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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13252
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McKESSON HBOC, INC.
A Delaware Corporation
I.R.S. Employer Identification Number
94-3207296
McKessonHBOC Plaza,
One Post Street,
San Francisco, CA 94104
Telephone--Area Code (415) 983-8300
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) (Name of Each Exchange on Which Registered)
Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
Aggregate market value of voting stock held by nonaffiliates of the Registrant
at June 1, 2000: $4,689,007,884
Number of shares of common stock outstanding at June 1, 2000: 284,182,296
Documents Incorporated By Reference
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on July 26, 2000 are incorporated by reference into
Part III of this report.
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TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business........................................................... 3
2. Properties......................................................... 9
3. Legal Proceedings.................................................. 10
4. Submission of Matters to a Vote of Security Holders................ 14
Executive Officers of the Registrant............................... 15
PART II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................ 17
6. Selected Financial Data............................................ 17
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 17
7A. Quantitative and Qualitative Disclosures About Market Risk......... 17
8. Financial Statements and Supplementary Data........................ 17
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure............................................... 17
PART III
10. Directors and Executive Officers of the Registrant................. 18
11. Executive Compensation............................................. 18
12. Security Ownership of Certain Beneficial Owners and Management..... 18
13. Certain Relationships and Related Transactions..................... 18
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 18
Signatures......................................................... 20
2
Item 1. Business
(a) General Development of Business
McKesson HBOC, Inc. ("McKessonHBOC," the "Company" or the "Registrant") is a
leading health care services company in North America, providing supply
management, software solutions, technological innovation and comprehensive
services to the health care industry.
The Company's mission is to advance the health of the health care system by
advancing the success of our partners. The Company's strategic vision is to be
the preferred provider of supply management, information solutions and
services to the health care industry.
Recent Acquisitions and Dispositions
McKessonHBOC has undertaken numerous strategic initiatives in recent years
to further focus the Company on its core health care businesses and enhance
its competitive position. These include the following significant acquisitions
and dispositions:
Health Care Supply Management Segment Acquisitions
. In November 1998, the Company acquired RedLine HealthCare Corporation
("RedLine"), a distributor of medical supplies and services to the
extended-care industry, including long-term homecare supply, for
approximately $233 million in cash.
Health Care Information Technology Segment Acquisitions
. In January 1999, McKesson Corporation ("McKesson") completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common
stock for all of the issued and outstanding shares of common stock of
HBOC. Each share of HBOC common stock was exchanged for 0.37 of a share
of McKesson common stock (the "Exchange Ratio"). McKesson was renamed
McKesson HBOC, Inc. The transaction was structured as a tax-free
reorganization and was accounted for as a pooling of interests.
. In December 1998, the Company acquired Access Health, Inc. ("Access"), a
provider of clinically based care management programs and health care
information services, for the equivalent, after application of the
Exchange Ratio, of approximately 12.7 million shares of Company common
stock.
. In October 1998, the Company acquired IMNET Systems, Inc. ("IMNET"), a
provider of electronic information and document management solutions for
the health care industry, for the equivalent of approximately 3.6
million shares of Company common stock and 0.6 million Company stock
options.
. In December 1997, the Company acquired HPR Inc. ("HPR"), a provider of
clinical information systems for the managed care industry, for the
equivalent of approximately 6.8 million shares of Company common stock.
. In June 1997, the Company acquired Enterprise Systems, Inc. ("ESi"), a
developer of resource management solutions including materials
management, operating room logistics, scheduling and financial
management, for the equivalent of approximately 5.6 million shares of
Company common stock.
. In June 1997, the Company acquired AMISYS Managed Care Systems, Inc.
("AMISYS"), a provider of managed care information systems for the payor
market, for the equivalent of approximately 4.0 million shares of
Company common stock.
e-Health Segment Acquisition
. In November 1999, the Company acquired Abaton.com, a provider of
internet-based clinical applications for use by physician practices,
pharmacy benefit managers, benefit payors, laboratories and pharmacies,
for approximately $95 million in cash and the assumption of employee
stock incentives.
3
Disposition
. In February 2000, the Company disposed of its last non-health care
business, its wholly-owned subsidiary McKesson Water Products Company,
for approximately $1.1 billion in cash.
(b) Financial Information About Industry Segments
Financial information about the Company's business segments for the three
years ended March 31, 2000 is included in Financial Note 17 to the
consolidated financial statements, "Segments of Business," appearing on pages
F-62 to F-64 of this Annual Report on Form 10-K.
(c) Narrative Description of Business
(1) Description of Segments of Business
The Company is organized under three operating segments: Health Care Supply
Management, Health Care Information Technology and e-Health. Within the United
States and Canada, the Health Care Supply Management segment is a leading
wholesale distributor of ethical and proprietary drugs, medical-surgical
supplies and health and beauty care products principally to chain and
independent drug stores, hospitals, alternate care sites, food stores and mass
merchandisers. The Health Care Information Technology segment delivers
enterprise-wide patient care, clinical, financial, managed care, payor and
strategic management software solutions, as well as networking technologies,
electronic commerce, information outsourcing and other services to health care
organizations throughout the United States and certain foreign countries. The
e-Health segment provides internet-based clinical applications for use by
physician practices, pharmacy benefit managers, benefit payors, laboratories
and pharmacies.
The Company generated annual sales of $36.7 billion, $30.0 billion, and
$22.1 billion in fiscal years 2000, 1999, and 1998, respectively;
approximately $35.5 billion, 97%, $28.5 billion, 95%, and $20.6 billion, 93%,
respectively, in the Health Care Supply Management segment; approximately $1.2
billion, 3%, $1.5 billion, 5%, and $1.4 billion, 7%, respectively, in the
Health Care Information Technology segment; and approximately $0.4 million in
fiscal 2000, in the e-Health segment.
Health Care Supply Management
Products and Markets
Through its Health Care Supply Management segment, McKessonHBOC is a leading
distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products in North America. The Company's Health Care
Supply Management segment consists of the Pharmaceutical Group, the Medical
Group, the Automation Group and the Pharmaceutical Partners Group
(collectively, the "Supply Management Business").
The Pharmaceutical Group supplies pharmaceuticals and health care related
products to three primary customer segments: retail chains (pharmacies, food
stores, and mass merchandisers), retail independent pharmacies and
institutional providers (including hospitals, alternate-site providers, and
integrated health networks) in all 50 states. These three customer categories
represented approximately 42.4%, 25.5%, and 32.1%, respectively, of the
Pharmaceutical Distribution Group's revenues in fiscal 2000. Operating under
the trade names EconoMost(R) and EconoLink(R) and a number of related service
marks, the Company promotes electronic order entry systems and a wide range of
computerized merchandising and asset management services for pharmaceutical
retailers and health care institutions. The Company has developed advanced
marketing programs and information services for retail pharmacies. These
initiatives include the Valu-Rite(R), Valu-Rite/CareMax(R) and Health Mart(R)
retail networks, the OmniLink(R) centralized pharmacy technology platform,
which offers retail
4
network members connectivity with managed care organizations while promoting
compliance with managed care plans, and .com pharmacy solutions(SM), a service
initiative that allows independent pharmacies to set up their own websites for
selling OTC products and prescription refills to their customers. The
Company's nationwide network of distribution centers utilizes the Acumax(R)
Plus warehouse management system which provides real-time inventory statistics
and tracks products from the receiving dock to shipping through scanned bar
code information and radio frequency signals with accuracy levels above 99% to
help ensure that the right product arrives at the right time and place for
both the Company's customers and their patients. The Company believes that its
financial strength, purchasing leverage, affiliation networks, nationwide
network of distribution centers, and advanced logistics and information
technologies provide competitive advantages to its pharmaceutical distribution
operations.
The Medical Group offers a full range of medical-surgical supplies,
equipment, logistics and related services across the continuum of health care
providers: hospitals, physicians' offices, long-term care, and homecare. The
Medical Group includes the operations of McKesson General Medical Corporation
("MGM"), RedLine, Hawk Medical Supply and MedPath. The Medical Group is the
nation's third largest distributor of medical-surgical supplies to hospitals
(acute care) and a leading supplier of medical-surgical supplies to the full-
range of alternate-site health care facilities, including physicians and
clinics (primary care), long-term care and homecare sites (extended care). The
Medical Group's Red.e.NetSM site provides an advanced way of ordering medical-
surgical products over the Internet and its Optipak program allows physicians
to customize ordering of supplies according to individual surgical procedure
preferences.
The Automation Group manufactures and markets automated pharmacy systems and
services to hospitals and retail pharmacies through its McKesson Automated
Healthcare ("MAH") and McKesson Automated Prescription Systems ("APS") units.
Key products of MAH include the ROBOT-Rx(TM) system, a robotic pharmacy
dispensing and utilization tracking system that enables hospitals to lower
pharmacy costs while significantly improving the accuracy of pharmaceutical
dispensing, AcuDose-Rx(TM) unit-based cabinets which automate the storage,
dispensing and tracking of commonly used drugs in patient areas, and AcuScan-
Rx(TM) which records, automates, and streamlines drug administration and
medication information requirements through bar code scanning at the patient's
bedside. APS manufactures a wide range of pharmaceutical dispensing and
productivity products including Baker Cells(TM) and Baker Cassettes(TM),
modular units that provide pharmacists with quick and accurate counting
capabilities combined with efficient space management; Autoscript(TM), a
robotic pharmacy dispensing system that enables retail pharmacies to lower
pharmacy costs through high volume dispensing while improving accuracy through
the use of bar code technology; and Pharmacy 2000(TM), an interactive
workstation system which combines software and automation to improve
productivity throughout the pharmacy prescription sales process.
The Pharmaceutical Partners Group combines the Company's pharmaceutical and
biotechnology services in a single group that is focused on helping
manufacturers meet their marketing goals. The Pharmaceutical Partners Group
provides sales, marketing and other services to pharmaceutical manufacturers
and biotechnology customers including distribution management and
reimbursement services, services in support of clinical trials and biomedical
research, direct mail and fulfillment services, decision support and data
analysis, full service sales force automation, business analytics, and
integrated contract sales and marketing support services.
Also included in the Supply Management Business is Zee Medical, Inc., a
distributor of first-aid products and safety supplies to industrial and
commercial customers and Med Management, a leading pharmacy management,
purchasing, consulting and information services company. International
operations include Medis Health and Pharmaceutical Services, Inc. ("Medis"), a
wholly-owned subsidiary and the largest pharmaceutical distributor in Canada;
and the Company's 22% equity interest in Nadro, S.A. de C.V., a leading
pharmaceutical distributor in Mexico.
5
Intellectual Property
The principal trademarks and service marks of the Health Care Supply
Management segment are: ECONOMOST(R), ECONOLINK(R), VALU-RITE(R), Valu-
Rite/CareMax(R), OmniLink(R), Health Mart(R), ROBOT-Rx(TM), AcuDose-Rx(TM),
AcuScan(TM), Baker Cells(TM), Baker Cassettes(TM), Baker Universal(TM),
Autoscript(TM), Pharmacy 2000(TM), coSource(R) and .com Pharmacy Solutions(SM).
The Company also owns other registered and unregistered trademarks and service
marks and similar rights used by the Health Care Supply Management segment.
All of the principal marks are registered in the United States or registration
has been applied for with respect to such marks. The United States federal
registrations of these trademarks and service marks have ten or twenty-year
terms, depending on date of registration. All are subject to unlimited
renewals. The Company believes this business has taken all necessary steps to
preserve the registration and duration of its trademarks and service marks,
although no assurance can be given that it will be able to successfully
enforce or protect its rights thereunder in the event that they are subject to
third-party infringement claims. The Company does not consider any particular
patent, license, franchise or concession to be material to the business of the
Health Care Supply Management segment.
Competition
In every area of operations, the Company's distribution businesses face
strong competition both in price and service from national, regional and local
full-line, short-line and specialty wholesalers, service merchandisers, self-
warehousing chains, and from manufacturers engaged in direct distribution. The
Health Care Supply Management segment faces competition from various other
service providers (including specialized business-to-business e-commerce
service providers) and from pharmaceutical and other health care manufacturers
(as well as other potential customers of the Health Care Supply Management
segment) which may from time to time decide to develop, for their own internal
needs, supply management capabilities which are provided by the Health Care
Supply Management segment and other competing service providers. Price,
quality of service, and, in some cases, convenience to the customer are
generally the principal competitive elements in the Health Care Supply
Management segment.
Health Care Information Technology
Products and Markets
The Company's Health Care Information Technology segment provides patient
care, clinical, financial, supply chain, managed care and strategic management
software solutions for payors and providers in the health care industry. The
segment also provides a full complement of network communications
technologies, including wireless capabilities, as well as outsourcing services
in which its staff manages and operates data centers, information systems,
medical call centers, organizations and business offices of health care
institutions of various sizes and structures. In addition, the segment offers
a wide range of care management and electronic commerce services, including
electronic medical claims and remittance advice services, and statement
processing.
The Health Care Information Technology segment markets its products and
services to integrated delivery networks, hospitals, physicians' offices, home
health providers, pharmacies, reference laboratories, managed care providers
and payors. The segment also sells its products and services internationally
through subsidiaries and/or distribution agreements in the United Kingdom,
France, the Netherlands, Canada, Israel, Ireland, Saudi Arabia, Kuwait,
Australia, New Zealand and Puerto Rico.
The Health Care Information Technology segment's product portfolio is
organized into nine components: acute-care or hospital information systems
("HIS"), infrastructure, community health management, clinical management,
practice management, access management, resource management, enterprise
management and payors.
6
Hospital Information Systems. HIS applications automate the operation of
individual departments and their respective functions within the in-patient
environment. The Company's HIS systems include applications for patient care,
laboratory, pharmacy, radiology, financial, supply chain and management
decision-making.
Infrastructure. Infrastructure components include local, wide area and
value-added networks, wireless technology, electronic data interchange (EDI)
capabilities, an interface manager and a data repository. Other infrastructure
applications include document imaging as well as an enterprise master person
index.
Community Health Management. Community health management applications and
services focus on managing the demand for health care services by predicting
what care may be required, preventing illness and managing the care required
as cost effectively as possible. Components of the Company's community health
management strategy include care management services and medical call center
management, data analysis to provide early identification of members with
high-risk/high-cost diseases and health conditions, guidelines and standards
to enable enterprises to improve care management processes, and computer
telephony and Internet links to provide electronic connectivity between
providers and consumers.
Clinical Management. The segment's point-of-care applications are designed
to allow physicians and other clinicians to document patient information,
establish and manage guidelines or standards of care, enter and manage orders,
and view all results and clinical information.
Practice Management. Practice management applications provide a
comprehensive solution for medical groups and physician enterprises, whether
they are independent or part of an integrated health network. With business
office management as its cornerstone, the Company's practice management
solution also includes risk management and managed care capabilities, clinical
systems for managing patient care, and scheduling, as well as decision
support, computer telephony, data quality analysis and electronic commerce.
Access Management. Access management solutions include indexing applications
that organize the vast amounts of information collected about a person
throughout the enterprise, allowing patients to be tracked and information
about them to be accessed wherever they go for care as well as scheduling
systems that instantly register and schedule patients, and the resources
needed to serve them, anywhere in the enterprise.
Resource Management. Resource management applications help health care
organizations better manage people, facilities, supplies, services and
equipment by integrating materials management, accounts payable/general
ledger, surgical services management and staff scheduling functions.
Enterprise Management. Enterprise management applications focus on providing
managers with the clinical, financial and other information necessary to
contain costs while ensuring high-quality care, including utilization
management, accounts receivable management and managed care contracting and
member management applications.
Payors. Payor solutions support a full range of health insurance and managed
care needs. Solutions include businesswide systems that automate all financial
and administrative operations, as well as clinically intelligent solutions
that monitor quality of care and support provider credentialing and profiling,
claims audit, care management, utilization and financial-based analysis.
In addition to the segment's product offerings described above, the segment
also provides the following services:
Enterprise Services. Enterprise services include UNIX processing support,
remote system monitoring and single-point issue resolution. In addition, the
Health Care Information Technology segment's service path implementation
methodology provides a flexible suite of implementation services that can
include an enterprise project manager to assist in planning, installing and
supporting multiple Company products. Other service areas include education,
enterprise consulting, application-specific services, computer telephony and
care management services.
7
Connect Technology Group. The Connect Technology Group provides network
installation and support, as well as a suite of information services that
extend local area networks outside of the hospital to include payors, vendors,
financial institutions and the Internet.
Outsourcing Services Group. The Health Care Information Technology segment
has been in the outsourcing business in the United States for more than 20
years and offers outsourcing services in the United Kingdom as well.
Outsourcing services include managing hospital data processing operations
(traditionally known as facilities management) as well as strategic management
services in information systems planning, receivables management, revenue
cycle outsourcing, business office administration and major system
conversions.
Electronic Commerce Group. The Health Care Information Technology segment's
e-commerce capabilities in EDI service include claims processing, eligibility
verification and remittance advice as well as statement printing.
Research and Development
The Health Care Information Technology segment's product development effort
applies computer technology and installation methodologies to specific
information processing needs of hospitals. Management believes a substantial
and sustained commitment to such research and development ("R&D") is important
to the long-term success of the business.
Investment in software development includes both R&D expense as well as
capitalized software. The Health Care Information Technology segment expended
$110.0 million (9.1% of revenue) for R&D activities during fiscal 2000,
compared to $114.7 million (7.5% of revenue) and $112.5 million (7.9% of
revenue) during 1999 and 1998, respectively. The Health Care Information
Technology segment capitalized 31%, 31% and 26% of its R&D expenditures in
2000, 1999 and 1998, respectively.
Information regarding R&D is included in Financial Note 1 to the
consolidated financial statements, "Significant Accounting Policies,"
appearing on pages F-37 to F-39 of this Annual Report on Form 10-K.
Intellectual Property
The substantial majority of technical concepts and codes embodied in the
Health Care Information Technology segment's computer programs and program
documentation are not protected by patents or copyrights but constitute trade
secrets that are proprietary to the Company. The principal trademarks and
service marks of the Health Care Information Technology segment are:
AMISYS(R), ASK-A-NURSE(R), Connect 2000SM, Credentialer(R), CRMS(TM), Episode
Profiler(R), HealthQuest(R), InterQual(R), Paragon(R), Patterns Profiler(TM),
Pathways 2000(R), America's Source for Health Care Answers(R) and
TRENDSTAR(R). The Company also owns other registered and unregistered
trademarks and service marks and similar rights used by the Health Care
Information Technology segment. All of the principal trademarks and service
marks are registered in the United States, in addition to certain other
jurisdictions. The United States federal registrations of these trademarks
have terms of ten or twenty years, depending on date of registration, and are
subject to unlimited renewals. The Company believes this business has taken
all necessary steps to preserve the registration and duration of its
trademarks and service marks, although no assurance can be given that it will
be able to successfully enforce or protect its rights thereunder in the event
that they are subject to third-party infringement claims. The Company does not
consider any particular patent, license, franchise or concession to be
material to the business of the Health Care Information Technology segment.
Competition
The Company's Health Care Information Technology segment experiences
substantial competition from many firms, including other computer services
firms, consulting firms, shared service vendors, certain hospitals and
hospital groups, hardware vendors and internet-based companies with technology
applicable to the health care industry. Competition varies in size from small
to large companies, in geographical coverage, and in scope and breadth of
products and services offered.
8
e-Health
Products and Markets
e-Health sales and marketing efforts are directed at large physician
practices and physician practice management organizations, integrated delivery
systems, clinical laboratories, pharmacy benefit managers and health
maintenance organizations. The e-Health segment offers a clinical suite of
products consisting of browser-based software applications which may be
purchased and used separately or collectively to automate internal and
external clinical communications including: multi-laboratory order entry and
result reporting, electronic prescribing within formulary and medical
guidelines, and advanced task management and medical record documentation
including web-based dictation, transcription and attestation, most of which
are done via paper today.
Intellectual Property
The principal trademarks and service marks of the e-Health segment are:
Abaton.com(SM), ClinChart.com(SM), ClinRx.com(SM), ClinWorkflow.com(SM),
ClinReports.com(SM), ClinLabs.com(SM) and Abaton.com Clinical Suite(SM). A
utility patent application has been filed with the U.S. Patent and Trademark
Office for the clinical transaction system. The Company has also registered the
domain names for each of its product names.
Competition
The e-Health market is becoming increasingly competitive as health care
entities recognize the need for fully integrated web-based solutions.
Competitors include practice management vendors, traditional hospital
information companies and internet-based companies with technology applicable
to the health care industry.
(2) Other Information About the Business
Customers--The Company's recent strategy has been to build relationships
with large customers that are achieving rapid growth. A significant portion of
the Company's increase in sales has been to a limited number of these large
customers. During the fiscal year ended March 31, 2000, sales to the Company's
ten largest customers accounted for approximately 52% of the Company's
revenues. Sales to the Company's largest customer, Rite Aid Corporation,
represented approximately 15% of the Company's fiscal 2000 revenues.
Environmental Legislation--The Company sold its chemical distribution
operations in fiscal 1987. In connection with the disposition of those
operations, the Company retained responsibility for certain environmental
obligations and has entered into agreements with the Environmental Protection
Agency and certain states pursuant to which it is or may be required to
conduct environmental assessments and cleanups at several closed sites. These
matters are described further in "Item 3. Legal Proceedings" on pages 10 to 14
of this report. Other than any capital expenditures which may be required in
connection with those matters, the Company does not anticipate making
substantial capital expenditures for environmental control facilities or to
comply with environmental laws and regulations in the future. The amount of
capital expenditures expended by the Company for environmental compliance was
not material in fiscal 2000 and is not expected to be material in the next
fiscal year.
Employees--At March 31, 2000, the Company employed approximately 21,100
persons.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Information as to foreign operations is included in Financial Note 17 to the
consolidated financial statements "Segments of Business," appearing on pages
F-62 to F-64 of this Annual Report on Form 10-K.
Item 2. Properties
Because of the nature of the Company's principal businesses, plant,
warehousing, office and other facilities are operated in widely dispersed
locations. The warehouses are typically owned or leased on a long-term basis.
9
The Company considers its operating properties to be in satisfactory condition
and adequate to meet its needs for the next several years without making
capital expenditures materially higher than historical levels. Information as
to material lease commitments is included in Financial Note 12 to the
consolidated financial statements, "Lease Obligations," appearing on page F-52
of this Annual Report on Form 10-K.
Item 3. Legal Proceedings
I. Accounting Litigation
Since the Company's announcements in April, May and July of 1999 that the
Company determined certain software sales transactions in its Information
Technology Business unit, formerly HBOC, were improperly recorded as revenue
and reversed, and as of June 1, 2000, seventy-nine lawsuits have been filed in
various state and federal courts throughout the nation against the Company,
certain of its current or former officers or directors, and in some of the
cases other defendants, including Bear Stearns & Co., Inc. and Arthur
Andersen LLP.
A. Federal Actions
Sixty-one of these actions have been filed in Federal Court (the "Federal
Actions"). Of these, fifty-eight were filed in the U.S. District Court for the
Northern District of California, one in the Northern District of Illinois
(which has been voluntarily dismissed without prejudice), one in the Eastern
District of Pennsylvania (which has been transferred to the Northern District
of California), and one in the Western District of Louisiana.
On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District
of California issued an order consolidating fifty-three of the Federal Actions
into one action entitled In re McKesson HBOC, Inc. Securities Litigation (Case
No. C-99-20743 RMW) (the "Consolidated Action"). On December 22, 1999,
Judge Whyte appointed the New York State Common Retirement Fund as lead
plaintiff ("Lead Plaintiff") and approved Lead Plaintiff's choice of counsel.
Judge Whyte's December 22 order also consolidated another class action, Jacobs
v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), into the Consolidated Action.
By order dated February 7, 2000, Judge Whyte coordinated an action alleging
ERISA claims, Chang v. McKesson HBOC, Inc., et al. (Case No. C-00-20030 RMW)
and a derivative action, Cohen v. McCall et al. (Case No. C-99-20916 RMW) with
the Consolidated Action.
On February 25, 2000, Lead Plaintiff filed an Amended and Consolidated Class
Action Complaint (the "Consolidated Complaint"). The Consolidated Complaint
names as defendants the Company, certain of its current or former officers or
directors, Arthur Andersen LLP and Bear Stearns & Co., Inc. The Consolidated
Complaint generally alleges that the defendants violated the federal
securities laws in connection with the events leading to the Company's need to
restate its financial statements. The Consolidated Complaint seeks (i) a
declaration that the action is maintainable as a class action and that the
Lead Plaintiff is a proper class representative, (ii) unspecified compensatory
damages, (iii) costs and expenses of suit including reasonable attorneys'
fees, and (iv) any other relief deemed proper by the Court. On April 25, 2000,
the Company filed a motion to dismiss and/or to strike portions of the
Consolidated Complaint. Lead Plaintiff has not yet filed a written opposition
to the Company's motion to dismiss, which is scheduled to be heard by the
Court on September 15, 2000. Under the Private Securities Litigation Reform
Act of 1995, all discovery is stayed in the Consolidated Action during the
pendency of this motion.
On April 27, 2000, Lead Plaintiff in the Consolidated Action filed a
purported class action complaint against HBOC in the U.S. District Court for
the Northern District of California (Case No. C-99-00 20472 PVT). The
complaint incorporates by reference the allegations and causes of action set
out in the Consolidated Complaint, and seeks to hold HBOC directly liable for
the wrongful conduct alleged in the complaint in the event the Court
determines that the Company is not the successor in interest to HBOC. No
response has yet been filed to the complaint.
Two other actions, Bea v. McKesson HBOC, Inc. et al. (Case No. C-00-20072
RMW), and Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW), have
also been filed in the Northern District of California. By stipulation, Bea
has been consolidated with the Consolidated Action and Cater has been stayed
pending the resolution of the Company's motion to dismiss the Consolidated
Complaint. One other action,
10
Baker v. McKesson HBOC, Inc. et al. (Case No. CV 00-0522) has been filed in
the U.S. District Court for the Western District of Louisiana. The Company has
moved to transfer Baker to the Northern District of California, or
alternatively, to stay pending the outcome of the Consolidated Action.
Finally, one additional action, Rosenberg v. McCall et al. (Case No. 1:99-CV-
1447 JEC) was filed in the Northern District of Georgia and subsequently
transferred to the Northern District of California, but that action names only
two former officers and does not name the Company.
B. State Actions
Eighteen actions have also been filed in various state courts in California,
Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the "State Actions").
Like the Consolidated Action, the State Actions generally allege misconduct by
the defendants in connection with the events leading to the Company's need to
restate its financial statements. Two of the State Actions are derivative
actions: Ash, et al. v. McCall, et al. (Del C.A. No. 17132) filed in the
Delaware Chancery Court, and Mitchell v. McCall et al. (Case. No. 304415)
filed in California Superior Court, City and County of San Francisco. The
Company has moved to dismiss both of these actions.
Five of the State Actions are class actions. Three of these were filed in
Delaware Chancery Court: Derdiger v. Tallman et al. (Case No. 17276), Carroll
v. McKesson HBOC, Inc. (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et.
al. (Case No. 17282-NC); and two were filed in Delaware Superior Court:
Edmondson v. McKesson HBOC, Inc. (Case No. 99-951) and Caravetta v. McKesson
HBOC, Inc. (Case No. 00C-04-214 WTQ). The Carroll and Kelly actions have been
voluntarily dismissed without prejudice. The Company has removed Edmondson to
Federal Court in Delaware, and plaintiffs filed a motion to remand, which is
pending. The Company has moved to stay Derdiger, and has moved to dismiss the
Caravetta complaint.
Eleven of the State Actions are individual actions which have been filed in
various state courts. Four of these were filed in the California Superior
Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al.
(Case No. 303857), The State of Oregon by and through the Oregon Public
Employees Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 307619),
Utah State Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 311269),
and Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case
No. 311747). The Court has sustained the Company's demurrer to the Yurick
action without leave to amend with respect to all causes of action except the
claims for common law fraud and negligent misrepresentation. The Court
sustained the Company's demurrer to these causes of action with leave to
amend. The Court has also stayed Yurick pending the commencement of discovery
in the Consolidated Action. By stipulation of the parties and order of the
Court, all proceedings other than motions to test the sufficiency of the
complaint in Oregon have been stayed pending the commencement of discovery in
the Consolidated Action. The Company has moved to dismiss the amended
complaint in Oregon, and has until June 20, 2000 to respond to the complaints
in Utah and Minnesota. Three actions have been filed in Georgia State Court:
Moulton v. McKesson HBOC, Inc. (Case No. 98-13176-9), Powell v. McKesson HBOC,
Inc. e. al. (Case No. 1999-CV-15443), and Adler v. McKesson HBOC, Inc. et al.
(Case No. 99-C-7980-3). The Company has answered the Moulton and Adler
complaints, and Powell has been dismissed without prejudice. One action has
been filed in Delaware Superior Court, Kelly v. McKesson HBOC, Inc. et al.
(Case No. 99C-09-265 WCC), one in the Pennsylvania Court of Common Pleas,
Chester County, Grant v. McKesson HBOC, Inc. (Case No. 99-03978), one in
Colorado District Court, Boulder County, American Healthcare Fund II v. HBO &
Company et al. (Case No. 00-CV-1762), and one in Louisiana State Court,
Rapides Parish, Baker v. McKesson HBOC, Inc. et al. (Case No. CV-199018-A).
The Company has moved to dismiss the complaints in Kelly, Grant and American
Healthcare Fund II, and has removed Baker to Federal Court in Louisiana.
In addition, the United States Attorney's Office for the Northern District
of California and the San Francisco District Office of the United States
Securities and Exchange Commission ("SEC") have also commenced investigations
in connection with the matters relating to the restatement of previously
reported amounts for HBOC described above. These investigations are ongoing.
The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amounts of, or
potential range of, loss with respect to these proceedings. In addition, the
timing of the final resolution of these proceedings is uncertain. The range of
possible resolutions of
11
these proceedings could include judgments against the Company or settlements
that could require substantial payments by the Company which could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
II. Other Litigation and Claims:
In addition to commitments and obligations in the ordinary course of
business, the Company is subject to various claims, other pending and
potential legal actions for product liability and other damages,
investigations relating to governmental laws and regulations and other matters
arising out of the normal conduct of the Company's business. These include:
A. Antitrust Matters
The Company currently is a defendant in numerous civil antitrust actions
filed since 1993 in federal and state courts by retail pharmacies. The federal
cases have been coordinated for pretrial purposes in the United States
District Court in the Northern District of Illinois and are known as MDL 997.
MDL 997 consists of a consolidated class action (the "Federal Class Action")
as well as approximately 109 additional actions brought by approximately 3,500
individual retail, chain and supermarket pharmacies (the "Individual
Actions"). There are numerous other defendants in these actions including
several pharmaceutical manufacturers and several other wholesale distributors.
These cases allege, in essence, that the defendants have violated the Sherman
Act by conspiring to fix the prices of brand name pharmaceuticals sold to
plaintiffs at artificially high, and non-competitive levels, especially as
compared with the prices charged to mail order pharmacies, managed care
organizations and other institutional buyers. On January 19, 1999, the
District Court entered its written opinion and judgment granting defendants'
motion for a judgment as a matter of law. On July 13, 1999, the Seventh
Circuit affirmed the District Court's judgment as to the dismissal of the
claims against the wholesalers. The Individual Actions, which are still
pending in the Northern District of Illinois for pre-trial purposes, will be
remanded to their original transferor jurisdictions for trial. The
wholesalers' motion for partial summary judgment that they should not be
liable for any damages resulting from drugs sold prior to four years from the
October 1997 amended complaints in those cases was granted. Most of the
individual cases brought by chain stores have been settled.
The currently pending state court antitrust cases against the Company are in
California, Mississippi and Tennessee. The state cases are based essentially
on the same facts alleged in the Federal Class Action and Individual Actions
and assert violations of state antitrust and/or unfair competition laws. The
case in California (referred to as Coordinated Special Proceeding,
Pharmaceutical Cases, I, II & III) is pending in Superior Court for the State
of California, City and County of San Francisco. A class of retail pharmacies
has been certified and the case is trailing MDL 997. The case in Mississippi
(Montgomery Drug Co., et al. v. The Upjohn Co., et al.) is pending in the
Chancery Court of Prentiss County, Mississippi. The Chancery Court has held
that the case may not be maintained as a class action. The Tennessee case,
filed in Knoxville, is a class action on behalf of consumers who purchased
brand-name drugs from retail stores in fourteen states. The claims, brought
under Tennessee law, allege deceptive trade practices, conspiracy to fix
prices, price discrimination and fraudulent concealment. On July 6, 1998, the
court conditionally certified the case as a multi-state class action. A motion
to dismiss the complaint is pending on the grounds, among others, that (i)
plaintiff class members are indirect purchasers and are not entitled to bring
an action against the wholesalers and manufacturers, and (ii) the state
antitrust statutes on which the class relied do not apply to interstate
commerce. A motion is also pending for permission to file an interlocutory
appeal from the order denying defendants' motion to vacate the order granting
conditional class certification.
In each of the cases, plaintiffs seek remedies in the form of injunctive
relief and unquantified monetary damages, attorneys' fees and costs.
Plaintiffs in the California cases also seek restitution. In addition, treble
damages are sought in the Federal Class Action, the Individual Actions, the
California case and the Tennessee case and statutory penalties of $500 per
violation are sought in the Mississippi case. The Company has entered into a
judgment sharing agreement with certain pharmaceutical manufacturer
defendants, which provides generally that the Company (together with the other
wholesale distributor defendants) will be held harmless by
12
such pharmaceutical manufacturer defendants and will be indemnified against
the costs of adverse judgments, if any, against the wholesaler and
manufacturers in these or similar actions, in excess of $1 million in the
aggregate per wholesale distributor defendant.
B. FoxMeyer Litigation
In January 1997, the Company and twelve pharmaceutical manufacturers (the
"Manufacturer Defendants") were named as defendants in the matter of FoxMeyer
Health Corporation vs. McKesson, et al. filed in the District Court in Dallas
County, Texas ("the Texas Action"). Plaintiff (the parent corporation of
FoxMeyer Drug Company and FoxMeyer Corporation, collectively "FoxMeyer
Corporation") alleges that, among other things, the Company (i) defrauded
Plaintiff, (ii) competed unfairly and tortiously interfered with FoxMeyer
Corporation's business operations, and (iii) conspired with the Manufacturer
Defendants, all in order to destroy FoxMeyer Corporation's business, restrain
trade and monopolize the marketplace, and allow the Company to purchase that
business at a distressed price. Plaintiff seeks relief against all defendants
in the form of compensatory damages of at least $400 million, punitive
damages, attorneys' fees and costs. The Company answered the complaint,
denying the allegations and removed the case to federal bankruptcy court in
Dallas.
In March 1997, the Company and the Manufacturer Defendants filed a complaint
in intervention against FoxMeyer Health (now known as Avatex Corporation) in
the action filed against Avatex by the FoxMeyer Unsecured Creditors Committee
in the United States Bankruptcy Court for the District of Delaware. The
complaint in intervention seeks declaratory relief and an order enjoining
Avatex from pursuing the Texas Action.
In November 1998, the Delaware court granted the Company's motion for
summary judgment as to the first three counts asserted in the Texas Action on
the ground of judicial estoppel. The Company filed a renewed motion of summary
judgment on the four remaining counts of Avatex's complaint in the Texas
Action which was denied without prejudice by the Delaware court on August 9,
1999. In addition, the Company filed cross-claims against the Trustee and
debtors seeking the same relief as sought in the Company's complaint against
Avatex. Based on the order granting summary judgment as to the first three
counts, the Texas bankruptcy court dismissed those counts with prejudice and
ordered the Texas Action remanded to state court. On November 30, 1998, the
Company and the other Defendants filed a notice of appeal to the District
Court from the remand ruling as well as the August 1997 ruling denying
defendants' motion to transfer the Texas Action to Delaware. In addition, the
Company has filed a counter-claim and cross-claim against Avatex and Messrs.
Estrin, Butler and Massman in the Texas Action, asserting various claims of
misrepresentation and breach of contract. The District Court upheld the remand
order and denied as moot the appeal from the denying transfer. A cross-appeal
by Avatex from the order dismissing the three counts with prejudice is still
pending. The Company and several of the other defendants appealed to the Court
of Appeals the ruling upholding the order denying transfer but subsequently
moved to dismiss the appeal with prejudice, which motion was granted and the
appeal was dismissed on October 4, 1999. As a result, the Texas Action is now
pending in Texas state court, and the parties presently are engaged in
discovery on the merits of the various claims asserted in the Texas Action.
C. Product Liability Litigation
The Company has been named as a defendant, or has received from customers
tenders of defense, in twenty-nine pending cases alleging injury due to the
diet drug combination of fenfluramine or dexfenfluramine and phentermine. All
of the cases are pending in the state courts of California, Idaho, Missouri,
Nevada and Nebraska. The Company has tendered the cases to the manufacturers
of the drugs and is currently defending the cases pending resolution of its
negotiations with the manufacturers.
Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the
"Subsidiaries") are defendants in approximately fifty cases in which
plaintiffs claim that they were injured due to exposure, over many years, to
the latex proteins in gloves manufactured by numerous manufacturers and
distributed by a number of distributors, including the Subsidiaries. Efforts
to resolve tenders of defense to their suppliers are continuing. The
Subsidiaries' insurers are providing coverage for these cases, subject to the
applicable deductibles.
13
There are five remaining state court class actions in New York, Oklahoma,
Pennsylvania, South Carolina and Texas filed against MGM on behalf of all
health care workers in those states who suffered accidental needle sticks that
exposed them to potentially contaminated bodily fluids, arising from MGM's
distribution of allegedly defective syringes. MGM's suppliers of the syringes
are also named defendants in these actions. The tender of these cases has been
accepted by the two major suppliers. By this acceptance, these suppliers are
paying for separate distributors' counsel and have agreed to fully indemnify
the Company for any judgments in these cases arising from its distribution of
their products.
D. Environmental Matters
Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:
The Company has received claims and demands from governmental agencies
relating to investigative and remedial action purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.
The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for
these five sites is approximately $17 million, net of approximately $3.5
million which third parties have agreed to pay in settlement or which the
Company expects, based either on agreements or nonrefundable contributions
which are ongoing, to be contributed by third parties. The $17 million is
expected to be paid out between April 2000 and March 2029 and is included in
the Company's recorded environmental liabilities at March 31, 2000.
In addition, the Company has been designated as a potentially responsible
party (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (as amended, the "Superfund" law or its state law
equivalent) for environmental assessment and cleanup costs as the result of
the Company's alleged disposal of hazardous substances at 18 sites. With
respect to each of these sites, numerous other PRPs have similarly been
designated and, while the current state of the law potentially imposes joint
and several liability upon PRPs, as a practical matter costs of these sites
are typically shared with other PRPs. The Company's estimated liability at
those 18 PRP sites is approximately $2 million. The aggregate settlements and
costs paid by the Company in Superfund matters to date has not been
significant. The $2 million is included in the Company's recorded
environmental liabilities at March 31, 2000.
The potential costs to the Company related to environmental matters is
uncertain due to such factors as: the unknown magnitude of possible pollution
and cleanup costs; the complexity and evolving nature of governmental laws and
regulations and their interpretations; the timing, varying costs and
effectiveness of alternative cleanup technologies; the determination of the
Company's liability in proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.
Except as specifically stated above with respect to the litigation matters
arising from the Company's restatement of previously reported amounts for the
Information Technology Business unit (section I, above), management believes,
based on current knowledge and the advice of the Company's counsel, that the
outcome of the litigation and governmental proceedings discussed in this Item
3 will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended March 31,
2000.
14
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
of the Company, including their principal occupations during the past five
years. The number of years of service with the Company includes service with
predecessor companies (including McKesson).
There are no family relationships between any of the executive officers or
directors of the Company. The executive officers are chosen annually to serve
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until their successors are elected and have
qualified, or until death, resignation or removal, whichever is sooner.
Position with Registrant and Business
Name Age Experience
---- --- -------------------------------------
John H. Hammergren............... 41 Co-President and Co-Chief Executive Officer
and a director since July 1999. Formerly
Executive Vice President, President and Chief
Executive Officer of the Supply Management
Business (January-July 1999); Group President,
McKesson Health Systems Group (1997-1999) and
Vice President of the Company since 1996.
President, Medical/Surgical Division, Kendall
Healthcare Products Company (1993-1996).
Service with the Company--4 years.
David L. Mahoney................. 46 Co-President and Co-Chief Executive Officer
and a director since July 1999. Executive Vice
President, President and Chief Executive
Officer, Pharmaceutical Services Business
(January-July 1999); Group President,
Pharmaceutical Services and International
Group (1997-1999); Vice President and
President, Pharmaceutical and Retail Services
(1996-1997); Vice President and President,
Pharmaceutical Services Group (December 1995-
August 1996); President, Health Care Delivery
Systems, Inc., subsidiary (1994-1995). Service
with the Company--10 years.
William R. Graber................ 57 Senior Vice President and Chief Financial
Officer since February 22, 2000. Vice
President and Chief Financial Officer, The
Mead Corporation (1993-1999). Service with the
Company--3 months.
Heidi E. Yodowitz................ 46 Senior Vice President since January 1999 and
Controller since 1996. Acting Chief Financial
Officer (June 1999- February 2000); Staff Vice
President, Planning & Analysis (1995-1996);
Assistant Controller (1990-1994). Service with
the Company--10 years.
Paul C. Julian................... 44 Senior Vice President since August 1999, and
President of Supply Management Business since
March 2000; Group President, McKesson General
Medical (1997- February, 2000); Executive Vice
President McKesson Health Systems (1996-1997);
Group Vice President, Corporate Officer of
Owens & Minor. (1994-1996). Service with the
Company--4 years.
15
Position with Registrant and Business
Name Age Experience
---- --- -------------------------------------
Graham O. King................... 60 Senior Vice President and President,
Information Technology Business since October
1999. Group President, Outsourcing Services of
HBOC (1998-1999); Chairman and Chief Executive
Officer of U.S. Servis (1994-1998). Service
with the Company--1 year, 6 months.
Ivan D. Meyerson................. 55 Corporate Secretary since April 1, 1999, and
Senior Vice President and General Counsel
since January 1999; Vice President and General
Counsel (1987-January 1999). Service with the
Company--22 years.
16
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
(a) Market Information
The principal market on which the Company's common stock is traded is the
New York Stock Exchange. The Company's common stock is also traded on the
Pacific Exchange, Inc. High and low prices for the common stock by quarter are
included in Financial Note 19 to the consolidated financial statements,
"Quarterly Financial Information (Unaudited)," appearing on pages F-71 to F-73
of this Annual Report on Form 10-K.
(b) Holders
The number of record holders of the Company's common stock at March 31,
2000 was approximately 17,000.
(c) Dividends
Dividend information is included in Financial Note 19 to the consolidated
financial statements, "Quarterly Financial Information (Unaudited)," appearing
on pages F-71 to F-73 to this Annual Report on Form 10-K.
Item 6. Selected Financial Data
Selected financial data is presented in the Six-Year Highlights on pages F-
2 to F-5 of this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of the Company's financial condition
and results of operations is presented in the Financial Review on pages F-6 to
F-28 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is included in the Financial Review on
page F-23 of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data appear on pages F-32 to F-73 of
this Annual Report on Form 10-K.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
17
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Company is incorporated by
reference from the Company's 2000 Proxy Statement (the "Proxy Statement").
Certain information relating to Executive Officers of the Company appears on
pages 15 to 16 of this Annual Report on Form 10-K. The information with
respect to this item required by Item 405 of Regulation S-K is incorporated
herein by reference from the Proxy Statement.
Item 11. Executive Compensation
Information with respect to this item is incorporated herein by reference
from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item is incorporated herein by reference
from the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain transactions with management is
incorporated by reference from the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)Financial Statements, Financial Statement Schedule and Exhibits
Page
----
(1) Consolidated Financial Statements and Independent Auditors'
Report:
See "Index to Consolidated Financial Statements"............. F-1
(2) Supplementary Consolidated Financial Statement Schedule--
Valuation and Qualifying Accounts............................ 21
Financial statements and schedules not included have been
omitted because of the absence of conditions under which they
are required or because the required information, where
material, is shown in the financial statements, financial
notes or supplementary financial information.
(3) Exhibits:
Exhibits submitted with this Annual Report on Form 10-K as
filed with the SEC and those incorporated by reference to
other filings are listed on the Exhibit Index................ 22
(b)Reports on Form 8-K
The following reports on Form 8-K were filed during the three months
ended March 31, 2000:
1. Form 8-K
Date of Report: January 25, 2000 Date Filed: January 25, 2000
Item 5. Other Events
The Registrant filed certain information regarding the Company's
signing of a definitive Stock Purchase Agreement to sell all of the
outstanding common stock of McKesson Water Products Company, a
California Corporation and a wholly-owned subsidiary of the Registrant,
for total consideration of approximately $1.1 billion in cash to Groupe
Danone SA.
18
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(c)Exhibits
99.1 Press Release issued by the Registrant on January 11,
2000.
2.Form 8-K
Date of Report: February 1, 2000 Date Filed: February 1, 2000
Item 5. Other Events
The Registrant filed certain information regarding the Company's
signing of a definitive Stock Purchase Agreement to sell all of the
outstanding common stock of McKesson Water Products Company, a
California Corporation and a wholly-owned subsidiary of the Registrant,
for total consideration of approximately $1.1 billion in cash to Groupe
Danone SA. Pro forma financial information to reflect the
classification of the net assets and results of operations of the
McKesson Water Products Company as a discontinued operation was
included as part of the filing. The Registrant's filing also included
the Registrant's press release of January 25, 2000 announcing its
financial results for the third fiscal quarter ended December 31, 1999.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(c)Exhibits
99.1 Stock Purchase Agreement, dated as of January 10, 2000, by
and among McKesson HBOC, Inc., Danone International Brands,
Inc. and Groupe Danone SA.
99.2 Pro forma financial information of the Registrant.
99.3 Press Release issued by the Registrant on January 25, 2000.
19
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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 HBOC, Inc.
Dated: June 13, 2000
By /s/ William R. Graber
---------------------------------
William R. Graber
Senior Vice President and
Chief Financial Officer
Pursuant on behalf of the Registrant and to the requirements of the
Securities Act of 1934, this report has been signed below by the following
persons in the capacities and on the date indicated:
*
- -------------------------------------
John H. Hammergren
Co-President and Co-Chief Executive
Officer and Director
(Principal Executive Officer)
*
- -------------------------------------
David L. Mahoney
Co-President and Co-Chief Executive
Officer and Director
(Principal Executive Officer)
*
- -------------------------------------
William R. Graber
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
*
- -------------------------------------
Heidi E. Yodowitz
Senior Vice President and Controller
(Principal Accounting Officer)
*
- -------------------------------------
Alfred C. Eckert III, Director
*
- -------------------------------------
Tully M. Friedman, Director
*
- -------------------------------------
Alton F. Irby III, Director
*
- -------------------------------------
M. Christine Jacobs, Director
*
- -------------------------------------
Gerald E. Mayo, Director
*
- -------------------------------------
James V. Napier, Director
*
- -------------------------------------
David S. Pottruck, Director
*
- -------------------------------------
Carl E. Reichardt, Director
*
- -------------------------------------
Alan Seelenfreund, Chairman of the
Board
*
- -------------------------------------
Jane E. Shaw, Director
/s/ Ivan D. Meyerson
- -------------------------------------
Ivan D. Meyerson
*Attorney-in-Fact
Dated: June 13, 2000
20
Schedule II
McKESSON HBOC, INC.
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(in millions)
Column A Column B Column C Column D Column E
-------- ------------ ---------------------- ------------- ----------
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions(1) Period(2)
----------- ------------ ---------- ---------- ------------- ----------
Amounts deducted from
assets to which they
apply:
Year Ended March 31,
2000
Allowances for
doubtful accounts
receivable........... $140.4 $216.8(3) $ -- $(120.7) $236.5
Other reserves........ 40.8 0.5 -- (2.3) 39.0
------ ------ ----- ------- ------
$181.2 $217.3 $ -- $(123.0) $275.5
====== ====== ===== ======= ======
Year Ended March 31,
1999
Allowances for
doubtful accounts
receivable........... $ 54.0 $ 87.2(4) $16.2 $ (17.0) $140.4
Other reserves........ 29.8 11.1 -- (0.1) 40.8
------ ------ ----- ------- ------
$ 83.8 $ 98.3 $16.2 $ (17.1) $181.2
====== ====== ===== ======= ======
Year Ended March 31,
1998
Allowances for
doubtful accounts
receivable........... $ 37.7 $ 16.3 $ -- $ -- $ 54.0
Other reserves........ 22.8 20.1 -- (13.1) 29.8
------ ------ ----- ------- ------
$ 60.5 $ 36.4 $ -- $ (13.1) $ 83.8
====== ====== ===== ======= ======
Notes: 2000 1999 1998
- ------ ------ ------ -----
(1) Deductions:
Written off............................................ $120.4 $ 17.1 $12.9
Credited to other accounts............................. 2.6 -- 0.2
------ ------ -----
Total.................................................... $123.0 $ 17.1 $13.1
====== ====== =====
(2) Amounts shown as deductions from:
Current receivables.................................... $274.9 $180.6 $83.0
Other assets........................................... 0.6 0.6 0.8
------ ------ -----
Total.................................................... $275.5 $181.2 $83.8
====== ====== =====
(3) Includes charges of $68.5 million for a change in estimate of receivable
reserve requirements and customer reserves, $72.6 million for customer
settlements (forgiveness of accounts receivable, customer credits and
refunds) associated with discontinued product lines and $7.7 million for
uncollectible unbilled receivables in the Health Care Information
Technology segment.
(4) Includes charges of $70.0 million for receivable reserves for the Health
Care Information Technology segment related to exposures for bad debts,
disputed amounts and customer allowances.
21
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of October 17, 1998, by and
among McKesson Corporation ("the Company"), McKesson Merger Sub, Inc.
("Merger Sub") and HBO & Company ("HBOC") (Exhibit 2.1(1)).
2.2 Amendment Agreement to Agreement and Plan of Merger, dated as of
November 9, 1998, by and among the Company, Merger Sub and HBOC
(Exhibit 2.2 (1)).
2.3 Second Amendment Agreement to that certain Agreement and Plan of
Merger dated October 17, 1998, as amended by an Amendment Agreement
dated as of November 9, 1998 (Exhibit 2.1 (2)).
3.1 Restated Certificate of Incorporation of the Company as filed with the
office of the Delaware Secretary of State on July 30, 1998 (Exhibit
3.2 (3)).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of Registrant as filed with the office of the Delaware Secretary of
State on January 12, 1999 (Exhibit 4.3 (4)).
3.3 Amended and Restated By-Laws of the Company dated as of July 15, 1999
(Exhibit 4.5 (5)).
4.1 Rights Agreement dated as of October 21, 1994 between the Company and
First Chicago Trust Company of New York, as Rights Agent (the "Rights
Agreement") (Exhibit 4.1 (6)).
4.2 Amendment No. 1 to the Rights Agreement dated as of October 19, 1998
(Exhibit 99.1 (7)).
4.3 Indenture, dated as of March 11, 1997, by and between the Company, as
Issuer, and The First National Bank of Chicago, as Trustee (Exhibit
4.4 (8)).
4.4 Amended and Restated Declaration of Trust of McKesson Financing Trust,
dated as of February 20, 1997, among the Company, as Sponsor, The
First National Bank of Chicago, as Institutional Trustee, First
Chicago Delaware, Inc., as Delaware Trustee and William A. Armstrong,
Ivan D. Meyerson and Nancy A. Miller, as Regular Trustees (Exhibit 4.2
(9)).
4.5 McKesson Corporation Preferred Securities Guarantee Agreement, dated
as of February 20, 1997, between the Company, as Guarantor, and The
First National Bank of Chicago, as Preferred Guarantor (Exhibit 4.7
(10)).
4.6 Registrant agrees to furnish to the Commission upon request a copy of
each instrument defining the rights of security holders with respect
to issues of long-term debt of the Registrant, the authorized
principal amount of which does not exceed 10% of the total assets of
the Registrant.
10.1 Employment Agreement, dated as of August 1, 1999, by and between the
Company and the Chairman of the Board.
10.2 Amended and Restated Employment Agreement, dated as of June 21, 1999,
by and between the Company and John H. Hammergren, Co-President and
Co-Chief Executive Officer.
10.3 Amended and Restated Employment Agreement, dated as of March 26, 1999,
by and between the Company and its former President and Chief
Executive Officer (Exhibit 10.3 (15)).
10.4 Form of Termination Agreement by and between the Company and certain
designated Corporate Officers (Exhibit 10.23 (11)).
10.5 McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan, as
amended through January 27, 1999 (Exhibit 10.5 (14)).
10.6 McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity Compensation
and Deferral Plan, as amended through January 27, 1999 (Exhibit 10.6
(14)).
22
Exhibit
Number Description
------- -----------
10.7 McKesson HBOC, Inc. Supplemental PSIP (Exhibit 10.7 (14)).
10.8 McKesson HBOC, Inc. Deferred Compensation Administration Plan, amended
as of January 27, 1999 (Exhibit 10.8 (14)).
10.9 McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as
amended effective January 27, 1999 (Exhibit 10.9 (14)).
10.10 McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as amended
effective January 27, 1999 (Exhibit 10.10 (14)).
10.11 McKesson HBOC, Inc. Directors' Deferred Compensation Plan, as amended
effective January 27, 1999 (Exhibit 10.11 (14)).
10.12 McKesson HBOC, Inc. 1985 Executives' Elective Deferred Compensation
Plan, amended as of January 27, 1999 (Exhibit 10.12 (14)).
10.13 McKesson HBOC, Inc. Management Deferred Compensation Plan, amended as
of January 27, 1999 (Exhibit 10.13 (14)).
10.14 McKesson HBOC, Inc. 1984 Executive Benefit Retirement Plan, as amended
through January 27, 1999 (Exhibit 10.14 (14)).
10.15 McKesson HBOC, Inc. 1988 Executive Survivor Benefits Plan, as amended
effective January 27, 1999 (Exhibit 10.15 (14)).
10.16 McKesson HBOC, Inc. Executive Medical Plan Summary (Exhibit 10.16
(14)).
10.17 McKesson HBOC, Inc. Severance Policy for Executive Employees, as
amended through January 27, 1999 (Exhibit 10.17 (14)).
10.18 McKesson HBOC, Inc. Management Incentive Plan, as amended through
January 27, 1999 (Exhibit 10.18 (14)).
10.19 McKesson HBOC, Inc. Long-Term Incentive Plan, as amended through
January 27, 1999 (Exhibit 10.19 (14)).
10.20 McKesson HBOC, Inc. Stock Purchase Plan, as amended through January
27, 1999 (Exhibit 10.20 (14)).
10.21 McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan (Exhibit 99.1
(12)).
10.22 Stock Purchase Agreement, dated as of January 10, 2000, by and among
the Company, Danone International Brands, Inc. and Groupe Danone SA
(Exhibit 99.1 (15)).
10.23 Amendment No.1 to January 10, 2000 Stock Purchase Agreement, dated as
of February 28, 2000.
10.25 HBO & Company 1993 Stock Option Plan for Nonemployee Directors
(Exhibit 4 (13)).
10.26 Amendment and Restated Employment Agreement, dated as of June 21,
1999, by and between the Company and David L. Mahoney, Co-President
and Co-Chief Executive Officer.
10.27 McKesson HBOC, Inc. 2000 Employee Stock Purchase Plan.
10.28 Statement of Terms and Conditions Applicable to Certain Stock Options
Granted on January 27, 1999 (Exhibit 10.28 (14)).
10.29 Credit Agreement dated as of November 10, 1998 among the Company,
Medis Health and Pharmaceutical Services Inc., Bank of America
National Trust and Savings Association, as Agent, Bank of America
Canada, as Canadian Administrative Agent, The Chase Manhattan Bank, as
documentation agent, First Union National Bank, as documentation
agent, The First National Bank of Chicago, as documentation agent, and
the other financial institutions party thereto (Exhibit 10.29 (14)).
10.30 Stock Option Agreement, dated October 17, 1998, between McKesson and
HBOC (Exhibit 99.1 (1)).
10.31 Stock Option Agreement, dated October 17, 1998, between HBOC and
McKesson (Exhibit 99.2 (1)).
23
Exhibit
Number Description
------- -----------
10.32 Credit Agreement dated as of October 22, 1999 among the Company and
the several financial institutions from time to time party to the
Agreement ("Banks"), The Chase Manhattan Bank, First Union National
Bank, Morgan Guaranty Trust Company as documentation agents for Banks
and Bank of America N.A. as administrative agent for Banks.
10.33 First Amendment to November 10, 1998 Credit Agreement, dated as of
June 28, 1999.
10.34 Second Amendment to November 10, 1998 Credit Agreement, dated as of
December 1, 1999.
10.35 Receivables Purchase Agreement dated as of June 25, 1999 among the
Company, as servicer, CGSF Funding Corporation, as seller, Preferred
Receivables Funding Corporation, Falcon Asset Securitization
Corporation and Blue Ridge Asset Funding Corporation, as conduits, The
First National Bank of Chicago and Wachovia Bank, N.A., as managing
agents, the several financial institutions from time to time party to
the Agreement, and The First National Bank of Chicago, as collateral
agent.
10.36 First Amendment to June 25, 1999 Receivables Purchase Agreement, dated
as of September 29, 1999.
10.37 Second Amendment to June 25, 1999 Receivables Purchase Agreement,
dated as of December 6, 1999.
10.38 Statement of Terms and Conditions Applicable to certain Stock Options
granted on August 16, 1999.
10.39 Statement of Terms and Conditions Applicable to certain Restricted
Stock grants on January 31, 2000.
10.40 Syndicated Revolving Promissory Note dated as of May 28, 1999 among
the Company, Bank of America National Trust and Savings Association,
as Agent, and the other noteholders' signatures to the Note, Banc of
America LLC as Sole Lead Arranger.
10.41 Employment Agreement, dated as of June 21, 1999 by and between the
Company and its Senior Vice President, President, Information
Technology Business.
10.42 Employment Agreement, dated as of August 1, 1999 by and between the
Company and its Senior Vice President, President, Supply Management
Business.
10.43 Employment Agreement, dated as of March 31, 1999 by and between the
Company and its Senior Vice President, Group President, Retail and
Customer Operations Group.
21 List of Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
- --------
Footnotes to Exhibit Index:
(1) Incorporated by reference to designated exhibit to Amendment No. 1 to
McKesson's Form S-4 Registration Statement No. 333-67299 filed on
November 27, 1998.
(2) Incorporated by reference to designated exhibit to the Company's Current
Report on Form 8-K dated January 14, 1999.
(3) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(4) Incorporated by reference to designated exhibit to the Company's Form S-8
Registration Statement No. 333-70501 filed on January 12, 1999.
24
(5) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on for 10-Q for the quarter ended June 30, 1999.
(6) Incorporated by reference to designated exhibit to Amendment No. 3 to the
Company's Registration Statement on Form 10 filed on October 27, 1994.
(7) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(8) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
(9) Incorporated by reference to designated exhibit to Amendment No. 1 to the
Company's Form S-3 Registration Statement No. 333-26433 filed on June 18,
1997.
(10) Incorporated by reference to designated exhibit to the Company's Form S-3
Registration Statement No. 333-26433 filed on May 2, 1997.
(11) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995.
(12) Incorporated by reference to designated exhibit to the Company's Form S-8
Registration Statement No. 333-71917 filed on February 5, 1999.
(13) Incorporated by reference to designated exhibit to HBOC's Form S-8
Registration Statement No. 33-67300 filed on August 12, 1993.
(14) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
(15) Incorporated by reference to designated exhibit to the Company's Current
Report on Form 8-K dated February 1, 2000.
25
CONSOLIDATED FINANCIAL INFORMATION
CONTENTS
Page
----
Six-Year Highlights....................................................... F-2
Financial Review.......................................................... F-6
Consolidated Financial Statements
Independent Auditors' Report............................................ F-30
Report of Independent Public Accountants................................ F-31
Statements of Consolidated Income for the years ended March 31, 2000,
1999 and 1998.......................................................... F-32
Consolidated Balance Sheets, March 31, 2000, 1999 and 1998.............. F-33
Statements of Consolidated Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998.......................................... F-34
Statements of Consolidated Cash Flows for the years ended March 31,
2000, 1999 and 1998.................................................... F-36
Financial Notes......................................................... F-37
F-1
SIX-YEAR HIGHLIGHTS
CONSOLIDATED OPERATIONS(1)
Years Ended March 31
---------------------------------------------------------------------------------
2000 1999 1998 1997(2) 1996 1995
--------- --------- --------- --------- --------- ---------
(dollars in millions except per share amounts)
Revenues.................. $36,734.2 $30,028.7 $22,105.7 $16,612.7 $13,520.1 $12,680.0
Percent change........... 22.3% 35.8% 33.1% 22.9% 6.6% 9.6%
Gross profit(3)........... 2,322.4 2,399.2 2,158.6 1,479.5 1,141.3 920.2
Percent of revenues...... 6.3% 8.0% 9.8% 8.9% 8.4% 7.3%
Operating profit.......... 580.1(4) 310.0(5) 579.8(6) 216.0(7) 158.1(8) 112.0(9)
Percent of revenues...... 1.6% 1.0% 2.6% 1.3% 1.2% 0.9%
Interest expense-net of
corporate interest
income................... 107.3 90.4 72.7 35.6 8.2 26.5
Income (loss) from
continuing operations
before income taxes...... 313.1(4,10) 168.2(5) 459.3(6) 135.0(7) 112.3(8) (30.2)(9,11)
Income taxes.............. 122.3 101.4 177.9(12) 73.3 42.8 97.3(13)
Effective tax rate........ 39.1% 60.3% 38.7% 54.3% 38.1% --
Dividends on preferred
securities of subsidiary
trust, net of tax
benefit.................. 6.2 6.2 6.2 0.7 -- --
Income (loss) after taxes
Continuing operations.... 184.6(4,10) 60.6(5) 275.2(6,12) 61.0(7) 69.5(8) (127.5)(9,11,13)
Discontinued operations.. 539.1(14) 24.3 29.4 151.1(15) 39.6 557.3(16)
Net income................ 723.7 84.9 304.6 212.1 109.1 429.8
Percent change........... 752.4% (72.1)% 43.6% 94.4% (74.6)% 164.8%
Average stockholders'
equity................... 3,082.9 2,772.0 2,273.8 1,690.9 1,093.9 841.7
Return on equity(17)..... 23.5% 3.1% 13.4% 12.5% 10.0% 51.1%
Common dividends
declared................. 67.5 84.9 62.0 52.1 45.5 57.2
Shares on Which Diluted
Earnings Per Common Share
Were Based Diluted....... 281.3 275.2 282.1 265.2 243.8 221.6
Basic.................... 281.3 275.2 266.2 253.9 239.5 221.6
Diluted earnings (loss)
per common share(18)
Continuing operations.... $ 0.66 $ 0.22 $ 1.00 $ 0.23 $ 0.29 $ (0.58)
Discontinued operations.. 1.91 0.09 0.10 0.57 0.16 2.52
Total................... 2.57 0.31 1.10 0.80 0.45 1.94
- -------
(1) All periods have been restated to classify the Water Products business as
a discontinued operation. On February 29, 2000, the Company sold its
Water Products business to Groupe Danone for approximately $1.1 billion
in cash.
(2) Includes the results of the FoxMeyer Corporation pharmaceutical
distribution business ("FoxMeyer") from the acquisition date of November
8, 1996 and of MGM from the acquisition date of February 21, 1997.
(3) Revenues less cost of sales; fiscal 2000, 1999 and 1995 include $0.8
million, $1.2 million and $35.9 million, respectively, of Health Care
Supply Management segment charges for restructuring, asset impairments
and other operating items representing 0.002%, 0.004% and 0.3% of 2000,
1999 and 1995 revenues, respectively.
(4) Includes Health Care Information Technology segment charges for asset
impairments, customer reserves and severance of $240.9 million primarily
associated with product streamlining and reorganization and an additional
charge of $68.5 million in this segment for a change in estimate of
reserve requirements for accounts receivable and customer reserves. These
charges are offset, in part, by net gains in the segment totaling $267.0
million primarily from the exchange and subsequent sale of equity
investments. Also includes charges of $31.5 million for asset impairments
and receivable reserves in the Health Care Supply Management segment
related to a prior year implementation of a contract system, $2.9 million
in severance and exit-related charges primarily associated with segment
staff reductions and income of $6.6 million related to reductions in
prior year restructuring reserves. Also includes a charge of $1.5 million
for the e-Health segment's write-off of purchased in-process technology
related to the Company's November 1999 acquisition of Abaton.com. These
items represent 0.2% of revenues in the aggregate, $47.0 million after-
tax.
F-2
(5) Includes $180.3 million of Health Care Supply Management and $215.6
million of Health Care Information Technology segment charges for
transaction costs, costs associated with employee benefits, primarily
related to change of control provisions, employee severance, asset
impairment write-downs, restructuring, integration and affiliation costs
incurred, and system installation costs associated primarily with
acquisitions, 1.3% of revenues in the aggregate, $285.8 million after-
tax.
(6) Includes $16.7 million of Health Care Supply Management segment charges
for the terminated merger with AmeriSource Health Corporation
("AmeriSource") and $13.9 million in costs associated primarily with the
integration and rationalization of acquisitions; and, $65.5 million of
Health Care Information Technology segment charges related to the
acquisitions of AMISYS Managed Care Systems, Inc., Enterprise Systems,
Inc., HPR Inc. and National Health Enhancement Systems, Inc. and the
merger of Access Health, Inc. and Informed Access Systems, Inc., 0.4% of
revenues in the aggregate, $65.3 million after-tax.
(7) Includes Health Care Supply Management segment charges of $91.8 million
for restructuring, asset impairment and other operating items and $48.2
million for the write-off of purchased in-process technology related to
the acquisition of Automated Healthcare, Inc., and, Health Care
Information Technology segment charges of $81.5 million related to the
acquisition of CyCare Systems, Inc., Management Software, Inc., and GMIS
Inc. and the merger of Access Health, Inc. and Informed Access Systems
Inc., 1.3% of revenues in the aggregate, $156.9 million after-tax.
(8) Includes Health Care Information Technology segment charges of $116.4
million for asset write-offs, $19.0 million for acquisition-related
severance and $4.6 million in product related write-offs, 1.0% of
revenues in the aggregate, $84.2 million after-tax.
(9) Includes $107.3 million of Health Care Supply Management segment charges
for restructuring, asset impairments and other operating items and $13.7
million of Health Care Information Technology segment charges for
acquisition-related activities and severance costs, 1.0% of revenues, in
the aggregate, $72.5 million after-tax.
(10) In addition to items described in Note 4 above, includes Corporate and
other charges of $55.8 million for accounting, legal and other costs
incurred in connection with the Company's earlier restatement of prior
years' financial results and resulting pending litigation, costs
associated with former employees and other acquisition related costs.
These items represent 0.2% of revenues in the aggregate, $33.4 million
after-tax.
(11) In addition to the items described in Note 9 above, includes $74.3
million of Corporate expenses for compensation costs associated with the
sale of the Company's pharmaceutical benefit management business ("PCS")
to Eli Lilly and Company and charges for restructuring, asset impairment
and other operating items representing 0.6% of revenues in the aggregate,
$55.8 million after-tax.
(12) Includes a $4.6 million favorable tax adjustment.
(13) Includes $107.0 million of income tax expense related to the sale of PCS.
(14) Includes after-tax income from the Water Products business of $24.4
million, an after-tax charge of $1.2 million for increases in
environmental reserves for sites associated with the discontinued
chemical operations and a $515.9 million after-tax gain on sale of the
Water Products business.
(15) Includes gain on sale of Armor All Products Corporation ("Armor All") of
$120.2 million after-tax.
(16) Includes gain on sale of PCS of $576.7 million after-tax, write-down of
the Company's investment in Millbrook Distribution Services, Inc.
("Millbrook") of $72.8 million after-tax, and $1.0 million of income
after-tax from a donation of Armor All stock.
(17) Based on net income.
(18) Dilutive securities are excluded in the computation of diluted earnings
per share in fiscal 2000, 1999 and 1995 due to their antidilutive effect.
F-3
SIX-YEAR HIGHLIGHTS
CONSOLIDATED FINANCIAL POSITION(1)
Years Ended March 31
-----------------------------------------------------------
2000 1999 1998 1997(2) 1996 1995
--------- -------- -------- -------- -------- --------
(dollars in millions except per share amounts)
Customer receivables.... $ 2,847.4 $2,290.0 $1,774.0 $1,452.6 $ 786.2 $ 861.3
Days of sales(3)....... 27.9 27.5 28.9 25.8 20.9 24.5
Inventories............. 4,149.3 3,522.5 2,603.1 2,271.1 1,327.8 1,088.4
Days of sales(3)....... 43.4 45.9 47.0 44.5 38.6 33.3
Drafts and accounts
payable................ 3,883.9 3,549.4 2,186.1 2,102.7 1,391.8 1,405.7
Days of sales(3)....... 40.6 46.3 39.5 41.2 40.5 43.0
Current assets.......... 7,965.5 6,452.8 5,318.1 4,571.7 2,982.0 2,899.5
Current liabilities..... 5,121.8 4,744.8 3,083.8 3,031.9 1,902.0 1,783.4
Working capital......... 2,843.7 1,708.0 2,234.3 1,539.8 1,080.0 1,116.1
Percent of
revenues(3)........... 7.7% 5.7% 10.1% 7.6% 8.0% 8.8%
Property, plant and
equipment-net.......... 555.4 529.6 448.6 372.2 340.8 316.7
Percent of
revenues(3)........... 1.5% 1.8% 2.0% 1.8% 2.5% 2.5%
Capital expenditures... 145.1 199.2 166.4 91.4 75.7 70.0
Total assets............ 10,372.9 9,020.0 7,291.8 6,413.4 4,314.3 4,106.8
Total debt(4)........... 1,260.0 1,151.2 1,318.4 1,032.0 423.2 442.9
Convertible preferred
securities............. 195.8 195.6 195.4 194.8 -- --
Stockholders' equity.... 3,565.8 2,881.8 2,561.7 2,081.8 1,739.6 1,636.7
Capital employed(5)..... 5,021.6 4,228.6 4,075.5 3,308.6 2,162.8 2,079.6
Ratio of net debt to
net capital
employed(6)........... 14.8% 22.4% 18.8% 16.2% -- --
Common shares
outstanding at March
31..................... 283.4 280.6 271.0 259.0 246.1 224.5
Dividends per common
share(7)............... 0.24 0.44 0.50 0.50 0.50 0.67
Cash distribution from
the sale of PCS per
common share(8)........ -- -- -- -- -- 38.00(8)
Book value per common
share(9)............... 12.58 10.27 9.45 8.04 7.07 7.29
Market price
High................... 69 1/4 96 1/4 61 3/4 34 1/8 27 13/16 54 5/8
Low.................... 18 1/4 52 1/4 31 1/2 20 9/16 18 5/8 15 1/16
At year end............ 21 66 57 3/4 32 25 5/8 20 3/16
- --------
(1) All periods have been restated to classify the Water Products business as
a discontinued operation. On February 29, 2000, the Company sold its Water
Products business to Groupe Danone for approximately $1.1 billion in cash.
(2) Includes the results of FoxMeyer from the acquisition date of November 8,
1996 and of MGM from the acquisition date of February 21, 1997.
(3) Based on year-end balances and sales or cost of sales assuming major
acquisitions occurred at beginning of year.
(4) Total debt includes all interest-bearing debt and capitalized lease
obligations.
(5) Capital employed consists of total debt, convertible preferred securities
of subsidiary trust and stockholders' equity.
(6) Ratio computed as net debt (total debt less cash and cash equivalents and
marketable securities) to net capital employed (capital employed less cash
and cash equivalents and marketable securities).
(7) Dividends per common share amounts do not reflect the effects of poolings
of interest transactions.
(8) Received by stockholders directly from Eli Lilly and Company in connection
with the sale of PCS.
(9) Stockholders' equity divided by year-end common shares outstanding.
F-4
SIX-YEAR HIGHLIGHTS--SUPPLEMENTAL DATA
CONSOLIDATED OPERATIONS(1)
Years Ended March 31
------------------------------------------------------
2000 1999 1998 1997(2) 1996 1995
-------- -------- -------- -------- ------ ------
(dollars in millions except per share amounts)
EBIT(3,8)............... $ 420.4 $ 258.6 $ 532.0 $ 170.6 $120.5 $ (3.7)
Percent of revenues..... 1.1% 0.9% 2.4% 1.0% 0.9% --
EBIT(3,8) excluding
unusual items(4)....... 547.9 654.5 628.1 392.1 260.5 191.6
Percent of revenues..... 1.5% 2.2% 2.8% 2.4% 1.9% 1.5%
Amortization of
intangibles............ 55.5 41.0 34.7 24.1 19.9 11.9
EBITA(5,8).............. 475.9 299.6 566.7 194.7 140.4 8.2
Percent of revenues..... 1.3% 1.0% 2.6% 1.2% 1.0% 0.1%
EBITA(5,8) excluding
unusual items(4)....... 603.4 695.5 662.8 416.2 280.4 203.5
Percent of revenues..... 1.6% 2.3% 3.0% 2.5% 2.1% 1.6%
Average committed
capital(6)............. 3,420.2 3,026.8 2,230.7 1,520.3 831.3 882.8
Return on committed
capital(7)............. 15.4% 11.5% 27.8% 16.8% 26.6% 6.1%
Return on committed
capital(7)
excluding unusual
items(4)............... 19.1% 24.9% 32.1% 31.8% 43.4% 39.8%
- --------
(1) All periods have been restated to classify the Water Products business as
a discontinued operation. On February 29, 2000, the Company sold its Water
Products business to Groupe Danone for approximately $1.1 billion in cash.
(2) Includes the results of FoxMeyer from the acquisition date of November 8,
1996 and of MGM from the acquisition date of February 21, 1997.
(3) Income (loss) from continuing operations before interest expense-net of
corporate interest income, taxes and dividends on preferred securities of
subsidiary trust.
(4) Unusual items include those which management believes are either one-time
occurrences and/or events which are not related to normal, on-going
operations or represent charges that are in excess of normal/historical
amounts. See Notes 3 to 11 on pages F-2 and F-3.
(5) Income (loss) from continuing operations before interest expense-net of
corporate interest income, income taxes and amortization of intangibles.
(6) Capital employed less cash and cash equivalents, marketable securities and
intangibles (including accounts associated with discontinued operations).
(7) Earnings (including income from discontinued operations) before interest
expense-net of corporate interest income, income taxes and amortization of
intangibles divided by average committed capital (capital employed less
cash and cash equivalents, marketable securities and intangibles).
(8) EBITA and EBIT are not intended to represent cash flow from operations, or
alternatives to net income, each as defined by generally accepted
accounting principles. In addition, the measures of EBITA and EBIT
presented herein may not be comparable to other similarly titled measures
used by other companies. The Company believes that EBITA and EBIT are
standard measures commonly reported and widely used by analysts, investors
and other interested parties operating in the Company's industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in similar industries.
F-5
McKESSON HBOC, INC.
FINANCIAL REVIEW
GENERAL
Management's discussion and analysis, referred to as the Financial Review,
is intended to assist in the understanding and assessment of significant
changes and trends related to the results of operations and financial
condition of McKesson HBOC, Inc. ("McKesson HBOC" or the "Company"), together
with its subsidiaries. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and
accompanying Financial Notes.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
In addition to historical information, management's discussion and analysis
includes certain forward--looking statements within the meaning of section 27A
of the Securities Act of 1933, as amended (the "Securities Act") and section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Some of the forward-looking statements can be identified by use of forward-
looking words such as "believes", "expects", "anticipates", "may", "will",
"should", "seeks", "approximately", "intends", "plans", "estimates", or
"anticipates", or the negative of these words or other comparable terminology.
The discussion of financial trends, strategy, plans or intentions may also
include forward-looking statements. Forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those projected. These include, but are not limited to the factors discussed
under "Additional Factors That May Affect Future Results" of this "Financial
Review."
These and other risks and uncertainties are described herein or in the
Company's other public documents. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
BUSINESS SEGMENTS
The Company conducts its operations through three operating business
segments: Health Care Supply Management, Health Care Information Technology
and e-Health. The Health Care Supply Management segment includes the Company's
U.S. pharmaceutical, health care products and medical-surgical supplies
distribution businesses. U.S. Health Care Supply Management operations also
include marketing and other support services to pharmaceutical manufacturers,
the manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacists, consulting and outsourcing services to
pharmacies, and distribution of first-aid products to industrial and
commercial customers. In addition, Health Care Supply Management includes the
Company's international distribution operations (including operations in
Canada and an equity interest in a Mexican distribution business). The Health
Care Information Technology segment delivers enterprise-wide patient care,
clinical, financial, managed care, payor and strategic management software
solutions, as well as networking technologies, electronic commerce,
outsourcing and other services to health care organizations throughout the
U.S. and certain foreign countries. The e-Health segment includes the
Abaton.com business which was acquired in fiscal 2000 (see Acquisitions). This
business is engaged in providing internet-based clinical applications for
physician office environments.
Acquisitions
Fiscal Year 2000 Acquisitions
In November 1999, the Company acquired Abaton.com, a provider of internet-
based clinical applications for use by physician practices, pharmacy benefit
managers, benefit payors, laboratories and pharmacies, for approximately $95
million in cash and the assumption of approximately $8 million of employee
stock incentives.
F-6
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Goodwill and other intangibles related to the acquisition of $101 million are
being amortized on a straight-line basis over periods ranging from three to
seven years. A charge of $1.5 million was recorded to write off the portion of
the purchase price of Abaton.com allocated to in-process technology for which
technological feasibility had not been established as of the acquisition date
and for which there were no alternative uses. The Company received an
independent valuation which utilized a discounted cash flow methodology by
product line to assist in valuing in-process and existing technologies as of
the acquisition date.
In fiscal 2000, the Company also made several smaller acquisitions and
investments in the Health Care Supply Management and Health Care Information
Technology segments.
Fiscal Year 1999 Acquisitions
On January 12, 1999, McKesson Corporation ("McKesson"), completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common stock
for all of the issued and outstanding shares of common stock of HBOC (the
"HBOC Transaction"). Each share of HBOC common stock was exchanged for 0.37 of
a share of McKesson common stock (the "Exchange Ratio"). McKesson was renamed
McKesson HBOC, Inc. The transaction was structured as a tax-free
reorganization and was accounted for as a pooling of interests.
In addition to the HBOC Transaction, the Company completed several
acquisitions in fiscal 1999 in the Health Care Supply Management and Health
Care Information Technology segments that were accounted for under the pooling
of interests method as follows:
In August 1998, the Company acquired Hawk Medical Supply, Inc., a
distributor of medical-surgical supplies, for approximately 2 million shares
of Company common stock.
Also, in August 1998, the Company acquired J. Knipper and Company, a
provider of direct mail, fulfillment and sales support services, including
sample distribution to physician and pharmaceutical company sales
representatives, for approximately 300,000 shares of Company common stock.
In September 1998, the Company acquired Automated Prescription Systems,
Inc., a manufacturer of automated prescription filling and dispensing systems,
for approximately 1.4 million shares of Company common stock.
In October 1998, the Company acquired US Servis, Inc., a professional
management company that provides outsourcing services for physician delivery
systems and hospital business offices, for the equivalent, after application
of the Exchange Ratio, of approximately 700,000 shares of Company common
stock.
Also in October 1998, the Company completed the acquisition of IMNET
Systems, Inc., a provider of electronic information and document management
solutions for the health care industry, for the equivalent of approximately
3.6 million shares of Company common stock and 0.6 million Company stock
options.
In December 1998, the Company acquired Access Health, Inc., a provider of
clinically based care management programs and health care information
services, for the equivalent of approximately 12.7 million shares of Company
common stock
In fiscal 1999, the Company completed the acquisitions of the following
companies in its Health Care Supply Management segment, each accounted for
under the purchase method of accounting:
In September 1998, the Company acquired MedManagement LLC ("MedManagement"),
a pharmacy management, purchasing, consulting and information services
company, for approximately $38 million in cash.
F-7
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
The acquisition was funded with short-term borrowings. The excess of the
purchase price over the fair value of the net assets acquired of $41 million
is being amortized on a straight-line basis over 20 years.
In November 1998, the Company acquired RedLine Health Care Corporation
("RedLine") a distributor of medical supplies and services to the extended-
care industry, including long-term-care and home-care sites for approximately
$233 million in cash. The acquisition was funded with short-term borrowings.
The excess of the purchase price over the fair value of the net assets
acquired of $149 million is being amortized on a straight-line basis over 40
years.
Fiscal Year 1998 Acquisitions
In fiscal 1998, the Company's Canadian Health Care Supply Management
business, Medis Health and Pharmaceutical Services Inc. ("Medis"), announced
an agreement with Drug Trading Company, Limited ("Drug Trading") to acquire
Drug Trading's retail customers over a transition period. This transition
began in August 1997 and was substantially completed by the end of fiscal
1998. The acquisition was funded with proceeds from operations and short-term
borrowings. In fiscal 1998, the Company also made several smaller acquisitions
in the Health Care Supply Management segment.
In October 1997, the Company acquired in its Health Care Information
Technology segment AT&T's UK Specialist Health Care Services Division ("ATT-
UK"), a provider of software solutions and remote processing services for
financial and payroll needs of health care providers in the United Kingdom,
for approximately $30 million in cash. The Company allocated $7.7 million of
the purchase price to in-process research and development projects as
determined by an independent appraisal of the business, which was expensed as
of the acquisition date.
The Drug Trading and ATT-UK acquisitions were accounted for under the
purchase method of accounting.
In fiscal 1998, the Company completed the acquisitions of the following
companies in its Health Care Information Technology segment, all accounted for
as poolings of interests:
In June 1997, the Company acquired AMISYS Managed Care Systems, Inc.
("AMISYS"), a provider of managed care information systems for the payor
market, for the equivalent of approximately 4.0 million shares of Company
common stock.
Also in June 1997, the Company completed the acquisition of Enterprise
Systems, Inc. ("ESi"), a developer of resource management solutions including
materials management, operating room logistics, scheduling and financial
management, for the equivalent of approximately 5.6 million shares of Company
common stock.
In December 1997, the Company completed the acquisition of HPR, Inc.
("HPR"), a provider of clinical information systems for the managed care
industry for the equivalent of approximately 6.8 million shares of Company
common stock.
Also in December 1997, the Company acquired National Health Enhancement
Systems, Inc. ("NHES"), a provider of health information technology solutions
specializing in demand and disease management products, for the equivalent of
approximately 1.3 million shares of Company common stock.
Divestiture:
In February 2000, the Company sold its wholly-owned subsidiary, McKesson
Water Products Company for approximately $1.1 billion and recognized an after-
tax gain of $515.9 million. All periods presented have been restated to
present the Water Products business as a discontinued operation.
F-8
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Financial Results
The results of continuing operations include the following:
Years Ended March 31
------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
Pre- Pre-
tax After tax Pre-tax After-tax tax After-tax
------ --------- ------- --------- ------ ---------
(in millions)
Income from Continuing
Operations
Before unusual items
and dividends on
convertible preferred
securities of
subsidiary trust..... $440.6 $271.2 $ 564.1 $ 352.6 $555.4 $342.1
Dividends on
convertible preferred
securities of
subsidiary trust..... -- (6.2) -- (6.2) -- (6.2)
------ ------ ------- ------- ------ ------
Before unusual items.. 440.6 265.0 564.1 346.4 555.4 335.9
Unusual items
Health Care Supply
Management........... (27.8) (16.6) (180.3) (112.9) (30.6) (25.4)
Health Care
Information
Technology........... (42.4) (28.9) (215.6) (172.9) (65.5) (39.9)
e-Health.............. (1.5) (1.5) -- -- -- --
Corporate and other... (55.8) (33.4) -- -- -- --
Favorable tax
adjustment........... -- -- -- -- -- 4.6
------ ------ ------- ------- ------ ------
Income from Continuing
Operations............. $313.1 $184.6 $ 168.2 $ 60.6 $459.3 $275.2
====== ====== ======= ======= ====== ======
Fiscal 2000
Fiscal 2000 after-tax income from continuing operations before unusual items
was $265.0 million, a 23% decline from the prior year's income from continuing
operations before unusual items of $346.4 million. Fiscal 2000 results reflect
revenue and operating profit declines in the Health Care Information
Technology segment, modest operating profit growth in the Health Care Supply
Management segment, operating losses of the e-Health segment, and higher
financing costs to support revenue growth in the Health Care Supply Management
segment.
Fiscal 1999
Fiscal 1999 after-tax income from continuing operations before unusual items
was $346.4 million, a 3% increase over the prior year's income from continuing
operations before unusual items of $335.9 million. Fiscal 1999 results reflect
revenue and operating margin growth and the positive impact of acquisitions in
the Health Care Supply Management segment offset, in part, by a decline in
Health Care Information Technology segment operating results.
Fiscal 1998
Fiscal 1998 after-tax income from continuing operations before unusual items
was $335.9 million, a 54% increase over the prior year's income from
continuing operations before unusual items of $217.9 million. Fiscal 1998
results reflect internal growth, operating margin expansion and the full-year
effect of acquisitions accounted for as purchases made late in the prior
fiscal year.
Unusual Items
In each of fiscal 2000, 1999 and 1998, the Company incurred charges for
acquisition-related activities including transaction costs, employee benefit
costs, severance, as well as costs for consolidation of facilities and
F-9
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
administrative processes and certain operating charges. In addition, in fiscal
2000, the Company incurred costs in connection with the Investigation (as
defined below), the restatement of the historical consolidated financial
statements related to improper accounting practices at HBOC and the resulting
pending litigation. Also in fiscal 2000, the Company recorded gains from the
exchange and sale of certain equity investments. In addition, the Company
incurred charges for asset impairments, customer reserves and severance
primarily associated with product streamlining and reorganization in its
Health Care Information Technology segment.
For the purposes of discussing the results of operations, the items
described above are referred to as "unusual items" in the Financial Review.
The results of operations excluding "unusual items" are not intended to
represent income from operations, or alternatives to net income, each as
defined by accounting principles generally accepted in the United States of
America. In addition, the charges included as "unusual items" presented herein
may not be comparable to other similarly titled measures used by other
companies. Management believes, however, that the discussion of the results of
operations excluding such unusual items is the most informative representation
of recurring, non-transactional operating results. Management believes that
these items either represent one-time occurrences and/or events which are not
related to normal, ongoing operations or represent charges that are in excess
of normal/historical operating amounts.
The unusual items in fiscal 2000, 1999 and 1998 are as follows:
Years Ended March
31,
---------------------
2000 1999 1998
------- ------ -----
(in millions)
Restatement-related costs incurred...................... $ 18.9
Net gains on the exchange and sale of equity
investments............................................ (259.3)
Transaction costs....................................... $ 79.6 $16.0
Costs associated with the terminated merger transaction
with AmeriSource Health Corporation.................... 5.0 16.7
Costs associated with employee benefits, primarily
related to change in control provisions................ 88.7 1.4
Employee severance...................................... 4.2 31.9 17.5
Restructuring and asset impairments..................... 228.5 108.4 36.8
Other merger-related costs.............................. (0.3) 13.8 7.7
Costs associated with former employees.................. 23.8
Acquisition-related integration costs incurred.......... 32.3
Other operating items:
Accounts receivable and customer reserves............. 68.5
Contract system costs................................. 31.5 36.2
Other................................................. 11.7
------- ------ -----
Total pre-tax........................................... $ 127.5 $395.9 $96.1
======= ====== =====
Total after-tax......................................... $ 80.4 $285.8 $65.3
======= ====== =====
F-10
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Fiscal 2000 Unusual Items
In fiscal 2000, the Company recorded net pre-tax charges for unusual items
totaling $127.5 million including $27.8 million in the Health Care Supply
Management segment, $42.4 million in the Health Care Information Technology
segment, $1.5 million in the e-Health segment and $55.8 million in Corporate
and other. Following is a description of these items in fiscal 2000:
Restatement-Related Costs Incurred
In April 1999, following the January 1999 acquisition of HBOC, the Company
discovered improper accounting practices at HBOC. In July 1999, the Audit
Committee of the Company's Board of Directors completed an investigation into
such matters (the "Investigation"), which resulted in the previously reported
restatement of the Company's historical consolidated financial statements
related to HBOC (pre-acquisition) in fiscal 1999, 1998 and 1997. In fiscal
2000, the Company incurred costs in connection with the Investigation, the
restatement of the historical consolidated financial statements and the
resulting pending litigation, and recorded charges of $18.9 million for
accounting and legal fees and other costs.
Net Gains on the Exchange and Sale of Equity Investments
The Company recorded gains on the exchange of the Company's WebMD common
shares and warrants for Healtheon/WebMD common shares and warrants that were
recognized upon the November 11, 1999 merger of the two companies.
Subsequently in fiscal 2000, the Company donated 250,000 Healtheon/WebMD
shares to the McKesson HBOC Foundation and sold the remaining Healtheon/WebMD
common shares. As a result of these transactions, the Company recognized gains
related to the investment in Healtheon/WebMD of $248.8 million of which $155.4
million was realized. The remaining gain of $93.4 million which resulted from
the November 11, 1999 exchange of warrants, had not been realized as of March
31, 2000. The estimated fair value of the warrants declined from $93.4 million
as of November 11, 1999 to $32.3 million as of March 31, 2000, resulting in an
unrealized loss of $61.1 million, which is included in stockholders' equity.
As of May 19, 2000, the estimated fair value of the warrants further declined
to $14.7 million. In addition, other equity investments were sold during the
year at a gain of $20.3 million, and a $9.8 million charge was recorded to
reflect the donation of the Healtheon/WebMD shares to the McKesson HBOC
Foundation.
Severance
The Company recorded severance costs totaling $6.2 million in the aggregate
related to workforce reductions in the Health Care Information Technology
segment associated with product streamlining and reorganization and in the
Health Care Supply Management segment associated with distribution facility
consolidations. The current year charge was offset, in part, by a $2.0 million
reduction in prior year severance reserves. The fiscal 2000 severance charges
relate to the termination of approximately 500 employees, primarily in product
development and support, administration and distribution center functions.
Severance of $6.0 million will be paid in fiscal 2001 and the balance will be
paid in fiscal 2002.
Restructuring and Asset Impairments
In the fourth quarter of fiscal 2000, the Company completed an assessment of
the Health Care Information Technology's business and product portfolio. This
resulted in the decision to reorganize the business and to discontinue
overlapping or nonstrategic product offerings. The Company recorded asset
impairments of $232.7 million. These included charges to write off $49.1
million of capitalized product development costs, $39.3 million of purchased
software and $50.7 million of goodwill associated with discontinued product
lines
F-11
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
based upon an analysis of discounted cash flows. In addition, a $74.1 million
reserve was recorded for customer settlements (forgiveness of accounts
receivable, customer credits and refunds) attributable to the discontinued
product lines. The Company also recorded a $9.4 million loss on the
disposition of a non-core foreign operation, and a $7.7 million charge for
uncollectible unbilled receivables and $2.4 million charge for obsolete
equipment associated with the discontinued products. Substantially all of
these charges were non-cash asset write-offs except for the customer
settlements. In addition, a charge of $0.6 million was recorded for costs to
prepare facilities for disposal, lease costs and property taxes required
subsequent to termination of operations and other exit-related activities.
As a result of the Health Care Information Technology segment's
reorganization and product streamlining, sales, development and support
activities for certain discontinued products ceased at fiscal year-end and
activities associated with the remaining discontinued products will be phased
out within twelve months. The Company estimates that future revenues and costs
associated with the discontinued products will be reduced or eliminated, but
they are not expected to materially impact the Company's financial position,
future operating results and liquidity.
In the fourth quarter of fiscal 2000, the Company reviewed the operations
and cost structure of the Health Care Supply Management's medical-surgical
business. This resulted in the planned closure of a sales office and a
workforce reduction. The Company recorded $0.6 million in charges for exit-
related activities. Also in fiscal 2000, the Company reassessed prior years'
restructuring plans resulting in the decision to retain one of the six
pharmaceutical distribution centers identified for closure in fiscal 1999 and
to reduce the number of medical-surgical distribution center closures. In
addition, the Company announced and completed the closure of one additional
pharmaceutical distribution center in fiscal 2000. The Company recorded income
of $6.9 million as a result of reducing prior year reserves for exit-related
costs, offset in part, by additional asset impairments of $1.5 million.
In fiscal 2000, the Company completed the closures of three pharmaceutical
distribution centers, including the additional distribution center mentioned
above. In addition, the realignment of the sales organization was completed
and certain back office functions were eliminated. This resulted in the
termination of approximately 200 employees and the payment of $3.6 million in
severance. Also, the Company completed the closures of three medical-surgical
distribution centers and paid $1.0 million in severance to approximately 100
employees who were terminated in fiscal 1999 and 2000. The Company plans to
continue these closure activities throughout fiscal 2001.
Other Merger-Related Items
The Company recorded a charge of $1.5 million in the e-Health segment to
write off the portion of the purchase price of Abaton.com allocated to
purchased in-process technology for which feasibility had not been established
as of the acquisition date.
In the Health Care Information Technology segment, the Company recorded a
$1.3 million charge for the impairment of a note receivable from a former
stockholder of an acquired company and $6.8 million in income related to
reversals of accruals booked in prior years for estimated merger-related
costs.
Corporate and other includes a charge of $3.7 million related to additional
costs incurred and paid associated with the HBOC Transaction.
F-12
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Costs Associated With Former Employees
In fiscal 2000, the Company recorded charges of $23.8 million for severance
and benefit costs resulting from changes in executive management made in the
first quarter. The charges were based on the terms of employment contracts in
place with these executives. $2.8 million was paid in fiscal 2000, $2.8
million will be paid in fiscal 2001 and the balance, primarily pension
benefits, will be paid in fiscal 2002 and thereafter.
Other Operating Items
Other operating items include charges in the Health Care Information
Technology segment for a $68.5 million change in estimate of requirements for
accounts receivable and customer reserves, a $1.1 million non-cash charge for
the write-off of internal-use computer software that was abandoned and a $1.2
million charge related to the settlement of a software patent infringement
claim that was paid during the year.
The Health Care Supply Management segment recorded a charge of $31.5 million
for asset impairments and receivable reserves related primarily to a prior
year implementation of a contract system.
Corporate and other includes non-cash charges of $7.7 million for impairment
of notes receivable from former employees and $1.7 million for costs
associated with employee-retention following the announcement of the
Investigation.
Fiscal 1999 Unusual Items
In fiscal 1999, the Company recorded pre-tax charges for unusual items of
$180.3 million in the Health Care Supply Management segment and $215.6 million
in the Health Care Information Technology segment, $395.9 million in the
aggregate. Following is a description of these items in fiscal 1999:
Transaction Costs
Total unusual items include $84.6 million of transaction costs incurred in
connection with the acquisitions described above, primarily consisting of
professional fees such as investment banking, legal and accounting fees. This
amount includes $6.6 million of transaction costs related to terminated
transactions of which $5.0 million related to the terminated merger with
AmeriSource Health Corporation. Approximately $83.6 million of invoices were
paid in fiscal 1999, with a balance of $1.0 million paid in fiscal 2000.
Employee Benefits
The Company incurred $88.7 million of employee benefit costs related to
acquisitions, including $39.0 million for restricted stock and stock
appreciation rights subject to change of control provisions, $37.0 million of
long-term incentive and phantom stock awards subject to change of control
provisions, $8.7 million of signing and retention bonuses, and $4.0 million of
retirement and employee benefit plan costs. Of these amounts, $36.3 million
were non-cash charges, primarily related to restricted stock, $44.1 million
were paid in fiscal 1999, $1.6 million were paid in fiscal 2000 and $6.7
million are estimated to be paid in fiscal 2001.
Severance
Severance costs totaled $31.9 million (net of a $3.0 million reversal of
previously recorded severance obligations which were determined to be in
excess), resulting from the consolidation of acquired company operating and
corporate functions, the consolidation of existing U.S. Health Care
pharmaceutical distribution centers, and other employee terminations. The
severance charges relate to the termination of approximately
F-13
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
1,550 employees, primarily in distribution centers, administration and product
functions. Severance of $9.1 million was paid in fiscal 1999 and $14.9 million
was paid in fiscal 2000. Severance of $5.6 million will be paid in 2001 and
the remaining severance will be paid in fiscal 2002.
Restructuring and Asset Impairments
In fiscal 1999, the Health Care Supply Management segment identified six
distribution centers for closure, of which one distribution center was shut
down by March 31, 1999. The Company recorded a charge of $25.5 million related
to such closures. Of this charge, $21.7 million was required to reduce the
carrying value of facility assets to their estimated fair value less disposal
costs, and $3.8 million was related to computer hardware and software which
will no longer be used at such facilities. Fair value was determined based on
sales of similar assets, appraisals, and/or other estimates such as
discounting of estimated future cash flows. Considerable management judgment
is necessary to estimate fair values; accordingly, actual results could vary
significantly from such estimates. Also related to such closures, a charge of
$17.2 million was recorded for other exit-related costs. These primarily
consist of costs to prepare facilities for disposal, lease costs and property
taxes required subsequent to termination of operations, as well as the write-
off of costs related to duplicate assets from acquired companies that do not
have future use by the Company. Of the above charges, $25.5 million were non-
cash asset write-offs. $3.9 million was paid in fiscal 1999, $2.6 million was
paid in fiscal 2000, and the remaining amounts will be paid in fiscal 2001.
Also, in connection with the previously discussed reassessment of this
restructuring plan in fiscal 2000, the Company recorded income of $5.4 million
in fiscal 2000 as a result of reducing previously recorded exit-related
reserves, offset in part, by additional asset impairments.
The Health Care Supply Management segment also wrote off $23.5 million of
computer hardware and software which was abandoned as the result of an
acquisition during the year.
In connection with acquisitions made by the Health Care Information
Technology segment and its acquisition by McKesson, duplicate facilities,
products and internal systems were identified for elimination, resulting in
charges of $22.2 million, relating principally to the write-off of capitalized
costs, lease termination costs, and royalty agreements which were terminated
at a cost of $12.0 million because products subject to minimum royalty
payments to third parties were replaced with acquired products. In addition,
following the HBOC Transaction, the Company evaluated the performance of a
foreign business and elected to shut down its facility. Charges of $11.6
million were recorded, principally related to the write-down of goodwill to
fair value based on estimated discounted cash flows. Revenues and net
operating income for this foreign business were not significant in fiscal
1999. Certain investments became impaired during fiscal 1999 and were written
down by $4.3 million to their net realizable values based primarily on
estimated discounted cash flows, and other reserves of $4.1 million were
recorded to cover customer and other claims arising out of the acquisitions.
Substantially all of the above charges were non-cash asset write-offs.
Other Merger-related Costs
The Health Care Information Technology segment incurred costs totaling $13.8
million in fiscal 1999 due to an acquired company which had receivables
outstanding from HBOC competitors that became uncollectible and were written
off after the HBOC Transaction.
Acquisition-related Integration Costs
Acquisition-related integration costs of $32.3 million consist of $1.9
million incurred for salaries and benefits of integration and affiliation team
members of the Company and $30.4 million of other direct costs associated with
the integration and rationalization of recent acquisitions in the Health Care
Supply Management and Health Care Information Technology segments.
F-14
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Other Operating Items
Other operating items of $36.2 million consist of losses resulting from the
implementation of a contract administration system and expenses incurred for
corrective actions associated with that system.
Fiscal 1998 Unusual Items
In fiscal 1998, the Company recorded pre-tax charges for unusual items of
$30.6 million in the Health Care Supply Management segment and $65.5 million
in the Health Care Information Technology segment, $96.1 million in the
aggregate. Following is a description of these items in fiscal 1998:
Transaction Costs
Total unusual items include $32.7 million of transaction costs incurred in
connection with the acquisitions described above, primarily consisting of
professional fees such as investment banking, legal and accounting fees. This
amount includes $16.7 million of transaction costs related to the Company's
termination of its proposed merger with AmeriSource Health Corporation.
Substantially all related invoices were paid during fiscal 1998.
Employee Benefits
The Company incurred $1.4 million of employee benefit costs related to
change of control provisions associated with the acquisition of NHES.
Severance
Severance costs totaled $17.5 million resulting from the consolidation of
acquired company operating and corporate functions, the consolidation of
existing U.S. Health Care pharmaceutical distribution centers, and other
employee terminations. The severance charge relates to the termination of
approximately 600 employees primarily in distribution center and back office
functions in the Health Care Supply Management segment, and operating and
corporate personnel in the Health Care Information Technology segment.
Severance of $7.4 million was paid during fiscal 1998. The remaining severance
was paid in fiscal 1999.
Restructuring and Asset Impairments
In fiscal 1998, the Health Care Supply Management segment recorded a $3.7
million loss on the sale of an investment, and a charge of $0.7 million
associated with the closure of a facility in Canada.
In connection with acquisitions made by the Health Care Information
Technology segment, duplicate products, facilities and internal systems were
identified which resulted in charges of $22.4 million (all non-cash),
consisting primarily of capitalized costs and intangible write-offs of $19.3
million related to discontinuance of duplicate product lines. Revenues and net
income from the discontinued product lines were replaced by acquired product
lines. In addition, a $10.0 million minority investment became impaired and
was written off (all non-cash).
Other Merger-related Costs
In connection with the acquisition of ATT-UK by the Health Care Information
Technology segment, a charge of $7.7 million was recorded to write off the
portion of the purchase price allocated to purchased in-process technology for
which feasibility had not been established as of the acquisition date.
F-15
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Results Of Operations
The discussion of the financial results that follows focuses on the results
of continuing operations excluding unusual items, as management believes such
discussion is the most informative representation of recurring, non-
transactional related operating results.
Health Care Supply Management
The following table identifies significant performance indicators of the
Health Care Supply Management segment:
2000 1999 1998
------- ------- -------
(dollars in millions)
Revenues
Excluding Sales to
customers' warehouses
Pharmaceutical
distribution and
services
U.S. Health Care........ $21,824 $17,400 $14,418
International........... 2,237 1,953 1,639
------- ------- -------
Total pharmaceutical.... 24,061 19,353 16,057
Medical-Surgical
distribution and
services................ 2,706 2,292 1,879
------- ------- -------
Subtotal................ 26,767 21,645 17,936
Sales to customers'
warehouses.............. 8,747 6,813 2,704
------- ------- -------
Total................... $35,514 $28,458 $20,640
======= ======= =======
Revenue growth
Excluding sales to
customers' warehouses
Pharmaceutical
distribution and
services
U.S. Health Care........ 25% 21% 32%
International........... 15 19 8
Total pharmaceutical.... 24 21 29
Medical-Surgical
distribution and
services................ 18 22 N.M.
Total excluding sales to
customers' warehouse.... 24 21 42
Total.................... 25 38 34
Operating profit.......... $ 536.4 $ 521.9 $ 383.4
Percentage change........ 3% 36% 64%
Gross profit margin(1).... 6.8 7.4 7.4
Operating expense
margin(1)................ 4.8 5.0 5.3
Operating profit as a
percent of revenues(1)... 2.0 2.4 2.1
Depreciation.............. $ 63.1 $ 51.8 $ 48.5
Amortization of
intangibles.............. 26.8 22.6 17.4
Capital expenditures...... 93.8 97.2 82.1
Capital employed at year-
end
Committed capital(2)
Operating working
capital(3).............. $ 3,266 $ 2,176 $ 2,061
Other--net............... 190 71 80
------- ------- -------
Total................... 3,456 2,247 2,141
Intangibles.............. 982 989 795
------- ------- -------
Total................... $ 4,438 $ 3,236 $ 2,936
======= ======= =======
Returns
Committed capital(4)..... 19.0% 20.3% 19.8%
Total capital
employed(5)............. 13.3 14.4 13.4
- --------
(1) Excluding sales to customers' warehouses.
(2) Capital employed less cash and cash equivalents, marketable securities and
goodwill and other intangibles.
(3) Receivables and inventories net of related payables.
(4) Operating profit before amortization of intangibles divided by average
committed capital.
(5) Operating profit divided by average capital employed.
F-16
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Over the most recent three fiscal years, the Health Care Supply Management
business has experienced strong revenue growth from internal growth and
acquisitions. Revenue growth in this segment, excluding sales to customers'
warehouses, is as follows:
2000 1999 1998
----- ----- ------
Pharmaceutical Distribution and
Services
Existing businesses............... 24.0% 20.0% 13.4%
Acquisitions...................... 0.3 0.5 15.6
----- ----- ------
Total............................. 24.3% 20.5% 29.0%
===== ===== ======
Medical-Surgical Supply Distribution
and Services
Existing businesses............... 6.5% 14.5% Not
Acquisitions...................... 11.5 7.5 Meaningful
----- -----
Total............................. 18.0% 22.0%
===== =====
Internal growth in Health Care Supply Management has been driven primarily
by increased sales volume to the retail chain and institutional customer
segments. Sales to retail customers have benefited from the Company's service
offerings and programs that focus on broad product selection, service levels,
inventory carrying cost reductions, connectivity and automation technologies.
Growth with institutional customers has benefited from the focus on reducing
both product cost and internal labor and logistics costs for the customers.
Services available include pharmaceutical distribution, medical-surgical
supply distribution, pharmaceutical dispensing automation, pharmacy
outsourcing and utilization reviews. These retail chain and institutional
capabilities have resulted in the implementation of significant long-term
contracts with major customers.
2000 1999 1998
----- ----- ------
Customer Mix--Pharmaceutical
Distribution and Services Revenues
Indepependents.................... 25.5% 28.7% 34.9%
Retail Chains..................... 42.4 38.5 32.3
Institutions...................... 32.1% 32.8% 32.8%
----- ----- ------
100.0% 100.0% 100.0%
===== ===== ======
Sales to customers' warehouses are large volume sales of pharmaceuticals to
major self-warehousing drugstore chains whereby the Company acts as an
intermediary in the order and subsequent delivery of products directly from
the manufacturer to the customers' warehouses. The growth in sales to
customers' warehouses in fiscal 1999 and 2000 was primarily the result of two
significant contracts with retail chains which also provided new direct store
sales growth.
The operating profit margin declined in fiscal 2000, due to a decline in the
gross profit margin reflecting the competitive environment, a shift in the mix
of pharmaceutical distribution revenues to a higher proportion of chain
business and somewhat lower procurement profits as a percentage of revenues in
the current year. Procurement profits benefited in the prior year from price
increases on inventory builds associated with new customer agreements. The
decline in the gross profit margin was offset, in part, by a lower operating
expense ratio reflecting continuing productivity improvements. The improvement
in the operating expense ratio was achieved despite higher expenses for
receivable and transaction processing related charges. Operating margins
expanded in fiscal 1999 and 1998 due to a change in business mix to higher
margin businesses resulting from acquisitions in pharmaceutical services for
manufacturers, retail and institutional automation and medical-
F-17
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
surgical supply distribution. In addition, expanded profitability from product
procurement, warehouse automation and efficiency improvements, and fixed cost
leverage from volume growth contributed to the margin expansion.
The Health Care Supply Management segment uses the last-in, first-out (LIFO)
method of accounting for the majority of its inventories which results in cost
of sales that more closely reflect replacement cost than other accounting
methods, thereby mitigating the effects of inflation and deflation on
operating profit. The practice in the Health Care Supply Management
distribution businesses is to pass published price changes from suppliers on
to customers. Manufacturers generally provide the Company with price
protection, which prevents inventory losses. Price declines on many generic
pharmaceutical products in this segment in each of the fiscal years ended
March 31, 2000, 1999 and 1998 have moderated the effects of inflation in other
product categories, which resulted in minimal overall price changes in those
fiscal years.
Fiscal 2000 and 1999 capital expenditures include higher levels associated
with new systems and facility consolidations in the medical-surgical business
and growth in the automation and services businesses. Fiscal 1998 capital
expenditures reflect expansion of certain facilities in conjunction with the
integration and rationalization of the Drug Trading business and
U.S. pharmaceutical and medical-surgical businesses acquired in late fiscal
1997.
The Health Care Supply Management segment requires a substantial investment
in operating working capital (customer receivables and inventories net of
related trade payables). Average capital employed increased in fiscal 2000 and
1999, reflecting the MedManagement and RedLine acquisitions, capital spending
and increased working capital to support the 24% and 19% growth from existing
businesses. Operating working capital is susceptible to large variations
during the year as a result of inventory purchase patterns and seasonal
demands. Inventory purchase activity is a function of sales activity, new
customer build-up requirements and the desired level of investment inventory.
Operating working capital was significantly higher at March 31, 2000 compared
to 1999. The working capital increase primarily reflects increases in
receivables and net financial inventories (inventories net of accounts and
drafts payable) resulting from sales growth, the absence of accounts
receivable sales at March 31, 2000 compared to $400.0 million of sales at
March 31, 1999 (pursuant to a committed revolving receivables sales facility,
see "Capitalization" below) and the timing of vendor payments. At March 31,
1999, vendor payables were unusually high relative to inventory both as a
result of purchases made late in the fiscal year and the timing of vendor
payments. As a result, average operating working capital levels in fiscal 2000
were significantly higher than the March 31, 1999 balance. At March 31, 1998,
vendor payables were relatively low due to a lower level of purchase activity
at year end and revised payment terms with certain vendors in the medical-
surgical distribution and services business.
F-18
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Health Care Information Technology
Significant performance indicators of the Health Care Information Technology
segment are as follows:
2000 1999 1998
------ ------ ------
(dollars in
millions)
Revenues
Software............................................. $ 209 $ 345 $ 406
Services............................................. 905 984 809
------ ------ ------
Subtotal............................................ 1,114 1,329 1,215
Hardware............................................. 93 209 214
------ ------ ------
Total revenues...................................... 1,207 1,538 1,429
====== ====== ======
Revenue Growth
Software............................................. (39)% (15)% 27%
Services............................................. (8) 22 25
Subtotal............................................ (16) 9 26
Hardware............................................. (55) (2) 32
Total............................................... (22) 8 27
Operating profit...................................... $127.6 $184.0 $292.5
Percent change....................................... (31)% (37)% 44%
Gross profit margin................................... 42.9 50.5 55.5
Operating expense margin.............................. 32.3 38.5 35.0
Operating profit as a percent of revenues............. 10.6 12.0 20.5
Depreciation.......................................... $ 49.8 $ 46.4 $ 35.9
Amortization of intangibles........................... 22.3 18.4 17.4
Amortization of capitalized software.................. 29.5 25.9 21.3
Capital expenditures.................................. 48.0 79.2 76.9
Capital employed
Committed capital(1)................................. $ 159 $ 382 $ 383
Intangibles.......................................... 123 226 188
------ ------ ------
Total............................................... $ 282 $ 608 $ 571
====== ====== ======
Returns
Committed capital(2)................................. 42.5% 65.1% 126.8%
Total capital employed(3)............................ 20.0 38.0 68.2
- --------
(1) Capital employed less cash and cash equivalents, marketable securities and
goodwill and other intangibles.
(2) Operating profit before amortization of intangibles divided by average
committed capital.
(3) Operating profit divided by average capital employed.
Health Care Information Technology revenues declined 22% to $1.2 billion in
fiscal 2000. Revenues increased 8% to $1.5 billion in fiscal 1999. Management
believes the decline in fiscal 2000 revenues reflects the overall industry-
wide slowdown in sales of health care information technology software and
hardware products resulting from delays in purchasing decisions that are
attributed both to Year 2000 issues and a general weakness in demand for
healthcare software. Services revenues associated with software implementation
also declined for the same reasons. Also contributing to the decline was the
impact to the business caused by the results of the Investigation and Health
Care Information Technology senior management changes made early in the year.
In addition, the terms of certain contracts for software and implementation
services executed late in the fiscal year
F-19
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
resulted in such contracts being accounted for under the contract method,
which had the impact of dampening software revenues as the related contract
revenue will be recognized over the respective contract term as services are
provided. The fiscal 1999 decline in software revenues of 15% reflects a
general industry-wide slowdown in sales of health care information technology
products and changes in accounting due to the adoption of Statement of
Position 97-2, "Software Revenue Recognition", effective April 1, 1998. In
addition, during fiscal 1999, the Health Care Information Technology segment
experienced delays in current and potential customers' purchasing decisions
with respect to its enterprise solutions. Management believes such delays were
due to Year 2000 issues, technological innovations, increased competition,
greater requirement for integration of products and general market conditions
in the computer software industry. Services revenues increased in fiscal 1999,
in part, as implementation activity increased for enterprise solutions and
materials management products as a result of increased sales in fiscal 1998.
Outsourcing growth was strong as a significant number of new outsourcing
customers were added in fiscal 1999. In addition to general growth in services
as a result of a growing business, services revenues increased due to the full
year impact of the purchase of ATT-UK.
Hardware is sold as an accommodation to customers and at a significantly
lower operating margin than software and services. Fiscal 2000 and 1999
revenues from the sale of hardware reflect the lower level of software sales,
general price declines for hardware and a shift to less costly Microsoft
Windows NT(TM) platforms.
Management anticipates a shift in revenue mix away from one-time software
and hardware arrangements to arrangements that will require revenue to be
recognized over the term of the related contract as its strategy of providing
total information solutions to its customer base is pursued. Revenues will
include outsourcing and Application Service Providers (ASP) arrangements, and
contracts that will be accounted for under the contract method. These
agreements are expected to have the effect of dampening revenue in the near
term and could result in year-to-year declines in operating profit, but should
result in more predictable revenue streams and operating profits over future
periods.
Health Care Information Technology segment operating profit before unusual
items declined 30.7% to $127.6 million in fiscal 2000 and 37% to $184.0
million in fiscal 1999. The declines in both years reflect the previously
discussed decline in overall sales and a lower mix of higher-margin software
sales in both fiscal 2000 and 1999 compared to 1998 (17% and 22% in fiscal
2000 and 1999, respectively, as compared to 28% in fiscal 1998, as a
percentage of total Health Care Information Technology revenues). In addition,
the fiscal 2000 operating profit includes an increased level of expenses to
enhance customer support and future product introductions. Fiscal 1999 results
also included a bad debt provision of $70 million and a termination fee
associated with a telecommunications contract. The bad debt provision
reflects, in part, inadequate staffing of and focus on receivables collections
during a portion of fiscal 1999, implementation issues associated with certain
products and contingencies associated with litigation.
The fiscal 1999 and 1998 capital expenditures reflect the acquisition and
construction of the segment's new corporate office building in Georgia and the
purchase of an aircraft in 1998.
The return on committed capital and total capital employed in fiscal 2000
and 1999 reflect the previously discussed decline in operating profit.
e-Health
The e-Health segment was added in fiscal 2000 following the Company's
acquisition of Abaton.com (see Fiscal Year 2000 Acquisitions) which reported
revenue of $400,000 and an operating loss before special items of $12.2
million. The operating loss reflects the Company's continued investment in the
development of internet-based solutions for physicians, and includes goodwill
amortization expense of $6.3 million resulting from the acquisition.
F-20
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
In seeking to bring new physician and medical management solutions to market
quickly, the Company formed a new business unit, iMcKesson, in May 2000. The
goal of iMcKesson is to use the power of the Internet and other innovative,
emerging technologies to share information real-time to drive improved
clinical outcomes, cost efficiencies and increased satisfaction for all
healthcare participants. This unit will include the current assets of e-Health
together with selected assets from the Health Care Information Technology and
Health Care Supply Management segments.
iMcKesson's strategy is to combine existing teams, products and services and
to provide a more focused approach to the development of a series of unique
solutions for physician practices, medical management and health care
connectivity.
International Operations
International operations accounted for 6.4%, 6.9%, 7.7% and 8.7%, 6.6%, 6.1%
of fiscal 2000, 1999 and 1998 consolidated revenues and operating profits
before unusual items, respectively, and 5.8%, 5.5% and 5.9% of consolidated
assets at March 31, 2000, 1999 and 1998, respectively. International
operations are subject to certain opportunities and risks, including currency
fluctuations. The Company monitors its operations and adopts strategies
responsive to changes in the economic and political environment in each of the
countries in which it operates.
Consolidated Working Capital
Operating working capital (receivables and inventories net of related
payables) as a percent of revenues was 9.0%, 8.4% and 10.6% at March 31, 2000,
1999 and 1998, respectively. Excluding the impact of receivable sales,
operating working capital as a percent of revenues was 9.0%, 9.7% and 12.0% at
March 31, 2000, 1999 and 1998, respectively. The calculation is based on year-
end balances and assumes major purchase acquisitions occurred at the beginning
of the year.
The improvement in the operating working capital ratio in fiscal 2000
(excluding the impact of receivable sales) is due to a reduction in year-end
days sales outstanding in both customer receivables and inventory, reflecting
working capital initiatives. This improvement was offset, in part, by lower
days sales outstanding in payables at March 31, 2000 compared to March 31,
1999.
The decline in the operating working capital ratio in fiscal 1999 is
primarily due to the timing of vendor payments in the U.S. pharmaceutical and
medical-surgical distribution businesses which offset the effect of operating
working capital growth in the Health Care Information Technology segment.
CASH FLOW AND LIQUIDITY
Cash and cash equivalents and marketable securities (primarily U.S. Treasury
securities with maturities of one year or less) were $606 million, $262
million, and $682 million at March 31, 2000, 1999 and 1998, respectively.
The increase in fiscal 2000 reflects proceeds from the February 2000 sale of
the Water Products business and a private placement of term debt (see "Other
Financing Activities" below).
The decline in fiscal 1999 reflects the use of HBOC cash balances following
the HBOC Transaction to pay down short-term borrowings. Marketable securities
balances include $17 million, $23 million and $77 million at March 31, 2000,
1999 and 1998, respectively, from the fiscal 1997 sale of Armor All, which is
restricted and held in trust as exchange property in connection with the
Company's exchangeable debentures.
F-21
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Cash Flows from Operations Available for Capital Expenditures
The following table summarizes the excess (deficit) of cash flow from
operations over capital expenditures:
Years Ended March
31,
-------------------
2000 1999 1998
----- ----- -----
(in millions)
Net cash provided (used) by continuing operations before
receivable sales and capital expenditures:
Income from continuing operations(1)................... $ 185 $ 61 $ 275
Depreciation........................................... 116 104 90
Amortization of intangibles............................ 55 41 35
Amortization of capitalized software................... 30 26 21
Other non-cash charges(1).............................. 246 361 191
Working capital changes................................ (635) (437) (542)
----- ----- -----
Total before receivable sales and capital
expenditures........................................ (3) 156 70
Receivable sales......................................... (400) 100 153
Capital expenditures..................................... (145) (199) (166)
----- ----- -----
Excess (Deficit)..................................... $(548) $ 57 $ 57
===== ===== =====
- --------
(1) Includes previously discussed "Unusual Items".
Cash flows from continuing operations reflect the cash earnings of the
Company's continuing businesses and the effects of the changes in working
capital. The working capital increase in fiscal 2000 primarily reflects the
timing of vendor payments in the prior year and increases in receivables and
inventories associated with sales growth in the Health Care Supply Management
segment that were offset, in part, by improvements in days sales outstanding
in both customer receivables and inventories resulting from working capital
initiatives. The March 31, 1999 payables balance was approximately $400
million higher than expected based on the historical relationship of payables
to sales. The increase in working capital requirements in fiscal 2000 reflects
the restoration of payables in the current year to a more normalized level.
Adjusting for the impact of the payables fluctuation, net cash provided (used)
by continuing operations before receivable sales and capital expenditures
would have been approximately $397 million and $(244) million in fiscal 2000
and 1999, respectively. The working capital increase in fiscal 1999 primarily
reflects increases in receivables and inventories resulting from sales growth
in all operating segments offset, in part, by the higher payables balance due
to the timing of vendor payments in the Health Care Supply Management segment.
Other Financing Activities
In February 2000, the Company completed the sale of its wholly-owned
subsidiary McKesson Water Products Company to Groupe Danone for $1.1 billion
in cash, which enabled the Company to reduce short-term borrowings and add to
its cash and marketable securities.
Also in February 2000, the Company completed a private placement of $335
million in term debt, the proceeds of which were used to retire term debt
maturing in March 2000 and for other general corporate purposes. $100 million
of the debt matures on February 28, 2005, $20 million matures on February 28,
2007 and $215 million is due on February 28, 2010.
In May 1998, the Company's Employee Stock Ownership Plan purchased
approximately 1.3 million shares of newly issued Company common stock from the
Company at a market value of $78.125 per share.
In February 1998, the Company issued fixed-rate-unsubordinated debt totaling
$300 million to finance internal growth. On March 1, 2005, $150 million of the
debt matures, and the remaining $150 million is due on March 1, 2008.
F-22
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
In October 1997, a subsidiary of the Company issued $125 million of fixed-
rate debt, which matures on November 1, 2002. Proceeds were used to pay down
short-term borrowings of the Company's Canadian subsidiary, Medis.
Credit Resources
The Company currently has $1.275 billion of available credit under committed
revolving credit lines: a $400 million five-year facility expiring in fiscal
2004 and an $875 million facility expiring on October 20, 2000. These
revolving credit facilities are primarily intended to support commercial paper
borrowings. The Company also has available a committed revolving receivables
sale facility aggregating $850 million. At March 31, 2000, the Company had no
commercial paper or revolving credit borrowings outstanding and its committed
receivables sale facility was fully available.
The Company's senior debt credit ratings from S&P, Duff & Phelps, and
Moody's are currently BBB, BBB+ and Baa2, and its commercial paper ratings are
currently A-2, D-2, and P-2, respectively. The Company's ratings are on
negative credit outlook.
Management believes that the Company has adequate access to credit sources
to meet its funding requirements. Funds necessary for future debt maturities
and other cash requirements of the Company are expected to be met by existing
cash balances, cash flow from operations, existing credit sources or other
capital market transactions.
Market Risk
The Company's major risk exposure is changing interest rates, primarily in
the United States. The Company manages interest rates through the use of a
combination of fixed and floating rate debt. Interest rate swaps may be used
to adjust interest rate exposures when appropriate, based upon market
conditions. These contracts are entered into with major financial institutions
thereby minimizing the risk of credit loss.
If interest rates on existing variable-rate debt were to change 50 basis
points, the Company believes that its results from operations and cash flows
would not be materially affected.
The Company conducts business in Canada, Mexico and the United Kingdom, and
is subject to foreign currency exchange risk on cash flows related to sales,
expenses, financing and investment transactions. If exchange rates on such
currencies were to fluctuate 10%, the Company believes that its results from
operations and cash flows would not be materially affected. Aggregate foreign
exchange translation gains and losses included in net income, comprehensive
income and in equity are discussed in Financial Note 1 on pages F-37 to F-39
of the accompanying consolidated financial statements.
F-23
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Capitalization
The Company's capitalization was as follows:
March 31
----------------------
2000 1999 1998
------ ------ ------
(in millions)
Short-term borrowings.................................. $ -- $ 17 $ 94
Term debt.............................................. 1,232 1,097 1,111
Exchangeable debt...................................... 28 37 113
------ ------ ------
Total debt........................................... 1,260 1,151 1,318
Convertible preferred securities of subsidiary trust... 196 196 195
Stockholders' equity................................... 3,566 2,882 2,562
------ ------ ------
Total capitalization................................. $5,022 $4,229 $4,075
====== ====== ======
Debt-to-capital ratio at March 31...................... 25.1% 27.2% 32.3%
Net debt-to-capital ratio at March 31(1)............... 14.8% 22.4% 18.8%
Average interest rates during year.....................
Total debt........................................... 6.4% 6.3% 6.5%
Short-term borrowings................................ 5.6 5.6 5.6
Other debt........................................... 6.9 6.7 7.0
- --------
(1) Ratio computed as net debt (total debt less cash and cash equivalents and
marketable securities) to net capital employed (capital employed less cash
and cash equivalents and marketable securities).
The decline in the net debt-to-capital ratio at March 31, 2000 primarily
reflects the February 2000 proceeds from the sale of the Water Products
business. The increase in the net debt-to-capital ratio at March 31, 1999
primarily reflects the increase in net debt to fund internal growth and
acquisitions.
The Company has an $850 million committed receivable sales facility which
was fully available at March 31, 2000. The Company's receivable sales program
in March 1999 and 1998, provided for the sale by the Company of $400.0 million
and $299.9 million, respectively, of undivided interests in the Company's
trade accounts receivable. The program qualifies for sale treatment under
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
sales were recorded at the estimated fair values of the receivables sold,
reflecting discounts for the time value of money based on U.S. commercial
paper rates and estimated loss provisions.
Average diluted shares were 289.6 million in fiscal 2000, 289.8 million in
fiscal 1999 and 282.1 million in fiscal 1998. Common stock outstanding
increased to 283.4 million at March 31, 2000 from 280.6 million at March 31,
1999 and 271.0 million at March 31, 1998, due primarily to the issuance of
common stock under employee benefit plans.
Environmental Matters
The Company's continuing operations do not require ongoing material
expenditures to comply with federal, state and local environmental laws and
regulations. However, in connection with the disposition of its chemical
operations in fiscal 1987, the Company retained responsibility for certain
environmental obligations. In addition, the Company is a party to a number of
proceedings brought under the Comprehensive Environmental Response,
Compensation and Liability Act (commonly known as "Superfund"), and other
federal and state environmental statutes primarily involving sites associated
with the operation of the Company's former chemical distribution
F-24
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
businesses. In fiscal 2000, a $2.0 million increase to the reserves for these
environmental matters was recorded within discontinued operations. There were
no adjustments made to the reserves in fiscal 1999 and 1998. Management does
not believe that changes in the remediation cost estimates in future periods,
or the ultimate resolution of the Company's environmental matters, will have a
material impact on the Company's consolidated financial position or results of
operations. See Financial Note 18, "Other Commitments and Contingent
Liabilities" on pages, F-65 to F-70 of the accompanying consolidated financial
statements.
Income Taxes
The tax rate on income from continuing operations (excluding unusual items)
was 38.5% in fiscal 2000, 37.5% in fiscal 1999 and 38.4% in fiscal 1998. The
increase in the effective rate from fiscal 1999 to 2000 primarily reflects the
impact of non-deductible goodwill amortization associated with purchase
acquisitions made late in fiscal 1999 and in fiscal 2000.
NEW ACCOUNTING PRONOUNCEMENTS
See Financial Note 1 "Significant Accounting Policies" on pages F-37 to F-39
of the accompanying consolidated financial statements.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following additional factors may affect the Company's future results:
Adverse judgments regarding the restatement of the Company's historical
financial statements may cause it to incur material losses.
Subsequent to the Company's April 28, 1999 restatement of financial results
announcement, and as of June 1, 2000, 79 lawsuits have been filed in various
state and federal courts against the Company, certain current or former
officers or directors of the Company and other defendants (see Financial Note
18, "Other Commitments and Contingent Liabilities" on pages F-65 to F-70 of
the accompanying consolidated financial statements.) In addition, the United
States Attorney's Office for the Northern District of California and the
San Francisco District Office of the SEC have also commenced investigations in
connection with the matters relating to the restatement of previously reported
amounts.
The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amount of, or
potential range of, loss with respect to these proceedings. In addition, the
timing of the final resolution of these proceedings is uncertain. The range of
possible resolutions of these proceedings could include judgments against the
Company or settlements that could require substantial payments by the Company
which could cause it to incur material losses.
The restatement of the Company's earnings may negatively impact the management
of the Company's business.
The effect of the pending litigation and government investigations relating
to the previously announced financial restatement could present challenges in
attracting and retaining quality employees and managers. Such difficulties
could impair the Company's ability to manage the Company's business.
F-25
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Changes in the United States healthcare environment could have a material
negative impact on the Company's revenues.
The Company's products and services are intended to function within the
structure of the healthcare financing and reimbursement system currently being
used in the United States. In recent years, the healthcare industry has
changed significantly in an effort to reduce costs. These changes include
increased use of managed care, cuts in Medicare, consolidation of
pharmaceutical and medical-surgical supply distributors, and the development
of large, sophisticated purchasing groups. The Company expects the healthcare
industry to continue to change significantly in the future. Some of these
changes, such as a reduction in governmental support of healthcare services or
adverse changes in legislation or regulations governing the privacy of patient
information, or the delivery of pricing of pharmaceuticals and healthcare
services or mandated benefits, may cause healthcare industry participants to
greatly reduce the amount of the Company's products and services they purchase
or the price they are willing to pay for the Company's products and services.
Changes in pharmaceutical manufacturers' pricing or distribution policies
could also significantly reduce the Company's income. Due to the diverse range
of health care supply management and health care information technology
products and services the Company offers, such changes may adversely impact
the Company while not affecting some of the Company's competitors that offer a
more narrow range of products and services.
Substantial defaults in payment or a material reduction in purchases of the
Company's products by some large customers could have a significant negative
impact on the Company's financial condition, results of operations and
liquidity.
The Company's recent strategy has been to build relationships with large
customers that are achieving rapid growth. During the fiscal year ended March
31, 2000, sales to the Company's ten largest customers accounted for
approximately 52% of the Company's total revenues. Sales to the Company's
largest customer, Rite Aid Corporation, represented approximately 15% of the
Company's fiscal 2000 revenues. A significant portion of the Company's
increase in sales has been to a limited number of these large customers.
Consequently, the Company's sales and credit concentration have significantly
increased. Accordingly, any defaults in payment or a material reduction in
purchases of the Company's products by these large customers could have a
significant negative impact on the Company's financial condition, results of
operations and liquidity.
The ability of the Health Care Information Technology business to attract and
retain customers due to challenges in integrating software products and
technological advances may significantly reduce the Company's revenues.
The Company's Health Care Information Technology business delivers
enterprise-wide patient care, clinical, financial, managed care, payor and
strategic management software solutions, as well as networking technologies,
electronic commerce, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries.
Challenges in integrating software products used by the Health Care
Information Technology business with those of its customers could impair the
Company's ability to attract and retain customers and may reduce its revenues
or increase its expenses.
Future advances in the health care information systems industry could lead
to new technologies, products or services that are competitive with the
products and services offered by the Health Care Information Technology
business. Such technological advances could also lower the cost of such
products and services or otherwise result in competitive pricing pressure. The
success of the Health Care Information Technology business will depend, in
part, on its ability to be responsive to technological developments and
challenges, including pricing pressures and changing business models. In
addition, to remain competitive in the evolving health care information
systems marketplace, the Health Care Information Technology business must
develop new products on a timely basis. The failure to develop competitive
products and to introduce new products on a timely basis could curtail the
F-26
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
ability of the Health Care Information Technology business to attract and
retain customers and thereby significantly reduce the Company's net income.
Proprietary technology protections may not be adequate and proprietary rights
may infringe on rights of third parties.
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights in its products. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Although the Company
believes that its products and other proprietary rights do not infringe upon
the proprietary rights of third parties, from time to time third parties have
asserted infringement claims against the Company and there can be no assurance
that third parties will not assert infringement claims against the Company in
the future. Additionally, the Company may find it necessary to initiate
litigation to protect the Company's trade secrets, to enforce its patent,
copyright and trademark rights, and to determine the scope and validity of the
proprietary rights of others. These types of litigation can be costly and time
consuming. These litigation expenses or any damage payments resulting from
adverse determinations of third party claims could be significant and could
result in material losses to the Company.
Potential product liability claims arising from Health Care Information
Technology business products could result in material losses to the Company.
Some products of the Health Care Information Technology business provide
information for use by health care providers in providing health care to
patients. Although the Company has not experienced any material claims to
date, any failure of the Company's Health Care Information Technology business
products to provide accurate and timely information could result in claims
against it. The Company maintains insurance to protect against claims
associated with the use of such products, but there can be no assurance that
the Company's insurance coverage would adequately cover any claims asserted
against it. If its insurance coverage is not adequate, the Company may be
required to pay the damages which could result in material losses to it.
System errors and warranties in Health Care Information Technology business
products could cause unforeseen liabilities.
The Company's Health Care Information Technology business' systems are very
complex. As with complex systems offered by others, the Company's systems may
contain errors, especially when first introduced. The Health Care Information
Technology business' systems are intended to provide information for health
care providers in providing health care to patients. Therefore, users of its
products have a greater sensitivity to system errors than the market for
software products generally. Failure of a client's system to perform in
accordance with its documentation could constitute a breach of warranty and
could require the Company to incur additional expense in order to make the
system comply with the documentation. If such failure is not timely remedied,
it could constitute a material breach under a contract allowing the client to
cancel the contract.
F-27
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Concluded)
The Company's business could be hindered if it is unable to complete and
integrate acquisitions successfully.
An element of the Company's business is to pursue strategic acquisitions
that either expand or complement its business. The Company routinely reviews
such potential acquisition opportunities and has historically engaged in
numerous acquisitions. Integration of acquisitions, including the HBOC
Transaction, involves a number of special risks. Such risks include:
. the diversion of management's attention to the assimilation of the
operations of businesses the Company has acquired;
. difficulties in the integration of operations and systems and the
realization of potential operating synergies;
. difficulties in the integration of any acquired companies operating in a
different sector of the health care industry;
. delays or difficulties in opening and operating larger distribution
centers in a larger and more complex distribution network;
. the assimilation and retention of the personnel of the acquired
companies;
. challenges in retaining the customers of the combined businesses; and
. potential adverse effects on operating results.
If the Company is unable to successfully complete and integrate strategic
acquisitions in a timely manner, its business and the Company's growth
strategies could be negatively affected.
The Company's issuance of equity to finance acquisitions could have a
potential dilutive effect on its stock.
The Company anticipates that it will finance acquisitions, at least partly
by incurring debt or by the issuance of additional securities. The use of
equity financing, rather than debt, for acquisitions would dilute the
ownership of the Company's then current stockholders.
F-28
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-29
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
McKesson HBOC, Inc:
We have audited the accompanying consolidated balance sheets of
McKessonHBOC, Inc. and subsidiaries (the "Company") as of March 31, 2000,
1999, and 1998, and the related statements of consolidated income,
consolidated stockholders' equity and consolidated cash flows for the years
then ended. Our audits also included the supplementary consolidated financial
statement schedule listed in Item 14(a). These consolidated financial
statements and supplementary consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and supplementary
consolidated financial statement schedule based on our audits. The
consolidated financial statements and supplementary consolidated financial
statement schedule give retroactive effect to the acquisition by McKesson
Corporation and subsidiaries of HBO & Company and subsidiaries ("HBOC") on
January 12, 1999, which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements. We did not audit
the consolidated financial statements or supplementary consolidated financial
statement schedule of HBOC as of and for the year ended March 31, 1998 which
consolidated financial statements reflected total assets of $1,698.9 million
as of March 31, 1998, revenues of $1,429.2 million, and net income of $151.1
million for the year ended March 31, 1998. Those consolidated financial
statements and supplementary consolidated financial statement schedule were
audited by other auditors whose report (which expresses an unqualified opinion
and includes an explanatory paragraph related to certain shareholder
litigation) has been furnished to us, and our opinion, insofar as it relates
to the amounts included for HBOC as of and for the year ended March 31, 1998,
is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at March 31, 2000,
1999, and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, based on our audits and
the report of other auditors, such supplementary consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Financial Note 18 to the consolidated financial statements,
the Company is involved in certain shareholder litigation related to HBOC.
Deloitte & Touche LLP
San Francisco, California
May 19, 2000
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To McKesson HBOC, Inc.:
We have audited the consolidated balance sheet of HBO & COMPANY (a Delaware
corporation and a wholly-owned subsidiary of McKesson HBOC, Inc.) AND
SUBSIDIARIES as of March 31, 1998 and the related consolidated statements of
income, stockholders' equity, and cash flows (not presented herein) for the
year then ended. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of HBO & Company and
subsidiaries as of March 31, 1998 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule, valuation
and qualifying accounts (not presented herein), is presented to comply with
the Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
As discussed in Note 18 to the consolidated financial statements, McKesson
HBOC, Inc. is involved in certain shareholder litigation related to the
Company.
Arthur Andersen LLP
Atlanta, Georgia
July 12, 1999
F-31
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED INCOME
Years Ended March 31
-------------------------------
2000 1999 1998
--------- --------- ---------
(in millions except per share
amounts)
Revenues (Note 1)............................ $36,734.2 $30,028.7 $22,105.7
--------- --------- ---------
Costs and Expenses (Note 4)
Cost of sales.............................. 34,411.8 27,629.5 19,947.1
Selling.................................... 356.7 444.9 413.1
Distribution............................... 465.5 503.9 378.6
Research & development..................... 112.6 114.7 112.5
Administrative............................. 1,229.4 1,049.5 691.9
Interest................................... 114.2 118.0 103.2
--------- --------- ---------
Total.................................... 36,690.2 29,860.5 21,646.4
--------- --------- ---------
Gain on equity investments (Note 3).......... 269.1 -- --
--------- --------- ---------
Income from Continuing Operations Before
Income Taxes and Dividends on Preferred
Securities of Subsidiary Trust.............. 313.1 168.2 459.3
Income taxes (Note 15)....................... 122.3 101.4 177.9
--------- --------- ---------
Income from Continuing Operations Before
Dividends on Preferred Securities of
Subsidiary Trust............................ 190.8 66.8 281.4
Dividends on preferred securities of
subsidiary trust, net of tax benefit of
$4.0, $4.1 and $4.4 (Note 11)............... (6.2) (6.2) (6.2)
--------- --------- ---------
Income After Taxes
Continuing operations...................... 184.6 60.6 275.2
Discontinued operations (Notes 2 and 9).... 23.2 24.3 29.4
Discontinued operations (Notes 2 and 9)--
Gain on sale of McKesson Water Products
Company................................... 515.9 -- --
--------- --------- ---------
Net Income................................... $ 723.7 $ 84.9 $ 304.6
========= ========= =========
Earnings Per Common Share
Diluted
Continuing operations...................... $ 0.66 $ 0.22 $ 1.00
Discontinued operations.................... 0.08 0.09 0.10
Discontinued operations--Gain on sale of
McKesson Water Products Company........... 1.83 -- --
--------- --------- ---------
Total.................................... $ 2.57 $ 0.31 $ 1.10
========= ========= =========
Basic
Continuing operations...................... $ 0.66 $ 0.22 $ 1.03
Discontinued operations.................... 0.08 0.09 0.11
Discontinued operations--Gain on sale of
McKesson Water Products Company........... 1.83 -- --
--------- --------- ---------
Total.................................... $ 2.57 $ 0.31 $ 1.14
========= ========= =========
Shares on Which Earnings Per Common Share
Were Based
Diluted.................................... 281.3 275.2 282.1
Basic...................................... 281.3 275.2 266.2
See Financial Notes.
F-32
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
March 31
-----------------------------
2000 1999 1998
--------- -------- --------
(in millions except par
value)
Assets
Cash and cash equivalents (Note 1).............. $ 548.9 $ 233.7 $ 564.4
Marketable securities available for sale (Note
1)............................................. 57.0 28.2 117.1
Receivables (Note 6)............................ 3,034.5 2,552.0 1,931.8
Inventories (Note 7)............................ 4,149.3 3,522.5 2,603.1
Prepaid expenses (Note 15)...................... 175.8 116.4 101.7
--------- -------- --------
Total current assets.......................... 7,965.5 6,452.8 5,318.1
--------- -------- --------
Property, plant and equipment, net (Note 8)..... 555.4 529.6 448.6
Capitalized software............................ 92.2 106.9 77.2
Notes receivable................................ 100.9 73.0 34.0
Goodwill and other intangibles.................. 1,185.6 1,200.6 969.4
Net assets of discontinued operations........... -- 179.4 131.7
Other assets (Notes 15 and 16).................. 473.3 477.7 312.8
--------- -------- --------
Total assets.................................. $10,372.9 $9,020.0 $7,291.8
========= ======== ========
Liabilities
Drafts payable.................................. $ 205.6 $ 417.7 $ 283.6
Accounts payable--trade......................... 3,678.3 3,131.7 1,902.5
Deferred revenue................................ 368.7 408.6 282.1
Short-term borrowings........................... -- 16.7 93.8
Current portion of long-term debt (Note 10)..... 16.2 195.3 15.0
Salaries and wages.............................. 115.5 93.0 93.7
Taxes (Note 15)................................. 354.8 90.8 39.5
Interest and dividends.......................... 33.9 34.7 30.1
Other........................................... 348.8 356.3 343.5
--------- -------- --------
Total current liabilities..................... 5,121.8 4,744.8 3,083.8
--------- -------- --------
Postretirement obligations and other noncurrent
liabilities (Note 16).......................... 245.7 258.6 241.3
Long-term debt (Note 10)........................ 1,243.8 939.2 1,209.6
McKesson HBOC-obligated mandatorily redeemable
preferred securities of subsidiary grantor
trust whose sole assets are junior subordinated
debentures of McKesson HBOC (Note 11).......... 195.8 195.6 195.4
Other Commitments and Contingent Liabilities
(Note 18)
Stockholders' Equity
Common stock (400.0 shares authorized, 283.9,
281.1 and 271.2 issued as of March 31, 2000,
1999 and 1998, respectively; par value of $.01)
(Note 14)...................................... 2.8 2.8 2.7
Additional paid-in capital...................... 1,791.1 1,725.7 1,330.9
Other........................................... (126.1) (107.7) (59.1)
Retained earnings............................... 2,122.3 1,465.0 1,462.5
Accumulated other comprehensive losses.......... (97.1) (57.7) (54.9)
ESOP notes and guarantees (Note 16)............. (99.9) (115.5) (115.6)
Treasury shares, at cost (Note 14).............. (27.3) (30.8) (4.8)
--------- -------- --------
Stockholders' equity.......................... 3,565.8 2,881.8 2,561.7
--------- -------- --------
Total liabilities and stockholders' equity.... $10,372.9 $9,020.0 $7,291.8
========= ======== ========
See Financial Notes.
F-33
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Years Ended March 31, 2000, 1999 and 1998
(shares in thousands, dollars in millions)
Common
Stock Additional
-------------- Paid-in
Shares Amount Capital
------- ------ ----------
Balances, March 31, 1997............................ 260,205 $2.6 $1,081.0
Issuance of shares under employee plans (Note 14)... 10,957 0.1 249.0
Employee Stock Ownership Plan (ESOP) note payments..
Translation adjustment..............................
Additional minimum pension liability, net of tax of
$(2.2) (Note 16)...................................
Net income..........................................
Other (Note 16)..................................... 0.9
Cash dividends declared (Note 14)...................
------- ---- --------
Balances, March 31, 1998............................ 271,162 2.7 1,330.9
Issuance of shares under employee plans (Note 14)... 7,454 0.1 288.3
ESOP note payments..................................
Translation adjustment..............................
Additional minimum pension liability, net of tax of
$(0.2) (Note 16)...................................
Net income..........................................
Sale of shares to ESOP.............................. 1,346 105.2
Other (Note 16)..................................... 1,161 1.3
Cash dividends declared (Note 14)...................
------- ---- --------
Balances, March 31, 1999............................ 281,123 2.8 1,725.7
Issuance of shares under employee plans (Note 14)... 2,745 61.4
ESOP note payments..................................
Translation adjustment..............................
Additional minimum pension liability, net of tax of
$0.2 (Note 16).....................................
Net income..........................................
Acquisition of Abaton.com (Note 2).................. 8.1
Unrealized loss on investments, net of tax of $23.8
(Note 3)...........................................
Other (Note 16)..................................... (4.1)
Cash dividends declared (Note 14)...................
------- ---- --------
Balances, March 31, 2000............................ 283,868 $2.8 $1,791.1
======= ==== ========
See Financial Notes.
F-34
Accumulated Treasury
Other ESOP Notes --------------
Other Retained Comprehensive and Common Stockholders' Comprehensive
Capital Earnings Losses Guarantees Shares Amount Equity Income
- ------- -------- ------------- ---------- ------ ------ ------------- -------------
$ (23.5) $1,219.2 $(50.9) $(118.3) (1,224) $(28.3) $2,081.8
(35.6) 1,045 23.5 237.0
2.7 2.7
(0.6) (0.6) $ (0.6)
(3.4) (3.4) (3.4)
304.6 304.6 304.6
0.7 1.6
(62.0) (62.0)
- ------- -------- ------ ------- ------ ------ -------- ------
(59.1) 1,462.5 (54.9) (115.6) (179) (4.8) 2,561.7 $300.6
======
(48.6) (360) (26.0) 213.8
0.1 0.1
(2.5) (2.5) (2.5)
(0.3) (0.3) (0.3)
84.9 84.9 84.9
105.2
2.5 3.8
(84.9) (84.9)
- ------- -------- ------ ------- ------ ------ -------- ------
(107.7) 1,465.0 (57.7) (115.5) (539) (30.8) 2,881.8 $ 82.1
======
(18.4) (92) (3.0) 40.0
15.6 15.6
(3.7) (3.7) (3.7)
0.3 0.3 0.3
723.7 723.7 723.7
8.1
(36.0) (36.0) (36.0)
1.1 116 6.5 3.5
(67.5) (67.5)
- ------- -------- ------ ------- ------ ------ -------- ------
$(126.1) $2,122.3 $(97.1) $ (99.9) (515) $(27.3) $3,565.8 $684.3
======= ======== ====== ======= ====== ====== ======== ======
F-35
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended March 31
---------------------------
2000 1999 1998
--------- ------- -------
(in millions)
Operating Activities
Income from continuing operations................ $ 184.6 $ 60.6 $ 275.2
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation.................................. 116.2 103.9 89.8
Amortization of intangibles and capitalized
software held for sale....................... 85.1 66.9 56.1
Provision for bad debts....................... 116.1 80.5 11.1
Deferred taxes on income...................... 26.5 (33.0) 48.1
Other noncash (Note 4)........................ 103.9 314.5 131.6
--------- ------- -------
Total..................................... 632.4 593.4 611.9
--------- ------- -------
Effects of changes in:
Receivables................................... (732.5) (678.6) (223.6)
Inventories................................... (629.8) (894.2) (296.9)
Accounts and drafts payable................... 296.1 1,268.6 55.3
Taxes......................................... 40.1 (46.1) 99.9
Deferred revenue.............................. 14.0 126.5 80.9
Other......................................... (23.2) (113.4) (104.7)
--------- ------- -------
Total..................................... (1,035.3) (337.2) (389.1)
--------- ------- -------
Net cash provided (used) by continuing
operations............................... (402.9) 256.2 222.8
Discontinued operations (Notes 2 and 9).......... (13.1) (23.6) 0.5
--------- ------- -------
Net cash provided (used) by operating
activities............................... (416.0) 232.6 223.3
--------- ------- -------
Investing Activities
Purchases of marketable securities............... (161.1) (27.9) (118.3)
Maturities of marketable securities.............. 162.8 117.9 179.0
Property acquisitions............................ (145.1) (199.2) (166.4)
Properties sold.................................. 14.9 22.3 19.4
Proceeds from sales of subsidiaries and
investments (Note 2)............................ 1,077.9 -- 1.8
Notes receivable issuances, net.................. (36.9) (32.9) 0.4
Acquisitions of businesses, less cash and short-
term investments acquired (Note 2).............. (128.9) (277.8) (177.5)
Other............................................ (128.8) (188.1) (133.1)
--------- ------- -------
Net cash provided (used) by investing
activities............................... 654.8 (585.7) (394.7)
--------- ------- -------
Financing Activities (Notes 10, 11 and 14)
Proceeds from issuance of debt................... 379.4 82.7 446.7
Repayment of debt................................ (267.3) (189.5) (215.7)
Dividends paid on convertible preferred
securities...................................... (10.0) (10.0) (10.3)
Capital stock transactions:
Issuances........................................ 26.2 224.9 147.8
ESOP note payments............................... 15.6 0.1 2.6
Dividends paid................................... (67.5) (84.8) (58.8)
Other............................................ -- (1.0) (8.1)
--------- ------- -------
Net cash provided by financing activities. 76.4 22.4 304.2
--------- ------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 315.2 (330.7) 132.8
Cash and Cash Equivalents at beginning of year... 233.7 564.4 431.6
--------- ------- -------
Cash and Cash Equivalents at end of year......... $ 548.9 $ 233.7 $ 564.4
========= ======= =======
See Financial Notes.
F-36
McKESSON HBOC, INC.
FINANCIAL NOTES
1. Significant Accounting Policies
The consolidated financial statements of McKesson HBOC, Inc. ("McKesson
HBOC" or the "Company") include the financial statements of all majority-owned
companies, except those classified as discontinued operations. All significant
intercompany transactions and balances have been eliminated. Certain prior
year amounts have been reclassified to conform to the current year
presentation.
The Company is organized under three operating segments, Health Care Supply
Management, Health Care Information Technology, and e-Health. Within the
United States and Canada, the Health Care Supply Management segment is a
leading wholesale distributor of ethical and proprietary drugs, medical-
surgical supplies and health and beauty care products principally to chain and
independent drug stores, hospitals, alternate care sites, food stores and mass
merchandisers. The Health Care Information Technology segment delivers
enterprise-wide patient care, clinical, financial, managed care, payor and
strategic management software solutions, as well as networking technologies,
electronic commerce, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries. The
e-Health segment provides internet-based clinical applications for use by
physician practices, pharmacy benefit managers, benefit payors, laboratories
and pharmacies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.
Marketable Securities Available for Sale are carried at fair value and the
net unrealized gains and losses, net of the related tax effect, computed in
marking these securities to market have been reported within stockholders'
equity. The investments mature on various dates through fiscal 2001.
Inventories are stated at the lower of cost or market. Inventories of the
Health Care Supply segment consist of merchandise held for resale with the
majority of the cost of domestic inventories determined on the last-in first-
out (LIFO) method and international inventories stated at average cost. Health
Care Information Technology segment inventories consist of computer hardware
with cost determined either by the specific identification or first-in, first-
out (FIFO) method.
Property, Plant and Equipment is stated at cost and depreciated on the
straight-line method at rates designed to distribute the cost of properties
over estimated service lives ranging from one to 45 years.
Capitalized Software primarily reflects costs of the Health Care Information
Technology segment to develop software products once the project has reached
the point of technological feasibility. Management monitors the net realizable
value of all software development investments to ensure that the investment
will be recovered through future sales. Completed projects are amortized after
reaching the point of general availability using the straight-line method
based on an estimated useful life of three years.
The Company capitalized software development costs of $54.5 million, $56.3
million, and $41.8 million in fiscal 2000, 1999, and 1998, respectively.
Amortization of capitalized software costs totaled $32.2 million,
$25.9 million and $21.3 million in 2000, 1999, and 1998, respectively. Royalty
fees of $18.2 million, $39.0 million and $32.1 million, were expensed in 2000,
1999 and 1998, respectively, for software provided by third-party business
partners.
F-37
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
The Company adopted Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" as of April 1, 1998.
The impact of the adoption was not material to the Company's consolidated
financial position, results of operations or cash flows. Capitalized software
of the Health Care Supply Management segment, included in other assets,
reflects costs related to internally developed or purchased software for
projects with costs in excess of $250,000 that are capitalized and amortized
on a straight-line basis over estimated useful lives not exceeding seven
years.
Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 3 to 40 years. Negative goodwill
arising from the fiscal 1997 acquisition of the FoxMeyer business is being
amortized over a five-year period. Accumulated amortization balances netted
against goodwill and other intangibles were $178.7 million, $172.3 million,
and $131.3 million at March 31, 2000, 1999 and 1998, respectively.
Long-lived Assets. The Company periodically assesses the recoverability of
the cost of its long-lived assets, including goodwill. Measurement of
impairment losses for long-lived assets, including goodwill, that the Company
expects to hold and use is based on estimated fair values of the assets.
Estimates of fair values are based on quoted market prices, when available,
the results of valuation techniques utilizing discounted cash flows (using the
lowest level of identifiable cash flows) or fundamental analysis. Long-lived
assets to be disposed of, either by sale or abandonment, are reported at the
lower of carrying amount or fair value less costs to sell. See Financial Note
4 for charges the Company has recorded related to the impairment of assets.
Insurance Programs. Under the Company's insurance programs, coverage is
obtained for catastrophic exposures as well as those risks required to be
insured by law or contract. It is the policy of the Company to retain a
significant portion of certain losses related primarily to workers'
compensation, physical loss to property, business interruption resulting from
such loss, and comprehensive general, product, and vehicle liability.
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
Revenue Recognition. Revenues of the Health Care Supply Management segment
are recognized when products are shipped or services are provided to
customers. Included in these revenues are large volume sales of
pharmaceuticals to major self-warehousing drugstore chains whereby the Company
acts as an intermediary in the order and subsequent delivery of products
directly from the manufacturer to the customers' warehouses. These sales
totaled $8.7 billion in 2000, $6.8 billion in 1999 and $2.8 billion in 1998.
Revenues of the Health Care Information Technology segment are generated
primarily by licensing software systems, and providing outsourcing and
professional services. Software systems are marketed under equipment purchase
and software license agreements as well as service agreements. Perpetual or
one-time software arrangements are recognized at the time of delivery or under
the contract method in accordance with Statement of Position 97-2 ("SOP 97-
2"), "Software Revenue Recognition" and SOP 81-1 "Accounting for Performance
of Construction-Type and Certain Product-Type Contracts," based on the terms
and conditions in the contract. Changes in estimates to complete and revisions
in overall profit estimates are recognized in the period in which they are
determined. Hardware is generally recognized upon delivery. Multi-year
software license agreements are recognized ratably over the term of the
agreement. Implementation fees are recognized as the work is performed or on
the contract method. Maintenance and support agreements are marketed under
annual or multiyear agreements and are recognized ratably over the period
covered by the agreements. Remote processing services are recognized monthly
as the work is performed. Outsourcing services are recognized as the work is
performed or on the contract method.
F-38
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
The Company also offers its products on an application service provider
("ASP") basis, making available Company software functionality on a remote
processing basis from the Company's data centers. The data centers provide
system and administrative support as well as processing services. Revenue on
products sold on an ASP basis is recognized on a monthly basis over the term
of the contract.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB101"), which provided
guidance on certain revenue recognition practices. The Company has reviewed
SAB101 and does not anticipate any material changes to its revenue recognition
policies as a result of the adoption of SAB101.
Also included in revenues is interest income of $21.7 million, $37.8
million, and $37.4 million in fiscal 2000, 1999 and 1998, respectively.
Income Taxes. The Company accounts for income taxes under the liability
method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Foreign Currency Translation. Assets and liabilities of the Company's
foreign affiliates are translated at current exchange rates, while revenue and
expenses are translated at average rates prevailing during the year.
Translation adjustments related to the Company's foreign operations are
reported as a component of stockholders' equity.
Derivative Financial Instruments. The Company's policy generally is to use
financial derivatives only to manage exposure to fluctuations in interest and
foreign currency exchange rates. The Company has entered into interest rate
and currency swap agreements to hedge certain interest and currency rate risks
which are accounted for using the settlement basis of accounting. Premiums
paid on interest rate and currency swap agreements are deferred and amortized
to interest expense over the life of the underlying hedged instrument, or
immediately if the underlying hedged instrument is settled. No gains or losses
are recorded for movements in the swaps' values during the terms of the
respective agreements.
Employee Stock Options. The Company uses the intrinsic value method to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". See
Financial Note 14 for the disclosures of pro forma earnings and earnings per
share had the fair value method been used to account for stock-based employee
compensation plans in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation".
New Accounting Pronouncements. In 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure these
instruments at fair value.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" which defers the effective date of SFAS No. 133 until the
Company's fiscal year 2002. The Company is currently evaluating what impact,
if any, SFAS No. 133 may have on its consolidated financial statements.
F-39
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
2. Acquisitions, Investments and Divestitures
Fiscal 2000 Acquisitions:
On November 2, 1999, the Company completed the acquisition of Abaton.com, a
provider of internet-based clinical applications for use by physician
practices, pharmacy benefit managers, benefit payors, laboratories and
pharmacies, for approximately $95 million in cash and the assumption of
approximately $8 million of employee stock incentives. Goodwill and other
intangibles related to the acquisition of $101 million are being amortized on
a straight-line basis over periods ranging from three to seven years. A charge
of $1.5 million was recorded to write off the portion of the purchase price of
Abaton.com allocated to in-process technology for which technological
feasibility had not been established as of the acquisition date and for which
there were no alternative uses. The Company received an independent valuation
which utilized a discounted cash flow methodology by product line to assist in
valuing in-process and existing technologies as of the acquisition date.
In fiscal 2000, the Company also made a number of smaller acquisitions
including eight distributors of first-aid products, a provider of systems that
adjudicate third party prescription claims and three health care information
technology businesses. The aggregate cost of these acquisitions, accounted for
as purchases, totaled approximately $34.1 million. The aggregate excess of
purchase price over the fair value of net assets acquired of $34.9 million is
being amortized on a straight-line basis over periods ranging from 6 to 20
years. The results of operations of the acquired businesses have been included
in the consolidated financial statements since their respective acquisition
dates.
Fiscal 1999 Acquisitions:
HBOC Transaction
On January 12, 1999, McKesson Corporation ("McKesson") completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common stock
for all of the issued and outstanding shares of common stock of HBOC
(the "HBOC Transaction"). Each share of HBOC stock was exchanged for 0.37 of a
share of McKesson common stock (the "Exchange Ratio"). McKesson was renamed
McKesson HBOC, Inc. The transaction was structured as a tax-free
reorganization and was accounted for as a pooling of interests.
In April 1999, the Company discovered improper accounting practices at HBOC.
In July, 1999, the Audit Committee of the Company's Board of Directors
completed an investigation into such matters (the "Investigation"), which
resulted in the previously reported restatement of the Company's historical
consolidated financial statements related to HBOC (pre-acquisition) in fiscal
1999, 1998 and 1997. In fiscal 2000, the Company incurred costs in connection
with the Investigation and the resulting restatement of the historical
consolidated financial statements, and pending litigation (see Financial Note
18) and recorded charges of $18.9 million for accounting and legal fees and
other costs.
Other Poolings of Interests
In addition to the HBOC Transaction, the following acquisitions were
accounted for under the pooling of interests method:
In August 1998, the Company acquired Hawk Medical Supply, Inc., a
distributor of medical-surgical supplies primarily to the primary care sector,
for approximately 2 million shares of Company common stock.
Also in August 1998, the Company acquired J. Knipper and Company, a provider
of direct mail, fulfillment and sales support services, including sample
distribution to physician and pharmaceutical company sales representatives,
for approximately 300,000 shares of Company common stock.
F-40
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
In September 1998, the Company acquired Automated Prescription Systems,
Inc., a manufacturer of automated prescription filling and dispensing systems,
for approximately 1.4 million shares of Company common stock.
In October 1998, the Company acquired US Servis, Inc., a professional
management company that provides outsourcing services for physician delivery
systems and hospital business offices, for the equivalent, after application
of the Exchange Ratio, of approximately 700,000 shares of Company common
stock.
In October 1998, the Company completed the acquisition of IMNET Systems,
Inc., a provider of electronic information and document management solutions
for the health care industry, for the equivalent of approximately 3.6 million
shares of Company common stock and 0.6 million Company stock options.
In December 1998, the Company acquired Access Health, Inc., a provider of
clinically based care management programs and health care information
services, for the equivalent of approximately 12.7 million shares of Company
common stock.
In connection with the fiscal 1999 acquisitions discussed above, the Company
incurred transaction costs, primarily consisting of professional fees such as
investment banking, legal and accounting fees of $84.6 million, including $6.6
million of transaction costs associated with various terminated transactions
which had been explored by the Company. In addition, the Company incurred
acquisition-related employee benefit costs of $88.7 million, primarily related
to benefits received by employees in connection with change of control
provisions, signing and retention bonuses and retirement and employee
benefits.
Purchase Transactions
The following fiscal 1999 acquisitions were accounted for under the purchase
method and the results of operations of the acquired businesses have been
included in the consolidated financial statements since their respective
acquisition dates:
In September 1998, the Company acquired MedManagement LLC, a pharmacy
management, purchasing, consulting and information services company, for
approximately $38 million in cash. The acquisition was funded with debt. The
excess of the purchase price over the fair value of the net assets acquired of
$41 million is being amortized on a straight-line basis over 20 years.
In November 1998, the Company acquired RedLine HealthCare Corporation
("RedLine"), a distributor of medical supplies and services to the extended-
care industry, including long-term-care and home-care sites for approximately
$233 million in cash. The acquisition was funded with debt. The valuation of
the RedLine net assets acquired included the recognition of liabilities
totaling $5.8 million related to closures of duplicate facilities, and
involuntary termination and relocation benefits. The excess of the purchase
price over the fair value of the net assets acquired of $149 million is being
amortized on a straight-line basis over 40 years.
In fiscal 1999, the Company also made a number of smaller acquisitions
including six distributors of first-aid products. The aggregate cost of these
acquisitions, accounted for as purchases, totaled approximately $35 million.
Fiscal 1998 Acquisitions:
Poolings of Interests
In June 1997, the Company completed the acquisition of AMISYS Managed Care
Systems, Inc. ("AMISYS"), a provider of information systems for managed care
entities and other parties that assume financial risk for healthcare
populations, for the equivalent of approximately 4.0 million shares of Company
common stock.
F-41
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
Also in June 1997, the Company completed the acquisition of Enterprise
Systems, Inc. ("ESi"), a developer of resource management solutions, for the
equivalent of approximately 5.6 million shares of Company common stock.
In December 1997, the Company completed the acquisition of HPR, Inc.
("HPR"), a provider of clinical information systems for the managed care
industry, for the equivalent of approximately 6.8 million shares of Company
common stock.
Also in December 1997, the Company completed the acquisition of National
Health Enhancement Systems, Inc. ("NHES"), a provider of health care
information technology solutions specializing in demand and disease management
products, for the equivalent of approximately 1.3 million shares of Company
common stock.
In connection with the acquisitions discussed above, which were accounted
for as poolings of interests, the Company incurred transaction costs,
primarily consisting of professional fees such as investment banking, legal
and accounting fees of $16.0 million. The Company also incurred $16.7 million
of transaction costs associated with the terminated merger with AmeriSource
Health Corporation.
In addition, the Company incurred costs of $1.4 million during the year
ended March 31, 1998, primarily related to benefits received by employees in
connection with change of control provisions associated with the acquisitions.
Purchase Transactions
In August 1997, the Company's Canadian health care distribution business,
Medis Health and Pharmaceutical Services Inc. ("Medis") announced an agreement
with Drug Trading Company, Limited ("Drug Trading") to transition Drug
Trading's retail customers to Medis over a six-month period. The Company
acquired assets consisting primarily of accounts receivable, inventories and
customer contracts, for approximately $83 million in cash. The transaction was
funded with proceeds from operations and short-term borrowings. This
acquisition was accounted for under the purchase accounting method and the
excess of the purchase price over the fair value of the net assets acquired of
$9.2 million is being amortized on a straight-line basis over 40 years.
In October 1997, the Company acquired AT&T's UK Specialist Health Care
Services Division ("ATT-UK"), a provider of software solutions and remote
processing services for financial and payroll needs of health care providers
in the United Kingdom for approximately $30 million in cash. In connection
with the acquisition, the Company wrote off $7.7 million of purchase price
allocated to in-process technology based on an independent appraisal of the
business. These costs were expensed as of the acquisition date.
In fiscal 1998, the Company also made a number of smaller acquisitions
including six distributors of first-aid products, two distributors of
medical/surgical supplies, and a pharmaceuticals distributor. The aggregate
cost of these acquisitions, accounted for as purchases, amounted to
approximately $20 million.
Divestiture
On February 29, 2000, the Company sold its wholly-owned subsidiary, McKesson
Water Products Company (the "Water Products business") to Groupe Danone for
approximately $1.1 billion in cash and recognized an after-tax gain of $515.9
million. The taxes related to this transaction have been accrued and are
scheduled to be paid in fiscal 2001. All of the net assets and results of
operations of the Water Products business have been classified as discontinued
operations and all prior years restated accordingly. See Financial Note 9.
F-42
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
3. Gains on Equity Investments
In November 1999, the Company received 4.5 million shares of Healtheon/WebMD
common stock and 8.4 million warrants to purchase Healtheon/WebMD common stock
in exchange for its shares and warrants of WebMD, as a result of the November
11, 1999 merger between Healtheon Corporation and WebMD, Inc. The Company
recorded gains on the exchange of the common stock based on the November 11,
1999 closing market price and on the warrants at fair value using the Black-
Scholes valuation method.
Subsequently in fiscal 2000, the Company donated 250,000 shares of
Healtheon/WebMD common stock to the McKesson HBOC Foundation and sold the
remaining Healtheon/WebMD common shares. As a result of these transactions,
the Company recognized gains related to the investment in Healtheon/WebMD of
$248.8 million of which $155.4 million was realized. The remaining gain of
$93.4 million, which resulted from the November 11, 1999 exchange of warrants,
had not been realized as of March 31, 2000. The Company's warrants to purchase
Healtheon/WebMD common stock have been classified as "available-for-sale"
securities under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The estimated fair value of the warrants declined from
$93.4 million as of November 11, 1999 to $32.3 million as of March 31, 2000,
resulting in an unrealized loss of $61.1 million, which is included in
stockholders' equity. As of May 19, 2000, the estimated fair value of the
warrants further declined to $14.7 million. The warrants have exercise prices
ranging from $11.14 to $50.86 and expire on September 1, 2004. In addition,
other equity investments were sold during the year at a gain of $20.3 million,
and a $9.8 million charge was recorded in administrative expense to reflect
the donation of the Healtheon/WebMD common stock to the McKesson HBOC
Foundation.
4. Restructuring and Asset Impairments
In fiscal 2000, 1999 and 1998 the Company recorded charges and adjustments
for restructuring and asset impairments of $232.7 million, $140.3 million and
$54.3 million, respectively. The major components of the charges are as
follows:
2000 1999 1998
------ ------ -----
(in millions)
Write-down of assets................................... $234.2 $ 91.2 $36.1
Other exit-related costs............................... (5.7) 17.2 0.7
Severance.............................................. 4.2 31.9 17.5
------ ------ -----
$232.7 $140.3 $54.3
====== ====== =====
Fiscal 2000
Health Care Supply Management
In the fourth quarter of fiscal 2000, the Company reviewed the operations
and cost structure of the Health Care Supply Management's medical-surgical
business. This resulted in the planned closure of a sales office and a
workforce reduction. The Company recorded a $0.6 million charge for exit-
related costs and a severance charge of $2.3 million relating to the
termination of approximately 200 employees primarily in warehouse,
administrative and sales functions. The employees will be terminated in fiscal
2001. Severance of $2.1 million will be paid in fiscal 2001, and the remaining
severance will be paid in fiscal 2002.
In addition, the Company reassessed prior years' restructuring plans
resulting in the decision to retain one of the six pharmaceutical distribution
centers identified for closure in fiscal 1999, and to reduce the number of
medical-surgical distribution center closures. The Company also announced and
completed the closure of one
F-43
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
additional pharmaceutical distribution center in fiscal 2000. The Company
recorded income of $6.9 million and $1.2 million for net reductions of prior
year-reserves for exit-related activities and severance, respectively, and
charges of $1.5 million for additional asset impairments associated with
closed distribution centers ($0.7 million for receivables and $0.8 million for
inventories).
In fiscal 2000, the Company completed the closures of three pharmaceutical
distribution centers, including the additional distribution center mentioned
above. In addition, the realignment of the sales organization was completed
and certain back office functions were eliminated. This resulted in the
termination of approximately 200 employees and the payment of $3.6 million in
severance. The Company also completed the closures of three medical-surgical
distribution centers and paid $1.0 million in severance to approximately 100
employees who were terminated in fiscal 1999 and 2000. In addition, the
Company paid $2.6 million in costs incurred in connection with the
distribution center closures and also real estate property taxes, rents,
utility and other costs for the facilities subsequent to termination of
operations. The Company plans to continue these closure activities throughout
fiscal 2001.
Health Care Information Technology
In the fourth quarter of fiscal 2000, the Company completed an assessment of
the Health Care Information technology's business and product portfolio. This
resulted in the decision to reorganize the business and to discontinue
overlapping or nonstrategic product offerings. The Company recorded charges of
$232.7 million for asset impairments. These included charges to write off
$49.1 million of capitalized software development costs, $39.3 million of
purchased software and $50.7 million of goodwill associated with the
discontinued product lines based upon an analysis of discounted cash flows. In
addition, a $74.1 million reserve was recorded for customer settlements
(forgiveness of accounts receivable, customer credits and refunds)
attributable to the discontinued product lines. The Company also recorded a
$9.4 million loss on the disposition of a non-core foreign operation, and a
$7.7 million charge for uncollectible unbilled receivables and $2.4 million
charge for obsolete equipment associated with the discontinued products.
Substantially all of the charges were non-cash asset write-offs except for the
customer settlements. In addition, a charge of $0.6 million was recorded for
costs to prepare facilities for disposal, lease costs and property taxes
required subsequent to termination of operations and other exit-related
activities. In fiscal 2000, the Company paid $0.5 million in rent costs for
office space abandoned in prior years.
The Company also recorded a $3.9 million severance charge related to the
product streamlining and reorganization. The fiscal 2000 charge relates to
approximately 300 employees, primarily in product development and support and
administrative functions who were terminated at the end of fiscal 2000.
Substantially all of the severance will be paid in fiscal 2001. In addition,
the Company recorded income of $0.8 million to reduce prior-year reserves for
severance, in this segment.
As a result of the Health Care Information Technology segment's
reorganization and product streamlining, sales, development and support
activities for certain discontinued products ceased at fiscal year-end and
activities associated with the remaining discontinued products will be phased
out within twelve months. The Company estimates that future revenues and costs
associated with the discontinued products will be reduced or eliminated, but
they are not expected to materially impact fiscal 2001 revenues and operating
profit.
To reflect the items discussed above, charges of $0.8 million have been
recorded in cost of sales and $234.8 million have been recorded in
administrative expenses. In addition, income of $0.3 million and $2.6 million
have been recorded in selling expenses and distribution expenses,
respectively.
F-44
McKESSON HBOC
FINANCIAL NOTES--(Continued)
Fiscal 1999
Health Care Supply Management
In fiscal 1999, the Company identified six distribution centers for closure
of which one distribution center was shut down by March 31, 1999. The Company
recorded a charge of $25.5 million related to such closures. Of this charge,
$21.7 million was required to reduce the carrying value of facility assets to
their estimated fair value less disposal costs, and $3.8 million was related
to computer hardware and software which will no longer be used at such
facilities. Fair value was determined based on sales of similar assets,
appraisals, and/or other estimates such as discounting of estimated future
cash flows. Considerable management judgment is necessary to estimate fair
values, accordingly, actual results could vary significantly from such
estimates. Also related to such closures, a charge of $17.2 million was
recorded for other exit-related costs. These primarily consist of costs to
prepare facilities for disposal, lease costs and property taxes required
subsequent to termination of operations, as well as the write-off of costs
related to duplicate assets which do not have future use by the Company. Of
the above charges, $25.5 million were non-cash asset write-offs. Also, in
connection with the previously discussed reassessment of this plan in fiscal
2000, the Company recorded income of $6.9 million in fiscal 2000 as a result
of reducing previously recorded exit-related reserves offset in part, by
additional asset impairments of $1.5 million.
As part of this plan, the Company recorded a severance charge of $13.3
million for workforce reductions. The severance charge relates to the
termination of approximately 1,000 employees, primarily in distribution
centers and associated back-office functions. Severance of $2.7 million was
paid during fiscal 1999 in connection with the termination of approximately
100 distribution center employees, $4.6 million was paid in fiscal 2000 to
approximately 300 employees, primarily in distribution centers, sales and
associated back-office functions, and the balance will be paid in fiscal 2001.
In addition, $1.2 million, primarily associated with a reduction in estimated
terminations of approximately 100 employees, was recorded as income in fiscal
2000, as a result of the previously discussed reassessment of this
restructuring plan.
The Company also wrote off $23.5 million (non-cash) of computer hardware and
software which were abandoned as the result of an acquisition during the year.
Health Care Information Technology
In fiscal 1999, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, and the merger
with McKesson, plans were approved by management to consolidate facilities,
reduce workforce and eliminate duplicate products and internal systems.
In order to effect these plans, the Company identified workforce reductions,
including both acquired company and Company personnel, and recorded severance
costs of $18.6 million (net of a $3.0 million reversal of previously recorded
severance obligations which were determined to be in excess). The severance
charge relates to the termination of approximately 550 employees, primarily in
development and administrative functions. Severance of $6.4 million and $10.3
million was paid during fiscal 1999 and 2000, respectively, primarily under
salary continuance arrangements. Severance of $0.8 million will be paid in
fiscal 2001 and the balance will be paid in 2002.
In addition, duplicate facilities, products and internal systems were
identified for elimination, resulting in charges of $22.2 million, relating
principally to the write-off of capitalized costs, lease termination costs,
and royalty agreements which were terminated at a cost of $12.0 million
because products subject to minimum royalty payments to third parties were
replaced with acquired products. In addition, following the HBOC Transaction,
the Company evaluated the performance of a foreign business and elected to
shut down its facility. Charges of $11.6 million were recorded, principally
related to the write-off of goodwill to fair value based on
F-45
McKESSON HBOC
FINANCIAL NOTES--(Continued)
discounted cash flows. Revenues and net operating income for this foreign
business were not significant in fiscal 1999. Certain investments became
impaired during fiscal 1999 and were written down by $4.3 million to their net
realizable values based primarily on discounted cash flows, and other reserves
of $4.1 million were recorded to cover customer and other claims arising out
of the acquisitions. Substantially all of the above charges were non-cash
asset write-offs.
The charges discussed above have been recorded in selling, distribution and
administrative expenses. During fiscal 1999, there were no significant changes
in estimates or recharacterizations of amounts from restructuring reserves
recorded in prior years, except for the $3.0 million reversal described above.
Fiscal 1998
Health Care Supply Management
The Company recorded a charge of $9.4 million for workforce reductions
announced in fiscal 1998. The severance charge relates to the termination of
approximately 600 employees, primarily in distribution center and back-office
functions. Approximately 200 of these employees were terminated, and $2.8
million of severance costs were paid during fiscal 1998. The remaining
employees were terminated, and the remaining severance was paid, in fiscal
1999. In addition, $3.7 million was recorded due to the loss on the sale of an
investment, and a charge of $0.7 million was recorded associated with the
closure of a facility in Canada.
Health Care Information Technology
In fiscal 1998, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, duplicate
products, facilities and internal systems were eliminated and, employees were
terminated. In addition, a minority investment became impaired.
The Company identified workforce reductions, including both acquired company
and Company personnel, and recorded severance costs of $8.1 million. Severance
of $4.6 million was paid during fiscal 1998 to approximately 100 employees who
were terminated in that year, and the remaining severance was paid in fiscal
1999.
Duplicate products, facilities and internal systems were identified which
resulted in charges of $22.4 million (non-cash), consisting primarily of
capitalized costs and intangible write-offs of $19.3 million related to
discontinuance of certain product lines. In addition, a $10.0 million minority
investment became impaired and was written off (non-cash).
The charges discussed above have been recorded in selling, distribution and
administrative expenses. During fiscal 1998 there were no significant changes
in estimates or recharacterization of amounts from restructuring reserves
recorded in prior years.
F-46
McKESSON HBOC
FINANCIAL NOTES--(Continued)
Summary of Reserve Balances
A roll-forward of the reserves for severance and exit-related activities
from March 31, 1997 to March 31, 2000, by operating segment, follows:
Health Care Health Care
Supply Management Information Technology
---------------------- -----------------------------
Severance Exit-Related Severance Exit-Related Total
--------- ------------ --------- ------------ ------
(in millions)
Balance, March 31,
1997................... $ -- $ 9.5 $ 3.2 $ 1.9 $ 14.6
Fiscal 1998 Charges..... 9.4 0.7 8.1 18.2
Severance amounts paid
during the year........ (2.8) (7.8) (10.6)
Costs paid during the
year................... (4.5) (0.8) (5.3)
----- ----- ------ ----- ------
Balance, March 31,
1998................... 6.6 5.7 3.5 1.1 16.9
Fiscal 1999 Charges..... 13.3 17.2 21.6 52.1
Adjustments............. (3.0) (3.0)
Severance amounts paid
during the year........ (9.3) (9.9) (19.2)
Costs paid during the
year................... (3.9) (0.5) (4.4)
----- ----- ------ ----- ------
Balance, March 31,
1999................... 10.6 19.0 12.2 0.6 42.4
Fiscal 2000 Charges..... 2.3 0.6 3.9 0.6 7.4
Adjustments............. (1.2) (6.9) (0.8) (8.9)
Severance amounts paid
during the year........ (4.6) (10.3) (14.9)
Costs paid during the
year................... (2.6) (0.5) (3.1)
----- ----- ------ ----- ------
Balance, March 31,
2000................... $ 7.1 $10.1 $ 5.0 $ 0.7 $ 22.9
===== ===== ====== ===== ======
The remaining balances at March 31, 2000 relate primarily to charges
recorded in fiscal 2000 and 1999, with the exception of $0.8 million of exit-
related costs associated with the fiscal 1997 plan. The reserves for other
exit-related items consist of costs for preparing facilities for disposal,
lease costs and property taxes required subsequent to termination of
operations.
5. Off-Balance Sheet Risk and Concentrations of Credit Risk
Trade receivables subject the Company to a concentration of credit risk with
customers in the retail and institutional sectors. A significant proportion of
the Company's increase in sales has been to a limited number of large
customers. Consequently, the Company's credit concentration has increased.
Accordingly, any defaults in payment by these large customers could have a
significant negative impact on the Company's financial condition, results of
operations and liquidity. At March 31, 2000, receivables from the Company's
ten largest customers accounted for approximately 37% of total customer
accounts receivable. Fiscal 2000 sales to, and March 31, 2000 receivables
from, the Company's largest customer, Rite Aid Corporation, represented
approximately 15% of consolidated sales and 11% of consolidated receivables,
respectively.
At March 31, 2000, the Company had an $850 million committed receivables
sales facility which was fully available as of March 31, 2000. The Company's
accounts receivable sales program accommodated the sale by the Company in
March 1999 and 1998, of $400.0 million and $299.9 million, respectively, of
undivided interests in the Company's trade accounts receivable. The program
qualifies for sale treatment under SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The sales
were recorded at the estimated fair values of the receivables sold, reflecting
discounts for the time value of money based on U.S. commercial paper rates and
estimated loss provisions.
F-47
McKESSON HBOC
FINANCIAL NOTES--(Continued)
The Company's Canadian subsidiary, Medis, has agreements with certain of its
customers' financial institutions under which Medis has the option to
repurchase certain inventory in the event the customers are unable to meet
certain obligations to the financial institutions. Medis has also agreed to
guarantee the payment of a major customer's leases. The amounts related to
these guarantees were approximately $59.2 million for the inventory and $10.2
million for the lease obligations at March 31, 2000.
The Company's U.S. pharmaceutical distribution business has entered into
agreements to provide loans to certain customers some of which are on a
revolving basis. As of March 31, 2000, a total of $81.0 million of these
commitments remained outstanding, of which $38.7 million were reflected as
other receivables and notes receivable on the consolidated balance sheet.
Under the terms of the loans, the Company has a security interest in the
assets of the customers. In addition, the Company has agreed to guarantee
customer loans of $40 million.
6. Receivables
March 31
----------------------------
2000 1999 1998
-------- -------- --------
(in millions)
Customer accounts.............................. $2,847.4 $2,290.0 $1,774.0
Other.......................................... 462.0 442.6 240.8
-------- -------- --------
Total........................................ 3,309.4 2,732.6 2,014.8
Allowances..................................... (274.9) (180.6) (83.0)
-------- -------- --------
Net.......................................... $3,034.5 $2,552.0 $1,931.8
======== ======== ========
The allowances are for uncollectible accounts, discounts, returns, refunds
and other adjustments.
7. Inventories
The LIFO method was used to value approximately 87%, 86% and 82% of the
inventories at March 31, 2000, 1999 and 1998, respectively. Inventories before
the LIFO cost adjustment, which approximates replacement cost, were $4,397.2
million, $3,762.5 million and $2,844.9 million at March 31, 2000, 1999 and
1998, respectively.
8. Property, Plant and Equipment, net
March 31
---------------------------
2000 1999 1998
-------- -------- -------
(in millions)
Land............................................ $ 34.5 $ 37.0 $ 35.1
Building, machinery and equipment............... 1,115.1 1,029.1 882.8
-------- -------- -------
Total property, plant and equipment............. 1,149.6 1,066.1 917.9
Accumulated depreciation........................ (594.2) (536.5) (469.3)
-------- -------- -------
Property, plant and equipment, net.............. $ 555.4 $ 529.6 $ 448.6
======== ======== =======
F-48
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
9. Discontinued Operations
The net assets (liabilities) of discontinued operations were as follows:
March 31
---------------------
2000 1999 1998
----- ------ ------
(in millions)
Total assets.......................................... $ 0.6 $242.6 $191.5
Total liabilities..................................... (2.1) (63.2) (59.8)
----- ------ ------
Net assets (liabilities)............................ $(1.5) $179.4 $131.7
===== ====== ======
At March 31, 2000, the net liabilities of discontinued operations are
included in other current liabilities. Assets consist primarily of land held
for sale and investments in affiliates. Liabilities consist primarily of other
accrued liabilities.
At March 31, 1999 and 1998, assets of discontinued operations consist
primarily of receivables, inventory, property, plant and equipment and
goodwill of the Water Products business. Liabilities of discontinued
operations consist primarily of accounts payable and other accrued liabilities
of the Water Products business.
Results of discontinued operations were as follows:
Years Ended March 31
----------------------
2000 1999 1998
------ ------ ------
(in millions)
Revenues........................................... $366.3 $355.1 $313.8
====== ====== ======
Discontinued operations before taxes............... $ 38.3 $ 40.1 $ 47.2
Provision for taxes on income...................... (15.1) (15.8) (17.8)
------ ------ ------
Discontinued operations.......................... 23.2 24.3 29.4
Gain on sale of Water Products business, net of tax
of $333.9......................................... 515.9 -- --
------ ------ ------
Total............................................ $539.1 $ 24.3 $ 29.4
====== ====== ======
Discontinued operations in fiscal 2000, 1999 and 1998 include the operations
of the Water Products business.
F-49
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
10. Long-Term Debt
March 31
--------------------------
2000 1999 1998
-------- -------- --------
(in millions)
ESOP related debt............................... $ 99.9 $ 115.5 $ 115.6
4.50% exchangeable subordinated debentures due
2004........................................... 28.1 37.3 113.3
8.91 % Ser. A Senior Notes due 2005............. 100.0 -- --
8.95 % Ser. B Senior Notes due 2007............. 20.0 -- --
9.13 % Ser. C Senior Notes due 2010............. 215.0 -- --
6.60% Notes due 2000............................ -- 175.0 175.0
6.875% Notes due 2002........................... 175.0 175.0 175.0
6.55% Notes due 2002............................ 125.0 125.0 125.0
6.30% Notes due 2005............................ 150.0 150.0 150.0
6.40% Notes due 2008............................ 150.0 150.0 150.0
7.65% Debentures due 2027....................... 175.0 175.0 175.0
5.375% to 5.85% IDRBs due through 2026.......... 9.0 9.0 11.8
Capital lease obligations (averaging 7.85%)..... 9.9 19.0 6.3
Other, 7.0% to 10.875%, due through 2021........ 3.1 3.7 27.6
-------- -------- --------
Total Debt.................................... 1,260.0 1,134.5 1,224.6
Less current portion............................ 16.2 195.3 15.0
-------- -------- --------
Total Long-Term Debt.......................... $1,243.8 $ 939.2 $1,209.6
======== ======== ========
The Company has a revolving credit agreement with several domestic and
international banks whereby the banks commit $400 million borrowing
availability at the reference rate (9% at March 31, 2000) or money market-
based rates. The agreement expires in fiscal 2004. The Company has an
additional $875 million available for general purposes under a facility with a
duration of 364 days or less which is due to expire on October 20, 2000. At
March 31, 2000, the Company had $1.275 billion of unused borrowing capacity
under these agreements, which are used primarily to support commercial paper
borrowings. In addition, the Company has an $850 million committed receivables
sales facility, which was fully available as of March 31, 2000. The accounts
receivable sales facility will terminate, if not renewed, on June 23, 2000.
In fiscal 2000, the Company issued fixed-rate debt totaling $335.0 million.
The 8.91% Series A notes mature on February 28, 2005, the 8.95% Series B notes
mature on February 28, 2007 and the 9.13% Series C notes mature on February
28, 2010. Interest only is payable semiannually.
Total interest payments were $115.0 million, $117.8 million, and $95.0
million in fiscal 2000, 1999 and 1998, respectively.
ESOP related debt (see Note 16) is payable to banks and insurance companies,
bears interest at rates ranging from 8.6% fixed rate to approximately 80% of
prime or LIBOR +0.4% and is due in installments through 2009.
In connection with the 4.5% exchangeable subordinated debentures, the March
31, 2000 marketable securities balance includes $17.3 million held in trust as
exchange property for the exchangeable subordinated debentures. Through March
31, 2000, the Company had repurchased $151.9 million of the exchangeable
subordinated debentures.
In fiscal 1998, the Company entered into two interest rate swap agreements,
each with a notional principal amount of $150 million. The swaps mature in
2005 and 2008 and swap fixed interest payments of 6.30% and
F-50
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
6.40%, respectively, for floating interest payments based on a LIBOR index;
the floating rates at March 31, 2000 were 5.8% and 5.7%, respectively. These
swaps include an imbedded interest rate cap of 7%.
Also in fiscal 1998, a subsidiary of the Company entered into a currency
swap agreement to convert the $125 million proceeds from the issuance of
senior notes to $173 million Canadian currency, which was used to pay down
short-term borrowings of the Company's Canadian subsidiary, Medis. This swap
matures on November 1, 2002.
Certain debt agreements require that the Company's total debt not exceed
56.5% of total capitalization (total debt plus equity). At March 31, 2000, the
Company was in compliance with its capitalization and other financial
covenants.
Aggregate annual payments on long-term debt and capitalized lease
obligations (see Financial Note 12) for the years ending March 31 are:
Long-Term Capital
Debt Leases Total
--------- ------------- --------
(in millions)
2001........................................ $ 11.4 $4.8 $ 16.2
2002........................................ 187.4 3.2 190.6
2003........................................ 138.0 0.4 138.4
2004........................................ 39.2 0.4 39.6
2005........................................ 259.7 0.2 259.9
Thereafter.................................. 614.4 0.9 615.3
-------- ---- --------
Total..................................... $1,250.1 $9.9 $1,260.0
======== ==== ========
11. Convertible Preferred Securities
In February 1997, a wholly-owned subsidiary trust of the Company issued 4
million shares of preferred securities to the public and 123,720 common
securities to the Company, which are convertible at the holder's option into
McKessonHBOC common stock. The proceeds of such issuances were invested by the
trust in $206,186,000 aggregate principal amount of the Company's 5%
Convertible Junior Subordinated Debentures due 2027 (the "Debentures"). The
Debentures represent the sole assets of the trust. The Debentures mature on
June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are
redeemable by the Company beginning in March 2000 at 103.5% of the principal
amount thereof.
Holders of the securities are entitled to cumulative cash distributions at
an annual rate of 5% of the liquidation amount of $50 per security. Each
preferred security is convertible at the rate of 1.3418 shares of McKessonHBOC
common stock, subject to adjustment in certain circumstances. The preferred
securities will be redeemed upon repayment of the Debentures and are callable
by the Company at 103.5% of the liquidation amount beginning in March 2000.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the preferred securities (the "Guarantee"). The Guarantee,
when taken together with the Company's obligations under the Debentures and in
the indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provides a full and unconditional guarantee of amounts due
on the preferred securities.
The Debentures and related trust investment in the Debentures have been
eliminated in consolidation and the preferred securities reflected as
outstanding in the accompanying consolidated financial statements.
F-51
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
12. Lease Obligations
The Company leases facilities and equipment under both capital and operating
leases. Net assets held under capital leases included in property, plant and
equipment were $9.1 million, $4.4 million, and $4.6 million at March 31, 2000,
1999 and 1998, respectively. Amortization of capital leases is included in
depreciation expense.
As of March 31, 2000, future minimum lease payments and sublease rentals in
years ending March 31 are:
Non- Non-
cancelable cancelable
Operating Sublease Capital
Leases Rentals Leases
---------- ---------- -------
2001.......................................... $ 64.9 $ 4.7 $ 6.7
2002.......................................... 58.5 3.9 3.7
2003.......................................... 51.5 3.0 1.5
2004.......................................... 40.8 1.3 0.3
2005.......................................... 33.9 0.9 0.2
Thereafter.................................... 62.3 1.1 0.1
------ ----- -----
Total minimum lease payments................ $311.9 $14.9 12.5
====== =====
Less amounts representing interest............ 2.6
-----
Present value of minimum lease payments..... $ 9.9
=====
Rental expense was $108.3 million, $110.0 million, and $100.5 million in
fiscal 2000, 1999 and 1998, respectively.
Most real property leases contain renewal options and provisions requiring
the Company to pay property taxes and operating expenses in excess of base
period amounts.
13. Fair Value of Financial Instruments
At March 31, 2000, 1999 and 1998, the carrying amounts of cash and cash
equivalents, marketable securities, receivables, drafts payable, accounts
payable--trade and other liabilities approximate their estimated fair values
because of the short maturity of these financial instruments. The estimated
fair values of the Company's remaining financial instruments, as determined
under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
were as follows:
2000 1999 1998
------------------- ------------------- -------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- -------- ---------- -------- ----------
(in millions)
Long-term debt,
including current
portion................ $1,260.0 $1,199.7 $1,134.5 $1,145.8 $1,224.6 $1,197.7
Interest rate swaps--
unrealized
gain/(loss)............ -- 11.0 -- 3.7 -- (5.1)
Foreign currency rate
swap................... -- (5.8) -- 12.6 -- 4.0
The estimated fair values of these instruments were determined based on
quoted market prices or market comparables.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of March 31, 2000, 1999
or 1998 or that will be realized in the future.
F-52
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
14. Stockholders' Equity
On October 29, 1997, the Company's board of directors declared a two-for-one
split of the Company's common stock. The split was effective January 2, 1998
for shareholders of record on December 1, 1997. All share and per share
amounts have been restated for the split.
Before giving effect to the acquisitions accounted for as poolings of
interests (see "Acquisitions, Investments and Divestitures" Financial Note 2),
McKesson declared dividends of $0.435 and $0.50 per share and HBOC declared
dividends of $0.04 and $0.035 per share, in fiscal years 1999 and 1998,
respectively.
At March 31, 2000, 1999, and 1998, the Company was authorized to issue
100,000,000 shares of series preferred stock ($.01 par value) of which none
were outstanding and 400,000,000 shares of common stock ($.01 par value) of
which approximately 283,353,000 shares, 280,584,000 shares and 270,983,000
shares, respectively, were outstanding net of treasury stock.
In October 1994, the Company's Board of Directors declared a dividend of one
right (a "Right") for each then outstanding share of common stock and
authorized the issuance of one Right for each share subsequently issued to
purchase, upon the occurrence of certain specified triggering events, a unit
consisting of one hundredth of a share of Series A Junior Participating
Preferred Stock. Triggering events include, without limitation, the
acquisition by another entity of 15% or more of the Company's common stock
without the prior approval of the Company's Board. The Rights have certain
anti-takeover effects and will cause substantial dilution to the ownership
interest of a person or group that attempts to acquire the Company on terms
not approved by the Board. The Rights expire in 2004 unless redeemed earlier
by the Board. As a result of the two-for-one stock split described earlier,
each share of common stock now has attached to it one-half of a Right.
F-53
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for income from continuing
operations:
2000
--------------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)
Basic EPS
Income from continuing operations............. $184.6 281.3 $0.66
=====
Effect of Dilutive Securities................... -- --
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions.......................... $184.6 281.3(1) $0.66
====== ===== =====
1999
--------------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)
Basic EPS
Income from continuing operations............. $ 60.6 275.2 $0.22
=====
Effect of Dilutive Securities................... -- --
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions.......................... $ 60.6 275.2(1) $0.22
====== ===== =====
1998
--------------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)
Basic EPS
Income from continuing operations............. $275.2 266.2 $1.03
=====
Effect of Dilutive Securities
Options to purchase common stock.............. -- 10.1
Trust convertible preferred securities........ 6.2 5.4
Restricted stock.............................. -- 0.4
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions.......................... $281.4 282.1 $1.00
====== ===== =====
- --------
(1) The diluted share base for fiscal years 2000 and 1999 excludes 2.9 million
shares and 8.9 million shares related to options to purchase common stock,
respectively, 5.4 million shares related to trust convertible preferred
securities in fiscal 2000 and 1999, and 0.3 million shares related to
restricted stock in fiscal 1999. Additionally, the income available to
common stockholders excludes dividends on convertible preferred securities
of $6.2 million in fiscal 2000 and 1999. These amounts are excluded due to
their antidilutive effect.
As of March 31, 2000, the Company had six stock option plans. The 1994 Stock
Option and Restricted Stock Plan provides grants of nonqualified stock options
to employees of the Company, and, until January 1, 1997 to non-employee
directors. After January 1, 1997, all non-employee directors receive grants
under the 1997 Non-Employee Director's Equity Compensation and Deferral Plan.
The 1998 Canadian Stock Incentive Plan
F-54
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
provides grants of nonqualified stock options with stock appreciation rights
to the Company's Canadian employees. Most grants under the Director's Equity
Compensation and Deferral Plan vest immediately on grant date. Most other
options generally vest over four years and all options expire ten years after
the grant date. Under the plans, options are generally granted at prices not
less than the fair value of the stock on the date of grant. In fiscal 1999,
two grants were made at below market prices under the 1998 Canadian Stock
Incentive Plan. Under the Plans, the Company is authorized to grant up to 71.6
million shares, including 68.4 million for options as of March 31, 2000. In
addition to the above-described plans, options have been granted to certain
key executives on generally the same terms as those granted under the 1994
Plan. Finally, the Company has assumed options of acquired companies in
connection with the acquisition of such companies.
The following is a summary of options outstanding at March 31, 2000:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Number of Average Weighted- Number of Weighted-
Options Remaining Average Options Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At Year End Life Price at Year End Price
----------------- ----------- ----------- --------- ----------- ---------
(in years)
$ 0.01 to $ 9.94...... 3,617,851 3.4 $ 6.24 3,472,095 $ 6.47
$ 10.56 to $ 15.08...... 341,305 4.9 13.12 340,776 13.12
$ 16.23 to $ 24.13...... 11,605,170 9.2 20.53 1,406,631 19.68
$ 24.88 to $ 37.25...... 17,800,286 8.5 29.20 4,167,109 27.33
$ 37.40 to $ 55.92...... 4,718,661 7.0 44.97 3,791,060 45.90
$ 56.15 to $ 83.63...... 17,043,064 8.7 72.16 2,440,171 69.27
$ 85.75 to $113.50...... 1,032,898 8.1 100.56 1,032,898 100.56
$136.74 to $136.74...... 440,001 8.2 136.74 440,001 136.74
---------- ----------
56,599,236 8.2 42.25 17,090,741 39.53
========== ==========
Expiration dates range from April 1, 2000 to March 27, 2010.
As a result of the change of control of McKesson at the time of the HBOC
Transaction on January 12, 1999, most options granted by McKesson which were
outstanding on that date vested. Due to certain tax and accounting issues, the
vesting for certain officers was postponed until April 22, 1999.
The following is a summary of changes in the options for the stock option
plans:
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year................ 39,472,342 $55.11 24,156,651 $31.34 24,648,023 $19.39
Granted................. 24,650,681 25.68 21,286,922 75.10 7,478,095 53.17
Exercised............... (1,212,262) 14.92 (3,762,649) 23.79 (6,815,460) 12.77
Canceled................ (6,311,525) 63.23 (2,208,582) 41.21 (1,154,007) 27.15
---------- ---------- ----------
Outstanding at year
end.................... 56,599,236 42.25 39,472,342 55.11 24,156,651 31.34
========== ========== ==========
Pursuant to SFAS No. 123, the Company has elected to account for its stock-
based compensation plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized in the consolidated financial statements for the stock
option plans,
F-55
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
except an insignificant amount related to the two Canadian grants noted above.
Had compensation cost for the stock option plan been recognized based on the
fair value at the grant dates for awards under those plans, consistent with
the provision of SFAS No. 123, net income and earnings per share would have
been as indicated in the table below. Since pro forma compensation cost
relates to all periods over which the awards vest, the initial impact on pro
forma income from continuing operations may not be representative of
compensation cost in subsequent years, when the effect of amortization of
multiple awards would be reflected.
Years Ended March
31,
-------------------
2000 1999 1998
------ ----- -----
(in millions,
except per share
amounts)
Income (loss) from continuing operations
As reported........................................... $184.6 $60.6 275.2
Pro forma............................................. 82.2 (6.7) 224.1
Earnings (loss) per common share--diluted
As reported........................................... $ 0.66 $0.22 $1.00
Pro forma............................................. 0.29 (0.02) 0.82
Earnings (loss) per common share--basic
As reported........................................... $ 0.66 $0.22 $1.03
Pro forma............................................. 0.29 (0.02) 0.84
Fair values of the options were estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended
March 31,
----------------
2000 1999 1998
---- ---- ----
Expected stock price volatility............................ 46.0% 32.4% 40.4%
Expected dividend yield.................................... 1.50% 1.42% 0.64%
Risk-free interest rate.................................... 6.1% 4.8% 5.9%
Expected life (in years)................................... 5.0 5.0 7.3
The weighted average grant date fair values of the options granted during
2000, 1999 and 1998 were $11.33, $24.06 and $27.54 per share, respectively.
Other, within stockholders' equity, includes notes receivable from certain
of the Company's current or former officers and senior managers totaling $94.5
million, $99.0 million and $7.2 million at March 31, 2000, 1999 and 1998,
respectively, related to purchases of Company common stock. Such notes were
issued for amounts equal to the market value of the stock on the date of the
purchase and are full recourse to the borrower. As of March 31, 2000, $53.7
million of such notes were collateralized by the related stock. The notes bear
interest at rates ranging from 4.7% to 8.0% and are due at various dates
through February 2005.
F-56
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
15. Income Taxes
The provision for income taxes related to continuing operations consists of
the following:
Years Ended March
31,
----------------------
2000 1999 1998
------ ------ ------
(in millions)
Current
Federal............................................... $ 62.9 $112.8 $ 99.0
State and local....................................... 19.8 12.8 21.2
Foreign............................................... 13.1 8.8 9.6
------ ------ ------
Total current....................................... 95.8 134.4 129.8
------ ------ ------
Deferred
Federal............................................... 30.5 (24.2) 43.4
State................................................. (5.7) (7.6) 4.7
Foreign............................................... 1.7 (1.2) --
------ ------ ------
Total deferred...................................... 26.5 (33.0) 48.1
------ ------ ------
Total provision..................................... $122.3 $101.4 $177.9
====== ====== ======
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. Foreign pre-tax earnings were $40.5 million, $24.6 million, and
$29.6 million, in fiscal 2000, 1999 and 1998, respectively.
The reconciliation between the Company's effective tax rate on income from
continuing operations and the statutory Federal income tax rate follows:
Years Ended
March 31,
------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate..................... 35.0 % 35.0 % 35.0 %
State and local income taxes net of federal tax
benefit.............................................. 4.6 7.1 4.3
Nondeductible acquisition costs....................... -- 20.7 1.2
Nondeductible amortization............................ 3.0 6.5 1.2
Nontaxable income--life insurance..................... (0.9) (1.7) (0.9)
Favorable tax adjustment.............................. -- (5.1) (1.0)
Dividends paid deduction--ESOP allocated shares....... (0.2) (0.6) (0.2)
Tax-advantaged debt issuance.......................... (0.8) (1.5) (0.2)
Other--net............................................ (1.6) (0.1) (0.7)
---- ---- ----
Effective tax rate.................................. 39.1 % 60.3 % 38.7 %
==== ==== ====
Income tax payments were $121.6 million, $175.8 million, and $84.5 million
in fiscal 2000, 1999 and 1998, respectively.
At March 31, 2000, the Company had $40.0 million in cumulative undistributed
earnings of certain foreign subsidiaries. The Company's earnings from these
foreign subsidiaries are considered to be indefinitely reinvested and,
accordingly, no provision for federal and state income taxes has been made for
these earnings. Determination of the amount of unrecognized deferred tax
liability on these undistributed earnings is not practicable. Upon
distribution of foreign subsidiary earnings in the form of dividends or
otherwise, the Company would be subject to both income taxes and withholding
taxes payable.
F-57
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
As of March 31, the deferred tax balances consisted of the following:
2000 1999 1998
------- ------- -------
(in millions)
Assets
Nondeductible accruals for environmental
obligations........................................ $ 8.0 $ 7.8 $ 8.9
Receivable reserves................................. 104.1 63.6 31.1
Deferred revenue.................................... 39.9 65.1 50.2
Customer related allowances......................... 76.2 17.2 0.3
Compensation and benefit-related accruals........... 38.8 46.6 19.4
Costs associated with duplicate facility closures
and workforce reductions related to acquired
businesses......................................... 15.9 7.5 2.4
Loss and credit carryovers.......................... -- -- 39.2
Tax benefit on unrealized loss...................... 23.8 -- --
Other............................................... 13.8 28.3 38.5
------- ------- -------
Current........................................... 320.5 236.1 190.0
------- ------- -------
Nondeductible accruals for:
Postretirement and postemployment plans........... 87.7 66.5 68.8
Deferred compensation............................. 36.9 33.5 31.1
Costs associated with facility closures, surplus
properties and asset write-downs................. 4.5 10.0 7.0
Intangibles......................................... 84.8 65.5 59.8
Loss and credit carryforwards....................... 7.1 67.0 12.5
Other............................................... 11.9 17.3 28.5
------- ------- -------
Noncurrent........................................ 232.9 259.8 207.7
------- ------- -------
Total............................................. $ 553.4 $ 495.9 $ 397.7
======= ======= =======
Liabilities
Basis differences for inventory valuation........... $(208.0) $(192.3) $(139.1)
Other............................................... (0.6) (1.2) (4.2)
------- ------- -------
Current........................................... (208.6) (193.5) (143.3)
------- ------- -------
Accelerated depreciation............................ (8.3) (22.9) (41.1)
Systems development costs........................... (88.7) (83.6) (65.7)
Retirement plan..................................... (30.3) (17.3) (13.5)
Other............................................... (11.0) (8.9) (4.8)
------- ------- -------
Noncurrent........................................ (138.3) (132.7) (125.1)
------- ------- -------
Total............................................. $(346.9) $(326.2) $(268.4)
======= ======= =======
Total net current--included in prepaid expenses..... $ 111.9 $ 42.6 $ 46.7
======= ======= =======
Total net noncurrent--included in other assets...... $ 94.6 $ 127.1 $ 82.6
======= ======= =======
16. Postretirement and Postemployment Benefits
Pension Plans
Prior to December 31, 1996, substantially all full-time employees of
McKesson were covered under either the Company-sponsored defined benefit
retirement plan or by bargaining unit sponsored multi-employer plans.
F-58
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
On December 31, 1996, the Company amended the Company-sponsored defined
benefit plan to freeze all plan benefits based on each employee's plan
compensation and creditable service accrued to that date. Accordingly,
employees joining the Company after December 31, 1996, and employees of
companies acquired after December 31, 1996, are not eligible for coverage
under the Company-sponsored defined benefit retirement plan. The benefits for
such Company-sponsored plans are based primarily on age of employees at date
of retirement, years of service and employees' pay during the five years prior
to retirement. On January 1, 1997, the Company amended the ESOP to provide
future additional benefits in place of a portion of those benefits previously
provided by the pension plan.
The following tables provide a reconciliation of the changes in the Company-
sponsored defined benefit retirement plan and executive supplemental
retirement plans:
2000 1999 1998
------ ------ ------
(in millions)
Change in benefit obligations:
Benefit obligation at beginning of year........... $349.4 $312.0 $299.9
Service cost...................................... 2.0 0.7 0.7
Interest cost..................................... 24.2 21.7 22.6
Amendments........................................ 5.4 15.0 --
Acquisitions...................................... -- 17.8 --
Actuarial losses (gains).......................... (27.8) 11.0 24.7
Benefit payments.................................. (35.5) (28.8) (35.9)
------ ------ ------
Benefit obligation at end of year................. $317.7 $349.4 $312.0
====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.... $310.9 $294.0 $262.3
Actual return on plan assets...................... 110.0 42.5 55.4
Employer contributions............................ 9.9 5.3 14.8
Expenses paid..................................... -- (2.1) (2.6)
Benefits paid..................................... (35.5) (28.8) (35.9)
------ ------ ------
Fair value of plan assets at end of year.......... $395.3 $310.9 $294.0
====== ====== ======
Funded status:
Funded status at end of year...................... $ 77.6 $(38.5) $(18.0)
Unrecognized net actuarial loss (gain)............ (66.0) 30.1 28.8
Unrecognized prior service cost................... 6.1 1.2 1.3
Unrecognized prior service cost-plan amendments... -- 23.0 --
Unrecognized transition obligation................ -- -- (0.3)
------ ------ ------
Prepaid benefit cost.............................. $ 17.7 $ 15.8 $ 11.8
====== ====== ======
The following table provides the amounts recognized in the Company's
consolidated balance sheet:
2000 1999 1998
------ ------ ------
(in millions)
Prepaid benefit cost............................... $ 48.2 $ 38.5 $ 29.6
Accrued benefit cost............................... (30.5) (22.7) (17.8)
Intangible asset................................... 6.0 24.2 1.3
Minimum pension liability--net of tax of $6.1,
$6.2, and $6.0.................................... (9.3) (9.6) (9.3)
------ ------ ------
Net amount recognized.............................. $ 14.4 $ 30.4 $ 3.8
====== ====== ======
F-59
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
The following table provides components of the net periodic pension expense
(income) for the Company sponsored defined benefit retirement plan and
executive supplemental retirement plans:
2000 1999 1998
------ ------ ------
(in millions)
Service cost--benefits earned during the year.... $ 2.0 $ 0.7 $ 0.7
Interest cost on projected benefit obligation.... 24.2 21.7 22.6
Return on assets................................. (29.3) (27.6) (24.8)
Amortization of unrecognized loss and prior
service costs................................... 2.7 1.1 0.8
Amortization of unrecognized net transition
asset........................................... (0.3) (2.5)
Immediate recognition of pension cost............ 8.3(1)
------ ------ ------
Net pension expense (income)................... $ 7.9 $ (4.4) $ (3.2)
====== ====== ======
- --------
(1) Primarily associated with changes in executive management, based on the
terms of employment contracts.
Assets of the plans are measured on a calendar year basis.
The projected unit credit method is utilized for measuring net periodic
pension cost over the employees' service life. Costs are funded based on the
recommendations of independent actuaries. The projected benefit obligations
for Company-sponsored plans were determined using discount rates of 7.75% at
December 31, 1999, 7% at December 31, 1998 and 7.25% at December 31, 1997 and
an assumed increase in future compensation levels of 4.0% for all periods. The
expected long-term rate of return on assets used to determine pension expense
was 9.75% for all periods.
The assets of the plan consist primarily of listed common stocks and bonds
for which fair value is determined based on quoted market prices.
Profit-Sharing Investment Plan
Retirement benefits for employees not covered by collective bargaining
arrangements include a supplementary contributory profit sharing investment
plan ("PSIP"). The leveraged ESOP portion of the PSIP has purchased an
aggregate of 24.3 million shares of common stock since inception. These
purchases have been financed by 10 to 20-year loans from or guaranteed by the
Company. The Company's related receivables from the ESOP have been classified
as a reduction of stockholders' equity. The loans will be repaid by the ESOP
from common dividends on shares not yet allocated to participants, interest
earnings on cash balances not yet allocated to participants, common dividends
on certain allocated shares and future Company cash contributions. The ESOP
loan maturities and rates are identical to the terms of related Company
borrowings (see Financial Note 10).
After-tax ESOP expense (income), including interest expense on ESOP debt,
was $12.4 million, $1.4 million, and $(0.8) million in fiscal 2000, 1999 and
1998, respectively. The higher ESOP expense in fiscal 2000 was required to
maintain a desired level of benefits provided to employees despite a decline
in the stock price. Additional tax benefits received on dividends paid on
unallocated shares of $1.1 million, $2.2 million, and $2.4 million in fiscal
2000, 1999 and 1998, respectively, have been credited directly to retained
earnings in accordance with SFAS No. 109. Contribution expense for the PSIP in
fiscal 2000, 1999 and 1998 was all ESOP related and is reflected in the
amounts above. In fiscal 2000, 1999 and 1998 approximately 2,617,000, 642,000,
and 808,000 shares, respectively, were allocated to plan participants.
Through March 31, 2000, 14.7 million common shares have been allocated to
plan participants. At March 31, 2000, 9.6 million common shares in the ESOP
Trust had not been allocated to plan participants.
F-60
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
Health Care and Life Insurance
In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain retired employees. The Company's
policy is to fund these benefits as claims are paid. The benefits have been
reduced significantly for those employees retiring after December 31, 1990. In
1989, the Company implemented an ESOP to provide funds at retirement that
could be used for medical costs or health care coverage.
Expenses for postretirement health care and life insurance benefits
consisted of the following:
2000 1999 1998
----- ----- -----
(in millions)
Service cost--benefits earned during the period....... $ 1.1 $ 0.9 $ 0.7
Interest cost on projected benefit obligation......... 8.1 8.4 9.1
Amortization of unrecognized gain and prior service
costs................................................ (0.9) (0.9) (0.9)
Recognized actuarial gain............................. (0.3) (4.0) (8.0)
Settlement gain....................................... -- (4.0) --
----- ----- -----
Total............................................... $ 8.0 $ 0.4 $ 0.9
===== ===== =====
The following table presents a reconciliation of the postretirement health
care and life insurance benefits obligation at March 31:
2000 1999 1998
------- ------- -------
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year........ $ 120.7 $ 120.2 $ 122.9
Service cost................................... 1.1 0.9 0.7
Interest cost.................................. 8.1 8.4 9.1
Actuarial loss (gain).......................... 5.4 7.5 (0.7)
Settlement..................................... (4.0) --
Benefits paid.................................. (12.3) (12.3) (11.8)
------- ------- -------
Benefit obligation at end of year.............. $ 123.0 $ 120.7 $ 120.2
======= ======= =======
Funded Status
Funded status at end of year................... $(123.0) $(120.7) $(120.2)
Unrecognized actuarial loss.................... 10.0 4.4 (7.1)
Unrecognized prior service cost................ (7.0) (8.0) (9.0)
------- ------- -------
Accrued post-retirement benefit obligation..... $(120.0) $(124.3) $(136.3)
======= ======= =======
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were 5.0%, 5.0%, and 5.33% at the end of
fiscal 2000, 1999 and 1998, respectively. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
trend rate by one percentage point would increase the accumulated
postretirement health care and life insurance obligation as of March 31, 2000
by $7.1 million and the related fiscal 2000 aggregate service and interest
costs by $0.6 million. Decreasing the trend rate by one percentage point would
reduce the accumulated postretirement health care and life insurance
obligation as of March 31, 2000 by $6.7 million and the related fiscal 2000
aggregate service and interest cost by $0.6 million. The discount rates used
in determining the accumulated postretirement benefit obligation were 7.75%,
7% and 7.25% at March 31, 2000, 1999 and 1998, respectively.
F-61
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
The Company has an employee discount stock purchase plan for eligible
employees. Under such plan, participants may use up to 10% of their annual
compensation, up to certain dollar limitations whichever is higher, to
purchase, through payroll deductions, the Company's common stock at the end of
each plan year for 85% of the lower of the beginning or ending stock price for
the plan year.
17. Segments of Business
Effective March 31, 1999, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements,
and also established standards for enterprise-wide disclosure of segment
information based on products and services, geographic areas, and major
customers. Operating segments are defined by SFAS No. 131 as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision makers who determine the allocation of resources and evaluate the
financial performance of the operating segments are the Co-Chief Executive
Officers. In evaluating financial performance, management focuses on operating
profit as a segment's measure of profit or loss. Operating profit is income
before interest expense, corporate interest income, taxes on income, and
allocation of certain corporate revenues and expenses.
The Company's operating segments include Health Care Supply Management,
Health Care Information Technology and e-Health. The Company's Corporate
division is included in the presentation of reportable segment information
since certain revenues and expenses of this division are not allocated
separately to the operating segments.
The Health Care Supply Management segment includes the Company's U.S.
pharmaceutical, health care products and medical-surgical supplies
distribution businesses. U.S. Health Care Supply Management operations also
include marketing and other support services to pharmaceutical manufacturers,
manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacies, consulting and outsourcing services to
pharmacies, and distribution of first-aid products to industrial and
commercial customers. Health Care Supply Management also includes the
Company's international distribution operations (including Canada and an
equity interest in a Mexican distribution business).
The Health Care Information Technology segment delivers enterprise-wide
patient care, clinical, financial, managed care, payor and strategic
management software solutions, as well as networking technologies, electronic
commerce, outsourcing and other services to health care organizations
throughout the U.S. and certain foreign countries.
The e-Health segment provides internet-based clinical applications for use
by physician practices, pharmacy benefit managers, benefit payors,
laboratories and pharmacies.
The Corporate division includes expenses associated with corporate functions
and projects, certain employee benefits, and an inter-segment elimination in
fiscal 1999.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
F-62
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
Financial information relating to the Company's reportable operating segments
as of and for the years ended March 31, is presented below:
2000 1999 1998
--------- --------- ---------
(in millions)
Revenues
Health Care Supply Management............... $35,513.7 $28,457.7 $20,640.4
Health Care Information Technology.......... 1,207.3 1,538.1 1,429.2
e-Health.................................... 0.4 -- --
Corporate and Other......................... 12.8 32.9(1) 36.1
--------- --------- ---------
Total..................................... $36,734.2 $30,028.7 $22,105.7
========= ========= =========
Operating profit
Health Care Supply Management(2)............ $ 508.6 $ 341.6 $ 352.8
Health Care Information Technology.......... 85.2 (31.6) 227.0
e-Health.................................... (13.7) -- --
--------- --------- ---------
Total..................................... 580.1 310.0 579.8
Interest--net(3)............................ (107.3) (90.4) (72.7)
Corporate and Other......................... (159.7) (51.4) (47.8)
--------- --------- ---------
Income from continuing operations before
taxes on income and dividends on
preferred securities of subsidiary
trust.................................... $ 313.1 $ 168.2 $ 459.3
========= ========= =========
Segment assets--at year-end
Health Care Supply Management............... $ 8,484.5 $ 6,889.7 $ 5,219.6
Health Care Information Technology.......... 948.2 1,357.3 1,133.9
e-Health.................................... 109.8 -- --
--------- --------- ---------
Total..................................... 9,542.5 8,247.0 6,353.5
Corporate and Other:
Cash, cash equivalents and marketable
securities............................... 605.9 261.9 681.5
Other..................................... 224.5 511.1 256.8
--------- --------- ---------
Total..................................... $10,372.9 $ 9,020.0 $ 7,291.8
========= ========= =========
Depreciation and amortization
Health Care Supply Management............... $ 89.9 $ 74.4 $ 65.9
Health Care Information Technology.......... 101.6 90.7 74.6
e-Health.................................... 6.6 -- --
Corporate and Other......................... 3.2 5.7 5.4
--------- --------- ---------
Total..................................... $ 201.3 $ 170.8 $ 145.9
========= ========= =========
Expenditures for long-lived assets
Health Care Supply Management............... $ 93.8 $ 97.2 $ 82.1
Health Care Information Technology.......... 48.0 79.2 76.9
e-Health.................................... 0.5 -- --
Corporate and Other......................... 2.8 22.8 7.4
--------- --------- ---------
Total..................................... $ 145.1 $ 199.2 $ 166.4
========= ========= =========
F-63
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
2000 1999 1998
--------- --------- ---------
(in millions)
Revenues by products and services
Health Care Supply Management
Pharmaceutical Distribution and Services..... $32,808.0 $26,165.5 $18,761.9
Medical-Surgical Distribution and Services... 2,705.7 2,292.2 1,878.5
Health Care Information Technology
Software..................................... 209.3 345.0 405.9
Services..................................... 905.0 984.4 809.1
Hardware..................................... 93.0 208.7 214.2
e-Health....................................... 0.4 -- --
Corporate and Other............................ 12.8 32.9(1) 36.1
--------- --------- ---------
Total........................................ $36,734.2 $30,028.7 $22,105.7
========= ========= =========
- --------
(1) Net of $3.0 million inter-segment elimination related to a Health Care
Information Technology segment software sale to the Health Care Supply
Management segment for use in that segment's consulting and outsourcing
business.
(2) Includes $16.9 million, $13.3 million and $12.0 million of pre-tax
earnings from an equity investment in fiscal 2000, 1999 and 1998,
respectively.
(3) Interest expense is shown net of corporate interest income.
Revenues, operating profit and long-lived assets by geographic areas:
2000 1999 1998
--------- --------- ---------
(in millions)
Revenues
United States.................................... $34,371.3 $27,966.2 $20,393.3
International(1)................................. 2,362.9 2,062.5 1,712.4
--------- --------- ---------
Total.......................................... $36,734.2 $30,028.7 $22,105.7
========= ========= =========
Operating profit
United States.................................... $ 532.5 $ 269.2 $ 553.7
International(1)................................. 47.6 40.8 26.1
--------- --------- ---------
Total.......................................... $ 580.1 $ 310.0 $ 579.8
========= ========= =========
Long-lived assets, at year end
United States.................................... $ 515.6 $ 491.1 $ 404.7
International(1)................................. 39.8 38.5 43.9
--------- --------- ---------
Total.......................................... $ 555.4 $ 529.6 $ 448.6
========= ========= =========
- --------
(1) International represents a wholly-owned subsidiary which distributes
pharmaceuticals in Canada, an equity investment in a pharmaceutical
distributor in Mexico, and an information technology business in the
United Kingdom.
F-64
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
18. Other Commitments and Contingent Liabilities
I. Accounting Litigation
Since the Company's announcements in April, May and July of 1999 that the
Company determined certain software sales transactions in its Information
Technology Business unit, formerly HBOC, were improperly recorded as revenue
and reversed, and as of June 1, 2000, seventy-nine lawsuits have been filed in
various state and federal courts throughout the nation against the Company,
certain of its current or former officers or directors, and in some of the
cases other defendants, including Bear Stearns & Co., Inc. and Arthur
Andersen LLP.
A. Federal Actions
Sixty-one of these actions have been filed in Federal Court (the "Federal
Actions"). Of these, fifty-eight were filed in the U.S. District Court for the
Northern District of California, one in the Northern District of Illinois
(which has been voluntarily dismissed without prejudice), one in the Eastern
District of Pennsylvania (which has been transferred to the Northern District
of California), and one in the Western District of Louisiana.
On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District
of California issued an order consolidating fifty-three of the Federal Actions
into one action entitled In re McKesson HBOC, Inc. Securities Litigation (Case
No. C-99-20743 RMW) (the "Consolidated Action"). On December 22, 1999,
Judge Whyte appointed the New York State Common Retirement Fund as lead
plaintiff ("Lead Plaintiff") and approved Lead Plaintiff's choice of counsel.
Judge Whyte's December 22 order also consolidated another class action, Jacobs
v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), into the Consolidated Action.
By order dated February 7, 2000, Judge Whyte coordinated an action alleging
ERISA claims, Chang v. McKesson HBOC, Inc., et al. (Case No. C-00-20030 RMW)
and a derivative action, Cohen v. McCall et al. (Case No. C-99-20916 RMW) with
the Consolidated Action.
On February 25, 2000, Lead Plaintiff filed an Amended and Consolidated Class
Action Complaint (the "Consolidated Complaint"). The Consolidated Complaint
names as defendants the Company, certain of its current or former officers or
directors, Arthur Andersen LLP and Bear Stearns & Co., Inc. The Consolidated
Complaint generally alleges that the defendants violated the federal
securities laws in connection with the events leading to the Company's need to
restate its financial statements. The Consolidated Complaint seeks (i) a
declaration that the action is maintainable as a class action and that the
Lead Plaintiff is a proper class representative, (ii) unspecified compensatory
damages, (iii) costs and expenses of suit including reasonable attorneys'
fees, and (iv) any other relief deemed proper by the Court. On April 25, 2000,
the Company filed a motion to dismiss and/or to strike portions of the
Consolidated Complaint. Lead Plaintiff has not yet filed a written opposition
to the Company's motion to dismiss, which is scheduled to be heard by the
Court on September 15, 2000. Under the Private Securities Litigation Reform
Act of 1995, all discovery is stayed in the Consolidated Action during the
pendency of this motion.
On April 27, 2000, Lead Plaintiff in the Consolidated Action filed a
purported class action complaint against HBOC in the U.S. District Court for
the Northern District of California (Case No. C-99-00 20472 PVT). The
complaint incorporates by reference the allegations and causes of action set
out in the Consolidated Complaint, and seeks to hold HBOC directly liable for
the wrongful conduct alleged in the complaint in the event the Court
determines that the Company is not the successor in interest to HBOC. No
response has yet been filed to the complaint.
Two other actions, Bea v. McKesson HBOC, Inc. et al. (Case No. C-00-20072
RMW), and Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW), have
also been filed in the Northern District of
F-65
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
California. By stipulation, Bea has been consolidated with the Consolidated
Action and Cater has been stayed pending the resolution of the Company's
motion to dismiss the Consolidated Complaint. One other action, Baker v.
McKesson HBOC, Inc. et al. (Case No. CV 00-0522) has been filed in the U.S.
District Court for the Western District of Louisiana. The Company has moved to
transfer Baker to the Northern District of California, or alternatively, to
stay pending the outcome of the Consolidated Action. Finally, one additional
action, Rosenberg v. McCall et al. (Case No. 1:99-CV-1447 JEC) was filed in
the Northern District of Georgia and subsequently transferred to the Northern
District of California, but that action names only two former officers and
does not name the Company.
B. State Actions
Eighteen actions have also been filed in various state courts in California,
Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the "State Actions").
Like the Consolidated Action, the State Actions generally allege misconduct by
the defendants in connection with the events leading to the Company's need to
restate its financial statements. Two of the State Actions are derivative
actions: Ash, et al. v. McCall, et al. (Del C.A. No. 17132) filed in the
Delaware Chancery Court, and Mitchell v. McCall et al. (Case. No. 304415)
filed in California Superior Court, City and County of San Francisco. The
Company has moved to dismiss both of these actions.
Five of the State Actions are class actions. Three of these were filed in
Delaware Chancery Court: Derdiger v. Tallman et al. (Case No. 17276), Carroll
v. McKesson HBOC, Inc. (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et.
al. (Case No. 17282-NC); and two were filed in Delaware Superior Court:
Edmondson v. McKesson HBOC, Inc. (Case No. 99-951) and Caravetta v. McKesson
HBOC, Inc. (Case No. 00C-04-214 WTQ). The Carroll and Kelly actions have been
voluntarily dismissed without prejudice. The Company has removed Edmondson to
Federal Court in Delaware, and plaintiffs filed a motion to remand, which is
pending. The Company has moved to stay Derdiger, and has moved to dismiss the
Caravetta complaint.
Eleven of the State Actions are individual actions which have been filed in
various state courts. Four of these were filed in the California Superior
Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al.
(Case No. 303857), The State of Oregon by and through the Oregon Public
Employees Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 307619),
Utah State Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 311269),
and Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case
No. 311747). The Court has sustained the Company's demurrer to the Yurick
action without leave to amend with respect to all causes of action except the
claims for common law fraud and negligent misrepresentation. The Court
sustained the Company's demurrer to these causes of action with leave to
amend. The Court has also stayed Yurick pending the commencement of discovery
in the Consolidated Action. By stipulation of the parties and order of the
Court, all proceedings other than motions to test the sufficiency of the
complaint in Oregon have been stayed pending the commencement of discovery in
the Consolidated Action. The Company has moved to dismiss the amended
complaint in Oregon, and has until June 20, 2000 to respond to the complaints
in Utah and Minnesota. Three actions have been filed in Georgia State Court:
Moulton v. McKesson HBOC, Inc. (Case No. 98-13176-9), Powell v. McKesson HBOC,
Inc. e. al. (Case No. 1999-CV-15443), and Adler v. McKesson HBOC, Inc. et al.
(Case No. 99-C-7980-3). The Company has answered the Moulton and Adler
complaints, and Powell has been dismissed without prejudice. One action has
been filed in Delaware Superior Court, Kelly v. McKesson HBOC, Inc. et al.
(Case No. 99C-09-265 WCC), one in the Pennsylvania Court of Common Pleas,
Chester County, Grant v. McKesson HBOC, Inc. (Case No. 99-03978), one in
Colorado District Court, Boulder County, American Healthcare Fund II v. HBO &
Company et al. (Case No. 00-CV-1762), and one in Louisiana State Court,
Rapides Parish, Baker v. McKesson HBOC, Inc. et al. (Case No. CV-199018-A).
The Company has moved to dismiss the complaints in Kelly, Grant and American
Healthcare Fund II, and has removed Baker to Federal Court in Louisiana.
F-66
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
In addition, the United States Attorney's Office for the Northern District
of California and the San Francisco District Office of the United States
Securities and Exchange Commission ("SEC") have also commenced investigations
in connection with the matters relating to the restatement of previously
reported amounts for HBOC described above. These investigations are ongoing.
The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amounts of, or
potential range of, loss with respect to these proceedings. In addition, the
timing of the final resolution of these proceedings is uncertain. The range of
possible resolutions of these proceedings could include judgments against the
Company or settlements that could require substantial payments by the Company
which could have a material adverse impact on the Company's financial
position, results of operations and cash flows.
II. Other Litigation and Claims
In addition to commitments and obligations in the ordinary course of
business, the Company is subject to various claims, other pending and
potential legal actions for product liability and other damages,
investigations relating to governmental laws and regulations and other matters
arising out of the normal conduct of the Company's business. These include:
A. Antitrust Matters
The Company currently is a defendant in numerous civil antitrust actions
filed since 1993 in federal and state courts by retail pharmacies. The federal
cases have been coordinated for pretrial purposes in the United States
District Court in the Northern District of Illinois and are known as MDL 997.
MDL 997 consists of a consolidated class action (the "Federal Class Action")
as well as approximately 109 additional actions brought by approximately 3,500
individual retail, chain and supermarket pharmacies (the "Individual
Actions"). There are numerous other defendants in these actions including
several pharmaceutical manufacturers and several other wholesale distributors.
These cases allege, in essence, that the defendants have violated the Sherman
Act by conspiring to fix the prices of brand name pharmaceuticals sold to
plaintiffs at artificially high, and non-competitive levels, especially as
compared with the prices charged to mail order pharmacies, managed care
organizations and other institutional buyers. On January 19, 1999, the
District Court entered its written opinion and judgment granting defendants'
motion for a judgment as a matter of law. On July 13, 1999, the Seventh
Circuit affirmed the District Court's judgment as to the dismissal of the
claims against the wholesalers. The Individual Actions, which are still
pending in the Northern District of Illinois for pre-trial purposes, will be
remanded to their original transferor jurisdictions for trial. The
wholesalers' motion for partial summary judgment that they should not be
liable for any damages resulting from drugs sold prior to four years from the
October 1997 amended complaints in those cases was granted. Most of the
individual cases brought by chain stores have been settled.
The currently pending state court antitrust cases against the Company are in
California, Mississippi and Tennessee. The state cases are based essentially
on the same facts alleged in the Federal Class Action and Individual Actions
and assert violations of state antitrust and/or unfair competition laws. The
case in California (referred to as Coordinated Special Proceeding,
Pharmaceutical Cases, I, II & III) is pending in Superior Court for the State
of California, City and County of San Francisco. A class of retail pharmacies
has been certified and the case is trailing MDL 997. The case in Mississippi
(Montgomery Drug Co., et al. v. The Upjohn Co., et al.) is pending in the
Chancery Court of Prentiss County, Mississippi. The Chancery Court has held
that the case may not be maintained as a class action. The Tennessee case,
filed in Knoxville, is a class action on behalf of consumers who purchased
brand-name drugs from retail stores in fourteen states. The claims, brought
under Tennessee law, allege deceptive trade practices, conspiracy to fix
prices, price discrimination and fraudulent
F-67
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
concealment. On July 6, 1998, the court conditionally certified the case as a
multi-state class action. A motion to dismiss the complaint is pending on the
grounds, among others, that (i) plaintiff class members are indirect
purchasers and are not entitled to bring an action against the wholesalers and
manufacturers, and (ii) the state antitrust statutes on which the class relied
do not apply to interstate commerce. A motion is also pending for permission
to file an interlocutory appeal from the order denying defendants' motion to
vacate the order granting conditional class certification.
In each of the cases, plaintiffs seek remedies in the form of injunctive
relief and unquantified monetary damages, attorneys' fees and costs.
Plaintiffs in the California cases also seek restitution. In addition, treble
damages are sought in the Federal Class Action, the Individual Actions, the
California case and the Tennessee case and statutory penalties of $500 per
violation are sought in the Mississippi case. The Company has entered into a
judgment sharing agreement with certain pharmaceutical manufacturer
defendants, which provides generally that the Company (together with the other
wholesale distributor defendants) will be held harmless by such pharmaceutical
manufacturer defendants and will be indemnified against the costs of adverse
judgments, if any, against the wholesaler and manufacturers in these or
similar actions, in excess of $1 million in the aggregate per wholesale
distributor defendant.
B. FoxMeyer Litigation
In January 1997, the Company and twelve pharmaceutical manufacturers (the
"Manufacturer Defendants") were named as defendants in the matter of FoxMeyer
Health Corporation vs. McKesson, et al. filed in the District Court in Dallas
County, Texas ("the Texas Action"). Plaintiff (the parent corporation of
FoxMeyer Drug Company and FoxMeyer Corporation, collectively "FoxMeyer
Corporation") alleges that, among other things, the Company (i) defrauded
Plaintiff, (ii) competed unfairly and tortiously interfered with FoxMeyer
Corporation's business operations, and (iii) conspired with the Manufacturer
Defendants, all in order to destroy FoxMeyer Corporation's business, restrain
trade and monopolize the marketplace, and allow the Company to purchase that
business at a distressed price. Plaintiff seeks relief against all defendants
in the form of compensatory damages of at least $400 million, punitive
damages, attorneys' fees and costs. The Company answered the complaint,
denying the allegations and removed the case to federal bankruptcy court in
Dallas.
In March 1997, the Company and the Manufacturer Defendants filed a complaint
in intervention against FoxMeyer Health (now known as Avatex Corporation) in
the action filed against Avatex by the FoxMeyer Unsecured Creditors Committee
in the United States Bankruptcy Court for the District of Delaware. The
complaint in intervention seeks declaratory relief and an order enjoining
Avatex from pursuing the Texas Action.
In November 1998, the Delaware court granted the Company's motion for
summary judgment as to the first three counts asserted in the Texas Action on
the ground of judicial estoppel. The Company filed a renewed motion of summary
judgment on the four remaining counts of Avatex's complaint in the Texas
Action which was denied without prejudice by the Delaware court on August 9,
1999. In addition, the Company filed cross-claims against the Trustee and
debtors seeking the same relief as sought in the Company's complaint against
Avatex. Based on the order granting summary judgment as to the first three
counts, the Texas bankruptcy court dismissed those counts with prejudice and
ordered the Texas Action remanded to state court. On November 30, 1998, the
Company and the other Defendants filed a notice of appeal to the District
Court from the remand ruling as well as the August 1997 ruling denying
defendants' motion to transfer the Texas Action to Delaware. In addition, the
Company has filed a counter-claim and cross-claim against Avatex and Messrs.
Estrin, Butler and Massman in the Texas Action, asserting various claims of
misrepresentation and breach of contract. The District Court upheld the remand
order and denied as moot the appeal from the denying transfer. A cross-appeal
by Avatex from the order dismissing the three counts with prejudice is still
pending. The Company and several of the other defendants appealed to the Court
of Appeals the ruling upholding the order denying transfer but
F-68
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
subsequently moved to dismiss the appeal with prejudice, which motion was
granted and the appeal was dismissed on October 4, 1999. As a result, the
Texas Action is now pending in Texas state court, and the parties presently
are engaged in discovery on the merits of the various claims asserted in the
Texas Action.
C. Product Liability Litigation
The Company has been named as a defendant, or has received from customers
tenders of defense, in twenty-nine pending cases alleging injury due to the
diet drug combination of fenfluramine or dexfenfluramine and phentermine. All
of the cases are pending in the state courts of California, Idaho, Missouri,
Nevada and Nebraska. The Company has tendered the cases to the manufacturers
of the drugs and is currently defending the cases pending resolution of its
negotiations with the manufacturers.
Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the
"Subsidiaries") are defendants in approximately fifty cases in which
plaintiffs claim that they were injured due to exposure, over many years, to
the latex proteins in gloves manufactured by numerous manufacturers and
distributed by a number of distributors, including the Subsidiaries. Efforts
to resolve tenders of defense to their suppliers are continuing. The
Subsidiaries' insurers are providing coverage for these cases, subject to the
applicable deductibles.
There are five remaining state court class actions in New York, Oklahoma,
Pennsylvania, South Carolina and Texas filed against MGM on behalf of all
health care workers in those states who suffered accidental needle sticks that
exposed them to potentially contaminated bodily fluids, arising from MGM's
distribution of allegedly defective syringes. MGM's suppliers of the syringes
are also named defendants in these actions. The tender of these cases has been
accepted by the two major suppliers. By this acceptance, these suppliers are
paying for separate distributors' counsel and have agreed to fully indemnify
the Company for any judgments in these cases arising from its distribution of
their products.
D. Environmental Matters
Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:
The Company has received claims and demands from governmental agencies
relating to investigative and remedial action purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.
The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for
these five sites is approximately $17 million, net of approximately $3.5
million which third parties have agreed to pay in settlement or which the
Company expects, based either on agreements or nonrefundable contributions
which are ongoing, to be contributed by third parties. The $17 million is
expected to be paid out between April 2000 and March 2029 and is included in
the Company's recorded environmental liabilities at March 31, 2000.
In addition, the Company has been designated as a potentially responsible
party (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (as amended, the "Superfund" law or its state law
equivalent) for environmental assessment and cleanup costs as the result of
the Company's alleged disposal of hazardous substances at 18 sites. With
respect to each of these sites, numerous
F-69
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
other PRPs have similarly been designated and, while the current state of the
law potentially imposes joint and several liability upon PRPs, as a practical
matter costs of these sites are typically shared with other PRPs. The
Company's estimated liability at those 18 PRP sites is approximately $2
million and is included in the Company's recorded environmental liabilities at
March 31, 2000. The aggregate settlements and costs paid by the Company in
Superfund matters to date has not been significant.
The potential costs to the Company related to environmental matters is
uncertain due to such factors as: the unknown magnitude of possible pollution
and cleanup costs; the complexity and evolving nature of governmental laws and
regulations and their interpretations; the timing, varying costs and
effectiveness of alternative cleanup technologies; the determination of the
Company's liability in proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.
Except as specifically stated above with respect to the litigation matters
arising from the Company's restatement of previously reported amounts for the
Information Technology Business unit (section I above), management believes,
based on current knowledge and the advice of the Company's counsel, that the
outcome of the litigation and governmental proceedings discussed above will
not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
F-70
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
19. Quarterly Financial Information (unaudited)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
-------- --------- --------- -------- ---------
(in millions except per share amounts)
Fiscal 2000
Revenues................ $8,598.8 $ 8,939.4 $ 9,890.9 $9,305.1 $36,734.2
Gross profit............ 576.3 569.5 565.1 611.5 2,322.4
Income (loss) after
taxes
Continuing
operations........... 62.9(1) 49.3(2) 160.6(3) (88.2)(4) 184.6
Discontinued
operations........... 7.2 10.0 6.2 (0.2) 23.2
Discontinued
operations--Gain on
sale of McKesson
Water Products
Company.............. -- -- -- 515.9 515.9
-------- --------- --------- -------- ---------
Total............. $ 70.1 $ 59.3 $ 166.8 $ 427.5 $ 723.7
======== ========= ========= ======== =========
Earnings (loss) per
common share
Diluted
Continuing
operations......... $ 0.22 $ 0.18 $ 0.56 $ (0.31) $ 0.66
Discontinued
operations......... 0.03 0.03 0.02 -- 0.08
Discontinued
operations--Gain on
sale of McKesson
Water Products
Company............ -- -- -- 1.83 1.83
-------- --------- --------- -------- ---------
Total............. $ 0.25 $ 0.21 $ 0.58 $ 1.52 $ 2.57
======== ========= ========= ======== =========
Basic Continuing
operations........... $ 0.22 $ 0.18 $ 0.57 $ (0.31) $ 0.66
Discontinued
operations......... 0.03 0.03 0.02 -- 0.08
Discontinued
operations--Gain on
sale of McKesson
Water Products
Company............ -- -- -- 1.83 1.83
-------- --------- --------- -------- ---------
Total............. $ 0.25 $ 0.21 $ 0.59 $ 1.52 $ 2.57
======== ========= ========= ======== =========
Cash dividends per
common share......... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
Market prices per
common share
High................ $ 69 1/4 $34 15/16 $28 13/16 $28 1/16 $ 69 1/4
Low................. 30 3/4 27 3/16 18 9/16 18 1/4 18 1/4
F-71
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- -------- -------- -------- ---------
(in millions except per share amounts)
Fiscal 1999
Revenues................ $ 6,200.3 $7,232.2 $8,287.5 $8,308.7 $30,028.7
Gross profit............ 550.7 553.7 610.5 684.3 2,399.2
Income (loss) after
taxes
Continuing
operations........... 62.1(5)(6) 15.5(6) 45.1(6) (62.1)(6) 60.6
Discontinued
operations........... 7.0 10.8 5.6 0.9 24.3
--------- -------- -------- -------- ---------
Total............. $ 69.1 $ 26.3 $ 50.7 $ (61.2) $ 84.9
========= ======== ======== ======== =========
Earnings (loss) per
common share
Diluted
Continuing
operations......... $ 0.22 $ 0.06 $ 0.16 $ (0.22) $ 0.22
Discontinued
operations......... 0.03 0.04 0.02 -- 0.09
--------- -------- -------- -------- ---------
Total............. $ 0.25 $ 0.10 $ 0.18 $ (0.22) $ 0.31
========= ======== ======== ======== =========
Basic
Continuing
operations......... $ 0.23 $ 0.06 $ 0.16 $ (0.22) $ 0.22
Discontinued
operations......... 0.02 0.04 0.02 -- 0.09
--------- -------- -------- -------- ---------
Total............. $ 0.25 $ 0.10 $ 0.18 $ (0.22) $ 0.31
========= ======== ======== ======== =========
Cash dividends per
common share......... $ 0.125 $ 0.125 $ 0.125 $ 0.06 $ 0.435
Market prices per
common share
High................ $85 13/16 $ 96 1/4 $ 96 $ 89 3/4 $ 96 1/4
Low................. 57 5/8 73 5/8 66 1/2 52 1/4 52 1/4
- --------
(1) Includes pre-tax charges of $6.3 million incurred in the quarter in
connection with the restatement of prior years' financial results and
resulting litigation. Also includes $18.5 million in severance and benefit
costs resulting from the change in executive management and $1.7 million
in retention benefits incurred in the quarter, $16.3 million in the
aggregate after-tax.
(2) Includes pre-tax charges of $8.7 million incurred in connection with the
restatement of prior years' financial statements and resulting litigation,
$12.1 million in severance and other costs associated with former
employees and $2.9 million in acquisition-related costs, $14.6 million in
the aggregate after-tax.
(3) Includes pre-tax charges for receivable reserves and asset impairments in
the Health Care Supply Management segment totaling $30.3 million related
primarily to a prior year implementation of a contract system, partially
offset by a $5.7 million reduction in prior year restructuring reserves.
Also includes net gains of $256.0 million primarily from the exchange and
subsequent sale of Health Care Information Technology segment's equity
investments. These gains are offset in part, by a charge of $68.5 million
for a change in estimate of the segment's requirements for accounts
receivable and customer reserves. Also includes a charge of $1.5 million
in the e-Health segment for the write-off of purchased in-process
technology related to the Company's November 1999 acquisition of
Abaton.com. In addition, includes pre-tax charges of $2.4 million for
accounting and legal fees and other costs incurred in connection with the
Company's earlier restatement of prior years' financial results and
resulting litigation and $0.7 million in acquisition-related costs. These
aggregate to $100.1 million in after-tax income.
(4) Includes pre-tax charges totaling $240.9 million for Health Care
Information Technology segment charges for asset impairments, customer
reserves and severance primarily associated with product streamlining and
reorganization. These charges are offset in part, by net gains in the
segment totaling $11.0 primarily from
F-72
McKESSON HBOC, INC.
FINANCIAL NOTES--(Concluded)
the exchange and subsequent sale of equity investments. In addition,
includes pre-tax charges of $1.2 million for asset impairments in the Health
Care Supply Management segment related to a prior year implementation of a
contract system. Also includes a pre-tax charge of $2.9 million for
severance and exit-related charges primarily associated with segment staff
reductions and income of $0.9 million related to reductions in prior year
restructuring reserves. Also includes corporate pre-tax charges of $2.5
million for accounting and legal fees and other costs incurred in connection
with the Company's earlier restatement of prior years' financial results and
resulting litigation, costs associated with former employees and other
acquisition-related costs. These items total $149.6 million, after-tax.
(5) Includes pre-tax and after-tax charges of $4.9 million for the terminated
merger with AmeriSource Health Corporation.
(6) Includes charges associated with acquisitions in the Health Care Supply
Management and Health Care Information Technology segments of $10.4
million pre-tax ($6.1 million after-tax) in the first quarter,
$70.9 million pre-tax ($44.6 million after-tax) in the second quarter,
$60.3 million pre-tax ($41.0 million after-tax) in the third quarter and
$249.4 million pre-tax ($189.2 million after-tax) in the fourth quarter.
These charges include transaction costs, employee benefit change in
control provisions, employee severance, restructuring, integration and
system installation costs associated with acquisition-related activities.
F-73