SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 2) (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended June 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 1-13252 ------- McKESSON CORPORATION - ------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 94-3207296 - ------------------------------- -------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Post Street, San Francisco, California 94104 - ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (415) 983-8300 - ------------------------------------------------------------------ (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 30, 1996 - ---------------------------- ---------------------------- Common stock, $.01 par value 42,820,705 shares The Registrant hereby amends the items, financial statements, exhibits, or portions of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 as set forth below. LIST OF ITEMS AMENDED PART I. FINANCIAL INFORMATION ============================== Item Page - ---- ---- 1. Financial Statements Consolidated Balance Sheets June 30, 1996 and March 31, 1996 3 - 4 Condensed Statements of Consolidated Income Quarter ended June 30, 1996 and 1995 5 Statements of Consolidated Cash Flows Quarter ended June 30, 1996 and 1995 6 - 7 Financial Notes 8 - 9 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Review 10 - 12 PART II. OTHER INFORMATION =========================== 6. Exhibits and Reports on Form 8-K 13 Exhibit Index 15 TEXT OF ITEMS AMENDED Each of the above listed Items is hereby amended by deleting the Item in its entirety and replacing it with the Items attached hereto and filed herewith. The purpose of this amendment is to reflect, in the first quarter ended June 30, 1996, the $48.2 million charge to write off the portion of the purchase price of Automated Healthcare, Inc. ("AHI") allocated to technology for which feasibility had not been established as of the acquisition date of April 23, 1996. Such charge was recorded in the third quarter ended December 31, 1996 in the originally filed financial statements. PART I. FINANCIAL INFORMATION ============================== McKESSON CORPORATION and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Restated (unaudited) June 30, March 31, 1996 1996 ------ ------ (in millions) ASSETS - ------ Current Assets Cash and cash equivalents $ 115.5 $ 260.8 Marketable securities available for sale 139.3 195.4 Receivables 791.0 672.8 Inventories 1,266.0 1,317.0 Prepaid expenses 21.0 17.0 ------- ------- Total 2,332.8 2,463.0 ------- ------- Property, Plant and Equipment Land 37.9 38.0 Buildings, machinery and equipment 690.7 675.7 ------- ------- Total 728.6 713.7 Accumulated depreciation (368.5) (357.7) ------- ------- Net 360.1 356.0 Goodwill and other intangibles 195.1 183.7 Net assets of discontinued operations (Note 3) 120.1 125.7 Other assets 244.9 231.8 ------- ------- Total Assets $3,253.0 $3,360.2 ======= ======= (Continued) - 3 - McKESSON CORPORATION and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Restated (unaudited) June 30, March 31, 1996 1996 ------ ------ (in millions) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Drafts payable $ 148.6 $ 194.0 Accounts payable - trade 1,119.0 1,149.2 Short-term borrowings 85.8 6.6 Current portion of long-term debt 27.5 27.9 Salaries and wages 23.7 26.3 Taxes 103.1 92.2 Interest and dividends 20.6 19.0 Other 126.1 127.3 ------- ------- Total 1,654.4 1,642.5 ------- ------- Postretirement Obligations and Other Noncurrent Liabilities 215.8 216.6 ------- ------- Long-Term Debt 438.6 436.5 ------- ------- Stockholders' Equity Common stock 0.4 0.4 Additional paid-in capital 333.3 332.0 Other capital (38.0) (36.2) Retained earnings 940.9 968.9 Accumulated translation adjustment (50.0) (49.7) ESOP notes and guarantee (120.7) (122.5) Treasury shares, at cost (121.7) (28.3) ------- ------- Net 944.2 1,064.6 ------- ------- Total Liabilities and Stockholders' Equity $3,253.0 $3,360.2 ======= ======= See Financial Notes. (Concluded) - 4 - McKESSON CORPORATION and SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME Restated (unaudited) Quarter Ended June 30 --------------------- 1996 1995 ------ ------ (in millions - except per share amounts) REVENUES $2,670.6 $2,388.3 ------- ------- COSTS AND EXPENSES Cost of sales 2,438.7 2,167.1 Selling, distribution and administration 177.5 162.5 Purchased in-process technology (Note 2) 48.2 - Interest 10.9 11.7 ------- ------- Total 2,675.3 2,341.3 ------- ------- INCOME (LOSS) BEFORE TAXES ON INCOME (4.7) 47.0 TAXES ON INCOME (16.7) (19.0) ------- ------- INCOME (LOSS) AFTER TAXES Continuing operations (21.4) 28.0 Discontinued operations (Note 3) 3.3 4.8 ------- ------- NET INCOME (LOSS) $ (18.1) $ 32.8 ======= ======= EARNINGS (LOSS) PER COMMON SHARE Fully diluted earnings (loss) Continuing operations $ (.49) $ .60 Discontinued operations .08 .10 ------- ------- Total $ (.41) $ .70 ======= ======= Primary earnings (loss) Continuing operations $ (.49) $ .60 Discontinued operations .08 .10 ------- ------- Total $ (.41) $ .70 ======= ======= DIVIDENDS PER COMMON SHARE $ .25 $ .25 ======= ======= SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED Fully diluted 43.8 46.9 Primary 43.8 46.8 See Financial Notes. - 5 - McKESSON CORPORATION and SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS Restated (unaudited) Quarter Ended June 30 --------------------- 1996 1995 ------ ------ (in millions) Operating Activities Income (loss) from continuing operations $ (21.4) $ 28.0 Adjustments to reconcile to net cash used by operating activities Depreciation 15.3 13.3 Amortization 2.3 1.7 Provision for bad debts 1.7 1.3 Deferred taxes on income 1.0 - Other non-cash items (Note 2) 49.4 (7.8) ------- ------- Total 48.3 36.5 ------- ------- Effects of changes in Receivables (113.3) (59.4) Inventories 51.8 76.7 Accounts and drafts payable (75.0) (42.6) Taxes 16.5 (45.1) Other (15.1) (18.8) ------- ------- Total (135.1) (89.2) ------- ------- Net cash used by continuing operations (86.8) (52.7) ------- ------- Discontinued operations 4.6 16.5 ------- ------- Net cash used by operating activities (82.2) (36.2) ------- ------- Investing Activities Purchases of marketable securities (0.2) (131.8) Maturities of marketable securities 58.3 35.0 Property acquisitions (19.8) (15.1) Properties sold 0.2 3.6 Acquisitions of businesses, less cash and short-term investments acquired (61.4) (11.2) Investing activities of discontinued operations (0.4) (2.4) Other (15.3) 3.2 ------- ------- Net cash used by investing activities (38.6) (118.7) ------- ------- (Continued) - 6 - McKESSON CORPORATION and SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS Restated (unaudited) Quarter Ended June 30 --------------------- 1996 1995 ------ ------ (in millions) Financing Activities Proceeds from issuance of debt $ 84.2 $ 61.1 Repayment of debt (3.3) (3.3) Capital stock transactions Treasury stock acquired (101.9) (4.7) Issuances 5.3 1.5 ESOP notes and guarantee 1.8 1.6 Dividends paid (10.7) (10.2) Financing activities of discontinued operations 0.1 - ------- ------- Net cash (used) provided by financing activities (24.5) 46.0 ------- ------- Net Decrease in Cash and Cash Equivalents (145.3) (108.9) Cash and Cash Equivalents at beginning of period 260.8 363.1 ------- ------- Cash and Cash Equivalents at end of period $ 115.5 $ 254.2 ======= ======= See Financial Notes. (Concluded) - 7 - McKESSON CORPORATION AND SUBSIDIARIES FINANCIAL NOTES 1. Interim Financial Statements ---------------------------- In the opinion of the Company, these unaudited consolidated financial statements include all adjustments necessary for a fair presentation of its financial position as of June 30, 1996 and the results of its operations and its cash flows for the three months ended June 30, 1996 and 1995. Such adjustments were of a normal recurring nature. Revenues and cost of sales have been restated to change the classification of sales and cost of sales associated with sales to customers' warehouses to present only the gross profit on such sales in revenues. The results of operations for the three months ended June 30, 1996 and 1995 are not necessarily indicative of the results for the full years. It is suggested that these interim financial statements be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto included in the Appendix to the Company's 1996 Proxy Statement which has previously been filed with the Commission. Such document was amended in February 1997 to reflect the discontinuance of Armor All Products Corporation ("Armor All") and Millbrook Distribution Services Inc. ("Service Merchandising"). 2. Acquisitions ------------ In April 1996, the Company acquired Automated Healthcare, Inc. ("AHI") for $61.4 million in cash and the assumption of $3.2 million of employee stock incentives. AHI designs, manufactures, sells and installs automated pharmaceutical dispensing equipment for use by health care institutions. The acquisition was accounted for as a purchase and accordingly, AHI's results are included in the consolidated financial statements since the date of acquisition. The results of operations of AHI were not material in relation to the Company's consolidated results of operations. The goodwill related to the acquisition of approximately $13.4 million is being amortized on a straight-line basis over a ten year period. A $48.2 million charge was recorded to write off the portion of the purchase price of AHI allocated to technology for which technological feasibility had not been established as of the acquisition date and for which there were no alternative uses. Existing technology was valued at $.4 million and is being amortized on a straight-line basis over a three year period. The Company utilized a discounted cash flow methodology by product line to value in-process and existing technologies as of the acquisition date. The resulting valuations represent management's best estimate of the respective fair values as of that date. As of the acquisition date, further costs necessary to develop the purchased technologies into commercially viable products were approximately $3.4 million, based on current estimates. Such costs are expected to be incurred during fiscal 1997 and 1998 and are associated with the following activities: engineering required to advance the design of products to the point that they meet specific functional and economic requirements and are ready for manufacture, prototype development, and product testing. The financial statements have been restated to reflect in the first quarter ended June 30, 1996, the $48.2 million charge to write off the portion of the purchase price of AHI allocated to technology for which feasibility had not been established as of the acquisition date of April 23, 1996. Such charge was recorded in the third quarter ended December 31, 1996 in the originally filed financial statements. The effects of the restatement on the financial statements as of and for the period ended June 30, 1996 are as follows: As Previously Reported As Restated ---------------------- ----------- (in millions, except per share amounts) Total Assets $3,301.2 $3,253.0 Stockholders' Equity 992.4 944.2 Net Income (Loss) 30.1 (18.1) Fully Diluted Earnings Per Share .66 (.41) - 8 - McKESSON CORPORATION AND SUBSIDIARIES FINANCIAL NOTES 3. Discontinued Operations ----------------------- On December 31, 1996, the Company sold its 55% equity interest in Armor All to The Clorox Company for $221.9 million and recognized an after-tax gain of $120.2 million. In addition, in December 1996 the Company made the decision to divest the net assets of its Service Merchandising Division for which no loss on disposition is anticipated. All of the net assets and results of operations of both Armor All and Service Merchandising have been reclassified as discontinued operations for all periods presented. The net assets of discontinued operations at June 30, 1996 and March 31, 1996 were as follows: June 30, March 31, 1996 1996 ------ ------ (in millions) Total assets $ 271.9 $ 275.5 Total liabilities (151.8) (149.8) ------ ------ Net assets $ 120.1 $ 125.7 ====== ====== Assets of discontinued operations consist primarily of cash, receivables, inventory, property plant and equipment, and goodwill of Armor All and Service Merchandising at June 30, 1996 and March 31, 1996. Liabilities of discontinued operations consist primarily of accounts payable and other accrued liabilities of Armor All and Service Merchandising at June 30, 1996 and March 31, 1996. The results of discontinued operations for the three months ended June 30, 1996 and 1995 were as follows: June 30, March 31, 1996 1996 ------ ------ (in millions) Revenues $174.5 $197.0 ===== ===== Income from discontinued operations before taxes $ 9.0 $ 10.8 Provision for taxes on income (3.7) (4.4) Less: Minority interest (2.0) (1.6) ----- ----- Net income discontinued operations $ 3.3 $ 4.8 ===== ===== Discontinued operations include $2.4 million and $2.0 million after tax from the operations of Armor All and $0.9 million and $2.8 million after tax from the operations of Service Merchandising for the three months ended June 30, 1996 and 1995, respectively. - 9 - McKESSON CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW Segment Results - --------------- The Company's Armor All and Service Merchandising segments have been classified as discontinued operations in the current quarter, and prior years have been restated accordingly (see Financial Note 3). The revenues and operating profits of the Company's continuing operations by business segment are as follows: Quarter Ended June 30 ------------------------- % 1996 1995 Chg. ------ ------ ---- (in millions) REVENUES - -------- Health Care Services Direct Delivery US (1) $2,219.5 $1,929.0 15.1 International 376.8 383.1 (1.6) ------- ------- Total Direct Delivery 2,596.3 2,312.1 12.3 Water Products 70.4 64.0 10.0 Corporate 3.9 12.2 ------- ------- Total $2,670.6 $2,388.3 11.8 ======= ======= OPERATING PROFIT - ---------------- Health Care Services(2) $ 3.3 $ 48.9 (93.3) Water Products 9.6 8.9 7.9 ------- ------- Total 12.9 57.8 (77.7) Interest - net (3) (7.7) (2.6) Corporate and other (9.9) (8.2) ------- ------- Income before taxes $ (4.7) $ 47.0 ======= ======= (1) U.S. Health Care revenues reflect the reclassification of sales and cost of sales associated with sales to customers' warehouses and include only the gross margin on such sales in revenues. (2) Health Care Services operating profit for the period ended June 30, 1996, includes a charge for $48.2 million to write off the portion of the purchase price of AHI allocated to technology for which feasibility had not been established as of the acquisition date. (3) Interest is shown net of corporate interest income. - 10 - McKESSON CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW Overview of Results - ------------------- Net loss for the first quarter was $18.1 million, $.41 per fully-diluted share, compared to net income of $32.8 million, $.70 per share in the prior year. Results for the first quarter include a $48.2 million charge to write off the portion of the purchase price of AHI allocated to technology for which feasibility had not been established as of the acquisition date. Results for the first quarter also include $3.3 million, $.08 per share, compared to $4.8 million, $.10 per share, in the prior year from the discontinued Armor All and Service Merchandising segments. Earnings growth in the Health Care Services segment (before the $48.2 million charge noted above) including costs associated with strategic initiatives, was more than offset by lower earnings from the discontinued Service Merchandising segment and higher net interest expense. The effective income tax rate applicable to continuing operations for the quarter ended June 30, 1996 differed from the effective tax rate for the comparable period in fiscal 1996 primarily due to the write-off in the current period of purchased in-process technology acquired with AHI of $48.2 million, which had no associated tax benefit. HEALTH CARE SERVICES The Health Care Services segment includes the operations of the Company's U.S. pharmaceutical and health care products distribution businesses and its international pharmaceutical operations (Canada and Mexico). This segment accounted for 97% of consolidated revenues for the first quarter. Segment revenues increased by 12% for the three months compared with the prior year. Revenue growth of 15% in the U.S. Health Care businesses was partially offset by declines in sales at Medis, the Company's Canadian unit. Operating profit for the quarter, excluding the effect of the $48.2 million charge noted above, increased by 5% from the prior year due to sales growth in every customer segment (independents, chain stores and hospitals) and to cost reduction efforts. First quarter results include $4.2 million of costs associated with a series of strategic initiatives designed to improve the Company's competitiveness in the retail and institutional market segments. WATER PRODUCTS Revenues in the Water Products segment increased by 10% for the three months compared with the prior year. Operating profit increased 8% to $9.6 million from $8.9 million for the first quarter, compared with the same quarter in the prior year. This improvement reflects growth in the direct delivery and packaged water businesses, and the favorable impact of the segment's ongoing programs to improve customer service which have reduced customer turnover expenses. - 11 - McKESSON CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW DISCONTINUED OPERATIONS The after-tax results of the discontinued operations of Armor All and Service Merchandising decreased to $3.3 million in the quarter from $4.8 million in the prior year. Armor All experienced an increase in revenue of 10% for the three months compared with the prior year. The increase was primarily attributable to sales growth of Armor All Protectant(R) and to sales of two new products introduced in December, 1995. Pre-tax income increased by 24% due to an increased proportion of higher margin automotive products in the sales mix. Revenues in the Service Merchandising segment declined 19% for the three months compared with the prior year. Strong competitive pressures and customer consolidations resulted in the loss of several large customers in fiscal 1996. Pre-tax income decreased 67% due primarily to the impact of fixed expenses over a lower revenue base. These trends are expected to continue and to adversely affect the Company's earnings for the rest of the fiscal year. Liquidity and Capital Resources - ------------------------------- Cash, equivalents and marketable securities decreased $201.4 million during the first quarter to $254.8 million primarily due to stock repurchase activity and the cost of the acquisition referred to in Financial Note 2. During the first three months of fiscal 1997, the Company repurchased 2.2 million shares of its common stock for $102 million under a share repurchase program initiated in June 1995 and expanded in May 1996. As of June 30, 1996, 3.4 million shares remain to be repurchased under the program. The Company's debt-to-capital ratio increased from 31% at March 31, 1996 to 37% at June 30, 1996 as debt increased from short-term borrowings by its health care products distribution operations in Canada and equity was reduced by the share repurchases. - 12 - PART II. OTHER INFORMATION =========================== Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits 3 Restated By-Laws of the Company, as amended effective July 31, 1996 10.1 Form of Employment Agreement effective as of January 31, 1996 by and between the Company and a corporate Vice President and President of its Health Systems unit 10.2 McKesson Corporation Severance Policy for Executive Employees, amended and restated as of May 31, 1996 27 Financial Data Schedule (b) Reports on Form 8-K 1. Form 8-K dated April 8, 1996 Item 5. Other Events --------------------- The Registrant announced that David E. McDowell was resigning as President and Chief Operating Officer of the company, effective upon commencement of employment of his successor. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits -------------------------------------------------- 2. Form 8-K dated April 29, 1996 Item 5. Other Events --------------------- The Registrant announced that Mark A. Pulido had been elected President and Chief Operating Officer and a Director of the Registrant, effective May 20, 1996. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits -------------------------------------------------- - 13 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McKESSON CORPORATION (Registrant) Dated: June 6, 1997 By /s/ Richard H. Hawkins ---------------------------- Richard H. Hawkins Vice President and Chief Financial Officer By /s/ Heidi E. Yodowitz --------------------------- Heidi E. Yodowitz Controller - 14 - EXHIBIT INDEX Exhibit Number Description - ------- ---------------------------------------------- 3 Restated By-Laws of the Company, as amended effective July 31, 1996 (1) 10.1 Form of Employment Agreement effective as of January 31, 1996 by and between the Company and a corporate Vice President and President of its Health Systems unit (1) 10.2 McKesson Corporation Severance Policy for Executive Employees, amended and restated as of May 31, 1996 (1) 27 Financial Data Schedule Footnotes to Exhibit Index: (1) Exhibits as previously filed in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 are not being amended in this filing. - 15 -