EXHIBIT 13
McKESSON
[PHOTO APPEARS HERE]
97
ANNUAL REPORT
OUR MISSION IS TO BE
THE WORLD LEADER
IN HEALTH CARE SUPPLY
MANAGEMENT BY
ADVANCING THE SUCCESS
OF OUR PARTNERS
CONTENTS
2 Letter to Shareholders
6 Essay on Operations
20 Six-Year Highlights
21 Six-Year Highlights Reporting Segments
22 Financial Review
29 Financial Statements
34 Notes to Consolidated Financial Statements
50 Statement of Management's Responsibility
50 Independent Auditors' Report
51 Directors and Officers
52 Shareholder Information
53 Investor Perspective
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McKESSON OVERVIEW
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CORPORATE PROFILE
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[MAP OF UNITED STATES APPEARS HERE]
. McKesson Customer Operations
. McKesson General Medical
. Medis Health and Pharmaceutical Services
. Nadro
McKesson Corporation, a Fortune 100 company, is the largest health care supply
management company in North America through its U.S. Health Care businesses; its
Canadian subsidiary, Medis Health and Pharmaceutical Services; and its interest
in Mexico's Nadro. With its acquisition of General Medical, the largest
multimarket distributor of medical-surgical supplies, McKesson has further
extended its leadership in health care supply management. The corporation also
owns McKesson Water Products Company, one of the nation's largest distributors
of bottled drinking water.
McKESSON CORPORATION
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U.S. HEALTH CARE
Pharmaceutical and Retail Services
McKesson Health Systems
Customer Operations
McKesson General Medical Corp.
Zee Medical, Inc.
INTERNATIONAL HEALTH CARE
Canada -- Medis Health and Pharmaceutical Services, Inc.
Mexico -- Nadro, S.A. de C. V.
(22.7% holding)
McKESSON WATER PRODUCTS COMPANY
Sparkletts(R)
Alhambra(R)
Crystal(TM)
McKESSON'S GROWING INFLUENCE ALONG THE HEALTH CARE SUPPLY CHAIN
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MANUFACTURERS
Helping pharmaceutical and medical-surgical supply manufacturers get their
valuable products to market -- rapidly, reliably, and universally
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UTILIZATION MANAGEMENT
Using cost-effective decision support systems to help health care providers
choose appropriate pharmaceuticals and supplies
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PACKAGING
Providing appropriate dose sizes tracked by barcode information to enhance
distribution safety and efficiency
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PRESCRIBING
Making pharmaceutical and medical supply information available
to help physicians and pharmacists make the best clinical decisions for their
patients
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LOGISTICS
Offering a full range of pharmaceutical and medical-surgical supplies at
industry-leading standards of availability, accuracy, and efficiency
U.S. HEALTH CARE
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PHARMACEUTICAL AND RETAIL SERVICES
Offering innovative marketing and retail services to improve the flow of
pharmaceuticals from manufacturer to patient
. Pharmaceutical marketing services
. OmniLink(SM) pharmacy connectivity software
. Valu-Rite(R), Valu-Rite/CareMax(SM), and
Health Mart(R) retail networks
. Healthcare Delivery Systems, Inc.
. McKesson BioServices Corporation
. McKesson Pharmacy Systems
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McKESSON HEALTH SYSTEMS
Serving the pharmaceutical distribution and supply management needs of health
care institutions
. Automated Healthcare, Inc. -- R\\x\\OBOT(TM),AcuScan-R\\x\\(TM), and
Connect-R\\x\\(TM)
. MedPath(SM)
. Multum Information Services, Inc.
(25% holding)
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CUSTOMER OPERATIONS
Providing retail and national account sales, service, and network operations
that support McKesson customers nationwide
. National distribution center network
. Drohan Data Center
. National Customer Service Center
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McKESSON GENERAL MEDICAL
Leading the industry in medical-surgical supply management across the continuum
of care
. Acute care -- hospitals, surgicenters
. Primary care -- physicians, clinics, and physician practice management
companies
. Extended care -- nursing homes, rehabilitative and home care
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DISPENSING
Promoting pharmacy success through a full suite of retail marketing programs and
advanced pharmacy management systems
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PAYMENT
Improving transaction accuracy and supporting retail pharmacy profitability
through online access to managed care networks
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COMPLIANCE
Providing retail Patient Care Enhancing Programs and specialized distribution to
improve patient compliance with prescribed therapies
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HEALTH CARE DATA
Gathering detailed information on utilization of pharmaceutical and medical-
surgical materials throughout the supply chain
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SHARED SAVINGS
Using McKesson's financial strength, information technology, and wide industry
relationships to share managed-care risks and benefits with our partners
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FINANCIAL HIGHLIGHTS
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Dollars in millions, except per share amounts
Years ended March 31 1997 1996 1995
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OPERATIONS
Revenues $12,886.7 $9,953.7 $9,438.7
Health Care Services Operating Profit/(1)/ 232.8 206.1 183.4
Water Products Operating Profit/(1)/ 41.6 39.6 31.8
Net Income 133.9 135.4 404.5
FINANCIAL STRENGTH
Working Capital $ 1,123.9 $ 820.5 $ 879.0
Total Assets 5,172.8 3,360.2 3,260.2
Stockholders' Equity 1,260.8 1,064.6 1,013.5
Capital Employed 2,440.8 1,462.9 1,438.6
PERFORMANCE MEASURES
Return on Average Equity 14% 13% 50%
Fully Diluted Earnings per Share
Continuing operations
Before unusual items $ 2.56 $ 2.59 $ 1.89
Unusual items (2.43) - (5.23)
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Total 0.13 2.59 (3.34)
Discontinued operations 0.19 0.31 (0.51)
Discontinued operations -
Gain on sale/donation of Armor All stock 2.66 - 0.02
Gain on sale of PCS - - 12.69
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Total $ 2.98 $ 2.90 $ 8.86
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Dividends per Common Share $ 1.00 $ 1.00 $ 1.34
Shares Outstanding (fully diluted) 45.1 46.7 45.5
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HEALTH CARE SERVICES
OPERATING PROFIT/(1)/
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Dollars in millions
[BAR GRAPH APPEARS HERE]
95 $183.4
96 $206.1
97 $232.8
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REVENUES
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Dollars in billions
[BAR GRAPH APPEARS HERE]
95 $9.4
96 $10.0
97 $12.9
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CAPITAL EMPLOYED
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Dollars in billions
[BAR GRAPH APPEARS HERE]
95 $1.4
96 $1.5
97 $2.4
/(1)/Excluding unusual items.
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TO OUR SHAREHOLDERS
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McKesson's strategic commitment to the health care industry entered its third
year in fiscal 1997. In last year's annual report, we outlined our excitement
about the opportunities in this vital sector of the economy and our initial
steps to create value, building on our core pharmaceutical distribution
business. Here we review significant progress made in 1997 toward our goal of
becoming the world's leading health care supply management company.
We reiterate our commitment to enhance shareholder value. As measured by
share-price rise and multiple expansion in fiscal 1997, the marketplace has
already begun to recognize and reward McKesson as it focuses on health care. In
this report we'll discuss the specifics of the past year and the reasons why we
believe we will consistently meet -- or exceed -- investor expectations in the
years ahead.
In fiscal 1997 we continued the process of senior management succession begun
in 1996. From April 1, 1997, Alan Seelenfreund will serve as Chairman of the
Board of Directors of McKesson, while Mark A. Pulido becomes Chief Executive
Officer as well as President. Alongside this joint letter, each of us presents
his personal perspective on this transition and the corporation's achievements
and prospects.
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INCREASED SHAREHOLDER VALUE
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Five-Year Cumulative Total Return
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1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
McKesson Corporation $100 $143 $196 $482 $624 $795
S&P Index 100 115 117 136 179 215
Value Line Health Care
Sector Index 100 84 81 112 160 197
AFFIRMING McKESSON'S HEALTH CARE MISSION
During fiscal 1997, McKesson management made its mission clear:
McKesson Corporation will become
the world leader in health care supply management
by advancing the success of our partners.
This mission statement is the foundation of our strategy, asset portfolio
decisions, investment priorities, and return expectations, and guides the way we
conduct our business.
Leading the World in Health Care
Supply Management
Health care supply -- pharmaceuticals, biotechnological agents, and medical-
surgical equipment and supplies -- presents a remarkable growth opportunity
and, with the information it generates, a complex management challenge
worldwide.
Health care growth is assured, driven by demand from aging populations.
Technological innovation drives new products and processes that enhance the
quality of care. At the same time, the U.S. and other societies are increasingly
facing the need to manage the dynamics of health care growth, so that the
benefits health care brings are not swamped by its cost.
The supply businesses within health care are surprisingly large. About $80
billion, or 8 percent of total U.S. health care expenditures, is spent on
pharmaceuticals, from the latest breakthrough drugs to cost-effective quality
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generics. Another $30 billion goes for medical-surgical supplies, from high-tech
surgical implants to clinic disposables.
Based on these strong fundamentals, McKesson's mission is to become the world
leader in managing the supply chain within health care. What will this entail?
First, the scale and capability to carry out increasingly complex logistics
processes. In the U.S. market, for example, some 30,000 different dispensing
units of prescription pharmaceuticals flow from over 500 manufacturers to 50,000
retail outlets, 6,300 hospitals, 15,000 nursing homes, and 200,000 clinics. Only
a distributor with continental scale and unquestioned financial resources can
supply these vital drugs reliably. McKesson, at a U.S. pharmaceutical annual
revenue run-rate exceeding $13 billion, leads the industry in distribution scope
and credibility. McKesson supply management has further room to grow share, from
volume now delivered directly from manufacturers or through small distributors
lacking the scope and systems needed in today's demanding marketplace.
Second, an information technology platform to manage supply cost and
utilization, while improving the quality of health care. True control over the
health care supply chain requires influence over key decisions, when and where
they are made. Guiding customers through their supply choices, and costs, is
tough enough. Helping our partners manage supply utilization while
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So many changes have occurred during my 22-year career at McKesson that it is
difficult to single out the most influential. But I take special satisfaction in
four major milestones attained over the eight years I've served as chief
executive officer.
First, McKesson's recognition of the role that pharmacy benefit management
companies would play in pharmaceutical cost management, which led to the long
nurture and eventual sale of our PCS subsidiary in fiscal 1995 for $4 billion.
This transaction indelibly established our commitment to shareholder value. Its
proceeds provided the basis for our future corporate development, and our
employee shareholders participated significantly in the rewards.
Second, I am convinced McKesson will prosper in concentrating on health care
supply management, and I am proud to have led the company in that direction. Our
distribution experience and information technology skills are legacies we can
capitalize upon in a dynamic industry that needs them badly. As a result,
McKesson has every opportunity to set the pace, globally, in health care supply
management.
Third, as both CFO and CEO I have tried to reinforce McKesson's strong balance
sheet and promote employee ownership. To augment our business scope and reach,
we take a disciplined approach to investment analysis, capital allocation, and
return on investment. Our own employees, who through the Employee Stock
Ownership Plan and option plans now have an interest in over 32 percent of our
equity, rely upon our integrity as prudent stewards of capital.
Finally, I am most pleased with the quality of our senior management team and
the support of our board, and am especially happy that Mark Pulido has joined
us. His background at McKesson and as a pharmacist, his health care
experience--including medical-surgical distribution and pharmaceutical
manufacturing --and his exceptional personal and leadership skills make him the
ideal choice to guide McKesson at this point in our evolution.
I've never been more confident in McKesson's future and look forward
enthusiastically to the success of its mission.
Alan Seelenfreund
3
enhancing health care quality, at the individual patient and physician level,
across many episodes and sites of care, will be an even greater challenge.
The information systems required to meet the challenge of managing the health
care supply chain are formidable. McKesson, long known for distribution systems
innovation, already leads the industry in applied information technology -- and
we'll extend that strength to supply management across all locations within the
health care continuum.
Third, broad supply services accommodating increasingly sophisticated
customers. For patients, health care is all about quality. Improving quality in
the supply arena will inevitably require managing both pharmaceuticals and
medical-surgical supplies. The industry will demand a comprehensive approach,
superseding traditional product-line fragmentation and accommodating the
evolving needs of integrated health care providers.
McKesson seized the opportunity to create broad-based supply management in
1997, acquiring General Medical Inc., the only national, multimarket medical-
surgical supply company in the U.S. General Medical has added distinctive
capabilities to our existing strength in pharmaceutical and biotechnological
distribution. Combined with our Canadian and Mexican holdings, McKesson now
stands in the first rank of health care supply management companies worldwide.
Advancing the Success of Our Partners
For 164 years, McKesson has prospered as our business partners have succeeded:
.Our pharmacist, physician, and nurse partners, who care for patients
.The manufacturers who create critical pharmaceuticals and supplies
.The communities in which we operate and whose welfare we promote
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Returning to McKesson, where both my father and I worked in the past, has been
both familiar and excitingly new. McKesson is poised to capture a wealth of
opportunity, and I am delighted to have the privilege of helping to shape its
future.
I was attracted back by many factors. McKesson's reputation for integrity and
customer service rests on the quality of its people. I find our employees'
values are as solid as I knew them to be in my early career, but supplemented by
new skills, new colleagues, and a competitive spirit that we'll encourage as we
go forward.
Equally important is McKesson's potential as a focused health care company. My
business experience makes me certain that focus and speed will create a powerful
competitive advantage for us. I endorse the conviction that we will prosper by
advancing the success of our health care partners.
My managerial philosophy requires clear communication of intentions and
reliable fulfillment of expectations. We will do what we say we'll do. I'll lead
our company in both communication and performance, with the strong support of
McKesson's board and management team.
Finally, in returning to McKesson, I want to acknowledge the gratitude and
respect we all owe to Alan Seelenfreund. He has overseen the most profound
strategic shifts in the company's modern history. He has been the architect of
our corporate restructuring. I am very proud to succeed him.
Mark A. Pulido
4
.Our employees, who devote themselves to providing unparalleled service
.Our shareholders, who entrust us with the capital to make a fundamental
contribution to the health care industry, and for whom we strive to provide a
superior return.
Our belief that success is mutual defines the way we conduct our business. We
fulfill our commitments. We insist on quality. We treat people with dignity and
consideration, and we do what's right.
FOCUSING STRATEGY AND REDEPLOYING CORPORATE ASSETS
Our two-part corporate strategy directly supports our mission:
.McKesson is and will remain the distributor of choice, recognized as first in
our core business, and will continue to increase market share in a financially
responsible manner.
.McKesson will lead in developing health care supply management services to
meet customer needs, capturing growth opportunities in the market and
improving our margins.
Accomplishing this ambitious strategy will require sustained focus throughout
the corporation. We realigned assets during fiscal 1997 through an unprecedented
series of acquisitions and divestitures, in order to establish a clear platform
at McKesson for market-leading performance and margin expansion. We also
completed the redeployment of the $600 million cash proceeds retained by the
company from the fiscal 1995 sale of PCS Health Systems, Inc., to Eli Lilly and
Company, with further investments in information technology, automated
logistics, managed care, retail electronic connectivity, and customer service
programs.
We have continued strengthening our senior management team -- the best
qualified in the industry. They, and a wide group of other McKesson managers,
hold significant equity and have incentives to pursue our strategy with
intensity. Our philosophy is that employees should be stockholders. The 23
percent of our common stock held by the Employee Stock Ownership Plan places
McKesson among the top 10 publicly held U.S. corporations in terms of employee
ownership.
COMMUNICATING OUR INTENTIONS AND SHOWING RESULTS
McKesson has been a good investment. Shareholders who purchased $100 of McKesson
stock in May 1992 hold a security worth $800 as of May 1997 -- outpacing the S&P
500 significantly, both before and after the PCS transaction.
To reinforce this trend and set clear expectations for McKesson's performance,
we have stepped up the frequency and scope of our communications with the
investor community. Quarterly and major-event analyst conference calls, frequent
discussions with major shareholders, and increased participation in industry
forums reinforce McKesson's mission, strategy implementation, and disciplined
approach to capital deployment.
We look ahead with confidence to fulfilling the expectations we have set, and
to the success of all partners in our mutual enterprise.
/s/ Alan Seelenfreund
Alan Seelenfreund
Chairman of the Board
/s/ Mark A. Pulido
Mark A. Pulido
President and Chief Executive Officer
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[ARTWORK APPEARS HERE]
IMPLEMENTING
McKESSON'S STRATEGY
1997 WAS A YEAR OF FOCUS FOR McKESSON, AS WE REDEPLOYED ASSETS, GAINED SHARE AS
DISTRIBUTOR OF CHOICE, AND ACCELERATED DEVELOPMENT OF HEALTH CARE SUPPLY
MANAGEMENT SERVICES.
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ASSET REDEPLOYMENT
Three major acquisitions and two divestitures in 1997 provide clear testimony to
McKesson's focus on its health care mission.
General Medical Inc., acquired in February 1997, broadens McKesson's business
scope. As the nation's leading medical-surgical supply distributor across the
continuum of health care sites, McKesson General Medical will enable the
corporation to provide a full range of health care supply management services to
national and regional integrated health networks. The acquisition also presents
McKesson with many cross-selling opportunities to institutions in conjunction
with pharmaceutical distribution and value-added information services.
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McKESSON REVENUE PROFILE
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Dollars in billions
[BAR CHART APPEARS HERE]
FY96 FY97 Run-Rate*
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U.S. Pharmaceutical
Distribution & Services $ 8.2 $10.9 $13.5
McKesson General Medical none 0.2 1.7
International Health Care 1.5 1.5 1.5
McKesson Water Products 0.3 0.3 0.3
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Total $10.0 $12.9 $17.0
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*Based on FY97 Fourth-Quarter Revenue Run-Rates
The health care distribution business of FoxMeyer Corporation, formerly the
fourth-largest U.S. pharmaceutical distributor, was acquired in November 1996.
Its valued customer base significantly enlarges McKesson's revenue, while the
integration of its distribution facilities will help establish our cost
structure as the new industry standard.
Automated Healthcare, Inc. (AHI), acquired in April 1996, is the nation's
premier manufacturer of automated pharmacy systems. Based on robotic and barcode
technology, AHI's R\\x\\OBOT/TM/ automated pharmacy station significantly
reduces the cost of picking drugs for patient-ready orders, while virtually
eliminating dispensing errors. The new AcuScan-R\\x\\/TM/ product from AHI scans
patient, drug, and nurse identification at the point of drug administration,
automating information for the Medical Administration Record and reducing
nursing labor costs. Using the new Connect-R\\x\\/TM/ interface, the AHI suite
of robotic and information technology products captures data and monitors
pharmaceutical usage from the warehouse to the patient's bedside.
Further concentrating the corporate portfolio on health care, McKesson
divested its holdings in Armor All Products Corporation and Millbrook
Distribution Services, Inc., recording an after-tax aggregate gain of $120
million.
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EXCELLING IN HEALTH CARE DISTRIBUTION
With an estimated 23 percent share of the market, and at an annual run-rate
exceeding $13 billion, McKesson stands out as the clear leader in U.S.
pharmaceutical distribution. And with some 20 percent of pharmaceutical dollar
volume still sold directly from manufacturers to providers, there is room to
grow.
Being the best in the world at our core business -- providing the right
product at the right place at the right time at the right price for pharmacist,
physician, nurse, and patient -- is the overriding goal at McKesson. To attain
that goal, McKesson operates sophisticated distribution and information networks
of continental scope, dedicated to premier customer service.
Every workday, McKesson handles more than one million transactions,
representing over $65 million worth of pharmaceuticals and medical-surgical
supplies. Approximately 9,500 warehouse personnel and drivers, salespeople,
information technology experts, and customer service representatives work on the
front lines in McKesson's distribution and processing centers. Their sole
purpose is to serve customers distinctively well.
McKesson invests in service -- whether it's the extra inventory needed for the
cough-and-cold season or advanced laptop information systems equipping our
representatives to counsel customers at their own locations. We invest in
intensive training for telephone customer service support. We continually
improve our information and financial support capabilities -- from our 80,000-
square-foot, state-of-the-art information technology center in Sacramento to the
ongoing extensive upgrades of systems at Medis in Canada and at McKesson General
Medical.
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U.S. PHARMACEUTICAL
DISTRIBUTION MARKET
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Calendar Year 1997 (Estimate)
In percent
100%=$72 billion*
[PIE CHART APPEARS HERE]
McKesson -- 23% AAS -- 10%
BBC -- 20% BDY -- 8%
CAH -- 19% Others -- 20%
*Total wholesale market including bulk
sales to customers' warehouses
SOURCE: SALOMON BROTHERS
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Extraordinary service is the result. McKesson stands at the forefront of the
industry, with customer-approval ratings consistently at the highest levels.
Operational sophistication makes all this possible, supported by continuous
quality improvement in both the warehouse and the marketplace. Acumax/(R)/Plus,
McKesson's proprietary warehouse management system, is now installed in 24
pharmaceutical distribution centers across the U.S. Handheld radio-frequency
scanning units enable distribution center personnel to check goods as they are
received from the manufacturer, to determine the status and location of
inventory in real time, and to monitor details of customer orders as they are
picked -- all with unprecedented accuracy and reliability.
To make McKesson more competitive, we have continued our disciplined program
of internal cost reduction. In particular, we have
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begun to consolidate the McKesson and FoxMeyer distribution networks
aggressively. When this project is completed in calendar 1998, the resulting
customer density and efficiencies will define the best full-service cost
structure in the industry.
Underlying all the statistics is the extraordinary dedication of McKesson
employees. McKesson distribution professionals perform hundreds of exacting
tasks around the clock to ensure the integrity and efficiency of the supply flow
and to maintain McKesson's performance as distributor of choice.
ADVANCING HEALTH CARE SUPPLY MANAGEMENT
McKesson's supply management strategy has a clear goal: helping our business
partners control health care costs while enhancing health care quality.
Under yesterday's permissive health care financing approach, few worried about
supply-chain inefficiencies or excessive resource use. Now, however, health care
providers have inherited spiraling utilization of drugs and supplies, while
facing stringent managed care reimbursement rules. They have mounds of data but,
typically, slim factual support in deciding how to balance cost and clinical
quality in the best interests of the patient. Meanwhile, research-based
pharmaceutical and medical-surgical supply manufacturers also have a huge stake
in distribution and supply management. With tens of billions invested annually
in lengthy research and development and regulatory approval processes, it is
imperative for manufacturers to assure the availability of their cost-effective,
high-value products to their physician and pharmacist customers.
Resolving the balance between quality and appropriate cost requires an end-to-
end perspective on pharmaceutical and medical-surgical product flow. The key to
effective supply management -- and fiscal integrity under managed care -- is the
ability to gather and use timely information to influence key decision points
along the supply chain, when and where decisions are made.
McKesson, in partnership with provider customers, is developing decision
support services to help customers determine which products to choose, from whom
to buy, how much to pay, and how much to use.
For example, through McKesson's software and consulting services our hospital
pharmacist partners can:
.Oversee health care supply procurement by item and by site of care
.Manage costs of health care supply transactions using accurate contract terms
.Interface with McKesson's warehouse and on-site automated dispensing systems
to optimize inventory
.Coordinate procurement and dispensing with clinical decisions of physician
committees
.Comply with managed care requirements and monitor their impact
.Take managed care risk responsibly.
McKesson brings the skills and credibility to create value-added services such
as these, advancing our partners' success while capturing the extraordinary
growth opportunity in managing health care supply information.
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[ARTWORK APPEARS HERE]
PERFORMING FOR OUR
RETAIL PARTNERS
McKESSON IS THE UNDISPUTED LEADER IN PHARMACEUTICAL DISTRIBUTION TO U.S. AND
CANADIAN RETAIL PHARMACIES. McKESSON PROGRAMS SET THE PACE FOR SERVICE ACROSS
ALL RETAIL CUSTOMER SEGMENTS.
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LEADING AN EXPANDING INDUSTRY
McKesson is particularly strong in distribution to the retail segment: we are
first in serving independent retail pharmacies -- and first in share of retail
chain pharmacies as well. While gaining significant revenue momentum in fiscal
1997, we balanced our retail customer base among independent community
pharmacies and multisite chain retailers, including fast-growing pharmacy
outlets in food stores and mass merchandisers.
The reason for McKesson's leading position is straightforward. Through
superior performance as the distributor of choice and through advanced
information technology, we help our retail partners succeed at their business --
serving physicians and patients.
SUPPORTING RETAILERS THROUGH OMNILINK
OmniLink(SM) is a revolutionary, centralized pharmacy information technology
introduced by McKesson in fiscal 1996 to support retail pharmacies in both the
independent and chain segments. A software application located on the
information pathway between the pharmacy and third-party health care payor,
OmniLink intercepts electronic script payment transactions and checks them for
accuracy. This powerful information management tool helps pharmacists comply
with the complicated requirements of managed care formularies and reimbursement
procedures, increasing pharmacy profitability by providing transaction and
payment audit trails.
More than 1,800 pharmacies have installed OmniLink, which captures savings by
automatically attending to the administrative demands of managed care
transactions. In real time, OmniLink confirms thousands of price updates and
clarifies the managed care stipulations governing the drugs pharmacists
dispense. The value to community pharmacy is significant. As Robert Bliss of
Penn Family Pharmacy in Pennsauken, N.J., says, "I used to get drug price
updates only once a month. Now it's daily, so I know OmniLink is making me
money."
McKesson documents savings from OmniLink in a monthly, customized OmniLink
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McKESSON CUSTOMER PROFILE
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In percent
[BAR CHART APPEARS HERE]
100%=$2.2 billion 100%=$3.4 billion
FY96 4Q FY97 4Q
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Institutions 26% 32%
Chains 34% 31%
Independents 40% 37%
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Value Report(TM), summarizing interventions performed and the additional profit
the store realized from them.
We plan to increase value to retail pharmacies by continually adding new
services and information to OmniLink. OmniLink(SM) Financial Services (OLFS) is
the latest of these innovations. OLFS offers automated reconciliation and pre-
funding of receivables, significantly reducing the pharmacist's working capital
needs by improving managed care cash flow.
CHOOSING HOW TO AFFILIATE WITH MCKESSON
McKesson tailors its retail service offerings closely to the particular needs of
customers in each retail segment. A good example is the wide choice of
affiliation offered to independent pharmacy customers of McKesson.
Valu-Rite(R) is McKesson's 5,200-member voluntary association of independent
pharmacies -- the largest such organization in the country. Valu-Rite brings its
members the benefits of a "virtual chain," including private-label products,
special purchasing programs, and in-store merchandising of over-the-counter
products -- while affording the maximum degree of autonomy to the independent
pharmacist.
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OMNILINK USER BASE GROWTH
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Total Units Installed
[BAR GRAPH APPEARS HERE]
FY97 FY97 FY98
Q1 Q4 Estimated
800 1800 2600
Health Mart(R) is McKesson's franchise program, offering services similar to
those of Valu-Rite along with the benefits of tighter organizational affiliation
with McKesson. The proprietors of approximately 650 pharmacies nationwide are
affiliated with Health Mart.
Since its launch last year, our new Valu-Rite/CareMax(SM) program has
contracted with more than 3,100 independent pharmacies. Using OmniLink
technology, CareMax improves efficiency, accuracy, and profitability in today's
complex dispensing environment, which encompasses hundreds of payment plans.
Through CareMax Patient Care Enhancing Programs, Valu-Rite/CareMax pharmacists
build a practice beyond the traditional dispensing pharmacist role. Finally,
CareMax helps community pharmacists compete in the demanding environment of
managed care, gaining program members access to managed care prescription volume
and simplifying the administrative burdens of third-party payment. Through
McKesson, Valu-Rite/CareMax members speak with a single voice through a single
contract to managed care payors -- a profile that large managed care
organizations demand in order to do business, and one that independents have
been largely unable to fulfill before joining CareMax.
The results have been outstanding for pharmacists. As Jerry Deom of Lincoln
Trail Pharmacy, Radcliff, Ky., says, "CareMax and OmniLink are the best programs
in the industry to keep us competitive in the world of managed care."
12
LINKING MANUFACTURER TO RETAILER
McKesson's Pharmaceutical and Retail Services group is organized to enhance the
flow of products from manufacturers to retailers through advanced marketing and
information services.
In fiscal 1997, McKesson introduced the first in a new series of Patient Care
Enhancing Programs for retail pharmacies, to generate prescription refill
reminders automatically. Through OmniLink, pharmacists remind patients to refill
physician-authorized prescriptions. The program supports compliance with the
drug therapy ordered by the patient's physician. In addition, patients can
receive important information about their therapy and health, which can
positively affect outcomes and lead to enhanced pharmaceutical care.
McKesson's Select Generics/(SM)/ program offers pharmacists approximately
1,350 of the most-used generic prescription products, on a competitive market
basis. Select Generics features only pharmaceuticals from the highest quality,
most reliable pharmaceutical manufacturers. Automatically administered through
McKesson's order-entry system, Select Generics helps retail pharmacists comply
with managed care mandates for generic substitution, while assuring them of
clinical integrity and cost parity with competition. Select Generics
manufacturers gain the advantages of predictably greater volume -- a winning
proposition for McKesson's partners at both ends of the pharmaceutical product
chain.
Marketplace response to Select Generics has been overwhelming. Some 5,900
stores have signed onto Select Generics, agreeing to high degrees of program
compliance in return for the quality and economic benefits of the program.
SERVICES TO
MANUFACTURERS
Manufacturers are critical to the health care supply chain -- and key partners
for McKesson.
McKesson's Healthcare Delivery Systems, Inc. (HDS) unit performs an entire
suite of specialized logistics and patient services for manufacturers, from
patient registers through reimbursement support and patient assistance programs.
Pioneering the integrated distribution of Berlex's biotech drug Betaseron(R) to
the population with multiple sclerosis, HDS has put together an organization
that directly links the ends of the pharmaceutical chain -- patients and
manufacturers. Because of its capability in patient identification and
reimbursement counseling, HDS can function as a marketing organization for the
newer biotech firms and deliver targeted marketing support services nationwide
for major pharmaceutical companies.
A good example is HDS's TrialScript/(SM)/ program, which enables
manufacturers to support pharmaceutical sampling by physicians in the clinic
through electronically controlled vouchers. Filled at a retail pharmacy,
vouchers eliminate the need for wasteful sample inventory, while enabling
McKesson to track drug usage and volume -- vital marketing information for
manufacturer-sponsors -- with unprecedented detail and accuracy.
The combined industry-leading size of McKesson's retail and institutional
customer base is a major attraction to manufacturers seeking to expand market
access. Our Patient Care Enhancing Programs permit manufacturers committed to
high quality and reliable patient care to partner closely with McKesson. With
its value-added programs and services, McKesson reaches the customer base of
clinical pharmacists who are dedicated to patient-centered fulfillment of
managed care standards and who are best positioned to prosper in an evolving
managed care environment.
13
[ART APPEARS HERE]
SETTING INSTITUTIONAL
SERVICE STANDARDS
SUPPLYING $5.4 BILLION ANNUALLY IN PHARMACEUTICAL AND MEDICAL-SURGICAL PRODUCTS
TO INSTITUTIONS, MCKESSON IS DEVELOPING INNOVATIVE SUPPLY MANAGEMENT SERVICES
FOR THE EVOLVING HEALTH CARE SYSTEM.
================================================================================
MCKESSON A MAJOR SUPPLIER
TO INSTITUTIONS
Institutional providers -- physicians, nurses, and clinical pharmacists --
account for more than 35 percent of all pharmaceutical demand, and use nearly
all medical-surgical supplies. McKesson has moved rapidly to address the needs
of the fastest-growing institutional market segments -- integrated health
networks, physicians, clinics, home health and long-term care providers -- in
addition to those of acute-care hospitals nationwide. In fiscal 1997, McKesson
established itself as a key partner for health care institutions, gaining
sizable market share.
Integrated health networks of regional and national scope are particularly
influential in redefining the shape of health care. McKesson Health Systems
(MHS), our institutional division, has paid special attention to integrated
health networks, growing its share of this market segment in fiscal 1997. MHS is
also actively serving the nation's institutional group purchasing organizations.
In addition, accelerated by the rise of integrated health networks, more and
more care is being provided in lower-cost settings that supplement traditional
hospital acute care, such as cost-effective physician office visits or services
at recuperative, rehabilitation, chronic, and geriatric facilities. MHS is
concentrating on these "alternate sites" -- and is already leading the industry
in serving institutional pharmacies, which supply pharmaceuticals to extended-
care providers. Addressing a similar service opportunity in the physician
sector, McKesson General Medical has significant and growing market share in
medical-surgical supply to physicians, clinics, and physician practice
management companies. With McKesson General Medical, we have a substantial
opportunity to improve the management of pharmaceutical supply to physicians as
well.
CREATING ADVANCED
LOGISTICS SERVICES
Just as it does for our retail customers, McKesson's national distribution
network meets the logistics needs of institutions with tailored services --
including daily hospital
================================================================================
----------------------------
INSTITUTIONAL REVENUE GROWTH
----------------------------
Dollars in billions
[BAR GRAPH APPEARS HERE]
FY96 FY97 Run-Rate*
McKesson Health Systems (pharmaceuticals) $1.7 $2.5 $3.7
McKesson General Medical (medical-sugical supplies) none $0.2 $1.7
Total $1.7 $2.7 $5.4
*BASED ON FY97 FOURTH-QUARTER REVENUE RUN-RATES
15
McKESSON GENERAL MEDICAL
Customers, employees, and the public markets have enthusiastically endorsed
McKesson's acquisition of General Medical Inc. of Richmond, Va. -- a transaction
that has created opportunities to extend our services and increase value for
McKesson shareholders.
A NEW BUSINESS FOR MCKESSON
Growing at a five-year compound rate of 20 percent, McKesson General Medical
participates in the attractive $30 billion medical-surgical supply industry.
McKesson General Medical is the only nationwide distributor of medical-
surgical supplies serving the three major market segments that cover the full
continuum of health care:
.Acute care -- encompassing hospitals
and outpatient surgicenters
.Primary care -- serving physicians in
their offices, the growing sector of
multispecialty clinics, and physician
practice management companies
.Extended care -- including nursing
homes, rehabilitation facilities, and
home health care.
McKesson General Medical's capabilities broaden the corporation's market and
customer base, leveraging logistics skills, information technology, and
marketing expertise. McKesson General Medical will operate as an integral
subsidiary, taking full advantage of opportunities to create a pharmaceutical
offering in collaboration with McKesson Health Systems, but also maintaining the
service standards and economic value that the seasoned McKesson General Medical
management and sales team has worked diligently to establish.
EXTENDING SUPPLY MANAGEMENT
McKesson General Medical significantly advances the corporate mission to develop
health care supply management services. This is because McKesson Health Systems
and McKesson General Medical together address the full spectrum of supply needs
throughout the continuum of care. Integrating fast-growing alternate sites into
the care system will require both market familiarity and new levels of
sophistication in information technology -- precisely the combination of skills
brought about through the acquisition.
------------
CUSTOMER MIX
------------
General Medical
100% = $1.7 billion
[PIE CHART APPEARS HERE]
Acute Care - $1.0 Billion
Primary Care - $490 Million
Extended Care - $170 Million
Integrated health networks (IHNs) are natural customers for the comprehensive
distribution capabilities of the combined companies. With its specialized sales
force dedicated to serving IHN accounts, McKesson General Medical complements
strong growth in this customer segment at McKesson Health Systems.
McKesson supply management systems will set the industry standard for
innovative supply management support services to IHNs. An excellent example is
Optima(TM), McKesson General Medical's fee-based materials services program in
acute care. In place at more than 60 customer sites, Optima services have a
documented track record of lowering medical-surgical inventory, freight, and
administrative handling costs -- while improving supply efficiency for acute-
care customers.
McKesson General Medical's strength in the physician and clinic segment
deserves special attention. Employing 500 sales professionals serving more than
50,000 primary care accounts, McKesson General Medical brings experience,
reputation, and scale to the $9 billion physician market. More than 80 percent
of supply volume to physicians is currently served by small distributors,
offering opportunities for cost-effective industry-segment consolidation.
16
As the health care system of tomorrow takes shape, McKesson General Medical
will implement a clear strategy:
.Build on national presence and
McKesson affiliation, providing
manufacturers with single-source
access to all segments in health care,
especially IHNs
.Provide sales and marketing expertise
for manufacturers, particularly in the
highly fragmented non-hospital market,
which is difficult for them to reach
.Emphasize growth in fast-growing,
alternate-site accounts, accelerating
supply management innovation
.Reduce customers' product costs
through efficient distribution and
targeted use of information technology
.Establish clear leadership in the primary
and extended care segments through
acquisition as well as internal growth.
================================================================================
--------------------
STRONG MARGIN GROWTH
--------------------
General Medical
In percent*
[BAR GRAPH APPEARS HERE]
12/95 -- 3.1%
3/96 -- 3.4%
6/96 -- 3.4%
9/96 -- 4.3%
12/96 -- 4.9%
*EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
================================================================================
delivery and emergency orders around the clock -- assuring order quality through
AcumaxPlus, our proprietary warehouse management system.
Beyond the basics, MHS is developing a suite of advanced logistics services
to meet the complex challenges of new multifacility institutional customers.
For health care networks with several hospital or clinic sites, MHS offers
its Central Pharmacy program. Central Pharmacy uses a single, optimally located
facility -- either the customer's or McKesson's -- to receive hospital pharmacy
orders, prepare patient-ready doses, and track inventory. Developed in close
conjunction with integrated health network partners, Central Pharmacy provides
cost-effective, cooperative pharmacy centralization, while avoiding customer
concerns about conventional pharmacy outsourcing and loss of clinical control.
More than 60 large hospitals nationwide are already taking advantage of the
RxOBOT, a unique automated pharmacy station developed by McKesson's subsidiary,
Automated Healthcare, Inc. (AHI). The RxOBOT uses robotic dispensing technology
to select pharmaceuticals for individual patients in unit-dose, barcoded
packaging. The RxOBOT's exceptional picking speed supplies drugs in a fraction
of the time manual methods require, lowering the cost of pharmacy
administration. In fiscal 1997, AHI introduced a flexible robotic unit suitable
in scale for smaller hospitals -- an innovation that more than triples potential
market size for the RxOBOT.
RxOBOT's unparalleled accuracy also directly contributes to the quality of
care. Recent studies published in leading medical
17
journals estimate that 10 percent of hospital patients are at risk for an
"adverse drug event" due to prescription administration error. The RxOBOT meets
this safety challenge through its barcode and information-database technology,
which virtually eliminates dispensing errors from the pharmacy.
McKesson is taking automated medication administration to the bedside with
its AcuScan-Rx units, showcased in fiscal 1997. Fully compatible with both
RxOBOT and hospital customers' pharmacy information systems, AcuScan-Rx's
handheld, barcode-scanning technology verifies that the nurse has provided the
right drug to the right patient in the right dose. Additionally, AcuScan-Rx
automates the Medical Administration Record, reducing paperwork and lowering
nursing time and cost.
CREATING HEALTH CARE SUPPLY MANAGEMENT
McKesson information technology leads to savings that sustain hard-pressed
customers in today's competitive institutional health care environment. McKesson
supply management services add value by leveraging automation and information
technology -- promoting our customers' success while providing solid financial
results for McKesson.
An estimated $3 to $7 billion in cost-saving opportunities exist in hospital
pharmaceutical administration, resulting from high pharmacy and nursing labor
costs as well as the lack of formulary and purchase contract compliance. In
direct response to this opportunity, McKesson's coordinated software and
consulting services have been designed as a cost-management tool for hospital
pharmacists, as well as physicians sharing managed care risk for pharmaceutical
costs.
By facilitating analysis of drug supply alternatives and pharmaceutical
utilization, McKesson helps medical professionals work effectively to balance
drug cost and quality. Integrated with the pharmaceutical ordering process,
McKesson's supply management services enable pharmacists to administer
formularies and improve purchasing-contract compliance throughout multifacility
networks. These services also make it possible for pharmacists and physicians to
develop and test drug utilization standards suitable for their own institutions,
monitoring actual experience compared to desired goals.
Best-in-class distribution services, advanced logistics, integrated
information and utilization management -- these form the core of the MHS program
to provide health care supply solutions for our customers. Customer demand for
these new offerings accelerated in fiscal 1997, bringing our annualized run-rate
as of the fourth quarter to $5.4 billion.
18
-----------------------
McKESSON WATER PRODUCTS
-----------------------
MCKESSON WATER PRODUCTS COMPANY, THE THIRD-LARGEST U.S. PROVIDER OF PURE
DRINKING WATER, IS GROWING GEOGRAPHICALLY UNDER ITS SPARKLETTS, ALHAMBRA, AND
CRYSTAL BRANDS.
================================================================================
In fiscal 1997, McKesson Water Products Company (MWPC) demonstrated share growth
in both its core direct delivery and grocery products businesses while
continuing steady profit improvement. With its Sparkletts(R), Alhambra(R), and
Crystal(TM) brand names, MWPC sells to more than 530,000 home and office
customers in California, Arizona, Texas, Oklahoma, Nevada, New Mexico, and
Washington.
BUILDING THE HOME DELIVERY BASE
McKesson Water Products' production capabilities lead the U.S. in quality. In
fiscal 1997, MWPC became the first U.S. bottled water company accredited by the
Geneva-based International Standards Organization (ISO) for unparalleled
excellence in quality-assurance systems. With ISO 9001 certification as the
industry quality leader, MWPC is positioned to accelerate future growth, as
municipal water systems around the country come under greater scrutiny.
In addition to all-important product quality, economic success in direct
bottled water delivery depends on customer service and retention. MWPC enjoyed
another strong year in these areas, improving more than 10 percent in customer
retention while achieving the highest customer satisfaction scores in the
company's history. These achievements reflect continual improvement in MWPC
service-response systems, as well as management's fundamental commitment to
excellence in both production and distribution.
GROWING GROCERY SHARE
Packaged water in retail stores -- both bulk water and designer lines -- is the
fastest-growing beverage category nationally. Across its market areas, MWPC
grocery revenue in fiscal 1997 grew 20 percent, due to greater brand presence,
share of shelf, and display activity.
MWPC's network of production facilities in the western U.S. positions the
company to continue vigorous growth in retail. In fiscal 1997, seven grocery-
product line extensions were launched in the key California market, leveraging
prior-year capital spending to increase production and warehousing capacity and
enabling entry into new distribution channels. A 50,000-square-foot bottling
plant went into production in Houston in April 1997, while dedicated grocery
production facilities in Anaheim, Calif., and Dallas will be completed by the
end of calendar 1997. In addition, the Aqua-Vend(R) product line was divested in
March 1997 to support further plant and geographic expansion.
With sustained focus on superior product quality and service excellence,
Sparkletts, Alhambra, and Crystal are increasingly recognized as brands at the
forefront of the growth of the bottled water category.
19
-------------------
SIX-YEAR HIGHLIGHTS
-------------------
Dollars in millions except per share amounts
Years ended March 31 1997/(1)/ 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS/(2)/
Revenues/(3)/ $12,886.7 $9,953.7 $ 9,438.7 $8,520.8 $7,991.8 $7,219.1
Percent change 29.5% 5.5% 10.8% 6.6% 10.7% 27.9%
Gross profit/(4)/ 1,037.3 915.5 808.2/(4)/ 783.6 777.2 723.3
Percent of revenues 8.0% 9.2% 8.6% 9.2% 9.7% 10.0%
Operating profit 127.4/(5)/ 245.7 90.6/(6)/ 202.6 200.3 129.2/(7)/
Percent change (48.1)% 171.2% (55.3)% 1.1% 55.0% (30.6)%
Percent of revenues 1.0% 2.5% 1.0% 2.4% 2.5% 1.8%
Operating margin (deficit)/(8)/ 92.8/(5)/ 241.3 (9.0)/(9)/ 153.6/(10)/ 156.5 79.3/(11)/
Percent of revenues 0.7% 2.4% (0.1)% 1.8% 2.0% 1.1%
Interest expense 55.7 44.4 44.5 39.3 47.5 52.9
Income (loss) before taxes on income and
dividends on preferred securities of
subsidiary trust 37.1/(5)/ 196.9 (53.5)/(9)/ 114.3/(10)/ 109.0 26.4/(11)/
Taxes on income 31.3 76.2 96.6/(12)/ 45.0 42.2 10.9
Effective tax rate 84.4% 38.7% - 39.4% 38.7% 41.3%
Dividends on preferred securities of
subsidiary trust 0.7 - - - - -
Income (loss) after taxes
Continuing operations 5.1/(5)/ 120.7 (150.1)/(9,12)/ 69.3/(10)/ 66.8 15.5/(11)/
Discontinued operations 128.8/(13)/ 14.7 554.6/(14)/ 87.8/(15)/ 47.9 16.8/(16)/
Extraordinary item -- debt extinguishment - - - (4.2) - -
Cumulative effects of accounting changes - - - (16.7) - (110.5)
Net income (loss) 133.9 135.4 404.5 136.2 114.7 (78.2)
Average stockholders' equity 990.6 1,043.3 808.3 623.1 581.5 593.3
Return on equity/(17)/ 13.5% 13.0% 50.0% 21.9% 19.7% (13.2)%
Common dividends declared 43.3 44.7 56.5 66.9 64.0 61.8
Fully diluted earnings (loss) per
common share
Continuing operations $ 0.13 $ 2.59 $ (3.34) $ 1.49 $ 1.44 $ 0.22
Discontinued operations 2.85 0.31 12.20 1.99 1.07 0.43
Extraordinary item - - - (0.10) - -
Cumulative effects of accounting changes - - - (0.38) - (2.85)
Total 2.98 2.90 8.86 3.00 2.51 (2.20)
FINANCIAL POSITION/(2)/
Customer receivables $ 1,180.4 $ 631.7 $ 635.6 $ 615.3 $ 605.3 $ 566.4
Days of sales/(18)/ 25.8 22.9 24.2 26.0 27.3 28.2
Inventories -- LIFO cost 2,259.5 1,317.0 1,081.9 900.5 777.1 746.2
Inventories -- FIFO cost 2,538.6 1,602.5 1,376.2 1,204.3 1,090.9 1,042.1
Days of sales/(18)/ 60.7 63.8 57.4 56.0 54.4 57.8
Drafts and accounts payable 2,065.4 1,343.2 1,229.8 1,061.5 999.9 910.2
Days of sales/(18)/ 49.4 53.5 51.3 49.4 49.9 50.4
Current assets 3,761.1 2,463.0 2,464.2 1,627.9 1,490.0 1,487.4
Current liabilities 2,637.2 1,642.5 1,585.2 1,326.5 1,298.6 1,196.4
Working capital 1,123.9 820.5 879.0 301.4 191.4 291.0
Percent of revenues/(18)/ 6.8% 8.2% 9.3% 3.6% 2.4% 4.0%
Property, plant and equipment -- net 373.6 356.0 341.6 345.7 334.2 333.8
Percent of revenues/(18)/ 2.3% 3.6% 3.6% 4.1% 4.2% 4.6%
Capital expenditures 76.9 73.6 76.4 68.1 49.0 67.1
Total assets 5,172.8 3,360.2 3,260.2 2,676.6 2,458.4 2,439.1
Total debt/(19)/ 985.2 398.3 425.1 499.0 397.6 543.9
Stockholders' equity 1,260.8 1,064.6 1,013.5 678.6 619.4 554.5
Capital employed/(20)/ 2,440.8 1,462.9 1,438.6 1,177.6 1,017.0 1,098.4
Ratio of net debt to capital
employed/(21)/ 34.2% - - 39.1% 34.1% 42.1%
Average capital employed/(20)/ 1,903.1 1,527.6 1,326.1 1,081.8 1,056.9 1,148.7
Turnover/(22)/ 6.8 6.5 7.1 7.9 7.6 6.3
Fully diluted shares 45.1 46.7 45.5 44.1 44.8 38.8/(23)/
Common shares outstanding at 3/31 45.8 44.8 44.4 40.6 40.6 38.9
Dividends per common share 1.00 1.00 1.34 1.66 1.60 1.60
Cash distribution from PCS
Transaction per common share - - 76.00/(24)/ - - -
Book value per common share/(25)/ 27.53 23.76 22.83 16.38 14.99 13.97
Market price
High 68 1/4 55 5/8 109 1/4 68 1/2 47 1/8 40 1/8
Low 41 1/8 37 1/4 30 1/8 38 5/8 30 1/4 32
At year end 64 51 1/4 40 3/8 59 1/2 44 3/4 32 5/8
20
--------------------------------------
SIX-YEAR HIGHLIGHTS REPORTING SEGMENTS
--------------------------------------
Dollars in millions
Years ended March 31 1997/(1)/ 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE SERVICES
Revenues/(3)/ $12,591.8 $9,656.7 $9,177.7 $8,274.7 $7,753.4 $6,976.9
Percent change 30.4% 5.2% 10.9% 6.7% 11.1% 29.2%
Operating profit 92.8/(26)/ 206.1 76.1/(27)/ 165.6 169.9 105.1/(28)/
Percent of revenues 0.7%/(26)/ 2.1% 0.8%/(27)/ 2.0% 2.2% 1.5%/(28)/
Average capital employed/(29)/ 1,527.8 1,043.5 989.5 836.9 663.3 722.7
Turnover/(22)/ 8.2 9.3 9.3 9.9 11.7 9.7
Return/(30)/ 6.1% 19.8% 7.7% 19.8% 25.6% 14.5%
Segment assets 4,648.2 2,525.3 2,148.6 1,951.6 1,759.5 1,699.2
Capital expenditures 41.9 43.5 44.4 34.4 24.5 38.3
Depreciation 40.3 33.9 30.2 23.1 20.2 20.4
Amortization of intangibles 6.3 6.9 7.0 6.9 6.1 7.0
WATER PRODUCTS
Revenues $ 275.1 $ 259.3 $ 246.0 $ 240.3 $ 229.6 $ 232.8
Percent change 6.1% 5.4% 2.4% 4.7% (1.4)% (1.6)%
Operating profit 34.6/(31)/ 39.6 14.5/(32)/ 37.0 30.4 24.1
Percent of revenues 12.6%/(31)/ 15.3% 5.9%/(32)/ 15.4% 13.2% 10.4%
Average capital employed/(29)/ 118.9 114.2 122.7 119.4 107.9 104.4
Turnover/(22)/ 2.3 2.3 2.0 2.0 2.1 2.2
Return/(30)/ 29.1% 34.7% 11.8% 31.0% 28.2% 23.1%
Segment assets 144.6 142.0 142.3 150.4 135.7 132.6
Capital expenditures 32.3 24.8 26.3 28.7 20.6 25.9
Depreciation 22.7 21.4 20.3 18.3 16.8 15.9
Amortization of intangibles 0.1 0.1 0.2 - - -
CORPORATE
Revenues $ 19.8 $ 37.7 $ 15.0 $ 5.8 $ 8.8 $ 9.4
Expenses (42.8) (35.5) (112.7)/(33)/ (50.0)/(34)/ (49.4) (56.8)
Average capital employed/(29)/ 256.4 369.9 213.9 125.5 285.7 321.6
Total assets* 380.0 692.9 969.3 574.6 563.2 607.3
Capital expenditures 2.7 5.3 5.7 5.0 3.9 2.9
Depreciation 2.4 1.9 1.4 6.2 9.9 10.1
*Total assets include:
Cash and cash equivalents
and marketable securities 229.8/(35)/ 456.2 670.4 62.7 77.5 140.0
Net assets of discontinued
operations in other assets/(36)/ - 125.7 88.2 353.9 333.3 287.2
/(1)/Includes the results of the FoxMeyer business from the acquisition date of
November 8, 1996 and of General Medical Inc. from the acquisition date of
February 21, 1997.
/(2)/Restated to reflect the Armor All and Millbrook segments as discontinued
operations.
/(3)/Reflects the reclassification of sales and cost of sales associated with
sales to customers' warehouses and includes only the gross margin on such
sales in revenues.
/(4)/Revenues less cost of sales, in fiscal 1995 includes $35.9 million of
charges for restructuring, asset impairment and other operating items, 0.4%
of revenues.
/(5)/Includes $98.8 million in charges for restructuring, asset impairment, and
other operating items and $48.2 million for the write-off of in-process
technology related to the acquisition of Automated Healthcare, Inc., 1.1%
of revenues in the aggregate, $109.5 million after tax.
/(6)/Includes $124.6 million in charges for restructuring, asset impairment, and
other operating items, 1.3% of revenues.
/(7)/Net of restructuring charges of $65.1 million, 0.9% of revenues.
/(8)/Income (loss) from continuing operations before interest expense, taxes on
income and dividends on preferred securities of subsidiary trust.
/(9)/Includes $59.4 million of compensation costs related to the PCS Transaction
and $139.5 million of charges for restructuring, asset impairment, and
other operating items, representing 2.1% of revenues in the aggregate,
$130.6 million after-tax.
/(10)/Includes a loss on the termination of interest rate swap arrangements of
$13.4 million, $8.2 million after-tax.
/(11)/Net of restructuring charges of $65.1 million, 0.9% of revenues, $41.0
million after-tax.
/(12)/Includes $107.0 million of income tax expense related to the sale of PCS.
/(13)/Includes gain on sale of Armor All of $120.2 million after-tax.
/(14)/Includes gain on sale of PCS of $576.7 million after-tax, write-down of
the Company's investment in Millbrook of $72.8 million after-tax, and $1.0
million of income after-tax from a donation of Armor All stock to the
McKesson Foundation.
/(15)/Includes $32.7 million after-tax relating to a gain on the sale and
donation of Armor All stock.
/(16)/Net of restructuring charges of $15.8 million after-tax related to
Millbrook.
/(17)/Based on net income.
/(18)/Based on year-end balances and sales or cost of sales assuming major
acquisitions occurred at beginning of year. With respect to the FoxMeyer
acquisition, assumes annualized retained revenues of $3.4 billion.
/(19)/Total debt includes all interest-bearing debt and capitalized lease
obligations. Amounts related to deferred compensation have been
reclassified as other current and non-current liabilities.
/(20)/Capital employed consists of total debt, convertible preferred securities
of subsidiary trust, and stockholders' equity.
/(21)/Ratio computed as net debt (total debt less cash and cash equivalents and
marketable securities) to net capital employed (capital employed less cash
and cash equivalents and marketable securities).
/(22)/Revenues divided by average capital employed.
/(23)/Excludes convertible securities which were anti-dilutive.
/(24)/Received by shareholders directly from Eli Lilly and Company.
/(25)/Stockholders'equity less preferred stock plus portion of ESOP notes and
guarantee related to the Series B ESOP preferred stock divided by year-end
common shares outstanding.
/(26)/Includes $91.8 million in charges for restructuring, asset impairment, and
other operating items and $48.2 million for the write-off of in-process
technology related to the acquisition of Automated Healthcare, Inc., 1.1%
of revenues in the aggregate.
/(27)/Includes $107.3 million of charges for restructuring, asset impairment,
and other operating items, 1.2% of revenues.
/(28)/Net of restructuring charges of $69.7 million, 1.0% of revenues.
/(29)/Net assets of the segment.
/(30)/Operating profit divided by average capital employed.
/(31)/Includes $7.0 million of charges for asset impairment, 2.5% of revenues.
/(32)/Includes $17.3 million of charges for restructuring, asset impairment, and
other operating items, 7.0% of revenues.
/(33)/Includes $74.3 million of expense related to compensation costs associated
with the PCS Transaction and charges for restructuring, asset impairment,
and other operating items.
/(34)/Includes a loss on the termination of interest rate swap arrangements of
$13.4 million.
/(35)/Includes $109.8 million which is restricted and held in trust as exchange
property in connection with the Company's outstanding exchangeable
debentures.
/(36)/Includes the net assets of the Armor All, Millbrook and PCS segments prior
to their respective disposition dates.
21
----------------
FINANCIAL REVIEW
----------------
In line with the Company's stated focus on health care supply management, the
Company continued to invest in fiscal 1997 in the roll-out of its retail and
institutional strategic initiatives, employed capital of $1.2 billion into
strategic acquisitions and divested certain non-core businesses. As a result of
these actions, the Company has improved the balance of its customer mix in
Health Care Services, has positioned itself to significantly reduce operating
expense ratios over the next two years as the acquired FoxMeyer Corporation's
pharmaceutical distribution business ("FoxMeyer") is integrated into existing
operations, and has assumed the leadership position in health care supply
distribution to institutions.
The acquisitions significantly increased the Company's revenue and capital
base. Pro forma revenues, reflecting the full-year effect of the acquisitions
(for the FoxMeyer acquisition, pro forma revenues reflect an estimated $3.4
billion of retained annualized sales), increased to $16.5 billion from $10.0
billion in fiscal 1996 while the capital base at March 31, 1997, increased to
$2.4 billion from $1.5 billion at March 31, 1996. The acquisitions were financed
through a combination of cash from operations, proceeds from divestitures, term
debt, and the issuance of common stock. This mix of financing allowed the
Company to end the year with a net debt-to-capital ratio of 34% and significant
debt capacity to fund future growth.
With the divestitures, the Company now operates in two business segments:
Health Care Services and Water Products. Strong results were reported in fiscal
1997 in the U.S. Health Care business, reflecting internal revenue growth of 17%
and an improvement in the base operating profit margin.
SIGNIFICANT FISCAL 1997 TRANSACTIONS CONSISTED OF THE FOLLOWING:
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 under the purchase method. Goodwill relating to
the acquisition of approximately $13.4 million is being amortized on a straight-
line basis over ten years. A $48.2 million charge was recorded to write off the
portion of the purchase price allocated to technology for which technological
feasibility had not been established as of the acquisition date. Existing
technology was valued at $0.4 million and is being amortized on a straight-line
basis over three years.
In November 1996, the Company acquired FoxMeyer for approximately $598
million, pursuant to an expedited auction process in the FoxMeyer Corporation
bankruptcy proceeding in Wilmington, Delaware. The Company paid approximately
$23 million in cash to the debtors, paid off approximately $500 million in
secured debt, and assumed an additional $75 million in other liabilities. The
Company utilized proceeds from commercial paper issuances and a note payable to
a bank to fund the transaction. The note payable was repaid prior to March 31,
1997, with cash flow from operations and proceeds from divestitures (see
"Divestitures" section below). The Company acquired assets consisting primarily
of accounts receivable and inventories of $650 million, customer contracts, and
fixed assets. This acquisition was accounted for under the purchase method. At
the time of the acquisition, FoxMeyer was receiving very little trade credit
from suppliers. Normal trade credit was restored subsequent to the acquisition,
resulting in a reduction in the investment associated with the retained FoxMeyer
customer base to approximately $400 million at March 31, 1997. The excess of the
fair value of the net assets acquired over the purchase price, after reducing to
zero the carrying value of long-term assets which are expected to be retained
for use by the Company, was approximately $50 million (negative goodwill).
Negative goodwill is being amortized on a straight-line basis over a five-year
period.
In February 1997, the Company acquired General Medical Inc. ("General
Medical") for approximately $775 million, including the issuance of 2.8 million
shares of the Company's common stock and the assumption of approximately $428
million in debt. General Medical is the nation's leading supplier of medical-
surgical supplies to the full range of alternate-site health care facilities,
including physicians and clinics, long-term care and home-care sites, and is the
third largest distributor of medical-surgical supplies to hospitals. The
acquisition was accounted for under the purchase method. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$600 million and is being amortized on a straight-line basis over 40 years.
Divestitures
In December 1996, the Company sold its 55% equity interest in Armor All Products
Corporation ("Armor All") to The Clorox Company for $221.9 million and
recognized an after-tax gain of $120.2 million.
In March 1997, the Company sold its service merchandising unit, Millbrook
Distribution Services, Inc. ("Millbrook"), to R.A.B. Holdings, Inc. The after-
tax proceeds on the sale approximated Millbrook's book value.
The Armor All and Millbrook segments have been classified as discontinued
operations for all periods presented.
22
In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua-
Vend"), a unit of the Water Products segment. The after-tax proceeds on the sale
approximated its book value, after giving effect to the $7.0 million pre-tax
provision for the impairment of Aqua-Vend assets recorded in the third quarter
of fiscal 1997.
RESULTS OF OPERATIONS
Fiscal 1997 net income was $133.9 million or $2.98 per fully diluted share.
Income from continuing operations was $5.1 million, which included $109.5
million of after-tax charges associated with the integration and rationalization
of the FoxMeyer and McKesson distribution operations, systems, program offerings
and administrative functions, the write-off of purchased in-process technology,
and other operating items. Income from discontinued operations was $128.8
million, including the $120.2 million gain on the sale of Armor All.
Fiscal 1996 net income was $135.4 million, or $2.90 per share, which included
earnings from continuing operations of $120.7 million and earnings from
discontinued operations of $14.7 million.
Fiscal 1995 net income was $404.5 million or $8.86 per share. The Company
recorded a loss from continuing operations of $150.1 million, which included
$237.6 million of after-tax expenses associated with the sale of PCS (the "PCS
Transaction;" see Note 3, "Sale of the PCS Business," on page 37 of the
accompanying financial statements) and initiatives taken by the Company to
enhance the productivity of its Health Care Services and Water Products
businesses. Net income also included $554.6 million from discontinued
operations, including a gain on the PCS Transaction of $576.7 million.
The results of continuing operations are detailed in the table below.
Years Ended March 31
--------------------------------------------------------------
1997 1996 1995
------------------- ------------------ -------------------
In millions Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax
- -----------------------------------------------------------------------------------------------------------------
Income from Continuing Operations
Before unusual items and dividends
on preferred securities of subsidiary trust $ 184.1 $ 115.3 $196.9 $120.7 $ 145.4 $ 87.5
Dividends on preferred securities of
subsidiary trust (0.7)
------- ------- ------ ------ ------- -------
Before unusual items 184.1 114.6 196.9 120.7 145.4 87.5
Unusual items(1)
Compensation costs related to the
PCS Transaction (59.4) (45.3)
Income tax expense related to the
PCS Transaction (107.0)
Charges for restructuring, asset impairment,
purchased in-process technology, and
other operating items (147.0) (109.5) (139.5) (85.3)
------- ------- ------ ------ ------- -------
Income (Loss) from Continuing Operations $ 37.1 $ 5.1 $196.9 $120.7 $ (53.5) $(150.1)
======= ======= ====== ====== ======= =======
(1)For the purposes of discussing the results of operations, these items are
referred to as "unusual items" in the Financial Review, as management
believes that these items either represent one-time occurrences and/or events
that are not related to normal, ongoing operations, or represent charges that
are in excess of normal/historical operating amounts.
- --------------------------------------------------------------------------------
Fiscal 1997
Fiscal 1997 income from continuing operations, before unusual items, was $114.6
million, a 5% decrease from the prior year's income from continuing operations
of $120.7 million. Fiscal 1997 results were negatively impacted by the
anticipated temporary dilutive effect of the FoxMeyer and AHI acquisitions and
investments in strategic initiatives geared toward enhancing our competitive
position in the institutional and retail markets and to improving productivity
through automated logistics. Management expects the acquisitions and investments
to be accretive to earnings in fiscal 1998.
UNUSUAL ITEMS
Included in the $147.0 million of unusual items in fiscal 1997 are $67.4 million
of charges associated primarily with the acquisition of FoxMeyer. The FoxMeyer
acquisition resulted in a significant increase in sales volume, a substantial
change in the Company's customer mix (primarily a large increase in
institutional customers), and overlapping, duplicate, and "similar purpose"
assets. This required management to reassess the Company's operations,
distribution center network, and business strategies, including program
offerings. The Company developed a plan to optimize the network configuration
from the combined distribution centers of the Company and those acquired in the
transaction,
23
which will result in the consolidation and closure of approximately 22
distribution centers, workforce reductions, and disposal of excess, duplicate
assets. Management has also reassessed strategies and program offerings for
expanding certain customer segments in light of the larger and more diverse
customer base and has identified certain programs and investments that will no
longer be pursued as originally contemplated. Other duplicate, common purpose
assets including administrative facilities, software and other equipment have
been reviewed to identify the optimum mix for the combined companies. This has
resulted in the impairment in the value of certain assets which will not
ultimately be retained or utilized as originally intended. The foregoing was
reflected in the valuation of the FoxMeyer assets acquired, and liabilities
assumed, and resulted in a $67.4 million pre-tax charge with respect to the
affected assets of the Company. Also included in the fiscal 1997 unusual items
was a $48.2 million charge to write off the portion of the purchase price of AHI
allocated to purchased in-process technology for which feasibility had not been
established as of the acquisition date, and charges of $15.1 million and $16.3
million for receivable reserves and other operating items, respectively.
Fiscal 1996
Fiscal 1996 income from continuing operations was $120.7 million, an increase of
38% over the prior year's income from continuing operations (before unusual
items) of $87.5 million, reflecting increased profits in Health Care Services
and Water Products, as well as additional interest income.
Fiscal 1995
On November 21, 1994, the Company and Eli Lilly completed the PCS Transaction
whereby Eli Lilly effectively acquired the Company's pharmaceutical benefits
management business which consisted primarily of PCS Health Systems, Inc., and
Clinical Pharmaceuticals, Inc., both wholly owned subsidiaries of the Company.
Of the approximately $4 billion of proceeds from this transaction, approximately
$600 million was paid to the Company. An additional $24 million of the $4
billion consideration was received from Eli Lilly to fund deferred vested stock
option payments. The remainder of the $4 billion was paid directly to
shareholders of the Company by Eli Lilly.
UNUSUAL ITEMS
The $59.4 million of pre-tax compensation costs related to the PCS Transaction
consists of $23.6 million associated with an allocation of cash and shares to
ESOP plan participants resulting from a paydown of ESOP debt by the ESOP trust,
and $35.8 million associated with the Company's vested stock options and other
compensation programs.
The $107.0 million of income tax expense resulted from the distribution of
the Company's common stock to effect the PCS Transaction.
The $139.5 million pre-tax charge for restructuring, asset impairment and
other operating items resulted, in part, from the initiation by the Company's
management of several measures designed to streamline operations and improve
productivity in the Company's Health Care Services and Water Products segments.
These measures included consolidation of certain facilities, workforce
reductions, and divestiture of under-performing assets. The charge included
write-downs of assets to be disposed of to fair value less costs to sell,
impairment losses on capitalized software due to changes in technology,
severance for announced workforce reductions, write-downs of inventory
associated with the discontinuation of certain product lines, and receivables
reserves related to facility closures and to a reassessment of credit risks in
the Health Care Services segment. The assets to be disposed of were associated
with facility consolidations in the Health Care Services segment and surplus
properties held by the Company.
BUSINESS SEGMENTS
Health Care Services is the Company's primary business and includes the U.S.
pharmaceutical, health care products, and medical-surgical supplies distribution
businesses. U.S. Health Care operations also include marketing and other support
services to drug manufacturers, a manufacturer of automated pharmaceutical-
dispensing systems for hospitals, and a distributor of first-aid products and
supplies to industrial and commercial customers. Health Care Services also
includes the Company's international pharmaceutical distribution business
(consisting of the Company's Canadian operations and an equity interest in a
Mexican distribution business).
McKesson Water Products is engaged in the processing, delivery, and sale of
bottled drinking water to homes and businesses in California, Arizona, Nevada,
Oklahoma, Washington, New Mexico, and Texas. It also sells packaged water
through retail stores.
REVENUE GROWTH
In fiscal 1997, revenues increased $2.9 billion or 29% to $12.9 billion. The
following table identifies the components of revenue growth over the past three
fiscal years:
Years Ended March 31
--------------------------
1997 1996 1995
- -------------------------------------------------------------
Existing business 14% 5% 11%
Growth from acquired businesses 15 - -
-- -- --
Total revenue growth 29% 5% 11%
== == ==
Revenue from existing business in the Health Care Services segment increased
by $1.4 billion or 14% in
24
fiscal 1997 compared with increases of 5% and 11%, respectively in fiscal 1996
and 1995. Internal growth in U.S. Health Care Services was 17% reflecting retail
chain growth of 28%, institutional growth of 19% and increased sales to
independent pharmacies of 10%. The fiscal 1997 growth was volume related,
reflecting growth from existing customers and revenue from new customers.
International revenues were flat reflecting the phased transition of a major
customer to self-warehousing at Medis Health and Pharmaceutical Services
("Medis") in Canada. Revenues from acquired businesses were $1.5 billion and
relate primarily to the FoxMeyer and General Medical acquisitions. The Company
retained an estimated $3.4 billion of annualized sales from customers of the
former FoxMeyer business.
The growth in fiscal 1996 Health Care Services revenue represents volume
growth from existing customers. The growth in fiscal 1996 was dampened by the
loss of a high-volume customer at the beginning of the fiscal year in the U.S.
Health Care business. All customer segments (independent, retail chain, and
institutional) recorded revenue increases, with significant contributions from
the Valu-Rite and proprietary generic drug programs.
The practice in the Health Care Services distribution business is to pass on
to customers published price changes from suppliers. In each of fiscal 1997,
1996, and 1995, prices declined on many generic pharmaceutical products sold by
the Health Care Services business. These price declines were offset, in part, by
moderate inflation on other product lines, which resulted in almost no net price
changes in each year.
Water Products revenues increased 6% in fiscal 1997 to $275.1 million and 5%
to $259.3 million in fiscal 1996. The increases in both years resulted from
higher packaged water sales to the grocery trade and moderate growth in the
direct-delivery business, mitigated by decreases in sales of vended water.
Fiscal 1997 revenues included $16.0 million from the Aqua-Vend vended water
business that was sold in March 1997.
Corporate revenues in fiscal 1997 decreased $17.9 million to $19.8 million
primarily due to decreased interest income as a result of lower balances in cash
and marketable securities available for sale. Corporate revenues in fiscal 1996
increased $22.7 million to $37.7 million primarily due to increased interest
income from higher cash and investment balances due to a full-year impact of the
proceeds from the PCS Transaction.
OPERATING PROFIT
Operating profit before unusual items for the Company increased 12% to $274.4
million in fiscal 1997 and in fiscal 1996 increased 14% to $245.7 million from
$215.2 million, due primarily to increases in the Health Care Services segment.
Health Care Services operating profit before unusual items rose 13% to $232.8
million in fiscal 1997, reflecting the increase in revenues and a six basis
point operating profit margin improvement in the base U.S. Health Care business.
Continued reductions in selling margins in U.S. Health Care were more than
offset by product management efforts under the Company's proprietary generic
pharmaceutical program and other inventory programs, as well as operating
expense efficiencies. The rate of growth was moderated by the effects of the
acquisitions and dilution from internal strategic initiatives. In addition,
international operating profits were lower due to the previously discussed loss
of a major customer by Medis and lower margins on the replacement business and
costs associated with the consolidation of distribution centers and
administrative functions. Operating profit for Health Care Services included
charges of $140.0 million for unusual items in fiscal 1997.
Health Care Services operating profit before unusual items rose 12% to $206.1
million in fiscal 1996. Operating profit for Health Care Services in fiscal 1995
included charges of $107.3 million for unusual items. Selling margin declines in
U.S. Health Care were offset by product management efforts and productivity
improvements. Fiscal 1996 operating profits also included the start-up and
research and development costs of strategic initiatives. These costs were offset
by a pre-tax gain of $11.2 million on the sale of the Company's interest in a
Central American pharmaceutical manufacturer for $36.1 million.
The Company uses the last-in, first-out (LIFO) method of accounting for
inventories, which results in cost of sales that more closely reflect
replacement cost than other accounting methods, thereby mitigating the effects
of inflation and deflation on operating profit. The practice in the Health Care
Services distribution business is to pass published price changes from suppliers
on to customers. Manufacturers generally provide the Company with price
protection, which prevents inventory losses from manufacturer price decreases.
As previously discussed, price declines on many generic pharmaceutical products
in the Health Care Services segment in each of the fiscal years ending March 31,
1997, 1996, and 1995 moderated the effects of inflation in other product
categories, which resulted in minimal overall price changes in those fiscal
years.
Water Products operating profit before unusual items increased 5% to $41.6
million in fiscal 1997 reflecting the 6% sales increase offset, in part, by
expenses associated with the continuing geographic expansion into Texas and the
Pacific Northwest. Operating profit for Water
25
Products included $7.0 million of unusual items in fiscal 1997 related to a
write-down of assets of its Aqua-Vend unit. Water Products operating profit
before unusual items increased 25% to $39.6 million in fiscal 1996 from $31.8
million in fiscal 1995 because of moderate sales growth and lower overall
operating costs due, in part, to ongoing programs to improve customer service,
which have reduced customer turnover expenses and increased productivity. Fiscal
1995 operating profit included charges for unusual items of $17.3 million.
Corporate expenses in fiscal 1997 increased $7.3 million to $42.8 million
primarily reflecting favorable adjustments to certain incentive programs in the
prior year. Corporate expenses in fiscal 1995 included charges of $74.3 million
for unusual items.
The following table summarizes operating profit as a percentage of revenues
by segment:
As a Percent of Revenue
-------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
Health Care Services 0.7%/(1)/ 2.1% 0.8%/(3)/
Water Products 12.6/(2)/ 15.3 5.9/(4)/
/(1)/ Excluding fiscal 1997 unusual items, the percentage is 1.8%.
/(2)/ Excluding fiscal 1997 unusual items, the percentage is 15.1%.
/(3)/ Excluding fiscal 1995 unusual items, the percentage is 2.0%.
/(4)/ Excluding fiscal 1995 unusual items, the percentage is 12.9%.
- --------------------------------------------------------------------------
The decline in the Health Care Services operating profit margin before unusual
items in fiscal 1997 reflects the previously discussed effects of the
acquisitions, internal strategic initiatives, and lower international margins
due to a change in customer mix and costs associated with distribution center
and administrative consolidations. These declines were offset, in part, by a six
basis point improvement in operating profit margins in the U.S. Health Care base
business reflecting productivity improvements. Absent the effects of the
acquisitions and strategic initiatives, the Health Care Services operating
profit before unusual items was 2.1% in fiscal 1997, unchanged from the prior
year.
The following table identifies the operating margin (income before interest
expense, taxes on income and dividends on preferred securities of subsidiary
trust as a percent of revenues) components for the past three years.
1997 1996 1995
- --------------------------------------------------------------------------
Gross profit margin(1) 8.0% 9.2% 8.6%/(3)/
Operating expenses 7.3/(2)/ 6.8 8.7/(3)/
--- --- ---
Operating margin (deficit) 0.7%/(2)/ 2.4% (0.1)%/(3)/
=== === ===
/(1)/ Revenues less cost of sales.
/(2)/ Excluding fiscal 1997 unusual items, operating expenses
are 6.2% and the operating margin is 1.8%, respectively.
/(3)/ Excluding fiscal 1995 unusual items, the gross profit
margin is 8.9%, operating expenses are 6.9% and the
operating margin is 2.0%.
- ------------------------------------------------------------
The decline in the operating margin in fiscal 1997 (excluding unusual items)
reflects duplicate costs associated with the FoxMeyer acquisition that are
expected to steadily decline as the Company consolidates and closes distribution
centers and administrative facilities. Seven out of the targeted 22 distribution
centers were closed through March 31, 1997. In addition, the margin was
negatively impacted in the current year by the previously discussed internal
strategic initiatives and lower international margins.
The operating margin excluding unusual items increased to 2.4% in fiscal 1996
from 2.0% in fiscal 1995 due to successful cost control efforts in the Health
Care Services and Water Products segments.
INTERNATIONAL OPERATIONS
International operations accounted for 12%, 16%, and 15% of fiscal 1997, 1996,
and 1995 consolidated operating profits before unusual items, and 5%, 7%, and 7%
of consolidated assets at March 31, 1997, 1996, and 1995, respectively.
International operations are subject to certain opportunities and risks,
including currency fluctuations. The Company monitors its operations and adopts
strategies responsive to changes in the economic and political environment in
each of the countries in which it operates.
WORKING CAPITAL
Operating working capital (receivables and FIFO inventories net of related
payables) as a percentage of revenues was 10.3%, 9.4%, and 8.5% at March 31,
1997, 1996, and 1995, respectively. The calculation is based on year-end
balances and assuming major acquisitions occurred at the beginning of the year
(FoxMeyer revenues have been adjusted to reflect an estimated $3.4 billion of
retained annualized sales). Excluding the effect of the FoxMeyer acquisition,
the operating working capital ratio was 9.1% at March 31, 1997. Operating
working capital associated with the FoxMeyer acquisition is expected to decline
as a percentage of revenues as facilities are consolidated over the next two
years.
CASH FLOW AND LIQUIDITY
Cash and cash equivalents and marketable securities (primarily U.S. Treasury
securities with maturities of one year or less) were $230 million, $456 million,
and $670 million at March 31, 1997, 1996 and 1995, respectively. The March 31,
1997 balance includes $109.8 million from the sale of Armor All, which is
restricted and held in trust as exchange property in connection with the
Company's exchangeable debentures. Approximately $12 million of this balance was
released in April 1997 following the repurchase by the Company of a portion of
the debentures in March 1997. The fiscal 1995 balance reflects the proceeds
received by the Company from the PCS Transaction.
26
Cash Flow from Operations for
Capital Expenditures and Dividends
The following table summarizes the excess (deficit) of cash flow from operations
over capital expenditures and dividends:
Years Ended March 31
-------------------------------
Dollars in millions 1997 1996 1995
- ------------------------------------------------------------------------
Net cash provided (used) by
continuing operations
Income (loss) after taxes from
continuing operations $ 5 $ 121 $(150)
Depreciation 65 57 52
Amortization of intangibles 6 7 7
Gain on sale of subsidiary - (11) -
Other noncash charges 148 49 190
Working capital changes 3 (212) 57
----- ----- -----
Total 227 11 156
Capital expenditures (77) (74) (76)
----- ----- -----
Excess (deficit) 150 (63) 80
Net cash provided (used) by
discontinued operations 11 (7) 43
Dividends paid (43) (44) (70)
----- ----- -----
Net excess (deficit) $ 118 $(114) $ 53
===== ===== =====
Cash flow from continuing operations reflects the cash earnings of the
Company's continuing businesses and the effects of the changes in working
capital. Working capital changes in fiscal 1997 were favorably impacted by the
previously discussed restoration of trade credit from suppliers on FoxMeyer
related purchases following the acquisition. Fiscal 1997 and 1995 noncash
charges reflect the unusual items discussed earlier. Working capital in fiscal
1996 was impacted by a $136 million increase in inventories net of related
payables to obtain favorable purchase terms on certain items from vendors and
the payment in fiscal 1996 of PCS Transaction liabilities.
Capital expenditures for the fiscal years ended March 31, 1997, 1996, and
1995 for the Health Care Services segment were $42 million, $44 million, and $44
million, respectively, and for the Water Products segment were $32 million, $25
million, and $26 million, respectively.
The decrease in dividends paid during fiscal 1996 reflects the conversion
during 1995 of preferred stock in connection with the PCS Transaction
(converting the associated dividend requirements to the lower common stock
dividend) and the change in the annual common stock dividend from $1.68 per
share to $1.00 per share following the PCS Transaction.
Other Financing Activities
During fiscal 1997 and 1996, the Company repurchased 3.4 million and 1.35
million of its common shares for $156 million and $63 million, respectively, as
part of a 7.0 million share repurchase program. Authorization to repurchase 2.25
million shares remains outstanding; however, the program was placed on hold in
January 1997. In February 1997, the Company issued approximately 2.8 million
common shares in conjunction with the General Medical acquisition.
In February 1997, the Company, through a wholly owned subsidiary trust,
issued $200 million of trust convertible preferred securities to fund internal
growth. These securities are convertible into approximately 2.7 million common
shares, yield a 5% dividend and are callable by the Company beginning in March
2000 at 103.5% of par.
In March 1997, the Company issued $525 million of fixed-rate debt to term out
the financing of the General Medical transaction including the refinancing of
higher cost debt assumed in the acquisition. The reduction in long-term debt in
fiscal 1996 reflects scheduled debt repayments.
The Company has $400 million of available credit under domestic committed
revolving credit lines. As a result of the Company's investment grade credit
rating (S&P A, Duff & Phelps A, and Moody's A3), management believes the Company
has access to additional private credit sources and to public capital markets at
favorable terms. Funds necessary for future debt maturities and other cash
requirements of the Company are expected to be met by existing cash balances,
cash flow from operations, existing credit sources, and other available debt
capacity.
CAPITALIZATION
The Company's capitalization was as follows:
March 31
---------------------------
Dollars in millions 1997 1996 1995
- --------------------------------------------------------------------
Short-term borrowings $ 100 $ 7 $ 22
Term debt 725 211 223
Exchangeable debt 160 180 180
------ ------ ------
Total debt 985 398 425
Convertible preferred securities
of subsidiary trust 195 - -
Stockholders' equity 1,261 1,065 1,014
------ ------ ------
Total capitalization $2,441 $1,463 $1,439
====== ====== ======
Debt-to-capital ratio at March 31 40.4% 27.2% 29.5%
Average interest rate during year
Total debt 5.9% 6.2% 6.2%
Short-term borrowings 5.7% 7.3% 6.2%
Other debt 6.1% 6.0% 6.2%
The increase in the debt-to-capital ratio in fiscal 1997 primarily reflects
the increase in debt to fund internal growth, acquisitions, and share
repurchases. The decreases in the debt-to-capital ratio in fiscal 1996 resulted
primarily from the increase in stockholders' equity from the PCS Transaction,
scheduled debt reductions, and repayments of short-term borrowings and other
debt.
Average fully diluted shares were 45.1 million in fiscal 1997, 46.7 million
in fiscal 1996, and 45.5 million in fiscal 1995. Common shares outstanding
increased to 45.8 million at March 31, 1997 from 44.8 million at March 31, 1996,
27
primarily due to shares issued in connection with the acquisition of General
Medical and issuance of shares under employee plans, in excess of the shares
repurchased during the year. Common shares outstanding increased to 44.8 million
at March 31, 1996, from 44.4 million at March 31, 1995, due primarily to
issuance of shares under employee plans, in excess of shares repurchased during
the year.
The Company enters fiscal 1998 with approximately 50.3 million fully diluted
shares inclusive of the shares issued in the General Medical transaction and the
assumed conversion of the trust convertible preferred securities.
CAPITAL EMPLOYED
Capital employed (net assets) by segment was:
Years Ended March 31
-----------------------------
Dollars in millions 1997 1996 1995
- ----------------------------------------------------------------------
Health Care Services $2,439 $1,149 $ 898
Water Products 108 110 110
------ ------ ------
Total Operations 2,547 1,259 1,008
Corporate
Cash, cash equivalents and
marketable securities 230 456 670
Discontinued operations - 126 88
Other (336) (378) (327)
------ ------ ------
Total capital employed $2,441 $1,463 $1,439
====== ====== ======
Return on average
capital employed(1)
Health Care Services 6.1%(2) 19.8% 7.7%(3)
Water Products 29.1(2) 34.7 11.8(3)
Total consolidated operations(4) 4.9(5) 15.8 (0.7)(5)
Return on average
stockholders' equity 13.5%(6) 13.0% 50.0%(6)
(1) Operating profit divided by average capital employed.
(2) Excluding fiscal 1997 unusual items from operating profit, Health Care
Services is 15.2% and Water Products is 35.0%.
(3) Excluding fiscal 1995 unusual items from operating profit, Health Care
Services is 18.5% and Water Products is 25.9%.
(4) Income from continuing operations before taxes, interest expense and
dividends on preferred securities of subsidiary trust divided by average
capital employed.
(5) Excluding fiscal 1997 and 1995 unusual items, consolidated return is 12.6%
and 14.3% in fiscal 1997 and 1995, respectively.
(6) Net income includes $120.2 million gain on sale of Armor All in fiscal 1997
and $576.7 million gain on sale of PCS in fiscal 1995.
- --------------------------------------------------------------------------------
The increase in capital employed in Health Care Services in fiscal 1997
reflects the acquisitions and the increased investment spending for retail and
institutional strategic initiatives. The decreases in the returns on average
capital employed before unusual items in the Health Care Services segment to
15.2% in fiscal 1997 from 19.8% in fiscal 1996 and in total consolidated
operations to 12.6% in fiscal 1997 from 15.8% in fiscal 1996 are due primarily
to the previously discussed effects of the acquisitions and strategic
initiatives. The increase in capital employed in Health Care Services in fiscal
1996 reflects the increased investment spending for retail and institutional
strategic initiatives and the additional inventory investment.
ENVIRONMENTAL MATTERS
The Company's continuing operations do not require ongoing material expenditures
to comply with federal, state, and local environmental laws and regulations.
However, in connection with the disposition of its chemical operations in fiscal
1987, the Company retained responsibility for certain environmental obligations.
In addition, the Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, (commonly
known as "Superfund"), and other federal and state environmental statutes
primarily involving sites associated with the operation of the Company's former
chemical distribution businesses. Increases (decreases) to reserves for these
environmental matters, primarily recorded within discontinued operations,
amounted to $(1.5) million and $3.4 million in fiscal 1996 and 1995,
respectively. There were no adjustments made to the reserves in fiscal 1997. The
increase in fiscal 1995 primarily resulted from a governmental directive to do
additional remedial work at a former operating site in Syracuse, N.Y. Management
does not believe that changes in the remediation cost estimates in future
periods, or the ultimate resolution of the Company's environmental matters, will
have a material impact on the Company's consolidated financial position; see
Note 17, "Other Commitments and Contingent Liabilities," on pages 46 to 48 of
the accompanying financial statements.
INCOME TAXES
The tax rate on income from continuing operations (excluding fiscal 1997 and
1995 unusual items) was 37.4% in fiscal 1997, 38.7% in fiscal 1996, and 39.8% in
fiscal 1995.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 "Significant Accounting Policies" on pages 34 and 35 of the
accompanying financial statements.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (such as the speed of integration of the acquired businesses and the impact
of continued intense competition) and as such may involve known and unknown
risks and uncertainties and other factors that may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements.
28
STATEMENTS OF CONSOLIDATED INCOME
In millions except per share amounts
Years ended March 31 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES (NOTE 1) $12,886.7 $9,953.7 $9,438.7
--------- -------- --------
COSTS AND EXPENSES (NOTE 4)
Cost of sales 11,849.4 9,038.2 8,630.5
Selling 139.8 114.0 116.5
Distribution 354.7 327.4 316.4
Administrative 450.0 232.8 384.3
Interest 55.7 44.4 44.5
--------- -------- --------
Total 12,849.6 9,756.8 9,492.2
--------- -------- --------
INCOME (LOSS) BEFORE TAXES ON INCOME
AND DIVIDENDS ON PREFERRED SECURITIES
OF SUBSIDIARY TRUST 37.1 196.9 (53.5)
Taxes on income (Note 14) 31.3 76.2 96.6
--------- -------- --------
Income (loss) before dividends on
preferred securities of subsidiary trust 5.8 120.7 (150.1)
Dividends on preferred securities
of subsidiary trust, net of $0.4 tax
benefit (Note 10) (0.7) - -
--------- -------- --------
INCOME (LOSS) AFTER TAXES
Continuing operations 5.1 120.7 (150.1)
Discontinued operations (Notes 2 and 8) 8.6 14.7 (23.1)
Discontinued operations (Notes 2, 8 and 17) -
Gain on sale/donation of Armor All stock 120.2 - 1.0
Gain on sale of PCS - - 576.7
--------- -------- --------
Net Income $ 133.9 $ 135.4 $ 404.5
========= ======== ========
EARNINGS (LOSS) PER COMMON SHARE
Fully diluted
Continuing operations $ 0.13 $ 2.59 $ (3.34)
Discontinued operations 0.19 0.31 (.51)
Discontinued operations -
Gain on sale/donation of Armor All stock 2.66 - 0.02
Gain on sale of PCS - - 12.69
--------- -------- --------
Total $ 2.98 $ 2.90 $ 8.86
========= ======== ========
Primary
Continuing operations $ 0.12 $ 2.59 $ (3.52)
Discontinued operations 0.19 0.31 (0.53)
Discontinued operations -
Gain on sale/donation of Armor All stock 2.70 - 0.02
Gain on sale of PCS - - 13.23
--------- -------- --------
Total $ 3.01 $ 2.90 $ 9.20
========= ======== ========
SHARES ON WHICH EARNINGS (LOSS)
PER COMMON SHARE WERE BASED
Fully diluted 45.1 46.7 45.5
Primary 44.5 46.6 43.6
See Financial Notes
29
CONSOLIDATED BALANCE SHEETS
In millions, except par value
March 31 1997 1996 1995
- -----------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 124.8 $ 260.8 $ 363.1
Marketable securities available for sale
(Note 1) 105.0 195.4 307.3
Receivables (Note 6) 1,224.5 672.8 651.7
Inventories (Note 7) 2,259.5 1,317.0 1,081.9
Prepaid expenses (Note 14) 47.3 17.0 60.2
-------- -------- --------
Total current assets 3,761.1 2,463.0 2,464.2
-------- -------- --------
Land 38.0 36.1 38.0
Buildings 208.5 205.8 199.9
Machinery and equipment 532.8 471.8 435.4
-------- -------- --------
Total property, plant, and equipment 779.3 713.7 673.3
Accumulated depreciation (405.7) (357.7) (331.7)
-------- -------- --------
Net property, plant, and equipment 373.6 356.0 341.6
Goodwill and other intangibles 736.2 183.7 172.4
Net assets of discontinued operations
(Notes 8 and 17) - 125.7 88.2
Other assets (Notes 14 and 15) 301.9 231.8 193.8
-------- -------- --------
Total assets $5,172.8 $3,360.2 $3,260.2
======== ======== ========
LIABILITIES
Drafts payable $ 210.7 $ 194.0 $ 160.1
Accounts payable - trade 1,854.7 1,149.2 1,069.7
Short-term borrowings 100.0 6.6 21.7
Current portion of long-term debt (Note 9) 60.3 21.1 11.7
Salaries and wages 52.9 26.3 33.5
Taxes 80.0 92.2 138.9
Interest and dividends 21.3 19.0 19.3
Other 257.3 134.1 130.3
-------- -------- --------
Total current liabilities 2,637.2 1,642.5 1,585.2
-------- -------- --------
Postretirement obligations and other
noncurrent liabilities (Note 15) 255.1 282.5 269.8
-------- -------- --------
Long-term debt (Note 9) 824.9 370.6 391.7
-------- -------- --------
McKesson - obligated mandatorily redeemable
preferred securities of subsidiary grantor
trust whose sole assets are junior
subordinated debentures of McKesson (Note 10) 194.8 - -
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock (200.0 shares authorized, 46.4, 45.5
and 44.4 issued as of March 31, 1997, 1996
and 1995, respectively; par value of $.01) 0.4 0.4 0.4
Additional paid-in capital 408.2 332.0 319.8
Other capital (19.2) (36.2) (4.1)
Retained earnings 1,062.6 968.9 875.9
Accumulated translation adjustment (44.6) (49.7) (51.6)
ESOP notes and guarantee (118.3) (122.5) (126.4)
Treasury shares, at cost (28.3) (28.3) (0.5)
-------- -------- --------
Stockholders' equity (Note 13) 1,260.8 1,064.6 1,013.5
-------- -------- --------
Total liabilities and stockholders' equity $5,172.8 $3,360.2 $3,260.2
======== ======== ========
See Financial Notes
30
STATEMENTS OF CONSOLIDATED CASH FLOWS
In millions
Years ended March 31 1997 1996 1995
- ---------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) after taxes from continuing
operations $ 5.1 $ 120.7 $ (150.1)
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation 65.4 57.2 51.9
Amortization of intangibles 6.4 7.0 7.2
Provision for bad debts 23.0 13.7 49.0
Deferred taxes on income (1.6) 42.9 (80.4)
Gain on sale of subsidiary - (11.2) -
Other noncash (Notes 2 and 4) 125.0 (7.4) 220.9
--------- -------- --------
Total 223.3 222.9 98.5
--------- -------- --------
Effects of changes in
Receivables (129.5) - (76.1)
Inventories (332.6) (239.6) (213.7)
Accounts and drafts payable 521.0 103.9 167.2
Taxes (39.0) (13.1) 115.3
Other (16.6) (62.9) 64.5
--------- -------- --------
Total 3.3 (211.7) 57.2
--------- -------- --------
Net cash provided by continuing operations 226.6 11.2 155.7
Discontinued operations (Notes 2, 3 and 8) 11.5 (7.4) 43.4
--------- -------- --------
Net cash provided by operating activities 238.1 3.8 199.1
--------- -------- --------
INVESTING ACTIVITIES
Purchases of marketable securities (103.1) (130.6) (324.0)
Maturities of marketable securities 198.2 244.8 19.9
Property acquisitions (76.9) (73.6) (76.4)
Properties sold 3.6 6.7 4.3
Proceeds from sale of subsidiaries (Notes 2 and 3) 300.7 36.1 568.5
Acquisitions of businesses, less cash and
short-term investments acquired (Note 2) (1,209.5) (33.5) (0.7)
Investing activities of discontinued operations (4.2) (4.4) (24.5)
Other (Note 15) (73.0) (49.5) (2.9)
--------- -------- --------
Net cash provided (used) by investing
activities (964.2) (4.0) 164.2
--------- -------- --------
FINANCING ACTIVITIES (Notes 9, 10 and 13)
Proceeds from issuance of debt 1,118.2 0.6 29.8
Proceeds from issuance of preferred
trust securities, net of issuance costs 195.1 - -
Repayment of debt (551.9) (19.1) (50.9)
Capital stock transactions
Issuances 27.4 19.2 13.5
Share repurchases (155.7) (62.7) (3.1)
ESOP note payments 4.2 3.9 13.6
Dividends paid (43.3) (44.2) (69.9)
Financing activities of discontinued operations 0.1 0.2 4.1
Other (4.0) - -
--------- -------- --------
Net cash provided (used) by financing
activities 590.1 (102.1) (62.9)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (136.0) (102.3) 300.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 260.8 363.1 62.7
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 124.8 $ 260.8 $ 363.1
========= ======== ========
See Financial Notes
31
- --------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shares in thousands, dollars in millions
Preferred Stocks Common Stock
------------------- ------------------
Years ended March 31, 1997, 1996, and 1995 Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1994 2,883 $ 125.3 44,583 $ 89.2
Issuances of shares under employee plans (Note 13) 538 0.1
Purchase of shares (Note 13) (2,883) (125.3) (733) (1.5)
Change in par value of common stock from
$2.00 to $.01 per share (Note 13) (87.4)
ESOP note payments
Distribution of net assets of PCS
Other
Translation adjustment
Unrealized gains on marketable securities
Net income
Cash dividends declared
Preferred stock (Series A, $.90 per share)
Preferred stock (Series B ESOP, $1.8098 per share)
Common, $1.34 per share
- -------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995 - - 44,388 0.4
Issuances of shares under employee plans (Note 13) 1,062
Purchase of shares (Note 13)
ESOP note payments
Other (Note 15)
Translation adjustment
Unrealized gains on marketable securities
Net income
Cash dividends declared
Common, $1.00 per share
- -------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 - - 45,450 0.4
Issuances of shares under employee plans (Note 13) 102
Purchase of shares (Note 13)
ESOP note payments
Other (Note 15)
Translation adjustment
Unrealized gains on marketable securities
Net income
Acquisition of General Medical (Note 2) 845
Cash dividends declared
Common, $1.00 per share
- -------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 - $ - 46,397 $ 0.4
====== ======== ====== =======
See Financial Notes
32
Additional Accumulated ESOP Treasury
Paid-in Other Retained Translation Notes and ----------------------- Stockholders'
Capital Capital Earnings Adjustment Guarantee Common Shares Amount Equity
- ----------------------------------------------------------------------------------------------------------
$ 174.4 $ (9.5) $ 610.3 $ (22.3) $ (165.1) (3,978) $ (123.7) $ 678.6
11.1 1.4 118 4.5 17.1
5.1 3,846 118.7 (3.0)
87.4 -
26.9 38.7 65.6
(80.1) (80.1)
14.9 2.1 2.7 19.7
(29.3) (29.3)
1.9 1.9
404.5 404.5
(0.1) (0.1)
(4.9) (4.9)
(56.5) (56.5)
- ----------------------------------------------------------------------------------------------------------
319.8 (4.1) 875.9 (51.6) (126.4) (14) (0.5) $1,013.5
(10.6) (4.0) 761 34.9 20.3
(1,349) (62.7) (62.7)
3.9 3.9
22.8 (27.3) 2.3 (2.2)
1.9 1.9
(0.8) (0.8)
135.4 135.4
(44.7) (44.7)
- ----------------------------------------------------------------------------------------------------------
332.0 (36.2) 968.9 (49.7) (122.5) (602) (28.3) $1,064.6
(25.2) (7.5) 1,434 66.0 33.3
(3,390) (155.7) (155.7)
4.2 4.2
18.4 25.6 3.1 47.1
5.1 5.1
(1.1) (1.1)
133.9 133.9
83.0 1,946 89.7 172.7
(43.3) (43.3)
- ----------------------------------------------------------------------------------------------------------
$ 408.2 $ (19.2) $ 1,062.6 $ (44.6) $ (118.3) (612) $ (28.3) $1,260.8
======== ======= ========== ======= ======== ====== ======== ========
33
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of McKesson Corporation ("the
Company" or "McKesson") include the financial statements of all majority-owned
companies, except those classified as discontinued operations. All significant
intercorporate amounts have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Within the U.S. and Canada, McKesson is the largest wholesale distributor
of ethical and proprietary drugs, medical-surgical supplies, and health and
beauty care products. The Company is also engaged in the processing and sale of
bottled drinking water to homes and businesses and packaged water through retail
stores. The principal markets for the drug, medical-surgical supplies, and
health and beauty care distribution businesses are chain and independent drug
stores, hospitals, alternate care sites, food stores, and mass merchandisers.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents include all highly liquid debt instruments purchased
with a maturity of three months or less at the date of acquisition.
Marketable Securities Available for Sale are carried at fair value and the net
unrealized gains and losses computed in marking these securities to market have
been reported within stockholders' equity. At March 31, 1997, the fair value
approximated the amortized cost of these securities. The investments mature on
various dates through fiscal 1998.
Inventories consist of merchandise held for resale and are stated at the lower
of cost or market. The majority of the cost of domestic inventories is
determined on the last-in, first-out (LIFO) method. International inventories
are stated at average cost.
Property, Plant, and Equipment is stated at cost and depreciated on the
straight-line method at rates designed to distribute the cost of properties over
estimated service lives.
Capitalized Software included in other assets reflects costs related to
internally developed or purchased software for projects in excess of $1.0
million that are capitalized and amortized on a straight-line basis over periods
not exceeding seven years.
Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 3 to 40 years. Negative goodwill
(see Note 2) is being amortized over a five-year period. Accumulated
amortization balances were $61.2 million, $54.8 million, and $47.8 million at
March 31, 1997, 1996, and 1995, respectively. The Company periodically assesses
the recoverability of the carrying value of its goodwill based on a review of
projected undiscounted cash flows of the related operating entities. These cash
flows are prepared and reviewed by management in connection with the Company's
annual long-range planning process.
Insurance Programs. Under the Company's insurance programs, coverage is obtained
for catastrophic exposures as well as those risks required to be insured by law
or contract. It is the policy of the Company to retain a significant portion of
certain losses related primarily to workers' compensation, physical loss to
property, business interruption resulting from such loss, and comprehensive
general, product, and vehicle liability. Provisions for losses expected under
these programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
Revenue Recognition. Revenue is recognized when products are shipped or services
are provided to customers. In addition, for large volume sales of
pharmaceuticals to major self-warehousing drugstore chains, the Company acts as
an intermediary in the order and subsequent delivery of products directly from
the manufacturer to the customers' warehouses. These sales of $2.8 billion in
1997, $3.0 billion in 1996, and $2.9 billion in 1995 are reported net of
associated cost of sales as revenues in the consolidated statements of income.
Included in revenues is interest income of $14.5 million, $37.8 million, and
$18.4 million in fiscal 1997, 1996, and 1995, respectively.
Income Taxes. The Company accounts for income taxes under the liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes;" see Note 14.
Earnings (Loss) per Common Share. Primary earnings (loss) per share are
calculated by dividing net income less preferred dividends by the weighted
average shares outstanding adjusted for the dilutive effect of stock options.
Fully diluted earnings (loss) per share reflect the dilutive effect of stock
options and assume the conversion of the convertible preferred securities and
related earnings adjustments.
34
Foreign Currency Translation. Assets and liabilities of the Company's foreign
affiliates are translated at current exchange rates, while revenue and expenses
are translated at average rates prevailing during the year. Translation
adjustments are reported as a component of stockholders' equity.
Accounting Changes. In fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires review of the carrying value of long-lived
assets and certain intangibles for impairment when events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable; see Note 4 for charges the Company recorded in fiscal 1997 related
to the impairment of assets.
In fiscal 1997, the Company adopted the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation," which provides for the
disclosure of pro forma net earnings and net earnings per share as if the fair
value method were used to account for stock-based employee compensation plans.
The Company has elected to continue to use the intrinsic value method to account
for stock-based compensation plans in accordance with Accounting Principles
Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees;" see
Note 13.
In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets sold to third parties; see Note 5.
New Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share." The Company is
required to adopt SFAS 128 in fiscal 1998. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Pro forma amounts for basic and diluted EPS, assuming SFAS 128 had been in
effect, are as follows:
Years ended March 31
------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net Income Per Share
Basic $3.13 $3.05 $9.55
Diluted 3.01 2.91 8.86
NOTE 2: ACQUISITIONS,
INVESTMENTS, AND DIVESTITURES
On February 21, 1997, the Company acquired General Medical Inc. ("General
Medical") for approximately $775 million including the issuance of approximately
2.8 million shares of the Company's common stock and the assumption of
approximately $428 million in debt. Payment of $30 million of the purchase price
has been withheld pending the outcome of a contingency. General Medical is a
multi-market distributor of medical-surgical supplies to acute-care, physician-
care, and extended-care markets. This acquisition has been accounted for under
the purchase method and the results of operations of General Medical have been
included in the consolidated financial statements since the date of acquisition.
The valuation of the General Medical net assets acquired included the
recognition of liabilities totaling $7.9 million related to closures of
duplicate facilities and involuntary termination and relocation benefits, of
which $7.3 million remained outstanding as of March 31, 1997. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$600 million is being amortized on a straight-line basis over 40 years. The
purchase price allocations are based on preliminary estimates and may be subject
to revision.
On November 8, 1996, the Company acquired FoxMeyer Corporation's
pharmaceutical distribution business ("FoxMeyer"), pursuant to an expedited
auction process in the FoxMeyer Corporation bankruptcy proceeding in Wilmington,
Delaware. Through an amended sale agreement, the Company paid approximately $23
million in cash to the debtors, paid off approximately $500 million in secured
debt, and assumed an additional $75 million in other liabilities. The Company
utilized proceeds from commercial paper issuances and a note payable to a bank
to fund the transaction. The note payable to a bank was repaid prior to March
31, 1997, with cash flow from operations and proceeds from divestitures. The
Company acquired assets consisting primarily of accounts receivable and
inventories of approximately $650 million, customer contracts and fixed assets.
This acquisition was accounted for under the purchase method.
As further discussed in Note 4, as a result of the FoxMeyer acquisition,
management has assessed strategies and program offerings and initiated a plan to
optimize the network configuration from the combined distribution centers of the
Company and those acquired. This plan has been reflected in the valuation of the
FoxMeyer net assets acquired. Liabilities of $37.6 million were recognized for
costs associated with closures of duplicate distribution centers and workforce
reductions of which $21.9 million remained
35
outstanding as of March 31, 1997. The plan to consolidate the FoxMeyer business
is expected to be completed over the next two years. The excess of the fair
value of net assets acquired over the purchase price, after reducing to zero the
carrying value of long-term assets which are expected to be retained for use by
the Company, was approximately $50 million (negative goodwill). The purchase
price allocations are based on preliminary estimates and may be subject to
revision. The negative goodwill is being amortized on a straight-line basis over
five years.
The following unaudited pro forma information has been prepared assuming
FoxMeyer and General Medical had been acquired as of the beginning of fiscal
1997 and fiscal 1996:
March 31
-------------------------
In millions, except per share amounts 1997 1996
- ---------------------------------------------------------------------------
Revenues $17,398.8 $16,992.8
Net income (loss) (269.3) 79.3
Earnings (loss) per share
Fully diluted (5.92) 1.60
Primary (5.92) 1.61
The unaudited pro forma information above is not indicative of the
consolidated financial position or results of operations of the Company as they
may be in the future or as they might have been had the General Medical and
FoxMeyer acquisitions been effected on the assumed dates. For instance, due to
FoxMeyer's bankruptcy filing on August 27, 1996, and the resulting deterioration
in its operations through November 8, 1996, FoxMeyer experienced a decline in
its sales base, wrote off its goodwill and other intangibles totaling $207.9
million, and established substantial accounts receivable and inventory reserves
and an additional valuation allowance for deferred tax assets aggregating $153.4
million during the period from April 1, 1996, to November 8, 1996.
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 $0.4 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
through fiscal 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.
In fiscal 1996 the Company made a $20 million acquisition in the Health
Care Services segment. The acquired company provides support services to
commercial, non-profit, and governmental organizations engaged in pharmaceutical
and biomedical development. The Company also acquired interests in two companies
engaged in the development of new technology-based initiatives to enhance the
Health Care Services segment's competitive position.
On March 31, 1997, the Company sold its service merchandising unit,
Millbrook Distribution Services, Inc. ("Millbrook"), to R.A.B. Holdings, Inc.
The after-tax proceeds on the sale approximated Millbrook's book value.
In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua-
Vend"), a unit of the Water Products segment. The after-tax proceeds on the sale
approximated Aqua-Vend's book value, after giving effect to the $7.0 million
pre-tax provision for impairment of its assets in the third quarter of fiscal
1997; see Note 4.
On December 31, 1996, the Company sold its 55% equity interest in Armor All
Products Corporation ("Armor All") to The Clorox Company for $221.9 million and
recognized an after-tax gain of $120.2 million. At closing, after-tax proceeds
of $109.8 million replaced the 6.9 million Armor All shares held in trust as
exchange property for the Company's $180 million exchangeable subordinated
debentures; see Note 9.
All of the net assets and results of operations of both Armor All and
Millbrook have been reclassified as discontinued operations. Prior year amounts
have been restated.
In fiscal 1996, the Company sold its interest in a Central American
pharmaceutical manufacturer for $36.1 million, resulting in a gain of $11.2
million.
36
NOTE 3: SALE OF THE PCS BUSINESS
On July 10, 1994, the Company entered into an Agreement and Plan of Merger and a
Reorganization and a Distribution Agreement ("Merger Agreement" and
"Distribution Agreement," respectively) providing for the acquisition by Eli
Lilly and Company ("Eli Lilly") of McKesson's pharmaceutical benefits management
business ("PCS"), which was primarily operated by PCS Health Systems, Inc. and
Clinical Pharmaceuticals, Inc., both of which were wholly owned subsidiaries of
McKesson, for approximately $4 billion.
As required by the Merger Agreement, on July 15, 1994, ECO Acquisition
Corporation ("ECO"), a subsidiary of Eli Lilly, commenced a cash tender offer to
purchase from McKesson shareholders all outstanding shares of McKesson Common
Stock (the "Shares") at a price of $76.00 per Share (the "Offer"). The Offer was
completed on November 21, 1994 and McKesson and ECO merged (the "Merger").
Simultaneous with the completion of the Offer and pursuant to the terms of
the Distribution Agreement, McKesson (i) transferred all of its assets and
liabilities, other than those related to PCS, to SP Ventures, Inc., a newly
formed corporation ("New McKesson") and (ii) declared a dividend of one share of
common stock of New McKesson, par value of $.01 per share, for each Share held
of record as of November 19, 1994 (collectively, the "Spin-Off"). After giving
effect to the Spin-Off and the completion of the Offer, the current businesses
of McKesson (other than PCS) are being continued through New McKesson. As a
result of the Offer, Merger, and Spin-Off (collectively, the "PCS Transaction"),
each existing McKesson shareholder received a cash payment of $76.00 per Share
(representing the proceeds from the sale of PCS) and one share of common stock
of New McKesson representing their continuing interest in the retained
businesses.
For financial statement purposes, New McKesson is the continuing entity and
has retained the name McKesson Corporation. The accompanying financial
statements reflect PCS as a discontinued operation.
Approximately $600 million of the $4 billion consideration paid by Eli
Lilly was received by the Company. An additional $24 million of the $4 billion
consideration was received from Eli Lilly to fund deferred vested stock option
payments. The remainder of the $4 billion was paid directly to shareholders of
the Company by Eli Lilly. In fiscal 1995, the Company recorded a gain on the
sale of PCS of $576.7 million, after transaction costs and other expenses.
NOTE 4: CHARGES AND GAINS IN
CONTINUING OPERATIONS
Fiscal 1997
The acquisition of the assets and operations of FoxMeyer (see Note 2) resulted
in a significant increase in sales volume, a substantial change in the customer
mix (primarily a large increase in institutional customers), and overlapping,
duplicate, and "similar purpose" assets. This required management to reassess
the Company's operations, distribution center network and business strategies,
including program offerings. A plan was developed to optimize the network
configuration from the combined distribution centers of the Company and those
acquired in the transaction which will result in the consolidation and closure
of approximately 22 distribution centers, workforce reductions, and disposal of
excess, duplicate assets. Management has also reassessed strategies and program
offerings for expanding certain customer segments in light of the larger and
more diverse customer base, and identified certain programs and investments,
which will no longer be pursued as originally contemplated. Other duplicate,
common purpose assets including administrative facilities, software, and other
equipment have been reviewed to identify the optimum mix for the combined
companies. This has resulted in the impairment in the value of certain assets,
which will not ultimately be retained or utilized as originally intended. The
foregoing has been reflected in the valuation of the FoxMeyer assets acquired,
and liabilities assumed (see Note 2), and in the charges discussed below with
respect to the affected assets of the Company.
The charges resulting from the impairment of assets of the Company as a
result of the integration and rationalization of the Company's distribution
operations, systems, strategies, and program offerings and administrative
functions and for certain operating items are recorded in selling, distribution,
and administration expenses and are summarized below (in millions):
Development costs and investments associated
with program offerings which will no longer
be pursued as originally contemplated $28.0
Computer software which will no longer be
utilized or for which the development program
has ceased 29.3
Cost of facilities closures - primarily write-down
of assets which will no longer be utilized and will
be disposed of 10.1
Receivables reserves 15.1
Other operating items 16.3
-----
$98.8
=====
37
The disposition of properties in connection with facilities closures is
expected to occur over the next three years. Substantially all of the charges
represent the write-down of existing balances and are, accordingly, noncash.
Balances remaining from a prior restructuring in fiscal 1995 for facilities
closures were considered in connection with the revised facilities plan after
the FoxMeyer transaction, resulting in an additional provision of $2.9 million.
There were no significant changes in estimates or recharacterization of other
amounts from the prior restructuring reserves. Also included in the charge for
facilities closures is $7.2 million associated with the Company's Canadian
operation, which is restructuring its distribution operations and network
following a significant change in its customer mix.
The charge related to receivable reserves results from management's
reevaluation of the U.S. Health Care business' estimated exposures for bad
debts, disputed amounts, customer allowances, and rebates.
Other operating items include a provision by the Water Products business of
$7.0 million for the impairment of assets in its vended water business. Other
operating items of the U.S. Health Care business consist of $2.8 million of
incremental costs incurred during a strike at a distribution center, $1.5
million for the termination of a marketing program and certain distributor
relationships, and $5.0 million of other charges.
Fiscal 1995
The loss from continuing operations in fiscal 1995 includes $59.4 million ($45.3
million after-tax) of compensation costs related to the PCS Transaction, $107.0
million of income tax expense related to the distribution of New McKesson common
stock to McKesson shareholders subsequent to the transfer of assets and
liabilities from McKesson to New McKesson to effect the PCS Transaction, and
$139.5 million ($85.3 million after-tax) of charges for restructuring, asset
impairment, and other operating items.
The $59.4 million of compensation expense related to the PCS Transaction in
continuing operations (classified in administrative expense) consists of $23.6
million associated with an allocation of cash and shares to ESOP plan
participants resulting from a paydown of ESOP debt by the ESOP trust and $35.8
million associated with the Company's vested stock options and other
compensation programs.
The $139.5 million of charges for restructuring, asset impairment, and
other operating items in continuing operations ($35.9 million included in cost
of sales and $103.6 million included in administrative expense) resulted, in
part, from the initiation by the Company's management of several measures
designed to streamline operations and improve productivity in the Company's
distribution and Water Products businesses. These measures included
consolidation of certain facilities, workforce reductions, and divestiture of
under-performing assets. Charges for other operating items consist primarily of
write-downs of assets to be disposed of to fair value less costs to sell,
impairment losses on capitalized software due to changes in technology,
severance for an announced company-wide workforce reduction of approximately 350
individuals, write-downs of inventory associated with the discontinuation of
certain product lines, and receivable reserves related to facility closures and
to a reassessment of credit risks in the Company's Health Care Services
businesses. The assets to be disposed of are associated with facility
consolidations in the Health Care Services and Water Products businesses and
surplus properties held by the Company. Balances remaining in the asset reserves
were re-evaluated in connection with the fiscal 1997 charges.
The charges (substantially all noncash with the exception of severance) for
restructuring, asset impairment, and other operating items included in
continuing operations in fiscal 1995 are as follows:
In millions
- --------------------------------------------------------------------------------
Costs associated with facility closures and surplus
properties - primarily write-downs of assets
to be disposed of $ 27.6
Severance costs for announced workforce reductions 11.5
Asset write-downs resulting from changed business conditions:
Facilities and equipment 2.4
Software 24.7
Discontinuation of product lines 20.5
Receivable reserves 32.2
Other operating items 20.6
------
Total $139.5
======
Summary of Reserve Balances
The remaining balances outstanding for the combined reserves at
March 31, 1997, and 1996 are as follows:
March 31
------------------
In millions 1997 1996
- -------------------------------------------------------------------------
Costs of facilities closures and surplus
properties - primarily write-down
of assets which will be disposed of $ 27.8 $13.1
Severance costs for announced
workforce reductions - 2.0
Discontinuation of product lines 6.1 14.3
Receivable reserves 7.7 0.6
Other operating items 6.5 2.2
------ -----
Total $ 48.1 $32.2
====== =====
38
The write-downs associated with assets to be disposed of and asset
impairments due to changed business conditions were based primarily on
independent appraisals. Charges to the restructuring reserve in fiscal 1997,
1996, and 1995 have consisted primarily of asset write-offs (substantially all
of which are noncash) and cash payments for severance of $2.0 million, $5.2
million, and $4.3 million in fiscal 1997, 1996, and 1995, respectively.
NOTE 5: OFF-BALANCE SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Company to a concentration of credit risk with
customers in the retail sector. This risk is spread over a large number of
geographically dispersed customers.
At March 31, 1997, the Company sold $154.6 million of trade receivables at
amounts approximating their fair value to a bank in accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
Proceeds received by the Company on sales of accounts receivable with
recourse to the Company for certain uncollectible amounts totaled $105 million
and $47 million in 1996 and 1995, respectively.
NOTE 6: RECEIVABLES
March 31
--------------------------
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
Customer accounts $1,180.4 $ 631.7 $ 635.6
Other 88.0 79.2 65.4
-------- -------- --------
Total 1,268.4 710.9 701.0
Allowances (43.9) (38.1) (49.3)
-------- -------- --------
Net $1,224.5 $ 672.8 $ 651.7
======== ======== ========
The allowances are for uncollectible accounts, discounts, returns, and
other adjustments.
NOTE 7: INVENTORIES
March 31
--------------------------
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
Inventories before LIFO cost adjustment
(approximates replacement cost) $2,538.6 $1,602.5 $1,376.2
LIFO cost adjustment (279.1) (285.5) (294.3)
-------- -------- --------
Total $2,259.5 $1,317.0 $1,081.9
======== ======== ========
The LIFO method was used to value approximately 84% of the inventories at March
31, 1997, and 90% of the inventories at March 31, 1996, and 1995.
NOTE 8: DISCONTINUED OPERATIONS
The net assets (liabilities) of discontinued operations at March 31 were as
follows:
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
Total assets $2.5 $275.5 $309.6
Total liabilities (5.8) (149.8) (221.4)
----- ------- ------
Net assets (liabilities) $(3.3) $ 125.7 $ 88.2
===== ======= ======
At March 31, 1997, net liabilities of discontinued operations were included
in other current liabilities. Assets consist primarily of land held for sale and
investments in affiliates. Liabilities consist primarily of other accrued
liabilities.
At March 31, 1996, and 1995, assets of discontinued operations consisted
primarily of cash; receivables; inventory; property, plant, and equipment; and
goodwill of Armor All and Millbrook. Liabilities of discontinued operations
consist primarily of accounts payable and other accrued liabilities of Armor All
and Millbrook.
Results of discontinued operations were as follows:
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
Revenues $592.1 $749.6 $999.9
====== ====== ======
Discontinued operations before taxes $ 17.2 $ 31.7 $ 20.2
Provision for taxes on income (5.6) (13.7) (32.3)
Minority interest in Armor All (3.0) (3.3) (11.0)
------ ------ ------
Discontinued operations 8.6 14.7 (23.1)
------ ------ ------
Gain on sale/donation of
Armor All stock 154.5 - (2.0)
Tax benefit (expense) (34.3) - 3.0
------ ------ ------
Net gain on sale/donation
of Armor All stock 120.2 - 1.0
------ ------ ------
Gain on sale of PCS - - 571.8
Tax benefit - - 4.9
------ ------ ------
Net gain on sale of PCS - - 576.7
------ ------ ------
Total $128.8 $ 14.7 $554.6
====== ====== ======
Discontinued operations in fiscal 1997 of $8.6 million after-tax includes
$3.7 million and $4.9 million after-tax from the operations of Armor All and
Millbrook, respectively.
Discontinued operations in fiscal 1996 of $14.7 million after-tax includes
$4.3 million and $10.4 million after-tax from the operations of Armor All and
Millbrook, respectively.
The after-tax loss from discontinued operations in fiscal 1995 of $23.1
million includes $19.4 million and $13.9 million in after-tax profits from the
operations of PCS and Armor All, respectively, and a $58.0 million loss after-
tax from Millbrook. Millbrook's results include approximately $72.8 million
after-tax of charges related to the write-down of the Company's investment as a
result of significant changes in this segment's customer base and marketplace.
Results also include $1.6 million after-tax profit from
39
settlements recovered in insurance litigation related to environmental matters
associated with the former operations of the Company's chemical businesses,
which were divested in fiscal 1987, net of adjustments to environmental
reserves. The gain on donation of Armor All stock of $1 million after-tax in
fiscal 1995 is related to contributions to the McKesson Foundation.
NOTE 9: LONG-TERM DEBT
March 31
--------------------------
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
ESOP related debt $118.3 $122.5 $126.4
4.50% exchangeable subordinated
debentures due 2004 160.4 180.0 180.0
8.625% Notes due 1998 49.0 49.0 49.0
8.75% Notes due 1997 - 10.0 10.0
6.60% Notes due 2000 175.0 - -
6.875% Notes due 2002 175.0 - -
7.65% Debentures due 2027 175.0 - -
3.45% to 7.47% IDRBs due
through 2012 21.4 20.0 25.6
Capital lease obligations
(averaging 8.5%) 4.2 4.4 4.7
Other, 6.5% to 12.125%, due
through 2021 6.9 5.8 7.7
------ ------ ------
Total 885.2 391.7 403.4
Less current portion 60.3 21.1 11.7
------ ------ ------
Total $824.9 $370.6 $391.7
====== ====== ======
The Company has a revolving credit agreement with seven U.S. banks and their
Canadian affiliates whereby the banks commit $250 million borrowing availability
at the reference rate (8.5% at March 31, 1997) or money market-based rates. The
agreement expires in fiscal 2002. The agreement permits the Company's wholly
owned Canadian subsidiary, Medis, to borrow the Canadian dollar equivalent of up
to $75 million (as part of the $250 million arrangement) at the Canadian prime
rate or Canadian money market-based rates. The agreement contains limitations on
additional indebtedness. Compensating balances are not required. The Company has
additional available liquidity for general working capital purposes in the form
of a 364-day facility with the same U.S. banks whereby the banks commit to
provide an additional $250 million. At March 31, 1997, the Company had
outstanding $100 million of commercial paper borrowings supported by these
agreements and $400 million of unused borrowing capacity.
Total interest payments were $53.6 million, $47.5 million, and $45.3 million
in fiscal 1997, 1996, and 1995, respectively.
ESOP-related debt (see Note 15) is payable to banks and insurance companies,
bears interest at rates ranging from 8.6% fixed rate to approximately 80% of the
prime or LIBOR +0.4% and is due in installments through 2009.
In connection with the 4.5% exchangeable subordinated debentures, the March
31, 1997, cash and cash equivalents and marketable securities balances include
$13.2 million and $96.6 million, respectively, held in trust as exchange
property for $180 million principal amount of debentures. In March 1997, the
Company repurchased $19.6 million of the exchangeable subordinated debentures.
The restricted portion of the marketable securities related to this purchase was
released in April 1997.
In fiscal 1997, the Company issued fixed-rate, unsecured, unsubordinated
debt totaling $525.0 million. The 6.6% notes mature on March 1, 2000, the 6.875%
notes mature on March 1, 2002, and the 7.65% debentures mature on March 1, 2027.
Interest only is payable semi-annually on all three issuances.
Certain debt agreements require that the Company's total debt not exceed
56.5% of total capitalization (total debt plus equity). At March 31, 1997, the
Company was in compliance with its debt covenants.
Aggregate annual payments on long-term debt and capitalized lease
obligations (see Note 11) for the years ending March 31 are:
Long-Term Capital
In millions Debt Leases Total
- ------------------------------------------------------------------------------
1998 $ 60.0 $0.3 $ 60.3
1999 10.1 0.3 10.4
2000 185.4 0.3 185.7
2001 11.0 0.4 11.4
2002 186.8 0.4 187.2
Later years 427.7 2.5 430.2
------ ---- ------
Total $881.0 $4.2 $885.2
====== ==== ======
NOTE 10: CONVERTIBLE PREFERRED SECURITIES
In February 1997, a wholly owned subsidiary trust of the Company issued 4
million preferred shares, which are convertible at the holder's option into
McKesson common stock. 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 security is convertible at the rate of .6709 shares of McKesson
common stock, subject to adjustment in certain circumstances. These securities
are callable by the Company at 103.5% of par beginning in March 2000. The sole
assets of the subsidiary trust consist of Convertible Junior Subordinated
Debentures of the Company with an aggregate principal amount equal to the
aggregate liquidation amount of the securities. The securities will be redeemed
upon repayment of the convertible
40
debentures. The Convertible Debentures mature on June 1, 2027, bear interest at
the rate of 5%, payable quarterly, and are redeemable by the Company beginning
in March 2000 at 103.5% of par.
NOTE 11: LEASE OBLIGATIONS
The Company leases facilities and equipment under both capital and operating
leases. Net assets held under capital leases included in property, plant, and
equipment were $3.0 million, $3.3 million, and $3.5 million at March 31, 1997,
1996, and 1995, respectively. Amortization of capital leases is included in
depreciation expense.
As of March 31, 1997, future minimum lease payments and sublease rentals in
years ending March 31 are:
Non- Non-
cancelable cancelable
Operating Sublease Capital
In millions Leases Rentals Leases
- --------------------------------------------------------------------------
1998 $ 35.0 $ (3.0) $0.6
1999 29.3 (2.3) 0.6
2000 23.1 (1.8) 0.6
2001 19.7 (1.3) 0.6
2002 15.4 (1.2) 0.6
Later years 43.4 (2.0) 3.5
------ ------- ----
Total minimum lease payments $165.9 $(11.6) 6.5
====== =======
Less amounts representing interest 2.3
----
Present value of minimum
lease payments $4.2
====
Rental expense was $33.7 million, $26.1 million, and $24.9 million in fiscal
1997, 1996, and 1995, respectively.
Most real property leases contain renewal options and provisions requiring
the Company to pay property taxes and operating expenses in excess of base-
period amounts.
NOTE 12: FAIR VALUE OF
FINANCIAL INSTRUMENTS
At March 31, 1997, the carrying amounts and estimated fair values of the
Company's financial instruments, as determined under SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," were as follows:
Carrying Estimated
In millions Amount Fair Value
- ------------------------------------------------------------------------------
Cash and cash equivalents $124.8 $124.8
Marketable securities 105.0 105.0
Short-term borrowings 100.0 100.0
Long-term debt, including current portion 885.2 866.3
The estimated fair values were determined as follows:
Cash and cash equivalents and short-term borrowings: carrying amounts
approximate fair value.
Marketable securities and long-term debt: quoted market prices or market
comparables.
NOTE 13: STOCKHOLDERS' EQUITY
At March 31, 1997, 1996, and 1995, the Company was authorized to issue
100,000,000 shares of series preferred stock ($.01 par value) of which none were
outstanding and 200,000,000 shares of common stock ($.01 par value) of which
approximately 45,785,000 shares, 44,848,000 shares, and 44,374,000 shares were
outstanding net of treasury stock, respectively. At March 31, 1994, there were
120,000,000 shares of common stock ($2.00 par value) authorized of which
approximately 40,605,000 were outstanding, net of treasury stock and two issues
of preferred stock authorized and outstanding. Prior to November 21, 1994, and
in connection with the PCS Transaction, all of the outstanding shares of
preferred stock were converted into either common stock or cash.
Noncash conversions of preferred stock to common stock totaled $123.5
million in fiscal 1995. Other noncash transactions impacting stockholders'
equity in fiscal 1995 included the $23.6 million paydown of ESOP debt by the
ESOP Trust and $80.1 million of net assets of PCS distributed in connection with
the PCS Transaction and charged to retained earnings.
The Company's stock-based compensation plan, the 1994 Stock Option and
Restricted Stock Plan (the "Stock Option Plan") provides grants of nonqualified
stock options to employees and non-employee directors of McKesson. Under the
Stock Option Plan, options are granted at prices not less than the fair market
value of the stock on the date of grant. The options generally vest over four
years and expire 10 years after the grant date. Under the Stock Option Plan, the
Company is authorized to grant up to 10.0 million shares, including 9.8 million
for options as of March 31, 1997.
41
The following is a summary of options outstanding at March 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted-
Number Average Number
of Options Remaining Weighted- of Options Weighted-
Range of Outstanding Contractual Life Average Exercisable Average
Exercise Prices at Year End (in Years) Exercise at Year End Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$2.16 to $10.38 472,316 4.89 $ 9.11 432,066 $ 9.75
$10.64 to $12.88 1,002,144 5.71 12.83 995,777 12.83
$13.17 to $16.67 847,747 6.78 16.63 545,402 16.64
$21.12 to $35.00 617,834 7.69 33.92 263,019 34.38
$36.88 to $50.00 1,006,367 8.65 48.35 198,151 48.83
$50.50 to $63.88 1,484,150 9.83 56.43 5,625 51.35
--------- ---------
5,430,558 7.70 34.00 2,440,040 18.47
========= =========
Expiration dates range from July 27, 1997, to March 26, 2007.
The following is a summary of changes in the options for the Stock Option Plan:
1997 1996 1995
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,970,403 $22.61 6,127,161 $ 15.96 3,205,025 $41.92
Assumed through acquisition 62,549 2.16 - - - -
Granted 1,732,974 54.72 884,200 49.53 828,150 37.12
Exercised (1,159,646) 14.98 (1,762,447) 12.67 (651,651) 19.20
Canceled (175,722) 30.52 (278,511) 23.29 (229,072) 27.61
PCS options/(1)/ - - - - (497,650) 48.30
Repricing of options due to PCS Transaction/(2)/ - - - - 3,472,359 41.74
--------- -------- ---------
Outstanding at year end 5,430,558 34.00 4,970,403 22.61 6,127,161 15.96
========= ========= =========
Exercisable at year end 2,440,040 $18.47 2,209,460 $ 14.55 2,188,196 $11.94
========= ========= =========
/(1)/ PCS employees that held McKesson options received directly from Eli Lilly
cash and restricted stock for all vested and unvested options,
respectively, at the time of the PCS Transaction.
/(2)/ Exercisable options held by an employee of the Company at the time of the
PCS Transaction were split into two separately exercisable options, one
for shares of McKesson common stock and one for shares of New McKesson
common stock. The options were repriced such that the aggregate intrinsic
value of the two separately exercisable options remained the same as the
value of the corresponding original exercisable option. Upon the
completion of the PCS Transaction, each adjusted McKesson option was
canceled in exchange for a cash amount, paid by Eli Lilly, equal to the
difference between $76 and the adjusted exercise price of such option. All
non-exercisable options held by an employee of the Company at the time of
the PCS Transaction were repriced at an exchange ratio of 3.3967 New
McKesson options to one McKesson option. The exercise price of each New
McKesson option is equal to the exercise price per share of the original
McKesson option divided by 3.3967.
- --------------------------------------------------------------------------------
Pursuant to SFAS 128, the Company has elected to account for its stock-based
compensation plan under APBO 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost has been recognized in the consolidated
financial statements for the Stock Option Plan. Had compensation cost for the
Stock Option Plan been recognized based on the fair value at the grant dates for
awards under those plans, consistent with the provision of SFAS No. 123, net
income and earnings per share would have been as indicated in the following
table. Since pro forma compensation cost relates to all periods over which the
awards vest, the initial impact on pro forma net income may not be
representative of compensation cost in subsequent years, when the effect of
amortization of multiple awards would be reflected.
Years Ended March 31
--------------------
In millions, except per share amount 1997 1996
- -----------------------------------------------------------------------------
Net income
As reported $133.9 $135.4
Pro forma 130.0 134.9
Earnings per common share - fully diluted
As reported 2.98 2.90
Pro forma 2.91 2.90
Earnings per common share - primary
As reported 3.01 2.90
Pro forma 2.94 2.90
Fair values of the options were estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions:
March 31
--------------
1997 1996
- ----------------------------------------------------------------------------
Expected stock price volatility 25.6% 25.6%
Expected dividend yield 1.5% 1.5%
Risk-free interest rate 6.2% 5.2%
Expected life (in years) 5 5
42
The weighted average grant date fair values of the options granted during
1997 and 1996 were $14.12 and $11.31 per share, respectively.
NOTE 14: TAXES ON INCOME
The provision for income taxes related to continuing operations consists of the
following:
In millions 1997 1996 1995
- ----------------------------------------------------------------
Current
Federal $26.6 $23.3 $137.3
State and local 2.9 5.0 30.4
Foreign 3.4 5.0 9.3
----- ----- ------
Total current 32.9 33.3 177.0
----- ----- ------
Deferred
Federal (3.2) 27.2 (65.6)
State 2.2 7.5 (13.5)
Foreign (0.6) 8.2 (1.3)
----- ----- ------
Total deferred (1.6) 42.9 (80.4)
----- ----- ------
Total provision $31.3 $76.2 $ 96.6
===== ===== ======
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Foreign pre-tax earnings were $12.1 million, $26.2 million, and
$25.3 million in fiscal 1997, 1996 and 1995, respectively.
The reconciliation between the Company's effective tax rate on income from
continuing operations and the statutory Federal income tax rate follows:
1997 1996 1995
- ----------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes net
of federal tax benefit 9.1 4.1 (20.4)
Nondeductible charge for the
write-off of in-process technology 45.5 - -
Nontaxable income - life insurance (7.0) (0.9) 1.3
Nondeductible amortization 5.3 1.1 (5.5)
Dividends paid deduction -
ESOP allocated shares (2.5) (0.5) 3.3
Basis difference on debentures (65.7)
Tax expense on corporate
restructuring to effect the
PCS Transaction (111.4)
Nondeductible compensation
costs related to the
PCS Transaction (15.4)
Nondeductible restructuring charges (1.0)
Other - net (1.0) (0.1) (0.8)
---- ---- ------
Effective tax rate 84.4% 38.7% (180.6)%
==== ==== ======
Income tax payments were $76 million, $97 million, and $69 million in
fiscal 1997, 1996, and 1995, respectively.
As of March 31, the deferred tax balances consisted of the following:
In millions 1997 1996 1995
- ----------------------------------------------------------------
Assets
Nondeductible accruals for
environmental obligations $ 10.6 $ 11.9 $ 15.9
Receivable reserves 17.6 13.8 12.2
Compensation and benefit-
related accruals 16.5 16.1 15.8
Loss and credit carryforwards 9.4 - -
Costs associated with duplicate
facility closures and
workforce reductions
related to acquired businesses 11.7 - -
Other 17.6 5.8 10.6
------- ----- -----
Current 83.4 47.6 54.5
------- ----- -----
Nondeductible accruals for:
Postretirement and post-
employment plans 76.2 76.6 81.6
Deferred compensation 33.0 29.0 26.4
Costs associated with facility
closures, surplus, properties
and asset write-downs 11.1 10.4 8.6
Retirement plan - 6.0 -
Systems development costs 11.8 - -
Loss and credit carryforwards 1.7 9.7 -
Other 15.3 17.0 13.0
------- ------ ------
Noncurrent 149.1 148.7 129.6
------- ------- ------
Total $ 232.5 $ 196.3 $184.1
======= ======= ======
Liabilities
Basis differences for inventory
valuation $ (70.1) $ (38.8) $ (5.0)
Other (5.2) (5.9) (2.8)
------- ------ -----
Current (75.3) (44.7) (7.8)
------- ------ -----
Accelerated depreciation (38.2) (43.6) (35.9)
Systems development costs - (14.5) (5.2)
Retirement plan (8.5) - (12.2)
Other (10.7) (9.9) (5.8)
------- ------- ------
Noncurrent (57.4) (68.0) (59.1)
------- ------- ------
Total $(132.7) $(112.7) $(66.9)
======= ======= ======
Total net current (included in
prepaid expenses) $ 8.1 $ 2.9 $ 46.7
======= ======= ======
Total net noncurrent (included
in other assets) $ 91.7 $ 80.7 $ 70.5
======= ======= ======
NOTE 15: POSTRETIREMENT AND
POSTEMPLOYMENT BENEFITS
Pension Plans
Substantially all full-time employees of the Company are covered under either
the Company-sponsored defined benefit retirement plan or by bargaining unit
sponsored multi-employer plans. The benefits for Company-sponsored plans are
based primarily on age of employees at date
43
of retirement, years of service and employees' pay during the five years prior
to retirement.
Net pension expense for the Company-sponsored defined benefit retirement
plan and executive supplemental retirement plan consisted of the following:
In millions 1997 1996 1995
- -----------------------------------------------------------------
Service cost - benefits earned
during the year $ 5.4 $ 5.3 $ 6.7
Interest cost on projected
benefit obligation 23.6 23.7 22.4
Return on assets
Actual (income) loss (35.5) (51.6) 3.2
Deferred gain (loss) 12.1 31.2 (25.9)
Amortization of unrecognized
gain and prior service costs 5.9 4.5 5.0
Amortization of unrecognized
net transition asset (2.5) (2.5) (2.5)
Curtailment loss 0.4 - -
------ ------ ------
Net pension expense $ 9.4 $ 10.6 $ 8.9
====== ====== ======
At December 31, 1996, the Company recognized a $400,000 curtailment loss
resulting from a plan amendment that froze all plan benefits based on each
employee's plan compensation and creditable service accrued to that date. On
January 1, 1997, the Company amended the ESOP to provide future additional
benefits in place of a portion of those benefits previously provided by the
pension plan.
Assets of the plans are measured on a calendar year basis. The funded
status of the company-sponsored defined benefit retirement plan at December 31,
was as follows:
In millions 1996 1995 1994
- -----------------------------------------------------------------
Actuarial present value of
benefit obligations -
Vested benefits $246.0 $249.8 $204.0
Nonvested benefits 13.9 14.1 11.0
------ ------ ------
Accumulated benefit obligation 259.9 263.9 215.0
Effect of assumed increase in
future compensation levels - 20.7 20.9
------ ------ ------
Projected benefit obligation for
services rendered to date 259.9 284.6 235.9
Assets of plan at fair value 262.3 248.9 218.8
------ ------ ------
Excess (shortfall) of assets over
projected benefit obligation 2.4 (35.7) (17.1)
Unrecognized prior service cost
and net loss from experience
different from that assumed 22.1 67.1 56.7
Unrecognized net transition asset,
recognized straight-line
through 1998 (3.1) (6.0) (8.8)
Adjustment required to recognize
minimum liability - (40.4) -
------ ------ ------
Pension asset (liability) included in
other assets (noncurrent
liabilities) $ 21.4 $(15.0) $ 30.8
====== ====== ======
The projected unit credit method is utilized for measuring net periodic
pension cost over the employees' service life. Costs are funded based on the
recommendations of independent actuaries. The projected benefit obligations for
Company-sponsored plans were determined using a discount rate of 7.75% at
December 31, 1996, 7.25% at December 31, 1995, and 8.75% at December 31, 1994,
and an assumed increase in future compensation levels of 4.0% at December 31,
1995, and 5.0% at December 31, 1994. The expected long-term rate of return on
assets used to determine pension expense was 9.75% for all periods. The
adjustment required to recognize the minimum liability at December 31, 1995 was
charged to other equity, net of tax, and was reversed at December 31, 1996.
The assets of the plan consist primarily of listed common stocks and bonds
for which fair value is determined based on quoted market prices.
The projected benefit obligation for the Company's executive supplemental
retirement plan at December 31, 1996, was $39.7 million of which $37.3 million
(the accumulated benefit obligation) is recognized as a liability on the
consolidated balance sheet.
Profit-Sharing Investment Plan
Retirement benefits for employees not covered by collective bargaining
arrangements include a supplementary contributory profit sharing investment plan
("PSIP"). The leveraged ESOP portion of the PSIP has purchased an aggregate of
9.3 million shares of common stock since inception and 2.85 million shares of
convertible preferred stock from the Company. The convertible preferred stock
was converted into common stock in connection with the PCS Transaction. These
purchases have been financed by 10- to 20-year loans from or guaranteed by the
Company. The Company's related receivables from the ESOP have been
44
classified as a reduction of stockholders' equity. The loans will be repaid by
the ESOP from common dividends on shares not yet allocated to participants,
interest earnings on cash balances not yet allocated to participants, common
dividends on certain allocated shares and future Company cash contributions. The
ESOP loan maturities and rates are identical to the terms of related Company
borrowings; see Note 9.
After-tax ESOP expense (income), including interest expense on ESOP debt,
was $2.3 million, $(0.2) million, and $4.0 million in fiscal 1997, 1996, and
1995, respectively. Additional tax benefits received on dividends paid on
unallocated shares of $3.1 million, $2.2 million, and $2.7 million in fiscal
1997, 1996, and 1995, respectively, have been credited directly to retained
earnings in accordance with SFAS 109.
Contribution expense for the PSIP in fiscal 1997, 1996, and 1995 was all
ESOP related and is reflected in the amounts above. In fiscal 1997 and 1996
approximately 501,000 and 457,000 shares, respectively, were allocated to plan
participants. In fiscal 1995, 693,000 shares and $8.9 million of cash were
allocated to plan participants.
In fiscal 1996, the ESOP Trust completed the purchase of 5.2 million
Company shares for $212 million with the remaining proceeds received on the
unallocated shares tendered in connection with the PCS Transaction; see Note 3.
In fiscal 1995, one-time compensation costs related to the PCS Transaction were
recorded that included $23.6 million associated with an allocation of $31.1
million of cash and 409,000 shares to ESOP plan participants resulting from a
paydown of ESOP debt by the ESOP Trust with a portion of the proceeds received
on the unallocated shares tendered under the Offer.
Through March 31, 1997, 5.3 million common shares have been allocated to
plan participants. At March 31, 1997, 6.8 million common shares in the ESOP
Trust had not been allocated to plan participants.
Health Care and Life Insurance
In addition to providing pension benefits, the Company provides health care and
life insurance benefits for certain retired employees. The Company's policy is
to fund these benefits as claims are paid. The benefits have been reduced
significantly for those employees retiring after December 31, 1990. In 1989, the
Company implemented the preferred stock ESOP to provide funds at retirement that
could be used for medical costs or health care coverage.
Expenses for postretirement health care and life insurance benefits
consisted of the following:
In millions 1997 1996 1995
- ------------------------------------------------------------------
Service cost - benefits earned
during the period $ 1.1 $ 1.1 $ 1.2
Interest cost on projected
benefit obligation 9.4 11.4 10.5
Amortization of unrecognized
gain and prior service costs (5.5) (9.3) (7.6)
----- ----- -----
Total $ 5.0 $ 3.2 $ 4.1
===== ===== =====
Payments for postretirement health care and life insurance benefits
amounted to $13.3 million, $10.9 million, and $11.5 million in fiscal 1997,
1996, and 1995, respectively.
The funded status and amounts recognized in the consolidated balance sheet
for postretirement health care and life insurance benefits at March 31, were as
follows:
In millions 1997 1996 1995
- ------------------------------------------------------------------
Accumulated postretirement
benefit obligations:
Retirees $110.6 $122.2 $118.6
Active plan participants 12.3 17.9 16.7
------ ------ ------
Total 122.9 140.1 135.3
Unrecognized prior service cost
and accumulated net gain 24.2 14.8 27.3
------ ------ ------
Accrued postretirement
benefit obligation $147.1 $154.9 $162.6
====== ====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation is 6.0% for 1997, gradually declining to 5.0%
in 1999 and thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. Increasing the trend rate by one
percentage point would increase the accumulated postretirement health care and
life insurance obligation as of March 31, 1997, by $7.3 million and the related
fiscal 1997 aggregate service and interest costs by $0.7 million. The discount
rate used in determining the accumulated postretirement benefit obligation was
7.75% at March 31, 1997, 7.25% at March 31, 1996, and 8.75% at March 31, 1995.
45
NOTE 16: SEGMENTS OF BUSINESS
In millions 1997 1996 1995
- ------------------------------------------------------------------------
Revenues
Health Care Services/(1)/ $12,591.8 $9,656.7 $9,177.7
Water Products 275.1 259.3 246.0
Corporate 19.8 37.7 15.0
--------- -------- --------
Total $12,886.7 $9,953.7 $9,438.7
========= ======== ========
Operating Profit
Health Care Services/(2)/ $ 92.8/(3)/ $ 206.1 $ 76.1/(4)/
Water Products 34.6/(3)/ 39.6 14.5/(4)/
--------- -------- --------
Total 127.4 245.7 90.6
Interest - net/(5)/ (47.5) (13.3) (31.4)
Corporate (42.8) (35.5) (112.7)/(4)/
--------- -------- --------
Income (loss) before
taxes on income $ 37.1 $ 196.9 $ (53.5)
========= ======== ========
Segment Assets - at year end
Health Care Services $ 4,648.2 $2,525.3 $2,148.6
Water Products 144.6 142.0 142.3
--------- -------- --------
Total 4,792.8 2,667.3 2,290.9
Corporate
Cash, cash equivalents and
marketable securities 229.8 456.2 670.4
Net assets of discontinued
operations - 125.7 88.2
Other 150.2 111.0 210.7
--------- -------- --------
Total $ 5,172.8 $3,360.2 $3,260.2
========= ======== ========
Depreciation and Amortization
Health Care Services $ 46.6 $ 40.8 $ 37.2
Water Products 22.8 21.5 20.5
Corporate 2.4 1.9 1.4
--------- -------- --------
Total $ 71.8 $ 64.2 $ 59.1
========= ======== ========
Capital Expenditures
Health Care Services $ 41.9 $ 43.5 $ 44.4
Water Products 32.3 24.8 26.3
Corporate 2.7 5.3 5.7
--------- -------- --------
Total $ 76.9 $ 73.6 $ 76.4
========= ======== ========
/(1)/ Reflects the reclassification of sales and cost of sales associated with
sales to customers' warehouses and includes only the gross margin on such
sales in revenues.
/(2)/ Includes $11.4 million, $12.2 million, and $8.9 million of pre-tax
earnings from an equity investment in fiscal 1997, 1996, and 1995,
respectively.
/(3)/ Health Care Services and Water Products amounts include charges for
restructuring, asset impairment, write-off of in-process purchased
technology and other operating items of $140.0 million and $7.0 million,
respectively.
/(4)/ Health Care Services and Water Products amounts in fiscal 1995 include
charges for restructuring, asset impairment, and other operating items of
$107.3 million and $17.3 million, respectively. Corporate includes $74.3
million of expense related to compensation costs associated with the PCS
Transaction, charges for restructuring, asset impairment, and other
operating items.
/(5)/ Interest expense is shown net of corporate interest income.
- --------------------------------------------------------------------------------
The Health Care Services segment includes the Company's U.S.
pharmaceutical, health care products and medical-surgical supplies distribution
businesses. U.S. Health Care operations also include marketing and other support
services to pharmaceutical manufacturers, a manufacturer of automated
pharmaceutical dispensing systems for hospitals and a distributor of first-aid
products and supplies to industrial and commercial customers. Health Care
Services also includes the Company's international distribution operations
(including Canada and an equity interest in a Mexican distribution business).
The Water Products segment is engaged in the processing, delivery, and sale
of bottled drinking water to homes and businesses and the sale of packaged water
to retail stores.
Information as to the Company's foreign operations was as follows:
In millions 1997 1996 1995
- ------------------------------------------------------------
Revenues/(1)/
U.S. $11,374.2 $8,429.5 $8,080.4
International 1,512.5 1,524.2 1,358.3
--------- -------- --------
Total $12,886.7 $9,953.7 $9,438.7
========= ======== ========
Operating Profit
U.S. 102.3 $ 207.5 $ 64.8
International 25.1 38.2 25.8
--------- -------- --------
Total 127.4/(2)/ $ 245.7 $ 90.6/(3)/
========= ======== ========
Assets, at year end
U.S. $ 4,935.4 $3,130.9 $3,024.2
International 237.4 229.3 236.0
--------- -------- --------
Total $ 5,172.8 $3,360.2 $3,260.2
========= ======== ========
/(1)/ Reflects the reclassification of sales and cost of sales associated with
sales to customers' warehouses and includes only the gross margin on such
sales in revenues.
/(2)/ Includes $147.0 million in charges for restructuring, asset impairment,
and other operating items.
/(3)/ Includes $124.6 million in charges for restructuring, asset impairment,
and other operating items.
- ------------------------------------------------------------
NOTE 17: OTHER COMMITMENTS AND
CONTINGENT LIABILITIES
In addition to commitments and obligations in the ordinary course of business,
the Company is subject to various claims, other pending and potential legal
actions for product liability and other damages, investigations relating to
governmental laws and regulations, and other matters arising out of the normal
conduct of the Company's business.
The Company currently is a defendant in seven civil actions filed since
late 1993 by retail pharmacies. The first proceeding, Feitelberg v. Abbott
Laboratories, is pending in the Superior Court for the State of California
(County of San Francisco) and is now referred to as Coordinated Proceeding
Special Title, Pharmaceutical Cases I, II, and III. The second proceeding, HJB,
Inc. v. Abbott Laboratories (now known as MDL 997), is pending in the U.S.
District Court for the Northern District of Illinois. The third proceeding,
46
K-S Pharmacies, Inc. v. Abbott Laboratories, is pending in the Circuit Court of
Wisconsin for Dane County. A fourth action, Adams v. Abbott Laboratories, was
filed in the U.S. District Court for the Eastern District of Arkansas. A fifth
action, Salk Drug Co. v. Abbott Laboratories, was filed in the District Court of
Minnesota, Fourth Judicial District. A sixth action was filed in California
Superior Court for San Francisco County, Horton v. Abbott Laboratories, et al.,
has been consolidated with Coordinated Proceeding Special Title, Pharmaceutical
Cases I, II and III. A seventh case, Durrett v. Upjohn Co., was served on
McKesson in 1996. These actions were brought as purported class actions on
behalf of all other similarly-situated retail pharmacies. A class has been
certified in Feitelberg and in MDL 997. There are numerous other defendants in
these actions including pharmaceutical manufacturers, a pharmaceutical mail
order firm, and several other wholesale distributors. These cases allege, in
essence, that the defendants have unlawfully conspired together and agreed to
fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially
high, discriminatory, and non-competitive levels, all in violation of various
state and federal antitrust laws. Some of the plaintiffs specifically contend
that the wholesaler and manufacturer defendants are engaged in a conspiracy to
fix prices charged to plaintiffs and members of the purported classes
(independent and chain retail drug stores) above the price levels charged to
mail order pharmacies, HMOs and other institutional buyers. The California cases
allege, among other things, violation of California antitrust law. In MDL 997,
plaintiffs allege that defendants' actions constitute price fixing in violation
of the Sherman Act. In the K-S Pharmacies, Inc., Salk Drug and Durrett
complaints, plaintiffs allege violation of Wisconsin, Minnesota, and Alabama
antitrust laws, respectively. In each of the complaints, except Adams,
plaintiffs seek certification as a class and remedies in the form of injunctive
relief, unquantified monetary damages (trebled as provided by law), and
attorneys fees and costs. In addition, the California cases seek restitution. In
MDL 997, plaintiffs have appealed the court's ruling granting the motion for
summary judgment filed by the Company and other wholesaler defendants. In K-S
Pharmacies, the court dismissed the Company and other wholesaler defendants with
prejudice and plaintiffs have appealed. In Durrett, the court denied the
wholesalers' motion to dismiss. The Company believes it has meritorious defenses
to the allegations made against it and intends to vigorously defend itself in
all of these cases.
In addition, the Company has entered into a judgment sharing agreement with
certain pharmaceutical manufacturer defendants, which provides generally that
the Company (together with the other wholesale distributor defendants) will be
held harmless by such pharmaceutical manufacturer defendants and will be
indemnified against the costs of adverse judgments, if any, against the
wholesaler and manufacturers in these or similar actions, in excess of $1
million in the aggregate per wholesale distributor defendant.
In December 1996, a purported stockholder class action entitled Vogel vs.
Armstrong, et al., was filed in the Court of Chancery of the State of Delaware
against the Company, Armor All Products Corporation ("Armor All"), then current
members of Armor All's Board of Directors, and The Clorox Company ("Clorox").
The complaint alleges that (i) the Company and Armor All's directors breached
their fiduciary duties to Armor All's public shareholders by entering into an
agreement to sell Armor All for an insufficient price, (ii) the Company and the
Armor All directors, contrary to their fiduciary duties, consummated the sale in
order to favor the Company over the public shareholders of Armor All, and (iii)
Clorox, in purchasing the shares of Armor All, aided and abetted those breaches
of fiduciary duty. Plaintiff seeks rescission, compensatory damages, interest,
and attorneys fees and costs. The Company has filed a motion to dismiss the
complaint, believes it has meritorious defenses to the allegations made against
it, and intends to vigorously defend the litigation.
In January 1997, the Company and 12 pharmaceutical manufacturers (the
"Manufacturer Defendants") were named as defendants in the matter of FoxMeyer
Health Corporation vs. McKesson Corporation, et al., filed in the District Court
in Dallas County, Texas. In its complaint, Plaintiff (the parent corporation of
FoxMeyer Drug Company and FoxMeyer Corporation collectively, "FoxMeyer
Corporation") alleges that, among other things, the Company (i) defrauded
Plaintiff, (ii) competed unfairly and tortiously interfered with FoxMeyer
Corporation's business operations, and (iii) conspired with the Manufacturer
Defendants, all in order to destroy FoxMeyer Corporation's business, restrain
trade and monopolize the marketplace, and allow the Company to purchase that
business at a distressed price. Plaintiff seeks relief against all defendants in
the form of compensatory damages of at least $400 million, punitive damages,
attorneys fees and costs. The Company has answered the complaint, denying the
allegations, and removed the case to federal bankruptcy court in Dallas. A
motion to transfer the case to bankruptcy court in Delaware is pending.
47
The Company believes it has meritorious defenses to the allegations made against
it and intends to vigorously defend the litigation.
In July 1995, a purported class action was filed in the Supreme Court of
the State of New York against General Medical Corp., Inc., and several other
defendants by Richard A. Bernstein, Chairman and President of Rabco Health
Services, Inc. and Chairman of General Medical at the time of its leveraged
buyout in 1993. Plaintiff alleges a conspiracy to orchestrate the buyout of
plaintiff's interest in Rabco at an unfairly low price. Plaintiff alleges common
law fraud, breach of fiduciary duty and inducing breach of fiduciary duty.
Plaintiff seeks rescissionary damages of $50 million, compensatory damages of
$25 million, and punitive damages of $25 million. The complaint was dismissed in
September 1996 and an appeal by plaintiff is pending. The Company believes that
it has meritorious defenses to the allegations made against it and intends to
vigorously defend the action.
Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:
The Company has received claims and demands from governmental agencies
relating to investigative and remedial actions purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.
The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for these
five sites is approximately $22 million, net of $5 million which third parties
have agreed to pay in settlement or which the Company expects, based either on
agreements or nonrefundable contributions which are ongoing, to be contributed
by third parties. The $22 million is expected to be paid out between April 1997
and March 2028 and is included in the Company's recorded environmental reserves
at March 31, 1997.
In addition, the Company has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended (the
"Superfund" law), for environmental assessment and cleanup costs as the result
of the Company's alleged disposal of hazardous substances at 22 Superfund sites.
With respect to each of these Superfund sites, numerous other PRPs have
similarly been designated and, while the current state of the law potentially
imposes joint and several liability upon PRPs, as a practical matter costs of
these sites are typically shared with other PRPs. The Company's estimated
liability at those 22 Superfund sites is approximately $2 million, net of $4
million which insurance companies, and $3 million which another PRP, are
expected or have agreed to contribute to the Company's allocated share. The
aggregate settlements and costs paid by the Company in Superfund matters to date
has not been significant. The $2 million is included in the Company's recorded
environmental reserves at March 31, 1997.
The potential costs to the Company related to environmental matters is
uncertain due to such factors as: the unknown magnitude of possible pollution
and cleanup costs; the complexity and evolving nature of governmental laws and
regulations and their interpretations; the timing, varying costs and
effectiveness of alternative cleanup technologies; the determination of the
Company's liability in proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.
Management believes, based on current knowledge and the advice of the
Company's counsel, that the outcome of the litigation and governmental
proceedings discussed in this note will not have a material adverse effect on
the Company.
48
NOTE 18: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Fiscal
In millions except per share amounts Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------
FISCAL 1997
Revenues/(1)/ $2,670.6 $2,730.9 $3,486.6 $3,998.6 $12,886.7
Gross profit 231.9 231.0 243.8 330.6 1,037.3
Income (loss) after taxes
Continuing operations (21.4)/(2)/ 25.8 (36.1)/(3)/ 36.8 5.1
Discontinued operations 3.3 2.3 2.1 0.9 8.6
Discontinued operations -
Gain on sale of Armor All - - 120.2 - 120.2
-------- -------- -------- -------- ---------
Total $ (18.1) $ 28.1 $ 86.2 $ 37.7 $ 133.9
======== ======== ======== ======== =========
Earnings (loss) per common share
Fully diluted
Continuing operations $ (0.49) $ 0.59 $ (0.82) $ 0.81 $ 0.13
Discontinued operations 0.08 0.05 0.05 0.02 0.19
Discontinued operations -
Gain on sale of Armor All - - 2.70 - 2.66
-------- -------- -------- -------- ---------
Total $ (0.41) $ 0.64 $ 1.93 $ 0.83 $ 2.98
======== ======== ======== ======== =========
Primary
Continuing operations $ (0.49) $ 0.59 $ (0.83) $ 0.81 $ 0.12
Discontinued operations 0.08 0.05 0.06 0.02 0.19
Discontinued operations -
Gain on sale of Armor All - - 2.71 - 2.70
-------- -------- -------- -------- ---------
Total $ (0.41) $ 0.64 $ 1.94 $ 0.83 $ 3.01
======== ======== ======== ======== =========
Cash dividends per share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 1.00
======== ======== ======== ======== =========
Market prices per common share
High $ 51 1/4 $ 48 1/8 $ 56 3/4 $ 68 1/4 $ 68 1/4
Low 44 1/8 41 1/8 45 3/4 52 1/8 41 1/8
FISCAL 1996
Revenues/(1)/ $2,388.3 $2,402.6 $2,581.1 $2,581.7 $ 9,953.7
Gross profit 221.2 229.3 226.2 238.8 915.5
Income after taxes
Continuing operations 28.0 28.2 28.7 35.8 120.7
Discontinued operations 4.8 3.5 4.2 2.2 14.7
-------- -------- -------- -------- ---------
Total $ 32.8 $ 31.7 $ 32.9 $ 38.0 $ 135.4
======== ======== ======== ======== =========
Earnings per common share
Fully diluted
Continuing operations $ 0.60 $ 0.61 $ 0.61 $ 0.77 $ 2.59
Discontinued operations 0.10 0.07 0.09 0.05 0.31
-------- -------- -------- -------- ---------
Total $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
======== ======== ======== ======== =========
Primary
Continuing operations $ 0.60 $ 0.61 $ 0.61 $ 0.77 $ 2.59
Discontinued operations 0.10 0.07 0.09 0.05 0.31
-------- -------- -------- -------- ---------
Total $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
======== ======== ======== ======== =========
Cash dividends per share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 1.00
======== ======== ======== ======== =========
Market prices per common share
High $ 47 3/8 $ 46 5/8 $ 53 1/4 $ 55 5/8 $ 55 5/8
Low 37 1/4 42 5/8 44 7/8 46 1/2 37 1/4
/(1)/ Reflects the reclassification of sales and cost of sales associated with
sales to customers' warehouses and includes only the gross margin on such
sales in revenues.
/(2)/ Includes a charge for $48.2 million to write off purchased in-process
technology.
/(3)/ Includes $61.3 million in after-tax charges for restructuring, asset
impairment, and other operating items.
49
----------------------------------------
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
----------------------------------------
Management is responsible for the preparation and accuracy of the consolidated
financial statements and other information included in this report. The
financial statements have been prepared in conformity with generally accepted
accounting principles using, where appropriate, management's best estimates and
judgments.
In meeting its responsibility for the reliability of the financial
statements, management has developed and relies on the Company's system of
internal accounting control. The system is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed as
authorized and are properly recorded. The system is augmented by written
policies and procedures and an internal audit department.
The Board of Directors reviews the financial statements and reporting
practices of the Company through its Audit Committee, which is composed entirely
of directors who are not officers or employees of the Company. The committee
meets regularly with the independent auditors, internal auditors, and management
to discuss audit scope and results and to consider internal control and
financial reporting matters. Both the independent and internal auditors have
direct unrestricted access to the Audit Committee. The entire Board of Directors
reviews the Company's financial performance and financial plan.
/s/ Mark A. Pulido
Mark A. Pulido
President and Chief Executive Officer
/s/ Richard H. Hawkins
Richard H. Hawkins
Vice President and Chief Financial Officer
----------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
THE STOCKHOLDERS AND BOARD OF DIRECTORS OF MCKESSON CORPORATION:
We have audited the accompanying consolidated balance sheets of McKesson
Corporation and subsidiaries as of March 31, 1997, 1996, and 1995, and the
related statements of consolidated income, consolidated stockholders' equity,
and consolidated cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of McKesson Corporation and
subsidiaries at March 31, 1997, 1996, and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
May 16, 1997
50
----------------------
DIRECTORS AND OFFICERS
----------------------
BOARD OF DIRECTORS PRINCIPAL EXECUTIVES
Alan Seelenfreund, 60 Mark A. Pulido, 44 Alan Seelenfreund, 60 Mark A. Pulido, 44
Chairman of the Board, President and Chairman of the Board/1/ President and
McKesson Corporation Chief Executive Officer, Chief Executive Officer/1/
McKesson Corporation
Mary G. F. Bitterman, 53 CORPORATE OFFICERS
President and Carl E. Reichardt, 65
Chief Executive Officer, Chairman of the Board, William A. Armstrong, 56 Nancy A. Miller, 53
KQED, Inc. Retired, Vice President Vice President and
Wells Fargo & Company Human Resources and Corporate Secretary
Tully M. Friedman, 55 Administration
Chairman and Jane E. Shaw, 58 Steven B. Nielsen, 49
Chief Executive Officer, Founder, The Stable Michael T. Dalby, 51 Vice President and
Tully M. Friedman & Network; Vice President Chairman and
Company, LLC Former President and Strategic Planning Chief Executive Officer,
Chief Operating Officer, McKesson General
John M. Pietruski, 64 ALZA Corporation John H. Hammergren, 38 Medical Corp.
Chairman of the Board, Vice President and
Texas Biotechnology Robert H. Waterman, Jr., 60 President, McKesson Charles A. Norris, 51
Corporation; Chairman, The Waterman Health Systems Vice President and
Chairman and Chief Group, Inc. President, McKesson Water
Executive Officer, Retired, Richard H. Hawkins, 47 Products Company
Sterling Drug, Inc. /1/ Elected May 30, 1997. Vice President and
Chief Financial Officer Alan M. Pearce, 48
David S. Pottruck, 48 Treasurer/2/
President and David L. Mahoney, 42
Chief Operating Officer, Vice President and Carmine J. Villani, 54
The Charles Schwab President, Pharmaceutical Vice President and
Corporation/1/ and Retail Services Chief Information Officer
Mark T. Majeske, 39 Heidi E. Yodowitz, 43
Vice President and Controller
President, Customer
Operations /1/ From April 1, 1997, Alan
Seelenfreund will serve
Ivan D. Meyerson, 52 as Chairman of the Board
Vice President and of Directors of McKesson,
General Counsel while Mark A. Pulido
becomes Chief Executive
Officer as well as
President.
/2/ Elected May 30, 1997.
COMMITTEES OF THE BOARD AND WHAT THEY DO
To assist the Board of Directors in carrying out its responsibilities, the board
has established five standing committees. The responsibilities and membership
of the committees are as follows:
The Audit Committee recommends the selection of independent auditors and
monitors their activities. The committee reviews the annual audited financial
statements and the Form 10-K annual report; consults with internal and external
auditors and management on internal financial control procedures; and reviews on
an ongoing basis implementation and compliance with the Corporate Code of
Conduct. The committee consists of Jane Shaw, chair; Mary Bitterman; Carl
Reichardt; and Robert Waterman.
The Compensation Committee oversees the pension, incentive and stock option
plans for senior and mid-level managers, establishes investment policies and
selects managers of the retirement funds. The committee also recommends
compensation of the chief executive officer and approves compensation and terms
of employment of other principal officers. The committee consists of John
Pietruski, chair; Tully Friedman; Carl Reichardt; and Jane Shaw.
The Executive Committee is authorized to exercise most of the powers of the
board when it is not in session. The committee is chaired by Alan Seelenfreund
and also includes Tully Friedman, John Pietruski, Jane Shaw, and Robert
Waterman.
The Finance Committee reviews long-range financial policies and annual
financial plans with management and provides advice and counsel to management on
all significant financial matters. Members of the committee are Tully Friedman,
chair; Mary Bitterman; Carl Reichardt; and Alan Seelenfreund.
The Committee on Directors and Corporate Governance considers and
recommends nominees for election to the board; reviews and makes recommendations
concerning the size and composition of the board, criteria for election to the
board, the structure and membership of board committees and director
compensation and benefits; and oversees matters of corporate governance. Members
of the committee are Robert Waterman, chair; Tully Friedman; John Pietruski; and
Jane Shaw.
51
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SHAREHOLDER INFORMATION
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COMMON STOCK
McKesson common stock is listed on the New York Stock Exchange and the Pacific
Exchange (ticker symbol MCK) and is quoted in the daily stock tables carried by
most newspapers.
VISIT MCKESSON'S HOME PAGE
Internet browsers may visit McKesson Corporation's home page on the World Wide
Web at http://www.mckesson.com
INFORMATION AVAILABLE FROM FIRST CHICAGO
First Chicago Trust Co. of New York, P.O. Box 2500, Jersey City, N.J. 07303-
2500, acts as transfer agent, registrar, dividend-paying agent and dividend
reinvestment plan agent for McKesson stock and maintains all stockholder records
for the corporation. For information about McKesson stock or to request
replacement of lost dividend checks, stock certificates or 1099s, stockholders
may call First Chicago's Telephone Response Center at (201) 324-1644, weekdays
8:30 a.m. to 7:00 p.m., EST. First Chicago also has an Internet address --
fctc@em.fcnbd.com -- that stockholders may use 24 hours a day to request account
information. First Chicago will acknowledge and respond to electronic
communications through the Internet. For more information, call First Chicago's
Telephone Response Center.
DIVIDENDS
Dividends are generally paid on the first business day of January, April, July,
and October to stockholders of record on the first business day of the preceding
month. You may have your dividend check deposited directly into your checking or
savings account. For more information, or to request an enrollment form, call
First Chicago at (800) 870-2340, Monday through Friday, 8:00 a.m. - 10:00 p.m.,
EST, or Saturday, 8:00 a.m. - 3:30 p.m., EST.
DIVIDEND REINVESTMENT PLAN
McKesson's Dividend Reinvestment Plan offers stockholders the opportunity to
reinvest dividends in common stock and to purchase additional common stock
without paying brokerage commissions or other service fees, and to have their
stock certificates held in safekeeping. For more information or to request an
enrollment form, call First Chicago's Telephone Response Center at
(201) 324-1644.
ANNUAL REPORT ON FORM 10-K
Stockholders may obtain, without charge, a copy of McKesson's annual report on
Form 10-K to the Securities and Exchange Commission, excluding certain exhibits,
by writing to: Investor Relations, Box K, McKesson Corporation, One Post Street,
San Francisco, CA 94104; (800) 826-9360.
ANNUAL MEETING TO BE HELD JULY 30
McKesson's annual meeting of stockholders will be held at 10:00 a.m., PDT, on
Wednesday, July 30, 1997, in the Colonial Room at The Westin St. Francis Hotel,
335 Powell St., San Francisco.
MCKESSON NEWS RELEASES
The company makes news releases available at no charge through the McKesson
NewsOnDemand fax service. To immediately receive an index of available releases,
call 1-800-344-6495 and press 2.
ANALYST COVERAGE OF MCKESSON
. A.G. Edwards & Sons, Inc.
. Alex. Brown & Sons, Inc.
. Bear, Stearns & Co., Inc.
. Cleary Gull Reiland & McDevitt, Inc.
. Donaldson, Lufkin & Jenrette Securities Corporation
. Goldman Sachs & Co.
. Monness, Crespi, Hardt & Co., Inc.
. Morgan Stanley & Co., Inc.
. Salomon Brothers, Inc.
. Value Line Securities, Inc.
. Wheat First Butcher Singer, Inc.
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INVESTOR PERSPECTIVE
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An Investor's View of McKesson
As the largest health care supply management company in North America, McKesson
is simultaneously increasing its business scope and its value as an investment.
Capturing the benefits of scale and technological sophistication through
acquisition and internal development, McKesson has deployed its strong balance
sheet to gain share and move into the lead in an industry with robust growth
prospects. In turn, these fundamental economic strengths support investor
confidence in McKesson's ability to meet Wall Street expectations.
During fiscal 1997, the stock market enthusiastically endorsed McKesson's
intensified health care focus, including its acquisitions and divestitures, as
well as the increased frequency of our investor communications program. The
direct result has been a tripling of reports published by Wall Street brokerage
firms that cover the company's progress. Increased coverage leads to increased
demand. Both reflect a very positive environment for current and future McKesson
shareholders.
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"WE BELIEVE THAT MANAGEMENT IS TRANSFORMING THE COMPANY INTO A MORE COMPETITIVE
HEALTHCARE COMPANY AND THAT GROWTH WILL ACCELERATE IN THE 1998-2000 TIME FRAME."
David Risinger, Morgan Stanley & Co., Inc.
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McKesson financial targets have been clarified for investors. In support of
our mission, we intend to achieve 20 percent growth in earnings per share,
return on equity in excess of 15 percent, and a debt-to-total-capital ratio of
between 40 and 50 percent.
As McKesson's profile changes, its shareholder base is growing and changing
in response. New owners are matching McKesson's aggressive financial targets
with their own portfolio goals. That process, begun in fiscal 1997, has
significantly increased the number of money market managers monitoring
McKesson's performance and prospects. The share-price and multiple expansion
experienced by McKesson common stock during fiscal 1997 are creating an
institutional investor base oriented to growth.
"WE REMAIN EXTREMELY BULLISH ON THE OUTLOOK FOR McKESSON SHARES AND FEEL THAT
THE COMPANY IS MAKING ALL THE PROPER STRATEGIC MOVES IT NEEDS TO CONTINUE TO BE
A LEADER IN ALL ASPECTS OF HEALTH CARE SUPPLY MANAGEMENT."
John Ford, Bear, Stearns & Co. Inc.
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SHAREHOLDER INVESTMENT STYLE
----------------------------
McKesson Investor Base*
In percent
[PIE GRAPH APPEARS HERE]
Growth - 26% Classic Value - 32%
Aggressive Growth - 4% Balanced - 2%
Income - 2% Growth at Any
Value/Income -11% Reasonable Price - 23%
*AT FISCAL YEAR END - 1997
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"KEY INDUSTRY PLAYERS ARE BROADENING THEIR FOCUS IN AN ATTEMPT TO EXPAND CHANNEL
INFLUENCE. McKESSON CORP. SEEKS TO GAIN A CLEAR MARKET-SHARE LEADERSHIP ROLE
WITH ITS ACQUISITIONS, AS THEY WILL PROVIDE THE COMPANY WITH A BIGGER RETAIL
BUYING BASE."
Larry Marsh, Salomon Brothers, Inc.
53
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[LOGO OF McKESSON APPEARS HERE]
McKESSON CORPORATION One Post Street San Francisco, CA 94104
Telephone: 415-983-8300
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