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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
CARDINAL HEALTH, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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[CARDINAL HEALTH LOGO]
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 5, 2003
----------------------
Notice is hereby given that the Annual Meeting of Shareholders of
Cardinal Health, Inc., an Ohio corporation (the "Company"), will be held at the
Company's corporate offices at 7000 Cardinal Place, Dublin, Ohio, on Wednesday,
November 5, 2003, at 11:30 a.m., local time, for the following purposes:
1. To elect five Directors, each to serve for a term of three
years and until his successor is duly elected and qualified;
and
2. To transact such other business as may properly come before
the meeting or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
FIVE DIRECTORS LISTED IN ITEM 1.
Only shareholders of record on September 8, 2003 are entitled to notice
of and to vote at the meeting or any adjournment or postponement thereof.
Shareholders of record on the record date will be admitted to the meeting with
verification of share ownership. If your shares are not registered in your name,
evidence of ownership (such as a recent bank or brokerage firm account
statement, together with proper identification) must be presented for admission
to the meeting.
By Order of the Board of Directors.
/s/ Paul S. Williams
PAUL S. WILLIAMS, Secretary
October 9, 2003
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE
URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, OR TO VOTE BY TELEPHONE OR THE INTERNET PURSUANT
TO INSTRUCTIONS PROVIDED WITH THE PROXY.
TABLE OF CONTENTS
PAGE
----
PROXY STATEMENT.......................................................................................... 1
ELECTION OF DIRECTORS.................................................................................... 1
Nominees For Election At the Annual Meeting........................................................... 2
Directors Whose Terms Will Continue After the Annual Meeting.......................................... 2
CORPORATE GOVERNANCE..................................................................................... 5
Nominating and Governance Committee................................................................... 5
Corporate Governance Guidelines....................................................................... 5
Role of the Board................................................................................... 5
Board Composition................................................................................... 5
Committee Matters................................................................................... 5
Meetings of the Board............................................................................... 5
Assessment and Leadership Development............................................................... 6
Other Matters....................................................................................... 6
Periodic Review..................................................................................... 6
Presiding Director.................................................................................... 6
Policies on Business Ethics........................................................................... 6
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................... 6
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.............................................. 7
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................................................. 8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................... 8
EXECUTIVE COMPENSATION................................................................................... 10
Human Resources and Compensation Committee Report..................................................... 10
Executive Compensation................................................................................ 14
Summary Compensation Table.......................................................................... 14
Option Grants in Last Fiscal Year................................................................... 15
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values............................ 16
Shareholder Performance Graph......................................................................... 17
Employment Agreements and Other Arrangements.......................................................... 17
Pension Plan.......................................................................................... 19
Compensation of Directors............................................................................. 19
AUDIT COMMITTEE REPORT................................................................................... 20
SELECTION OF INDEPENDENT AUDITORS........................................................................ 20
Information Regarding Change in Independent Accountants............................................... 20
Independent Accountants Fees.......................................................................... 21
Audit Fees.......................................................................................... 21
Audit-Related Fees.................................................................................. 21
Tax Fees............................................................................................ 21
Financial Information Systems Design and Implementation Fees........................................ 21
All Other Fees...................................................................................... 21
Audit Committee Audit and Non-Audit Services Pre-Approval Policy...................................... 22
PROPOSAL 1 -- ELECTION OF NOMINEES FOR DIRECTORS OF THE COMPANY AT THE ANNUAL MEETING.................... 22
FUTURE SHAREHOLDER PROPOSALS............................................................................. 22
OTHER MATTERS............................................................................................ 22
APPENDIX A -- CARDINAL HEALTH, INC. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER.................... A-1
[CARDINAL HEALTH LOGO]
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Cardinal Health,
Inc., an Ohio corporation ("Cardinal Health" or the "Company"), for use at the
annual meeting of the shareholders of the Company (the "Annual Meeting") to be
held on Wednesday, November 5, 2003, at the offices of the Company, located at
7000 Cardinal Place, Dublin, Ohio 43017, at 11:30 a.m., local time, and at any
adjournment or postponement thereof. This Proxy Statement and the accompanying
proxy, together with the Company's Annual Report to Shareholders for the fiscal
year ended June 30, 2003 ("FY03"), are first being sent to shareholders of the
Company on or about October 9, 2003.
The close of business on September 8, 2003 has been fixed as the record
date for the determination of shareholders of the Company entitled to notice of
and to vote at the Annual Meeting. At that date, the Company had outstanding
432,421,025 common shares, without par value ("Common Shares"). Except as set
forth below, holders of Common Shares at the record date are entitled to one
vote per share for the election of Directors and upon all matters on which
shareholders are entitled to vote.
The address of the Company's principal executive office is 7000
Cardinal Place, Dublin, Ohio 43017.
ELECTION OF DIRECTORS
The Company's Board of Directors currently consists of thirteen
members, divided into three classes, two classes of five members each and one
class of three members. The Company's Restated Code of Regulations, as amended
(the "Code of Regulations"), currently provides that the number of Directors may
be increased or decreased by action of the Board of Directors upon the majority
vote of the Board, but in no case may the number of Directors be fewer than nine
or more than sixteen without an amendment to the Code of Regulations approved by
the affirmative vote of the holders of not less than 75% of the shares having
voting power with respect to the proposed amendment.
At the Annual Meeting, the Company's shareholders will be asked to vote
for the election of the five nominees named below, each to serve for a term of
three years and until his successor is duly elected and qualified. (See
"Proposal 1" below.) Common Shares represented by proxies, unless otherwise
specified, will be voted for the named nominees. If, by reason of death or other
unexpected occurrence, any one or more of the nominees should not be available
for election, the proxies will be voted for the election of any substitute
nominee(s) as the Board of Directors may propose. Proxies may not be voted at
the Annual Meeting for more than five nominees.
Under Ohio law, if notice in writing is given by any shareholder
entitled to vote at the Annual Meeting to the President, a Vice President or the
Secretary of the Company, not less than 48 hours before the scheduled time of
the meeting, that the shareholder desires the voting for election of Directors
be cumulative, and if an announcement of the request for cumulative voting is
made at the beginning of the meeting by the Chairperson or Secretary, or by or
on behalf of the shareholder giving such notice, each shareholder entitled to
vote at the Annual Meeting will have the right to cumulate such voting power as
he or she possesses at such election and to give one nominee a number of votes
equal to the number of Directors to be elected multiplied by the number of
shares he or she holds, or to distribute votes on the same basis among two or
more nominees, as he or she sees fit. If voting for the election of Directors is
cumulative, the persons named in the enclosed proxy will vote the shares
represented thereby and by other proxies held by them so as to elect as many of
the five nominees named below as possible.
1
Votes will be tabulated by or under the direction of inspectors of
election, who will certify the results of the voting at the Annual Meeting. The
five nominees receiving the greatest number of votes will be elected Directors.
Abstentions and broker non-votes thus will not affect the results of the
election.
Listed below are the names of those persons nominated for election as
Directors of the Company (each is currently a Director of the Company), and of
the Directors of the Company whose terms of office will continue after the
Annual Meeting, their ages, principal occupations, occupations held during the
past five years (unless otherwise stated, the occupations listed have been held
during the entire past five years), other public companies of which they are
directors (which are shown parenthetically), the year in which they first became
a Director of the Company and the year in which their term as a Director is
scheduled to expire (information provided as of September 8, 2003):
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ ----- -------
Dave Bing................. 59 Chairman and Chief Executive Officer of The Bing 2000 2003
Group, L.L.C., an automotive parts manufacturer
(DTE Energy Company, an energy company).
John F. Finn.............. 55 Chairman and Chief Executive Officer of Gardner, Inc., 1994 2003
an outdoor power equipment distributor (One Group
Mutual Funds, a registered investment company).
John F. Havens............ 76 Director Emeritus and retired Chairman of Bank One 1979 2003
Corporation, a bank holding company.
David W. Raisbeck......... 53 Vice Chairman of Cargill, Incorporated, a marketer, 2002 2003
processor and distributor of agricultural,
food, financial and industrial products and
services (Cargill, Incorporated and Eastman
Chemical Company, a plastics, chemicals and
fibers manufacturer).
Robert D. Walter.......... 58 Chairman and Chief Executive Officer of the Company 1971 2003
(American Express Company, a travel, financial and
network services company, and Viacom Inc., a media
company).
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE ANNUAL MEETING
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ ----- -------
George H. Conrades........ 64 Chairman and Chief Executive Officer of Akamai 1999 2004
Technologies, Inc., an e-business infrastructure
provider, April 1999 to present; Venture partner in
Polaris Venture Partners, an early stage investment
company, August 1998 to present (Akamai Technologies,
Inc. and Harley-Davidson, Inc., a motorcycle
manufacturer).
Robert L. Gerbig.......... 58 Retired Chairman and Chief Executive Officer of 1975 2004
Gerbig, Snell/Weisheimer & Associates, Inc., an
advertising agency.
2
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ ----- -------
Richard C. Notebaert...... 56 Chairman and Chief Executive Officer of Qwest 1999 2004
Communications International Inc., a
telecommunications systems company, July 2002 to
present; President and Chief Executive Officer of
Tellabs, Inc., a communications equipment and services
provider, September 2000 to July 2002; Chairman and
Chief Executive Officer of Ameritech Corporation, a
full-service communications company, April 1994 to
December 1999 (Qwest Communications International Inc.
and Aon Corporation).
J. Michael Losh........... 57 Retired Chairman of Metaldyne Corporation, an 1996 2005
automotive parts manufacturer, October 2000 to April
2002; Chief Financial Officer of General Motors
Corporation, an automobile manufacturer, 1994 to
August 2000 (Metaldyne Corporation, AMB Property
Corporation, an industrial real estate owner and
operator, Aon Corporation and H.B. Fuller Company, a
specialty chemicals and industrial adhesives
manufacturer).
John B. McCoy............. 60 Chairman of the Board of Corillian Corporation, an 1987 2005
online banking and software services company, June
2000 to present; Chief Executive Officer of Bank One
Corporation, 1984 to December 1999 (Corillian
Corporation, Federal Home Loan Mortgage Corporation, a
corporation supporting homeownership and rental
housing, and SBC Communications, Inc., a
telecommunications systems company).
Michael D. O'Halleran..... 53 President and Chief Operating Officer of Aon 1999 2005
Corporation, an insurance brokerage, consulting and
underwriting company (Aon Corporation).
Jean G. Spaulding, M.D.... 56 Consultant to Duke University Health System, a 2002 2005
non-profit academic health care system, January 2003
to present; Trustee of The Duke Endowment, a
charitable trust, January 2002 to present; Private
medical practice in psychiatry, 1977 to present;
Associate Clinical Professorships with the Departments
of Psychiatry and Community & Family Medicine at Duke
University Medical Center, a non-profit academic
hospital, 1998 to present; On-camera consultant to an
ABC news affiliate, 1997 to present; Vice Chancellor
for Health Affairs, Duke University Health System,
1998 to 2002.
3
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ ----- -------
Matthew D. Walter......... 34 Chief Executive Officer of Bound Tree Medical, LLC, a 2002 2005
provider of medical equipment and supplies to the
emergency medical market, November 2000 to present;
Founding and Managing Partner of Talisman Capital, a
private investment company, June 2000 to present; Vice
President and General Manager of National PharmPak,
Inc., a subsidiary of Cardinal Health, Inc., July 1996
to September 2000 (Bancinsurance Corporation, a
specialty property insurance holding company). Mr. M.
Walter is the son of Robert D. Walter, Chairman and
Chief Executive Officer of the Company.
Four regular meetings and one special meeting of the Company's Board of
Directors were held during FY03. Each Director attended 75% or more of the
meetings of the Board and Board committees on which he or she served.
Messrs. Finn, Losh, McCoy and R. Walter are the current members of the
Board's Executive Committee, which is empowered to exercise all powers and
perform all duties of the Board of Directors when the Board is not in session
other than the authority to fill vacancies among the Directors or on any
committee of the Board. The Executive Committee met two times during the last
fiscal year, and acted two times by written action without a meeting as
permitted by Ohio law.
Messrs. Finn, Bing, Conrades, Gerbig, O'Halleran and Raisbeck are the
current members of the Board's Audit Committee, which is empowered to exercise
all powers and authority of the Board of Directors with respect to the Company's
annual audit, accounting policies, financial reporting and system of internal
controls regarding finance, accounting, legal and code of ethics compliance. The
Audit Committee met five times during the last fiscal year.
Messrs. Losh, McCoy and Notebaert, and Dr. Spaulding are the current
members of the Board's Human Resources and Compensation Committee (the
"Compensation Committee"), which is empowered to exercise all powers and
authority of the Board of Directors with respect to compensation of the
employees of the Company, sales to employees of stock in the Company and grants
of stock-based incentives to employees, including options to purchase Common
Shares. The Compensation Committee also reviews and approves the Company goals
and objectives relevant to the Chief Executive Officer's compensation and
evaluates the Chief Executive Officer's performance in light of those goals and
objectives. The Compensation Committee met four times during the last fiscal
year and, as permitted by Ohio law, acted several times by written action
without a meeting.
Messrs. McCoy, Conrades, Finn, Havens and Losh are the current members
of the Board's Nominating and Governance Committee, which is empowered to
exercise all powers and authority of the Board of Directors with respect to
selecting nominees to serve on the Board and its various committees as well as
developing and recommending to the Board a set of corporate governance
principles and performing a leadership role in shaping the Company's corporate
governance. The Nominating and Governance Committee will consider nominees
recommended by shareholders upon submission in writing to the Corporate
Secretary of the names of such nominees, together with their qualifications for
service as a Director of the Company. The Nominating and Governance Committee
met four times during the last fiscal year.
The Audit Committee Charter is attached as Appendix A to this Proxy
Statement. The charters for each of the Audit, Compensation and Nominating and
Governance Committees are available on the Company's website, at
www.cardinal.com, under the "Investor Relations--Corporate Governance" captions.
This information also is available in print to any shareholder who requests it
from the Investor Relations department.
4
CORPORATE GOVERNANCE
Cardinal Health's Board of Directors and management are committed to
maintaining a strong and effective corporate governance program to sustain the
confidence and commitment of the Company's shareholders, employees, customers
and suppliers, and the communities where Cardinal Health and its stakeholders
reside and do business. Because of this, Cardinal Health believes it is
important to inform its shareholders of the Company's major corporate governance
practices. Some of these practices have been in place for many years, as
implemented on either a formal or informal basis, whereas others were recently
adopted as part of the Company's regular review of its corporate governance
practices in an effort to keep its practices current with regulatory and
legislative changes. The Company is in the process of updating its corporate
governance practices to ensure full compliance with all newly adopted
requirements in advance of their effectiveness and believes that its corporate
governance practices, as they currently exist, would substantially comply with
the New York Stock Exchange's proposed new corporate governance listing
standards. The following is a summary of the Company's current corporate
governance practices.
NOMINATING AND GOVERNANCE COMMITTEE
Cardinal Health recently expanded the duties of its existing Nominating
Committee of the Board to include performing a leadership role in shaping the
Company's corporate governance program. The Nominating and Governance Committee
will review and recommend changes to the Company's corporate governance
principles on an on-going basis.
CORPORATE GOVERNANCE GUIDELINES
Cardinal Health recently adopted a formal set of Corporate Governance
Guidelines (the "Guidelines"), the full text of which is available on the
Company's website, at www.cardinal.com, under the "Investor Relations--Corporate
Governance" captions. This information also is available in print to any
shareholder who requests it from the Investor Relations department. The
following is a summary of certain key elements of the Corporate Governance
Guidelines.
Role of the Board. The Guidelines define the Board's role as
representing and acting on behalf of all of Cardinal Health's shareholders. In
representing the shareholders, the Board's primary functions include overseeing
management to conduct Cardinal Health's businesses in conformity with applicable
laws and regulations and to establish and maintain for the Company the highest
standards of legal and ethical conduct.
Board Composition. The Guidelines mandate that a majority of the Board
must be comprised of independent Directors. The definition of "independent
Director" set forth in the Guidelines tracks the New York Stock Exchange's
proposed definition. The Guidelines also affirm the Company's stock ownership
commitment, embodied in the Guidelines for Share Ownership requirements recently
adopted by the Board. These Guidelines for Share Ownership currently require
each non-management Director to own an equity interest in Cardinal Health equal
to four times his or her annual retainer within three years of joining the
Board, or by July 2006 for current Directors.
Non-management Directors are encouraged to limit the number of boards
on which they serve, taking into account potential board attendance,
participation and effectiveness on these boards. Directors will be provided with
an orientation program and are encouraged to participate in a continuing
education program to be developed by the Company or to be provided by outside
sources at the Company's expense.
Committee Matters. The Guidelines require that all members of each of
the Audit, Compensation and Nominating and Governance Committees must be
independent. Such committees generally meet at least four times a year.
Committee members are assigned, and committee chairs are selected, by the Board
upon recommendation of the Nominating and Governance Committee. Committee
membership may be rotated periodically.
Meetings of the Board. The Guidelines provide for executive sessions of
non-management Directors without management present at least four times each
year. The chairperson of the Nominating and Governance Committee of the Board or
another Director selected by the non-management Directors will preside at these
executive sessions. Absent unusual circumstances, each Director is expected to
attend all Board meetings and all
5
meetings of the committees of which the Director is a member. Directors have
full and free access to senior management. The Board and each of the Audit,
Compensation and Nominating and Governance Committees have the power to retain
independent outside counsel, experts and other advisors, as they may deem
necessary.
Assessment and Leadership Development. The Board, through the
Compensation Committee, will evaluate the performance of the Chief Executive
Officer against criteria established by the Board. This evaluation will be used
by the Compensation Committee in setting the Chief Executive Officer's
compensation. The Nominating and Governance Committee will conduct an annual
review of Board performance, and each committee will conduct its own
self-assessment. The Board also will work with the Compensation Committee to
evaluate potential successors to the Chief Executive Officer.
Other Matters. The Board reviews and evaluates at least annually the
long-term strategic and business plans of the Company. Senior management of the
Company reports periodically to the Compensation Committee on the status of
Director compensation practices in relation to other companies of comparable
size and the Company's competitors. Changes in Director compensation, if any,
are recommended by the Compensation Committee, and approved by the full Board.
Periodic Review. The Nominating and Governance Committee is responsible
for periodically reviewing the Guidelines and making recommendations for
appropriate changes to the Board.
PRESIDING DIRECTOR
The chairperson of the Nominating and Governance Committee of the Board
or another Director selected by the non-management Directors will preside at the
executive sessions of non-management Directors, which will occur without
management present at least four times each year. Mr. McCoy currently chairs the
Nominating and Governance Committee and will preside over the executive sessions
of non-management Directors until such time as he ceases to chair the Nominating
and Governance Committee or another presiding Director is selected by the
non-management Directors.
POLICIES ON BUSINESS ETHICS
All of Cardinal Health's employees, including its Chief Executive
Officer, Chief Financial Officer and Corporate Controller, as well as its
Directors, are required to comply with the Company's Standards of Business
Ethics to ensure that the Company's business is conducted in a consistently
legal and ethical manner. The Sarbanes-Oxley Act of 2002 requires companies to
have procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls or auditing matters and to allow for
the confidential, anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. Cardinal Health currently has these
procedures in place, which are set forth in the Standards of Business Ethics.
The full text of the Cardinal Health Ethics Guide, which includes the
Standards of Business Ethics, is posted on the Company's website, at
www.cardinal.com, under the "Investor Relations--Corporate Governance" captions.
This information also is available in print to any shareholder who requests it
from the Investor Relations department. Cardinal Health will disclose future
amendments to, or waivers from, certain provisions of its Standards of Business
Ethics for its Chief Executive Officer, Chief Financial Officer and Corporate
Controller, if any, on its website within five business days following the date
of the amendment or waiver, or such earlier period of time that the SEC may
later require.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A property which includes parts of the Company's former Columbus food
distribution center is leased by the Company from a limited partnership in which
the general partner was, until June 2003, Mr. R. Walter. The limited partners
include four adult children of Mr. Havens, one individually and the other three
through separate trusts. In June 2003, Mr. R. Walter divested his interest in
the limited partnership. The rent payable by the Company to the limited
partnership is $92,000 per annum (approximately $0.72 per sq. ft.), which amount
is substantially below fair market value for the rental property. For FY03, the
Company had subleased the property to
6
a third party for $378,860, generating a gross profit net of real estate taxes
of $237,823 for the Company. The lease, by its terms, will expire in February
2004, unless the Company exercises its right to renew the lease. If the lease is
renewed, the rent payable by the Company will increase to fair market value. The
Company does not currently intend to renew the lease.
Mr. R. Walter is a general partner in a limited partnership that owns a
retail shopping center. One of the tenants in the shopping center is an
individual who operates a pharmacy as a Medicine Shoppe franchisee under a
five-year lease which will expire in September 2005. The lease calls for rent of
$2,000 per month. To assist the franchisee in establishing this location, the
lease was guaranteed by Medicine Shoppe International, Inc., a subsidiary of the
Company ("MSI"). No amounts have been requested from or paid by MSI on the
guaranty.
Ms. Beth E. Simonetti, Senior Vice President - Human Resources for the
Company's Healthcare Products and Services businesses, is the sister-in-law of
Ms. Carole S. Watkins, Executive Vice President - Human Resources of the
Company.
See also "Compensation Committee Interlocks and Insider Participation"
below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Losh, McCoy and Notebaert, and Dr. Spaulding are the current
members of the Board's Human Resources and Compensation Committee (the
"Compensation Committee"). Prior to May 2003, the Compensation Committee's Human
Resources and Compensation Subcommittee (the "Compensation Subcommittee") acted
on matters relating to and affected by Section 16 of the Exchange Act, as
amended (the "Exchange Act"), Section 162(m) ("Section 162(m)") of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), and all matters
relating to the Chief Executive Officer's compensation. Mr. M. Walter, Mr. R.
Walter's son, did not at any time serve on the Compensation Subcommittee that
determined Mr. R. Walter's compensation, but he was a member of the Compensation
Committee from May 2002 until May 2003. The Compensation Committee, of which Mr.
M. Walter is no longer a member, is now responsible for determining Mr. R.
Walter's compensation.
The Company owns a 31% equity interest in ArcLight Systems, LLC
("ArcLight"). In April 2002, ArcLight subleased office space from inChord
Communications, Inc. ("inChord") for a term expiring on June 30, 2008. Mr. M.
Walter is a director and minority shareholder of inChord, and his two brothers
own substantially all of the remainder of inChord. During the term of this
sublease, ArcLight will pay base rent to inChord which fluctuates from $118,250
to $198,710 per year.
inChord and its subsidiaries also perform health care marketing and
recruiting services on behalf of the Company and its subsidiaries from time to
time in the ordinary course of business and on arm's-length terms. During FY03,
the Company paid inChord approximately $203,207 for time and services rendered
on the Company's behalf. To assist in the launch of a customer's product for
which the Company was providing contract sales services, the Company advanced
the customer approximately $582,000 for marketing services. This advance funded
a portion of inChord's fees for marketing services later rendered to the
customer. The total amount of payments described in this paragraph represented
less than 1% of inChord's consolidated gross revenues for its last full fiscal
year.
In October 2003, the Company and inChord entered into a joint marketing
program ("RxPedite") designed to promote a comprehensive package of product
commercialization services to pharmaceutical manufacturers. This program
provides a mechanism for the parties to share the joint costs of the RxPedite
marketing effort, and is terminable by either party at any time. It is
contemplated that the Company and inChord will provide capital, services and
other resources to the RxPedite program.
Mr. M. Walter and his two brothers own a majority of Bound Tree
Medical, LLC ("BTM"), an Ohio limited liability company engaged in the emergency
medical supply business. Mr. M. Walter also is an officer and manager of BTM.
During FY03, BTM and its affiliates purchased approximately $505,326 of product
from the Company and its subsidiaries in the ordinary course of business and on
arm's-length terms. This amount represented less than 1% of BTM's consolidated
gross revenues for its last full fiscal year.
7
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during FY03 and any written representations regarding
the same, all officers and Directors of the Company timely filed all reports
required under Section 16(a) of the Exchange Act during FY03.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Shares as of September 8, 2003, by:
(a) the Company's Directors; (b) each other person who is known by the Company
to own beneficially more than 5% of the outstanding Common Shares; (c) the
Company's Chief Executive Officer and the other executive officers named in the
Summary Compensation Table (collectively, the "named executive officers"); and
(d) the Company's executive officers and Directors as a group. Except as
otherwise described in the notes below, the following beneficial owners have
sole voting and investment power with respect to all Common Shares set forth
opposite their names:
NUMBER OF
COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------------ ------------------ ----------------
FMR Corp. (1)................................................ 45,357,117 10.5%
AXA Financial, Inc. (2)...................................... 40,458,030 9.4%
Robert D. Walter (3) (4) (12)................................ 6,713,862 1.5%
Matthew D. Walter (5) (11)................................... 1,376,775 *
James F. Millar (4) (12)..................................... 436,064 *
George L. Fotiades (4) (12).................................. 417,132 *
Stephen S. Thomas (4) (12)................................... 177,870 *
Anthony J. Rucci (4) (12).................................... 127,326 *
John B. McCoy (5) (6) (10)................................... 122,086 *
Robert L. Gerbig (5)......................................... 84,446 *
John F. Havens (5) (7) (10).................................. 63,493 *
John F. Finn (5) (8) (10).................................... 54,851 *
Richard C. Notebaert (5) (10)................................ 31,146 *
J. Michael Losh (5) (9) (10)................................. 28,877 *
Michael D. O'Halleran (5).................................... 21,011 *
Dave Bing (5) (10)........................................... 19,362 *
George H. Conrades (5) (10).................................. 17,061 *
David W. Raisbeck (5) (10)................................... 11,114 *
Jean G. Spaulding (5) (10)................................... 7,861 *
All Executive Officers and Directors as a
Group (25 Persons) (13).................................... 10,541,054 2.4%
---------------------
* Indicates beneficial ownership of less than 1% of the outstanding
Common Shares.
(1) Based on information obtained from a Schedule 13G jointly filed with
the SEC on February 13, 2003 by FMR Corp. ("FMR"), Edward C. Johnson,
III and Abigail P. Johnson. The address of FMR is 82 Devonshire Street,
Boston, Massachusetts 02109. FMR reported that it has sole voting power
with respect to 782,334 Common Shares and sole dispositive power with
respect to all Common Shares held. The number of shares held by FMR may
have changed since the filing of the Schedule 13G.
(2) Based on information obtained from a Schedule 13G jointly filed with
the SEC on March 28, 2003 by AXA Financial, Inc. ("AXA Financial") and
four French mutual insurance companies and AXA and its subsidiaries
(collectively, the "AXA entities"). The address of AXA Financial is
1290 Avenue of the
8
Americas, New York, New York 10104. AXA Financial reported that it has
sole voting power with respect to 17,969,508 Common Shares, shared
voting power with respect to 8,264,356 Common Shares, sole dispositive
power with respect to 40,424,729 Common Shares and shared dispositive
power with respect to 4,077 Common Shares. Each of the AXA entities
reported that it has sole voting power with respect to 17,997,432
Common Shares, shared voting power with respect to 8,264,356 Common
Shares, sole dispositive power with respect to 40,451,253 Common Shares
and shared dispositive power with respect to 6,777 Common Shares. The
number of shares held by AXA Financial and the AXA entities may have
changed since the filing of the Schedule 13G.
(3) Includes 3,278,691 Common Shares held in the aggregate in Mr. R.
Walter's four grantor retained annuity trusts and 500,000 Common Shares
beneficially owned by Mr. R. Walter through a limited liability
company.
(4) Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include outstanding
options to purchase Common Shares which are exercisable within 60 days
of September 8, 2003, as follows: Mr. R. Walter - 2,214,633 shares; Mr.
Millar - 324,761 shares; Mr. Fotiades - 374,198 shares; Mr. Thomas -
144,992 shares; and Mr. Rucci - 89,511 shares.
(5) Common Shares and the percent of class listed as being beneficially
owned by the listed Company Directors (except for Mr. R. Walter)
include outstanding options to purchase Common Shares which are
exercisable within 60 days of September 8, 2003, as follows: Mr. Bing -
17,133 shares; Mr. Conrades - 15,200 shares; Mr. Finn - 21,324 shares;
Mr. Gerbig - 21,324 shares; Mr. Havens - 28,142 shares; Mr. Losh -
21,404 shares; Mr. McCoy - 28,142 shares; Mr. Notebaert - 15,200
shares; Mr. O'Halleran - 13,511 shares; Mr. Raisbeck - 7,136 shares;
Dr. Spaulding - 7,127 shares; and Mr. M. Walter - 7,127 shares.
(6) Includes 34,137 Common Shares held in trust for the benefit of Mr.
McCoy, 6,436 Common Shares held in trust for the benefit of Mr. McCoy's
son and 50,773 Common Shares held in the aggregate in Mr. McCoy's two
grantor retained annuity trusts.
(7) Includes 26,034 Common Shares held in trust for the benefit of Mr.
Havens' spouse and children.
(8) Includes 1,032 Common Shares held by Mr. Finn's wife.
(9) Includes 1,500 Common Shares held in trust for the benefit of Mr.
Losh's daughters.
(10) Includes Common Shares held under the Company's Directors Deferred
Compensation Plan as follows: Mr. Bing - 2,229 shares; Mr. Conrades -
861 shares; Mr. Finn - 2,730 shares; Mr. Havens - 2,346 shares; Mr.
Losh - 2,598 shares; Mr. McCoy - 2,598 shares; Mr. Notebaert - 2,346
shares; Mr. Raisbeck - 978 shares; and Dr. Spaulding - 734 shares.
(11) Includes 81,964 Common Shares held in trust for the benefit of Mr. M.
Walter and 1,112,663 Common Shares beneficially owned by Mr. M. Walter
through a limited liability company.
(12) Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include Common Shares
in the Company's Employee Stock Purchase Plan, as follows: Mr. R.
Walter - 1,962 shares; Mr. Millar - 1,967 shares; Mr. Fotiades - 209
shares; Mr. Thomas - 1,839 shares; and Mr. Rucci - 0 shares.
(13) Common Shares and percent of class listed as being beneficially owned
by all executive officers and Directors as a group include outstanding
options to purchase Common Shares which are exercisable within 60 days
of September 8, 2003.
9
EXECUTIVE COMPENSATION
HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT
The Company's executive compensation program is administered by the
Human Resources and Compensation Committee (the "Compensation Committee") of the
Company's Board of Directors, which has responsibility for reviewing all aspects
of the compensation program for the Company's executive officers. The
Compensation Committee is comprised of Messrs. Losh, McCoy and Notebaert, and
Dr. Spaulding. Prior to May 2003, the Compensation Committee's Human Resources
and Compensation Subcommittee (the "Compensation Subcommittee") acted on matters
relating to and affected by Section 16 of the Exchange Act, Section 162(m) of
the Internal Revenue Code and all matters relating to the Chief Executive
Officer's compensation. Mr. M. Walter, Mr. R. Walter's son, did not at any time
serve on the Compensation Subcommittee, but he was a member of the Compensation
Committee from May 2002 until May 2003. The Compensation Committee now performs
the functions previously performed by the Compensation Subcommittee. References
to the "Compensation Committee" hereafter may include the Compensation
Subcommittee, where applicable. The Compensation Committee's primary objective
with respect to executive compensation is to establish programs which attract
and retain key executives and align their compensation with the Company's
overall business strategies, values and performance. To this end, the
Compensation Committee has established, and the Board of Directors has endorsed,
an executive compensation philosophy which includes the following
considerations:
- A "pay-for-performance" orientation that differentiates
compensation results based upon corporate, business unit and
individual performance;
- An emphasis on long-term incentives as a significant component of
total compensation in order to more closely align the interests of
Company executives with the stock interests of shareholders;
- An objective of having an emphasis on total compensation vs. cash
compensation, rewarding Company executives with total compensation
(including cash and stock incentive programs) at or above
competitive levels, if performance is superior;
- Recognition that as an executive's level of responsibility
increases, a greater portion of the total compensation opportunity
should be based upon stock and other performance incentives; and
- An appropriate mix of short-term and long-term compensation which
facilitates retention of talented executives and encourages
Company stock ownership and capital accumulation.
The primary components of the Company's executive compensation program
are (a) base salaries, (b) annual cash incentive opportunities and (c) long-term
incentive opportunities in the form of stock options, restricted shares and
restricted share units. This three-part approach enables the Company to meet the
requirements of the highly competitive environment in which the Company operates
while ensuring that executive officers are compensated in a way that advances
both the short- and long-term interests of shareholders. Each primary component
of executive pay is discussed below.
The executive officers' and CEO's base salary, annual bonus target and
award, and long-term incentives are reviewed at least annually to ensure market
competitiveness and to assure satisfaction of the Company's objective of
providing total executive pay which achieves the appropriate leverage of
variable pay-for-performance and at-risk equity holdings. The Compensation
Committee has been advised by independent outside executive compensation
consultants in its review of the executive officers' and Mr. R. Walter's
compensation. In making their recommendations, the independent advisors
considered the appropriate peer group of companies for the Company. The
companies considered by the independent advisors include some of, but are not
the same as, those in the Value Line Health Care Index utilized in the
Shareholder Performance Graph set forth below, and which represent a broader
spectrum of wholesale, retail and manufacturing companies that the Compensation
Committee believes to be a more representative measure of the size, scope,
performance and complexity of the competitive market for executive talent.
10
In reviewing compensation of the Company's executive officers for FY03
(including that of Mr. R. Walter), the Compensation Committee considered
multiple factors, including the Company's performance in difficult economic
conditions, size and complexity, overall quality of earnings performance,
balance sheet and cash flow performance, expansive foreign operations and total
shareholder return. The Compensation Committee also considered each executive
officer's contribution toward positioning of the Company for future expansion
and success. In addition, in establishing Mr. R. Walter's compensation for FY03,
the Compensation Committee considered the growth and expansion of the Company's
business from previous years, successful integration of previously acquired
businesses, strategic positioning and continued business development activities,
more diversified lines of business, geographically diverse work force and the
Company's growth in comparison to other S&P 500 companies. The Compensation
Committee observed that FY03 marked yet another year of solid financial
performance and effective strategic positioning for the Company.
Base Salaries. Base salaries for Company executives are generally
subject to annual review and adjustment on the basis of individual and Company
performance, level of responsibility, and competitive, inflationary and internal
equity considerations. In order to effectively recruit and retain key managers,
the Company has adopted a base salary philosophy which takes into account
competitive market compensation levels. In considering Mr. R. Walter's FY03 base
salary, the Compensation Committee considered the same factors as those
considered for other executive officers.
Annual Cash Incentives. Company executives are eligible to receive
annual cash incentive awards pursuant to the Company's Management Incentive Plan
("MIP"). Targeted MIP incentive amounts, which are designed to provide
competitive incentive pay, are established each year, with such amounts varying
as a percentage of base salary depending upon each executive's level of
responsibility and function. Performance objectives intended to focus attention
on achieving key goals are established for the Company and for each significant
business unit within the Company at the beginning of each fiscal year. These
objectives include a specific target for Company earnings growth and Net
Earnings After Tax ("NEAT") target for each business unit. In addition,
individual performance objectives are established for each executive, which
include both specific performance goals and other, more qualitative and
developmental criteria. For FY03, the targeted MIP award is adjusted based on
attainment of the business unit NEAT as a percent of the NEAT target and
achievement of individual performance objectives. The maximum achievable bonus
after applying the adjustments for performance is an additional 100% of the
target award. Incentive awards pursuant to the Company's MIP were approved by
the Compensation Committee based upon these corporate, business unit and
individual performance criteria. The Compensation Committee also has discretion
to consider the quality of the Company's earnings in determining achievement of
the Company earnings growth as well as attainment of the individual business
unit NEAT target.
Certain executive officers' bonuses are paid under the Cardinal Health,
Inc. Performance-Based Incentive Compensation Plan (the "Performance-Based
Plan"). The Budget Reconciliation Act of 1993 (the "Act") amended the Internal
Revenue Code to add Section 162(m), which prohibits a deduction to any publicly
held corporation for non-performance-based compensation paid to a "covered
employee" in excess of $1 million per year (the "Dollar Limitation"). A covered
employee is an employee who, on the last day of a company's taxable year, is the
chief executive officer of the company or an employee who appears in the Summary
Compensation Table by reason of being one of the four most highly compensated
executive officers for the taxable year (other than the chief executive
officer). In anticipation that the deductibility of compensation paid to Mr. R.
Walter and other executive officers could be affected by the Act, in August
1996, the Company's Board of Directors adopted the Performance-Based Plan, the
material terms of the performance goals of which have been approved by the
Company's shareholders. Compensation paid in accordance with the
Performance-Based Plan generally will not be applied toward the Dollar
Limitation. Messrs. R. Walter, Millar, Fotiades, Thomas and Rucci were the
Company's covered employees for FY03. Under the terms of the Performance-Based
Plan, and in accordance with Section 162(m), a maximum bonus potential level is
set for each covered employee if the performance goals established by the
Compensation Committee are fully satisfied. The performance goals established by
the Compensation Committee under the Performance-Based Plan for the covered
employees for FY03 were fully satisfied. As permitted by the Performance-Based
Plan, the Compensation Committee then considered other factors, including,
without limitation, the results of the business unit managed by each such
executive, in determining the amount of bonus paid to each covered employee for
FY03, within the maximum award limits.
11
Long-Term Stock Incentives. The Company has granted equity-based awards
to its executives under the Company's Stock Incentive Plan, as amended (the
"Stock Incentive Plan"), which was initially approved by the Company's
shareholders in 1987, and the Company's Amended and Restated Equity Incentive
Plan, as amended (the "Equity Incentive Plan"), which replaced the Stock
Incentive Plan as to ongoing grants, and which was approved by the Company's
shareholders in November 1995, and amendments to which were approved by the
Company's shareholders in November 1998. The Stock Incentive Plan was, and
Equity Incentive Plan is, designed to align a significant portion of the
executive compensation package with the long-term interests of the Company's
shareholders by providing an incentive that focuses attention on managing the
Company from the perspective of an owner with an equity stake in the business.
The Equity Incentive Plan provides for the grant of several types of
equity-based awards, including stock options, restricted shares and restricted
share units.
Although not required to do so, the Company has consistently made
annual grants of stock options to its management personnel, including its
executive officers. This annual grant program is designed to provide Company
managers, over a number of years, multiple stock options, each granted with an
exercise price equal to the market price for Common Shares on the date of the
grant. Individual option grants are determined by the Compensation Committee
based on a manager's current performance, potential for future responsibility,
and salary multiples designed to increase the portion of the total compensation
opportunity represented by stock incentives as a manager's level of
responsibility increases. Because a primary purpose of granting stock options is
to encourage positive future performance, when granting options in FY03 the
Compensation Committee did not consider the number of options granted to an
individual in previous years. The Company's standard stock option agreement
contains provisions providing for forfeiture of the option or option value
received in the event the option holder engages in certain behavior in
competition with or contrary to the interests of the Company. The Compensation
Committee places a relatively heavy emphasis on equity incentives, consistent
with its philosophy that stock incentives more closely align the interests of
Company managers with the long-term interests of shareholders.
Approximately 3,600 individuals below the executive officer level were
granted stock options under the Company's Equity Incentive Plan and
Broadly-based Equity Incentive Plan, as amended (the "Broadly-based Equity
Incentive Plan"), during FY03. This program is an increasingly important element
of the Company's efforts to identify, develop and motivate key employees who
will sustain the Company's superior performance in the future. It also
reinforces an entrepreneurial environment by providing real incentives for these
employees to sustain and enhance the Company's long-term performance.
Grants of restricted shares and restricted share units are intended to
reward exceptional performance with a long-term benefit in lieu of cash, to
facilitate stock ownership and to deter recruitment of key Company managers by
competitors and others. Unlike the Company's stock option program, restricted
share and restricted share unit grants are not made on an annual or other
regularly established basis. Recipients of restricted share and restricted share
unit grants are subject to restrictions on the disposition of the stock during a
period determined by the Compensation Committee at the time of grant. Generally,
restricted share and restricted share unit awards are forfeited by their terms
if the recipient terminates employment with the Company prior to the expiration
of the restriction period. Restricted share and restricted share unit awards
are, in most instances, also forfeited by their terms if the recipient engages
in certain behavior in competition with or contrary to the interests of the
Company.
Consistent with the Company's philosophy of linking total compensation
to stock performance for all of its executive officers, a significant portion of
Mr. R. Walter's overall compensation package is comprised of stock incentives.
In November 2002, the Compensation Committee granted Mr. R. Walter options to
purchase 486,009 Common Shares with an exercise price of $67.90 per share (the
market price on the date of grant) as part of the annual option grant made to
Company executives under the Company's Equity Incentive Plan. Consistent with
the other options granted as part of the annual grant, these options vest on the
third anniversary of the grant date and have a term of 10 years. In making this
grant, the Compensation Committee considered several of the same factors as
those considered for the other executive officers, including implementation of
the Compensation Committee's objective to more closely align the Company's stock
incentive awards with those of the market. In addition, the Compensation
Committee took into account Mr. R. Walter's leadership effectiveness, as well as
the Company's consistent, multi-year financial performance, its strong strategic
positioning, and the overall market competitiveness of Mr. R. Walter's total
compensation package. All of the options granted to Mr. R. Walter during the
fiscal year
12
also contain provisions for forfeiture of the option or option value received in
the event Mr. R. Walter engages in certain behavior in competition with or
contrary to the interests of the Company.
Impact of Internal Revenue Code Section 162(m). As discussed above,
Section 162(m) of the Internal Revenue Code prohibits a deduction to any
publicly held corporation for non-performance-based compensation paid to a
covered employee in excess of the Dollar Limitation. It is the Compensation
Committee's general policy to minimize the effect of the Act on the Company's
compensation expense. The Compensation Committee reserves the authority to award
non-deductible compensation in such circumstances as it deems appropriate.
Further, because of ambiguities and uncertainties as to the application and
interpretation of Section 162(m) and the regulations issued thereunder, no
assurance can be given, notwithstanding the Company's efforts, that compensation
intended by the Company to satisfy the requirements for deductibility under
Section 162(m) does in fact do so.
Conclusion. As described above, the Company's executive compensation
program provides a significant link between total compensation and the Company's
performance and long-term shareholder value consistent with the compensation
philosophies set forth above. This program is believed to be a significant
factor in the Company's growth and profitability and the resulting long-term
gains achieved by the Company's shareholders.
Submitted by the Human Resources and Compensation Committee of the Board.
August 5, 2003 J. Michael Losh, Chairman
John B. McCoy
Richard C. Notebaert
Jean G. Spaulding
13
EXECUTIVE COMPENSATION
The following information is set forth with respect to the Company's
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers.
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ----------------------------
OTHER
ANNUAL RESTRICTED SECURITIES
COMPEN- STOCK UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS SATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2)(3) (#)(3) ($)(4)
---------------------------------------------------------------------------------------------------------------------------
Robert D. Walter 2003 $1,015,144 $2,112,135 $111,374(5) -0- 486,009 $ 36,473(6)
Chairman and Chief 2002 1,000,000 2,701,370 173,545(5) $10,354,500(7) 440,529 208,938
Executive Officer 2001 968,847 1,828,493 139,729(5) -0- 272,384 213,585
---------------------------------------------------------------------------------------------------------------------------
James F. Millar 2003 $ 668,248 $ 582,133 -- -0- 320,000 $ 36,437
President and Chief 2002 634,491 807,393 -- -0- 100,955 1,003,479(8)
Executive Officer - 2001 590,385 702,894 -- -0- 94,578 32,450
Healthcare Products and
Services
---------------------------------------------------------------------------------------------------------------------------
George L. Fotiades 2003 $ 531,633 $ 387,412 -- -0- 250,000 $ 35,957
President and Chief 2002 495,692 498,482 -- -0- 67,915 1,052,667(8)(9)
Executive Officer - Life 2001 491,410 340,360 -- -0- 60,530 67,167
Sciences Products and
Services
---------------------------------------------------------------------------------------------------------------------------
Stephen S. Thomas 2003 $ 397,331 $ 378,727 -- -0- 91,237 $ 37,493
Executive Vice President 2002 380,694 372,003 -- -0- 38,546 698,229(8)
and Group President - 2001 366,173 230,318 -- -0- 33,776 32,450
Automation and Information
Services
---------------------------------------------------------------------------------------------------------------------------
Anthony J. Rucci 2003 $ 433,639 $ 279,068 -- -0- 48,822 $ 34,061
Executive Vice President 2002 416,219 398,263 -- -0- 48,164 383,729(8)
and Chief Administrative 2001 399,616 339,558 -- -0- 46,532 128,450
Officer
---------------------------------------------------------------------------------------------------------------------------
(1) "--" indicates that the aggregate amount of perquisites and other personal
benefits, securities or property in the aggregate did not exceed the lesser
of $50,000 or 10% of the total of Salary and Bonus, and the executive had
no other compensation reportable under this category.
(2) Aggregate restricted share unit holdings and values on June 30, 2003 (based
upon the closing price of the Common Shares on the New York Stock Exchange
on that date, the last trading day of FY03), for the named executive
officers are as follows: Mr. R. Walter - 264,644 shares, $17,016,609; Mr.
Millar - 29,137 shares, $1,873,509; Mr. Fotiades - 26,362 shares,
$1,695,077; Mr. Thomas - 31,039 shares, $1,995,808; and Mr. Rucci - 25,620
shares, $1,647,366. Dividend equivalents are paid in cash on restricted
share units.
(3) All numbers have been adjusted to reflect all applicable stock splits of
the Company's Common Shares.
(4) Amounts shown represent Company contributions to the executive's account
under the Company's Profit Sharing, Retirement and Savings Plan and
Deferred Compensation Plan for FY03 as follows: Mr. R. Walter - $34,109;
Mr. Millar - $36,437; Mr. Fotiades - $35,957; Mr. Thomas - $37,493; and Mr.
Rucci - $34,061.
14
(5) Includes $111,012, $160,827 and $127,323 and related gross-up for taxes
relating to personal use by Mr. R. Walter of a Company airplane for the
fiscal years ended June 30, 2003, 2002 and 2001, respectively.
(6) Includes $2,364 for premiums paid by the Company on a split-dollar life
insurance arrangement, entered into on April 16, 1993, among the Company,
Mr. R. Walter and a trust for Mr. R. Walter's family. The arrangement
terminated by its terms on January 12, 2003, at which point the Company
recovered the then-current cash surrender value of the underlying insurance
policy.
(7) Includes restricted share units that vest in under three years from the
date of grant as follows: Mr. R. Walter - 150,000 shares vesting on June
30, 2004.
(8) Includes the vesting of cash incentive awards, granted in the fiscal year
ended June 30, 2000, as follows: Mr. Millar - $971,250; Mr. Fotiades -
$878,750; Mr. Thomas - $666,000; and Mr. Rucci - $351,500. Employment
agreements entered into by each of these executive officers during the
fiscal year ended June 30, 2000 provided for such cash incentive awards if
the executive officer remained employed by the Company through February 9,
2002. The agreements with Messrs. Millar, Fotiades and Thomas have since
been replaced and superceded (see "Employment Agreements and Other
Arrangements" below). Mr. Rucci's agreement has expired.
(9) Includes $166,667 paid to Mr. Fotiades as an incentive fee pursuant to
certain provisions contained in an employment agreement entered into
between the Company and Mr. Fotiades at the time the Company acquired R.P.
Scherer Corporation. The agreement has since been replaced and superceded
(see "Employment Agreements and Other Arrangements" below).
OPTION GRANTS IN LAST FISCAL YEAR (1)
-----------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
---------------------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM (4)
GRANTED IN FISCAL PRICE EXPIRATION ---------------------------------
NAME (#)(1) YEAR (2) ($/SH)(3) DATE 0% ($) 5% ($) 10% ($)
-----------------------------------------------------------------------------------------------------------------
Robert D. Walter 486,009 5.14% $67.90 11/18/12 $0.00 $20,753,530 $52,593,519
-----------------------------------------------------------------------------------------------------------------
James F. Millar 320,000 3.38% $67.90 11/18/12 $0.00 $13,664,622 $34,628,836
-----------------------------------------------------------------------------------------------------------------
George L. Fotiades 250,000 2.64% $67.90 11/18/12 $0.00 $10,675,486 $27,053,778
-----------------------------------------------------------------------------------------------------------------
Stephen S. Thomas 41,237 0.44% $67.90 11/18/12 $0.00 $ 1,760,900 $ 4,462,467
50,000 0.53% $64.00 2/5/13 $0.00 $ 2,012,463 $ 5,099,976
-----------------------------------------------------------------------------------------------------------------
Anthony J. Rucci 48,822 0.52% $67.90 11/18/12 $0.00 $ 2,084,794 $ 5,283,278
-----------------------------------------------------------------------------------------------------------------
(1) All options granted during the fiscal year to the named executive officers
are nonqualified stock options granted under the Company's Equity Incentive
Plan, are exercisable in full on and after the third anniversary from the
date of grant, and have a term of 10 years.
(2) Based on total options to purchase 9,458,415 Common Shares granted to all
employees during FY03 under the Company's Equity Incentive Plan and
Broadly-based Equity Incentive Plan.
(3) Market price on date of grant.
(4) These amounts are based on hypothetical appreciation rates of 0%, 5% and
10% and are not intended to forecast the actual future appreciation of the
Company's stock price. No gain to optionees is possible without an actual
increase in the price of the Company's Common Shares, which benefits all of
the Company's shareholders.
15
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FY-END (#) FY-END ($)(2)
ACQUIRED ON REALIZED -------------------------------------------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------------------------------------------------------------------------------------
Robert D. Walter 249,628 $11,719,888 2,214,633 1,198,922 $72,272,426 $0
---------------------------------------------------------------------------------------------------------------------
James F. Millar 75,011 $ 3,193,137 324,761 515,533 $11,056,889 $0
---------------------------------------------------------------------------------------------------------------------
George L. Fotiades -0- -0- 374,198 378,445 $11,473,834 $0
---------------------------------------------------------------------------------------------------------------------
Stephen S. Thomas -0- -0- 144,992 163,559 $ 4,275,233 $0
---------------------------------------------------------------------------------------------------------------------
Anthony J. Rucci -0- -0- 89,511 143,518 $ 2,999,785 $0
---------------------------------------------------------------------------------------------------------------------
(1) Value calculated as the amount by which the fair market value of the Common
Shares on the date of exercise exceeds the option exercise price before
payment of any taxes.
(2) Value calculated as the amount by which the fair market value of the Common
Shares on June 30, 2003 (the last trading day of FY03) exceeds the option
exercise price.
16
SHAREHOLDER PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return
of the Company's Common Shares with the cumulative total return of the Standard
& Poor's Composite - 500 Stock Index and the Value Line Health Care Sector
Index, an independently prepared index which includes more than 100 companies in
the health care industry (the "Value Line Health Care Index" or "Peer Group").
The graph assumes, in each case, an initial investment of $100 as of June 30,
1998 based on the market prices at the end of each fiscal year through and
including June 30, 2003, with the Value Line Health Care Index investment
weighted on the basis of market capitalization at the beginning of each such
fiscal year, and assuming reinvestment of dividends (and taking into account all
stock splits during such periods).
[PERFORMANCE GRAPH]
----------------------------------------------------------------------------------------------------
Fiscal Year 1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------
Cardinal Health, Inc. $100.00 $102.75 $118.80 $166.80 $148.68 $155.94
----------------------------------------------------------------------------------------------------
S&P 500 100.00 121.20 128.43 108.10 87.39 86.04
----------------------------------------------------------------------------------------------------
Value Line Health Care Index 100.00 113.50 132.59 127.71 109.91 115.14
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EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
During the fiscal year ended June 30, 2002, the Company entered into an
agreement with Mr. R. Walter (the "Walter Agreement"). The Walter Agreement
provides for an employment term through June 30, 2004. However, the Walter
Agreement will extend beyond June 30, 2004 on a day-for-day basis for each day
Mr. R. Walter remains employed by the Company after June 30, 2003. Commencing
June 30, 2003, the Company or Mr. R. Walter can provide notice of termination to
be effective one year from the notice date. In addition to base salary and an
annual cash incentive payable under the standard terms of the bonus plan for
which Mr. R. Walter is eligible, the Walter Agreement provides for an annual
option grant and an initial grant of restricted share units. The Walter
Agreement also provides for a severance payment to Mr. R. Walter in the event
the Company terminates Mr. R. Walter's employment without Cause or Mr. R. Walter
terminates employment for Good Reason (each as defined in the Walter Agreement)
prior to the end of his full time employment period. The amount of such
severance payment is increased if such termination occurs within three years of
a Change of Control (as defined in the Walter Agreement) of the
17
Company. In the event of Mr. R. Walter's death, the Walter Agreement provides
for death benefits and payment of Accrued Obligations (as defined in the Walter
Agreement). In the event of Mr. R. Walter's Disability (as defined in the Walter
Agreement), Mr. R. Walter will receive the Company's disability benefits and
Accrued Obligations. In the event of Mr. R. Walter's death or the Company
terminates Mr. R. Walter's employment without Cause or Mr. R. Walter terminates
employment for Good Reason, all stock options, restricted shares and restricted
share units (collectively, "Stock Awards") held by Mr. R. Walter at the time of
such event will vest and stock options will remain exercisable until the end of
their original term. In the event of Mr. R. Walter's retirement prior to June
30, 2004, all Stock Awards will continue to vest or be forfeited in accordance
with their original terms. If Mr. R. Walter becomes Disabled during the
employment term or retires after June 30, 2004, generally all Stock Awards held
by Mr. R. Walter at that time will vest in accordance with their original terms
and stock options will remain exercisable until the end of their original term.
A portion of payments made to Mr. R. Walter as a result of the termination of
his employment in connection with a Change in Control of the Company may not be
deductible to the Company as an ordinary and necessary business expense and may
be subject to a 20% excise tax imposed on Mr. R. Walter under Section 4999 of
the Internal Revenue Code. The Walter Agreement provides for an additional
payment to Mr. R. Walter equal to the amount of any such excise tax imposed on
him and any taxes, interest or penalties incurred with respect thereto. Under
the Walter Agreement, Mr. R. Walter has agreed to comply with certain
non-compete and non-solicitation covenants during the term of his employment and
generally for two years thereafter. In addition, Mr. R. Walter is obligated to
keep the Company's proprietary information and trade secrets confidential.
During the fiscal year ended June 30, 2003, the Company entered into an
agreement with Mr. Millar (the "Millar Agreement"), which replaced and
superceded the employment agreement previously in place between the Company and
Mr. Millar. The Millar Agreement provides for an employment term of three years
commencing on November 13, 2002. In addition to base salary and an annual cash
incentive payable under the standard terms of the bonus plan for which Mr.
Millar is eligible, the Millar Agreement provides for an initial option grant.
The Millar Agreement also provides for severance payments and benefits to Mr.
Millar in the event the Company terminates Mr. Millar's employment without Cause
(as defined in the Millar Agreement) either (i) prior to the end of his
employment period, or (ii), if Mr. Millar continues employment with the Company
beyond the date his employment period expires, prior to November 13, 2007. Mr.
Millar also will be paid severance payments and benefits in the event that
during the employment period, or during any employment continuation period but
prior to November 13, 2007, (i) Mr. Millar's employment is terminated by the
Company within one year after a Change in Control (as defined in the Company's
Equity Incentive Plan) for any reason other than because of Mr. Millar's death,
retirement, incapacity or by the Company for Cause, or (ii) Mr. Millar has
experienced a material diminution of his duties and as a result has terminated
his employment within one year after a Change in Control. Under the Millar
Agreement, Mr. Millar has agreed to comply with certain non-compete and
non-solicitation covenants during the term of his employment and generally for
24 months thereafter. In addition, Mr. Millar is obligated to keep the Company's
proprietary information and trade secrets confidential.
During the fiscal year ended June 30, 2003, the Company entered into an
agreement with Mr. Fotiades (the "Fotiades Agreement"), which replaced and
superceded the employment agreement previously in place between the Company and
Mr. Fotiades. The Fotiades Agreement provides for an employment term of three
years commencing on November 13, 2002. In addition to base salary and an annual
cash incentive payable under the standard terms of the bonus plan for which Mr.
Fotiades is eligible, the Fotiades Agreement provides for an initial option
grant. The Fotiades Agreement also provides for substantially the same severance
arrangements and covenants as the Millar Agreement described above.
During the fiscal year ended June 30, 2003, the Company entered into an
agreement with Mr. Thomas (the "Thomas Agreement"), which replaced and
superceded the employment agreement previously in place between the Company and
Mr. Thomas. The Thomas Agreement provides for an employment term of three years
commencing on February 5, 2003. In addition to base salary and an annual cash
incentive payable under the standard terms of the bonus plan for which Mr.
Thomas is eligible, the Thomas Agreement provides for an initial option grant.
The Thomas Agreement also provides for severance payments and benefits to Mr.
Thomas in the event the Company terminates Mr. Thomas' employment without Cause
(as defined in the Thomas Agreement) prior to the end of his employment period.
Mr. Thomas also will be paid severance payments and benefits in the event that
Mr. Thomas has experienced a material diminution of his duties during his
employment period and within one year after a Change in Control (as defined in
the Company's Equity Incentive Plan), and as a result has terminated his
employment
18
within one year after a Change in Control. Under the Thomas Agreement, Mr.
Thomas has agreed to comply with certain non-compete and non-solicitation
covenants during the term of his employment and generally for 24 months
thereafter. In addition, Mr. Thomas is obligated to keep the Company's
proprietary information and trade secrets confidential.
The Company's Stock Incentive Plan, Equity Incentive Plan and
Broadly-based Equity Incentive Plan each provides for acceleration of the
vesting of stock options, restricted share and restricted share unit awards
based upon the occurrence of a change of control of the Company. A change of
control is defined generally, with certain exclusions, as acquisition by an
individual or group of 25% or more of the Common Shares, an involuntary change
in the composition of at least a majority of the members of the Board of
Directors, or approval by the Company's shareholders (or consummation, depending
upon the date of the grant) of a merger, reorganization, consolidation,
liquidation or sale of substantially all of the assets of the Company.
PENSION PLAN
Mr. Fotiades participates in a defined benefit and supplemental plan
(the "Pension Plan") which was assumed by the Company when it acquired R.P.
Scherer in 1998.
Benefits payable under the Pension Plan at retirement are determined
primarily by average final compensation and years of service. The compensation
covered by the Pension Plan for Mr. Fotiades is substantially the same as that
set forth in the Salary and Bonus columns of the Summary Compensation Table set
forth on page 14. The defined benefit plan was frozen as of December 31, 2002
and the supplemental plan was frozen as of December 31, 2001. No additional
benefits will be earned and no compensation or credited service will be
considered beyond these dates. Mr. Fotiades has 6.5 years of service credited
under the defined benefit plan and 5.5 years of service credited under the
supplemental plan.
The annual amount payable upon retirement is $20,644.92. The benefits
are payable as a straight-life annuity beginning at age 65. These benefits are
not subject to any deduction for Social Security or any other offset amounts.
COMPENSATION OF DIRECTORS
During FY03, the Company's Directors each were paid a retainer of
$10,000 per quarter. The chairperson of the Audit Committee and each Director
serving as the chairperson of another Board committee also received $3,000 and
$1,500, respectively, in additional compensation during the last quarter of FY03
for such service. Each such committee chairperson, including the chairperson of
the Audit Committee, received $1,000 per quarter for such service during the
first three quarters of FY03. Other than the chairperson, Directors receive no
additional compensation for service on Board committees. Directors may elect to
defer payment of their fees into the Company's Directors Deferred Compensation
Plan, one of the investment alternatives for which is a Company Common Shares
Fund. The Company also reimburses Directors for out-of-pocket travel expenses
incurred in connection with attendance at Board and committee meetings.
Effective April 1, 2003, Directors receive an annual option grant to
purchase Common Shares having an aggregate exercise price for such Common Shares
of $300,000. Also effective April 1, 2003, each Director also receives, upon
first appointment or election to the Board, an option grant to purchase Common
Shares having an aggregate exercise price for such Common Shares of $300,000.
The exercise price per share of these options is the fair market value of a
Common Share on the date of grant. The actual value of the options will be the
difference between the market value of the underlying Common Shares on the
exercise date and the exercise price. In determining the value of the Director
options and, thus, the total compensation to Directors, the Board of Directors
made certain assumptions about the future increase in the market value of the
Company's Common Shares over the term of the options. The options are granted
pursuant to the Company's Equity Incentive Plan and Outside Directors Equity
Incentive Plan. All grants to Directors generally vest immediately, are
exercisable for 10 years from the date of grant, and are subject to adjustment
for subsequent stock dividends, splits and other changes in the Company's
capital structure. Options granted to Directors are treated as nonqualified
options under the Internal Revenue Code. On November 6, 2002, Messrs. Bing,
Conrades, Finn, Gerbig, Havens, Losh, McCoy, Notebaert, O'Halleran,
19
Raisbeck and M. Walter, and Dr. Spaulding each were granted options to purchase
3,571 Common Shares in accordance with the provisions of the Equity Incentive
Plan and the Outside Directors Equity Incentive Plan. Such options had an
aggregate exercise price of $250,000 per Director. Mr. R. Walter does not
receive any of the compensation described in this paragraph or the preceding
paragraph.
AUDIT COMMITTEE REPORT
The Audit Committee currently consists of six members of the Company's
Board of Directors, each of whom is independent of the Company and its
management, as defined by the current New York Stock Exchange listing standards.
The Audit Committee's activities are governed by a written charter, which
specifies the scope of the committee's responsibilities and how it carries out
those responsibilities. A copy of the charter, which was approved in its current
form by the Board on May 7, 2003, is attached to this Proxy Statement as
Appendix A.
The Audit Committee has reviewed and discussed the audited financial
statements for the fiscal year ended June 30, 2003 (the "FY03 Audited Financial
Statements") with Company management and with Ernst & Young LLP ("Ernst &
Young"), the Company's independent auditors. The Audit Committee also has
discussed with Ernst & Young the matters required to be discussed by Statement
on Auditing Standards No. 61 (Communication with Audit Committees), as amended
by Statement on Auditing Standards No. 90 (Audit Committee Communications). The
Audit Committee also received from Ernst & Young the written disclosures and the
letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and has discussed with Ernst & Young its
independence from the Company. The Audit Committee also has considered whether
the provision of non-audit services to the Company is compatible with the
independence of Ernst & Young.
Based on the review and discussions referred to above, and relying
thereon, the Audit Committee recommended to the Board of Directors that the FY03
Audited Financial Statements be included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2003 filed with the Securities and
Exchange Commission.
Submitted by the Audit Committee of the Board.
August 5, 2003 John F. Finn, Chairman
Dave Bing
George H. Conrades
Robert L. Gerbig
Michael D. O'Halleran
David W. Raisbeck
SELECTION OF INDEPENDENT AUDITORS
INFORMATION REGARDING CHANGE OF INDEPENDENT ACCOUNTANTS
On May 8, 2002, the Board of Directors of the Company, upon the
recommendation of its Audit Committee, dismissed Arthur Andersen LLP ("Arthur
Andersen" or "AA") as the Company's independent public accountants and engaged
Ernst & Young to serve as the Company's independent public accountants for the
fiscal year ending June 30, 2002. Arthur Andersen's reports on the Company's
consolidated financial statements for each of the fiscal years ended June 30,
2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for the Company's fiscal years ended
June 30, 2001 and 2000 and through May 8, 2002, there were no disagreements
between the Company and Arthur Andersen on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedure which,
if not resolved to AA's satisfaction, would have caused AA to make reference to
the subject matter in connection with AA's report on the Company's consolidated
financial statements for such fiscal years; and there were no reportable events
as defined in Item 304(a)(1)(v) of SEC Regulation S-K. The Company provided
Arthur Andersen with a copy of the foregoing disclosures. Attached as Exhibit 16
to the Company's Current Report on Form 8-K filed with the SEC on May 9, 2002 is
a copy of AA's letter, dated May 9, 2002, stating its agreement with such
statements. During the fiscal years ended June 30, 2001
20
and 2000 and through May 8, 2002, the Company did not consult Ernst & Young with
respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's consolidated financial statements, or any other
matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation
S-K.
INDEPENDENT ACCOUNTANTS FEES
As described above, the Company changed its independent public
accountants during the fiscal year ended June 30, 2002 ("FY02") from Arthur
Andersen to Ernst & Young. Ernst & Young was appointed on May 9, 2002 to conduct
the examination of the Company's financial statements for FY02. The fees paid to
Arthur Andersen during FY02 for audit services totaled approximately $772,000.
Fees paid to Ernst & Young for services rendered during FY02 and FY03 are
summarized below, broken down between the periods before and after Ernst & Young
was appointed to be the Company's independent public accountants. For FY02 and
FY03, fees for services rendered by Ernst & Young totaled approximately
$4,919,500 and $8,923,235, respectively, as described in more detail below.
Audit Fees. Audit fees include fees paid by the Company to Ernst &
Young related to the annual audit of the Company's consolidated financial
statements, the review of financial statements included in the Company's
Quarterly Reports on Form 10-Q and statutory audits of various international
subsidiaries. Audit fees also include fees for services performed by Ernst &
Young that are closely related to the audit and in many cases could only be
provided by the Company's independent accountants, such as comfort letters and
consents related to SEC registration statements. The aggregate fees billed to
the Company by Ernst & Young for audit services rendered to the Company and its
subsidiaries for FY02 and FY03 totaled approximately $2,342,500 and $3,797,895,
respectively. All audit fees billed to the Company for FY02 were for services
rendered after Ernst & Young's appointment as the Company's independent
accountants on May 9, 2002.
Audit-Related Fees. Audit-related services include due diligence
services related to mergers and acquisitions, audit-related research and
assistance and employee benefit plan audits. The aggregate fees billed to the
Company by Ernst & Young for audit-related services rendered to the Company and
its subsidiaries for FY02 and FY03 totaled approximately $0 and $3,193,960,
respectively.
Tax Fees. Tax fees include tax compliance and other tax related
services. The aggregate fees billed to the Company by Ernst & Young for tax
services rendered to the Company and its subsidiaries for FY02 and FY03 totaled
approximately $1,969,000 and $1,916,880, respectively. Of the total amount of
tax fees billed to the Company for FY02, $1,723,000 was for services rendered
prior to Ernst & Young's appointment as the Company's independent accountants on
May 9, 2002, and $246,000 related to services rendered after such appointment.
Financial Information Systems Design and Implementation Fees. Ernst &
Young did not bill the Company any fees during FY02 or FY03 in connection with
the design and implementation of financial information systems.
All Other Fees. The aggregate fees billed to the Company by Ernst &
Young for all other services rendered to the Company and its subsidiaries for
such matters as litigation assistance and internal audit services(1) for FY02
and FY03 totaled approximately $608,000 and $14,500, respectively. Of the total
amount of all other fees billed to the Company for FY02, $591,000 was for
services rendered prior to Ernst & Young's appointment as the Company's
independent accountants on May 9, 2002, and $17,000 related to services rendered
after such appointment.
--------------------
(1) The internal audit service arrangement existed prior to Ernst & Young's
appointment as the Company's independent accountants. During FY02 Ernst & Young
billed the Company $252,000 for professional services rendered under the
internal audit service arrangement. This arrangement with Ernst & Young was
terminated immediately upon their appointment as the Company's independent
accountants.
21
AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY
Under the Sarbanes-Oxley Act of 2002, the Audit Committee is
responsible for the appointment, compensation and oversight of the work of the
independent accountants. As part of this responsibility, the Audit Committee is
required to pre-approve the audit and non-audit services performed by the
independent accountants in order to assure that they do not impair the
accountants' independence from the Company. Accordingly, the Audit Committee has
adopted, and the Board of Directors has ratified, an Audit and Non-Audit
Services Pre-Approval Policy (the "Policy") which sets forth the procedures and
the conditions under which services proposed to be performed by the independent
accountants must be pre-approved. The Policy also sets forth the prohibited
non-audit services that may not be provided by the independent accountants.
Pursuant to the Policy, certain proposed services may be pre-approved
on a periodic basis so long as the services do not exceed certain pre-determined
cost levels. If not pre-approved on a periodic basis, proposed services must
otherwise be separately pre-approved prior to being performed by the independent
accountants. In addition, any proposed services that were pre-approved on a
periodic basis but later exceed the pre-determined cost level also will require
separate pre-approval by the Audit Committee.
Representatives of Ernst & Young, which served as the Company's
independent public accountants for FY03 and which the Board has appointed as the
independent public accountants for the fiscal year ending June 30, 2004, are
expected to be present at the Annual Meeting. At the Annual Meeting
representatives of Ernst & Young will have the opportunity to make a statement
about the Company's financial condition, if they desire to do so, and to respond
to appropriate questions from shareholders.
PROPOSAL 1 - ELECTION OF NOMINEES FOR DIRECTORS OF THE COMPANY
AT THE ANNUAL MEETING
The Company's Board of Directors has nominated each of Dave Bing, John
F. Finn, John F. Havens, David W. Raisbeck and Robert D. Walter to serve as a
Director of the Company for a term of three years and until his successor is
duly elected and qualified. Each of Messrs. Bing, Finn, Havens, Raisbeck and R.
Walter currently serves as a Director of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THESE NOMINEES TO SERVE
AS MORE FULLY DESCRIBED UNDER "ELECTION OF DIRECTORS" IN THIS PROXY STATEMENT.
FUTURE SHAREHOLDER PROPOSALS
Any shareholder who intends to present a proposal for the Company's
2004 Annual Meeting of Shareholders for inclusion in the proxy statement and
form of proxy relating to that meeting is advised that the proposal must be
received by the Company at its principal executive offices not later than June
11, 2004. The Company will not be required to include in its proxy statement or
form of proxy a shareholder proposal which is received after that date or which
otherwise fails to meet the requirements for shareholder proposals established
by SEC regulations.
In addition, if a shareholder intends to present a proposal at the
Company's 2004 Annual Meeting of Shareholders without the inclusion of that
proposal in the Company's proxy materials and written notice of the proposal is
not received by the Company on or before August 25, 2004, or if the Company
meets other requirements of the SEC rules, proxies solicited by the Board of
Directors for the 2004 Annual Meeting of Shareholders will confer discretionary
authority to vote on the proposal at the meeting.
OTHER MATTERS
This solicitation of proxies is made by and on behalf of the Board of
Directors. The cost of the solicitation will be borne by the Company. In
addition to solicitation by mail, proxies may be solicited by Directors,
officers and employees of the Company in person or by telephone, telegraph or
other means of communication. These persons will receive no additional
compensation for solicitation of proxies but may be reimbursed for reasonable
out-of-
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pocket expenses in connection with such solicitation. The Company has retained
MacKenzie Partners, Inc. at an estimated cost of $8,500, plus reimbursement of
expenses, to assist in its solicitation of proxies from brokers, nominees,
institutions and individuals. Arrangements also will be made by the Company with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and the Company will reimburse these persons for
reasonable expenses incurred in connection therewith.
If you and other residents at your mailing address own Common Shares in
street name, your broker or bank may have sent you a notice that your household
will receive only one annual report and proxy statement unless contrary to your
instructions. This practice is known as "householding," and is designed to
reduce the Company's printing and postage costs. However, if any shareholder
residing at such an address wishes to receive a separate annual report or proxy
statement, he or she may write to the Company's Investor Relations department at
the Company's corporate office, or call the Investor Relations Line at (614)
757-5222.
If the enclosed proxy is executed and returned, or a proxy is voted by
telephone or the Internet, the Common Shares represented thereby will be voted
in accordance with any specifications made by the shareholder. With respect to
the election of Directors, proxies returned without specifications made by the
shareholder will be voted to elect five Directors as set forth under "Election
of Directors" above.
The presence of any shareholder at the Annual Meeting will not operate
to revoke his or her proxy. A proxy may be revoked at any time insofar as it has
not been exercised by giving written notice to the Company or in open meeting or
by executing and forwarding a later-dated proxy to the Company or voting a later
proxy by telephone or the Internet.
If any other matters shall properly come before the Annual Meeting, the
persons named in the proxy, or their substitutes, will vote thereon in
accordance with their judgment. The Board of Directors does not know of any
other matters which will be presented for action at the Annual Meeting.
By Order of the Board of Directors.
/s/ Paul S. Williams
October 9, 2003 PAUL S. WILLIAMS, Secretary
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APPENDIX A
CARDINAL HEALTH, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The primary function of the Audit Committee (the "Committee") is to
assist the Board of Directors of Cardinal Health, Inc. (the "Company") in
fulfilling its oversight responsibilities by reviewing: the financial reports
and other financial information provided by the Company to any governmental body
or the public; the Company's systems of internal controls regarding finance,
accounting, legal and code of ethics compliance; the Company's internal auditing
function; and the Company's accounting and financial reporting processes.
Consistent with this function, the Committee should encourage continuous
improvement of, and should foster adherence to, the Company's policies,
procedures and practices at all levels. The Committee's primary duties and
responsibilities are to:
- Serve as an independent and objective party to monitor the Company's
financial reporting processes and system of internal accounting
controls.
- Annually review and appraise the efforts and qualifications of the
Company's independent auditor and its Corporate Audit Department.
- Provide an open avenue of communication among the independent auditor,
financial and executive management, the Corporate Audit Department, and
the Board of Directors.
The Committee shall also be responsible for reviewing and approving reports
required by the Securities and Exchange Commission (the "Commission"), e.g.,
"audit committee reports" and "selection of independent auditors" sections in
the Company's annual proxy statement to shareholders.
The Committee will primarily fulfill these responsibilities by carrying out the
specific activities enumerated in Section IV of this Charter and, upon the
direction and approval of the Board of Directors, to direct an investigation
into any activity of the Company. The Committee is empowered to retain such
advisors as it deems appropriate to assist the Committee in fulfilling its
responsibilities, and shall receive appropriate funding from the Company, as
determined by the Committee, to compensate such advisors.
II. COMPOSITION
The Committee has been created by the Board of Directors pursuant to
the authority of Section 1701.63, Ohio Revised Code, and Article 2, Section 2.18
of the Company's code of regulations.
The Committee shall be comprised of no fewer than three directors as determined
by the Board of Directors. The members of the Committee shall meet the
independence and experience requirements of the New York Stock Exchange, Section
10A(m)(3) of the Securities Exchange Act of 1934 and the rules and regulations
of the Commission. Audit Committee members shall not simultaneously serve on the
audit committees of more than two other public companies. All members of the
Committee shall have a working familiarity with basic finance and accounting
practices. In addition, at least one Committee member must have accounting or
related financial management expertise as determined by the Board in accordance
with Commission rules.
The members of the Committee shall be elected by the Board of Directors and
serve until their successors shall be duly elected and qualified. The Committee
shall be subject to the control and direction of the Board of Directors. Unless
a Chair is appointed by the Board of Directors, the members of the Committee may
designate a Chair by majority vote of the full Committee membership.
A-1
III. MEETINGS
The Committee shall meet at least four times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Committee should meet periodically with management, the
principal internal auditor and the independent auditor in separate executive
sessions to discuss any matters that the Committee or each of these groups
believe should be discussed privately. The Committee may request any officer or
employee of the Company or the Company's outside counsel or independent auditor
to attend a meeting of the Committee or to meet with any member of, or
consultant to, the Committee.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties, the Audit Committee shall:
Documents/Reports Review
1. Review and update this Charter periodically, at least annually, as
conditions dictate. In conjunction with this update, the Committee should
perform an annual self-assessment of its processes and communications with
management, the independent auditor and the Board of Directors.
2. Review the Company's annual financial statements and any reports or other
financial information submitted to any governmental body, or the public,
including any certification, report, opinion, or review rendered by the
independent auditor.
3. Review summaries of reports to management prepared by the Corporate Audit
Department and management's responses.
4. Review with financial management of the Company any public announcement of
financial results and SEC Form 10-Q's or 10-K's prior to filing or public
release.
Independent Auditor
5. The Committee shall have the sole authority to appoint or replace the
independent auditor. The Committee shall be directly responsible for the
compensation and oversight of the work of the independent auditor
(including resolution of disagreements between management and the
independent auditor for the purposes of preparing or issuing an audit
report or related work). The independent auditor shall report directly to
the Committee. The Committee is also responsible for actively engaging in a
dialogue with the independent auditor with respect to any disclosed
relationships or services that may impact their objectivity and
independence and for taking, or recommending that the full board take,
appropriate action to ensure such independence. In addition, the Committee
shall assess, at least annually, the independent auditor's internal quality
assurance procedures.
The Committee shall pre-approve the audit and non-audit services provided
by the Company's independent auditor. Pre-approval of such services along
with discussions with the independent auditor will support the Committee's
statement in the Company's proxy statement that it has considered whether
the provision of non-audit services to the Company is compatible with the
independence of its independent auditor. The Committee has adopted and the
Board of Directors has ratified the Audit and Non-Audit Services
Pre-Approval Policy which sets forth the procedures and the conditions
pursuant to which services proposed to be performed by the independent
auditor must be pre-approved.
6. Periodically meet privately with the independent auditor to discuss a)
internal controls and any special steps adopted in light of material
control deficiencies, and b) fullness and accuracy of the Company's
financial statements.
7. Obtain assurance that the independent auditor is not aware of any illegal
acts as provided in Section 10A(b) of the 34 Act.
8. Review and evaluate the lead partner of the independent auditor's team.
Ensure the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible for
reviewing the audit as required by law.
9. Establish and monitor policies for the Company's hiring of employees or
former employees of the independent auditor who participated in any
capacity in the audit of the Company.
A-2
Financial Statement and Disclosure Matters
10. In consultation with the independent auditor and the corporate auditors,
review the integrity of the organization's financial reporting process.
11. Consider the independent auditor's judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
12. Consider and approve, if appropriate, changes to the Company's
accounting principles and practices as suggested by the independent
auditor, management, or the Corporate Audit Department.
13. Review and discuss quarterly information from the independent auditor on:
(a) All critical accounting policies and practices used.
(b) All alternative treatments of financial information within generally
accepted accounting principles that have been discussed with
management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the independent auditor.
(c) Other material written communications between the independent auditor
and management, such as any management letter or schedule of unadjusted
differences.
14. Discuss with management the Company's earnings press releases, including
the use of "pro forma" or "adjusted" non-GAAP information, as well as
financial information and earnings guidance provided to analysts and rating
agencies. Such discussion may be done generally i.e., consisting of
discussing the types of information to be disclosed and the types of
presentations to be made.
15. Discuss with management and the independent auditor the effect of
proposed or pending regulatory and accounting requirements on the Company's
financial statements.
16. Review disclosures made to the Audit Committee by the Company's CEO and CFO
during their certification process for the Form 10-K and Form 10-Q about
any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management
or other employees who have a significant role in the Company's internal
controls.
17. Review any significant disagreement among management and the independent
auditor which, if not resolved to the independent auditor's satisfaction,
would have caused them to issue a qualified report on the Company's
financial statements. "Disagreements" for this purpose shall be those
contemplated by item 304 of SEC Regulation S-K or successor rule.
Process Improvement
18. Establish regular and separate systems of reporting to the Committee by
each of management, the independent auditor and the corporate auditors
regarding any significant judgments made in management's preparation of the
financial statements and the view of each as to the appropriateness of such
judgments.
19. Following completion of the annual audit, review separately with each of
management, the independent auditor and the corporate auditors any
significant difficulties encountered during the course of the audit,
including any restrictions on the scope of the work or access to required
information.
20. Review with the independent auditor, the corporate auditors and management
the extent to which changes or improvements in financial or accounting
practices, as approved by the Committee, have been implemented.
21. Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
Ethical, Legal and Other Compliance Activities
22. Review Company's compliance procedures regarding its Ethics Guide and to
ensure that management is maintaining a system to enforce this code.
23. Ensure that management has the proper review system in place to ensure that
the Company's financial statements, reports and other financial information
disseminated to governmental organizations, and the public satisfy legal
requirements.
24. Review Company's procedures regarding receipt, retention and treatment of
complaints received regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employees
of concerns regarding ethical matters. Establish that the Company's
communications regarding such process allows for direct communication to
the Audit Committee of any such issues.
25. Review with management and the independent auditor activities,
organizational structure, qualifications and budget of the Corporate Audit
Department including appointment and replacement of the senior audit
executive.
A-3
26. Review, with the Company's internal counsel, legal compliance matters
including corporate securities trading policies.
27. Review, with the Company's internal counsel, any legal matter that could
have a significant impact on the Company's financial statements.
28. Perform any other activities consistent with the Charter, the Company's
Code of Regulations and governing law, as the Committee of the Board deems
necessary or appropriate.
29. Submit minutes of all audit committee meetings to the Board of Directors of
the Company.
30. Recommend to the Board of Directors any changes in the authority,
responsibility or duties of the Committee.
Limitation of Audit Committee's Role
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial statements and disclosures are complete
and accurate and are in accordance with generally accepted accounting principles
and applicable rules and regulations. These are the responsibilities of
management and the independent auditor.
A-4
[Cardinal Health Logo]
PROXY - CARDINAL HEALTH, INC.
7000 CARDINAL PLACE
DUBLIN, OHIO 43017
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Brendan A. Ford, Anthony J. Rucci and Paul S.
Williams, and each of them, the attorneys and proxies of the undersigned with
full power of substitution to vote as indicated herein all the common shares,
without par value, of Cardinal Health, Inc. held of record by the undersigned at
the close of business on September 8, 2003, at the annual meeting of
shareholders to be held on November 5, 2003, or any postponements or
adjournments thereof, with all the powers the undersigned would possess if then
and there personally present.
By returning this proxy card you are conferring upon management the authority to
vote in their discretion upon such other business as may properly come before
the meeting or any postponement or adjournment thereof.
-----------------
SEE REVERSE
SIDE
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- FOLD AND DETACH HERE -
[The text set forth below is not part of the proxy]
[Cardinal Health Logo]
ALL SHAREHOLDERS ARE URGED TO VOTE THEIR PROXY AS EARLY AS POSSIBLE.
Participants holding shares through any of the company's employee benefit plans
are urged to vote their shares no later than Friday, October 31, 2003, in order
to ensure complete voting by the applicable plan administrator.
Please see reverse side for information on voting your proxy by telephone or the
Internet.
[ X ] Please mark your votes as in this example
THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.
1. Election of Directors. [ ] FOR ALL [ ] WITHHELD ALL
Nominees: Dave Bing, John F. Finn, John F. Havens, David W. Raisbeck and Robert
D. Walter
FOR ALL EXCEPT vote withheld for the following nominee(s):
________________________________________________________________________________
2. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BY THE SHAREHOLDER.
IF NO SPECIFICATIONS ARE MADE, THE PROXY WILL BE VOTED TO ELECT THE NOMINEES
DESCRIBED IN ITEM 1 ABOVE, AND WITH DISCRETIONARY AUTHORITY ON ALL OTHER MATTERS
THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY POSTPONEMENTS OR
ADJOURNMENTS THEREOF.
Please sign as your name appears hereon. If shares are held jointly, all holders
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give your full title. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person, indicating where proper,
official position or representative capacity.
Receipt of Notice of Annual Meeting of Shareholders and the related Proxy
Statement is hereby acknowledged.
________________________________
________________________________
SIGNATURE(S) DATE
--------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
[The text set forth below is not part of the proxy]
[Cardinal Health Logo]
Dear Shareholder:
We encourage you to take advantage of two modern and convenient ways by which
you can vote your shares. You may vote your shares electronically by touch-tone
telephone or via the Internet, which eliminates the need to return your proxy
card.
VOTE BY TELEPHONE: To vote your shares by telephone, use a touch-tone telephone
and call the following toll-free number: 1-877-PRX-VOTE, 24 hours a day, 7 days
a week. Then follow the simple recorded instructions. You will incur no costs
for such call as this is a toll-free number.
VOTE BY INTERNET: To vote via the Internet, go to web site
WWW.EPROXYVOTE.COM/CAH. Then follow the simple instructions. Please be aware
that if you vote over the Internet, you may incur costs such as
telecommunication and Internet access charges for which you will be responsible.
The Internet and telephone voting facilities will be available until 11:59 p.m.
(EST) on November 4, 2003, the day before Cardinal Health's Annual Meeting.
DO NOT RETURN THE PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET,
AS THE PROXY CARD WILL REVOKE ANY PREVIOUSLY PROVIDED VOTE