<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2)
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 8, 1996
McKESSON CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13252 94-3207296
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
McKesson Plaza
One Post Street
San Francisco, California 94104
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(Address of principal executive offices) (Zip Code)
(415) 983-8300
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- ----------------------------------------------------------------------------
This item contains the financial statements of FoxMeyer Corporation
("FoxMeyer"). McKesson purchased the assets and assumed certain liabili-
ties of FoxMeyer's healthcare distribution business, which was the
primary business of FoxMeyer. The pro forma information presents the
historical FoxMeyer financial information adjusted to reflect only those
assets acquired and liabilities assumed by McKesson.
(a)(1) Independent Auditors' Report
(a)(2) Financial Statements of FoxMeyer Corporation as of and for the year
ended March 31, 1996 (as prepared by FoxMeyer Corporation)
(a)(3) Condensed Financial Statements of FoxMeyer Corporation as of
September 30, 1996 and for the six-month periods ended September 30,
1995 and 1996 (unaudited)
(b) Pro Forma Condensed Financial Information
(c) See Exhibit Index
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McKESSON CORPORATION
(Registrant)
Dated: April 28, 1997 By /s/ Richard H. Hawkins
-------------------------------------
Richard H. Hawkins
Vice President and
Chief Financial Officer
By /s/ Heidi E. Yodowitz
---------------------------------------
Heidi E. Yodowitz
Controller
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FoxMeyer Corporation
Carrollton, Texas
We have audited the accompanying consolidated balance sheet of FoxMeyer
Corporation and subsidiaries as of March 31, 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for the year then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FoxMeyer Corporation and
subsidiaries at March 31, 1996, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
We have not audited any financial statements of the Corporation for any period
subsequent to March 31, 1996. However, as discussed in paragraph seven of Note Q
to the financial statements, on November 8, 1996, the U.S. Bankruptcy Court
approved a sale of the principal assets of the Corporation to McKesson
Corporation. On March 18, 1997, the Corporation and certain other subsidiaries
of the Corporation amended its filing, originally dated August 27, 1996, for
protection under Chapter 11 of the U.S. Bankruptcy Code to Chapter 7 with the
intention of liquidating the remaining net assets of the Corporation. The
financial statements do not include any adjustments that might result from the
bankruptcy proceedings or the sale of the Corporation's principal assets.
Deloitte & Touche LLP
Dallas, Texas
June 28, 1996
(March 18, 1997, as to paragraph seven of Note Q)
1
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- --------------------------------------------------------------------
<CAPTION>
For the
year ended
March 31,
1996
----------
<S> <C>
Net sales $5,487,362
Costs and expenses
Cost of goods sold 5,254,276
Selling, general and administrative expenses 218,673
Depreciation and amortization 23,740
Unusual items 47,433
----------
(56,760)
Other income, net 1,165
----------
Operating loss (55,595)
Financing costs
Interest expense 28,397
Interest income 1,319
Interest income from FoxMeyer Health Corporation 2,800
----------
Financing costs, net 24,278
----------
Loss from continuing operations before equity in loss
of affiliates and income tax provision (benefit) (79,873)
Equity in loss of affiliates 1,017
----------
Loss from continuing operations before income tax
provision (benefit) (80,890)
Income tax provision (benefit) (27,955)
----------
Loss from continuing operations (52,935)
Loss from discontinued operations, net of tax 536
Loss on disposal of discontinued operations, net of tax 7,081
----------
Net loss $ (60,552)
==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- --------------------------------------------------------------------
<CAPTION>
March 31,
1996
----------
<S> <C>
ASSETS
Current assets
Cash and short-term investments $ 21,514
Receivables, net of allowance for possible losses
of $23,070 290,475
Inventories 632,269
Net assets of discontinued operations held for sale 16,527
Other current assets 36,422
----------
Total current assets 997,207
Investments in affiliates 13,064
Property, plant and equipment 197,118
Less: Allowance for depreciation and amortization 72,280
----------
Net property, plant and equipment 124,838
Other assets
Goodwill, net of accumulated amortization of $52,944 200,476
Other intangible assets, net of accumulated
amortization of $9,956 11,535
Note receivable from FoxMeyer Health Corporation 30,000
Deferred tax asset 44,514
Miscellaneous assets 18,020
----------
Total other assets 304,545
----------
Total assets $1,439,654
==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
March 31,
1996
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
Current liabilities
Accounts payable $ 608,938
Other accrued liabilities 32,239
Salaries, wages, and employee benefits 6,945
Deferred income taxes payable 38,618
Long-term debt due within one year 1,351
----------
Total current liabilities 688,091
Long-term debt 378,536
Other long-term liabilities 4,627
Stockholder's equity
Common stock -
Capital in excess of par value 399,405
Net unrealized holding gain (loss) on marketable
securities -
Retained deficit (31,005)
----------
Total stockholder's equity 368,400
----------
Total liabilities and stockholder's equity $1,439,654
==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FoxMeyer Corporation And Subsidiaries (In thousands of dollars)
- -------------------------------------------------------------------------------
Year ended March 31, 1996
-------------------------
Net
unrealized
holding
gain (loss)
Capital in on Retained
Common excess of marketable earnings
stock par value securities (deficit)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 $ - $398,964 $ 635 $ 39,586
Net loss - - - (60,552)
Net unrealized holding loss on
marketable securities - - (635) -
Contribution from FoxMeyer Health
Corporation - 441 - -
Dividends declared - - - (10,000)
Other - - - (39)
------ -------- ----- --------
BALANCE AT MARCH 31, 1996 $ - $399,405 $ - $(31,005)
====== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------
For the year
ended
March 31,
1996
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (60,552)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 23,740
Provision for losses on accounts receivable 21,470
Equity in loss of affiliates 1,017
Other non-cash charges or write-offs 6,536
Loss on sale of property, plant and equipment 1,403
Gain on investments (8,525)
Unusual items 47,712
Deferred tax benefit (29,226)
Cash provided (used) by working capital items, net of acquisitions
Receivables (80,364)
Inventories 104,627
Other assets (653)
Accounts payable and accrued liabilities (2,072)
Other (3,323)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,790
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (38,772)
Prepayment on long-term commitment (532)
Purchase of investments (48,624)
Proceeds from the sale of investments 33,994
Acquisitions, net of cash acquired (5,161)
Other (19)
-----------
NET CASH USED BY INVESTING ACTIVITIES (59,114)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities 1,444,880
Repayments under revolving credit facilities (1,396,880)
Loans to FoxMeyer Health Corporation (2,300)
Other debt repayments (725)
Loan origination fees (688)
Dividends paid on common stock (10,000)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,287
-----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (3,037)
Cash and short-term investments, beginning of year 24,551
-----------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 21,514
===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOXMEYER CORPORATION AND SUBSIDIARIES
FOR THE YEAR ENDED MARCH 31, 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
DESCRIPTION OF BUSINESS: FoxMeyer Corporation and its subsidiaries (the
"Corporation") are engaged principally in the wholesale distribution of a full
line of pharmaceutical products and health and beauty aids to independent drug
stores, chain stores, hospitals and alternate care facilities in the United
States. The Corporation is a wholly-owned subsidiary of FoxMeyer Health
Corporation ("FoxMeyer Health").
BASIS OF PRESENTATION: The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities, at the dates of the financial statements and the reported amounts
of revenues and expenses during such reporting periods. Actual results could
differ from these estimates.
The consolidated financial statements of the Corporation include the accounts of
all its majority-owned subsidiaries. Investments in 20-50% owned companies are
accounted for on the equity basis. Investments of less than 20% are generally
accounted for on the cost basis except for the Corporation's 7.8% investment in
Phar-Mor, Inc. ("Phar-Mor"). The Corporation has accounted for this investment
on an equity basis to conform to FoxMeyer Health's accounting for their
consolidated 38.7% investment in Phar-Mor (see Note E).
These consolidated financial statements include the results of certain
operations as discontinued as discussed in Note C. All significant intercompany
balances and transactions have been eliminated. Certain other previously
reported amounts have been reclassified to conform to current year
presentations.
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested in
time deposit instruments having a maturity of three months or less at the time
of purchase and are recorded at cost.
INVENTORIES: Inventories, consisting solely of finished goods, are valued at
the lower of cost or market. Cost for a majority of inventory is determined by
the last-in, first-out ("LIFO") cost method (see Note G). Cost for the remainder
of the inventory is determined by the first-in, first-out ("FIFO") cost method
of inventory accounting.
INVESTMENTS: The Corporation's investments in equity securities have been
classified as either "available for sale" or "trading" and are carried at fair
value. The classification of the security is determined at the acquisition date
and reviewed periodically. The unrealized gains or losses resulting from the
difference in the fair value and the cost of securities, for securities
available for sale, are shown as a component of stockholder's equity and, for
trading securities, are reported in the results of operations. The Corporation
periodically reviews its investments for which fair value is less than cost to
determine if the decline in value is other than temporary. If the decline in
value is judged to be other than temporary, the cost basis of the security is
written down to fair value. The amount of any write-down would be included in
the results of operations as a realized loss. Realized gains and losses
resulting from the sale of securities are determined using the average cost
method (see Note H).
7
<PAGE>
INCOME TAX PROVISION: The Corporation files a consolidated federal income tax
return with FoxMeyer Health. Under a tax sharing agreement (the "Tax Sharing
Agreement"), the Corporation is obligated to pay to FoxMeyer Health an amount
equal to the income taxes the Corporation would have paid had it been required
to file a separate federal income tax return. The Corporation has provided for
current and deferred income taxes on its financial statements as if it were
actually filing a separate federal income tax return.
Deferred income taxes and liabilities are established for temporary differences
between financial statement carrying amounts and the taxable basis of assets and
liabilities using rates currently in effect. A valuation allowance is
established for any portion of the deferred tax asset for which realization is
not likely. The amount of the deferred tax asset considered realizable could be
further reduced in the near term if estimates of taxable income during tax loss
carryforward periods are reduced.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Differences between amounts received and the net carrying values of
properties retired or disposed of are included in results of operations. The
cost of maintenance and repairs is charged against results of operations as
incurred. Depreciation of property and equipment is provided using the straight-
line method at rates designed to distribute the cost of properties over their
estimated service lives of 10 to 40 years for buildings and building
improvements, 3 to 10 years for equipment and furniture and 3 to 7 years for
software. Amortization of leasehold improvements is included in depreciation and
amortization based on the lesser of the term of the lease or the asset's
estimated useful life of 5 to 20 years. Depreciation for income tax purposes is
computed by using both the straight-line and accelerated methods (see Note I).
CAPITALIZATION OF SOFTWARE COSTS: The Corporation capitalizes software
purchased in connection with major system developments as well as certain
expenditures related to the implementation of this software. In addition,
software that is developed or substantially modified internally by the
Corporation is also capitalized. The capitalization of these internal projects
begins after technological feasibility has been established and ends when
testing on the project is completed. Acquisition costs plus direct expenses are
capitalized. Interest incurred on borrowed funds used during the capitalization
period of $2.0 million in 1996 was also capitalized. Routine upgrades,
modifications and maintenance are expensed as incurred.
SELF-INSURANCE PROGRAMS: The Corporation is self-insured for various levels of
general liability, automobile, workers' compensation and employee medical
coverage. Provisions for claims under the self-insurance programs are
actuarially determined for both claims reported and for claims incurred but not
reported after consideration of excess loss insurance coverage limits.
INTANGIBLE ASSETS: Intangible assets consist of goodwill and customer lists
arising from business combinations. Goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets acquired, is
amortized using the straight-line method over the period of expected benefit of
40 years. The customer lists are amortized using the straight-line method over
the period of benefit, but in no instance exceeding 20 years.
The Corporation periodically reviews the appropriateness of the remaining life
of its intangible assets considering whether any events have occurred or
conditions have developed which indicate that the remaining life or the
amortization method require adjustment. After reviewing the appropriateness of
the remaining life and the pattern of usage of the intangible asset, the
Corporation then assesses the overall recoverability of intangible assets by
determining if the unamortized balance can be recovered through
8
<PAGE>
estimated undiscounted future operating cash flows. Absent any unfavorable
findings, the Corporation continues to amortize its intangible assets based on
the existing estimated life.
SALES: Generally, sales are recorded when goods are shipped and title passes or
when services are rendered. In addition, for large volume sales of
pharmaceuticals to major self-warehousing drug store chains, the Corporation
acts as an intermediary in the order and subsequent delivery of products
directly from the manufacturer to the customers' warehouses. These sales of
$548.6 million in 1996 are credited to the same account as their associated cost
of sales and reported on a net basis in the consolidated statements of
operations. While no one customer accounted for more than 10% of net sales in
1996, sales to customers that were members of a hospital buying group did
account for approximately 13% of net sales.
UNUSUAL ITEMS: Unusual items consist of certain charges related to (i) the
closing or relocation of distribution facilities, including costs to shut-down
the Corporation's trading operations, (ii) the closing of the Wichita, Kansas
data processing center and the write-off of the remaining book value of systems
that are being replaced, (iii) severance costs for personnel reductions
involving approximately 100 employees, primarily at the Corporation's corporate
office, (iv) losses expected for certain customer contracts and (v) the write-
off of certain impaired long-term assets. Partially offsetting the charges were
$6.4 million of recoveries on a prior year unusual charge related to the Phar-
Mor bankruptcy (see Note E). Approximately $10.5 million of the total unusual
charges will require future cash expenditures primarily related to certain
customer contracts, severance costs and the closing of the data processing
center.
OTHER CHARGES: During the fourth quarter of 1996 the Corporation recorded an
adjustment to inventory that resulted in a charge to cost of goods sold of
approximately $18.5 million. This adjustment was due primarily to significant
information systems problems incurred in connection with the opening of the
Corporation's new automated national distribution center in July 1995, and the
installation of a new system utilized to record the transfer of product among
the Corporation's facilities. The problems caused by the initial inadequacies of
these systems resulted in the Corporation shipping more product to some of its
customers than it billed, and inflated the amount of credit given to certain of
its customers. The ability of the Corporation to track certain shipments was
significantly impaired as well.
The magnitude of the problem was not identified until subsequent to year end at
which time the Corporation retained the services of an independent third party
to help evaluate the problem and provide assurance the Corporation has
implemented appropriate measures to resolve the problems and prevent them from
recurring. In connection with the national distribution center project, the
Corporation engaged, and relied upon, the services of a number of professional
consulting firms, equipment manufacturers and software development companies to
manage the design, installation and implementation (including adequate training)
of the various systems. As a result of the Corporation's own analysis of this
inventory shortage, discussion with the independent third party retained by the
Corporation to evaluate the problem and based on an evaluation of the nature of
the inventory problems, the lack of sufficient reporting, and the time period
covered, the Corporation does not believe it can reasonably estimate the impact
of the adjustment on a quarter-by-quarter basis.
The Corporation also recorded an additional charge to operating expenses of
approximately $15.5 million during the fourth quarter, to increase its allowance
for doubtful accounts. A portion of the increase is due to billing problems
arising from the issues addressed above. The remainder of the increase is the
result of problems primarily related to customers serviced from facilities
closed during
9
<PAGE>
late 1996. As noted above, the Corporation does not believe it can reasonably
estimate the impact of the adjustment on a quarter-to-quarter basis.
Management believes that all material problems have been identified and resolved
and that the adjustments referred to above are non-recurring in nature.
NOTE B - ACQUISITIONS
On June 28, 1994, the Corporation completed an amalgamation of a wholly-owned
subsidiary with Evans Health Group Limited receiving 4,250,000 shares of common
stock in the amalgamated corporation, FoxMeyer Canada Inc. ("FoxMeyer Canada").
Subsequently, the Corporation exercised options for 5,200,000 shares of common
stock increasing the Corporation's ownership interest at March 31, 1996 to
47.5%. FoxMeyer Canada, which provides healthcare and pharmacy services in
Canada, is accounted for on an equity basis and, at March 31, 1996, the
Corporation's investment was $4.6 million and the market value was $65.1 million
based on the closing price of the common stock on the Toronto Stock Exchange.
The Corporation has options to acquire up to 4,800,000 additional shares of
common stock of FoxMeyer Canada for (in Canadian dollars) $3.00 per share. In
addition, the Corporation holds a FoxMeyer Canada convertible debenture of $0.8
million.
The Corporation acquired the stock of a pharmacy benefit management company,
Scrip Card Enterprises, Inc. ("Scrip Card"), on April 1, 1994 for $10.0 million.
The transaction was accounted for by the purchase method of accounting with $8.1
million of the purchase price assigned to the customer list acquired in the
transaction. The results of operations of Scrip Card have been included in the
consolidated financial statements of the Corporation since its acquisition.
During 1996, an additional $1.5 million was paid on the contingent purchase
price agreement to the former owners of this business.
NOTE C - DISCONTINUED OPERATIONS
In July 1995, the Corporation adopted a plan to dispose of certain of its
managed care and certain information service operations. The Corporation has
also recorded a $7.1 million after-tax loss for future operating losses after
June 30, 1995 and for the expected loss on the sale of these operations. The
$7.1 million after-tax loss was based on management's best estimates of the
amounts of future operating losses and proceeds to be realized on the sale or
other disposition of the discontinued operations. Actual operating losses and
proceeds from disposition may vary from these estimated amounts.
At March 31, 1996, $5.6 million of after-tax operating losses had been incurred
since June 30, 1995. The Corporation has completed the sale of two operations
and is in negotiations and expects to complete the sale of one of the remaining
businesses by the end of the second quarter of fiscal 1997. The net book value
of those assets and liabilities which are expected to be sold is reflected on
the consolidated balance sheet at March 31, 1996 as "Net assets of discontinued
operations held for sale". The net assets, before reclassification, consisted of
$15.5 million of current assets, $13.7 million of long-term assets, $12.6
million of current liabilities and $0.1 million of long-term liabilities.
Sales for the year ended March 31, 1996 for these segments, primarily from the
managed care operations, were $14.9 million. The loss from discontinued
operations is net of $0.4 million of tax benefits for the year ended March 31,
1996.
10
<PAGE>
NOTE D - ACCOUNTS RECEIVABLE FINANCING
The Corporation participated in a $200.0 million accounts receivable financing
program under which the Corporation sold a percentage ownership interest in a
defined pool of its trade accounts receivable with limited recourse. Generally,
an undivided interest in new accounts receivable was sold daily as existing
accounts receivable were collected to maintain the participation interest at
$200.0 million. Accounts receivable sold under this program were not included in
the accompanying balance sheet at March 31, 1996. An allowance for doubtful
accounts was retained on the participation interest sold based on estimate of
the Corporation's risk of credit loss from its obligation under the recourse
provisions. The cost of the program was $13.0 million for the year ended March
31, 1996, and was charged against "Other income, net" in the accompanying
consolidated statement of operations. The Corporation also acted as agent for
the purchaser by performing recordkeeping and collection functions on the
participation interest sold. The agreement contained certain covenants regarding
the quality of the accounts receivable portfolio, as well as other covenants
which were substantially identical to those contained in the Corporation's
credit facilities. Subsequent to March 31, 1996, the Corporation replaced the
current accounts receivable financing program with a new $275.0 million, five
year program (see Note Q).
NOTE E - PHAR-MOR, INC. RECEIVABLE AND INVESTMENT
On August 17, 1992, Phar-Mor filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The Corporation's records reflected that on the filing date it
had receivables due from Phar-Mor of approximately $68.8 million. As a result of
Phar-Mor's submission of a Plan of Reorganization, in September 1995, the
Corporation received shares of common stock in, and warrants to purchase common
stock of, Phar-Mor in final settlement of all claims. The common stock and
warrants had a market value of $7.4 million resulting in a reduction in the loss
recognized in prior years of approximately $1.4 million. In addition, the
Corporation received a $5.0 million settlement from other parties related to the
Phar-Mor bankruptcy.
The Corporation has accounted for its 7.8% investment in Phar-Mor common stock
on an equity basis (see Note A). The carrying value at March 31, 1996 was $7.6
million. In addition, the Corporation has warrants with a book value of $0.1
million to purchase an additional 91,902 shares of Phar-Mor common stock. The
market value of the common stock and warrants at March 31, 1996 was $7.2
million.
NOTE F - OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Corporation to a concentration of credit risk with
customers in the retail and in the hospital and alternate care facility sectors.
This risk is limited due to the large number of customers comprising the
Corporation's customer base and their geographic dispersion. The Corporation
performs ongoing credit evaluations of its customer's financial condition and
maintains reserves for potential credit losses. The accounts receivable
valuation allowance of $23.1 million represents management's best estimate of
potential credit losses. Actual credit losses may differ from these estimated
amounts. Generally, the Corporation requires no collateral from its customers.
In addition, temporary cash investments may also subject the Corporation to a
concentration of credit risk. The Corporation places its temporary cash
investments primarily with major financial institutions and diversified money
market mutual funds.
11
<PAGE>
NOTE G - INVENTORIES
Inventories valued by the LIFO cost method totaled $547.5 million at March 31,
1996. If the FIFO cost method had been used, inventories would have been $56.8
million higher than the amount reported in the accompanying consolidated
balance sheet. In addition, liquidation of LIFO inventories carried at lower
costs prevailing in prior years, as compared with the current cost of purchases,
had the effect of increasing net income in 1996 by $0.1 million.
NOTE H - INVESTMENTS IN MARKETABLE SECURITIES
The Corporation's investments in equity securities are classified as either
"available for sale" or "trading". No securities were classified as available
for sale at March 31, 1996.
The gross proceeds and realized gains and losses from the sale of available for
sale securities and the change in unrealized gains (losses) on available for
sale and trading securities are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
======================================================================================
For the
year ended
March 31,
1996
- --------------------------------------------------------------------------------------
<S> <C>
Available for sale securities:
Proceeds from sales $22,568
Realized gains 433
Realized losses 813
Net change in unrealized holding gains (losses) (635)
Trading securities:
Net change in unrealized holding gains 7,365
=======
</TABLE>
Approximately $2.1 million of net unrealized losses were charged to operations
as a result of changing the classification of certain securities from available
for sale to trading ($3.2 million in unrealized losses less $1.1 million in
unrealized gains).
NOTE I - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
======================================================================================
March 31,
1996
- --------------------------------------------------------------------------------------
<S> <C>
Land $ 3,219
Buildings 35,552
Leasehold Improvements 21,285
Equipment and Furniture 84,675
Software 19,500
Construction in progress 32,887
--------
Total $197,118
========
</TABLE>
12
<PAGE>
NOTE J - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt was as follows (in thousands of dollars):
====================================================================
March 31,
1996
- --------------------------------------------------------------------
<S> <C>
Senior Notes $198,000
Unamortized discount on Senior Notes (2,967)
Revolving Credit Facility 180,800
Industrial development revenue bonds with interest
rates ranging from 5.0% to 8.0% per annum with
various maturities 1,458
Notes and mortgages with interest rates ranging from
7.5% to 10.3% per annum with various maturities 2,596
--------
379,887
Less long-term debt due within one year 1,351
--------
Total $378,536
========
</TABLE>
On April 29, 1993, the Corporation issued a $198.0 million of 7.09% senior notes
due April 15, 2005 (the "Senior Notes"). As a result of the refinancing
discussed in Note Q, the Senior Notes were retired in June, 1996.
The Corporation maintained a $295.0 million revolving credit facility (the
"Credit Facility") which was to expire December 31, 1997. At March 31, 1996,
$180.8 million was outstanding under the Credit Facility at an average interest
rate of 7.0%. The Corporation also maintained a $60.0 million seasonal credit
facility which expired March 31, 1996. The average and maximum amounts
outstanding under the Credit Facility and seasonal credit facility during 1996
were $228.5 million and $341.0 million, respectively. In addition, the
Corporation had $4.2 million in outstanding letters of credit at March 31, 1996.
As a result of the refinancing discussed in Note Q, the Credit Facility was
repaid in June 1996.
The industrial development revenue bonds, notes and mortgages represent
different issues with varying principal payments. Some of these issues bear
interest at fixed rates and others bear interest at floating rates. These
obligations are generally secured by the underlying real estate.
The Credit Facility and Senior Notes contain covenants which limited the amount
of dividends that could be paid by the Corporation. While the Credit Facility
and the Senior Notes were repaid and retired in June 1996, the refinancing
discussed in Note Q will also limit the amount of dividends that can be paid by
the Corporation.
The aggregate maturity requirements on long-term debt by fiscal year are as
follows (after taking into consideration the refinancing discussed in Note Q):
$1.4 million in 1997; $0.6 million in 1998; $0.7 million in 1999; $0.6 million
in 2000; and $0.5 million in 2001; and $379.1 million thereafter.
The Corporation paid interest costs totaling $30.4 million during 1996.
13
<PAGE>
NOTE K - INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
==================================================================
For the year
ended
March 31,
1996
- ------------------------------------------------------------------
<S> <C>
State:
Current $ 1,271
Deferred (4,144)
Federal:
Deferred (25,082)
--------
Income tax provision (benefit) $(27,955)
========
</TABLE>
The reasons for the difference between the total tax provision (benefit) and the
amount computed by applying the statutory federal income tax rate to loss from
continuing operations before income tax provision (benefit) were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
==================================================================
Year ended
March 31,
1996
- ------------------------------------------------------------------
<S> <C>
Statutory rate applied to pre-tax loss $(28,312)
State income taxes (net of federal tax (1,868)
Amortization of goodwill and other
nondeductible items 2,446
Other items (221)
--------
Total tax provision (benefit) $(27,955)
========
</TABLE>
The Corporation has net operating loss carryforwards for federal income tax
purposes of $141.5 million, $15.6 million of which are limited in their
utilization because they were incurred by subsidiaries prior to their
acquisition by the FoxMeyer Health consolidated group. The tax operating losses
expire during the years 1997 through 2011. The Corporation has investment tax
credit carryforwards of $2.3 million expiring in various years from 1997 until
2000, and alternative minimum tax credit carryforwards of $4.6 million, both of
which are available to offset the future regular tax liability of the
Corporation. Alternative minimum tax credit carryforwards do not expire.
14
<PAGE>
The Corporation's current and noncurrent deferred taxes, which net to a $5.9
million asset consisted of the following temporary differences and net operating
losses, at the statutory rate, tax credits and valuation allowance (in thousands
of dollars):
<TABLE>
<CAPTION>
================================================================================
March 31, 1996
------------------------------
Deferred Deferred
tax tax
assets liabilities
- ----------------------------------------------------------------------------
<S> <C> <C>
Inventory methods $ - $ 51,658
Other reserves 8,742 -
Harris acquisition reserves 319 -
Bad debt reserves 8,953 -
Depreciation - 3,258
Accrued interest - 1,173
Investments 9,808 7,061
Tax net operating losses 46,008 -
Tax credits 767 -
Other 185 -
------- ------
Total deferred assets and liabilities 74,782 63,150
Valuation allowance on deferred tax assets (5,736) -
------- ------
Total deferred taxes $69,046 63,150
=======
Less: Deferred tax asset (69,046)
------- ------
Deferred tax asset, net $ (5,896)
========
</TABLE>
The valuation allowance did not change during fiscal 1996. The Corporation
expects that a combination of projected future earnings and the reversal of
certain deferred tax liability items will provide more than the required amount
of taxable income necessary to realize the value of the deferred tax asset.
Income taxes paid by the Corporation to taxing authorities totaled $0.3 million
in 1996. The Corporation paid $1.7 million to FoxMeyer Health under the Tax
Sharing Agreement during 1996.
NOTE L - RETIREMENT PLANS AND COMPENSATION PLANS
The Corporation maintains an employees' savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Under the plan, employees generally may elect to exclude up to 12% of
their compensation from amounts subject to income tax as a salary deferral
contribution. The Corporation makes a matching contribution to each employee in
an amount equal to 50% of the first 6% of such contributions. The Corporation's
matching contribution to the plan was approximately $1.3 million in 1996. The
Corporation did not make any profit-sharing contributions during the year ended
March 31, 1996.
15
<PAGE>
NOTE M - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation has two plans, relating exclusively to retired employees, that
provide for postretirement health care and life insurance benefits. Health care
benefits include major medical insurance with deductible and coinsurance
provisions. Life insurance benefits are usually for a flat benefit that
decreases to age 65. Generally, the plans provide that retirees pay for a
portion of their coverage. The plans are not funded. The Corporation pays all
benefits on a current basis. No current active employees are covered under these
plans.
The net periodic postretirement benefit cost for the year ended March 31, 1996,
was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
==================================================================
For the year
ended
March 31,
1996
- ------------------------------------------------------------------
<S> <C>
Service cost - benefits earned for the year $ -
Interest cost 220
Amortization of prior service cost (46)
----
Net periodic postretirement benefit cost $174
====
</TABLE>
The accumulated postretirement benefit obligation at March 31, 1996, included in
the accompanying consolidated balance sheet, utilizing a discount rate of 7.8%,
is presented below (in thousands of dollars):
<TABLE>
<CAPTION>
==================================================================
March 31,
1996
- ------------------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation $2,679
Unrecognized net gain 342
Unrecognized gain due to prior service cost 283
------
Amount of postretirement benefit obligation included
in the consolidated balance sheet $3,304
======
</TABLE>
The following assumptions have been used to arrive at the actuarially determined
postretirement benefit obligation and periodic postretirement benefit cost.
Medical costs were assumed to increase at a rate of 12.0% during 1996. The trend
in costs of health care was assumed to decrease over 28 years to a rate of
5.75%. An analysis of this trend rate scenario shows medical costs, on a
national basis, stabilizing at 20% of Gross National Product. In order to
demonstrate the volatility of the valuation results based on these assumptions,
the impact of a 1% increase in the cost of health care will result in an 11.6%
increase in the accumulated postretirement benefit obligation and a
corresponding 16.3% increase in periodic postretirement benefit cost.
16
<PAGE>
NOTE N - COMMITMENTS AND CONTINGENCIES
The Corporation leases various types of properties, primarily warehouse property
and computer equipment, through noncancellable operating leases. Certain leases
contain escalation clauses and provide for renewal options, generally at fair
market rates. Rental expense from continuing operations under operating leases
totaled $18.8 million in 1996. Minimum rental payments under these leases with
initial or remaining terms of one year or more at March 31, 1996, total $90.4
million and payments due during the next five fiscal years are 1997 - $14.2
million; 1998 - $29.8 million; 1999 - $17.5 million; 2000 - $18.4 million; 2001-
$2.5 million and thereafter $8.0 million. See Note Q for a discussion of the
impact on future rental payments as a result of the purchase of certain property
currently under an operating lease.
From time to time the Corporation makes advances to customers in anticipation of
future sales. At March 31, 1996, advances totaling $2.8 million were
outstanding. In addition, the Corporation has guaranteed debt of certain
customers to their banks totaling $1.0 million.
In connection with the merger of the Corporation into a wholly-owned subsidiary
of FoxMeyer Health (the "Merger"), several class action lawsuits were filed
against the Corporation and certain of its officers and directors alleging,
among other things, that the defendants breached their fiduciary duties owed to
holders of the Corporation's common stock. Subsequent to the filing of the
lawsuits, an agreement was reached, as evidenced by a Memorandum of
Understanding (the "Memorandum"), between the plaintiffs and defendants
concerning the terms of the Merger and the settlement of the class action
lawsuits. In September 1994, two plaintiffs in the class action lawsuits
withdrew from the Memorandum. Thereafter, the remaining plaintiffs also withdrew
from the Memorandum. In December 1994, the State of Wisconsin Investment Board
("SWIB") filed a complaint against the Corporation. The SWIB complaint alleges
that the defendants breached their fiduciary duty to the Corporation's
shareholders by agreeing to the Merger at an unfair price and that the proxy
statement issued in connection with the Merger failed to disclose certain
important facts. On April 30, 1995, the SWIB action was consolidated with the
class action lawsuit. An amended complaint was filed in the consolidated case on
February 13, 1996. The amended complaint essentially alleges the same claims
previously raised. The Corporation believes these lawsuits are without merit and
intends to contest these allegations. Management believes the outcome of these
lawsuits will not have a material effect on the consolidated financial condition
or results of the operation of the Corporation.
The Corporation was named a defendant in several class action lawsuits filed by
independent retail drug stores alleging that pharmaceutical manufacturers and
drug wholesalers conspired to fix prices of prescription drugs sold to retail
drug stores. The plaintiffs sought treble damages of an unspecified amount,
injunctive relief and attorney's fees. The Corporation has entered into a
Judgment Sharing Agreement (the "Agreement") with the manufacturer defendants in
these actions. Under the Agreement, the Corporation's liability will be limited
to a maximum of $1.0 million for damages in any action in which there is a
judgment against a manufacturer and wholesaler. In the event the manufacturer
defendants settle, the Agreement provides that no contribution to such
settlement would be required by the Corporation. On April 14, 1996, a federal
judge in Chicago granted the defendant drug wholesalers' summary judgment motion
and dismissed the case. The plaintiffs have filed an appeal. Management believes
that no material effect on the consolidated financial condition or results of
operations will result from the eventual settlement of these lawsuits.
17
<PAGE>
There are various pending claims and lawsuits arising out of the normal conduct
of the Corporation's business. In the opinion of management, the ultimate
outcome of these claims and lawsuits will not have a material effect on the
consolidated financial condition or results of operations of the Corporation.
NOTE O - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Corporation based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates are not necessarily indicative of the amounts that the Corporation
might realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value. The following fair values of financial instruments have
been determined at March 31, 1996:
The carrying amounts of cash and short-term investments, securities, accounts
receivable, accounts payable and other accrued liabilities are reasonable
estimates of their fair value. The estimated fair value of notes receivable was
not materially different from the carrying value for financial statement
purposes at March 31, 1996. In making this determination, the Corporation used
interest rates based on the credit worthiness of the customer.
The carrying value of long-term debt was $379.9 million at March 31, 1996. The
estimated fair value of long-term debt was $372.4 million at March 31, 1996,
based upon interest rates available to the Corporation for issuance of similar
debt with similar terms and remaining maturities.
The Corporation has other long-term investments at March 31, 1996 with a
carrying value of $1.1 million and an estimated value of approximately $5.0
million based upon the underlying market value of the securities into which the
investment may be converted.
The fair value estimates were based on pertinent information available to
management as of March 31, 1996. Such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE P - RELATED PARTY TRANSACTIONS
The Corporation has an agreement to loan up to $30.0 million to FoxMeyer Health
(the "FoxMeyer Health Loan") at an interest rate of 9.09%. At March 31, 1996,
the entire balance was outstanding, however, the FoxMeyer Health Loan was
forgiven by the Corporation in June 1996 and treated as a dividend to FoxMeyer
Health (see Note Q).
The Corporation and each of its subsidiaries join in the filing of a
consolidated federal income tax return with FoxMeyer Health. As members of the
FoxMeyer Health consolidated group, the Corporation and each of its subsidiaries
are severally liable for all federal income tax liabilities of every member of
the FoxMeyer Health consolidated group for years during which the Corporation
and its subsidiaries are members of such group. The Corporation and FoxMeyer
Health have entered into the Tax Sharing Agreement which relates to the payment
of taxes and certain related matters. During the term of the Tax Sharing
Agreement, the Corporation is obligated to pay FoxMeyer Health an amount equal
to those federal income taxes the Corporation would have paid if, subject to the
exceptions described below, the Corporation (on behalf of itself and its
subsidiaries) had filed a separate federal income tax return. If a
18
<PAGE>
Potential Default or Event of Default (as defined in the Credit Facility) occurs
or is reasonably likely to occur under the Credit Facility, or if, in general,
net income of the Corporation and its subsidiaries was not positive for the
preceding year, the amount of the payments made by the Corporation under the Tax
Sharing Agreement may not exceed the amount of federal income taxes actually
payable by FoxMeyer Health until such time as the Potential Default or Event of
Default is cured, or net income is positive, at which time any amounts otherwise
payable under the Tax Sharing Agreement will be paid. Further, under the Tax
Sharing Agreement, FoxMeyer Health must compensate the Corporation to the extent
a tax attribute of the Corporation is used to reduce the amount of federal
income taxes that otherwise would have been paid by FoxMeyer Health. Any such
attributes for which the Corporation is so compensated will not be available to
the Corporation to reduce amounts owing to FoxMeyer Health under the Tax Sharing
Agreement. The Tax Sharing Agreement provides for analogous principles to be
applied to any consolidated, combined or unitary state or local taxes.
During 1996, certain expenses were paid by either the Corporation or FoxMeyer
Health which were allocated to, and reimbursed by, the other party. In total,
these allocations were not material. In addition, FoxMeyer Health has reimbursed
the Corporation for facilities and services provided to FoxMeyer Health at a
rate set by a management agreement between FoxMeyer Health and the Corporation.
Total payments to the Corporation under this management agreement were $0.7
million for 1996. The Corporation leases an aircraft for which the Corporation
is entirely reimbursed by FoxMeyer Health. The Corporation also provides
FoxMeyer Health employees with medical, life insurance and 401(k) benefits for
which it is also reimbursed by FoxMeyer Health.
FoxMeyer Health made a capital contribution to the Corporation in 1996 of $0.4
million. The contribution represented the tax benefit to the Corporation from
compensation expense attributed to the Corporation from the exercise of non-
qualified stock options of FoxMeyer Health by the Corporation's employees. The
Corporation paid dividends of $10.0 million to FoxMeyer Health during 1996.
During 1996, FoxMeyer Health sold to the Corporation $26.0 million in equity
investments at the current market value at the date of sale. The Corporation
sold $23.4 million in equity investments to FoxMeyer Health at the then current
market value of those investments realizing a gain of $0.7 million.
Sales to Phar-Mor, in which the Corporation obtained a 7.8% equity interest
during 1996, were $236.1 million for the year ended March 31, 1996.
The Corporation subleased two facilities and a portion of its data processing
center to Ben Franklin Retail Stores, Inc. ("Ben Franklin"), an affiliate of
FoxMeyer Health, at an amount equal to its incurred costs. Ben Franklin
purchased one of the properties from the lessor in 1994. The Corporation also
provided certain data processing services and telecommunications services to Ben
Franklin. The total charges for the subleases and services for the year ended
March 31, 1996 were approximately $1.9 million. The Corporation had a receivable
from Ben Franklin for these payments and for inventory purchased from the
Corporation of $2.5 million at March 31, 1996.
NOTE Q - SUBSEQUENT EVENTS (PARAGRAPH EIGHT - UNAUDITED)
On June 19, 1996, the Corporation, through its wholly-owned subsidiary FoxMeyer
Drug Company, entered into new financing agreements for a $475.0 million
revolving credit facility (the "New Credit Facility") and a $275.0 million
accounts receivable financing program (the "New Receivable Financing"), both of
which mature in five years. Borrowings under these facilities were used to repay
amounts outstanding under the Credit Facility (see Note J), to retire the $198.0
million Senior Notes (see
19
<PAGE>
Note J) and to replace the $200.0 million accounts receivable financing program
(see Note D). The Corporation will incur approximately $6.8 million of charges
in the first quarter of fiscal 1997 as a result of the early extinguishment of
debt and waiver fees paid on the FoxMeyer Credit Facility. In addition,
approximately $22.5 million was used to purchase property and equipment that
were being leased by the Corporation.
The New Credit Facility matures in June 2001 and is secured by all the tangible
and intangible assets of the Corporation except for certain real property and
equipment. The interest rates on the New Credit Facility, for the first year,
will be based on either the prime rate plus 0.5% or a LIBOR rate (as defined)
plus 2.0%. After the first year, the interest rate adjustments to the prime and
LIBOR rates will vary depending on certain financial ratios. The New Credit
Facility contains certain affirmative and negative covenants including (i)
restrictions on acquisitions, mergers, and sales of certain assets by the
Corporation, (ii) restrictions on the Corporation's ability to enter into
transactions with affiliates, (iii) restrictions on the Corporation's ability to
incur additional indebtedness, to make capital expenditures, and to make certain
loans, advances and investments, and (iv) requirements to maintain a minimum
interest coverage ratio, ratio of accounts payable to inventory and net worth.
Amounts available pursuant to the New Credit Facility are limited to a
percentage of certain eligible inventory and accounts receivable balances. The
New Credit Facility limits the amount of dividends that can be paid by the
Corporation to the lessor of $15.0 million or 50% of the Corporation's prior
fiscal year net income. Under this limitation, the Corporation will not be able
to pay a dividend in fiscal 1997. The New Credit Facility does permit payments
under the Tax Sharing Agreement between the Corporation and FoxMeyer Health but
limits the amount of transfers of cash or other assets.
The New Receivable Financing also matures June 2001 and provides that the
Corporation will sell, with limited recourse, a percentage ownership interest in
a defined pool of its trade receivables. The New Receivable Financing requires
that all receivables generated by FoxMeyer Drug Company be sold to a new
corporation, FoxMeyer Funding, Inc. ("FFI"), a wholly-owned subsidiary of
FoxMeyer Drug Company. FFI's business consists only of the purchase of
receivables from FoxMeyer Drug Company and the sale of those receivables.
Generally, an undivided interest in new accounts receivable will be sold daily
by FFI as existing accounts receivable are collected to attempt to maintain the
participation interest at $275.0 million. FoxMeyer Drug Company will act as
agent for the purchaser performing recordkeeping and collection functions on the
participation interest sold. The cost of the program will be based on commercial
paper rates plus an additional margin of 0.875%. The New Receivable Financing
contains affirmative and negative covenants which are substantially the same as
those in the New Credit Facility.
As part of the refinancing, the Corporation has elected to purchase certain
equipment and other personal property formerly used under an operating lease.
Subsequent to the purchase, the Corporation's future minimum rental payments
(see Note N) under leases with initial or remaining terms of one year or more at
March 31, 1996, will be $67.3 million with payments due during the next five
fiscal years of $10.9 million in 1997, $10.1 million in 1998, $17.5 million in
1999, $18.4 million in 2000, $2.5 million in 2001 and $7.9 million, thereafter.
Concurrent with the refinancing, the Corporation declared and paid a dividend to
FoxMeyer Health consisting of certain assets held by the Corporation, unrelated
to its core business, with a book value of $94.7 million at March 31, 1996. The
dividend included substantially all the assets and liabilities of the
discontinued operations (see Note C), another subsidiary that is an information
service provider and the Corporation's investments in FoxMeyer Canada, Phar-Mor,
and other marketable securities. The
20
<PAGE>
Corporation also forgave the $30.0 million FoxMeyer Health Loan (see Note P)
plus accrued interest due thereon. An unaudited condensed pro forma balance
sheet at March 31,1996 as if the dividend had been paid at that time follows (in
thousands):
<TABLE>
- -------------------------------------------------------
<S> <C>
Current assets $ 949,061
Net property, plant and equipment 121,987
Other assets 272,356
----------
Total assets $1,343,404
----------
Current liabilities $ 686,550
Long-term debt 378,536
Other long-term liabilities 4,627
Stockholder's equity 273,691
----------
Total liabilities and stockholder's
equity $1,343,404
----------
</TABLE>
Commencing in mid July 1996, a group of the Corporations' most significant
vendors began reducing their credit lines to the Corporation. Despite positive
cash flow projections, the liquidity offered by the New Credit Facility and the
Corporation's history of timely debt payments, the group of vendors eliminated
approximately $100 million of liquidity from the Corporation's operations over a
forty-five day period by shortening repayment terms or requiring prepayment for
inventory purchases. In addition, during July and August, 1996, the Corporation
made certain prepayments to its suppliers for shipments of critical orders,
where after receiving payment, the vendors refused to release the product. In
August 1996, the Corporation met with certain key vendors requesting a
reinstatement of credit lines to previous levels; however, an agreement could
not be reached. Therefore, as a result of the above noted events, management of
the Corporation filed for protection under Chapter 11 of the U.S. Bankruptcy
Code ("Chapter 11") on August 27, 1996. Management believes that as a result of
uncertainties created by the bankruptcy filing, many customers withheld payment
on accounts receivable and, due in part to substantial staff turnover, disputed
items increased resulting in deterioration of accounts receivable aging.
Concurrent with the Corporation's filing for protection under Chapter 11 on
August 27, 1996, the Corporation entered into a new debtor-in-possession
financing arrangement which replaced the revolving credit facility and the
accounts receivable financing program. The arrangement, which expires on August
27, 1997, provides for borrowings up to $775 million. Advances under the
arrangement are limited in the aggregate to the amount of the eligible borrowing
base which is calculated as the sum of 70% of eligible inventory (as defined)
and 85% of eligible accounts receivable (as defined). Interest is calculated
daily as .75% plus the higher of (a) the highest daily prime rate of the five
largest member banks of the New York Clearing House Association or (b) the
weighted average rate on overnight federal funds transactions. In addition, all
litigation as described in Note N to the consolidated financial statements, has
been stayed pursuant to the rules of the U.S. Bankruptcy Code. On November 8,
1996, the U.S. Bankruptcy Court approved a sale of the principal assets of the
Corporation to McKesson Corporation ("McKesson"). In connection with the
Corporation's asset sale, McKesson paid approximately $23 million in cash to
debtors, paid off approximately $500 million in secured debt and assumed an
additional $75 million in other liabilities. On March 18, 1997, the Corporation
amended its bankruptcy filing from Chapter 11 to Chapter 7 with the intention of
liquidating the remaining net assets of the Corporation.
The unaudited condensed presentation of net assets of the Corporation and its
subsidiaries which was filed with the bankruptcy court as of March 18, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
ASSETS
Cash $ 432
Short-term investments-Treasury Bills 16,185
Other assets 250
---------
TOTAL ASSETS $ 16,867
=========
CURRENT LIABILITIES:
Current professional fees payable $ 1,798
Professional fee holdback payable 1,161
LIABILITIES SUBJECT TO COMPROMISE:
Secured claims 1,842
Priority claims 1,355
Unsecured 423,771
---------
TOTAL LIABILITIES 429,927
STOCKHOLDERS' DEFICIT (413,060)
---------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 16,867
=========
</TABLE>
The condensed information presented above is not meant to reflect the net assets
in liquidation of the Corporation under generally accepted acounting principles.
21
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- ------------------------------------------------------------------------
September 30,
-------------
1996
----
<S> <C>
ASSETS (unaudited)
Current assets
Cash and short-term investments $ 20,914
Receivables - net 307,221
Inventories 362,641
Other current assets 14,367
---------
Total current assets 705,143
Property, plant and equipment 250,815
Less: Allowance for depreciation and amortization 84,530
---------
Net property, plant and equipment 166,285
Other assets 10,949
---------
Total assets $ 882,377
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable $ 7,448
Accrued liabilities 23,902
Debt due within one year 527,447
---------
Total current liabilities 558,797
Liabilities subject to compromise 436,652
Other long-term liabilities 6,123
Stockholder's deficit
Common stock -
Capital in excess of par value 399,405
Retained deficit (518,600)
---------
Total stockholder's deficit (119,195)
---------
Total liabilities and stockholder's
deficit $ 882,377
=========
- ------------------------------------------------------------------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- -----------------------------------------------------------------------------------------
For the six-month periods ended
September 30,
-----------------------------------
1995 1996
---------- ----------
(unaudited)
<S> <C> <C>
Net sales $2,598,721 $2,635,393
Costs and expenses
Cost of goods sold 2,468,127 2,580,860
Selling, general and administrative expenses 98,314 178,972
Depreciation and amortization 11,807 15,674
Goodwill and other intangibles write-off - 207,887
---------- ----------
20,473 (348,000)
Other income (expense) (3,707) 7,753
---------- ----------
Operating income (loss) 16,766 (340,247)
Financing costs
Interest expense 11,266 28,780
Interest income 449 1,394
---------- ----------
Financing costs, net 10,817 27,386
---------- ----------
Income (loss) from continuing
operations before income tax provision 5,949 (367,633)
Income tax provision 2,498 5,897
---------- ----------
Income (loss) from continuing operations 3,451 (373,530)
Gain (loss) from discontinued operations, net of tax (1,317) 482
Extraordinary items - early extinguishment of debt - (8,697)
---------- ----------
Net income (loss) $ 2,134 $ (381,745)
========== ==========
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FoxMeyer Corporation And Subsidiaries (In thousands of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Net
unrealized
holding
gain (loss)
Capital in on Retained
excess of marketable earnings
Common stock par value securities (deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 $ - $398,964 $ 635 $ 39,586
Net income - 2,134
Net unrealized loss on
marketable securities (995)
Dividends declared (10,000)
Other 86
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1995 $ - $398,964 $ (360) $ 31,806
================================================================================================================================
BALANCE MARCH 31, 1996 $ - $399,405 $ - $ (31,005)
Net loss - - - $(381,745)
Dividend to FoxMeyer Health
Corporation - - - $(105,888)
Other - - - 38
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 $ - $399,405 $ - $(518,600)
================================================================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FoxMeyer Corporation and Subsidiaries (In thousands of dollars)
- --------------------------------------------------------------------------------------------------------------------------------
For the six-month periods ended September 30,
-------------------------------------------------
1995 1996
--------- ----------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,134 $ (381,745)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 11,807 15,674
Provision for losses on accounts receivable 1,309 101,591
Provision for losses on inventories - 26,200
Other non-cash charges or write-offs 2,130 3,647
Gain on investments (1,214) (6,414)
Goodwill and other intangibles write-off - 207,887
Extraordinary items - 8,697
Deferred tax provision 2,457 -
Valuation allowance on deferred taxes - 5,897
Write-off of deferred financing fees - 6,652
Cash provided (used) by working capital items, net of acquisitions
Receivables 14,645 (189,990)
Inventories (147,290) 179,428
Other assets (6,287) (4,466)
Accounts payable and accrued liabilities/ liabilities subject to compromise 76,118 (181,994)
Proceeds from accounts receivable financing program - 100,000
Other (1,613) (598)
--------- ----------
Net cash used by operating activities (45,804) (109,534)
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (24,145) (56,192)
Prepayment on long-term commitment - (300)
Purchase of investments (26,532) -
Proceeds from the sale of investments 12,092 1,343
Acquisitions, net of cash acquired (4,609) -
Other (1,356) -
--------- ----------
Net cash used by investing activities (44,550) (55,149)
--------- ----------
Cash flows from financing activities:
Borrowings under revolving credit facilities 671,080 1,084,917
Repayments under revolving credit facilities (568,080) (703,730)
Loans to FoxMeyer Health Corporation (2,300) -
Other debt repayments (477) (198,162)
Loan origination fees (85) (18,942)
Dividends paid on common stock (10,000) -
--------- ----------
Net cash provided by financing activities 90,138 164,083
--------- ----------
Net decrease in cash and short-term investments (216) (600)
Cash and short-term investments, beginning of year 24,551 21,514
--------- ----------
Cash and short-term investments, end of year $ 24,335 $ 20,914
========= ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
FOXMEYER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
NOTE A - CURRENT DEVELOPMENTS
As of September 30, 1996, FoxMeyer Corporation and its subsidiaries (the
"Corporation") were engaged principally in the wholesale distribution of a full
line of pharmaceutical products and health and beauty aids to independent drug
stores, chain stores, hospitals and alternate care facilities in the United
States. The Corporation is a wholly-owned subsidiary of FoxMeyer Health
Corporation ("FoxMeyer Health").
As discussed in Note Q to the Corporation's consolidated financial statements as
of and for the year ended March 31, 1996, the Corporation filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on August 27, 1996. As a result of
uncertainties created by the bankruptcy filing many customers withheld payment
on accounts receivable and, due in part to substantial staff turnover, disputed
items increased resulting in a deterioration of accounts receivable aging. On
November 8, 1996, the U.S. Bankruptcy Court approved a sale of the principal
assets of the Corporation to McKesson Corporation (McKesson). In connection
with the Corporation's asset sale, McKesson paid approximately $23 million in
cash to debtors, paid off approximately $500 million in secured debt and assumed
an additional $75 million in other liabilities.
The sale to McKesson at a value substantially less than the book value of the
tangible net assets indicated that the Corporation's goodwill and other
intangibles at September 30, 1996 of $197.4 million and $10.5 million,
respectively, were impaired and such assets were written off in their entirety.
The deterioration in the Corporation's operations discussed above resulted in
the need for substantial reserves for receivables and inventories, and an
additional valuation allowance for deferred tax assets. The write-off for these
items aggregated $126.0 million and is reflected in the results for the six
month period ended September 30, 1996.
NOTE B - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at the dates of the
financial statements and the reported amounts of revenues and expenses during
such reporting periods. Significant estimates and assumptions made by
management which are included in the accompanying financial statements include
valuation reserves for receivables, inventories and deferred tax assets, and the
impairment of goodwill and other intangibles. Actual results could differ from
these estimates.
The accompanying condensed consolidated balance sheet of the Corporation as of
September 30, 1996, the condensed consolidated statements of operations, cash
flows and stockholder's equity for the six-month periods ended September 30,
1995 and 1996 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited consolidated financial statements
as of and for the year ended March 31, 1996, and include all adjustments
necessary for the fair presentation of financial position, results of
operations, changes in stockholder's equity (deficit) and cash flows. These
condensed consolidated financial statements should be read in conjunction with
the Corporation's consolidated financial statements as of and for the year ended
March 31, 1996. The results of operations for the six month period ended
September 30, 1996 are not indicative of
<PAGE>
the results that may be expected for the entire year due to the significant
write-offs that are included in the period as discussed in Note A.
LIABILITIES SUBJECT TO COMPROMISE: Liabilities subject to compromise represent
certain liabilities incurred by the Corporation prior to its bankruptcy filing
and consist primarily of accounts payable to unsecured creditors at September
30, 1996.
SALES: Generally, sales are recorded when goods are shipped and title passes or
when services are rendered. In addition, for large volume sales of
pharmaceuticals to major self-warehousing drug store chains, the Corporation
acts as an intermediary in the order and subsequent delivery of products
directly from the manufacturer to the customers' warehouses. These sales of
$173.3 million and $275.9 million for the six-month periods ended September 30,
1995 and 1996, respectively, are credited to the same account as their
associated cost of sales and reported on a net basis in the condensed
consolidated statements of operations.
OTHER CHARGES: During the fourth quarter of fiscal 1996 the Corporation recorded
an adjustment to inventory that resulted in a charge to cost of goods sold of
approximately $18.5 million. This adjustment was due primarily to significant
information systems problems incurred in connection with the opening of the
Corporation's new automated national distribution center in July 1995, and the
installation of a new system utilized to record the transfer of product among
the Corporation's facilities. The problems caused by the initial inadequacies of
these systems resulted in the Corporation shipping more product to some of its
customers than it billed, and inflated the amount of credit given to certain of
its customers. The ability of the Corporation to track certain shipments was
significantly impaired as well.
The magnitude of the problem was not identified until subsequent to year end at
which time the Corporation retained the services of an independent third party
to help evaluate the problem and provide assurance the Corporation had
implemented appropriate measures to resolve the problems and prevent them from
recurring. In connection with the national distribution center project, the
Corporation engaged, and relied upon, the services of a number of professional
consulting firms, equipment manufacturers and software development companies to
manage the design, installation and implementation (including adequate training)
of the various systems. As a result of the Corporation's own analysis of this
inventory shortage, discussion with the independent third party retained by the
Corporation to evaluate the problem and based on an evaluation of the nature of
the inventory problems, the lack of sufficient reporting, and the time period
covered, the Corporation does not believe it can reasonably estimate the impact
of the adjustment on a quarter-by-quarter basis. The accompanying condensed
consolidated statements of operations and cash flows for the six month period
ended September 30, 1995 do not reflect any adjustment for these matters.
The Corporation also recorded an additional charge to operating expenses of
approximately $15.5 million during the fourth quarter of fiscal 1996, to
increase its allowance for doubtful accounts. A portion of the increase is due
to billing problems arising from the issues addressed above. The remainder of
the increase is the result of problems primarily related to customers serviced
from facilities closed during late fiscal 1996. As noted above, the Corporation
does not believe it can reasonably estimate the impact of the adjustment on a
quarter-to-quarter basis. The accompanying condensed consolidated statements of
operations and cash flows for the six month period ended September 30, 1995 do
not reflect any adjustment for these matters.
<PAGE>
NOTE C - INVENTORIES
Inventories valued by the LIFO cost method totaled $345.6 million at September
30, 1996. If the FIFO cost method had been used, inventories would have been
$52.5 million higher than the amounts reported in the accompanying consolidated
balance sheet at September 30, 1996. In addition, liquidation of LIFO
inventories carried at lower costs prevailing in prior years, as compared with
the current cost of purchases, had the effect of decreasing the net loss in the
six-month period ended September 30, 1996 by $4.7 million.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands of
dollars):
<TABLE>
<S> <C>
Land $ 4,015
Buildings 61,069
Leasehold Improvements 20,532
Equipment and Furniture 101,142
Software 56,493
Construction in Progress 7,564
--------
Total $250,815
=======================================
</TABLE>
As part of the refinancing discussed in Note E the Corporation elected to
purchase for $22.5 million certain equipment and other personal property
formerly used under an operating lease. In addition, in September 1996, the
Corporation purchased for $25.1 million certain buildings formerly under
operating leases.
NOTE E - DEBT
As discussed in Note J to the Corporation's consolidated financial statements as
of and for the year ended March 31, 1996, on June 19, 1996, the Corporation,
through its wholly-owned subsidiary FoxMeyer Drug Company, entered into new
financing agreements for a $475.0 million revolving credit facility and a $275.0
million accounts receivable financing program, both of which were to mature in
five years. The new accounts receivable financing was increased to $300.0
million on August 2, 1996. Concurrent with the Corporation's filing for
protection under Chapter 11 of the U.S. Bankruptcy Code on August 27, 1996, the
Corporation entered into a new debtor-in-possession financing arrangement which
replaced the revolving credit facility and the accounts receivable financing
program. The arrangement, which expires on August 27, 1997, provides for
borrowings up to $775 million. Advances under the arrangement are limited in
the aggregate to the amount of the eligible borrowing base which is defined as
the sum of 70% of eligible inventory (as defined) and 85% of eligible accounts
receivable (as defined). Interest is calculated daily at .75% plus the higher
of (a) the highest daily prime rate of the five largest member banks of the New
York Clearing House Association or (b) the weighted average rate on overnight
Federal funds transactions. At September 30, 1996, borrowings under this
arrangement were $527.4 million and were classified as current liabilities.
Subsequent to September 30, 1996, McKesson Corporation provided $30 million to
the Corporation through participation in the Corporation's existing debtor-in-
possession financing, which allowed the Corporation to purchase additional
inventory.
<PAGE>
NOTE F - COMMITMENTS AND CONTINGENCIES
As discussed in Note N to the Corporation's consolidated financial statements as
of and for the year ended March 31, 1996, the Corporation was named as a
defendant in a number of class action lawsuits. As a result of the Chapter 11
filing, these lawsuits were stayed.
NOTE G - DIVIDEND TO FOXMEYER HEALTH
Concurrent with the June 19, 1996 refinancing described in Note E, the
Corporation declared and paid a dividend to FoxMeyer Health consisting of
certain assets held by the Corporation, unrelated to its core business, with a
book value of $105.9 million at June 19, 1996. The dividend included
substantially all the assets and liabilities of the discontinued operations,
another subsidiary that is an information service provider and the Corporation's
investments in FoxMeyer Canada, Phar-Mor, and other marketable securities and
the forgiveness of the $30.0 million FoxMeyer Health loan plus accrued interest
due thereon.
<PAGE>
Pro Forma Condensed Financial Information
(Unaudited)
McKesson Corporation's ("McKesson") acquisition of the assets and
assumption of certain liabilities (the "Acquisition") of FoxMeyer Corporation's
healthcare distribution business ("FoxMeyer") will be accounted for under the
"purchase" method of accounting which requires the purchase price to be
allocated to the acquired assets and liabilities on the basis of their estimated
fair values as of the date of acquisition. The following pro forma combined
condensed balance sheet gives effect to the Acquisition as if it occurred on
September 30, 1996 and the pro forma combined condensed statements of income
give effect to the Acquisition as if it occurred on April 1, 1995 and include
adjustments which are directly attributable to the Acquisition and expected to
have a continuing impact on the combined company (collectively, the "Pro Forma
Financial Information"). As the Pro Forma Financial Information has been
prepared based on preliminary estimates of fair values, amounts actually
recorded may change upon additional analysis of individual assets acquired and
liabilities assumed.
The Pro Forma Financial Information and related notes are provided for
informational purposes only and are not indicative of the consolidated financial
position or results of operations of the Company as they may be in the future or
as they might have been had the Acquisition been effected on the assumed dates.
For instance, due to its bankruptcy filing and the resultant deterioration in
its operations during the six-month period ended September 30, 1996, FoxMeyer
wrote-off its goodwill and other intangibles totaling $207.9 million and
established substantial accounts receivable and inventory reserves and an
additional valuation allowance for deferred tax assets totaling $126.0 million.
In addition, McKesson plans to restructure certain of FoxMeyer's business
activities in the future. The Pro Forma Financial Information should be read in
conjunction with the historical consolidated financial statements of McKesson,
and the related notes thereto, which are included in McKesson's Annual Report on
Form 10-K for the year ended March 31, 1996, and the historical financial
statements of FoxMeyer Corporation, and the related notes thereto, presented
elsewhere in this Current Report on Form 8-K/A.
Subsequent to September 30, 1996, McKesson sold its majority-owned
subsidiary, Armor All Products Corporation, and reached a decision to dispose of
its wholly-owned subsidiary Millbrook Distribution Services Inc. Consequently,
both businesses have been reclassified as discontinued operations in the
accompanying Pro Forma Financial Information. In addition, in order to conform
to industry practice, McKesson changed the classification of its sales and cost
of sales associated with sales to customers' warehouses to present only the
gross profit from such sales in revenues. This change is also reflected in the
accompanying Pro Forma Financial Information.
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
(unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
REVISED -------------------------
HISTORICAL HISTORICAL HISTORICAL
MCKESSON ADJUSTMENTS MCKESSON FOXMEYER ADJUSTMENTS COMBINED
----------- ------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $13,716.4 $ (564.7)/a/ $9,953.7 $5,487.4 $ (0.7)/d/ $15,440.4
(186.5)/b/
(3,011.5)/c/
Cost of Sales 12,569.4 (430.4)/a/ 9,038.2 5,254.3 (0.1)/d/ 14,292.4
(89.3)/b/
(3,011.5)/c/
--------- --------- -------- -------- ------ ---------
Gross profit 1,147.0 (231.5) 915.5 233.1 (0.6) 1,148.0
Selling, general and administrative
expenses 872.9 (113.1)/a/ 674.2 289.7 (31.8)/d,e/ 932.1
(85.6)/b/
Interest expense 46.7 (3.7)/a/ 44.4 24.3 68.7
1.4/b/
--------- --------- -------- -------- ------ ---------
Income (loss) before taxes on income 227.4 (30.5) 196.9 (80.9) 31.2 147.2
Taxes on income (loss) (88.7) 7.1/a/ (76.2) 28.0 (3.2)/f/ (51.4)
5.4/b/
--------- --------- -------- -------- ------ ---------
Income (loss) before minority interest 138.7 (18.0) 120.7 (52.9) 28.0 95.8
Minority Interest (3.3) 3.3/b/
--------- --------- -------- -------- ------ ---------
Income (loss) after taxes
Continuing operations 135.4 (14.7) 120.7 (52.9) 28.0 95.8
Discontinued operations 10.4/a/ 14.7 (7.6) 5.1/d/ 12.2
4.3/b/
--------- --------- -------- -------- ------ ---------
Net Income (loss) $ 135.4 $ 0 $ 135.4 $ (60.5) $ 33.1 $ 108.0
========= ========= ======== ======== ====== =========
Net income per share
Fully diluted
Continuing operations $ 2.90 $ 2.59 $ 2.05
Discontinued operations 0.31 0.26
--------- -------- ---------
Total $ 2.90 $ 2.90 $ 2.31
========= ======== =========
Primary
Continuing operations $ 2.90 $ 2.59 $ 2.05
Discontinued operations 0.31 0.26
--------- -------- ---------
Total $ 2.90 $ 2.90 $ 2.31
========= ======== =========
Shares on which net income
per common share were based
Fully diluted 46.7 46.7 46.7
Primary 46.6 46.6 46.6
</TABLE>
a. Represents the reclassification of amounts related to McKesson's
discontinuance of its Millbrook subsidiary based on management's
decision in December 1996 to dispose of such subsidiary.
b. Represents the reclassification of amounts related to McKesson's
discontinuance of its majority-owned Armor All subsidiary which was sold in
December 1996.
c. Represents the reclassification of sales and cost of sales associated with
sales to customers' warehouses to reflect only the gross profit from such
sales in revenues.
d. Reflects the elimination of the amounts related to subsidiaries, investments
and other assets which FoxMeyer Corporation transferred to FoxMeyer Health
Corporation, in the form of a dividend during June 1996 as follows; (i)
revenues of $0.7 million, (ii) cost of sales of $0.1 million, (iii)
investment income of $7.3 million, and (iv) losses from discontinued
operations of $5.1 million.
e. Reflects (i) a net reduction of goodwill and other intangibles amortization
of $22.8 million to eliminate the amortization recognized by FoxMeyer on a
historical basis and to record the amortization of the negative goodwill
resulting from the Acquisition, and (ii) the elimination of FoxMeyer
historical depreciation of $16.3 million due to the reduction to zero of the
carrying value of property, plant and equipment resulting from the excess of
the fair value of net assets acquired over purchase price. Negative goodwill
is being amortized on a straight-line basis over 5 years.
f. Adjusts the historical provision for income taxes to give effect to the pro
forma adjustments discussed above.
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
SIX MONTH PERIOD ENDED SEPTEMBER 30, 1996
(unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
REVISED -----------------------
HISTORICAL HISTORICAL HISTORICAL
MCKESSON ADJUSTMENTS MCKESSON FOXMEYER ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $7,068.0 $ (237.2)/a/ $5,401.5 $2,635.4 $ (0.3)/d/ $8,036.6
(92.8)/b/
(1,336.5)/c/
Cost of Sales 6,496.8 (179.8)/a/ 4,938.5 2,580.9 7,519.4
(42.0)/b/
(1,336.5)/c/
-------- --------- -------- -------- ------ --------
Gross profit 571.2 (108.2) 463.0 54.5 (0.3) 517.2
Selling, general and administrative
expenses 448.0 (53.2)/a/ 356.5 394.8 (19.5)/d,e/ 731.8
(38.3)/b/
Interest expense 22.1 (1.9)/a/ 21.1 27.4 (3.3)/f/ 45.2
0.9/b/
-------- --------- -------- -------- ------ --------
Income (loss) before taxes on income 101.1 (15.7) 85.4 (367.7) 22.5 (259.8)
Taxes on income (loss) (39.4) 1.0/a/ (32.8) (5.9) (4.3)/g/ (43.0)
5.6/b/
-------- --------- -------- -------- ------ --------
Income (loss) before minority interest 61.7 (9.1) 52.6 (373.6) 18.2 (302.8)
Minority Interest (3.5) 3.5/b/
-------- --------- -------- -------- ------ --------
Income (loss) after taxes
Continuing operations 58.2 (5.6) 52.6 (373.6) 18.2 (302.8)
Discontinued operations 1.3/a/ 5.6 0.5 6.1
4.3/b/
Extraordinary items (8.7) (8.7)
-------- --------- -------- -------- ------ --------
Net Income (loss) $ 58.2 $ 0 $ 58.2 $ (381.8) $ 18.2 $ (305.4)
======== ========= ======== ======== ====== ========
Net income (loss) per share
Fully diluted
Continuing operations $ 1.30 $ 1.18 $ (7.03)
Discontinued operations 0.12 0.14
Extraordinary items (0.20)
-------- -------- --------
Total $ 1.30 $ 1.30 $ (7.09)
======== ======== ========
Primary
Continuing operations $ 1.30 $ 1.18 $ (7.03)
Discontinued operations 0.12 0.14
Extraordinary items (0.20)
-------- -------- --------
Total $ 1.30 $ 1.30 $ (7.09)
======== ======== ========
Shares on which net income (loss)
per common share were based
Fully diluted 44.6 44.6 43.1
Primary 44.6 44.6 43.1
</TABLE>
a. Represents the reclassification of amounts related to McKesson's
discontinuance of its Millbrook subsidiary based on management's decision in
December 1996 to dispose of such subsidiary.
b. Represents the reclassification of amounts related to McKesson's
discontinuance of its majority-owned Armor All subsidiary which was sold in
December 1996.
c. Represents the reclassification of sales and cost of sales associated with
sales to customers' warehouses to reflect only the gross profit from such
sales in revenues.
d. Reflects the elimination of the amounts related to subsidiaries, investments
and other assets which FoxMeyer Corporation transferred to FoxMeyer Health
Corporation, in the form of a dividend during June 1996 as follows; (i)
revenues of $0.3 million, and (ii) investment income of $3.9 million.
e. Reflects (i) a net reduction of goodwill and other intangibles amortization
of $11.4 million to eliminate the amortization and depreciation recognized by
FoxMeyer on a historical basis and to record the amortization of the negative
goodwill resulting from the Acquisition, and (ii) the elimination of FoxMeyer
historical depreciation of $12.0 million due to the reduction to zero of the
carrying value of property, plant and equipment resulting from the excess of
the fair value of net assets acquired over purchase price. Negative goodwill
is being amortized on a straight-line basis over 5 years.
f. Represents the reduction of interest expense recognized by FoxMeyer on a
historical basis based on the terms of McKesson's borrowings used to
refinance the FoxMeyer debt assumed.
g. Adjusts the historical provision for income taxes to give effect to the pro
forma adjustments discussed above.
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(unaudited)
(in millions)
<TABLE>
<CAPTION>
PRO FORMA
REVISED -------------------------
HISTORICAL HISTORICAL HISTORICAL
MCKESSON ADJUSTMENTS MCKESSON FOXMEYER ADJUSTMENTS COMBINED
---------- ------------ ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 188.3 (55.0)/b/ $ 133.3 $ 20.9 $ (23.1)/c,d/ $ 131.1
Marketable securities available for sale 57.0 57.0 57.0
Receivables 989.2 (25.6)/a/ 933.0 307.2 (0.3)/d/ 1,239.9
(30.6)/b/
Inventories 1,342.7 (51.8)/a/ 1,283.8 362.6 31.8/d,e/ 1,678.2
(7.1)/b/
Prepaid expenses 41.1 (4.6)/a/ 26.2 14.4 11.1/f,g/ 51.7
(10.3)/b/
Property, plant and equipment - net 388.9 (13.4)/a/ 366.7 166.3 (166.3)/g,h/ 366.7
(8.8)/b/
Goodwill and other intangibles 279.2 (38.5)/b/ 240.7 240.7
Net assets of discontinued operations 54.9/a/ 121.1 3.6/i/ 124.7
66.2/b/
Other assets 277.2 (4.7)/a/ 271.9 11.0 282.9
(0.6)/b/
-------- ------- -------- ------ ------- --------
Total assets $3,563.6 $(129.9) $3,433.7 $882.4 $(143.2) $4,172.9
======== ======= ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Drafts and accounts payable $1,456.3 (30.6)/a/ $1,416.3 $ 7.4 $1,423.7
(9.4)/b/
Other current liabilities 412.3 (8.4)/a/ 387.3 551.5 97.0/d,j,k/ 1,035.8
(16.6)/b/
Post retirement obligations and
noncurrent liabilities 213.2 (0.5)/b/ 212.7 6.2 77.1/l/ 296.0
Long-term debt 445.7 (6.2)/a/ 439.5 439.5
Liability subject to compromise 436.6 (436.6)/m/
Minority interest in subsidiary 58.2 (58.2)/b/
Stockholders' equity (deficit) 977.9 977.9 (119.3) 119.3/n/ 977.9
-------- ------- -------- ------ ------- --------
Total liabilities and
stockholders' equity $3,563.6 $(129.9) $3,433.7 $ 882.4 $(143.2) $4,172.9
======== ======= ======== ======= ======= ========
</TABLE>
a. Represents the reclassification of balances related to McKesson's
discontinuance of its Millbrook subsidiary.
b. Represents the reclassification of balances related to McKesson's
discontinuance of its Armor All subsidiary.
c. Represents cash paid by McKesson to settle the pre-petition claims of
unsecured creditors in connection with the Acquisition.
d. Represents the reclassification to discontinued operations of a FoxMeyer
division to be disposed of by McKesson consisting of cash ($0.1 million),
receivables ($0.3 million), inventory ($3.6 million) and accrued liabilities
($0.4 million).
e. Represents adjustment of FoxMeyer's inventory of $35.4 million to reflect
estimated fair value and to conform FoxMeyer's inventory valuation
methodology with that of McKesson.
f. Represents the elimination of $8.7 million of deferred costs related to debt
which was refinanced by McKesson.
g. Reflects the reclassification from property, plant and equipment to current
assets of the estimated net realizable value of acquired assets to be sold
($19.8 million) by McKesson.
h. Reflects a reduction of the carrying value of long-term assets which will be
retained for use by McKesson of $146.5 million resulting from the excess of
the fair value of net assets acquired over the purchase price.
i. Represents the net realizable value of a FoxMeyer division acquired by
McKesson of which it intends to dispose.
j. Reflects deferred taxes of $47.3 for differences between book and tax basis.
k. Represents an accrual of $50.1 million for estimated
expenses which are directly related to the Acquisition, including transaction
costs, severance, facility closure expenses, and integration costs.
l. Represents the excess of the fair value of net assets acquired over the
purchase price (negative goodwill).
m. Represents the settlement of the pre-petition claims of unsecured creditors
for $23 million. The remaining balance was not assumed by McKesson in the
Acquisition.
n. Reflects the elimination of FoxMeyer's stockholder's equity (deficit).
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
2.1 Asset Purchase Agreement dated as of October 3, 1996 by and among
FoxMeyer Corporation, FoxMeyer Drug Company, Health Mart, Inc.,
FoxMeyer Software, Inc., FoxMeyer Funding, Inc., Healthcare
Transportation System, Inc. and Merchandise Coordinator Services
Corporation as Sellers, and the Registrant, as Purchaser and FoxMeyer
Health Corporation (Exhibit 2.1)/(1)/.
2.2 First Amendment and Waiver to the Asset Purchase Agreement dated as of
November 7, 1996 by and among FoxMeyer Health Corporation, FoxMeyer
Corporation, FoxMeyer Drug Company, Healthcare Transportation System,
Inc., FoxMeyer Software, Inc., FoxMeyer Funding, Inc., Health Mart,
Inc., Merchandise Coordinator Services Corporation d/b/a FoxMeyer
Trading Company, and the Registrant (Exhibit 2.2)/(1)/.
23 Independent Auditors' Consent
</TABLE>
Footnote to Exhibit Index:
(1) Incorporated by reference to designated exhibit to the Company's Form 8-K
filed with the Commission on November 22, 1996, File No. 1-13252.
<PAGE>
Exhibit 23
Independent Auditors' Consent
We consent to the incorporation by reference in McKesson Corporation
Registration Statements No. 33-86536, 333-611 and 333-2871 on Form S-8 of our
report dated June 28, 1996 (March 18, 1997 as to paragraph seven of Note Q),
which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the sale of the principal assets of FoxMeyer Corporation
and its Chapter 7 bankruptcy filing, with respect to the financial statements
of FoxMeyer Corporation as of and for the year ended March 31, 1996 included in
this Current Report on Form 8-K/A of McKesson Corporation filed with the
Securities and Exchange Commission.
Deloitte & Touche LLP
Dallas, Texas
April 28, 1997
