<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13252
MCKESSON CORPORATION
A DELAWARE CORPORATION
I.R.S. EMPLOYER NUMBER 94-3207296
MCKESSON PLAZA, ONE POST STREET, SAN FRANCISCO, CA 94104
TELEPHONE - AREA CODE (415) 983-8300
Securities registered pursuant to Section 12(b) of the Act:
(NAME OF EACH EXCHANGE
(TITLE OF EACH CLASS) ON WHICH REGISTERED)
Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the Registrant
at June 1, 1998: $5,606,443,190
Number of shares of common stock outstanding at June 1, 1998: 94,929,952
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended March 31, 1998 are incorporated by reference into Parts I, II and IV of
this report. Portions of the Registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on July 29, 1998 are incorporated by
reference into Part III of this report.
<PAGE>
The undersigned Registrant hereby amends the items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 as set forth below.
LIST OF ITEMS AMENDED
---------------------
Item Page
- ---- ----
PART II
8. Financial Statements and Supplementary Data........ 1
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 34
Signatures......................................... 35
TEXT OF AMENDMENTS
------------------
Each of the above listed Items is hereby amended by deleting the Item in
its entirety and replacing it with the Items attached hereto and filed herewith.
The purpose of the amendment is to expand the disclosure in Note 9
"Convertible Preferred Securities" to the Company's financial statements.
<PAGE>
Part II
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data Schedule
- -------------------------------------------------------------
Page
----
Consolidated Financial Statements:
Independent Auditors' Report....................................... 2
Statements of Consolidated Income for the years ended
March 31, 1998, 1997 and 1996................................ 3
Consolidated Balance Sheets, March 31, 1998, 1997, and 1996........ 4
Statements of Consolidated Stockholders' Equity for the years
ended March 31, 1998, 1997 and 1996.......................... 5
Statements of Consolidated Cash Flows for the years ended
March 31, 1998, 1997, and 1996............................... 7
Financial Notes.................................................... 8
Financial statements and schedules not included herein have been omitted
because of the absence of conditions under which they are required or because
the required information, where material, is shown in the financial statements,
financial notes or supplementary financial information.
1
<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, 1998, 1997, and 1996, and the
related statements of consolidated income, consolidated stockholders' equity
and consolidated cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of McKesson Corporation and
subsidiaries at March 31, 1998, 1997, and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
May 18, 1998
2
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES (Note 1).............................. $20,857.3 $15,710.8 $12,964.8
--------- --------- ---------
COSTS AND EXPENSES (Note 3)
Cost of sales.................................. 19,336.0 14,673.5 12,049.3
Selling........................................ 240.6 139.8 114.0
Distribution................................... 477.0 354.7 327.4
Administrative................................. 441.5 450.0 232.8
Interest....................................... 102.5 55.7 44.4
--------- --------- ---------
Total...................................... 20,597.6 15,673.7 12,767.9
--------- --------- ---------
INCOME BEFORE TAXES ON INCOME AND DIVIDENDS
ON PREFERRED SECURITIES OF SUBSIDIARY TRUST... 259.7 37.1 196.9
Taxes on income (Note 13)...................... 98.6 31.3 76.2
--------- --------- ---------
INCOME BEFORE DIVIDENDS ON PREFERRED SECURITIES
OF SUBSIDIARY TRUST........................... 161.1 5.8 120.7
Dividends on preferred securities of subsidiary
trust,
net of $4.0 and $0.4 tax benefit (Note 9)..... (6.2) (0.7) --
--------- --------- ---------
INCOME AFTER TAXES
Continuing operations.......................... 154.9 5.1 120.7
Discontinued operations (Notes 2 and 7)........ -- 8.6 14.7
Discontinued operations--Gain on sale of
Armor All stock (Notes 2 and 7) .............. -- 120.2 --
--------- --------- ---------
NET INCOME..................................... $ 154.9 $ 133.9 $ 135.4
========= ========= =========
EARNINGS PER COMMON SHARE
Diluted
Continuing operations........................ $ 1.59 $ 0.06 $ 1.29
Discontinued operations...................... -- 0.10 0.16
Discontinued operations--Gain on sale of
Armor All stock............................. -- 1.35 --
--------- --------- ---------
Total...................................... $ 1.59 $ 1.51 $ 1.45
========= ========= =========
Basic
Continuing operations........................ 1.69 $ 0.06 $ 1.36
Discontinued operations...................... -- 0.10 0.17
Discontinued operations--Gain on sale of
Armor All stock............................. -- 1.41 --
--------- --------- ---------
Total...................................... $ 1.69 $ 1.57 $ 1.53
========= ========= =========
SHARES ON WHICH EARNINGS
PER COMMON SHARE WERE BASED
Diluted........................................ 101.2 89.4 93.2
Basic.......................................... 91.5 85.5 88.8
</TABLE>
See Financial Notes.
3
<PAGE>
MCKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1998 1997 1996
-------- -------- --------
(IN MILLIONS, EXCEPT PAR
VALUE)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 35.7 $ 124.8 $ 260.8
Marketable securities available for sale (Note
1).............................................. 77.9 105.0 195.4
Receivables (Note 5)............................. 1,380.4 1,224.5 672.8
Inventories (Note 6)............................. 2,583.5 2,259.5 1,317.0
Prepaid expenses (Note 13)....................... 28.1 47.3 17.0
-------- -------- --------
Total current assets........................... 4,105.6 3,761.1 2,463.0
-------- -------- --------
Land............................................. 35.6 38.0 36.1
Buildings........................................ 225.9 208.5 205.8
Machinery and equipment.......................... 608.8 532.8 471.8
-------- -------- --------
Total property, plant and equipment............ 870.3 779.3 713.7
Accumulated depreciation......................... (440.0) (405.7) (357.7)
-------- -------- --------
Net property, plant and equipment.............. 430.3 373.6 356.0
Goodwill and other intangibles................... 752.4 736.2 183.7
Net assets of discontinued operations (Notes 2
and 7).......................................... -- -- 125.7
Other assets (Notes 13 and 14)................... 319.2 301.9 231.8
-------- -------- --------
Total assets................................... $5,607.5 $5,172.8 $3,360.2
======== ======== ========
LIABILITIES
Drafts payable................................... $ 286.2 $ 210.7 $ 194.0
Accounts payable--trade.......................... 1,859.1 1,854.7 1,149.2
Short-term borrowings............................ -- 100.0 6.6
Current portion of long-term debt (Note 8)....... 10.0 60.3 21.1
Salaries and wages............................... 53.9 52.9 26.3
Taxes (Note 13).................................. 115.7 80.0 92.2
Interest and dividends........................... 29.5 21.3 19.0
Other............................................ 223.4 257.3 134.1
-------- -------- --------
Total current liabilities...................... 2,577.8 2,637.2 1,642.5
-------- -------- --------
Postretirement obligations and other noncurrent
liabilities (Note 14)........................... 233.3 255.1 282.5
-------- -------- --------
Long-term debt (Note 8).......................... 1,194.2 824.9 370.6
-------- -------- --------
McKesson-obligated mandatorily redeemable
preferred securities of subsidiary grantor trust
whose sole assets are junior subordinated
debentures of McKesson (Note 9)................. 195.4 194.8 --
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock (200.0 shares authorized, 93.4, 92.8
and 90.9 issued as of March 31, 1998, 1997 and
1996, respectively; par value of $.01) (Note
12)............................................. 0.9 0.8 0.8
Additional paid-in capital....................... 440.7 408.2 332.0
Other capital.................................... (42.2) (19.2) (36.2)
Retained earnings................................ 1,173.2 1,062.2 968.5
Accumulated translation adjustment............... (45.4) (44.6) (49.7)
ESOP notes and guarantee (Note 14)............... (115.6) (118.3) (122.5)
Treasury shares, at cost (Note 12)............... (4.8) (28.3) (28.3)
-------- -------- --------
Stockholders' equity........................... 1,406.8 1,260.8 1,064.6
-------- -------- --------
Total liabilities and stockholders' equity..... $5,607.5 $5,172.8 $3,360.2
======== ======== ========
</TABLE>
See Financial Notes.
4
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(SHARES IN THOUSANDS, DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
<S> <C> <C> <C>
BALANCES, MARCH 31, 1995 (RESTATED FOR THE
TWO-FOR-ONE SPLIT--NOTE 12)........................... 88,776 $0.8 $319.8
Issuance of shares under employee plans (Note 12)...... 2,124 (10.6)
Purchase of shares ....................................
ESOP note payments.....................................
Translation adjustment.................................
Unrealized gain on marketable securities...............
Net income.............................................
Other (Note 14)........................................ 22.8
Cash dividends declared
Common, $0.50 per share..............................
------ ---- ------
BALANCES, MARCH 31, 1996 (RESTATED FOR THE
TWO-FOR-ONE SPLIT--NOTE 12)........................... 90,900 0.8 332.0
Issuance of shares under employee plans (Note 12)...... 204 (25.2)
Purchase of shares.....................................
ESOP note payments.....................................
Translation adjustment.................................
Unrealized gain on marketable securities...............
Net income.............................................
Acquisition of MGM..................................... 1,690 83.0
Other (Note 14)........................................ 18.4
Cash dividends declared
Common, $0.50 per share..............................
------ ---- ------
BALANCES, MARCH 31, 1997 (RESTATED FOR THE
TWO-FOR-ONE SPLIT--NOTE 12)........................... 92,794 0.8 408.2
Issuance of shares under employee plans (Note 12)...... 605 0.1 16.2
ESOP note payments.....................................
Translation adjustment.................................
Net income.............................................
Other (Note 14)........................................ 16.3
Cash dividends declared
Common, $0.50 per share..............................
------ ---- ------
BALANCES, MARCH 31, 1998............................... 93,399 $0.9 $440.7
====== ==== ======
</TABLE>
See Financial Notes.
5
<PAGE>
<TABLE>
<CAPTION>
TREASURY
--------------
ACCUMULATED ESOP
OTHER RETAINED TRANSLATION NOTES AND COMMON STOCKHOLDERS'
CAPITAL EARNINGS ADJUSTMENT GUARANTEE SHARES AMOUNT EQUITY
- ------- -------- ----------- --------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
$ (4.1) $ 875.5 $(51.6) $(126.4) (28) $ (0.5) $1,013.5
(4.0) 1,522 34.9 20.3
(2,698) (62.7) (62.7)
3.9 3.9
1.9 1.9
(0.8) (0.8)
135.4 135.4
(27.3) 2.3 (2.2)
(44.7) (44.7)
- ------ -------- ------ ------- ------ ------ --------
(36.2) 968.5 (49.7) (122.5) (1,204) (28.3) 1,064.6
(7.5) 2,868 66.0 33.3
(6,780) (155.7) (155.7)
4.2 4.2
5.1 5.1
(1.1) (1.1)
133.9 133.9
3,892 89.7 172.7
25.6 3.1 47.1
(43.3) (43.3)
- ------ -------- ------ ------- ------ ------ --------
(19.2) 1,062.2 (44.6) (118.3) (1,224) (28.3) 1,260.8
(19.7) 1,045 23.5 20.1
2.7 2.7
(0.8) (0.8)
154.9 154.9
(3.3) 2.4 15.4
(46.3) (46.3)
- ------ -------- ------ ------- ------ ------ --------
$(42.2) $1,173.2 $(45.4) $(115.6) (179) $ (4.8) $1,406.8
====== ======== ====== ======= ====== ====== ========
</TABLE>
6
<PAGE>
MCKESSON CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
---------------------------
1998 1997 1996
------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations................. $ 154.9 $ 5.1 $ 120.7
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation..................................... 70.3 65.4 57.2
Amortization of intangibles...................... 16.9 6.4 7.0
Provision for bad debts.......................... 10.2 23.0 13.7
Deferred taxes on income......................... 66.4 (1.6) 42.9
Gain on sale of subsidiary....................... -- -- (11.2)
Other noncash (Note 3)........................... 18.8 125.0 (7.4)
------- --------- -------
Total......................................... 337.5 223.3 222.9
------- --------- -------
Effects of changes in:
Receivables..................................... (124.0) (129.5) --
Inventories..................................... (292.2) (332.6) (239.6)
Accounts and drafts payable..................... 84.4 521.0 103.9
Taxes........................................... 75.5 (39.0) (13.1)
Other........................................... (76.6) (16.6) (62.9)
------- --------- -------
Total......................................... (332.9) 3.3 (211.7)
------- --------- -------
NET CASH PROVIDED BY CONTINUING OPERATIONS.... 4.6 226.6 11.2
Discontinued operations (Notes 2 and 7)........... (2.4) 11.5 (7.4)
------- --------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 2.2 238.1 3.8
------- --------- -------
INVESTING ACTIVITIES
Purchases of marketable securities................ (1.3) (103.1) (130.6)
Maturities of marketable securities............... 32.7 198.2 244.8
Property acquisitions............................. (130.0) (76.9) (73.6)
Properties sold................................... 8.4 3.6 6.7
Proceeds from sales of subsidiaries and
investments (Note 2)............................. 1.8 300.7 36.1
Acquisitions of businesses, less cash and short-
term investments acquired (Note 2)............... (102.4) (1,209.5) (33.5)
Investing activities of discontinued operations... -- (4.2) (4.4)
Other............................................. (94.4) (73.0) (49.5)
------- --------- -------
NET CASH USED BY INVESTING ACTIVITIES......... (285.2) (964.2) (4.0)
------- --------- -------
FINANCING ACTIVITIES (Notes 8, 9 and 12)
Proceeds from issuance of debt.................... 445.8 1,118.2 0.6
Proceeds from issuance of trust convertible
preferred securities, net of issuance costs...... -- 195.1 --
Repayment of debt................................. (211.7) (551.9) (19.1)
Capital stock transactions........................
Issuances........................................ 11.3 27.4 19.2
Share repurchases................................ -- (155.7) (62.7)
ESOP note payments............................... 2.7 4.2 3.9
Dividends paid................................... (46.3) (43.3) (44.2)
Other............................................. (7.9) (3.9) 0.2
------- --------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................... 193.9 590.1 (102.1)
------- --------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (89.1) (136.0) (102.3)
Cash and Cash Equivalents at beginning of year.... 124.8 260.8 363.1
------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 35.7 $ 124.8 $ 260.8
======= ========= =======
</TABLE>
See Financial Notes.
7
<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. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Within the United States and Canada, McKesson is the largest wholesale
distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products. The Company is also engaged in the processing
and sale of bottled drinking water to homes and businesses and packaged water
through retail stores. The principal markets for the drug, medical-surgical
supplies and health and beauty care distribution businesses are chain and
independent drug stores, hospitals, alternate care sites, food stores and mass
merchandisers.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.
Marketable Securities Available for Sale are carried at fair value and the
net unrealized gains and losses computed in marking these securities to market
have been reported within stockholders' equity. At March 31, 1998, the fair
value approximated the amortized cost of these securities. The investments
mature on various dates through fiscal 1999.
Inventories consist of merchandise held for resale and are stated at the
lower of cost or market. The majority of the cost of domestic inventories is
determined on the last-in, first-out (LIFO) method. International inventories
are stated at average cost.
Property, Plant and Equipment is stated at cost and depreciated on the
straight-line method at rates designed to distribute the cost of properties
over estimated service lives ranging from one to 45 years.
Capitalized Software included in other assets reflects costs related to
internally developed or purchased software for projects in excess of $1
million that are capitalized and amortized on a straight-line basis over
periods not exceeding seven years.
Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 3 to 40 years. Negative goodwill
arising from the acquisition of the FoxMeyer business is being amortized over
a five year period (see Note 2). Accumulated amortization balances netted
against goodwill and other intangibles were $78.1 million, $61.2 million, and
$54.8 million at March 31, 1998, 1997 and 1996, respectively.
Long-lived Assets. The Company periodically assesses the recoverability of
the cost of its long-lived assets, including goodwill, based on a review of
projected undiscounted cash flows associated with these assets. These cash
flows are prepared and reviewed by management in connection with the Company's
annual long range planning process. See Note 3 for charges the Company
recorded in fiscal 1997 related to impairment of assets.
8
<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 are large volume
sales of pharmaceuticals to major self-warehousing drugstore chains whereby
the Company acts as an intermediary in the order and subsequent delivery of
products to the customers' warehouses. These sales totaled $2.7 billion in
1998, $2.8 billion in 1997 and $3.0 billion in 1996. Previously only the gross
margin from such sales had been classified in revenues. Such sales have been
reclassified into revenues and cost of sales for all periods presented. Also
included in revenues is interest income of $12.9 million, $14.5 million, and
$37.8 million in fiscal 1998, 1997 and 1996, respectively.
Income Taxes. The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes", see Note 13.
Foreign Currency Translation. Assets and liabilities of the Company's
foreign affiliates are translated at current exchange rates, while revenue and
expenses are translated at average rates prevailing during the year.
Translation adjustments related to the Company's Canadian operation are
reported as a component of stockholders' equity.
The Company has a 23% equity interest in a pharmaceutical distributor in
Mexico, which has been designated a "highly inflationary economy" effective
January 1, 1997. Accordingly, adjustments associated with the translation of
this entity's financial statements have been reflected in the Company's
consolidated statement of income since that date. Prior to January 1, 1997,
translation adjustments associated with this entity were reported as a
component of stockholders' equity.
Derivative Financial Instruments. The Company has entered into interest rate
and currency swap agreements to hedge certain interest and currency rate risks
which are accounted for using the settlement basis of accounting. As such, no
gains or losses are recorded for movements in the swaps' values during the
terms of the respective agreements.
Employee Stock Options. The Company uses the intrinsic value method to
account for stock-based compensations in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 12
for the disclosures of pro forma earnings and earnings per share had the fair
value method been used to account for stock-based employee compensation plans
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
Accounting Change. In fiscal 1998, the Company adopted SFAS No. 128
"Earnings per Share" which requires a dual presentation of basic and diluted
earnings per share ("EPS"). Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. All share and per
share amounts have been restated in accordance with the provisions of SFAS No.
128. See Note 12.
9
<PAGE>
FINANCIAL NOTES--(CONTINUED)
New Accounting Pronouncements. In fiscal 1998, the Financial Accounting
Standards Board issued SFAS No. 130 "Reporting Comprehensive Income," which
requires that an enterprise report, by major component and as a single total,
the change in its net assets during the period from nonowner sources; SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information, "
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers; and SFAS No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other postretirement
benefits and expands disclosures on changes in benefit obligations and fair
values of plan assets. The Company plans to implement these statements in
fiscal 1999. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures.
2. ACQUISITIONS, INVESTMENTS AND DIVESTITURES
In August 1997, the Company's Canadian health care distribution business,
Medis Health and Pharmaceutical Services Inc. ("Medis") announced an agreement
with Drug Trading Company, Limited ("Drug Trading") to transition Drug
Trading's retail customers to Medis over a transition period. The Company
acquired assets consisting primarily of accounts receivable, inventories and
customer contracts, for approximately $83 million in cash. The transaction was
funded with proceeds from operations and short-term borrowings. This
acquisition was accounted for under the purchase accounting method and the
excess of the purchase price over the fair value of the net assets acquired of
$9.2 million is being amortized on a straight-line basis over 40 years. The
purchase price allocation is based on preliminary estimates and may be subject
to revision.
In fiscal 1998, the Company also made a number of smaller acquisitions
including six distributors of first-aid products, two distributors of medical-
surgical supplies, and a pharmaceuticals distributor. The aggregate cost of
these acquisitions, accounted for as purchases, amounted to approximately
$20 million.
On February 21, 1997, the Company acquired General Medical Inc. ("MGM") for
approximately $775 million including the issuance of approximately 5.6 million
shares of the Company's common stock and the assumption of approximately $428
million in debt. Payment of $30 million of the purchase price has been
withheld pending the outcome of a contingency. MGM is a multi-market
distributor of medical-surgical supplies to acute-care, physician-care, and
extended-care markets. This acquisition was accounted for under the purchase
method and the results of operations of MGM have been included in the
consolidated financial statements since the date of acquisition. The valuation
of the MGM net assets acquired included the recognition of liabilities
totaling $7.9 million related to closures of duplicate facilities and
involuntary termination and relocation benefits, of which $1.0 million and
$7.3 million remained outstanding as of March 31, 1998 and 1997, respectively.
Changes to the reserve in fiscal 1998 consisted primarily of cash payments for
severance benefits and costs to close down duplicate facilities. The excess of
the purchase price over the fair value of the net assets acquired of
approximately $600 million is being amortized on a straight-line basis over 40
years.
On November 8, 1996, the Company acquired FoxMeyer Corporation's
pharmaceutical distribution business ("FoxMeyer"), pursuant to an expedited
auction process in the FoxMeyer Corporation bankruptcy proceeding in
Wilmington, Delaware. Through an amended sale agreement, the Company paid
approximately $23 million in cash to the debtors, paid off approximately $500
million in secured debt, and assumed an additional $75 million in other
liabilities. The Company utilized proceeds from commercial paper issuances and
a note payable to a bank to fund the transaction. The note payable
10
<PAGE>
FINANCIAL NOTES--(CONTINUED)
to a bank was repaid prior to March 31, 1997, with cash flow from operations
and proceeds from divestitures. The Company acquired assets consisting
primarily of accounts receivable and inventories of approximately $650
million, customer contracts and fixed assets. This acquisition was accounted
for under the purchase method.
As further discussed in Note 3, as a result of the FoxMeyer acquisition,
management assessed strategies and program offerings and initiated a plan to
optimize the network configuration from the combined distribution centers of
the Company and those acquired. This plan was reflected in the valuation of
the FoxMeyer net assets acquired. The plan to consolidate the FoxMeyer
business was developed and executed during the latter part of fiscal 1997 and
1998. Liabilities of $37.6 million were recognized for costs associated with
closures of duplicate distribution centers and workforce reductions of which
$3.0 million and $21.9 million remained outstanding as of March 31, 1998 and
1997, respectively. Reductions in the reserves in fiscal 1998 consisted
primarily of cash payments for severance benefits and costs related to
FoxMeyer facility closures. The excess of the fair value of net assets
acquired over the purchase price, after reducing to zero the carrying value of
long-term assets expected to be retained for use by the Company, was initially
estimated at $50 million (negative goodwill). In fiscal 1998, the estimates
were finalized resulting in a $22 million increase in goodwill (reduction in
negative goodwill) primarily for reserves for out of date and slow-moving
inventory at the acquisition date and additional liabilities assumed in the
transaction. The negative goodwill is being amortized over 5 years.
The following unaudited pro forma information has been prepared assuming
FoxMeyer and MGM had been acquired as of the beginning of fiscal 1996:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1997 1996
--------- ---------
(IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................ $17,398.8 $16,992.8
Net income (loss)....................................... (269.3) 79.3
Earnings (loss) per share
Diluted............................................... (3.15) 0.85
Basic................................................. (3.15) 0.89
</TABLE>
The unaudited pro forma information above is not indicative of the
consolidated financial position or results of operations of the Company as
they may be in the future or as they might have been had the MGM and FoxMeyer
acquisitions been effected on the assumed dates. For instance, due to
FoxMeyer's bankruptcy filing on August 27, 1996, and the resulting
deterioration in its operations through November 8, 1996, FoxMeyer experienced
a decline in its sales base, wrote off its goodwill and other intangibles
totaling $207.9 million, and established substantial accounts receivable and
inventory reserves and an additional valuation allowance for deferred tax
assets aggregating $153.4 million during the period from April 1, 1996 to
November 8, 1996.
In April 1996, the Company acquired Automated Healthcare, Inc. ("MAH") for
$61.4 million in cash and the assumption of $3.2 million of employee stock
incentives. MAH designs, manufactures, sells, and installs automated
pharmaceutical dispensing equipment for use by health care institutions. The
acquisition was accounted for as a purchase and accordingly, MAH's results are
included in the consolidated financial statements since the date of
acquisition. The results of operations of MAH were not material in relation to
the Company's consolidated results of operations. The goodwill related to the
acquisition of approximately $13.4 million is being amortized on a straight-
line basis over a ten-year period. A $48.2 million charge was recorded to
write off the portion of the purchase price of MAH allocated to technology for
which technological feasibility had not been established as of the acquisition
11
<PAGE>
FINANCIAL NOTES--(CONTINUED)
date and for which there were no alternative uses. Existing technology was
valued at $0.4 million and is being amortized on a straight-line basis over a
three-year period. The Company utilized a discounted cash flow methodology by
product line to value in-process and existing technologies as of the
acquisition date.
In fiscal 1996, the Company acquired McKesson BioServices, a provider of
support services to commercial, non-profit and governmental organizations
engaged in drug and biomedical development for $20 million. The Company also
acquired interests in two companies engaged in the development of new
technology-based initiatives to enhance the Health Care Services segment's
competitive position.
On March 31, 1997, the Company sold its service merchandising unit,
Millbrook Distribution Services, Inc. ("Millbrook"), to R.A.B. Holdings, Inc.
The after-tax proceeds on the sale approximated Millbrook's book value.
In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua-
Vend"), a unit of the Water Products segment. The after-tax proceeds on the
sale approximated Aqua-Vend's book value, after giving effect to the $7.0
million pre-tax provision for impairment of certain assets recorded in the
third quarter of fiscal 1997; see Note 3.
On December 31, 1996, the Company sold its 55% equity interest in Armor All
Products Corporation ("Armor All") to The Clorox Company for $221.9 million
and recognized an after-tax gain of $120.2 million. At closing, after-tax
proceeds of $109.8 million replaced the 6.9 million Armor All shares held in
trust as exchange property for the Company's $180 million exchangeable
subordinated debentures; see Note 8.
All of the net assets and results of operations of both Armor All and
Millbrook have been reclassified as discontinued operations. Prior year
amounts have been restated.
In fiscal 1996, the Company sold its interest in a Central American
pharmaceutical manufacturer for $36.1 million, resulting in a gain of $11.2
million.
3. CHARGES AND GAINS IN CONTINUING OPERATIONS
Fiscal 1998
On September 23, 1997, the Company and AmeriSource Health Corporation
("AmeriSource"), a leading U.S. wholesale distributor of pharmaceutical and
related health care products and services, jointly announced the execution of
a definitive Merger Agreement providing for the Company to acquire
AmeriSource. On March 3, 1998, the Federal Trade Commission voted to block the
proposed merger. On March 9, 1998, the FTC filed a complaint with the United
States District Court of the District of Columbia seeking a preliminary
injunction to halt the merger. On March 18, 1998, the Company and AmeriSource
each announced that they will oppose the FTC's motion for preliminary
injunction. A full hearing on the FTC's motion is expected to begin June 9,
1998. Although the merger and transactions contemplated thereby have been
approved by stockholders of both companies, there can be no assurance that
McKesson and AmeriSource will prevail in their opposition of the FTC's request
for a preliminary injunction, that the merger will be completed, or that it
will be completed as contemplated or what the results of the merger might be.
In light of this uncertainty, management deemed it appropriate to write off
transaction costs incurred to date of $16.7 million.
In addition, the Company took a pre-tax charge of $10.5 million for costs
associated with the integration and rationalization of recent acquisitions
into the Company's operations including workforce
12
<PAGE>
FINANCIAL NOTES--(CONTINUED)
reductions designed to reduce cost structure. Approximately $9.4 million of
the $10.5 million charge is for severance and related benefits.
The Company also incurred a charge of $3.4 million pre-tax in the Health
Care Services segment related primarily to the sale of an investment.
The above discussed charges totaling $30.6 million, $25.4 million after-tax,
have been recorded in selling, distribution and administrative expenses. In
addition, the Company recognized a favorable one-time tax adjustment of $4.6
million associated with the completion of tax audits for certain prior years.
The favorable tax adjustment was a non-cash transaction. There were no
significant changes in estimates or recharacterization of other amounts from
prior restructuring reserves in fiscal 1998.
Fiscal 1997
The acquisition of the assets and operations of FoxMeyer (see Note 2)
resulted in a significant increase in sales volume, a substantial change in
the customer mix (primarily a large increase in institutional customers), and
overlapping, duplicate, and "similar purpose" assets. In fiscal 1997,
management reassessed the Company's operations, distribution center network
and business strategies, including program offerings in light of the FoxMeyer
acquisition. A plan was developed and executed during the latter part of
fiscal 1997 and fiscal 1998 to optimize the network configuration from the
combined distribution centers of the Company and those acquired in the
transaction which has resulted in the consolidation and closure of 15
distribution centers, workforce reductions, and disposal of excess, duplicate
assets. Management also reassessed strategies and program offerings for
expanding certain customer segments in light of the larger and more diverse
customer base and identified certain programs and investments, that would no
longer be pursued as originally contemplated. Other duplicate, common purpose
assets including administrative facilities, software, and other equipment were
reviewed to identify the optimum mix for the combined companies. This resulted
in the impairment in the value of certain assets which were not retained or
utilized as originally intended. The foregoing was reflected in the valuation
of the FoxMeyer assets acquired and liabilities assumed, and in the charges
discussed below with respect to the affected assets of the Company.
The charges resulting from the impairment of assets of the Company as a
result of the integration and rationalization of the Company's distribution
operations, systems, strategies, and program offerings and administrative
functions, and for certain operating items were recorded in selling,
distribution, and administrative expenses and are summarized below:
<TABLE>
<S> <C>
Development costs and investments associated with program offerings
that are no longer being pursued as originally contemplated.......... $28.0
Computer software which will no longer be utilized or for which the
development program has ceased....................................... 29.3
Cost of facilities closures--primarily write-down of assets which are
to be disposed of.................................................... 10.1
Receivable reserves................................................... 15.1
Other operating items................................................. 16.3
-----
$98.8
=====
</TABLE>
The write-downs associated with assets to be disposed of and asset
impairments due to changed business conditions were based primarily on
independent appraisals. Substantially all of the charges represented the
write-down of existing balances and were, accordingly, noncash. Balances
remaining
13
<PAGE>
FINANCIAL NOTES--(CONTINUED)
from a prior restructuring in fiscal 1995 for facilities closures were
considered in connection with the revised facilities plan after the FoxMeyer
transaction, resulting in an additional provision of $2.9 million. There were
no other significant changes in estimates or recharacterization of other
amounts from the prior restructuring reserves. Also included in the charge for
facilities closures was $7.2 million for Medis which had restructured its
distribution operations and network following a significant change in its
customer mix.
The charge related to receivable reserves resulted from management's
reevaluation of the U.S. Health Care business' estimated exposures for bad
debts, disputed amounts, customer allowances, and rebates.
Other operating items included a provision by the Water Products business of
$7.0 million for the impairment of assets in its vended water business. Other
operating items of the U.S. Health Care Services business consisted of $2.8
million of incremental costs incurred during a strike at a distribution
center, $1.5 million for the termination of a marketing program and certain
distributor relationships, and $5.0 million of other charges.
Summary of Reserve Balances
The remaining balances outstanding for the combined reserves at March 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31
-----------
1998 1997
----- -----
<S> <C> <C>
Costs of facilities closure and surplus properties, primarily
write-down of assets which will no longer be utilized and will
be disposed of................................................. $17.4 $27.8
Severance costs for announced workforce reductions.............. 6.6 --
----- -----
$24.0 $27.8
===== =====
</TABLE>
The disposition of properties in connection with facilities closures is
expected to be completed over the next one to two years. Charges to the
restructuring reserve in fiscal 1998, 1997 and 1996 consisted primarily of
asset write-offs (substantially all of which are non-cash) and cash payments
for severance of $1.7 million and asset holding costs of $1.9 million in
fiscal 1998, and for severance of $2.0 million and $5.2 million in fiscal 1997
and 1996, respectively.
4. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Company to a concentration of credit risk with
customers in the retail and institutional sectors. This risk is spread over a
large number of geographically dispersed customers.
The Company sold $299.9 million and $147.4 million at March 31, 1998 and
1997, respectively, of trade receivables at amounts approximating their fair
value to a bank.
Proceeds received by the Company on sales of accounts receivable with
recourse to the Company for certain uncollectible amounts totaled $105 million
in 1996.
The Company's Canadian subsidiary, Medis, has agreements with certain of its
customers' financial institutions to repurchase inventory in the event the
customers are unable to meet certain obligations to the financial
institutions. Medis has also agreed to guarantee the payment of a major
customer's leases. The amounts related to these guarantees were approximately
$55.7 million for the inventory and $12 million for the lease obligations at
March 31, 1998.
14
<PAGE>
FINANCIAL NOTES--(CONTINUED)
5. RECEIVABLES
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1997 1996
-------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Customer accounts................................ $1,249.4 $1,180.4 $631.7
Other............................................ 189.0 88.0 79.2
-------- -------- ------
Total.......................................... 1,438.4 1,268.4 710.9
Allowances....................................... (58.0) (43.9) (38.1)
-------- -------- ------
Net............................................ $1,380.4 $1,224.5 $672.8
======== ======== ======
</TABLE>
The allowances are for uncollectible accounts, discounts, returns and other
adjustments.
6. INVENTORIES
The LIFO method was used to value approximately 83%, 84% and 90% of the
inventories at March 31, 1998, 1997, and 1996, respectively. Inventories
before the LIFO cost adjustment, which approximates replacement cost, were
$2,825.3, $2,538.6 and $1,602.5 million at March 31, 1998, 1997 and 1996,
respectively.
7. DISCONTINUED OPERATIONS
The net assets (liabilities) of discontinued operations at March 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -------
(IN MILLIONS)
<S> <C> <C> <C>
Total assets.......................................... $ 1.9 $ 2.5 $ 275.5
Total liabilities..................................... (2.8) (5.8) (149.8)
----- ----- -------
Net assets (liabilities)............................ $(0.9) $(3.3) $ 125.7
===== ===== =======
</TABLE>
At March 31, 1998 and 1997, net liabilities of discontinued operations are
included in other current liabilities. Assets consist primarily of land held
for sale and investments in affiliates. Liabilities consist primarily of other
accrued liabilities.
At March 31, 1996, assets of discontinued operations consisted primarily of
cash, receivables, inventory, property, plant and equipment and goodwill of
Armor All and Millbrook. Liabilities of discontinued operations consist
primarily of accounts payable and other accrued liabilities of Armor All and
Millbrook.
Results of discontinued operations were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................. $ 0.2 $592.1 $749.6
===== ====== ======
Discontinued operations before taxes................. $ 0.1 $ 17.2 $ 31.7
Provision for taxes on income........................ (0.1) (5.6) (13.7)
Minority interest in Armor All....................... -- (3.0) (3.3)
----- ------ ------
Discontinued operations............................ -- 8.6 14.7
----- ------ ------
Gain on sale of Armor All stock...................... -- 154.5 --
Tax expense.......................................... -- (34.3) --
----- ------ ------
Discontinued operations--gain on sale of Armor All
stock............................................. -- 120.2 --
----- ------ ------
Total............................................ $ -- $128.8 $ 14.7
===== ====== ======
</TABLE>
15
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Discontinued operations in fiscal 1997 of $8.6 million after-tax includes
$3.7 million and $4.9 million after-tax from the operations of Armor All and
Millbrook, respectively.
Discontinued operations in fiscal 1996 of $14.7 million after-tax includes
$4.3 million and $10.4 million after-tax from the operations of Armor All and
Millbrook, respectively.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31
----------------------
1998 1997 1996
-------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
ESOP related debt..................................... $ 115.6 $118.3 $122.5
4.50% exchangeable subordinated debentures due 2004... 113.3 160.4 180.0
8.625% Notes due 1998................................. -- 49.0 49.0
8.75% Notes due 1997.................................. -- -- 10.0
6.60% Notes due 2000.................................. 175.0 175.0 --
6.875% Notes due 2002................................. 175.0 175.0 --
6.55% Notes due 2002.................................. 125.0 --
6.30% Notes due 2005.................................. 150.0 -- --
6.40% Notes due 2008.................................. 150.0 -- --
7.65% Debentures due 2027............................. 175.0 175.0 --
3.65% to 5.70% IDRBs due through 2026................. 17.8 21.4 20.0
Capital lease obligations (averaging 8.5%)............ 3.9 4.2 4.4
Other, 6.0% to 12.125%, due through 2021.............. 3.6 6.9 5.8
-------- ------ ------
Total............................................. 1,204.2 885.2 391.7
Less current portion.................................. 10.0 60.3 21.1
-------- ------ ------
Total............................................. $1,194.2 $824.9 $370.6
======== ====== ======
</TABLE>
The Company has a revolving credit agreement with certain U.S. and Canadian
banks whereby the banks commit $250 million borrowing availability at the
reference rate (8.50% at March 31, 1998) or money market-based rates. The
agreement expires in fiscal 2002. The agreement permits the Company's wholly-
owned Canadian subsidiary, Medis, to borrow the Canadian dollar equivalent of
up to $75 million (as part of the $250 million arrangement) at the Canadian
prime rate or Canadian money market-based rates. The agreement contains
limitations on additional indebtedness. Compensating balances are not
required. The Company has additional available liquidity of $500 million for
general working capital purposes in the form of two facilities with a duration
of 364 days or less. At March 31, 1998, the Company had $750 million of unused
borrowing capacity under these agreements.
Total interest payments were $94.4 million, $53.6 million, and $47.5 million
in fiscal 1998, 1997 and 1996, respectively.
ESOP related debt (see Note 14) is payable to banks and insurance companies,
bears interest at rates ranging from 8.6% fixed rate to approximately 80% of
the prime or LIBOR +0.4% and is due in installments through 2009.
In connection with the 4.5% exchangeable subordinated debentures, the March
31, 1998 marketable securities balance includes $76.7 million held in trust as
exchange property for the exchangeable subordinated debentures. The March 31,
1997 cash and cash equivalents and marketable securities balances include
$13.2 million and $96.6 million, respectively, held in trust as exchange
property for the exchangeable subordinated debentures. Through March 31, 1998,
the Company repurchased $66.7 million of the exchangeable subordinated
debentures.
16
<PAGE>
FINANCIAL NOTES--(CONTINUED)
In fiscal 1998, the Company issued fixed rate, unsecured unsubordinated debt
totaling $300 million. The 6.3% notes mature on March 1, 2005 and the 6.4%
notes mature on March 1, 2008. In addition, a wholly-owned subsidiary of the
Company issued $125 million of 6.55% senior notes due November 1, 2002 which
are guaranteed by the Company.
Certain debt agreements require that the Company's total debt not exceed
56.5% of total capitalization (total debt plus equity). At March 31, 1998, the
Company was in compliance with its debt covenants.
In fiscal 1998, the Company entered into two interest rate swap agreements,
each with a notional principal amount of $150 million. The swaps mature in
2005 and 2008 and swap fixed interest payments of 6.30% and 6.40%,
respectively, for floating interest payments based on a LIBOR index; the
floating rates at March 31, 1998 were 4.92% and 4.82%, respectively. These
swaps have an imbedded interest rate cap of 7%.
Also in fiscal 1998, a subsidiary of the Company entered into a currency
swap agreement to convert the $125 million proceeds from the issuance of
senior notes to $173 million Canadian currency, which was used to pay down
short-term borrowings of the Company's Canadian subsidiary, Medis. This swap
matures on November 1, 2002.
Aggregate annual payments on long-term debt and capitalized lease
obligations (see Note 10) for the years ending March 31 are:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C>
1999.............................................. $ 9.7 $0.3 $ 10.0
2000.............................................. 185.5 0.3 185.8
2001.............................................. 11.3 0.4 11.7
2002.............................................. 187.1 0.4 187.5
2003.............................................. 138.2 0.4 138.6
Later years....................................... 668.5 2.1 670.6
-------- ---- --------
Total........................................... $1,200.3 $3.9 $1,204.2
======== ==== ========
</TABLE>
9. CONVERTIBLE PREFERRED SECURITIES
In February 1997, a wholly-owned subsidiary trust of the Company issued 4
million shares of preferred securities to the public and 123,720 common
securities to the Company, which are convertible at the holder's option into
McKesson common stock. The proceeds of such issuances were invested by the
trust in $206,186,000 aggregate principal amount of the Company's 5%
Convertible Junior Subordinated Debentures due 2027 (the "Debentures"). The
Debentures represent the sole assets of the trust. The Debentures mature on
June 1, 2027, bear interest at the rate of 5%, payable quarterly and are
redeemable by the Company beginning in March 2000 at 103.5% of the principal
amount thereof.
Holders of the securities are entitled to cumulative cash distributions at
an annual rate of 5% of the liquidation amount of $50 per security. Each
preferred security is convertible at the rate of 1.3418 shares of McKesson
common stock, subject to adjustment in certain circumstances. The preferred
securities will be redeemed upon repayment of the Debentures and are callable
by the Company at 103.5% of the liquidation amount beginning in March 2000.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the preferred securities (the "Guarantee"). The Guarantee, when
taken together with the Company's obligations under the Debentures and in the
indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provides a full and unconditional guarantee of amounts due on
the preferred securities.
The Debentures and related trust investment in the Debentures have been
eliminated in consolidation and the preferred securities reflected as
outstanding in the accompanying consolidated financial statements.
17
<PAGE>
FINANCIAL NOTES--(CONTINUED)
10. LEASE OBLIGATIONS
The Company leases facilities and equipment under both capital and operating
leases. Net assets held under capital leases included in property, plant and
equipment were $2.9 million, $3.0 million, and $3.3 million at March 31, 1998,
1997 and 1996, respectively. Amortization of capital leases is included in
depreciation expense.
As of March 31, 1998, future minimum lease payments and sublease rentals in
years ending March 31 are:
<TABLE>
<CAPTION>
NON- NON-
CANCELABLE CANCELABLE
OPERATING SUBLEASE CAPITAL
LEASES RENTALS LEASES
---------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C>
1999........................................... $ 42.0 $ 3.9 $0.7
2000........................................... 36.3 3.3 0.7
2001........................................... 31.6 2.8 0.6
2002........................................... 26.1 2.6 0.6
2003........................................... 21.8 2.2 0.6
Later years.................................... 64.4 4.6 2.8
------ ----- ----
Total minimum lease payments................... $222.2 $19.4 6.0
====== =====
Less amounts representing interest............. 2.1
----
Present value of minimum lease payments........ $3.9
====
</TABLE>
Rental expense was $52.9 million, $33.7 million, and $26.1 million in fiscal
1998, 1997 and 1996, respectively.
Most real property leases contain renewal options and provisions requiring
the Company to pay property taxes and operating expenses in excess of base
period amounts.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1998, the carrying amounts and estimated fair values of the
Company's financial instruments, as determined under SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", were as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................ $ 35.7 $ 35.7
Marketable securities.................................... 77.9 77.9
Long-term debt, including current portion................ 1,204.2 1,177.3
Interest rate swaps...................................... -- (5.1)
Foreign currency rate swap............................... -- 4.0
</TABLE>
The estimated fair values were determined as follows:
Cash and cash equivalents: carrying amounts approximate fair value.
Marketable securities and long-term debt: quoted market prices or market
comparables.
Interest and foreign currency rate swaps: quoted market prices or market
comparables.
18
<PAGE>
FINANCIAL NOTES--(CONTINUED)
12. STOCKHOLDERS' EQUITY
On October 29, 1997, the Company's board of directors declared a two-for-one
split of the Company's common stock. The split was effective January 2, 1998
for shareholders of record on December 1, 1997. All share and per share
amounts have been restated for the split.
At March 31, 1998, 1997, and 1996, the Company was authorized to issue
100,000,000 shares of series preferred stock ($.01 par value) of which none
were outstanding and 200,000,000 shares of common stock ($.01 par value) of
which approximately 93,220,000 shares, 91,570,000 shares and 89,696,000 shares
were outstanding net of treasury stock, respectively.
In October 1994, the Company's Board of Directors declared a dividend
distribution of one right (a "Right") for each then outstanding share of
common stock and authorized the issuance of one Right for each share
subsequently issued to purchase, upon the occurrence of certain specified
triggering events, a unit consisting of one one hundredth of a share of Series
A Junior Participating Preferred Stock. Triggering events include, without
limitation, the acquisition by another entity of 15% or more of the Company's
common stock without the prior approval of the Company's Board. The Rights
have certain anti-takeover effects and will cause substantial dilution to the
ownership interest of a person or group that attempts to acquire the Company
on terms not approved by the Board. The rights expire in 2004 unless redeemed
earlier by the Board. As a result of the two-for-one stock split described
above, each share of common stock now has attached to it one-half of a Right.
The Company adopted SFAS No. 128, "Earnings per Share," in the third quarter
of the current fiscal year. All earnings and share amounts have been restated
in accordance with the provisions of SFAS No. 128.
19
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for income from continuing
operations:
<TABLE>
<CAPTION>
1998
------------------------------------------
INCOME SHARES PER SHARE
------------- ------------ --------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic EPS
Income from continuing
operations...................... $ 154.9 91.5 $ 1.69
============
Effect of Dilutive Securities
Options to purchase common stock. -- 3.9
Trust convertible preferred
securities...................... 6.2 5.4
Restricted stock................. -- 0.4
------------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions..................... $ 161.1 101.2 $ 1.59
============= ============ ============
<CAPTION>
1997
------------------------------------------
INCOME SHARES PER SHARE
------------- ------------ --------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic EPS
Income from continuing
operations...................... $ 5.1 85.5 $ 0.06
============
Effect of Dilutive Securities
Options to purchase common stock. -- 3.2
Trust convertible preferred
securities...................... 0.7 0.6
Restricted stock................. -- 0.1
------------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions..................... $ 5.8 89.4 $ 0.06
============= ============ ============
<CAPTION>
1996
------------------------------------------
INCOME SHARES PER SHARE
------------- ------------ --------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic EPS
Income from continuing
operations...................... $ 120.7 88.8 $ 1.36
============
Effect of Dilutive Securities
Options to purchase common stock. -- 4.3
Restricted stock................. -- 0.1
------------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions..................... $ 120.7 93.2 $ 1.29
============= ============ ============
</TABLE>
The Company's stock-based compensation plan, the 1994 Stock Option and
Restricted Stock Plan provides grants of nonqualified stock options to
employees of the Company, and, until January 1, 1997 to non-employee
directors. After January 1, 1997, all non-employee directors receive grants
under the 1997 Director's Equity Compensation and Deferral Plan. Most grants
under the Director's Equity Compensation and Deferral Plan vest immediately on
grant date. Most other options generally vest over four years and all options
expire ten years after the grant date. Under the plans, the Company is
authorized to grant up to 30 million shares, including 25.6 million for
options as of March 31, 1998.
20
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The following is a summary of options outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
NUMBER OF AVERAGE WEIGHTED- NUMBER OF WEIGHTED-
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT YEAR END LIFE PRICE AT YEAR END PRICE
- --------------- ----------- ----------- --------- ----------- ---------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.01 to $10.56......... 3,965,846 5.01 $6.79 3,895,723 $ 6.87
$11.61 to $20.13........ 997,067 6.77 17.28 684,650 17.37
$21.38 to $27.88........ 4,332,118 8.41 26.39 1,117,370 25.64
$31.94 to $44.75........ 1,033,650 9.12 40.97 74,100 36.34
$50.38 to $59.06........ 1,703,847 9.82 50.78 -- --
---------- ---------
12,032,528 7.41 23.88 5,771,843 12.13
========== =========
</TABLE>
Expiration dates range from July 28, 1998 to March 25, 2008.
The following is a summary of changes in the options for the stock option
plans:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 10,861,116 $17.00 9,940,806 $11.31 12,254,322 $ 7.98
Assumed through
acquisition............ -- -- 125,098 1.08 -- --
Granted................. 2,555,747 48.04 3,465,948 27.36 1,768,400 24.76
Exercised............... (1,127,316) 12.05 (2,319,292) 7.49 (3,524,894) 6.34
Canceled................ (257,019) 25.28 (351,444) 15.26 (557,022) 11.65
---------- ---------- ----------
Outstanding at year end. 12,032,528 23.88 10,861,116 17.00 9,940,806 11.31
========== ========== ==========
Exercisable at year end. 5,771,843 12.13 4,880,080 9.24 4,418,920 7.28
========== ========== ==========
</TABLE>
21
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Pursuant to SFAS No. 123, the Company has elected to account for its stock-
based compensation plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized in the consolidated financial statements for the stock
option plans. Had compensation cost for the stock option plan been recognized
based on the fair value at the grant dates for awards under those plans,
consistent with the provision of SFAS No. 123, net income and earnings per
share would have been as indicated in the table below. Since pro forma
compensation cost relates to all periods over which the awards vest, the
initial impact on pro forma net income may not be representative of
compensation cost in subsequent years, when the effect of amortization of
multiple awards would be reflected.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income
As reported........................................... $154.9 $133.9 $135.4
Pro forma............................................. 144.7 130.0 134.9
Earnings per common share--diluted
As reported........................................... $ 1.59 $ 1.51 $ 1.45
Pro forma............................................. 1.49 1.46 1.45
Earnings per common share--basic
As reported........................................... $ 1.69 $ 1.57 $ 1.53
Pro forma............................................. 1.58 1.52 1.52
</TABLE>
Fair values of the options were estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected stock price volatility............................ 23.8% 25.6% 25.6%
Expected dividend yield.................................... 1.5% 1.5% 1.5%
Risk-free interest rate.................................... 5.6% 6.2% 5.2%
Expected life (in years)................................... 5 5 5
</TABLE>
The weighted average grant date fair values of the options granted during
1998, 1997 and 1996 were $16.06, $7.06 and $5.66 per share, respectively.
22
<PAGE>
FINANCIAL NOTES--(CONTINUED)
13. TAXES ON INCOME
The provision for income taxes related to continuing operations consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
Federal................................................... $13.2 $26.6 $23.3
State and local........................................... 9.5 2.9 5.0
Foreign................................................... 9.5 3.4 5.0
----- ----- -----
Total current........................................... 32.2 32.9 33.3
----- ----- -----
DEFERRED
Federal................................................... 58.2 (3.2) 27.2
State..................................................... 8.2 2.2 7.5
Foreign................................................... -- (0.6) 8.2
----- ----- -----
Total deferred.......................................... 66.4 (1.6) 42.9
----- ----- -----
Total provision......................................... $98.6 $31.3 $76.2
===== ===== =====
</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 $21.4 million, $12.1 million, and
$26.2 million in fiscal 1998, 1997 and 1996, respectively.
The reconciliation between the Company's effective tax rate on income from
continuing operations and the statutory Federal income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<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... 4.5 9.1 4.1
Nondeductible charge for the write-off of in-process
technology............................................... -- 45.5 --
AmeriSource merger costs.................................. 2.2 -- --
Nondeductible amortization................................ 2.2 5.3 1.1
Nontaxable income--life insurance......................... (1.6) (7.0) (0.9)
Favorable tax adjustment.................................. (1.8) -- --
Dividends paid deduction--ESOP allocated shares........... (0.4) (2.5) (0.5)
Tax-advantaged debt issuance.............................. (0.4) -- --
Other--net................................................ (1.7) (1.0) (0.1)
---- ---- ----
Effective tax rate........................................ 38.0% 84.4% 38.7%
==== ==== ====
</TABLE>
Income tax payments were $34 million, $76 million, and $97 million in fiscal
1998, 1997 and 1996, respectively.
23
<PAGE>
FINANCIAL NOTES--(CONTINUED)
As of March 31, the deferred tax balances consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Nondeductible accruals for environmental obliga-
tions.............................................. $ 8.9 $ 10.6 $ 11.9
Receivable reserves................................. 24.2 17.6 13.8
Compensation and benefit-related accruals........... 19.4 16.5 16.1
Loss and credit carryforwards....................... 39.3 9.4 --
Costs associated with duplicate facility closures
and workforce reductions related to acquired
businesses......................................... 2.4 11.7 --
Other............................................... 18.2 17.6 5.8
------- ------- -------
Current............................................. 112.4 83.4 47.6
------- ------- -------
Nondeductible accruals for:
Postretirement and postemployment plans........... 68.8 76.2 76.6
Deferred compensation............................. 30.9 33.0 29.0
Costs associated with facility closures and
surplus properties and asset write-downs......... 7.0 11.1 10.4
Retirement plan..................................... -- -- 6.0
Systems development costs........................... -- 11.8 --
Loss and credit carryforwards....................... 10.1 1.7 9.7
Other............................................... 14.3 15.3 17.0
------- ------- -------
Noncurrent.......................................... 131.1 149.1 148.7
------- ------- -------
Total............................................. $ 243.5 $ 232.5 $ 196.3
======= ======= =======
LIABILITIES
Basis differences for inventory valuation........... $(139.1) $ (70.1) $ (38.8)
Other............................................... (4.1) (5.2) (5.9)
------- ------- -------
Current............................................. (143.2) (75.3) (44.7)
------- ------- -------
Accelerated depreciation............................ (38.0) (38.2) (43.6)
Systems development costs........................... (35.2) -- (14.5)
Retirement plan..................................... (13.5) (8.5) --
Other............................................... (4.8) (10.7) (9.9)
------- ------- -------
Noncurrent.......................................... (91.5) (57.4) (68.0)
------- ------- -------
Total............................................. $(234.7) $(132.7) $(112.7)
======= ======= =======
Total net current--included in (taxes payable) pre-
paid expenses...................................... $ (30.8) $ 8.1 $ 2.9
======= ======= =======
Total net noncurrent (included in other assets)..... $ 39.6 $ 91.7 $ 80.7
======= ======= =======
</TABLE>
14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Pension Plans
On December 31, 1996, substantially all full-time employees of the Company
were covered under either the Company-sponsored defined benefit retirement
plan or by bargaining unit sponsored multi-employer plans. On that date, the
Company amended the Company-sponsored defined benefit plan to freeze all plan
benefits based on each employee's plan compensation and creditable service
accrued to that date. The benefits for such Company-sponsored plans are based
primarily on age of employees at date of retirement, years of service and
employees' pay during the five years prior to employment.
24
<PAGE>
FINANCIAL NOTES--(CONTINUED)
On January 1, 1997, the Company amended the ESOP to provide future additional
benefits in place of a portion of those benefits previously provided by the
pension plan.
Net pension expense (income) for the Company-sponsored defined benefit
retirement plan and executive supplemental retirement plan consisted of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned during the year...... $ 0.7 $ 5.4 $ 5.3
Interest cost on projected benefit obligation...... 22.6 23.6 23.7
Return on assets
--actual income................................... (55.4) (35.5) (51.6)
--deferred gain................................... 30.6 12.1 31.2
Amortization of unrecognized loss and prior service
costs............................................. 0.8 5.9 4.5
Amortization of unrecognized net transition asset.. (2.5) (2.5) (2.5)
Curtailment loss recognized in connection with the
December 31, 1996 plan amendment.................. -- 0.4 --
------ ------ ------
Net pension expense (income)...................... $ (3.2) $ 9.4 $ 10.6
====== ====== ======
</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>
1997 1996 1995
------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations
Vested benefits.................................. $266.0 $246.0 $ 249.8
Nonvested benefits............................... 9.8 13.9 14.1
------ ------ -------
Accumulated benefit obligation................... 275.8 259.9 263.9
Effect of assumed increase in future compensation
levels.......................................... -- -- 20.7
------ ------ -------
Projected benefit obligation for services
rendered to date................................ 275.8 259.9 284.6
Assets of plan at fair value....................... 294.0 262.3 248.9
------ ------ -------
Excess (shortfall) of assets over projected benefit
obligation........................................ 18.2 2.4 (35.7)
Unrecognized prior service cost and net loss from
experience different from that assumed............ 11.7 22.1 67.1
Unrecognized net transition asset, recognized
straight-line through 1998........................ (0.3) (3.1) (6.0)
Adjustment required to recognize minimum liability. -- -- (40.4)
------ ------ -------
Pension asset (liability) included in other assets
(noncurrent liabilities).......................... $ 29.6 $ 21.4 $ (15.0)
====== ====== =======
</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, 1997, 7.75% at December 31, 1996 and 7.25% at December 31, 1995
and an assumed increase in future compensation levels of 4.0% at December 31,
1995. The expected long-term rate of return on assets used to determine
pension expense was 9.75% for all periods. The adjustment required to
recognize the minimum liability at December 31, 1995 was charged to other
equity, net of tax, and was reversed at December 31, 1996.
The assets of the plan consist primarily of listed common stocks and bonds
for which fair value is determined based on quoted market prices.
25
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The projected benefit obligation for the Company's executive supplemental
retirement plan at December 31, 1997 was $35.6 million of which $33.8 million
(the accumulated benefit obligation) is recognized as a liability on the
consolidated balance sheet.
Profit-Sharing Investment Plan
Retirement benefits for employees not covered by collective bargaining
arrangements include a supplementary contributory profit sharing investment
plan ("PSIP"). The leveraged ESOP portion of the PSIP has purchased an
aggregate of 24.3 million shares of common stock since inception. These
purchases have been financed by 10 to 20-year loans from or guaranteed by the
Company. The Company's related receivables from the ESOP have been classified
as a reduction of stockholders' equity. The loans will be repaid by the ESOP
from common dividends on shares not yet allocated to participants, interest
earnings on cash balances not yet allocated to participants, common dividends
on certain allocated shares and future Company cash contributions. The ESOP
loan maturities and rates are identical to the terms of related Company
borrowings (see Note 8).
After-tax ESOP expense (income), including interest expense on ESOP debt,
was $(0.1) million, $2.3 million, and $(0.2) million in fiscal 1998, 1997 and
1996, respectively. Additional tax benefits received on dividends paid on
unallocated shares of $2.4 million, $3.1 million, and $2.2 million in fiscal
1998, 1997 and 1996, respectively, have been credited directly to retained
earnings in accordance with SFAS No. 109.
Contribution expense for the PSIP in fiscal 1997, 1996 and 1995 was all ESOP
related and is reflected in the amounts above. In fiscal 1998, 1997 and 1996
approximately 694,000, 907,000 and 915,000 shares, respectively, were
allocated to plan participants.
Through March 31, 1998, 11.3 million common shares have been allocated to
plan participants. At March 31, 1998, 13.0 million common shares in the ESOP
Trust had not been allocated to plan participants.
Health Care and Life Insurance
In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain retired employees. The Company's
policy is to fund these benefits as claims are paid. The benefits have been
reduced significantly for those employees retiring after December 31, 1990. In
1989, the Company implemented an ESOP to provide funds at retirement that
could be used for medical costs or health care coverage.
Expenses for postretirement health care and life insurance benefits
consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned during the period........ $ 0.7 $ 1.1 $ 1.1
Interest cost on projected benefit obligation.......... 9.1 9.4 11.4
Amortization of unrecognized gain and prior service
costs................................................. (8.9) (5.5) (9.3)
----- ----- -----
Total................................................ $ 0.9 $ 5.0 $ 3.2
===== ===== =====
</TABLE>
Payments for postretirement health care and life insurance benefits amounted
to $11.8 million, $13.3 million, and $10.9 million in fiscal 1998, 1997 and
1996, respectively.
26
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The funded status and amounts recognized in the consolidated balance sheet
for postretirement health care and life insurance benefits at March 31, were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees............................................. $111.6 $110.6 $122.2
Active plan participants............................. 13.4 12.3 17.9
------ ------ ------
Total.............................................. 125.0 122.9 140.1
Unrecognized prior service cost and accumulated
net gain............................................ 11.3 24.2 14.8
------ ------ ------
Accrued postretirement benefit obligation............ $136.3 $147.1 $154.9
====== ====== ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation is 6.0% for 1998, decreasing to 5.33% in
1999 and to an ultimate rate of 5.0% thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. Increasing
the trend rate by one percentage point would increase the accumulated
postretirement health care and life insurance obligation as of March 31, 1998
by $7.2 million and the related fiscal 1998 aggregate service and interest
costs by $0.7 million. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at March 31, 1998, 7.75% at March
31, 1997 and 7.25% at March 31, 1996.
27
<PAGE>
FINANCIAL NOTES--(CONTINUED)
15. SEGMENTS OF BUSINESS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Health Care Services.................. $20,563.0 $15,415.9 $12,667.8
Water Products........................ 282.9 275.1 259.3
Corporate............................. 11.4 19.8 37.7
--------- --------- ---------
Total............................... $20,857.3 $15,710.8 $12,964.8
========= ========= =========
OPERATING PROFIT
Health Care Services(1)............... $ 354.7(2) $ 92.8(3) $ 206.1
Water Products........................ 49.2 34.6(3) 39.6
--------- --------- ---------
Total............................... 403.9 127.4 245.7
Interest--net(4)...................... (96.5) (47.5) (13.3)
Corporate............................. (47.7) (42.8) (35.5)
--------- --------- ---------
Income before taxes on income....... $ 259.7 $ 37.1 $ 196.9
========= ========= =========
SEGMENT ASSETS--AT YEAR END
Health Care Services.................. $ 5,166.4 $ 4,648.2 $ 2,525.3
Water Products........................ 166.5 144.6 142.0
--------- --------- ---------
Total............................... 5,332.9 4,792.8 2,667.3
Corporate
Cash, cash equivalents and marketable
securities.......................... 113.6 229.8 456.2
Net assets of discontinued
operations.......................... -- -- 125.7
Other................................ 161.0 150.2 111.0
--------- --------- ---------
Total............................... $ 5,607.5 $ 5,172.8 $ 3,360.2
========= ========= =========
DEPRECIATION AND AMORTIZATION
Health Care Services.................. $ 62.7 $ 46.6 $ 40.8
Water Products........................ 22.2 22.8 21.5
Corporate............................. 2.3 2.4 1.9
--------- --------- ---------
Total............................... $ 87.2 $ 71.8 $ 64.2
========= ========= =========
CAPITAL EXPENDITURES
Health Care Services.................. $ 75.2 $ 41.9 $ 43.5
Water Products........................ 47.4 32.3 24.8
Corporate............................. 7.4 2.7 5.3
--------- --------- ---------
Total............................... $ 130.0 $ 76.9 $ 73.6
========= ========= =========
</TABLE>
- --------
(1) Includes $12.0 million, $11.4 million and $12.2 million of pre-tax
earnings from an equity investment in fiscal 1998, 1997 and 1996,
respectively.
(2) Includes $16.7 million in charges for the proposed merger with AmeriSource
and $13.9 million in costs associated primarily with the integration and
rationalization of recent acquisitions.
(3) Health Care Services and Water Products amounts include charges for
restructuring, asset impairment, write-off of in-process purchased
technology and other operating items of $140.0 million and $7.0 million,
respectively.
(4) Interest expense is shown net of corporate interest income.
28
<PAGE>
FINANCIAL NOTES--(CONTINUED)
The Health Care Services segment includes the Company's U.S. pharmaceutical,
health care products and medical-surgical supplies distribution businesses.
U.S. Health Care operations also include marketing and other support services
to pharmaceutical manufacturers, a manufacturer of automated pharmaceutical
dispensing systems for hospitals and a distributor of first-aid products to
industrial and commercial customers. Health Care Services also includes the
Company's international distribution operations (including Canada and an
equity interest in a Mexican distribution business).
The Water Products segment is engaged in the processing, delivery and sale
of bottled drinking water to homes and businesses and the sale of packaged
water to retail stores.
Information as to the Company's foreign operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
United States......................... $19,218.1 $14,198.3 $11,440.6
International......................... 1,639.2 1,512.5 1,524.2
--------- --------- ---------
Total............................... $20,857.3 $15,710.8 $12,964.8
========= ========= =========
OPERATING PROFIT
United States......................... $ 370.3(1) $ 94.1(2) $ 207.5
International......................... 33.6(3) 33.3(4) 38.2
--------- --------- ---------
Total............................... $ 403.9 $ 127.4 $ 245.7
========= ========= =========
ASSETS, AT YEAR END
United States......................... $ 5,194.8 $ 4,935.4 $ 3,130.9
International......................... 412.7 237.4 229.3
--------- --------- ---------
Total............................... $ 5,607.5 $ 5,172.8 $ 3,360.2
========= ========= =========
</TABLE>
- --------
(1) Includes $16.7 million in charges for the proposed merger with AmeriSource
and $13.1 million in costs associated primarily with the integration and
rationalization of recent acquisitions.
(2) Includes $90.6 million in charges for restructuring, asset impairment and
other operating items and $48.2 million for the write-off of in-process
purchased technology.
(3) Includes $0.8 million in costs associated with the integration and
rationalization of recent acquisitions.
(4) Includes $8.2 million in charges for restructuring, asset impairment and
other operating items.
16. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In addition to commitments and obligations in the ordinary course of
business, the Company is subject to various claims, other pending and
potential legal actions for product liability and other damages,
investigations relating to governmental laws and regulations, and other
matters arising out of the normal conduct of the Company's business.
The Company currently is a defendant in numerous civil antitrust actions
filed since 1993 in federal and state courts by retail pharmacies. The federal
cases have been coordinated for pretrial purposes in the United States
District Court in the Northern District of Illinois and are known as MDL 997.
MDL 997 consists of a consolidated class action (the "Federal Class Action")
as well as approximately 109 additional actions brought by approximately 3,500
individual retail, chain and supermarket pharmacies (the "Individual
Actions"). There are numerous other defendants in these actions including
several pharmaceutical manufacturers and several other wholesale distributors.
These cases allege, in essence, that the defendants have violated the Sherman
Act by conspiring to fix the prices of brand name pharmaceuticals sold to
plaintiffs at artificially high, and non-competitive levels, especially as
29
<PAGE>
FINANCIAL NOTES--(CONTINUED)
compared with the prices charged to mail order pharmacies, managed care
organizations and other institutional buyers. A class has been certified in
the Federal Class Action. The Seventh Circuit Court of Appeals reversed the
District Court's grant of summary judgment in favor of the Company and the
other wholesale distributors in the Federal Class Action. Trial of the Federal
Class Action is currently scheduled to begin on September 14, 1998. The
Individual Actions will remain in the Northern District of Illinois for pre-
trial purposes, but will be remanded to their original transferor
jurisdictions for trial.
The currently pending state court antitrust cases against the Company are in
California, Alabama and Mississippi. The Company has been dismissed pursuant
to a settlement in cases which were pending in Wisconsin (K-S Pharmacy, et al.
v. Abbott Laboratories, et al.) and Minnesota (Salk Drug v. Abbott
Laboratories, et al.). The state cases are based essentially on the same facts
alleged in the Federal Class Action and Individual Actions and assert
violations of state antitrust and/or unfair competition laws. The case in
California (referred to as Coordinated Special Proceeding, Pharmaceutical
Cases I, II & III) is pending in Superior Court for the State of California
(San Francisco County). A class of retail pharmacies has been certified and
the case is trailing MDL 997. The case in Alabama (Durrett, et al. v. The
Upjohn Co. et al.) is venued in the Circuit Court for Greene County, Alabama.
A class has not yet been certified, and the case is currently before the
Alabama Supreme Court on an appeal from the denial of defendants' motion to
dismiss. The case in Mississippi (Montgomery Drug Co. et al. v. The Upjohn Co.
et al.) is pending in the Chancery Court of Prentiss County, Mississippi. The
Chancery Court has held that the case may not be maintained as a class action.
In each of the cases, plaintiffs seek remedies in the form of injunctive
relief and unquantified monetary damages, and attorneys fees and costs.
Plaintiffs in the California cases also seek restitution. In addition, trebled
damages are sought in the Federal Class Action, the Individual Actions and the
California case and statutory penalties of $500 per violation are sought in
the Mississippi and Alabama cases. The Company believes it has meritorious
defenses to the allegations made against it and intends to vigorously defend
itself in all of these actions. In addition, the Company has entered into a
judgment sharing agreement with certain pharmaceutical manufacturer
defendants, which provides generally that the Company (together with the other
wholesale distributor defendants) will be held harmless by such pharmaceutical
manufacturer defendants and will be indemnified against the costs of adverse
judgments, if any, against the wholesaler and manufacturers in these or
similar actions, in excess of $1 million in the aggregate per wholesale
distributor defendant.
In January 1997, the Company and twelve pharmaceutical manufacturers (the
"Manufacturer Defendants") were named as defendants in the matter of FoxMeyer
Health Corporation vs. McKesson Corporation, et. al. filed in the District
Court in Dallas County, Texas. In its complaint, Plaintiff (the parent
corporation of FoxMeyer Drug Company and FoxMeyer Corporation collectively,
"FoxMeyer Corporation") alleges that, among other things, the Company (i)
defrauded Plaintiff, (ii) competed unfairly and tortiously interfered with
FoxMeyer Corporation's business operations, and (iii) conspired with the
Manufacturer Defendants, all in order to destroy FoxMeyer Corporation's
business, restrain trade and monopolize the marketplace, and allow the Company
to purchase that business at a distressed price. Plaintiff seeks relief
against all defendants in the form of compensatory damages of at least $400
million, punitive damages, attorneys fees and costs. The Company answered the
complaint, denying the allegations, and removed the case to federal bankruptcy
court in Dallas (the "Texas Action").
In March 1997, the Company and the Manufacturer Defendants filed a complaint
in intervention against Plaintiff (now known as Avatex Corporation) in the
action filed against Avatex by the FoxMeyer Unsecured Creditors Committee in
the United States Bankruptcy Court for the District of Delaware. The complaint
in intervention seeks declaratory relief and an order enjoining Avatex from
pursuing the
30
<PAGE>
FINANCIAL NOTES--(CONTINUED)
Texas Action. Motions for summary judgment filed by the Company, the
Manufacturer Defendants and the Chapter 7 trustee in the Delaware action are
pending, as is a motion by Avatex to transfer the complaint in intervention to
the Texas Bankruptcy Court. In August 1997, the Texas Bankruptcy Court entered
an order denying the defendants' motion to transfer the case to the District
of Delaware and deferred ruling on the plaintiff's motion to demand the case
to the Texas State Court until the bankruptcy court in Delaware has ruled on
the motions for the summary judgment. The Company believes it has meritorious
defenses to the allegations made against it and intends to vigorously defend
this litigation.
In July 1995, a purported class action was filed in the Supreme Court of the
State of New York against General Medical Corp., Inc. (also known as McKesson
General Medical) and several other defendants by Richard A. Bernstein,
Chairman and President of Rabco Health Services, Inc. and Chairman of General
Medical at the time of its leveraged buyout in 1993. Plaintiff alleges a
conspiracy to orchestrate the buyout of plaintiff's interest in Rabco at an
unfairly low price. Plaintiff alleges common law fraud, breach of fiduciary
duty and inducing breach of fiduciary duty. Plaintiff seeks rescissionary
damages of $50 million, compensatory damages of $25 million, and punitive
damages of $25 million. The complaint was initially dismissed with prejudice
by the Court but that order was reversed by the Court's Appellate Division.
Defendants thereupon filed their answers to the complaint together with a
motion for leave to appeal to the Court of Appeals, which motion was denied. A
renewed motion by defendants General Medical and GM Holdings to dismiss and/or
for summary judgment is pending. The Company believes it has meritorious
defenses to the allegations made against it and intends to vigorously defend
the action.
The Company has been named along with several other defendants in two
lawsuits in California, Royer v. Wyeth-Ayerst Laboratories, et al. and
Valentine v. Wyeth-Ayerst Laboratories, et al., alleging that the plaintiffs
have been injured because they took the drugs fenfluramine or dexfenfluramine
with phentermine, commonly known as dexfen-phen or fen-phen. The Company has
tendered the cases to manufacturers of the drugs and has filed an answer in
one of the cases pending a reply. In addition, a third fen-phen case, Galvan
v. American Home Products, et al., filed in New York state court against a
customer of the Company, has been tendered to the Company by the customer.
This case is being defended by counsel retained by the Company to protect the
customer's interest pending the determination of tender to the manufacturers.
Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:
The Company has received claims and demands from governmental agencies
relating to investigative and remedial action purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.
The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for
these five sites is approximately $19 million, net of approximately $4 million
which third parties have agreed to pay in settlement or which the Company
expects, based on either on agreements or nonrefundable contributions which
are ongoing, to be contributed by third parties. The $19 million is expected
to be paid out between April 1998 and March 2028 and is included in the
Company's recorded environmental reserves at March 31, 1998.
31
<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 18 Superfund sites. With respect to each of these Superfund sites, numerous
other PRP's have similarly been designated and while the current state of the
law potentially imposes joint and several liability upon PRPs, as a practical
matter costs of these sites are typically shared with other PRPs. The
Company's estimated liability at those 18 Superfund sites is approximately $1
million, net of $2 million which insurance companies, and $2 million which
another PRP, are expected or have agreed to contribute to the Company's
allocated share. The aggregate settlements and costs paid by the Company in
Superfund matters to date has not been significant. The $1 million is included
in the Company's recorded environmental reserves at March 31, 1998.
The potential costs to the Company related to environmental matters is
uncertain due to such factors as: the unknown magnitude of possible pollution
and cleanup costs; the complexity and evolving nature of governmental laws and
regulations and their interpretations; the timing, varying costs and
effectiveness of alternate cleanup technologies; the determination of the
Company's liability of proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.
Management believes, based on current knowledge and the advice of the
Company's counsel, that the outcome of the litigation and governmental
proceedings discussed in this note will not have a material adverse effect on
the Company's financial position or results of operations.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<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 1998
Revenues................... $4,975.5 $5,147.1 $5,373.5 $5,361.2 $20,857.3
Gross profit............... 364.8 367.7 377.0 411.8 1,521.3
Net income................. 37.6 39.6 42.0 35.7(/1/) 154.9
Earnings per common
share(/2/, /3/)
Diluted................... $ 0.39 $ 0.41 $ 0.43 $ 0.36 $ 1.59
Basic..................... 0.41 0.44 0.45 0.39 1.69
Cash dividends per common
share(/3/)................ $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Market prices per common
share(/3/)
High...................... $40 1/16 $ 53 1/8 $ 56 7/8 $ 61 3/4 $ 61 3/4
Low....................... 31 1/2 38 1/4 48 11/16 47 7/8 31 1/2
</TABLE>
- --------
(1) Includes $16.7 million in after-tax charges for the proposed merger with
AmeriSource, $8.7 million in after-tax costs associated primarily with the
integration and rationalization of recent acquisitions and a $4.6 million
favorable tax adjustment.
(2) Restated in accordance with Statement of Financial Accounting Standards
No. 128 "Earnings per Share."
(3) Restated to reflect the two-for-one stock split declared October 29, 1997,
distributed January 2, 1998 to stockholders of record December 1, 1997.
32
<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 1997
Revenues............... $3,326.7 $3,410.6 $4,211.5 $4,762.0 $15,710.8
Gross profit........... 231.9 231.0 243.8 330.6 1,037.3
Income (loss) after
taxes.................
Continuing operations. (21.4)(1) 25.8 (36.1)(2) 36.8 5.1
Discontinued
operations........... 3.3 2.3 2.1 0.9 8.6
Discontinued
operations--Gain on
sale of Armor All.... -- -- 120.2 -- 120.2
-------- -------- -------- -------- ---------
Total................ $ (18.1) $ 28.1 $ 86.2 $ 37.7 $ 133.9
======== ======== ======== ======== =========
Earnings (loss) per
common share(3, 4)
Diluted
Continuing operations. $ (0.25) $ 0.29 $ (0.43) $ 0.41 $ 0.06
Discontinued
operations........... 0.04 0.03 0.02 0.01 0.10
Discontinued
operations--Gain on
sale of Armor All.... -- -- 1.44 -- 1.35
-------- -------- -------- -------- ---------
Total................ $ (0.21) $ 0.32 $ 1.03 $ 0.42 $ 1.51
======== ======== ======== ======== =========
Basic
Continuing operations. $ (0.25) $ 0.30 $ (0.43) $ 0.42 $ 0.06
Discontinued
operations........... 0.04 0.03 0.02 0.01 0.10
Discontinued
operations--Gain on
sale of Armor All.... -- -- 1.44 -- 1.41
-------- -------- -------- -------- ---------
Total................ $ (0.21) $ 0.33 $ 1.03 $ 0.43 $ 1.57
======== ======== ======== ======== =========
Cash dividends per
share(4)............... $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Market prices per common
share(4)
High................... $ 25 5/8 $24 1/16 $ 28 3/8 $ 34 1/8 $ 34 1/8
Low.................... 22 1/16 20 9/16 22 7/8 26 1/16 20 9/16
</TABLE>
- --------
(1) Includes $48.2 million for the write-off of purchased in-process
technology.
(2) Includes $61.3 million in after-tax charges for restructuring, asset
impairment and other operating items.
(3) Restated in accordance with Statement of Financial Accounting Standards No.
128 "Earnings per Share."
(4) Restated to reflect the two-for-one stock split declared October 29, 1997,
distributed January 2, 1998 to stockholders of record December 1, 1997.
33
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)(1) Financial Statements - see Index to Consolidated Financial Statements and
Supplementary Data Schedule at page 1 of this Form 10K/A.
(2) Financial Statement Schedule - The Supplementary Financial Statement
Schedule which was previously filed in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and which is not
amended has been omitted from this filing.
(3) Exhibits - See Exhibit Index at page 36 of this Form 10-K/A.
(b) Reports on Form 8-K
Information as to reports on Form 8-K filed during the three months ended
March 31, 1998 is not amended and has been omitted from this filing.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
McKESSON CORPORATION
(Registrant)
Dated: July 29, 1998 By /s/ RICHARD H. HAWKINS
-----------------------
Richard H. Hawkins
Vice President and Chief Financial Officer
By /s/ HEIDI E. YODOWITZ
------------------------
Heidi E. Yodowitz
Controller
35
<PAGE>
EXHIBIT INDEX/(1)/
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------
<S> <C>
13 1998 Consolidated Financial Statements - see Index to Consolidated
Financial Statements at page 1 of this Form 10-K/A
23 Independent Auditors' Consent.
</TABLE>
- ---------
(1) Exhibits which have been previously filed, or incorporated by reference, in
the Company's Annual Report of Form 10-K for the fiscal year ended March 31,
1998 and which are not amended in this filing have been omitted from this
Exhibit Index.
36
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in McKesson Corporation
Registration Statement Nos. 33-86536, 333-611, 333-2871, 333-21931, 333-32643,
333-32645, 333-43101, 333-43079, 333-48337, 333-48339, and 333-48859 on Form S-8
and Registration Statement Nos. 333-26443, and Amendment No. 1 thereto, and 333-
50985, and Amendment No. 1 thereto, on Form S-3, and Registration Statement
Nos. 333-49119, and Amendment No. 1 thereto, and 333-56623, and Amendment No. 1
thereto, on Form S-4 of our reports dated May 18, 1998 incorporated by reference
in, and appearing in, this Annual Report on Form 10-K/A of McKesson Corporation,
for the year ended March 31, 1998.
DELOITTE & TOUCHE LLP
San Francisco, California
July 29, 1998
37
