-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfiIY1zedZj+VLuAL+SM9vTwT9QHNNbO7aRPQnCOpnNtoEutRa04fied4hdkU5Eu a3u029nCfOK/xoG7cznHBQ== 0000950152-01-505857.txt : 20020410 0000950152-01-505857.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950152-01-505857 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDINAL HEALTH INC CENTRAL INDEX KEY: 0000721371 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 310958666 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11373 FILM NUMBER: 1788505 BUSINESS ADDRESS: STREET 1: 7000 CARDINAL PL CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147175000 MAIL ADDRESS: STREET 1: 5555 GLEDNON COURT CITY: DUBLIN STATE: OH ZIP: 43016 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 10-Q 1 l91098ae10-q.txt CARDINAL HEALTH, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended September 30, 2001 Commission File Number 0-11373 CARDINAL HEALTH, INC. (Exact name of registrant as specified in its charter) OHIO 31-0958666 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7000 CARDINAL PLACE, DUBLIN, OHIO 43017 (Address of principal executive offices and zip code) (614) 757-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of Registrant's Common Shares outstanding at the close of business on October 31, 2001 was as follows: Common Shares, without par value: 450,889,276 -------------- Page 1 CARDINAL HEALTH, INC. AND SUBSIDIARIES Index *
Page No. Part I. Financial Information: --------------------- Item 1. Financial Statements: Condensed Consolidated Statements of Earnings for the Three Months Ended September 30, 2001 and 2000 (unaudited)...................................... 3 Condensed Consolidated Balance Sheets at September 30, 2001 and June 30, 2001 (unaudited).......................................................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2000 (unaudited)............................................ 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................................................ 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 16 Part II. Other Information: ----------------- Item 1. Legal Proceedings.................................................................. 16 Item 6. Exhibits and Reports on Form 8-K................................................... 16
* Items not listed are inapplicable. Page 2 PART I. FINANCIAL INFORMATION CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 ----------- ----------- Revenue: Operating revenue $ 9,865.4 $ 8,510.9 Bulk deliveries to customer warehouses 1,908.0 2,529.0 ----------- ----------- Total revenue 11,773.4 11,039.9 Cost of products sold: Operating cost of products sold 8,950.7 7,707.2 Cost of products sold - bulk deliveries 1,908.0 2,528.5 ----------- ----------- Total cost of products sold 10,858.7 10,235.7 Gross margin 914.7 804.2 Selling, general and administrative expenses 502.4 455.3 Goodwill amortization - 12.1 Special charges 12.3 12.3 ----------- ----------- Operating earnings 400.0 324.5 Interest expense and other 28.6 33.7 ----------- ----------- Earnings before income taxes 371.4 290.8 Provision for income taxes 125.0 100.8 ----------- ----------- Net earnings before cumulative effect of change in accounting principle 246.4 190.0 Cumulative effect on prior years of change in accounting principle, net of tax (See Note 8) 70.1 - ----------- ----------- Net earnings $ 176.3 $ 190.0 =========== =========== Basic earnings per Common Share: Before cumulative effect of change in accounting principle $ 0.55 $ 0.43 Cumulative effect of change in accounting principle (0.16) - ----------- ----------- Net basic earnings per Common Share $ 0.39 $ 0.43 =========== =========== Diluted earnings per Common Share: Before cumulative effect of change in accounting principle $ 0.53 $ 0.42 Cumulative effect of change in accounting principle (0.15) - ----------- ----------- Net diluted earnings per Common Share $ 0.38 $ 0.42 =========== =========== Weighted average number of Common Shares outstanding: Basic 449.6 438.9 Diluted 460.6 450.9 Cash dividends declared per Common Share $ 0.025 $ 0.020
See notes to condensed consolidated financial statements. Page 3 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS)
SEPTEMBER 30, JUNE 30, 2001 2001 --------- --------- ASSETS Current assets: Cash and equivalents $ 872.0 $ 934.1 Trade receivables, net 2,251.6 2,408.7 Current portion of net investment in sales-type leases 182.3 236.3 Inventories 7,704.7 6,286.1 Prepaid expenses and other 939.1 851.1 --------- --------- Total current assets 11,949.7 10,716.3 --------- --------- Property and equipment, at cost 3,380.2 3,345.9 Accumulated depreciation and amortization (1,532.3) (1,507.6) --------- --------- Property and equipment, net 1,847.9 1,838.3 Other assets: Net investment in sales-type leases, less current portion 539.6 671.7 Goodwill and other intangibles 1,166.9 1,175.4 Other 217.4 240.7 --------- --------- Total $15,721.5 $14,642.4 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ 13.4 $ 8.3 Current portion of long-term obligations 12.5 5.9 Accounts payable 5,663.8 5,319.9 Other accrued liabilities 1,368.2 1,240.7 --------- --------- Total current liabilities 7,057.9 6,574.8 --------- --------- Long-term obligations, less current portion 2,288.6 1,871.0 Deferred income taxes and other liabilities 704.9 759.5 Shareholders' equity: Common Shares, without par value 1,931.4 1,893.1 Retained earnings 4,313.7 4,146.0 Common Shares in treasury, at cost (444.0) (457.2) Other comprehensive income (127.1) (140.3) Other (3.9) (4.5) --------- --------- Total shareholders' equity 5,670.1 5,437.1 --------- --------- Total $15,721.5 $14,642.4 ========= =========
See notes to condensed consolidated financial statements. Page 4 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings before cumulative effect of change in accounting principle $ 246.4 $ 190.0 Adjustments to reconcile net earnings before cumulative effect of change in accounting principle to net cash from operating activities: Depreciation and amortization 61.2 68.0 Provision for bad debts 9.3 3.4 Change in operating assets and liabilities, net of effects from acquisitions: (Increase)/decrease in trade receivables 151.7 (133.0) Increase in inventories (1,411.0) (779.8) (Increase)/decrease in net investment in sales-type leases 186.0 (11.9) Increase in accounts payable 342.9 491.7 Other operating items, net (67.2) (210.8) -------- -------- Net cash used in operating activities (480.7) (382.4) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired - (239.9) Proceeds from sale of property and equipment 9.6 3.4 Additions to property and equipment (58.3) (53.4) -------- -------- Net cash used in investing activities (48.7) (289.9) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in commercial paper and short-term debt 405.1 608.0 Reduction of long-term obligations (13.4) (23.9) Proceeds from long-term obligations, net of issuance costs 36.2 15.4 Common Shares issued under employee benefit plans 53.3 70.4 Dividends on Common Shares and cash paid in lieu of fractional shares (11.2) (9.0) Other (2.7) (2.4) -------- -------- Net cash provided by financing activities 467.3 658.5 -------- -------- NET DECREASE IN CASH AND EQUIVALENTS (62.1) (13.8) CHANGE IN BINDLEY'S FISCAL YEAR - 47.6 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 934.1 539.5 -------- -------- CASH AND EQUIVALENTS AT END OF PERIOD $ 872.0 $ 573.3 ======== ========
See notes to condensed consolidated financial statements. Page 5 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. The condensed consolidated financial statements of Cardinal Health, Inc. (the "Company") include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim reporting. In the opinion of management, all adjustments necessary for a fair presentation have been included. Except as disclosed elsewhere herein, all such adjustments are of a normal and recurring nature. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (the "2001 Form 10-K"). Without limiting the generality of the foregoing, Note 1 of the "Notes to Consolidated Financial Statements" from the 2001 Form 10-K is specifically incorporated herein by reference. Note 2. Basic earnings per Common Share ("Basic") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share is similar to the computation for Basic, except that the denominator is increased by the dilutive effect of stock options outstanding, computed using the treasury stock method. In September 2001, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. The repurchased shares will be held as treasury shares and used for general corporate purposes. As of September 30, 2001, no shares had been repurchased through this program. Note 3. The Company's comprehensive income consists of net earnings, foreign currency translation adjustments, unrealized (loss)/gain on investment, reclassification adjustment for investment losses included in net income, and net unrealized loss on derivative instruments as follows: For the Three Months Ended (in millions) September 30, -------------------------- 2001 2000 -------------------------- Net earnings $ 176.3 $ 190.0 Foreign currency translation adjustments 14.3 (20.3) Unrealized (loss)/gain on investment 2.2 (5.4) Reclassification adjustment for investment losses included in net income 3.2 -- Net unrealized loss on derivative instruments (6.5) (0.2) ---------- --------- Total comprehensive income $ 189.5 $ 164.1 ========== ========= Note 4. Pyxis Funding LLC ("Pyxis Funding") was organized during the first quarter of fiscal year 2002 for the sole purpose of buying receivables and selling them to certain investors. Pyxis Funding is a wholly owned, special purpose, bankruptcy-remote subsidiary of Pyxis Corporation ("Pyxis"). During the first quarter of fiscal year 2002, Pyxis Funding acquired a pool of sales-type leases from Pyxis, and sold an undivided interest in those leases to an investor for approximately $150 million, which approximated the fair value of the sold interest. This was accounted for as a sale by the Company and Pyxis under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Although Pyxis Funding is consolidated by the Company and Pyxis as required by generally accepted accounting principles, it is a separate legal entity and maintains separate financial statements. The assets of Pyxis Funding are available, first and foremost, to satisfy claims of its creditors. Page 6 Note 5. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. The merger-related costs currently being recognized are primarily a result of the merger transactions with Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig Medical Corporation ("BBMC"), Automatic Liquid Packaging, Inc. ("ALP"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation ("Scherer"). The following is a summary of the special charges for the three-month periods ended September 30, 2001 and 2000. Special Charges Three Months Ended September 30, ---------------------------------------------------------------------- (in millions) 2001 2000 ---------------------------------------------------------------------- Merger-Related Costs: Employee-related costs $ (4.1) $ (7.9) Exit costs and asset impairment (2.6) (0.1) Restructuring costs - (1.6) Other integration costs (5.6) (7.7) ---------------------------------------------------------------------- Total merger-related costs $ (12.3) $ (17.3) ---------------------------------------------------------------------- Other Special Charges: Litigation settlement $ - $ 5.0 ---------------------------------------------------------------------- Total other special charges $ - $ 5.0 ---------------------------------------------------------------------- Total special charges $ (12.3) $ (12.3) Tax effect of special charges 4.7 6.3 ---------------------------------------------------------------------- Net effect of special charges $ (7.6) $ (6.0) ====================================================================== Merger-Related Costs During the above stated periods, the Company incurred employee-related costs associated with certain of its merger transactions. These expenses primarily consist of severance, noncompete agreements, and transaction/stay bonuses as a result of the Bindley, BBMC, ALP, Allegiance and Scherer merger transactions. Exit costs relate primarily to costs associated with lease terminations, moving expenses, and asset impairments as a direct result of the merger transactions with Bindley, BBMC, ALP, Allegiance and Scherer. Other integration costs include charges primarily related to integrating the operations of the above mentioned merger transactions. The Company incurred a restructuring charge of $1.6 million during the three months ended September 30, 2000 relating to the Company's merger transaction with Scherer. As part of the business restructuring, the Company has closed certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. Other Special Charges During the first quarter of fiscal 2001, Bindley recorded a benefit of approximately $5.0 million related to a reduction in a litigation settlement accrual, which was previously recorded. The amount of the final settlement was lower than originally anticipated. Summary The net effect of the various special charges recorded during the three months ended September 30, 2001 and 2000 was to reduce net earnings before cumulative effect of change in accounting principle by $7.6 million to $246.4 million and by $6.0 million to $190.0 million, respectively, and to reduce reported diluted earnings per Common Share before cumulative effect of change in accounting principle by $0.02 per share to $0.53 per share and by $0.01 per share to $0.42 per share, respectively. Note 6. The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates in four business segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. With the exception noted in Note 8 for the Automation and Information Page 7 Services segment, the Company has not made any significant changes in the segments reported or the basis of measurement of segment profit or loss from the information provided in the Company's 2001 Form 10-K. The Pharmaceutical Distribution and Provider Services segment involves the distribution of a broad line of pharmaceuticals, healthcare and beautycare products, radiopharmaceuticals, therapeutic plasma and other specialty pharmaceutical products and other items typically sold by hospitals, retail drug stores and other healthcare providers. In addition, this segment provides services to the healthcare industry through integrated pharmacy management, temporary pharmacy staffing, as well as franchising of apothecary-style retail pharmacies. The Medical-Surgical Products and Services segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products to hospitals, physician offices, surgery centers and other healthcare providers. The Pharmaceutical Technologies and Services segment provides services to the healthcare manufacturing industry through the design of unique drug delivery systems, liquid fill contract manufacturing, comprehensive packaging services, and sales and marketing services. The Automation and Information Services segment provides services to hospitals and other healthcare providers through pharmacy automation equipment and clinical information system services. The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Special charges are not allocated to the segments. The following table includes revenue and operating earnings for the three-month periods ended September 30, 2001 and 2000 for each segment and reconciling items necessary to equal amounts reported in the condensed consolidated financial statements:
For the Three Months Ended September 30, ---------------------------------- (in millions) Net Revenue ---------------------------------- 2001 2000 ---------------- ---------------- Operating revenue: Pharmaceutical Distribution and Provider Services $7,960.7 $6,779.7 Medical-Surgical Products and Services 1,509.5 1,378.5 Pharmaceutical Technologies and Services 300.7 272.1 Automation and Information Services 108.3 90.1 Other (13.8) (9.5) ---------------- ---------------- Total operating revenue 9,865.4 8,510.9 Bulk deliveries to customer warehouses: Pharmaceutical Distribution and Provider Services 1,908.0 2,529.0 ---------------- ---------------- Total net revenue $11,773.4 $11,039.9 ------------------------------------------------------------------------------------------------------- Operating Earnings ---------------------------------- 2001 2000 ---------------- ---------------- Operating earnings: Pharmaceutical Distribution and Provider Services $221.8 $177.7 Medical-Surgical Products and Services 126.5 102.6 Pharmaceutical Technologies and Services 57.7 49.9 Automation and Information Services 29.8 23.1 Corporate (1) (35.8) (28.8) ---------------- ---------------- Total operating earnings $400.0 $324.5 -------------------------------------------------------------------------------------------------------
(1) Corporate - operating earnings primarily consist of special charges of $12.3 million in each of the three month periods ended September 30, 2001 and 2000 and unallocated corporate depreciation and amortization and administrative expenses. Page 8 Note 7. On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. Healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which was acquired by the Company on February 3, 1999, agreed to indemnify Baxter Healthcare Corporation ("BHC") from certain claims related to the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance will be defending and indemnifying BHC, as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims pertaining to the litigation assumed by Allegiance. As of September 30, 2001, there were approximately 609 lawsuits involving BHC and/or Allegiance containing allegations of sensitization to natural rubber latex products. Some of the cases are now proceeding to trial. Because of the number of claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the resolution of cases involving natural rubber latex gloves. AEIA, one of the insurers for the latex glove litigation, previously advised the Company of its intent to resolve through arbitration the extent of its obligation to reimburse the Company for certain defense costs and loss expenses incurred in connection with the litigation. On October 22, 2001, BHC, Allegiance and AEIA reached a settlement agreement resolving all issues related to the Company's recovery of reimbursable expenses under the AEIA insurance policy, the terms of which are confidential. The Company believes a substantial portion of any liability will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company also becomes involved from time-to-time in other litigation incidental to its business, including, without limitation, inclusion of certain of its subsidiaries as a potentially responsible party for environmental clean-up costs. Although the ultimate resolution of the litigation referenced herein cannot be forecast with certainty, the Company intends to vigorously defend itself and does not currently believe that the outcome of any pending litigation will have a material adverse effect on the Company's consolidated financial statements. Note 8. In the first quarter of fiscal 2002, the method of recognizing revenue for pharmacy automation equipment was changed from recognizing revenue when the units were delivered to the customer to recognizing revenue when the units are installed at the customer site. Management believes that the change in accounting method will provide for a more objectively determinable method of revenue recognition. In addition, the Company has implemented other changes to better service its customers and leverage operational efficiencies. The Company has recorded a cumulative effect of change in accounting principle of $70.1 million (net of tax of $44.6 million) in the consolidated statement of earnings during the first quarter of fiscal 2002. The after tax dilutive impact of the cumulative effect is $0.15 per diluted share. The estimated effect of the change for the three months ended September 30, 2001, is to reduce net earnings before the cumulative effect by $4.2 million (or $0.01 per share). The pro-forma effect of this accounting change on prior periods has not been presented as the required information is not available. Note 9. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142 "Goodwill and Other Intangible Asssets" which revises the accounting for purchased goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company has elected to adopt SFAS 142 beginning with the first quarter of fiscal 2002. Under SFAS 142, purchased goodwill and intangible assets with indefinite lives are no longer amortized, but instead tested for impairment at least annually. Accordingly, the Company has ceased amortization of all goodwill and intangible assets with indefinite lives as of July 1, 2001. Intangible assets with finite lives, primarily patents and trademarks, will continue to be amortized over their useful lives. During the quarter ended September 30, 2001, there have been no material changes to goodwill as a result of acquisitions, impairment losses, or disposals. SFAS 142 requires a two step impairment test for goodwill. The first step is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the carrying amount exceeds the fair value then the second step is required to be completed, which involves the fair value of the reporting unit being allocated to each asset and liability with the excess being implied goodwill. The impairment loss is the amount by which the recorded goodwill exceeds the implied goodwill. The Company is required to complete a "transitional" impairment test for goodwill as of the beginning of the fiscal year in which the statement is adopted. This transitional impairment test requires that the Company complete step one of the goodwill impairment test within six months from the date of initial Page 9 adoption, or December 31, 2001. The Company has not completed the transitional impairment test but does not anticipate any material impairment charges upon completion of the test. The following table compares the Company's net earnings and per share amounts before the cumulative effect of change in accounting principle for the three months ended September 30, 2001, to net earnings and per share amounts for the three months ended September 30, 2000, adjusted for the amortization of intangible assets and goodwill.
For the Three Months Ended (in millions, except per share amounts) September 30, ------------------------------------ 2001 2000 ------------------------------------ Earnings before cumulative effect of change in accounting principle $246.4 $201.0 Basic earnings per share $0.55 $0.46 Diluted earnings per share $0.53 $0.44
Note 10. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company does not believe that the prospective adoption of this standard will have a material impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement creates one accounting model, based on the framework established in SFAS No. 121, to be applied to all long-lived assets including discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements. Page 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of September 30, 2001 and June 30, 2001, and for the condensed consolidated statements of earnings for the three month periods ended September 30, 2001 and 2000. This discussion and analysis should be read together with management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. Portions of management's discussion and analysis presented below include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify "forward-looking statements", which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those made, projected or implied. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.01 to this Form 10-Q and are incorporated herein by reference. The Company disclaims any obligation to update any forward-looking statement. GENERAL The Company operates within four operating business segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. See Note 6 of "Notes to Condensed Consolidated Financial Statements" for a description of these segments. RESULTS OF OPERATIONS
Operating Revenue Percent of Total Operating Revenues --------------------------------- Three months ended September 30, Growth (1) 2001 2000 - -------------------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 17% 81% 80% Medical-Surgical Products and Services 10% 15% 16% Pharmaceutical Technologies and Services 11% 3% 3% Automation and Information Services 20% 1% 1% Total Company 16% 100% 100% - --------------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the three-month period ended September 30, 2001 compared to the corresponding period of the prior year. Total operating revenue for the three months ended September 30, 2001 increased 16% compared to the same period of the prior year. The increase in operating revenue resulted from a higher sales volume to existing customers; pharmaceutical price increases; acquisitions; and addition of new customers, some of which was a result of cross-selling opportunities among the various businesses. The Pharmaceutical Distribution and Provider Services segment's operating revenue growth during the first quarter of fiscal 2002 resulted from strong sales to all customer segments, especially chain pharmacies and health systems. All operating revenue growth for this segment was internal and was primarily the result of increased volume to existing customers. The Medical-Surgical Products and Services segment's operating revenue growth during the first quarter of fiscal 2002 resulted from an increase in sales of self-manufactured products and distributed products. Bergen Brunswig Medical Corporation ("BBMC") was acquired in August of fiscal 2001 and accounted for as a purchase transaction. As prior period revenues for this segment were not restated, this resulted in one month of incremental revenues for distributed products in fiscal 2002, which contributed to the operating revenue growth. Page 11 The Pharmaceutical Technologies and Services segment's operating revenue growth during the first quarter of fiscal 2002 resulted from higher sales volume particularly involving sterile-liquid and controlled-release pharmaceutical technologies, as well as its proprietary packaging offerings. The pharmaceutical technologies business benefited from strong demand for several sterile-liquid technologies. The pharmaceutical packaging business' growth was attributable to the addition of several new customers and increased volume from existing customers. The Automation and Information Services segment's operating revenue growth during the first quarter of fiscal 2002 resulted from strong sales of new products, such as MEDSTATION SN(R) and SUPPLYSTATION(R) System 30, and further penetration of the market with existing automation products. Bulk Deliveries to Customer Warehouses. The Company reports bulk deliveries made to customers' warehouses as revenue. These sales involve the Company acting as an intermediary in the ordering and subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries result largely from circumstances that the Company cannot control, including consolidation within the customers' industries, decisions by customers to either begin or discontinue warehousing activities, and changes in policies by manufacturers related to selling directly to customers. Due to the lack of margin generated through bulk deliveries, fluctuations in their amount have no significant impact on the Company's earnings.
Gross Margin Three Months Ended September 30, - ------------------------------------------------------------------------------------------------ (As a percentage of operating revenue) 2001 2000 - ------------------------------------------------------------------------------------------------ Pharmaceutical Distribution and Provider Services 5.21% 5.16% Medical-Surgical Products and Services 21.42% 22.50% Pharmaceutical Technologies and Services 33.82% 32.44% Automation and Information Services 66.92% 64.32% Total Company 9.27% 9.45% - ------------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased during the first quarter of fiscal 2002. This decrease resulted primarily from a greater mix of lower margin distributed products, especially within the Pharmaceutical Distribution and Provider Services and Medical-Surgical Products and Services segments. This decrease was partially offset by higher vendor margins from favorable price increases and manufacturer marketing programs as well as improved product mix. The Pharmaceutical Distribution and Provider Services segment's gross margin as a percentage of operating revenue increased as a result of vendor margin opportunities from favorable price increases and manufacturer marketing programs. This increase was partially offset by the continuing impact of lower selling margins within the highly competitive distribution market. The Medical-Surgical Products and Services segment's gross margin as a percentage of operating revenue decreased due to the purchase of BBMC. This acquisition has temporarily shifted product mix toward lower margin distributed products. The Pharmaceutical Technologies and Services segment's gross margin as a percentage of operating revenue increased primarily from stronger sales volume in the higher margin liquid fill contract manufacturing and drug delivery system businesses. The drug delivery system business' shift to higher margin pharmaceutical products from lower margin health and nutrition products also contributed to the improvement in gross margin. The gross margin in this segment was negatively impacted by certain items that occurred in fiscal year 2001 that did not recur in fiscal year 2002, namely a milestone payment related to the use of the Company's proprietary technology and a decline in business related to the decision to reduce the Company's participation in the domestic health and nutritional market. These declines were largely offset by the recording of the minimum recovery expected to be received for claims against vitamin manufacturers for amounts overbilled in prior years. This pricing adjustment was recorded as a reduction of cost of goods sold, consistent with the classification of the original overcharge. The Automation and Information Services segment's gross margin as a percentage of operating revenue increased primarily from changes in its product mix and improved productivity. Page 12
Selling, General and Administrative Expenses Three Months Ended September 30, - -------------------------------------------------------------------------------------------------------- (As a percentage of operating revenue) 2001 2000 - -------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution and Provider Services 2.42% 2.54% Medical-Surgical Products and Services 13.03% 15.06% Pharmaceutical Technologies and Services 14.62% 14.08% Automation and Information Services 39.43% 38.68% Total Company 5.09% 5.49% - --------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses as a percentage of operating revenue decreased during the first quarter of fiscal 2002 as compared to the same period of fiscal 2001. This decrease reflects economies of scale associated with the Company's revenue growth. Significant productivity gains resulting from continued cost control efforts in all segments and the continuation of consolidation and selective automation of operating facilities contributed to the improvement. The Company is continuing to take advantage of synergies from recent acquisitions to decrease selling, general and administrative expenses as a percentage of operating revenue. In addition, the Company ceased amortizing goodwill during the first quarter of fiscal 2002 due to the adoption of Statement of Financial Accounting Standards 142 "Goodwill and Other Intangible Assets" (see Note 9 in the "Notes to Condensed Consolidated Financial Statements" for further discussion), which also contributed to the improvement. Partially offsetting the improvements in fiscal 2002 was an increase in selling, general and administrative expenses as a percentage of operating revenue for the Pharmaceutical Technologies and Services segment. This change was primarily a result of surplus capacity in the manufacturing facilities for this segment as investments have been made in advance of expected future growth. Selling, general and administrative expenses, including goodwill amortization, grew 7% during the first quarter of fiscal 2002 as compared to the same period in fiscal 2001. This increase is primarily attributed to increases in personnel costs and depreciation expense, partially offset by the fact that no goodwill amortization was recorded in fiscal 2002. The overall increase compares favorably to the 16% growth in operating revenue for the same period. Special Charges. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. The merger-related costs currently being recognized are primarily a result of the merger transactions with Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig Medical Corporation ("BBMC"), Automatic Liquid Packaging, Inc. ("ALP"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation ("Scherer"). The following is a summary of the special charges for the three-month periods ended September 30, 2001 and 2000.
Special Charges Three Months Ended September 30, - ------------------------------------------------------------------------------------------------ (in millions) 2001 2000 - ------------------------------------------------------------------------------------------------ Merger-Related Costs: Employee-related costs $ (4.1) $ (7.9) Exit costs and asset impairment (2.6) (0.1) Restructuring costs - (1.6) Other integration costs (5.6) (7.7) - ------------------------------------------------------------------------------------------------ Total merger-related costs $ (12.3) $ (17.3) - ------------------------------------------------------------------------------------------------ Other Special Charges: Litigation settlement $ - $ 5.0 - ------------------------------------------------------------------------------------------------ Total other special charges $ - $ 5.0 - ------------------------------------------------------------------------------------------------ Total special charges $ (12.3) $ (12.3) Tax effect of special charges 4.7 6.3 - ------------------------------------------------------------------------------------------------ Net effect of special charges $ (7.6) $ (6.0) ================================================================================================
Page 13 Merger-Related Costs. During the above stated periods, the Company incurred employee-related costs associated with certain of its merger transactions. These expenses primarily consist of severance, noncompete agreements, and transaction/stay bonuses as a result of the Bindley, BBMC, ALP, Allegiance and Scherer merger transactions. Exit costs relate primarily to costs associated with lease terminations, moving expenses, and asset impairments as a direct result of the merger transactions with Bindley, BBMC, ALP, Allegiance and Scherer. Other integration costs include charges primarily related to integrating the operations of the above mentioned merger transactions. The Company incurred a restructuring charge of $1.6 million during the three months ended September 30, 2000 relating to the Company's merger transaction with Scherer. As part of the business restructuring, the Company has closed certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. Other Special Charges. During the first quarter of fiscal 2001, Bindley recorded a benefit of approximately $5.0 million related to a reduction in a litigation settlement accrual, which was previously recorded. The amount of the final settlement was lower than originally anticipated. Summary. The net effect of the various special charges recorded during the three months ended September 30, 2001 and 2000 was to reduce net earnings before cumulative effect of change in accounting principle by $7.6 million to $246.4 million and by $6.0 million to $190.0 million, respectively, and to reduce reported diluted earnings per Common Share before cumulative effect of change in accounting principle by $0.02 per share to $0.53 per share and by $0.01 per share to $0.42 per share, respectively. The Company estimates that it will incur additional merger-related costs and integration expenses associated with the various mergers it has completed to date (primarily related to the Allegiance, ALP, BBMC, and Bindley mergers) of approximately $130.0 million ($80.6 million, net of tax) in future periods (primarily fiscal 2002 and 2003) related to the exit of contractual arrangements, employee-related costs, and costs to properly integrate operations and implement efficiencies. Such amounts will be charged to expense when incurred. Provision for Income Taxes. The Company's provision for income taxes relative to pre-tax earnings, excluding the impact of goodwill amortization, was 33.7% and 33.6% for the first quarters of fiscal 2002 and 2001, respectively. Fluctuations in the effective tax rate are primarily due to the impact of recording non-deductible merger-related costs during various periods as well as fluctuating state and foreign effective tax rates as a result of the Company's business mix. The provision for income taxes excluding the impact of merger-related charges and goodwill amortization was 33.8% and 34.3% for the quarters ended September 30, 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $4.9 billion at September 30, 2001 from $4.1 billion at June 30, 2001. This increase resulted from additional investment in inventories partially offset by effective asset management. Inventories increased by $1.4 billion during the first quarter of fiscal 2002. This reflects the higher level of business volume in Pharmaceutical Distribution and Provider Services' activities, as well as initiatives to augment inventories in support of the Company's commitment to emergency-response readiness. A portion of the inventory increase can also be attributed to the Company investing in inventories in conjunction with various vendor-margin programs. Partially offsetting the increase in inventories was a decrease in trade receivables of $157.1 million and an increase in accounts payable of $343.9 million. The decrease in trade receivables was a result of effective asset management and focus on reducing the number of days sales outstanding. The change in accounts payable is due primarily to the timing of inventory purchases and related payments. Property and equipment, at cost, increased by $34.3 million from June 30, 2001. The increase was primarily the result of ongoing plant expansion and manufacturing equipment purchases in certain manufacturing businesses, as well as additional investments made for management information systems and upgrades to distribution facilities. Net investment in sales-type leases, less current portion decreased $132.1 million during the first quarter of fiscal 2002. This decrease was primarily the result of the sale by Pyxis Funding LLC ("Pyxis Funding") of an undivided interest in a defined pool of sales-type leases to an investor at amounts approximating their fair value. Pyxis Funding obtained proceeds of approximately $150 million related to the transaction (see Note 4 in the "Notes to Condensed Consolidated Financial Statements" for further discussion). Page 14 Shareholders' equity increased to $5.7 billion at September 30, 2001 from $5.4 billion at June 30, 2001, primarily due to net earnings of $176.3 million and the investment of $53.3 million by employees of the Company through various employee stock benefit plans. These increases were offset by dividends of $11.2 million. In September 2001, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. The repurchased shares will be held as treasury shares and used for general corporate purposes. As of September 30, 2001, no shares had been repurchased through this program. The Company believes that it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements, including those related to business combinations. Page 15 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes there has been no material change in its exposure to market risk from that discussed in the Company's Form 10-K for the fiscal year ended June 30, 2001. PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The following disclosure should be read together with the disclosure set forth in the Company's Form 10-K for the fiscal year ended June 30, 2001, and to the extent any such statements constitute "forward looking statements" reference is made to Exhibit 99.01 of this Form 10-Q. On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. Healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which was acquired by the Company on February 3, 1999, agreed to indemnify Baxter Healthcare Corporation ("BHC") from certain claims related to the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance will be defending and indemnifying BHC, as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims pertaining to the litigation assumed by Allegiance. As of September 30, 2001, there were approximately 609 lawsuits involving BHC and/or Allegiance containing allegations of sensitization to natural rubber latex products. Some of the cases are now proceeding to trial. Because of the number of claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the resolution of cases involving natural rubber latex gloves. AEIA, one of the insurers for the latex glove litigation, previously advised the Company of its intent to resolve through arbitration the extent of its obligation to reimburse the Company for certain defense costs and loss expenses incurred in connection with the litigation. On October 22, 2001, BHC, Allegiance and AEIA reached a settlement agreement resolving all issues related to the Company's recovery of reimbursable expenses under the AEIA insurance policy, the terms of which are confidential. The Company believes a substantial portion of any liability will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company also becomes involved from time-to-time in other litigation incidental to its business, including, without limitation, inclusion of certain of its subsidiaries as a potentially responsible party for environmental clean-up costs. Although the ultimate resolution of the litigation referenced herein cannot be forecast with certainty, the Company intends to vigorously defend itself and does not currently believe that the outcome of any pending litigation will have a material adverse effect on the Company's consolidated financial statements. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Listing of Exhibits: Exhibit Exhibit Description ------- ------------------- Number ------ 3.01 Amended and Restated Code of Regulations of the Registrant, as amended 18.01 Letter Regarding Change in Accounting Principle 99.01 Statement Regarding Forward-Looking Information (1) - -------------- (1) Included as an exhibit to the Registrant's Annual Report on Form 10-K filed August 24, 2001 (File No. 0-11373) and incorporated herein by reference. (b) Reports on Form 8-K: None. Page 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARDINAL HEALTH, INC. Date: November 14, 2001 By: /s/ Robert D. Walter ------------------------------------------ Robert D. Walter Chairman and Chief Executive Officer By: /s/ Richard J. Miller ------------------------------------------ Richard J. Miller Executive Vice President and Chief Financial Officer Page 17 EX-3.01 3 l91098aex3-01.txt EXHIBIT 3.01 EXHIBIT 3.01 RESTATED CODE OF REGULATIONS ---------------------------- OF -- CARDINAL HEALTH, INC. --------------------- ADOPTED JUNE 14, 1983 AMENDED SEPTEMBER 14, 1984 AMENDED JANUARY 27, 1994 AMENDED NOVEMBER 23, 1998 AMENDED NOVEMBER 7, 2001 TABLE OF CONTENTS
PAGE ARTICLE 1 Meetings of Shareholders.................................................1 Section 1.1 Annual Meeting......................................................1 Section 1.2 Special Meetings....................................................1 Section 1.3 Place of Meetings...................................................1 Section 1.4 Notice of Meetings..................................................1 Section 1.5 [Reserved]..........................................................1 Section 1.6 Waiver of Notice....................................................1 Section 1.7 Quorum..............................................................2 Section 1.8 Organization........................................................2 Section 1.9 Order of Busines....................................................2 Section 1.10 Voting..............................................................2 Section 1.11 Proxies.............................................................2 Section 1.12 Inspectors of Elections.............................................2 Section 1.13 Record Date.........................................................3 Section 1.14 List of Shareholders at Meeting.....................................3 Section 1.15 Action in Writing in Lieu of Meeting................................3 ARTICLE 2 Board of Directors.......................................................3 Section 2.1 General Powers of Board.............................................3 Section 2.2 Number and Classification...........................................3 Section 2.3 Compensation and Expenses...........................................4 Section 2.4 Election of Directors...............................................4 Section 2.5 Term of Office......................................................4 Section 2.6 Resignations........................................................4 Section 2.7 Removal of Directors................................................4 Section 2.8 Vacancies...........................................................4 Section 2.9 Organization of Meetings............................................5 Section 2.10 Place of Meetings...................................................5 Section 2.11 Regular Meetings....................................................5 Section 2.12 Special Meetings....................................................5 Section 2.13 Notices of Meetings.................................................5 Section 2.14 Notice of Adjournment of Meeting....................................5 Section 2.15 Quorum and Manner of Acting.........................................5 Section 2.16 Order of Business ..................................................6 Section 2.17 Action in Writing in Lieu of Meeting................................6 Section 2.18 Executive and Other Committees......................................6 ARTICLE 3 Officers.................................................................6 Section 3.1 Number and Titles...................................................6 Section 3.2 Election, Terms of Office, Qualifications, and Compensation.........7 Section 3.3 Additional Officers, Agents, Etc....................................7
i Section 3.4 Removal.............................................................7 Section 3.5 Resignations........................................................7 Section 3.6 Vacancies...........................................................7 Section 3.7 Powers, Authority, and Duties of Officers...........................7 ARTICLE 4 Shares and Their Transfer................................................8 Section 4.1 Certificates for Shares.............................................8 Section 4.2 Transfer of Shares..................................................8 Section 4.3 Regulations.........................................................8 Section 4.4 Lost, Destroyed or Stolen Certificates..............................8 ARTICLE 5 Examination of Books by Shareholders.....................................9 ARTICLE 6 Indemnification and Insurance............................................9 Section 6.1 Costs Incurred......................................................9 Section 6.2 Indemnification Procedure..........................................10 Section 6.3 Advance Payment of Costs...........................................10 Section 6.4 Non-Exclusive......................................................10 Section 6.5 Insurance..........................................................10 Section 6.6 Survival...........................................................10 Section 6.7 Successors.........................................................10 ARTICLE 7 Seal....................................................................11 ARTICLE 8 Fiscal Year.............................................................11 ARTICLE 9 Control Share Acquisitions..............................................11 ARTICLE 10 Amendment of Regulations................................................11
ii ARTICLE 1 MEETINGS OF SHAREHOLDERS Section 1.1 ANNUAL MEETING. The annual meeting of the shareholders, for the purpose of electing directors and transacting such other business as may come before the meeting, shall be held on such date and at such time during the first six months of each fiscal year of the Company as may be fixed by the board of directors and stated in the notice of the meeting. Section 1.2 SPECIAL MEETINGS. A special meeting of the shareholders may be called by the chairman of the board, or the president, or a majority of the directors acting with or without a meeting, or the holders of shares entitling them to exercise twenty-five percent of the voting power of the Company entitled to be voted at the meeting. Upon delivery to the chairman, president, or secretary of a request in writing for a shareholders' meeting by any persons entitled to call such meeting, the officer to whom the request is delivered shall give notice to the shareholders of such meeting. Any such request shall specify the purposes and the date and hour for such meeting. The date shall be at least 14 and not more than 65 days after delivery of the request. If such officer does not call the meeting within five days after any such request, the persons making the request may call the meeting by giving notice as provided in Section 1.4 or by causing it to be given by their designated representative. Section 1.3 PLACE OF MEETINGS. All meetings of shareholders shall be held at such place or places, within or without the State of Ohio, as may be fixed by the board of directors or, if not so fixed, as shall be specified in the notice of the meeting. Section 1.4 NOTICE OF MEETINGS. A notice of each annual or special meeting of shareholders shall be given to shareholders in accordance with and to the extent required by applicable law by the chairman, president or secretary, or, in case of their refusal or failure to do so, by the person or persons entitled to call such meeting. Except when expressly required by law, no publication of any notice of a shareholders meeting shall be required. If shares are transferred after notice has been given, notice need not be given to the transferee. A record date may be fixed for determining the shareholders entitled to notice of any meeting of shareholders, in accordance with the provisions of Section 1.13. Only the business provided for in such notice shall be considered at the meeting. Notice of the adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at the meeting. Section 1.5 [RESERVED] Section 1.6 WAIVER OF NOTICE. Any shareholder, either before or after any meeting, may waive any notice required by law, the articles, or these regulations. Waivers must be in writing and filed with or entered upon the records of the meeting. Notice of a meeting will be deemed to have been waived by any shareholder who attends the meeting either in person or by proxy, and who does not, before or at the commencement of the meeting, protest the lack of proper notice. 1 Section 1.7 QUORUM. The holders of shares entitling them to exercise a majority of the voting power of the Company entitled to vote at a meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except when a greater number is required by law, the articles of incorporation, or these regulations. In the absence of a quorum at any meeting or any adjournment of the meeting, the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote may adjourn the meeting from time to time. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 1.8 ORGANIZATION. At each shareholders meeting the chairman of the board, or, in the chairman's absence, the president, or, in the absence of both of them, any vice president, or, in the absence of any vice president, a chairman chosen by the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote, shall act as chairman, and the secretary of the Company, or, in the secretary's absence, any assistant secretary, or, in the absence of all of them, any person whom the chairman of the meeting appoints, shall act as secretary of the meeting. Section 1.9 ORDER OF BUSINESS. The order of business at each shareholders meeting shall be fixed by the chairman of the meeting at the beginning of the meeting but may be changed by the vote of the holders of shares entitling them to exercise a majority of the voting power of the shareholders present in person or by proxy and entitled to vote. Section 1.10 VOTING. Each holder of a share or shares of the class or classes entitled to vote by law or the articles of incorporation shall be entitled to one vote in person or by proxy for each such share registered in the holder's name on the books of the Company. As provided in Section 1.12, a record date for determining which shareholders are entitled to vote at any meeting may be fixed. Shares of its own stock belonging to the Company shall not be voted directly or indirectly. Persons holding voting shares in a fiduciary capacity shall be entitled to vote the shares so held. A shareholder whose shares are pledged shall be entitled to vote the shares standing in his or her name on the books of the Company. Upon a demand by any shareholder present in person or by proxy at any meeting and entitled to vote, any vote shall be by ballot. Each ballot shall be signed by the shareholder or such shareholder's proxy and shall state the number of shares voted by such shareholder. Otherwise, votes shall be made orally. Section 1.11 PROXIES. Any shareholder who is entitled to attend or vote at a shareholders meeting shall be entitled to exercise such right and any other of his or her rights by proxy or proxies appointed by a writing signed by such shareholder, which need not be witnessed or acknowledged. Except as otherwise specifically provided in these regulations, actions taken by proxy shall be governed by the provisions of Section 1701.48, Ohio Revised Code, or any future statute of like tenor or effect, including the provisions relating to the sufficiency of the writing, duration of the validity of the proxy, power of substitution, revocation, and all other provisions. Section 1.12 INSPECTORS OF ELECTIONS. Inspectors of elections may be appointed and act as provided in Section 1701.50, Ohio Revised Code, or any future statute of like tenor or effect. 2 Section 1.13 RECORD DATE. The board of directors may fix a record date for any lawful purpose, including without limitation the determination of shareholders entitled to: (a) receive notice of or to vote at any meeting, (b) receive payment of any dividend or other distribution, (c) receive or exercise rights of purchase of, subscription for, or exchange or conversion of, shares or other securities, subject to any contract right with respect thereto, or (d) participate in the execution of written consents, waivers, or releases. Any such record date shall not be more than sixty days preceding the date of such meeting, the date fixed for the payment of any dividend or other distribution, or the date fixed for the receipt or the exercise of rights, as the case may be. Section 1.14 LIST OF SHAREHOLDERS AT MEETING. Upon request of any shareholder at any meeting of shareholders, there shall be produced at the meeting an alphabetically arranged list, or classified lists, of the shareholders of record as of the applicable record date who are entitled to vote, showing their respective addresses and the number and classes of shares held by them. Section 1.15 ACTION IN WRITING IN LIEU OF MEETING. Any action which may be authorized or be taken at a meeting of the shareholders may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all the shareholders who would be entitled to notice of a meeting of the shareholders held for that purpose. ARTICLE 2 BOARD OF DIRECTORS Section 2.1 GENERAL POWERS OF BOARD. The powers of the Company shall be exercised, its business and affairs shall be conducted, and its property shall be controlled by the board of directors, except as otherwise provided by law of Ohio, the articles, or these regulations. Section 2.2 NUMBER AND CLASSIFICATION. The number of directors of the Corporation shall be thirteen (13). The number of directors may be increased or decreased by action of the board of directors upon the vote of a majority of the board; provided, however, that in no case shall the number of directors be fewer than nine (9) or more than sixteen (16) without an amendment to this Section 2.2 approved in the manner specified in Article 10 of these regulations; and provided further that no decrease in the number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. The directors shall be divided into three classes. The term of office of the first class shall expire at the 2000 annual meeting of shareholders, the term of office of the second class shall expire at the 2001 annual meeting of shareholders, and the term of office of the third class shall expire at the 2002 annual meeting of shareholders. At each annual meeting of shareholders, directors elected to succeed those whose terms then expire shall be elected for a term of office expiring at the annual meeting of shareholders during the third year after their election. In case of any increase in the number of directors (after a reduction below sixteen), the additional directors shall be distributed among the several classes so as to make the classes as nearly equal in number as possible. 3 Section 2.3 COMPENSATION AND EXPENSES. The directors shall be entitled to such compensation, on a monthly or annual basis, or on the basis of meetings attended, or on both bases, as the board of directors may from time to time determine and establish. No director shall be precluded from serving the Company as an officer or in any other capacity, or from receiving compensation for so serving. Directors may be reimbursed for their reasonable expenses incurred in the performance of their duties, including the expense of traveling to and from meetings of the board, if such reimbursement is authorized by the board of directors. Section 2.4 ELECTION OF DIRECTORS. At each meeting of the shareholders for the election of directors of a particular class at which a quorum is present, the persons receiving the greatest number of votes shall be deemed elected the directors of that class. Any shareholder may cumulate his or her votes at an election of directors upon fulfillment of the conditions prescribed in Section 1701.55, Ohio Revised Code, or any future statute of like tenor or effect. Section 2.5 TERM OF OFFICE. Each director shall hold office until the annual meeting of shareholders in the year of the expiration of his or her term of office, or, if the election of directors shall not be held at that annual meeting, until a special meeting of the shareholders for the purpose of electing directors is held as provided in Section 1.2, or the taking of action by all the shareholders in writing in lieu of either such meetings, and in any case until his or her successor is elected and qualified or until his or her earlier resignation, removal from office, or death. Section 2.6 RESIGNATIONS. Any director may resign by giving written notice to the chairman, the president, or the secretary of the Company. Such resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. Section 2.7 REMOVAL OF DIRECTORS. All the directors, or all the directors of a particular class, or any individual director may be removed from office, without assigning any cause, by the affirmative vote of the holders of record of not less than 75 percent of the shares having voting power of the Company with respect to the election of directors, provided that unless all the directors, or all the directors of a particular class, are removed, no individual director shall be removed in case the votes of a sufficient number of shares are cast against his or her removal which, if cumulatively voted at an election of all the directors, or all the directors of a particular class, as the case may be, would be sufficient to elect at least one director. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed. Any director may also be removed by the board of directors for any of the causes specified in Section 1701.58(B), Ohio Revised Code, or any future statute of like tenor or effect. Section 2.8 VACANCIES. A vacancy in the board of directors may be filled by majority vote of the remaining directors, even though they are less than a quorum, until the shareholders hold an election to fill the vacancy. Shareholders entitled to elect directors may elect a director to fill any vacancy in the board (whether or not the vacancy has previously been temporarily filled by the remaining directors) at any shareholders meeting called for that purpose. 4 Section 2.9 ORGANIZATION OF MEETINGS. At each meeting of the board of directors, the chairman of the board, or, in his or her absence, the president, or, in his or her absence, a chairman chosen by a majority of the directors present, shall act as chairman. The secretary of the Company, or, if the secretary shall not be present, any person whom the chairman of the meeting shall appoint, shall act as secretary of the meeting. Section 2.10 PLACE OF MEETINGS. Meetings of the board shall be held at such place or places, within or without the State of Ohio, as may from time to time be fixed by the board of directors or as shall be specified or fixed in the notice of the meeting. Section 2.11 REGULAR MEETINGS. Regular meetings of the board will not be held unless this code of regulations shall be amended to provide therefor. Section 2.12 SPECIAL MEETINGS. Special meetings of the board of directors shall be held whenever called by the chairman of the board, if any, or by the president, or by a number of directors equal to one-third of the total number of directors. Section 2.13 NOTICES OF MEETINGS. Unless waived before, at or after the meeting as hereinafter provided, notice of each board of directors meeting shall be given to each director in accordance with and to the extent required by applicable law by the chairman, the president, the secretary, an assistant secretary, or the persons calling such meeting in any of the following ways: (a) By orally informing him of the meeting in person or by telephone not later than twelve hours before the date and time of the meeting. (b) By delivering notice in writing, electronically or by other legally sufficient means not later than one day before the date of the meeting. (c) By mail, telegram or cablegram at least two days before the meeting addressed to him at the address furnished by him to the secretary of the Company, or to such other address as the person sending the notice shall know to be correct. Unless otherwise required by the articles of incorporation, this code of regulations, or the laws of the State of Ohio, the notice of any meeting need not specify the purposes of the meeting. Notice of any meeting of the board may be waived by any director, either before, at, or after the meeting, in writing or by any other legally sufficient means. Section 2.14 NOTICE OF ADJOURNMENT OF MEETING. Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at the meeting. Section 2.15 QUORUM AND MANNER OF ACTING. A majority of the number of directors fixed or established pursuant to Section 2.2 as of the time of any meeting of the board of directors must be present in person at such meeting in order to constitute a quorum for the transaction of business, provided that meetings of the directors may include participation by directors through any communications equipment if all directors participating can hear each other, and 5 such participation in a meeting shall constitute presence at such meeting. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors. In the absence of a quorum, a majority of those present may adjourn a meeting from time to time until a quorum is present. Notice of an adjourned meeting need not be given. The directors shall act only as a board. Individual directors shall have no power as such. Section 2.16 ORDER OF BUSINESS. The order of business at meetings of the board shall be such as the chairman of the meeting may prescribe or follow, subject, however, to his or her being overruled with respect thereto by a majority of the members of the board present. Section 2.17 ACTION IN WRITING IN LIEU OF MEETING. Any action which may be authorized or taken at a meeting of the directors may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all the directors. Section 2.18 EXECUTIVE AND OTHER COMMITTEES. The directors may create and from time to time abolish or reconstitute an executive committee and any other committee or committees of directors each to consist of not less than three directors, and may delegate to any such committee or committees any or all of the authority of the directors, however conferred, other than that of filling vacancies in the board of directors or in any committee of directors. Each such committee shall serve at the pleasure of the directors, and shall act only in the intervals between meetings of the board of directors, and shall be subject to the control and direction of the board of directors. The directors may adopt or authorize the committees to adopt provisions with respect to the government of any such committee or committees which are not inconsistent with applicable law, the articles of incorporation of the Company, or these regulations. An act or authorization of any act by any such committee within the authority properly delegated to it by the directors shall be as effective for all purposes as the act or authorization of the directors. Any right, power, or authority conferred in these regulations to the "directors" or to the "board of directors" shall also be deemed conferred upon each committee or committees of directors to which any such right, power, or authority is delegated (expressly, or by general delegation, or by necessary implication) by the board of directors. ARTICLE 3 OFFICERS Section 3.1 NUMBER AND TITLES. The officers of the Company shall be a chairman of the board, a president, one or more vice presidents, if needed, a secretary, one or more assistant secretaries, if needed, a treasurer, one or more assistant treasurers, if needed, and such other officers and assistant officers as the board may deem necessary. The board shall have the discretion to determine from time to time the number of vice presidents, if any, the Company shall have, whether or not assistant secretaries and assistant treasurers are needed, and, if so, the number of assistant secretaries and assistant treasurers the Company shall have. Furthermore, if there is more than one vice president, the board may, in its discretion, establish designations for the vice presidencies so as to distinguish among them as to their functions or their order, or both. Any two or more offices may be held by the same person, but no 6 officer shall execute, acknowledge, or verify any instrument in more than one capacity if such instrument is required by law, the articles, or these regulations to be executed, acknowledged, or verified by two or more officers. Section 3.2 ELECTION, TERMS OF OFFICE, QUALIFICATIONS, AND COMPENSATION. The officers shall be elected by the board of directors. Each shall be elected for an indeterminate term and shall hold office during the pleasure of the board of directors. The board of directors may hold annual elections of officers; in that event, each such officer shall hold office until his or her successor is elected and qualified unless he or she is removed earlier by the board of directors. The chairman of the board shall be a director, but no other officer need be a director. The other qualifications of all officers shall be such as the board of directors may establish. The board of directors shall fix the compensation, if any, of each officer. Section 3.3 ADDITIONAL OFFICERS, AGENTS, ETC. In addition to the officers mentioned in Section 3.1, the Company may have such other officers, agents, and committees as the board of directors may deem necessary and may appoint, each of whom or each member of which shall hold office for such period, have such authority, and perform such duties as may be provided in these regulations or as may, from time to time, be determined by the board. The board of directors may delegate to any officer or committee the power to appoint any subordinate officer, agents, or committees. In the absence of any officer, or for any other reason the board of directors may deem sufficient, the board of directors may delegate, for the time being, the powers and duties, or any of them, of such officer to any other officer, or to any director. Section 3.4 REMOVAL. Any officer may be removed, either with or without cause, at any time, by the board of directors at any meeting, the notices (or waivers of notices) of which shall have specified that such removal action was to be considered. Any officer appointed by an officer or committee to which the board shall have delegated the power of appointment may be removed, either with or without cause, by the committee or superior officer (including successors) who made the appointment, or by any committee or officer upon whom such power of removal may be conferred by the board of directors. Section 3.5 RESIGNATIONS. Any officer may resign at any time by giving written notice to the board of directors, the chairman, the president, or the secretary. Any such resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.6 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise shall be filled in the manner prescribed for regular appointments or elections to such office. Section 3.7 POWERS, AUTHORITY, AND DUTIES OF OFFICERS. Officers of the Company shall have the powers and authority conferred and the duties prescribed by law, in addition to those specified or provided for in these regulations and such other powers, authority, and duties as may be determined by the board of directors from time to time. 7 ARTICLE 4 SHARES AND THEIR TRANSFER Section 4.1 CERTIFICATES FOR SHARES. Every owner of one or more shares in the Company shall be entitled to a certificate or certificates, which shall be in such form as may be approved by the board of directors, certifying the number and class of shares in the Company owned by him. The certificates for the respective classes of such shares shall be numbered in the order in which they are issued and shall be signed in the name of the Company by the chairman or the president and the secretary; provided that, if such certificates are countersigned by a transfer agent or registrar, the signatures of such officers upon such certificates may be facsimiles, stamped, or printed. If an officer who has signed or whose facsimile signature has been used, stamped, or printed on any certificates ceases to be such officer because of death, resignation or other reason before such certificates are delivered by the Company, such certificates shall nevertheless be conclusively deemed to be valid if countersigned by any such transfer agent or registrar. A record shall be kept of the name of the owner or owners of the shares represented by each such certificate and the number of shares represented thereby, the date thereof, and in case of cancellation, the date of cancellation. Every certificate surrendered to the Company for exchange or transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificates until such existing certificates shall have been so cancelled, except in cases provided for in Section 4.4. Section 4.2 TRANSFER OF SHARES. Any certificate for shares of the Company shall be transferable in person or by attorney upon the surrender of the certificate to the Company or any transfer agent for the Company (for the class of shares represented by the certificate surrendered) properly endorsed for transfer and accompanied by such assurances as the Company or its transfer agent may require as to the genuineness and effectiveness of each necessary endorsement. The person in whose name any shares stand on the books of the Company shall, to the full extent permitted by law, be conclusively deemed to be the unqualified owner and holder of the shares and entitled to exercise all rights of ownership for all purposes relating to the Company. Neither the Company nor any transfer agent of the Company shall be required to recognize any equitable interest in, or any claim to, any such shares on the part of any other person, whether disclosed on the certificate or any other way, nor shall they be required to see to the performance of any trust or other obligation. Section 4.3 REGULATIONS. The board of directors may make such rules and regulations as it may deem expedient or advisable, not inconsistent with these regulations, concerning the issue, transfer, and registration of certificates for shares. It may appoint one or more transfer agents or one or more registrars, or both, and may require all certificates for shares to bear the signature of either or both. Section 4.4 LOST, DESTROYED OR STOLEN CERTIFICATES. A new share certificate or certificates may be issued in place of any certificate theretofore issued by the Company which is alleged to have been lost, destroyed, or wrongfully taken upon: (a) the execution and delivery to the Company by the person claiming the certificate to have been lost, destroyed, or wrongfully taken of an affidavit of that fact in form satisfactory to the Company, specifying whether or not the 8 certificate was endorsed at the time of such alleged loss, destruction or taking, and (b) the receipt by the Company of a surety bond, indemnity agreement, or any other assurances satisfactory to the Company and to all transfer agents and registrars of the class of shares represented by the certificate against any and all losses, damages, costs, expenses, liabilities or claims to which they or any of them may be subjected by reason of the issue and delivery of such new certificate or certificates or with respect to the original certificate. ARTICLE 5 EXAMINATION OF BOOKS BY SHAREHOLDERS The board of directors may make reasonable rules and regulations prescribing under what conditions the books, records, accounts, and documents of the Company, or any of them, shall be open to the inspection of the shareholders. No shareholder shall be denied any right which is conferred by Section 1701.37, Ohio Revised Code, or any other applicable law to inspect any book, record, account, or document of the Company. An original or duplicate stock ledger showing the names and addresses of the shareholders and the number and class of shares issued or transferred of record to or by them from time to time shall at all times during the usual hours for business be open to the examination of every shareholder at the principal office or place of business of the Company in the State of Ohio. ARTICLE 6 INDEMNIFICATION AND INSURANCE Section 6.1 COSTS INCURRED. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he or she is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding provided that: (a) he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company; (b) with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful; and (c) in any action or suit by or in the right of the Company, no indemnification shall be made with respect to any amounts paid in settlement or with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company unless and only to the extent that the Court of Common Pleas or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such other court shall deem proper. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, 9 or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, that he or she had reasonable cause to believe that his or her conduct was unlawful. Section 6.2 INDEMNIFICATION PROCEDURE. Any indemnification under Section 6.1 shall be made by the Company only if and as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.1. Such determination shall be made by one of the following methods: (a) by a majority vote of a quorum consisting of directors of the Company who were not and are not parties to or threatened with any such action, suit, or proceeding; or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel retained by the Company, other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Company or any person to be indemnified within the past five years; or (c) by the shareholders; or (d) by the Court of Common Pleas of Franklin County, Ohio, or the court in which such action, suit, or proceeding was brought. Section 6.3 ADVANCE PAYMENT OF COSTS. Expenses, including attorneys' fees, incurred in defending any action, suit, or proceeding referred to in Section 6.1 may be paid by the Company in advance of the final disposition of such action, suit, or proceeding as authorized by the directors in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount unless it shall ultimately be determined that he or she is entitled to be indemnified by the Company as authorized in this Article. Section 6.4 NON-EXCLUSIVE. The indemnification authorized in this Article shall not be deemed exclusive of any other rights to which persons seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. Section 6.5 INSURANCE. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Company would have the power to indemnify him or her against such liability under this Article or under Chapter 1701, Ohio Revised Code. Section 6.6 SURVIVAL. The indemnification authorized in this Article shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent. Section 6.7 SUCCESSORS. The indemnification authorized in this Article shall inure to the benefit of the heirs, executors, and administrators of any person entitled to indemnification under this Article. 10 ARTICLE 7 SEAL The board of directors may adopt and alter a corporate seal and use the same or a facsimile thereof, but failure to affix the corporate seal, if any, shall not affect the validity of any instrument. ARTICLE 8 FISCAL YEAR The fiscal year of the Company shall be fixed and may be changed from time to time by the board of directors. ARTICLE 9 CONTROL SHARE ACQUISITIONS Section 1701.831, Ohio Revised Code, shall not apply to control share acquisitions of shares of the Company. ARTICLE 10 AMENDMENT OF REGULATIONS These regulations may be amended or new regulations may be adopted: (a) at any meeting of the shareholders held for such purpose by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal, except that the affirmative vote of the holders of record of not less than 75% of the shares having voting power with respect to any such proposal shall be required to amend, change, adopt any provision inconsistent with, or repeal Sections 2.2, 2.5, or 2.7 or to amend, change, or repeal the provisions of this Article 10 establishing the voting requirements for amending, changing, adopting any provision inconsistent with, or repealing Sections 2.2, 2.5, or 2.7; or (b) without a meeting of the shareholders, by the written consent of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal, except that the written consent of the holders of record of not less than 75 percent of the shares having voting power with respect to any such proposal shall be required to amend, change, adopt any provision inconsistent with, or repeal Sections 2.2, 2.5, or 2.7 or to amend, change, or repeal the provisions of this Article 10 establishing the consent requirements for amending, changing, adopting any provisions inconsistent with, or repealing Sections 2.2, 2.5, or 2.7. If any amendment or new regulations are adopted without a meeting of the shareholders, the secretary shall mail a copy of the amendment or new regulations to each shareholder who would have been entitled to vote on the proposal but who did not participate in the adoption of the amendment or new regulations. 11 EX-18.01 4 l91098aex18-01.txt EXHIBIT 18.01 EXHIBIT 18.01 Cardinal Health, Inc. c/o Mr. Richard J. Miller Executive Vice President and Chief Financial Officer 7000 Cardinal Place Dublin, Ohio 43017 October 8, 2001 RE: FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2001 This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent public accountants whenever there has been a change in accounting principle or practice. We have been informed that, as of July 1, 2001, Cardinal Health, Inc. (the Company) changed its revenue recognition application method related to its wholly-owned subsidiary, Pyxis Corporation's (Pyxis), automated dispensing units from the "as delivered" method to the "as installed" method of revenue recognition. According to the management of the Company, this change was made to provide for a more objectively determinable method of revenue recognition on sales of its Pyxis automated dispensing units. A complete coordinated set of financial and reporting standards for determining the preferability of accounting principles among acceptable alternative principles has not been established by the accounting profession. Thus, we cannot make an objective determination of whether the change in accounting described in the preceding paragraph is to a preferable method. However, we have reviewed the pertinent factors, including those related to financial reporting, in this particular case on a subjective basis, and our opinion stated below is based on our determination made in this manner. We are of the opinion that the Company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with you, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgement and business planning of your management. We have not audited the application of this change to the consolidated financial statements of any period subsequent to June 30, 2001. Further, we have not examined and do not express any opinion with respect to your consolidated financial statements for the three months ended September 30, 2001. Very truly yours, /s/ Arthur Andersen LLP Columbus, Ohio -----END PRIVACY-ENHANCED MESSAGE-----