-----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, T3Tpam+k2EwXJfrDrUda128La7fwQQcBKRGPNxFuFfAv1g6oyIgVp7q4l40Jtip6 MKbXcNYn61VceaRXWVu2yQ== 0000898822-95-000162.txt : 19951120 0000898822-95-000162.hdr.sgml : 19951120 ACCESSION NUMBER: 0000898822-95-000162 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951113 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19951116 SROS: NYSE 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11373 FILM NUMBER: 95594310 BUSINESS ADDRESS: STREET 1: 655 METRO PL SOUTH STE 925 CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147618700 MAIL ADDRESS: STREET 1: 655 METRO PLACE SOUTH STREET 2: SUITE 925 CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K 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) 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- 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- 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 Medicine Shoppe International, Inc. Statements of Earnings
Fiscal Years Ending September 30, 1994 1993 1992 ----- ---- ---- 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 ============ =========== ===========
See Accompanying Notes to Financial Statements. A-2 Medicine Shoppe International, Inc. Balance Sheets
ASSETS As of September 30, 1994 1993 ---- ---- 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 =========== ===========
See Accompanying Notes to Financial Statements. A-3 Medicine Shoppe International, Inc. Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY As of September 30, 1994 1993 ---- ----- 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 =========== ===========
See Accompanying Notes to Financial Statements. A-4 Medicine Shoppe International, Inc. Statements of Cash Flows
Fiscal Years Ending September 30, 1994 1993 1992 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------- 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 ============ ========== ==========
See Accompanying Notes to Financial Statements. A-5 Medicine Shoppe International, Inc. Statements of Stockholders' Equity
Common Paid-In Retained Stockholders' Stock Capital Earnings Equity ------ ------- -------- ------------- 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 ======== =========== =========== ===========
See Accompanying Notes to Financial Statements. A-6 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 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 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.
1994 1993 ---- ---- SUMMARY OF RECEIVABLES: 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 =========== ===========
A-9 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,
Total ----- 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 ==========
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 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
1994 1993 1992 ---- ---- ---- Current: 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 ========== ========== ==========
Reconciliation between statutory income tax rate and effective tax rate is summarized below: RECONCILIATION OF EFFECTIVE TAX RATE
1994 1993 1992 ---- ---- ---- 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% ====== ====== ======
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 Medicine Shoppe International, Inc. Notes to Financial Statements
September 30, 1994 ------------------ 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 ==========
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:
Price Range 1994 ----------- ---- 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
A-12 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 Medicine Shoppe International, Inc. Notes to Financial Statements NOTE 9, ACCRUED LIABILITIES
1994 1993 ---------- ---------- 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 ========== ==========
A-14 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 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.
Cardinal MSI Pro Pro June 30, June 30, Forma Forma 1995 1995 Adjustments Balances ---------- --------- ----------- -------- (In thousands) 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 $ 9,700 130,070 ---------- ------- ------- ---------- 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)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 ========== ======= ======= ==========
See accompanying notes to the unaudited pro forma combined financial information. B-2 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
Year Ended June 30, 1995 Pro ---------------------------- Forma Cardinal MSI Results -------- ------------ ---------- (In thousands, except per share data) 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: Primary.............. $ 2.01 $ 2.07 Fully diluted........ 2.01 2.07 Weighted average number of Common Shares outstanding: Primary.............. 42,175 48,698 Fully diluted........ 42,221 48,748
See accompanying notes to the unaudited pro forma combined financial information. B-4
Year Ended June 30, 1994 Pro ---------------------------- Forma Cardinal MSI Results -------- ------------ ---------- (In thousands, except per share data) 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...... 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.... 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: Primary................. $ 0.86 $ 1.04 Fully diluted........... 0.86 1.04 Weighted average number of Common Shares outstanding: Primary................. 39,392 46,004 Fully diluted........... 39,477 46,091
See accompanying notes to the unaudited pro forma combined financial information. B-5
Year Ended March 31, 1993 Pro --------------------------- Forma Cardinal MSI Results -------- ------------ ---------- (In thousans, except per share data) 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....... 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... 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: Primary.................. $ 1.10 $ 1.22 Fully diluted............ 1.06 1.18 Weighted average number of Common Shares outstanding: Primary................ 34,311 41,046 Fully diluted.......... 38,616 45,355
See accompanying notes to the unaudited pro forma combined financial information. B-6 NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED) [FN] (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:
Three Months Ended June 30, 1993 ------------------------------- Cardinal MSI ------------- -------------- (In thousands) Net revenues................ $ 550,034 $ 11,329 Net earnings................ 7,771 3,342
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. (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 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. (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. (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 The following supplemental information summarizes the Car- dinal and MSI unaudited pro forma combined results excluding the impact of the unusual items:
Cardinal Pro Forma Combined -------------------- ---------------------- Fiscal Year Ended Fiscal Year Ended -------------------- ---------------------- March 31, June 30, March 31, June 30, 1993 1994 1993 1994 --------- -------- --------- -------- 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
B-9 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:
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 --------- -------- --------- -------- 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 ======== ======= ======== =======
B-10 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 EXHIBIT INDEX None. -----END PRIVACY-ENHANCED MESSAGE-----