<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
FOXMEYER HEALTH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 25-1425889
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1220 Senlac Drive, Carrollton, Texas 75006
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 214-446-4800
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Indicate by check mark whether the registrant (1) had 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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Number of shares of Common Stock outstanding as of August 9, 1996: 15,773,088
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------
(In thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 4,070 $ 1,759
OPERATING COSTS
Selling, general and administrative expenses 5,319 4,212
Depreciation and amortization 489 143
- --------------------------------------------------------------------------------------------------------------
(1,738) (2,596)
Other income 840 9,068
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OPERATING INCOME (LOSS) (898) 6,472
FINANCING COSTS
Interest income 360 992
Interest expense 2,117 1,392
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Financing costs, net 1,757 400
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION,
EQUITY IN LOSS OF AFFILIATES, INCOME TAX BENEFIT (PROVISION) AND MINORITY
INTEREST (2,655) 6,072
National Steel Corporation net preferred income 2,419 923
Equity in loss of affiliates (1,603) (1,240)
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (PROVISION)
AND MINORITY INTEREST (1,839) 5,755
Income tax benefit (provision) (29,579) 1,219
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (31,418) 6,974
Minority interest in results of operations of consolidated subsidiaries (785) (635)
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (32,203) 6,339
DISCONTINUED OPERATIONS:
Loss from operations (17,467) (138)
Loss on sale of discontinued operations (238,682) -
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (288,352) 6,201
Preferred stock dividends 4,080 5,223
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NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (292,432) $ 978
- --------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK:
Income (loss) from continuing operations $ (2.14) $ 0.07
Loss from discontinued operations (15.13) (0.01)
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NET INCOME (LOSS) PER SHARE $ (17.27) $ 0.06
- --------------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,929 16,716
==============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands of dollars) June 30, 1996 March 31, 1996
- -------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $ 7,064 $ 26,987
Receivables - net 16,719 291,750
Inventories - 632,269
Net assets of discontinued operations held for sale 40,303 16,527
Other current assets 37,142 43,632
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 101,228 1,011,165
INVESTMENT IN NATIONAL STEEL CORPORATION 46,499 44,099
INVESTMENTS IN AFFILIATES 45,940 49,602
PROPERTY, PLANT AND EQUIPMENT 30,410 216,604
Less: allowances for depreciation and amortization 1,825 73,749
- -------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 28,585 142,855
OTHER ASSETS
Goodwill - net 7,330 207,935
Intangible assets - net 2,735 12,554
Deferred tax asset, net of valuation allowance - 79,676
Miscellaneous assets 11,333 29,184
- -------------------------------------------------------------------------------------------------------------
21,398 329,349
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 243,650 $ 1,577,070
=============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands of dollars) June 30, 1996 March 31, 1996
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 9,969 $ 610,579
Accrued liabilities 25,866 51,475
Deferred income taxes - 43,917
Long-term debt due within one year 34,930 28,793
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 70,765 734,764
LONG-TERM DEBT 27,057 403,831
OTHER LONG-TERM LIABILITIES 33,032 38,646
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 10,727 10,074
REDEEMABLE PREFERRED STOCK 190,446 187,292
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $5.00 par value; authorized 50,000,000 shares;
24,188,084 shares issued 120,940 120,940
Capital in excess of par value 209,544 209,613
Minimum pension liability (64,634) (64,634)
Net unrealized holding loss on marketable securities (66) (17)
Retained earnings (deficit) (222,171) 70,431
- ---------------------------------------------------------------------------------------------------------
43,613 336,333
Less: cost of common stock held in treasury - 7,415,296 shares at
June 30, 1996 and 7,520,882 shares at March 31, 1996 131,990 133,870
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (88,377) 202,463
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 243,650 $ 1,577,070
=========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------
(In thousands of dollars) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (288,352) $ 6,201
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 785 635
Equity in loss of affiliates 1,603 1,240
Depreciation and amortization 489 143
Net preferred income from National Steel Corporation (2,419) (923)
Gain on investments (2,877) (463)
Other non-cash (credits) or charges 2,266 (8,674)
Deferred income tax provision (benefit) 29,579 (1,219)
Depreciation and amortization, provisions for losses on accounts
receivable and other items related to discontinued operations 10,392 8,792
Loss on sale of discontinued operations 238,682 -
Cash provided (used) by working capital items, net of acquisitions:
Receivables 5,773 63,074
Inventories 26,018 (65,790)
Other assets 374 (3,583)
Accounts payable and accrued liabilities 1,191 33,713
Proceeds from accounts receivable financing program 75,000 -
Other (1,476) (990)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97,028 32,156
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations or change
to equity method of accounting (24,366) (9,108)
Purchase of property, plant and equipment (31,418) (12,301)
Purchase of investments (6,248) (36,218)
Proceeds from the sale of investments 10,763 10,556
Acquisitions, net of cash acquired - (2,452)
Other 393 (172)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (50,876) (49,695)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities 447,492 338,050
Repayments under revolving credit facilities (312,693) (295,750)
Proceeds from issuance of long-term debt 15,120 1,700
Debt repayments (207,067) (1,666)
Loan origination fees (8,235) (78)
Dividends paid on redeemable preferred stock (926) (1,045)
Dividends paid to minority interests (1,446) (932)
Other 1,680 264
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (66,075) 40,543
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (19,923) 23,004
Cash and short-term investments, beginning of period 26,987 35,232
- ------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 7,064 $ 58,236
==================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
FoxMeyer Health Corporation (the "Corporation") is a holding company owning
subsidiaries that are primarily engaged in real estate operations, principally
hotels and office buildings, and investing in other corporations and
partnerships.
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at the dates of the
financial statements and the reported amounts of revenues and expenses during
such reporting periods. Actual results could differ from these estimates.
Certain previously reported amounts have been reclassified to conform to
current year presentations.
The accompanying condensed consolidated balance sheet of the Corporation as of
June 30, 1996, the condensed consolidated statements of operations for the
three months ended June 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the three months ended June 30, 1996 and 1995 are
unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited consolidated financial statements, and include
all adjustments necessary for the fair presentation of financial position,
results of operations and cash flows. Such adjustments, except for those
related to the Corporation's discontinued operations, were of a normal
recurring nature. The results of operations for the three months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the entire year. The condensed consolidated balance sheet as of March 31, 1996
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. Additional
information is contained in the Corporation's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended March 31,
1996, and should be read in conjunction with this quarterly report.
NOTE 2 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share is based on income (loss) after preferred stock
dividend requirements and the weighted average number of shares of common stock
outstanding during the period after giving effect to stock options considered
to be dilutive common stock equivalents. Fully diluted net income per share is
not presented as it is substantially the same as primary earnings per share or
is anti-dilutive, as applicable.
NOTE 3 - DISCONTINUED OPERATIONS
On August 14, 1996, the Board of Directors of the Corporation approved a plan
to divest the Corporation's distribution subsidiary, FoxMeyer Drug Company,
which was the primary operating unit of the Corporation. The Corporation has,
therefore, treated the subsidiary and its parent, FoxMeyer Corporation
("FoxMeyer"), as a discontinued operation. Certain of FoxMeyer's subsidiaries
and investments in other corporations, which were transferred to the
Corporation by FoxMeyer as a dividend on June 19, 1996, have been treated as
continuing operations for both of the three month periods ended June 30, 1996
and 1995, respectively. The dividend included FoxMeyer's investment in
FoxMeyer Canada Inc., Phar-Mor, Inc., US Health Data Interchange, and
marketable securities. The measurement date for the determination of the loss
on the sale of the discontinued operation was June 30, 1996. The Corporation
recognized a loss from discontinued operations of FoxMeyer for the three months
ended June 30, 1996, of $17.5 million, net of taxes. In addition, the
Corporation recognized an estimated $238.7 million loss from the write-down of
the net assets being disposed of to their estimated net realizable value. Prior
year results of operations have been reclassified to reflect FoxMeyer as a
discontinued operation. The balance sheet at June 30, 1996, reflects the net
realizable value of FoxMeyer in "Net assets of discontinued operations held for
sale". The balance sheet at March 31, 1996, has not been restated.
Discontinued operations generated sales for the three months ended June 30,
1996 and 1995 of $1,427.1 million and $1,278.2 million, respectively. The loss
from operations is net of the applicable income tax benefit of $4.6 million in
1996 and an income tax provision of $0.4 million in 1995.
5
<PAGE> 7
In July 1995, the Corporation adopted a plan to dispose of certain of its
managed care and information services operations. In fiscal 1996, the
Corporation recorded a $7.1 million reserve, net of taxes for future
operating losses after the measurement date of June 30, 1995 and for expected
losses on the sale of these operations. Approximately $1.5 million of the
reserve remained at March 31, 1996. The Corporation has incurred additional
losses of $1.1 million during the three months ended June 30, 1996 that have
been applied against the remaining reserve. The net book value of assets and
liabilities which are expected to be sold is reflected on the consolidated
balance sheet at June 30, 1996 as "Net assets of discontinued operations held
for sale". The net assets, before reclassification, consisted of $0.1 million
of current assets and $15.2 million of long-term assets.
In July 1996, the Corporation signed a definitive agreement to sell the
pharmacy benefit management operation for $30.5 million with an additional $2.5
million due in one year. The additional payment may increase to a maximum of
$5.0 million based on certain criteria. The transaction closed on August 2,
1996. The transaction will result in a gain on discontinued operations that
will be recognized in the second quarter of fiscal 1997. The exact amount of
the gain has not yet been determined.
NOTE 4 - LONG-TERM DEBT
On August 2, 1996, the Corporation retired its $15.0 million credit facility.
At June 30, 1996, the amount outstanding under this facility was $14.2 million.
As of August 19, 1996, the Corporation was in violation of certain terms of its
$20.0 million secured loan (the "Hamilton Facility") and, therefore, all of the
$20.0 million balance outstanding at June 30, 1996, has been classified as
"Long-term debt due within one year". In July 1996, the Corporation reduced
the balance outstanding on the Hamilton Facility to $17.4 million. The
Corporation is currently negotiating with the creditor to amend or refinance
the Hamilton Facility.
The Corporation borrowed an additional $15.1 million, before repayments, in
connection with the purchase or refinancing of real estate in limited
partnerships controlled by the Corporation. The additional borrowings are
non-recourse and secured solely by the underlying real estate.
NOTE 5 - INVESTMENTS IN AFFILIATES
The Corporation has written off the remaining book value of its investment in
Ben Franklin Retail Stores, Inc. ("Ben Franklin") of approximately $2.0
million. The write-off resulted from the Chapter 11 bankruptcy filing by Ben
Franklin on July 26, 1996. As a result of the write-off of this investment,
the Corporation will no longer account for Ben Franklin on an equity basis.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided for interest and
income taxes paid and for noncash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three months ended June 30,
---------------------------
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 16,201 $ 10,633
Income taxes paid - 11
Noncash transactions:
Payment of dividends in kind on preferred stock 2,659 3,778
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
As a result of the plan to divest FoxMeyer, the Corporation has reviewed its
valuation allowance on the deferred tax assets available to the Corporation.
Without the projected taxable income from FoxMeyer, the Corporation has
determined that an additional valuation allowance of $29.9 million was needed
at June 30, 1996.
6
<PAGE> 8
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Corporation has retained responsibility for certain potential environmental
liabilities attributable to former operating units and as a result is subject
to federal, state or local environmental laws, rules and regulations. The laws
generally impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties regardless of fault. The Corporation and its subsidiaries have
received various claims and demands from governmental agencies relating to
investigations and remedial actions to address environmental clean-up costs
and, in some instances, have been designated as a potentially responsible party
by the Environmental Protection Agency.
The Corporation's reserves for potential environmental assessments or
remediation activities, penalties, or fines, that may be imposed for
non-compliance with such laws or regulations, have not changed materially since
March 31, 1996. The Corporation's estimates of these costs are based on
currently available facts, existing technologies, presently enacted laws and
regulations, and the professional judgment of consultants and counsel.
The amounts of reserves for environmental liabilities are difficult to estimate
due to such factors as the unknown extent of remedial actions that may be
required and, in the case of sites not owned by the Corporation, the unknown
extent of the Corporation's probable liability in proportion to the probable
liability of other parties. Moreover, the Corporation may have environmental
liabilities that the Corporation cannot, in its judgment, estimate at this time
and losses attributable to remediation costs may arise at other sites. The
Corporation cannot now estimate the additional cost and expenses it may incur
for such environmental liabilities. While management of the Corporation does
not believe the liabilities associated with such other sites will have a
material adverse effect on its financial condition or results of operations, it
recognizes additional work may have to be performed to ascertain the ultimate
liability for such sites, and further information could ultimately change
management's current assessment.
There are various pending claims and lawsuits arising out of the normal conduct
of the Corporation. In the opinion of management, the ultimate outcome of
these claims and lawsuits will not have a material effect on the consolidated
financial condition or results of operations of the Corporation.
NOTE 9 - SUBSEQUENT EVENT
The Corporation has signed a definitive agreement to sell FoxMeyer for $25.0
million plus the assumption of FoxMeyer's debt. The $25.0 million includes $10.0
million in cash and a $15.0 million subordinated convertible note. The
transaction is subject to obtaining various approvals and to other customary
closing conditions. In addition, the purchaser must obtain commitments for new
additional working capital financing for FoxMeyer of $50.0 million by September
19, 1996.
7
<PAGE> 9
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FoxMeyer Health Corporation and its subsidiaries (the "Corporation") were
principally engaged in the wholesale distribution of pharmaceutical products
and health and beauty aids through FoxMeyer Corporation ("FoxMeyer"). On
August 14, 1996, the Corporation's Board of Directors approved a plan to divest
FoxMeyer. Therefore, FoxMeyer will be treated as a discontinued operation as
of June 30, 1996. FoxMeyer's operating loss to the measurement date of June
30, 1996 of $17.5 million is shown as a loss from discontinued operations. The
Corporation has also recorded an estimated $238.7 million loss from the
write-down of the net assets of FoxMeyer to their estimated net realizable
value. The decision to divest FoxMeyer will cause substantial changes in the
Corporation's future results of operations, assets and liabilities and future
liquidity and capital resources. The prior year statement of operations has
been restated to reflect FoxMeyer as a discontinued operation.
The Corporation has signed a definitive agreement to sell FoxMeyer for $25.0
million plus the assumption of FoxMeyer's debt. The $25.0 million includes
$10.0 million in cash and a $15.0 million subordinated convertible note. The
transaction is subject to obtaining various approvals and to other customary
closing conditions. In addition, the purchaser must obtain commitments for
new additional working capital financing for FoxMeyer of $50.0 million by
September 19, 1996.
FoxMeyer declared and paid a dividend (the "FoxMeyer Dividend") to the
Corporation on June 19, 1996, consisting of assets unrelated to its core
distribution business, including assets of FoxMeyer's discontinued operations
(certain managed care and information service subsidiaries); another subsidiary
that is an information service provider, US Health Data Interchange ("USHDI");
FoxMeyer's investments in FoxMeyer Canada Inc. ("FoxMeyer Canada"), Phar-Mor,
Inc. ("Phar-Mor") and other marketable securities; and FoxMeyer's forgiveness
of a $31.3 million loan to the Corporation including accrued interest.
After the divestiture of FoxMeyer, the Corporation will continue to operate
hotels and office buildings, principally in the Washington D.C. area, and to
make and hold investments in other corporations and partnerships, including
those received as part of the FoxMeyer Dividend.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
OPERATING INCOME (LOSS)
Net sales, primarily from real estate operations, increased to $4.1 million for
the three months ended June 30, 1996 as compared to $1.8 million for the three
months ended June 30, 1995. The increase is primarily the result of the
increase in hotel revenues including an increase related to the addition of a
new hotel management agreement.
Operating costs increased to $5.8 million for the current period as compared to
$4.4 million for the prior period. The increase is also due primarily to
increases in operating expenses at the Corporation's real estate operations.
Other income decreased $8.2 million compared to the prior year period. The
decrease was principally due to a write-off of approximately $2.0 million
for the Corporation's investment in Ben Franklin Retail Stores, Inc. ("Ben
Franklin") in the current year (see Note 5 to the condensed consolidated
financial statements), and to a non-recurring gain recognized in the prior year
for the settlement of certain issues related to the fiscal 1992 sale of The
Permian Corporation. The Corporation recorded a gain from the early settlement
of a discounted note receivable in the current period partially offsetting the
decreases.
NET FINANCING COSTS
Net financing costs increased to $1.8 million for the three months ended June
30, 1996 as compared to $0.4 million for the three months ended June 30, 1995.
Interest income decreased $0.6 million primarily from reduced investments in
notes receivable in the real estate operations and, in the prior period,
interest on funds held as a deposit by another company. Interest expense
increased $0.8 million from additional funds borrowed in the real estate
operations and to acquire the Corporation's interest in Hamilton Morgan L.L.C.
("Hamilton Morgan").
8
<PAGE> 10
NATIONAL STEEL CORPORATION RESULTS
The net preferred income for National Steel Corporation ("NSC") was $2.4
million for the three months ended June 30, 1996, compared to $0.9 million for
the prior period. The increase was primarily due to the reduction in the
actuarially determined expense related to the Weirton pension obligation for
the current fiscal year.
EQUITY IN LOSS OF AFFILIATES
The equity in loss of affiliates primarily represented the positive results of
real estate partnership investments carried on the equity basis, the
Corporations 41% interest in FoxMeyer Canada's losses for the quarter as well
as the Corporation's 39% equity interest in the loss incurred by Phar-Mor. In
the prior year, the equity in loss of affiliates consisted of 68% of Ben
Franklin's losses and 47% of FoxMeyer Canada's losses for the quarter.
INCOME TAXES
The Corporation recorded an income tax benefit of $1.2 million for the three
months ended June 30, 1995. The benefit was primarily due to the reduction in
the deferred tax asset valuation allowance. The current period expense of $29.6
million primarily reflects the increase in the deferred tax asset valuation
allowance due to the loss of FoxMeyer's future estimated operating results.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The minority interest in the results of operations of consolidated subsidiaries
was $0.8 million for the three months ended June 30, 1996 as compared to $0.6
million for the three months ended June 30, 1995. The minority interest in the
current quarter relates to the real estate partnerships and Hamilton Morgan
while in the prior year the minority interest consisted only of the real
estate partnerships. The increase in minority interest is primarily
attributable to increased real estate earnings.
DISCONTINUED OPERATIONS
The loss from discontinued operations for the current and prior year represent
the loss from FoxMeyer for the three months ended June 30, 1996 and 1995,
respectively. The loss on sale of discontinued operations represents the
write-off of the investment in FoxMeyer to its estimated net realizable value.
The following is a discussion of the significant components of the discontinued
operations for fiscal 1997 as compared to fiscal 1996:
Net sales increased $148.9 million to $1,427.1 million for the three months
ended June 30, 1996 as compared to $1,278.2 million for the three months ended
June 30, 1995. Sales increased across all customer segments. Sales in the next
quarter of fiscal 1997 are expected to decline slightly from current trends in
as much as FoxMeyer and the RiteAid Corporation ("RiteAid"), a national retail
drug store chain, mutually agreed to terminate their relationship in July 1996.
RiteAid accounted for $113.7 million in net sales for the quarter ended June 30,
1996.
Gross profit decreased $17.3 million to $46.4 million for the three months
ended June 30, 1996. As a percentage of net sales, gross margin decreased to
3.3% for the three months ended June 30, 1996 from 5.0% for the three months
ended June 30, 1995. Increased sales to large volume and lower margin customers
as well as continuing price competition throughout the industry contributed to
this decrease.
Operating costs other than cost of goods sold ("operating expenses") decreased
$1.4 million to $53.2 million for the three months ended June 30, 1996 as
compared to $54.6 million for the three months ended June 30, 1995. As a
percentage of net sales, operating expenses decreased to 3.7% of net sales as
compared to 4.3% in the prior year reflecting FoxMeyer's continuing
efforts to reduce costs. While steps taken to date have lowered operating
expenses, additional cost reductions will be necessary to improve
profitability. The ability of management to reduce costs quickly and
efficiently, in connection with its initiatives to increase gross profit for
fiscal 1997, will be a significant factor in future profitability.
Other expense increased $1.3 million from $2.3 million for the three months
ended June 30, 1995 to $3.6 million for the three months ended June 30, 1996.
The increase was principally due to increased fees of $1.5 million on the
accounts receivable financing program. The increase in fees is due to higher
costs associated with the sale of receivables as compared to the prior year,
which trend will continue for the remainder of the year, and from the sale of
an additional $75.0 million of receivables on June 19, 1996.
Net financing costs increased $3.0 million to $8.6 million for the three months
ended June 30, 1996, as compared to $5.6 million for the three months ended
June 30, 1995. Total interest income did not change significantly; however,
interest expense increased by $3.1 million to $9.0 million for the three months
ended June 30, 1996. The increase in interest expense was attributable to:(i)
an increase in average debt outstanding for the quarter of approximately $13.1
million as compared to the prior year period; (ii) violations of certain
covenants under FoxMeyer's credit facility that required FoxMeyer to pay higher
interest rates as well as significant waiver fees through June 19, 1996 when
the credit facility was replaced; and (iii) higher average interest rates under
the new FoxMeyer credit facility than under the old facility.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $4.1 million for the three months ended June 30,
1996, compared to $5.2 million for the three months ended June 30, 1995. The
decrease of $1.1 million is due to fewer outstanding convertible preferred
shares in the current quarter as compared to the prior year and to lower
dividends on the Series A redeemable preferred stock. The dividend on the
Series A preferred stock is paid in kind, and the amount of the dividend is
based on the current market price of the preferred stock on the ex-dividend
date. The price of the Series A preferred stock has fallen significantly since
the prior year quarter resulting in lower dividend expense.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of cash flow reflects the operations of the
Corporation, including FoxMeyer, for the three months ended June 30, 1996, the
measurement date for accounting for FoxMeyer as a discontinued operation.
Net cash provided by operations (which includes working capital components) was
$97.0 million for the three months ended June 30, 1996. The change in working
capital components provided $33.4 million of funds primarily from the decrease
in inventory at FoxMeyer from March 31, 1996 to June 30, 1996. The sale of
additional accounts receivable by FoxMeyer under an accounts receivable
financing program provided $75.0 million in cash.
Cash used in investing activities was $50.9 million for the three months ended
June 30, 1996. Approximately $31.4 million of funds were used to purchase
property and equipment during this period including approximately $22.5 million
used to purchase property and equipment that were formerly leased by FoxMeyer.
Another $24.4 million of the decrease represents the cash balance of FoxMeyer
at June 30, 1996, which will no longer be available to the Corporation as a
result of the plan to divest FoxMeyer's operations.
9
<PAGE> 11
Financing activities used $66.1 million of cash for the three months ended June
30, 1996. Repayments of debt of $57.1 million, net of borrowings, were the
principal use of the funds. Net borrowings under the Corporation's various
revolving credit facilities increased by $134.8 million during this period.
The increase was principally due to the retirement of FoxMeyer's $198.0 million
of senior notes using funds borrowed under FoxMeyer's revolving credit facility
less the impact of the $75.0 million increase in the accounts receivable
financing program, which proceeds were used to reduce revolver borrowings.
FoxMeyer had $24.4 million in cash at June 30, 1996. In addition, it had
borrowed $316.4 million under its $475.0 million revolving credit facility at
an average interest rate of 7.7%. The average and maximum amounts borrowed
during the three months ended June 30, 1996 under the revolving credit
facility and its predecessor were $211.9 million and $337.4 million,
respectively. FoxMeyer also increased its accounts receivable financing by
another $25.0 million on August 2, 1996 to $300.0 million. After the release of
the fiscal 1996 results, FoxMeyer has experienced pressure from vendors through
reductions in credit limits resulting in an impairment of FoxMeyer's liquidity.
Successful implementation of the initiatives announced in late June will require
the support of FoxMeyer's suppliers and customers. There can be no assurance
that FoxMeyer will be successful in the implementation and execution of these
initiatives.
With the proposed divestiture of FoxMeyer, the Corporation retains certain real
estate limited partnership activities, which include the operation of hotels
and office buildings principally in the Washington D.C. area, investments in
other corporations and partnerships, and certain corporate office and other
miscellaneous activities. The following discussion of liquidity and capital
resources refers to these remaining activities:
The Corporation had cash and short-term investments of approximately $5.8
million at June 30, 1996, excluding cash and short-term investments in real
estate limited partnerships. In addition, at June 30, 1996, the Corporation had
borrowed $14.2 million under a revolving credit facility (the "Credit
Facility") and $20.0 million under a secured loan (the "Hamilton Facility"),
which was obtained in fiscal 1996 to purchase Hamilton Morgan. On August 2,
1996, the Corporation retired the remaining balance under the Credit Facility.
The Hamilton Facility requires payments of $2.5 million each in September 1996
and 1997 with the remainder due September 1998. The Hamilton Facility also
requires that the Corporation maintain a minimum net worth, restricts the
payment of cash dividends on the Corporation's common stock, and limits the
amount that may be expended on the repurchase of shares of the Corporation's
common stock. The Hamilton Facility is collateralized by (i) a portion of the
Corporation's shares of FoxMeyer, (ii) the Corporation's interest in Phar-Mor
common stock held by Hamilton Morgan and (iii) other marketable securities. As
of August 19, 1996, the Corporation was in violation of certain terms of the
Hamilton Facility and, therefore, the entire balance of $20.0 million at June
30, 1996 was classified as a current liability in the condensed consolidated
financial statements. In July 1996, the Corporation reduced the balance to
$17.4 million. The Corporation is currently negotiating with the creditor to
amend or refinance the Hamilton Facility.
The Corporation's cash requirements during the remainder of fiscal 1997 include
the funding of monthly operating expenses, benefit obligations, dividend
payments on the Corporation's convertible redeemable preferred stock and
mandatory sinking fund payments thereon, repayment of the Credit Facility, the
$2.5 million principal payment due under the Hamilton Facility and cash outlays
attributable to environmental liabilities of previously owned businesses, the
amounts and timing of which are uncertain. The Corporation intends to pay
dividends-in-kind on its Series A preferred stock through October 1996.
Beginning in January 1997, the Corporation may only pay cash dividends on the
Series A preferred stock. In addition, the Corporation may make additional real
estate and other investments. During the period from the end of the quarter
through August 19, 1996, the Corporation used approximately $8.4 million to
repurchase 999,700 shares of its own common stock.
The Corporation will rely on cash on hand, proceeds of $40.5 million from the
sale of discontinued operations (see Note 3 and Note 9 to the condensed
consolidated financial statements), proceeds from the sale of investments,
borrowings against other investments, refinancing of real estate investments
and any excess cash from its real estate operations to meet its obligations and
to repurchase shares of its common stock. The Corporation expects to fund
additional real estate investments primarily from additional non-recourse debt
which management believes will be available at reasonable rates.
As a result of the plan to divest FoxMeyer, the Corporation will be required to
rely entirely on its remaining assets to fund future cash requirements. These
assets consist primarily of investments in real estate limited partnerships,
Phar-Mor, FoxMeyer Canada, and other investments in securities and
partnerships. In addition to the cash requirements described above, the
Corporation may be required to pay down the Hamilton Facility to correct the
violation of certain terms of that facility. As a result, the Corporation may
be required to liquidate a portion of its investments in affiliates and other
investments in order to meet future cash requirements. There can be no
assurance as to the value of these assets or the ability of the Corporation to
timely liquidate these investments when funds are needed.
OTHER
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125") "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which is
effective for transfers of assets and extinguishments of liabilities occurring
after December 31, 1996. The Corporation has not yet determined the effects
SFAS 125 will have on its financial position or the results of operations.
10
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 12, 1996, an action was filed in the United States District Court
for the Northern District of Texas against the registrant, Melvyn J. Estrin
and Abbey J. Butler. The action purports to be brought on behalf of a class
of purchasers of the registrant's common stock and seeks unspecified money
damages based on allegations that the registrant violated federal securities
laws by making supposedly false and misleading statements concerning its
business, operations and prospects. The registrant intends to vigorously
contest the allegations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
The registrant did not file any Current Reports on
Form 8-K during the three months ended June 30, 1996.
11
<PAGE> 13
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.
FOXMEYER HEALTH CORPORATION
By: /s/ Edward L. Massman
-----------------------------------------
Edward L. Massman
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: August 19, 1996
12
<PAGE> 14
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
11 Computatiion of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
13
<PAGE> 1
EXHIBIT 11
FOXMEYER HEALTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(In thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the three months ended
June 30,
------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIMARY
Income (loss) from continuing operations
Income (loss) from continuing operations $ (32,203) $ 6,339
Deduct dividends on preferred shares 4,080 5,223
---------- ----------
Income (loss) from continuing operations applicable to common stockholders $ (36,283) $ 1,116
========== ==========
Loss from discontinued operations $ (256,149) $ (138)
========== ==========
Shares
Weighted average number of common shares outstanding 16,929 16,716
========== ==========
Income (loss) from continuing operations $ (2.14) $ 0.07
Loss from discontinued operations (15.13) (0.01)
---------- ----------
Net income (loss) $ (17.27) $ 0.06
========== ==========
ASSUMING FULL DILUTION
Income (loss) from continuing operations
Income (loss) from continuing operations $ (32,203) $ 6,339
Dividends on non-convertible preferred shares 3,154 4,178
Dividends on convertible preferred shares (conversion of preferred
shares would be anti-dilutive) 926 1,045
---------- ----------
Income (loss) from continuing operations applicable to common stockholders $ (36,283) $ 1,116
========== ==========
Loss from discontinued operations $ (256,149) $ (138)
========== ==========
Shares
Weighted average number of common shares outstanding 16,929 16,716
Conversion of preferred stock (anti-dilutive) - -
Additional dilutive effect of outstanding options (as determined
by the treasury stock method) - -
---------- ----------
Weighted average number of common shares outstanding as adjusted 16,929 16,716
========== ==========
Income (loss) from continuing operations $ (2.14) $ 0.07
Loss from discontinued operations (15.13) (0.01)
---------- ----------
Net income (loss)** $ (17.27) $ 0.06
========== ==========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
** This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,064
<SECURITIES> 35,969
<RECEIVABLES> 17,929
<ALLOWANCES> 1,210
<INVENTORY> 0
<CURRENT-ASSETS> 101,228
<PP&E> 30,410
<DEPRECIATION> 1,825
<TOTAL-ASSETS> 243,650
<CURRENT-LIABILITIES> 70,765
<BONDS> 27,057
<COMMON> 120,940
190,446
0
<OTHER-SE> (209,317)
<TOTAL-LIABILITY-AND-EQUITY> 243,650
<SALES> 4,070
<TOTAL-REVENUES> 4,070
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,117
<INCOME-PRETAX> (236)
<INCOME-TAX> 29,579
<INCOME-CONTINUING> (32,203)
<DISCONTINUED> (256,149)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,352)
<EPS-PRIMARY> (17.27)
<EPS-DILUTED> (17.27)
</TABLE>
