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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended December 31, 2000
[_] 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
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McKESSON HBOC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3207296
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
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 December 31, 2000
----- --------------------------------
Common stock, $.01 par value 284,860,915 shares
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McKESSON HBOC, INC.
TABLE OF CONTENTS
Item Page
---- -----
PART I. FINANCIAL INFORMATION
1. Condensed Financial Statements
Consolidated Balance Sheets
December 31, 2000 and March 31, 2000............................ 3-4
Statements of Consolidated Income
Three and nine month periods ended December 31, 2000 and 1999... 5
Statements of Consolidated Cash Flows
Nine month periods ended December 31, 2000 and 1999............. 6
Financial Notes.................................................. 7-15
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Review................................................. 16-22
3. Quantitative and Qualitative Disclosures about Market Risk....... 22
PART II. OTHER INFORMATION
1. Legal Proceedings................................................ 23
6. Exhibits and Reports on Form 8-K................................. 23
2
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
2000 2000
------------ ---------
(in millions)
ASSETS
Current Assets
Cash and cash equivalents............................ $ 333.2 $ 548.9
Marketable securities available for sale (Notes 4, 8
and 9).............................................. 19.0 57.0
Receivables.......................................... 3,541.9 3,034.5
Inventories.......................................... 4,922.9 4,149.3
Prepaid expenses..................................... 120.8 175.8
--------- ---------
Total.............................................. 8,937.8 7,965.5
Property, Plant and Equipment
Land................................................. 34.0 34.5
Buildings, machinery and equipment................... 1,177.3 1,115.1
--------- ---------
Total.............................................. 1,211.3 1,149.6
Accumulated depreciation............................. (651.6) (594.2)
--------- ---------
Net................................................ 559.7 555.4
Capitalized Software................................... 105.4 92.2
Notes Receivable....................................... 126.7 100.9
Goodwill and Other Intangibles (Note 3)................ 1,199.6 1,185.6
Other Assets........................................... 507.6 473.3
--------- ---------
Total Assets....................................... $11,436.8 $10,372.9
========= =========
(Continued)
See Financial Notes.
3
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
2000 2000
------------ ---------
(in millions, except
par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts payable....................................... $ 600.4 $ 205.6
Accounts payable--trade.............................. 4,413.6 3,678.3
Deferred revenue..................................... 405.3 368.7
Short-term borrowings................................ 1.3 --
Current portion of long-term debt.................... 18.0 16.2
Salaries and wages................................... 91.5 115.5
Taxes................................................ 132.7 354.8
Interest and dividends............................... 53.2 33.9
Other................................................ 345.8 348.8
--------- ---------
Total.............................................. 6,061.8 5,121.8
Postretirement Obligations and Other Noncurrent
Liabilities........................................... 255.2 245.7
Long-Term Debt (Note 4)................................ 1,207.5 1,243.8
McKesson HBOC-Obligated Mandatorily Redeemable
Convertible Preferred Securities of Subsidiary Grantor
Trust Whose Sole Assets are Junior Subordinated
Debentures of McKesson HBOC (Note 5).................. 195.9 195.8
Other Commitments and Contingent Liabilities........... -- --
Stockholders' Equity
Common stock (400.0 shares authorized, 286.3 issued
as of December 31, 2000, and 283.9 issued as of
March 31, 2000; par value $0.01).................... 2.9 2.8
Additional paid-in capital........................... 1,835.2 1,791.1
Other capital........................................ (111.7) (126.1)
Retained earnings.................................... 2,198.9 2,122.3
Accumulated other comprehensive losses (Note 9)...... (74.7) (97.1)
ESOP notes and guarantees............................ (89.0) (99.9)
Treasury shares, at cost............................. (45.2) (27.3)
--------- ---------
Total Stockholders' Equity......................... 3,716.4 3,565.8
--------- ---------
Total Liabilities and Stockholders' Equity......... $11,436.8 $10,372.9
========= =========
(Concluded)
See Financial Notes.
4
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(in millions, except per share
amounts)
REVENUES............................ $11,029.1 $9,890.9 $30,632.4 $27,429.1
--------- -------- --------- ---------
COSTS AND EXPENSES
Cost of sales..................... 10,416.3 9,325.8 28,860.9 25,718.2
Selling, distribution, research
and development and
administration (Note 6 and 8).... 471.2 538.8 1,369.4 1,440.1
Interest.......................... 28.3 28.9 84.4 87.1
--------- -------- --------- ---------
Total........................... 10,915.8 9,893.5 30,314.7 27,245.4
--------- -------- --------- ---------
GAIN (LOSS) ON INVESTMENTS (Note
8)................................. (98.9) 263.2 (91.1) 263.2
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
OF SUBSIDIARY TRUST................ 14.4 260.6 226.6 446.9
INCOME TAXES........................ (5.6) (98.5) (89.2) (169.5)
DIVIDENDS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUST................... (1.5) (1.5) (4.6) (4.6)
--------- -------- --------- ---------
INCOME AFTER TAXES
Continuing operations............. 7.3 160.6 132.8 272.8
Discontinued operations (Note 2).. (5.6) 6.2 (5.6) 23.4
--------- -------- --------- ---------
NET INCOME.......................... $ 1.7 $ 166.8 $ 127.2 $ 296.2
========= ======== ========= =========
EARNINGS PER COMMON SHARE (Note 10)
Diluted:
Continuing operations............. $ 0.03 $ 0.56 $ 0.47 $ 0.96
Discontinued operations (Note 2).. (0.02) 0.02 (0.02) 0.08
--------- -------- --------- ---------
Total........................... $ 0.01 $ 0.58 $ 0.45 $ 1.04
========= ======== ========= =========
Basic:
Continuing operations............. $ 0.03 $ 0.57 $ 0.47 $ 0.97
Discontinued operations (Note 2).. (0.02) 0.02 (0.02) 0.08
--------- -------- --------- ---------
Total........................... $ 0.01 $ 0.59 $ 0.45 $ 1.05
========= ======== ========= =========
DIVIDENDS PER COMMON SHARE.......... $ 0.06 $ 0.06 $ 0.18 $ 0.18
SHARES ON WHICH EARNINGS PER COMMON
SHARE WERE BASED
Diluted........................... 295.1 288.8 292.3 289.8
Basic............................. 283.4 281.4 283.0 281.1
See Financial Notes.
5
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months
Ended
December 31,
-----------------
2000 1999
-------- -------
(in millions)
Operating Activities
Income from continuing operations.......................... $ 132.8 $ 272.8
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation.............................................. 85.4 86.3
Amortization.............................................. 92.4 74.1
Provision for bad debts................................... 37.3 92.3
Deferred taxes on income.................................. 9.3 (19.7)
Other non-cash items...................................... 60.5 (124.7)
-------- -------
Total................................................... 417.7 381.1
-------- -------
Effects of changes in:
Receivables............................................... (566.6) (314.5)
Inventories............................................... (780.9) (538.8)
Accounts and drafts payable............................... 1,136.4 583.9
Deferred revenue.......................................... 36.4 (32.7)
Taxes..................................................... (145.6) 102.6
Other..................................................... (9.1) 10.3
-------- -------
Total................................................... (329.4) (189.2)
-------- -------
Net cash provided by continuing operations.............. 88.3 191.9
Discontinued operations.................................... (6.7) (25.3)
-------- -------
Net cash provided by operating activities............... 81.6 166.6
-------- -------
Investing Activities
Maturities (purchases) of marketable securities............ 7.7 (4.7)
Property acquisitions...................................... (96.0) (106.1)
Properties sold............................................ 6.1 8.5
Acquisitions of businesses, less cash and short-term
investments acquired...................................... (50.7) (123.7)
Other...................................................... (93.5) (156.7)
-------- -------
Net cash used by investing activities................... (226.4) (382.7)
-------- -------
Financing Activities
Proceeds from issuance of debt............................. 5.6 772.3
Repayment of debt.......................................... (38.8) (564.7)
Dividends paid on preferred securities of subsidiary
trust..................................................... (7.5) (7.5)
Capital stock transactions:
Issuances................................................. 34.2 24.8
Share repurchases......................................... (25.7) --
Dividends paid............................................ (51.3) (50.6)
ESOP notes and guarantees................................. 10.9 15.6
Other..................................................... 1.7 (2.7)
-------- -------
Net cash provided (used) by financing activities........ (70.9) 187.2
-------- -------
Net decrease in Cash and Cash Equivalents................... (215.7) (28.9)
-------- -------
Cash and Cash Equivalents at beginning of period............ 548.9 233.7
-------- -------
Cash and Cash Equivalents at end of period.................. $ 333.2 $ 204.8
======== =======
See Financial Notes.
6
McKESSON HBOC, INC.
FINANCIAL NOTES
(unaudited)
1. Interim Financial Statements
In the opinion of McKesson HBOC, Inc. ("McKesson HBOC" or the "Company"),
these unaudited condensed consolidated financial statements include all
adjustments necessary for a fair presentation of its financial position as of
December 31, 2000, the results of its operations for the three and nine months
ended December 31, 2000 and 1999, and its cash flows for the nine months ended
December 31, 2000 and 1999.
The results of operations for the three and nine months ended December 31,
2000 and 1999 are not necessarily indicative of the results for the full
years.
These interim financial statements should be read in conjunction with the
annual audited financial statements, accounting policies and financial notes
thereto included in the Company's fiscal 2000 consolidated financial
statements which have previously been filed with the Securities and Exchange
Commission (the "SEC").
2. Discontinued Operations
The after-tax loss from discontinued operations for the three and nine
months ended December 31, 2000 primarily reflects an adjustment to the gain
recorded on the fiscal 2000 sale of the Company's former subsidiary, McKesson
Water Products Company ("Water Products business"). Income after taxes from
discontinued operations for the three and nine months ended December 31, 1999
represents the results of operations of the Water Products business.
3. Acquisitions
In July 2000, the Company's iMcKesson business completed the acquisition of
MediVation, Inc., a provider of an automated web-based system for physicians
to communicate with patients online, for approximately $24 million in cash,
$14 million in Company common stock and the assumption of $6 million of
employee stock incentives. A charge of $2.1 million was recorded in the second
quarter to write off the portion of the purchase price 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 that utilized a discounted cash flow
methodology by product line to assist in valuing in-process and existing
technologies as of the acquisition date. Goodwill and other intangibles
related to the acquisition of $41.7 million are being amortized on a straight-
line basis over periods ranging from three to seven years. In the nine months
ended December 31, 2000, the Company also completed a number of smaller
acquisitions in the Health Care Supply Management and iMcKesson segments.
4. Marketable Securities
The December 31, 2000 marketable securities balance includes $4.0 million
held in trust as exchange property for the Company's $6.6 million principal
amount of 4.5% exchangeable subordinated debentures, which remain outstanding.
This account also includes the Company's warrants to purchase WebMD
Corporation common stock (see Financial Notes 6 and 8).
5. 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
McKesson HBOC common stock. The proceeds of such issuances were invested by
the trust in
7
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
$206,186,000 aggregate principal amount of the Company's 5% Convertible Junior
Subordinated Debentures due in 2027 (the "Debentures"). The Debentures
represent the sole assets of the trust. The Debentures mature on June 1, 2027,
bear interest at an annual 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 McKesson
HBOC common stock, subject to adjustment in certain circumstances. If not
converted, 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 are reflected as
outstanding in the accompanying consolidated financial statements.
6. Gains and Charges in Continuing Operations
In April 1999, following the Company's January 1999 acquisition of HBO &
Company ("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, 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.
During the quarter and nine months ended December 31, 2000, the Company
incurred $1.1 million and $1.8 million, respectively, in legal fees in
conjunction with the pending securities litigation arising out of the
restatement (see Financial Note 12). During the quarter and nine months ended
December 31, 2000, the Health Care Supply Management segment incurred charges
of $1.7 million and $2.2 million, respectively, for asset impairments,
severance and facility closing costs (see Financial Note 7). The quarter and
nine months ended December 31, 2000 also include a charge of $98.9 million for
an impairment of equity investments held by iMcKesson (see Financial Note 8).
In addition, during the nine months ended December 31, 2000, iMcKesson
recorded a $7.8 million pre-tax gain on the liquidation of an investment (see
Financial Note 8), charges of $2.3 million for severance and facility closing
costs (see Financial Note 7) and a $2.1 million charge for the write-off of
in-process technology (see Financial Note 3).
During the quarter and nine months ended December 31, 1999, the Company
incurred accounting and legal fees and other costs totaling $2.4 million and
$17.4 million, respectively, in connection with the Audit Committee's
investigation, the restatement of the historical consolidated financial
statements and the resulting pending securities litigation (see Financial Note
12). Additionally, Corporate expense includes acquisition-related costs of
$0.7 million and $3.6 million in the quarter and nine months, respectively,
and $32.3 million in the nine months in severance and other costs associated
with former employees. In the quarter and nine months ended December 31, 1999,
the Health Care Supply Management segment incurred charges for receivable
reserves and asset impairments totaling $30.3 million related primarily to a
prior year implementation of a contract system. These charges were partially
offset by a $5.7 million net reduction in the restructuring reserves for prior
year plans. Also, during the quarter and nine months, the Health Care
Information Technology segment recorded a
8
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
charge of $61.4 million for a change in estimate of requirements for accounts
receivable and customer reserves. This charge was offset, in part, by a $2.6
million reversal of prior year reserves for acquisition-related activities due
to a change in requirements. Finally, the iMcKesson segment recorded gains
totaling $263.2 million on the exchange and subsequent sale of equity
investments (see Financial Note 8). These gains were partially offset by
charges of $7.1 million for accounts receivable and customer reserves, $1.5
million for the write-off of in-process technology and $9.8 million of expense
related to the donation of equity investments to the McKesson HBOC Foundation
(see Financial Note 8).
7. Restructuring
During the quarter ended December 31, 2000, the Company closed one Health
Care Supply Management pharmaceutical distribution center. In connection with
this closure, the Company recorded charges of $0.5 million for severance
relating to the termination of 54 employees, $0.7 million in asset impairments
and $0.5 million for facility closing costs and paid $0.4 million to 43 of
those employees. During the nine months ended December 31, 2000, the Company
recorded a severance charge of $0.5 million relating to the termination of
25 employees in the Health Care Supply Management pharmacy management business
and paid $0.4 million to 19 of those employees. The Company also reviewed the
operations and the cost structure of iMcKesson's medical management business
resulting in a planned closure of a call center and a workforce reduction. The
Company recorded a severance charge of $2.1 million relating to the
termination of 114 employees and a charge of $0.2 million for facility closing
costs and paid $0.2 million to 4 of those employees in the nine months ended
December 31, 2000.
In conjunction with restructuring plans provided for in prior fiscal years,
during the nine months ended December 31, 2000, the Company closed two
pharmaceutical distribution centers, seven medical/surgical distribution
centers and two medical/surgical sales offices in the Health Care Supply
Management segment. This resulted in the payment of $1.5 million in severance
to approximately 80 terminated pharmaceutical distribution center & back-
office employees. Also, the Company paid $2.0 million in severance to
approximately 200 employees that were terminated in the medical/surgical
business. In addition, the Company paid $2.4 million for costs incurred in
connection with the distribution center closures and associated real estate
property taxes, rents, utility and other costs for facilities subsequent to
termination of operations in the Health Care Supply Management segment. The
Company plans to continue the previously announced distribution center
closures, back-office reductions and workforce reductions in the Health Care
Supply Management segment throughout fiscal 2002. In the Health Care
Information Technology segment, severance of $4.7 million was paid in the nine
months ended December 31, 2000 to approximately 270 employees that were
terminated in fiscal 1999 and 2000 but have severance agreements that provide
for payments through fiscal 2002. In addition, $0.1 million in exit-related
costs was paid related to closed facilities in the Health Care Information
Technology segment.
9
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
A reconciliation of the reserves for the restructuring plans from March 31,
2000 to December 31, 2000, by operating segment follows:
Health Care
Health Care Information
Supply Management Technology iMcKesson
----------------- ----------------- -----------------
Exit- Exit- Exit-
Severance Related Severance Related Severance Related Total
--------- ------- --------- ------- --------- ------- -----
(in millions)
Balance, March 31,
2000................... $ 7.1 $10.1 $ 5.0 $ 0.7 $ -- $ -- $22.9
Charges incurred during
the period............. 1.0 0.5 -- -- 2.1 0.2 3.8
Severance paid during
the period............. (4.3) -- (4.7) -- (0.2) -- (9.2)
Other costs paid during
the period............. -- (2.4) -- (0.1) -- -- (2.5)
----- ----- ----- ----- ----- ---- -----
Balance, December 31,
2000................... $ 3.8 $ 8.2 $ 0.3 $ 0.6 $ 1.9 $0.2 $15.0
===== ===== ===== ===== ===== ==== =====
The remaining balances at December 31, 2000 relate primarily to charges
recorded in fiscal 1999 and 2000, with the exception of $0.5 million of exit-
related reserves 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.
8. Gain (Loss) on Investments
In November 1999, the Company received 4.5 million shares of WebMD
Corporation common stock and 8.4 million warrants to purchase WebMD
Corporation common stock in exchange for its shares and warrants of WebMD,
Inc. 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.
In December 1999, the Company donated 250,000 shares of WebMD common stock
to the McKesson HBOC Foundation and sold 2.0 million WebMD common shares. As a
result of these events, the Company recognized gains related to the investment
in WebMD of $242.9 million. In addition, other equity investments were sold in
December 1999 at a gain of $20.3 million, and a $9.8 million charge was
recorded in administrative expense to reflect the donation of the WebMD common
stock to the McKesson HBOC Foundation.
The estimated fair value of the WebMD warrants declined to $1.2 million as
of December 31, 2000. As a result of the continued decline in the value, the
Company recorded an impairment loss on this investment of $92.2 million during
the quarter. The Company also recorded an impairment loss of $6.7 million
based upon its review of other equity investments during the quarter. During
the nine months ended December 31, 2000, the Company recorded a gain of $7.8
million on the liquidation of another investment.
10
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
9. Comprehensive Income
Comprehensive income is defined as all changes in stockholders' equity from
non-owner sources. As such, it includes net income and amounts arising from
unrecognized pension costs, unrealized gains or losses on marketable
securities and investments classified as available for sale which are recorded
directly to stockholders' equity and foreign currency translations. Total
comprehensive income for the three and nine months ended December 31, 2000 and
1999 is as follows:
Three Months Nine Months
Ended Ended
December 31, December 31,
------------ --------------
2000 1999 2000 1999
(in millions)
Net income................................... $ 1.7 $166.8 $127.2 $296.2
Unrealized gain (loss) on marketable
securities and investments.................. 39.5 (10.0) 30.4 (9.9)
Foreign currency translation adjustments..... 0.2 (1.6) (8.0) (3.1)
----- ------ ------ ------
$41.4 $155.2 $149.6 $283.2
===== ====== ====== ======
For the three and nine months ended December 31, 2000, unrealized gain
(loss) on marketable securities and investments reflects the reversal of the
unrealized loss and recognition of the loss on the impairment of certain
equity investments (see Financial Note 8).
Accumulated Other Comprehensive Losses includes certain items that may be
included in the cumulative effect of adopting Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The cumulative effect cannot be determined at this
time because it will be based on fair values as of the date of implementation
of SFAS No. 133 (see Financial Note 11).
10. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share computations for income from
continuing operations:
Three Months Ended
-----------------------------------------------
December 31, 2000 December 31, 1999
----------------------- -----------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
(in millions, except per share amounts)
Basic EPS
Income from continuing
operations................... $7.3 283.4 $0.03 $160.6 281.4 $0.57
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 5.9 -- 1.9
Trust convertible preferred
securities................... 1.5 5.4 1.5 5.4
Restricted stock.............. -- 0.4 -- 0.1
---- ----- ------ -----
Diluted EPS
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $8.8 295.1 $0.03 $162.1 288.8 $0.56
==== ===== ===== ====== ===== =====
11
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
Nine Months Ended
-----------------------------------------------
December 31, 2000 December 31, 1999
----------------------- -----------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
(in millions, except per share amounts)
Basic EPS
Income from continuing
operations................... $132.8 283.0 $0.47 $272.8 281.1 $0.97
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 3.6 -- 3.2
Trust convertible preferred
securities................... 4.6 5.4 4.6 5.4
Restricted stock.............. -- 0.3 -- 0.1
------ ----- ------ -----
Diluted EPS
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $137.4 292.3 $0.47 $277.4 289.8 $0.96
====== ===== ===== ====== ===== =====
11. New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. SFAS No. 133 requires that entities
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 FASB further amended SFAS No. 133 to address implementation
issues by issuing SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an amendment of FASB Statement No. 133", in
June 2000. The Company has completed the inventory of potential derivative
instruments. The impact, if any, that SFAS No. 133 will have on the Company's
consolidated financial statements will be based on the fair values of the
derivative instruments as of the Company's planned adoption date of April 1,
2001.
In December 1999, the SEC released Staff Accounting Bulletin No. 101 ("SAB
101"), which provides the staff's views on applying generally accepted
accounting principles to selected revenue recognition issues. During the
quarter ended December 31, 2000, the Company adopted SAB 101, which did not
materially impact the Company's consolidated financial position, results of
operations or cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires entities that have securitized
financial assets to provide specific disclosures. SFAS No. 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Company is evaluating the
impact, if any, SFAS No. 140 may have on its consolidated financial
statements.
12. Litigation
A. Accounting Litigation
In its Annual Report on Form 10-K for fiscal year ended March 31, 2000, its
quarterly reports on Form 10-Q for the quarters ending June 30, 2000, and
September 30, 2000, and the Form 8-K filed January 11, 2001, the
12
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
Company reported on numerous legal proceedings arising out of the Company's
announcement on April 28, 1999 regarding accounting improprieties at HBOC.
On November 14, 2000, Lead Plaintiff, New York State Common Retirement Fund
("Lead Plaintiff") in the previously reported Federal Actions entitled In re
McKesson HBOC, Inc. Securities Litigation (the "Consolidated Action") filed a
Second Amended and Consolidated Class Action Complaint (the "SAC") against the
Company, HBOC, certain of the Company's or HBOC's current or former officers
or directors, Arthur Andersen LLP ("Arthur Andersen"), and Bear, Stearns &
Co., Inc. The SAC asserts claims against the Company under Sections 10(b),
14(a) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act").
These claims generally arise out of the January 12, 1999 acquisition of HBOC
(the "Acquisition") and the Company's announcement of the need to restate its
financial statements. On January 18, 2001, the Company filed a motion to
dismiss the claim under Section 14(a) of the Exchange Act in its entirety, and
the claim under Section 10(b) of the Exchange Act to the extent it is based on
the statements or conduct of the Company prior to the Acquisition. Lead
Plaintiff has not yet filed an opposition to the Company's motion to dismiss,
which is currently set for hearing on March 23, 2001.
The SAC asserts claims against HBOC under Sections 10(b) and 14(a) of the
Exchange Act. The claim under Section 10(b) of the Exchange Act against HBOC
purports to be brought on behalf of a class of persons including (i) persons
who acquired publicly traded securities of HBOC during the period January 20,
1997 through and including January 12, 1999, and (ii) persons who acquired
publicly traded securities or call options, or who sold put options, of the
Company during the period from October 18, 1998 through and including
April 27, 1999. The Section 10(b) claim against HBOC is generally based on
statements made by HBOC before the Acquisition and statements made by the
Company after the Acquisition. The claim under Section 14(a) of the Exchange
Act against HBOC purports to be brought on behalf of a class of persons
including persons who held McKesson common stock on November 27, 1998 and
still held those shares on January 12, 1999. The Section 14(a) claim against
HBOC alleges that HBOC made materially false and misleading statements in the
Joint Proxy Statement/Prospectus issued to shareholders of the Company and
HBOC prior to the Acquisition. On January 18, 2001, HBOC filed a motion to
dismiss the claim under Section 14(a) of the Exchange Act in its entirety.
Lead Plaintiff has not yet filed an opposition to HBOC's motion to dismiss,
which is currently set for hearing on March 23, 2001.
On January 11, 2001, the Company filed an action against the New York State
Common Retirement Fund, individually, and as a representative of a class of
former HBOC shareholders who exchanged their HBOC shares for Company shares in
the Acquisition, captioned McKesson HBOC, Inc. v. New York Common Retirement
Fund, et. al. (Case No. C01-2001 PVT (ADR)) (the "Complaint and
Counterclaim"). In the Complaint and Counterclaim, the Company alleges that
the exchanged HBOC shares were artificially inflated due to undisclosed
accounting improprieties, and that the exchange ratio therefore provided too
many shares to former HBOC shareholders. The Company has taken this action to
recover the "unjust enrichment" received by each HBOC shareholder who
exchanged more than 20,000 shares in the Acquisition. The Company does not
allege any wrongdoing by these shareholders. The Company has itself been sued
by most of the purported class members who the Complaint and Counterclaim
alleges have already benefited from the unfair exchange ratio.
On October 24, 2000, an action was filed in the State Court for the County
of Fulton, State of Georgia, captioned Suffolk Partners Limited Partnership,
et. al., v. McKesson HBOC, Inc. et. al., (Case No. 00 VS 010469A). Plaintiffs
in the Suffolk action assert claims under Georgia's securities and
racketeering laws, and for common law fraud, negligent misrepresentation,
conspiracy, and aiding and abetting. The Suffolk action names as defendants
the Company, HBOC, and certain of its or HBOC's current or former officers or
directors, and Arthur Andersen. Like the Consolidated Action, the claims in
the Suffolk action generally arise out of the Acquisition, and the Company's
announcement of the need to restate its financial statements. The Company and
13
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
HBOC separately answered the complaint on January 9, 2001. The Company and
HBOC moved for an order staying the Suffolk action in favor of the
Consolidated Action on January 10, 2001. No hearing is set on the Company and
HBOC's motion to stay and Plaintiffs in the Suffolk action have not yet
responded to the motion.
On November 1, 2000, an action was filed in the State Court for the County
of Fulton, State of Georgia, captioned Curran Partners, L.P. v. McKesson HBOC,
Inc., et. al., (Case No. 00 VS 010801). The claims in the Curran action are
identical to the claims in the Suffolk action. The Company and HBOC separately
answered the complaint on January 9, 2001. The Company and HBOC moved for an
order staying the Curran action in favor of the Consolidated Action on January
10, 2001. No hearing is set on the Company and HBOC's motion to stay and
Plaintiffs in the Curran action have not yet responded to the motion.
On December 12, 2000, plaintiffs in the previously reported San Francisco
Superior Court action entitled Yurick v. McKesson HBOC, Inc. (Case No. 303857)
filed their First Amended Complaint asserting claims for fraud and negligent
misrepresentation. Like the Consolidated Action, the claims in the Yurick
action generally arise out of the Acquisition, and the Company's announcement
of the need to restate its financial statements. The Company's response to the
amended complaint in Yurick is currently due February 23, 2001.
A September 10, 200l trial date has been set in the previously reported
Colorado state court action entitled American Healthcare Fund II, L.P. (Case
No. 99-CV-1762).
The previously reported investigations by the United States Attorney's
Office and the Securities and Exchange Commission are continuing. On January
10, 2001, the grand jury returned a superseding indictment in the Northern
District of California against former HBOC officer, Jay P. Gilbertson, and
former Company and HBOC officer, Albert J. Bergonzi (United States v.
Bergonzi, et al., Case No. CR-00-0505).
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.
B. Antitrust Litigation
As previously reported, The Company has been named as 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 for the Northern District of
Illinois (MDL 997) which proceedings include a consolidated class action (the
"Federal Class Action"), as well as additional actions brought by individual
retail, chain and supermarket pharmacies (the "Individual Actions"). As
previously reported, the Company prevailed at trial in the Federal Class
Action, and that judgment is final. On November 6, 2000 the District Court
granted summary judgment in favor of the wholesalers, including the Company,
in the Individual Actions. That decision is being appealed to the Seventh
Circuit. The summary judgment did not reach the Arkansas state law claims, and
thus those claims are still pending against the Company in MDL 997.
As previously reported, the state court antitrust actions pending against
the Company in California state court have been consolidated (Coordinated
Special Proceedings, Pharmaceutical Cases, I, II & III) and are pending in
Superior Court for the State of California, City and County of San Francisco.
On November 13, 2000, a new, but related, state court case was filed by a
number of pharmacies in Superior Court for the State of California, County of
Santa Clara (Paradise Drugs v. Abbott Laboratories, et al), and the Company
has not yet filed its response in that matter.
14
McKESSON HBOC, INC.
FINANCIAL NOTES--(Concluded)
(unaudited)
13. Segment Information
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. In fiscal 2001, the Company formed the iMcKesson business segment,
which consists of assets of the former e-Health segment, and certain assets
reclassified from the Health Care Supply Management and Health Care
Information Technology segments to iMcKesson. iMcKesson's objective 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. Financial
information relating to the Company's continuing operations reportable
segments for the three and nine months ended December 31, 2000 and 1999, and
as of December 31, 2000 and March 31, 2000, is presented below:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ----------------------
2000 1999 2000 1999
--------- -------- ------------ ---------
(in millions)
Revenues
Health Care Supply Management... $10,753.6 $9,592.9 $29,817.6 $26,495.3
Health Care Information
Technology..................... 199.8 223.6 595.0 702.5
iMcKesson....................... 72.3 70.6 210.2 221.8
Corporate....................... 3.4 3.8 9.6 9.5
--------- -------- --------- ---------
Total......................... $11,029.1 $9,890.9 $30,632.4 $27,429.1
========= ======== ========= =========
Operating profit
Health Care Supply Management... $ 164.8 $ 113.3 $ 464.6 $ 366.1
Health Care Information
Technology..................... 12.4 (42.1) 30.9 13.9
iMcKesson....................... (111.4) 248.9 (124.1) 278.5
--------- -------- --------- ---------
Total......................... 65.8 320.1 371.4 658.5
Interest--net................... (24.8) (27.1) (76.6) (81.5)
Corporate and other............. (26.6) (32.4) (68.2) (130.1)
--------- -------- --------- ---------
Income from continuing
operations before income
taxes and dividends on
preferred securities of
subsidiary trust............. $ 14.4 $ 260.6 $ 226.6 $ 446.9
========= ======== ========= =========
December 31, March 31,
2000 2000
------------ ---------
(in millions)
Segment assets
Health Care Supply Management... $ 9,629.9 $ 8,462.4
Health Care Information
Technology..................... 737.6 724.6
iMcKesson....................... 335.1 355.5
Corporate....................... 734.2 830.4
--------- ---------
Total......................... $11,436.8 $10,372.9
========= =========
15
McKESSON HBOC, INC.
FINANCIAL REVIEW
Segment Results
The revenues and operating profits from continuing operations of the
Company by business segment are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------------- -----------------------------------
2000 1999(1) % Chg. 2000 1999(1) % Chg.
--------- -------- ------ --------- --------- ------
(dollars in millions)
REVENUES
Health Care Supply
Management
Pharmaceutical
Distribution &
Services
U.S. Health Care(2).... $ 9,348.6 $8,277.7 12.9 $25,697.6 $22,749.2 13.0
International.......... 694.2 610.6 13.7 1,974.9 1,713.8 15.2
--------- -------- --------- ---------
Total Pharmaceutical
Distribution &
Services............ 10,042.8 8,888.3 13.0 27,672.5 24,463.0 13.1
Medical/Surgical
Distribution &
Services.............. 710.8 704.6 0.9 2,145.1 2,032.3 5.6
--------- -------- --------- ---------
Total Health Care
Supply Management... 10,753.6 9,592.9 12.1 29,817.6 26,495.3 12.5
--------- -------- --------- ---------
Health Care Information
Technology
Software............... 27.8 37.2 (25.3) 85.0 96.8 (12.2)
Services............... 150.9 165.8 (9.0) 454.6 538.4 (15.6)
Hardware............... 21.1 20.6 2.4 55.4 67.3 (17.7)
--------- -------- --------- ---------
Total Health Care
Information
Technology.......... 199.8 223.6 (10.6) 595.0 702.5 (15.3)
--------- -------- --------- ---------
iMcKesson............... 72.3 70.6 2.4 210.2 221.8 (5.2)
Corporate............... 3.4 3.8 9.6 9.5
--------- -------- --------- ---------
Total................... $11,029.1 $9,890.9 11.5 $30,632.4 $27,429.1 11.7
========= ======== ========= =========
OPERATING PROFIT
Health Care Supply
Management............. $ 164.8 (4) $ 113.3 (7) $ 464.6 (4) $ 366.1 (7)
Health Care Information
Technology............. 12.4 (42.1)(8) 30.9 13.9 (8)
iMcKesson............... (111.4)(5) 248.9 (9) (124.1)(5) 278.5 (9)
--------- -------- --------- ---------
Total................... 65.8 320.1 371.4 658.5
Interest--net(3)........ (24.8) (27.1) (76.6) (81.5)
Corporate and other..... (26.6)(6) (32.4)(10) (68.2)(6) (130.1)(10)
--------- -------- --------- ---------
Income from continuing
operations before
income
taxes and dividends on
preferred securities of
subsidiary trust....... $ 14.4 $ 260.6 $ 226.6 $ 446.9
========= ======== ========= =========
- --------
(1) Reflects the reclassification of revenues and operating profits of
certain business units which were previously included in the Health Care
Supply Management and Health Care Information Technology segments into
iMcKesson.
(2) Includes sales to customers' warehouses of $3,015.1 million and $2,346.2
million in the quarters and $7,715.7 million and $6,647.3 million in the
nine months ended December 31, 2000 and 1999, respectively.
(3) Interest expense is shown net of corporate interest income.
(4) The quarter and nine months ended December 31, 2000 include charges of
$1.7 million and $2.2 million, respectively, for asset impairments,
severance and facility closing costs.
(5) The quarter and nine months ended December 31, 2000 include a charge of
$98.9 million for asset impairments of certain equity investments. The
nine months also include a $7.8 million gain on the liquidation of an
investment, a charge of $2.1 million for the write-off of purchased in-
process technology and a $2.3 million charge for severance and facility
closing costs.
(6) Includes charges of $1.1 million in the quarter and $1.8 million in the
nine months ended December 31, 2000 for legal costs incurred in
connection with the pending securities litigation.
(7) Includes $30.3 million in charges for receivable reserves and asset
impairments, partially offset by a $5.7 million reduction in prior year
restructuring reserves.
(8) Includes a charge of $61.4 million for a change in estimate of reserve
requirements for accounts receivable and customer reserves, partially
offset by a $2.6 million reversal of prior year reserves for a change in
requirements for acquisition-related activities.
16
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
(9) Includes gains totaling $263.2 million from the exchange and subsequent
sale of equity investments. The gains are offset, in part, by charges of
$7.1 million for accounts receivable and customer reserves, $1.5 million
for the write-off of purchased in-process technology and $9.8 million of
expense related to the donation of equity investments.
(10) Includes accounting and legal fees and other costs totaling $2.4 million
in the quarter and $17.4 million in the nine months ended December 31,
1999 incurred in connection with the restatement of prior years'
financial statements and resulting pending securities litigation. Also
includes acquisition-related costs of $0.7 million in the quarter and
$3.6 million in the nine months. In addition, the nine months ended
December 31, 1999 includes $32.3 million in severance and other costs
associated with former employees.
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 the use of
forward-looking words such as "believes", "expects", "anticipates", "may",
"will", "should", "seeks", "approximately", "intends", "plans", "estimates",
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 and other risks and uncertainties are described herein or in the
Company's Forms 10-K, 10-Q, 8-K and other public documents filed with the SEC.
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.
Overview of Results
Net income for the third quarter decreased to $1.7 million, $0.01 per
diluted share, from $166.8 million, $0.58 per diluted share, in the prior
year. For the nine-month period, net income decreased to $127.2 million, $0.45
per diluted share, compared to $296.2 million, $1.04 per diluted share in the
prior year. The results for the quarter and nine months ended December 31,
2000 include an after-tax loss from discontinued operations resulting
primarily from an adjustment to the previously recorded gain on the fiscal
2000 sale of the Water Products business. The results for the quarter and nine
months ended December 31, 1999 included $6.2 million and $23.4 million,
respectively, in income after taxes from discontinued operations, representing
the results of operations of the Water Products business.
17
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
The results from continuing operations consist of the following:
Three Months Ended December 31,
-----------------------------------
2000 1999
----------------- -----------------
Pre- 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........................ $116.1 $ 70.8 $102.3 $ 62.0
Dividends on convertible preferred
securities of Subsidiary trust.......... -- (1.5) -- (1.5)
------ ------ ------ ------
Before unusual items..................... 116.1 69.3 102.3 60.5
Unusual items
Health Care Supply Management............ (1.7) (1.0) (24.6) (15.1)
Health Care Information Technology....... -- -- (58.8) (36.2)
iMcKesson................................ (98.9) (60.3) 244.8 153.3
Corporate and other...................... (1.1) (0.7) (3.1) (1.9)
------ ------ ------ ------
Income from Continuing Operations.......... $ 14.4 $ 7.3 $260.6 $160.6
====== ====== ====== ======
Nine Months Ended December 31,
-----------------------------------
2000 1999
----------------- -----------------
Pre- 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........................ $326.1 $198.9 $338.8 $208.2
Dividends on convertible preferred
securities of subsidiary trust.......... -- (4.6) -- (4.6)
------ ------ ------ ------
Before unusual items..................... 326.1 194.3 338.8 203.6
Unusual items
Health Care Supply Management............ (2.2) (1.3) (24.6) (15.1)
Health Care Information Technology....... -- -- (58.8) (36.2)
iMcKesson................................ (95.5) (59.1) 244.8 153.3
Corporate and other...................... (1.8) (1.1) (53.3) (32.8)
------ ------ ------ ------
Income from Continuing Operations.......... $226.6 $132.8 $446.9 $272.8
====== ====== ====== ======
The results for the quarter and nine months ended December 31, 2000 include
after-tax unusual items that reduced income from continuing operations by
$62.0 million and $61.5 million, respectively. The unusual items in the Health
Care Supply Management segment consisted of a $1.0 million charge in the
quarter and $1.3 million in the nine months for asset impairments, severance
and facility closing costs. The unusual items in the iMcKesson segment
consisted of a $60.3 million charge for equity investment impairments in the
quarter and nine months, and charges of $1.5 million for severance and other
exit-related costs and $2.1 million for the write-off of purchased in-process
technology, partially offset by a $4.8 million gain on the liquidation of an
investment in the nine months. Corporate expense includes unusual items of
$0.7 million in the quarter and $1.1 million in the nine months for legal fees
incurred in connection with the pending securities litigation resulting from
the restatement of prior years' financial results.
The prior year's third quarter and nine-month period results include after-
tax unusual items that increased income from continuing operations by $100.1
million and $69.2 million, respectively. These unusual items for the quarter
and nine months ended December 31, 1999 consisted of $18.6 million in charges
for receivable
18
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
reserves and asset impairments, partially offset by a $3.5 million reduction
in previous year restructuring reserves in the Health Care Supply Management
segment. The unusual items in the Health Care Information Technology segment
consisted of a $37.8 million charge for a change in estimate of reserve
requirements for accounts receivable and customer reserves, partially offset
by a $1.6 million reduction in prior year reserves for acquisition-related
activities. The unusual items in the iMcKesson segment consisted of net gains
of $159.1 million primarily from the exchange and subsequent sale of equity
investments, partially offset by charges of $4.3 million for accounts
receivable and customer reserves and $1.5 million for the write-off of
purchased in-process technology. Corporate expense includes unusual items of
$1.9 million in the quarter and $32.8 million in the nine months for
accounting, legal and other associated fees incurred in connection with
previously reported restatement of HBOC's historical (pre-acquisition)
financial statements and resulting securities litigation, severance and other
costs associated with former employees and other acquisition-related costs.
Income from continuing operations (before the items discussed above in the
current and prior year periods) increased to $69.3 million in the third
quarter from $60.5 million in the prior year third quarter and decreased to
$194.3 million in the nine months ended December 31, 2000 from $203.6 million
in the prior year nine months. The increase in the quarter reflects an
increase in operating profits in the Health Care Supply Management segment,
reductions in interest expense, net of corporate interest income and Corporate
expense, partially offset by declines in the operating profits in the
iMcKesson and Health Care Information Technology segments. The overall decline
in the nine months ended December 31, 2000 reflects decreases in the operating
profits in the iMcKesson and Health Care Information Technology segments
partially offset by an increase in the operating profit of the Health Care
Supply Management segment and reductions in interest expense, net of corporate
interest income and Corporate expense.
The effective income tax rate applicable to continuing operations for the
nine months ended December 31, 2000 increased from the effective income tax
rate for the comparable prior year period primarily due to an increase in
nondeductible amortization of goodwill as the result of acquisitions made in
the second half of fiscal 2000 and in fiscal 2001.
The discussion of the financial results that follows focuses on the results
from 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 Health Care Supply Management segment includes the operations of the
Company's U.S. pharmaceutical distribution and services businesses, its
international pharmaceutical operations (Canada and Mexico), and its
medical/surgical distribution and services business. This segment accounted
for 98% and 97% of consolidated revenues for the three and nine-month periods
ended December 31, 2000, respectively.
Pharmaceutical Distribution & Services revenues increased by 13% to $10.0
billion in the quarter and by 13% to $27.7 billion in the nine-month period.
This increase reflects growth during the quarter and nine months in the U.S.
direct delivery business of 7% and 12%, an increase in U.S. sales to
customers' warehouses of 29% and 16% and an increase in international revenues
of 14% and 15%, respectively.
Medical/Surgical Distribution & Services revenues increased by 1% to $710.8
million in the quarter and 6% to $2,145.1 million in the nine-month period.
The nine months ended December 31, 2000 contained 5 more selling days than the
prior year's nine months as a result of that business' fiscal calendar.
Excluding the additional selling days, revenues increased by 4% in the nine
months.
19
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
The 7% and 1% revenue increases in the quarter in the U.S. direct delivery
business and the Medical/Surgical Distribution & Services business reflect the
impact of heavy Y2K-induced purchases in December 1999, which depressed the
year-over-year comparison.
Health Care Supply Management operating profit before unusual items
increased $28.6 million or 21% to $166.5 million in the quarter and $76.1
million or 19% to $466.8 million in the nine months. Operating profit before
unusual items as a percent of revenues (calculated excluding sales to
customers' warehouses) increased 25 basis points to 2.15% in the third quarter
and 14 basis points to 2.11% for the nine months compared to the respective
prior year margins. The increase in the operating margin primarily reflects
margin expansion in the U.S. pharmaceutical distribution and services business
due to gross margin initiatives and productivity improvements in both back-
office and field operations and in the Canadian pharmaceutical business
reflecting sales growth and operational efficiencies, partially offset by the
Company's 22% interest in the reduced profits of Nadro, a Mexican
pharmaceutical distribution business.
Health Care Information Technology
The Health Care Information Technology segment includes revenues from
software sales, services business and hardware sales. This segment accounted
for 2% of consolidated revenues for the three and nine months ended December
31, 2000. Prior year's segment information reflects the transfer of certain
business units from this segment into the iMcKesson segment. Revenues declined
11% to $199.8 million compared to $223.6 million in the prior year third
quarter and declined 15% to $595.0 million in the nine-month period from
$702.5 million in the respective prior year period. Software revenues
decreased 25% to $27.8 million from $37.2 million in the third quarter and
declined 12% to $85.0 million from $96.8 million in the nine-month period. In
the current year quarter and nine-month period, certain contracts were entered
into which the Company is accounting for under the percentage of completion
method, which extends the recognition of revenue over a period of time.
Software amounts included in these contracts that are expected to be
recognized as revenue in future periods amounted to $9.4 million in the
quarter and $32.2 million in the nine-month period. Services revenues of
$150.9 million declined 9% from $165.8 million in the prior year third quarter
and 16% to $454.6 million from $538.4 million for the respective prior year
nine-month period, reflecting the lagging impact of reduced prior period
software sales on implementation services revenues. Hardware revenues
increased 2% to $21.1 million from $20.6 million in the quarter and decreased
18% to $55.4 million from $67.3 million for the nine-month period, with the
nine-month period reflecting the lower level of software sales and lower unit
prices. Hardware revenues for the quarter ended December 31, 1999 reflect a
slowdown of investments in hardware as a result of Y2K concerns.
Operating profit decreased by $4.3 million or 26% to $12.4 million in the
quarter ended December 31, 2000 from $16.7 million in the prior year quarter
and by $41.8 million or 57% to $30.9 million from $72.7 million for the nine-
month period. The operating profit margin declined to 6.21% and 5.19% in the
quarter and nine months ended December 31, 2000 compared to 7.47% and 10.35%
for the comparable prior year periods. The decline is primarily the result of
the extended software revenue recognition cycle under the percentage of
completion accounting method previously discussed, lower services revenues and
an increased level of expenses to enhance customer support and future product
introductions.
iMcKesson
The iMcKesson segment became a reportable segment in the first quarter of
fiscal 2001. Prior year segment information includes revenues and operating
profit of certain business units, which were previously reported in the Health
Care Supply Management and Health Care Information Technology segments.
Revenues for iMcKesson were $72.3 million in the quarter and $210.2 million
for the nine months ended December 31, 2000, representing a 2% increase from
revenues of $70.6 million in the prior year third quarter and a 5% decline
from
20
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
revenues of $221.8 million for the nine months ended December 31, 1999.
iMcKesson incurred an operating loss before unusual items of $12.5 million and
$28.6 million in the quarter and nine months ended December 31, 2000,
respectively, compared to operating profit of $4.1 million and $33.7 million
for the respective prior year periods. The results of the fiscal 2001 third
quarter and nine months include the operating losses and goodwill amortization
of Abaton.com which was acquired in November 1999, and MediVation, Inc. which
was acquired in July 2000, expenses related to the formation of the iMcKesson
organization and management team, and technology licensing agreements entered
into in late fiscal 2000. Also, in the nine months ended December 31, 2000
iMcKesson had lower revenues and operating profit reflecting the loss of a
number of services customers in the former Access Health business and an
extended revenue recognition cycle for certain software products.
Other
Corporate expense before unusual items declined from $29.3 million to $25.5
million in the third quarter of fiscal 2001 and declined from $76.8 million to
$66.4 million in the nine-months ended December 31, 2000 from the comparable
prior year periods. This decline primarily reflects lower costs resulting from
a reduced accounts receivable sales program.
Discontinued Operations
The after-tax loss from discontinued operations for the three and nine
months ended December 31, 2000 primarily reflects an adjustment to the gain
recorded on the fiscal 2000 sale of the Water Products business. Income after
taxes from discontinued operations for the three and nine months ended
December 31, 1999 represents the results of operations of the Water Products
business.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $333.2 million from $548.9 million
at March 31, 2000. During the nine months ended December 31, 2000, net cash
provided by operating activities was $81.6 million, compared to $166.6 million
in the prior year. The cash flows from operations for the nine months ended
December 31, 2000 reflect the payment of taxes related to the gain on the
February 2000 sale of the Water Products business.
Cash and marketable securities available for sale were $352.2 million at
December 31, 2000 compared to $605.9 million at March 31, 2000. The December
31, 2000 marketable securities balance includes $4.0 million that is currently
restricted and held in trust as exchange property in connection with the
Company's outstanding exchangeable debentures.
The Company sold $100 million of undivided interests in certain of the
Company's trade accounts receivables at December 31, 2000, under the Company's
receivables sales facility. Including the receivables sold, the increase in
receivables at December 31, 2000 compared to March 31, 2000 reflects the
comparable quarter's sales growth. The increase in inventories and payables is
primarily the result of an increased focus on buying opportunities late in the
quarter. The additional increase in payables reflects the timing of vendor
payments.
Interest expense, net of corporate interest income, declined to $24.8
million from $27.1 million in the prior year third quarter and to $76.6
million from $81.5 million in the prior year nine months. The decrease from
the prior year is due primarily to a decline in borrowings reflecting the
receipt and management of cash proceeds from the February 2000 sale of the
Water Products business.
Stockholders' equity was $3.7 billion at December 31, 2000, and the net
debt-to-capital ratio was 18%, up from 15% at March 31, 2000. The net debt-to-
capital ratio for both periods was computed by reducing the outstanding debt
amount by the cash and marketable securities balances.
21
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Concluded)
Common shares outstanding increased to 284.9 million at December 31, 2000
from 283.4 million at March 31, 2000 due primarily to shares issued under
employee benefit plans and in the acquisition of MediVation, Inc., partially
offset by the effect of the 1.0 million shares repurchased as part of the
Company's previously announced $250 million share repurchase program. Average
diluted shares increased to 295.1 million in the quarter ended December 31,
2000 from 288.8 million in the comparable prior year period due primarily to
an increase in the effect of dilutive securities resulting from the increase
in the Company's stock price, and an increase in common shares outstanding.
Additional Factors That May Affect Future Results
Reference is made to the Additional Factors That May Affect the Company's
Future Results described in the Company's most recent Annual Report on Form
10-K for its fiscal year ended March 31, 2000. The Company notes that certain
of such factors relating to the Company's Health Care Information Technology
segment are also applicable to the new iMcKesson business segment inasmuch as
that segment includes certain assets which were previously part of the Health
Care Information Technology segment.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company believes there has been no material change in its exposure to
risks associated with fluctuations in interest and foreign currency exchange
rates discussed in the Company's 2000 Annual Report on Form 10-K.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Financial Note 12 to the Company's unaudited condensed consolidated
financial statements contained in Part I of this Quarterly Report on Form 10-Q
is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
December 31, 2000.
The following report on Form 8-K was filed on January 11, 2001:
Form 8-K
Date of Report: January 11, 2001 Date Filed: January 11, 2001
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
99.1 Complaint and Compulsory Counterclaim of McKesson HBOC, Inc.
Item 9. Regulation FD Disclosure
McKesson HBOC, Inc. ("McKesson") filed an action against the New York
State Common Retirement Fund, individually, and as a representative of a
class of former HBO & Company ("HBOC") shareholders who exchanged their
HBOC shares for McKesson shares in the 1999 acquisition of HBOC. In the
Complaint, the Company alleges that the exchanged HBOC shares were
artificially inflated due to undisclosed accounting improprieties, and
that the exchange ratio therefore provided too many shares to former HBOC
shareholders. The Company has taken this action to recover the "unjust
enrichment" received by each HBOC shareholder who exchanged more than
20,000 shares in the acquisition. The Company does not allege any
wrongdoing by these shareholders. McKesson believes this action is both
prudent and necessary to protect the Company's interests, to benefit the
current shareholders of the Company, and to enable McKesson to preserve
all claims available to it. The Company has itself been sued by most of
these same HBOC shareholders who have already benefited from the unfair
exchange ratio.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
McKESSON HBOC, INC.
Dated: February 1, 2001
/s/ William R. Graber
By __________________________________
William R. Graber
Senior Vice President and
Chief Financial Officer
/s/ Heidi E. Yodowitz
By __________________________________
Heidi E. Yodowitz
Senior Vice President and
Controller
24