<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13252
----------------
McKESSON HBOC, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <S>
Delaware 94-3207296
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)
<CAPTION>
One Post Street, San Francisco, California 94104
<C> <S>
(Address of principal executive offices) (Zip Code)
</TABLE>
(415) 983-8300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at September 30, 2000
----- ---------------------------------
<S> <C>
Common stock, $.01 par value 283,949,068 shares
</TABLE>
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<PAGE>
McKESSON HBOC, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- -----
PART I. FINANCIAL INFORMATION
<C> <S> <C>
1. Condensed Financial Statements
Consolidated Balance Sheets
September 30, 2000 and March 31, 2000........................... 3-4
Statements of Consolidated Income
Three and six month periods ended September 30, 2000 and 1999... 5
Statements of Consolidated Cash Flows
Six month periods ended September 30, 2000 and 1999............. 6
Financial Notes.................................................. 7-14
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Review................................................. 15-20
3. Quantitative and Qualitative Disclosures about Market Risk....... 20
PART II. OTHER INFORMATION
1. Legal Proceedings................................................ 21
6. Exhibits and Reports on Form 8-K................................. 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- ---------
(in millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................................... $ 176.4 $ 548.9
Marketable securities available for sale (Notes 4 and 8)........... 34.8 57.0
Receivables........................................................ 3,221.4 3,034.5
Inventories........................................................ 4,467.5 4,149.3
Prepaid expenses................................................... 169.0 175.8
--------- ---------
Total............................................................ 8,069.1 7,965.5
Property, Plant and Equipment
Land............................................................... 34.0 34.5
Buildings, machinery and equipment................................. 1,158.1 1,115.1
--------- ---------
Total............................................................ 1,192.1 1,149.6
Accumulated depreciation........................................... (635.5) (594.2)
--------- ---------
Net.............................................................. 556.6 555.4
Capitalized Software................................................. 99.4 92.2
Notes Receivable..................................................... 110.7 100.9
Goodwill and Other Intangibles....................................... 1,207.3 1,185.6
Other Assets......................................................... 504.9 473.3
--------- ---------
Total Assets..................................................... $10,548.0 $10,372.9
========= =========
</TABLE>
(Continued)
See Financial Notes.
3
<PAGE>
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- ---------
(in millions, except
par value)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts payable..................................................... $ 367.4 $ 205.6
Accounts payable--trade............................................ 3,976.8 3,678.3
Deferred revenue................................................... 297.1 368.7
Current portion of long-term debt.................................. 17.1 16.2
Salaries and wages................................................. 93.7 115.5
Taxes.............................................................. 84.4 354.8
Interest and dividends............................................. 33.8 33.9
Other.............................................................. 339.6 348.8
--------- ---------
Total............................................................ 5,209.9 5,121.8
Postretirement Obligations and Other Noncurrent Liabilities.......... 250.1 245.7
Long-Term Debt (Note 4).............................................. 1,224.3 1,243.8
McKesson HBOC-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Subsidiary Grantor Trust Whose Sole Assets are Junior
Subordinated Debentures of McKesson HBOC (Note 5)................... 195.9 195.8
Other Commitments and Contingent Liabilities
Stockholders' Equity
Common stock (400.0 shares authorized, 285.6 issued as of
September 30, 2000, and 283.9 issued as of March 31, 2000;
par value $0.01).................................................. 2.9 2.8
Additional paid-in capital......................................... 1,827.3 1,791.1
Other capital...................................................... (113.4) (126.1)
Retained earnings.................................................. 2,214.1 2,122.3
Accumulated other comprehensive losses (Note 8).................... (114.4) (97.1)
ESOP notes and guarantees.......................................... (96.7) (99.9)
Treasury shares, at cost........................................... (52.0) (27.3)
--------- ---------
Total Stockholders' Equity....................................... 3,667.8 3,565.8
--------- ---------
Total Liabilities and Stockholders' Equity....................... $10,548.0 $10,372.9
========= =========
</TABLE>
(Concluded)
See Financial Notes.
4
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES............................................ $ 9,874.8 $ 8,939.4 $19,603.3 $17,538.2
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales..................................... 9,298.9 8,369.9 18,444.6 16,392.4
Selling, distribution, research and development
and administration (Note 6)...................... 449.6 460.5 898.2 901.3
Interest.......................................... 28.7 27.0 56.1 58.2
--------- --------- --------- ---------
Total........................................... 9,777.2 8,857.4 19,398.9 17,351.9
--------- --------- --------- ---------
GAIN ON INVESTMENTS (Note 6)........................ 7.8 -- 7.8 --
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES OF SUBSIDIARY TRUST........... 105.4 82.0 212.2 186.3
INCOME TAXES........................................ (41.9) (31.1) (83.6) (71.0)
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY
TRUST.............................................. (1.6) (1.6) (3.1) (3.1)
--------- --------- --------- ---------
INCOME AFTER TAXES
Continuing operations............................. 61.9 49.3 125.5 112.2
Discontinued operations (Note 2).................. -- 10.0 -- 17.2
--------- --------- --------- ---------
NET INCOME.......................................... $ 61.9 $ 59.3 $ 125.5 $ 129.4
========= ========= ========= =========
EARNINGS PER COMMON SHARE (Note 9)
Diluted:
Continuing operations............................. $ 0.22 $ 0.18 $ 0.44 $ 0.40
Discontinued operations (Note 2).................. -- 0.03 -- 0.06
--------- --------- --------- ---------
Total........................................... $ 0.22 $ 0.21 $ 0.44 $ 0.46
========= ========= ========= =========
Basic:
Continuing operations............................. $ 0.22 $ 0.18 $ 0.44 $ 0.40
Discontinued operations (Note 2).................. -- 0.03 -- 0.06
--------- --------- --------- ---------
Total........................................... $ 0.22 $ 0.21 $ 0.44 $ 0.46
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE.......................... $ 0.06 $ 0.06 $ 0.12 $ 0.12
SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED
Diluted........................................... 292.0 289.4 290.7 290.2
Basic............................................. 283.0 281.1 282.8 280.9
</TABLE>
See Financial Notes.
5
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------
2000 1999
-------- --------
(in millions)
<S> <C> <C>
Operating Activities
Income from continuing operations........................................ $ 125.5 $ 112.2
Adjustments to reconcile to net cash provided (used) by operating
activities:
Depreciation............................................................ 56.1 56.6
Amortization............................................................ 60.4 46.1
Provision for bad debts................................................. 22.7 4.0
Deferred taxes on income................................................ 9.3 (25.6)
Other non-cash items.................................................... (3.3) 29.7
-------- --------
Total................................................................. 270.7 223.0
-------- --------
Effects of changes in:
Receivables............................................................. (236.1) (155.7)
Inventories............................................................. (325.4) (154.7)
Accounts and drafts payable............................................. 470.0 (292.6)
Deferred revenue........................................................ (71.8) (87.9)
Taxes................................................................... (233.6) 36.8
Other................................................................... (33.2) (23.6)
-------- --------
Total................................................................. (430.1) (677.7)
-------- --------
Net cash provided (used) by continuing operations..................... (159.4) (454.7)
Discontinued operations.................................................. (1.1) (14.9)
-------- --------
Net cash provided (used) by operating activities...................... (160.5) (469.6)
-------- --------
Investing Activities
Purchases of marketable securities....................................... -- (0.5)
Property acquisitions.................................................... (59.6) (75.0)
Properties sold.......................................................... 3.8 5.3
Acquisitions of businesses, less cash and short-term investments
acquired................................................................ (39.8) (22.6)
Other.................................................................... (58.0) (114.2)
-------- --------
Net cash provided (used) by investing activities...................... (153.6) (207.0)
-------- --------
Financing Activities
Proceeds from issuance of debt........................................... 2.0 667.7
Repayment of debt........................................................ (20.6) (36.4)
Dividends paid on preferred securities of subsidiary trust............... (5.0) (5.0)
Capital stock transactions:
Issuances............................................................... 20.0 16.6
Share repurchases....................................................... (25.5) --
Dividends paid.......................................................... (34.2) (33.7)
ESOP notes and guarantees............................................... 3.2 8.5
Other................................................................... 1.7 (1.1)
-------- --------
Net cash provided (used) by financing activities...................... (58.4) 616.6
-------- --------
Net decrease in Cash and Cash Equivalents................................. (372.5) (60.0)
-------- --------
Cash and Cash Equivalents at beginning of period.......................... 548.9 233.7
-------- --------
Cash and Cash Equivalents at end of period................................ $ 176.4 $ 173.7
======== ========
</TABLE>
See Financial Notes.
6
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES
(unaudited)
1. Interim Financial Statements
In the opinion of McKesson HBOC, Inc. ("McKesson HBOC" or the "Company"),
these unaudited condensed consolidated financial statements include all
adjustments necessary for a fair presentation of its financial position as of
September 30, 2000, the results of its operations for the three and six months
ended September 30, 2000 and 1999, and its cash flows for the six months ended
September 30, 2000 and 1999.
The results of operations for the three and six months ended September 30,
2000 and 1999 are not necessarily indicative of the results for the full
years.
These interim financial statements should be read in conjunction with the
annual audited financial statements, accounting policies and financial notes
thereto included in the Company's fiscal 2000 consolidated financial
statements which have previously been filed with the Securities and Exchange
Commission (the "SEC").
2. Discontinued Operations
Income after taxes from discontinued operations for the three and six
months ended September 30, 1999, represents the results of operations of
McKesson Water Products Company, which was sold in February 2000.
3. Acquisitions
In July 2000, the Company's iMcKesson business completed the acquisition of
MediVation, Inc., a provider of an automated web-based communications system
for physicians to communicate with patients online, for approximately $24
million in cash, $14 million in Company common stock and the assumption of $6
million of employee stock incentives. A charge of $2.1 million was recorded in
the second quarter to write off the portion of the purchase price allocated to
in-process technology for which technological feasibility had not been
established as of the acquisition date and for which there were no alternative
uses. The Company received an independent valuation that utilized a discounted
cash flow methodology by product line to assist in valuing in-process and
existing technologies as of the acquisition date. Goodwill and other
intangibles related to the acquisition of $41.7 million are being amortized on
a straight-line basis over periods ranging from three to seven years. In the
six months ended September 30, 2000, the Company also completed a number of
smaller acquisitions in the Health Care Supply Management and iMcKesson
segments.
4. Marketable Securities
The September 30, 2000 marketable securities balance includes $10.0 million
held in trust as exchange property for the Company's $16.4 million principal
amount of 4.5% exchangeable subordinated debentures which remain outstanding.
This account also includes the Company's warrants to purchase Healtheon/WebMD
common stock. In fiscal 2000, the Company recognized a gain related to the
exchange of the warrants totaling $93.4 million. The estimated fair value of
the warrants has since declined to $9.5 million as of September 30, 2000,
resulting in an unrealized pre-tax loss of $83.9 million which is included in
the accumulated other comprehensive losses account in stockholders' equity.
5. Convertible Preferred Securities
In February 1997, a wholly-owned subsidiary trust of the Company issued 4
million shares of preferred securities to the public and 123,720 common
securities to the Company, which are convertible at the holder's option into
McKesson HBOC common stock. The proceeds of such issuance's were invested by
the trust in
7
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
$206,186,000 aggregate principal amount of the Company's 5% Convertible Junior
Subordinated Debentures due in 2027 (the "Debentures"). The Debentures
represent the sole assets of the trust. The Debentures mature on June 1, 2027,
bear interest at an annual rate of 5%, payable quarterly, and are redeemable
by the Company beginning in March 2000 at 103.5% of the principal amount
thereof.
Holders of the securities are entitled to cumulative cash distributions at
an annual rate of 5% of the liquidation amount of $50 per security. Each
preferred security is convertible at the rate of 1.3418 shares of McKesson
HBOC common stock, subject to adjustment in certain circumstances. If not
converted, the preferred securities will be redeemed upon repayment of the
Debentures, and are callable by the Company at 103.5% of the liquidation
amount beginning in March 2000.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the preferred securities (the "Guarantee"). The
Guarantee, when taken together with the Company's obligations under the
Debentures and in the indenture pursuant to which the Debentures were issued
and the Company's obligations under the Amended and Restated Declaration of
Trust governing the subsidiary trust, provides a full and unconditional
guarantee of amounts due on the preferred securities.
The Debentures and related trust investment in the Debentures have been
eliminated in consolidation and the preferred securities are reflected as
outstanding in the accompanying consolidated financial statements.
6. Gains and Charges in Continuing Operations
In April 1999, following the Company's January 1999 acquisition of HBO &
Company ("HBOC"), the Company discovered improper accounting practices at
HBOC. In July 1999, the Audit Committee of the Company's Board of Directors
completed an investigation into such matters, which resulted in the previously
reported restatement of the Company's historical consolidated financial
statements related to HBOC (pre-acquisition) in fiscal 1999, 1998 and 1997.
During the quarter and six month period ended September 30, 2000, the
Company incurred $0.7 million in legal fees in connection with the pending
securities litigation arising out of the restatement (see Financial Note 11).
The Company also recorded a $7.8 million pre-tax gain on the liquidation of an
investment held by iMcKesson, pre-tax charges of $0.5 million and $2.1 million
for severance associated with staff reductions in the Health Care Supply
Management segment and iMcKesson segment, respectively, and $0.2 million in
facility closing costs in the iMcKesson segment (see Financial Note 7).
During the quarter and six months ended September 30, 1999, the Company
incurred accounting and legal fees and other costs totaling $8.7 million and
$15.0 million, respectively, in connection with the Audit Committee's
investigation, the restatement of the historical consolidated financial
statements and the resulting pending securities litigation (see Financial Note
11). In addition, the Company recorded $12.1 million in the quarter and $32.3
million in the first half in severance and other costs associated with former
employees. The Company also recorded pre-tax charges of $2.9 million in the
quarter ended September 30, 1999, in acquisition-related costs.
7. Restructuring
During the quarter ended September 30, 2000, the Company reviewed the
operations and the cost structure of the Health Care Supply Management's
pharmacy management business. This resulted in a workforce reduction. The
Company recorded a severance charge of $0.5 million relating to the
termination of 25 employees and paid $0.2 million to 10 employees during the
quarter. The Company also reviewed the operations and the
8
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
cost structure of iMcKesson's medical management business resulting in a
planned closure of a call center and a workforce reduction. The Company
recorded a severance charge of $2.1 million relating to the termination of 114
employees and a charge of $0.2 million for facility closing costs.
In conjunction with restructuring plans provided for in prior fiscal years,
during the six months ended September 30, 2000, the Company closed two
pharmaceutical distribution centers, five medical/surgical distribution centers
and one medical/surgical sales office in the Health Care Supply Management
segment. This resulted in the termination of approximately 75 pharmaceutical
distribution center & back-office employees and the payment of $1.1 million in
severance. Also, the Company paid $1.5 million in severance to approximately
170 employees that were terminated in the medical/surgical business. In
addition, the Company paid $1.8 million for costs incurred in connection with
the distribution center closures and associated real estate property taxes,
rents, utility and other costs for facilities subsequent to termination of
operations. The Company plans to continue the previously announced distribution
center closures, back-office reductions and workforce reductions in the Health
Care Supply Management segment throughout fiscal 2002. In the Health Care
Information Technology segment, severance of $3.9 million was paid in the six
months ended September 30, 2000 to approximately 270 employees who were
terminated in fiscal 1999 and 2000. Severance agreements for certain employees
of the Health Care Information Technology segment provide for payments through
fiscal 2002.
A reconciliation of the reserves for the restructuring plans from March 31,
2000 to September 30, 2000, by operating segment follows:
<TABLE>
<CAPTION>
Health Care Health Care
Supply Information
Management Technology iMcKesson
----------------- ----------------- -----------------
Exit- Exit- Exit-
Severance Related Severance Related Severance Related Total
--------- ------- --------- ------- --------- ------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 2000............... $ 7.1 $10.1 $ 5.0 $ 0.7 $ -- $ -- $22.9
Charges incurred during the period.... 0.5 -- -- -- 2.1 0.2 2.8
Severance amounts paid during the
period............................... (2.8) -- (3.9) -- -- -- (6.7)
Other costs paid during the period.... -- (1.8) -- (0.1) -- -- (1.9)
----- ----- ----- ----- ---- ---- -----
Balance, September 30, 2000........... $ 4.8 $ 8.3 $ 1.1 $ 0.6 $2.1 $0.2 $17.1
===== ===== ===== ===== ==== ==== =====
</TABLE>
The remaining balances at September 30, 2000 relate primarily to charges
recorded in fiscal 1999 and 2000, with the exception of $0.6 million of exit-
related reserves associated with the fiscal 1997 plan. The reserves for other
exit-related items consist of costs for preparing facilities for disposal,
lease costs and property taxes required subsequent to termination of
operations.
9
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
8. Comprehensive Income
Comprehensive income is defined as all changes in stockholders' equity from
non-owner sources. As such, it includes net income and amounts arising from
unrecognized pension costs, unrealized gains or losses on marketable
securities and investments classified as available for sale which are recorded
directly to stockholders' equity and foreign currency translations. Total
comprehensive income for the three and six months ended September 30, 2000 and
1999 is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Net income................................. $ 61.9 $ 59.3 $125.5 $129.4
Unrealized gain (loss) on marketable
securities and investments................ 4.4 0.1 (9.1) 0.1
Foreign currency translation adjustments... (2.9) (1.2) (8.2) (1.5)
------ ------ ------ ------
$ 63.4 $ 58.2 $108.2 $128.0
====== ====== ====== ======
</TABLE>
Accumulated Other Comprehensive Losses includes certain items that may be
included in the cumulative effect of adopting Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The cumulative effect cannot be determined at this
time because it is based on fair values as of the date of implementation of
SFAS No. 133. See Financial Note 10.
9. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share computations for income from
continuing operations:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
September 30, 2000 September 30, 1999
----------------------- -----------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income from continuing operations.............. $61.9 283.0 $0.22 $49.3 281.1 $0.18
===== =====
Effect of Dilutive Securities
Options to purchase common stock............... -- 3.3 -- 2.8
Trust convertible preferred securities......... 1.6 5.4 1.6 5.4
Restricted stock............................... -- 0.3 -- 0.1
----- ----- ----- -----
Diluted EPS
Income from continuing operations available to
common stockholders plus assumed conversions.. $63.5 292.0 $0.22 $50.9 289.4 $0.18
===== ===== ===== ===== ===== =====
</TABLE>
10
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------
September 30, 2000 September 30, 1999
----------------------- -----------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income from continuing
operations................... $125.5 282.8 $0.44 $112.2 280.9 $0.40
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 2.3 -- 3.8
Trust convertible preferred
securities................... 3.1 5.4 3.1 5.4
Restricted stock.............. -- 0.2 -- 0.1
------ ----- ------ -----
Diluted EPS
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $128.6 290.7 $0.44 $115.3 290.2 $0.40
====== ===== ===== ====== ===== =====
</TABLE>
10. New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" which
defers the effective date of SFAS No. 133 until the Company's fiscal year
2002. The FASB further amended SFAS No. 133 to address implementation issues
by issuing SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an amendment of FASB Statement No. 133", in June
2000.
In December 1999, the SEC released Staff Accounting Bulletin No. 101 ("SAB
101"), which provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. In March 2000,
the SEC released SAB 101A, which delayed for one quarter the implementation
date of SAB 101 for registrants with fiscal years beginning between December
16, 1999 and March 15, 2000. In June 2000, the SEC released SAB 101B, which
delayed the implementation date of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires entities that have securitized
financial assets to provide specific disclosures. SFAS No. 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001.
The Company is evaluating what impact, if any, SFAS 133 and SFAS 140 may
have on its consolidated financial statements. The Company does not believe
that the adoption of SAB 101 will have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
11
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
11. Litigation
A. Accounting Litigation
In its Annual Report on Form 10-K for fiscal year ended March 31, 2000, the
Company reported on numerous legal proceedings arising out of the Company's
announcement on April 28, 1999 regarding accounting improprieties at HBOC.
By order dated September 28, 2000 in the Federal Actions entitled In re
McKesson HBOC, Inc. Securities Litigation (the "Consolidated Action"), the
Honorable Ronald M. Whyte of the United States District Court, Northern
District of California (i) dismissed with prejudice claims against the Company
by HBOC shareholders under Section 11 of the Securities Act of 1933 (the
"Securities Act"), (ii) dismissed with prejudice claims under Section 11 of
the Securities Act by HBOC shareholders who acquired their HBOC stock pursuant
to certain registration statements previously issued by HBOC, (iii) dismissed
without prejudice claims against the Company under Section 14(a) of the
Securities Exchange Act of 1934 (the "Exchange Act"), (iv) sustained the
adequacy of the complaint in pleading claims against the Company under Section
10(b) of the Exchange Act by purchasers of the Company's stock after the
McKesson-HBOC merger and (v) dismissed with prejudice claims against the
Company under Section 10(b) of the Exchange Act by pre-merger purchasers.
Plaintiffs have until November 14, 2000, to file an amended complaint.
The Company's demurrers in three previously reported actions pending in
California state court, State of Oregon, by and Through the Oregon Public
Employees Retirement Board v. McKesson HBOC, Inc., et al. (Case No. 307619),
Utah State Retirement Board v. McKesson HBOC, Inc., et al. (Case No. 311269)
and Minnesota State Board of Investment v. McKesson HBOC, Inc., et al. (Case
No. 311747), will be heard on November 15, 2000. Discovery has been stayed in
the Oregon action. The Company has moved to stay the Utah and Minnesota
actions, and those motions will also be heard by the Court on November 15,
2000.
The previously reported action filed in Louisiana, Baker v. McKesson HBOC,
Inc., et al., has been transferred to the Northern District of California and
consolidated with the Consolidated Action.
On July 14, 2000, an amended complaint was filed in Adler v. McKesson HBOC,
Inc., et al. (Case No. 99-C-7980-3). The Company filed its answer and defenses
on August 21, 2000.
On July 24, 2000, a complaint entitled Hess v. McKesson HBOC, Inc., et al.
was filed in state court in Arizona (Case No. C20003862). The Hess plaintiffs
have named as defendants the Company, HBOC and MWPC Acquisition Corporation
and assert various causes of action under state and federal law relating to
the Company's purchase of Ephrata Diamond Spring Water Company. The Company
removed the action to federal court on August 24, 2000, and on September 15,
2000, filed a motion to transfer the action to the Northern District of
California.
On September 7, 2000, the Company's motion to stay the previously reported
Delaware state court action Caravetta v. McKesson HBOC, Inc. (Case No. 00C-04-
214WTQ) was granted.
On September 11, 2000, plaintiff Jeffrey Powell filed a new complaint in
Georgia state court, Powell v. McKesson HBOC, Inc., et al. (Case No. 2000 CV
27864). The Powell complaint names the Company, HBOC, and two former HBOC
officers as defendants and asserts claims under Georgia's Blue Sky laws and
various other causes of action. The Company answered the complaint on October
11, 2000, and filed motions to dismiss and for a partial stay.
12
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
On September 13, 2000, the Pennsylvania state court granted in part the
Company's motion to dismiss Grant v. McKesson HBOC, Inc. (Case No. 99-03970)
with leave for plaintiffs to amend their complaint, which they did on October
4, 2000. The Company filed its preliminary objections on October 24, 2000,
seeking to dismiss all claims and stay the action.
On September 15, 2000, the Delaware state court dismissed all claims in the
previously reported derivative action Ash v. McCall, et al. (formerly entitled
Fine v. McCall, et al. (Case No. 17132), but granted plaintiffs leave to
replead what the Court denominated "oversight" claims.
On September 21, 2000 the plaintiffs in the previously reported case Jacobs
v. McKesson HBOC, Inc., which has been consolidated with the Consolidated
Action, filed a new action entitled Jacobs v. HBO & Company (Case No. C-00-
20974). The Jacobs complaint names only HBOC as a defendant and asserts claims
under Sections 11 and 12(2) of the Securities Act, Section 10(b) of the
Exchange Act and various state law causes of action. This action is to be
consolidated with the Consolidated Action.
The previously reported investigations by the United States Attorney's
Office and the Securities Exchange Commission are continuing. The United
States Attorney's Office has revealed that on May 15, 2000, it filed a one-
count information against former HBOC officer, Dominick DeRosa, charging Mr.
DeRosa with aiding and abetting securities fraud, and that on May 15, 2000,
Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an
indictment was unsealed in the Northern District of California against former
HBOC officer, Jay P. Gilbertson, and former Company and HBOC officer, Albert
J. Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). On that
same date, a civil complaint was filed by the Securities and Exchange
Commission against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa (Securities and
Exchange Commission v. Gilbertson, et al., Case No. C-00-3570). Mr. DeRosa
settled with the SEC by agreeing to disgorge gains on sales of his shares of
the Company's common stock (plus interest), paying a civil penalty, and
agreeing not to serve as an officer or director of a public company for five
years. Mr. DeRosa did not admit or deny the substantive allegations of the
complaint.
The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amounts of, or
potential range of loss with respect to these proceedings. In addition, the
timing of the final resolution of these proceedings is uncertain. The range of
possible resolutions of these proceedings could include judgments against the
Company or settlements, that could require substantial payments by the Company
which could have a material adverse impact on the Company's financial
position, results of operations and cash flows.
B. Product Liability Litigation
The Company has resolved its defense and indemnity dispute with American
Home Products ("AHP"), the manufacturer of Pondimin and Redux, two of the
three drugs at issue in the fen-phen diet drug litigation. Under the parties'
agreement, AHP has agreed to accept complete defense and indemnity in all
pending fen-phen cases effective July 1, 2000, except in cases of independent
negligence or, under certain circumstances, punitive damage awards. As part of
this agreement, AHP will also reimburse the Company for the majority of the
fees and costs incurred since the inception of the diet drug litigation.
12. Segment Information
The Company's chief operating decision makers who determine the allocation
of resources and evaluate the financial performance of the operating segments
are the Co-Chief Executive Officers. In evaluating financial performance,
management focuses on operating profit as a segment's measure of profit or
loss. Operating profit
13
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Concluded)
(unaudited)
is income before interest expense, corporate interest income, taxes on income
and allocation of certain corporate revenues and expenses. In fiscal 2001, the
Company formed the iMcKesson business segment, which consists of assets of the
former e-Health segment, and certain assets reclassified from the Health Care
Supply Management and Health Care Information Technology segments to iMcKesson.
iMcKesson's objective is to use the power of the Internet and other innovative,
emerging technologies to share information real-time to drive improved clinical
outcomes, cost efficiencies and increased satisfaction for all healthcare
participants. Financial information relating to the Company's continuing
operations reportable segments for the three and six months ended September 30,
2000 and 1999, and as of September 30, 2000 and March 31, 2000, is presented
below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- -----------------------
2000 1999 2000 1999
--------- --------- ------------- ---------
(in millions)
<S> <C> <C> <C> <C>
Revenues
Health Care Supply Management.................... $ 9,607.0 $ 8,623.8 $19,064.0 $16,902.4
Health Care Information Technology............... 195.8 236.7 395.2 478.9
iMcKesson........................................ 69.4 76.0 137.9 151.2
Corporate........................................ 2.6 2.9 6.2 5.7
--------- --------- --------- ---------
Total.......................................... $ 9,874.8 $ 8,939.4 $19,603.3 $17,538.2
========= ========= ========= =========
Operating profit
Health Care Supply Management.................... $ 150.7 $ 127.4 $ 299.8 $ 252.8
Health Care Information Technology............... 10.3 16.6 18.5 56.0
iMcKesson........................................ (6.7) 12.9 (12.7) 29.6
--------- --------- --------- ---------
Total.......................................... 154.3 156.9 305.6 338.4
Interest--net.................................... (27.0) (24.9) (51.8) (54.4)
Corporate and other.............................. (21.9) (50.0) (41.6) (97.7)
--------- --------- --------- ---------
Income from continuing operations before income
taxes and dividends on preferred securities of
subsidiary trust.............................. $ 105.4 $ 82.0 $ 212.2 $ 186.3
========= ========= ========= =========
<CAPTION>
September 30, March 31,
2000 2000(1)
------------- ---------
(in millions)
<S> <C> <C> <C> <C>
Segment assets
Health Care Supply Management.................... $ 9,033.9 $ 8,462.4
Health Care Information Technology............... 625.9 673.2
iMcKesson........................................ 344.0 323.2
Corporate........................................ 544.2 914.1
--------- ---------
Total.......................................... $10,548.0 $10,372.9
========= =========
</TABLE>
--------
(1) Certain prior year amounts have been reclassified to conform to the current
year presentation.
14
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW
Segment Results
The revenues and operating profits from continuing operations of the
Company by business segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
2000 1999(1) % Chg. 2000 1999(1) % Chg.
-------- -------- ------ --------- --------- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Health Care Supply Management
Pharmaceutical Distribution & Services
U.S. Health Care(2)....................... $8,261.8 $7,403.5 11.6 $16,349.0 $14,471.5 13.0
International............................. 650.4 547.7 18.8 1,280.7 1,103.2 16.1
-------- -------- --------- ---------
Total Pharmaceutical Distribution &
Services............................... 8,912.2 7,951.2 12.1 17,629.7 15,574.7 13.2
Medical/Surgical Distribution & Services.. 694.8 672.6 3.3 1,434.3 1,327.7 8.0
-------- -------- --------- ---------
Total Health Care Supply Management..... 9,607.0 8,623.8 11.4 19,064.0 16,902.4 12.8
-------- -------- --------- ---------
Health Care Information Technology
Software.................................. 27.0 26.8 0.7 57.2 59.6 (4.0)
Services.................................. 151.1 183.0 (17.4) 303.7 372.6 (18.5)
Hardware.................................. 17.7 26.9 (34.2) 34.3 46.7 (26.6)
-------- -------- --------- ---------
Total Health Care Information
Technology............................. 195.8 236.7 (17.3) 395.2 478.9 (17.5)
-------- -------- --------- ---------
iMcKesson.................................. 69.4 76.0 (8.7) 137.9 151.2 (8.8)
Corporate.................................. 2.6 2.9 6.2 5.7
-------- -------- --------- ---------
Total...................................... $9,874.8 $8,939.4 10.5 $19,603.3 $17,538.2 11.8
======== ======== ========= =========
OPERATING PROFIT
Health Care Supply Management.............. $ 150.7 (4) $ 127.4 $ 299.8 (4) $ 252.8
Health Care Information Technology......... 10.3 16.6 18.5 56.0
iMcKesson.................................. (6.7)(5) 12.9 (12.7)(5) 29.6
-------- -------- --------- ---------
Total...................................... 154.3 156.9 305.6 338.4
Interest--net(3)........................... (27.0) (24.9) (51.8) (54.4)
Corporate and other........................ (21.9)(6) (50.0)(7) (41.6)(6) (97.7)(7)
-------- -------- --------- ---------
Income from continuing operations before
income taxes and dividends on preferred
securities of subsidiary trust............ $ 105.4 $ 82.0 $ 212.2 $ 186.3
======== ======== ========= =========
</TABLE>
--------
(1) Reflects the reclassification of revenues and operating profits of certain
business units which were previously included in the Health Care Supply
Management and Health Care Information Technology segments into iMcKesson.
(2) Includes sales to customers' warehouses of $2,375.3 million and $2,140.5
million in the quarters and $4,700.6 million and $4,301.1 million in the
six months ended September 30, 2000 and 1999, respectively.
(3) Interest expense is shown net of corporate interest income.
(4) Includes pre-tax charges of $0.5 million for severance associated with
staff reductions in the pharmacy management business.
(5) Includes a pre-tax gain of $7.8 million on the liquidation of an
investment, a charge of $2.1 million for the write-off of purchased in-
process technology related to the July 2000 acquisition of MediVation,
Inc. and $2.3 million for severance and facility closing costs associated
with staff reductions in the medical management business.
(6) Includes pre-tax charges of $0.7 million for legal costs incurred in
connection with the pending litigation resulting from the restatement of
prior years' financial statements.
(7) Includes pre-tax charges of $8.7 million and $15.0 million for accounting
and legal fees and other costs incurred in the quarter and six months in
connection with the restatement of prior year's financial results and
resulting litigation. Also includes $12.1 million and $32.3 million in
severance and other costs associated with former employees during the
quarter and six months ended September 30, 1999. The quarter ended
September 30, 1999 also includes $2.9 million in acquisition-related
costs.
15
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Factors Affecting Forward-Looking Statements
In addition to historical information, management's discussion and analysis
includes certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act") and section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Some of the forward-looking statements can be identified by the use of
forward-looking words such as "believes", "expects", "anticipates", "may",
"will", "should", "seeks", "approximately", "intends", "plans", "estimates",
or "anticipates", or the negative of these words or other comparable
terminology. The discussion of financial trends, strategy, plans or intentions
may also include forward-looking statements. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those projected.
These and other risks and uncertainties are described herein or in the
Company's Forms 10-K, 10-Q, 8-K and other public documents filed with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
Overview of Results
Net income for the second quarter increased to $61.9 million, $0.22 per
diluted share, from $59.3 million, $0.21 per diluted share, in the prior year.
For the six month period, net income decreased to $125.5 million, $0.44 per
diluted share, compared to $129.4 million, $0.46 per diluted share in the
prior year. The results for the prior year second quarter and six months ended
September 30, 1999 included $10.0 million and $17.2 million, respectively, in
income after taxes from discontinued operations, representing the results of
operations of the Water Products business, which was sold in February 2000.
The results from continuing operations include the following:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------
2000 1999
------------------ ------------------
Pre-tax After-tax Pre-tax After-tax
------- --------- ------- ---------
(in millions)
<S> <C> <C> <C> <C>
Income from Continuing Operations
Before unusual items and dividends on convertible
preferred securities of subsidiary trust................. $103.2 $63.0 $105.7 $ 65.5
Dividends on convertible preferred securities of
subsidiary trust......................................... -- (1.6) -- (1.6)
------ ----- ------ ------
Before unusual items...................................... 103.2 61.4 105.7 63.9
Unusual items
Health Care Supply Management........................... (0.5) (0.3) -- --
iMcKesson............................................... 3.4 1.2 -- --
Corporate and other..................................... (0.7) (0.4) (23.7) (14.6)
------ ----- ------ ------
Income from Continuing Operations......................... $105.4 $61.9 $ 82.0 $ 49.3
====== ===== ====== ======
</TABLE>
16
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-------------------------------------
2000 1999
------------------ ------------------
Pre-tax After-tax Pre-tax After-tax
------- --------- ------- ---------
(in millions)
<S> <C> <C> <C> <C>
Income from Continuing Operations
Before unusual items and dividends on convertible
preferred securities of subsidiary trust................. $210.0 $128.1 $236.5 $146.2
Dividends on convertible preferred securities of
subsidiary trust......................................... -- (3.1) -- (3.1)
------ ------ ------ ------
Before unusual items...................................... 210.0 125.0 236.5 143.1
Unusual items
Health Care Supply Management........................... (0.5) (0.3) -- --
iMcKesson............................................... 3.4 1.2 -- --
Corporate and other..................................... (0.7) (0.4) (50.2) (30.9)
------ ------ ------ ------
Income from Continuing Operations......................... $212.2 $125.5 $186.3 $112.2
====== ====== ====== ======
</TABLE>
The results for the quarter and six months ended September 30, 2000 include
after-tax unusual items that increased net income by $0.5 million. These
unusual items consisted of a $0.3 million charge for severance in the Health
Care Supply Management segment; a $4.8 million gain on the liquidation of an
investment partially offset by charges of $1.5 million for severance and other
exit-related costs and a $2.1 million write-off of purchased in-process
technology in the iMcKesson segment; and $0.4 million of legal fees incurred
in connection with the pending securities litigation resulting from the
restatement of prior years' financial results in Corporate and other.
The prior year's second quarter and first half results included after-tax
unusual items that reduced income from continuing operations by $14.6 million
and $30.9 million, respectively. These unusual items represented accounting,
legal and other associated fees incurred in connection with the previously
reported restatement of the HBOC's historical (pre-acquisition) financial
statements and resulting litigation, severance and other costs associated with
former employees and other acquisition-related costs.
Income from continuing operations (before the items discussed above in the
current and prior year periods) decreased to $61.4 million from $63.9 million
in the second quarter and to $125.0 million from $143.1 million for the six
months ended September 30, 2000 and 1999, respectively, reflecting declines in
operating profits in the iMcKesson and Health Care Information Technology
segments which were partially offset by an increase in the Health Care Supply
Management segment's operating profit.
The effective income tax rate applicable to continuing operations for the
six months ended September 30, 2000 differed from the effective income tax
rate for the comparable prior year period primarily due to an increase in
nondeductible amortization of goodwill as the result of acquisitions made in
the second half of fiscal 2000 and in fiscal 2001.
The discussion of the financial results that follows focuses on the results
from continuing operations excluding unusual items as management believes such
discussion is the most informative representation of recurring, non-
transactional related operating results.
Health Care Supply Management
The Health Care Supply Management segment includes the operations of the
Company's U.S. pharmaceutical distribution and services businesses, its
international pharmaceutical operations (Canada and Mexico), and its
medical/surgical distribution and services business. This segment accounted
for 97% of consolidated revenues for the three and six-month periods ended
September 30, 2000.
17
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Pharmaceutical Distribution & Services revenues increased by 12% to $8.9
billion in the quarter and 13% to $17.6 billion in the six-month period. This
increase reflects growth during the quarter and first half in the U.S. direct
delivery business of 12% and 15%, an increase in U.S. sales to customers'
warehouses of 11% and 9% and an increase in international revenues of 19% and
16%, respectively.
Medical/Surgical Distribution & Services revenues increased 3% to $694.8
million in the quarter and 8% to $1,434.3 million in the six-month period. The
six months ended September 30, 2000 contained five more selling days than the
prior year's first half as a result of that business' fiscal calendar.
Excluding the additional selling days, revenues increased by 5% in the first
half.
Health Care Supply Management operating profit before unusual items
increased $23.8 million to $151.2 million in the quarter and $47.5 million to
$300.3 million for the six months. Operating profit before unusual items as a
percent of revenues (calculated excluding sales to customers' warehouses)
increased 12 basis points to 2.09% in the second quarter and 8 basis points to
2.09% for the six months compared to the respective prior year margins. The
increase in the operating margin primarily reflects margin expansion in the
U.S. pharmaceutical distribution and services business due to gross margin
initiatives and productivity improvements in both back-office and field
operations. The increase was offset in part by a lower operating profit margin
in the medical/surgical distribution and services business due primarily to
changes in the customer mix and additional accounts receivable reserves.
Health Care Information Technology
The Health Care Information Technology segment includes revenues from
software sales, services business and hardware sales. This segment accounted
for 2% of consolidated revenues for the three and six months ended September
30, 2000. Prior year's segment information reflects the transfer of certain
business units from this segment into the iMcKesson segment. Revenues declined
17% to $195.8 million compared to $236.7 million in the prior year second
quarter and declined 17% to $395.2 million in the six-month period from $478.9
million in the respective prior year period. Software revenues increased 1% to
$27.0 million from $26.8 million in the second quarter and declined 4% to
$57.2 million from $59.6 million in the half. In the current year quarter and
half, contracts were entered into which require the recognition of revenue
over an extended period under the percentage of completion method. Software
amounts included in these contracts that are expected to be recognized as
revenue in future periods amounted to $14.5 million in the quarter and $22.8
million in the half. Services revenues of $151.1 million declined 17% from the
prior year's second quarter of $183.0 million, and 18% to $303.7 million from
$372.6 million for the respective prior year six month period, reflecting the
lagging impact of reduced prior period software sales on implementation
services revenues. Hardware revenues declined 34% to $17.7 million from $26.9
million in the quarter and 27% to $34.3 million from $46.7 million for the
six-month period reflecting the lower level of software sales and lower unit
prices.
Operating profit decreased by $6.3 million to $10.3 million in the quarter
ended September 30, 2000 from $16.6 million in the prior year quarter and by
$37.5 million to $18.5 million from $56.0 million for the six month period.
The operating profit margin declined to 5.26% and 4.68% in the quarter and six
months ended September 30, 2000 compared to 7.01% and 11.69% for the
comparable prior year periods. The decline is primarily the result of lower
services revenues and an increased level of expenses to enhance customer
support and future product introductions.
iMcKesson
The iMcKesson segment became a reportable segment in the first quarter of
fiscal 2001. Prior year segment information includes revenues and operating
profit of certain business units which were previously reported in the Health
Care Supply Management and Health Care Information Technology segments.
Revenues for
18
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
iMcKesson were $69.4 million in the quarter and $137.9 million for the six
months ended September 30, 2000, representing a 9% decline from revenues of
$76.0 million in the quarter and $151.2 million for the six months ended
September 30, 1999. iMcKesson incurred an operating loss before unusual items
of $10.1 million and $16.1 million in the quarter and six months ended
September 30, 2000, respectively, compared to operating profit of $12.9
million and $29.6 million for the respective prior year periods. The fiscal
2001 second quarter and first half results include the operating losses and
goodwill amortization of Abaton.com which was acquired in November 1999, and
MediVation, Inc. which was acquired in July 2000, expenses related to the
formation of the iMcKesson organization and management team, and technology
licensing agreements entered into in late fiscal 2000. Also, iMcKesson had
lower revenues and operating profit reflecting the loss of a number of triage
customers in the former Access Health business and an extended revenue
recognition cycle for certain software products.
Other
Corporate expense before unusual items declined from $26.3 million to $21.2
million in the second quarter of fiscal 2001 and declined from $47.5 million
to $40.9 million in the six months ended September 30, 2000 from the
comparable prior year periods. The decline in Corporate expenses primarily
reflects lower costs resulting from a reduced accounts receivable sales
program.
Discontinued Operations
Income from discontinued operations was $10.0 million in the prior year
first quarter and $17.2 million in the six months ended September 30, 1999.
These amounts represent the results from the Water Products business, which
was sold in the fourth quarter of fiscal 2000.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $372.5 million from $548.9 million
at March 31, 2000 to $176.4 million at September 30, 2000. During the six
months ended September 30, 2000, net cash used by operating activities was
$160.5 million, reflecting the payment of taxes related to the gain on the
February 2000 sale of the Company's Water Products business. The improvement
in cash flows from operations compared to the prior year was primarily the
result of working capital initiatives in the Health Care Supply Management
segment.
Cash and marketable securities available for sale were $211.2 million at
September 30, 2000 compared to $605.9 million at March 31, 2000. The September
30, 2000 marketable securities balance includes $10.0 million that is
currently restricted and held in trust as exchange property in connection with
the Company's outstanding exchangeable debentures.
Interest expense, net of corporate interest income, increased to $27.0
million from $24.9 million in the prior year second quarter and decreased to
$51.8 million from $54.4 million in the prior year six months ended September
30, 1999. The decrease from the prior year first half is due to a decline in
short-term borrowings reflecting the receipt of cash proceeds from the
February 2000 sale of the Water Products business.
Stockholders' equity was $3.7 billion at September 30, 2000, and the net
debt-to-capital ratio was 21% up from 15% at March 31, 2000. The net debt-to-
capital ratio for both periods was computed by reducing the outstanding debt
amount by the cash and marketable securities balances.
Common shares outstanding increased to 283.9 million at September 30, 2000
from 283.4 million at March 31, 2000 due primarily to shares issued under
employee benefit plans and in the acquisition of MediVation, Inc., partially
offset by the effect of the 1.0 million shares repurchased as part of the
Company's
19
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Concluded)
previously announced $250 million share repurchase program. Average diluted
shares increased to 292.0 million in the second quarter of fiscal 2001 from
289.4 million in the comparable prior year period due primarily to an increase
in the common shares outstanding.
In October 2000, the Company renewed its 364-day revolving credit agreement
which allows for borrowings up to $825 million under terms substantially
similar to those previously in place, except that a 364-day term out option
was reinstated.
Additional Factors That May Affect Future Results
Reference is made to the Additional Factors That May Affect the Company's
Future Results described in the Company's most recent Annual Report on Form
10-K for its fiscal year ended March 31, 2000. The Company notes that certain
of such factors relating to the Company's Health Care Information Technology
segment are also applicable to the new iMcKesson business segment inasmuch as
that segment includes certain assets which were previously part of the Health
Care Information Technology segment.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company believes there has been no material change in its exposure to
risks associated with fluctuations in interest and foreign currency exchange
rates discussed in the Company's 2000 Annual Report on Form 10-K.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Financial Note 11 to the Company's unaudited condensed consolidated
financial statements contained in Part I of this Quarterly Report on Form 10-Q
is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
McKESSON HBOC, INC.
Dated: November 6, 2000
/s/ William R. Graber
By __________________________________
William R. Graber
Senior Vice President and
Chief Financial Officer
/s/ Heidi E. Yodowitz
By __________________________________
Heidi E. Yodowitz
Senior Vice President and
Controller
22
