<PAGE>
RULE 424(B)(4)
REGISTRATION NO. 33-52075
PROSPECTUS
$160,000,000
McKesson Corporation
4 1/2% EXCHANGEABLE SUBORDINATED DEBENTURES DUE 2004
Exchangeable for Shares of Common Stock of
ARMOR ALL PRODUCTS CORPORATION
----------------
Interest payable March 1 and September 1
----------------
THE DEBENTURES WILL BE EXCHANGEABLE INTO COMMON STOCK OF ARMOR ALL PRODUCTS
CORPORATION ("ARMOR ALL") OWNED BY MCKESSON CORPORATION ("MCKESSON") AT
THE OPTION OF THE HOLDER AFTER 60 DAYS FOLLOWING THE ORIGINAL ISSUANCE
THEREOF, UNLESS PREVIOUSLY REDEEMED. THE EXCHANGE PRICE WILL BE
$25.9375 PER SHARE OF ARMOR ALL COMMON STOCK (EQUIVALENT TO AN
EXCHANGE RATE OF 38.5542 SHARES OF ARMOR ALL COMMON STOCK FOR EACH
$1,000 PRINCIPAL AMOUNT OF DEBENTURES), SUBJECT TO ADJUSTMENT IN
CERTAIN EVENTS AND SUBJECT TO MCKESSON'S RIGHT TO PAY CASH
EQUAL TO THE AVERAGE MARKET PRICE OF THE SHARES OF ARMOR ALL
COMMON STOCK FOR THE FIVE TRADING DAYS PRECEDING THE DATE
OF NOTICE OF EXCHANGE IN LIEU OF SUCH SHARES. THE ARMOR
ALL COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "ARMR." ON MARCH 7, 1994,
THE REPORTED LAST SALE PRICE OF THE ARMOR ALL
COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS
$21. THE DEBENTURES WILL BE SUBORDINATED AS
DESCRIBED HEREIN TO ALL SENIOR INDEBTEDNESS
OF MCKESSON.
----------------
THE DEBENTURES WILL NOT BE REDEEMABLE PRIOR TO MARCH 2, 1999. THEREAFTER
THE DEBENTURES WILL BE REDEEMABLE AT ANY TIME ON AT LEAST 30 DAYS'
NOTICE AT THE OPTION OF MCKESSON, IN WHOLE OR IN PART, INITIALLY
AT 102.25% AND AT DECREASING PRICES THEREAFTER TO 100% AT
MATURITY, TOGETHER IN EACH CASE WITH ACCRUED INTEREST.
----------------
THE DEBENTURES AND THE ARMOR ALL COMMON STOCK DELIVERABLE UPON EXCHANGE OF
THE DEBENTURES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
PRICE 100% AND ACCRUED INTEREST, IF ANY
----------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) McKesson(1)(3)
------------ -------------- --------------
<S> <C> <C> <C>
Per Debenture........................ 100.0% 1.0% 99.0%
Total(3)(4).......................... $160,000,000 $1,600,000 $158,400,000
</TABLE>
- --------
(1) Plus accrued interest, if any, from the date of issuance.
(2) McKesson and Armor All have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933.
(3) Before deducting expenses payable by McKesson estimated at $300,000.
(4) McKesson has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of
$20,000,000 additional aggregate principal amount of Debentures at the
price to public less underwriting discounts and commissions, for the
purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, total price to public, underwriting
discounts and commissions and proceeds to McKesson will be
$180,000,000, $1,800,000 and $178,200,000, respectively. See
"Underwriters."
----------------
The Debentures are offered, subject to prior sale, when, as and if accepted
by the Underwriters and subject to the approval of certain legal matters by
Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the
Underwriters. It is expected that delivery of the Debentures will be made on
or about March 14, 1994 at the offices of Morgan Stanley & Co. Incorporated,
New York, New York, against payment therefor in New York funds.
----------------
MORGAN STANLEY & CO.
Incorporated
March 7, 1994
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MCKESSON, ARMOR ALL, THE UNDERWRITERS OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH
PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents By Reference........................... 3
Prospectus Summary........................................................ 5
Use of Proceeds........................................................... 9
Capitalization of McKesson................................................ 9
Armor All Common Stock Price Range and Dividends.......................... 10
McKesson.................................................................. 10
Selected Consolidated Financial Information of McKesson.................. 12
Armor All................................................................. 13
Selected Consolidated Financial Information of Armor All................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Armor All............................................. 15
Business of Armor All.................................................... 19
Management of Armor All.................................................. 24
Certain Relationships and Transactions.................................... 26
Description of the Debentures............................................. 28
Certain United States Tax Consequences.................................... 37
Underwriters.............................................................. 41
Legal Matters............................................................. 42
Experts................................................................... 42
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES
OFFERED HEREBY OR THE ARMOR ALL COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
AVAILABLE INFORMATION
McKesson Corporation (together with its subsidiaries, unless the context
otherwise requires, "McKesson") and Armor All Products Corporation (together
with its subsidiaries, unless the context otherwise requires, "Armor All") are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith file reports
and other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy and information statements and other information
filed by McKesson and Armor All may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. and at certain of its regional offices located
at: Seven World Trade Center, 13th Floor, New York, New York; and 500 West
Madison Street, Suite 1400, Chicago, Illinois. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Securities of McKesson are
listed on the New York and Pacific Stock Exchanges, and the Armor All Common
Stock is traded on the Nasdaq National Market. Reports and other information
concerning McKesson may be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York, and the Pacific Stock
Exchange, 301 Pine Street, San Francisco, California. Reports and other
information concerning Armor All may be inspected at the National Association
of Securities Dealers, Inc., 1735 K Street, Washington, D.C.
McKesson and Armor All have filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), relating to the Debentures offered hereby
and the shares of Armor All Common Stock deliverable upon exchange of the
Debentures. This Prospectus does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by McKesson with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
(1) Annual Report on Form 10-K for the year ended March 31, 1993;
(2) Quarterly Report on Form 10-Q for the quarter ended June 30, 1993;
(3) Quarterly Report on Form 10-Q for the quarter ended September 30,
1993; and
(4) Quarterly Report on Form 10-Q for the quarter ended December 31,
1993.
The following documents heretofore filed by Armor All with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
(1) Registration Statement on Form 8-A dated September 2, 1986;
(2) Current Report on Form 8-K dated April 23, 1993;
(3) Annual Report on Form 10-K for the year ended March 31, 1993;
(4) Quarterly Report on Form 10-Q for the quarter ended June 30, 1993;
(5) Quarterly Report on Form 10-Q for the quarter ended September 30,
1993; and
(6) Quarterly Report on Form 10-Q for the quarter ended December 31,
1993.
All documents subsequently filed by McKesson pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of the offering of Debentures made hereby, and all documents
subsequently filed by Armor All pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 prior to the termination of the offering
of Armor All Common Stock made hereby,
3
<PAGE>
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of the filing of such documents. McKesson and Armor All, as the
case may be, will provide without charge a copy of any and all of such
documents (exclusive of exhibits unless such exhibits are specifically
incorporated by reference therein) without charge to each person to whom a copy
of this Prospectus is delivered, upon written or oral request to Nancy A.
Miller, Vice President and Corporate Secretary, McKesson Corporation, One Post
Street, San Francisco, California 94104 (telephone number: (415) 983-8301).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is incorporated or deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere and
incorporated by reference in this Prospectus.
MCKESSON
McKesson Corporation conducts its operations through three business
segments--Health Care Services, Water Products and Armor All. McKesson's Health
Care Services segment includes McKesson's distribution services operation and
PCS Health Systems, Inc. ("PCS"). Within the United States and Canada, the
distribution services operation is the largest wholesale distributor of ethical
and proprietary drugs and health and beauty care products. Its products are
distributed to chain and independent drug stores, hospitals, food stores and
mass merchandisers throughout the United States and Canada. PCS provides
prescription drug claims processing and pharmacy benefit design, administration
and management to health plan sponsors. Also included in this segment are the
results of McKesson's Central American pharmaceutical operation and equity
interest in a pharmaceutical wholesale distributor in Mexico. The Health Care
Services segment generated 97% of McKesson's total revenues and 78% of its
operating profit in the nine months ended December 31, 1993 and in fiscal 1993.
McKesson's Water Products segment engages in the processing, sale and delivery
of bottled drinking water and the sale of packaged water to retail stores.
In May 1993, McKesson sold 5,175,000 shares of Armor All Common Stock in a
registered public offering. As of March 7, 1994, McKesson owned 11,975,000
shares of Armor All Common Stock, or approximately 57% of Armor All's
outstanding shares, and a majority of the members of Armor All's Board of
Directors are also officers of McKesson. As a result, McKesson may be able to
control Armor All and, as a result of such control, may be able to effect
certain transactions which could result in a change in the property deliverable
upon exchange of the Debentures offered hereby. See "Description of the
Debentures". If all of the Debentures offered hereby (assuming that the
Underwriters' over-allotment option is exercised in full) were immediately
exchanged for shares of Armor All Common Stock, McKesson would own 5,035,241
shares of Armor All Common Stock, representing approximately 24% of the shares
of Armor All Common Stock outstanding on March 7, 1994.
THE OFFERING
<TABLE>
<S> <C>
McKesson Corporation, a Delaware
Issuer............................. corporation
Securities Offered................. $160,000,000 principal amount of 4 1/2%
Exchangeable Subordinated Debentures Due
2004 ($180,000,000 principal amount of the
Debentures if the Underwriters' over-
allotment option is exercised in full).
The Debentures will mature on March 1,
2004, unless previously redeemed or
exchanged.
Interest Payment Dates............. March 1 and September 1, commencing
September 1, 1994.
Exchange Rights and Cash Option on The Debentures will be exchangeable at the
Exchange.......................... option of the holder at any time after May
13, 1994 (60 days following original
issuance thereof), unless previously
redeemed, into shares of Armor All Common
Stock at an exchange price of $25.9375 per
share (equivalent to an exchange rate of
38.5542 shares of Armor All Common Stock
for each $1,000 principal amount of
Debentures), subject to adjustment in
certain events and subject to McKesson's
right to pay cash equal to the average
market price of the shares for the five
consecutive trading days preceding the
date of notice of exchange in lieu of such
shares.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Redemption.......................... The Debentures will not be redeemable by
McKesson prior to March 2, 1999.
Thereafter, the Debentures will be
redeemable at any time on at least 30
days' notice at the option of McKesson, in
whole or in part, initially at 102.25% and
at decreasing prices thereafter to 100% at
maturity, together in each case with
accrued interest.
Subordination....................... Subordinated to all Senior Indebtedness (as
defined herein) of McKesson. At January
31, 1994, Senior Indebtedness totalled
approximately $47 million.
Use of Proceeds..................... McKesson will use the net proceeds to repay
domestic short-term borrowings.
Trading Information................. The Debentures have been approved for
listing on the Nasdaq SmallCap Market
under the symbol "MKAAG." The Armor All
Common Stock is traded on the Nasdaq
National Market under the symbol "ARMR."
</TABLE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF MCKESSON
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------------- --------------------
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31, DEC. 31,
1993 1992 1991 1990 1989 1993 1992
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $11,669.4 $10,312.6 $8,420.6 $7,790.9 $7,046.4 $9,251.3 $8,717.6
Income (loss) after
taxes
Continuing operations.. 114.7 39.6(1) 99.9 93.7 91.9 116.7(2) 80.9
Discontinued
operations............ -- (7.3) (4.6) -- 6.6 -- --
Extraordinary item--
debt extinguishment... -- -- -- -- -- (4.2) --
Cumulative effects of
accounting changes.... -- (110.5) -- -- -- (15.8) --
--------- --------- -------- -------- -------- -------- --------
Net income (loss)...... $ 114.7 $ (78.2) $ 95.3 $ 93.7 $ 98.5 $ 96.7 $ 80.9
========= ========= ======== ======== ======== ======== ========
Fully diluted earnings
per common share
Continuing operations.. $ 2.51 $ 0.84 $ 2.23 $ 2.03 $ 2.09 $ 2.59 $ 1.77
Discontinued
operations............ -- (0.19) (0.10) -- 0.14 -- --
Extraordinary item--
debt extinguishment... -- -- -- -- -- (0.10) --
Cumulative effects of
accounting changes.... -- (2.85) -- -- -- (0.36) --
--------- --------- -------- -------- -------- -------- --------
Total.................. $ 2.51 $ (2.20) $ 2.13 $ 2.03 $ 2.23 $ 2.13 $ 1.77
========= ========= ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges(3)....... 4.21x 2.19x 3.52x 3.54x 3.79x 6.08x 4.08x
<CAPTION>
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31,
1993 1992 1991 1990 1989 1993
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 283.3 $ 321.3 $ 311.0 $ 292.3 $ 292.1 $ 209.5
Total assets............ 2,800.1 2,756.9 2,460.9 2,327.2 2,117.3 3,203.4
Total debt(4)........... 434.8 579.2 626.9 538.2 469.7 563.8
Stockholders' equity.... 619.4 554.5 675.6 684.1 692.2 651.4
</TABLE>
- --------
(1) Net of a $56.8 million after tax charge relating to McKesson's program to
restructure its U.S. and Canadian health care services distribution
businesses and the write-off of an investment.
(2) Includes $24.5 million after tax of special items relating to the gain on
the sale and donation of Armor All Common Stock, partially offset by a
donation to the McKesson Foundation, Inc. and a loss on the termination of
interest rate swap arrangements.
(3) The ratio of earnings to fixed charges was computed by dividing fixed
charges (interest expense, including the interest portion of capital and
operating leases) into earnings available for fixed charges (income from
continuing operations plus taxes on income and fixed charges). The ratio of
earnings to combined fixed charges and ESOP dividend requirements was
3.44x, 1.81x, 2.87x, 2.95x and 3.52x in 1993, 1992, 1991, 1990 and 1989,
respectively, and 4.84x and 3.32x for the nine months ended December 31,
1993 and 1992, respectively. The ratios in 1992 include the effect of
restructuring charges of $82.8 million pre-tax and, in the nine months
ended December 31, 1993, the effect of the $37.4 million pre-tax gain
associated with special items.
(4) Total debt includes all interest-bearing debt of McKesson and consolidated
subsidiaries, including the current portion, and capital lease obligations.
6
<PAGE>
ARMOR ALL
Armor All Products Corporation develops and markets branded appearance
enhancement and protection products targeted primarily for the do-it-yourself
automotive aftermarket. Its principal brand, Armor All(R), has the leading
position in the domestic automotive protectant market. A second major brand,
Rain Dance(R), is a strong competitor in the market for automotive waxes,
polishes and washes. Armor All believes that consumer awareness of its brand
names gives it a significant competitive advantage. In a recent market research
study of persons responsible for taking care of the appearance of a car, light
truck or van, 94% of the respondents were aware of the Armor All brand name.
Armor All invests substantial amounts in consumer advertising to maintain a
high level of brand awareness.
Under the leadership of the senior management team assembled in fiscal 1991
and 1992, Armor All is continuing to implement its strategic plan designed to
increase domestic sales of Armor All(R) Protectant, develop and market new
automotive products, increase Armor All's international presence, and enter the
home care market.
Armor All Protectant, Armor All's principal product, is designed to protect
and beautify natural and synthetic polymer materials and is used primarily on
automobile surfaces made of rubber, vinyl and plastic, such as dashboards,
seats, door panels, tire sidewalls, vinyl tops and rubber bumpers. Armor All
Protectant is the leading protectant product in the domestic automotive
aftermarket, and Armor All believes it outsells its nearest competitor by more
than three to one. Armor All Protectant accounted for 70% of Armor All's
revenues in the nine months ended December 31, 1993 and 70% and 77% of its
revenues in fiscal 1993 and 1992, respectively. Since November 1991, Armor All
has introduced eight new products, including Armor All(R) Tire Foam(TM)
Protectant, which has become the leading product in its category since its
introduction. In December 1993, Armor All began shipping Armor All
QuickSilver(TM) Wheel Cleaner, a spray-on cleaner designed for use on
automotive wheels, wheel covers and hubcaps; Armor All Protectant Low-Gloss
Natural Finish(TM), a low-gloss version of Armor All Protectant designed to
minimize dashboard glare for consumers who prefer a less shiny appearance; and
Armor All Spot & Wash(TM) Concentrate, a car wash product designed to remove
bugs, tar residue and tree sap from car finishes. These products will be
supported by national television advertising and by special introductory
pricing and promotional programs. In January 1994, Armor All also acquired the
E-Z Deck Wash(R) product, which cleans and restores wood surfaces.
Armor All's products are marketed in the United States and Canada by its
direct sales force and also through independent manufacturers' representatives
and distributors. Primary customers include mass merchandise retailers, auto
supply stores, warehouse clubs, hardware stores and other retail outlets in the
United States and certain foreign markets. Armor All believes that its products
are sold at over 100,000 retail outlets. In the nine months ended December 31,
1993, sales to Armor All's two largest customers, Wal-Mart Stores, Inc. (and
its affiliates) and Kmart Corporation (and its affiliates), accounted for 15%
and 8%, respectively, of Armor All's revenues. In fiscal 1993, sales to these
same two customers represented 15% and 11%, respectively, of Armor All's
revenues. International sales represented 15% and 12% of Armor All's revenues
in the nine months ended December 31, 1993 and in fiscal 1993, respectively.
Armor All is seeking to expand its international presence, in part through a
marketing and distribution alliance with S.C. Johnson & Son, Inc. ("S.C.
Johnson").
Armor All's products are mixed and packaged by contract packagers. Armor
All's use of packagers permits it to reduce its fixed capital requirements,
limit its employment needs, and minimize its investment in product inventory
because its packagers own most raw materials and finished products until
shipment to Armor All's customers.
7
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF ARMOR ALL
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
-------------------------------------------- -----------------
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31, DEC. 31,
1993 1992 1991 1990 1989 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $168,400 $145,910 $133,804 $165,447 $162,780 $117,361 $108,413
Net income.............. 19,152 12,864 6,843 18,821 27,113 13,108 11,122
Earnings per common
share.................. $ 0.91 $ 0.61 $ 0.33 $ 0.90 $ 1.30 $ 0.62 $ 0.53
</TABLE>
<TABLE>
<CAPTION>
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31,
1993 1992 1991 1990 1989 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 60,373 $ 46,149 $ 38,825 $ 40,615 $ 36,310 $ 65,330
Current assets.......... 93,429 68,485 65,788 90,267 90,516 86,356
Total assets............ 140,560 119,823 121,731 150,069 150,364 131,717
Total debt.............. 0 0 6,549 28,688 26,141 0
Stockholders' equity.... 106,555 96,326 93,307 99,321 93,763 109,779
</TABLE>
SUMMARY OF CERTAIN UNITED STATES TAX CONSEQUENCES
Stated interest on the Debentures will be includable in and taxable as
ordinary income in accordance with the holder's method of accounting. In
addition, a taxable event generally will occur, giving rise to capital or
ordinary gain or loss to a Debentureholder, if (1) the Debentureholder sells or
exchanges the Debentures (including the exchange of the Debentures for Armor
All Common Stock or other Exchange Property as defined herein) or (2) McKesson
redeems the Debentures (including the exercise of McKesson's option to pay cash
in lieu of Armor All Common Stock or other Exchange Property to an exchanging
Debentureholder) or (3) after exchanging the Debentures for Armor All Common
Stock or other Exchange Property, the holder thereof sells or disposes of such
property. Certain adjustments to the exchange rate (or distributions on the
Armor All Common Stock or other Exchange Property prior to an exchange which
may be equivalent to an exchange rate adjustment) may cause Debentureholders to
be treated as receiving constructive distributions taxable as dividends to the
extent of Armor All earnings and profits. Further, under certain circumstances
a change in the Exchange Property could be deemed a "significant modification"
of the Debentures, which would be treated as an exchange of the original
Debentures for a new debt instrument, potentially giving rise to taxable gain
or loss to the Debentureholder. See "Certain United States Tax Consequences."
8
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Debentures are estimated to be $158.1
million ($177.9 million, if the Underwriters' over-allotment option is
exercised in full). McKesson intends to use the net proceeds to repay a portion
of its domestic short-term borrowings ($199.9 million as of December 31, 1993
with maturities of three to 27 days and interest rates of 3.18% to 3.37%).
CAPITALIZATION OF MCKESSON
The following table sets forth the total capitalization of McKesson at
December 31, 1993 and as adjusted to reflect the application of the proceeds
from the sale by McKesson of $160,000,000 principal amount of Debentures
pursuant to this offering (assuming that the Underwriters' over-allotment
option is not exercised), as described above under "Use of Proceeds." The
capitalization table should be read in conjunction with the financial
statements of McKesson incorporated by reference herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Short-term borrowings.................................. $ 251.5 $ 93.4
Current portion of long-term debt...................... 28.0 28.0
-------- --------
Total................................................ $ 279.5 $ 121.4
-------- --------
Long-term debt and capital lease obligations(1)(2)....... $ 284.3 $ 444.3
-------- --------
Stockholders' Equity:
Cumulative preferred stock, $35 par value, 6,000,000
shares authorized, 135,769 Series A shares issued and
outstanding........................................... $ 4.7 $ 4.7
Series preferred stock, $1 par value, 10,000,000 shares
authorized, 2,755,787 Series B ESOP shares issued and
outstanding........................................... 120.9 120.9
Common stock, $2 par value, 120,000,000 shares
authorized, 44,759,322 shares issued(3)............... 89.5 89.5
Other capital.......................................... 173.4 173.4
Retained earnings...................................... 589.4 589.4
Accumulated translation adjustment..................... (20.1) (20.1)
ESOP notes and guarantee(4)............................ (167.5) (167.5)
Treasury common shares, 4,342,946 shares, at cost...... (138.9) (138.9)
-------- --------
Total Stockholders' Equity........................... $ 651.4 $ 651.4
-------- --------
Total Capitalization............................... $1,215.2 $1,217.1
======== ========
</TABLE>
- --------
(1) For additional information on long-term debt, see Note 9 of the Financial
Notes in the Appendix (the "Appendix") to McKesson's definitive Proxy
Statement for the annual meeting of stockholders held on July 28, 1993 (the
"Proxy Statement"), incorporated by reference in the Annual Report on Form
10-K for the year ended March 31, 1993 which is incorporated herein by
reference.
(2) For additional information on capital lease obligations and operating lease
commitments, see Note 10 of the Financial Notes in the Appendix,
incorporated by reference in the Annual Report on Form 10-K for the year
ended March 31, 1993 which is incorporated herein by reference.
(3) For additional information regarding shares reserved for conversion of
preferred stock and convertible debentures and options to purchase common
stock, see Note 12 of the Financial Notes in the Appendix, incorporated by
reference in the Annual Report on Form 10-K for the year ended March 31,
1993 which is incorporated herein by reference.
(4) For additional information regarding the ESOP notes and guarantee, see Note
14 of the Financial Notes in the Appendix, incorporated by reference in the
Annual Report on Form 10-K for the year ended March 31, 1993 which is
incorporated herein by reference.
9
<PAGE>
ARMOR ALL COMMON STOCK
PRICE RANGE AND DIVIDENDS
Armor All Common Stock is traded on the Nasdaq National Market under the
symbol "ARMR." The following table sets forth, for the periods indicated, high
and low sale prices for the Armor All Common Stock, as reported on the Nasdaq
National Market, and the cash dividends declared per common share.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE
-------------- CASH DIVIDENDS
HIGH LOW DECLARED PER SHARE
------- ------ ------------------
<S> <C> <C> <C>
YEAR ENDED MARCH 31, 1992:
First quarter............................... $12 1/4 $ 9 $.12
Second quarter.............................. 13 9 1/4 .12
Third quarter............................... 11 1/2 9 1/2 .12
Fourth quarter.............................. 13 1/4 10 1/4 .12
YEAR ENDED MARCH 31, 1993:
First quarter............................... 16 5/8 11 .12
Second quarter.............................. 17 3/4 11 1/2 .12
Third quarter............................... 21 12 .12
Fourth quarter.............................. 19 16 1/4 .12
YEAR ENDED MARCH 31, 1994:
First quarter............................... 18 3/4 15 .16
Second quarter.............................. 19 1/4 16 1/2 .16
Third quarter............................... 20 1/2 16 1/4 .16
Fourth quarter (through March 7, 1994)...... 21 3/4 19 3/4 .16
</TABLE>
On March 7, 1994, the reported last sale price of the Armor All Common Stock
on the Nasdaq National Market was $21 per share.
MCKESSON
McKesson conducts its operations through three business segments--Health Care
Services, Water Products and Armor All. McKesson's Health Care Services segment
includes McKesson's distribution services operation and PCS. Within the United
States and Canada, the distribution services operation is the largest wholesale
distributor of ethical and proprietary drugs and health and beauty care
products. PCS provides computer-based prescription drug claims processing and
pharmacy benefit design, administration and management to health plan sponsors.
McKesson principally operates through its wholly-owned Maryland subsidiary of
the same name ("McKesson-Maryland"). McKesson's principal executive offices are
located at McKesson Plaza, One Post Street, San Francisco, CA 94104, and its
telephone number at that address is (415) 983-8300.
HEALTH CARE SERVICES
Wholesale Distribution of Pharmaceutical & Health Care Products. Within the
United States and Canada, McKesson is the largest distributor of ethical and
proprietary drugs and health and beauty care products. Its products are
distributed to chain and independent drug stores, hospitals, food stores and
mass merchandisers throughout the United States and Canada. This business
requires large inventories, significant amounts of which are financed by
related payables.
Using the names "Economost" and "Econolink" and a number of related service
marks, McKesson has promoted electronic order entry systems and a wide range of
computerized merchandising and asset management services for drug retailers and
hospitals. McKesson is also a supplier of computer systems and software for
pharmacists.
10
<PAGE>
In the United States, McKesson does business under the McKesson Drug Co. and
S-P Drug tradenames. In Canada, McKesson does business under the Medis and
Groupe Pharmaceutique Focus names. In April 1993, McKesson acquired a 22.7%
equity interest in Nadro S.A. de C.V. ("Nadro"), the leading pharmaceutical
wholesale distributor in Mexico. McKesson also received an option to acquire an
additional 9% of Nadro's common stock.
Voluntary Marketing Program. Under the Valu-Rite(R) pharmacy program,
McKesson provides its independent U.S. retail drug store customers with a
common marketing identity, group advertising, purchasing programs and
promotional merchandise. At December 31, 1993, approximately 4,500 stores were
participating in the Valu-Rite program. Similar programs are available to
independent drug stores through other drug wholesalers. McKesson provides
similar services to retail drug stores in Canada.
Service Merchandising. Service merchandising distributes health and beauty
care products, general merchandise and specialty foods to supermarkets, drug
stores and discount department stores. The distribution services provided often
include review of inventory levels and restocking of retail sales areas for
customers. McKesson does business under the names McKesson Service
Merchandising Co. and Millbrook Distributors, Inc.
PCS Health Systems, Inc. PCS provides computer-based prescription drug claims
processing and pharmacy benefit design, administration and management to health
plan sponsors including insurance companies, third party administrators, self-
insured employers and health maintenance and Blue Cross/Blue Shield
organizations that underwrite or administer prescription benefit plans. It
helps these customers manage the cost of prescription plans by providing drug
utilization reviews, clinically based formularies and generic substitution
programs. Clinically based drug formulary services are provided by McKesson's
subsidiary, Clinical Pharmaceuticals, Inc. PCS also operates an on-line
electronic network to transmit medical, hospital, laboratory, clinical and
billing information that links health care providers (physicians, hospitals and
clinics) with health plan sponsors. RECAP,SM PCS's on-line prescription claims
management system, is linked with over 95% of retail pharmacies in the U.S.
Other. Through its Sunmark operations, McKesson supplies durable medical
equipment to the home health care industry. Through its Central American
operation, McKesson manufactures a full line of McKesson branded generic
pharmaceuticals that are distributed directly and indirectly to retailers in
Central America. Through Zee Medical, Inc., McKesson distributes first-aid
products and supplies to industrial and commercial customers.
WATER PRODUCTS
McKesson Water Products Company is primarily engaged in the processing and
sale of bottled drinking water delivered to homes and businesses under its
Sparkletts(R), Alhambra(R) and Crystal(R) brands. It also sells packaged water
through retail stores in California, Arizona, Nevada and Texas, and sells and
leases processed water dispensers and coolers. In addition, under the Aqua-
Vend(R) trademark, McKesson sells processed water though vending machines in
California, Arizona, Nevada, Texas, Louisiana and Florida.
ARMOR ALL
See "Armor All," "Business of Armor All" and "Certain Relationships and
Transactions."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF MCKESSON
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The selected consolidated financial data of McKesson set forth below as of
March 31 and for the years then ended, with the exception of the ratio of
earnings to fixed charges, have been derived from McKesson's consolidated
financial statements incorporated by reference in McKesson's Annual Reports on
Form 10-K. Such consolidated financial statements for the years ended March 31,
1993, 1992 and 1991, together with the report thereon of Deloitte & Touche,
independent auditors, are incorporated herein by reference from the Appendix to
the Proxy Statement, incorporated by reference in McKesson's Annual Report on
Form 10-K for the year ended March 31, 1993 which is incorporated herein by
reference. The selected data should be read in conjunction with such financial
statements and related notes. The selected financial data as of December 31,
1993 and 1992 and for the nine months then ended, with the exception of the
ratio of earnings to fixed charges, have been derived from McKesson's unaudited
condensed consolidated financial statements which, in the opinion of McKesson's
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results for the nine-month periods are not necessarily indicative of the
results to be expected for the full year.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------------- ---------------------
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31, DEC. 31,
1993 1992 1991 1990 1989 1993 1992
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................ $11,669.4 $10,312.6 $8,420.6 $7,790.9 $7,046.4 $9,251.3 $8,717.6
Costs and expenses
Cost of sales.......... 10,536.2 9,251.9 7,429.5 6,808.2 6,104.8 8,405.3 7,896.3
Selling, distribution
and administration.... 886.8 838.5 766.2 762.8 728.0 652.0 646.4
Special items.......... -- -- -- -- -- (37.4)(2) --
Restructuring charges.. -- 82.8(1) -- -- -- -- --
Interest............... 49.5 57.7 55.8 53.3 47.1 30.7 37.0
--------- --------- -------- -------- -------- -------- --------
Total................ 11,472.5 10,230.9 8,251.5 7,624.3 6,879.9 9,050.6 8,579.7
--------- --------- -------- -------- -------- -------- --------
Income before income
taxes.................. 196.9 81.7 169.1 166.6 166.5 200.7 137.9
Income taxes............ 78.8 39.9 68.0 68.4 68.2 79.1 55.1
Income before minority
interest............... 118.1 41.8 101.1 98.2 98.3 121.6 82.8
Minority interest in net
income of subsidiaries. (3.4) (2.2) (1.2) (4.5) (6.4) (4.9) (1.9)
Income (loss) after
taxes
Continuing operations.. 114.7 39.6(1) 99.9 93.7 91.9 116.7(2) 80.9
Discontinued
operations............ -- (7.3) (4.6) -- 6.6 -- --
Extraordinary item--
debt extinguishment... -- -- -- -- -- (4.2) --
Cumulative effects of
accounting changes.... -- (110.5) -- -- -- (15.8) --
--------- --------- -------- -------- -------- -------- --------
Net income (loss)....... $ 114.7 $ (78.2) $ 95.3 $ 93.7 $ 98.5 $ 96.7 $ 80.9
========= ========= ======== ======== ======== ======== ========
Fully diluted earnings
per common share
Continuing operations.. $ 2.51 $ 0.84 $ 2.23 $ 2.03 $ 2.09 $ 2.59 $ 1.77
Discontinued
operations............ -- (0.19) (0.10) -- 0.14 -- --
Extraordinary item--
debt extinguishment... -- -- -- -- -- (0.10) --
Cumulative effects of
accounting changes.... -- (2.85) -- -- -- (0.36) --
--------- --------- -------- -------- -------- -------- --------
Total................ $ 2.51 $ (2.20) $ 2.13 $ 2.03 $ 2.23 $ 2.13 $ 1.77
========= ========= ======== ======== ======== ======== ========
Fully diluted shares.... 44.8 38.8(3) 44.6 46.3 45.8 44.0 44.9
========= ========= ======== ======== ======== ======== ========
Primary earnings per
common share
Continuing operations.. $ 2.69 $ 0.84 $ 2.41 $ 2.18 $ 2.17 $ 2.74 $ 1.90
Discontinued
operations............ -- (0.19) (0.12) -- 0.16 -- --
Extraordinary item--
debt extinguishment... -- -- -- -- -- (0.10) --
Cumulative effects of
accounting changes.... -- (2.85) -- -- -- (0.39) --
--------- --------- -------- -------- -------- -------- --------
Total................ $ 2.69 $ (2.20) $ 2.29 $ 2.18 $ 2.33 $ 2.25 $ 1.90
========= ========= ======== ======== ======== ======== ========
Primary shares.......... 40.0 38.8 38.5 40.4 42.1 40.6 39.7
========= ========= ======== ======== ======== ======== ========
Cash dividends declared
per common share....... $ 1.60 $ 1.60 $ 1.60 $ 1.44 $ 1.44 $ 1.24 $ 1.20
========= ========= ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges(4)....... 4.21x 2.19x 3.52x 3.54x 3.79x 6.08x 4.08x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31,
1993 1992 1991 1990 1989 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........... $ 283.3 $ 321.3 $ 311.0 $ 292.3 $ 292.1 $ 209.5
Total assets.............. 2,800.1 2,756.9 2,460.9 2,327.2 2,117.3 3,203.4
Total debt(5)............. 434.8 579.2 626.9 538.2 469.7 563.8
Stockholders' equity...... 619.4 554.5 675.6 684.1 692.2 651.4
</TABLE>
- --------
(1) $82.8 million for restructuring ($56.8 million after tax) relates to
McKesson's program to restructure its U.S. and Canadian health care
services distribution businesses and the write-off of an investment.
(2) $37.4 million of special items ($24.5 million after tax) relates to the
gain on the sale and donation of Armor All Common Stock, partially offset
by a donation to the McKesson Foundation, Inc. and a loss on the
termination of interest rate swap arrangements.
(3) Excludes convertible securities that were anti-dilutive.
(4) The ratio of earnings to fixed charges was computed by dividing fixed
charges (interest expense, including the interest portion of capital and
operating leases) into earnings available for fixed charges (income from
continuing operations plus taxes on income and fixed charges). The ratio of
earnings to combined fixed charges and ESOP dividend requirements was
3.44x, 1.81x, 2.87x, 2.95x and 3.52x in 1993, 1992, 1991, 1990 and 1989,
respectively, and 4.84x and 3.32x for the nine months ended December 31,
1993 and 1992, respectively. The ratios in 1992 include the effect of
restructuring charges of $82.8 million pre-tax and, in the nine months
ended December 31, 1993, the effect of the $37.4 million pre-tax gain
associated with special items.
(5) Total debt includes all interest-bearing debt of McKesson and consolidated
subsidiaries, including the current portion, and capital lease obligations.
ARMOR ALL
Armor All develops and markets a broad line of branded appearance enhancement
and protection products targeted primarily for the do-it-yourself automotive
aftermarket. Its principal brand, Armor All(R), has a leading position in the
domestic automotive protectant market. A second major brand, Rain Dance(R), is
a strong competitor in the market for automotive waxes, polishes and washes.
Armor All also markets automotive appearance products under the Rally(R) and
No. 7(R) brand names. Armor All believes that consumer awareness of its brand
names gives it a significant competitive advantage. In a recent market research
study of persons responsible for maintaining vehicle appearance, 94% of the
respondents were aware of the Armor All brand name. See "Business of Armor
All." Armor All invests substantial amounts in consumer advertising to maintain
a high level of consumer brand awareness.
Armor All's principal executive offices are located at 6 Liberty, Aliso
Viejo, CA 92656, and its telephone number at that address is (714) 362-0600.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF ARMOR ALL
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data of Armor All set forth below as of
March 31 and for the years then ended have been derived from Armor All's
consolidated financial statements incorporated by reference in Armor All's
Annual Reports on Form 10-K. Such consolidated financial statements of Armor
All as of March 31, 1993 and 1992 and for each of the three years in the period
ended March 31, 1993, together with the report thereon of Deloitte & Touche,
independent auditors, are incorporated herein by reference from Armor All's
Annual Report on Form 10-K for the year ended March 31, 1993. The selected
financial data for the nine months ended December 31, 1993 and 1992 have been
derived from unaudited condensed consolidated financial statements prepared on
the same basis as the audited financial statements. In the opinion of Armor
All's management, such unaudited consolidated condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the nine months ended December 31, 1993 are not necessarily indicative of the
results to be expected for the full year. The selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and notes thereto incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------- -----------------
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31, DEC. 31,
1993 1992 1991 1990 1989 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................ $168,400 $145,910 $133,804 $165,447 $162,780 $117,361 $108,413
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales......... 68,841 59,709 57,980 68,118 63,578 48,095 44,490
Selling, general and
administrative....... 63,670 60,465 58,133 60,654 50,985 45,144 42,734
Amortization of
intangibles.......... 3,768 4,314 4,315 4,357 2,760 2,102 2,966
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses........... 136,279 124,488 120,428 133,129 117,323 95,341 90,190
-------- -------- -------- -------- -------- -------- --------
Operating income........ 32,121 21,422 13,376 32,318 45,457 22,020 18,223
Interest income
(expense), net......... 1,245 1,080 (704) (677) 511 1,074 920
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 33,366 22,502 12,672 31,641 45,968 23,094 19,143
Income taxes............ 14,214 9,638 5,829 12,820 18,855 9,986 8,021
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 19,152 $ 12,864 $ 6,843 $ 18,821 $ 27,113 $ 13,108 $ 11,122
======== ======== ======== ======== ======== ======== ========
Earnings per common
share.................. $ 0.91 $ 0.61 $ 0.33 $ 0.90 $ 1.30 $ 0.62 $ 0.53
======== ======== ======== ======== ======== ======== ========
Cash dividends declared
per common share....... $ 0.48 $ 0.48 $ 0.64 $ 0.64 $ 0.52 $ 0.48 $ 0.36
======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding..... 21,024 20,953 20,945 20,931 20,914 21,107 21,011
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MAR. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31, DEC. 31,
1993 1992 1991 1990 1989 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $ 60,373 $ 46,149 $ 38,825 $ 40,615 $ 36,310 $ 65,330
Current assets.......... 93,429 68,485 65,788 90,267 90,516 86,356
Total assets............ 140,560 119,823 121,731 150,069 150,364 131,717
Total debt.............. 0 0 6,549 28,688 26,141 0
Stockholders' equity.... 106,555 96,326 93,307 99,321 93,763 109,779
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ARMOR ALL
RESULTS OF OPERATIONS
Net income for the nine months ended December 31, 1993 increased 18% from the
corresponding period in the prior year, and net income in fiscal 1993 and 1992
increased 49% and 88% from the respective prior years. These improvements were
primarily due to higher revenues from both existing and new products, as well
as to improved promotional and administrative cost efficiencies.
REVENUES
The following table sets forth a summary of revenues by major geographic
region (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DEC. 31,
----------------------- ---------------
1993 1992 1991 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
United States........................... $ 148.6 $ 126.6 $ 110.7 $ 99.5 $ 94.3
International........................... 19.8 19.3 23.1 17.9 14.1
------- ------- ------- ------- -------
Total............................... $ 168.4 $ 145.9 $ 133.8 $ 117.4 $ 108.4
======= ======= ======= ======= =======
Percentage change from prior period..... 15% 9% 8%
</TABLE>
Substantially all of the $5.2 million increase in Armor All's U.S. revenues
in the nine months ended December 31, 1993 in comparison with the prior-year
period resulted from higher sales of Armor All(R) Tire Foam(TM) Protectant,
which has become the leader in its category since its introduction in November
1991, and Rain Dance(R) Dark Car Formula Polish and Rain Dance(R) Light Car
Formula Polish, which were introduced in January 1993, and from initial sales
of Armor All QuickSilver(TM) Wheel Cleaner, Armor All Protectant Low-Gloss
Natural Finish(TM) and Armor All Spot & Wash(TM) Concentrate in December 1993.
The $3.8 million increase in international revenues in the nine-month period
reflects higher sales in each of Armor All's principal foreign markets: Canada,
Europe, Asia, Latin America and Australia.
Approximately half of the increase in Armor All's U.S. revenues in fiscal
1993 from fiscal 1992 was due to higher sales of Armor All Tire Foam
Protectant. In part because trade customers were still reducing their retail
inventory levels during the first two quarters of fiscal 1992, sales of Armor
All Protectant also increased in fiscal 1993. The introduction of Armor All
Protectant with additional sunscreen in January 1993, accompanied by a 5%
selling price increase, also contributed to higher sales in the fourth quarter.
Sales of Armor All's line of waxes and washes rose moderately in fiscal 1993,
mainly due to higher sales of Rain Dance(R) Advanced Formula Car Polish, which
was introduced in November 1991, and initial sales of Rain Dance Dark Car
Formula Polish and Rain Dance Light Car Formula Polish.
The increase in Armor All's U.S. revenues in fiscal 1992 from fiscal 1991 was
primarily attributable to higher sales of Armor All Protectant. This
improvement resulted from several factors, including increased consumer demand
and the effect of changes in Armor All's trade management practices initiated
at the end of fiscal 1990. In March 1990, Armor All discontinued certain trade
promotions and pricing practices that encouraged inventory buildups by trade
customers. These high retail inventory levels in turn dampened sales by Armor
All in fiscal 1991. In addition, during the second half of fiscal 1991, Armor
All's retail customers were extremely cautious in their purchasing practices in
response to the deepening economic recession and the outbreak of war in the
Middle East. In fiscal 1992, Armor All strengthened its support of key
customers' inventory management and promotional efforts, in part by initiating
electronic data interchange links with retailers. Also contributing to the
increased revenues in fiscal 1992 was the introduction of three new products in
November 1991: Armor All Tire Foam Protectant, Armor All Leather Care(TM)
Protectant and Rain Dance Advanced Formula Car Polish. Sales of Armor All's
line of waxes and washes declined slightly, primarily due to the discontinuance
of certain products.
The increase in international revenues of $0.5 million in fiscal 1993 and the
decrease in fiscal 1992 were due to several, sometimes offsetting, factors. One
significant factor affecting both fiscal 1993 and 1992 in several countries,
notably Japan and Germany, was the distribution agreement with S.C. Johnson,
which was
15
<PAGE>
entered into in September 1991. Under the agreement, which is effective through
June 2001, S.C. Johnson has the right to distribute Armor All (R) Protectant
and certain of Armor All's other products in a number of international markets
on a country-by-country basis, subject to agreement with Armor All on a
business and marketing plan for each country and thereafter the attainment of
certain performance targets. Armor All and S.C. Johnson share in the profits or
losses on sales in these markets. Sales are at much lower prices to S.C.
Johnson, which incurs virtually all associated selling and marketing expenses
previously borne by Armor All. The net effect is that Armor All records lower
revenues and selling and marketing expenses.
Offsetting the S.C. Johnson impact, international revenues in fiscal 1993
benefited from increased sales to its largest Canadian customer, which had
reduced its high inventory levels of the previous year, and increased market
penetration in Asia, Latin America and the United Kingdom. On the other hand,
sales were adversely affected in Germany due to the economic recession in that
country. In addition to the S.C. Johnson effects, international revenues
decreased in fiscal 1992, primarily because Armor All's largest Canadian
customer slowed purchases while working down high retail inventory levels.
OPERATING EXPENSES
The following table sets forth the percentage relationships of operating
expenses and operating income to revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DEC. 31,
------------------------- ----------------
1993 1992 1991 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales..................... 40.9 40.9 43.3 41.0 41.0
Selling, General and
Administrative................... 37.8 41.4 43.5 38.5 39.4
Amortization...................... 2.2 3.0 3.2 1.8 2.8
------- ------- ------- ------- -------
Operating Income.................. 19.1% 14.7% 10.0% 18.7% 16.8%
======= ======= ======= ======= =======
</TABLE>
Cost of sales as a percentage of revenues was unchanged in the nine months
ended December 31, 1993 in comparison with the prior-year period due to the
effects of several offsetting factors. The cost percentage was increased by
changes in the product mix, higher shipments of certain promotional items and
the higher cost of the additional-sunscreen formula for Armor All Protectant.
However, the effect of these factors was offset by the 5% selling price
increase on Armor All Protectant and the absorption of fixed manufacturing and
distribution costs over a higher sales volume.
Cost of sales as a percentage of revenues in fiscal 1993 was unchanged from
fiscal 1992 due to the effects of several offsetting factors. The cost
percentage was increased slightly due to changes in the product mix and higher
sales of certain promotional items. Additionally, margins were lower in the
markets served by S.C. Johnson due to the billing method described above under
"Revenues." However, the effect of these factors was offset as fixed
manufacturing and distribution costs were absorbed over a higher sales volume.
The decrease in cost of sales as a percentage of revenues in fiscal 1992 from
fiscal 1991 was partially due to a favorable shift in the product mix, with a
greater proportion of higher-margin sales of Armor All Protectant than sales of
Armor All's waxes and washes. In addition, Armor All did not repeat a lower-
margin promotional program. Armor All also incurred lower freight costs and was
able to spread its fixed manufacturing and distribution costs over a higher
sales volume.
The decrease in selling, general and administrative (SG&A) expenses as a
percentage of revenues in the nine months ended December 31, 1993 from the
prior-year period was principally due to the absorption of media advertising
and fixed administrative expenses over a higher sales volume, partially offset
by the introduction of several new consumer promotions.
SG&A expenses as a percentage of revenues decreased in fiscal 1993 from
fiscal 1992 primarily due to more efficient trade promotion practices.
Beginning in late fiscal 1992, Armor All implemented a new trade promotion
approach in which Armor All offers its trade customers fixed sums in return for
specific
16
<PAGE>
promotional activities. Also contributing to the decrease was the spreading of
fixed administrative expenses over a higher sales volume. The S.C. Johnson
agreement reduced fiscal 1993 SG&A expenses, as noted above. In addition,
fiscal 1992 was adversely affected by expenses associated with certain
litigation settled in that year. Partially offsetting these factors were
increased expenditures in fiscal 1993 on media advertising and certain consumer
promotions in the United States.
The decrease in SG&A expenses as a percentage of revenues in fiscal 1992 from
fiscal 1991 was principally due to lower advertising expenditures for waxes.
Also contributing to the decrease were the spreading of fixed administrative
expenses over a higher sales volume and lower trade marketing expenses under
the new approach described above. These factors were partially offset by the
implementation of several new consumer promotional programs.
Amortization expense, principally relating to intangible assets associated
with Armor All's acquisition of several brands in September 1988, declined by
$0.9 million in the nine months ended December 31, 1993 and by $0.5 million in
fiscal 1993, and is expected to decline further in fiscal 1995 as certain of
such assets become fully amortized.
Interest income increased by $0.2 million in the nine months ended December
31, 1993 and by $0.2 million in fiscal 1993 due to higher cash balances during
those periods. Cash balances increased primarily as a result of profitable
operations without significant investments in working capital or fixed assets.
However, the effect of the improved cash position was partially offset by lower
interest rates. Net interest income increased by $1.8 million in fiscal 1992
from fiscal 1991, also primarily because of higher cash balances. The
improvement in Armor All's cash position in that year was largely due to
management's decision to shorten customer payment terms during the winter
promotional season.
Armor All's effective income tax rates were 43.2% and 41.9% in the nine
months ended December 31, 1993 and 1992, respectively. The higher effective
rate in the current nine-month period principally reflects the enactment of the
Omnibus Budget Reconciliation Act of 1993, which increased the federal
corporate income tax rate from 34% to 35% retroactive to January 1993.
Approximately 0.4% of the increase represents the additional taxes which will
be paid for the fiscal year ended March 31, 1993 due to the retroactive
provision of the Act. Armor All's effective income tax rates were 42.6%, 42.8%
and 46.0% in fiscal 1993, 1992 and 1991, respectively. The tax rate in fiscal
1991 was relatively high because a greater proportion of Armor All's expenses
was composed of nondeductible intangible asset amortization and foreign
subsidiary operating losses.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth unaudited quarterly income statement and
dividend information for Armor All's last eight fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUN. 30, MAR. 31, DEC. 31, SEPT. 30, JUN. 30, MAR. 31,
1993 1993 1993 1993 1992 1992 1992 1992
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $33,407 $36,232 $47,722 $59,987 $30,927 $35,198 $42,288 $50,455
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales........... 13,870 14,972 19,253 24,351 12,945 14,335 17,210 20,102
Selling, general and
administrative......... 13,087 13,455 18,602 20,936 12,132 14,009 16,593 17,676
Amortization of
intangibles............ 494 804 804 802 803 1,085 1,078 1,078
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 27,451 29,231 38,659 46,089 25,880 29,429 34,881 38,856
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 5,956 7,001 9,063 13,898 5,047 5,769 7,407 11,599
Interest income, net.... 405 405 264 325 360 335 225 212
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 6,361 7,406 9,327 14,223 5,407 6,104 7,632 11,811
Income taxes............ 2,739 3,376 3,871 6,193 2,266 2,557 3,198 5,063
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,622 $ 4,030 $ 5,456 $ 8,030 $ 3,141 $ 3,547 $ 4,434 $ 6,748
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common
share.................. $ .17 $ .19 $ .26 $ .38 $ .15 $ .17 $ .21 $ .32
Dividends per common
share.................. $ .16 $ .16 $ .16 $ .12 $ .12 $ .12 $ .12 $ .12
Weighted average common
shares outstanding..... 21,123 21,105 21,094 21,064 21,027 21,010 20,995 20,953
</TABLE>
17
<PAGE>
Armor All's revenues typically peak in the fourth fiscal quarter (from
January through March) as customers purchase inventory to prepare for increased
consumer purchasing activity in the spring and summer. Interest income is
generally highest in the summer and autumn, due to the improvement in Armor
All's cash position which accompanies the collection of receivables associated
with fourth and first quarter sales. Quarterly results may also be affected by
Armor All's method of allocating annual media advertising expenses and certain
trade promotional expenses among interim periods in proportion to estimated
annual sales volume.
FINANCIAL RESOURCES AND LIQUIDITY
Armor All's working capital requirements fluctuate during the year,
traditionally peaking in the spring due to extended payment terms offered to
customers in connection with winter promotional activities. Cash inflow is
strongest during the summer months as these receivables are collected.
Reflecting these seasonal factors, at December 31, 1993, Armor All had balances
of cash and cash equivalents of $53.2 million and no short-term or long-term
debt. At December 31, 1993, Armor All had working capital of $65.3 million.
Armor All does not have substantial investments in inventory as its contract
packagers generally own the raw materials and finished goods in their
possession and transfer title to Armor All just prior to shipment to Armor
All's customers. Armor All's use of contract packagers also permits it to avoid
significant investments in machinery and other fixed assets. See "Business of
Armor All--Manufacturing and Packaging."
During the nine months ended December 31, 1993 and 1992, respectively, cash
flow from operations was $31.7 million and $37.2 million. Despite higher net
income in the current period, cash flow from operations was lower due to the
timing of payments for income taxes and certain accrued advertising and selling
expenses. During fiscal 1993 and 1992, cash flow from operations was $24.7
million and $30.4 million, respectively. Cash flow from operations declined in
fiscal 1993, despite a higher net income, primarily due to the increase in
receivables associated with the higher fourth quarter sales volume. Cash
outflows for investing activities during the two years were relatively small,
as Armor All did not have significant capital expenditures. In addition, Armor
All paid dividends on its Common Stock of $9.3 million in the nine months ended
December 31, 1993, $10.1 million in fiscal 1993 and $10.9 million in fiscal
1992.
Armor All's sources of liquidity at December 31, 1993 included a $48.8
million balance under a cash management program administered by McKesson, $4.4
million of other cash balances, and a $3.0 million (Canadian) line of credit
with a Canadian bank that is renewable annually. In addition, as long as Armor
All continues to participate in the cash management program, McKesson will make
available the cash necessary to provide Armor All with sufficient funds to meet
its needs as defined in its annual capital and operating plans. There are no
advance notification requirements or other limitations on Armor All's access to
cash under the program. Participation in the cash management program is
provided as part of a Services Agreement with McKesson, and amounts deposited
under the program are deposited in a separate bank account in Armor All's name.
See "Certain Relationships and Transactions." In the event that Armor All
ceases to participate in the cash management program, Armor All believes that
it would be able to obtain a line of credit from other sources at competitive
terms. At December 31, 1993, Armor All had a payable to McKesson of $1.2
million for payroll, freight and other expenses paid by McKesson on Armor All's
behalf; Armor All repaid this amount in January 1994.
Armor All believes that its current sources of liquidity, combined with cash
flow from operations, will be sufficient to meet its needs for the foreseeable
future.
18
<PAGE>
BUSINESS OF ARMOR ALL
Armor All Products Corporation develops and markets a broad line of branded
appearance enhancement and protection products targeted primarily for the do-
it-yourself automotive aftermarket. Its principal brand, Armor All(R), has the
leading position in the domestic automotive protectant market. A second major
brand, Rain Dance(R), is a strong competitor in the market for automotive
waxes, polishes and washes. Armor All believes that consumer awareness of its
brand names gives it a significant competitive advantage. In a September 1993
study conducted by a market research and consulting firm, which involved a
national sampling of approximately 460 persons aged 16 to 54 years who were
responsible for taking care of the appearance of a car, light truck or van (the
"1993 Market Research Study"), 94% of the respondents were aware of the Armor
All brand name (either unprompted or when given name and product attributes).
BUSINESS STRATEGY
Under the leadership of the senior management team assembled in fiscal 1991
and 1992, Armor All has adopted and is continuing to implement a strategic
business plan to build on the strength of Armor All's well-established brand
names to increase domestic sales of Armor All Protectant, introduce new
automotive products, increase Armor All's international presence, and enter the
home care market.
Increase Domestic Sales of Armor All Protectant
Armor All seeks to increase sales of Armor All Protectant through targeted
advertising and promotion to enlarge the user base, increase the frequency of
product use, and expand the number of surfaces on which the product is applied.
Armor All believes that sales of Armor All Protectant represent approximately
two-thirds of all domestic sales of automotive protectants. According to the
1993 Market Research Study, 99% of all respondents who were current users of
Armor All Protectant expressed satisfaction with the product, with 70%
indicating that they were "very" satisfied with it. While 59% of the
respondents had used Armor All Protectant during the preceding six months, 35%
had used no protectant product, which Armor All believes demonstrates an
opportunity to expand the user base.
As part of its plan to expand the protectant market, Armor All intends to add
line extensions to attract new users. In December 1993, Armor All introduced a
new product, Armor All Protectant Low-Gloss Natural Finish(TM), described
below.
Introduce New Automotive Products
Since November 1991, Armor All has introduced eight new products, including
Armor All Tire Foam (TM) Protectant, which together accounted for approximately
15% of revenues in the nine months ended December 31, 1993 and for
approximately 13% of revenues in the fiscal year ended March 31, 1993. In
December 1993, Armor All began shipping Armor All QuickSilver(TM) Wheel
Cleaner, a spray-on wheel cleaner designed for use on wheels, wheel covers and
hubcaps; Armor All Protectant Low-Gloss Natural Finish(TM), a low-gloss version
of Armor All Protectant designed to minimize dashboard glare for consumers who
prefer a less shiny appearance; and Armor All Spot & Wash(TM) Concentrate, a
car wash product designed to remove bugs, tar residue and tree sap from car
finishes. These products will be supported by national television advertising
and by special introductory pricing and promotional programs.
Armor All intends to continue to develop new products and product line
extensions under its well-established Armor All and Rain Dance brand names. To
that end, Armor All's research and development and marketing personnel seek to
develop and acquire promising technologies and invest in consumer market
research. Armor All also seeks to anticipate industry trends that affect care
of automotive surfaces, such as increased exposure of automobile interiors to
sunlight, use of leather upholstery, and changes in vinyls, rubbers, paints and
other automotive surfaces.
Increase International Presence
Armor All's management believes that foreign markets will, over time, present
a significant growth opportunity for the company. Armor All Protectant already
enjoys a leading position in several international
19
<PAGE>
markets, including Canada, Australia and Mexico. International sales are
effected through sales offices in Canada and the United Kingdom, through
foreign distributors, and through a marketing and distribution alliance with
S.C. Johnson. The S.C. Johnson arrangement provides Armor All with access to
certain international markets, primarily Germany, Japan and Mexico, without the
high selling and marketing costs incurred in a direct sales program. However,
Armor All plans to continue identifying foreign markets attractive for direct
sales or distribution by entities other than S.C. Johnson, based on a number of
factors, including economic, political and competitive conditions, cultural and
demographic trends, and car care habits.
Enter the Home Care Market
Armor All's management believes that the home care market represents a growth
opportunity for Armor All. Armor All has established a new division intended to
utilize its marketing and new product development strengths to penetrate this
market. On January 28, 1994, Armor All acquired the E-Z Deck Wash(R) brand. The
E-Z Deck Wash product cleans and restores wood surfaces such as decks and
siding and will be marketed under the Armor All name. An application for patent
protection on the E-Z Deck Wash formula is pending.
PRODUCTS
Armor All markets a broad line of automotive appearance chemicals under four
brand names: Armor All(R) , Rain Dance(R) , Rally(R) and No. 7(R) .
Armor All Brand
Armor All markets protectants, waxes, washes and other cleaning aids under
the Armor All name.
Armor All's principal product, Armor All Protectant, is designed to protect
and beautify natural and synthetic polymer materials and is primarily used on
automobile surfaces made of rubber, vinyl and plastic, such as dashboards,
seats, vinyl tops, door panels, tire sidewalls and rubber bumpers. Armor All
Protectant is the leading protectant product in the domestic automotive
aftermarket, and Armor All believes it outsells its nearest competitor by more
than three to one. Armor All Protectant accounted for 70% of Armor All's
revenues in the nine months ended December 31, 1993 and for 70% and 77% of its
revenues in fiscal 1993 and 1992, respectively.
Armor All Tire Foam Protectant, introduced in November 1991, cleans, shines
and protects tire sidewalls without wiping. Sales of this product represented a
majority of the revenues attributable to new products in the nine months ended
December 31, 1993 and fiscal 1993. Armor All Leather Care (TM) Protectant, also
introduced in November 1991, is designed primarily for leather upholstery.
Armor All also markets a liquid car wax, a multi-purpose cleaner, and a car
wash liquid concentrate under the Armor All name.
In December 1993, Armor All started shipping three additions to the Armor All
product line: Armor All QuickSilver (TM) Wheel Cleaner, Armor All Protectant
Low-Gloss Natural Finish (TM) and Armor All Spot & Wash (TM) Concentrate.
Rain Dance Brand
Armor All markets polishes, waxes and car wash products under the Rain Dance
name. In November 1991, Armor All introduced Rain Dance Advanced Formula Car
Polish, and in January 1993, Armor All introduced two additional car polishes,
Rain Dance Light Car Formula Polish and Rain Dance Dark Car Formula Polish,
with different light reflectant characteristics. Liquid and paste car wax and a
variety of car wash products are also marketed under the Rain Dance name.
Rally and No. 7 Brands
Armor All markets cream and liquid waxes under the Rally name. Under the No.
7 name, Armor All markets a variety of polishing and rubbing compounds and
other cleaning aids.
20
<PAGE>
GEOGRAPHIC MARKETS
Armor All's products are sold predominantly in the United States and Canada,
with additional sales occurring in several other countries. In the nine months
ended December 31, 1993, 85% of sales were in the United States, 6% in Canada
and 9% in other foreign countries, principally Australia, Germany, Japan,
Mexico and the United Kingdom. In fiscal 1993, 88% of sales were in the United
States, 5% in Canada and 7% in other foreign countries. Armor All does not have
large fixed capital investments in its foreign operations. Foreign currency
exchange fluctuations have not had a significant impact on Armor All's
operating results.
SALES AND MARKETING
In the United States and Canada, a sales force of 13 employees accounted
directly for over 50% of revenues in the first nine months of fiscal 1994 and
in fiscal 1993. In addition, Armor All's sales force oversees 21 independent
manufacturers' representative organizations that also market Armor All's
products. Primary customers include mass merchandise retailers, auto supply
stores, warehouse clubs, hardware stores and other retail outlets. Armor All
believes that its products are sold at over 100,000 retail outlets.
Armor All's largest customers have represented an increasing percentage of
its revenues. Sales to Armor All's 20 largest customers accounted for 64% of
Armor All's consolidated revenues in the nine months ended December 31, 1993
and for 63%, 59% and 49% of Armor All's consolidated revenues in fiscal 1993,
1992 and 1991, respectively. In the nine months ended December 31, 1993, sales
to Armor All's two largest customers, Wal-Mart Stores, Inc. (and its
affiliates) and Kmart Corporation (and its affiliates), accounted for 15% and
8%, respectively, of Armor All's revenues. In fiscal 1993, sales to these same
two customers accounted for 15% and 11%, respectively, of Armor All's revenues.
Armor All's direct sales force works closely with customers on joint
marketing and promotional activities. Armor All also assists its customers with
inventory management. Its efforts to help customers manage their inventories
are supported, in certain cases, by electronic data interchange ("EDI") links
between Armor All and the customer. In addition, EDI provides Armor All with
valuable marketing information. Among other things, Armor All uses EDI point-
of-sale statistics to analyze geographic purchasing patterns, measure the
success of test marketing programs and monitor sales of holiday gift packs and
other time-sensitive promotions. Armor All intends to establish additional EDI
links with its customers and to expand the use of existing links.
Armor All's management assists in sales and marketing efforts by providing
national advertising and promotional support and retail merchandising
management assistance, including product information and sales training.
Although Armor All's promotional activities target both trade accounts and
retail consumers, Armor All has increased the proportion of marketing funds
devoted to consumer promotion over the last three years. Armor All has also
increased the proportion of its marketing expenses which are offered to trade
customers as fixed sums in return for specific promotional activities, as
opposed to more general cooperative advertising arrangements. From time to
time, Armor All uses various retail sales incentive devices, such as coupons,
rebates, "Bonus Packs" (e.g., 20 ounces for the price of 16), merchandise with
attached free samples, and other special offers to stimulate retail sales.
Armor All believes that it invests more in consumer advertising than do its
competitors in the automotive appearance chemicals industry. Management
attempts to allocate Armor All's advertising spending among media which provide
the greatest potential exposure to desired audiences per dollar. Armor All
intends to continue to invest in consumer advertising to maintain the high
level of consumer brand awareness which Armor All currently enjoys.
Retail sales of Armor All's products are seasonal and are highest between
April and September. However, sales to Armor All's customers are highest in its
fourth fiscal quarter (from January through March). Consistent with industry
practice, Armor All offers extended payment terms in conjunction with its
winter promotional activities.
21
<PAGE>
International sales are effected through sales offices in Canada and the
United Kingdom, through foreign distributors, and through a marketing and
distribution alliance with S.C. Johnson. Under an agreement between Armor All
and S.C. Johnson, S.C. Johnson is the exclusive distributor of Armor All
Protectant and certain of Armor All's other products in Germany, Japan and
Mexico, subject to agreement with Armor All on annual business and marketing
plans for each country. Under the agreement, S.C. Johnson pays virtually all
selling and marketing expenses, and Armor All and S.C. Johnson share in the
profits or losses. The S.C. Johnson agreement expires in June 2001, with
automatic five-year renewals unless either party provides 12 months' prior
notice. Armor All will have the right to terminate the agreement on a country-
by-country basis if S.C. Johnson fails to meet certain revenue objectives over
specified periods, subject to S.C. Johnson's right to avoid termination by
compensating Armor All for any shortfall. S.C. Johnson is also the exclusive
distributor of Armor All (R) Protectant in several Southeast Asian countries
under separate agreements that do not involve profit or loss sharing.
MANUFACTURING AND PACKAGING
Armor All's products are manufactured by contract packagers. Armor All's
relationships with its two most important packagers have lasted for 8 and 20
years, respectively. Subject to contractual arrangements, Armor All
periodically reevaluates its selection of packagers, and believes that other
acceptable packagers are readily available.
Armor All avoids significant investments in inventory. In general, Armor
All's full-service packagers are responsible for purchasing product ingredients
and approved component packaging materials. Armor All negotiates the raw
material supply arrangements on behalf of its packagers. The packagers blend,
package and warehouse the finished product. With certain exceptions, the full-
service packagers own all the raw materials and finished products in their
possession and transfer title to Armor All just prior to shipment to Armor
All's customers. In the case of Armor All Protectant, Armor All premixes a
concentrate which it sells to the full-service packagers. For certain products,
Armor All has title to raw materials and finished products and pays a
manufacturing fee to the packager.
Armor All's products are manufactured in four principal locations in the
United States, one location in Canada and one location in Australia.
Protectants are manufactured at five of these locations, and waxes at the
sixth. Armor All's management believes that the existing packagers can
accommodate Armor All's production needs for the foreseeable future.
Armor All has alternative sources for the ingredients used in, and packaging
components for, all of its products. Armor All has contracts with certain
suppliers to provide a continued supply of the primary chemical ingredients and
packaging components used in producing its products, which expire by their
terms on various dates through March 1995.
TRADEMARKS AND PATENTS
Armor All's principal trademarks are: The ARMOR ALL(R) trademark, the symbol
of a male VIKING figure surrounded by a rainbow design, the RAIN DANCE(R)
trademark, the RALLY(R) trademark and the NO. 7(R) trademark. Armor All also
owns other registered and unregistered trademarks. All five principal
trademarks are registered in the United States and Canada. In addition, the
ARMOR ALL trademark is registered in 84 countries, the VIKING trademark is
registered in 85 countries, the RAIN DANCE trademark is registered in 55
countries, the RALLY trademark is registered in 35 countries and the NO. 7
trademark is registered in 3 countries. Armor All believes it has taken all
necessary steps to preserve the registration of its trademarks. Armor All also
owns a process patent on ARMOR ALL Protectant and a patent on RAIN DANCE wax,
and has applied for patents on ARMOR ALL QuickSilver(TM) Wheel Cleaner and
ARMOR ALL Spot & Wash(TM) Concentrate. Armor All's process patent on ARMOR ALL
Protectant will expire in 1996. Armor All's management believes that Armor
All's trademarks are more important assets than its patents, and that the
termination or invalidity of its patents would not have a materially adverse
effect on Armor All.
22
<PAGE>
COMPETITION
In the domestic protectant market, Armor All has two principal competitors,
STP Son-of-a-Gun(R) Protectant and Turtle Wax Formula 2001(R), and several
secondary competitors. Armor All estimates that domestic sales of Armor All
Protectant account for approximately two-thirds of all domestic protectant
sales. Armor All Tire Foam Protectant has two principal competitors, No
Touch(R) and STP Son-of-a-Gun(R) Tire Care, and several secondary competitors.
Armor All brand cleaner competes against many specialty automotive cleaner
products. Armor All brand wax and wash products and all of the Rain Dance and
Rally brand products compete with numerous wash, wax and polish products in the
automotive aftermarket. The No. 7 brand products compete with many wash and
specialty cleaning products. Competition in international markets varies by
country.
Armor All believes that brand recognition and loyalty, access to retail shelf
space, product convenience and effectiveness, trade promotion and consumer
advertising, support of customers' inventory management and marketing efforts,
and pricing are important competitive factors in the appearance protection
market. Armor All believes that it competes favorably with respect to these
factors.
EMPLOYEES
At December 31, 1993, Armor All employed 127 persons. None of Armor All's
employees is represented by a union. Armor All believes its employee relations
are good.
PROPERTIES
Armor All owns its headquarters facility located in Aliso Viejo, California.
The facility, which was built in 1989, comprises 45,000 square feet of office
space on a 4.6 acre site.
Armor All also leases approximately 17,000 square feet of warehouse space in
Aliso Viejo, California. The facility is used primarily for warehousing certain
components, finished goods and promotional items. Armor All also mixes the
Armor All Protectant concentrate and performs various special product-packaging
functions at this location. Armor All also utilizes limited space in various
public warehouses in the United States and abroad for temporary inventory
storage and shipping.
Armor All maintains sales offices in Canada and the United Kingdom, each with
less than 2,000 square feet. It conducts its laboratory research and
development activities at a leased facility of approximately 5,000 square feet
located near Armor All's headquarters in Aliso Viejo, California.
Armor All believes that these properties will be sufficient to meet its needs
for the next several years.
23
<PAGE>
MANAGEMENT OF ARMOR ALL
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Armor All are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth M. Evans................. 52 President, Chief Executive Officer
and Director
Mervyn J. McCulloch.............. 50 Executive Vice President and Chief
Financial Officer
Michael A. Caron................. 42 Senior Vice President and President,
Armor All International
Steven L. Kliff.................. 35 Senior Vice President, Consumer
Products
David E. McDowell................ 51 Chairman of the Board
William A. Armstrong............. 52 Director
Jon S. Cartwright................ 56 Director
David L. Mahoney................. 39 Director
Joseph A. Sasenick............... 53 Director
Alan Seelenfreund................ 57 Director
OTHER OFFICERS
Other non-executive officers of Armor All are as follows:
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Niels F. Hayns................... 58 Vice President, International, Asia-
Pacific/Americas
Lawrence R. Kahn................. 36 Vice President, Product Development
Gayle Metzler.................... 40 Vice President, Human Resources
Nancy A. Miller.................. 50 Vice President and Secretary
Stephen J. Sarich................ 43 Vice President, Sales
Garret A. Scholz................. 54 Vice President and Treasurer
John F. Schueller................ 49 Vice President, Manufacturing and
Corporate Quality
Donald N. Weinberger............. 57 Vice President, Operations
</TABLE>
Kenneth M. Evans has been President and Chief Executive Officer of Armor All
since April 1991. From 1989 to April 1991, he was Group Vice President of the
Do-it-Yourself Products Group of L. & F. Products, a subsidiary of Eastman
Kodak. Mr. Evans was President of the Thompson & Formby Division of L. & F.
Products from 1985 to 1989. Mr. Evans has been a director of Armor All since
July 1991 and is also a director of the O'Brien Corporation.
Mervyn J. McCulloch has been Executive Vice President and Chief Financial
Officer of Armor All since March 1990. From 1972 to March 1990, he was a
Partner of Deloitte & Touche, a public accounting firm.
Michael A. Caron has been Senior Vice President of Armor All since October
1991. He has been President of Armor All International, a division of Armor
All, since August 1993. From October 1991 to August 1993, Mr. Caron was Senior
Vice President-Marketing, and from April 1989 to October 1991, he was Senior
Vice President, Marketing/International Operations. Mr. Caron served as Armor
All's Vice President, Marketing and International Operations from February 1987
to April 1989.
Steven L. Kliff has been Armor All's Senior Vice President, Consumer
Products, since August 1993. Mr. Kliff was Armor All's Vice President, Sales
and Product Development from November 1991 to August
24
<PAGE>
1993 and was Vice President, Product and Business Development from September
1991 to November 1991. From February 1986 to August 1991, he held various
positions with Blistex Incorporated, a manufacturer of over-the-counter topical
medications, including Director of Marketing/Chief Marketing Officer and
Director of Strategic Planning.
David E. McDowell has been Chairman of the Board of Armor All since April 1,
1992 and was first elected to the Board in January 1992. Mr. McDowell has been
President and Chief Operating Officer and a director of McKesson since January
1992. From November 1990 to January 1992, he was Vice President and General
Manager, Quality and Chief Information Officer of International Business
Machines Corporation ("IBM"), and he served as President of IBM's National
Service Division from July 1987 to November 1990.
William A. Armstrong became a director of Armor All in July 1991. Mr.
Armstrong has been Vice President Human Resources and Administration of
McKesson since April 1993. He was Vice President Administration of McKesson
from July 1991 to April 1993, Executive Assistant to the Office of the Chief
Executive of McKesson from April 1990 to January 1992 and Staff Vice President
of Management Development of McKesson from April 1988 to April 1990. From 1980
to 1988, Mr. Armstrong was Vice President Personnel of McKesson's former
Beverage Group.
Jon S. Cartwright became a director of Armor All on January 21, 1993. He has
been the Executive Director of the Center for Telecommunications Management, a
nonprofit research and education center affiliated with the University of
Southern California Graduate School of Business Administration, since January
1990. In January 1991, he was appointed Associate Professor of Management and
Organization at the USC Graduate School of Business Administration. Before
joining USC, Mr. Cartwright had a 33-year career with IBM, including service as
Corporate Resident Manager from 1987 to 1990 and Vice President and Western
Area Manager for the IBM National Service Division from 1984 to 1987.
David L. Mahoney was elected to Armor All's Board of Directors in 1992. Mr.
Mahoney has been Vice President, Strategic Planning of McKesson since July
1990. From 1987 to July 1990, he was a Principal of McKinsey & Co., an
international management consulting firm.
Joseph A. Sasenick has been a director of Armor All since July 1990. He has
been President and Chief Executive Officer of Alcide Corporation, a developer
and manufacturer of disinfecting systems, since February 1992 and was Alcide's
President and Chief Operating Officer from February 1991 to February 1992. From
1988 to February 1991, Mr. Sasenick was Managing Director/Partner of Vista
Resource Group, and from March 1988 to August 1988, he was President of Bioline
Laboratories.
Alan Seelenfreund became a director of Armor All in June 1986. He has been
Chairman of the Board and Chief Executive Officer of McKesson since November
1989 and a director of McKesson since July 1988. Mr. Seelenfreund served as
Executive Vice President of McKesson from November 1986 to November 1989 and
was Chief Financial Officer of McKesson from April 1984 to April 1990.
Niels F. Hayns has been Armor All's Vice President, International, Asia-
Pacific/Americas since August 1993. From January 1988 to August 1993, he was
Vice President, International Operations. Mr. Hayns was Vice President of
Operations of Hang-Ten International, a marketer of sportswear and footwear,
from January 1985 to January 1988.
Lawrence R. Kahn has been Vice President, Product Development of Armor All
since August 1993. From October 1987 to August 1993, he was Armor All's
Marketing Director. Mr. Kahn joined Armor All in September 1985.
Gayle Metzler has been Armor All's Vice President, Human Resources since
November 1992. Before assuming her current position, she served Armor All in
various other capacities, including Vice President, Personnel and
Administration, since September 1978.
25
<PAGE>
Nancy A. Miller has been Armor All's Vice President and Secretary since July
1986. She has been Vice President and Corporate Secretary of McKesson since
December 1989 and was Staff Vice President and Corporate Secretary of McKesson
from November 1986 to December 1989.
Stephen J. Sarich has been Armor All's Vice President, Sales since February
1987. He served as Armor All's National Sales Manager from October 1986 to
February 1987 and joined Armor All in 1984.
Garret A. Scholz has been Armor All's Vice President and Treasurer since July
1986. He has been Vice President Finance of McKesson since April 1990 and was
Vice President and Treasurer of McKesson from November 1984 to April 1990.
John F. Schueller has been Armor All's Vice President, Manufacturing and
Corporate Quality since April 1993. From October 1991 to April 1993, he was
Vice President, Corporate Quality. Mr. Schueller was Vice President, Credit and
Customer Service from April 1990 to October 1991, Executive Vice President,
Finance from July 1988 to March 1990 and Executive Vice President, Operations
and Finance from July 1986 to July 1988.
Donald N. Weinberger has been Armor All's Vice President, Operations since
May 1989. He was Vice President, Manufacturing of Beecham Products U.S.A., a
consumer packaged goods concern, from March 1980 to May 1989.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
On July 1, 1986, Armor All entered into a Services Agreement (the "Services
Agreement") with a subsidiary of McKesson. Pursuant to the Services Agreement,
McKesson has agreed to provide to Armor All, and Armor All has agreed to
purchase, certain corporate staff services. For fiscal 1992, fiscal 1993 and
the first nine months of fiscal 1994, the amount charged Armor All by McKesson
for such services was $566,000, $622,000 and $448,000, respectively, exclusive
of insurance and outside professional services that are billed separately.
Armor All believes that these expenses would not have been materially different
if Armor All operated on a stand-alone basis. These charges are modified
annually to reflect changes in McKesson's costs of providing these services.
The services provided by McKesson include treasury and financial, risk
management support, legal, corporate secretary, investor relations, tax,
internal audit, planning and corporate development, accounting advice, and
employee benefit, personnel and payroll services. Armor All can request, and
McKesson may provide, data processing, computer programming and other services
to supplement the capabilities of Armor All. McKesson has agreed to make
available to Armor All certain employee benefit plans and also has agreed to
allow Armor All employees to continue to participate in McKesson's retirement
plan and employee stock ownership plans. Armor All has agreed to contribute
annually to the plans the amount necessary to fund employee participation.
Armor All is also insured under McKesson's property and casualty insurance
program for limits of liability and deductibles deemed appropriate for Armor
All's risk exposures and size. Premiums are based on Armor All's risk exposure
and historical loss experience.
The Services Agreement is automatically renewed for successive one-year terms
unless terminated and is reviewed annually by Armor All's Chief Financial
Officer with Armor All's independent directors. The Services Agreement will be
terminated if McKesson should own less than fifty percent of the outstanding
voting stock of Armor All, or upon 120 days' prior written notice by either
party, or upon such earlier date as the parties may mutually agree in writing.
The Services Agreement provides that McKesson's liability with respect to any
loss or damages arising in connection with the provision of services to Armor
All is limited to amounts billed or billable for such services.
Pursuant to the Services Agreement, Armor All's U.S. operations participate
on a daily basis in a cash management program administered by McKesson. Under
this arrangement, Armor All invests any excess
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cash under the cash management program, has unrestricted access to the cash
invested and meets cash requirements through borrowings from McKesson. Prior to
March 23, 1993, Armor All invested excess cash with McKesson. Effective on that
date, all amounts invested with McKesson were deposited in a separate bank
account in Armor All's name. Armor All receives interest under the program
through McKesson on funds deposited in the separate bank account, or pays
interest to McKesson on funds received, at a rate equal to the monthly Federal
Reserve Composite Rate for 7-day commercial paper less one-tenth of one percent
for funds deposited under the program and plus one-half of one percent for
funds borrowed from McKesson. The Services Agreement provides that McKesson
will make available that amount of cash necessary to provide Armor All with
sufficient funds to meet its needs as defined in its annual capital and
operating budget, and that Armor All will pay McKesson an annual credit
facility fee of $25,000. At December 31, 1993, Armor All had invested
$48,793,000 under the cash management program at an interest rate of 3.1%.
During most of fiscal 1993, Armor All also had a $3,000,000 (Canadian) demand
note receivable from a Canadian subsidiary of McKesson. The demand note was
repaid in March 1993. The maximum amount invested by Armor All under the cash
management program at any month-end during fiscal 1992 and 1993 and the first
nine months of fiscal 1994 was $23,239,000, $41,900,000 and $51,396,000,
respectively. In fiscal 1992 and 1993 and the first nine months of fiscal 1994,
Armor All received from McKesson net interest in the amount of $764,000,
$1,113,000 and $948,000, respectively, pursuant to this arrangement.
At December 31, 1993, Armor All had a payable to McKesson of $1,150,000 for
payroll, freight and other expenses paid by McKesson on Armor All's behalf;
Armor All repaid this amount in January 1994. Before establishing its own cash
management bank account in March 1993, Armor All reimbursed McKesson for such
items through automatic transfers from Armor All's amounts on deposit with
McKesson under the cash management program.
Sales by Armor All to divisions of McKesson were $654,000, $889,000, and
$1,111,000 in fiscal 1991, 1992 and 1993, respectively, and $575,000 in the
nine months ended December 31, 1993.
Under the terms of the Acquisition Agreement dated July 1, 1986 pursuant to
which McKesson transferred the business of its Armor All Products Division to
Armor All, McKesson and Armor All have agreed that McKesson has no obligation
to refer to Armor All ideas or products whether or not related to appearance
protection products applicable to the automotive aftermarket. McKesson is not
obligated to fund, or permit Armor All to fund, development of any product or
idea, if McKesson concludes that such development is not in Armor All's best
interests.
Armor All is included in McKesson's consolidated federal income tax returns
for tax periods ending before May 19, 1993. Pursuant to a Tax Allocation
Agreement dated as of July 1, 1986 between Armor All and McKesson (the "Tax
Allocation Agreement"), adjustments to federal income tax liabilities for
periods in which Armor All was included in McKesson's consolidated federal
income tax returns are allocated between Armor All and the other businesses
conducted by McKesson and its affiliates. The agreement requires Armor All to
reimburse McKesson for any tax audit adjustment of taxes attributable to it
which were reported on McKesson's consolidated federal income tax returns. Tax
refunds will be the property of the party bearing economic responsibility for
the applicable tax. The Tax Allocation Agreement also provides for the
allocation of state franchise or corporate income taxes which Armor All and
McKesson are required or permitted to pay on a combined or "unitary" basis so
that, in general, Armor All is treated as a separate taxpayer.
As of March 7, 1994, McKesson owned 11,975,000 shares of Armor All Common
Stock, representing approximately 57% of all outstanding shares. In May 1993,
McKesson sold 5,175,000 shares of Armor All Common Stock in an underwritten
public offering. If all of the Debentures offered hereby (assuming that the
Underwriters' over-allotment option is exercised in full) were exchanged for
shares of Armor All Common Stock, McKesson would own 5,035,241 shares of Armor
All Common Stock, representing approximately 24% of the shares of Armor All
Common Stock outstanding on the above date. As described above, any exchange of
Debentures for Armor All Common Stock that results in McKesson owning less than
50% of Armor All's outstanding shares would result in a termination of the
Services Agreement unless it is otherwise
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extended by mutual consent. In the opinion of McKesson and Armor All,
termination of the Services Agreement would not have any material adverse
effect on either McKesson or Armor All. The exchange of Debentures for Armor
All shares would not affect any other material agreement between McKesson and
Armor All.
DESCRIPTION OF THE DEBENTURES
The Debentures will be issued under an Indenture (the "Indenture") dated as
of March 14, 1994 between McKesson and The First National Bank of Chicago, as
trustee (the "Trustee"). The following description of the terms of the
Debentures is subject to the detailed provisions of the Indenture and is
qualified in its entirety by reference to the Indenture, a copy of which is an
exhibit to the Registration Statement. Capitalized terms not defined herein
have the meanings ascribed to them in the Indenture.
GENERAL
The Debentures will constitute unsecured general obligations of McKesson
subordinate in right of payment to certain other obligations of McKesson and
will be exchangeable, at the option of the holder, for shares of Armor All
Common Stock and/or other property attributable to such shares (collectively,
the "Exchange Property"). See "Subordination of Debentures" and "Exchange
Rights" below. However, in lieu of delivering Exchange Property upon surrender
of a Debenture for exchange, McKesson may at its option pay cash equal to the
value of the Exchange Property. See "Exchange Rights--McKesson's Cash Option on
Exchange" below. As used in the Indenture, the term "Exchange Property" means
initially the 6,939,759 fully paid and nonassessable shares of Armor All Common
Stock delivered to the Exchange Agent by McKesson pursuant to the Exchange
Agent Agreement simultaneously with the execution and delivery of the
Indenture, and thereafter may also include such other securities, cash or other
property attributable to the Armor All Common Stock or other Exchange Property,
which at the time are deliverable upon surrender of the Debentures for
exchange.
The Debentures will be limited to $180,000,000 aggregate principal amount
(including $20,000,000 subject to the Underwriters' over-allotment option),
will be issued in fully registered form and only in denominations of $1,000 or
any integral multiple thereof and will mature on March 1, 2004, unless earlier
redeemed at the option of McKesson.
The Indenture does not contain any restrictions on the payment of dividends
or the repurchase of securities of McKesson or any financial covenants.
Interest at the annual rate set forth on the cover page hereof is payable
semiannually on March 1 and September 1, commencing on September 1, 1994, to
holders of record at the close of business on the preceding February 15 and
August 15, respectively, and may, at McKesson's option, be paid by check mailed
to such holders.
Principal and premium, if any, will be payable, and the Debentures may be
presented for exchange, registration of transfer and substitution, without
service charge, at the office of the Trustee in New York, New York.
As of March 7, 1994, McKesson owned 11,975,000 shares of Armor All Common
Stock (representing approximately 57% of Armor All's outstanding shares), and a
majority of the members of Armor All's Board of Directors are also officers of
McKesson. As a result, McKesson may be able to control Armor All and, as a
result of such control, may be able to effect certain transactions which could
result in a change in the composition of the Exchange Property.
EXCHANGE RIGHTS
The Debentures (or portions thereof in integral multiples of $1,000) are
exchangeable, at the option of the holder, for Armor All Common Stock and/or
other Exchange Property, at any time after 60 days
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following the original issuance thereof and from time to time prior to maturity
or redemption, at a price (the "Exchange Price") initially equal to $25.9375
per share of Armor All Common Stock (equivalent to an exchange rate of 38.5542
shares of Armor All Common Stock per $1,000 principal amount of Debentures).
The Exchange Price will be proportionately adjusted if (1) Armor All effects a
stock dividend or stock split or a combination of outstanding shares of Armor
All Common Stock into a smaller number of shares, or (2) some (but not all) of
the shares of Armor All Common Stock otherwise deliverable upon exchange are
sold or exchanged pursuant to a tender or exchange offer for Armor All Common
Stock or are otherwise sold or transferred in a manner provided in the
Indenture. In the event Armor All is merged or consolidated with or into any
other entity, or all or substantially all the assets of Armor All are sold or
transferred, and as a result holders of shares of Armor All Common Stock, as
constituted prior to the consummation of the transaction, receive other
securities and/or property, including cash, in exchange for their shares of
Armor All Common Stock, or in the event of a tender or exchange offer for Armor
All Common Stock which results in the sale or exchange of all shares of Armor
All Common Stock previously constituting Exchange Property, McKesson will
execute and deliver a supplemental indenture and a supplement to the Exchange
Agent Agreement as described below under "--Merger or Consolidation of Armor
All" and "--Tender or Exchange Offer." No fractional shares or interests in
Armor All Common Stock or other Exchange Property will be delivered on any
exchange of Debentures, but in lieu thereof a cash adjustment will be paid
based on the Market Price (as defined below under "--McKesson's Cash Option on
Exchange") of the Armor All Common Stock or other Exchange Property.
Debentures may be exchanged at any time after 60 days following their
original issuance but prior to their maturity or, in the event they are called
for redemption, until the close of business on the date immediately prior to
the date of redemption. In order to exercise the right of exchange, a
Debentureholder must properly complete the Exchange Notice provided on the
Debenture and surrender the Debenture to The First National Bank of Chicago,
who will act as exchange agent for Debentureholders (the "Exchange Agent") on
behalf of McKesson, at the office of the Exchange Agent maintained for such
purpose in New York, New York. If Debentures not called for redemption are
surrendered for exchange during the period from the close of business on a
record date for the payment of interest and prior to the next succeeding
interest payment date, such Debentures must be accompanied by funds equal to
the interest payable on such succeeding interest payment date on the principal
amount so exchanged.
Upon any such proper surrender of Debentures for exchange, McKesson shall, as
promptly as practicable, cause delivery to the Debentureholder of the amount
and kind of Armor All Common Stock and/or other Exchange Property deliverable
upon such exchange. As described below under "--McKesson's Cash Option on
Exchange," however, McKesson at its option may pay cash in lieu of delivering
the Exchange Property. The Debentureholder will also receive a check for
fractional shares or interests, if any, in the Exchange Property. If less than
the full principal amount of a Debenture has been surrendered for exchange, the
Debentureholder will also receive a Debenture representing the unexchanged
principal amount.
Delivery of Armor All Common Stock or other Exchange Property may be delayed
for a reasonable period of time at the request of McKesson in order to
calculate any necessary adjustments on the Exchange Property, to obtain any
certificate representing securities to be delivered, to complete any
reapportionment of the Exchange Property required by the Indenture or to comply
with any applicable law. If, in the opinion of counsel to McKesson, securities
constituting Exchange Property may not be delivered in exchange for Debentures
without registration under the Securities Act, McKesson will cause any such
required registration as promptly as practicable, but in the absence of such
registration McKesson may deliver cash in lieu of such securities. Such
registration may be required if the securities constituting Exchange Property
have been issued by an entity of which McKesson is an "affiliate" within the
meaning of the federal securities laws, but no assurances can be given that
McKesson will be able to cause such registration. Failure to deliver Exchange
Property or its cash value upon exchange of a Debenture as promptly as
practicable or within a reasonable period of time in the circumstances
described above would constitute an Event of Default under the Indenture and
could be so declared by the Trustee or by the holders of 25% or more of the
Debentures then outstanding. As what constitutes a reasonable period of time
may depend on circumstances, no date certain for delivery is provided in the
Indenture; consequently, the precise timing of such an Event of Default is
uncertain.
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Deposit of Exchange Property
Initially, the Exchange Property shall consist solely of shares of Armor All
Common Stock, and prior to and in connection with the original issuance of the
Debentures, McKesson will deposit the number of shares of Armor All Common
Stock deliverable in exchange for the Debentures with the Exchange Agent.
Exchange Property may, as a result of potential extraordinary transactions
involving Armor All Common Stock, subsequently include cash or property other
than or in addition to Armor All Common Stock. See "--Additions to Exchange
Property," "--Merger or Consolidation of Armor All," and "--Tender or Exchange
Offer." In any such case, McKesson will deposit with the Exchange Agent any
cash and other property which may become deliverable as Exchange Property in
exchange for the Debentures. McKesson will not be permitted to pledge,
mortgage, hypothecate or grant a security interest in, or permit any mortgage,
pledge, security interest or other lien upon, the Armor All Common Stock or
other Exchange Property so deposited. However, McKesson will be entitled to
vote the shares of Armor All Common Stock and any other voting securities which
may constitute Exchange Property so deposited.
The right of a Debentureholder to exchange Debentures for Armor All Common
Stock or other Exchange Property could be adversely affected in the event of
the bankruptcy, insolvency or liquidation of McKesson. In such event, the Armor
All Common Stock or other Exchange Property could be assets of McKesson subject
to the claims of its general creditors.
To the extent that Debentures are redeemed prior to exchange, McKesson will
be entitled to receive from the Exchange Agent such number of shares of Armor
All Common Stock and such other Exchange Property, if any, held by the Exchange
Agent for exchange as exceeds the number of shares of Armor All Common Stock or
other Exchange Property required to be held by the Exchange Agent for the
exchange of all Debentures remaining then outstanding. The deposit arrangements
with the Exchange Agent will terminate at such time as the right to exchange
Debentures shall have expired pursuant to the Indenture.
Subject to the Repurchase Rights described below, McKesson will be entitled
to withdraw Armor All Common Stock or other Exchange Property deposited with
the Exchange Agent. However, no such withdrawal shall in any way affect
McKesson's obligation to deliver the precise kind and amount of Exchange
Property to which a Debentureholder surrendering Debentures for exchange is
entitled at the time of surrender (or, at McKesson's option, the cash value of
that precise kind and amount of Exchange Property, as described below under "--
McKesson's Cash Option on Exchange").
McKesson's Cash Option on Exchange
In lieu of delivering Exchange Property in exchange for any Debentures,
McKesson may pay to the holder surrendering such Debentures an amount in cash
equal to the market price of the Exchange Property for which such Debentures
are exchangeable (the "Market Price"), based on (1) in the case of Armor All
Common Stock or other Exchange Property which consists of publicly traded
securities, the average closing market price (or average bid and asked prices,
if closing prices are not available) for the five consecutive trading days
immediately preceding the date of receipt by the Exchange Agent of the notice
of exchange relating to such Debentures (or, if such date is not a business
day, on the business day next preceding such date), and (2) in the case of
Exchange Property which does not consist of publicly traded securities, the
market value of such property on the date of receipt by the Exchange Agent of
the notice of exchange relating to such Debentures as determined by an
investment banking firm selected by the Exchange Agent. Before directing the
Exchange Agent to make any such cash payment, McKesson will deposit with the
Exchange Agent the cash so payable.
Additions to Exchange Property
McKesson will be entitled to receive all ordinary cash dividends paid and
interest earned on the shares of Armor All Common Stock or other Exchange
Property deposited with the Exchange Agent. All other distributions (including
extraordinary cash dividends), if any, on deposited shares of Armor All Common
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Stock or other Exchange Property shall (after any sale of such distributed
property or any provision for taxes, as described below) become additional
Exchange Property. The additional Exchange Property will be apportioned pro
rata among the deposited shares of Armor All Common Stock (or, if there shall
be no such shares, among such other Exchange Property as shall have replaced
such shares).
If there is a taxable distribution on Exchange Property of any securities,
options, warrants or similar rights or other noncash items of property,
McKesson will instruct the Exchange Agent to sell all such distributed property
for cash in such manner as McKesson shall instruct, and the cash proceeds of
such property after payment of taxes thereon will be Exchange Property. If
extraordinary cash dividends are paid on securities constituting Exchange
Property pursuant to a plan of liquidation, partial liquidation,
recapitalization or restructuring, or if securities constituting Exchange
Property are converted into cash pursuant to a merger or tender offer, then,
after payment of any taxes thereon, the remainder will be Exchange Property.
If there is a nontaxable distribution on Exchange Property of any securities
or other noncash items of property (other than options, warrants or similar
rights as described in the following paragraph), McKesson may, at its option,
cause the sale of some or all of such property (which may be a taxable event),
and the cash proceeds and/or the remainder of such property after payment of
any taxes thereon will be Exchange Property.
If there is a nontaxable distribution on Exchange Property of any options,
warrants or similar rights, McKesson may, at its option, (1) cause the sale of
such options, warrants or similar rights (which may be a taxable event), and
the cash proceeds, after payment of any taxes thereon, will be Exchange
Property; (2) to the extent there is sufficient cash among the Exchange
Property or to the extent McKesson may cause the sale of Armor All Common Stock
or other Exchange Property to provide sufficient cash, after provision for
taxes, among the Exchange Property, cause the exercise of such options,
warrants or similar rights and thereafter, either (a) retain the securities
received upon such exercise as Exchange Property, (b) cause some or all of such
securities to be sold (which may be a taxable event), in which case the cash
proceeds and the remainder of such property, if any, after payment of any taxes
thereon, will be Exchange Property, or (c) cause the pro rata distribution of
such securities to Debentureholders; (3) retain such options, warrants or
similar rights as Exchange Property, provided that such options, warrants or
similar rights shall not be allowed to expire unexercised so long as they are
in the money and if otherwise feasible; or (4) cause the pro rata distribution
of such options, warrants or similar rights to Debentureholders. Because any
subsequent distribution to Debentureholders of securities, options, warrants or
similar rights or other noncash items of property received with respect to
Exchange Property may give rise to tax liability for McKesson, McKesson may be
more likely to elect to cause the sale of such items (or, in the case of
options, warrants or similar rights, to cause the sale of the securities
received upon the exercise of such items) and to cause the cash proceeds (after
provision for taxes) to be treated as Exchange Property, in lieu of causing the
pro rata distribution of such items to the Debentureholders.
Upon the happening of any of the foregoing events with respect to the Armor
All Common Stock or other Exchange Property which is taxable or treated as
being taxable to McKesson or the Exchange Agent, the Exchange Agent will
deliver cash which it holds for exchange (including cash received as a result
of such event) to McKesson or to itself for payment of the taxes arising from
such transaction. If the cash held for exchange is insufficient to pay such
taxes, the Exchange Agent will sell such of the shares of Armor All Common
Stock or other Exchange Property as may be necessary to pay the amount of the
insufficiency and any taxes payable by McKesson or the Exchange Agent arising
from such sale. Any proceeds from such sale which remain after the above tax
payments are made will be Exchange Property.
Merger or Consolidation of Armor All
In the case of any merger or consolidation of Armor All with or into any
other entity which results in shares of Armor All Common Stock, as constituted
prior to the consummation of such transaction, being
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converted into other securities and/or property, including cash, or any sale or
transfer of all or substantially all the assets of Armor All (if in connection
with such sale or transfer holders of Armor All Common Stock receive other
securities and/or property, including cash, in exchange for their shares of
Armor All Common Stock), McKesson will execute and deliver to the Trustee a
supplemental indenture, and to the Exchange Agent a supplement to the Exchange
Agent Agreement, each providing that the holder of any Debenture surrendered
for exchange thereafter will, subject to provision for taxes, be entitled to
receive, in addition to other Exchange Property, if any, the kind and amount of
securities and/or property receivable in connection with such transaction by a
holder of the number of shares of Armor All Common Stock for which such
Debenture might have been exchanged immediately prior to such transaction.
Tender or Exchange Offer
A tender offer or exchange offer for Armor All Common Stock or any other
class of securities included within the Exchange Property may result in shares
of Armor All Common Stock or other Exchange Property being replaced with cash
or other property, which may or may not be other publicly traded equity
securities. Any such replacement would not trigger the Repurchase Rights
described below under "Repurchase Rights."
In the event of a tender offer or exchange offer for any class of securities
included within the Exchange Property (1) if McKesson owns other securities of
such class which are not Exchange Property, McKesson will cause the Exchange
Agent to tender such securities of such class in the same proportion that
McKesson tenders its securities in such class which are not Exchange Property,
and (2) if the only securities of such class owned by McKesson are Exchange
Property, McKesson may, at its option and in its sole discretion, elect to
cause the Exchange Agent to tender all or any portion or none of such class of
security included within the Exchange Property. If, however, the tender or
exchange offer for securities included within the Exchange Property is made by
McKesson or any affiliate of McKesson, McKesson will not cause the Exchange
Agent to tender any such securities unless a majority of such class of
securities that are held by persons other than McKesson or any affiliate of
McKesson have been tendered and not withdrawn pursuant to such tender or
exchange offer as of immediately prior to the expiration of such offer.
If Exchange Property is tendered and accepted for payment or exchange, the
proceeds, after provision for taxes, of the sale of any such Exchange Property
pursuant to any such tender or exchange offer will be held by the Exchange
Agent for the benefit of Debentureholders as provided in the Indenture. As a
result of the tender or exchange of Armor All Common Stock or other Exchange
Property, Debentureholders will not participate in any subsequent appreciation
or depreciation in the market price of the tendered securities.
Prior to the expiration of any withdrawal rights provided for in any tender
or exchange offer for any class of securities included within the Exchange
Property, a Debentureholder may, by properly surrendering a Debenture for
exchange, receive Exchange Property and retain or tender such securities,
subject to McKesson's right to pay cash in lieu of delivering Exchange
Property. If McKesson were to exercise its right to pay cash, the
Debentureholder would receive with respect to such securities cash equal to the
Market Price thereof, which may be less than the amount payable pursuant to the
tender or exchange offer.
If any tender offer or exchange offer results in there being no shares of
Armor All Common Stock among the Exchange Property, McKesson will execute and
deliver to the Trustee a supplemental indenture, and to the Exchange Agent a
supplement to the Exchange Agent Agreement, each providing that the holder of
any Debenture surrendered for exchange thereafter will, subject to provision
for taxes, be entitled to receive, in addition to other Exchange Property, if
any, the kind and amount of securities and/or property receivable upon or in
connection with such tender or exchange offer by a holder of the number of
shares of Armor All Common Stock for which such Debenture might have been
exchanged immediately prior to such transaction.
Certain Tax Withholding, Notices and Investment of Exchange Property
From time to time, McKesson may require the Exchange Agent to segregate such
Exchange Property as McKesson determines may be necessary for McKesson or the
Exchange Agent to pay taxes with respect to the transactions or events
described above, subject to the determination of taxability (and any expenses
incurred in determining taxability), and such property (or any portion thereof)
will be deliverable to holders
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of Debentures only after determination that such withholding is not necessary
for the payment of such taxes and after deducting the expenses incurred in
connection with such determination.
McKesson is required to notify Debentureholders of certain dividends or other
distributions on the Armor All Common Stock or other Exchange Property
deliverable upon exchange of Debentures, the granting of subscription rights,
options, warrants or other similar rights to holders of Armor All Common Stock,
any reclassification of Armor All Common Stock (other than a subdivision or
combination of outstanding shares of Armor All Common Stock), certain mergers
involving Armor All, the sale of all or substantially all of the assets of
Armor All, and the dissolution, liquidation or winding up of Armor All.
Any cash held by the Exchange Agent that is deliverable as Exchange Property
upon exchange of Debentures will be invested by the Exchange Agent at the
direction of McKesson in U.S. Government Obligations with maturity dates of
twelve months or less. Any interest or gain on such investments will be for the
benefit of McKesson, and McKesson will be responsible for any losses on such
investments. As used in the Indenture, the term "U.S. Government Obligations"
means direct non-callable obligations of, or non-callable obligations the
payment of principal of and interest on which is guaranteed by, the United
States of America, or to the payment of which obligations or guarantees the
full faith and credit of the United States of America is pledged, or beneficial
interests in a trust the corpus of which consists exclusively of money or such
obligations or a combination thereof.
REPURCHASE RIGHTS
The Exchange Agent will act as agent for McKesson in connection with
McKesson's exchange obligations under the Indenture and will not act as escrow
agent for the benefit of holders of Debentures. Accordingly, McKesson may at
any time obtain from the Exchange Agent or otherwise authorize or direct the
Exchange Agent to release all or a part of the Armor All Common Stock or other
Exchange Property. In the event that McKesson obtains or otherwise releases any
Armor All Common Stock or other Exchange Property, other than Exchange Property
in excess of that which would be deliverable upon exchange of all Debentures
then outstanding, each Debentureholder will have the right (a "Repurchase
Right"), at such holder's option, to require McKesson to repurchase all of such
holder's Debentures, or a portion thereof which is $1,000 or any integral
multiple thereof, in the manner and at the price described below.
Promptly (and in any event within 10 days) after McKesson has obtained or
released any Exchange Property other than Exchange Property in excess of that
which would be deliverable upon exchange of all then outstanding Debentures,
the Exchange Agent will mail to all Debentureholders of record a notice thereof
and the Repurchase Right arising as a result thereof (a "Repurchase Notice").
In connection with any such Repurchase Notice, McKesson will comply with any
applicable tender offer rules. To exercise the Repurchase Right, a
Debentureholder must deliver on or before the 20th business day after the date
of the Repurchase Notice written notice to the Exchange Agent of the holder's
exercise of such right, together with the Debentures with respect to which such
right is being exercised, duly endorsed for transfer.
Promptly after the expiration of the period in which a Debentureholder may
exercise the Repurchase Right (the "Repurchase Date"), McKesson will be
required to repurchase all Debentures in respect of which the Repurchase Right
has been exercised at the following repurchase price: (i) if the date on which
McKesson first obtains or releases Exchange Property other than Exchange
Property in excess of that which would be deliverable upon exchange of all then
outstanding Debentures (the "Triggering Date") is before March 2, 1999, the
product of (1) 120% and (2) the greater of the principal amount at maturity of
such Debentures (plus accrued and unpaid interest, if any, to the Repurchase
Date) and the Market Price of the Exchange Property deliverable in exchange for
such Debentures on the Triggering Date (or if such date is not a business day,
on the next succeeding business day); and (ii) if the Triggering Date occurs on
or after March 2, 1999, the greater of (1) the redemption price as specified
under "Redemption Provisions" on the Triggering Date and (2) the Market Price
of the Exchange Property deliverable in exchange for such Debentures on the
Triggering Date (or if such date is not a business day, on the next succeeding
business day).
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<PAGE>
The obligation of McKesson to deliver Exchange Property (or cash in lieu
thereof) in exchange for Debentures shall survive and continue to apply in full
force and effect following and notwithstanding the occurrence of any event
triggering a Repurchase Right. Failure by McKesson to exchange Debentures in
accordance with the Indenture or to repurchase Debentures upon exercise of a
Repurchase Right will constitute an Event of Default with respect to the
Debentures, and holders of Debentures will have the remedies provided for in
the Indenture, including acceleration of the indebtedness evidenced by the
Debentures, in the event of any such failure. See "Events of Default and
Remedies."
The exchange obligations of McKesson may not be assigned or otherwise
transferred by McKesson except in accordance with a transfer of the
indebtedness evidenced by the Debentures in the manner permitted by the
Indenture.
If an offer is made to repurchase Debentures in connection with a Repurchase
Right, McKesson will comply with all tender offer rules, including but not
limited to Sections 13(e) or 14(d) and 14(e) under the Exchange Act and Rules
13e-1, 13e-4, 14d-1 and 14e-1 thereunder, to the extent applicable to such
offer (including any applicable withdrawal rights).
REDEMPTION PROVISIONS
The Debentures will not be redeemable prior to March 2, 1999. At any time on
or after that date, the Debentures may be redeemed at the option of McKesson,
in whole or from time to time in part, on not less than 30 nor more than 60
days' notice by mail, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
beginning March 1 of the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999.......................... 102.25%
2000.......................... 101.80%
2001.......................... 101.35%
2002.......................... 100.90%
2003.......................... 100.45%
</TABLE>
and 100% at March 1, 2004, in each case together with accrued interest to the
redemption date; provided, however, that installments of interest on Debentures
whose stated maturity is on or prior to the redemption date shall be payable to
the holders of such Debentures, registered as such at the close of business on
the relevant record dates. If fewer than all of the Debentures are to be
redeemed, the Trustee will select the Debentures to be redeemed by lot or, in
its discretion, on a pro rata basis. If any Debenture is to be redeemed in part
only, a new Debenture or Debentures in principal amount equal to the unredeemed
principal portion thereof will be issued. There is no sinking fund applicable
to the Debentures.
CONSOLIDATION, MERGER AND SALE OF ASSETS
McKesson may merge or consolidate into or with any other corporation or sell,
convey or lease all or substantially all of its property to any other
corporation, provided that (i) the corporation formed by such consolidation or
merger or which has acquired or leased such property is organized under the
laws of any State of the United States or the District of Columbia and such
corporation expressly assumes all of the covenants and conditions of the
Indenture by executing and delivering a supplemental indenture to the Trustee
providing for the applicable exchange rights set forth in the Indenture, and
(ii) at the time of such transaction and immediately after giving effect
thereto, no Event of Default shall have occurred and be continuing.
34
<PAGE>
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures is subordinate to the prior
payment in full of all Senior Indebtedness (as defined). During the continuance
beyond any applicable grace period of any default in the payment of principal,
premium, interest or any other payment due on any Senior Indebtedness, no
payment of principal of, or premium, if any, or interest on the Debentures
shall be made by McKesson. In addition, upon any distribution of assets of
McKesson upon any dissolution, winding up, liquidation or reorganization, the
payment of the principal of, or premium, if any, and interest on the Debentures
is to be subordinated to the extent provided in the Indenture in right of
payment to the prior payment in full of all Senior Indebtedness. By reason of
the subordination, in the event of McKesson's dissolution, holders of Senior
Indebtedness may receive more, ratably, and holders of the Debentures may
receive less, ratably, than the other creditors of McKesson. Such subordination
will not prevent the occurrence of any Event of Default under the Indenture.
Subject to the qualifications described below, the term "Senior Indebtedness"
means the principal of, premium, if any, interest on, and any other payment due
pursuant to any of the following whether outstanding on the date of the
Indenture or thereafter incurred or created:
(a) All indebtedness of McKesson for money borrowed (including any
indebtedness secured by a mortgage or other lien which is (i) given to
secure all or part of the purchase price of property subject thereto,
whether given to the vendor of such property or to another, or (ii)
existing on property at the time of acquisition thereof);
(b) All indebtedness of McKesson evidenced by notes, debentures, bonds or
similar instruments (excluding any such indebtedness for trade payables or
constituting the deferred purchase price of assets or services incurred in
the ordinary course of business) and all indebtedness of McKesson
consisting of reimbursement obligations due and owing with respect to
letters of credit;
(c) All lease obligations of McKesson which are capitalized on the books
of McKesson in accordance with generally accepted accounting principles;
(d) All indebtedness consisting of commitment or standby fees due and
payable to lending institutions with respect to credit facilities available
to McKesson;
(e) All indebtedness consisting of obligations of McKesson due and
payable under interest rate and currency swaps, floors, caps or other
similar arrangements intended to fix interest rate obligations;
(f) All indebtedness of others of the kinds described in any of the
preceding clauses (a), (b), (d), or (e) and all lease obligations of the
kind described in the preceding clause (c) assumed by or guaranteed in any
manner by McKesson or in effect guaranteed by McKesson through an agreement
to purchase, contingent or otherwise; and
(g) All renewals, extensions, refundings, deferrals, amendments,
modifications or supplements of indebtedness of the kinds described in any
of the preceding clauses (a), (b), (d), (e) or (f) and all renewals or
extensions of lease obligations of the kinds described in any of the
preceding clauses (c) or (f);
unless in the case of any particular indebtedness, lease, renewal, extension,
refunding, amendment, modification or supplement, the instrument, lease or
other document creating or evidencing the same or the assumption or guarantee
of the same expressly provides that such indebtedness, lease, renewal,
extension, refunding, amendment, modification or supplement is not superior in
right of payment to the Debentures. Notwithstanding the foregoing, Senior
Indebtedness shall not include any indebtedness or lease obligations of any
kind of McKesson to any subsidiary of McKesson, a majority of the voting stock
of which is owned, directly or indirectly, by McKesson.
As of January 31, 1994, McKesson had outstanding Senior Indebtedness of
approximately $47 million. The amount of Senior Indebtedness may change in the
future. The Indenture contains no limitation on the incurrence of additional
Senior Indebtedness.
35
<PAGE>
Because substantially all of the assets of McKesson are owned by its
subsidiaries, McKesson's rights and the rights of its creditors, including
Debentureholders, to participate in the assets of any McKesson subsidiary upon
the subsidiary's liquidation, recapitalization or otherwise will be effectively
subordinated to the prior claims of the subsidiary's creditors (including trade
creditors), except to the extent that McKesson may itself be a creditor with
recognized claims against the subsidiary. As of January 31, 1994, McKesson's
subsidiaries had total interest-bearing indebtedness (which does not include
trade debt) of approximately $537 million.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being default in payment
of the principal of or premium, if any, on the Debentures; default for 30 days
in payment of any installment of interest on the Debentures; failure by
McKesson to deliver Armor All Common Stock or other Exchange Property (or cash
in lieu thereof) upon exchange of the Debentures; failure by McKesson to
repurchase Debentures upon the exercise of a Repurchase Right; default by
McKesson in any material respect for 60 days after notice in the observance or
performance of any other covenants contained in the Indenture for the benefit
of holders of the Debentures; or certain events involving bankruptcy,
insolvency or reorganization of McKesson or, under certain circumstances,
McKesson-Maryland. The Indenture provides that the Trustee may withhold notice
to the holders of Debentures of any default (except in payment of principal, or
premium, if any, or interest with respect to the Debentures) if the Trustee
considers it in the interest of the holders of the Debentures to do so.
The Indenture provides that if any Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Debentures then outstanding may declare the principal of the
Debentures to be due and payable immediately, but if McKesson shall cure all
defaults (except the nonpayment of interest on, premium, if any, and principal
of any Debentures which shall have become due by acceleration) and certain
other conditions are met, such declaration may be cancelled and past defaults
may be waived by the holders of a majority in principal amount of Debentures
then outstanding.
The holders of a majority in principal amount of the Debentures then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting McKesson and the Trustee, with
the consent of the holders of not less than a majority in principal amount of
the Debentures at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Debentures, except
that no such modification shall (i) extend the fixed maturity of any Debenture,
reduce the rate or extend the time or payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, impair or affect the
right of a holder to institute suit for the payment thereof, change the
currency in which the Debentures are payable, modify the subordination
provisions of the Indenture in a manner adverse to the holders of the
Debentures, or impair the right of holders to exchange the Debentures for
Exchange Property or to cause the repurchase of the Debentures, subject to the
terms set forth in the Indenture, without the consent of the holder of each
Debenture so affected, or (ii) reduce the aforesaid percentage of Debentures,
without the consent of the holders of all of the Debentures then outstanding.
SATISFACTION AND DISCHARGE
McKesson may discharge its obligations under the Indenture when either the
Debentures have been delivered to the Trustee for cancellation or if not so
delivered (a) have become due and payable, or (b) will become due and payable
at their scheduled maturity within one year, or (c) are to be called for
redemption within one year, or (d) are delivered to the Trustee for exchange or
repurchase, and in each such case,
36
<PAGE>
McKesson has deposited with the Trustee an amount sufficient to discharge the
entire indebtedness on such Debentures on the date of their scheduled maturity
or the scheduled date of redemption.
GOVERNING LAW
The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
such State's conflict of laws principles.
CONCERNING THE TRUSTEE
The First National Bank of Chicago is the Trustee under the Indenture and has
been appointed by McKesson as the paying agent, registrar and custodian with
regard to the Debentures. The First Chicago Trust Company of New York, an
affiliate of the Trustee, is the transfer agent of McKesson's Common Stock and
of the Armor All Common Stock. The Trustee and its affiliates provide and may
continue to provide banking services to McKesson and/or Armor All in the
ordinary course of their business.
CERTAIN UNITED STATES TAX CONSEQUENCES
The following summary is a general discussion of the material United States
federal income tax consequences of acquiring, holding and disposing of the
Debentures, including the exchange of the Debentures for Armor All Common
Stock, and of acquiring, holding and disposing of Armor All Common Stock
received in such exchange. The summary is based upon laws, regulations, rulings
and decisions now in effect or about to come into effect, all of which are
subject to change. This summary does not discuss all aspects of federal income
taxation that may be relevant to a particular investor in light of the
investor's personal investment circumstances and does not discuss any aspects
of state, local or foreign tax laws that may be applicable to the Debentures,
to Armor All Common Stock or to the holders thereof. This discussion is limited
to persons who hold Debentures and Armor All Common Stock as "capital assets"
(generally, property held for investment) within the meaning of section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"), and does not cover
special rules applicable to taxpayers who may fall into special classes, such
as financial institutions, insurance companies, mutual funds, S corporations,
trusts and exempt institutions. Accordingly, prospective purchasers should
consult their own tax advisors with respect to the application of federal,
state, local and foreign tax laws to them in light of their particular
circumstances concerning the matters discussed below.
INTEREST AND ORIGINAL ISSUE DISCOUNT
Stated Interest
Stated interest on the Debentures will be includable in and taxable as
ordinary income in accordance with the holder's method of accounting.
Original Issue Discount
On February 2, 1994, the U.S. Treasury Department promulgated final
regulations which provide, among other things, that the exchange right
contained in a Debenture (i.e., the right to exchange the Debenture for Armor
All Common Stock) is to be ignored for purposes of applying the original issue
discount provisions of the Code. While those final regulations are generally
effective for obligations issued on or after April 4, 1994, taxpayers may rely
on the final regulations, other than portions dealing with an election not here
relevant, for obligations issued after December 21, 1992; McKesson intends to
rely on these recently promulgated final regulations with respect to the
Debentures.
37
<PAGE>
Accordingly, the Debentures will be viewed as issued with original issue
discount only if their issue price (in general, the first price at which a
substantial amount of Debentures is sold for cash) is less than their stated
redemption price at maturity (in this case the principal amount of $1,000) by
more than a de minimis amount (generally, .0025 multiplied by the Debentures'
stated redemption price at maturity (here $1,000) multiplied by the number of
complete years to maturity from the issue date). As it is expected that the
issue price of the Debentures will be $1,000, it is not expected that the
Debentures will be issued with original issue discount.
If the Debentures were issued with original issue discount, then a holder of
a Debenture generally would be required to include in gross income
(irrespective of such holder's method of accounting) a portion of the original
issue discount for each year during which the Debenture is held, even though
the holder may not have received payment in respect of such income. The amount
of any original issue discount included in income for each year would be
calculated under a constant yield to maturity formula that would result in the
inclusion of less original issue discount in the early years of the term of the
Debenture and more original issue discount in the later years.
TAX BASIS OF DEBENTURES
The federal income tax basis of a Debenture will be equal to the full amount
paid for the Debenture, increased, were the Debentures issued with original
issue discount, by any original issue discount included in the holder's income.
DISPOSITION OF DEBENTURES
Generally the redemption by McKesson (including the exercise of its option to
pay cash in lieu of Armor All Common Stock or other Exchange Property to an
exchanging Debentureholder) or the sale of the Debentures will result in
taxable gain or loss equal to the difference between the amount of cash and
fair market value of other property received and the holder's tax basis in the
Debentures. Such gain or loss will be capital gain or loss and will be long-
term gain or loss if the holding period exceeds one year. To the extent that
the amount received is attributable to accrued interest, however, that amount
will be taxed as ordinary income.
EXCHANGE OF DEBENTURES FOR ARMOR ALL COMMON STOCK OR OTHER EXCHANGE PROPERTY
If a Debentureholder exercises the right to exchange a Debenture for Armor
All Common Stock or other Exchange Property, such exchange will be treated as a
taxable disposition, and the holder will be required to recognize taxable gain
(or loss) to the extent that the fair market value of the Armor All Common
Stock or other Exchange Property received in such exchange exceeds (or is less
than) the holder's adjusted tax basis in the Debenture immediately prior to
such exchange. Any gain or loss on the exchange generally will be long-term
capital gain or loss if the Debenture has been held for more than one year. The
holder's tax basis for the Armor All Common Stock or other Exchange Property
would equal the fair market value of such property at the time of the exchange,
and the holder's holding period for the Armor All Common Stock or other
Exchange Property would not include any portion of the holding period for the
exchanged Debenture.
ADJUSTMENT OF EXCHANGE RATE AND MODIFICATION OF EXCHANGE PROPERTY
Holders of Debentures may be deemed to have received constructive
distributions where the exchange rate is adjusted to reflect property
distributions with respect to Armor All Common Stock into which such Debentures
are exchangeable. Adjustments to the exchange rate made pursuant to a bona fide
reasonable adjustment formula which has the effect of preventing the dilution
of the interest of the holders of the Debentures, however, will generally not
be considered to result in a constructive distribution of Armor All Common
Stock. Certain adjustments provided in the Debentures may not qualify as being
pursuant to a bona fide reasonable adjustment formula. If such adjustments were
made, the holders of Debentures could be deemed to have received constructive
distributions taxable as dividends to the extent of Armor All earnings
38
<PAGE>
and profits. See "--Distributions on Armor All Common Stock." In addition,
distributions with respect to Exchange Property of any securities, options,
warrants, similar rights or other noncash items of property could be viewed as
equivalent to exchange rate adjustments giving rise to constructive
distributions to holders of Debentures. Further, under proposed U.S. Treasury
Department regulations, some of the possible changes in the Exchange Property
could be deemed a "significant modification" of the Debentures, which would be
treated as a taxable exchange of the original Debentures for modified debt
instruments, potentially giving rise to gain or loss in the hands of a
Debentureholder equal to the difference between the fair market value of the
modified debt instruments and such holder's adjusted basis in the original
Debentures.
DISTRIBUTIONS ON ARMOR ALL COMMON STOCK
Distributions with respect to shares of Armor All Common Stock that are
received in exchange for Debentures will be treated as dividends for federal
income tax purposes and will be taxed as ordinary income to the extent of Armor
All's earnings and profits for such purposes. Certain corporations may qualify
for a 70% dividends received deduction (80% for certain corporate stockholders
owning at least 20%, by vote and value, of Armor All's stock) if various
conditions are met.
Distributions will constitute dividends taxable as ordinary income to the
extent Armor All has either (a) current earnings and profits determined at the
end of the taxable year in which the distribution is made or (b) accumulated
earnings or profits determined at the time the distribution is made. To the
extent that the entire distribution is greater than the amount of earnings and
profits determined above, the excess will be treated as a nontaxable return of
capital which will reduce the recipient's basis for the Armor All Common Stock.
To the extent that a recipient receives aggregate distributions that are not
out of current or accumulated earnings and profits and such distributions
exceed the tax basis of the Armor All Common Stock, the excess will be taxed as
a gain from the sale or exchange of the Armor All Common Stock. See "--
Dispositions of Armor All Common Stock."
To be entitled to the dividends received deduction, stockholders taxed as
regular corporations must, among other requirements, hold the Armor All Common
Stock for a period of more than 45 days, not counting days on which the
stockholder's risk of loss is diminished, for example, by a short sale. One
item of tax preference for corporations is 75% of the excess of adjusted
current earnings over alternative minimum taxable income (determined without
regard to this preference or any alternative minimum tax net operating loss
carryovers). Thus, a corporation's alternative minimum tax base would generally
be increased by 75% of the dividends received deduction, although special rules
may apply to dividends eligible for an 80% dividends received deduction.
To the extent a corporation incurs indebtedness directly attributable to
investment in portfolio stock in another corporation (which would include Armor
All Common Stock received upon exchange of the Debentures), the dividends
received deduction will be reduced by a percentage equal, in general, to the
amount of such indebtedness divided by the total adjusted tax basis in the
investment. In addition, the dividends received deduction cannot exceed 70% of
taxable income with certain adjustments (80% in the case of dividends
qualifying for the 80% dividends received deduction). Finally, corporate
stockholders may be required in certain circumstances to reduce the tax basis
of their shares of Armor All Common Stock to reflect the dividends received
deduction allowed with respect to certain "extraordinary dividends," if any,
paid on the Armor All Common Stock.
DISPOSITIONS OF ARMOR ALL COMMON STOCK
Generally, any sale or other disposition of Armor All Common Stock will be a
taxable event and will result in capital gain or loss if the Armor All Common
Stock is held as a capital asset. The amount of such gain or loss will
generally be the difference between the federal income tax basis of the Armor
All Common Stock on the date of the sale or other disposition and the cash and
fair market value of property received.
39
<PAGE>
Such gain or loss will be long-term gain or loss if the Armor All Common Stock
is held for more than one year.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable U.S.
Treasury Department regulations, a holder of Debentures or Armor All Common
Stock may be subject to backup withholding at the rate of 31% with respect to
interest on and any original issue discount with respect to Debentures,
dividends on Armor All Common Stock and the gross proceeds of a sale, exchange,
retirement or redemption of Debentures or Armor All Common Stock. However,
backup withholding generally will not be required if such holder (a) is a
corporation or comes within certain other exempt categories and when required
demonstrates this fact or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
amount of any backup withholding from a payment to a holder will be allowed as
a credit against the holder's federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service ("IRS").
McKesson or Armor All will cause to be reported to the holders of Debentures
or Armor All Common Stock and the IRS for each calendar year the amount of
interest or dividends paid and original issue discount accrued during such
year, if any, and the amount of tax withheld, if any, with respect to the same.
FOREIGN HOLDERS
Interest and original issue discount, if any, on the Debentures held by
nonresident alien individuals or foreign corporations will generally be exempt
from United States federal income tax. To obtain such exemption, the Code
requires the beneficial owner to submit a statement that such owner is not a
United States person, which statement must be filed with the person who would
otherwise be responsible for withholding such tax. Temporary regulations issued
by the U.S. Treasury Department require that statement to be signed by the
beneficial owner under penalties of perjury and to provide such owner's
address. Interest and original issue discount, if any, on the Debentures may be
subject to United States federal income tax (and branch profits tax for foreign
corporate holders) if they are effectively connected with the conduct of a
trade or business within the United States. There are also special rules for
controlled foreign corporations, certain other types of foreign stockholders
and foreign partnerships, estates and trusts. In general, dividends paid on
shares of Armor All Common Stock held by a nonresident alien individual or
foreign corporation will be subject to withholding tax at a rate of 30% but
will not be subject to backup withholding. The withholding rate may be lower
under an applicable tax treaty. Prospective nonresident purchasers should
consult their tax advisors as to the scope of and procedural requirements under
any such treaties and with regard to the exemption from United States federal
income tax for interest and original issue discount, if any, on the Debentures
and the special backup withholding rules and provisions regarding gain from the
sale, exchange, redemption or other disposition of Debentures or Armor All
Common Stock applicable to such purchasers.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and McKesson has agreed to sell to them, severally, the
respective principal amounts of Debentures set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $ 80,000,000
Monness, Crespi, Hardt & Co., Inc........................... 20,000,000
Montgomery Securities....................................... 40,000,000
Wheat, First Securities, Inc................................ 20,000,000
------------
Total................................................... $160,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Debentures are subject to
the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are committed to take and pay for all of the
Debentures if any are taken.
The Underwriters propose to offer part of the Debentures directly to the
public at the public offering price set forth on the cover page hereof and part
to certain dealers at a price that represents a concession not in excess of
.60% of the principal amount of the Debentures. Any Underwriter may allow, and
such dealers may reallow, a concession not in excess of .25% of the principal
amount of the Debentures to other Underwriters or to certain other dealers.
McKesson and Armor All have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
McKesson has granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional $20,000,000
principal amount of Debentures at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, incurred in the sale of the Debentures.
McKesson and Armor All have agreed in the Underwriting Agreement not to offer
to sell, sell, contract to sell or otherwise dispose of any shares of Armor All
Common Stock or any securities convertible into or exchangeable for Armor All
Common Stock for a period of 90 days after the date of this Prospectus, without
the prior written consent of Morgan Stanley & Co. Incorporated, as
representative of the several Underwriters, provided that Armor All may issue
shares under its stock option and restricted stock plans during such 90-day
period, and except that, commencing 30 days after the offering of Debentures
made hereby, McKesson may contribute up to 350,000 shares of Armor All Common
Stock to the McKesson Foundation, Inc. (the "Foundation"), a non-profit,
charitable foundation, without restrictions on the subsequent disposition of
such shares by the Foundation.
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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by
Pillsbury Madison & Sutro, San Francisco, California, counsel for McKesson and
Armor All. Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo
Alto, California, are acting as counsel for the Underwriters in connection with
certain legal matters relating to the securities offered hereby.
EXPERTS
The consolidated financial statements of McKesson as of March 31, 1993, 1992
and 1991 and for the years then ended and the related consolidated financial
statement schedules included in the Appendix to the Proxy Statement and
incorporated by reference in McKesson's Annual Report on Form 10-K, which is
incorporated by reference in this Prospectus, and the financial statements of
Armor All as of March 31, 1993 and 1992 and for each of the three years in the
period ended March 31, 1993 and the related financial statement schedules
appearing in and incorporated by reference in Armor All's Annual Report on
Form10-K, which is incorporated by reference in this Prospectus, have been
audited by Deloitte & Touche, independent auditors, as stated in their reports,
which are incorporated herein by reference, and have been so incorporated in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
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(McKesson Logo)
(Armor All Logo)
