<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 December 31, 1999
[_] 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 (IRS Employer Identification No.)
or organization)
One Post Street, San Francisco, California 94104
(Address of principal executive offices) (Zip Code)
(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.
<CAPTION>
Class Outstanding at December 31, 1999
----- --------------------------------
<C> <S>
Common stock, $.01 par value 281,745,630 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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
December 31, 1999 and March 31, 1999............................ 3-4
Statements of Consolidated Income
Three and nine month periods ended December 31, 1999 and 1998... 5
Statements of Consolidated Cash Flows
Nine month periods ended December 31, 1999 and 1998............. 6
Financial Notes.................................................. 7-14
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Review................................................. 15-23
3. Quantitative and Qualitative Disclosures about Market Risk....... 23
PART II. OTHER INFORMATION
1. Legal Proceedings................................................ 24
6. Exhibits and Reports on Form 8-K................................. 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(in millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 204.8 $ 233.7
Marketable securities (Notes 3 and 7)................. 195.4 28.2
Receivables........................................... 2,730.1 2,552.0
Inventories........................................... 4,060.0 3,522.5
Prepaid expenses...................................... 136.2 116.4
--------- --------
Total............................................... 7,326.5 6,452.8
Property, Plant and Equipment
Land.................................................. 33.0 37.0
Buildings, machinery and equipment.................... 1,103.7 1,029.1
--------- --------
Total............................................... 1,136.7 1,066.1
Accumulated depreciation.............................. (587.5) (536.5)
--------- --------
Net................................................. 549.2 529.6
Capitalized Software.................................... 117.5 106.9
Notes Receivable........................................ 134.9 73.0
Goodwill and Other Intangibles.......................... 1,283.9 1,200.6
Net Assets of Discontinued Operations (Note 2).......... 228.1 179.4
Other Assets (Note 7)................................... 565.8 477.7
--------- --------
Total Assets........................................ $10,205.9 $9,020.0
========= ========
</TABLE>
(Continued)
See Financial Notes.
3
<PAGE>
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(in millions, except
par value)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts payable........................................ $ 257.7 $ 417.7
Accounts payable--trade............................... 3,922.2 3,131.7
Deferred revenue...................................... 322.1 408.6
Short-term borrowings................................. 249.3 16.7
Current portion of long-term debt..................... 191.7 195.3
Salaries and wages.................................... 89.1 93.0
Taxes................................................. 209.8 90.8
Interest and dividends................................ 51.1 34.7
Other................................................. 353.0 356.3
--------- --------
Total............................................... 5,646.0 4,744.8
Postretirement Obligations and Other Noncurrent
Liabilities............................................ 277.5 258.6
Long-Term Debt (Note 3)................................. 914.8 939.2
McKesson HBOC-Obligated Mandatorily Redeemable
Convertible Preferred Securities of Subsidiary Grantor
Trust Whose Sole Assets are Junior Subordinated
Debentures of McKesson HBOC (Note 4)................... 195.7 195.6
Stockholders' Equity
Common stock (400.0 shares authorized, 282.2 issued as
of December 31, 1999, and 281.1 issued as of March
31, 1999; par value $0.01)........................... 2.8 2.8
Additional paid-in capital............................ 1,754.8 1,725.7
Other capital......................................... (99.7) (107.7)
Retained earnings..................................... 1,711.4 1,465.0
Accumulated other comprehensive loss (Note 8)......... (70.7) (57.7)
ESOP notes and guarantees............................. (99.9) (115.5)
Treasury shares, at cost.............................. (26.8) (30.8)
--------- --------
Total Stockholders' Equity.......................... 3,171.9 2,881.8
--------- --------
Total Liabilities and Stockholders' Equity.......... $10,205.9 $9,020.0
========= ========
</TABLE>
(Concluded)
See Financial Notes.
4
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
December 31, December 31,
------------------ --------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(in millions, except per share
amounts)
<S> <C> <C> <C> <C>
REVENUES............................. $9,890.9 $8,287.5 $27,429.1 $21,720.0
-------- -------- --------- ---------
COSTS AND EXPENSES
Cost of sales...................... 9,325.8 7,677.0 25,718.2 20,005.1
Selling, distribution, research and
development and administration
(Notes 5 and 7)................... 538.8 499.5 1,440.1 1,410.7
Interest........................... 28.9 31.4 87.1 89.2
-------- -------- --------- ---------
Total............................ 9,893.5 8,207.9 27,245.4 21,505.0
-------- -------- --------- ---------
GAIN ON EQUITY INVESTMENTS (Note 7).. 263.2 -- 263.2 --
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUST.................... 260.6 79.6 446.9 215.0
INCOME TAXES......................... (98.5) (33.0) (169.5) (87.7)
DIVIDENDS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUST.................... (1.5) (1.5) (4.6) (4.6)
-------- -------- --------- ---------
INCOME AFTER TAXES
Continuing operations.............. 160.6 45.1 272.8 122.7
Discontinued operations (Note 2)... 6.2 5.6 23.4 23.4
-------- -------- --------- ---------
Net Income....................... $ 166.8 $ 50.7 $ 296.2 $ 146.1
======== ======== ========= =========
EARNINGS PER COMMON SHARE (Note 9)
Diluted:
Continuing operations.............. $ 0.56 $ 0.16 $ 0.96 $ 0.44
Discontinued operations............ 0.02 0.02 0.08 0.08
-------- -------- --------- ---------
Total............................ $ 0.58 $ 0.18 $ 1.04 $ 0.52
======== ======== ========= =========
Basic:
Continuing operations.............. $ 0.57 $ 0.16 $ 0.97 $ 0.45
Discontinued operations............ 0.02 0.02 0.08 0.08
-------- -------- --------- ---------
Total............................ $ 0.59 $ 0.18 $ 1.05 $ 0.53
======== ======== ========= =========
DIVIDENDS PER COMMON SHARE........... $ 0.06 $ 0.125 $ 0.18 $ 0.375
SHARES ON WHICH EARNINGS PER COMMON
SHARE WERE BASED
Diluted............................ 288.8 289.7 289.8 289.3
Basic.............................. 281.4 275.2 281.1 274.1
</TABLE>
See Financial Notes.
5
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------
1999 1998
-------- --------
Operating Activities (in millions)
<S> <C> <C>
Income from continuing operations......................... $ 272.8 $ 122.7
Adjustments to reconcile to net cash provided (used) by
operating activities:
Depreciation............................................. 86.3 76.8
Amortization............................................. 73.2 54.8
Provision for bad debts.................................. 92.3 54.9
Deferred taxes on income................................. (19.7) 37.9
Other non-cash items..................................... (119.2) 109.4
-------- --------
Total................................................... 385.7 456.5
-------- --------
Effects of changes in:
Receivables.............................................. (314.5) (435.3)
Inventories.............................................. (538.8) (666.0)
Accounts and drafts payable.............................. 583.9 655.0
Taxes.................................................... 102.6 30.0
Deferred revenue......................................... (32.7) (48.9)
Other.................................................... 2.3 (66.2)
-------- --------
Total................................................... (197.2) (531.4)
-------- --------
Net cash provided (used) by continuing operations....... 188.5 (74.9)
Discontinued operations................................... (25.3) (23.0)
-------- --------
Net cash provided (used) by operating activities........ 163.2 (97.9)
-------- --------
Investing Activities
Purchases of marketable securities........................ (161.7) (33.8)
Maturities of marketable securities....................... 157.0 109.3
Property acquisitions..................................... (106.1) (140.7)
Properties sold........................................... 8.5 17.5
Acquisitions of businesses, less cash and short-term
investments acquired..................................... (123.7) (275.3)
Other..................................................... (153.3) (183.9)
-------- --------
Net cash used by investing activities................... (379.3) (506.9)
-------- --------
Financing Activities
Proceeds from issuance of debt............................ 772.3 948.4
Repayment of debt......................................... (564.7) (275.0)
Dividends paid on preferred securities of subsidiary
trust.................................................... (7.5) (7.5)
Capital stock transactions
Issuances................................................ 24.8 149.9
ESOP notes and guarantees................................ 15.6 0.1
Dividends paid........................................... (50.6) (59.4)
Other.................................................... (2.7) (1.7)
-------- --------
Net cash provided by financing activities............... 187.2 754.8
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... (28.9) 150.0
-------- --------
Cash and Cash Equivalents at beginning of period........... 233.7 564.4
-------- --------
Cash and Cash Equivalents at end of period................. $ 204.8 $ 714.4
======== ========
</TABLE>
See Financial Notes
6
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES
(unaudited)
1. Interim Financial Statements
In the opinion of McKesson HBOC, Inc. (the "Company"), these unaudited
condensed consolidated financial statements include all adjustments necessary
for a fair presentation of its financial position as of December 31, 1999, the
results of its operations for the three and nine months ended December 31,
1999 and 1998 and its cash flows for the nine months ended December 31, 1999
and 1998.
The results of operations for the three and nine months ended December 31,
1999 and 1998 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 1999 Consolidated Financial Statements which
have previously been filed with the Securities and Exchange Commission (the
"SEC").
2. Acquisitions and Divestitures
On November 2, 1999, the Company completed the acquisition of Abaton.com, a
provider of internet-based clinical applications for use by physician
practices, pharmacy benefit managers, benefit payors, laboratories and
pharmacies, for approximately $95 million in cash and the assumption of
approximately $8 million of employee stock incentives. Goodwill and other
intangibles related to the acquisition of $101 million are being amortized on
a straight-line basis over periods ranging from three to seven years. A charge
of $1.5 million was recorded in the third quarter to write off the portion of
the purchase price of Abaton.com 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 which utilized a discounted cash flow methodology by
product line to assist in valuing in-process and existing technologies as of
the acquisition date.
On January 11, 2000, the Company announced it had signed a definitive
agreement to sell its wholly-owned subsidiary, McKesson Water Products
Company, (the "Water Products Business"), to Groupe DANONE for $1.1 billion in
cash. The sale is contingent upon regulatory approval and is expected to be
completed in the first calendar quarter of 2000. The net assets and results of
operations of the Water Products Business have been reclassified as a
discontinued operation. Prior year amounts have been restated.
The net assets of discontinued operations at December 31, 1999 and March
31, 1999 were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(in millions)
<S> <C> <C>
Total assets........................................ $281.9 $243.7
Total liabilities................................... (53.8) (64.3)
------ ------
Net assets.......................................... $228.1 $179.4
====== ======
</TABLE>
Assets of discontinued operations consist primarily of receivables,
inventory, property, plant and equipment and goodwill of the Water Products
Business. Liabilities of discontinued operations consist primarily of accounts
payable and other accrued liabilities of the Water Products Business.
7
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
The results of discontinued operations were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------
1999 1998
-------- --------
(in millions)
<S> <C> <C>
Revenues............................................... $ 307.6 $ 267.2
======== ========
Income from discontinued operations before income
taxes................................................. $ 39.5 $ 38.0
Income taxes........................................... 16.1 14.6
-------- --------
Income from discontinued operations.................... $ 23.4 $ 23.4
======== ========
</TABLE>
3. Marketable Securities
The December 31, 1999 marketable securities balance includes $19.8 million
held in trust as exchange property for the Company's $32.4 million principal
amount of 4.5% exchangeable subordinated debentures which remain outstanding.
4. 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 issuances were invested by
the trust in $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 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
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.
8
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
5. Charges in Continuing Operations
On January 12, 1999, McKesson Corporation ("McKesson") completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common stock
for all of the issued and outstanding common stock of HBOC. The transaction
was accounted for as a pooling of interests. In April 1999, the Company
discovered improper accounting practices at HBOC (see Financial Note 11). In
July, the Audit Committee of the Company's Board of Directors completed an
investigation into such matters (the "Investigation"), which resulted in the
restatement of the Company's historical consolidated financial statements
related to HBOC (pre-merger) in fiscal 1999, 1998, and 1997.
In fiscal 2000, the Company incurred costs in connection with the
investigation and the resulting restatement of the historical consolidated
financial statements. In the quarter and nine months ended December 31, 1999,
the Company recorded charges totaling $2.4 million and $17.4 million,
respectively, for accounting and legal fees and other costs incurred in
connection with the restatement of prior years' financial results and $0.7
million and $3.6 million, respectively, in acquisition-related costs. In
addition, the Company recorded charges of $32.3 million for severance and
other costs associated with former employees in the nine months ended December
31, 1999.
In the quarter and nine months ended December 31, 1999, the Health Care
Supply Management segment incurred charges for receivable reserves and asset
impairments totaling $30.3 million related primarily to a prior year
implementation of a contract system. This charge was partially offset by a
$5.7 million net reduction in restructuring reserves for prior year plans (see
Financial Note 6). Also, during the quarter and nine months, the Health Care
Information Technology segment recorded gains totaling $263.2 million on the
sale of equity investments and exchange of WebMD shares for Healtheon/WebMD
shares, that was recognized upon the completion of the merger of the two
companies in November 1999. These gains were offset, in part, by a charge of
$68.5 million for a change in estimate of requirements for accounts receivable
and customer reserves and $9.8 million of expense related to the donation of
Healtheon/WebMD shares to the McKesson HBOC Foundation. In addition, $2.6
million of prior year reserves for acquisition-related activities were
reversed due to a change in requirements.
Prior year results include charges associated with acquisitions in the
Health Care Supply Management and Health Care Information Technology segments
of $26.5 million and $33.8 million, respectively, in the quarter and $100.2
million and $41.4 million, respectively, in the nine months ended December 31,
1998. These charges include transaction costs, employee benefit change in
control provisions, employee severance, restructuring, integration and system
installation costs associated with acquisition-related activities. The nine
months ended December 31, 1998 also includes charges of $4.9 million for the
terminated merger with AmeriSource Corporation.
6. Restructuring and Asset Impairments
In fiscal 1999, the Company identified six pharmaceutical distribution
centers and several smaller medical/surgical distribution centers in the
Health Care Supply Management segment for closure, of which one pharmaceutical
distribution center was shut down by fiscal year end. During the quarter ended
December 31, 1999, management reassessed these plans, resulting in the
decision to retain one of the six pharmaceutical distribution centers
identified for closure in fiscal 1999 and to reduce the number of
medical/surgical distribution center closures. Also during the quarter, the
Company announced and completed the closure of one additional pharmaceutical
distribution center. These changes resulted in the net reduction of $5.7
million in restructuring reserves.
During the nine months ended December 31, 1999, the Company completed the
closures of three pharmaceutical distribution centers, including the
additional distribution center mentioned above. This resulted
9
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
in the termination of approximately 100 employees and the payment of $1.0
million in severance. In addition, the realignment of the sales organization
was completed and certain back office functions were eliminated resulting in
the termination of approximately 90 employees and the payment of $2.2 million
in severance. Also, the Company completed the closures of two medical/surgical
distribution centers and paid $0.8 million in severance to approximately 90
employees who were terminated in fiscal 1999 and 2000 related to the
elimination of duplicate functions. The Company plans to continue the closure
activities associated with the pharmaceutical distribution centers and other
medical/surgical distribution centers throughout fiscal 2001. At December 31,
1999, assets associated with the restructuring plans, primarily distribution
center buildings and improvements, totaled $10.4 million, net of asset
valuation reserves. In the Health Care Information Technology segment,
approximately 550 employees were terminated in fiscal 1999; $9.9 million of
severance was paid in the nine month period ended December 31, 1999, to
approximately 330 of the employees who were terminated in fiscal 1999.
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,
1999 to December 31, 1999, by operating segment follows:
<TABLE>
<CAPTION>
Health Care
Health Care Information
Supply Management Technology
--------------------------------- ---------------------
Asset Other Exit- Other Exit-
Severance Impairments Related Severance Related Total
--------- ----------- ----------- --------- ----------- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1999................... $10.6 $ 35.0 $19.0 $12.2 $ 0.6 $ 77.4
Adjustments............. (0.8) 1.7 (6.6) (5.7)
Severance amounts paid
during the period...... (4.0) (9.9) (13.9)
Asset dispositions...... (10.0) (10.0)
Other costs paid during
the period............. (2.0) (0.3) (2.3)
----- ------ ----- ----- ----- ------
Balance, December 31,
1999................... $ 5.8 $ 26.7 $10.4 $ 2.3 $ 0.3 $ 45.5
===== ====== ===== ===== ===== ======
</TABLE>
The remaining balances at December 31, 1999 relate primarily to charges
recorded in fiscal 1999, with the exception of $6.9 million of asset valuation
reserves and $1.0 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.
7. Gain on Equity Investments
As a result of the November 11, 1999 merger between Healtheon Corporation
and WebMD, Inc., the Company received 4.5 million shares of Healtheon/WebMD
common stock and 8.4 million warrants to purchase Healtheon/WebMD common stock
in exchange for its shares and warrants of WebMD. The Company recorded the
Healtheon/WebMD shares received at the November 11, 1999 closing market price
and the warrants at fair value using the Black-Scholes valuation method. In
December 1999, the Company sold 2.0 million Healtheon/WebMD common shares and
donated 250,000 Healtheon/WebMD common shares to the McKesson HBOC Foundation.
The fair value of the Company's remaining investment in Healtheon/WebMD common
stock, which has been classified as a trading security under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," totaled $86.9 million at
December 31, 1999, based on a closing price of $37 1/2. The Company sold its
remaining Healtheon/WebMD common shares in January 2000. The fair value of the
Company's warrants to purchase Healtheon/WebMD common stock, which have been
classified as available-for-sale under SFAS 115 and included in other assets,
was $75.5 million at December 31, 1999. The warrants have exercise prices
ranging from $11.14 to $50.86 and
10
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
expire on September 1, 2004. As a result of the above transactions, during the
quarter ended December 31, 1999, the Company recognized gains related to the
investment in Healtheon/WebMD of $242.9 million, of which $74.5 million was
realized. In addition, other equity investments were sold during the quarter
ended December 31, 1999, which resulted in a gain of $20.3 million, and an
expense of $9.8 million was recorded in selling, distribution, research and
development and administrative expenses to reflect the donation of the
Healtheon/WebMD shares to the McKesson HBOC Foundation.
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 classified as available for sale which are recorded directly to
stockholders' equity and foreign currency translations. Total comprehensive
income for the three and nine months ended December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Net income........................ $ 166.8 $ 50.7 $ 296.2 $ 146.1
Unrealized gain (loss) on
marketable securities............ (10.0) -- (9.9) 0.1
Foreign currency translation
adjustments...................... (1.6) (2.3) (3.1) (5.3)
--------- -------- -------- --------
$ 155.2 $ 48.4 $ 283.2 $ 140.9
========= ======== ======== ========
</TABLE>
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
-----------------------------------------------
December 31, 1999 December 31, 1998
----------------------- -----------------------
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................... $160.6 281.4 $0.57 $45.1 275.2 $0.16
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 1.9 -- 8.7
Trust convertible preferred
securities................... 1.5 5.4 1.5 5.4
Restricted stock.............. -- 0.1 -- 0.4
------ ----- ----- -----
Diluted EPS
Income available to common
stockholders plus assumed
conversions.................. $162.1 288.8 $0.56 $46.6 289.7 $0.16
====== ===== ===== ===== ===== =====
</TABLE>
11
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------
December 31, 1999 December 31, 1998
----------------------- -----------------------
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................... $272.8 281.1 $0.97 $122.7 274.1 $0.45
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 3.2 -- 9.4
Trust convertible preferred
securities................... 4.6 5.4 4.6 5.4
Restricted stock.............. -- 0.1 -- 0.4
------ ----- ------ -----
Diluted EPS
Income available to common
stockholders plus assumed
conversions.................. $277.4 289.8 $0.96 $127.3 289.3 $0.44
====== ===== ===== ====== ===== =====
</TABLE>
10. New Accounting Pronouncements
The Company adopted Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" as of
April, 1, 1998. The impact of the adoption was not material to the Company's
consolidated financial position, results of operations or cash flows.
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 Company is currently evaluating what impact, if any, SFAS No. 133
may have on its consolidated financial statements.
11. Litigation
In its Annual Report on Form 10-K/A for fiscal year ended March 31, 1999
and its Form 10-Q filed November 15, 1999, the Company reported on numerous
legal proceedings arising out of the Company's announcement on April 28, 1999
regarding accounting improprieties at HBOC.
On November 2, 1999, the United States District Court for the Northern
District of California issued an order consolidating fifty-three class actions
alleging violations of the federal securities laws into one action entitled In
re McKesson HBOC, Inc. Securities Litigation (the "Consolidated Action"). By
order dated December 23, 1999, the court appointed the New York State Common
Retirement Fund as Lead Plaintiff and designated two law firms as Lead
Counsel. The court's order of December 23, 1999, also consolidated an
individual action into the Consolidated Action. By stipulation, Lead Plaintiff
has until February 25, 2000, to file a consolidated complaint, after which the
Company will be required to respond. In addition, an action entitled Chang v.
McKesson HBOC, Inc. et al., (No. C-99-5075 (CAL)), an action alleging
violations of the Employee Retirement Income Security Act, was filed in the
Northern District and has been coordinated with the Consolidated Action.
12
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
In American Healthcare Fund II, L.P., et al, v. HBO & Company and McKesson
HBOC, Inc. (No. 99-CV-1762) (Col. St. Ct.), the Company has filed a motion to
dismiss and the plaintiffs have filed a motion for partial summary judgment,
both of which are currently pending before the court.
On December 9, 1999, an action entitled Adler v. McKesson HBOC, Inc. et al.
(Ga. Sup. Ct. No. 99-C-7980-3) ("Adler") was filed in Georgia Superior Court
for Gwinnett County. Plaintiff in Adler, a purported HBOC shareholder, asserts
a claim for common law fraud arising out of McKesson HBOC's need to restate
its financial statements. On February 8, 1999, the Company answered the
complaint in Adler, filed a motion to stay the case in favor of the
Consolidated Action, and filed a motion to dismiss or in the alternative to
require that HBOC be added as a party.
In Kelly v. McKesson HBOC, Inc., et al. (No. 99C-09-265 WCC) (Del. Supr.
Ct.), the Company has filed a motion to dismiss and plaintiffs have filed a
motion for partial summary judgment, both of which are pending before the
court. In two other Delaware actions, Carroll v. McKesson HBOC, Inc., et al.
(Del. Chancery Ct. No. 17454) and Kelly v. McKesson HBOC, Inc. et al. (Del.
Chancery Ct. No. 17282 NC), plaintiffs have filed notices of dismissal without
prejudice.
As previously reported, the United States Attorney's Office for the
Northern District of California and the San Francisco District Office of the
SEC have also commenced investigations in connection with the matters relating
to the restatement of previously reported amounts for HBOC described in
Financial Note 5. These investigations are ongoing.
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.
Except for the matters discussed above, there have not been any significant
changes with respect to the litigation matters described in Financial Note 19
to the Company's Annual Report on Form 10-K/A for the fiscal year ended March
31, 1999 and in Financial Note 10 to the Form 10-Q filed on November 15, 1999.
13
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Concluded)
(unaudited)
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 is income before interest expense, corporate interest
income, taxes on income and allocation of certain corporate revenues and
expenses. During the third quarter, the Company added the new e-Health
business segment following its acquisition of Abaton.com (see Financial Note
2). There have been no other changes in the segments reported or the basis of
measurement of segment profit or loss from that which was reported in the
Company's 1999 Annual Report on Form 10-K/A, except for the reclassification
of the Water Products segment as a discontinued operation (see Financial Note
2). Financial information relating to the Company's continuing operations
reportable segments for the three and nine months ended December 31, 1999 and
1998, and as of December 31, 1999 and March 31, 1999, is presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Revenues
Health Care Supply Management.... $ 9,594.1 $ 7,897.8 $26,497.5 $20,555.5
Health Care Information
Technology...................... 292.8 380.8 921.9 1,135.5
e-Health......................... 0.2 -- 0.2 --
Corporate........................ 3.8 8.9 9.5 29.0
--------- --------- --------- ---------
Total.......................... $ 9,890.9 $ 8,287.5 $27,429.1 $21,720.0
========= ========= ========= =========
Operating profit
Health Care Supply Management.... $ 112.7 $ 103.8 $ 365.1 $ 241.8
Health Care Information
Technology...................... 213.8 13.3 299.8 73.9
e-Health......................... (6.4) -- (6.4) --
--------- --------- --------- ---------
Total.......................... 320.1 117.1 658.5 315.7
Interest--net.................... (27.1) (23.9) (81.5) (63.8)
Corporate and other.............. (32.4) (13.6) (130.1) (36.9)
--------- --------- --------- ---------
Income from continuing
operations before income taxes
and dividends on preferred
securities of subsidiary
trust......................... $ 260.6 $ 79.6 $ 446.9 $ 215.0
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(in millions)
<S> <C> <C>
Segment assets
Health Care Supply Management......................... $ 7,959.5 $6,889.7
Health Care Information Technology.................... 1,375.9 1,357.3
e-Health.............................................. 102.9 --
Corporate (including net assets of discontinued
operations).......................................... 767.6 773.0
--------- --------
Total............................................... $10,205.9 $9,020.0
========= ========
</TABLE>
14
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW
Segment Results
The revenues and operating profits of the Company by business segment are
as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Three Months Ended December 31, December 31,
--------------------------------------- ----------------------------------
1999 1998 % Chg. 1999 1998 % Chg.
----------- ----------- ------- --------- --------- ------
REVENUES (dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Health Care Supply
Management
Pharmaceutical
Distribution &
Services
U.S. Health Care(1)... $ 8,278.9 $ 6,778.5 22.1 $22,751.4 $17,431.0 30.5
International......... 610.6 489.1 24.8 1,713.8 1,483.7 15.5
----------- ----------- --------- ---------
Total Pharmaceutical
Distribution &
Services............. 8,889.5 7,267.6 22.3 24,465.2 18,914.7 29.3
Medical/Surgical
Distribution &
Services.............. 704.6 630.2 11.8 2,032.3 1,640.8 23.9
----------- ----------- --------- ---------
Total Health Care
Supply Management.... 9,594.1 7,897.8 21.5 26,497.5 20,555.5 28.9
----------- ----------- --------- ---------
Health Care Information
Technology
Software............... 53.6 79.9 (32.9) 153.4 238.5 (35.7)
Services............... 217.7 248.7 (12.5) 699.3 728.9 (4.1)
Hardware............... 21.5 52.2 (58.8) 69.2 168.1 (58.8)
----------- ----------- --------- ---------
Total Health Care
Information
Technology........... 292.8 380.8 (23.1) 921.9 1,135.5 (18.8)
----------- ----------- --------- ---------
e-Health................ 0.2 -- 0.2 --
Corporate............... 3.8 8.9 9.5 29.0
----------- ----------- --------- ---------
Total................... $ 9,890.9 $ 8,287.5 19.3 $27,429.1 $21,720.0 26.3
=========== =========== ========= =========
OPERATING PROFIT
Health Care Supply
Management............. $ 112.7 (3) $ 103.8 (7) $ 365.1 (3) $ 241.8 (7)
Health Care Information
Technology............. 213.8 (4) 13.3 (8) 299.8 (4) 73.9 (8)
e-Health................ (6.4)(5) -- (6.4)(5) --
----------- ----------- --------- ---------
Total................... 320.1 117.1 658.5 315.7
Interest--net(2)........ (27.1) (23.9) (81.5) (63.8)
Corporate and other..... (32.4)(6) (13.6) (130.1)(6) (36.9)
----------- ----------- --------- ---------
Income from continuing
operations before
income taxes and
dividends on preferred
securities of
subsidiary trust....... $ 260.6 $ 79.6 $ 446.9 $ 215.0
=========== =========== ========= =========
</TABLE>
- -------
(1) Includes sales to customers' warehouses of $2,346.2 million and $2,206.0
million in the quarter and $6,647.3 million and $4,806.9 million in the
nine months ended December 31, 1999 and 1998, respectively.
(2) Interest expense is shown net of corporate interest income.
(3) Includes charges of $30.3 million for receivable reserves and asset
impairments related primarily to a prior year implementation of a contract
system, partially offset by a $5.7 million net reduction in prior year
restructuring reserves.
(4) Includes net gains totaling $256.0 million primarily on the sale of equity
investments and a gain on the exchange of WebMD shares for Healtheon/WebMD
shares that was recognized upon the completion of the merger of the two
companies in November 1999, offset, in part, by a charge of $68.5 million
for a change in estimate of requirements for accounts receivable and
customer reserves.
(5) Includes a charge of $1.5 million for the write-off of purchased in-
process technology associated with the November 1999 acquisition of
Abaton.com.
(6) Includes accounting and legal fees and other costs totaling $2.4 million
and $17.4 million incurred in the quarter and nine months ended
December 31, 1999 in connection with the restatement of prior year
financial results. Also includes $0.7 million and $3.6 million incurred in
the quarter and nine months ended December 31, 1999 in acquisition-related
costs. In addition, the nine months ended December 31, 1999 includes $32.3
million in severance and other costs associated with former employees.
(7) Includes charges of $26.5 million and $100.2 million in the quarter and
nine months ended December 31, 1998 associated with acquisitions including
transaction costs, employee benefit change in control provisions,
restructuring, integration and system installation costs associated with
acquisition-related activities. The nine months ended December 31, 1998
also includes charges of $4.9 million for the terminated merger
transaction with AmeriSource Corporation.
(8) Includes charges associated with acquisitions of $33.8 million and $41.4
million in the quarter and nine months ended December 31, 1998 for
transaction costs, severance and asset impairments.
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 include, but are not limited to the factors discussed
under "Year 2000" and "Additional Factors That May Affect Future Results" of
this "Financial Review."
These and other risks and uncertainties are described herein or in the
Company's other public documents. 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 third quarter increased to $166.8 million, $0.58 per
diluted share, from $50.7 million, $0.18 per diluted share, in the prior year.
For the nine month period, net income increased to $296.2 million, $1.04 per
diluted share, compared to $146.1 million, $0.52 per diluted share, in the
prior year.
The results for the quarter and nine months ended December 31, 1999 include
after-tax special items that increased net income by $100.1 million and $69.2
million, respectively. The special items consist predominantly of a net after-
tax gain of $159.1 million from the exchange, sale and donation of certain
Health Care Information Technology equity investments offset, in part, by
charges in the Company's operating business segments and at Corporate. These
charges totaled $59.0 million and $89.9 million after-tax in the quarter and
nine months ended December 31, 1999 and relate primarily to charges for
receivable-related reserves, asset impairments, severance and other costs
associated with former employees and professional fees associated with the
restatement of prior year financial results.
The prior year's results include after-tax charges of $41.0 million in the
quarter and $96.6 million in the nine months associated with completed and
terminated acquisitions including transaction costs, employee benefit change
in control provisions, employee severance, restructuring, integration and
system installation costs.
The effective income tax rate applicable to continuing operations for the
nine months ended December 31, 1999 differed from the effective income tax
rate for the comparable prior year period primarily due to certain
nondeductible transaction expenses included in the prior year charges noted
above.
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 nine month periods ended
December 31, 1999.
16
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Pharmaceutical Distribution & Services revenues increased by 22% to $8.9
billion in the quarter and 29% to $24.5 billion in the nine months, reflecting
growth in the U.S. direct delivery business of 30% in the quarter and 28% in
nine months, an increase in U.S. sales to customers' warehouses of 6% and 38%,
respectively, and an increase in international revenues of 25% and 16%,
respectively. Internal growth in the U.S. direct delivery business was 30% and
27% in the quarter and nine months, respectively.
Medical/Surgical Distribution & Services revenues increased 12% to $704.6
million in the quarter and 24% to $2,032.3 million in the nine month period.
Fiscal 2000 revenues included $111.5 million in the quarter and $310.1 million
in the nine months from Red Line HealthCare which was acquired in a purchase
transaction in November 1998. The internal growth rate in the Medical/Surgical
Distribution & Services business was 4% in the quarter and 9% in the nine
months.
Health Care Supply Management operating profit increased $8.9 million to
$112.7 million in the quarter and by $123.3 million to $365.1 million in the
nine months. The quarter ended December 31, 1999 included $30.3 million in
charges for receivable reserves and asset impairments related primarily to a
prior year implementation of a contract system, partially offset by a $5.7
million reduction in prior year restructuring reserves. In addition, the
quarter included $0.3 million in additional amortization expense resulting
from a reduction in the goodwill life related to the prior year acquisition of
MedManagement to 20 years from 40 years, effective October 1, 1999.
The prior year's results included charges of $26.5 million in the quarter
and $100.2 million in the nine month period, associated with acquisitions
including transaction costs, employee benefit change in control provisions and
restructuring, integration and system installation costs. The nine months
ended December 31, 1998 also included charges of $4.9 million for the
terminated merger transaction with AmeriSource Corporation. Excluding the
effect of such charges, operating profit for the Health Care Supply Management
segment increased by 5% and 12% in the third quarter and nine months,
respectively. Operating profit as a percent of revenues (calculated excluding
sales to customers' warehouses and the previously discussed charges) declined
40 basis points to 1.89% in the third quarter and 24 basis points to 1.96% in
the nine months, compared to the respective prior year margins. The period-to-
period comparisons were negatively affected by receivable-related charges, the
continued competitive pressures that affected both new and renewed customer
agreements and a shift in the pharmaceutical distribution mix to faster-
growing customer segments. The receivable-related charges in the third quarter
ended December 31, 1999 decreased the operating margin by 17 basis points.
Health Care Information Technology
The Health Care Information Technology segment includes revenues from
software sales, services business and hardware sales. This segment accounted
for 3% of consolidated revenues for the quarter and nine month periods ended
December 31, 1999.
Management believes that the overall decline in revenues of 23% in the
quarter and 19% in the nine month period reflects the continued general,
industry-wide slowdown in sales of health care information technology software
and hardware products resulting from delays in purchasing decisions that are
attributed both to Year 2000 issues and general market conditions. Also
contributing to the decline in the nine months ended December 31, 1999, was
the disruption to this business caused by the completed Audit Committee
Investigation (see Financial Note 5) and Health Care Information Technology
senior management changes made during the current year.
Operating profit increased by $200.5 million to $213.8 million in the
quarter and by $225.9 million to $299.8 million in the nine months. The
current year results included net gains totaling $256.0 million primarily from
the sales and donation of equity investments and a gain on the exchange of the
Company's WebMD shares
17
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
for Healtheon/WebMD shares that was recognized upon the completion of the
merger of the two companies in November 1999. The gains were offset, in part,
by a charge of $68.5 million for a change in estimate of requirements for
receivable and customer reserves associated with resolving customer
satisfaction issues relating to certain product installations. The operating
profit margin, excluding the impact of the items discussed above, declined to
8.98% in the quarter ended December 31, 1999 compared to 12.37% for the prior
year quarter, and increased to 12.18% in the nine month period ended December
31, 1999 compared to 10.15% in the prior year comparable period. The decline
in the quarter is attributed to lower sales of software and services, and
increased expenses to enhance customer support. The favorable comparison in
the nine month period reflects a high level of bad debt provisions and other
expense items in the prior year.
Management is currently conducting an assessment of the entire Health Care
Information Technology product portfolio, which it expects to complete in the
fourth quarter ending March 31, 2000. Following the completion of this
assessment, management expects to streamline its product offerings to
eliminate redundancies, focus on current and anticipated customer needs and
implement new technologies. As a result, the Company expects to record
additional charges associated with impaired assets and related expenses in the
fourth quarter.
Management expects an increased level of contract negotiations and sales
activity as the effects of Year 2000 issues diminish. However, management does
not expect a meaningful rebound in software sales until late in the 2000
calendar year. Revenue may be augmented by the recognition of certain revenues
previously reversed as a result of the Audit Committee Investigation and
resulting restatement (see Financial Note 5).
e-Health
The e-Health segment became a reportable segment in the current quarter
following the completion of the Company's acquisition of Abaton.com in
November 1999 (see Financial Note 2). Revenues for the e-Health segment were
$0.2 million for the quarter. The e-Health segment incurred an operating loss
of $6.4 million in the quarter, which included a $1.5 million charge for the
write-off of purchased in-process technology associated with the acquisition
of Abaton.com.
Other
Corporate expense included pre-tax charges of $3.1 million and $53.3
million in the quarter and nine months ended December 31, 1999, respectively,
consisting of professional fees incurred in connection with the previously
discussed Audit Committee Investigation and resulting restatement of prior
year financial statements, severance benefits and other costs associated with
former employees and other acquisition-related costs. Corporate expense also
reflects higher expenses for certain employee benefits (required to maintain a
desired level of benefits to employees despite a decline in the stock price),
affiliation costs incurred in the nine months, and transaction costs
associated with the Company's committed receivables sales facility.
Discontinued Operations
Income from discontinued operations was $23.4 million in the current year
and prior year nine month periods respectively. These amounts represent the
results from the Company's Water Products Business which was reclassified to
discontinued operations in the current quarter as a result of the signing of a
definitive agreement to sell the Water Products Business to Group DANONE for
$1.1 billion in cash (see Financial Note 2).
Liquidity and Capital Resources
Cash and marketable securities available for sale were $400.2 million at
December 31, 1999 and $261.9 million at March 31, 1999. The December 31, 1999
marketable securities balance includes $19.8 million that is currently
restricted and held in trust as exchange property in connection with the
Company's outstanding exchangeable debentures.
18
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Interest expense, net of corporate interest income, increased to $27.1
million in the third quarter and to $81.5 million in the nine month period
compared to $23.9 million and $63.8 million in the prior year respective
periods. The increases from the prior year reflect increased average working
capital to support strong Health Care Supply Management growth, cash used for
acquisitions and lower cash flows from the Health Care Information Technology
segment.
Stockholders' equity was $3.2 billion at December 31, 1999, and the net
debt-to-capital ratio was 22% at both December 31, 1999 and March 31, 1999.
The net debt-to-capital ratio for both periods was computed by reducing the
outstanding debt amount by the cash and marketable securities balances.
In October 1999, Duff & Phelps, an agency that rates the Company's debt,
lowered the Company's senior debt rating to BBB+ from A-, and reaffirmed the
Company's commercial paper rating of D-2. In December 1999, Standard & Poors
lowered the Company's senior debt rating to BBB from BBB+ and reaffirmed the
commercial paper rating of A-2. The Company's ratings from Moodys of Baa1 for
senior debt and P-2 for commercial paper remain unchanged from those disclosed
in the Company's 1999 Annual Report on Form 10-K. The Company's ratings from
Standard & Poors and Moodys are on negative credit outlook and credit watch,
respectively.
Common shares outstanding increased to 281.7 million at December 31, 1999
from 280.6 million at March 31, 1999 due primarily to shares issued under
employee benefit plans. Average diluted shares declined to 288.8 million in
the third quarter of fiscal 2000 from 289.7 million in the comparable prior
year period due to a lower effect of dilutive securities as a result of the
stock price decline (see Financial Note 9).
YEAR 2000
The "Year 2000 Issue" refers to the fact that some computer hardware,
software and embedded firmware are designed to read and store dates using only
the last two digits of the year. Such applications may fail or cause errors in
the Year 2000.
The Company incurred costs of approximately $16 million in the nine months
ended December 31, 1999, and $14 million in fiscal 1999 for a total project
cost of less than $40 million, associated with modifications to the Company's
existing systems to make them Year 2000 ready, related testing and outside
consulting.
As of February 14, 2000, the Company has not incurred any significant
business disruption as a result of the Year 2000 Issue. However, while no such
occurrence has developed, problems due to the Year 2000 Issue, including those
experienced by the Company's customers, suppliers and other third parties on
which the Company relies, could arise in the future. The Company does not
expect to incur significant additional costs related to the Year 2000 Issue;
however, should such problems arise, the Company could incur additional costs.
The Health Care Information Technology segment may experience an increase
in warranty claims relating to (i) malfunctions in Company products which have
not been upgraded, either because the Company has discontinued support for
such products and has therefore not provided the necessary enhancement or
because the customer has not installed an enhancement made available by the
Company or (ii) malfunctions resulting from Year 2000 problems in third-party
hardware or software used in connection with the operation of Company software
products. Although such warranty claims are generally subject to contractual
liability limitations, the Company is not able to accurately assess or
estimate the possible impact of such claims.
Management believes that the costs of work by customers related to Year
2000 issues have caused some Health Care Information Technology customers and
prospective customers to defer current projects or prospective decisions
regarding the acquisition of new software.
The Company will continue to monitor its own Year 2000 compliance and that
of its customers, supplies and other third parties on which its relies.
19
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following additional factors may affect the Company's future results:
Adverse judgments regarding the restatement of the Company's historical
financial statements may cause it to incur material losses.
Subsequent to the Company's April 28, 1999 restatement announcement, and as
of December 31, 1999, fifty-nine class action lawsuits, three derivative
actions, and seven individual actions have been filed against the Company, and
certain current or former officers and directors of the Company in federal and
state courts (see Financial Note 11, "Litigation"). In addition, the United
States Attorney's Office for the Northern District of California and the San
Francisco District Office of the SEC have also commenced investigations in
connection with the matters relating to the restatement of previously reported
amounts.
The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amount 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 cause it to incur material losses.
The restatement of the Company's earnings may negatively impact the management
of the Company's business.
The effect of the pending litigation and government investigations relating
to the previously announced financial restatement could present challenges in
attracting and retaining quality employees and managers. Such difficulties
could impair the Company's ability to manage the Company's business.
The Company's business could be hindered if it is unable to complete and
integrate acquisitions successfully.
An element of the Company's business is to pursue strategic acquisitions
that either expand or complement its business. The Company routinely reviews
such potential acquisition opportunities and has historically engaged in
numerous acquisitions. Integration of acquisitions, including the merger that
created McKesson HBOC, Inc., involves a number of special risks. Such risks
include:
. the diversion of management's attention to the assimilation of the
operations of businesses the Company has acquired;
. difficulties in the integration of operations and systems and the
realization of potential operating synergies;
. difficulties in the integration of any acquired companies operating in a
different sector of the health care industry;
. delays or difficulties in opening and operating larger distribution
centers in a larger and more complex distribution network;
. the assimilation and retention of the personnel of the acquired
companies;
. challenges in retaining the customers of the combined businesses; and
. potential adverse effects on operating results.
20
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
If the Company is unable to successfully complete and integrate strategic
acquisitions in a timely manner, its business and the Company's growth
strategies could be negatively affected.
The Company's issuance of equity to finance acquisitions could have a
potential dilutive effect on its stock.
The Company anticipates that it will finance acquisitions, at least partly
by incurring debt or by the issuance of additional securities. The use of
equity financing, rather than debt, for acquisitions would dilute the
ownership of the Company's then current stockholders.
Changes in the United States healthcare environment could have a material
negative impact on the Company's revenues.
The Company's products and services are intended to function within the
structure of the healthcare financing and reimbursement system currently being
used in the United States. In recent years, the healthcare industry has
changed significantly in an effort to reduce costs. These changes include
increased use of managed care, cuts in Medicare, consolidation of
pharmaceutical and medical/surgical supply distributors, and the development
of large, sophisticated purchasing groups. The Company expects the healthcare
industry to continue to change significantly in the future. Some of these
changes, such as a reduction in governmental support of healthcare services or
adverse changes in legislation or regulations governing the delivery or
pricing of healthcare services or mandated benefits, may cause healthcare
industry participants to greatly reduce the amount of the Company's products
and services they purchase or the price they are willing to pay for the
Company's products and services. Changes in pharmaceutical manufacturers'
pricing or distribution policies could also significantly reduce the Company's
income. Due to the diverse range of health care supply management and health
care information technology products and services the Company offers, such
changes may adversely impact the Company while not affecting some of the
Company's competitors that offer a more narrow range of products and services.
Substantial defaults in payment or a material reduction in purchases of the
Company's products by some large customers could have a significant negative
impact on the Company's financial condition, results of operations and
liquidity.
The Company's recent strategy has been to build relationships with large
customers that are achieving rapid growth. During the fiscal year ended March
31, 1999, sales to the Company's ten largest customers accounted for
approximately 45% of the Company's sales. A growing portion of the Company's
increased sales in fiscal 2000 has been to a limited number of these large
customers. Consequently, the Company's sales and credit concentration have
significantly increased. Accordingly, any defaults in payment or a material
reduction in purchases of the Company's products by these large customers
could have a significant negative impact on the Company's financial condition,
results of operations and liquidity.
The ability of the Health Care Information Technology business to attract and
retain customers due to challenges in integrating software products,
technological advances and Year 2000 concerns may significantly reduce the
Company's revenues.
The Company's Health Care Information Technology business delivers
enterprise-wide patient care, clinical, financial, managed care, payor and
strategic management software solutions, as well as networking technologies,
electronic commerce, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries.
Challenges in integrating software products used by the Health Care
Information Technology business with those of its customers could impair the
Company's ability to attract and retain customers and may reduce its revenues
or increase its expenses.
21
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Future advances in the health care information systems industry could lead
to new technologies, products or services that are competitive with the
products and services offered by the Health Care Information Technology
business. Such technological advances could also lower the cost of such
products and services or otherwise result in competitive pricing pressure. The
success of the Health Care Information Technology business will depend, in
part, on its ability to be responsive to technological developments and
challenges, including pricing pressures and changing business models. In
addition, to remain competitive in the evolving health care information
systems marketplace, the Health Care Information Technology business must
develop new products on a timely basis. The failure to develop competitive
products and to introduce new products on a timely basis could curtail the
ability of the Health Care Information Technology business to attract and
retain customers and thereby significantly reduce the Company's net income.
Finally, management believes that the costs of work by customers related to
Year 2000 Issues have caused some Health Care Information Technology customers
and prospective customers to defer current projects or prospective decisions
regarding the acquisition of new software. These Year 2000 concerns by
existing and potential new customers may adversely affect sales of the
Company's products.
Proprietary technology protections may not be adequate and proprietary rights
may infringe on rights of third parties.
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights in its products. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Although the Company
believes that its products and other proprietary rights do not infringe upon
the proprietary rights of third parties, from time to time third parties have
asserted infringement claims against the Company and there can be no assurance
that third parties will not assert infringement claims against the Company in
the future. Additionally, the Company may find it necessary to initiate
litigation to protect the Company's trade secrets, to enforce its patent,
copyright and trademark rights, and to determine the scope and validity of the
proprietary rights of others. These types of litigation can be costly and time
consuming. These litigation expenses or any damage payments resulting from
adverse determinations of third party claims could be significant and could
result in material losses to the Company.
Potential product liability claims arising from Health Care Information
Technology business products could result in material losses to the Company.
Some products of the Health Care Information Technology business provide
information for use by health care providers in providing health care to
patients. Although the Company has not experienced any material claims to
date, any failure of the Company's Health Care Information Technology business
products to provide accurate and timely information could result in claims
against it. The Company maintains insurance to protect against claims
associated with the use of such products, but there can be no assurance that
the Company's insurance coverage would adequately cover any claims asserted
against it. If its insurance coverage is not adequate, the Company may be
required to pay the damages which could result in material losses to it.
System errors and warranties in the Health Care Information Technology
business's products could cause unforeseen liabilities.
The Company's Health Care Information Technology business's systems are
very complex. As with complex systems offered by others, the Company's systems
may contain errors, especially when first introduced. The Health Care
Information Technology business's systems are intended to provide information
for health care
22
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Concluded)
providers in providing health care to patients. Therefore, users of its
products have a greater sensitivity to system errors than the market for
software products generally. Failure of a client's system to perform in
accordance with its documentation could constitute a breach of warranty and
could require the Company to incur additional expense in order to make the
system comply with the documentation. If such failure is not timely remedied,
it could constitute a material breach under a contract allowing the client to
cancel the contract.
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 1999 Annual Report on Form 10-K/A.
23
<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
December 31, 1999.
24
<PAGE>
SIGNATURE
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: February 14, 2000
By /s/ Heidi E. Yodowitz
-----------------------------------
Heidi E. Yodowitz
Senior Vice President and
Controller
and Acting Chief Financial
Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000927653
<NAME> McKESSON HBOC, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 204,800
<SECURITIES> 195,400
<RECEIVABLES> 3,069,300
<ALLOWANCES> 339,200
<INVENTORY> 4,060,000
<CURRENT-ASSETS> 7,326,500
<PP&E> 1,136,700
<DEPRECIATION> 587,500
<TOTAL-ASSETS> 10,205,900
<CURRENT-LIABILITIES> 5,646,000
<BONDS> 914,800
195,700
0
<COMMON> 2,800
<OTHER-SE> 3,169,100
<TOTAL-LIABILITY-AND-EQUITY> 10,205,900
<SALES> 27,429,100
<TOTAL-REVENUES> 27,429,100
<CGS> 25,718,200
<TOTAL-COSTS> 27,245,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,100
<INCOME-PRETAX> 446,900
<INCOME-TAX> 169,500
<INCOME-CONTINUING> 272,800
<DISCONTINUED> 23,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296,200
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
</TABLE>
