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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MCKESSON CORPORATION
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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MCKESSON CORP.
One Post Street, San Francisco, CA 94104
[LOGO OF MCKESSON]
June 17, 1996
Dear Stockholder:
It is my pleasure to invite you to attend the Annual Meeting of Stockholders
of McKesson Corporation scheduled for 10:00 A.M. on Wednesday, July 31, 1996.
The meeting will be held in the Gold Room at The Fairmont Hotel, 950 Mason
Street, San Francisco, California.
The matters expected to be acted upon at the meeting are described in detail
in the attached Notice of Meeting and Proxy Statement.
The Corporation's audited financial statements, certain general information,
six-year highlights and financial review are contained in the enclosed Appendix
to the Proxy Statement as a separately bound document to facilitate retention
as a reference source.
The Summary Annual Report, which will be mailed shortly, will contain our
letter to stockholders, a financial and operating review and outlook, condensed
financial statements and six-year highlights, as well as other information of
topical interest.
I look forward to seeing you at the meeting.
Sincerely,
/s/ ALAN SEELENFREUND
Alan Seelenfreund
Chairman and Chief Executive Officer
<PAGE>
[LOGO OF MCKESSON]
MCKESSON CORP.
One Post Street, San Francisco, CA 94104 Tel 415 983 8300
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 31, 1996
The Annual Meeting of Stockholders of McKesson Corporation, a Delaware
corporation (hereinafter called "McKesson" or the "Corporation"), will be held
at 10:00 A.M. on Wednesday, July 31, 1996 in the Gold Room at The Fairmont
Hotel, 950 Mason Street, San Francisco, California, to consider and take action
upon the election of one director for a term expiring at the annual meeting in
1997 and two directors for terms expiring at the annual meeting in 1999, and to
transact such other business as may properly come before the meeting or any
adjournment thereof.
Holders of record of the Corporation's Common Stock at the close of business
on June 3, 1996 are entitled to receive notice of and to vote at the meeting.
Whether or not you plan to attend the meeting, you are urged to complete,
sign, date and return the enclosed proxy card promptly in the enclosed postage-
prepaid envelope. Returning your proxy does not deprive you of your right to
attend the meeting and to vote your shares in person.
By Order of the Board of Directors
/s/ NANCY A. MILLER
Nancy A. Miller
Vice President and Corporate Secretary
June 17, 1996
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information....................................................... 1
Voting Securities and Record Date......................................... 2
Security Ownership of Certain Beneficial Owners........................... 2
Security Ownership of Directors and Executive Officers.................... 3
Election of Directors..................................................... 3
Securities Exchange Act of 1934........................................... 6
Board of Directors and Committees of the Board............................ 6
Compensation of Directors................................................. 8
Report of the Compensation Committee on Executive Compensation............ 9
Stock Price Performance Graphs............................................ 12
Executive Officer Compensation............................................ 14
Summary Compensation Table.............................................. 14
Option Grants in the Last Fiscal Year................................... 15
Aggregated Option/SAR Exercises in the Last Fiscal Year................. 15
Long-Term Incentive Plan Awards in the Last Fiscal Year................. 16
Executive Severance Policy and Termination of Employment and Change in
Control Arrangements................................................... 16
Pension Benefits........................................................ 17
Certain Transactions...................................................... 18
Indebtedness of Executive Officers........................................ 18
Independent Certified Public Accountants.................................. 19
Additional Information.................................................... 19
Stockholder Proposals for the 1997 Annual Meeting......................... 19
</TABLE>
<PAGE>
MCKESSON CORP.
One Post Street, San Francisco, CA 94104 Tel 415 983 8300
June 17, 1996
PROXY STATEMENT
The Corporation was organized in the state of Delaware on July 7, 1994 as a
wholly-owned subsidiary of McKesson Corporation, a Delaware corporation ("Old
McKesson"), for the purpose of owning and operating the businesses of Old
McKesson following the acquisition of Old McKesson's pharmaceutical benefits
management business (the "PCS Business") by a subsidiary of Eli Lilly and
Company (the "PCS Transaction").
As part of the PCS Transaction, on November 21, 1994 (the "Closing Date") the
Corporation acquired all of the assets and liabilities of Old McKesson, other
than those related to the PCS Business, and Old McKesson distributed to its
stockholders one share of the Corporation's Common Stock for each share of Old
McKesson Common Stock outstanding as of November 19, 1994.
THE CORPORATION HAD NO MATERIAL ASSETS, OPERATIONS OR ACTIVITIES PRIOR TO
NOVEMBER 21, 1994. AFTER THAT DATE THE CORPORATION HAS CONTINUED THE BUSINESSES
OF OLD MCKESSON, OTHER THAN THE PCS BUSINESS, ON AN UNINTERRUPTED BASIS. FOR
THE PURPOSE OF COMPLETENESS, THIS PROXY STATEMENT INCLUDES, FOR PERIODS PRIOR
TO THE CLOSING DATE, INFORMATION WITH RESPECT TO OLD MCKESSON; AND REFERENCES
TO THE "CORPORATION" WITH RESPECT TO SUCH PERIODS SHALL REFER TO THE BUSINESS,
OPERATIONS, CAPITALIZATION AND ACTIVITIES OF OLD MCKESSON, EXCEPT WHERE
OTHERWISE INDICATED.
GENERAL INFORMATION
This Proxy Statement is being mailed on or about June 17, 1996 to
stockholders of McKesson in connection with the solicitation of proxies by the
Board of Directors of the Corporation for use at the Annual Meeting of
Stockholders to be held on July 31, 1996, and at any and all adjournments of
that meeting, pursuant to the accompanying Notice of Meeting. Shares
represented by a properly executed proxy will be voted as indicated on the
proxy. Stockholders may revoke the authority granted by their proxies at any
time before the exercise of the powers conferred thereby by notice in writing
delivered to the Secretary of the Corporation; by submitting a subsequently
dated proxy; or by attending the meeting, withdrawing the proxy, and voting in
person.
It is proposed that at the meeting action will be taken upon the election of
three directors for the terms specified in this Proxy Statement. The Board of
Directors knows of no other matters that properly may be presented for action
at the meeting. If any other matters do properly come before the meeting, the
persons named on the enclosed proxy will have discretionary authority to vote
thereon in accordance with their best judgment. Under the Corporation's
Restated By-Laws, for business to be properly brought before an annual meeting
by a stockholder, the Secretary of the Corporation must have received written
notice thereof not less than 60 days nor more than 90 days prior to the meeting
(except, if fewer than 70 days' notice or prior public disclosure of the
meeting date is given or made to stockholders, not later than the close of
business on the 10th day following the day of mailing notice of the meeting or
public disclosure thereof). The notice must contain certain information about
the proposed business and the stockholder who proposes to bring the business
before the annual meeting, including (a) a brief description of the proposed
business and the reasons for conducting such business at the annual meeting,
(b) the stockholder's name and record address,
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(c) the class and number of shares beneficially owned by the stockholder, and
(d) any material interest of the stockholder in the business so proposed.
Notwithstanding anything in the Restated By-Laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the foregoing
procedures.
The cost of soliciting proxies will be borne by the Corporation. In addition
to solicitations by mail, officers and regular employees of the Corporation may
solicit proxies personally or by telephone, telegraph or other means without
additional compensation. Arrangements will also be made with banks, brokerage
houses and other custodians, nominees and fiduciaries to forward solicitation
material to the beneficial owners of stock held of record by such persons, and
the Corporation will, upon request, reimburse them for their reasonable
expenses in so doing. Georgeson & Company, Inc., New York, N.Y., has been
retained by the Corporation to assist in the solicitation of proxies for an
anticipated fee of approximately $6,000 plus out-of-pocket costs and expenses.
VOTING SECURITIES AND RECORD DATE
At the close of business on June 3, 1996, there were 42,939,511 shares of
Common Stock of the Corporation, par value $0.01 per share (the "Common
Stock"), outstanding and entitled to vote at the meeting. Each share of Common
Stock outstanding on such date entitles the stockholder of record thereof to
one vote on each matter to be voted upon at the meeting. The presence in person
or by proxy of holders of a majority of the outstanding shares of Common Stock
entitled to vote will constitute a quorum for the transaction of business at
the meeting. Abstentions and broker non-votes will be counted for purposes of
determining the presence or absence of a quorum. Provided a quorum is present,
directors will be elected by a plurality of the votes cast by the holders of
the Corporation's Common Stock voting in person or by proxy at the meeting.
Thus abstentions will have no effect on the vote for election of directors. In
addition, broker non-votes, if any, will not be included in vote totals and
will have no effect on the outcome of the vote.
If a stockholder participates in the Corporation's Automatic Dividend
Reinvestment Plan, the enclosed proxy includes all full shares of Common Stock
held in the stockholder's dividend reinvestment plan account on the record date
for the annual meeting, as well as shares held of record by the stockholder.
Participants in the Corporation's Profit-Sharing Investment Plan (the "PSIP")
have the right to instruct the Plan trustee, on a confidential basis, how the
shares allocated to their accounts are to be voted and will receive a separate
voting instruction card for that purpose.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below lists as of June 3, 1996, unless otherwise indicated,
information as to the only persons believed by the Corporation to be beneficial
owners of more than five percent of the Corporation's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Common The Chase Manhattan Bank, 10,956,593(1) 25.5
N.A., as Trustee for the
McKesson Corporation Profit-
Sharing Investment Plan
1 Chase Manhattan Plaza
New York, NY 10081
</TABLE>
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(1) These shares are held in trust for the benefit of participants in the PSIP
for which The Chase Manhattan Bank, N.A. is the Trustee. Shares that have
been allocated to the individual accounts of participants in the PSIP are
voted by the Trustee as instructed by PSIP participants. Shares allocated
to participants' PAYSOP accounts for which no voting instructions are
received will not be voted. The PSIP provides that all other shares for
which no voting instructions are received from participants and unallocated
shares of Common Stock held in the leveraged employee stock ownership plan
(the "Leveraged ESOP") established as part of the PSIP, will be voted by
the Trustee in the same proportion as shares as to which voting
instructions are received.
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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The table below shows the number of shares of the Corporation's Common Stock
beneficially owned as of June 3, 1996, by each current director, each executive
officer named in the Summary Compensation Table on page 14, and by all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED (1)
---- ----------------------
<S> <C>
Mary G.F. Bitterman................... 6,000(2)(4)
Tully M. Friedman..................... 10,803(3)(4)(5)
George M. Keller...................... 18,065(4)(5)(6)
John M. Pietruski..................... 9,500(4)
Mark A. Pulido........................ 20,000(7)
Carl E. Reichardt..................... 0
Alan Seelenfreund..................... 477,571(4)(8)
Jane E. Shaw.......................... 10,041(4)(5)(6)
Robert H. Waterman, Jr................ 7,500(4)(6)
David L. Mahoney...................... 103,587(4)(8)
David E. McDowell..................... 196,785(4)(8)
Ivan D. Meyerson...................... 100,538(4)(8)(9)
Charles A. Norris..................... 112,328(4)(8)
All Directors and Executive Officers
as a group (21 persons).......... 1,471,440(2)(3)(4)(5)(6)(7)(8)(9)
</TABLE>
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(1) Represents shares held as of June 3, 1996 directly and with sole voting and
investment power (or with voting and investment power shared with a spouse)
unless otherwise indicated. The number of shares of Common Stock owned by
each director or executive officer represents less than 1% of the
outstanding shares of such class. All directors and executive officers as a
group own 3.4% of the outstanding shares of Common Stock.
(2) Includes 1,000 shares held by Dr. Bitterman's husband through an Individual
Retirement Account, for which beneficial ownership is disclaimed.
(3) Includes 5,000 shares held in a revocable trust established by and for the
benefit of Mr. Friedman who is the sole Trustee of such trust.
(4) Includes shares that may be acquired within 60 days after June 3, 1996
through the exercise of stock options granted under the Corporation's stock
option plan as follows: Dr. Bitterman, 5,000; Mr. Friedman, 4,500; Mr.
Keller, 3,500; Mr. Pietruski, 4,500; Mr. Seelenfreund, 382,920; Dr. Shaw,
4,500; Mr. Waterman, 4,500; Mr. Mahoney, 96,663; Mr. McDowell, 136,125; Mr.
Meyerson, 73,588; Mr. Norris, 104,226; and all directors and executive
officers as a group, 1,115,841.
(5) Includes shares credited to bookkeeping accounts maintained by the
Corporation on behalf of the following named nonemployee directors who
participate in the Directors' Deferred Compensation Plan and as to which
shares such director has no voting or investment power until the shares are
distributed: Mr. Friedman, 303 shares; Mr. Keller, 9,965 shares; Dr. Shaw,
2,448 shares; and those directors as a group, 12,716 shares.
(6) Includes shares held by family trusts as to which each of the following
named directors, executive officers or those persons as a group and their
respective spouses have shared voting and investment power: Mr. Keller,
4,600 shares; Dr. Shaw, 3,093 shares; Mr. Waterman, 3,000 shares; and all
directors and executive officers as a group, 10,693 shares.
(7) These shares are subject to possible forfeiture under the terms of the
Corporation's 1994 Stock Option and Restricted Stock Plan.
(8) Includes shares held under the PSIP as to which the participant has sole
voting but no investment power, as follows: Mr. Seelenfreund, 8,571; Mr.
Mahoney, 1,424; Mr. McDowell, 980; Mr. Meyerson, 4,346; Mr. Norris, 1,585;
and all directors and executive officers as a group, 34,331.
(9) Includes 200 shares held by Mr. Meyerson and 2,140 shares held by other
members of the group as custodians for their minor children.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. At each annual meeting
of stockholders, members of one of the classes, on a rotating basis, are
elected for a three-year term.
The Board of Directors elects directors to fill vacancies on the Board, as
they occur, as well as newly created directorships. A director elected to fill
a vacancy is elected to the same class as the director he or she succeeds, and
a director elected to fill a newly created directorship holds office until the
next election by the stockholders of the class to which such director is
elected.
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Since the last annual meeting, two persons have been elected directors of the
Corporation: Carl E. Reichardt to fill a vacancy created by reason of an
increase in the authorized number of directors from nine to ten for a term
expiring at this year's annual meeting, and Mark A. Pulido to fill the vacancy
resulting from the resignation of David E. McDowell for a term expiring at the
annual meeting in 1998. James R. Harvey, a director since 1987 and a member of
the class whose term expires at this year's meeting, died on June 6, 1996. In
accordance with the Corporation's Restated By-Laws, the Board of Directors by
resolution has fixed the total number of directors at nine until the 1996
Annual Meeting, at which time it shall revert to eight members upon the
retirement from the Board of George M. Keller.
The three persons designated by the Board of Directors as nominees for
election as directors at the 1996 Annual Meeting are Messrs. Carl E. Reichardt
and Alan Seelenfreund and Dr. Jane E. Shaw. Mr. Reichardt is a nominee for
election to the class of directors whose term expires at the annual meeting in
1997. The remaining two nominees are standing for election for a three-year
term expiring in 1999.
Each nominee has consented to being named in the proxy statement and to serve
if elected. All of the nominees are currently serving as directors and, except
for Mr. Reichardt, were previously elected by the stockholders.
It is the intention of the persons named in the enclosed form of proxy,
unless authorization to do so is withheld, to vote for the election of the
three nominees named below. If prior to the annual meeting any nominee should
become unavailable for election, an event that is not now anticipated by the
Board, the proxies will be voted for the election of such other person or
persons as shall be determined by the persons named in the enclosed form of
proxy in accordance with their judgment, or the number of authorized directors
may be reduced.
Biographical information follows for each person nominated and each person
whose term of office as a director will continue after the Annual Meeting.
Directors' ages are as of June 3, 1996.
NOMINEE FOR ELECTION FOR A ONE-YEAR TERM EXPIRING AT THE ANNUAL MEETING IN 1997
CARL E. REICHARDT
Chairman of the Board, Retired, Wells Fargo & Company
Mr. Reichardt, 64, retired as Chairman of the Board and Chief Executive
Officer of Wells Fargo & Company and its principal subsidiary, Wells Fargo
Bank, N.A., at the end of 1994, having occupied those positions since 1983. Mr.
Reichardt joined Wells Fargo & Company in 1970, was named Executive Vice
President in 1973 and President of Wells Fargo Bank, N.A. in 1978. He is a
director of Columbia/HCA Healthcare Corporation, ConAgra, Inc., Ford Motor
Company, Newhall Management Corporation, Pacific Gas and Electric Company,
SunAmerica Inc., Wells Fargo & Company and Wells Fargo Bank, N.A. Mr. Reichardt
was elected a director of the Corporation effective February 1, 1996.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE ANNUAL MEETING IN
1999
ALAN SEELENFREUND
Chairman and Chief Executive Officer
Mr. Seelenfreund, age 59, has been Chairman of the Board and Chief Executive
Officer of the Corporation and Old McKesson since November 1989. He previously
served Old McKesson as Executive Vice President from November 1986 to November
1989; as Chief Financial Officer from April 1984 to April 1990; and held
various other senior financial positions since joining Old McKesson in 1975.
Mr. Seelenfreund is a director of Pacific Gas and Electric Company and Armor
All Products Corporation, a publicly owned subsidiary of the Corporation. He
previously served as a director of
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Old McKesson since 1988 and was elected to serve as a director of the
Corporation on November 9, 1994. He is a member of the Finance Committee and
Chairman of the Executive Committee of the Board.
JANE E. SHAW
Founder, The Stable Network; Former President and Chief Operating Officer, ALZA
Corporation
Dr. Shaw, age 57, founded The Stable Network, a biopharmaceutical consulting
firm, in 1995. In September 1994, Dr. Shaw resigned as President and Chief
Operating Officer of ALZA Corporation, a pharmaceutical research, manufacturing
and marketing firm with which she had been associated in various technical and
executive positions since 1970. She is a director of Boise Cascade Corporation
and Intel Corporation. Dr. Shaw previously served as a director of Old McKesson
since 1992 and was elected to serve as a director of the Corporation on
November 9, 1994, She is a member of the Audit Committee and Chairman of the
Public Policy Committee of the Board.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1997 ANNUAL MEETING
TULLY M. FRIEDMAN
General Partner of Hellman & Friedman
Mr. Friedman, age 54, is a General Partner of Hellman & Friedman, a private
investment firm formed in 1984. Prior to forming Hellman & Friedman, he was a
Managing Director and General Partner of Salomon Brothers Inc. He is currently
on the Advisory Board of Tevecap, S.A., the Board of Directors of APL Limited,
Levi Strauss & Co., Mattel, Inc., and MobileMedia Corporation, and a member of
the Board of Representatives of Falcon Holding Group, L.P. Mr. Friedman is a
member of the Executive Committee and a Trustee of the American Enterprise
Institute, and a Director of the Stanford Management Company. Mr. Friedman
previously served as a director of Old McKesson since 1992, and was elected to
serve as a director of the Corporation on November 9, 1994. He is a member of
the Compensation and Finance Committees of the Board.
JOHN M. PIETRUSKI
Chairman of the Board, Texas Biotechnology Corporation; Chairman and Chief
Executive Officer, Retired, Sterling Drug Inc.
Mr. Pietruski, age 63, is Chairman of the Board of Texas Biotechnology
Corporation, a publicly held pharmaceutical research and development company.
In September 1988, Mr. Pietruski retired as Chairman and Chief Executive
Officer of Sterling Drug Inc. with which company he had been associated in
various executive positions since 1977. He is a director of General Public
Utilities Corporation, Hershey Foods Corporation and Lincoln National
Corporation and is a Regent of Concordia College. Mr. Pietruski previously
served as a director of Old McKesson since 1990 and was elected to serve as a
director of the Corporation on November 9, 1994. He is a member of the
Executive and Compensation Committees and Chairman of the Audit Committee of
the Board.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING
MARY G.F. BITTERMAN
President and Chief Executive Officer, KQED, Inc.
Dr. Bitterman, age 52, has been President and Chief Executive Officer of
KQED, Inc. (public broadcasting) since November 1993. For the five years prior
to joining KQED she was a private consultant on development, communications and
international affairs. Previously, Dr. Bitterman served as Executive Director
of the Hawaii Public Broadcasting Authority (1974-1980), Director of the Voice
of America (1980-1981), Director of the Hawaii State Department of Commerce and
Consumer Affairs (1981-1983) and Director of the East-West Center's Institute
of Culture and Communication (1984-1988). She is a director of Bancorp Hawaii,
the Bank of Hawaii and several of its subsidiary companies; a trustee of the
International Center for Communications, San Diego State University; a
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member of the Board of Governors of Pacific Forum/CSIS, and a member of the
Board of Directors of the World Affairs Council and the Bay Area Council. Dr.
Bitterman was elected a director of the Corporation on April 26, 1995. She is a
member of the Audit and Public Policy Committees of the Board.
MARK A. PULIDO
President and Chief Operating Officer
Mr. Pulido, age 43, was elected President and Chief Operating Officer and a
Director of the Corporation effective May 20, 1996. For the six years prior to
joining McKesson, he was associated with Sandoz International Ltd., an
international pharmaceutical company. In 1990 he joined Red Line Healthcare
Corporation, a Sandoz affiliate and the nation's largest provider of medical
supplies and reimbursement services to the long-term care industry, where he
rose to the position of Chairman, President and Chief Executive Officer. Mr.
Pulido served as Chief Operating Officer of Sandoz Pharmaceuticals Corporation
from 1994 until 1996 and most recently was that company's Chief Executive
Officer with responsibility for all aspects of its U.S. pharmaceutical,
consumer products and generic drug business.
ROBERT H. WATERMAN, JR.
Chairman, The Waterman Group, Inc.
Mr. Waterman, age 59, is the founder and Chairman of The Waterman Group,
Inc., a management research and publishing firm established in 1986. For the 21
years prior to 1986, he was a Senior Director at McKinsey & Company, Inc., an
international management consulting firm. Mr. Waterman has authored several
books and essays on business management. He is a director of Boise Cascade
Corporation and AES Corporation; a trustee of the World Wildlife Fund and an
advisor to the President of the National Academy of Sciences. Mr. Waterman
previously served as a director of Old McKesson since 1990 and was elected to
serve as a director of the Corporation on November 9, 1994. He is a member of
the Audit and Public Policy Committees of the Board.
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's Directors, its executive officers and persons who own more than
ten percent of the Corporation's Common Stock to file reports of ownership of
the Corporation's Common Stock and any subsequent changes in that ownership
with the Securities and Exchange Commission, the New York Stock Exchange and
the Corporation. Based on its review of the copies of such forms received by
it, or written representations from certain reporting persons that no Form 5
reports were required to be filed for those persons, the Corporation believes
that, during the last fiscal year, all such filing requirements were satisfied,
except that Mary G.F. Bitterman inadvertently filed one late Form 4 with
respect to the purchase of 1,000 shares by her husband, and the Trustee under
the Corporation's PSIP inadvertently failed to file on a timely basis ten
reports on Form 4 during the last fiscal year, and one report on Form 3 and two
reports on Form 4 during the previous fiscal year, for a total of 296
transactions. These transactions were purchases of Common Stock required by the
need to reinvest the cash proceeds received in connection with the PCS
Transaction, purchases from the accounts of plan participants upon termination
of their employment and annual allocations of shares of Common Stock to the
accounts of plan participants.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of the Corporation, although
it is not involved in day-to-day operating management. Members of the Board are
kept informed of the Corporation's business by various reports and documents
sent to them on a regular basis, as well as by operating and financial reports
made at Board meetings by the Chief Executive Officer, the Chief Operating
Officer and other executive officers.
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Attendance at Meetings
The Board of Directors held seven meetings during the year ended March 31,
1996. Attendance at Board and Committee meetings combined averaged 94.4%. Each
director attended more than 75% of the combined total meetings of the Board and
Committees of the Board on which the director served at any time during the
year.
Certain Committees of the Board
To assist in the discharge of its responsibilities, the Board has designated
several standing committees including an Audit Committee, a Compensation
Committee and an Executive Committee. The members of each standing committee
are elected by the Board of Directors at its organizational meeting following
the annual stockholders' meeting, each for a term of one year or until his or
her successor is elected.
The Audit Committee, composed of four directors who are neither officers nor
employees of the Corporation, held four meetings during the year ended March
31, 1996. The Audit Committee recommends to the Board the retention or
discharge of the Corporation's independent auditors; reviews the engagement of
the independent auditors including the scope, extent and procedures of the
audit and fees to be paid therefor; reviews, in consultation with the
independent auditors, the audit results and their auditor's report and related
management letter, if any; reviews the independence of the independent auditors
and, in this connection, reviews the engagement of the independent auditors for
services of a non-audit nature; reviews and approves the audited financial
statements and recommends to the Board their inclusion in the Corporation's
annual report on Form 10-K to the Securities and Exchange Commission and in the
Appendix to this Proxy Statement; reviews the condensed financial data (derived
from the audited financial statements) included in the annual report to
stockholders; consults with the independent auditors, the internal auditors and
management (together or separately) on the adequacy of internal accounting
controls and reviews the results thereof; reviews, on a continuing basis, the
procedures designed to implement the corporate code of conduct and compliance
therewith; directs and supervises investigations into matters within the scope
of the Committee's duties; and performs such other functions as may be
necessary in the efficient discharge of its duties.
The Compensation Committee, composed of four directors who are neither
officers nor employees of the Corporation, held seven meetings during the year
ended March 31, 1996. The Compensation Committee administers the Corporation's
1989 Management Incentive Plan, the 1981 Long-Term Incentive Plan, the Deferred
Compensation Administration Plan II, the Deferred Compensation Administration
Plan and the Management Deferred Compensation Plan and all stock option,
restricted stock or stock purchase plans; reviews the administration of all
other incentive plans within the Corporation; approves the selection of
trustees and investment advisers and managers and establishes the overall
investment policies with respect to the funds incident to the Corporation's
retirement program; reviews and makes recommendations to the Board with respect
to salary and other terms and conditions of employment and changes therein of
the Chief Executive Officer and approves salaries and other terms and
conditions of employment and changes therein of the other executive officers
and key management employees of the Corporation above specified salary grades;
and examines and makes recommendations to the Board regarding the Corporation's
overall compensation program for managerial level employees.
The Executive Committee, composed of five directors, a majority of whom are
neither officers nor employees of the Corporation, held one meeting during the
year ended March 31, 1996. Subject to any restrictions that the Board may from
time to time impose, the Committee is authorized to exercise all of the powers
of the Board when it is not in session, except the power to declare dividends,
elect directors, amend the By-Laws, issue stock or recommend to stockholders
any action requiring their approval. The Committee also considers and makes
recommendations to the Board
7
<PAGE>
regarding the size and composition of the Board; recommends and nominates
candidates to fill Board vacancies that occur; and recommends to the Board the
director nominees for whom the Board will solicit proxies. The Committee will
consider nominees recommended by stockholders. Any stockholder who wishes to
recommend a nominee should write to the Vice President and Corporate Secretary,
McKesson Corporation, One Post Street, San Francisco, CA 94104, stating in
detail the qualifications of the proposed nominee for consideration by the
Committee.
The Restated By-Laws of the Corporation provide that a stockholder may
nominate a person for election as a director at a meeting of stockholders only
if written notice thereof has been received by the Secretary of the Corporation
not less than 60 days nor more than 90 days prior to the meeting; provided,
however, that in the event that less than 70 days' notice or prior public
disclosure of the meeting date is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. The notice must
contain certain information about the proposed nominee, including such person's
name, age, business and residence addresses, principal occupation or
employment, the class and number of shares of the Corporation beneficially
owned by the person and any other information relating to the person that would
be required to be included in a proxy statement soliciting proxies for election
of directors, and certain information about the nominating stockholder. The
Corporation may also require any proposed nominee to furnish other information
reasonably required by the Corporation to determine the proposed nominee's
eligibility to serve as a director.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Corporation receives an annual
retainer of $24,000; a stipend of $1,000 for each Board or Executive Committee
meeting attended; a stipend of $850 ($1,000 for the Chairman) for each other
committee meeting attended; and is reimbursed for all expenses incurred in
attending such meetings. Directors who are employees of the Corporation receive
no additional compensation for their services as members of the Board or any
Board committee.
Nonemployee directors are eligible to defer all or a portion of their
compensation for services as a director through participation in the Deferred
Compensation Administration Plan II ("DCAP II"). The minimum amount that may be
deferred under DCAP II for any year is $5,000 and the minimum deferral period
is generally five years, except in cases of death, disability, retirement, pre-
retirement termination or a change in control of the Corporation, where the
minimum deferral period does not apply. The interest rate on DCAP II deferrals
is determined by the Compensation Committee each year based upon several
related factors, including, the Corporation's cost of money; its corporate tax
bracket; the size and years of deferrals; the number and ages of participants
and mortality and turnover patterns. Four nonemployee directors have elected to
defer a portion of their compensation for calendar year 1996 under DCAP II.
Prior to January 1, 1994, nonemployee directors could defer compensation
received for their services as directors under the Directors Deferred
Compensation Plan, thereby automatically becoming participants in the Deferred
Compensation Administration Plan (the "DCAP") or under the Management Deferred
Compensation Plan (the "MDCP", or together with the DCAP, the "Prior Deferred
Plans"). Although the Prior Deferred Plans have been superseded and replaced by
DCAP II as to future compensation deferrals, previous deferrals under these
plans will continue to be administered in accordance with the respective
provisions of the plans under which the original deferrals were made. Interest
on deferral balances held under the Prior Plans is credited each year at the
same rate as that determined by the Compensation Committee for deferrals under
DCAP II.
In the event of a change in control of the Corporation (as defined in DCAP II
and the Prior Deferred Plans), deferred amounts will be distributed immediately
upon the effective date of the
8
<PAGE>
change unless the director has made an irrevocable election (at least twelve
months in advance of the effective date of any such change) to receive payment
of any deferral balance in accordance with his or her most recent valid
election on file with the Corporation rather than in a single sum. Any deferral
election under DCAP II or the Prior Deferred Plans may be modified as to the
length of the deferral period and the timing of the distribution provided such
changes are made at least twelve months prior to the previously scheduled date
of commencement of payments and payments do not begin earlier than twelve
months from the date of the modified election.
Under the retirement program for nonemployee members of the Board, a director
who retires after having attained age 65 with five or more years of Board
service as an outside director of the Corporation (including previous service
as an outside director of Old McKesson) will receive, for Board service prior
to July 29, 1992, an annual payment equivalent to the amount of the annual
retainer in effect at time of retirement, plus an amount equal to the sum of
all Board and committee meeting fees paid to the director in the twelve months
preceding retirement. For service as an outside director from and after July
29, 1992, the director will receive an annual benefit equal to the amount of
the annual retainer in effect at the time of retirement. Payments are made for
a period equal to the length of Board service as an outside director, with the
annual payment amount prorated for periods of less than one year. In the event
of the death of an eligible director prior to retirement, benefit payments will
be made to the director's designated beneficiary or estate. If death occurs
after retirement, any remaining benefit payments will be paid to the director's
designated beneficiary or estate.
The 1994 Stock Option and Restricted Stock Plan (the "1994 Plan") provides
for the automatic grant to each nonemployee director on the date of election to
the Board for the first time at any annual or special meeting of the
Corporation's stockholders of a nonqualified option to purchase 5,000 shares of
Common Stock. These options are immediately exercisable in full but expire in
five equal annual installments. On the date of each subsequent annual meeting,
each nonemployee director continuing in office is automatically granted an
option for an additional 1,500 shares which is immediately exercisable in full.
All options are granted at fair market value on the effective date of grant,
and, subject to the above-mentioned expiration provisions applicable to the
initial grant, have a term of five years.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Corporation's executive compensation program is administered by the
Compensation Committee (the "Committee") of the Board of Directors. The
Committee is composed entirely of independent, nonemployee directors. The
Committee is responsible for administering the Corporation's stock option and
restricted stock plans, reviewing and making recommendations to the full Board
with respect to the salary, incentive compensation and other terms and
conditions of employment of the Chief Executive Officer and approving salaries,
incentive compensation and other terms and conditions of employment of
executive officers, including those named in the Summary Compensation Table on
page 14 (the "named executive officers") and other officers and key employees
of the Corporation in and above specified salary grade levels.
This report describes the policies and the criteria used by the Committee in
establishing the principal components, and setting the levels, of executive
compensation during FY 1996.
In its deliberations concerning compensation of executive officers, the
Committee considers the following factors: 1) the Corporation's performance
measured against previously set objectives and against prior year's
achievement; 2) the individual performance of each executive officer; 3) a
number of comparative compensation surveys, which are supplied by professional
compensation consultants approved by the Committee and retained by the
Corporation for this purpose, and other material concerning compensation levels
and stock grants at other companies, such as compensation information disclosed
in the proxy statements of other companies; 4) the overall
9
<PAGE>
competitive environment for executives and the level of compensation needed to
attract and retain executive talent and 5) the recommendations of professional
compensation consultants. Companies used in comparative analyses for executive
compensation purposes are selected with the assistance of these professional
compensation consultants. Such companies represent a broad cross-section of
non-manufacturing service companies and are selected based on a number of
factors including similarity in financial attributes, size and complexity to
the Corporation. The companies used in comparative analyses for executive
compensation purposes include some of the companies in the Value Line Health
Care Sector Index (the "Health Care Index") used in the Performance Graph, as
well as other companies. The Committee relies on a broad array of companies in
various industries for comparative analysis of executive compensation because
it believes that the Corporation's competitors for executive talent are more
varied than the companies in the Health Care Index chosen for comparing
stockholder return in the Performance Graphs.
The Corporation's compensation program is designed to enhance stockholder
value by linking a large part of executive officers' compensation directly to
performance. The objective is to provide base salary for executive officers at
approximately the median level for executive officers of companies in the
comparison group, while providing an opportunity to achieve total compensation
(including base salary, annual bonus and long-term incentives) at the 75th
percentile or above for exceptional performance.
Components of Compensation
The Corporation's compensation package consists of base salary, a short-term
incentive plan, and long-term incentives (stock and cash). Base pay is reviewed
annually. Actual base salary is based on individual performance, competitive
pay practices and level of responsibility. Competitive pay practices are
determined through job evaluation and market comparisons. The FY 1996 salaries
of executive officers were determined primarily on the basis of each executive
officer's performance and responsibilities, the Corporation's performance, and
competitive salary level market data. Increases in FY 1996 salaries reflected
the Committee's determination that compensation levels should be increased to
remain competitive, given each executive officer's performance, the
Corporation's performance in FY 1996 and the competitive environment for
executive talent.
The Management Incentive Plan (the "MIP") rewards participants for reaching
profit targets related to required rates of return. Individual executives'
target award values vary by level of responsibility, are set as a percentage of
base salary and are competitive with those paid to executive officers at
companies in the comparison group. The annual incentive award an executive
officer is eligible to receive can range from zero to three times the target
award percentage assigned to his or her salary grade. Actual awards to the
named executive officers for FY 1996 depended on the degree to which the
business unit (corporate or division) achieved its target income objectives and
the extent to which the executive officer was judged to have contributed to the
overall results.
The Corporation has two executive compensation plans to focus attention on
the achievement of long-term performance objectives. The two plans are the 1994
Stock Option and Restricted Stock Plan (the "1994 Plan") and the 1981 Long-Term
Incentive Plan (the "LTIP"). Two-thirds of competitive long-term incentive
value is intended to be provided by stock options and one-third by the cash
LTIP. Target values vary by level of responsibility, are set at a percentage of
base salary and are competitive with those paid at companies in the comparison
group. The LTIP provides cash awards based solely on the Corporation's
financial results over four-year periods. Goals for this plan are set annually
for the successive four-year period. These goals are designed to focus
executive officers' attention on long-term growth balanced with return to
stockholders. There are two measures of financial performance currently in use
and they are weighted equally. They are compound growth in annual earnings per
share ("EPS") and return on average stockholder equity ("ROE"). The Committee
determines how these measures are to be weighted in calculating potential
awards for each incentive period. The LTIP awards to the named executive
officers for the four-year period ended March 31, 1996, as shown in the Summary
Compensation Table on page 14, reflected the Corporation's achievement of 125%
of the LTIP targets.
10
<PAGE>
The Corporation's 1994 Plan is designed to strengthen the link between the
interests of stockholders and management. Stock options are generally granted
annually and provide executives a ten-year period, subject to specified vesting
requirements, to purchase shares of Common Stock at the full market price of
the stock on the day the option was granted. Annual grants are generally equal
to a target percent of pay determined competitively and modified by
performance. In addition, the Committee considers the size of prior grants, but
does not take into account the number of options currently held by an executive
officer in determining annual award levels. The number of options needed to
provide the target percent of pay is determined by use of the Black-Scholes
model for valuing stock options.
Policy Regarding Tax Deduction for Compensation Under Internal Revenue Code
Section 162(m)
Section 162(m) of the Internal Revenue Code (the "Code") limits the tax
deduction to $1 million for compensation paid to certain executive officers of
the Corporation named in the proxy statement, unless compensation is
performance-based. It has been determined that the limitations did not impact
the Corporation in FY 1996. The Committee's present intention is to comply with
the requirements of Section 162(m) unless the Committee concludes that required
changes would not be in the best interest of the Corporation or its
stockholders.
The Compensation Committee believes that the total compensation paid to the
named executive officers in FY 1996 reflects the achievement of the
Corporation's goals, attainment of business strategy, and performance
consistent with the interests of its stockholders.
Compensation of the Chairman and Chief Executive Officer
During FY 1996, the Committee reviewed the performance of the Chairman and
Chief Executive Officer and made recommendations to the Board concerning his
compensation using the same criteria as those discussed at the beginning of
this report for determining salaries and incentive compensation levels for the
other named executive officers.
On April 1, 1995, the salary of the Chairman and Chief Executive Officer was
increased from $625,000 to $655,000 based on the Corporation's performance for
FY 1995, and competitive market data on salary levels. During FY 1996, the
Corporation achieved a 15% increase in earnings per share as Mr. Seelenfreund
directed the continued implementation of the Corporation's long-range plan. The
Corporation reinvested cash into assets and expertise to expand its reach in
the pharmaceutical supply chain. In addition, the roles of senior management
were realigned to be more responsive to the needs of the marketplace. At the
end of the year, the Committee deemed Mr. Seelenfreund's current level of
salary to be appropriate for his current duties and responsibilities. His MIP
award for FY 1996 represented 43% of his annual compensation and reflected the
Corporation's operating results. He also received a cash award of $250,000
under the LTIP for the four-year period ending FY 1996, which represented 125%
achievement of the Corporation's long-term financial objectives for this
period.
The stock option award for the Chairman and Chief Executive Officer made in
January 1996 represented the Committee's ongoing effort to retain his
continuing services and focus his efforts on continuing to build shareholder
value.
It is the Committee's view that the total compensation package for the
Chairman and Chief Executive Officer for FY 1996 was based on an appropriate
balance of (1) the Corporation's performance, (2) his own performance and (3)
competitive practice.
The Compensation Committee
George M. Keller, Chairman
Tully M. Friedman
James R. Harvey
John M. Pietruski
11
<PAGE>
STOCK PRICE PERFORMANCE GRAPHS
The following graphs compare the cumulative total stockholder return on the
Corporation's Common Stock for the periods indicated with the Standard & Poor's
500 Stock Index and the Value Line Health Care Sector Index (comprised of
seventy-nine companies in the health care industry, including the Corporation).
The stock price performance depicted in the performance graphs is not
necessarily indicative of future price performance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
AMONG McKESSON, S&P 500 INDEX AND
VALUE LINE HEALTHCARE SECTOR INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
S&P
Measurement Period S&P 500 FINANCIAL
(Fiscal Year Covered) McKESSON INDEX INDEX
- --------------------- -------- ------- ---------
<S> <C> <C> <C>
Measurement Pt-1991 $100.00 $100.00 $100.00
FYE 1992 $103.87 $111.08 $118.09
FYE 1993 $148.57 $128.20 $ 99.49
FYE 1994 $203.81 $130.42 $ 97.28
FYE 1995 $500.13 $150.76 $134.01
FYE 1996 $648.28 $199.22 $191.47
</TABLE>
* Assumes $100 invested in McKesson Common Stock and in each index on March
31, 1991 and that all dividends are reinvested.
12
<PAGE>
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
AMONG McKESSON, S&P 500 INDEX AND
VALUE LINE HEALTHCARE SECTOR INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
S&P
Measurement Period S&P 500 FINANCIAL
(Fiscal Year Covered) McKESSON INDEX INDEX
- --------------------- -------- ------- ---------
<S> <C> <C> <C>
Measurement Pt-11/21/94 $100.00 $100.00 $100.00
FYE 3/31/95 $134.69 $111.35 $112.86
FYE 3/31/96 $174.59 $147.15 $161.09
</TABLE>
* Assumes $100 invested in McKesson Common Stock and in each index on November
21, 1994 and that all dividends are reinvested.
13
<PAGE>
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the compensation for services in all
capacities to the Corporation and its subsidiaries (including compensation for
services rendered previously to Old McKesson and its subsidiaries) for the
three fiscal years ended March 31, 1994, 1995 and 1996, of the Chief Executive
Officer and each of the other four most highly compensated executive officers
of the Corporation in FY1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- -----------------------------
AWARDS PAYOUTS
--------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL SATION AWARD(S) SARS PAYOUTS SATION
POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) (#)(3) ($) ($)(4)
------------------ ---- ---------- --------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alan Seelenfreund 1996 655,000 500,000 -- 0 55,000 250,000 132,164
Chairman and Chief 1995 625,000 1,100,000 -- 0 55,000 180,000 140,991
Executive Officer 1994 575,000 775,000 -- 0 135,868 140,800 102,145
David E. McDowell(5) 1996 495,000 325,000 131,820(6) 0 35,000 175,000 59,631
President and Chief 1995 480,000 750,000 108,460 0 35,000 105,000 74,368
Operating Officer 1994 450,000 550,000 98,235 0 101,901 61,600 48,829
David L. Mahoney 1996 265,000 125,000 -- 0 15,000 52,500 29,344
Vice President and 1995 250,000 337,500 -- 0 15,000 42,000 45,258
President, Pharma- 1994 225,000 275,000 -- 0 101,901 35,200 30,086
ceutical Services Group
Ivan D. Meyerson 1996 256,000 115,000 -- 0 7,000 58,750 24,754
Vice President and 1995 251,000 185,000 -- 0 10,000 47,000 41,016
General Counsel 1994 243,000 150,000 -- 0 16,983 38,720 29,117
Charles A. Norris(5) 1996 235,000 175,000 -- 0 12,000 52,500 19,234
Vice President and 1995 235,000 55,000 -- 0 7,000 42,000 38,264
President, McKesson 1994 222,000 175,000 -- 0 33,967 35,200 23,729
Water Products
Corporation
</TABLE>
- --------
(1) Except as noted in the footnotes below, the dollar value of perquisites
and other personal benefits for each named executive officer during FY
1996 was less than established reporting thresholds.
(2) No restricted stock awards were made in the fiscal years listed to any
named executive officers. The number and value of the aggregate Restricted
Incentive Stock ("RIS") holdings of the named executive officers on
Friday, March 29, 1996 (based upon the closing market value stock price of
$51.25) were as follows: Mr. Seelenfreund, 22,586 and $1,157,533; Mr.
Meyerson, 4,245 and $217,556 and Messrs. McDowell, Mahoney and Norris, 0
and $0. Under the provisions of Old McKesson's 1988 Restricted Stock Plan,
RIS Grants were awarded to certain designated key executives with respect
to nonqualified options granted under Old McKesson's 1978 Stock Option
Plan in order to encourage such persons to hold shares of stock following
exercise of nonqualified options. RIS grants were awarded on the basis of
one share of Common Stock for every ten option shares. The restrictions
imposed on RIS grant shares lapse on the third anniversary of the option
exercise date provided the related option shares have not been sold or
otherwise disposed of prior to such third anniversary. If they have been
so disposed of, then all rights to the RIS grant shares immediately
terminate. Dividends are paid on RIS grant shares at the same rate and at
the same time as on the Common Stock.
(3) For FY 1994 the table reflects the number of options issued upon the
adjustment of Old McKesson options in connection with the PCS Transaction.
(4) For FY 1996, includes the aggregate value of (i) the Corporation's stock
contributions under the PSIP, a plan designed to qualify as an employee
stock ownership plan under the Internal Revenue Code, allocated to the
accounts of the named executive officers, as follows: Mr. Seelenfreund,
$12,343; Mr. McDowell, $11,059; Mr. Mahoney, $12,343; Mr. Meyerson,
$12,343 and Mr. Norris, $12,295; (ii) employer matching contributions
under the Supplemental PSIP, an unfunded, nonqualified plan established
because of limitations on annual contributions to the PSIP contained in
the Code, as follows: Mr. Seelenfreund, $58,905; Mr. McDowell, $39,778;
Mr. Mahoney, $15,850; Mr. Meyerson, $10,654 and Mr. Norris, $5,444; and
(iii) above-market interest accrued on deferred compensation for the
following executive officers: Mr. Seelenfreund, $60,916; Mr. McDowell,
$8,795; Mr. Mahoney, $1,151; Mr. Meyerson, $1,756 and Mr. Norris, $1,495.
(footnotes continued on next page)
14
<PAGE>
(5) Mr. McDowell resigned as President and Chief Operating Officer of the
Corporation effective May 20, 1996 and Mr. Norris became an executive
officer of Old McKesson on April 28, 1993.
(6) Includes an annual housing assistance payment in the amount of $60,000
(which amount is equal to 1/10th of the original principal amount of the
housing loan made to Mr. McDowell and discussed under "Indebtedness of
Executive Officers" on page 18) and imputed interest on the housing
assistance loan in the amount of $47,214.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) GRANT DATE VALUE
------------------------------------------------- ----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE VALUE(3)
- ----------------- ------------- ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Alan Seelenfreund 55,000 6.30 50.00 1/31/06 $616,000
David E. McDowell 35,000 4.00 50.00 1/31/06 392,000
David L. Mahoney 15,000 1.70 50.00 1/31/06 168,000
Ivan D. Meyerson 7,000 0.80 50.00 1/31/06 78,400
Charles A. Norris 12,000 1.40 50.00 1/31/06 134,400
</TABLE>
- --------
(1) Individual grants become exercisable in installments of 25% per year on
each of the first through fourth anniversaries of the grant date. No
options were granted with SARs and no freestanding SARs have ever been
granted. Upon the occurrence of a change in control of the Corporation (as
defined in the 1994 Plan) all options granted by the Corporation become
immediately exercisable.
(2) All options were granted at 100% fair market value. Optionees may satisfy
the exercise price by submitting currently owned shares and/or cash. Income
tax withholding obligations may be satisfied by electing to have the
Corporation withhold shares otherwise issuable under the option with a fair
market value equal to such obligations.
(3) In accordance with Securities and Exchange Commission rules, a modified
Black-Scholes option pricing model was chosen to estimate the grant date
present value of 22.4% for the options set forth in this table. The
assumptions used in calculating the reported value included: stock
volatility, 17.77%; interest rate, 5.65%; annual dividend, $1.00;
reductions of approximately 9.61% to reflect probability of forfeiture due
to termination prior to vesting and approximately 17.86% to reflect the
probability of a shortened option term due to termination of employment
prior to the option expiration date. The Corporation does not believe that
the Black-Scholes model, or any other model can accurately determine the
value of an option. Accordingly, there is no assurance that the value, if
any, realized by an executive, will be at or near the value estimated by
the Black-Scholes model. Future compensation resulting from option grants
is based solely on the performance of the Corporation's stock price.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN THE MONEY OPTIONS/
ACQUIRED VALUE MARCH 31, 1996 (#) SARS AT MARCH 31, 1996(3)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan Seelenfreund 127,577 4,645,389 348,953 274,576 $13,083,466 $7,442,846
David E. McDowell 127,378 4,588,491 119,142 180,133 4,371,391 4,898,193
David L. Mahoney 28,335 1,181,472 89,021 97,579 3,152,419 2,772,103
Ivan D. Meyerson 28,396 1,042,814 65,521 43,795 2,502,633 1,250,728
Charles A. Norris 0.00 0.00 96,159 55,037 3,734,257 1,514,069
</TABLE>
- --------
(1) All options were granted at 100% fair market value. Optionees may satisfy
the exercise price by submitting currently owned shares and/or cash. Income
tax withholding obligations may be satisfied by electing to have the
Corporation withhold shares otherwise issuable under the option with a fair
market value equal to such obligations.
(2) Fair market value of securities underlying options or SARs on the date of
exercise minus the exercise price.
(3) Calculated based upon the fair market value share price of $51.25 on
Friday, March 29, 1996, less the share price to be paid upon exercise.
There is no guarantee that if and when these options are exercised they
will have this value.
15
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(1)
OTHER PERIOD ---------------------------------
UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT ($) ($) ($)
---- ---------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Alan Seelenfreund Four years 87,770 262,000 393,000
David E. McDowell Four years 58,039 173,250 259,875
David L. Mahoney Four years 17,755 53,000 79,500
Ivan D. Meyerson Four years 17,152 51,200 76,800
Charles A. Norris Four years 15,745 47,000 70,500
</TABLE>
- --------
(1) The table above represents potential payouts of cash awards, if earned,
upon completion of the four-year incentive period ending March 31, 1999.
These awards are currently tied to after-tax growth in annual earnings per
share (EPS) and return on average stockholder equity (ROE). These two
measures of financial performance currently in use are weighted equally.
Target amounts will be earned for the EPS objective if 100% of the EPS
growth target is achieved; threshold amounts are earned at 50% of target,
and maximum amounts at 130% of target. Additionally, target amounts will be
earned for the ROE objective if 100% of the ROE growth target is achieved;
threshold amounts are earned at 84% of target, and maximum amounts at 116%
of target. Awards, if earned, will be paid in cash at the end of the
performance cycle.
EXECUTIVE SEVERANCE POLICY AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Corporation has implemented an Executive Severance Policy (the "Policy"),
which applies in the event an executive officer is terminated by the
Corporation for reasons other than for cause at any time other than within two
years following a change in control (as defined in the Policy) of the
Corporation. The benefit payable to executive officers under the Policy is
equal to 12 months' base salary plus one month's pay per year of service, up to
a maximum of 24 months. Such benefits would be reduced or eliminated by any
income the executive officer receives from subsequent employers during the
severance payment period and discontinued in the event the executive officer is
employed by a competitor. Executive officers who are age 55 or older and have
15 or more years of service with the Corporation at the time of such
involuntary termination are granted "approved retirement" for purposes of the
Corporation's 1984 Executive Benefit Retirement Plan (the "EBRP") and the 1988
Executive Survivor Benefits Plan. The Policy also provides that, upon such
involuntary termination, awards under the LTIP are pro-rated for all cycles
then in progress. In addition, vesting of stock options and lapse of
restrictions on restricted stock awards will cease as of the date of
termination, and no severance benefits will be paid beyond age 62.
The Corporation has entered into termination agreements with 12 executive
officers, including Messrs. Seelenfreund, Mahoney, Meyerson and Norris.
Pursuant to the Arrangement with Mr. McDowell described on page 14, his
agreement is of no further force or effect. The agreements operate
independently of the Policy, continue through December 31 of each year, and are
automatically extended in one-year increments until terminated by the
Compensation Committee (or by the Board of Directors in the case of Mr.
Seelenfreund's agreement). The agreements are automatically extended for a
period of two years following any change in control.
The agreements provide for the payment of certain severance and other
benefits to executive officers whose employment is terminated within two years
of a change in control of the Corporation. Specifically, if following a change
in control, the executive officer is terminated by the Corporation for any
reason, other than for "Cause" (as defined in the agreements), or if such
executive officer terminates his or her employment for "Good Reason" (as that
term is defined in the agreements), then the Corporation will pay to the
executive officer, as severance pay in cash, an amount equal to 2.99 times his
or her "base amount" (as that term is defined in Section 280G of the Code) less
any amount which constitutes a "parachute payment" (as defined in Section
280G). The Corporation will also continue the executive officer's coverage in
the health and welfare benefit plans in which he or she was a participant as of
the date of termination of employment, and the executive officer will
16
<PAGE>
continue to accrue benefits under the EBRP, in both such cases for the period
of time with respect to which the executive officer would be entitled to
payments under the Corporation's Executive Severance Policy (as described
above) if the executive officer's termination of employment had been covered by
such Policy. In addition, if the executive officer is age 55 or older and has
15 or more years of service (as determined under such plan on the date of
executive's termination of employment), then such termination will
automatically be deemed to be an "approved retirement" under the terms of the
EBRP. The amount of severance benefits paid shall be no higher than the amount
that is not subject to disallowance of deduction under Section 280G of the
Internal Revenue Code.
For purposes of the termination agreements and as used elsewhere in this
proxy statement, a "change in control" is generally deemed to occur if: (i) any
"person" (as defined in the Securities Exchange Act of 1934, as amended) other
than the Corporation or any of its subsidiaries or a trustee or any fiduciary
holding securities under an employee benefit plan of the Corporation or any of
its subsidiaries, acquires securities representing 30% or more of the combined
voting power of the Corporation's then outstanding securities; (ii) during any
period of not more than two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Corporation and any new
director whose election by the Board of Directors or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds (
2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(iii) the stockholders of the Corporation approve a merger or consolidation of
the Corporation with any other corporation, other than (a) a merger or
consolidation which would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to represent, in combination
with the ownership of any trustee or other fiduciary holding securities under
an employee benefit plan of the Corporation, at least 50% of the combined
voting power of the voting securities of the Corporation or such surviving
entity outstanding immediately after such merger or consolidation, or (b) a
merger or consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no person acquires more than 50%
of the combined voting power of the Corporation's then outstanding securities;
or (iv) the stockholders approve a plan of complete liquidation of the
Corporation or an agreement for the sale or disposition by the Corporation of
all or substantially all of its assets.
The Corporation has entered into an arrangement with Mr. McDowell concerning
his resignation as President and Chief Operating Officer of the Corporation
effective May 20, 1996 (the "Arrangement"). Under the Arrangement, Mr. McDowell
will continue as an employee of the Corporation, in a senior advisory capacity,
until November 30, 1997. His base compensation will remain at its current level
until March 31, 1997, at which time it will be reduced by 50%. Mr. McDowell
will be eligible for an MIP bonus award at his current target percentage of
salary for FY 1997, and a pro-rata award for FY 1998; will receive an LTIP
award for the four-year incentive period ending March 31, 1997 and pro-rata
awards for all other incentive periods then in effect (assuming, in each case,
that corporate performance objectives are met); and, will continue to
participate in all other employee benefit plans in which he currently
participates until his service under the Arrangement terminates, at which time
he will be granted an "approved retirement" under the 1984 Executive Benefit
Retirement Plan (the "EBRP"). In addition, the Corporation will continue to
make an annual payment in the amount of $60,000 in January each year through
calendar 1997 (or such later date as may be mutually agreed upon) into the DCAP
II account associated with Mr. McDowell's housing loan, which loan is to be
repaid in full upon termination of the Arrangement.
PENSION BENEFITS
The table below illustrates the estimated combined annual benefits payable
upon retirement at age 65 under the Corporation's qualified retirement plan and
the supplemental EBRP in the specified compensation and years-of-service
classifications. The benefits are computed as single life annuity amounts.
17
<PAGE>
<TABLE>
<CAPTION>
FIVE YEAR YEARS OF SERVICE
AVERAGE --------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 93,100 $110,800 $120,000 $120,000 $120,000
$ 400,000 186,200 221,600 240,000 240,000 240,000
$ 600,000 279,300 332,400 360,000 360,000 360,000
$ 800,000 372,400 443,200 480,000 480,000 480,000
$1,000,000 465,500 554,000 600,000 600,000 600,000
$1,200,000 558,600 664,800 720,000 720,000 720,000
$1,400,000 651,700 775,600 840,000 840,000 840,000
</TABLE>
The compensation covered under the plans whose benefits are summarized in the
above table includes the base salary and annual bonus amounts reported in the
Summary Compensation Table.
The estimated credited years of service at March 31, 1996 for each of the
executive officers named in the Summary Compensation Table are as follows: Mr.
Seelenfreund, 21; Mr. McDowell, 4; Mr. Mahoney, 6; Mr. Meyerson, 18 and Mr.
Norris, 6.
The benefit under the EBRP is a percentage of final average pay based on
years of service or is determined by the Board of Directors. The maximum
benefit is 60% of final average pay. The total paid under the EBRP is not
reduced by Social Security benefits but is reduced by those benefits payable on
a single life basis under the Corporation's qualified retirement plan. Based on
approved retirement at the time Mr. McDowell's Arrangement with the Corporation
(as described on page 17) terminates, it is estimated that he will receive a
combined annual benefit payable under the Retirement Plan and the EBRP of
approximately $200,000.
CERTAIN TRANSACTIONS
The Corporation and its subsidiaries also have transactions in the ordinary
course of business with unaffiliated corporations of which certain of the
Corporation's nonemployee directors are directors and/or executive officers.
The Corporation does not consider the amounts involved in such transactions to
be material in relation to the businesses of such other corporations or the
interests of the directors involved. The Corporation anticipates that similar
transactions will occur in FY 1997.
INDEBTEDNESS OF EXECUTIVE OFFICERS
Under the 1973 Stock Purchase Plan, which plan was assumed by the Corporation
from Old McKesson upon consummation of the PCS Transaction, loans bearing
interest at the rate of 8% per annum have been made to key employees of the
Corporation and its subsidiaries for the purchase of shares of the
Corporation's Common Stock at 100% of the fair market value on the date of
purchase. No such loans were made during FY 1996.
The table below shows as to each director or executive officer who was
indebted to the Corporation in an amount exceeding $60,000 at any time during
the period April 1, 1995 through May 15, 1996, (i) the largest aggregate amount
of indebtedness outstanding during such period, and (ii) the amount of
indebtedness outstanding at May 15, 1996. All indebtedness shown in the case of
Messrs. Dalby, Ferrell, Hawkins and Mahoney resulted from loans under the 1973
Stock Purchase Plan. The amounts shown for Messrs. Armstrong, Hammergren and
McDowell relate to secured loans given to assist those named executives with
housing relocation from other areas upon joining the Corporation (see footnote
(6) to the Summary Compensation Table on page 14 for further information
regarding Mr. McDowell's loan). Such loans are without interest so long as the
individuals remain in the employ of the Corporation, and thereafter at a market
rate.
18
<PAGE>
<TABLE>
<CAPTION>
LARGEST AGGREGATE AMOUNT OF
AMOUNT OF INDEBTEDNESS AT
INDEBTEDNESS MAY 15, 1996
----------------- ---------------
<S> <C> <C>
William A. Armstrong $ 95,000 $ 95,000
Michael T. Dalby 75,041 63,545
Kevin B. Ferrell 725,963 637,643
John H. Hammergren 500,000 500,000
Richard H. Hawkins 121,505 102,065
David L. Mahoney 108,367 94,925
David E. McDowell 600,000 600,000
</TABLE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
At the recommendation of the Audit Committee, the Board of Directors has
reappointed the firm of Deloitte & Touche LLP as the principal independent
auditors to audit the consolidated financial statements of the Corporation and
its subsidiaries for the fiscal year ending March 31, 1997, such appointment to
continue at the pleasure of the Board of Directors. Deloitte & Touche has acted
as the Corporation's independent auditors for several years, is knowledgeable
about the Corporation's operations and accounting practices, and is well
qualified to act in the capacity of auditor.
Representatives of Deloitte & Touche are expected to be present at the
meeting to respond to appropriate questions and to make a statement if they
desire to do so.
ADDITIONAL INFORMATION
The audited financial statements of the Corporation for the fiscal year ended
March 31, 1996 are included in the enclosed Appendix to this Proxy Statement.
The Appendix also contains the information required by the Securities and
Exchange Commission to be included in an annual report to security-holders.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
A stockholder who intends to submit a proposal for inclusion pursuant to Rule
14a-8 under the Securities Exchange Act of 1934 in the proxy statement for the
1997 Annual Meeting, must send the proposal so as to be received by the Vice
President and Corporate Secretary at the principal executive offices of the
Corporation, One Post Street, San Francisco, CA 94104, no later than February
17, 1997.
By Order of the Board of Directors
/s/ NANCY A. MILLER
NANCY A. MILLER
Vice President and Corporate
Secretary
June 17, 1996
A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND
EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED MARCH 31, 1996, EXCLUDING CERTAIN
EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE, BY WRITING TO INVESTOR
RELATIONS, BOX K, MCKESSON CORPORATION, ONE POST STREET, SAN FRANCISCO, CA
94104.
19
<PAGE>
APPENDIX
MCKESSON CORPORATION
GENERAL AND FINANCIAL INFORMATION
FISCAL YEAR 1996
[LOGO OF MCKESSON APPEARS HERE]
<PAGE>
DIRECTORS
<TABLE>
<C> <S>
Alan Seelenfreund............. Chairman of the Board and Chief Executive
Officer, McKesson
Mark A. Pulido................ President and Chief Operating Officer, McKesson
Mary G.F. Bitterman........... President and Chief Executive Officer, KQED,
Inc.
Tully M. Friedman............. General Partner, Hellman & Friedman
George M. Keller.............. Chairman and Chief Executive Officer, Retired,
Chevron Corp.
John M. Pietruski............. Chairman and Chief Executive Officer, Retired,
Sterling Drug Inc.
Carl E. Reichardt............. Chairman of the Board, Retired, Wells Fargo &
Company
Jane E. Shaw.................. Founder, The Stable Network
Robert H. Waterman, Jr. ...... Founder and President, The Waterman Group, Inc.
EXECUTIVE OFFICERS
Alan Seelenfreund............. Chairman of the Board and Chief Executive
Officer
Mark A. Pulido................ President and Chief Operating Officer
William A. Armstrong.......... Vice President Human Resources and
Administration
Michael T. Dalby.............. Vice President Strategic Planning
Jon W. d'Alessio.............. Staff Vice President and Treasurer
Kevin B. Ferrell.............. Vice President and Chief Financial Officer
John H. Hammergren............ Vice President and President of McKesson Health
Systems
Richard H. Hawkins............ Vice President and Controller
David L. Mahoney.............. Vice President and President of McKesson's
Pharmaceutical Services Group
Ivan D. Meyerson.............. Vice President and General Counsel
Nancy A. Miller............... Vice President and Corporate Secretary
Charles A. Norris............. Vice President and President of McKesson Water
Products Company
Robert A. Sigel............... Vice President and President of Millbrook
Distribution Services Inc.
</TABLE>
STOCK EXCHANGES; STOCKHOLDERS
The Company's common stock is listed on the New York and Pacific Stock
Exchanges. As of March 31, 1996, there were 15,143 stockholders of record.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission for the fiscal year ended March 31, 1996, excluding
exhibits thereto, may be obtained without charge by writing to Investor
Relations, Box K, McKesson Corp., One Post Street, San Francisco, CA 94104.
COMMON STOCK PRICES AND DIVIDENDS
The Company's common stock prices and dividend information appears in
Financial Note 17, "Quarterly Financial Information" on pages 41 and 42 of this
Appendix.
ii
<PAGE>
FINANCIAL INFORMATION
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Six-Year Highlights....................................................... 2
Financial Review.......................................................... 7
Statement of Management's Responsibility.................................. 16
Independent Auditors' Report.............................................. 17
Consolidated Financial Statements
Statements of Consolidated Income for the years ended March 31, 1996,
1995 and 1994.......................................................... 18
Consolidated Balance Sheets, March 31, 1996, 1995 and 1994.............. 19
Statements of Consolidated Stockholders' Equity for the years ended
March 31, 1996, 1995 and 1994.......................................... 20
Statements of Consolidated Cash Flows for the years ended March 31,
1996, 1995 and 1994.................................................... 22
Financial Notes......................................................... 23
</TABLE>
1
<PAGE>
SIX-YEAR HIGHLIGHTS
CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $13,716.4 $13,189.1 $12,251.4 $11,555.7 $10,209.3 $8,325.1
Percent change......... 4.0% 7.7% 6.0% 13.2% 22.6% 8.2%
Gross profit(/1/)....... 1,147.0 1,093.9(/1/) 1,064.4 1,064.8 997.5 941.8
Percent of revenues.... 8.4% 8.3% 8.7% 9.2% 9.8% 11.3%
Operating profit........ 277.0 74.7(/2/) 262.4 253.2 153.3(/3/) 224.1
Percent change......... 270.8% (71.5)% 3.6% 65.2% (31.6)% (2.9)%
Percent of revenues.... 2.0% .6% 2.1% 2.2% 1.5% 2.7%
Operating margin
(deficit)(/4/)......... 274.1 (24.7)(/5/) 265.4(/6/) 213.6 107.4(/7/) 198.4
Percent of revenues.... 2.0% (0.2)% 2.2% 1.8% 1.1% 2.4%
Interest expense........ 46.7 46.0 41.3 49.5 55.2 55.3
Income (loss) before
taxes on income........ 227.4 (70.7)(/5/) 224.1(/6/) 164.1 52.2(/7/) 143.1
Percent change......... -- -- 36.6% 214.4% (63.5)% (7.6)%
Taxes on income......... 88.7 111.5(/8/) 88.6 65.6 28.0 56.9
Effective tax rate..... 39.0% -- 39.5% 40.0% 53.6% 39.8%
Income (loss) after
taxes
Continuing operations.. 135.4 (193.2)(/5/)(/8/) 126.5(/6/) 95.1 22.0(/7/) 85.0
Percent change........ -- -- 33.0% 332.3% (74.1)% (1.6)%
Discontinued
operations............ -- 597.7(/9/) 30.6 19.6 10.3 10.3
Extraordinary item--
debt extinguishment... -- -- (4.2) -- -- --
Cumulative effects of
accounting changes.... -- -- (16.7) -- (110.5) --
Net income (loss)....... 135.4 404.5 136.2 114.7 (78.2) 95.3
Percent change......... (66.5)% 197.0% 18.7% -- -- 1.7%
Average stockholders'
equity................. 1,043.3 808.3 623.1 581.5 593.3 660.1
Return on
equity(/1//0/)........ 13.0% 50.0% 21.9% 19.7% (13.2)% 14.4%
Total dividends
declared............... 44.7 61.5 77.1 74.4 72.3 71.8
Common dividends
declared............... 44.7 56.5 66.9 64.0 61.8 61.2
Fully diluted earnings
(loss) per common share
Continuing operations.. $ 2.90 $ (4.29) $ 2.78 $ 2.07 $ .39 $ 1.90
Percent change........ -- -- 34.3% 430.8% (79.5)% 1.6%
Discontinued
operations............ -- 13.15 .70 .44 .26 .23
Extraordinary item..... -- -- (.10) -- -- --
Cumulative effects of
accounting changes.... -- -- (.38) -- (2.85) --
Total.................. 2.90 8.86 3.00 2.51 (2.20) 2.13
Percent change........ (67.3)% 195.3% 19.5% -- -- 4.9%
</TABLE>
- -------
(1) Revenues less cost of sales, in fiscal 1995 includes $36.9 million of
charges for restructuring, asset impairment and other operating items,
0.3% of revenues.
(2) Includes $208.0 million in charges for restructuring, asset impairment and
other operating items, 1.6% of revenues.
(3) Net of restructuring charges of $69.7 million, 0.7% of revenues.
(4) Income from continuing operations before interest expense, taxes on income
and minority interest.
(5) Includes $59.4 million of compensation costs related to the PCS
Transaction, $222.9 million of charges for restructuring, asset impairment
and other operating items and $2.0 million of contributions to the
McKesson Foundation, representing 2.2% of revenues in the aggregate,
$202.4 million after-tax.
(6) Includes pre-tax gain of $37.4 million, 0.3% of revenues, $24.5 million
after-tax, relating to a $55.1 million gain on the sale and donation of
Armor All stock, partially offset by a contribution of Armor All stock to
the McKesson Foundation of $4.3 million and a loss on the termination of
interest rate swap arrangements of $13.4 million.
(7) Net of restructuring charges of $82.8 million, 0.8% of revenues, $56.8
million after-tax.
(8) Includes $107.0 million of income tax expense related to the sale of PCS.
(9) Includes gain on sale of PCS of $576.7 million.
(10) Based on net income.
2
<PAGE>
SIX-YEAR HIGHLIGHTS
CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Customer receivables.... $ 741.7 $ 766.3 $ 737.8 $ 723.5 $ 669.7 $ 494.1
Days of sales(/1/)..... 19.5 20.9 21.7 22.5 23.0 21.4
Inventories--LIFO cost.. 1,379.1 1,160.2 993.5 885.4 847.8 694.7
Inventories--FIFO cost.. 1,673.1 1,464.6 1,311.6 1,214.4 1,157.4 976.6
Days of sales(/1/)..... 47.9 43.6 42.2 41.7 44.1 47.6
Days of sales excluding
sales to customers'
warehouses(/1/)....... 63.2 57.3 56.3 55.5 58.3 61.9
Drafts and accounts
payable................ 1,389.0 1,296.5 1,130.5 1,074.6 990.4 723.3
Days of sales(/1/)..... 39.8 38.6 36.4 36.9 37.8 35.3
Current assets.......... 2,665.0 2,699.4 1,873.5 1,757.5 1,702.3 1,363.4
Current liabilities..... 1,722.6 1,738.2 1,428.2 1,419.1 1,316.7 992.4
Working capital......... 942.4 961.2 445.3 338.4 385.6 371.0
Percent of
revenues(/1/)......... 6.9% 7.3% 3.6% 2.9% 3.7% 4.5%
Property, plant and
equipment--net......... 379.8 366.3 396.6 390.2 391.5 386.5
Percent of reve-
nues(/1/)............. 2.8% 2.8% 3.2% 3.4% 3.7% 4.6%
Capital expenditures.... 77.3 82.3 74.1 56.9 70.6 74.1
Total assets............ 3,503.9 3,479.2 2,835.0 2,603.6 2,580.6 2,246.4
Total debt(/2/)......... 477.4 498.3 538.0 434.1 579.1 602.7
Stockholders' equity.... 1,064.6 1,013.5 678.6 619.4 554.5 675.6
Capital employed(/3/)... 1,542.0 1,511.8 1,216.6 1,053.5 1,133.6 1,278.3
Ratio of debt to
capital employed...... 31.0% 33.0% 44.2% 41.2% 51.1% 47.1%
Average capital
employed(/3/).......... 1,605.7 1,378.1 1,121.1 1,093.3 1,184.2 1,219.1
Turnover(/4/).......... 8.5 9.6 10.9 10.6 8.6 6.8
Fully diluted shares.... 46.7 45.5 44.1 44.8 38.8(/5/) 44.6
Common shares
outstanding at 3/31.... 44.8 44.4 40.6 40.6 38.9 38.2
Dividends per common
share.................. 1.00 1.34 1.66 1.60 1.60 1.60
Cash distribution from
PCS
Transaction per common
share................. -- 76.00(/6/) -- -- -- --
Book value per common
share(/7/)............. 23.76 22.83 16.38 14.99 13.97 17.44
Market price
High................... 55 5/8 109 1/4 68 1/2 47 1/8 40 1/8 38
Low.................... 37 1/4 30 1/8 38 5/8 30 1/4 32 26 7/8
At year end............ 51 1/4 40 3/8 59 1/2 44 3/4 32 5/8 32 7/8
</TABLE>
- -------
(1) Based on year-end balances and sales or cost of sales assuming major
acquisitions occurred at beginning of year.
(2) Total debt includes all interest-bearing debt and capitalized lease
obligations.
(3) Capital employed consists of total debt and stockholders' equity.
(4) Revenues divided by average capital employed.
(5) Excludes convertible securities which were anti-dilutive.
(6) Received by shareholders directly from Eli Lilly and Company.
(7) Stockholders' equity less preferred stock plus portion of ESOP notes and
guarantee related to the Series B ESOP preferred stock divided by year-end
common shares outstanding.
3
<PAGE>
SIX-YEAR HIGHLIGHTS
REPORTING SEGMENTS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
---------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
HEALTH CARE SERVICES
Revenues............... $12,667.8 $12,063.1 $11,075.4 $10,360.5 $9,042.7 $7,104.4
Percent change........ 5.0% 8.9% 6.9% 14.6% 27.3% 10.3%
Sales to customers'
warehouses............ 3,011.1 2,888.1 2,800.7 2,607.2 2,066.3 1,706.5
Revenues excluding
sales to customers'
warehouses............ 9,656.7 9,175.0 8,274.7 7,753.3 6,976.4 5,397.9
Percent change........ 5.3% 10.9% 6.7% 11.1% 29.2% 10.9%
Operating profit....... 206.1 76.1(/1/) 165.6 169.9 105.1(/2/) 161.9
Percent change........ 170.8% (54.0)% (2.5)% 61.7% (35.1)% 18.3%
Percent of revenues... 1.6% .6%(/1/) 1.5% 1.6% 1.2%(/2/) 2.3%
Percent of revenues
excluding sales to
customers'
warehouses........... 2.1% .8%(/1/) 2.0% 2.2% 1.5%(/2/) 3.0%
Average capital
employed(/3/)......... 1,043.5 989.5 836.9 663.3 722.7 656.4
Turnover(/4/)......... 12.1 12.2 13.2 15.6 12.5 10.8
Return(/5/)........... 19.8% 7.7% 19.8% 25.6% 14.5% 24.6%
Segment assets......... 2,525.3 2,148.6 1,951.6 1,759.5 1,699.2 1,340.2
Capital expenditures... 43.5 44.4 34.4 24.5 38.3 26.4
Depreciation........... 33.9 30.2 23.1 20.2 20.4 16.5
Amortization of
intangibles........... 6.9 7.0 6.9 6.1 7.0 7.6
SERVICE MERCHANDISING
Revenues............... 564.7 648.2 747.6 788.4 778.3 839.7
Percent change........ (12.9)% (13.3)% (5.2)% 1.3% (7.3)% (.4)%
Operating profit....... 20.3 (56.2)(/6/) 21.5 20.8 2.7 24.5
Percent change........ 136.1% (361.4)% 3.4% 670.4% (89.0)% --
Percent of revenues... 3.6% (8.7)%(/6/) 2.9% 2.6% .3% 2.9%
Average capital
employed(/3/)......... 71.5 140.2 174.6 167.3 181.9 196.3
Turnover(/4/)......... 7.9 4.6 4.3 4.7 4.3 4.3
Return(/5/)........... 28.4% (40.1)% 12.3% 12.4% 1.5% 12.5%
Segment assets......... 111.1 130.2 247.8 275.8 263.8 293.3
Capital expenditures... 2.1 3.9 4.6 7.2 2.7 5.9
Depreciation........... 3.1 5.5 7.1 8.2 9.8 10.4
Amortization of
intangibles........... -- 1.4 1.8 1.8 2.5 2.3
</TABLE>
- --------
(1) Includes $107.3 million of charges for restructuring, asset impairment and
other operating items, .9% of revenues, 1.2% of revenues excluding sales to
customers' warehouses.
(2) Net of restructuring charges of $69.7 million, 0.8% of revenues, 1.0% of
revenues excluding sales to customers' warehouses.
(3) Net assets of the segment.
(4) Revenues divided by average capital employed.
(5) Operating profit divided by average capital employed.
(6) Includes $83.4 million of charges for restructuring, asset impairment and
other operating items, 12.9% of revenues.
4
<PAGE>
SIX-YEAR HIGHLIGHTS
REPORTING SEGMENTS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
WATER PRODUCTS
Revenues............... $259.3 $246.0 $240.3 $229.6 $232.8 $236.7
Percent change........ 5.4% 2.4% 4.7% (1.4)% (1.6)% 1.8%
Operating profit....... 39.6 14.5(/4/) 37.0 30.4 24.1 24.3
Percent change........ 173.1% (60.8)% 21.7% 26.1% (0.8)% (34.5)%
Percent of revenues... 15.3% 5.9%(/4/) 15.4% 13.2% 10.4% 10.3%
Average capital
employed(/1/)......... 114.2 122.7 119.4 107.9 104.4 103.1
Turnover(/2/)......... 2.3 2.0 2.0 2.1 2.2 2.3
Return(/3/)........... 34.7% 11.8% 31.0% 28.2% 23.1% 23.6%
Segment assets......... 142.0 142.3 150.4 135.7 132.6 127.3
Capital expenditures... 24.8 26.3 28.7 20.6 25.9 25.9
Depreciation........... 21.4 20.3 18.3 16.8 15.9 15.5
Amortization of
intangibles........... 0.1 0.2 -- -- -- --
ARMOR ALL
Revenues............... 186.3 216.8 182.3 168.4 146.1 133.8
Percent change........ (14.1)% 18.9% 8.3% 15.3% 9.2% (19.1)%
Operating profit....... 11.0 40.3 38.3 32.1 21.4 13.4
Percent change........ (72.7)% 5.2% 19.3% 50.0% 59.7% (58.5)%
Percent of revenues... 5.9% 18.6% 21.0% 19.1% 14.6% 10.0%
Average capital
employed(/3/)
--net of minority
interest............. 68.4 68.1 66.7 84.7 77.1 81.7
Turnover(/2/)(/5/).... 1.5 1.8 1.7 1.6 1.6 1.4
Return(/3/)(/5/)...... 8.6% 33.1% 35.0% 31.3% 22.9% 13.6%
Segment assets(/6/).... 158.9 172.9 151.8 140.6 138.8 115.9
Capital expenditures... 1.6 2.0 1.4 0.7 0.8 1.3
Depreciation........... 1.5 1.3 1.1 1.2 1.2 0.8
Amortization of
intangibles........... 2.5 2.5 2.7 3.8 4.3 4.4
</TABLE>
- --------
(1) Net assets of the segment.
(2) Revenues divided by average capital employed.
(3) Operating profit divided by average capital employed.
(4) Includes $17.3 million of charges for restructuring, asset impairment and
other operating items, 7.0% of revenues.
(5) Calculated on average capital employed before deduction for minority
interest.
(6) Armor All segment assets include $20.9 million, $22.2 million and $26.3
million of cash and cash equivalents at March 31, 1996, 1995 and 1994,
respectively.
5
<PAGE>
SIX-YEAR HIGHLIGHTS
REPORTING SEGMENTS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------- ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CORPORATE
Revenues.............. $ 38.3 $ 15.0 $ 5.8 $ 8.8 $ 9.4 $ 10.5
Expenses.............. (34.1) (112.6)(/2/) 1.8(/3/) (45.4) (53.1) (30.6)
Average capital
employed(/1/)........ 308.1 57.6 (76.5) 70.1 98.1 181.1
Total assets*......... 566.6 885.2 333.4 292.0 346.2 369.7
Capital expenditures.. 5.3 5.7 5.0 3.9 2.9 14.6
Depreciation.......... 1.9 1.4 6.2 9.9 10.1 10.0
*Total assets include:
Cash and cash
equivalents and
marketable
securities.......... 456.3 670.5 62.7 77.6 145.2 155.4
Net assets of
discontinued
operations in other
assets(/4/)......... -- -- 119.1 66.2 60.4 21.2
</TABLE>
- --------
(1) Net assets of the segment.
(2) Includes $76.3 million of expense related to compensation costs associated
with the PCS Transaction, charges for restructuring, asset impairment and
other operating items and contributions to the McKesson Foundation.
(3) Includes $37.4 million in income consisting of a $55.1 million gain on the
sale and donation of Armor All stock, partially offset by a contribution
to the McKesson Foundation of $4.3 million and a loss on the termination
of interest rate swap arrangements of $13.4 million.
(4) Includes net assets of PCS prior to disposition, November 21, 1994.
6
<PAGE>
FINANCIAL REVIEW
RESULTS OF OPERATIONS
Fiscal 1996 income from continuing operations was $135.4 million, $2.90 per
fully diluted share, an increase of 17% over the prior year's income from
continuing operations of $116.2 million before unusual items. Fiscal 1995
income includes expenses associated with the sale of PCS and charges resulting
from initiatives to streamline the distribution and water businesses. Fiscal
1994 results include a gain on the sale of Armor All stock and other charges.
For purposes of discussing the results of operations, these income and expense
items are referred to as "unusual items" in the Financial Review.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-----------------------------------------------------
1996 1995 1994
---------------- ------------------ -----------------
PRE- PRE-
TAX AFTER-TAX PRE-TAX AFTER-TAX TAX AFTER-TAX
------ --------- ------- --------- ------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Income from Continuing
Operations
Before unusual items
and minority interest. $227.4 $138.7 $ 213.6 $ 127.2 $186.7 $111.0
Minority interest in
net income of Armor
All................... (3.3) (11.0) (9.0)
------ ------ ------- ------- ------ ------
Before unusual items... 227.4 135.4 213.6 116.2 186.7 102.0
Unusual Items
Compensation costs
related to the PCS
Transaction.......... (59.4) (45.3)
Income tax expense
related to the PCS
Transaction.......... (107.0)
Charges for
restructuring, asset
impairment and other
operating items...... (222.9) (158.1)
Gain on sale of Armor
All stock............ 52.1 32.3
Other................. (2.0) 1.0 (14.7) (7.8)
------ ------ ------- ------- ------ ------
Income (loss) from
Continuing Operations... $227.4 $135.4 $ (70.7) $(193.2) $224.1 $126.5
====== ====== ======= ======= ====== ======
</TABLE>
PCS Transaction
On November 21, 1994 McKesson and Eli Lilly and Company ("Eli Lilly")
completed a transaction whereby Eli Lilly effectively acquired McKesson's
pharmaceutical benefits management business which consisted primarily of PCS
Health Systems, Inc. and Clinical Pharmaceuticals, Inc., both wholly-owned
subsidiaries of McKesson. Of the approximately $4 billion of proceeds from this
transaction, approximately $600 million was paid to the Company. An additional
$24 million of the $4 billion consideration was received from Eli Lilly to fund
deferred vested stock option payments. The remainder of the $4 billion was paid
directly to the McKesson shareholders by Eli Lilly.
Unusual Items--Fiscal 1995
The $59.4 million of pre-tax compensation costs related to the PCS
Transaction consists of $23.6 million associated with an allocation of cash and
shares to ESOP plan participants resulting from a paydown of ESOP debt by the
ESOP trust, and $35.8 million associated with the Company's vested stock
options and other compensation programs.
The $107.0 million of income tax expense resulted from the distribution of
McKesson common stock to effect the PCS Transaction.
The $222.9 million pre-tax charge for restructuring, asset impairment and
other operating items resulted, in part, from the initiation by the Company's
management of several measures designed to
7
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
streamline operations and improve productivity in the Company's Health Care
Services, Service Merchandising and Water Products segments. These measures
included consolidation of certain facilities, workforce reductions and
divestiture of under-performing assets and were expected to reduce operating
expenses, improve working capital efficiency and enhance customer service.
Approximately $83 million of the charge related to a write-down of the
Company's investment in its Service Merchandising business as a result of
significant changes in that business' customer base and marketplace. Other
charges consist primarily of write-downs of assets to be disposed of to fair
value less costs to sell, impairment losses on capitalized software due to
changes in technology, severance for announced workforce reductions, write-
downs of inventory associated with the discontinuation of certain product
lines, and receivables reserves related to facility closures and a reassessment
of credit risks in the Health Care Services segments. The assets to be disposed
of are associated with facility consolidations in the Health Care Service and
Water Products segments and surplus properties held by the Company. The
disposition of these properties is expected to occur over the next three years.
Unusual Items--Fiscal 1994
Fiscal 1994 income from continuing operations includes a $52.1 million pre-
tax gain on the sale of Armor All stock, a pre-tax loss of $13.4 million from
the termination of interest rate swap arrangements and a $1.3 million pre-tax
charge for the contribution of Armor All shares to the McKesson Foundation.
Net Income
Fiscal 1996 net income was $135.4 million or $2.90 per fully-diluted share.
Fiscal 1995 net income was $404.5 million or $8.86 per fully diluted share,
both of which include amounts related to the PCS Transaction and to initiatives
taken by the Company to enhance the productivity of its businesses. The Company
recorded income of $597.7 million from discontinued operations, including a
gain on the sale of PCS of $576.7 million and $21.0 million for PCS earnings
during the part of the year it was owned by the Company. Fiscal 1994 net income
was $136.2 million or $3.00 per share which includes $126.5 million from
continuing operations, $30.6 million from the PCS discontinued operations, an
extraordinary after-tax loss of $4.2 million from the early retirement of debt
and a $16.7 million after-tax charge for the cumulative effect of the
accounting change to adopt Statement of Financial Accounting Standards ("SFAS")
No. 112 "Employers' Accounting for Postemployment Benefits."
BUSINESS SEGMENTS
The Company's business segments consist of Health Care Services, Service
Merchandising, Water Products and Armor All. Health Care Services is the
Company's primary business and includes the U.S. pharmaceutical and health care
products distribution business, its operations to support the needs of
pharmaceutical and other health care product manufacturers, institutional and
retail customers and its international pharmaceutical distribution operations
(including Canada and an equity interest in a Mexican distribution business).
Service Merchandising distributes health and beauty care products, general
merchandise and specialty foods to supermarkets, drug stores and discount
department stores. It was previously included in the Health Care Services
segment and has been reclassified as a separate segment to better reflect
health care related activities in the Health Care Services segment. Prior year
amounts have been reclassified accordingly.
Water Products is engaged in the processing, delivery and sale of bottled
drinking water and the sale of packaged water to retail stores.
Armor All Products Corporation is a majority-owned subsidiary engaged in
developing and marketing branded appearance enhancement and protection products
for the automotive and homecare markets.
8
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
REVENUE GROWTH
In fiscal 1996, revenues increased by $527.3 million or 4% to $13.7 billion
from the prior year. Revenues of $13.2 billion in fiscal 1995 increased 8%
from fiscal 1994. Substantially all of the revenue growth was from existing
businesses.
Revenues for Health Care Services increased 5% in fiscal 1996 compared with
increases of 9% and 7%, respectively, in 1995 and 1994. The growth in fiscal
1996 was dampened by the loss of a high-volume customer at the beginning of
the fiscal year. All customer segments (retail and institutional) recorded
revenue increases, with significant contributions from the Valu-Rite and
proprietary generic drug programs. Revenue growth accelerated in the fourth
quarter of fiscal 1996, increasing 9% excluding sales to customers' warehouses
compared with the fourth quarter of fiscal 1995.
Revenues for Service Merchandising decreased 13% in fiscal 1996 to $564.7
million and 13% to $648.2 million in fiscal 1995 as strong competitive
pressures and customer consolidations resulted in the loss of several large
customers in both years.
Water Products revenues increased 5% in fiscal 1996 to $259.3 million and 2%
to $246.0 million in fiscal 1995. The increases in both years resulted from
higher packaged water sales to the grocery trade and moderate growth in the
direct-delivery business, mitigated by a decrease in sales of vended water.
Armor All revenues declined 14% in fiscal 1996 to $186.3 million due to
reduced consumer demand for automotive protectant and appearance products as
well as efforts by retailers to reduce inventories. In fiscal 1995, Armor All
revenues increased 19% to $216.8 million due primarily to sales of new
products.
Corporate revenues in fiscal 1996 increased to $38.3 million from $15.0
million in fiscal 1995, primarily due to increased interest income from higher
cash and short-term investment balances as a result of the full year benefit
from the PCS Transaction proceeds.
OPERATING PROFIT
Health Care Services operating profit before unusual items rose 12% to
$206.1 million in fiscal 1996. Operating profit for Health Care Services in
fiscal 1995 included charges of $107.3 million for unusual items. The U.S.
distribution business experienced intense competition in fiscal 1996 which
caused a decline in selling margins. This decline was offset by product
management efforts under the Company's proprietary generic pharmaceutical
program and other inventory management programs, as well as operating expense
efficiencies. Fiscal 1996 operating profits also included the start-up and
research and development costs of strategic initiatives. These costs were
offset by a pre-tax gain of $11.2 million on the sale of the Company's
interest in a Central American pharmaceutical manufacturer for $36.1 million.
The operating profit for fiscal 1995 reflects lower operating expenses due to
workforce reductions and ongoing consolidation of facilities and
administrative services and moderate increases in international operations.
The Company uses the last-in, first-out (LIFO) method of accounting for
inventories which results in cost of sales that more closely reflect
replacement cost than other accounting methods, thereby mitigating the effects
of inflation and deflation on operating profit. The practice in the Health
Care Services distribution businesses is to pass on to customers price changes
from suppliers. The Company generally receives price protection from
manufacturers that prevents inventory losses from manufacturer price
decreases. Price declines on many generic pharmaceutical products in the
Health Care Services segment in each of the fiscal years ended March 31, 1996,
1995 and 1994 moderated the effects of inflation in other product categories,
which resulted in minimal overall cost changes in those fiscal years.
Service Merchandising operating profit before unusual items decreased 25% to
$20.3 million in fiscal 1996. Strong competitive pressures, customer
consolidations and a decline in promotional
9
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
incentives from manufacturers significantly affected earnings. Fiscal 1995
operating profit, excluding unusual items of $83.4 million, increased by 26%
as operating expense reductions more than offset the gross margin impact of
the revenue decline.
Water Products operating profit before unusual items increased 25% to $39.6
million in fiscal 1996 due to moderate sales growth and lower overall
operating costs, due in part to ongoing programs to improve customer service
which have reduced customer turnover expenses and increased productivity.
Fiscal 1995 operating profit, excluding unusual items of $17.3 million,
declined 14% due to expenses in the grocery products division related to the
introduction of new products, promotional activities and increased packaging
raw materials costs and competitive pressures in the vended water division.
Armor All operating profit declined 73% to $11.0 million in fiscal 1996 due
to continued weakness in consumer demand for its principal products. The
decrease in operating profit is greater than the 14% decrease in revenues
primarily due to $8 million of charges related to packaging problems and
allowances for obsolete and discontinued inventory items and the absorption of
fixed marketing and selling costs over the lower revenue base. In fiscal 1995,
operating profit increased $2.0 million or 5%. Operating profit increased at a
slower rate than revenues due to continued investment in new home care and
automotive products and costs associated with a new promotional program for
Armor All's protectant product.
Corporate expenses in fiscal 1995 included charges of $76.3 million for
unusual items and in fiscal 1994 included income of $37.4 million for unusual
items. Adjusting for such unusual items, Corporate expenses were $34.1
million, $36.3 million and $35.6 million in fiscal 1996, 1995 and 1994,
respectively.
The following table identifies the operating margin (income before interest
expense, taxes on income and minority interest as a percent of revenues)
components for the past three years.
Computed based on total revenues:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross profit margin(/1/)........................ 8.4% 8.3%(/2/) 8.7%
Operating expenses.............................. 6.4 8.5(/2/) 6.5(/3/)
--- ---- ---
Operating margin (deficit)...................... 2.0% (0.2)%(/2/) 2.2%(/3/)
=== ==== ===
</TABLE>
- --------
(1) Revenues less cost of sales.
(2) Excluding fiscal 1995 unusual items, the gross profit margin is 8.6%,
operating expenses are 6.6% and the operating margin is 2.0%.
(3) Excluding fiscal 1994 unusual items, operating expenses are 6.8% and the
operating margin is 1.9%.
Computed based on revenues excluding sales to customers' warehouses:(/1/)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross profit margin(/2/)....................... 10.7% 10.6%(/3/) 11.3%
Operating expenses............................. 8.1 10.9(/3/) 8.5(/4/)
---- ---- ----
Operating margin (deficit)..................... 2.6% (0.3)%(/3/) 2.8%(/4/)
==== ==== ====
</TABLE>
- --------
(1) Computed with revenues excluding sales to customers' warehouses of $3.0
billion, $2.9 billion, and $2.8 billion in fiscal 1996, 1995 and 1994,
respectively. Sales to customers' warehouses consist of bulk sales of
pharmaceuticals to drug chain warehouses. Such sales have almost no gross
margins, minimal operating costs, require no incremental investment in
working capital and are made in connection with other sales to these
customers.
(2) Revenues less cost of sales.
(3) Excluding fiscal 1995 unusual items, the gross profit margin is 11.0%,
operating expenses are 8.5% and the operating margin is 2.5%.
(4) Excluding fiscal 1994 unusual item, operating expenses are 8.9% and the
operating margin is 2.4%.
10
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
Operating margin (computed based on revenues excluding sales to customers'
warehouses) excluding unusual items, increased to 2.6% in fiscal 1996 from 2.5%
in fiscal 1995 as successful cost control efforts at Health Care Services and
Water Products more than offset the adverse impact from lower margins at Armor
All and Service Merchandising.
The following table summarizes operating profit as a percentage of revenues
by segment:
<TABLE>
<CAPTION>
AS A PERCENT OF REVENUE
------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Health Care Services........................ 1.6% 0.6%(/1/) 1.5%
Health Care Services (excluding sales to
customers' warehouses)..................... 2.1 0.8(/1/) 2.0
Service Merchandising....................... 3.6 (8.7)(/2/) 2.9
Water Products.............................. 15.3 5.9(/3/) 15.4
Armor All................................... 5.9 18.6 21.0
</TABLE>
- --------
(1) Excluding fiscal 1995 unusual items, the percentages are 1.5% of total
revenues and 2.0% of revenues excluding sales to customers' warehouses.
(2) Excluding fiscal 1995 unusual items, the percentage is 4.2%.
(3) Excluding fiscal 1995 unusual items, the percentage is 12.9%.
Operating profit for Health Care Services increased moderately from fiscal
1995 excluding unusual items due to operating expense improvements and product
management efforts which offset declines in selling margins.
INTERNATIONAL OPERATIONS
International operations accounted for 15% of fiscal 1996 consolidated
operating profits and 7% of consolidated assets at March 31, 1996. Fiscal 1995
international operations were 13% of consolidated operating profits excluding
unusual items and 7% of consolidated assets at March 31, 1995. International
operations are subject to certain opportunities and risks, including currency
fluctuations. The Company monitors its operations and adopts strategies
responsive to changes in the economic and political environment in each of the
countries in which it operates.
WORKING CAPITAL
The following table shows working capital at March 31 of each year as a
percentage of revenues for the fiscal year. Working capital for the purposes of
this presentation excludes cash, cash equivalents, marketable securities and
interest-bearing obligations.
<TABLE>
<CAPTION>
MARCH 31 WORKING CAPITAL
AS A PERCENT OF REVENUES
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Health Care Services.......................... 4.3% 3.5% 3.4%
Health Care Services (excluding sales to
customers' warehouses)....................... 5.6 4.6 4.5
Total Company............................... 3.6 2.3 3.5
</TABLE>
The decrease in the 1995 total company working capital ratio is primarily due
to approximately $120 million of accrued liabilities at March 31, 1995 related
to the PCS Transaction. Excluding such items, the March 31, 1995 total company
working capital ratio would have been 3.2%. The increase in fiscal 1996 is
primarily due to an increased investment in inventories of $223.4 million to
obtain favorable purchase terms on certain items from vendors and to support
the increasing sales growth in Health Care Services. The increase in payables
associated with higher inventory levels partially mitigated the effect of the
higher inventory investment.
11
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
The Company maintains no inventory for sales to customers' warehouses.
Product is received by the Company and then immediately shipped to customers or
is shipped directly to the customer by the manufacturer. Customer receivable
terms and vendor payment terms associated with warehouse sales do not differ
significantly from terms associated with other sales in the Health Care
Services distribution operations, resulting in no incremental investment in
working capital from warehouse business.
CASH FLOW AND LIQUIDITY
Cash and cash equivalents and marketable securities (primarily U.S. Treasury
securities with maturities of two years or less) were $477 million, $693
million and $89 million at March 31, 1996, 1995 and 1994, respectively. The
increase in fiscal 1995 reflects the proceeds received by the Company from the
PCS Transaction.
Cash Flow from Operations for Capital Expenditures and Dividends
The following table summarizes the excess (deficit) of cash flow from
operations over capital expenditures and dividends:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net cash provided (used) by continuing operations
Income (loss) after taxes from continuing
operations........................................ $ 135 $ (193) $ 126
Depreciation....................................... 62 59 56
Amortization of intangibles........................ 10 11 11
Gains on sales of subsidiary and subsidiary stock.. (11) -- (52)
Other noncash charges.............................. 50 189 24
Working capital changes............................ (245) 60 (132)
------ ------ ------
Total............................................. 1 126 33
Capital expenditures................................ (77) (82) (74)
------ ------ ------
Excess (deficit).................................. (76) 44 (41)
Net cash provided by PCS operations, net of capital
expenditures....................................... -- 61 5
Dividends paid...................................... (44) (70) (77)
------ ------ ------
Net excess (deficit).............................. $ (120) $ 35 $ (113)
====== ====== ======
</TABLE>
Cash flow from continuing operations reflects the cash earnings of the
Company's continuing businesses and the effects of the changes in working
capital. Working capital in fiscal 1996 was impacted by the $143 million
increase in inventories net of related payables and the payment in fiscal 1996
of PCS Transaction liabilities. The cash used for working capital changes in
fiscal 1994 primarily reflects a management decision to increase inventories
early in that year.
Capital expenditures for the fiscal years ended March 31, 1996, 1995 and 1994
for the Health Care Services segment were $44 million, $44 million and $34
million, respectively, and for the Water Products segment were $25 million, $26
million and $29 million, respectively.
The decrease in dividends paid during fiscal 1996 reflects the conversion
during 1995 of preferred stock in connection with the PCS Transaction
(converting the associated dividend requirements to the lower common stock
dividend) and the change in the annual common stock dividend from $1.68 per
share to $1.00 per share following the PCS Transaction.
12
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
Other Financing Activities
During fiscal 1996, the Company repurchased 1.35 million of its common shares
for $63 million as part of a 3.5 million share repurchase program authorized in
May 1995. On May 31, 1996, the Company announced the authorization for the
repurchase of an additional 3.5 million common shares and that substantially
all of the shares in the initial authorization had been repurchased.
The reductions in long-term debt in fiscal 1996 and 1995 reflect scheduled
debt repayments and an advanced ESOP debt payment in 1995.
In fiscal 1996, the Company made a $20 million acquisition in the Health Care
Services segment. The acquired company provides support services to commercial,
non-profit and governmental organizations engaged in drug and biomedical
development. The Company also acquired interests in two companies engaged in
the development of new technology based initiatives for $13.3 million to
enhance Health Care Services' competitive position. In April 1996, the Company
acquired another company in the Health Care Services segment for approximately
$65 million. The newly acquired company designs, manufactures, installs and
supports automated pharmaceutical dispensing equipment for use by health care
institutions.
The Company has $250 million of available credit under domestic committed
revolving credit lines. As a result of the Company's investment grade credit
rating (S&P A+; Moody's A2), management believes the Company has access to
additional private credit sources and to public capital markets at favorable
terms. Funds necessary for future debt maturities and other cash requirements
of the Company are expected to be met by existing cash balances, cash flow from
operations, existing credit sources and other available debt capacity.
CAPITALIZATION
The Company's capitalization was as follows:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Short-term borrowings................................ $ 7 $ 22 $ 57
Term debt............................................ 290 296 301
Exchangeable debt.................................... 180 180 180
------ ------ ------
Total debt......................................... 477 498 538
Stockholders' equity................................. 1,065 1,014 679
------ ------ ------
Total capitalization............................... $1,542 $1,512 $1,217
====== ====== ======
Debt-to-capital ratio at March 31.................... 31.0% 33.0% 44.2%
Average interest rate during year
Total debt......................................... 6.8% 6.5% 6.1%
Short-term borrowings.............................. 7.3 6.2 3.7
Other debt......................................... 6.7 6.6 7.9
</TABLE>
The decreases in the debt-to-capital ratios in fiscal 1996 and 1995 resulted
primarily from the increase in stockholders' equity from the PCS Transaction,
scheduled debt reductions, repayments of short-term borrowings and an advanced
ESOP debt payment in 1995.
Average fully-diluted shares were 46.7 million in fiscal 1996, 45.5 million
in fiscal 1995 and 44.1 million in fiscal 1994. Common shares outstanding
increased to 44.8 million at March 31, 1996 from 44.4 million at March 31, 1995
primarily due to shares issued upon exercise of employee stock options in
excess of the 1.35 million shares repurchased during the year.
13
<PAGE>
FINANCIAL REVIEW--(CONTINUED)
CAPITAL EMPLOYED
Capital employed (net assets) by segment was:
<TABLE>
<CAPTION>
MARCH 31
---------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Health Care Services....................... $1,149 $ 898 $ 887
Service Merchandising...................... 70 69 175
Water Products............................. 110 110 123
Armor All--net of minority interest(/1/)... 64 72 69
------ ------ ------
Total Operations......................... 1,393 1,149 1,254
Corporate
Cash, cash equivalents and marketable
securities............................... 456 671 63
Other..................................... (307) (308) (100)
------ ------ ------
Total Capital Employed................... $1,542 $1,512 $1,217
====== ====== ======
Return on Average Capital Employed(/2/)
Health Care Services...................... 19.8% 7.7%(/3/) 19.8%
Service Merchandising..................... 28.4 (40.1)(/3/) 12.3
Water Products............................ 34.7 11.8(/3/) 31.0
Armor All(/4/)............................ 8.6 33.1 35.0
Total Consolidated Operations(/5/)....... 17.1 (1.8)(/6/) 23.7(/6/)
Return on Average Stockholders' Equity..... 13.0% 50.0%(/7/) 21.9%
</TABLE>
- --------
(1) Armor All capital employed includes $20.9 million, $22.2 million and $26.3
million of cash and cash equivalents at March 31, 1996, 1995 and 1994,
respectively.
(2) Operating profit divided by average capital employed.
(3) Excluding fiscal 1995 unusual items from operating profit, Health Care
Services is 18.5%, Service Merchandising is 19.4% and Water Products is
25.9%.
(4) Calculated based on average capital employed before deduction for minority
interest.
(5) Income from continuing operations before taxes, interest expense and
minority interest divided by average capital employed.
(6) Excluding fiscal 1995 and 1994 unusual items, consolidated return is 18.8%
and 20.3% in fiscal 1995 and 1994, respectively.
(7) Net income includes $576.7 million gain on sale of PCS.
The increase in capital employed in Health Care Services in fiscal 1996
reflects the increased investment spending for retail and institutional
strategic initiatives and the additional inventory investment. The increase in
capital employed in fiscal 1995 resulted from the cash received from the PCS
Transaction, net of fiscal 1995 reserves for restructuring, asset impairments
and other operating items.
ENVIRONMENTAL MATTERS
The Company's continuing operations do not require ongoing material
expenditures to comply with federal, state and local environmental laws and
regulations. However, in connection with the disposition of its chemical
operations in fiscal 1987, the Company retained responsibility for certain
environmental obligations. In addition, the Company is a party to a number of
proceedings brought under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund, and other federal
and state environmental statutes primarily involving sites associated with the
operation of the Company's former chemical distribution businesses. Increases
(decreases) to reserves for these environmental matters, primarily recorded
within discontinued operations, amounted
14
<PAGE>
FINANCIAL REVIEW--(CONCLUDED)
to ($1.5) million, $3.4 million and $8.7 million in fiscal 1996, 1995 and 1994,
respectively. The increase in fiscal 1995 primarily resulted from a
governmental directive to do additional remedial work at a former operating
site in Syracuse, New York. The increase in fiscal 1994 was primarily required
as a result of adverse technical developments at former operating sites in
Santa Fe Springs and Union City, California, offset in part by a positive soil
remedy selection at the Syracuse site. Management does not believe that changes
in the remediation cost estimates in future periods, or the ultimate resolution
of the Company's environmental matters, will have a material impact on the
Company's consolidated financial position. See "Legal Proceedings."
INCOME TAXES
The tax rate on income from continuing operations (excluding fiscal 1995 and
1994 unusual items) was 39% in fiscal 1996 and 40% in fiscal 1995 and 1994.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 "Significant Accounting Policies" on pages 23 and 24 of the
accompanying financial statements.
15
<PAGE>
STATEMENT OF
MANAGEMENT'S RESPONSIBILITY
Management is responsible for the preparation and accuracy of the
consolidated financial statements and other information included in this
report. The financial statements have been prepared in conformity with
generally accepted accounting principles using, where appropriate, management's
best estimates and judgments.
In meeting its responsibility for the reliability of the financial
statements, management has developed and relies on the Company's system of
internal accounting control. The system is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed as
authorized and are properly recorded. The system is augmented by written
policies and procedures and an internal audit department.
The Board of Directors reviews the financial statements and reporting
practices of the Company through its Audit Committee, which is composed
entirely of directors who are not officers or employees of the Company. The
committee meets regularly with the independent auditors, internal auditors and
management to discuss audit scope and results and to consider internal control
and financial reporting matters. Both the independent and internal auditors
have direct unrestricted access to the Audit Committee. The entire Board of
Directors reviews the Company's financial performance and financial plan.
/s/ Alan Seelenfreund
Alan Seelenfreund Kevin B. Ferrell
Chairman of the Board and Chief Vice President and Chief Financial
Executive Officer Officer
16
<PAGE>
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, 1996, 1995, and 1994, 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, 1996, 1995, and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 14 of the consolidated financial statements, in 1994 the
Corporation changed its method of accounting for postemployment benefits to
conform with Statement of Financial Accounting Standards No. 112.
DELOITTE & TOUCHE LLP
San Francisco, California
May 13, 1996
17
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES (Note 1).................... $ 13,716.4 $ 13,189.1 $ 12,251.4
------------ ------------ ------------
COSTS AND EXPENSES (Note 3)
Cost of sales........................ 12,569.4 12,095.2 11,187.0
Selling.............................. 233.4 254.0 242.8
Distribution......................... 369.6 361.6 375.9
Administrative....................... 269.9 508.4 235.4
Interest............................. 46.7 46.0 41.3
------------ ------------ ------------
Total............................ 13,489.0 13,265.2 12,082.4
------------ ------------ ------------
GAIN ON SALE AND DONATION OF SUBSIDI-
ARY STOCK........................... -- 5.4 55.1
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ON INCOME
AND MINORITY INTEREST............... 227.4 (70.7) 224.1
Taxes on income (Note 13)............ 88.7 111.5 88.6
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTER-
EST................................. 138.7 (182.2) 135.5
Minority interest in net income of
subsidiary.......................... (3.3) (11.0) (9.0)
------------ ------------ ------------
INCOME (LOSS) AFTER TAXES
Continuing operations................ 135.4 (193.2) 126.5
Discontinued operations (Notes 2 and
8).................................. -- 21.0 30.6
Discontinued operations--gain on sale
of PCS (Notes 2 and 8).............. -- 576.7 --
Extraordinary item--debt extinguish-
ment (Note 9)....................... -- -- (4.2)
Cumulative effect of accounting
change (Note 14).................... -- -- (16.7)
------------ ------------ ------------
NET INCOME........................... $ 135.4 $ 404.5 $ 136.2
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE
Fully diluted
Continuing operations.............. $ 2.90 $ (4.29) $ 2.78
Discontinued operations............ -- .46 .70
Discontinued operations--gain on
sale of PCS....................... -- 12.69 --
Extraordinary item................. -- -- (.10)
Cumulative effect of accounting
change............................ -- -- (.38)
------------ ------------ ------------
Total............................ $ 2.90 $ 8.86 $ 3.00
============ ============ ============
Primary
Continuing operations.............. $ 2.90 $ (4.51) $ 2.93
Discontinued operations............ -- .48 .75
Discontinued operations--gain on
sale of PCS....................... -- 13.23 --
Extraordinary item................. -- -- (.10)
Cumulative effect of accounting
change............................ -- -- (.41)
------------ ------------ ------------
Total............................ $ 2.90 $ 9.20 $ 3.17
============ ============ ============
SHARES ON WHICH EARNINGS (LOSS)
PER COMMON SHARE WERE BASED
Fully diluted........................ 46.7 45.5 44.1
Primary.............................. 46.6 43.6 40.8
</TABLE>
See Financial Notes.
18
<PAGE>
MCKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 281.8 $ 385.4 $ 89.0
Marketable securities available for sale
(Note 1)....................................... 195.4 307.3 --
Receivables (Note 6)............................. 781.4 778.6 744.4
Inventories (Note 7)............................. 1,379.1 1,160.2 993.5
Prepaid expenses (Note 13)....................... 27.3 67.9 46.6
-------- -------- --------
Total current assets........................... 2,665.0 2,699.4 1,873.5
-------- -------- --------
Land............................................. 39.0 41.0 43.4
Buildings........................................ 227.6 225.1 236.0
Machinery and equipment.......................... 533.0 497.0 508.7
-------- -------- --------
Total property, plant and equipment............ 799.6 763.1 788.1
Accumulated depreciation......................... (419.8) (396.8) (391.5)
-------- -------- --------
Net property, plant and equipment.............. 379.8 366.3 396.6
Goodwill and other intangibles................... 223.4 214.3 281.4
Other assets (Notes 8, 13 and 14)................ 235.7 199.2 283.5
-------- -------- --------
Total assets................................... $3,503.9 $3,479.2 $2,835.0
======== ======== ========
LIABILITIES
Drafts payable................................... $ 200.4 $ 175.7 $ 205.1
Accounts payable--trade.......................... 1,188.6 1,120.8 925.4
Short-term borrowings............................ 6.6 21.7 57.2
Current portion of long-term debt (Note 9)....... 28.3 17.8 18.5
Salaries and wages............................... 30.3 40.6 38.4
Taxes............................................ 97.0 144.0 28.1
Interest and dividends........................... 20.6 20.9 28.5
Other (Note 8)................................... 150.8 196.7 127.0
-------- -------- --------
Total current liabilities...................... 1,722.6 1,738.2 1,428.2
-------- -------- --------
Postretirement obligations and other noncurrent
liabilities (Note 14)........................... 217.0 208.8 214.8
-------- -------- --------
Long-term debt (Note 9).......................... 442.5 458.8 462.3
-------- -------- --------
Minority interest in subsidiary.................. 57.2 59.9 51.1
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred stocks................................. -- -- 125.3
Common stock..................................... .4 .4 89.2
Other capital.................................... 295.8 315.7 164.9
Retained earnings................................ 968.9 875.9 610.3
Accumulated translation adjustment............... (49.7) (51.6) (22.3)
ESOP notes and guarantee (Note 12)............... (122.5) (126.4) (165.1)
Treasury shares, at cost......................... (28.3) (.5) (123.7)
-------- -------- --------
Stockholders' equity (Notes 9 and 12).......... 1,064.6 1,013.5 678.6
-------- -------- --------
Total liabilities and stockholders' equity..... $3,503.9 $3,479.2 $2,835.0
======== ======== ========
</TABLE>
See Financial Notes.
19
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(SHARES IN THOUSANDS, DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PREFERRED STOCKS COMMON STOCK
----------------- --------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ------ ------
<S> <C> <C> <C> <C>
BALANCES, MARCH 31, 1993.................... 2,913 $ 126.5 44,583 $ 89.2
Purchase of shares..........................
Issuance of shares under employee plans
(Note 12)..................................
Conversion or redemption of debentures and
preferred stock............................ (30) (1.2)
ESOP note payments..........................
Tax benefit of unallocated ESOP share
dividends..................................
Other.......................................
Translation adjustment......................
Net income..................................
Cash dividends declared
Preferred stock (Series A, $1.80 per
share)...................................
Preferred stock (Series B ESOP, $3.62 per
share)...................................
Common, $1.60 per share...................
------- -------- ------ ------
BALANCES, MARCH 31, 1994.................... 2,883 125.3 44,583 89.2
Issuance of shares under employee plans
(Note 12).................................. 538 0.1
Purchase of shares (Note 12)................ (2,883) (125.3) (733) (1.5)
Change in par value of common stock from
$2.00 to $.01 per share (Note 12).......... (87.4)
ESOP note payments..........................
Distribution of net assets of PCS...........
Other.......................................
Translation adjustment......................
Unrealized gain on marketable securities....
Net income..................................
Cash dividends declared
Preferred stock (Series A, $.90 per
share)...................................
Preferred stock (Series B ESOP, $1.8098
per share)...............................
Common, $1.34 per share...................
------- -------- ------ ------
BALANCES, MARCH 31, 1995.................... -- -- 44,388 0.4
Issuance of shares under employee plans
(Note 12).................................. 1,062
Purchase of shares (Note 12)................
ESOP note payments..........................
Other (Note 14).............................
Translation adjustment......................
Unrealized gain on marketable securities....
Net income..................................
Cash dividends declared
Common, $1.00 per share...................
------- -------- ------ ------
BALANCES, MARCH 31, 1996.................... -- $ -- 45,450 $ 0.4
======= ======== ====== ======
</TABLE>
See Financial Notes.
20
<PAGE>
<TABLE>
<CAPTION>
TREASURY
------------------
ACCUMULATED ESOP STOCK-
OTHER RETAINED TRANSLATION NOTES AND COMMON HOLDERS'
CAPITAL EARNINGS ADJUSTMENT GUARANTEE SHARES AMOUNT EQUITY
------- --------- ----------- --------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
$172.4 $546.8 $(17.0) $(177.1) (4,009) $(121.4) $ 619.4
(769) (31.5) (31.5)
(3.3) 705 25.6 22.3
(1.1) 37 1.4 (0.9)
12.0 12.0
4.4 4.4
(3.1) 58 2.2 (0.9)
(5.3) (5.3)
136.2 136.2
(0.2) (0.2)
(10.0) (10.0)
(66.9) (66.9)
------ ------ ------ ------- ------ ------- --------
164.9 610.3 (22.3) (165.1) (3,978) (123.7) 678.6
12.5 118 4.5 17.1
5.1 3,846 118.7 (3.0)
87.4 --
26.9 38.7 65.6
(80.1) (80.1)
17.0 2.7 19.7
(29.3) (29.3)
1.9 1.9
404.5 404.5
(0.1) (0.1)
(4.9) (4.9)
(56.5) (56.5)
------ ------ ------ ------- ------ ------- --------
315.7 875.9 (51.6) (126.4) (14) (0.5) 1,013.5
(14.6) 761 34.9 20.3
(1,349) (62.7) (62.7)
3.9 3.9
(4.5) 2.3 (2.2)
1.9 1.9
(0.8) (0.8)
135.4 135.4
(44.7) (44.7)
------ ------ ------ ------- ------ ------- --------
$295.8 $968.9 $(49.7) $(122.5) (602) $ (28.3) $1,064.6
====== ====== ====== ======= ====== ======= ========
</TABLE>
21
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) after taxes from continuing opera-
tions.............................................. $ 135.4 $(193.2) $ 126.5
Adjustments to reconcile to net cash provided by op-
erating activities:
Depreciation....................................... 61.8 58.7 55.8
Amortization of intangibles........................ 9.5 11.1 11.4
Provision for bad debts............................ 13.9 49.5 10.0
Deferred taxes on income........................... 43.2 (81.0) 15.8
Gain on sale of subsidiary......................... (11.2) -- --
Gain on sale of subsidiary stock................... -- -- (52.0)
Other noncash (Note 3)............................. (7.4) 220.9 (2.5)
------- ------- -------
Total........................................... 245.2 66.0 165.0
------- ------- -------
Effects of changes in
Receivables....................................... (17.8) (84.2) (47.6)
Inventories....................................... (223.4) (200.1) (118.9)
Accounts and drafts payable....................... 80.8 167.8 67.8
Taxes............................................. (15.2) 115.9 (8.6)
Other............................................. (68.9) 60.6 (25.0)
------- ------- -------
Total........................................... (244.5) 60.0 (132.3)
------- ------- -------
NET CASH PROVIDED (USED) BY CONTINUING OPERA-
TIONS.......................................... 0.7 126.0 32.7
Discontinued operations (Notes 2 and 8)............. 1.8 69.1 41.1
------- ------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVI-
TIES........................................... 2.5 195.1 73.8
------- ------- -------
INVESTING ACTIVITIES
Purchases of marketable securities.................. (130.6) (324.0) --
Maturities of marketable securities................. 244.8 19.9 --
Property acquisitions............................... (77.3) (82.3) (74.1)
Properties sold..................................... 6.7 4.4 9.8
Proceeds from sale of subsidiaries (Notes 2 and 4).. 36.1 568.5 --
Acquisitions of businesses, less cash and short-term
investments acquired (Note 4)...................... (33.5) (0.7) (63.5)
Proceeds from sale of subsidiary stock.............. -- -- 78.7
Investing activities of discontinued operations..... -- (12.3) (67.4)
Other (Note 14)..................................... (50.2) (9.3) (6.6)
------- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVI-
TIES........................................... (4.0) 164.2 (123.1)
------- ------- -------
FINANCING ACTIVITIES (Notes 9 and 12)
Proceeds from issuance of debt...................... 1.2 30.0 204.9
Repayment of debt................................... (19.5) (50.9) (104.1)
Capital stock transactions
Issuances.......................................... 19.2 13.5 21.7
Share repurchases.................................. (62.7) (3.1) (31.5)
ESOP note payments................................. 3.9 13.6 11.9
Dividends paid..................................... (44.2) (69.9) (76.5)
Financing activities of discontinued operations..... -- 3.9 0.4
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVI-
TIES........................................... (102.1) (62.9) 26.8
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.............................................. (103.6) 296.4 (22.5)
Cash and Cash Equivalents at beginning of year...... 385.4 89.0 111.5
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 281.8 $ 385.4 $ 89.0
======= ======= =======
</TABLE>
See Financial Notes. Above referenced Notes describe related noncash investing
and financing activities. In addition, see Note 9 for interest paid and Note 13
for income taxes paid.
22
<PAGE>
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. Minority interest represents the
minority shareholders' proportionate share in the equity or income of the
Company's majority-owned Armor All Products Corporation ("Armor All")
subsidiary. Certain prior year amounts have been restated to conform to the
current year presentation.
Within the United States and Canada, McKesson is the largest wholesale
distributor of ethical and proprietary drugs 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. Through its 55% ownership of Armor All, the company is engaged in
developing and marketing a line of branded appearance enhancement and
protection products primarily for the do-it-yourself automotive and home care
markets. The principal markets for the drug and health and beauty care
distribution businesses are chain and independent drug stores, hospitals,
alternate care sites, food stores and mass merchandisers. The principal markets
for Armor All products are mass merchandiser retailers, auto supply stores,
warehouse clubs, hardware stores and other retail outlets.
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, 1996, the fair
value exceeded the amortized cost of these securities by $1.1 million. The
investments mature on various dates through fiscal 1998.
Inventories consist of merchandise held for resale and are stated at the
lower of cost or market. The cost of substantially all domestic inventories is
determined on the last-in, first-out (LIFO) method. International inventories
are stated at average cost.
Property, Plant and Equipment is stated at cost and depreciated on the
straight-line method at rates designed to distribute the cost of properties
over estimated service lives.
Capitalized Software included in other assets reflects costs related to
internally developed or purchased software for projects in excess of $1.0
million that are capitalized and amortized on a straight-line basis over
periods not exceeding seven years.
Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 25 to 40 years. Accumulated
amortization balances netted against goodwill and other intangibles were $91.2
million, $81.8 million and $84.5 million at March 31, 1996, 1995 and 1994,
respectively. The Company periodically assesses the recoverability of the cost
of its goodwill based on a review of projected undiscounted cash flows of the
related operating entities. These cash flows are prepared and reviewed by
management in connection with the Company's annual long range planning process.
23
<PAGE>
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 is interest income of
$37.9 million, $18.6 million and $6.4 million in fiscal 1996, 1995 and 1994,
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.
Earnings (Loss) per Common Share. Primary earnings (loss) per share are
calculated by dividing net income less preferred dividends by the weighted
average shares outstanding adjusted for the dilutive effect of stock options.
Fully diluted earnings (loss) per share reflect the dilutive effect of stock
options and assume the conversion of the preferred stocks and related earnings
adjustments.
Foreign Currency Translation. Assets and liabilities of the Company's foreign
affiliates are translated at current exchange rates, while revenue and expenses
are translated at average rates prevailing during the year. Translation
adjustments are reported as a component of stockholders' equity.
New Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires a Company to review the
carrying value of long-lived assets and certain intangibles for impairment when
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. This standard is effective for the Company's 1997
fiscal year. The Company has not yet determined the effects SFAS 121 will have
on its financial position or the results of its operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which will be effective for the Company's 1997 fiscal year. SFAS
No. 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting
required by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" and disclosure of the proforma impact of adoption in
the footnotes to the financial statements. The Company intends to continue to
account for stock-based compensation arrangements under APB Opinion No. 25, and
therefore management does not believe that the effect of implementing this
standard will be material to the Company's financial position, results of
operations or cash flows.
2. SALE OF THE PCS BUSINESS
On July 10, 1994, the Company entered into an Agreement and Plan of Merger
and a Reorganization and a Distribution Agreement ("Merger Agreement" and
"Distribution Agreement", respectively) providing for the acquisition by Eli
Lilly and Company ("Eli Lilly") of McKesson's pharmaceutical benefits
management business ("PCS"), which was primarily operated by PCS Health
Systems, Inc. and Clinical Pharmaceuticals, Inc., both of which were wholly-
owned subsidiaries of McKesson, for approximately $4 billion.
24
<PAGE>
FINANCIAL NOTES--(CONTINUED)
As required by the Merger Agreement, on July 15, 1994 ECO Acquisition
Corporation ("ECO"), a subsidiary of Eli Lilly, commenced a cash tender offer
to purchase from McKesson shareholders all outstanding shares of McKesson
Common Stock (the "Shares") at a price of $76.00 net per Share (the "Offer").
The Offer was completed on November 21, 1994 with ECO purchasing over 90% of
the Shares. Following the purchase of Shares under the Offer, McKesson and ECO
merged (the "Merger") and each Share not purchased in the Offer (other than
Shares held by Eli Lilly and certain other related entities) was converted into
the right to receive $76.00 in cash, without interest.
Simultaneous with the completion of the Offer and pursuant to the terms of
the Distribution Agreement, McKesson (i) transferred all of its assets and
liabilities, other than those related to PCS, to SP Ventures, Inc., a newly-
formed corporation ("New McKesson") and (ii) declared a dividend of one share
of common stock of New McKesson, par value of $.01 per share, for each Share
held of record as of November 19, 1995 (collectively, the "Spin-Off"). After
giving effect to the Spin-Off and the completion of the Offer, the current
business of McKesson (other than PCS) is being continued through New McKesson.
As a result of the Offer, Merger and Spin-Off (collectively, the "PCS
Transaction"), each existing McKesson shareholder received a cash payment of
$76 per Share (representing the proceeds from the sale of PCS) and one share of
common stock of New McKesson representing their continuing interest in the
retained businesses.
For financial statement purposes, New McKesson is the continuing entity and
has retained the name McKesson Corporation. The accompanying financial
statements reflect PCS as a discontinued operation.
Approximately $600 million of the $4 billion consideration paid by Eli Lilly
was received by the Company. An additional $24 million of the $4 billion
consideration was received from Eli Lilly to fund deferred vested stock option
payments. The remainder of the $4 billion was paid directly to McKesson
shareholders by Eli Lilly. In fiscal 1995, the Company recorded a gain on the
sale of PCS of $576.7 million, after transaction costs and other expenses.
3. CHARGES AND GAINS IN CONTINUING OPERATIONS
Fiscal 1995
The loss from continuing operations in fiscal 1995, includes $59.4 million
($45.3 million after-tax) of compensation costs related to the PCS Transaction,
$107.0 million of income tax expense related to the distribution of New
McKesson common stock to McKesson shareholders subsequent to the transfer of
assets and liabilities from McKesson to New McKesson to effect the PCS
Transaction, $222.9 million ($158.1 million after-tax) of charges for
restructuring, asset impairment and other operating items and $2.0 million of
expense ($1.0 million income after-tax) related to contributions to the
McKesson Foundation.
The $59.4 million of compensation expense related to the PCS Transaction in
continuing operations (classified in administrative expense) consists of $23.6
million associated with an allocation of cash and shares to ESOP plan
participants resulting from a paydown of ESOP debt by the ESOP trust and $35.8
million associated with the Company's vested stock options and other
compensation programs.
The $222.9 million of charges for restructuring, asset impairment and other
operating items in continuing operations ($36.9 million included in cost of
sales and $186.0 million included in administrative expense) resulted, in part,
from the initiation by the Company's management of several measures designed to
streamline operations and improve productivity in the Company's distribution
and Water Products businesses. These measures include consolidation of certain
facilities, work-force reductions and divestiture of under-performing assets.
Approximately $83.0 million of the charge is
25
<PAGE>
FINANCIAL NOTES--(CONTINUED)
related to a write-down of the Company's investment in its Service
Merchandising segment as a result of significant changes in that business'
customer base and marketplace. Other charges consist primarily of write-downs
of assets to be disposed of to fair value less costs to sell, impairment losses
on capitalized software due to changes in technology, severance for an
announced company-wide work-force reduction of approximately 350 individuals,
write-downs of inventory associated with the discontinuation of certain product
lines, and receivable reserves related to facility closures and a reassessment
of credit risks in the Company's distribution businesses. The assets to be
disposed of are associated with facility consolidations in the distribution and
Water Products businesses and surplus properties held by the Company. The
disposition of these properties is expected to occur over the next three years.
The write-downs associated with assets to be disposed of and asset
impairments due to changed business conditions were based primarily on
independent appraisals. During fiscal 1996, the Company charged costs of $13.0
million relating to the closures of certain facilities and disposals of surplus
properties against the liabilities recorded in fiscal 1995. Cash payments
charged to the liabilities were $5.9 million and $4.3 million for severance
costs in fiscal years 1996 and 1995, respectively.
The fiscal 1995 contributions to the McKesson Foundation consisted of shares
of the Company's majority-owned Armor All Products Corporation subsidiary. A
pre-tax gain of $5.4 million was recorded on the donations. The shares donated
to the McKesson Foundation had a market value of $7.4 million, which was
recorded as a contribution expense within administrative expense.
Fiscal 1994
Included in continuing operations in fiscal 1994 is a gain of $55.1 million
from the sale of 5,175,000 shares and the donation of 250,000 shares of Armor
All. The shares donated to the McKesson Foundation had a market value of $4.3
million, which was recorded as a contribution expense within administrative
expense. Also included in administrative expense was a loss of $13.4 million
resulting from the termination of interest rate swap arrangements. These
interest rate swap arrangements had been designated, through March 31, 1993, as
a hedge of the Company's short-term variable interest domestic borrowings. As a
result of the Company's May 12, 1993 sale of Armor All shares and other
factors, the interest rate swap arrangements were no longer considered
effective as a hedge against the variable-rate borrowings as the Company, at
that time, no longer expected to borrow domestically on a short-term basis in
fiscal 1994.
4. ACQUISITIONS, INVESTMENTS AND DIVESTITURES
In fiscal 1996 the Company made a $20 million acquisition in the Health Care
Services segment. The acquired company provides support services to commercial,
non-profit and governmental organizations engaged in drug and biomedical
development. The Company also acquired interests in two companies engaged in
the development of new technology-based initiatives to enhance the Health Care
Services segment's competitive position. In April 1996, the Company acquired
another company in the Health Care Services segment for $65 million. The newly
acquired company designs, manufactures, installs and supports automated
pharmaceutical dispensing equipment for use by health care institutions.
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.
The Company made several acquisitions in fiscal 1994 for an aggregate cash
purchase price of $63.5 million. These included the purchase of a local
delivery water company in the Water Products segment and a brand acquisition in
the Armor All segment. In addition, in April 1993, the Company
26
<PAGE>
FINANCIAL NOTES--(CONTINUED)
acquired a 22.7% interest in Nadro S.A. de C.V. ("Nadro") in the Health Care
Services segment. Nadro is the leading pharmaceutical wholesale distributor in
Mexico. The Company has an option to acquire an additional 9% of Nadro's common
stock; such option has not yet been exercised and remains currently exercisable
by the Company.
5. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Company to a concentration of credit risk with
customers in the retail sector. This risk is spread over a large number of
geographically dispersed customers.
At March 31, 1996, the Company was contingently liable for approximately $105
million of trade receivables. These receivables were sold to a bank with
recourse to the Company for certain uncollectible amounts. Proceeds received by
the Company on sale of accounts receivable amounted to $105 million, $47
million and $40 million in fiscal 1996, 1995 and 1994, respectively.
6. RECEIVABLES
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Customer accounts.................................... $741.7 $766.3 $737.8
Other................................................ 82.8 68.3 37.4
------ ------ ------
Total.............................................. 824.5 834.6 775.2
Allowances........................................... (43.1) (56.0) (30.8)
------ ------ ------
Net................................................ $781.4 $778.6 $744.4
====== ====== ======
</TABLE>
The allowances are for uncollectible accounts, discounts, returns and other
adjustments.
7. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Inventories before LIFO cost adjustment (ap-
proximates
replacement cost)............................ $1,673.1 $1,464.6 $1,311.6
LIFO cost adjustment.......................... (294.0) (304.4) (318.1)
-------- -------- --------
Total....................................... $1,379.1 $1,160.2 $ 993.5
======== ======== ========
</TABLE>
The LIFO method was used to value approximately 88% of the inventories at
March 31, 1996 and 86% of the inventories at March 31, 1995 and 1994.
8. DISCONTINUED OPERATIONS
The net assets (liabilities) of discontinued operations at March 31 were as
follows:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1996 1995 1994
----- ----- -------
(IN MILLIONS)
<S> <C> <C> <C>
Total assets.......................................... $ 3.3 $ 1.9 $ 487.1
Total liabilities..................................... (8.5) (8.4) (368.0)
----- ----- -------
Net assets (liabilities)............................ $(5.2) $(6.5) $ 119.1
===== ===== =======
</TABLE>
27
<PAGE>
FINANCIAL NOTES--(CONTINUED)
At March 31, 1996 and 1995, the net liabilities of discontinued operations
are included in other current liabilities. Assets consist primarily of land
held for sale and investments in affiliates. Liabilities consist primarily of
payables and other accrued liabilities.
At March 31, 1994, assets of discontinued operations consist primarily of PCS
claim reimbursements and rebate receivables, and property plant and equipment
and goodwill associated with the PCS operations. Liabilities of discontinued
operations consist primarily of PCS claim and rebate payables and other accrued
liabilities. The net assets at March 31, 1994 are included in other assets.
Results of discontinued operations were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues.............................................. $ 2.4 $136.4 $178.5
===== ====== ======
Discontinued operations before taxes.................. $ 1.1 $ 35.4 $ 51.1
Provision for taxes on income......................... (1.1) (14.4) (20.5)
----- ------ ------
Discontinued operations............................. -- 21.0 30.6
----- ------ ------
Gain on sale of PCS................................... -- 571.8 --
Tax benefit........................................... -- 4.9 --
----- ------ ------
Discontinued operations--gain on sale of PCS........ -- 576.7 --
----- ------ ------
Total............................................. $ -- $597.7 $ 30.6
===== ====== ======
</TABLE>
Discontinued operations include $19.4 million and $30.6 million after-tax
from the operations of PCS in fiscal 1995 and 1994, respectively. Discontinued
operations in fiscal 1995 also include $1.6 million from settlements recovered
in insurance litigation related to environmental matters associated with the
former operations of the Company's chemical businesses, which were divested in
fiscal 1987, net of adjustments to environmental reserves.
Discontinued operations in fiscal 1994 also include adjustments to
environmental and other reserves associated with previously divested
operations, offset completely by a gain from the settlement of tax litigation
associated with the Company's former wine and spirits operations in the state
of Florida and other operating income.
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31
--------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
ESOP related debt....................................... $122.5 $126.4 $165.1
4.50% exchangeable subordinated debentures due 2004..... 180.0 180.0 180.0
8.625% Notes due 1998................................... 49.0 49.0 49.0
8.75% Notes due 1997.................................... 10.0 10.0 10.0
3.45% to 7.47% IDRBs due through 2012................... 20.0 25.6 25.9
Capital lease obligations (averaging 8.5%).............. 4.4 4.7 5.0
Other, 6.5% to 15.7%, due through 2021.................. 84.9 80.9 45.8
------ ------ ------
Total............................................... 470.8 476.6 480.8
Less current portion.................................... 28.3 17.8 18.5
------ ------ ------
Total............................................... $442.5 $458.8 $462.3
====== ====== ======
</TABLE>
28
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The Company has a revolving credit agreement with eight U.S. banks and their
Canadian affiliates whereby the banks commit $250 million borrowing
availability at the reference rate (8.25% at March 31, 1996) or money market-
based rates. The agreement expires in fiscal 2000. 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. In April, 1996, the agreement was extended to expire
in FY 2002 and modified to accommodate the merger of two banks participating in
the credit. At March 31, 1996, the Company had $250 million of unused borrowing
capacity under this agreement.
Total interest payments were $47.5 million, $45.3 million, $43.3 million in
fiscal 1996, 1995 and 1994, 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.
The exchangeable subordinated debentures are exchangeable, at the option of
the holder, into shares of Armor All common stock owned by the Company at an
exchange price of $25.94 per share (equivalent to an exchange rate of 38.55
shares of Armor All common stock for each $1,000 principal amount of
debentures), subject to the Company's right to pay cash equal to the market
price of the stock in lieu of making the exchange.
During fiscal 1994, the Company redeemed $50.7 million of 8.625% Notes and
recorded an extraordinary loss of $4.2 million on the early retirement.
Certain debt agreements require that the Company's total debt not exceed
56.5% of total capitalization (total debt plus equity). At March 31, 1996,
total debt was 31.0% of total capitalization.
Aggregate annual payments on long-term debt and capitalized lease obligations
(see Note 10) for the years ending March 31 are:
<TABLE>
<CAPTION>
LONG-
TERM CAPITAL
DEBT LEASES TOTAL
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
1997.................................................. $ 28.0 $0.3 $ 28.3
1998.................................................. 67.3 0.3 67.6
1999.................................................. 18.4 0.3 18.7
2000.................................................. 19.9 0.3 20.2
2001.................................................. 20.6 0.3 20.9
Later years........................................... 312.2 2.9 315.1
------ ---- ------
Total................................................ $466.4 $4.4 $470.8
====== ==== ======
</TABLE>
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 $3.3 million, $3.5 million and $4.2 million at March 31, 1996,
1995 and 1994, respectively. Amortization of capital leases is included in
depreciation expense.
29
<PAGE>
FINANCIAL NOTES--(CONTINUED)
As of March 31, 1996, future minimum lease payments and sublease rentals in
years ending March 31 are:
<TABLE>
<CAPTION>
NON- NON-
CANCELABLE CANCELABLE
OPERATING SUBLEASE CAPITAL
LEASES RENTALS LEASES
---------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C>
1997........................................... $18.6 $(1.4) $ .6
1998........................................... 15.7 (1.1) .6
1999........................................... 12.8 (.5) .6
2000........................................... 9.9 (.3) .6
2001........................................... 7.9 (.1) .6
Later years.................................... 24.3 (.1) 4.1
----- ----- ----
Total minimum lease payments................... $89.2 $(3.5) 7.1
===== =====
Less amounts representing interest............. 2.7
----
Present value of minimum lease payments........ $4.4
====
</TABLE>
Rental expense was $33.1 million, $31.4 million and $30.7 million in fiscal
1996, 1995 and 1994, 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, 1996, the carrying amount and the fair value of the Company's
financial instruments, as determined under SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments", were as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................ $281.8 $281.8
Marketable securities.................................... 195.4 195.4
Short-term borrowings.................................... 6.6 6.6
Long-term debt, including current portion................ 470.8 470.6
</TABLE>
The estimated fair values were determined as follows:
Cash and cash equivalents and short-term borrowings: carrying amounts
approximate fair value.
Marketable securities and long-term debt: quoted market prices or market
comparables.
12. STOCKHOLDERS' EQUITY
At March 31, 1996 and 1995, the Company was authorized to issue 100,000,000
shares of preferred stock ($.01 par value) of which none were outstanding and
200,000,000 shares of common stock ($.01 par value) of which approximately
44,848,000 shares and 44,374,000 shares were outstanding net of treasury stock,
respectively. At March 31, 1994 there were 120,000,000 shares of common stock
($2.00 par value) authorized of which approximately 40,605,000 were
outstanding, net of treasury stock and two issues of preferred stock authorized
and outstanding. Prior to November 21,1994 and in connection with the PCS
Transaction, all of the outstanding shares of preferred stock were converted
into either common stock or cash.
30
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Noncash conversions of preferred stock to common stock totaled $123.5
million in fiscal 1995. Other noncash transactions impacting stockholders'
equity in fiscal 1995 included the $23.6 million paydown of ESOP debt by the
ESOP Trust and $80.1 million of net assets of PCS distributed in connection
with the PCS Transaction and charged to retained earnings.
Options to purchase common stock at various times through the year 2006 have
been granted at market prices at date of grant to key employees.
Option information follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ---------------
<S> <C> <C> <C>
OPTION SHARES
Outstanding at beginning of
year........................ 6,127,161 3,205,025 3,240,719
Granted...................... 884,200 828,150 828,675
Exercised.................... (1,762,447) (651,651) (684,310)
Canceled..................... (278,511) (229,072) (175,355)
Surrendered (stock apprecia-
tion rights)................ -- -- (4,704)
PCS options(/1/)............. -- (497,650) --
Repricing of options due to
PCS Transaction(/2/)........ -- 3,472,359 --
------------- ------------- ---------------
Outstanding at year end...... 4,970,403 6,127,161 3,205,025
Available for additional
grants at year end.......... 2,527,999 3,133,688 648,410
------------- ------------- ---------------
Reserved at end of year...... 7,498,402 9,260,849 3,853,435
============= ============= ===============
Exercisable at end of year... 2,209,460 2,188,196 1,174,526
AT MARCH 31
Range of outstanding option
prices...................... $5.78-$36.875 $5.78-$36.875 $19.625-$59.625
Aggregate amounts (in mil-
lions)
Option price................ $112.4 $97.8 $134.4
Market value................ $254.7 $247.4 $190.7
</TABLE>
- --------
(1) PCS employees that held McKesson options received directly from Eli Lilly
cash and restricted stock for all vested and unvested options,
respectively, at the time of the PCS Transaction.
(2) Exercisable options held by an employee of the Company at the time of the
PCS Transaction were split into two separately exercisable options, one
for shares of McKesson common stock and one for shares of New McKesson
common stock. The options were repriced such that the aggregate intrinsic
value of the two separately exercisable options remained the same as the
value of the corresponding original exercisable option. Upon the
completion of the PCS Transaction, each adjusted McKesson option was
canceled in exchange for a cash amount, paid by Eli Lilly, equal to the
difference between $76 and the adjusted exercise price of such option. All
non-exercisable options held by an employee of the Company at the time of
the PCS Transaction were repriced at an exchange ratio of 3.3967 New
McKesson options to one McKesson option. The exercise price of each New
McKesson option is equal to the exercise price per share of the original
McKesson option divided by 3.3967.
The holders of options with stock appreciation rights may exercise the
option or, with the approval of the Compensation Committee of the Board of
Directors, may receive the appreciation in the stock's value in the form of
cash or stock.
31
<PAGE>
FINANCIAL NOTES--(CONTINUED)
13. TAXES ON INCOME
The provision for income taxes related to continuing operations consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
Federal.................................................. $33.4 $149.4 $51.7
State and local.......................................... 7.1 32.9 13.1
Foreign.................................................. 5.0 10.2 8.0
----- ------ -----
Total Current.......................................... 45.5 192.5 72.8
----- ------ -----
DEFERRED
Federal.................................................. 27.5 (66.7) 10.3
State.................................................... 7.5 (13.0) 2.3
Foreign.................................................. 8.2 (1.3) 3.2
----- ------ -----
Total Deferred........................................... 43.2 (81.0) 15.8
----- ------ -----
Total Provision........................................ $88.7 $111.5 $88.6
===== ====== =====
</TABLE>
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 $26.7 million, $26.2 million and
$22.4 million in fiscal 1996, 1995 and 1994, respectively.
The reconciliation between the Company's effective tax rate on income from
continuing operations and the statutory Federal income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ------ ----
<S> <C> <C> <C>
Statutory federal income tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes net of federal tax
benefit............................................... 4.1 (18.3) 4.5
Nondeductible amortization............................. 1.2 (4.9) 1.6
Dividends paid deduction--ESOP allocated shares........ (0.4) 2.5 (0.9)
Donation of Armor All shares........................... 2.7 (0.4)
Armor All basis difference............................. (49.8)
Tax expense on corporate restructuring to effect the
PCS Transaction....................................... (84.3)
Nondeductible compensation costs related to the PCS
Transaction........................................... (11.7)
Nondeductible restructuring charges.................... (28.7)
Other--net............................................. (0.9) (0.2) (0.3)
---- ------ ----
Effective tax rate..................................... 39.0% (157.7)% 39.5%
==== ====== ====
</TABLE>
Income tax payments were $97 million, $69 million and $86 million in fiscal
1996, 1995 and 1994, respectively.
32
<PAGE>
FINANCIAL NOTES--(CONTINUED)
As of March 31 the deferred tax balances consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Nondeductible accruals for
environmental obligations........................ $ 11.9 $ 15.9 $ 15.8
Receivable reserves............................... 15.2 13.4 5.0
Other............................................. 39.7 45.0 39.4
------- ------ -------
Current........................................... 66.8 74.3 60.2
------- ------ -------
Nondeductible accruals for:
Postretirement and postemployment plans......... 76.7 81.8 82.8
Deferred compensation........................... 31.6 28.8 15.3
Costs associated with facility closures
and surplus properties......................... 8.8 7.8 0.8
Facilities and equipment write-downs resulting
from changed business conditions............... 10.8 9.6 --
Retirement plan................................... 6.0 -- --
Loss and credit carryforwards..................... 9.7 -- --
Other............................................. 17.2 13.4 15.5
------- ------ -------
Noncurrent........................................ 160.8 141.4 114.4
------- ------ -------
Total........................................... $ 227.6 $215.7 $ 174.6
======= ====== =======
LIABILITIES
Basis differences for inventory valuation......... $ (55.0) $(21.9) $ (26.8)
Other............................................. (6.0) (2.8) (2.5)
------- ------ -------
Current........................................... (61.0) (24.7) (29.3)
------- ------ -------
Accelerated depreciation.......................... (52.7) (44.5) (46.8)
Basis difference related to tax advantaged invest-
ments............................................ -- -- (15.1)
Systems development costs......................... (14.5) (5.2) (13.6)
Retirement plan................................... -- (12.2) (12.6)
Other............................................. (10.7) (7.3) (18.1)
------- ------ -------
Noncurrent........................................ (77.9) (69.2) (106.2)
------- ------ -------
Total........................................... $(138.9) $(93.9) $(135.5)
======= ====== =======
Total net current (included in prepaid expenses).. $ 5.8 $ 49.6 $ 30.9
======= ====== =======
Total net noncurrent (included in other assets)... $ 82.9 $ 72.2 $ 8.2
======= ====== =======
</TABLE>
14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Pension Plans
Substantially all full-time employees of the Company are covered under either
the Company-sponsored defined benefit retirement plan or by bargaining unit
sponsored multi-employer plans. The benefits for Company-sponsored plans are
based primarily on age of employees at date of retirement, years of service and
employees' pay during the five years prior to retirement.
33
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Net pension expense for the Company-sponsored defined benefit retirement plan
and executive supplemental retirement plan consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned during the year....... $ 5.3 $ 6.7 $ 5.5
Interest cost on projected benefit obligation....... 23.7 22.4 22.0
Return on assets--actual (income) loss.............. (51.6) 3.2 (23.6)
--deferred gain (loss).............................. 31.2 (25.9) 2.3
Amortization of unrecognized loss and prior service
costs.............................................. 4.5 5.0 2.1
Amortization of unrecognized net transition asset... (2.5) (2.5) (2.5)
------ ------ ------
Net pension expense............................... $ 10.6 $ 8.9 $ 5.8
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations
Vested benefits.................................. $249.8 $204.0 $226.0
Nonvested benefits............................... 14.1 11.0 13.5
------ ------ ------
Accumulated benefit obligation................... 263.9 215.0 239.5
Effect of assumed increase in future compensation
levels.......................................... 20.7 20.9 21.9
------ ------ ------
Projected benefit obligation for services
rendered to date................................ 284.6 235.9 261.4
Assets of plan at fair value....................... 248.9 218.8 241.5
------ ------ ------
Shortfall of assets over projected benefit
obligation........................................ (35.7) (17.1) (19.9)
Unrecognized prior service cost and net loss from
experience different from that assumed............ 67.1 56.7 63.8
Unrecognized net transition asset, recognized
straight-line through 1998........................ (6.0) (8.8) (11.7)
Adjustment required to recognize minimum liability. (40.4) -- --
------ ------ ------
Pension asset (liability) included in other assets
(noncurrent liabilities).......................... $(15.0) $ 30.8 $ 32.2
====== ====== ======
</TABLE>
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, 1995, 8.75% at December 31, 1994 and 7.5% at December 31, 1993 and
an assumed increase in future compensation levels of 4.0% at December 31, 1995
and 1993 and 5.0% at December 31, 1994. The expected long-term rate of return
on assets used to determine pension expense was 9.75% for all periods. The
adjustment required to recognize the minimum liability was charged to other
equity, net of tax.
The assets of the plan consist primarily of listed common stocks and bonds
for which fair value is determined based on quoted market prices.
The projected benefit obligation for the Company's executive supplemental
retirement plan at December 31, 1996 was $43.0 million of which $37.4 million
(the accumulated benefit obligation) is recognized as a liability on the
consolidated balance sheet.
34
<PAGE>
FINANCIAL NOTES--(CONTINUED)
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 4.1 million shares of common stock since inception and 2.85
million shares of convertible preferred stock from the Company. The convertible
preferred stock was converted into common stock in connection with the PCS
Transaction. These purchases have been financed by 10 to 20-year loans from or
guaranteed by the Company. The Company's related receivables from the ESOP have
been classified as a reduction of stockholders' equity. The loans will be
repaid by the ESOP from common dividends on shares not yet allocated to
participants, interest earnings on cash balances not yet allocated to
participants, common dividends on certain allocated shares and future Company
cash contributions. The ESOP loan maturities and rates are identical to the
terms of related Company borrowings (see Note 9).
After-tax ESOP expense (income), including interest expense on ESOP debt, was
$(0.2) million, $4.0 million and $5.1 million in fiscal 1996, 1995 and 1994,
respectively. Additional tax benefits received on dividends paid on unallocated
shares of $2.2 million, $2.7 million and $4.5 million in fiscal 1996, 1995 and
1994, respectively, have been credited directly to retained earnings in
accordance with SFAS 109.
Contribution expense for the PSIP in fiscal 1996, 1995 and 1994 was all ESOP
related and is reflected in the amounts above. In fiscal 1996 and 1994,
approximately 457,000 and 497,000 shares, respectively, were allocated to plan
participants. In fiscal 1995, 693,000 shares and $8.9 million of cash were
allocated to plan participants.
In fiscal 1996, the ESOP Trust completed the purchase of 5.2 million Company
shares for $212 million with the remaining proceeds received on the unallocated
shares tendered in connection with the PCS Transaction (see Note 2). In fiscal
1995 one-time compensation costs related to the PCS Transaction were recorded
that included $23.6 million associated with an allocation of $31.1 million of
cash and 409,000 shares to ESOP plan participants resulting from a paydown of
ESOP debt by the ESOP Trust with a portion of the proceeds received on the
unallocated shares tendered under the Offer.
Through March 31, 1996, 4.8 million common shares have been allocated to plan
participants. At March 31, 1996, 7.3 million common shares in the ESOP Trust
had not been allocated to plan participants.
Health Care and Life Insurance
In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain retired employees. The Company's policy
is to fund these benefits as claims are paid. The benefits have been reduced
significantly for those employees retiring after December 31, 1990. In 1989,
the Company implemented the preferred stock ESOP to provide funds at retirement
that could be used for medical costs or health care coverage.
Expenses for postretirement health care and life insurance benefits consisted
of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned during the period........ $ 1.1 $ 1.2 $ 1.5
Interest cost on projected benefit obligation.......... 11.4 10.5 12.8
Amortization of unrecognized gain and prior service
costs................................................. (9.3) (7.6) (8.6)
----- ----- -----
Total................................................ $ 3.2 $ 4.1 $ 5.7
===== ===== =====
</TABLE>
35
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Payments for postretirement health care and life insurance benefits amounted
to $10.9 million, $11.5 million and $12.8 million in fiscal 1996, 1995 and 1994
respectively.
The funded status and amounts recognized in the consolidated balance sheet
for postretirement health care and life insurance benefits at December 31, were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees............................................. $122.3 $118.7 $122.5
Active plan participants............................. 18.1 16.8 21.7
------ ------ ------
Total.............................................. 140.4 135.5 144.2
Unrecognized prior service cost and accumulated net
gain................................................ 14.8 27.3 27.0
------ ------ ------
Accrued postretirement benefit obligation............ $155.2 $162.8 $171.2
====== ====== ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation is 6.7% for 1996, gradually declining to 5.0%
in 1999 and thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. Increasing the trend rate by one
percentage point would increase the accumulated postretirement health care and
life insurance obligation as of December 31, 1995 by $9.2 million and the
related fiscal 1996 aggregate service and interest costs by $0.8 million. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% at December 31, 1995, 8.75% at December 31, 1994 and 7.5%
at December 31, 1993.
Postemployment Benefits
As of April 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." The cumulative effect of adopting the new
standard resulted in a charge to net income of $16.7 million, net of a $10.4
million tax benefit.
36
<PAGE>
FINANCIAL NOTES--(CONTINUED)
15. SEGMENTS OF BUSINESS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Health Care Services................. $12,667.8 $12,063.1 $11,075.4
Service Merchandising................ 564.7 648.2 747.6
Water Products....................... 259.3 246.0 240.3
Armor All............................ 186.3 216.8 182.3
Corporate............................ 38.3 15.0 5.8
--------- --------- ---------
Total.............................. $13,716.4 $13,189.1 $12,251.4
========= ========= =========
OPERATING PROFIT
Health Care Services(/1/)............ $ 206.1 $ 76.1(/2/) $ 165.6
Service Merchandising................ 20.3 (56.2)(/2/) 21.5
Water Products....................... 39.6 14.5(/2/) 37.0
Armor All............................ 11.0 40.3 38.3
--------- --------- ---------
Total.............................. 277.0 74.7 262.4
Interest--net(/3/)................... (15.5) (32.8) (40.1)
Corporate............................ (34.1) (112.6)(/2/) 1.8(/4/)
--------- --------- ---------
Income (loss) before taxes on
income............................ $ 227.4 $ (70.7) $ 224.1
========= ========= =========
SEGMENT ASSETS--AT YEAR END
Health Care Services................. $ 2,525.3 $ 2,148.6 $ 1,951.6
Service Merchandising................ 111.1 130.2 247.8
Water Products....................... 142.0 142.3 150.4
Armor All(/5/)....................... 158.9 172.9 151.8
--------- --------- ---------
Total.............................. 2,937.3 2,594.0 2,501.6
Corporate
Cash, cash equivalents and
marketable securities(/5/)......... 456.3 670.5 62.7
Net assets of discontinued
operations......................... -- -- 119.1
Other............................... 110.3 214.7 151.6
--------- --------- ---------
Total.............................. $ 3,503.9 $ 3,479.2 $ 2,835.0
========= ========= =========
DEPRECIATION AND AMORTIZATION
Health Care Services................. $ 40.8 $ 37.2 $ 30.0
Service Merchandising................ 3.1 6.9 8.9
Water................................ 21.5 20.5 18.3
Armor All............................ 4.0 3.8 3.8
Corporate............................ 1.9 1.4 6.2
--------- --------- ---------
Total.............................. $ 71.3 $ 69.8 $ 67.2
========= ========= =========
CAPITAL EXPENDITURES
Health Care Services................. $ 43.5 $ 44.4 $ 34.4
Service Merchandising................ 2.1 3.9 4.6
Water................................ 24.8 26.3 28.7
Armor All............................ 1.6 2.0 1.4
Corporate............................ 5.3 5.7 5.0
--------- --------- ---------
Total.............................. $ 77.3 $ 82.3 $ 74.1
========= ========= =========
</TABLE>
- --------
(1) Includes $12.2 million, $8.9 million and $7.9 million of pre-tax earnings
from an equity investment in fiscal 1996, 1995 and 1994, respectively.
(2) Health Care Services, Service Merchandising and Water Products amounts in
fiscal 1995 include charges for restructuring, asset impairment and other
operating items of $107.3 million, $83.4 million and $17.3 million,
respectively. Corporate includes $76.3 million of expense related to
compensation costs associated with the PCS Transaction, charges for
restructuring, asset impairment and other operating items and
contributions to the McKesson Foundation.
(3) Interest expense is shown net of corporate interest income.
(4) Corporate includes in fiscal 1994 $37.4 million in income consisting of a
$55.1 million gain on the sale and donation of Armor All stock, partially
offset by a contribution to the McKesson Foundation of $4.3 million and a
loss on the termination of interest rate swap arrangements of $13.4
million.
(5) Armor All segment assets include $20.9 million, $22.2 million and $26.3
million of cash and cash equivalents at March 31, 1996, 1995 and 1994,
respectively.
37
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The Health Care Services segment includes the Company's U.S. pharmaceutical
and health care products distribution businesses, its operations to support the
needs of pharmaceutical and other health care product manufacturers and
institutional and retail customers and its international pharmaceutical
operations (including Canada and an equity interest in a Mexican distribution
business).
The Company's Service Merchandising segment distributes health and beauty
care products, general merchandise and specialty foods to supermarkets, drug
stores and discount department stores. It was previously included in the Health
Care Services segment and has been reclassified as a separate segment to better
reflect health care related activities. Prior year amounts have been
reclassified accordingly.
The Water segment is engaged in the processing, delivery and sale of bottled
drinking water and the sale of packaged water to retail stores.
Armor All Products Corporation, a majority-owned subsidiary, is engaged in
developing and marketing branded appearance enhancement and protection products
targeted primarily for the do-it-yourself automotive and home care markets.
Sales to the Company's largest customer, Wal-Mart Stores, Inc., accounted for
11% of consolidated revenues in fiscal 1996 and 10% in fiscal 1995 and 1994.
Information as to the Company's foreign operations was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
United States.............................. $12,167.6 $11,804.7 $10,952.1
International.............................. 1,548.8 1,384.4 1,299.3
--------- --------- ---------
Total.................................... $13,716.4 $13,189.1 $12,251.4
========= ========= =========
OPERATING PROFIT
United States.............................. $ 234.4 $ 43.9 $ 230.5
International.............................. 42.6 30.8 31.9
--------- --------- ---------
Total.................................... $ 277.0 $ 74.7(/1/) $ 262.4
========= ========= =========
ASSETS, AT YEAR END
United States.............................. $ 3,263.5 $ 3,229.2 $ 2,576.7
International.............................. 240.4 250.0 258.3
--------- --------- ---------
Total.................................... $ 3,503.9 $ 3,479.2 $ 2,835.0
========= ========= =========
</TABLE>
- --------
(1) Includes $208.0 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 possible
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 six civil actions filed since late
1993 by retail pharmacies. The first proceeding, Feitelberg v. Abbott
Laboratories, is pending in the Superior Court for the State of California
(County of San Francisco) and is now referred to as Coordinated Proceeding
Special Title,
38
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Pharmaceutical Cases I, II and III. The second proceeding, HJB, Inc. v. Abbott
Laboratories (now known as MDL 997), is pending in the United States District
Court for the Northern District of Illinois. The third proceeding, K-S
Pharmacies, Inc. v. Abbott Laboratories, is pending in the Circuit Court of
Wisconsin for Dane County. A fourth action, Adams v. Abbott Laboratories, was
filed in the U.S. District Court for the Eastern District of Arkansas. A fifth
action, Salk Drug Co. v. Abbott Laboratories, was filed in the District Court
of Minnesota, Fourth Judicial District. Finally, an action was filed this past
year in California Superior Court for San Francisco County, Horton v. Abbott
Laboratories, et. al. These actions were brought as purported class actions on
behalf of all other similarly-situated retail pharmacies. A class has been
certified in Feitelberg and in MDL 997. There are numerous other defendants in
these actions including pharmaceutical manufacturers, a pharmaceutical mail
order firm, and several other wholesale distributors. These cases allege, in
essence, that the defendants have unlawfully conspired together and agreed to
fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially
high, discriminatory, and non-competitive levels, all in violation of various
state and federal antitrust laws. Some of the plaintiffs specifically contend
that the wholesaler and manufacturer defendants are engaged in a conspiracy to
fix prices charged to plaintiffs and members of the purported classes
(independent and chain retail drug stores) above the price levels charged to
mail order pharmacies, HMOs and other institutional buyers. The California
cases allege, among other things, violation of California antitrust law. In MDL
997, plaintiffs allege that defendants' actions constitute price fixing in
violation of the Sherman Act. In the K-S Pharmacies, Inc. and Salk Drug
complaints, plaintiffs allege violation of Wisconsin and Minnesota antitrust
laws, respectively. In each of the complaints, except Adams, plaintiffs seek
certification as a class and remedies in the form of injunctive relief,
unquantified monetary damages (trebled as provided by law), and attorneys fees
and costs. In addition, the California cases seek restitution. In MDL 997, the
court recently granted the motion for summary judgment filed by the Company and
other wholesaler defendants. In K-S Pharmacies, the court dismissed the Company
and other wholesaler defendants without prejudice and is considering whether
the dismissal will be with prejudice. The Company believes it has meritorious
defenses to the allegations made against it and intends to vigorously defend
itself in the remaining cases. In addition, the Company has entered into a
judgment sharing agreement with certain pharmaceutical manufacturer defendants,
which provides generally that the Company (together with the other wholesale
distributor defendants) will be held harmless by such pharmaceutical
manufacturer defendants and will be indemnified against the costs of adverse
judgments, if any, against the wholesaler and manufacturers in these or similar
actions, in excess of $1 million in the aggregate per wholesale distributor
defendant.
Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:
The Company has received claims and demands from governmental agencies
relating to investigative and remedial actions purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.
The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for these
five sites is approximately $24 million, net of amounts which third parties
have agreed to pay in settlement or which the Company expects, based either on
agreements or nonrefundable contributions which are ongoing, to be contributed
by third parties. The $24 million is expected to be paid out between April 1996
and March 2028, and is included in the Company's recorded environmental
reserves at March 31, 1996.
39
<PAGE>
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 27
Superfund sites. With respect to each of these Superfund sites, numerous other
PRPs have similarly been designated and, while the current state of the law
potentially imposes joint and several liability upon PRPs, as a practical
matter costs of these sites are typically shared with other PRPs. The Company's
estimated liability at these 27 Superfund sites is approximately $3 million,
net of amounts which third parties are expected or have agreed to contribute
where the Company believes it is probable that the third parties will fulfill
their agreements to pay. Settlements and costs paid by the Company in Superfund
matters to date have not been significant. The $3 million is included in the
Company's recorded environmental reserves at March 31, 1996, along with an
additional $1 million for miscellaneous other matters.
The potential costs to the Company related to environmental matters is
uncertain due to such factors as: the unknown magnitude of possible pollution
and cleanup costs; the complexity and evolving nature of governmental laws and
regulations and their interpretations; the timing, varying costs and
effectiveness of alternative cleanup technologies; the determination of the
Company's liability in proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.
Management believes, based on current knowledge and the advice of 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.
40
<PAGE>
FINANCIAL NOTES--(CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1996
Revenues......................... $3,336.0 $3,348.4 $3,549.7 $3,482.3 $13,716.4
Gross profit..................... 282.3 285.2 277.7 301.8 1,147.0
Income after taxes...............
Continuing operations........... 32.8 31.7 32.9 38.0 135.4
Discontinued operations.........
-------- -------- -------- -------- ---------
Total......................... $ 32.8 $ 31.7 $ 32.9 $ 38.0 $ 135.4
======== ======== ======== ======== =========
Earnings per common share
Fully diluted
Continuing operations.......... $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
Discontinued operations........
-------- -------- -------- -------- ---------
Total......................... $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
======== ======== ======== ======== =========
Primary
Continuing operations.......... $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
Discontinued operations........
-------- -------- -------- -------- ---------
Total......................... $ 0.70 $ 0.68 $ 0.70 $ 0.82 $ 2.90
======== ======== ======== ======== =========
Cash dividends per share
Common......................... $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 1.00
Market prices per common share
High............................ $ 47 3/8 $ 46 5/8 $ 53 1/4 $ 55 5/8 $ 55 5/8
Low............................. 37 1/4 42 5/8 44 7/8 46 1/2 37 1/4
</TABLE>
41
<PAGE>
FINANCIAL NOTES--(CONCLUDED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- --------- -------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1995
Revenues............... $3,235.2 $ 3,255.8 $ 3,350.0 $3,348.1 $13,189.1
Gross profit........... 274.5 269.8 236.2 313.4 1,093.9
Income (loss) after
taxes
Continuing operations. 26.4 17.1(/1/) (276.3)(/2/) 39.6 (193.2)
Discontinued opera-
tions................ 9.6 8.4 3.0 21.0
Discontinued opera-
tions--gain on sale
of PCS............... 576.7 576.7
-------- --------- --------- -------- ---------
Total............... $ 36.0 $ 25.5 $ 303.4 $ 39.6 $ 404.5
======== ========= ========= ======== =========
Earnings (loss) per
common share
Fully diluted
Continuing opera-
tions............... $ 0.57 $ 0.36 $ (6.06) $ 0.86 $ (4.29)
Discontinued opera-
tions............... 0.22 0.18 0.07 0.46
Discontinued opera-
tions--gain on sale
of PCS.............. 12.64 12.69
-------- --------- --------- -------- ---------
Total............... $ 0.79 $ 0.54 $ 6.65 $ 0.86 $ 8.86
======== ========= ========= ======== =========
Primary
Continuing opera-
tions............... $ 0.60 $ 0.36 $ (6.24) $ 0.86 $ (4.51)
Discontinued opera-
tions............... 0.23 0.20 0.07 0.48
Discontinued opera-
tions--gain on sale
of PCS.............. 13.03 13.23
-------- --------- --------- -------- ---------
Total............... $ 0.83 $ 0.56 $ 6.86 $ 0.86 $ 9.20
======== ========= ========= ======== =========
Cash dividends per
share
Common................ $ 0.42 $ 0.42 $ 0.25 $ 0.25 $ 1.34
Series A preferred.... 0.45 0.45 0.90
Series B ESOP pre-
ferred............... .905 .905 1.81
Cash distribution from
PCS Transaction per
common share......... $ 76
Market prices per com-
mon share
High.................. $ 87 $ 103 5/8 $ 109 1/4 $ 40 3/4 $ 109 1/4
Low................... 58 1/2 70 3/4 30 1/8 31 7/8 30 1/8
</TABLE>
- --------
(1) Includes $11.5 million of charges for other operating items and a $0.8
million contribution to the McKesson Foundation, $6.6 million after-tax in
the aggregate.
(2) Includes $59.4 million of compensation costs related to the PCS
Transaction, $211.4 million of charges for restructuring, asset impairment
and other operating items and $1.2 million of contributions to the
McKesson Foundation, $195.8 million after-tax in the aggregate.
42
<PAGE>
P R O X Y
MCKESSON CORPORATION
PROXY FOR ANNUAL MEETING
10:00 A.M., JULY 31, 1996
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION
The undersigned, whose signature appears on the reverse side, hereby consti-
tutes and appoints Alan Seelenfreund, Ivan D. Meyerson and Nancy A. Miller, and
each of them, with full power of substitution, proxies to vote all stock of Mc-
Kesson Corporation which the undersigned is entitled to vote at the Annual
Meeting of Stockholders to be held in the Gold Room at the Fairmont Hotel, 950
Mason Street, San Francisco, California, on July 31, 1996, and any adjournments
thereof, as specified upon the matter indicated on the reverse side, and in
their discretion upon any other matter that may properly come before said meet-
ing.
Election of Directors
Nominee for one-year term expiring in 1997:
Carl E. Reichardt
Nominees for three-year terms expiring in 1999:
Alan Seelenfreund
Jane E. Shaw
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXY COMMITTEE
CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
SEE REVERSE
SIDE
<PAGE>
Please mark your
[X] votes as in this
example. 4896
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BELOW.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR THE FOLLOWING PROPOSAL.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of Directors [_] [_]
(see reverse)
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------------------------------
Please sign exactly as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) DATE
<PAGE>
PSIP VOTING CARD
DIRECTIONS TO TRUSTEE, MCKESSON CORPORATION PROFIT-SHARING INVESTMENT PLAN
To: The Chase Manhattan Bank, N.A.
I direct you as Trustee of the McKesson Corporation Profit-Sharing Investment
Plan to vote (in person or by proxy) as I have specified on the reverse side
hereof all shares of McKesson Corporation Common Stock allocated to my accounts
under the plan at the Annual Meeting of Stockholders of McKesson Corporation on
July 31, 1996. You may vote according to your discretion (or that of your proxy
holder) on any other matter which may properly come before the meeting.
Election of Directors
Nominee for one-year term expiring in 1997:
Carl E. Reichardt
Nominees for three-year terms expiring in 1999:
Alan Seelenfreund
Jane E. Shaw
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS.
SEE REVERSE
SIDE
<PAGE>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
WITH- FOR ALL
FOR HOLD EXCEPT
1. Election of Directors [_] [_] [_]
CARL E. REICHARDT
ALAN SEELENFREUND
JANE E. SHAW
If you do not wish your shares voted "FOR" a particular nominee, mark the
"For All Except" box and strike a line through the nominee(s) name. Your
shares will be voted for the remaining nominee(s).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ABOVE PROPOSAL.
THIS VOTING CARD WHEN PROPERLY EXECUTED WILL BE
VOTED IN THE MANNER DIRECTED ABOVE. IF NO
DIRECTION IS GIVEN, IT WILL BE VOTED FOR THE PROPOSAL.
(Signature) X: ___________ Date:
Please be sure to sign and date this Proxy.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DETACH CARD DETACH CARD
<PAGE>
MCKESSON CORP.
One Post Street, San Francisco, CA 94104
[LOGO OF MCKESSON APPEARS HERE]
June 17, 1996
Dear McKesson Profit-Sharing Investment Plan Participant:
As a participant in the McKesson Corporation Profit-Sharing Investment Plan
("PSIP"), you are a stockholder in the Corporation. At the Annual Stockholders
Meeting, you have the right to instruct the Plan Trustee, on a confidential
basis, how the shares of McKesson Common Stock in your account are to be voted
on matters that come before the meeting. Your PSIP account includes the shares
held for the Company Matching Contributions, PAYSOP, ESOP, PSIP Plus and
Quarterly Contributions.
The only proposal to be voted on at this year's meeting is the election of
three directors for the terms specified in the accompanying Notice of Meeting
and Proxy Statement. The Board of Directors recommends that you vote FOR the
proposal. PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PSIP VOTING CARD IN THE
ENVELOPE PROVIDED. If you sign and return this card without marking your
choices, your shares will be voted in accordance with the Board of Directors'
recommendation as indicated above. This card also gives the Trustee authority
to vote on your behalf on any other matters that may properly come before the
meeting.
If the Trustee receives no voting instructions for shares credited to
participants' PAYSOP accounts, no vote will be cast on those shares. The PSIP
provides that all other shares for which the Trustee receives no voting
instructions from participants, as well as all unallocated shares of Common
Stock, will be voted by the Trustee in the same proportion as shares for which
voting instructions are received.
Participants who own shares of McKesson Common Stock by means other than
through the PSIP will receive a separate proxy card for the voting of those
shares.
To ensure that your shares are represented and voted at the meeting according
to your wishes, your signed PSIP voting card must be received by the Trustee by
July 26, 1996. The audited financial statements of the Corporation for the
fiscal year ended March 31, 1996 are included in the enclosed Appendix to the
Proxy Statement. The Summary Annual Report contains condensed financial data
derived from the audited financial statements, as well as other information of
topical interest, and will be distributed separately.
We urge you to exercise your voting rights as a stockholder. Your vote does
make a difference.
Sincerely,
/s/ ALAN SEELENFREUND
------------------------------------
Alan Seelenfreund
Chairman and Chief Executive Officer
