SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
NOVEMBER 13, 1995
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
CARDINAL HEALTH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
OHIO 0-12591 31-0958666
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
655 METRO PLACE SOUTH, SUITE 925, DUBLIN, OHIO 43017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(614) 761-8700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------- ------------------------------------
At a special meeting of stockholders held on
November 13, 1995, the stockholders of Medicine Shoppe
International, Inc., a Delaware corporation ("MSI"), voted
upon and approved and adopted an Agreement and Plan of
Merger, dated as of August 26, 1995 (the "Merger Agreement"),
by and among MSI, Cardinal Health, Inc., an Ohio corporation
("Cardinal"), and Arch Merger Corp., a Delaware corporation
and a wholly owned subsidiary of Cardinal ("Subcorp").
Pursuant to the Merger Agreement, Subcorp was merged with and
into MSI (the "Merger"), and each share of MSI common stock, $0.01
par value ("MSI Common Stock"), was converted into .8289 of a share
of Cardinal common stock, without par value ("Cardinal Common
Shares"), with cash in lieu of fractional shares. It is
anticipated that approximately 6,547,843 Cardinal Common
Shares will be issued pursuant to the Merger to former
stockholders of MSI, inclusive of shares issuable upon
exercise of options to purchase Cardinal Common Shares into
which outstanding options to purchase MSI Common Stock were
converted in the Merger. The Merger became effective at 5:00
p.m. on November 13, 1995. As a result of the Merger, MSI
became a wholly owned subsidiary of Cardinal.
MSI is the largest franchisor of independent retail
pharmacies in the United States. As of June 30, 1995, MSI
had 987 franchisee locations operating in 46 states, and also
had franchisees operating 109 pharmacies in seven foreign
countries. Approximately 94% of the sales from MSI's
apothecary-style pharmacies is derived from the sale of
prescription drugs and substantially all franchises are owned
and operated by pharmacists. MSI provides the pharmacist/
franchisee with a comprehensive system of programs including
business training, site location, store design, financing,
marketing, advertising, purchasing, managed care, information
management, education and other support programs designed to
help the franchisee build a successful business.
Additional information concerning the Merger and
the transactions related thereto is contained in Cardinal's
Registration Statement on Form S-4 (Registration Number 33-
63283) filed with the Securities and Exchange Commission (the
"Commission") on October 10, 1995 and declared effective by
the Commission on October 11, 1995.
-1-<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
------- INFORMATION AND EXHIBITS
-----------------------------------------
(a) Financial Statements of Medicine Shoppe International,
Inc.
-----------------------------------------------------
(i) Report of Independent Public Accountants
(ii) Statements of Earnings for the three fiscal
years ended September 30, 1994
(iii) Balance Sheets as of September 30, 1994 and
September 30, 1993
(iv) Statements of Cash Flows for the three fiscal
years ended September 30, 1994
(v) Statements of Stockholders' Equity for the
three fiscal years ended September 30, 1994
(vi) Notes to Financial Statements
The above financial statements and report are set forth
as Annex A hereto and are incorporated herein by this
reference.
(b) Pro Forma Financial Information
-------------------------------
(i) Unaudited Pro Forma Combined Balance Sheet
combining the consolidated balance sheet of
Cardinal Health, Inc. as of June 30, 1995 with
the balance sheet of Medicine Shoppe
International, Inc. as of June 30, 1995
(ii) Unaudited Pro Forma Combined Statements of
Earnings combining the consolidated statements
of earnings of Cardinal Health, Inc. for the
fiscal years ended June 30, 1995, June 30,
1994 and March 31, 1993 with the statements of
earnings of Medicine Shoppe International,
Inc. for the twelve month periods ended June
30, 1995, June 30, 1994 and March 31, 1993
(iii) Notes to Pro Forma Combined Financial
Information
The above pro forma financial information is set forth
as Annex B hereto and is incorporated herein by this
reference.
(c) Exhibits
--------
None.
-2-<PAGE>
ANNEX A
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Medicine Shoppe International, Inc.
We have audited the accompanying balance sheets of
MEDICINE SHOPPE INTERNATIONAL, INC. (a Delaware corporation),
as of September 30, 1994, and 1993, and the related
statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended September 30,
1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
financial position of Medicine Shoppe International, Inc., as
of September 30, 1994 and 1993, and the results of its
operations and cash flows for each of the three years in the
period ended September 30, 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
November 4, 1994
St. Louis, Missouri
A-1<PAGE>
Medicine Shoppe International, Inc.
Statements of Earnings
<TABLE>
<CAPTION>
Fiscal Years Ending September 30,
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Total Sales Reported by
Domestic and International
Pharmacies (Unaudited) $851,457,000 $764,684,000 $698,230,000
============ ============ ============
REVENUES AND EXPENSES
Revenues:
Sales to Franchisees $ 10,685,350 $ 8,617,312 $ 8,371,176
Franchise fees 34,734,621 31,513,505 28,935,285
Origination fees 1,358,137 1,005,201 1,020,000
Interest income on
financing and other
revenues 3,784,636 3,422,691 3,062,661
------------ ----------- -----------
50,562,744 44,558,709 41,389,122
------------ ----------- -----------
Costs and Expenses:
Cost of sales to Franchisees 9,011,726 7,154,269 7,133,464
Selling, general & adminis-
trative 19,792,433 18,325,630 17,528,930
------------ ----------- -----------
28,804,159 25,479,899 24,662,394
------------ ----------- -----------
Earnings from operations 21,758,585 19,078,810 16,726,728
------------ ----------- -----------
Income on Investments 741,000 706,702 1,162,002
------------ ----------- -----------
Earnings before taxes 22,499,585 19,785,512 17,888,730
------------ ----------- -----------
Income Tax Provision 8,033,000 6,871,000 6,021,000
------------ ----------- -----------
Net Earnings $ 14,466,585 $12,914,512 $11,867,730
============ =========== ===========
Earnings Per Share $ 1.84 $ 1.62 $ 1.46
============ =========== ===========
Average Shares Outstanding 7,875,921 7,976,490 8,153,871
============ =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
A-2<PAGE>
Medicine Shoppe International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
As of September 30,
1994 1993
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,989,274 $ 1,500,258
Short-term investments 10,064,000 9,722,268
Accrued investment income
receivable 246,000 221,935
Accounts receivable, net 9,741,426 10,607,978
Notes and accrued interest
receivable, net 4,647,824 4,753,377
Other current assets 2,105,651 1,736,268
----------- -----------
Total Current Assets 32,794,175 28,542,084
----------- -----------
Other Assets:
Long-term investments 7,078,000 6,400,335
Finance notes and accrued
interest receivable, net 32,981,110 28,080,381
Investment in pharmacies 5,456,092 5,542,831
Deferred income tax benefit 1,404,000 1,161,410
Other assets 1,478,367 1,464,415
----------- -----------
Total Other Assets 48,397,569 42,649,372
----------- -----------
Property and Equipment, at cost:
Furniture and equipment 4,851,525 4,518,108
Leasehold improvements 548,437 524,946
----------- -----------
5,399,962 5,043,054
Less -- Accumulated depreciation
and amortization (3,712,334) (3,299,904)
----------- -----------
Net Property and Equipment 1,687,628 1,743,150
----------- -----------
Total Assets $82,879,372 $72,934,606
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
A-3<PAGE>
Medicine Shoppe International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
As of September 30,
1994 1993
---- -----
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,850,999 $ 1,395,618
Accrued income taxes 566,000 544,000
Other accrued expenses 1,552,524 1,157,621
----------- -----------
Total Current Liabilities 3,969,523 3,097,239
----------- -----------
Deferred Origination Fee Income,
net of related direct expenses
incurred to date of $1,220,884
and $1,268,439, respectively 940,185 719,314
----------- -----------
Stockholders' Equity:
Common stock -- $.01 par value,
10,000,000 shares authorized;
7,851,432 and 7,934,397 shares
issued and outstanding,
respectively 78,514 79,344
Paid-in capital 14,047,328 13,649,035
Retained earnings 63,843,822 55,389,674
----------- -----------
Total Stockholders' Equity 77,969,664 69,118,053
----------- -----------
Total Liabilities and Stock-
holders' Equity $82,879,372 $72,934,606
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
A-4<PAGE>
Medicine Shoppe International, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Years Ending September 30,
1994 1993 1992
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
<S> <C> <C> <C>
Net earnings $14,466,585 $12,914,512 $11,867,730
Adjustments to reconcile net earnings
to net cash provided (required)
by operations:
Depreciation and amortization 637,574 637,624 575,530
Deferred origination fee income, net 220,871 432,763 (1,819)
Deferred income taxes (242,590) (220,000) (224,000)
Changes in:
Accounts and investment income
receivable 842,487 (1,398,574) (244,088)
Finance notes and accrued interest
receivable (4,795,176) (3,789,314) (7,136,528)
Accounts payable 455,381 (103,511) (145,384)
Income taxes 22,000 (960,410) (48,000)
Other current assets (369,383) 234,984 336
Other current liabilities 394,903 94,720 (125,900)
Net cash provided by operating ----------- ---------- ----------
activities 11,632,652 7,842,794 4,517,877
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Proceeds from sale/maturity of
investments 10,499,078 11,698,311 15,504,551
Purchase of investments (11,518,475) (9,482,782) (16,778,801)
Acquisition of Dayton, Ohio,
pharmacies -- (2,437,575) --
Change in net investment in pharmacies 86,739 (1,244,472) 199,156
Acquisition of system rights -- (1,041,598) --
Additions to property and equipment (546,293) (318,703) (373,721)
Other (49,711) (40,256) 36,369
Net cash required by investing ----------- ---------- -----------
activities (1,528,662) (2,867,075) (1,412,446)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Repurchase of common stock (2,423,342) (4,869,018) (1,272,500)
Dividends paid (3,781,130) (3,508,967) (2,939,996)
Proceeds from exercise of common
stock options 589,498 482,013 311,387
Net cash required by financing ----------- ---------- -----------
activities (5,614,974) (7,895,972) (3,901,109)
----------- ---------- ------------
Net change in cash and cash
equivalents 4,489,016 (2,920,253) (795,678)
Cash and cash equivalents at
beginning of period 1,500,258 4,420,511 5,216,189
Cash and cash equivalents at end ------------ ----------- ----------
of period $5,989,274 $1,500,258 $4,420,511
============ ========== ==========
Supplemental disclosures:
Cash paid during the period
for income taxes $8,381,000 $7,518,000 $6,426,000
============ ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
A-5<PAGE>
Medicine Shoppe International, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1991 $81,559 $13,306,433 $42,744,900 $56,132,892
Proceeds from 17,747 shares
of stock options exercised 177 311,210 -- 311,387
Purchase of 158,000 shares
at cost (1,580) (262,581) (3,593,593) (3,857,754)
Dividends paid -- -- (2,939,996) (2,939,996)
Net earnings for 1992 -- -- 11,867,730 11,867,730
-------- ----------- ---------- -----------
Balance, September 30, 1992 80,156 13,355,062 48,079,041 61,514,259
Proceeds from 29,797 shares
of stock options
exercised 298 481,715 -- 482,013
Purchase of 111,000 shares
at cost (1,110) (187,742) (2,094,912) (2,283,764)
Dividends paid -- -- (3,508,967) (3,508,967)
Net earnings for 1993 -- -- 12,914,512 12,914,512
-------- ----------- ---------- ----------
Balance, September 30, 1993 79,344 13,649,035 55,389,674 69,118,053
Proceeds from 27,835 shares
of stock options exercised 278 589,220 -- 589,498
Purchase of 110,800 shares
at cost (1,108) (190,927) (2,231,307) (2,423,342)
Dividends paid -- -- (3,781,130) (3,781,130)
Net earnings for 1994 -- -- 14,466,585 14,466,585
-------- ----------- ----------- -----------
Balance, September 30, 1994 $ 78,514 $14,047,328 $63,843,822 $77,969,664
======== =========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
A-6<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
NOTE 1, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME RECOGNITION:
Franchise fees, representing monthly fees based upon
Franchisees' sales, are recognized on a current basis.
Origination fees, representing revenue and related
direct expenses for a franchise, are deferred until the new
store is opened. Master franchise origination fees are
recognized as income when all significant conditions relating
to the agreement have been satisfied by Medicine Shoppe
International, Inc. (MSI).
CASH EQUIVALENTS:
Cash equivalents consist of money market funds and
are stated at cost which approximates market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES:
MSI maintains reserves for accounts and notes
receivable which may not be ultimately collected. The balance
maintained is based upon historical collection experience,
current aging of amounts due and specific evaluations of the
collectibility of individual balances. Individual accounts and
notes are written off against the reserve when they are deemed
to be uncollectible.
INVENTORIES:
Inventories, which are included in other current
assets, consist of supplies, promotional items, and non-
prescription medications which are distributed or sold to
Franchisees, and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method. The
amount of inventory on hand as of the end of fiscal year 1994
and 1993 was $1,820,000 and $1,110,000, respectively.
INVESTMENTS:
Investments are stated at cost, adjusted for discount
accretion and premium amortization. 59% of the portfolio will
mature within one year. Due to the short-term nature of the
portfolio, the difference between cost and market is not
material. As of September 30, 1994, predominantly all short
and long-term investments were in municipal bonds.
A-7<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
The Financial Accounting Standards Board issued a new
standard of accounting and reporting for certain investments in
debt and equity securities (SFAS No. 115). MSI will adopt the
new accounting and disclosure rules of SFAS No. 115 beginning
in fiscal 1995 which requires, among other things, that
securities be classified based upon MSI's intentions with
respect to the ultimate disposition of the security and its
ability to effect those intentions. Adoption of the standard
is not expected to materially impact net earnings or financial
position.
DEPRECIATION AND AMORTIZATION:
Depreciation is provided using the straight-line
method over the estimated useful lives of the property.
Amortization of leasehold improvements is provided
using the straight-line method over the estimated useful lives
of the improvements or the term of the lease.
SEGMENT INFORMATION:
MSI operates its business in a single business
segment, which is franchising. MSI provides various services,
including financing, to its Franchisees; all of these services
are for the sole purpose of maintaining and enhancing the
quality of existing Franchisees or developing and expanding new
franchise business.
EARNINGS PER SHARE:
Earnings per share are computed by dividing net
earnings by the weighted average shares outstanding during the
year. Earnings per share assuming full dilution have not been
shown as there would be no material dilution.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK:
MSI's concentrations of credit risk relate primarily
to cash equivalents, investments and accounts and notes
receivable. MSI's cash equivalents consist primarily of
temporary investments of less than 90 days that are maintained
at national and regional brokerage houses that MSI uses for its
investments. Investments are primarily municipal bond
securities of state and local governments. Since the
investments are spread among various municipalities throughout
A-8<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
the United States and the securities must be of high investment
quality, MSI's concentration of credit risk is limited.
The accounts and notes receivable are primarily with
MSI Franchisees. Due to MSI's credit evaluation process (the
geographical dispersion of its Franchisees and the evidence of
secured collateral), concentrations of credit risk are limited.
NOTE 2, RECEIVABLES
MSI has a program to provide financing to selected
Franchisees primarily for acquisition and conversion costs
other than the origination fee. Such amounts are normally
repayable in seven to ten years at an interest rate which
fluctuates with the prime rate. A substantial portion of the
notes are secured by personal and real property and fixtures of
the Franchisees and third-party guarantors. At September 30,
1994, MSI has committed to provide approximately $2,800,000 for
additional financial assistance to future Franchisees.
Accounts receivable primarily include monthly
franchise fees and receivables related to product sales due
from Franchisees.
<TABLE>
<CAPTION>
1994 1993
---- ----
SUMMARY OF RECEIVABLES:
<S> <C> <C>
Accounts receivable $10,596,426 $11,444,978
Less reserve for
uncollectible accounts (855,000) (837,000)
----------- -----------
Accounts receivable, net $ 9,741,426 $10,607,978
=========== ===========
Finance notes and accrued
interest receivable $38,817,934 $33,889,758
Less reserve for
uncollectible notes (1,189,000) (1,056,000)
Net finance notes receivable ----------- -----------
and accrued interest 37,628,934 32,833,758
Less current portion (4,647,824) (4,753,377)
----------- -----------
Finance notes and accrued
interest receivable, net $32,981,110 $28,080,381
=========== ===========
</TABLE>
A-9<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
NOTE 3, LEASES
MSI leases its headquarters facility under a non-
cancellable lease expiring January 1998, with an option for an
additional five years. Additionally, MSI leases retail space
during the time it operates pharmacies until they can be resold
and franchised. Rent expense charged to operations was
approximately $1,028,000 in fiscal 1994, $992,000 in fiscal
1993, and $779,000 in fiscal 1992. The following is a schedule
of future minimum rental payments required under all operating
leases as of September 30, 1994.
SCHEDULED MINIMUM RENTAL PAYMENTS
FISCAL YEARS ENDING SEPTEMBER 30,
<TABLE>
<CAPTION>
Total
-----
<S> <C>
1995 $1,136,000
1996 1,155,000
1997 1,142,000
1998 356,000
1999 0
Thereafter 0
----------
Total 3,789,000
Less: Minimum
sublease payments (17,000)
----------
Total minimum
lease payments required $3,772,000
==========
</TABLE>
NOTE 4, INCOME TAXES
In October 1993, MSI adopted Financial Accounting
Standards Board (FASB) Statement No. 109, Accounting for Income
Taxes. The adoption, which was made prospectively, had no
material impact on current period net earnings or financial
position.
A-10<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
The provision for income taxes for the fiscal years ending
September 30 consist of:
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $7,684,000 $6,749,000 $5,843,000
State 591,000 342,000 402,000
Deferred (242,000) (220,000) (224,000)
---------- ---------- ----------
Total $8,033,000 $6,871,000 $6,021,000
========== ========== ==========
</TABLE>
Reconciliation between statutory income tax rate and
effective tax rate is summarized below:
RECONCILIATION OF EFFECTIVE TAX RATE
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income
tax rate 35.0% 34.8% 34.0%
State taxes, net of
Federal benefit 1.7 1.1 1.5
Interest income not subject
to Federal income taxes (1.0) (1.2) (1.8)
----- ----- -----
Total 35.7% 34.7% 33.7%
====== ====== ======
</TABLE>
Under FASB Statement No. 109, certain of MSI's
revenues and expenses are recognized in different periods for
income tax and financial statement reporting purposes. These
temporary differences, using the tax rates expected to be in
effect for the years in which these differences reverse, give
rise to deferred tax assets and deferred tax liabilities. The
components of MSI's net deferred tax asset for 1994 were as
follows:
A-11<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
September 30, 1994
------------------
<S> <C>
Franchisee Award Program $1,067,000
Reserves & allowances 730,000
Depreciation & amortization (256,000)
Deferred income & expenses (137,000)
----------
Net deferred tax assets $1,404,000
==========
</TABLE>
NOTE 5, STOCK OPTIONS
In 1990 MSI adopted an Employee Incentive Stock
Option Plan (the "1990 Plan"), whereby MSI may grant options to
purchase 200,000 shares of common stock to directors, officers
and employees of MSI in the form of incentive or non-qualified
stock options. The 1990 Plan supplements the previous Employee
Stock Option Plan which permitted MSI to issue only incentive
stock options to officers and key employees.
Both Plans are administered by the Compensation
Committee of the Board of Directors. Stock options are granted
at no less than their fair market value at the date of the
grant.
The exercise price of non-qualified stock options
under the 1990 Plan is set by the Compensation Committee.
Options that have been granted under both Plans become
exercisable ratably over a four year period beginning one year
from date of grant and expire after five years. None of the
options granted under the Plans have reached the expiration
date before being exercised.
Information regarding MSI's stock option plans is
summarized below:
<TABLE>
<CAPTION>
Price Range 1994
----------- ----
<S> <C> <C>
Outstanding, Beginning of year $27.25-17.50 145,774
Granted $26.00-21.00 28,650
Cancelled $27.25-22.50 (3,950)
Exercised $22.88-17.50 (27,835)
-------
Outstanding, End of year $27.00-19.25 142,639
=======
At September 30, 1994
Exercisable 54,114
Available for future grants 64,125
</TABLE>
A-12<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
NOTE 6, EMPLOYEE PROFIT SHARING PLAN
MSI has a 401(k) profit sharing plan that covers
substantially all eligible full-time employees. MSI, at the
option of the Board of Directors, can contribute funds on
behalf of the employees. MSI's expense for the Plan in fiscal
1994, fiscal 1993 and fiscal 1992 was $136,000, $124,000 and
$104,000, respectively.
In 1994, the Board of Directors of MSI adopted the
Medicine Shoppe International, Inc. Executive Choice Plan, a
long term incentive program for executives of MSI, and directed
that the Plan be submitted to stockholders of MSI for their
approval. The Plan will be effective only if a majority of the
outstanding shares of common stock approve the Plan at the
Annual Meeting in February 1995. The Plan is intended to be an
incentive to key employees of MSI as designated by the
Compensation Committee of the Board of Directors by providing
them the opportunity to obtain or increase a proprietary
interest in MSI inherent in common stock ownership and the
opportunity to receive supplemental retirement income.
NOTE 7, TRANSACTIONS WITH RELATED PARTIES
MSI pays consulting fees of $35,000 per year to a
corporation which employs certain director/stockholders of MSI
in exchange for medical consulting services regarding the needs
and desires of the medical community and their patients.
On December 31, 1992, MSI acquired the assets of
Medicine Shoppes of St. Louis for approximately $1 million.
The assets included one Medicine Shoppe Pharmacy, the license
rights to six Medicine Shoppe Pharmacies, and the current and
future rights, title and interest in certain pharmacy operating
systems. Medicine Shoppes of St. Louis, Inc., was controlled
by certain director/shareholders of MSI.
NOTE 8, PHARMACIES ACQUIRED FOR RESALE AND FRANCHISING
MSI temporarily acquires and operates certain
pharmacies for resale and franchising. During fiscal 1993, MSI
acquired eight apothecary-type retail pharmacies in the Dayton,
Ohio, area for approximately $2.4 million. As of September 30,
1994, eleven pharmacies were operated by MSI. During fiscal
1994, one pharmacy previously acquired had been sold and
refranchised; four units were closed. The operation of these
stores are accounted for as part of the selling, general and
administrative expenses.
A-13<PAGE>
Medicine Shoppe International, Inc.
Notes to Financial Statements
NOTE 9, ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Accrued Bonuses payable $ 703,000 $ 424,000
Franchise Award Program 550,000 454,000
Other 299,524 279,621
---------- ----------
$1,552,524 $1,157,621
========== ==========
</TABLE>
A-14<PAGE>
ANNEX B
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial in-
formation should be read in conjunction with the financial
statements, including the notes thereto, of Cardinal and MSI.
The pro forma information is presented for illustration
purposes only and is not necessarily indicative of the
operating results or financial position that would have
occurred if the Merger had been consummated in accordance
with the assumptions set forth below, nor is it necessarily
indicative of future operating results or financial position.
B-1<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined balance sheet
presents, under the pooling-of-interests accounting method,
the consolidated balance sheet of Cardinal as of June 30,
1995 combined with the balance sheet of MSI as of June 30,
1995.
<TABLE>
<CAPTION>
Cardinal MSI Pro Pro
June 30, June 30, Forma Forma
1995 1995 Adjustments Balances
---------- --------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents and
marketable securities
available for sale....... $ 63,195 $20,025 $ 83,220
Trade receivables.......... 516,262 15,608 531,870
Merchandise inventories.... 1,071,811 1,071,811
Prepaid expenses and other. 23,446 2,026 25,472
---------- ------- ----------
Total current assets..... 1,674,714 37,659 1,712,373
---------- ------- ----------
Long-term investments in
marketable securities held
to maturity................ 7,118 7,118
Finance notes and accrued
interest receivable - net.. 33,330 33,330
Property and equipment - net 95,228 1,854 97,082
Other assets................. 71,862 8,570 80,432
---------- ------- ----------
Total.................... $1,841,804 $88,531 $1,930,335
========== ======= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities:
Current portion of
long-term obligations.... $ 5,083 $ 5,083
Accounts payable........... 949,992 $ 2,214 952,206
Other accrued liabilities.. 118,295 2,075 $ 9,700<F2> 130,070
---------- ------- ------- ----------
Total current liabilities 1,073,370 4,289 9,700 1,087,359
---------- ------- ------- ----------
Long-term obligations -
less current portion....... 209,250 209,250
Other liabilities............ 10,987 1,203 12,190
Shareholders' equity:
Common Shares.............. 345,538 14,930 360,468
Retained earnings.......... 209,804 68,109 (9,700)<F2>268,213
Common Shares in
treasury, at cost........ (4,011) (4,011)
Unamortized restricted
stock awards............. (3,134) (3,134)
---------- ------- ------- --------
Total shareholders'
equity................. 548,197 83,039 (9,700) 621,536
---------- ------- ------- --------
Total.................... $1,841,804 $88,531 $1,930,335
========== ======= ======= ==========
</TABLE>
See accompanying notes to the unaudited pro forma combined
financial information.
B-2<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
The following unaudited pro forma combined statements of
earnings present, under the pooling-of-interests accounting
method, the consolidated statements of earnings of Cardinal for
the fiscal years ended June 30, 1995, June 30, 1994 and March
31, 1993 combined with the statements of earnings of MSI for
the twelve months ended June 30, 1995, June 30, 1994 and March
31, 1993. The estimated Merger expenses (aggregating $9.7 mil-
lion, net of tax) as discussed in Note 2 have not been consid-
ered in the following unaudited pro forma combined statements
of earnings.
B-3<PAGE>
<TABLE>
<CAPTION>
Year Ended
June 30, 1995 Pro
---------------------------- Forma
Cardinal MSI Results<F1>
-------- ------------ ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues................... $7,806,092 $ 53,827 $7,859,919
Cost of products sold.......... 7,341,636 9,073 7,350,709
---------- -------- ----------
Gross margin................... 464,456 44,754 509,210
Selling, general and
administrative expenses...... (300,817) (20,696) (321,513)
---------- -------- ----------
Operating earnings............. 163,639 24,058 187,697
Other income (expense):
Interest expense............. (19,341) (19,341)
Other, net - primarily
interest income............ 2,207 1,007 3,214
---------- --------- ---------
Earnings before
income taxes................. 146,505 25,065 171,570
Provision for
income taxes................. (61,532) (9,038) (70,570)
---------- --------- ----------
Earnings available for
Common Shares,
excluding estimated
MSI merger expenses.......... $ 84,973 $ 16,027 $ 101,000
========== ========= ==========
Earnings per Common Share,
excluding estimated
MSI merger expenses<F3>:
Primary.............. $ 2.01 $ 2.07
Fully diluted........ 2.01 2.07
Weighted average number
of Common Shares
outstanding<F3>:
Primary.............. 42,175 48,698
Fully diluted........ 42,221 48,748
</TABLE>
See accompanying notes to the unaudited pro forma combined financial
information.
B-4<PAGE>
<TABLE>
<CAPTION>
Year Ended
June 30, 1994 Pro
---------------------------- Forma
Cardinal MSI Results<F1>
-------- ------------ ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues................ $5,790,411 $ 48,163 $5,838,574
Cost of products sold....... 5,435,239 7,781 5,443,020
---------- -------- ----------
Gross margin................ 355,172 40,382 395,554
Selling, general and
administrative expenses... (233,305) (19,133) (252,438)
Unusual item:
Merger costs.............. (35,880) (35,880)
---------- -------- ----------
Operating earnings<F4>...... 85,987 21,249 107,236
Other income (expense):
Interest expense.......... (18,140) (18,140)
Other, net - primarily
interest income.... 2,913 650 3,563
---------- -------- ----------
Earnings before
income taxes.............. 70,760 21,899 92,659
Provision for
income taxes.............. (35,624) (7,840) (43,464)
---------- -------- ----------
Earnings before preferred
dividends declared<F4>.... 35,136 14,059 49,195
Preferred dividends
declared.................. (1,205) (1,205)
---------- -------- ----------
Earnings available for
Common Shares,
excluding estimated
MSI merger expenses....... $ 33,931 $ 14,059 $ 47,990
========== ======== ==========
Earnings per Common Share,
excluding estimated
MSI merger
expenses<F3><F4>:
Primary................. $ 0.86 $ 1.04
Fully diluted........... 0.86 1.04
Weighted average number
of Common Shares
outstanding<F3>:
Primary................. 39,392 46,004
Fully diluted........... 39,477 46,091
</TABLE>
See accompanying notes to the unaudited pro forma combined financial
information.
B-5<PAGE>
<TABLE>
<CAPTION>
Year Ended
March 31, 1993 Pro
--------------------------- Forma
Cardinal MSI Results<F1>
-------- ------------ ----------
(In thousans, except per share data)
<S> <C> <C> <C>
Net revenues................. $4,633,375 $ 42,902 $4,676,277
Cost of products sold........ 4,336,082 7,207 4,343,289
---------- -------- ----------
Gross margin................. 297,293 35,695 332,988
Selling, general and
administrative expenses.... (203,740) (17,756) (221,496)
Unusual items:
Termination fee............ 13,466 13,466
Restructuring and other
charges.................. (18,904) (18,904)
---------- -------- ----------
Operating earnings<F4>....... 88,115 17,939 106,054
Other income (expense):
Interest expense........... (26,623) (26,623)
Other, net - primarily
interest income.......... 4,765 1,061 5,826
Earnings before income taxes
and cumulative effect of
change in accounting
principle.................. 66,257 19,000 85,257
Provision for income
taxes...................... (25,710) (6,442) (32,152)
---------- -------- ----------
Earnings before cumulative
effect of change in
accounting principle<F4>... 40,547 12,558 53,105
Preferred dividends
declared/accretion......... (2,876) (2,876)
---------- -------- ----------
Earnings available for Common
Shares, before cumulative
effect of change in
accounting principle,
excluding estimated MSI
merger expenses............ $ 37,671 $12,558 $ 50,229
========== ======= =========
Earnings per Common Share
before cumulative effect
of change in accounting
principle, excluding
estimated MSI merger
expenses<F3><F4>:
Primary.................. $ 1.10 $ 1.22
Fully diluted............ 1.06 1.18
Weighted average number of Common
Shares outstanding<F3>:
Primary................ 34,311 41,046
Fully diluted.......... 38,616 45,355
</TABLE>
See accompanying notes to the unaudited pro forma combined financial
information.
B-6<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
[FN]
<F1>
(1) CARDINAL AND MSI HISTORICAL FISCAL YEARS
Cardinal's fiscal year had historically ended on
March 31. On March 1, 1994, in connection with the merger with
Whitmire Distribution Corporation ("Whitmire"), Cardinal changed
its fiscal year end from March 31 to June 30. Accordingly, the
pro forma combined financial information presented herein
excludes the operating results of Cardinal for the three month
period ended June 30, 1993.
MSI's fiscal year had historically ended on September
30. For purposes of combining MSI's historical financial
information with Cardinal's historical financial information in
the pro forma financial information, the financial information
of MSI has been compiled for the twelve month periods ending
June 30, 1995, June 30, 1994 and March 31, 1993. Due to this
difference from MSI's historical fiscal year, MSI's operating
results for the three months ended June 30, 1993 have also not
been included in the pro forma combined financial information.
The operating results for Cardinal and MSI for the
three month periods ended June 30, 1993 are summarized as fol-
lows:
<TABLE>
<CAPTION>
Three Months
Ended
June 30, 1993
-------------------------------
Cardinal MSI
------------- --------------
(In thousands)
<S> <C> <C>
Net revenues................ $ 550,034 $ 11,329
Net earnings................ 7,771 3,342
</TABLE>
No material transactions have occurred between Cardi-
nal and MSI for the three years ended June 30, 1995 and, ac-
cordingly, no pro forma adjustments have been made to the pro
forma combined statements of earnings.
<F2>
(2) MERGER EXPENSES
Adjustment to reflect the estimated Merger expenses
(aggregating $9.7 million, net of tax) of: (i) approximately
$5.2 million for anticipated investment advisor, legal, ac-
counting, and other related transaction fees and costs associ-
ated with the Merger; and (ii) $4.5 million for integrating and
B-7<PAGE>
implementing efficiencies with regard to information systems,
customer systems, marketing programs and administrative func-
tions.
These Merger expense amounts are based upon a pre-
liminary estimate of the expenses expected to be incurred by
Cardinal and MSI, and actual Merger expenses may differ from
such estimate. These expenses are considered to be nonrecur-
ring and will be reflected in the actual earnings of the com-
bined company during the three month period ending December 31,
1995.
<F3>
(3) EARNINGS PER SHARE
The pro forma earnings per share reflect: (i) the
weighted average number of Cardinal Common Shares that would
have been outstanding had the Merger occurred at the beginning
of the periods presented based upon an exchange ratio of
.8289 Cardinal Common Shares to be issued for each share of
MSI Common Stock outstanding, based upon an Average Share Price
for Cardinal Common Shares of $54.29, and (ii) the dilutive
impact of Cardinal and MSI stock options and warrants using the
treasury stock method. All MSI options are to be converted
into options for Cardinal Common Shares at an exchange ratio of
.8289 Cardinal Common Shares for each share of MSI Common Stock
before application of the treasury stock method. The pro forma
fully diluted earnings per Common Share for the year ended
March 31, 1993 reflects the assumed conversion of all of Car-
dinal's 7.25% Convertible Subordinated Debentures due 2015 (the
"7.25% Notes") for all periods presented herein. The 7.25%
Notes were issued in July 1990 and were called for redemption,
effective July 2, 1993.
<F4>
(4) EFFECT OF UNUSUAL ITEMS
Amounts reflect the effect of unusual items recorded
by Cardinal in the fiscal years ended June 30, 1994 and March
31, 1993. In fiscal 1994, Cardinal recorded a charge to re-
flect estimated Whitmire merger costs of approximately $35.9
million ($28.2 million net of tax). During fiscal 1993, Cardi-
nal received a termination fee of approximately $13.5 million,
resulting from the termination by Durr-Fillauer Medical, Inc.
of its agreement to merge with Cardinal. During fiscal 1993,
Cardinal also recorded a restructuring charge totaling approxi-
mately $13.7 million primarily related to the closing of cer-
tain non-core operations and the integration, standardization
and improvement of selected distribution operations, informa-
tion systems and support functions. Also the modification of
the terms of certain Whitmire stock options in fiscal 1993 re-
sulted in a one-time stock option compensation charge of ap-
proximately $5.2 million.
B-8<PAGE>
The following supplemental information summarizes the Car-
dinal and MSI unaudited pro forma combined results excluding
the impact of the unusual items:
<TABLE>
<CAPTION>
Cardinal Pro Forma Combined
-------------------- ----------------------
Fiscal Year Ended Fiscal Year Ended
-------------------- ----------------------
March 31, June 30, March 31, June 30,
1993 1994 1993 1994
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Operating earnings, excluding
estimated MSI merger
expenses and unusual items.. $93,553 $121,867 $111,492 $143,116
Earnings available for Common
Shares before cumulative
effect of change in account-
ing principle, excluding
estimated MSI merger
expenses and unusual items.. $42,865 $63,044 $55,423 $77,103
Earnings per Common Share
before cumulative effect
of change in accounting
principle, excluding
estimated MSI merger
expenses and unusual items:
Primary.................. $ 1.25 $ 1.60 $ 1.35 $ 1.68
Fully diluted............ 1.19 1.60 1.29 1.67
</TABLE>
B-9<PAGE>
Operating earnings and earnings available for Common
Shares as presented in the "Unaudited Pro Forma Combined State-
ments of Earnings" are reconciled to the pro forma combined
results presented above as follows:
<TABLE>
<CAPTION>
Supplemental Pro Forma
Cardinal Combined Information
Fiscal Year Ended Fiscal Year Ended
March 31, 1993 March 31, 1993
---------------------- ----------------------
Operating Net Operating Net
Earnings Earnings Earnings Earnings
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Earnings as reported, before
cumulative effect of change
in accounting principle,
excluding estimated MSI
merger expenses............ $88,115 $37,671 $106,054 $50,229
Supplemental Adjustments:
Preferred stock redemptions 2,876 2,876
Interest adjustment on
preferred stock.......... (575) (575)
Termination fee............ (13,466) (7,163) (13,466) (7,163)
Restructuring charge....... 13,657 7,265 13,657 7,265
Stock option charge........ 5,247 2,791 5,247 2,791
------- ------- -------- -------
Earnings as supplementally
adjusted................... $93,553 $42,865 $111,492 $55,423
======= ======= ======== =======
Supplemental Pro Forma
Cardinal Combined Information
Fiscal Year Ended Fiscal Year Ended
June 30, 1994 June 30, 1994
---------------------- ----------------------
Operating Net Operating Net
Earnings Earnings Earnings Earnings
--------- -------- --------- --------
Earnings as reported, before
cumulative effect of change
in accounting principle,
excluding estimated MSI
merger expenses............ $ 85,987 $33,931 $107,236 $47,990
Supplemental Adjustments:
Merger costs............... 35,880 28,180 35,880 28,180
Preferred stock redemptions 1,205 1,205
Interest adjustment on
preferred stock.......... (272) (272)
-------- ------- -------- -------
Earnings as supplementally
adjusted $121,867 $63,044 $143,116 $77,103
======== ======= ======== =======
</TABLE>
B-10<PAGE>
SIGNATURE
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 hereunto
duly authorized.
CARDINAL HEALTH, INC.
Dated: November 16, 1995 By /s/ George H. Bennett, Jr.
-----------------------------
George H. Bennett, Jr.
Executive Vice President,
General Counsel and
Secretary<PAGE>
EXHIBIT INDEX
None.
