<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 June 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 (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 June 30, 2000
----- ----------------------------
<C> <S>
Common stock, $.01 par value 284,101,258 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
June 30, 2000 and March 31, 2000................................ 3-4
Statements of Consolidated Income
Three month periods ended June 30, 2000 and 1999................ 5
Statements of Consolidated Cash Flows
Three month periods ended June 30, 2000 and 1999................ 6
Financial Notes.................................................. 7-12
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Review................................................. 13-16
3. Quantitative and Qualitative Disclosures about Market Risk....... 16
PART II. OTHER INFORMATION
1. Legal Proceedings................................................ 17
4. Submission of Matters to a Vote of Security Holders.............. 17
6. Exhibits and Reports on Form 8-K................................. 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
(in millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ 452.3 $ 548.9
Marketable securities (Notes 3 and 7)................... 38.1 57.0
Receivables............................................. 3,100.8 3,034.5
Inventories............................................. 4,303.3 4,149.3
Prepaid expenses........................................ 186.4 175.8
--------- ---------
Total................................................. 8,080.9 7,965.5
Property, Plant and Equipment
Land.................................................... 32.5 34.5
Buildings, machinery and equipment...................... 1,137.0 1,115.1
--------- ---------
Total................................................. 1,169.5 1,149.6
Accumulated depreciation................................ (617.2) (594.2)
--------- ---------
Net................................................... 552.3 555.4
Capitalized Software...................................... 95.1 92.2
Notes Receivable.......................................... 105.8 100.9
Goodwill and Other Intangibles............................ 1,169.7 1,185.6
Other Assets.............................................. 484.6 473.3
--------- ---------
Total Assets.......................................... $10,488.4 $10,372.9
========= =========
</TABLE>
(Continued)
See Financial Notes.
3
<PAGE>
McKESSON HBOC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
(in millions,
except par value)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts payable......................................... $ 306.7 $ 205.6
Accounts payable--trade................................ 3,923.2 3,678.3
Deferred revenue....................................... 334.1 368.7
Current portion of long-term debt...................... 16.0 16.2
Salaries and wages..................................... 76.4 115.5
Taxes.................................................. 154.2 354.8
Interest and dividends................................. 53.2 33.9
Other.................................................. 328.5 348.8
--------- ---------
Total................................................ 5,192.3 5,121.8
Postretirement Obligations and Other Noncurrent
Liabilities............................................. 247.7 245.7
Long-Term Debt (Note 3).................................. 1,236.4 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 4).................... 195.8 195.8
Stockholders' Equity
Common stock (400.0 shares authorized, 284.9 issued as
of June 30, 2000, and 283.9 issued as of March 31,
2000; par value $0.01)................................ 2.8 2.8
Additional paid-in capital............................. 1,806.1 1,791.1
Other capital.......................................... (115.8) (126.1)
Retained earnings...................................... 2,169.0 2,122.3
Accumulated other comprehensive loss (Note 7).......... (115.9) (97.1)
ESOP notes and guarantees.............................. (97.4) (99.9)
Treasury shares, at cost............................... (32.6) (27.3)
--------- ---------
Total Stockholders' Equity........................... 3,616.2 3,565.8
--------- ---------
Total Liabilities and Stockholders' Equity........... $10,488.4 $10,372.9
========= =========
</TABLE>
(Concluded)
See Financial Notes.
4
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------
2000 1999
-------- --------
(in millions,
except per share
amounts)
<S> <C> <C>
REVENUES.................................................. $9,728.5 $8,598.8
-------- --------
COSTS AND EXPENSES
Cost of sales........................................... 9,145.7 8,022.5
Selling, distribution, research and development and
administration (Note 5)................................ 448.6 440.8
Interest................................................ 27.4 31.2
-------- --------
Total................................................. 9,621.7 8,494.5
-------- --------
INCOME BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED
SECURITIES OF SUBSIDIARY TRUST........................... 106.8 104.3
INCOME TAXES.............................................. (41.7) (39.9)
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST..... (1.5) (1.5)
-------- --------
INCOME AFTER TAXES
Continuing operations................................... 63.6 62.9
Discontinued operations (Note 2)........................ -- 7.2
-------- --------
Net Income............................................ $ 63.6 $ 70.1
======== ========
EARNINGS PER COMMON SHARE (Note 8)
Diluted:
Continuing operations................................... $ 0.22 $ 0.22
Discontinued operations................................. -- 0.03
-------- --------
Total................................................. $ 0.22 $ 0.25
======== ========
Basic:
Continuing operations................................... $ 0.23 $ 0.22
Discontinued operations................................. -- 0.03
-------- --------
Total................................................. $ 0.23 $ 0.25
======== ========
DIVIDENDS PER COMMON SHARE................................ $ 0.06 $ 0.06
SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED
Diluted................................................. 289.7 290.2
Basic................................................... 282.6 280.6
</TABLE>
See Financial Notes.
5
<PAGE>
McKESSON HBOC, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
2000 1999
--------- ---------
(in millions)
<S> <C> <C>
Operating Activities
Income from continuing operations....................... $ 63.6 $ 62.9
Adjustments to reconcile to net cash provided (used) by
operating activities:
Depreciation........................................... 28.5 26.9
Amortization........................................... 29.2 22.3
Provision for bad debts................................ 11.7 5.6
Deferred taxes on income............................... (1.3) (2.4)
Other non-cash items................................... (3.3) 0.2
--------- ---------
Total................................................. 128.4 115.5
--------- ---------
Effects of changes in:
Receivables............................................ (89.9) 53.0
Inventories............................................ (158.3) (130.9)
Accounts and drafts payable............................ 351.5 (310.8)
Taxes.................................................. (203.6) 32.1
Deferred revenue....................................... (32.8) (101.1)
Other.................................................. (27.2) (27.8)
--------- ---------
Total................................................. (160.3) (485.5)
--------- ---------
Net cash provided (used) by continuing operations..... (31.9) (370.0)
Discontinued operations................................. (0.6) (11.5)
--------- ---------
Net cash provided (used) by operating activities...... (32.5) (381.5)
--------- ---------
Investing Activities
Purchases of marketable securities...................... (0.3) (155.0)
Property acquisitions................................... (29.2) (40.5)
Properties sold......................................... 2.0 2.1
Acquisitions of businesses, less cash and short-term
investments acquired................................... (0.5) (7.4)
Other................................................... (28.0) (46.4)
--------- ---------
Net cash provided (used) by investing activities...... (56.0) (247.2)
--------- ---------
Financing Activities
Proceeds from issuance of debt.......................... -- 595.7
Repayment of debt....................................... (7.5) (27.4)
Dividends paid on preferred securities of subsidiary
trust.................................................. (2.5) (2.5)
Capital stock transactions:
Issuances.............................................. 14.8 13.1
ESOP notes and guarantees.............................. 2.5 7.2
Dividends paid......................................... (17.1) (16.9)
Other.................................................. 1.7 (0.4)
--------- ---------
Net cash provided (used) by financing activities...... (8.1) 568.8
--------- ---------
Net Decrease in Cash and Cash Equivalents................ (96.6) (59.9)
--------- ---------
Cash and Cash Equivalents at beginning of period......... 548.9 233.7
--------- ---------
Cash and Cash Equivalents at end of period............... $ 452.3 $ 173.8
========= =========
</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
June 30, 2000, the results of its operations for the three months ended June
30, 2000 and 1999, and its cash flows for the three months ended June 30, 2000
and 1999.
The results of operations for the three months ended June 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 months ended
June 30, 1999, represents the results of operations of McKesson Water Products
Company which was sold in February 2000.
3. Marketable Securities
The June 30, 2000 marketable securities balance includes $17.2 million held
in trust as exchange property for the Company's $28.1 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 issuance's 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.
7
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
5. 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 ended June 30, 1999, the Company incurred accounting and
legal fees and other costs totaling $6.3 million in connection with the
investigation, the restatement of the historical consolidated financial
statements and the resulting pending litigation (See Financial Note 10). The
Company also recorded $18.5 million in severance and benefit costs resulting
from the change in executive management announced during the quarter, and $1.7
million in retention benefits. For segment reporting purposes, (see Financial
Note 11) these charges are included in Corporate and other.
6. Restructuring
In conjunction with restructuring plans provided for in prior fiscal years,
during the three months ended June 30, 2000, the Company closed two Health
Care Supply Management pharmaceutical distribution centers. This resulted in
the termination of approximately 65 distribution center and back-office
employees and the payment of $0.8 million in severance. Also, the Company paid
$0.7 million in severance to approximately 80 employees that were terminated
in the Health Care Supply Management medical/surgical business. In addition,
the Company paid $0.7 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 2001. In the
Health Care Information Technology segment, $2.8 million of severance was paid
in the three month period ended June 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 June 30, 2000, by operating segment follows:
<TABLE>
<CAPTION>
Health Care
Health Care Information
Supply Management Technology
----------------- -----------------
Exit- Exit-
Severance Related Severance Related Total
--------- ------- --------- ------- -----
(in millions)
<S> <C> <C> <C> <C> <C>
Balance, March 31, 2000......... $ 7.1 $10.1 $ 5.0 $0.7 $22.9
Severance amounts paid during
the period..................... (1.5) (2.8) (4.3)
Other costs paid during the
period......................... (0.7) (0.7)
----- ----- ----- ---- -----
Balance, June 30, 2000.......... $ 5.6 $ 9.4 $ 2.2 $0.7 $17.9
===== ===== ===== ==== =====
</TABLE>
The remaining balances at June 30, 2000 relate primarily to charges
recorded in fiscal 1999 and 2000, with the exception of $0.8 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.
8
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
7. 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 months ended June 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Three Months
Ended June
30,
-------------
2000 1999
------ -----
(in
millions)
<S> <C> <C>
Net income.................................................. $ 63.6 $70.1
Unrealized gain (loss) on marketable securities and
investments................................................ (13.5) --
Foreign currency translation adjustments.................... (5.3) (0.3)
------ -----
$ 44.8 $69.8
====== =====
</TABLE>
8. 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
-----------------------------------------------
June 30, 2000 June 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................... $63.6 282.6 $0.23 $62.9 280.6 $0.22
===== =====
Effect of Dilutive Securities
Options to purchase common
stock........................ -- 1.6 -- 4.1
Trust convertible preferred
securities................... 1.5 5.4 1.5 5.4
Restricted stock.............. -- 0.1 -- 0.1
----- ----- ----- -----
Diluted EPS
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $65.1 289.7 $0.22 $64.4 290.2 $0.22
===== ===== ===== ===== ===== =====
</TABLE>
9. 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 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.
9
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
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.
The Company is evaluating what impact, if any, SFAS 133 and SAB 101 may
have on its consolidated financial statements.
10. 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.
As previously reported, on April 25, 2000, the Company filed a motion to
dismiss the action entitled In Re McKesson HBOC, Inc. Securities Litigation
(Case No. C-99-20743-RMW) ("The Consolidated Action"), pending before the
Honorable Ronald M. Whyte in the United States District Court for the Northern
District of California. Lead Plaintiff in the Consolidated Action filed its
opposition to the motion to dismiss on July 14, 2000. The Company has until
August 18, 2000 to reply to Lead Plaintiff's opposition, and the motion is
currently scheduled to be heard by the Court on September 15, 2000. All
discovery remains stayed in the Consolidated Action during the pendency of
this motion.
On June 20, 2000, the Company moved to dismiss two previously reported
actions pending in California state court, 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), and also moved to
stay those actions in favor of the Consolidated Action.
As previously reported, the Company moved to dismiss the complaint in an
action pending in Colorado state court, American Healthcare Fund II v. HBO &
Company et al. (Case No. 00-CV-1762). On June 26, 2000, the court granted in
part and denied in part the Company's motion and granted plaintiffs leave to
file an amended complaint. Plaintiffs filed an amended complaint in that
action on July 14, 2000.
The Company previously moved to stay a Delaware state court action,
Derdiger v. Tallman et al. (Case No. 17276), and was served in another
Delaware state court action, Caravetta v. McKesson HBOC, Inc. (Case No. OOC-
04-214WTQ). The Company's motion to stay Derdiger was granted on July 20,
2000. The Company moved to dismiss, or alternatively stay, the complaint in
Caravetta, which motion is pending.
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 commenced investigations in connection with the matters relating to
the restatement of previously reported amounts for HBOC. 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.
10
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Continued)
(unaudited)
Except for the matters discussed above, there have not been any significant
changes with respect to the litigation matters described in Financial Note 18
to the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2000.
11. 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 first quarter of 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 months ended June 30, 2000 and
1999, and as of June 30, 2000 and March 31, 2000, is presented below:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
2000 1999
--------- ---------
(in millions)
<S> <C> <C>
Revenues
Health Care Supply Management....................... $ 9,457.0 $ 8,278.6
Health Care Information Technology.................. 199.4 242.2
iMcKesson........................................... 68.5 75.2
Corporate........................................... 3.6 2.8
--------- ---------
Total............................................. $ 9,728.5 $ 8,598.8
========= =========
Operating profit
Health Care Supply Management....................... $ 149.1 $ 125.4
Health Care Information Technology.................. 8.2 39.4
iMcKesson........................................... (6.0) 16.7
--------- ---------
Total............................................. 151.3 181.5
Interest--net....................................... (24.8) (29.5)
Corporate and other................................. (19.7) (47.7)
--------- ---------
Income from continuing operations before income
taxes and dividends on preferred securities of
subsidiary trust................................. $ 106.8 $ 104.3
========= =========
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
(in millions)
<S> <C> <C>
Segment assets
Health Care Supply Management....................... $ 8,699.8 $ 8,462.4
Health Care Information Technology.................. 654.6 756.9
iMcKesson........................................... 307.7 323.2
Corporate........................................... 826.3 830.4
--------- ---------
Total............................................. $10,488.4 $10,372.9
========= =========
</TABLE>
11
<PAGE>
McKESSON HBOC, INC.
FINANCIAL NOTES--(Concluded)
(unaudited)
12. Subsequent Events
On July 5, 2000, the Company announced a definitive agreement to acquire
MediVation, Inc., a privately held company based in Needham, Massachusetts.
MediVation, Inc., which will be included in the iMcKesson operating segment,
offers an automated web-based communications system for providers to
communicate with patients online. On July 17, 2000, the Company completed the
acquisition of MediVation, Inc.
On July 27, 2000, the Company announced a program to repurchase from time to
time up to $250 million of the Company's shares of common stock in open market
or private transactions. The repurchased shares will be held as treasury shares
and used for general corporate purposes.
12
<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 June 30,
---------------------------------
2000 1999(1) % Chg.
---------- ------------ ------
(dollars in millions)
<S> <C> <C> <C>
REVENUES
Health Care Supply Management
Pharmaceutical Distribution & Services
U.S. Health Care(2).......................................... $ 8,087.2 $ 7,068.0 14.4
International................................................ 630.3 555.5 13.5
---------- ----------
Total Pharmaceutical Distribution & Services............... 8,717.5 7,623.5 14.4
Medical/Surgical Distribution & Services...................... 739.5 655.1 12.9
---------- ----------
Total Health Care Supply Management........................ 9,457.0 8,278.6 14.2
---------- ----------
Health Care Information Technology
Software...................................................... 30.2 32.8 (7.9)
Services...................................................... 152.6 189.6 (19.5)
Hardware...................................................... 16.6 19.8 (16.2)
---------- ----------
Total Health Care Information Technology................... 199.4 242.2 (17.7)
---------- ----------
iMcKesson...................................................... 68.5 75.2 (8.9)
Corporate...................................................... 3.6 2.8
---------- ----------
Total.......................................................... $ 9,728.5 $ 8,598.8 13.1
========== ==========
OPERATING PROFIT
Health Care Supply Management.................................. $ 149.1 $ 125.4 18.9
Health Care Information Technology............................. 8.2 39.4 (79.2)
iMcKesson...................................................... (6.0) 16.7
---------- ----------
Total.......................................................... 151.3 181.5 (16.6)
Interest--net(3)............................................... (24.8) (29.5)
Corporate and other............................................ (19.7) (47.7)(4)
---------- ----------
Income from continuing operations before income taxes and
dividends on preferred securities of subsidiary trust......... $ 106.8 $ 104.3
========== ==========
</TABLE>
--------
(1) Revenues and operating profits of certain business units which were
previously included in the Health Care Supply Management and Health Care
Information Technology segments have been reclassified into iMcKesson.
(2) Includes sales to customers' warehouses of $2,325.3 million and $2,160.6
million in the three months ended June 30, 2000 and 1999, respectively.
(3) Interest expense is shown net of corporate interest income.
(4) Includes pre-tax charges of $6.3 million incurred in the quarter in
connection with the restatement of prior year's financial results and
resulting litigation. Also includes $18.5 million in severance and benefit
costs resulting from a change in executive management and $1.7 million in
retention benefits incurred in the quarter.
13
<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 first quarter decreased to $63.6 million, $0.22 per
diluted share, from $70.1 million, $0.25 per diluted share, in the prior year.
The prior year's first quarter results from continuing operations included
after-tax charges of $16.3 million for accounting, legal and other associated
fees incurred in connection with the previously reported restatement of the
Health Care Information Technology segment's historical (pre-acquisition)
financial statements and resulting litigation, severance and benefit costs
resulting from a change in executive management and retention benefits
incurred in the quarter. Also included in the prior year first quarter results
was $7.2 million in income after taxes from discontinued operations,
representing the results of operations of the Water Products business which
was sold in February 2000.
Income from continuing operations (before the charges discussed above in
the prior year) decreased to $63.6 million from $79.2 million in the prior
year reflecting a decline in operating profit in the Health Care Information
Technology and iMcKesson segments.
The effective income tax rate applicable to continuing operations for the
three months ended June 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.
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 month period ended June 30,
2000.
Pharmaceutical Distribution & Services revenues increased by 14% to $8.7
billion in the quarter. This increase reflects growth in the U.S. direct
delivery business of 17% in the quarter, an increase in U.S. sales to
customers' warehouses of 8% and an increase in international revenues of 13%.
14
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Continued)
Medical/Surgical Distribution & Services revenues increased 13% to $739.5
million in the quarter. The quarter ended June 30, 2000 contained five more
selling days than the prior year's first quarter as a result of that business'
fiscal calendar. Excluding the additional selling days, revenues increased by
5% in the quarter.
Health Care Supply Management operating profit increased $23.7 million or
19% to $149.1 million in the quarter. Operating profit as a percent of
revenues (calculated excluding sales to customers' warehouses) increased 4
basis points to 2.09% in the first quarter compared to the respective prior
year margin. The increase in the operating margin reflects productivity
improvements in both back-office and field operations and expanded product
procurement profits.
Health Care Information Technology
The Health Care Information Technology ("HCIT") segment includes revenues
from software sales, services business and hardware sales. Prior year's
segment information reflects the transfer of certain business units from this
segment into the iMcKesson segment. HCIT revenues declined 18% to $199.4
million compared to $242.2 million in the prior year first quarter. Software
revenues declined 8% to $30.2 million from $32.8 million. The decline reflects
the increasing number of contracts for software and related services that
provide for the recognition of revenue over the contract term as services are
provided. Services revenues of $152.6 million declined 20% from the prior
year's first quarter of $189.6 million, reflecting the lagging impact of
reduced prior period software sales on implementation services revenues.
Hardware revenues declined 16% to $16.6 million from $19.8 million reflecting
the lower level of software sales and lower unit prices. This segment
accounted for 2% of consolidated revenues for the quarter ended June 30, 2000.
Operating profit decreased 79% to $8.2 million in the quarter ended June
30, 2000 from $39.4 million in the prior year quarter. The operating profit
margin declined to 4.11% in the quarter ended compared to 16.27% for the prior
year quarter. 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 iMcKesson were $68.5 million in the quarter ended June 30, 2000,
a 9% decline from revenues of $75.2 million in the quarter ended June 30,
1999. iMcKesson incurred an operating loss of $6.0 million in the quarter,
compared to operating profit of $16.7 million in the prior year. The fiscal
2001 first quarter results include the operating loss and goodwill
amortization of Abaton.com which was acquired in November 1999, expenses
related to the formation of the iMcKesson management team and organization and
technology licensing agreements entered into during the quarter. Also,
iMcKesson had lower revenues and operating profit reflecting the loss of a
number of triage customers and an increase in deferred revenue.
Other
Corporate expense declined from $47.7 million to $19.7 million in the first
quarter of fiscal 2001 from the comparable prior year period. Corporate
expense included pre-tax charges of $26.5 million in the three months ended
June 30, 1999, consisting of professional fees incurred in connection with the
previously discussed investigation, restatement of prior year financial
statements and resulting litigation, severance benefits and other costs
associated with former employees and retention benefit costs incurred (see
Financial Note 5).
15
<PAGE>
McKESSON HBOC, INC.
FINANCIAL REVIEW--(Concluded)
Discontinued Operations
Income from discontinued operations was $7.2 million in the prior year
first quarter. This amount represents 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 $96.6 million from $548.9 million at
March 31, 2000 to $452.3 million at June 30, 2000. During the first quarter of
fiscal 2001, net cash used by operating activities was $32.5 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 the result of working capital
initiatives in the Health Care Supply Management segment and the timing of
inventory purchases and related payments.
Cash and marketable securities available for sale were $490.4 million at
June 30, 2000 compared to $605.9 million at March 31, 2000. The June 30, 2000
marketable securities balance includes $17.2 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, decreased to $24.8
million from $29.5 million in the prior year. The decrease from the prior year
is due to a significant decline in short-term borrowings reflecting the
receipt of cash proceeds from the February 2000 sale of the Water Products
business.
Stockholders' equity was $3.6 billion at June 30, 2000, and the net debt-
to-capital ratio was 17%, 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 284.1 million at June 30, 2000 from
283.4 million at March 31, 2000 due primarily to shares issued under employee
benefit plans. Average diluted shares declined to 289.7 million in the first
quarter of fiscal 2001 from 290.2 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 8).
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 HCIT segment are also applicable to
the new iMcKesson business segment inasmuch as that segment includes certain
assets which were previously part of the HCIT 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.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Financial Note 10 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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on July 26, 2000. The
following matters were voted upon at the meeting and the stockholder votes on
each such matter are briefly described below:
The Board of Directors' nominees for directors as listed in the proxy
statement were each elected to serve for a three-year term expiring at the
Annual Meeting in 2003. The vote was as follows:
<TABLE>
<CAPTION>
Votes For Votes Withheld
----------- --------------
<S> <C> <C>
Tully M. Friedman............................. 243,843,274 9,362,672
Alton F. Irby III............................. 243,924,695 9,281,251
James V. Napier............................... 244,083,702 9,122,244
Carl E. Reichardt............................. 243,763,949 9,441,997
</TABLE>
The terms of the following named directors continued after the meeting:
<TABLE>
<S> <C>
Alfred C. Eckert III Gerald L. Mayo
John H. Hammergren David S. Pottruck
M. Christine Jacobs Alan Seelenfreund
Martin M. Koffel Jane E. Shaw
David L. Mahoney
</TABLE>
The proposal to approve the Company's 1989 Management Incentive Plan
received the following vote:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C>
215,602,321 36,010,080 1,593,545
</TABLE>
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 June
30, 2000.
17
<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: August 3, 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
18
