SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13252 MCKESSON CORPORATION A DELAWARE CORPORATION I.R.S. EMPLOYER NUMBER 94-3207296 MCKESSON PLAZA, ONE POST STREET, SAN FRANCISCO, CA 94104 TELEPHONE - AREA CODE (415) 983-8300 Securities registered pursuant to Section 12(b) of the Act: (NAME OF EACH EXCHANGE (TITLE OF EACH CLASS) ON WHICH REGISTERED) Common Stock, $.01 par value New York Stock Exchange Pacific Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange, Inc. Securities registered pursuant to Section 12 (g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by nonaffiliates of the Registrant at June 1, 1998: $5,606,443,190 Number of shares of common stock outstanding at June 1, 1998: 94,929,952 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended March 31, 1998 are incorporated by reference into Parts I, II and IV of this report. Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on July 29, 1998 are incorporated by reference into Part III of this report. The undersigned Registrant hereby amends the items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the fiscal year ended March 31, 1998 as set forth below. LIST OF ITEMS AMENDED --------------------- Item Page - ---- ---- PART II 8. Financial Statements and Supplementary Data........ 1 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 34 Signatures......................................... 35 TEXT OF AMENDMENTS ------------------ Each of the above listed Items is hereby amended by deleting the Item in its entirety and replacing it with the Items attached hereto and filed herewith. The purpose of the amendment is to expand the disclosure in Note 9 "Convertible Preferred Securities" to the Company's financial statements. Part II ITEM 8. Financial Statements and Supplementary Data Index to Financial Statements and Supplementary Data Schedule - ------------------------------------------------------------- Page ---- Consolidated Financial Statements: Independent Auditors' Report....................................... 2 Statements of Consolidated Income for the years ended March 31, 1998, 1997 and 1996................................ 3 Consolidated Balance Sheets, March 31, 1998, 1997, and 1996........ 4 Statements of Consolidated Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996.......................... 5 Statements of Consolidated Cash Flows for the years ended March 31, 1998, 1997, and 1996............................... 7 Financial Notes.................................................... 8 Financial statements and schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. 1 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, 1998, 1997, and 1996, 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, 1998, 1997, and 1996, 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 18, 1998 2 MCKESSON CORPORATION STATEMENTS OF CONSOLIDATED INCOME YEARS ENDED MARCH 31 ------------------------------- 1998 1997 1996 --------- --------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) REVENUES (Note 1).............................. $20,857.3 $15,710.8 $12,964.8 --------- --------- --------- COSTS AND EXPENSES (Note 3) Cost of sales.................................. 19,336.0 14,673.5 12,049.3 Selling........................................ 240.6 139.8 114.0 Distribution................................... 477.0 354.7 327.4 Administrative................................. 441.5 450.0 232.8 Interest....................................... 102.5 55.7 44.4 --------- --------- --------- Total...................................... 20,597.6 15,673.7 12,767.9 --------- --------- --------- INCOME BEFORE TAXES ON INCOME AND DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST... 259.7 37.1 196.9 Taxes on income (Note 13)...................... 98.6 31.3 76.2 --------- --------- --------- INCOME BEFORE DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST........................... 161.1 5.8 120.7 Dividends on preferred securities of subsidiary trust, net of $4.0 and $0.4 tax benefit (Note 9)..... (6.2) (0.7) -- --------- --------- --------- INCOME AFTER TAXES Continuing operations.......................... 154.9 5.1 120.7 Discontinued operations (Notes 2 and 7)........ -- 8.6 14.7 Discontinued operations--Gain on sale of Armor All stock (Notes 2 and 7) .............. -- 120.2 -- --------- --------- --------- NET INCOME..................................... $ 154.9 $ 133.9 $ 135.4 ========= ========= ========= EARNINGS PER COMMON SHARE Diluted Continuing operations........................ $ 1.59 $ 0.06 $ 1.29 Discontinued operations...................... -- 0.10 0.16 Discontinued operations--Gain on sale of Armor All stock............................. -- 1.35 -- --------- --------- --------- Total...................................... $ 1.59 $ 1.51 $ 1.45 ========= ========= ========= Basic Continuing operations........................ 1.69 $ 0.06 $ 1.36 Discontinued operations...................... -- 0.10 0.17 Discontinued operations--Gain on sale of Armor All stock............................. -- 1.41 -- --------- --------- --------- Total...................................... $ 1.69 $ 1.57 $ 1.53 ========= ========= ========= SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED Diluted........................................ 101.2 89.4 93.2 Basic.......................................... 91.5 85.5 88.8 See Financial Notes. 3 MCKESSON CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31 ---------------------------- 1998 1997 1996 -------- -------- -------- (IN MILLIONS, EXCEPT PAR VALUE) ASSETS Cash and cash equivalents........................ $ 35.7 $ 124.8 $ 260.8 Marketable securities available for sale (Note 1).............................................. 77.9 105.0 195.4 Receivables (Note 5)............................. 1,380.4 1,224.5 672.8 Inventories (Note 6)............................. 2,583.5 2,259.5 1,317.0 Prepaid expenses (Note 13)....................... 28.1 47.3 17.0 -------- -------- -------- Total current assets........................... 4,105.6 3,761.1 2,463.0 -------- -------- -------- Land............................................. 35.6 38.0 36.1 Buildings........................................ 225.9 208.5 205.8 Machinery and equipment.......................... 608.8 532.8 471.8 -------- -------- -------- Total property, plant and equipment............ 870.3 779.3 713.7 Accumulated depreciation......................... (440.0) (405.7) (357.7) -------- -------- -------- Net property, plant and equipment.............. 430.3 373.6 356.0 Goodwill and other intangibles................... 752.4 736.2 183.7 Net assets of discontinued operations (Notes 2 and 7).......................................... -- -- 125.7 Other assets (Notes 13 and 14)................... 319.2 301.9 231.8 -------- -------- -------- Total assets................................... $5,607.5 $5,172.8 $3,360.2 ======== ======== ======== LIABILITIES Drafts payable................................... $ 286.2 $ 210.7 $ 194.0 Accounts payable--trade.......................... 1,859.1 1,854.7 1,149.2 Short-term borrowings............................ -- 100.0 6.6 Current portion of long-term debt (Note 8)....... 10.0 60.3 21.1 Salaries and wages............................... 53.9 52.9 26.3 Taxes (Note 13).................................. 115.7 80.0 92.2 Interest and dividends........................... 29.5 21.3 19.0 Other............................................ 223.4 257.3 134.1 -------- -------- -------- Total current liabilities...................... 2,577.8 2,637.2 1,642.5 -------- -------- -------- Postretirement obligations and other noncurrent liabilities (Note 14)........................... 233.3 255.1 282.5 -------- -------- -------- Long-term debt (Note 8).......................... 1,194.2 824.9 370.6 -------- -------- -------- McKesson-obligated mandatorily redeemable preferred securities of subsidiary grantor trust whose sole assets are junior subordinated debentures of McKesson (Note 9)................. 195.4 194.8 -- -------- -------- -------- STOCKHOLDERS' EQUITY Common stock (200.0 shares authorized, 93.4, 92.8 and 90.9 issued as of March 31, 1998, 1997 and 1996, respectively; par value of $.01) (Note 12)............................................. 0.9 0.8 0.8 Additional paid-in capital....................... 440.7 408.2 332.0 Other capital.................................... (42.2) (19.2) (36.2) Retained earnings................................ 1,173.2 1,062.2 968.5 Accumulated translation adjustment............... (45.4) (44.6) (49.7) ESOP notes and guarantee (Note 14)............... (115.6) (118.3) (122.5) Treasury shares, at cost (Note 12)............... (4.8) (28.3) (28.3) -------- -------- -------- Stockholders' equity........................... 1,406.8 1,260.8 1,064.6 -------- -------- -------- Total liabilities and stockholders' equity..... $5,607.5 $5,172.8 $3,360.2 ======== ======== ======== See Financial Notes. 4 MCKESSON CORPORATION STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (SHARES IN THOUSANDS, DOLLARS IN MILLIONS) COMMON STOCK ADDITIONAL ------------- PAID-IN SHARES AMOUNT CAPITAL ------ ------ ---------- BALANCES, MARCH 31, 1995 (RESTATED FOR THE TWO-FOR-ONE SPLIT--NOTE 12)........................... 88,776 $0.8 $319.8 Issuance of shares under employee plans (Note 12)...... 2,124 (10.6) Purchase of shares .................................... ESOP note payments..................................... Translation adjustment................................. Unrealized gain on marketable securities............... Net income............................................. Other (Note 14)........................................ 22.8 Cash dividends declared Common, $0.50 per share.............................. ------ ---- ------ BALANCES, MARCH 31, 1996 (RESTATED FOR THE TWO-FOR-ONE SPLIT--NOTE 12)........................... 90,900 0.8 332.0 Issuance of shares under employee plans (Note 12)...... 204 (25.2) Purchase of shares..................................... ESOP note payments..................................... Translation adjustment................................. Unrealized gain on marketable securities............... Net income............................................. Acquisition of MGM..................................... 1,690 83.0 Other (Note 14)........................................ 18.4 Cash dividends declared Common, $0.50 per share.............................. ------ ---- ------ BALANCES, MARCH 31, 1997 (RESTATED FOR THE TWO-FOR-ONE SPLIT--NOTE 12)........................... 92,794 0.8 408.2 Issuance of shares under employee plans (Note 12)...... 605 0.1 16.2 ESOP note payments..................................... Translation adjustment................................. Net income............................................. Other (Note 14)........................................ 16.3 Cash dividends declared Common, $0.50 per share.............................. ------ ---- ------ BALANCES, MARCH 31, 1998............................... 93,399 $0.9 $440.7 ====== ==== ====== See Financial Notes. 5 TREASURY -------------- ACCUMULATED ESOP OTHER RETAINED TRANSLATION NOTES AND COMMON STOCKHOLDERS' CAPITAL EARNINGS ADJUSTMENT GUARANTEE SHARES AMOUNT EQUITY - ------- -------- ----------- --------- ------ ------ ------------- $ (4.1) $ 875.5 $(51.6) $(126.4) (28) $ (0.5) $1,013.5 (4.0) 1,522 34.9 20.3 (2,698) (62.7) (62.7) 3.9 3.9 1.9 1.9 (0.8) (0.8) 135.4 135.4 (27.3) 2.3 (2.2) (44.7) (44.7) - ------ -------- ------ ------- ------ ------ -------- (36.2) 968.5 (49.7) (122.5) (1,204) (28.3) 1,064.6 (7.5) 2,868 66.0 33.3 (6,780) (155.7) (155.7) 4.2 4.2 5.1 5.1 (1.1) (1.1) 133.9 133.9 3,892 89.7 172.7 25.6 3.1 47.1 (43.3) (43.3) - ------ -------- ------ ------- ------ ------ -------- (19.2) 1,062.2 (44.6) (118.3) (1,224) (28.3) 1,260.8 (19.7) 1,045 23.5 20.1 2.7 2.7 (0.8) (0.8) 154.9 154.9 (3.3) 2.4 15.4 (46.3) (46.3) - ------ -------- ------ ------- ------ ------ -------- $(42.2) $1,173.2 $(45.4) $(115.6) (179) $ (4.8) $1,406.8 ====== ======== ====== ======= ====== ====== ======== 6 MCKESSON CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS YEARS ENDED MARCH 31 --------------------------- 1998 1997 1996 ------- --------- ------- (IN MILLIONS) OPERATING ACTIVITIES Income from continuing operations................. $ 154.9 $ 5.1 $ 120.7 Adjustments to reconcile to net cash provided by operating activities: Depreciation..................................... 70.3 65.4 57.2 Amortization of intangibles...................... 16.9 6.4 7.0 Provision for bad debts.......................... 10.2 23.0 13.7 Deferred taxes on income......................... 66.4 (1.6) 42.9 Gain on sale of subsidiary....................... -- -- (11.2) Other noncash (Note 3)........................... 18.8 125.0 (7.4) ------- --------- ------- Total......................................... 337.5 223.3 222.9 ------- --------- ------- Effects of changes in: Receivables..................................... (124.0) (129.5) -- Inventories..................................... (292.2) (332.6) (239.6) Accounts and drafts payable..................... 84.4 521.0 103.9 Taxes........................................... 75.5 (39.0) (13.1) Other........................................... (76.6) (16.6) (62.9) ------- --------- ------- Total......................................... (332.9) 3.3 (211.7) ------- --------- ------- NET CASH PROVIDED BY CONTINUING OPERATIONS.... 4.6 226.6 11.2 Discontinued operations (Notes 2 and 7)........... (2.4) 11.5 (7.4) ------- --------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES..... 2.2 238.1 3.8 ------- --------- ------- INVESTING ACTIVITIES Purchases of marketable securities................ (1.3) (103.1) (130.6) Maturities of marketable securities............... 32.7 198.2 244.8 Property acquisitions............................. (130.0) (76.9) (73.6) Properties sold................................... 8.4 3.6 6.7 Proceeds from sales of subsidiaries and investments (Note 2)............................. 1.8 300.7 36.1 Acquisitions of businesses, less cash and short- term investments acquired (Note 2)............... (102.4) (1,209.5) (33.5) Investing activities of discontinued operations... -- (4.2) (4.4) Other............................................. (94.4) (73.0) (49.5) ------- --------- ------- NET CASH USED BY INVESTING ACTIVITIES......... (285.2) (964.2) (4.0) ------- --------- ------- FINANCING ACTIVITIES (Notes 8, 9 and 12) Proceeds from issuance of debt.................... 445.8 1,118.2 0.6 Proceeds from issuance of trust convertible preferred securities, net of issuance costs...... -- 195.1 -- Repayment of debt................................. (211.7) (551.9) (19.1) Capital stock transactions........................ Issuances........................................ 11.3 27.4 19.2 Share repurchases................................ -- (155.7) (62.7) ESOP note payments............................... 2.7 4.2 3.9 Dividends paid................................... (46.3) (43.3) (44.2) Other............................................. (7.9) (3.9) 0.2 ------- --------- ------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................................... 193.9 590.1 (102.1) ------- --------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS......... (89.1) (136.0) (102.3) Cash and Cash Equivalents at beginning of year.... 124.8 260.8 363.1 ------- --------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 35.7 $ 124.8 $ 260.8 ======= ========= ======= See Financial Notes. 7 FINANCIAL NOTES 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 United States 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, 1998, the fair value approximated the amortized cost of these securities. The investments mature on various dates through fiscal 1999. 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 ranging from one to 45 years. Capitalized Software included in other assets reflects costs related to internally developed or purchased software for projects in excess of $1 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 arising from the acquisition of the FoxMeyer business is being amortized over a five year period (see Note 2). Accumulated amortization balances netted against goodwill and other intangibles were $78.1 million, $61.2 million, and $54.8 million at March 31, 1998, 1997 and 1996, respectively. Long-lived Assets. The Company periodically assesses the recoverability of the cost of its long-lived assets, including goodwill, based on a review of projected undiscounted cash flows associated with these assets. These cash flows are prepared and reviewed by management in connection with the Company's annual long range planning process. See Note 3 for charges the Company recorded in fiscal 1997 related to impairment of assets. 8 FINANCIAL NOTES--(CONTINUED) 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. Included in revenues are large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of products to the customers' warehouses. These sales totaled $2.7 billion in 1998, $2.8 billion in 1997 and $3.0 billion in 1996. Previously only the gross margin from such sales had been classified in revenues. Such sales have been reclassified into revenues and cost of sales for all periods presented. Also included in revenues is interest income of $12.9 million, $14.5 million, and $37.8 million in fiscal 1998, 1997 and 1996, 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 13. Foreign Currency Translation. Assets and liabilities of the Company's foreign affiliates are translated at current exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments related to the Company's Canadian operation are reported as a component of stockholders' equity. The Company has a 23% equity interest in a pharmaceutical distributor in Mexico, which has been designated a "highly inflationary economy" effective January 1, 1997. Accordingly, adjustments associated with the translation of this entity's financial statements have been reflected in the Company's consolidated statement of income since that date. Prior to January 1, 1997, translation adjustments associated with this entity were reported as a component of stockholders' equity. Derivative Financial Instruments. The Company has entered into interest rate and currency swap agreements to hedge certain interest and currency rate risks which are accounted for using the settlement basis of accounting. As such, no gains or losses are recorded for movements in the swaps' values during the terms of the respective agreements. Employee Stock Options. The Company uses the intrinsic value method to account for stock-based compensations in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 12 for the disclosures of pro forma earnings and earnings per share had the fair value method been used to account for stock-based employee compensation plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." Accounting Change. In fiscal 1998, the Company adopted SFAS No. 128 "Earnings per Share" which requires a dual presentation of basic and diluted earnings per share ("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 would occur if securities or other contracts to issue common stock were exercised or converted into common stock. All share and per share amounts have been restated in accordance with the provisions of SFAS No. 128. See Note 12. 9 FINANCIAL NOTES--(CONTINUED) New Accounting Pronouncements. In fiscal 1998, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income," which requires that an enterprise report, by major component and as a single total, the change in its net assets during the period from nonowner sources; SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information, " which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers; and SFAS No. 132 "Employers' Disclosures about Pension and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits and expands disclosures on changes in benefit obligations and fair values of plan assets. The Company plans to implement these statements in fiscal 1999. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. 2. ACQUISITIONS, INVESTMENTS AND DIVESTITURES In August 1997, the Company's Canadian health care distribution business, Medis Health and Pharmaceutical Services Inc. ("Medis") announced an agreement with Drug Trading Company, Limited ("Drug Trading") to transition Drug Trading's retail customers to Medis over a transition period. The Company acquired assets consisting primarily of accounts receivable, inventories and customer contracts, for approximately $83 million in cash. The transaction was funded with proceeds from operations and short-term borrowings. This acquisition was accounted for under the purchase accounting method and the excess of the purchase price over the fair value of the net assets acquired of $9.2 million is being amortized on a straight-line basis over 40 years. The purchase price allocation is based on preliminary estimates and may be subject to revision. In fiscal 1998, the Company also made a number of smaller acquisitions including six distributors of first-aid products, two distributors of medical- surgical supplies, and a pharmaceuticals distributor. The aggregate cost of these acquisitions, accounted for as purchases, amounted to approximately $20 million. On February 21, 1997, the Company acquired General Medical Inc. ("MGM") for approximately $775 million including the issuance of approximately 5.6 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. MGM is a multi-market distributor of medical-surgical supplies to acute-care, physician-care, and extended-care markets. This acquisition was accounted for under the purchase method and the results of operations of MGM have been included in the consolidated financial statements since the date of acquisition. The valuation of the MGM 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 $1.0 million and $7.3 million remained outstanding as of March 31, 1998 and 1997, respectively. Changes to the reserve in fiscal 1998 consisted primarily of cash payments for severance benefits and costs to close down duplicate facilities. 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. 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 10 FINANCIAL NOTES--(CONTINUED) 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 3, as a result of the FoxMeyer acquisition, management 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 was reflected in the valuation of the FoxMeyer net assets acquired. The plan to consolidate the FoxMeyer business was developed and executed during the latter part of fiscal 1997 and 1998. Liabilities of $37.6 million were recognized for costs associated with closures of duplicate distribution centers and workforce reductions of which $3.0 million and $21.9 million remained outstanding as of March 31, 1998 and 1997, respectively. Reductions in the reserves in fiscal 1998 consisted primarily of cash payments for severance benefits and costs related to FoxMeyer facility closures. 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 expected to be retained for use by the Company, was initially estimated at $50 million (negative goodwill). In fiscal 1998, the estimates were finalized resulting in a $22 million increase in goodwill (reduction in negative goodwill) primarily for reserves for out of date and slow-moving inventory at the acquisition date and additional liabilities assumed in the transaction. The negative goodwill is being amortized over 5 years. The following unaudited pro forma information has been prepared assuming FoxMeyer and MGM had been acquired as of the beginning of fiscal 1996: MARCH 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenues................................................ $17,398.8 $16,992.8 Net income (loss)....................................... (269.3) 79.3 Earnings (loss) per share Diluted............................................... (3.15) 0.85 Basic................................................. (3.15) 0.89 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 MGM 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. ("MAH") for $61.4 million in cash and the assumption of $3.2 million of employee stock incentives. MAH 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, MAH's results are included in the consolidated financial statements since the date of acquisition. The results of operations of MAH 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 MAH allocated to technology for which technological feasibility had not been established as of the acquisition 11 FINANCIAL NOTES--(CONTINUED) 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. In fiscal 1996, the Company acquired McKesson BioServices, a provider of support services to commercial, non-profit and governmental organizations engaged in drug and biomedical development for $20 million. 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 certain assets recorded in the third quarter of fiscal 1997; see Note 3. 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 8. 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. 3. CHARGES AND GAINS IN CONTINUING OPERATIONS Fiscal 1998 On September 23, 1997, the Company and AmeriSource Health Corporation ("AmeriSource"), a leading U.S. wholesale distributor of pharmaceutical and related health care products and services, jointly announced the execution of a definitive Merger Agreement providing for the Company to acquire AmeriSource. On March 3, 1998, the Federal Trade Commission voted to block the proposed merger. On March 9, 1998, the FTC filed a complaint with the United States District Court of the District of Columbia seeking a preliminary injunction to halt the merger. On March 18, 1998, the Company and AmeriSource each announced that they will oppose the FTC's motion for preliminary injunction. A full hearing on the FTC's motion is expected to begin June 9, 1998. Although the merger and transactions contemplated thereby have been approved by stockholders of both companies, there can be no assurance that McKesson and AmeriSource will prevail in their opposition of the FTC's request for a preliminary injunction, that the merger will be completed, or that it will be completed as contemplated or what the results of the merger might be. In light of this uncertainty, management deemed it appropriate to write off transaction costs incurred to date of $16.7 million. In addition, the Company took a pre-tax charge of $10.5 million for costs associated with the integration and rationalization of recent acquisitions into the Company's operations including workforce 12 FINANCIAL NOTES--(CONTINUED) reductions designed to reduce cost structure. Approximately $9.4 million of the $10.5 million charge is for severance and related benefits. The Company also incurred a charge of $3.4 million pre-tax in the Health Care Services segment related primarily to the sale of an investment. The above discussed charges totaling $30.6 million, $25.4 million after-tax, have been recorded in selling, distribution and administrative expenses. In addition, the Company recognized a favorable one-time tax adjustment of $4.6 million associated with the completion of tax audits for certain prior years. The favorable tax adjustment was a non-cash transaction. There were no significant changes in estimates or recharacterization of other amounts from prior restructuring reserves in fiscal 1998. 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. In fiscal 1997, management reassessed the Company's operations, distribution center network and business strategies, including program offerings in light of the FoxMeyer acquisition. A plan was developed and executed during the latter part of fiscal 1997 and fiscal 1998 to optimize the network configuration from the combined distribution centers of the Company and those acquired in the transaction which has resulted in the consolidation and closure of 15 distribution centers, workforce reductions, and disposal of excess, duplicate assets. Management 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, that would no longer be pursued as originally contemplated. Other duplicate, common purpose assets including administrative facilities, software, and other equipment were reviewed to identify the optimum mix for the combined companies. This resulted in the impairment in the value of certain assets which were not retained or utilized as originally intended. The foregoing was reflected in the valuation of the FoxMeyer assets acquired and liabilities assumed, 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 were recorded in selling, distribution, and administrative expenses and are summarized below: Development costs and investments associated with program offerings that are no longer being 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 are to be disposed of.................................................... 10.1 Receivable reserves................................................... 15.1 Other operating items................................................. 16.3 ----- $98.8 ===== The write-downs associated with assets to be disposed of and asset impairments due to changed business conditions were based primarily on independent appraisals. Substantially all of the charges represented the write-down of existing balances and were, accordingly, noncash. Balances remaining 13 FINANCIAL NOTES--(CONTINUED) 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 other significant changes in estimates or recharacterization of other amounts from the prior restructuring reserves. Also included in the charge for facilities closures was $7.2 million for Medis which had restructured its distribution operations and network following a significant change in its customer mix. The charge related to receivable reserves resulted 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 included 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 Services business consisted 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. Summary of Reserve Balances The remaining balances outstanding for the combined reserves at March 31, 1998 and 1997 are as follows: MARCH 31 ----------- 1998 1997 ----- ----- Costs of facilities closure and surplus properties, primarily write-down of assets which will no longer be utilized and will be disposed of................................................. $17.4 $27.8 Severance costs for announced workforce reductions.............. 6.6 -- ----- ----- $24.0 $27.8 ===== ===== The disposition of properties in connection with facilities closures is expected to be completed over the next one to two years. Charges to the restructuring reserve in fiscal 1998, 1997 and 1996 consisted primarily of asset write-offs (substantially all of which are non-cash) and cash payments for severance of $1.7 million and asset holding costs of $1.9 million in fiscal 1998, and for severance of $2.0 million and $5.2 million in fiscal 1997 and 1996, respectively. 4. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK Trade receivables subject the Company to a concentration of credit risk with customers in the retail and institutional sectors. This risk is spread over a large number of geographically dispersed customers. The Company sold $299.9 million and $147.4 million at March 31, 1998 and 1997, respectively, of trade receivables at amounts approximating their fair value to a bank. Proceeds received by the Company on sales of accounts receivable with recourse to the Company for certain uncollectible amounts totaled $105 million in 1996. The Company's Canadian subsidiary, Medis, has agreements with certain of its customers' financial institutions to repurchase inventory in the event the customers are unable to meet certain obligations to the financial institutions. Medis has also agreed to guarantee the payment of a major customer's leases. The amounts related to these guarantees were approximately $55.7 million for the inventory and $12 million for the lease obligations at March 31, 1998. 14 FINANCIAL NOTES--(CONTINUED) 5. RECEIVABLES MARCH 31 -------------------------- 1998 1997 1996 -------- -------- ------ (IN MILLIONS) Customer accounts................................ $1,249.4 $1,180.4 $631.7 Other............................................ 189.0 88.0 79.2 -------- -------- ------ Total.......................................... 1,438.4 1,268.4 710.9 Allowances....................................... (58.0) (43.9) (38.1) -------- -------- ------ Net............................................ $1,380.4 $1,224.5 $672.8 ======== ======== ====== The allowances are for uncollectible accounts, discounts, returns and other adjustments. 6. INVENTORIES The LIFO method was used to value approximately 83%, 84% and 90% of the inventories at March 31, 1998, 1997, and 1996, respectively. Inventories before the LIFO cost adjustment, which approximates replacement cost, were $2,825.3, $2,538.6 and $1,602.5 million at March 31, 1998, 1997 and 1996, respectively. 7. DISCONTINUED OPERATIONS The net assets (liabilities) of discontinued operations at March 31 were as follows: 1998 1997 1996 ----- ----- ------- (IN MILLIONS) Total assets.......................................... $ 1.9 $ 2.5 $ 275.5 Total liabilities..................................... (2.8) (5.8) (149.8) ----- ----- ------- Net assets (liabilities)............................ $(0.9) $(3.3) $ 125.7 ===== ===== ======= At March 31, 1998 and 1997, net liabilities of discontinued operations are included in other current liabilities. Assets consist primarily of land held for sale and investments in affiliates. Liabilities consist primarily of other accrued liabilities. At March 31, 1996, 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: 1998 1997 1996 ----- ------ ------ (IN MILLIONS) Revenues............................................. $ 0.2 $592.1 $749.6 ===== ====== ====== Discontinued operations before taxes................. $ 0.1 $ 17.2 $ 31.7 Provision for taxes on income........................ (0.1) (5.6) (13.7) Minority interest in Armor All....................... -- (3.0) (3.3) ----- ------ ------ Discontinued operations............................ -- 8.6 14.7 ----- ------ ------ Gain on sale of Armor All stock...................... -- 154.5 -- Tax expense.......................................... -- (34.3) -- ----- ------ ------ Discontinued operations--gain on sale of Armor All stock............................................. -- 120.2 -- ----- ------ ------ Total............................................ $ -- $128.8 $ 14.7 ===== ====== ====== 15 FINANCIAL NOTES--(CONTINUED) 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. 8. LONG-TERM DEBT MARCH 31 ---------------------- 1998 1997 1996 -------- ------ ------ (IN MILLIONS) ESOP related debt..................................... $ 115.6 $118.3 $122.5 4.50% exchangeable subordinated debentures due 2004... 113.3 160.4 180.0 8.625% Notes due 1998................................. -- 49.0 49.0 8.75% Notes due 1997.................................. -- -- 10.0 6.60% Notes due 2000.................................. 175.0 175.0 -- 6.875% Notes due 2002................................. 175.0 175.0 -- 6.55% Notes due 2002.................................. 125.0 -- 6.30% Notes due 2005.................................. 150.0 -- -- 6.40% Notes due 2008.................................. 150.0 -- -- 7.65% Debentures due 2027............................. 175.0 175.0 -- 3.65% to 5.70% IDRBs due through 2026................. 17.8 21.4 20.0 Capital lease obligations (averaging 8.5%)............ 3.9 4.2 4.4 Other, 6.0% to 12.125%, due through 2021.............. 3.6 6.9 5.8 -------- ------ ------ Total............................................. 1,204.2 885.2 391.7 Less current portion.................................. 10.0 60.3 21.1 -------- ------ ------ Total............................................. $1,194.2 $824.9 $370.6 ======== ====== ====== The Company has a revolving credit agreement with certain U.S. and Canadian banks whereby the banks commit $250 million borrowing availability at the reference rate (8.50% at March 31, 1998) 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 of $500 million for general working capital purposes in the form of two facilities with a duration of 364 days or less. At March 31, 1998, the Company had $750 million of unused borrowing capacity under these agreements. Total interest payments were $94.4 million, $53.6 million, and $47.5 million in fiscal 1998, 1997 and 1996, respectively. ESOP related debt (see Note 14) 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, 1998 marketable securities balance includes $76.7 million held in trust as exchange property for the 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 the exchangeable subordinated debentures. Through March 31, 1998, the Company repurchased $66.7 million of the exchangeable subordinated debentures. 16 FINANCIAL NOTES--(CONTINUED) In fiscal 1998, the Company issued fixed rate, unsecured unsubordinated debt totaling $300 million. The 6.3% notes mature on March 1, 2005 and the 6.4% notes mature on March 1, 2008. In addition, a wholly-owned subsidiary of the Company issued $125 million of 6.55% senior notes due November 1, 2002 which are guaranteed by the Company. Certain debt agreements require that the Company's total debt not exceed 56.5% of total capitalization (total debt plus equity). At March 31, 1998, the Company was in compliance with its debt covenants. In fiscal 1998, the Company entered into two interest rate swap agreements, each with a notional principal amount of $150 million. The swaps mature in 2005 and 2008 and swap fixed interest payments of 6.30% and 6.40%, respectively, for floating interest payments based on a LIBOR index; the floating rates at March 31, 1998 were 4.92% and 4.82%, respectively. These swaps have an imbedded interest rate cap of 7%. Also in fiscal 1998, a subsidiary of the Company entered into a currency swap agreement to convert the $125 million proceeds from the issuance of senior notes to $173 million Canadian currency, which was used to pay down short-term borrowings of the Company's Canadian subsidiary, Medis. This swap matures on November 1, 2002. Aggregate annual payments on long-term debt and capitalized lease obligations (see Note 10) for the years ending March 31 are: LONG-TERM CAPITAL DEBT LEASES TOTAL --------- ------- -------- (IN MILLIONS) 1999.............................................. $ 9.7 $0.3 $ 10.0 2000.............................................. 185.5 0.3 185.8 2001.............................................. 11.3 0.4 11.7 2002.............................................. 187.1 0.4 187.5 2003.............................................. 138.2 0.4 138.6 Later years....................................... 668.5 2.1 670.6 -------- ---- -------- Total........................................... $1,200.3 $3.9 $1,204.2 ======== ==== ======== 9. CONVERTIBLE PREFERRED SECURITIES In February 1997, a wholly-owned subsidiary trust of the Company issued 4 million shares of preferred securities to the public and 123,720 common securities to the Company, which are convertible at the holder's option into McKesson common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregate principal amount of the Company's 5% Convertible Junior Subordinated Debentures due 2027 (the "Debentures"). The Debentures represent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payable quarterly and are redeemable by the Company beginning in March 2000 at 103.5% of the principal amount thereof. Holders of the securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security is convertible at the rate of 1.3418 shares of McKesson common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are callable by the Company at 103.5% of the liquidation amount beginning in March 2000. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the "Guarantee"). The Guarantee, when taken together with the Company's obligations under the Debentures and in the indenture pursuant to which the Debentures were issued and the Company's obligations under the Amended and Restated Declaration of Trust governing the subsidiary trust, provides a full and unconditional guarantee of amounts due on the preferred securities. The Debentures and related trust investment in the Debentures have been eliminated in consolidation and the preferred securities reflected as outstanding in the accompanying consolidated financial statements. 17 FINANCIAL NOTES--(CONTINUED) 10. 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 $2.9 million, $3.0 million, and $3.3 million at March 31, 1998, 1997 and 1996, respectively. Amortization of capital leases is included in depreciation expense. As of March 31, 1998, future minimum lease payments and sublease rentals in years ending March 31 are: NON- NON- CANCELABLE CANCELABLE OPERATING SUBLEASE CAPITAL LEASES RENTALS LEASES ---------- ---------- ------- (IN MILLIONS) 1999........................................... $ 42.0 $ 3.9 $0.7 2000........................................... 36.3 3.3 0.7 2001........................................... 31.6 2.8 0.6 2002........................................... 26.1 2.6 0.6 2003........................................... 21.8 2.2 0.6 Later years.................................... 64.4 4.6 2.8 ------ ----- ---- Total minimum lease payments................... $222.2 $19.4 6.0 ====== ===== Less amounts representing interest............. 2.1 ---- Present value of minimum lease payments........ $3.9 ==== Rental expense was $52.9 million, $33.7 million, and $26.1 million in fiscal 1998, 1997 and 1996, 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. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS At March 31, 1998, 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 AMOUNT FAIR VALUE -------- ---------- (IN MILLIONS) Cash and cash equivalents................................ $ 35.7 $ 35.7 Marketable securities.................................... 77.9 77.9 Long-term debt, including current portion................ 1,204.2 1,177.3 Interest rate swaps...................................... -- (5.1) Foreign currency rate swap............................... -- 4.0 The estimated fair values were determined as follows: Cash and cash equivalents: carrying amounts approximate fair value. Marketable securities and long-term debt: quoted market prices or market comparables. Interest and foreign currency rate swaps: quoted market prices or market comparables. 18 FINANCIAL NOTES--(CONTINUED) 12. STOCKHOLDERS' EQUITY On October 29, 1997, the Company's board of directors declared a two-for-one split of the Company's common stock. The split was effective January 2, 1998 for shareholders of record on December 1, 1997. All share and per share amounts have been restated for the split. At March 31, 1998, 1997, and 1996, 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 93,220,000 shares, 91,570,000 shares and 89,696,000 shares were outstanding net of treasury stock, respectively. In October 1994, the Company's Board of Directors declared a dividend distribution of one right (a "Right") for each then outstanding share of common stock and authorized the issuance of one Right for each share subsequently issued to purchase, upon the occurrence of certain specified triggering events, a unit consisting of one one hundredth of a share of Series A Junior Participating Preferred Stock. Triggering events include, without limitation, the acquisition by another entity of 15% or more of the Company's common stock without the prior approval of the Company's Board. The Rights have certain anti-takeover effects and will cause substantial dilution to the ownership interest of a person or group that attempts to acquire the Company on terms not approved by the Board. The rights expire in 2004 unless redeemed earlier by the Board. As a result of the two-for-one stock split described above, each share of common stock now has attached to it one-half of a Right. The Company adopted SFAS No. 128, "Earnings per Share," in the third quarter of the current fiscal year. All earnings and share amounts have been restated in accordance with the provisions of SFAS No. 128. 19 FINANCIAL NOTES--(CONTINUED) The following is a reconciliation of the numerators and denominators of the basic and diluted per-share computations for income from continuing operations: 1998 ------------------------------------------ INCOME SHARES PER SHARE ------------- ------------ -------------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Basic EPS Income from continuing operations...................... $ 154.9 91.5 $ 1.69 ============ Effect of Dilutive Securities Options to purchase common stock. -- 3.9 Trust convertible preferred securities...................... 6.2 5.4 Restricted stock................. -- 0.4 ------------- ------------ Diluted EPS Income available to common stockholders plus assumed conversions..................... $ 161.1 101.2 $ 1.59 ============= ============ ============ 1997 ------------------------------------------ INCOME SHARES PER SHARE ------------- ------------ -------------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Basic EPS Income from continuing operations...................... $ 5.1 85.5 $ 0.06 ============ Effect of Dilutive Securities Options to purchase common stock. -- 3.2 Trust convertible preferred securities...................... 0.7 0.6 Restricted stock................. -- 0.1 ------------- ------------ Diluted EPS Income available to common stockholders plus assumed conversions..................... $ 5.8 89.4 $ 0.06 ============= ============ ============ 1996 ------------------------------------------ INCOME SHARES PER SHARE ------------- ------------ -------------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Basic EPS Income from continuing operations...................... $ 120.7 88.8 $ 1.36 ============ Effect of Dilutive Securities Options to purchase common stock. -- 4.3 Restricted stock................. -- 0.1 ------------- ------------ Diluted EPS Income available to common stockholders plus assumed conversions..................... $ 120.7 93.2 $ 1.29 ============= ============ ============ The Company's stock-based compensation plan, the 1994 Stock Option and Restricted Stock Plan provides grants of nonqualified stock options to employees of the Company, and, until January 1, 1997 to non-employee directors. After January 1, 1997, all non-employee directors receive grants under the 1997 Director's Equity Compensation and Deferral Plan. Most grants under the Director's Equity Compensation and Deferral Plan vest immediately on grant date. Most other options generally vest over four years and all options expire ten years after the grant date. Under the plans, the Company is authorized to grant up to 30 million shares, including 25.6 million for options as of March 31, 1998. 20 FINANCIAL NOTES--(CONTINUED) The following is a summary of options outstanding at March 31, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- --------------------- WEIGHTED- NUMBER OF AVERAGE WEIGHTED- NUMBER OF WEIGHTED- OPTIONS REMAINING AVERAGE OPTIONS AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT YEAR END LIFE PRICE AT YEAR END PRICE - --------------- ----------- ----------- --------- ----------- --------- (IN YEARS) $0.01 to $10.56......... 3,965,846 5.01 $6.79 3,895,723 $ 6.87 $11.61 to $20.13........ 997,067 6.77 17.28 684,650 17.37 $21.38 to $27.88........ 4,332,118 8.41 26.39 1,117,370 25.64 $31.94 to $44.75........ 1,033,650 9.12 40.97 74,100 36.34 $50.38 to $59.06........ 1,703,847 9.82 50.78 -- -- ---------- --------- 12,032,528 7.41 23.88 5,771,843 12.13 ========== ========= Expiration dates range from July 28, 1998 to March 25, 2008. The following is a summary of changes in the options for the stock option plans: 1998 1997 1996 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year................ 10,861,116 $17.00 9,940,806 $11.31 12,254,322 $ 7.98 Assumed through acquisition............ -- -- 125,098 1.08 -- -- Granted................. 2,555,747 48.04 3,465,948 27.36 1,768,400 24.76 Exercised............... (1,127,316) 12.05 (2,319,292) 7.49 (3,524,894) 6.34 Canceled................ (257,019) 25.28 (351,444) 15.26 (557,022) 11.65 ---------- ---------- ---------- Outstanding at year end. 12,032,528 23.88 10,861,116 17.00 9,940,806 11.31 ========== ========== ========== Exercisable at year end. 5,771,843 12.13 4,880,080 9.24 4,418,920 7.28 ========== ========== ========== 21 FINANCIAL NOTES--(CONTINUED) Pursuant to SFAS No. 123, the Company has elected to account for its stock- based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized in the consolidated financial statements for the stock option plans. Had compensation cost for the stock option plan been recognized based on the fair value at the grant dates for awards under those plans, consistent with the provision of SFAS No. 123, net income and earnings per share would have been as indicated in the table below. Since pro forma compensation cost relates to all periods over which the awards vest, the initial impact on pro forma 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 -------------------- 1998 1997 1996 ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net income As reported........................................... $154.9 $133.9 $135.4 Pro forma............................................. 144.7 130.0 134.9 Earnings per common share--diluted As reported........................................... $ 1.59 $ 1.51 $ 1.45 Pro forma............................................. 1.49 1.46 1.45 Earnings per common share--basic As reported........................................... $ 1.69 $ 1.57 $ 1.53 Pro forma............................................. 1.58 1.52 1.52 Fair values of the options were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: YEARS ENDED MARCH 31 ---------------- 1998 1997 1996 ---- ---- ---- Expected stock price volatility............................ 23.8% 25.6% 25.6% Expected dividend yield.................................... 1.5% 1.5% 1.5% Risk-free interest rate.................................... 5.6% 6.2% 5.2% Expected life (in years)................................... 5 5 5 The weighted average grant date fair values of the options granted during 1998, 1997 and 1996 were $16.06, $7.06 and $5.66 per share, respectively. 22 FINANCIAL NOTES--(CONTINUED) 13. TAXES ON INCOME The provision for income taxes related to continuing operations consists of the following: 1998 1997 1996 ----- ----- ----- (IN MILLIONS) CURRENT Federal................................................... $13.2 $26.6 $23.3 State and local........................................... 9.5 2.9 5.0 Foreign................................................... 9.5 3.4 5.0 ----- ----- ----- Total current........................................... 32.2 32.9 33.3 ----- ----- ----- DEFERRED Federal................................................... 58.2 (3.2) 27.2 State..................................................... 8.2 2.2 7.5 Foreign................................................... -- (0.6) 8.2 ----- ----- ----- Total deferred.......................................... 66.4 (1.6) 42.9 ----- ----- ----- Total provision......................................... $98.6 $31.3 $76.2 ===== ===== ===== 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 $21.4 million, $12.1 million, and $26.2 million in fiscal 1998, 1997 and 1996, respectively. The reconciliation between the Company's effective tax rate on income from continuing operations and the statutory Federal income tax rate follows: 1998 1997 1996 ---- ---- ---- Statutory federal income tax rate......................... 35.0% 35.0% 35.0% State and local income taxes net of federal tax benefit... 4.5 9.1 4.1 Nondeductible charge for the write-off of in-process technology............................................... -- 45.5 -- AmeriSource merger costs.................................. 2.2 -- -- Nondeductible amortization................................ 2.2 5.3 1.1 Nontaxable income--life insurance......................... (1.6) (7.0) (0.9) Favorable tax adjustment.................................. (1.8) -- -- Dividends paid deduction--ESOP allocated shares........... (0.4) (2.5) (0.5) Tax-advantaged debt issuance.............................. (0.4) -- -- Other--net................................................ (1.7) (1.0) (0.1) ---- ---- ---- Effective tax rate........................................ 38.0% 84.4% 38.7% ==== ==== ==== Income tax payments were $34 million, $76 million, and $97 million in fiscal 1998, 1997 and 1996, respectively. 23 FINANCIAL NOTES--(CONTINUED) As of March 31, the deferred tax balances consisted of the following: 1998 1997 1996 ------- ------- ------- (IN MILLIONS) ASSETS Nondeductible accruals for environmental obliga- tions.............................................. $ 8.9 $ 10.6 $ 11.9 Receivable reserves................................. 24.2 17.6 13.8 Compensation and benefit-related accruals........... 19.4 16.5 16.1 Loss and credit carryforwards....................... 39.3 9.4 -- Costs associated with duplicate facility closures and workforce reductions related to acquired businesses......................................... 2.4 11.7 -- Other............................................... 18.2 17.6 5.8 ------- ------- ------- Current............................................. 112.4 83.4 47.6 ------- ------- ------- Nondeductible accruals for: Postretirement and postemployment plans........... 68.8 76.2 76.6 Deferred compensation............................. 30.9 33.0 29.0 Costs associated with facility closures and surplus properties and asset write-downs......... 7.0 11.1 10.4 Retirement plan..................................... -- -- 6.0 Systems development costs........................... -- 11.8 -- Loss and credit carryforwards....................... 10.1 1.7 9.7 Other............................................... 14.3 15.3 17.0 ------- ------- ------- Noncurrent.......................................... 131.1 149.1 148.7 ------- ------- ------- Total............................................. $ 243.5 $ 232.5 $ 196.3 ======= ======= ======= LIABILITIES Basis differences for inventory valuation........... $(139.1) $ (70.1) $ (38.8) Other............................................... (4.1) (5.2) (5.9) ------- ------- ------- Current............................................. (143.2) (75.3) (44.7) ------- ------- ------- Accelerated depreciation............................ (38.0) (38.2) (43.6) Systems development costs........................... (35.2) -- (14.5) Retirement plan..................................... (13.5) (8.5) -- Other............................................... (4.8) (10.7) (9.9) ------- ------- ------- Noncurrent.......................................... (91.5) (57.4) (68.0) ------- ------- ------- Total............................................. $(234.7) $(132.7) $(112.7) ======= ======= ======= Total net current--included in (taxes payable) pre- paid expenses...................................... $ (30.8) $ 8.1 $ 2.9 ======= ======= ======= Total net noncurrent (included in other assets)..... $ 39.6 $ 91.7 $ 80.7 ======= ======= ======= 14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Pension Plans On December 31, 1996, substantially all full-time employees of the Company were covered under either the Company-sponsored defined benefit retirement plan or by bargaining unit sponsored multi-employer plans. On that date, the Company amended the Company-sponsored defined benefit plan to freeze all plan benefits based on each employee's plan compensation and creditable service accrued to that date. The benefits for such Company-sponsored plans are based primarily on age of employees at date of retirement, years of service and employees' pay during the five years prior to employment. 24 FINANCIAL NOTES--(CONTINUED) 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. Net pension expense (income) for the Company-sponsored defined benefit retirement plan and executive supplemental retirement plan consisted of the following: 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Service cost--benefits earned during the year...... $ 0.7 $ 5.4 $ 5.3 Interest cost on projected benefit obligation...... 22.6 23.6 23.7 Return on assets --actual income................................... (55.4) (35.5) (51.6) --deferred gain................................... 30.6 12.1 31.2 Amortization of unrecognized loss and prior service costs............................................. 0.8 5.9 4.5 Amortization of unrecognized net transition asset.. (2.5) (2.5) (2.5) Curtailment loss recognized in connection with the December 31, 1996 plan amendment.................. -- 0.4 -- ------ ------ ------ Net pension expense (income)...................... $ (3.2) $ 9.4 $ 10.6 ====== ====== ====== 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: 1997 1996 1995 ------ ------ ------- (IN MILLIONS) Actuarial present value of benefit obligations Vested benefits.................................. $266.0 $246.0 $ 249.8 Nonvested benefits............................... 9.8 13.9 14.1 ------ ------ ------- Accumulated benefit obligation................... 275.8 259.9 263.9 Effect of assumed increase in future compensation levels.......................................... -- -- 20.7 ------ ------ ------- Projected benefit obligation for services rendered to date................................ 275.8 259.9 284.6 Assets of plan at fair value....................... 294.0 262.3 248.9 ------ ------ ------- Excess (shortfall) of assets over projected benefit obligation........................................ 18.2 2.4 (35.7) Unrecognized prior service cost and net loss from experience different from that assumed............ 11.7 22.1 67.1 Unrecognized net transition asset, recognized straight-line through 1998........................ (0.3) (3.1) (6.0) Adjustment required to recognize minimum liability. -- -- (40.4) ------ ------ ------- Pension asset (liability) included in other assets (noncurrent liabilities).......................... $ 29.6 $ 21.4 $ (15.0) ====== ====== ======= 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 7.25% at December 31, 1997, 7.75% at December 31, 1996 and 7.25% at December 31, 1995 and an assumed increase in future compensation levels of 4.0% at December 31, 1995. 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. 25 FINANCIAL NOTES--(CONTINUED) The projected benefit obligation for the Company's executive supplemental retirement plan at December 31, 1997 was $35.6 million of which $33.8 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 24.3 million shares of common stock since inception. These purchases have been financed by 10 to 20-year loans from or guaranteed by the Company. The Company's related receivables from the ESOP have been classified as a reduction of stockholders' equity. The loans will be repaid by the ESOP from common dividends on shares not yet allocated to participants, interest earnings on cash balances not yet allocated to participants, common dividends on certain allocated shares and future Company cash contributions. The ESOP loan maturities and rates are identical to the terms of related Company borrowings (see Note 8). After-tax ESOP expense (income), including interest expense on ESOP debt, was $(0.1) million, $2.3 million, and $(0.2) million in fiscal 1998, 1997 and 1996, respectively. Additional tax benefits received on dividends paid on unallocated shares of $2.4 million, $3.1 million, and $2.2 million in fiscal 1998, 1997 and 1996, respectively, have been credited directly to retained earnings in accordance with SFAS No. 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 1998, 1997 and 1996 approximately 694,000, 907,000 and 915,000 shares, respectively, were allocated to plan participants. Through March 31, 1998, 11.3 million common shares have been allocated to plan participants. At March 31, 1998, 13.0 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 an ESOP to provide funds at retirement that could be used for medical costs or health care coverage. Expenses for postretirement health care and life insurance benefits consisted of the following: 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Service cost--benefits earned during the period........ $ 0.7 $ 1.1 $ 1.1 Interest cost on projected benefit obligation.......... 9.1 9.4 11.4 Amortization of unrecognized gain and prior service costs................................................. (8.9) (5.5) (9.3) ----- ----- ----- Total................................................ $ 0.9 $ 5.0 $ 3.2 ===== ===== ===== Payments for postretirement health care and life insurance benefits amounted to $11.8 million, $13.3 million, and $10.9 million in fiscal 1998, 1997 and 1996, respectively. 26 FINANCIAL NOTES--(CONTINUED) 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: 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Accumulated postretirement benefit obligations: Retirees............................................. $111.6 $110.6 $122.2 Active plan participants............................. 13.4 12.3 17.9 ------ ------ ------ Total.............................................. 125.0 122.9 140.1 Unrecognized prior service cost and accumulated net gain............................................ 11.3 24.2 14.8 ------ ------ ------ Accrued postretirement benefit obligation............ $136.3 $147.1 $154.9 ====== ====== ====== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation is 6.0% for 1998, decreasing to 5.33% in 1999 and to an ultimate rate of 5.0% 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, 1998 by $7.2 million and the related fiscal 1998 aggregate service and interest costs by $0.7 million. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at March 31, 1998, 7.75% at March 31, 1997 and 7.25% at March 31, 1996. 27 FINANCIAL NOTES--(CONTINUED) 15. SEGMENTS OF BUSINESS 1998 1997 1996 --------- --------- --------- (IN MILLIONS) REVENUES Health Care Services.................. $20,563.0 $15,415.9 $12,667.8 Water Products........................ 282.9 275.1 259.3 Corporate............................. 11.4 19.8 37.7 --------- --------- --------- Total............................... $20,857.3 $15,710.8 $12,964.8 ========= ========= ========= OPERATING PROFIT Health Care Services(1)............... $ 354.7(2) $ 92.8(3) $ 206.1 Water Products........................ 49.2 34.6(3) 39.6 --------- --------- --------- Total............................... 403.9 127.4 245.7 Interest--net(4)...................... (96.5) (47.5) (13.3) Corporate............................. (47.7) (42.8) (35.5) --------- --------- --------- Income before taxes on income....... $ 259.7 $ 37.1 $ 196.9 ========= ========= ========= SEGMENT ASSETS--AT YEAR END Health Care Services.................. $ 5,166.4 $ 4,648.2 $ 2,525.3 Water Products........................ 166.5 144.6 142.0 --------- --------- --------- Total............................... 5,332.9 4,792.8 2,667.3 Corporate Cash, cash equivalents and marketable securities.......................... 113.6 229.8 456.2 Net assets of discontinued operations.......................... -- -- 125.7 Other................................ 161.0 150.2 111.0 --------- --------- --------- Total............................... $ 5,607.5 $ 5,172.8 $ 3,360.2 ========= ========= ========= DEPRECIATION AND AMORTIZATION Health Care Services.................. $ 62.7 $ 46.6 $ 40.8 Water Products........................ 22.2 22.8 21.5 Corporate............................. 2.3 2.4 1.9 --------- --------- --------- Total............................... $ 87.2 $ 71.8 $ 64.2 ========= ========= ========= CAPITAL EXPENDITURES Health Care Services.................. $ 75.2 $ 41.9 $ 43.5 Water Products........................ 47.4 32.3 24.8 Corporate............................. 7.4 2.7 5.3 --------- --------- --------- Total............................... $ 130.0 $ 76.9 $ 73.6 ========= ========= ========= - -------- (1) Includes $12.0 million, $11.4 million and $12.2 million of pre-tax earnings from an equity investment in fiscal 1998, 1997 and 1996, respectively. (2) Includes $16.7 million in charges for the proposed merger with AmeriSource and $13.9 million in costs associated primarily with the integration and rationalization of recent acquisitions. (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) Interest expense is shown net of corporate interest income. 28 FINANCIAL NOTES--(CONTINUED) 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 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 is as follows: 1998 1997 1996 --------- --------- --------- (IN MILLIONS) REVENUES United States......................... $19,218.1 $14,198.3 $11,440.6 International......................... 1,639.2 1,512.5 1,524.2 --------- --------- --------- Total............................... $20,857.3 $15,710.8 $12,964.8 ========= ========= ========= OPERATING PROFIT United States......................... $ 370.3(1) $ 94.1(2) $ 207.5 International......................... 33.6(3) 33.3(4) 38.2 --------- --------- --------- Total............................... $ 403.9 $ 127.4 $ 245.7 ========= ========= ========= ASSETS, AT YEAR END United States......................... $ 5,194.8 $ 4,935.4 $ 3,130.9 International......................... 412.7 237.4 229.3 --------- --------- --------- Total............................... $ 5,607.5 $ 5,172.8 $ 3,360.2 ========= ========= ========= - -------- (1) Includes $16.7 million in charges for the proposed merger with AmeriSource and $13.1 million in costs associated primarily with the integration and rationalization of recent acquisitions. (2) Includes $90.6 million in charges for restructuring, asset impairment and other operating items and $48.2 million for the write-off of in-process purchased technology. (3) Includes $0.8 million in costs associated with the integration and rationalization of recent acquisitions. (4) Includes $8.2 million in charges for restructuring, asset impairment and other operating items. 16. 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 numerous civil antitrust actions filed since 1993 in federal and state courts by retail pharmacies. The federal cases have been coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of a consolidated class action (the "Federal Class Action") as well as approximately 109 additional actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the "Individual Actions"). There are numerous other defendants in these actions including several pharmaceutical manufacturers and several other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially high, and non-competitive levels, especially as 29 FINANCIAL NOTES--(CONTINUED) compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. A class has been certified in the Federal Class Action. The Seventh Circuit Court of Appeals reversed the District Court's grant of summary judgment in favor of the Company and the other wholesale distributors in the Federal Class Action. Trial of the Federal Class Action is currently scheduled to begin on September 14, 1998. The Individual Actions will remain in the Northern District of Illinois for pre- trial purposes, but will be remanded to their original transferor jurisdictions for trial. The currently pending state court antitrust cases against the Company are in California, Alabama and Mississippi. The Company has been dismissed pursuant to a settlement in cases which were pending in Wisconsin (K-S Pharmacy, et al. v. Abbott Laboratories, et al.) and Minnesota (Salk Drug v. Abbott Laboratories, et al.). The state cases are based essentially on the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case in California (referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III) is pending in Superior Court for the State of California (San Francisco County). A class of retail pharmacies has been certified and the case is trailing MDL 997. The case in Alabama (Durrett, et al. v. The Upjohn Co. et al.) is venued in the Circuit Court for Greene County, Alabama. A class has not yet been certified, and the case is currently before the Alabama Supreme Court on an appeal from the denial of defendants' motion to dismiss. The case in Mississippi (Montgomery Drug Co. et al. v. The Upjohn Co. et al.) is pending in the Chancery Court of Prentiss County, Mississippi. The Chancery Court has held that the case may not be maintained as a class action. In each of the cases, plaintiffs seek remedies in the form of injunctive relief and unquantified monetary damages, and attorneys fees and costs. Plaintiffs in the California cases also seek restitution. In addition, trebled damages are sought in the Federal Class Action, the Individual Actions and the California case and statutory penalties of $500 per violation are sought in the Mississippi and Alabama cases. The Company believes it has meritorious defenses to the allegations made against it and intends to vigorously defend itself in all of these actions. 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 January 1997, the Company and twelve 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 answered the complaint, denying the allegations, and removed the case to federal bankruptcy court in Dallas (the "Texas Action"). In March 1997, the Company and the Manufacturer Defendants filed a complaint in intervention against Plaintiff (now known as Avatex Corporation) in the action filed against Avatex by the FoxMeyer Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the 30 FINANCIAL NOTES--(CONTINUED) Texas Action. Motions for summary judgment filed by the Company, the Manufacturer Defendants and the Chapter 7 trustee in the Delaware action are pending, as is a motion by Avatex to transfer the complaint in intervention to the Texas Bankruptcy Court. In August 1997, the Texas Bankruptcy Court entered an order denying the defendants' motion to transfer the case to the District of Delaware and deferred ruling on the plaintiff's motion to demand the case to the Texas State Court until the bankruptcy court in Delaware has ruled on the motions for the summary judgment. The Company believes it has meritorious defenses to the allegations made against it and intends to vigorously defend this 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. (also known as McKesson General Medical) 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 initially dismissed with prejudice by the Court but that order was reversed by the Court's Appellate Division. Defendants thereupon filed their answers to the complaint together with a motion for leave to appeal to the Court of Appeals, which motion was denied. A renewed motion by defendants General Medical and GM Holdings to dismiss and/or for summary judgment is pending. The Company believes it has meritorious defenses to the allegations made against it and intends to vigorously defend the action. The Company has been named along with several other defendants in two lawsuits in California, Royer v. Wyeth-Ayerst Laboratories, et al. and Valentine v. Wyeth-Ayerst Laboratories, et al., alleging that the plaintiffs have been injured because they took the drugs fenfluramine or dexfenfluramine with phentermine, commonly known as dexfen-phen or fen-phen. The Company has tendered the cases to manufacturers of the drugs and has filed an answer in one of the cases pending a reply. In addition, a third fen-phen case, Galvan v. American Home Products, et al., filed in New York state court against a customer of the Company, has been tendered to the Company by the customer. This case is being defended by counsel retained by the Company to protect the customer's interest pending the determination of tender to the manufacturers. Primarily as a result of the operation of its former chemical businesses, which were divested in fiscal 1987, the Company is involved in various matters pursuant to environmental laws and regulations: The Company has received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at five sites where the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. The current estimate (determined by the Company's environmental staff, in consultation with outside environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible remediation costs for these five sites is approximately $19 million, net of approximately $4 million which third parties have agreed to pay in settlement or which the Company expects, based on either on agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $19 million is expected to be paid out between April 1998 and March 2028 and is included in the Company's recorded environmental reserves at March 31, 1998. 31 FINANCIAL NOTES--(CONTINUED) 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 18 Superfund sites. With respect to each of these Superfund sites, numerous other PRP's have similarly been designated and while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. The Company's estimated liability at those 18 Superfund sites is approximately $1 million, net of $2 million which insurance companies, and $2 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 $1 million is included in the Company's recorded environmental reserves at March 31, 1998. 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 alternate cleanup technologies; the determination of the Company's liability of 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's financial position or results of operations. 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) FISCAL 1998 Revenues................... $4,975.5 $5,147.1 $5,373.5 $5,361.2 $20,857.3 Gross profit............... 364.8 367.7 377.0 411.8 1,521.3 Net income................. 37.6 39.6 42.0 35.7(/1/) 154.9 Earnings per common share(/2/, /3/) Diluted................... $ 0.39 $ 0.41 $ 0.43 $ 0.36 $ 1.59 Basic..................... 0.41 0.44 0.45 0.39 1.69 Cash dividends per common share(/3/)................ $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50 Market prices per common share(/3/) High...................... $40 1/16 $ 53 1/8 $ 56 7/8 $ 61 3/4 $ 61 3/4 Low....................... 31 1/2 38 1/4 48 11/16 47 7/8 31 1/2 - -------- (1) Includes $16.7 million in after-tax charges for the proposed merger with AmeriSource, $8.7 million in after-tax costs associated primarily with the integration and rationalization of recent acquisitions and a $4.6 million favorable tax adjustment. (2) Restated in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share." (3) Restated to reflect the two-for-one stock split declared October 29, 1997, distributed January 2, 1998 to stockholders of record December 1, 1997. 32 FINANCIAL NOTES--(CONCLUDED) FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) FISCAL 1997 Revenues............... $3,326.7 $3,410.6 $4,211.5 $4,762.0 $15,710.8 Gross profit........... 231.9 231.0 243.8 330.6 1,037.3 Income (loss) after taxes................. Continuing operations. (21.4)(1) 25.8 (36.1)(2) 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(3, 4) Diluted Continuing operations. $ (0.25) $ 0.29 $ (0.43) $ 0.41 $ 0.06 Discontinued operations........... 0.04 0.03 0.02 0.01 0.10 Discontinued operations--Gain on sale of Armor All.... -- -- 1.44 -- 1.35 -------- -------- -------- -------- --------- Total................ $ (0.21) $ 0.32 $ 1.03 $ 0.42 $ 1.51 ======== ======== ======== ======== ========= Basic Continuing operations. $ (0.25) $ 0.30 $ (0.43) $ 0.42 $ 0.06 Discontinued operations........... 0.04 0.03 0.02 0.01 0.10 Discontinued operations--Gain on sale of Armor All.... -- -- 1.44 -- 1.41 -------- -------- -------- -------- --------- Total................ $ (0.21) $ 0.33 $ 1.03 $ 0.43 $ 1.57 ======== ======== ======== ======== ========= Cash dividends per share(4)............... $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50 Market prices per common share(4) High................... $ 25 5/8 $24 1/16 $ 28 3/8 $ 34 1/8 $ 34 1/8 Low.................... 22 1/16 20 9/16 22 7/8 26 1/16 20 9/16 - -------- (1) Includes $48.2 million for the write-off of purchased in-process technology. (2) Includes $61.3 million in after-tax charges for restructuring, asset impairment and other operating items. (3) Restated in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share." (4) Restated to reflect the two-for-one stock split declared October 29, 1997, distributed January 2, 1998 to stockholders of record December 1, 1997. 33 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a)(1) Financial Statements - see Index to Consolidated Financial Statements and Supplementary Data Schedule at page 1 of this Form 10K/A. (2) Financial Statement Schedule - The Supplementary Financial Statement Schedule which was previously filed in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and which is not amended has been omitted from this filing. (3) Exhibits - See Exhibit Index at page 36 of this Form 10-K/A. (b) Reports on Form 8-K Information as to reports on Form 8-K filed during the three months ended March 31, 1998 is not amended and has been omitted from this filing. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. McKESSON CORPORATION (Registrant) Dated: July 29, 1998 By /s/ RICHARD H. HAWKINS ----------------------- Richard H. Hawkins Vice President and Chief Financial Officer By /s/ HEIDI E. YODOWITZ ------------------------ Heidi E. Yodowitz Controller 35 EXHIBIT INDEX/(1)/ Exhibit Number Description - ------- ------------------------------------------ 13 1998 Consolidated Financial Statements - see Index to Consolidated Financial Statements at page 1 of this Form 10-K/A 23 Independent Auditors' Consent. - --------- (1) Exhibits which have been previously filed, or incorporated by reference, in the Company's Annual Report of Form 10-K for the fiscal year ended March 31, 1998 and which are not amended in this filing have been omitted from this Exhibit Index. 36