6. Term of Plan.

The Plan shall become effective upon its approval by shareholders of the Company. It shall continue in effect for a term of ten (10) years from the date the Plan is approved by the shareholders of the Company unless terminated earlier under Section 17 of the Plan.

 

7. Term of Award.

Subject to the provisions of the Plan, the term of each Award shall be determined by the Administrator and stated in the Award Agreement. In the case of an Option or Stock Appreciation Right, the term shall be ten (10) years from the Grant Date or such shorter term as may be provided in the Award Agreement.

 

8. Options.

The Administrator may grant an Option or provide for the grant of an Option, either from time to time in the discretion of the Administrator or automatically upon the occurrence of specified events, including, without limitation, the achievement of performance goals, the satisfaction of an event or condition within the control of the Awardee or within the control of others.

(a) Option Agreement . Each Option Agreement shall contain provisions regarding (i) the number of Shares that may be issued upon exercise of the Option, (ii) the type of Option, (iii) the exercise price of the Option and the means of payment of such exercise price, (iv) the term of

 

10


the Option, (v) such terms and conditions on the vesting and/or exercisability of an Option as may be determined from time to time by the Administrator, (vi) restrictions on the transfer of the Option and forfeiture provisions, and (vii) such further terms and conditions, in each case not inconsistent with this Plan, as may be determined from time to time by the Administrator.

(b) Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, except that the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date. Notwithstanding the preceding sentence, at the Administrator’s discretion, Conversion Awards may be granted in substitution and/or conversion of options of an acquired entity, with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of such substitution and/or conversion.

(c) No Repricings . Except in connection with a corporate transaction or event described in Section 16(a) of this Plan, the terms of outstanding awards may not be amended to reduce the exercise price of outstanding Options or the base price of Stock Appreciation Rights, or cancel outstanding Options or Stock Appreciation Rights in exchange for cash, other awards or Options or Stock Appreciation Rights with an exercise price or base price, as applicable, that is less than the exercise price of the original Options or base price of the original Stock Appreciation Rights, as applicable, without shareholder approval.

(d) No Reload Grants . Options shall not be granted under the Plan in consideration for and shall not be conditioned upon the delivery of Shares to the Company in payment of the exercise price and/or tax withholding obligation under any other employee stock option.

(e) Vesting Period and Exercise Dates . Options granted under this Plan shall vest and/or be exercisable at such time and in such installments during the period prior to the expiration of the Option’s term as determined by the Administrator, except that no Option shall first become exercisable within one (1) year from its Grant Date, other than (i) upon a Change of Control as specified in Section 16(b) of the Plan or in connection with a Disafiliation, (ii) upon the death, Disability or Retirement of the Awardee, in each case as specified in the Option Agreement, or (iii) for up to 1,000,000 Shares subject to Options in the aggregate which shall have no minimum vesting period. The Administrator shall have the right to make the timing of the ability to exercise any Option granted under this Plan subject to continued active employment, the passage of time and/or such performance requirements as deemed appropriate by the Administrator. At any time after the grant of an Option, the Administrator may reduce or eliminate any restrictions surrounding any Participant’s right to exercise all or part of the Option, subject to restrictions set forth above.

(f) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment, either through the terms of the Option Agreement or at the time of exercise of an Option. Acceptable forms of consideration may include:

i. cash;

ii. check or wire transfer (denominated in U.S. Dollars);

 

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iii. subject to any conditions or limitations established by the Administrator, other Shares which (A) in the case of Shares acquired from the Company (whether upon the exercise of an Option or otherwise), have been owned by the Participant for more than six (6) months on the date of surrender (unless this condition is waived by the Administrator), and (B) have a Fair Market Value on the date of surrender equal to or greater than the aggregate exercise price of the Shares as to which said Option shall be exercised (it being agreed that the excess of the Fair Market Value over the aggregate exercise price shall be refunded to the Awardee in cash);

iv. subject to any conditions or limitations established by the Administrator, the Company’s withholding shares otherwise issuable upon exercise of an Option;

v. to the extent permitted by Applicable Law, consideration received by the Company under a broker-assisted sale and remittance program acceptable to the Administrator;

vi. such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Law; or

vii. any combination of the foregoing methods of payment.

(g) Procedure for Exercise; Rights as a Shareholder .

i. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the applicable Option Agreement.

ii. An Option shall be deemed exercised when the Company receives (A) written or electronic notice of exercise (in accordance with the Option Agreement or procedures established by the Administrator) from the person entitled to exercise the Option, (B) full payment for the Shares with respect to which the related Option is exercised, and (C) with respect to Nonqualified Stock Options, provisions acceptable to the Administrator have been made for payment of all applicable withholding taxes.

iii. Unless provided otherwise by the Administrator or pursuant to this Plan, until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option.

iv. The Company shall issue (or cause to be issued) such Shares as soon as administratively practicable after the Option is exercised. An Option may not be exercised for a fraction of a Share.

(h) Termination of Employment . The Administrator shall determine as of the Grant Date (subject to modification subsequent to the Grant Date) the effect a Termination of Employment due to (i) Disability, (ii) Retirement, (iii) death, or (iv) otherwise (including Termination for Cause) shall have on any Option.

 

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9. Incentive Stock Option Limitations/Terms.

(a) Eligibility . Only employees (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or any of its Subsidiaries may be granted Incentive Stock Options. No Incentive Stock Option shall be granted to any such employee who as of the Grant Date owns stock possessing more than 10% of the total combined voting power of the Company.

(b) $100,000 Limitation . Notwithstanding the designation “Incentive Stock Option” in an Option Agreement, if and to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Awardee during any calendar year (under all plans of the Company and any of its Subsidiaries) exceeds U.S. $100,000, such Options shall be treated as Nonqualified Stock Options. For purposes of this Section 9(b) of the Plan, Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the Grant Date.

(c) Transferability . The Option Agreement must provide that an Incentive Stock Option cannot be transferable by the Awardee otherwise than by will or the laws of descent and distribution, and, during the lifetime of such Awardee, must not be exercisable by any other person. If the terms of an Incentive Stock Option are amended to permit transferability, the Option will be treated for tax purposes as a Nonqualified Stock Option.

(d) Exercise Price . The per Share exercise price of an Incentive Stock Option shall in no event be inconsistent with the requirements for qualification of the Incentive Stock Option under Section 422 of the Code.

(e) Other Terms . Option Agreements evidencing Incentive Stock Options shall contain such other terms and conditions as may be necessary to qualify, to the extent determined desirable by the Administrator, with the applicable provisions of Section 422 of the Code.

 

10. Stock Appreciation Rights.

A “Stock Appreciation Right” is a right that entitles the Awardee to receive, in cash or Shares (as determined by the Administrator), value equal to or otherwise based on the excess of (i) the Fair Market Value of a specified number of Shares at the time of exercise over (ii) the aggregate exercise price of the right, as established by the Administrator on the Grant Date. Stock Appreciation Rights may be granted to Awardees either alone (“freestanding”) or in addition to or in tandem with other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 8 of the Plan. Any Stock Appreciation Right granted in tandem with an Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. All Stock Appreciation Rights under the Plan shall be granted subject to the same terms and conditions applicable to Options as set forth in Sections 7 and 8 of the Plan, including without limitation the prohibition on repricing in Section 8(c); provided, however, that Stock Appreciation Rights granted in tandem with a previously granted Option shall have the terms and conditions of such Option. Subject to the provisions of Sections 7 and 8 of the Plan, the Administrator may impose such other conditions or restrictions on any Stock Appreciation Right as it shall deem appropriate. Stock Appreciation Rights may be settled in Shares or cash as determined by the Administrator.

 

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11. Stock Awards.

(a) Stock Award Agreement . Each Stock Award Agreement shall contain provisions regarding (i) the number of Shares subject to such Stock Award or a formula for determining such number, (ii) the purchase price of the Shares, if any, and the means of payment for the Shares, (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of Shares granted, issued, retainable and/or vested, (iv) such terms and conditions on the grant, issuance, vesting and/or forfeiture of the Shares as may be determined from time to time by the Administrator, (v) restrictions on the transferability of the Stock Award, and (vi) such further terms and conditions in each case not inconsistent with this Plan as may be determined from time to time by the Administrator. No condition that is based upon performance criteria and level of achievement versus such criteria shall be based on performance over a period of less than one (1) year and no condition that is based upon continued employment or the passage of time shall provide for vesting in full of a Stock Award in less than pro rata installments over three (3) years from the date the Stock Award is made, other than (i) with respect to such Stock Awards that are issued upon the exercise or settlement of Options or Stock Appreciation Rights, (ii) upon a Change of Control as specified in Section 16(b) of the Plan or in connection with a Disaffiliation , (iii) upon the death, Disability or Retirement of the Awardee, in each case as specified in the Stock Award Agreement, or (iv) for up to 1,100,000 Shares subject to Stock Awards and Other Stock-Based Awards in the aggregate which shall have no minimum vesting period.

(b) Restrictions and Performance Criteria . The grant, issuance, retention and/or vesting of each Stock Award may be subject to such performance criteria and level of achievement versus these criteria as the Administrator shall determine, which criteria may be based on financial performance, personal performance evaluations and/or completion of service by the Awardee. Notwithstanding anything to the contrary herein, the performance criteria for any Stock Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing not later than ninety (90) days after the commencement of the period of service (or, if earlier, the elapse of 25% of such period) to which the performance goals relate, provided that the outcome is substantially uncertain at that time.

(c) Termination of Employment . The Administrator shall determine as of the Grant Date (subject to modification subsequent to the Grant Date) the effect a Termination of Employment due to (i) Disability, (ii) Retirement, (iii) death, or (iv) otherwise (including Termination for Cause) shall have on any Stock Award.

(d) Rights as a Shareholder . Unless otherwise provided for by the Administrator, the Participant shall have the rights equivalent to those of a shareholder and shall be a shareholder only after Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) to the Participant.

 

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12. Other Stock-Based Awards.

(a) Other Stock-Based Awards . An “Other Stock-Based Award” means any other type of equity-based or equity-related Award not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted Shares) in such amount and subject to such terms and conditions as the Administrator shall determine. Such Awards may involve the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of Shares. Each Other Stock-Based Award will be evidenced by an Award Agreement containing such terms and conditions as may be determined by the Administrator. No condition that is based upon performance criteria and level of achievement versus such criteria shall be based on performance over a period of less than one (1) year and no condition that is based upon continued employment or the passage of time shall provide for vesting in full of an Other Stock-Based Award in less than pro rata installments over three (3) years from the date the Other Stock-Based Award is made, other than (i) with respect to such Other Stock-Based Awards that are issued upon the exercise or settlement of Options or Stock Appreciation Rights, (ii) upon a Change of Control as specified in Section 16(b) of the Plan or in connection with a Disaffiliation, (iii) upon the death, Disability or Retirement of the Awardee, in each case as specified in the Other Stock-Based Award Agreement, or (iv) for up to 1,100,000 Shares subject to Stock Awards and Other Stock-Based Awards in the aggregate which shall have no minimum vesting period.

(b) Value of Other Stock-Based Awards . Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as determined by the Administrator. The Administrator may establish performance goals in its discretion. If the Administrator exercises its discretion to establish performance goals, the number and/or value of Other Stock-Based Awards that will be paid out to the Participant will depend on the extent to which the performance goals are met. Notwithstanding anything to the contrary herein, the performance criteria for any Other Stock-Based Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing not later than ninety (90) days after the commencement of the period of service (or, if earlier, the elapse of 25% of such period) to which the performance goals relate and otherwise within the time period required by the Code and the applicable Treasury Regulations, provided that the outcome is substantially uncertain at that time.

(c) Payment of Other Stock-Based Awards . Payment, if any, with respect to Other Stock-Based Awards shall be made in accordance with the terms of the Award, in cash or Shares as the Administrator determines.

(d) Termination of Employment . The Administrator shall determine as of the Grant Date (subject to modification subsequent to the Grant Date) the effect a Termination of Employment due to (i) Disability, (ii) Retirement, (iii) death, or (iv) otherwise (including Termination for Cause) shall have on any Other Stock-Based Award.

 

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13. Cash Awards.

Each Cash Award will confer upon the Participant the opportunity to earn a future payment tied to the level of achievement with respect to one or more performance criteria established for a performance period.

(a) Cash Award . Each Cash Award may contain provisions regarding (i) the amounts potentially payable to the Participant as a Cash Award, (ii) the performance criteria and level of achievement versus these criteria which shall determine the amount of such payment, (iii) the period as to which performance shall be measured for establishing the amount of any payment, (iv) the timing of any payment earned by virtue of performance, (v) restrictions on the alienation or transfer of the Cash Award prior to actual payment, (vi) forfeiture provisions, and (vii) such further terms and conditions, in each case not inconsistent with the Plan, as may be determined from time to time by the Administrator. The maximum amount payable as a Cash Award that is settled for cash may be a multiple of the target amount payable, but the maximum amount payable pursuant to portions of Cash Awards earned with respect to any fiscal year to any Awardee shall not exceed U.S. $7,500,000, provided, however, that this sentence shall not apply to any such Cash Award granted on or after the date this Amendment and Restatement becomes effective, and the limitation on Cash Awards specified in Section 3(b) hereof shall apply instead.

(b) Performance Criteria . The Administrator shall establish the performance criteria and level of achievement versus these criteria which shall determine the amounts payable under a Cash Award, which criteria may be based on financial performance and/or personal performance evaluations. The Administrator may specify the percentage of the target Cash Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code. Notwithstanding anything to the contrary herein, the performance criteria for any portion of a Cash Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be a measure established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing not later than ninety (90) days after the commencement of the period of service (or, if earlier, the elapse of 25% of such period) to which the performance goals relates, provided that the outcome is substantially uncertain at that time.

(c) Timing and Form of Payment . The Administrator shall determine the timing of payment of any Cash Award. The Administrator may provide for or, subject to such terms and conditions as the Administrator may specify, may permit an Awardee to elect for the payment of any Cash Award to be deferred to a specified date or event. The Administrator may specify the form of payment of Cash Awards, which may be cash or other property, or may provide for an Awardee to have the option for his or her Cash Award, or such portion thereof as the Administrator may specify, to be paid in whole or in part in cash or other property. To the extent that a Cash Award is in the form of cash, the Administrator may determine whether a payment is in U.S. dollars or foreign currency.

(d) Termination of Employment . The Administrator shall determine as of the Grant Date (subject to modification subsequent to the Grant Date) the effect a Termination of Employment due to (i) Disability, (ii) Retirement, (iii) death, or (iv) otherwise (including Termination for Cause) shall have on any Cash Award.

 

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14. Other Provisions Applicable to Awards.

(a) Non-Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by beneficiary designation, will or by the laws of descent or distribution. The Administrator may make an Award transferable to an Awardee’s family member or any other person or entity. If the Administrator makes an Award transferable, either as of the Grant Date or thereafter, such Award shall contain such additional terms and conditions as the Administrator deems appropriate, and any transferee shall be deemed to be bound by such terms upon acceptance of such transfer. In no event may Awards be transferred in exchange for consideration.

(b) Qualifying Performance Criteria . For purposes of this Plan, the term “Qualifying Performance Criteria” shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit, Affiliate or business segment, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee in the Award: (i) cash flow; (ii) earnings (including gross margin, earnings before interest and taxes, earnings before taxes, and net earnings); (iii) earnings per share; (iv) growth in earnings or earnings per share; (v) stock price; (vi) return on equity or average shareholders’ equity; (vii) total shareholder return; (viii) return on capital; (ix) return on assets or net assets; (x) return on investment; (xi) revenue; (xii) income or net income; (xiii) operating income or net operating income; (xiv) operating profit or net operating profit (whether before or after taxes); (xv) economic profit or profit margin; (xvi) operating margin; (xvii) return on operating revenue; (xviii) return on tangible capital; (xix) market share; (xx) contract awards or backlog; (xxi) overhead or other expense reduction; (xxii) growth in shareholder value relative to the moving average of the S&P 500 Index or a peer group index; (xxiii) credit rating; (xxiv) strategic plan development and implementation; (xxv) improvement in workforce diversity; (xxvi) customer satisfaction; (xxvii) employee satisfaction; (xxviii) management succession plan development and implementation; and (xxix) employee retention. With respect to any Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, the performance criteria must be Qualifying Performance Criteria, and the Administrator will (within the first quarter of the performance period, but in no event more than ninety (90) days into that period) establish the specific performance targets (including thresholds and whether to exclude certain extraordinary, non-recurring, or similar items) and award amounts (subject to the right of the administrator to exercise discretion to reduce payment amounts following the conclusion of the performance period).

(c) Certification . Prior to the payment of any compensation under an Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee shall certify in writing the extent to which any Qualifying Performance Criteria and any other material terms under such Award have been satisfied (other than in cases where such criteria relate solely to the increase in the value of the Common Shares).

 

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(d) Discretionary Adjustments Pursuant to Section 162(m) . Notwithstanding satisfaction of any completion of any Qualifying Performance Criteria, to the extent specified as of the Grant Date, the number of Shares, Options or other benefits granted, issued, retainable and/or vested under an Award on account of satisfaction of such Qualifying Performance Criteria may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine.

 

15. Dividends and Dividend Equivalents.

To the extent permitted by Section 409A of the Code, any Award other than an Option or Stock Appreciation Right may provide the Awardee with the right to receive dividend payments or dividend equivalent payments on the Shares subject the Award, whether or not such Award has been exercised or is vested. Such payments may be made in cash or may be credited as cash or Stock Units to an Awardee’s account and later settled in cash or Shares or a combination thereof, as determined by the Administrator. Such payments and credits may be subject to such conditions and contingencies as the Administrator may establish.

 

16. Adjustments upon Changes in Capitalization, Organic Change or Change of Control.

(a) Adjustment Clause . In the event of (i) a stock dividend, stock split, reverse stock split, share combination, or recapitalization or similar event affecting the capital structure of the Company (each, a “Share Change”), or (ii) a merger, consolidation, acquisition of property or shares, separation, spinoff, reorganization, stock rights offering, liquidation, Disaffiliation, or similar event affecting the Company or any of its Subsidiaries (each, a “Organic Change”), the Administrator or the Board may in its discretion, and for any Award granted after this Amendment and Restatement becomes effective shall, make such substitutions or adjustments as it deems appropriate and equitable to (i) the Share limitations set forth in Sections 3, 11(a) and 12(a) of the Plan, (ii) the number and kind of Shares covered by each outstanding Award, and (iii) the price per Share subject to each such outstanding Award. Such adjustments may include, without limitation, (x) the cancellation of outstanding Awards in exchange for payments of cash, property or a combination thereof having an aggregate value equal to the value of such Awards, as determined by the Administrator or the Board in its sole discretion (it being understood that in the case of an Organic Change with respect to which shareholders receive consideration other than publicly traded equity securities of the ultimate surviving entity, any such determination by the Administrator that the value of an Option or Stock Appreciation Right shall for this purpose be deemed to equal the excess, if any, of the value of the consideration being paid for each Share pursuant to such Organic Change over the exercise price of such Option or Stock Appreciation Right shall conclusively be deemed valid); (y) the substitution of other property (including, without limitation, cash or other securities of the Company and securities of entities other than the Company) for the Shares subject to outstanding Awards; and (z) in connection with any Disaffiliation, arranging for the assumption of Awards, or replacement of Awards with new awards based on other property or other securities (including, without limitation, other securities of the Company and securities of entities other than the Company), by the affected Subsidiary, Affiliate, or division or by the entity that controls such Subsidiary, Affiliate, or division following such Disaffiliation (as well as any corresponding adjustments to Awards that remain based upon Company securities).

 

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(b) Change of Control . In the event of a Change of Control, unless otherwise determined by the Administrator as of the Grant Date of a particular Award (or subsequent to the Grant Date), the following acceleration, exercisability and valuation provisions shall apply:

i. On the date that such Change of Control occurs, any or all Options and Stock Appreciation Rights awarded under this Plan not previously exercisable and vested shall become fully exercisable and vested.

ii. Except as may be provided in an individual severance or employment agreement (or severance plan) to which an Awardee is a party, in the event of an Awardee’s Termination of Employment within two (2) years after a Change of Control for any reason other than because of the Awardee’s death, Retirement, Disability or Termination for Cause, each Option and Stock Appreciation Right held by the Awardee (or a transferee) that is vested following such Termination of Employment shall remain exercisable until the earlier of the third (3rd) anniversary of such Termination of Employment (or any later date until which it would remain exercisable by its terms) or the expiration of its original term. In the event of an Awardee’s Termination of Employment more than two (2) years after a Change of Control, or within two (2) years after a Change of Control because of the Awardee’s death, Retirement, Disability or Termination for Cause, the provisions of Sections 8(h) and 10 of the Plan shall govern (as applicable).

iii. On the date that such Change of Control occurs, the restrictions applicable to any or all Stock Awards, Other Stock-Based Awards and Cash Awards shall lapse and such Awards shall be fully vested.

(c) Section 409A . Notwithstanding the foregoing: (i) any adjustments made pursuant to Section 16(a) of the Plan to Awards that are considered “deferred compensation” within the meaning of Section 409A of the Code shall be made in compliance with the requirements of Section 409A of the Code; (ii) any adjustments made pursuant to Section 16(a) of the Plan to Awards that are not considered “deferred compensation” subject to Section 409A of the Code shall be made in such a manner as to ensure that after such adjustment, the Awards either continue not to be subject to Section 409A of the Code or comply with the requirements of Section 409A of the Code; (iii) the Administrator shall not have the authority to make any adjustments pursuant to Section 16(a) of the Plan to the extent that the existence of such authority would cause an Award that is not intended to be subject to Section 409A of the Code to be subject thereto; and (iv) if any Award is subject to Section 409A of the Code, Section 16(b) of the Plan shall be applicable only to the extent specifically provided in the Award Agreement and permitted pursuant to Section 25 of the Plan.

 

17. Amendment and Termination of the Plan.

(a) Amendment and Termination . The Administrator may amend, alter or discontinue the Plan or any Award Agreement, but any such amendment shall be subject to approval of the shareholders of the Company in the manner and to the extent required by Applicable Law. In addition, without limiting the foregoing, unless approved by the shareholders of the Company and subject to Section 16(a), no such amendment shall be made that would:

i. increase the maximum aggregate number of Shares which may be subject to Awards granted under the Plan;

 

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ii. reduce the minimum exercise price for Options or Stock Appreciation Rights granted under the Plan; or

iii. reduce the exercise price of outstanding Options or Stock Appreciation Rights.

(b) Effect of Amendment or Termination . No amendment, suspension or termination of the Plan shall impair the rights of any Participant with respect to an outstanding Award, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company, except that no such agreement shall be required if the Administrator determines in its sole discretion that such amendment either (i) is required or advisable in order for the Company, the Plan or the Award to satisfy any Applicable Law or to meet the requirements of any accounting standard, or (ii) is not reasonably likely to significantly diminish the benefits provided under such Award, or that any such diminishment has been adequately compensated, except following a Change of Control. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

(c) Effect of the Plan on Other Arrangements . Neither the adoption of the Plan by the Board or a Committee nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or any Committee to adopt such other incentive arrangements as it or they may deem desirable, including without limitation, the granting of restricted shares or restricted share units or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

 

18. Designation of Beneficiary.

(a) An Awardee may file a written designation of a beneficiary who is to receive the Awardee’s rights pursuant to Awardee’s Award or the Awardee may include his or her Awards in an omnibus beneficiary designation for all benefits under the Plan. To the extent that Awardee has completed a designation of beneficiary while employed with Company, such beneficiary designation shall remain in effect with respect to any Award hereunder until changed by the Awardee to the extent enforceable under Applicable Law.

(b) Such designation of beneficiary may be changed by the Awardee at any time by written notice. In the event of the death of an Awardee and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Awardee’s death, the Company shall allow the legal representative of the Awardee’s estate to exercise the Award.

 

19. No Right to Awards or to Employment.

No person shall have any claim or right to be granted an Award and the grant of any Award shall not be construed as giving an Awardee the right to continue in the employ of the

 

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Company or its Affiliates. Further, the Company and its Affiliates expressly reserve the right, at any time, to dismiss any Employee or Awardee at any time without liability or any claim under the Plan, except as provided herein or in any Award Agreement entered into hereunder.

 

20. Recoupment.

The Administrator may, in its discretion, also require repayment to the Company of all or any portion of an Award if the amount of the Award was calculated based upon the achievement of certain financial results that were subsequently the subject of a restatement of the Company’s financial statements, the Participant engaged in misconduct that caused or contributed to the need for the restatement of the financial statements, and the amount payable to the Participant would have been lower than the amount actually paid to the Participant had the financial results been properly reported. This Section 20 shall not be the Company’s exclusive remedy with respect to such matters. This Section 20 shall not apply after a Change of Control.

 

21. Fractional Shares.

The Company shall not be required to issue any fractional Shares pursuant to this Plan. The Administrator may provide for the elimination of fractions or for the settlement thereof in cash.

 

22. Legal Compliance.

Shares shall not be issued pursuant to an Option, Stock Appreciation Right, Stock Award or Other Stock-Based Award unless the such Option, Stock Appreciation Right, Stock Award or Other Stock-Based Award and the issuance and delivery of such Shares shall comply with Applicable Law and shall be further subject to the approval of counsel for the Company with respect to such compliance. Unless the Awards and Shares covered by this Plan have been registered under the Securities Act or the Company has determined that such registration is unnecessary, each person receiving an Award and/or Shares pursuant to any Award may be required by the Company to give a representation in writing that such person is acquiring such Shares for his or her own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof.

 

23. Inability to Obtain Authority.

To the extent the Company is unable to or the Administrator deems it infeasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be advisable or necessary to the lawful issuance and sale of any Shares hereunder, the Company shall be relieved of any liability with respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

 

24. Reservation of Shares.

The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

 

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25. Notice.

Any written notice to the Company required by any provisions of this Plan shall be addressed to the Secretary of the Company and shall be effective when received.

 

26. Governing Law; Interpretation of Plan and Awards.

(a) This Plan and all determinations made and actions taken pursuant hereto shall be governed by the substantive laws, but not the choice of law rules, of the state of Ohio, except as to matters governed by U.S. federal law.

(b) In the event that any provision of the Plan or any Award granted under the Plan is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of the terms of the Plan and/or Award shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision.

(c) The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of the Plan, nor shall they affect its meaning, construction or effect.

(d) The terms of the Plan and any Award shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns.

 

27. Section 409A.

(a) To the extent applicable, it is intended that this Plan and any grants made hereunder comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to the Participant. This Plan and any grants made hereunder shall be administered in a manner consistent with this intent. Any reference in this Plan to Section 409A of the Code will also include any regulations or any other formal guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

(b) Neither a Participant nor any of a Participant’s creditors or beneficiaries shall have the right to subject any deferred compensation (within the meaning of Section 409A of the Code) payable under this Plan and grants hereunder to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. Except as permitted under Section 409A of the Code, any deferred compensation (within the meaning of Section 409A of the Code) payable to a Participant or for a Participant’s benefit under this Plan and grants hereunder may not be reduced by, or offset against, any amount owing by a Participant to the Company or any of its affiliates.

(c) If, at the time of a Participant’s separation from service (within the meaning of Section 409A of the Code), (i) the Participant shall be a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (ii) the Company shall make a good faith determination that an amount

 

22


payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day of the seventh month after such six-month period, together with interest thereon from the date that such amount would have been paid absent such determination through the date of payment at the long-term applicable federal rate, determined under Section 1274(d) of the Code.

(d) Notwithstanding any provision of this Plan and grants hereunder to the contrary, in light of the uncertainty with respect to the proper application of Section 409A of the Code, the Company reserves the right to make amendments to this Plan and grants hereunder as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A of the Code. In any case, a Participant shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on a Participant or for a Participant’s account in connection with this Plan and grants hereunder (including any taxes and penalties under Section 409A of the Code), and neither the Company nor any of its affiliates shall have any obligation to indemnify or otherwise hold a Participant harmless from any or all of such taxes or penalties.

 

28. Limitation on Liability.

The Company and any Affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant, an Employee, an Awardee or any other persons as to:

(a) The Non-Issuance of Shares . The non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares hereunder; and

(b) Tax or Exchange Control Consequences . Any tax consequence expected, but not realized, or any exchange control obligation owed, by any Participant, Employee, Awardee or other person due to the receipt, exercise or settlement of any Option or other Award granted hereunder.

 

29. Unfunded Plan.

Insofar as it provides for Awards, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Awardees who are granted Stock Awards under this Plan, any such accounts will be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets which may at any time be represented by Awards, nor shall this Plan be construed as providing for such segregation, nor shall the Company nor the Administrator be deemed to be a trustee of stock or cash to be awarded under the Plan. Any liability of the Company to any Participant with respect to an Award shall be based solely upon any contractual obligations which may be created by the Plan; no such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Administrator shall be required to give any security or bond for the performance of any obligation which may be created by this Plan.

 

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30. Foreign Employees.

Awards may be granted hereunder to Employees who are foreign nationals, who are located outside the United States or who are not compensated from a payroll maintained in the United States, or who are otherwise subject to (or could cause the Company to be subject to) legal or regulatory provisions of countries or jurisdictions outside the United States, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Administrator, be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes, the Administrator may make such modifications, amendments, procedures, or subplans as may be necessary or advisable to comply with such legal or regulatory provisions.

 

31. Tax Withholding.

Each Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to any Award under the Plan no later than the date as of which any amount under such Award first becomes includible as compensation of the Participant for any tax purposes with respect to which the Company has a tax withholding obligation. Unless otherwise determined by the Administrator, withholding obligations may be settled with Shares, including Shares that are part of the Award that gives rise to the withholding requirement; provided, however, that not more than the legally required minimum withholding may be settled with Shares. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any vested Shares or any other payment due to the participant at that time or at any future time. The Administrator may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Shares.

 

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Exhibit 10.2

CARDINAL HEALTH, INC.

RESOLUTIONS OF THE HUMAN RESOURCES AND

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

ADOPTED ON SEPTEMBER 26, 2008

NOW, THEREFORE, BE IT RESOLVED that, effective immediately, the terms of all outstanding Options granted under the Cardinal Health, Inc. Amended and Restated Equity Incentive Plan, as amended (the “EIP”) and Cardinal Health, Inc. Broadly-based Equity Incentive Plan, as amended (the “BEIP”) (other than those Options or employment or severance arrangements that may provide for terms more beneficial to the grantee) shall be amended to provide that if (a) the separation of the Clinical and Medical Products businesses by means of a spin-off of those businesses to its shareholders (the “Spin-Off”) occurs, (b) the termination of employment of the grantee is a result of, and within fifteen (15) months after, the Spin-off, and (c) the grantee was classified as an executive-level employee in accordance with the Company’s human resources system at termination of employment or had at least ten years of continuous service with the Cardinal Health, Inc. (the “Company”) and its affiliates, including service with an affiliate of the Company prior to the time that such affiliate became an affiliate of the Company, then the vested Options shall remain exercisable until the earlier of the second (2 nd ) anniversary of such termination of employment (or any later date until which it would remain exercisable by its terms) or the expiration of its original term;

RESOLVED, further, that effective immediately, the terms of all outstanding Options granted under the Company’s 2005 Long-Term Incentive Plan, as amended (the “2005 LTIP”) (other than those Options or employment or severance arrangements that may provide for terms more beneficial to the Awardee) shall be amended to provide that if (a) the Spin-Off occurs, (b) an Awardee’s Termination of Employment (as defined in the 2005 LTIP) is a result of, and within fifteen (15) months after, the Spin-off, and (c) the Awardee was classified as an executive-level employee in accordance with the Company’s human resources system at Termination of Employment or had at least ten years of continuous service with the Company and its affiliates, including service with an affiliate of the Company prior to the time that such affiliate became an affiliate of the Company, each vested Option held by the Awardee shall remain exercisable until the earlier of the second (2 nd ) anniversary of such Termination of Employment (or any later date until which it would remain exercisable by its terms) or the expiration of its original term; and

RESOLVED, further, that the Option Agreements under the 2005 LTIP, the EIP or the BEIP shall be deemed to be amended to reflect the resolutions above.

Exhibit 10.4

Cardinal Health

Deferred Compensation Plan

Amended and Restated Effective as of January 1, 2009

First Amendment

Background Information

 

A. Cardinal Health, Inc. (“Cardinal Health”) established and maintains the Cardinal Health Deferred Compensation Plan (the “Plan”) for the benefit of participants and their beneficiaries.

 

B. The Financial Benefit Plans Committee (the “Committee”) oversees the administration of the Plan and is authorized to amend administrative provisions of the Plan in accordance with authority delegated by the Human Resources and Compensation Committee of the Board of Directors of Cardinal Health.

 

C. The Committee has authorized the amendment of the Plan to eliminate the date certain distribution option and to clarify certain other distribution and enrollment provisions to reflect the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), related to rehired employees, and to provide for accelerated vesting in connection with certain reductions in force, as previously implemented through the Company’s policies regarding severance benefits.

 

D. Section 7.1 of the Plan permits the amendment of the Plan at any time.

Amendment of the Plan

The Plan is hereby amended as follows, effective as of January 1, 2009:

1. Section 3.1 of the Plan is hereby amended by the addition of the following to the end thereof:

“If an Eligible Employee has ceased being eligible to participate in the Plan (other than the accrual of earnings on his Account, if any), regardless of whether all amounts deferred under the Plan have yet been paid, and subsequently becomes eligible to participate in the Plan again, the Eligible Employee may be treated as being initially eligible to participate in the Plan if he has not been eligible to participate in the Plan (other than the accrual of earnings on his Account, if any) at any time during the 24-month period ending on the date the employee again becomes an Eligible Employee under the Plan.”


2. Section 4.1 of the Plan is hereby amended by the addition of the following to the end thereof:

“A Participant who has completed one Year of Service but less than three Years of Service and is terminated from employment under the terms of a designated reduction in force, a divestiture or designated layoff, shall receive additional ratable vesting credit hereunder determined by multiplying the portion of his Account that is subject to the vesting provisions of this Section 4.1 by a fraction, the numerator of which is the Participant’s calendar months of service calculated from his or her date of hire and the denominator of which is 36, and by rounding the product up to the next whole percentage. A month of service shall be included in the calculation of additional vesting credit under this Section if the Participant has performed at least one hour of service during the calendar month. In no event shall a Participant be more than 100% vested in any amounts credited to his Account.”

3. Section 5.1 of the Plan is hereby amended to read as follows:

“5.1 Distribution Timing . A Participant shall receive payment of the amounts credited to his Account upon his Separation from Service due to Retirement, death, Total Disability or any other reason. The Participant will begin to receive the amount credited to his Account as of such date beginning on the first regular payment processing date to occur at least six months after the date of the Participant’s Separation from Service, whether due to Retirement, death, Total Disability, or any other reason. The regular payment processing dates shall be January 15 and July 15 of each calendar year. If payment is to be made in a lump sum, it shall occur on the first regular payment processing date as described above. If payment is to be made in annual installments, it shall commence on such first regular payment processing date with subsequent annual installments to occur on the same regular payment processing date each year thereafter until the Participant’s Account is distributed in full.”

4. Section 5.4 of the Plan is hereby amended by the addition of the following at the end thereof:

“Notwithstanding the foregoing, in no event shall Disability payments cease to a Participant if to do so would violate Code Section 409A.”

5. All other terms and provisions shall remain unchanged. A restated Plan document shall also be prepared incorporating the above amendments.

 

CARDINAL HEALTH, INC.
By:  

/s/    Carole Watkins

Title:  

CHRO

Date:  

11-5-08

 

2

Exhibit 10.6

CARDINAL HEALTH, INC.

AIRCRAFT TIME SHARING AGREEMENT

This Aircraft Time Sharing Agreement (“Agreement”) by and between Cardinal Health, Inc. (“Operator”), an Ohio corporation whose address is 7000 Cardinal Place, Dublin, Ohio 43017 and                      (“User”), whose address is 7000 Cardinal Place, Dublin, Ohio 43017 (collectively the “Parties”), is effective                      , 20      , and shall terminate on                      , 20      , unless terminated sooner by either party pursuant to Article I below.

WHEREAS, Operator has the right of possession of the aircraft (“Aircraft”), equipped with engines and components as described in the Leased Aircraft Subject to the Time Sharing Agreement attached hereto and made a part hereof, as Exhibit A;

WHEREAS, Operator employs a fully qualified flight crew to operate the Aircraft;

WHEREAS, Operator desires to provide to User, and User desires to have the use of said Aircraft with flight crew on a non-exclusive time sharing basis as defined in Section 91.501(c)(1) of the Federal Aviation Regulations (“FAR”);

WHEREAS, this Agreement sets forth the understanding of the Parties as to the terms under which Operator will provide User with the use, on a periodic basis, of the Aircraft as described in Exhibits A hereto, currently operated by Operator; and

WHEREAS, the use of the Aircraft will at all times be pursuant to and in full compliance with the requirements of Federal Aviation Regulations (“FAR”) 91.501(b)(6), 91.501(c)(I ), and 91.501(d);

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Parties agree as follows:

1. Termination.

Either party may terminate this Agreement for any reason upon written notice to the other, such termination to become effective thirty (30) days from the date of the notice; provided that this Agreement may be terminated on such shorter notice as may be required to comply with applicable laws, regulations, insurance requirements or in the event the insurance required hereunder is not in full force and effect.

2. Use of Aircraft.

(a) User may use the Aircraft from time to time, with the permission and approval


of Operator’s Flight Operations Department, for any and all lawful purposes allowed by FAR 91.501(b)(6) at such times as the Operator does not require the use of the Aircraft for the business purposes of Operator or an affiliate. User’s use may include the use of the Aircraft by his family members (including children or grandchildren) and guests if they accompany him on the flight.

(b) User represents, warrants and covenants to Operator that:

 

  1. User shall use each Aircraft for and on his own account only and shall not use any Aircraft for the purposes of providing transportation of passengers or cargo in air commerce for compensation or hire and shall not accept any reimbursement from a passenger or otherwise for charges under this Agreement;

 

  2. User shall refrain from incurring any mechanics lien or other lien in connection with inspection, preventative maintenance, maintenance or storage of the Aircraft, whether permissible or impermissible under this Agreement, and User shall not attempt to convey, mortgage, assign, lease or any way alienate the Aircraft or create any kind of lien or security interest involving the Aircraft or do anything or take any action that might mature into such a lien;

 

  3. During the term of this Agreement, User will abide by and conform to all such laws, governmental, and airport orders, rules, and regulations as shall from time to time be in effect relating in any way to the operation and use of the Aircraft by a time-sharing User.

(c) User shall provide Operator’s Flight Operations Department with notice of his desire to use the Aircraft and proposed flight schedules pursuant to and in accordance with Operator’s Corporate Aircraft Utilization Policy, as amended from time to time.

(d) Operator shall have sole and exclusive authority over the scheduling of the Aircraft, including which Aircraft is used for any particular flight.

(e) Operator shall not be liable to User or any other person for loss, injury, or damage occasioned by the delay or failure to furnish the Aircraft and crew pursuant to this Agreement for any reason.

3. Time-Sharing Arrangement.

It is intended that this Agreement is and will meet the requirements of a “Time Sharing Agreement” as that term is defined in FAR Part 91.501(c)(1) whereby Operator will lease its Aircraft and flight crew to User.

4. Cost of Use of Aircraft.

(a) In exchange for use of the Aircraft, User shall pay the cost of fuel, landing fees and in flight food and beverages for any flight conducted under this Agreement

 

2


or a greater amount mutually agreed to by the Parties. Pursuant to FAR 91.501(d), amounts payable for a flight shall not exceed the following expenses for each use of the Aircraft:

 

  (1) Twice the cost of fuel, oil, lubricants and other additives.

 

  (2) Travel expenses of the crew, including food, lodging, and ground transportation.

 

  (3) Hangar and tie-down costs when the Aircraft is required by the User to be away from the Aircraft’s base of operation.

 

  (4) Insurance obtained for the specific flight.

 

  (5) Landing fees, airport taxes, and similar assessments.

 

  (6) Customs, foreign permit, and similar fees directly related to the flight.

 

  (7) In flight food and beverages.

 

  (8) Passenger ground transportation.

 

  (9) Flight planning and weather contract services.

(b) Operator will invoice, and User will pay, for all appropriate charges.

(c) In addition to the rental rate referenced in Section 4(a) above, User shall also be assessed the Federal Excise Taxes as imposed under Section 4261 of the Internal Revenue Code, any applicable state and local taxes and any segment and landing fees associated with such flight(s).

5. Invoicing and Payment.

All payments to be made to Operator by User hereunder shall be paid in the manner set forth in this Paragraph 5. Operator will pay to suppliers, employees, contractors and government entities all expenses related to the operations of the Aircraft hereunder in the ordinary course. As to each flight operated hereunder, Operator shall provide to User an invoice for the charges specified in Paragraph 4 of this Agreement (including Federal or international air transportation Excise Taxes, as applicable, imposed by the Internal Revenue Code and to be collected by Operator), such invoice to be issued within thirty (30) days after the completion of each such flight. User shall pay Operator the full amount of such invoice within thirty (30) days after receipt of the invoice. In the event Operator has not received a supplier invoice for reimbursable charges relating to such flight prior to such invoicing, Operator shall issue a supplemental invoice for such charges to User within thirty (30) days of the date of receipt of the supplier invoice and User shall pay such supplemental invoice amount within thirty (30) days after receipt thereof. All such invoices shall separately itemize the expenses in items (1) through (9) of paragraph 4(a) for each flight included in that invoice. User shall further pay all costs incurred by Operator in collecting any amounts due from User pursuant to the provisions of this Paragraph 5 after delinquency, including court costs and reasonable attorneys’ fees.

 

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6. Insurance and Limitation of Liability.

Operator represents that the flight operations for the Aircraft as contemplated in this Agreement will be covered by the Operator’s (or the Operator’s 100% wholly owned subsidiary’s) aircraft all-risk physical damage insurance (hull Coverage), aircraft bodily injury and property damage liability insurance, passenger, pilot and crew voluntary settlement insurance and statutory workers compensation and employer’s liability insurance.

(a) Insurance.

 

  1. Operator will maintain or cause to be maintained in full force and effect throughout the term of this Agreement aircraft liability insurance in respect of the Aircraft in an amount at least equal to $100 million combined single limit for bodily injury to or death of persons (including passengers) and property damage liability. Operator will retain all rights and benefits with respect to the proceeds payable under policies of hull insurance maintained by Operator (or the Operator’s 100% wholly owned subsidiary) that may be payable as a result of any incident or occurrence while an Aircraft is being operated on behalf of User under this Agreement.

 

  2. Operator shall use best efforts to procure such additional insurance coverage as User may request naming User as an additional insured; provided, that the cost of such additional insurance shall be borne by User pursuant to Paragraph 4(a)(4) hereof.

(b) Limitation of Liability. User agrees that the insurance specified in paragraph 6(a) shall provide its sole recourse for all claims, losses, liabilities, obligations, demands, suits, judgments or causes of action, penalties; fines, costs and expenses of any nature whatsoever, including attorneys’ fees and expenses for or on account of or arising out of, or in any way connected with the use of the Aircraft by User, family members or guests, including injury to or death of any persons, including User, family members and guests which may result from or arise out of the use or operation of the Aircraft during the term of this Agreement (“Claims”). This Section 6 shall survive termination of this Agreement.

(c) User agrees that when, in the reasonable view of Operator’s Flight Operations Department or the pilots of the Aircraft, safety may be compromised, Operator or the pilots may terminate a flight, refuse to commence a flight, or take other action necessitated by such safety considerations without liability for loss, injury, damage, or delay.

(d) In no event shall Operator be liable to User or his family members, employees, agents, representatives, guests, or invitees for any claims or liabilities, including property damage or injury and death, and expenses, including attorney’s fees, in excess of the amount paid by Operator’s insurance carrier in the event of such loss.

 

4


(e) OPERATOR SHALL IN NO EVENT BE LIABLE TO USER OR HIS FAMILY MEMBERS, EMPLOYEES, AGENTS, REPRESENTATIVES, GUESTS, OR INVITEES FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES AND/OR PUNIITIVE DAMAGES OF ANY KIND OR NATURE UNDER ANY CIRCUMSTANCES OR FOR ANY REASON INCLUDING ANY DELAY OR FAILURE TO FURNISH THE AIRCRAFT OR CAUSED OR OCCASIONED BY THE PERFORMANCE OR NON-PERFORMANCE OF ANY SERVICES COVERED BY THIS AGREEMENT.

7. Covenants Regarding Aircraft Maintenance.

Each Aircraft has been inspected and maintained in the twelve-month period preceding the date hereof in accordance with the provisions of FAR Part 91. Operator shall, at its own expense, inspect, maintain, service, repair, overhaul, and test the Aircraft in accordance with FAR Part 91. Each Aircraft will remain in good operating condition and in a condition consistent with its airworthiness certification, including all FAA-issued airworthiness directives and mandatory service bulletins. In the event that any non-standard maintenance is required during any applicable lease term, Operator, or Operator’s Pilot-In-Command, shall immediately notify User of the maintenance required, the effect on the ability to comply with User’s dispatch requirements and the manner in which the Parties will proceed with the performance of such maintenance and conduct of the balance of the planned flight(s).

8. No Warranty.

NEITHER OPERATOR (NOR ITS AFFLIATES) MAKES, HAS MADE OR SHALL BE DEEMED TO MAKE OR HAVE MADE: ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO ANY AIRCRAFT TO BE USED HEREUNDER OR ANY ENGINE OR COMPONENT THEREOF INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, AIRWORTHINESS, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR TITLE.

9. Operational Control.

Operator shall be responsible for the physical and technical operation of the Aircraft and the safe performance of all flights and shall retain full authority and control, including exclusive operational control, and possession of the Aircraft at all times during the term of this Agreement. In accordance with applicable FARs, the qualified flight crew provided by Operator will exercise all required and/or appropriate duties and responsibilities in regard to the safety of each flight conducted hereunder. The Pilot-In-Command shall have absolute discretion in all matters concerning the preparation of the Aircraft for flight and the flight itself, the load carried and its distribution, the decision whether or not a flight shall be undertaken, the route to be flown, the place where landings shall be made and all other matters relating to operation of the Aircraft. User specifically agrees that

 

5


the flight crew shall have final and complete authority to delay or cancel any flight for any reason or condition which, in sole judgment of the Pilot-In-Command, could compromise the safety of the flight and to take any other action which, in the sole judgment of the Pilot-In-Command, is necessitated by considerations of safety. No such action of the Pilot-In-Command shall create or support any liability to User or any other person for loss, injury, damages or delay. The Parties further agree that Operator shall not be liable for delay or failure to furnish the Aircraft and crew pursuant to this Agreement which is caused by government regulation or authority, mechanical difficulty or breakdown, war, civil commotion, strikes or labor disputes, weather conditions, acts of God or other circumstances beyond Operator’s reasonable control. User agrees that Operator’s operation of aircraft is within the operation guidelines of the Operator’s Flight Operations Department manual and the crews are responsible to operate within the guidelines of FAR 91 and the Operator’s Flight Operations Department manual.

10. Governing Law.

The Parties hereto acknowledge that this Agreement shall be governed by and construed in all respects in accordance with the laws of the State of Ohio.

11. Counterparts.

This Agreement may be executed in one or more counterparts each of which will be deemed an original, all of which together shall constitute one and the same agreement.

12. Notices and Communications.

All notices, requests, demands and other communications required or desired to be given hereunder shall be in writing (except as permitted pursuant to Paragraph 2(c)) and shall be deemed to be given: (i) if personally delivered, upon such delivery; (ii) if mailed by certified mail, return receipt requested, postage pre-paid, addressed as (to the extent applicable for mailing) listed in the preamble hereto, upon the earlier to occur of actual receipt, refusal to accept receipt or three (3) days after such mailing; (iii) if sent by regularly scheduled overnight delivery carrier with delivery fees either prepaid or an arrangement, satisfactory with such carrier, made for the payment of such fees, addressed (to the extent applicable for overnight delivery) as listed in the preamble hereto, upon the earlier to occur of actual receipt or the next “Business Day” (as hereafter defined) after being sent by such delivery; or (iv) upon actual receipt when sent by fax, mailgram, telegram or telex. Notice given by other means shall be deemed to be given only upon actual receipt. Addresses may be changed by written notice given as provided herein and signed by the party giving the notice.

13. Further Acts.

OPERATOR and USER shall from time to time perform such other and further acts and execute such other and further instruments as may be required by law or may be reasonably necessary to: (i) carry out the intent and purpose of this Agreement; and (ii) establish, maintain and protect the respective rights and remedies of the other party.

 

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14. Successors and Assigns.

Neither this Agreement nor any party’s interest herein shall be assignable to any other party whatsoever, except that Operator may assign its interest to an affiliate without the consent of the User. This Agreement shall inure to the benefit of and be binding upon the Parties hereto, their heirs, representatives and successors.

15. Severability.

In the event that any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable, those provisions shall be replaced by provisions acceptable to both Parties to this Agreement.

16. Flight Crew.

Operator is responsible for providing a qualified flight crew for all flight operations under this Agreement. The Operator will furnish two experienced and competent pilots who shall be under the direction and control of the Operator at all times.

17. Taxes.

The Parties acknowledge that reimbursement of all items specified in Paragraph 4, except for subsections (7) and (8) thereof, are subject to the Federal Excise Tax imposed under Internal Revenue Code 4261 (the “Commercial Transportation Tax”). User shall pay to Operator (for payment to the appropriate governmental agency) any Commercial Transportation Tax or state and local taxes, if any, applicable to flights of the Aircraft conducted hereunder. Operator shall indemnify User for any claims related to the Commercial Transportation Tax or other taxes to the extent that User has paid Operator the amounts necessary to pay such taxes.

18. Right of Possession.

Operator has the right of possession to each Aircraft in Exhibit A pursuant to an Aircraft Lease Agreement. Nothing herein shall constitute a transfer of Operator’s possessory rights to the Aircraft.

19. Truth-in-Leasing.

The Operator shall mail a copy of this Agreement for and on behalf of both Parties to: Federal Aviation Administration, Aircraft Registration Branch, Attention: Technical Section, P.O. Box 25724, Oklahoma City, Oklahoma 73125, within twenty-four (24) hours of its execution, as provided by FAR 91.23 (c)(1). Additionally, Operator agrees to comply with the notification requirements of FAR Section 91.23 by notifying by telephone or in person the Columbus, Ohio FAA Flight Standards District Office at least forty-eight (48) hours prior to the first flight under this Agreement.

(a) OPERATOR CERTIFIES THAT EACH AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED WITHIN THE 12-MONTH PERIOD PRECEDING THE DATE OF

 

7


THIS AGREEMENT IN ACCORDANCE WITH THE PROVISIONS OF PART 91 OF THE FEDERAL AVIATION REGULATIONS AND THAT ALL APPLICABLE REQUIREMENTS FOR EACH AIRCRAFT’S MAINTENANCE AND INSPECTION HEREUNDER WILL BE MET AND ARE VALID FOR THE OPERATIONS TO BE CONDUCTED UNDER THIS AGREEMENT DURING THE DURATION OF THIS AGREEMENT.

(b) OPERATOR, WHOSE ADDRESS APPEARS IN PARAGRAPH 12 ABOVE AND WHOSE AUTHORIZED SIGNATURE APPEARS BELOW, AGREES, CERTIFIES AND ACKNOWLEDGES THAT WHENEVER EACH AIRCRAFT IS OPERATED UNDER THIS AGREEMENT, OPERATOR SHALL BE KNOWN AS, CONSIDERED AND SHALL IN FACT BE THE OPERATOR OF THE AIRCRAFT AND THAT OPERATOR UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.

(c) THE PARTIES UNDERSTAND THAT AN EXPLANATION OF FACTORS AND PERTINENT FEDERAL AVIATION REGULATIONS BEARING ON OPERATIONAL CONTROL CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.

(d) OPERATOR AGREES TO KEEP A COPY OF THIS AGREEMENT IN THE AIRCRAFT AT ALL TIMES DURING THE TERM OF THIS AGREEMENT.

IN WITNESS WHEREOF, the Parties hereto have each caused this Agreement to be duly executed on                      , 20      .

 

OPERATOR:
Cardinal Health, Inc.

 

By:  
Its:  
USER:  

 

 

8


EXHIBIT A

Cardinal Health, Inc.

Leased Aircraft Subject to Time Sharing Agreement

Each of the undersigned is a party to the Time Sharing Agreement dated                      , 20      , by and between Cardinal Health, Inc. (“Operator”) and                      (“User”) (together the “Parties”), and agrees that from and after                      , 20      , until this Exhibit A shall be superseded and replaced through agreement of the Parties or the Time Sharing Agreement shall be terminated pursuant to its terms, the Aircraft described below shall constitute the “Aircraft” described in and subject to the terms of the Time Sharing Agreement.

[Description of Aircraft]

 

OPERATOR:
Cardinal Health, Inc.

 

By:
Its:
USER:

 

 

9

Exhibit 12.1

CARDINAL HEALTH, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

 

     Fiscal Year Ended June 30,     For the Three Months Ended,  

(in millions, except for ratios)

   2004     2005     2006     2007     2008     September 30, 2008  

Earnings before income taxes, discontinued operations, minority interest, and cumulative effect of change in accounting

   $ 2,008.9     $ 1,664.4     $ 1,740.4     $ 1,252.3     $ 1,949.8     $ 363.9  

Less: Minority Interest

     4.2       5.3       3.1       0.7       0.4       0.2  
                                                

Total Earnings before income taxes, discontinued operations, minority interest ad cumulative effect of change in accounting

     2,013.1       1,669.7       1,743.5       1,253.0       1,950.2       364.1  

Plus fixed charges:

            

Interest expense

     78.4       138.5       167.2       189.6       228.6       53.7  

Capitalized interest

     6.5       5.8       4.9       12.4       15.2       4.5  

Amortization of debt offering costs

     3.6       3.4       3.4       7.4       3.5       1.0  

Interest portion of rent expense (1)

     15.7       21.5       18.3       19.6       18.5       4.0  
                                                

Fixed charges

     104.2       169.2       193.8       229.0       265.8       63.2  

Plus amortization of capitalized interest

     1.6       2.1       2.0       1.2       1.4       0.5  

Less capitalized interest

     (6.5 )     (5.8 )     (4.9 )     (12.4 ))     (15.2 )     (4.5 )
                                                

Earnings

   $ 2,112.4     $ 1,835.2     $ 1,934.4     $ 1,470.8     $ 2,202.2     $ 423.3  
                                                

Ratio of earnings to fixed charges

     20.2       10.8       10.0       6.4       8.3       6.7  

 

(1)

The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings before income taxes, discontinued operations, minority interest and cumulative effect of change in accounting plus fixed charges and capitalized interest. Fixed charges include interest expense, amortization of debt offering costs and the portion of rent expense which is deemed to be representative of the interest factor. Interest expense recorded on tax exposures has been recorded in income tax expense and has therefore been excluded from the calculation.

Exhibit 31.1

I, R. Kerry Clark, certify that:

 

  1. I have reviewed this Form 10-Q of Cardinal Health, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 7, 2008

 

/s/ R. Kerry Clark

R. Kerry Clark
Chairman and Chief Executive Officer

Exhibit 31.2

I, Jeffrey W. Henderson, certify that:

 

  1. I have reviewed this Form 10-Q of Cardinal Health, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 7, 2008

 

/s/ Jeffrey W. Henderson

Jeffrey W. Henderson
Chief Financial Officer

Exhibit 32.1

Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, R. Kerry Clark, Chairman and Chief Executive Officer of Cardinal Health, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, that:

 

(1) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 containing the financial statements of the Company (the “Periodic Report”), which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

(2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2008

 

/s/ R. Kerry Clark

R. Kerry Clark
Chairman and Chief Executive Officer

Exhibit 32.2

Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Jeffrey W. Henderson, Chief Financial Officer of Cardinal Health, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, that:

 

(1) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 containing the financial statements of the Company (the “Periodic Report”), which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

(2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2008

 

/s/ Jeffrey W. Henderson

Jeffrey W. Henderson
Chief Financial Officer

Exhibit 99.1

Cardinal Health’s filings with the Securities and Exchange Commission (the “SEC”), including Cardinal Health’s annual report on Form 10-K for the fiscal year ended June 30, 2008 (the “2008 Form 10-K”), Cardinal Health’s Annual Report to Shareholders, any quarterly report on Form 10-Q or any current report on Form 8-K of Cardinal Health (along with any exhibits to such reports as well as any amendments to such reports), our press releases, or any other written or oral statements made by or on behalf of Cardinal Health, may include or incorporate by reference forward-looking statements which reflect Cardinal Health’s current view (as of the date such forward-looking statement is first made) with respect to future events, prospects, projections or financial performance. The matters discussed in these forward-looking statements are subject to certain risks and uncertainties and other factors that could cause actual results to differ materially from those made, implied or projected in or by such statements. These uncertainties and other factors include, but are not limited to:

 

   

competitive pressures in the markets in which the company operates, including pricing pressures;

 

   

increasing consolidation in the healthcare industry, which could give the resulting enterprises greater bargaining power and may increase pressure on prices for the company’s products and services;

 

   

the loss of, or default by, one or more key customers or suppliers, such as pharmaceutical or medical/surgical manufacturers for which alternative supplies may not be available or easily replaceable;

 

   

unfavorable changes to the terms of key customer or supplier relationships, or changes in customer mix;

 

   

changes in manufacturers’ pricing, selling, inventory, distribution or supply policies or practices, including policies concerning price appreciation;

 

   

changes in hospital buying groups or hospital buying practices;

 

   

changes in the frequency or rate of branded pharmaceutical price appreciation or generic pharmaceutical price deflation, restrictions in the amount of inventory available to the company, or changes in the timing of generic launches or the introduction of branded pharmaceuticals;

 

   

uncertainties relating to market conditions for pharmaceuticals;

 

   

changes in the distribution or outsourcing pattern for pharmaceutical and medical/surgical products and services, including an increase in direct distribution;

 

   

uncertainties regarding the decision to spin-off most of the company’s clinical and medical products businesses as a new stand-alone entity, including the timing and terms of any such spin-off and whether such spin-off will be completed, and uncertainties regarding the impact of the planned spin-off on Cardinal Health, the new clinical and medical products company and the potential market for their respective securities;

 

   

the costs, difficulties and uncertainties related to the integration of acquired businesses, including liabilities related to the operations or activities of such businesses prior to their acquisition;

 

   

uncertainties related to the company’s divestiture strategy, including difficulties in finding buyers or alternative exit strategies at acceptable prices and terms and in a timely manner;

 

   

uncertainties related to recent disruptions in the financial markets, including uncertainties related to the availability and/or cost of credit;

 

   

changes in laws and regulations or in the interpretation or application of laws or regulations, as well as possible failures to comply with applicable laws or regulations as a result of possible misinterpretations or misapplications;

 

   

legislative changes to the prescription drug reimbursement formula and related reporting requirements for generic pharmaceuticals under Medicaid;

 

   

actions of regulatory bodies and other government authorities, including the Food and Drug Administration and foreign counterparts, that could delay, limit or suspend product development, manufacturing or sales or result in recalls, seizures, injunctions and monetary sanctions;


   

costs or claims resulting from potential errors or defects in our manufacturing, compounding, repackaging, information systems or pharmacy management services that may injure persons or damage property or operations, including costs from remediation efforts or recalls;

 

   

the results, consequences, effects or timing of any commercial disputes, patent infringement claims, shareholder claims, derivative claims, or other legal proceedings;

 

   

the costs, effects, timing or success of restructuring programs or plans;

 

   

downgrades of our credit ratings, and the potential that such downgrades could adversely affect our access to capital or increase our cost of capital;

 

   

increased costs for the components, compounds, raw materials or energy used by our businesses, including oil and gas, or shortages in these inputs;

 

   

the risks of counterfeit products in the supply chain;

 

   

the continued financial viability and success of our customers, suppliers and franchisees and uncertainties related to the impact of recent financial market disruptions on such customers, suppliers and franchisees;

 

   

failure to retain or continue to attract senior management or key personnel;

 

   

risks associated with international operations, including fluctuations in currency exchange ratios;

 

   

costs associated with protecting our trade secrets and enforcing our patent, copyright and trademark rights, and successful challenges to the validity of our patents, copyrights or trademarks;

 

   

difficulties or delays in the development, production, manufacturing and marketing of new or existing products and services, including difficulties or delays associated with obtaining requisite regulatory consents or approvals associated with those activities;

 

   

difficulties and costs associated with enhancing our accounting systems and internal controls and complying with financial reporting requirements;

 

   

disruption or damage to or failure of our information systems;

 

   

uncertainties relating to general economic, political, business, industry, regulatory and market conditions; and

 

   

other factors described in “Item 1A: Risk Factors” of the 2008 Form 10-K.

The words “believe,” “expect,” “anticipate,” “project,” “estimate,” “target,” “intend,” “seek,” and similar expressions generally identify “forward-looking statements,” which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, except to the extent required under applicable law.

 

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