McKesson
Annual Report 2001

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended March 31, 2001 OR n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13252 McKESSON HBOC, INC. A Delaware Corporation I.R.S. Employer IdentiÑcation Number 94-3207296 McKesson HBOC Plaza, One Post Street, San Francisco, CA 94104 Telephone Ì Area Code (415) 983-8300 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 par value Preferred Stock Purchase Rights (Title of Each Class) New York Stock Exchange PaciÑc Exchange, Inc. New York Stock Exchange PaciÑc Exchange, Inc. (Name of Each Exchange on Which Registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ≤ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ≤ Aggregate market value of voting stock held by nonaÇliates of the Registrant at April 30, 2001: $8,783,293,063 Number of shares of common stock outstanding at April 30, 2001: 284,801,980 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on July 25, 2001 are incorporated by reference into Part III of this report. Item TABLE OF CONTENTS PART I 1. BusinessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6. Selected Financial DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏ 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureÏÏÏÏÏ PART III 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12. Security Ownership of Certain BeneÑcial Owners and ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART IV Page 1 7 7 13 14 15 15 15 15 15 15 16 16 16 16 16 18 i Item 1. Business General PART I McKesson HBOC, Inc. (""McKessonHBOC,'' the ""Company'' or the ""Registrant''), the world's largest health care service and technology company and a Fortune 35 corporation, delivers unique supply and information management solutions that reduce costs and improve quality for its health care customers. Business Segments The Company is organized under two operating segments: Health Care Supply Management and Health Care Information Technology. Within the United States and Canada, the Health Care Supply Management segment is a leading wholesale distributor of ethical and proprietary drugs, medical-surgical supplies and health and beauty care products principally to chain and independent drug stores, hospitals, alternate care sites, food stores and mass merchandisers. The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, Ñnancial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, information outsourcing and other services to health care organizations throughout the United States and certain foreign countries. The Company generated annual sales of $42.0 billion, $36.7 billion, and $30.0 billion in Ñscal years 2001, 2000, and 1999, respectively; approximately $41.1 billion, 98%, $35.7 billion, 97%, and $28.7 billion, 96%, respectively, in the Health Care Supply Management segment and approximately $0.9 billion, 2%, $1.0 billion, 3% and $1.3 billion, 4%, respectively, in the Health Care Information Technology segment. Financial information about the Company's business segments for each of the three years in the period ended March 31, 2001 is included in Financial Note 17 to the consolidated Ñnancial statements, ""Segments of Business,'' appearing on pages F-60 to F-62 of this Annual Report on Form 10-K. Health Care Supply Management Products and Markets Through its Health Care Supply Management segment, McKessonHBOC is a leading distributor of ethical and proprietary drugs, medical-surgical supplies and health and beauty care products and provider of services to the health care industry in North America. The Company's Health Care Supply Management segment consists of the Pharmaceutical Group, the Medical Group, the Automation Group, the Medical Management Group, the Pharmaceutical Partners Group, Zee Medical and MedManagement (collectively, the ""Supply Management Business''). The Pharmaceutical Group supplies pharmaceuticals and health care related products to three primary customer segments: retail chains (pharmacies, food stores, and mass merchandisers), retail independent pharmacies and institutional providers (including hospitals, alternate-site providers, and integrated health networks) in all 50 states. These three customer categories represented approximately 42.4%, 24.5%, and 33.1%, respectively, of the Pharmaceutical Distribution Group's revenues in Ñscal 2001. Operating under the trade names EconoMost» and EconoLink» and a number of related service marks, the Company promotes electronic order entry systems and a wide range of computerized merchandising and asset management services for pharmaceutical retailers and health care institutions. The Company has developed advanced marketing programs and information services for retail pharmacies. These initiatives include the Valu-Rite», Valu-Rite/CareMax» and Health Mart» retail networks, the OmniLink» centralized pharmacy technology platform, which oÅers retail network members connectivity with managed care organizations while promoting compliance with managed care plans, and .com pharmacy solutionsSM, a service initiative that allows independent pharmacies to set up their own websites for selling OTC products and prescription reÑlls to their customers. The Company's nationwide network of distribution centers utilizes the Acumax» Plus warehouse management system which provides real-time inventory statistics and tracks products from the receiving dock to shipping through scanned bar code information and radio frequency signals with accuracy levels above 99% 1 to help ensure that the right product arrives at the right time and place for both the Company's customers and their patients. The Company believes that its Ñnancial strength, purchasing leverage, aÇliation networks, nationwide network of distribution centers, and advanced logistics and information technologies provide competitive advantages to its pharmaceutical distribution operations. The Medical Group oÅers a full range of medical-surgical supplies, equipment, logistics and related services across the continuum of health care providers: hospitals, physicians' oÇces, long-term care, and homecare. The Medical Group includes the operations of McKesson General Medical Corporation (""MGM''), RedLine Extended Care, Hawk Medical Supply and MedPath. The Medical Group is the nation's third largest distributor of medical-surgical supplies to hospitals (acute care) and a leading supplier of medical-surgical supplies to the full-range of alternate-site health care facilities, including physicians and clinics (primary care), long-term care and homecare sites. The Medical Group's Supply Management On- Line provides an advanced way of ordering medical-surgical products over the Internet and its Optipak program allows physicians to customize ordering of supplies according to individual surgical procedure preferences. The Automation Group manufactures and markets automated pharmacy systems and services to hospitals and retail pharmacies through its McKesson Automated Healthcare (""MAH'') and McKesson Automated Prescription Systems (""APS'') units. Key products of MAH include the ROBOT-RxTM system, a robotic pharmacy dispensing and utilization tracking system that enables hospitals to lower pharmacy costs while signiÑcantly improving the accuracy of pharmaceutical dispensing, AcuDose-RxTM unit-based cabinets which automate the storage, dispensing and tracking of commonly used drugs in patient areas, AcuScan-RxTM which records, automates, and streamlines drug administration and medication information requirements through bar code scanning at the patient's bedside and SupplyScanSM, a point-of-use supply management system. APS manufactures a wide range of pharmaceutical dispensing and productivity products including Baker CellsTM and Baker CassettesTM, modular units that provide pharmacists with quick and accurate counting capabilities combined with eÇcient space management; AutoscriptTM, a robotic pharmacy dispensing system that enables retail pharmacies to lower pharmacy costs through high volume dispensing while improving accuracy through the use of bar code technology; and Pharmacy 2000TM, an interactive workstation system which combines software and automation to improve productivity throughout the pharmacy prescrip- tion sales process. The Medical Management Group brings together a comprehensive platform of medical management services and tools to help payors and providers better manage the cost and outcomes of medical care. The Medical Management Group delivers complete solutions through Ñve Care EnhanceSM product and service families: Care EnhanceSM Services (telephonic nurse advice and disease management), Care EnhanceSM Clinical Management Software (disease, utilization and case management software), Care EnhanceSM Clinical Criteria (InterQual» clinical appropriateness, level-of-care and clinically speciÑc decision support criteria), Care EnhanceSM Resource Management Software (provider proÑling, analytic and HEDIS reporting software), and Care EnhanceSM Access Center Products (triage and referral management software). The Pharmaceutical Partners Group combines the Company's pharmaceutical and biotechnology services in a single group that is focused on helping manufacturers meet their marketing goals. The Pharmaceutical Partners Group provides sales, marketing and other services to pharmaceutical manufacturers and biotechnology customers including distribution management and reimbursement services, services in support of clinical trials and biomedical research, direct mail and fulÑllment services, decision support and data analysis, business analytics, and integrated contract sales and marketing support services. Zee Medical, Inc. (""Zee Medical'') is the nation's leading provider of Ñrst-aid and safety products, training and services. Zee Medical distributes Ñrst-aid products and safety supplies and oÅers safety programs and materials to assist industrial and commercial customers reduce their exposure to escalating health care costs associated with on-the-job injuries and illnesses. McKesson MedManagement, L.L.C. (""MedManagement'') is a leading pharmacy management, purchasing, consulting and information services company that combines clinical expertise, Ñnancial manage- ment capabilities, operational tools and technologies and experience to assist health care organizations 2 optimize care and pharmaceutical resources. MedManagement provides customized solutions that allow its customer to improve their pharmaceutical distribution, automation and information technology capabilities and measure quality improvement through proven clinical and operational metrics. International operations of the Pharmaceutical Group business include Medis Health and Pharmaceuti- cal Services, Inc. (""Medis''), a wholly-owned subsidiary and the largest pharmaceutical distributor in Canada; and the Company's 22% equity interest in Nadro, S.A. de C.V., a leading pharmaceutical distributor in Mexico. Intellectual Property The principal trademarks and service marks of the Health Care Supply Management segment include: ECONOMOST», ECONOLINK», VALU-RITE», Valu-Rite/CareMax», OmniLink», Health Mart», ASK-A-NURSE», Credentialer», Episode ProÑler», InterQual», America's Source for Health Care An- swers», coSource», ROBOT-RxTM, AcuDose-RxTM, AcuScan-RxTM, Pak Plus-RxTM, SelfPaceTM, Baker CellsTM, Baker CassettesTM, Baker UniversalTM, AutoscriptTM, Pharmacy 2000TM, CRMSTM, Patterns ProÑlerTM, Care EnhanceSM, Closed Loop DistributionSM, .com Pharmacy SolutionsSM and SupplyScanSM. The Company also owns other registered and unregistered trademarks and service marks and similar rights used by the Health Care Supply Management segment. All of the principal marks are registered in the United States or registration has been applied for with respect to such marks. The United States federal registrations of these trademarks and service marks have ten or twenty-year terms, depending on date of registration. All are subject to unlimited renewals. The Company believes this business has taken all necessary steps to preserve the registration and duration of its trademarks and service marks, although no assurance can be given that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to third-party infringement claims. The Company does not consider any particular patent, license, franchise or concession to be material to the business of the Health Care Supply Management segment. Competition In every area of operations, the Company's distribution businesses face strong competition both in price and service from national, regional and local full-line, short-line and specialty wholesalers, service merchandis- ers, self-warehousing chains, and from manufacturers engaged in direct distribution. The Health Care Supply Management segment faces competition from various other service providers and from pharmaceutical and other health care manufacturers (as well as other potential customers of the Health Care Supply Management segment) which may from time to time decide to develop, for their own internal needs, supply management capabilities which are provided by the Health Care Supply Management segment and other competing service providers. Price, quality of service, and, in some cases, convenience to the customer are generally the principal competitive elements in the Health Care Supply Management segment. Health Care Information Technology Products and Markets The Company's Health Care Information Technology segment provides patient care, clinical, Ñnancial, supply chain, managed care and strategic management software solutions for providers and payors in the health care industry. The segment also provides a full complement of network communications technologies, including wireless capabilities, as well as outsourcing services in which its staÅ manages and operates data centers, information systems, organizations and business oÇces of health care institutions of various sizes and structures. In addition, the segment oÅers a wide range of care management and electronic commerce services, including electronic medical claims and remittance advice services, and statement processing. The Health Care Information Technology segment markets its products and services to integrated delivery networks, hospitals, physicians' oÇces, home health providers, pharmacies, reference laboratories, managed care providers and payors. The segment also sells its products and services internationally through subsidiaries and/or distribution agreements in the United Kingdom, France, the Netherlands, Canada, Ireland, Saudi Arabia, Kuwait, Australia, New Zealand and Puerto Rico. 3 The Health Care Information Technology segment's product portfolio is organized into eight compo- nents: acute-care or hospital information systems (""HIS''), infrastructure, clinical management, practice management, access management, resource management, enterprise management and payor solutions. Hospital Information Systems. HIS applications automate the operation of individual departments and their respective functions within the in-patient environment. The Company's HIS systems include applica- tions for patient care, laboratory, pharmacy, radiology and Ñnance. Infrastructure. Infrastructure components include local, wide area and value-added networks, wireless technology, electronic data interchange (EDI) capabilities, an interface manager and a data repository. Other infrastructure applications include document imaging as well as an enterprise master person index. Clinical Management. The segment's point-of-care applications are designed to allow physicians and other clinicians to document patient information, establish and manage guidelines or standards of care, enter and manage orders, and view all results and clinical information. The Clinical Management product portfolio includes a clinical suite of products consisting of browser-based software applications which may be purchased and used separately or collectively to automate internal and external clinical communications including: multi- laboratory order entry and result reporting, electronic prescribing within formulary and medical guidelines, and advance task management and medical record documentation including web-based dictation, transcription and attestation, most of which are done via paper today. Practice Management. Practice management applications provide a comprehensive solution for medical groups and physician enterprises, whether they are independent or part of an integrated health network. With business oÇce management as its cornerstone, the Company's practice management solution also includes risk management and managed care capabilities, clinical systems for managing patient care, and scheduling, as well as decision support, computer telephony, data quality analysis and electronic commerce. Access Management. Access management solutions include indexing applications that organize the vast amounts of information collected about a person throughout the enterprise, allowing patients to be tracked and information about them to be accessed wherever they go for care as well as scheduling systems that instantly register and schedule patients, and the resources needed to serve them, anywhere in the enterprise. Resource Management. Resource management applications including supply chain and management decision-making help health care organizations better manage people, facilities, supplies, services and equipment by integrating materials management, accounts payable/general ledger, surgical services manage- ment and staÅ scheduling functions. Enterprise Management. Enterprise management applications focus on providing managers with the clinical, Ñnancial and other information necessary to contain costs while ensuring high-quality care, including utilization management, accounts receivable management and managed care contracting and member management applications. Payor Solutions. Payor solutions support a range of health insurance and managed care needs. Solutions include businesswide systems that automate all Ñnancial and administrative operations, as well as clinically intelligent solutions that monitor quality of care and support provider credentialing and proÑling, claims audit, care management, utilization and Ñnancial-based analysis. In addition to the segment's product oÅerings described above, the segment also provides the following services: Enterprise Services. Enterprise services include UNIX processing support, remote system monitoring and single-point issue resolution. In addition, the Health Care Information Technology segment's service path implementation methodology provides a Öexible suite of implementation services that can include an enterprise project manager to assist in planning, installing and supporting multiple Company products. Other service areas include education, enterprise consulting, application-speciÑc services, computer telephony and care management services. 4 Connect Technology Group. The Connect Technology Group provides network installation and support, as well as a suite of information services that extend local area networks outside of the hospital to include payors, vendors, Ñnancial institutions and the Internet. Outsourcing Services Group. The Health Care Information Technology segment has been in the outsourcing business in the United States for more than 20 years and also oÅers outsourcing services in the United Kingdom. Outsourcing services include managing hospital data processing operations (traditionally known as facilities management) as well as strategic management services in information systems planning, receivables management, revenue cycle outsourcing, payroll processing, business oÇce administration and major system conversions. Electronic Commerce Group. The Health Care Information Technology segment's e-commerce capabil- ities in EDI service include claims processing, eligibility veriÑcation and remittance advice as well as statement printing. Research and Development The Health Care Information Technology segment's product development eÅort applies computer technology and installation methodologies to speciÑc information processing needs of hospitals. Management believes a substantial and sustained commitment to such research and development (""R&D'') is important to the long-term success of the business. Investment in software development includes both R&D expense as well as capitalized software. The Health Care Information Technology segment expended $152.5 million (16% of revenue) for R&D activities during Ñscal 2001, compared to $148.4 million (15% of revenue) and $145.8 million (11% of revenue) during 2000 and 1999, respectively. The Health Care Information Technology segment capitalized 20%, 29% and 32% of its R&D expenditures in 2001, 2000 and 1999, respectively. Information regarding R&D is included in Financial Note 1 to the consolidated Ñnancial statements, ""SigniÑcant Accounting Policies,'' appearing on pages F-35 to F-37 of this Annual Report on Form 10-K. Intellectual Property The substantial majority of technical concepts and codes embodied in the Health Care Information Technology segment's computer programs and program documentation are not protected by patents or copyrights but constitute trade secrets that are proprietary to the Company. The principal trademarks and service marks of the Health Care Information Technology segment are: AMISYS», HealthQuest», Paragon», Pathways 2000», TRENDSTAR», Horizon WPTM, Series 2000TM, Star 2000TM, Connect 2000SM, Practice- PointSM. The Company also owns other registered and unregistered trademarks and service marks and similar rights used by the Health Care Information Technology segment. All of the principal trademarks and service marks are registered in the United States or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. The Company believes this business has taken all necessary steps to preserve the registration and duration of its trademarks and service marks, although no assurance can be given that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to third-party infringement claims. The Company does not consider any particular patent, license, franchise or concession to be material to the business of the Health Care Information Technology segment. Competition The Company's Health Care Information Technology segment experiences substantial competition from many Ñrms, including other computer services Ñrms, consulting Ñrms, shared service vendors, certain hospitals and hospital groups, hardware vendors and internet-based companies with technology applicable to the health care industry. Competition varies in size from small to large companies, in geographical coverage, and in scope and breadth of products and services oÅered. 5 Recent Acquisitions, Investments and Dispositions McKessonHBOC has undertaken numerous strategic initiatives in recent years to further focus the Company on its core health care businesses and enhance its competitive position. These include the following signiÑcant acquisitions and dispositions: Acquisitions and Investments ‚ In July 2000, the Company acquired MediVation, Inc., a provider of an automated web-based system for physicians to communicate with patients online, for approximately $24 million in cash, $14 million in Company common stock and the assumption of $6 million of employee stock incentives. ‚ In April 2000, the Company and three other health care product distributors announced an agreement to form the New Health Exchange (subsequently renamed ""Health Nexis''). Health Nexis is an Internet-based company focused on information systems and other technology solutions to streamline communication, processing and management of product and contract data across the health care supply chain. The Company accounts for its 34% interest in Health Nexis under the equity method of accounting. In Ñscal 2001, the Company invested $10.8 million in Health Nexis. ‚ In November 1999, the Company acquired Abaton.com, a provider of internet-based clinical applications for use by physician practices, pharmacy beneÑt managers, beneÑt payors, laboratories and pharmacies, for approximately $95 million in cash and the assumption of $8 million of employee stock incentives. ‚ In January 1999, McKesson Corporation (""McKesson'') completed the acquisition of HBO & Company (""HBOC''), a leading health care information technology company, by exchanging 177 mil- lion shares of McKesson common stock for all of the issued and outstanding shares of common stock of HBOC. Each share of HBOC common stock was exchanged for 0.37 of a share of McKesson common stock (the ""Exchange Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was structured as a tax-free reorganization and was accounted for as a pooling of interests. ‚ In December 1998, the Company acquired Access Health, Inc. (""Access''), a provider of clinically based care management programs and health care information services, for the equivalent, after application of the Exchange Ratio, of approximately 12.7 million shares of Company common stock. ‚ In November 1998, the Company acquired RedLine HealthCare Corporation (""RedLine''), a distributor of medical supplies and services to the extended-care industry, including long-term care and home-care sites, for approximately $233 million in cash. ‚ In October 1998, the Company acquired IMNET Systems, Inc. (""IMNET''), a provider of electronic information and document management solutions for the health care industry, for the equivalent, after application of the Exchange Ratio, of approximately 3.6 million shares of Company common stock and 0.6 million Company stock options. Disposition ‚ In February 2000, the Company disposed of its last non-health care business, its wholly-owned subsidiary McKesson Water Products Company, for approximately $1.1 billion in cash. Other Information About the Business Customers Ì The Company's recent strategy has been to build relationships with large customers that are achieving rapid growth. A signiÑcant portion of the Company's increase in sales has been to a limited number of these large customers. During the Ñscal year ended March 31, 2001, sales to the Company's ten largest customers accounted for approximately 57% of the Company's revenues; sales to the largest customer, Rite Aid Corporation, represented approximately 16% of the Company's revenues. Environmental Legislation Ì The Company sold its chemical distribution operations in Ñscal 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection 6 Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in ""Item 3. Legal Proceedings'' on pages 7 to 13 of this report. Other than any capital expenditures which may be required in connection with those matters, the Company does not anticipate making substantial capital expenditures for environmental control facilities or to comply with environmental laws and regulations in the future. The amount of capital expenditures expended by the Company for environmental compliance was not material in Ñscal 2001 and is not expected to be material in the next Ñscal year. Employees Ì At March 31, 2001, the Company employed approximately 23,000 persons. Financial Information About Foreign and Domestic Operations and Export Sales Information as to foreign operations is included in Financial Note 17 to the consolidated Ñnancial statements ""Segments of Business,'' appearing on pages F-60 to F-62 of this Annual Report on Form 10-K. Item 2. Properties Because of the nature of the Company's principal businesses, plant, warehousing, oÇce and other facilities are operated in widely dispersed locations. The warehouses are typically owned or leased on a long-term basis. The Company considers its operating properties to be in satisfactory condition and adequate to meet its needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 12 to the consolidated Ñnancial statements, ""Lease Obligations,'' appearing on page F-50 of this Annual Report on Form 10-K. Item 3. Legal Proceedings I. Accounting Litigation Since the Company's announcements in April, May and July of 1999 that the Company had determined that certain software sales transactions in its Information Technology Business unit, formerly HBOC, were improperly recorded as revenue and reversed, as of April 30, 2001, eighty-Ñve lawsuits have been Ñled against the Company, certain of the Company's or HBOC's current or former oÇcers or directors, and other defendants including, Bear Stearns & Co., Inc. (""Bear Stearns''), and Arthur Andersen LLP (""Arthur Andersen''). A. Federal Actions Sixty-Ñve of these actions have been Ñled in Federal Court (the ""Federal Actions''). Of these, Ñfty-nine were Ñled in the U.S. District Court for the Northern District of California, one in the Northern District of Illinois (which has been voluntarily dismissed without prejudice), one in the Northern District of Georgia (which has been transferred to the Northern District of California), one in the Eastern District of Pennsylvania (which has been transferred to the Northern District of California), two in the Western District of Louisiana (which have been transferred to the Northern District of California) and one in the District of Arizona (which has been transferred to the Northern District of California). On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District of California issued an order consolidating Ñfty-three of these actions into one action entitled In RE McKesson HBOC, Inc. Securities Litigation (Case No. C-99-20743 RMW) (the ""Consolidated Action''), and by order dated December 22, 1999, appointed the New York State Common Retirement Fund as lead plaintiÅ (""Lead PlaintiÅ'') and approved Lead PlaintiÅs' choice of counsel. Judge Whyte's November 2, 1999 order also provided that related cases transferred to the Northern District of California shall be consolidated with the Consolidated Action. Judge Whyte's December 22 order also consolidated an individual action, Jacobs v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), with the Consolidated Action. On September 21, 2000, the plaintiÅs in Jacobs Ñled an individual action in the Northern District of California entitled Jacobs v. HBO & Company (Case No. C-00-20974 RMW), which is to be consolidated with the Consolidated Action and which purports to 7 state claims under Sections 11 and 12(2) of the Securities Act of 1933 (""Securities Act''), Section 10(b) of the Securities Exchange Act of 1934 (""Exchange Act'') and various state law causes of action. By order dated February 7, 2000, Judge Whyte coordinated a class action alleging ERISA claims, Chang v. McKesson HBOC, Inc. et al. (Case No. C-00-20030 RMW) and a shareholder derivative action that had been Ñled in the Northern District under the caption Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the Consolidated Action. Lead PlaintiÅ Ñled an Amended and Consolidated Class Action Complaint (the ""ACCAC'') on February 25, 2000. The ACCAC generally alleged that defendants violated the federal securities laws in connection with the events leading to the Company's announcements in April, May and July, 1999. On September 28, 2000, Judge Whyte dismissed all of the ACCAC claims against McKesson under Section 11 of the Securities Act with prejudice, dismissed a claim under Section 14(a) of the Exchange Act with leave to amend and declined to dismiss a claim against McKesson under Section 10(b) of the Exchange Act. On November 14, 2000, Lead PlaintiÅ Ñled its Second Amended and Consolidated Class Action Complaint (""SAC''). As with its ACCAC, Lead PlaintiÅ's SAC generally alleges that the defendants named therein violated the federal securities laws in connection with the events leading to the Company's announcements in April, May and July, 1999. The SAC names the Company, HBOC, certain current or former oÇcers or directors of the Company or HBOC, Arthur Andersen and Bear Stearns as defendants. The SAC purports to state claims against the Company under Sections 10(b) and 14(a) of the Exchange Act. On January 18, 2001, the Company Ñled a motion to dismiss the claim under Section 14(a) of the Exchange Act in its entirety, and the claim under Section 10(b) of the Exchange Act to the extent it is based on the statements or conduct of the Company prior to the Merger. HBOC also Ñled its own motion to dismiss the claim based on Section 14(a) of the Exchange Act insofar as that claim is asserted on behalf of McKesson shareholders. Those motions were heard on March 23, 2001, and Judge Whyte has not yet issued an order. On January 11, 2001, the Company Ñled an action in the U.S. District Court for the Northern District of California against the Lead PlaintiÅ in the Consolidated Action individually, and as a representative of a defendant class of former HBOC shareholders who exchanged HBOC shares for Company shares in the Merger, McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. et al. (Case No. C01- 20021 RMW) (the ""Complaint and Counterclaim''). In the Complaint and Counterclaim, the Company alleges that the exchanged HBOC shares were artiÑcially inÖated due to undisclosed accounting improprieties, and that the exchange ratio therefore provided more shares to former HBOC shareholders than would have otherwise been the case. In this action, the Company seeks to recover the ""unjust enrichment'' received by those HBOC shareholders who exchanged more than 20,000 HBOC shares in the Merger. The Company does not allege any wrongdoing by these shareholders. Lead PlaintiÅ's motion to dismiss the Complaint and Counterclaim was heard on March 23, 2001, and Judge Whyte has not yet issued an order. Two other individual actions, Bea v. McKesson HBOC, Inc. et al. (Case No. C-0020072 RMV), and Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW), have also been Ñled in the Northern District of California. By stipulation, Bea has been consolidated with the Consolidated Action and Cater has been stayed pending resolution of the Company's motion to dismiss the Consolidated Complaint. One other individual action, Baker v. McKesson HBOC, Inc. et al. (Case No. CV 00-0188) was Ñled in the U.S. District Court for the Western District of Louisiana. The Company moved to transfer Baker to the Northern District of California, together with a parallel state court action, Baker v. McKesson HBOC, Inc. et al. (Ñled as Case No. 199018; Case No. CV-00-0522 after removal), which had been removed to federal court. Both of the Baker cases have been transferred to the Northern District of California where they have been consolidated with the Consolidated Action. An additional action, Rosenberg v. McCall et al. (Case No. 1:99-CV-1447 JEC) was Ñled in the Northern District of Georgia and subsequently transferred to the Northern District of California, but that action names only two former oÇcers and does not name the Company. Finally, on July 24, 2000, an action captioned Hess v. McKesson HBOC, Inc. et al. was Ñled in state court in Arizona (Case No. C-20003862) on behalf of former shareholders of Ephrata Diamond Spring Water Company (""Ephrata'') who acquired McKesson shares in exchange for their Ephrata stock when McKesson acquired Ephrata in January, 1999. On August 24, 2000, the Company removed the Hess action to the United States 8 District Court for the District of Arizona, and on March 28, 2001, the District Court in Arizona granted the Company's motion to transfer the case to the Northern District of California. B. State Actions Twenty actions have also been Ñled in various state courts in California, Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the ""State Actions''). Like the Consolidated Action, the State Actions generally allege misconduct by the defendants in connection with the events leading to the Company's need to restate its Ñnancial statements. Two of the State Actions are derivative actions: Ash, et al. v. McCall, et al. (Case No. 17132), Ñled in the Delaware Chancery Court and Mitchell v. McCall et al. (Case. No. 304415), Ñled in California Superior Court, City and County of San Francisco. The Company moved to dismiss both of these actions and to stay the Mitchell action in favor of the earlier Ñled Ash and Cohen derivative actions. PlaintiÅs in Mitchell agreed to defer any action by the court on the Company's motions pending resolution of the Company's dismissal motions in Ash. On September 15, 2000, the Ash court dismissed all causes of action with leave to replead certain of the dismissed claims, and on January 22, 2001, the Ash plaintiÅs Ñled a Third Amended Complaint which is presently the subject of the Company's motions to dismiss. Five of the State Actions are class actions. Three of these were Ñled in Delaware Chancery Court: Derdiger v. Tallman et al. (Case No. 17276), Carroll v. McKesson HBOC, Inc. (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et al. (Case No. 17282 NC). Two additional actions were Ñled in Delaware Superior Court: Edmondson v. McKesson HBOC, Inc. (Case No. 99-951) and Caravetta v. McKesson HBOC, Inc. (Case No. 00C-04-214 WTQ). The Carroll and Kelly actions have been voluntarily dismissed without prejudice. The Company has removed Edmondson to Federal Court in Delaware where plaintiÅs have Ñled a motion to remand, which is pending. The Company's motions to stay the Derdiger and Caravetta actions in favor of proceedings in the federal Consolidated Action have been granted. Thirteen of the State Actions are individual actions which have been Ñled in various state courts. Four of these were Ñled in the California Superior Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al.(Case No. 303857), The State of Oregon by and through the Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 307619), Utah State Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 311269), and Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case No. 311747). In Yurick, the trial court sustained the Company's demurrer to the original complaint without leave to amend with respect to all causes of action, except the claims for common law fraud and negligent misrepresentation as to which amendment was allowed. The Court also stayed Yurick pending the commencement of discovery in the Consolidated Action, but allowed the Ñling of an amended complaint. The Company's demurrer to that amended pleading was heard on May 23, 2001 and no order has yet been issued. On May 23, 2001, the California Court of Appeals aÇrmed the Yurick trial court's order dismissing claims against certain of the individual defendants in the action without leave to amend. The Oregon, Utah and Minnesota actions referenced above are individual securities actions Ñled in the California Superior Court for the City and County of San Francisco by out-of-state pension funds. PlaintiÅs in each of those actions are in the process of Ñling amended complaints, and action on the Company's motions seeking stays of those actions and demurrers to the prior complaints has been suspended pending defendants' responses to those amended pleadings. Ten individual actions have been Ñled in various state courts outside of California. Five of these cases have been Ñled in Georgia state courts: Moulton v. McKesson HBOC, Inc. et al. (Case No. 98-13176-9), involving a former HBOC employee's claim for unpaid commissions, claims under Georgia's securities and racketeering laws, as well as various common law causes of action, has been settled and dismissed with prejudice. Powell v. McKesson HBOC, Inc. et al. (Case No. 1999CV-15443), involving a former HBOC employee's claims for unpaid commissions, claims under Georgia's securities and racketeering laws, as well as various common law causes of action, was dismissed by plaintiÅ and reÑled as Case No. 2000-CV-27864 and the Company's motions to dismiss or stay that action are presently pending. In Adler v. McKesson HBOC, Inc. (Case No. 99-C-7980-3), a former HBOC shareholder asserts a claim for common law fraud. The Georgia 9 Court of Appeals has granted interlocutory review of an order issued in Adler and the prior June, 2001, trial date has been vacated. SuÅolk Partners Limited Partnership et al. v. McKesson HBOC, Inc. et al. (Case No.00 VS 010469A) and Curran Partners, L.P. v. McKesson HBOC, Inc. et al. (Case No. 00 VS-010801) are related actions brought on behalf of individual shareholders and are based on Georgia securities, racketeering and common law claims. The Company has moved to stay both the SuÅolk and Curran actions in favor of proceedings in the federal Consolidated Action. Those motions have been heard by the Court and no order has yet been issued. Three individual state court cases have been Ñled outside of California. Grant v. McKesson HBOC, Inc. (C.A. No. 99-03978) was Ñled on May 12, 1999 in the Pennsylvania Court of Common Pleas, Chester County. The Grant case relates to the Company's acquisition of Keystone/Ozone Pure Water Company (""Keystone''). PlaintiÅs are former shareholders of Keystone who received McKesson shares in exchange for their shares in Keystone pursuant to a merger agreement between plaintiÅs, McKesson and a McKesson subsidiary. On March 6, 2001, the Court denied the Company's motion to stay and dismissed with prejudice all plaintiÅs' claims except for those based on breach of contract and negligent misrepresentation. The Company answered the Grant complaint on March 26, 2001. On September 28, 1999, an action was Ñled in Delaware Superior Court under the caption Kelly v. McKesson HBOC, Inc. et al. (C.A. No. 99C-09-265 WCC). PlaintiÅs in Kelly are former shareholders of KWS&P/SFA, Inc., which merged into the Company after the Merger. PlaintiÅs assert claims under the federal securities laws, as well as claims for breach of contract and breach of the duty of good faith and fair dealing. The Company's motion to dismiss and plaintiÅs' motion for summary judgment remain pending before the Court. On October 19, 1999, an individual action was Ñled in Colorado District Court, Boulder County, under the caption American Healthcare Fund II v. HBO & Company et al. (Case No. 00-CV-1762). PlaintiÅs in American Healthcare are former shareholders of Access Health, Inc., a company acquired by HBOC prior to the Merger, and assert claims for breach of the merger contract and related claims. The Company has answered an amended complaint and Ñled a counterclaim against the plaintiÅs alleging that, as HBOC shareholders exchanging HBOC shares for McKesson shares in the Merger, plaintiÅs were unjustly enriched. Discovery has commenced and trial is currently set for September 10, 2001. The previously reported investigations by the United States Attorney's OÇce and the Securities and Exchange Commission are continuing. On May 15, 2000, the United States Attorney's OÇce Ñled a one-count information against former HBOC oÇcer, Dominick DeRosa, charging Mr. DeRosa with aiding and abetting securities fraud, and on May 15, 2000, Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an indictment was unsealed in the Northern District of California against former HBOC oÇcer, Jay P. Gilbertson, and former Company and HBOC OÇcer, Albert J. Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). On that same date, a civil complaint was Ñled by the Securities and Exchange Commission against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa (Securities and Exchange Commission v. Gilbertson, et al., Case No. C-00-3570.) Mr. DeRosa has settled with the Securities Exchange Commission without admitting or denying the substantive allegations of the complaint. On January 10, 2001, the grand jury returned a superseding indictment in the Northern District of California against Messrs. Gilbertson and Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). The Company does not believe it is feasible to predict or determine the outcome or resolution of the Accounting Litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the Ñnal 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 Ñnancial position, results of operations and cash Öows. II. Other Litigation and Claims In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, other pending and potential legal actions for product liability and other damages, investigations 10 relating to governmental laws and regulations and other matters arising out of the normal conduct of the Company's business. These include: A. Antitrust Matters The Company currently is a defendant in numerous civil antitrust actions Ñled since 1993 in federal and state courts by retail pharmacies. The federal cases have been coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of a consolidated class action (the ""Federal Class Action'') as well as approximately 109 additional actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the ""Individual Actions''). There are numerous other defendants in these actions including several pharmaceutical manufac- turers and several other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to Ñx the prices of brand name pharmaceuticals sold to plaintiÅs at artiÑcially high, and non-competitive levels, especially as compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. On January 19, 1999, the District Court entered its written opinion and judgment granting defendants' motion for a judgment as a matter of law. On July 13, 1999, the Seventh Circuit aÇrmed the District Court's judgment as to the dismissal of the claims against the wholesalers. The wholesalers' motion for summary judgment in the Individual Actions has been granted. PlaintiÅs have appealed to the Seventh Circuit. Most of the individual cases brought by chain stores have been settled. State court antitrust cases against the Company are currently pending in California and Mississippi. The state cases are based on essentially the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case in Superior Court for the State of California, City and County of San Francisco is referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III. The case is trailing MDL 997. A case Ñled in Santa Clara County (Paradise Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was coordinated with the case pending in San Francisco. The case in Mississippi (Montgomery Drug Co., et al. v. The Upjohn Co., et al.) is pending in the Chancery Court of Prentiss County Mississippi. The Chancery Court has held that the case may not be maintained as a class action. In each of the cases, plaintiÅs seek remedies in the form of injunctive relief and unquantiÑed monetary damages, attorneys' fees and costs. PlaintiÅs in the California cases also seek restitution. In addition, treble damages are sought in the Federal Class Action, the Individual Actions and the California case, and statutory penalties of $500 per violation are sought in the Mississippi case. The Company has entered into a judgment sharing agreement with certain pharmaceutical manufacturer defendants, which provides generally that the Company (together with the other wholesale distributor defendants) will be held harmless by such pharmaceutical manufacturer defendants and will be indemniÑed against the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excess of $1 million in the aggregate per wholesale distributor defendant. B. FoxMeyer Litigation In January 1997, the Company and twelve pharmaceutical manufacturers (the ""Manufacturer Defend- ants'') were named as defendants in the matter of FoxMeyer Health Corporation vs. McKesson, et al. (Case No. 97 00311) Ñled in the District Court in Dallas County, Texas (""the Texas Action''). PlaintiÅ (the parent corporation of FoxMeyer Drug Company and FoxMeyer Corporation, collectively ""FoxMeyer Corporation'') has alleged that, among other things, the Company (i) defrauded PlaintiÅ, (ii) competed unfairly and tortiously interfered with FoxMeyer Corporation's business operations, and (iii) conspired with the Manufac- turer Defendants, all in order to destroy FoxMeyer Corporation's business, restrain trade and monopolize the marketplace, and allow the Company to purchase that business at a distressed price. PlaintiÅ seeks relief against all defendants in the form of compensatory damages of at least $400 million, punitive damages, attorneys' fees and costs. The Company answered the complaint, denying the allegations and removed the case to federal bankruptcy court in Dallas. 11 In March 1997, the Company and the Manufacturer Defendants Ñled a complaint in intervention against FoxMeyer Health (now known as Avatex Corporation) in the action Ñled against Avatex by the FoxMeyer Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In November 1998, the Delaware court granted the Company's motion for summary judgment as to the Ñrst three counts asserted in the Texas Action on the ground of judicial estoppel. The Company Ñled a renewed motion for summary judgment on the four remaining counts of Avatex's complaint in the Texas Action which was denied without prejudice by the Delaware court on August 9, 1999. In addition, the Company Ñled cross-claims against the Trustee and debtors seeking the same relief as sought in the Company's complaint against Avatex. Based on the order granting summary judgment as to the Ñrst three counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action remanded to state court. On November 30, 1998, the Company and the other Defendants Ñled a notice of appeal to the District Court from the remand ruling as well as the August 1997 ruling denying defendants' motion to transfer the Texas Action to Delaware. In addition, the Company has Ñled a counter-claim and cross-claim against Avatex and Messrs. Estrin, Butler and Massman in the Texas Action, asserting various claims of misrepresentation and breach of contract. The District Court upheld the remand order and denied as moot the appeal from the order denying transfer. A cross-appeal by Avatex from the order dismissing the Ñrst three counts with prejudice failed, as the District Court aÇrmed the Bankruptcy Court's dismissal by order dated March 28, 2001. The Company and several of the other defendants appealed to the Court of Appeals the ruling upholding the order denying transfer but subsequently moved to dismiss the appeal with prejudice, which motion was granted and the appeal was dismissed on October 4, 1999. As a result, the Texas Action is now pending in Texas state court, and the parties presently are engaged in discovery on the merits of the various claims asserted in the Texas Action. C. Product Liability Litigation The Company has been named as a defendant, or has received from customers tenders of defense, in Ñfteen pending cases alleging injury due to the diet drug combination of fenÖuramine or dexfenÖuramine and phentermine. All of the cases are pending in the state courts of California, Nebraska and New Jersey. The Company's tender of the cases to the manufacturers of the drugs has been accepted and the manufacturer is paying for counsel and fully indemnifying the Company for judgments or settlements arising from its distribution of the manufacturer's products. Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the ""Subsidiaries'') are two of the defendants in approximately ninety cases in which plaintiÅs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including the Subsidiaries. EÅorts to resolve tenders of defense to their suppliers are continuing and a tentative Ñnal agreement has been reached with one major supplier. The Subsidiaries' insurers are providing coverage for these cases, subject to the applicable deductibles. There is one remaining state court class action in South Carolina Ñled against MGM on behalf of all health care workers in that state who suÅered accidental needle sticks that exposed them to potentially contaminated bodily Öuids, arising from MGM's distribution of allegedly defective syringes. MGM's suppliers of the syringes are also named defendants in this action. The tender of all cases has been accepted by the two major suppliers. By this acceptance, these suppliers are paying for separate distributors' counsel and have agreed to fully indemnify the Company for any judgments in these cases arising from its distribution of their products. The Company, along with 134 other companies, has been named in a lawsuit brought by the Lemelson Medical, Educational & Research Foundation (""the Foundation'') alleging that the Company and its subsidiaries are infringing seven (7) U.S. patents relating to common bar code scanning technology and its use for the automated management and control of product inventory, warehousing, distribution and point-of-sale transactions. The Foundation seeks to enter into a license agreement with the Company, the lump sum fee for 12 which would be based upon a fraction of a percent of the Company's overall revenues over the past ten years. Due to the pendency of earlier litigation brought against the Foundation attacking the validity of the patents at issue, the court has stayed the action until the conclusion of the earlier case. The Company is assessing its potential exposure and evaluating the Foundations' claim with the assistance of expert patent counsel, after which it will determine an appropriate course of action. D. Environmental Matters Primarily as a result of the operation of its former chemical businesses, which were divested in Ñscal 1987, the Company is involved in various matters pursuant to environmental laws and regulations: The Company has received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at Ñve sites where the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. The current estimate (determined by the Company's environmental staÅ, in consultation with outside environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible remediation costs for these Ñve sites is approximately $13 million, net of approximately $1.5 million which third parties have agreed to pay in settlement or which the Company expects, based either on agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $13 million is expected to be paid out between April 2001 and March 2029 and is included in the Company's recorded environmental liabilities at March 31, 2001. In addition, the Company has been designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the ""Superfund'' law or its state law equivalent) for environmental assessment and cleanup costs as the result of the Company's alleged disposal of hazardous substances at 21 sites. With respect to each of these sites, numerous other PRPs have similarly been designated and, while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. The Company's estimated liability at those 21 PRP sites is approximately $1.5 million. The aggregate settlements and costs paid by the Company in Superfund matters to date has not been signiÑcant. The $1.5 million is included in the Company's recorded environmental liabilities at March 31, 2001. The potential costs to the Company related to environmental matters is uncertain due to such factors as: the unknown magnitude of possible pollution and cleanup costs; the complexity and evolving nature of governmental laws and regulations and their interpretations; the timing, varying costs and eÅectiveness of alternative cleanup technologies; the determination of the Company's liability in proportion to other PRPs; and the extent, if any, to which such costs are recoverable from insurance or other parties. Except as speciÑcally stated above with respect to the litigation matters summarized under ""Accounting Litigation'' (section I, above), management believes, based on current knowledge and the advice of the Company's counsel, that the outcome of the litigation and governmental proceedings discussed in this Item 3 will not have a material adverse eÅect on the Company's Ñnancial position, results of operations or cash Öows. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended March 31, 2001. 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the executive oÇcers of the Company, including their principal occupations during the past Ñve years. The number of years of service with the Company includes service with predecessor companies (including McKesson). There are no family relationships between any of the executive oÇcers or directors of the Company. The executive oÇcers are chosen annually to serve until the Ñrst meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have qualiÑed, or until death, resignation or removal, whichever is sooner. Name Age Position with Registrant and Business Experience Alan SeelenfreundÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 Chairman of the Board since June 1999; Chairman of the Board John H. HammergrenÏÏÏÏÏÏÏÏÏÏ William R. Graber ÏÏÏÏÏÏÏÏÏÏÏÏ (1989 Ó January 1999) and Chief Executive OÇcer (1989 Ó 1997). Service with the Company Ì 26 years. 42 President and Chief Executive OÇcer since April 1, 2001, Co-President and Co-Chief Executive OÇcer from July 1999 to April 1, 2001 and a director since July 1999; Executive Vice President, President and Chief Executive OÇcer of the Supply Management Business (January Ó July 1999); Group President, McKesson Health Systems (1997 Ó 1999) and Vice President of the Company since 1996. Service with the Company Ì 5 years. 58 Senior Vice President and Chief Financial OÇcer since March 2000; Vice President and Chief Financial OÇcer, The Mead Corporation (1993 Ó 1999). Service with the Company Ì 1 year, 3 months. Paul C. Julian ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45 Senior Vice President since August 1999, and President of Supply Management Business since March 2000; Group President, McKesson General Medical (1997 Ó 2000); Executive Vice President, McKesson Health Systems (1996 Ó 1997); Group Vice President and Corporate OÇcer, Owens & Minor (1994 Ó 1996). Service with the Company Ì 5 years. Graham O. King ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61 Senior Vice President and President, Information Technology Paul E. KirincicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ivan D. Meyerson ÏÏÏÏÏÏÏÏÏÏÏÏÏ Business since October 1999; Group President, Outsourcing Services, HBOC (1998 Ó 1999); Chairman and Chief Executive OÇcer, U.S. Servis, Inc. (1994 Ó 1998). Service with the Company Ì 2 years, 6 months. 50 Senior Vice President Ì Human Resources since January 2001; Vice President, Human Resources, Consumer Health Sector, Warner Lambert (1998 Ó 2001); Vice President, Human Resources, Whirlpool Europe, Whirlpool Corporation (1975 Ó 1998). Service with the Company 3 months. 56 Corporate Secretary since April 1, 1999, and Senior Vice President and General Counsel since January 1999; Vice President and General Counsel (1987 Ó January 1999). Service with the Company Ì 23 years. Carmine J. VillaniÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 Senior Vice President and Chief Information OÇcer since January 1999; Vice President and Chief Information OÇcer (1997 Ó January 1999) and Vice President, Information Management, McKesson Drug Company (1994 Ó 1997). Service with the Company Ì 9 years. 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (a) Market Information The principal market on which the Company's common stock is traded is the New York Stock Exchange. The Company's common stock is also traded on the PaciÑc Exchange, Inc. High and low prices for the common stock by quarter are included in Financial Note 19 to the consolidated Ñnancial statements, ""Quarterly Financial Information (Unaudited),'' appearing on pages F-70 to F-72 of this Annual Report on Form 10-K. (b) Holders The number of record holders of the Company's common stock at March 31, 2001 was approximately 16,000. (c) Dividends Dividend information is included in Financial Note 19 to the consolidated Ñnancial statements, ""Quarterly Financial Information (Unaudited),'' appearing on pages F-70 to F-72 of this Annual Report on Form 10-K. Item 6. Selected Financial Data Selected Ñnancial data is presented in the Five-Year Highlights on pages F-2 to F-5 of this Annual Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of the Company's Ñnancial condition and results of operations is presented in the Financial Review on pages F-6 to F-29 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Information required by this item is included in the Financial Review on page F-24 of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data appear on pages F-31 to F-72 of this Annual Report on Form 10-K. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 15 Item 10. Directors and Executive OÇcers of the Registrant PART III Information with respect to Directors of the Company is incorporated by reference from the Company's 2001 Proxy Statement (the ""Proxy Statement''). Certain information relating to Executive OÇcers of the Company appears on page 14 of this Annual Report on Form 10-K. The information with respect to this item required by Item 405 of Regulation S-K is incorporated herein by reference from the Proxy Statement. Item 11. Executive Compensation Information with respect to this item is incorporated herein by reference from the Proxy Statement. Item 12. Security Ownership of Certain BeneÑcial Owners and Management Information with respect to this item is incorporated herein by reference from the Proxy Statement. Item 13. Certain Relationships and Related Transactions Information with respect to certain transactions with management is incorporated by reference from the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Financial Statements, Financial Statement Schedule and Exhibits Page (1) Consolidated Financial Statements and Independent Auditors' Report: See ""Index to Consolidated Financial Statements'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-1 (2) Supplementary Consolidated Financial Statement Schedule Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial statements and schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the Ñnancial statements, Ñnancial notes or supplementary Ñnancial information (3) Exhibits: Exhibits submitted with this Annual Report on Form 10-K as Ñled with the SEC and those incorporated by reference to other Ñlings are listed on the Exhibit Index ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 20 (b) Reports on Form 8-K The following reports on Form 8-K were Ñled during the three months ended March 31, 2001: 1. Form 8-K Date of Report: January 11, 2001 Date Filed: January 11, 2001 Item 9. Regulation FD Disclosure The Company announced it had Ñled an action against the New York State Common Retirement Fund, Inc., individually, and as a representative of a class of former HBO & Company (""HBOC'') shareholders who exchanged their HBOC shares for McKesson shares in the 1999 acquisition of HBOC. 16 2. Form 8-K Date of Report: February 26, 2001 Date Filed: March 1, 2001 Item 5. Other Events McKesson HBOC, Inc. (the ""Company'') announced that John H. Hammergren, Co- President and Co-CEO of the Company, will become President and CEO of the Company eÅective April 1, 2001. The Company further announced the restructuring of its iMcKesson business unit. David L. Mahoney, currently Co-CEO of the Company will leave the Company and resign from its Board of Directors. 17 Pursuant to the requirements of Section 13 of 15(d) 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. SIGNATURES MCKESSON HBOC, INC. Dated: May 31, 2001 By /s/ WILLIAM R. GRABER William R. Graber Senior Vice President and Chief Financial OÇcer Pursuant on behalf of the Registrant and to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated: * John H. Hammergren President and Chief Executive OÇcer and Director (Principal Executive OÇcer) * William R. Graber Senior Vice President and Chief Financial OÇcer (Principal Financial OÇcer) * Nigel A. Rees Vice President and Controller (Principal Accounting OÇcer) * Alfred C. Eckert III, Director * Tully M. Friedman, Director * Alton F. Irby III, Director Dated: May 31, 2001 18 * M. Christine Jacobs, Director * Martin M. KoÅel, Director * Gerald E. Mayo, Director * James V. Napier, Director * David S. Pottruck, Director * Carl E. Reichardt, Director * Alan Seelenfreund, Chairman of the Board * Jane E. Shaw, Director /s/ IVAN D. MEYERSON Ivan D. Meyerson *Attorney-in-Fact SCHEDULE II McKESSON HBOC, INC. SUPPLEMENTARY CONSOLIDATED FINANCIAL SCHEDULE VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2001, 2000 and 1999 (in millions) Column A Column B Column C Additions Column D Column E Description Amounts deducted from assets to which they apply: Year Ended March 31, 2001 Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year Ended March 31, 2000 Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year Ended March 31, 1999 Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions(1) Balance at End of Period(2) $236.5 39.0 $275.5 $140.4 40.8 $181.2 $ 54.0 29.8 $ 83.8 $239.6(3) 8.4 $248.0 $216.8(4) 0.5 $217.3 $ 87.2(5) 11.1 $ 98.3 $ 9.1 Ì $ 9.1 $ Ì Ì $ Ì $16.2 Ì $16.2 $(101.5) (10.8) $(112.3) $(120.7) (2.3) $(123.0) $ (17.0) (0.1) $ (17.1) $383.7 36.6 $420.3 $236.5 39.0 $275.5 $140.4 40.8 $181.2 2001 2000 1999 (1) Deductions: Written oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Credited to other accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $108.7 3.6 $112.3 (2) Amounts shown as deductions from: Current receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $419.7 0.6 $420.3 $120.4 2.6 $123.0 $274.9 0.6 $275.5 $ 17.1 Ì $ 17.1 $180.6 0.6 $181.2 (3) Includes charges of $161.1 million for customer settlements (forgiveness of accounts receivable, customer credits and refunds) resulting from software and services issues associated with pre-July 1999 Health Care Information Technology contracts. (4) Includes charges of $68.5 million for a change in estimate of receivable allowance requirements, $72.6 million for customer settlements (forgiveness of accounts receivable, customer credits and refunds) associated with discontinued product lines and $7.7 million for uncollectible unbilled receivables primarily in the Health Care Information Technology segment. (5) Includes charges of $70.0 million for Health Care Information segment bad debts, disputed amounts and customer allowances. 19 Exhibit Number 2.1 2.2 2.3 3.1 3.2 3.3 4.1 4.2 4.3 4.4 EXHIBIT INDEX Description Agreement and Plan of Merger, dated as of October 17, 1998, by and among McKesson Corporation (""the Company''), McKesson Merger Sub, Inc. (""Merger Sub'') and HBO & Company (""HBOC'') (Exhibit 2.1(1)). Amendment Agreement to Agreement and Plan of Merger, dated as of November 9, 1998, by and among the Company, Merger Sub and HBOC (Exhibit 2.2(1)). Second Amendment Agreement to that certain Agreement and Plan of Merger dated October 17, 1998, as amended by an Amendment Agreement dated as of November 9, 1998 (Exhibit 2.1(2)). Restated CertiÑcate of Incorporation of the Company as Ñled with the oÇce of the Delaware Secretary of State on July 30, 1998 (Exhibit 3.2(3)). CertiÑcate of Amendment to the Restated CertiÑcate of Incorporation of Registrant as Ñled with the oÇce of the Delaware Secretary of State on January 12, 1999 (Exhibit 4.3(4)). Amended and Restated By-Laws of the Company dated as of March 31, 2001. Rights Agreement dated as of October 21, 1994 between the Company and First Chicago Trust Company of New York, as Rights Agent (the ""Rights Agreement'') (Exhibit 4.1(6)). Amendment No. 1 to the Rights Agreement dated as of October 19, 1998 (Exhibit 99.1(7)). Indenture, dated as of March 11, 1997, by and between the Company, as Issuer, and The First National Bank of Chicago, as Trustee (Exhibit 4.4(8)). Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20, 1997, among the Company, as Sponsor, The First National Bank of Chicago, as Institutional Trustee, First Chicago Delaware, Inc., as Delaware Trustee and William A. Armstrong, Ivan D. Meyerson and Nancy A. Miller, as Regular Trustees (Exhibit 4.2(9)). 4.6 4.5 McKesson Corporation Preferred Securities Guarantee Agreement, dated as of February 20, 1997, between the Company, as Guarantor, and The First National Bank of Chicago, as Preferred Guarantor (Exhibit 4.7(10)). Registrant agrees to furnish to the Commission upon request a copy of each instrument deÑning the rights of security holders with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of the total assets of the Registrant. Employment Agreement, dated as of August 1, 1999, by and between the Company and the Chairman of the Board(16). Amended and Restated Employment Agreement, dated as of June 21, 1999, by and between the Company and its President and Chief Executive OÇcer(16). Form of Termination Agreement by and between the Company and certain designated Corporate OÇcers (Exhibit 10.23(11)). 10.1 10.2 10.3 10.4 McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan, as amended through January 27, 1999 (Exhibit 10.5(14)). 10.5 McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity Compensation and Deferral Plan, as amended through January 27, 1999 (Exhibit 10.6(14)). 10.6 McKesson HBOC, Inc. Supplemental PSIP (Exhibit 10.7(14)). 10.7 McKesson HBOC, Inc. Deferred Compensation Administration Plan, amended as of January 27, 1999 (Exhibit 10.8(14)). 10.8 McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as amended eÅective January 27, 1999 (Exhibit 10.9(14)). 10.9 McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as amended eÅective January 27, 1999 (Exhibit 10.10(14)). 10.10 McKesson HBOC, Inc. Directors' Deferred Compensation Plan, as amended eÅective January 27, 1999 (Exhibit 10.11(14)). 10.11 McKesson HBOC, Inc. 1985 Executives' Elective Deferred Compensation Plan, amended as of January 27, 1999 (Exhibit 10.12(14)). 20 Exhibit Number Description 10.12 McKesson HBOC, Inc. Management Deferred Compensation Plan, amended as of January 27, 1999 (Exhibit 10.13(14)). 10.13 McKesson HBOC, Inc. 1984 Executive BeneÑt Retirement Plan, as amended through January 27, 1999 (Exhibit 10.14(14)). 10.14 McKesson HBOC, Inc. 1988 Executive Survivor BeneÑts Plan, as amended eÅective January 27, 1999 (Exhibit 10.15(14)). 10.15 McKesson HBOC, Inc. Executive Medical Plan Summary (Exhibit 10.16(14)). 10.16 McKesson HBOC, Inc. Severance Policy for Executive Employees, as amended through January 27, 1999 (Exhibit 10.17(14)). 10.17 McKesson HBOC, Inc. Management Incentive Plan, as amended through January 27, 1999 (Exhibit 10.18(14)). 10.18 McKesson HBOC, Inc. Long-Term Incentive Plan, as amended through January 27, 1999 (Exhibit 10.19(14)). 10.19 McKesson HBOC, Inc. Stock Purchase Plan, as amended through January 27, 1999 (Exhibit 10.20(14)). 10.20 McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan (Exhibit 99.1(12)). 10.21 Stock Purchase Agreement, dated as of January 10, 2000, by and among the Company, Danone International Brands, Inc. and Groupe Danone SA (Exhibit 99.1(15)). 10.22 Amendment No. 1 to January 10, 2000 Stock Purchase Agreement, dated as of February 28, 2000 (Exhibit 10.23(16)). 10.23 First Amendment to October 22, 1999 Credit Agreement dated as of October 10, 2000. 10.24 HBO & Company 1993 Stock Option Plan for Nonemployee Directors (Exhibit 4(13)). 10.25 Amendment and Restated Employment Agreement, dated as of June 21, 1999, by and between the Company and its former Co-President and Co-Chief Executive OÇcer (Exhibit 10.26(16)). 10.26 Third Amendment to June 25, 1999 Receivables Purchase Agreement dated as of June 16, 2000. 10.27 Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27, 1999 (Exhibit 10.28(14)). 10.28 Credit Agreement dated as of November 10, 1998 among the Company, Medis Health and Pharmaceutical Services Inc., Bank of America National Trust and Savings Association, as Agent, Bank of America Canada, as Canadian Administrative Agent, The Chase Manhattan Bank, as documentation agent, First Union National Bank, as documentation agent, The First National Bank of Chicago, as documentation agent, and the other Ñnancial institutions party thereto (Exhibit 10.29(14)). Stock Option Agreement, dated October 17, 1998, between McKesson and HBOC (Exhibit 99.1(1)). Stock Option Agreement, dated October 17, 1998, between HBOC and McKesson (Exhibit 99.2(1)). 10.30 10.29 10.31 Credit Agreement dated as of October 22, 1999 among the Company and the several Ñnancial institutions from time to time party to the Agreement (""Banks''), The Chase Manhattan Bank, First Union National Bank, Morgan Guaranty Trust Company as documentation agents for Banks and Bank of America N.A. as administrative agent for Banks (Exhibit 10.32(16)). First Amendment to November 10, 1998 Credit Agreement, dated as of June 28, 1999 (Exhibit 10.33(16)). Second Amendment to November 10, 1998 Credit Agreement, dated as of December 1, 1999 (Exhibit 10.34(16)). 10.33 10.32 10.34 Receivables Purchase Agreement dated as of June 25, 1999 among the Company, as servicer, CGSF Funding Corporation, as seller, Preferred Receivables Funding Corporation, Falcon Asset Securitization Corporation and Blue Ridge Asset Funding Corporation, as conduits, The First National Bank of Chicago and Wachovia Bank, N.A., as managing agents, the several Ñnancial institutions from time to time party to the Agreement, and The First National Bank of Chicago, as collateral agent (Exhibit 10.35(16)). 21 Exhibit Number 10.35 10.36 10.37 10.38 10.39 Description First Amendment to June 25, 1999 Receivables Purchase Agreement, dated as of September 29, 1999 (Exhibit 10.36(16)). Second Amendment to June 25, 1999 Receivables Purchase Agreement, dated as of December 6, 1999 (Exhibit 10.37(16)). Statement of Terms and Conditions Applicable to certain Stock Options granted on August 16, 1999 (Exhibit 10.38(16)). Statement of Terms and Conditions Applicable to certain Restricted Stock grants on January 31, 2000 (Exhibit 10.39(16)). Syndicated Revolving Promissory Note dated as of May 28, 1999 among the Company, Bank of America National Trust and Savings Association, as Agent, and the other noteholders' signatures to the Note, Banc of America LLC as Sole Lead Arranger (Exhibit 10.40(16)). 10.40 Employment Agreement, dated as of June 21, 1999 by and between the Company and its Senior Vice President, President, Information Technology Business (Exhibit 10.41(16)). 10.41 Employment Agreement, dated as of August 1, 1999 by and between the Company and its Senior Vice President, President, Supply Management Business (Exhibit 10.42(16)). List of Subsidiaries of the Company. Consent of Deloitte & Touche LLP. Power of Attorney. 21 23.1 24 Footnotes to Exhibit Index: (1) Incorporated by reference to designated exhibit to Amendment No. 1 to McKesson's Form S-4 Registration Statement No. 333-67299 Ñled on November 27, 1998. (2) Incorporated by reference to designated exhibit to the Company's Current Report on Form 8-K dated January 14, 1999. (3) Incorporated by reference to designated exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (4) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement No. 333-70501 Ñled on January 12, 1999. (5) Incorporated by reference to designated exhibit to the Company's Quarterly Report on for 10-Q for the quarter ended June 30, 1999. (6) Incorporated by reference to designated exhibit to Amendment No. 3 to the Company's Registration Statement on Form 10 Ñled on October 27, 1994. (7) Incorporated by reference to designated exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (8) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the Ñscal year ended March 31, 1997. (9) Incorporated by reference to designated exhibit to Amendment No. 1 to the Company's Form S-3 Registration Statement No. 333-26433 Ñled on June 18, 1997. (10) Incorporated by reference to designated exhibit to the Company's Form S-3 Registration Statement No. 333-26433 Ñled on May 2, 1997. (11) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the Ñscal year ended March 31, 1995. (12) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement No. 333-71917 Ñled on February 5, 1999. (13) Incorporated by reference to designated exhibit to HBOC's Form S-8 Registration Statement No. 33- 67300 Ñled on August 12, 1993. 22 (14) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the Ñscal year ended March 31, 1999. (15) Incorporated by reference to designated exhibit to the Company's Current Report on Form 8-K dated February 1, 2000. (16) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the Ñscal year ended March 31, 2000. 23 CONSOLIDATED FINANCIAL INFORMATION CONTENTS Five-Year Highlights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Review ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page F-2 F-6 Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-30 Consolidated Financial Statements Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999 ÏÏÏÏÏ F-31 Consolidated Balance Sheets as of March 31, 2001, 2000 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-32 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2000 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-33 Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999 ÏÏÏÏ F-34 Financial Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-35 F-1 FIVE-YEAR HIGHLIGHTS CONSOLIDATED OPERATIONS Revenues(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense-net of corporate interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends on preferred securities of subsidiary trust, net of tax beneÑt ÏÏÏÏ Income (loss) after taxes Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average stockholders' equityÏÏÏÏÏÏÏÏÏÏÏ Return on equity(15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common dividends declared ÏÏÏÏÏÏÏÏÏÏÏ Shares on which diluted earnings per common share were based DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings (loss) per common share(16) Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $42,010.0 14.5% 2,431.0 5.8% 370.0(4) 0.9% 2000 Years Ended March 31, 1999 (dollars in millions, except per share amounts) $22,041.8 $29,970.9 $36,687.0 1998 22.4% 2,224.9 6.1% 322.4(5) 0.9% 36.0% 2,320.5 7.7% 310.0(6) 1.0% 33.1% 2,094.8 9.5% 579.8(7) 2.6% 1997(1) $16,559.3 23.2% 1,426.1 8.6% 216.0(8) 1.3% 102.7 107.3 90.4 72.7 35.6 15.8(4,9) 52.3 331.0% 313.1(5,10) 122.3 39.1% 168.2(6) 101.4 60.3% 459.3(7) 177.9(11) 38.7% 135.0(8) 73.3 54.3% 6.2 6.2 6.2 6.2 0.7 (42.7)(4,9) (5.6)(12) (48.3) Ì 3,655.5 (1.3)% 68.3 184.6(5,10) 539.1(13) 723.7 752.4% 60.6(6) 24.3 84.9 (72.1)% 275.2(7,11) 29.4 304.6 43.6% 61.0(8) 151.1(14) 212.1 94.4% 3,082.9 2,772.0 2,273.8 1,690.9 23.5% 67.5 3.1% 84.9 13.4% 62.0 12.5% 52.1 283.1 283.1 281.3 281.3 275.2 275.2 282.1 266.2 265.2 253.9 $ (0.15) (0.02) (0.17) $ 0.66 1.91 2.57 $ 0.22 0.09 0.31 $ 1.00 0.10 1.10 $ 0.23 0.57 0.80 (1) Includes the results of the FoxMeyer Corporation pharmaceutical distribution business (""FoxMeyer'') from the acquisition date of November 8, 1996 and of McKesson General Medical Corporation (""MGM'') from the acquisition date of February 21, 1997. (2) Excludes other income. (3) Revenues less cost of sales; Ñscal 2000 and 1999 include $0.8 million and $1.2 million, respectively, of Health Care Supply Management segment charges for restructuring, asset impairments and other operating items representing 0.002% and 0.004% of Ñscal 2000 and 1999 revenues, respectively. (4) Includes Health Care Supply Management segment charges for asset impairments, severance and facility closing costs of $28.9 million (including $18.2 million for the restructure of the former iMcKesson segment), partially oÅset by a $7.8 million gain of the liquidation of an investment and Health Care Information Technology segment charges of $161.1 million for customer settlements and $134.5 million for asset impairments, severance and exit-related costs primarily related to the restructure of the former iMcKesson business, 0.8% of revenues in the aggregate, $239.4 million after- tax. F-2 (5) Includes Health Care Supply Management segment charges of $40.0 million for asset impairments, accounts receivable reserves and customer settlements primarily related to a prior year implementation of a contract system, and $2.9 million in severance and exit-related charges primarily associated with segment staÅ reductions, partially oÅset by income of $8.1 million related to reductions in prior year restructuring accruals. Also includes Health Care Information Technology segment charges of $239.8 million for asset impairments, customer accounts receivable, severance and exit costs primarily associated with product streamlining and reorganization, $61.8 million for accounts receivable and customer settlements, $1.5 million for the write-oÅ of purchased in-process technology, partially oÅset by income of $7.0 million related to a reduction in prior year accruals for acquisition-related activities, 0.9% of revenues in the aggregate, $198.7 million after-tax. (6) Includes $214.3 million of Health Care Supply Management and $181.6 million of Health Care Information Technology segment charges for transaction costs, costs associated with employee beneÑts, primarily related to change of control provisions, employee severance, asset impairment write-downs, restructuring, integration and aÇliation costs incurred, and system installation costs associated primarily with acquisitions, 1.3% of revenues in the aggregate, $285.8 million after-tax. (7) Includes $16.7 million of Health Care Supply Management segment charges for the terminated merger with AmeriSource Health Corporation (""AmeriSource'') and $44.1 million in costs associated primarily with the integration and rationalization of acquisitions; and, $35.3 million of Health Care Information Technology segment charges related to the acquisitions of AMISYS Managed Care Systems, Inc. and Enterprise Systems, Inc., 0.4% of revenues in the aggregate, $65.3 million after-tax. (8) Includes Health Care Supply Management segment charges of $98.8 million for restructuring, asset impairment and other operating items, $48.2 million for the write-oÅ of purchased in-process technology related to the acquisition of Automated Healthcare, Inc., and $6.4 million related to the merger of Access Health, Inc. and Informed Access Systems Inc. and Health Care Information Technology segment charges of $68.1 million related to the acquisition of CyCare Systems, Inc., Management Software, Inc. and GMIS Inc., 1.3% of revenues in the aggregate, $156.9 million after-tax. (9) In addition to the items discussed in Note 4 above, includes Corporate segment charges of $33.9 million for asset impairments, severance and facility closing costs related to the restructure of the iMcKesson business, $105.2 million for asset impairments of investments and $2.5 million in legal fees incurred in connection with the Company's earlier restatement of prior years' Ñnancial results and resulting pending litigation. These items represent 0.3% of revenues in the aggregate, $86.3 million after-tax. (10) In addition to items described in Note 5 above, includes Corporate segment net gains of $259.2 from the exchange and subsequent sale and donation of equity investments, partially oÅset by charges of $55.8 million for accounting, legal and other costs incurred in connection with the Company's earlier restatement of prior years' Ñnancial results and resulting pending litigation, costs associated with former employees and other acquisition related costs. These items represent 0.6% of revenues in the aggregate, $118.3 million after-tax. (11) Includes a $4.6 million tax settlement. (12) Includes an after-tax loss reÖecting an adjustment to the gain recorded on the Ñscal 2000 sale of McKesson Water Products Company (""Water Products business''). (13) Includes after-tax income from the Water Products business of $24.4 million, an after-tax charge of $1.2 million for increases in environmental costs for sites associated with the discontinued chemical operations and a $515.9 million after-tax gain on sale of the Water Products business. (14) Includes after-tax gain on sale of Armor All Products Corporation (""Armor All'') of $120.2 million. (15) Based on net income. (16) Dilutive securities are excluded in the computation of diluted earnings per share in Ñscal 2001, 2000, and 1999 due to their antidilutive eÅect. F-3 FIVE-YEAR HIGHLIGHTS CONSOLIDATED FINANCIAL POSITION 2001 2000 1999 1998 1997(1) Years Ended March 31, Customer receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Drafts and accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏ Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of revenues(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment-netÏÏÏÏÏÏÏ Percent of revenues(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total debt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Convertible preferred securities ÏÏÏÏÏÏÏÏÏ Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital employed(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ratio of net debt to net capital employed(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common shares outstanding at March 31 ÏÏ Dividends per common share(6) ÏÏÏÏÏÏÏÏ Book value per common share(7) ÏÏÏÏÏÏÏ Market price High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ At year endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,298.8 28.3 5,116.4 46.6 5,361.9 48.8 9,164.0 6,549.7 2,614.3 (dollars in millions, except per share amounts) $1,774.0 29.0 2,603.1 47.0 2,186.1 39.5 5,318.1 3,083.8 2,234.3 $ 2,847.4 27.9 4,149.3 43.4 3,883.9 40.6 7,965.5 5,121.8 2,843.7 $2,290.0 27.5 3,522.5 45.9 3,549.4 46.3 6,452.8 4,744.8 1,708.0 6.2% 595.3 1.4% 7.8% 555.4 1.5% 5.7% 529.6 1.8% 10.1% 448.6 2.0% 158.9 11,529.9 1,229.7 195.9 3,492.9 4,918.5 145.1 10,372.9 1,260.0 195.8 3,565.8 5,021.6 199.2 9,020.0 1,151.2 195.6 2,881.8 4,228.6 166.4 7,291.8 1,318.4 195.4 2,561.7 4,075.5 $1,452.6 25.9 2,271.1 44.5 2,102.7 41.2 4,571.7 3,031.9 1,539.8 7.6% 372.2 1.8% 91.4 6,413.4 1,032.0 194.8 2,081.8 3,308.6 17.5% 14.8% 22.4% 18.8% 16.2% 284.0 0.24 12.30 37.00 16.00 26.75 283.4 0.24 12.58 69.25 18.19 21.00 280.6 0.44 10.27 96.25 52.25 66.00 271.0 0.50 9.45 61.75 31.50 57.75 259.0 0.50 8.04 34.13 20.56 32.00 (1) Includes the results of FoxMeyer from the acquisition date of November 8, 1996 and of MGM from the acquisition date of February 21, 1997. (2) Based on year-end balances and sales or cost of sales assuming major acquisitions occurred at beginning of year and a 360-day year. (3) Total debt includes all interest-bearing debt and capitalized lease obligations. (4) Capital employed consists of total debt, convertible preferred securities of subsidiary trust and stockhold- ers' equity. (5) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net capital employed (capital employed less cash and cash equivalents and marketable securities). (6) Dividends per common share amounts do not reÖect the eÅects of poolings of interest transactions. (7) Stockholders' equity divided by year-end common shares outstanding. F-4 FIVE-YEAR HIGHLIGHTSÌSUPPLEMENTAL DATA CONSOLIDATED OPERATIONS EBIT(2,7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EBIT excluding unusual items(2,3,7) ÏÏÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EBITA(4,7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EBITA excluding unusual items(3,4,7) ÏÏÏÏ Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average committed capital(5) ÏÏÏÏÏÏÏÏÏÏÏÏ Return on committed capital(6) ÏÏÏÏÏÏÏÏÏÏ Return on committed capital(6) excluding unusual items(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 1998 1997(1) Years Ended March 31, 1999 (dollars in millions) $ 258.6 $ 420.4 $ 532.0 1.1% 547.9 1.5% 55.5 475.9 1.3% 603.4 1.6% 0.9% 654.5 2.2% 41.0 299.6 1.0% 695.5 2.3% 2.4% 628.1 2.8% 34.7 566.7 2.6% 662.8 3.0% $ 118.5 0.3% 576.8 1.4% 66.2 184.7 0.4% 643.0 1.5% $ 170.6 1.0% 392.1 2.4% 24.1 194.7 1.2% 416.2 2.5% 3,565.8 3,420.2 3,026.8 2,230.7 1,520.3 5.2% 15.4% 11.5% 27.8% 16.8% 18.0% 19.1% 24.9% 32.1% 31.8% (1) Includes the results of FoxMeyer from the acquisition date of November 8, 1996 and of MGM from the acquisition date of February 21, 1997. (2) Income (loss) from continuing operations before interest expense-net of corporate interest income, taxes and dividends on preferred securities of subsidiary trust. (3) Unusual items include those which management believes are either one-time occurrences and/or events which are not related to normal, on-going operations or represent charges that are in excess of normal/ historical amounts. See Notes 3 to 11 on pages F-2 and F-3. (4) Income (loss) from continuing operations before interest expense-net of corporate interest income, income taxes and amortization of intangibles. (5) Capital employed less cash and cash equivalents, marketable securities and intangibles (including accounts associated with discontinued operations). (6) Earnings (including income from discontinued operations) before interest expense-net of corporate interest income, income taxes and amortization of intangibles divided by average committed capital (capital employed less cash and cash equivalents, marketable securities and intangibles). (7) EBITA and EBIT are not intended to represent cash Öow from operations, or alternatives to net income, each as deÑned by accounting principles generally accepted in the United States of America. In addition, the measures of EBITA and EBIT presented herein may not be comparable to other similarly titled measures used by other companies. The Company believes that EBITA and EBIT are standard measures commonly reported and widely used by analysts, investors and other interested parties operating in the Company's industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in similar industries. F-5 McKESSON HBOC, INC. FINANCIAL REVIEW GENERAL Management's discussion and analysis, referred to as the Financial Review, is intended to assist in the understanding and assessment of signiÑcant changes and trends related to the results of operations and Ñnancial position of McKesson HBOC, Inc. (""McKesson HBOC'' or the ""Company''), together with its subsidiaries. This discussion and analysis should be read in conjunction with the Company's consolidated Ñnancial statements and accompanying Financial Notes. 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 identiÑed by use of forward-looking words such as ""believes'', ""expects'', ""anticipates'', ""may'', ""will'', ""should'', ""seeks'', ""approximately'', ""intends'', ""plans'', or ""estimates'', or the negative of these words or other comparable terminology. The discussion of Ñnancial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to diÅer materially from those projected. These include, but are not limited to, the factors discussed under ""Additional Factors That May AÅect 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 reÖect events or circumstances after the date hereof or to reÖect the occurrence of unanticipated events. BUSINESS SEGMENTS The Company conducts its operations through two operating business segments: Health Care Supply Management and Health Care Information Technology. The Health Care Supply Management segment includes the Company's U.S. pharmaceutical, health care products and medical-surgical supplies distribution businesses. U.S. Health Care Supply Management operations also include the manufacture and sale of automated pharmaceutical dispensing systems for hospitals and retail pharmacists, medical management services and tools to payors and providers, marketing and other support services to pharmaceutical manufac- turers, consulting and outsourcing services to pharmacies, and distribution of Ñrst-aid products to industrial and commercial customers. In addition, Health Care Supply Management includes the Company's interna- tional distribution operations (including operations in Canada and an equity interest in a Mexican distribution business). The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, Ñnancial, supply chain, managed care and strategic management software solutions, as well as networking technologies, including wireless capabilities, electronic commerce, outsourcing and other services to health care organizations throughout the U.S. and certain foreign countries. Acquisitions Fiscal Year 2001 Acquisitions and Investments In April 2000, the Company and three other health care product distributors announced an agreement to form the New Health Exchange (subsequently renamed ""Health Nexis''). Health Nexis is an Internet-based company focused on information systems and other technology solutions to streamline communication, processing and management of product and contract data across the health care supply chain. The Company accounts for its 34% interest in Health Nexis under the equity method of accounting. In Ñscal 2001, the F-6 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Company invested $10.8 million in Health Nexis and recorded equity in the losses of Health Nexis of $5.0 million. In July 2000, the Company completed the acquisition of MediVation, Inc., a provider of an automated web-based system for physicians to communicate with patients online, for approximately $24 million in cash, $14 million in Company common stock and the assumption of $6 million of employee stock incentives. A charge of $2.1 million was recorded in the second quarter to write oÅ the portion of the purchase price allocated to in-process technology for which technological feasibility had not been established as of the acquisition date and for which there were no alternative uses. The Company received an independent valuation that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date. In connection with the restructure of the Company's former iMcKesson business in February, 2001 and based on the utilization of a discounted cash Öow methodology, the Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31, 2001. In Ñscal 2001, the Company also completed a number of smaller acquisitions in the Health Care Supply Management and Health Care Information Technology segments. Fiscal Year 2000 Acquisitions In November 1999, the Company acquired Abaton.com, a provider of internet-based clinical applications for use by physician practices, pharmacy beneÑt managers, beneÑt payors, laboratories and pharmacies, for approximately $95 million in cash and the assumption of approximately $8 million of employee stock incentives. A charge of $1.5 million was recorded to write oÅ 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 that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date. In connection with the restructure of the Company's former iMcKesson business in February, 2001 and based on the utilization of a current discounted cash Öow methodology, the Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31, 2001. In Ñscal 2000, the Company also made several smaller acquisitions and investments in the Health Care Supply Management and Health Care Information Technology segments. Fiscal Year 1999 Acquisitions 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 shares of common stock of HBOC. Each share of HBOC common stock was exchanged for 0.37 of a share of McKesson common stock (the ""Exchange Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was structured as a tax- free reorganization and was accounted for as a pooling of interests. In addition, the Company completed several acquisitions in Ñscal 1999 in the Health Care Supply Management and Health Care Information Technology segments that were accounted for under the pooling of interests method as follows: In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical supplies, for approximately 2 million shares of Company common stock. F-7 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Also, in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail, fulÑllment and sales support services, including sample distribution to physician and pharmaceutical company sales representatives, for approximately 300,000 shares of Company common stock. In September 1998, the Company acquired Automated Prescription Systems, Inc., a manufacturer of automated prescription Ñlling and dispensing systems, for approximately 1.4 million shares of Company common stock. In October 1998, the Company acquired US Servis, Inc., a professional management company that provides outsourcing services for physician delivery systems and hospital business oÇces, for the equivalent, after application of the Exchange Ratio, of approximately 700,000 shares of Company common stock. Also in October 1998, the Company completed the acquisition of IMNET Systems, Inc., a provider of electronic information and document management solutions for the health care industry, for the equivalent of approximately 3.6 million shares of Company common stock and 0.6 million Company stock options. In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care management programs and health care information services, for the equivalent of approximately 12.7 million shares of Company common stock In Ñscal 1999, the Company completed the acquisitions of the following companies in its Health Care Supply Management segment, each accounted for under the purchase method of accounting: In September 1998, the Company acquired MedManagement, a pharmacy management, purchasing, consulting and information services company, for approximately $38 million in cash. The acquisition was funded with short-term borrowings. The excess of the purchase price over the fair value of the net assets acquired of $41 million is being amortized on a straight-line basis over 20 years. In November 1998, the Company acquired RedLine Health Care Corporation (""RedLine'') a distributor of medical supplies and services to the extended-care industry, including long-term-care and home-care sites for approximately $233 million in cash. The acquisition was funded with short-term borrowings. The excess of the purchase price over the fair value of the net assets acquired of $149 million is being amortized on a straight-line basis over 40 years. Divestiture In February 2000, the Company sold its wholly-owned subsidiary, McKesson Water Products Company for approximately $1.1 billion and recognized an after-tax gain of $515.9 million. The Water Products business has been classiÑed as a discontinued operation for all periods presented. F-8 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Financial Results The results of continuing operations include the following: Income from Continuing Operations Before unusual items and dividends on convertible preferred securities of subsidiary trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends on convertible preferred securities of subsidiary trustÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Before unusual items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unusual items by segment 2001 Years Ended March 31, 2000 1999 Pre-tax After-tax Pre-tax After-tax Pre-tax After-tax (in millions) $ 474.1 $ 289.2 $ 440.6 $ 271.2 $ 564.1 $ 352.6 Ì 474.1 (6.2) 283.0 Ì 440.6 (6.2) 265.0 Ì 564.1 (6.2) 346.4 Health Care Supply Management ÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (Loss) from Continuing Operations ÏÏ (21.1) (295.6) (141.6) 15.8 $ (12.9) (226.5) (86.3) (34.8) (296.1) 203.4 $ (42.7) $ 313.1 (20.8) (177.9) 118.3 $ 184.6 (214.3) (181.6) Ì $ 168.2 (133.3) (152.5) Ì 60.6 $ Fiscal 2001 Fiscal 2001 after-tax income from continuing operations before unusual items was $283.0 million, a 7% increase over the prior year's income from continuing operations of $265.0 million. Fiscal 2001 results reÖect revenue and operating margin growth in the Health Care Supply Management segment partially oÅset by declines in revenues and operating proÑts in the Health Care Information Technology segment. Fiscal 2000 Fiscal 2000 after-tax income from continuing operations before unusual items was $265.0 million, a 23% decline from the prior year's income from continuing operations before unusual items of $346.4 million. Fiscal 2000 results reÖect revenue and operating proÑt declines in the Health Care Information Technology segment, modest operating proÑt growth in the Health Care Supply Management segment, and higher Ñnancing costs to support revenue growth in the Health Care Supply Management segment. Fiscal 1999 Fiscal 1999 after-tax income from continuing operations before unusual items was $346.4 million, a 3% increase over the prior year's income from continuing operations before unusual items of $335.9 million. Fiscal 1999 results reÖect revenue and operating margin growth and the positive impact of acquisitions in the Health Care Supply Management segment oÅset, in part, by a decline in Health Care Information Technology segment operating results. Unusual Items In Ñscal 2001, the Company incurred charges for asset impairments, severance and exit costs primarily associated with the restructure of the Company's former iMcKesson business segment. In Ñscal 2001 and 2000, the Company incurred charges associated with product streamlining and reorganization in its Health Care Information Technology segment including, provision for customer settlements in 2001, and asset impairments, customer settlements and severance in 2000. In both years, the Company recorded gains and losses for certain equity investments and costs incurred in connection with the Investigation (as deÑned F-9 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) below), the restatement of historical (pre-acquisition) consolidated Ñnancial statements and the resulting pending securities litigation. In Ñscal 2000 and 1999, the Company incurred charges for acquisition-related activities including transaction costs, employee beneÑt costs, severance, as well as costs for consolidation of facilities and administrative processes and certain operating charges. For the purposes of discussing the results of operations, the items described above are referred to as ""unusual items'' in the Financial Review. The results of operations excluding ""unusual items'' are not intended to represent income from operations, or alternatives to net income, each as deÑned by accounting principles generally accepted in the United States of America. In addition, the charges included as ""unusual items'' presented herein may not be comparable to other similarly titled measures used by other companies. Management believes, however, that the discussion of the results of operations excluding such unusual items is the most informative representation of recurring, non-transactional operating results. Management believes that these items either represent one-time occurrences and/or events which are not related to normal, ongoing operations or represent charges that are in excess of normal/historical operating amounts. The unusual items in Ñscal 2001, 2000 and 1999 are as follows: Restatement-related costs incurred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net losses (gains) on the exchange and sale of equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transaction costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs associated with the terminated merger transaction with AmeriSource Health Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs associated with employee beneÑts, primarily related to change in control provisionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring, asset impairments and customer settlements ÏÏÏÏÏ Employee severance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other merger-related costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs associated with former employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisition-related integration costs incurred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other operating items: Accounts receivable allowancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Contract system costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total after-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $325.7 2001 Years Ended March 31, 2000 (in millions) 1999 $ 2.5 $ 18.9 97.8 (259.2) $ 79.6 5.0 88.7 108.4 31.9 13.8 32.3 36.2 $395.9 $285.8 319.3 36.6 2.1 228.5 4.2 (0.4) 23.8 68.5 31.5 11.7 $ 127.5 $ 80.4 $458.3 Fiscal 2001 Unusual Items In Ñscal 2001, the Company recorded net pre-tax charges for unusual items totaling $458.3 million including $21.1 million in the Health Care Supply Management segment, $295.6 million in the Health Care Information Technology segment and $141.6 million in the Corporate segment. Following is a description of these items in Ñscal 2001: Restatement-Related Costs Incurred In April 1999, following the January 1999 acquisition of HBOC, the Company discovered improper accounting practices at HBOC. In July 1999, the Audit Committee of the Company's Board of Directors F-10 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) completed an investigation into such matters (the ""Investigation''), which resulted in the previously reported restatement of the Company's historical consolidated Ñnancial statements related to HBOC (pre-acquisition) in Ñscal 1999, 1998 and 1997. In Ñscal 2001, the Company incurred legal fees totaling $2.5 million, in connection with the pending securities litigation arising out of the restatement. (Gain) Loss on Investments The Company recorded an other than temporary impairment loss of $105.6 million on its WebMD warrants and other equity and venture capital investments as a result of signiÑcant declines in the market values of these investments. The Company also recorded a $7.8 million gain on the liquidation of another investment. Restructuring, Asset Impairments and Customer Settlements In May 2000, the Company announced the formation of a new business unit, iMcKesson, to focus on healthcare applications using the Internet and other emerging technologies. iMcKesson included selected net assets from the former e-Health, Health Care Supply Management and Health Care Information Technology segments and Ñscal 2001 acquisitions of strategic investments and businesses. In February 2001, the Company announced the restructuring of the iMcKesson business unit by moving responsibility for iMcKesson's medical management business to the Health Care Supply Management segment and the physician services business to the Health Care Information Technology segment. In connection with the assessment of these businesses, management shut down certain iMcKesson operations. The Company wrote down goodwill and intangibles totaling $116.2 million arising from the acquisitions of Abaton.com and MediVation, Inc., based upon an updated analysis of discounted cash Öows. The Company also recorded $29.8 million in non-cash asset impairments including $23.1 million for the write-down of equity investments whose market values had signiÑcantly declined, $5.2 million in capitalized software costs and $1.5 million in other Ñxed assets. In addition, the Company recorded $9.1 million in exit-related costs including $6.0 million for non-cancelable services directly related to discontinued products, $1.5 million for estimated claims resulting from the abandonment of products no longer core to its business and $1.6 million in other exit-related costs. In the second quarter of Ñscal 2001, the Company reviewed the operations and cost structure of its medical management business resulting in the planned closure of a call center and a workforce reduction and recorded $0.2 million in charges for exit-related activities. In the third quarter of Ñscal 2001, the Company closed a pharmaceutical distribution center and recorded $0.7 million in asset impairments and $0.5 million in charges for exit-related activities. In the fourth quarter of Ñscal 2001, the Company reviewed the operations and cost structure of its pharmaceutical services business resulting in the planned closures of two oÇces. The Company recorded $1.4 million in asset impairments and $1.6 million in exit-related costs primarily related to remaining lease obligations subsequent to termination of operations. The Company also reduced prior year reserves for exit-related activities by $1.3 million. In addition, the Company's Health Care Information Technology segment recorded a $161.1 million charge for customer settlements (forgiveness of accounts receivable, customer credits and refunds) associated with pre-July 1999 software contracts. These customer settlements generally relate to product replacements as well as requirements for certain customers to upgrade hardware and software to accommodate new product releases. F-11 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Severance The Company recorded severance costs totaling $29.0 million related to the restructure of the former iMcKesson business, $1.0 million in the Health Care Supply Management segment, $3.3 million in the Health Care Information Technology segment and $24.7 million in the Corporate segment. The severance charges relate to the termination of approximately 220 employees, primarily in sales, service and administration functions. The Company also recorded severance costs totaling $8.5 million in the aggregate related to workforce reductions in the Health Care Supply Management segment associated with the closure of a pharmaceutical distribution center, closure of a medical management call center, consolidation of medical-surgical customer service centers, closures of facilities in the pharmaceutical services business and staÅ reductions in the pharmaceutical management business. The Ñscal 2001 severance charges relate to the termination of approximately 360 employees, primarily in sales, service, administration and distribution center functions. In addition, the Company reduced prior year severance reserves by $0.9 million. In connection with the severance charges described above, $3.2 million was a non-cash charge, severance of $2.4 million was paid in Ñscal 2001, $12.4 million will be paid in Ñscal 2002 and the balance of $19.5 million, primarily pension beneÑts, will be paid in Ñscal 2003 and thereafter. As a result of the previously discussed restructuring activities, future operating results and cash Öows will be impacted. Development and support activities for certain discontinued products associated with the former iMcKesson business will be phased out within twelve months. Although future revenues associated with the discontinued products will be reduced or eliminated, the Company does not anticipate they will materially impact the company's future operating results or cash Öows. The Company anticipates that goodwill amortization expense will be approximately $20 million lower in Ñscal 2002 as a result of the Abaton.com and MediVation, Inc. goodwill and intangibles write downs. In addition, the Company anticipates reduced product development expenses as a result of terminating certain product licensing agreements and gradual reductions in payroll expenses and occupancy costs as the former iMcKesson operations wind down. Closure of the medical management call center is not anticipated to signiÑcantly impact future revenues (customers will be serviced out of the remaining call centers) but payroll cost savings are anticipated. Closure of the pharmaceutical distribution center, pharmaceutical services facilities and consolidations of the medical- surgical customer service centers are not expected to have a material impact on the Company's Ñscal 2002 operating results. Other Merger-Related Items The Company recorded a charge of $2.1 million in the Information Technology segment to write oÅ the portion of the purchase price of MediVation, Inc. allocated to purchased in-process technology for which feasibility had not been established as of the acquisition date. Fiscal 2000 Unusual Items In Ñscal 2000, the Company recorded net pre-tax charges for unusual items totaling $127.5 million including $34.8 million in the Health Care Supply Management segment, $296.1 million in the Health Care Information Technology segment, and $203.4 million income in Corporate. Following is a description of these items in Ñscal 2000: Restatement-Related Costs Incurred In Ñscal 2000, the Company incurred costs in connection with the previously discussed Investigation, the restatement of the historical consolidated Ñnancial statements and the resulting pending litigation, and recorded charges of $18.9 million for accounting and legal fees and other costs. F-12 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Net Gains on the Exchange and Sale of Equity Investments The Company recorded gains on the exchange of the Company's WebMD common shares and warrants for Healtheon/WebMD (subsequently renamed WebMD) common shares and warrants that were recognized upon the November 11, 1999 merger of the two companies. Subsequently in Ñscal 2000, the Company donated 250,000 WebMD shares to the McKesson HBOC Foundation and sold the remaining common shares. As a result of these transactions, the Company recognized gains related to the investment in WebMD of $248.7 million of which $155.3 million was realized. The remaining gain of $93.4 million which resulted from the November 11, 1999 exchange of warrants, had not been realized as of March 31, 2000. The estimated fair value of the warrants declined from $93.4 million as of November 11, 1999 to $32.3 million as of March 31, 2000, resulting in an unrealized loss of $61.1 million. In Ñscal 2001, the estimated fair value of the warrants declined further and the Company recognized a loss (see Fiscal 2001 Unusual Items). In addition, other equity investments were sold during the year at a gain of $20.3 million, and a $9.8 million charge was recorded to reÖect the donation of the WebMD shares to the McKesson HBOC Foundation. Restructuring, Asset Impairments and Customer Settlements In the fourth quarter of Ñscal 2000, the Company completed an assessment of the Health Care Information Technology's business and product portfolio. This resulted in the decision to reorganize the business and to discontinue overlapping or nonstrategic product oÅerings. The Company recorded asset impairments of $232.5 million. These included charges to write oÅ $49.1 million of capitalized product development costs, $39.3 million of purchased software and $50.7 million of goodwill associated with discontinued product lines based upon an analysis of discounted cash Öows. In addition, a $74.1 million reserve was recorded for customer settlements attributable to the discontinued product lines. The Company also recorded a $9.4 million loss on the disposition of a non-core foreign operation, a $7.7 million charge for uncollectible unbilled receivables and a $2.2 million charge for obsolete equipment associated with the discontinued products. Substantially all of these charges were non-cash asset write-oÅs except for the customer settlements. In addition, a charge of $0.6 million was recorded for costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations and other exit-related activities. In the fourth quarter of Ñscal 2000, the Company reviewed the operations and cost structure of the Health Care Supply Management's medical-surgical business. This resulted in the planned closure of a sales oÇce and a workforce reduction. The Company recorded $0.6 million in charges for exit-related activities. Also in Ñscal 2000, the Company reassessed prior years' restructuring plans resulting in the decision to retain one of the six pharmaceutical distribution centers identiÑed for closure in Ñscal 1999 and to reduce the number of medical-surgical distribution center closures. In addition, the Company announced and completed the closure of one additional pharmaceutical distribution center in Ñscal 2000. The Company recorded income of $6.9 million as a result of reducing prior year accruals for exit-related costs, oÅset in part, by additional asset impairments of $1.5 million. The Company also recorded asset impairments for its medical-management business of $0.2 million for obsolete equipment associated with discontinued products. Severance In Ñscal 2000, the Company completed the closures of three pharmaceutical distribution centers, including the additional distribution center mentioned above. In addition, the realignment of the sales organization was completed and certain back oÇce functions were eliminated. This resulted in the termination of approximately 200 employees and the payment of $3.6 million in severance. Also, the Company completed the closures of three medical-surgical distribution centers and paid $1.0 million in severance to approximately 100 employees who were terminated in Ñscal 1999 and 2000. The Company plans to continue these closure activities throughout Ñscal 2002. F-13 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) The Company recorded severance costs totaling $6.2 million in the aggregate related to workforce reductions in the Health Care Information Technology segment associated with product streamlining and reorganization and in the Health Care Supply Management segment associated with distribution facility consolidations. This charge was offset, in part, by a $2.0 million reduction in prior year severance reserves. The fiscal 2000 severance charges relate to the termination of approximately 500 employees, primarily in product development and support, administration and distribution center functions. In fiscal 2001, the Company paid severance of $4.9 million and reduced previously recorded reserves by $0.9 million. The remaining balance will be paid in fiscal 2002. Other Merger-Related Items The Company recorded a charge of $1.5 million to write oÅ the portion of the purchase price of Abaton.com allocated to purchased in-process technology for which feasibility had not been established as of the acquisition date. The Company also recorded a $1.3 million charge for the impairment of a note receivable from a former stockholder of an acquired company and reversed $6.9 million of accruals booked in prior years for estimated merger-related costs. Corporate and other includes a charge of $3.7 million related to additional costs incurred and paid associated with the acquisition of HBOC. Costs Associated With Former Employees In Ñscal 2000, the Company recorded charges of $23.8 million for severance and beneÑt costs resulting from changes in executive management made in the Ñrst quarter. The charges were based on the terms of employment contracts in place with these executives. $2.8 million was paid in Ñscal 2000 and $2.1 million was paid in Ñscal 2001. The Company estimates that $3.7 million will be paid in Ñscal 2002 and the balance, primarily pension beneÑts, will be paid thereafter. Other Operating Items Other operating items include charges of $61.8 million in the Health Care Information Technology segment for accounts receivable and customer settlements, a $1.1 million non-cash charge for the write-oÅ of internal-use computer software that was abandoned and a $1.2 million charge related to the settlement of a software patent infringement claim that was paid during the year. The Health Care Supply Management segment recorded a charge of $31.5 million for asset impairments and receivables related primarily to a prior year implementation of a contract system, and a $6.7 million charge for customer accounts receivable in the medical management business. Corporate includes non-cash charges of $7.7 million for impairment of notes receivable from former employees and $1.7 million for costs associated with employee-retention following the announcement of the Investigation. Fiscal 1999 Unusual Items In Ñscal 1999, the Company recorded pre-tax charges for unusual items of $214.3 million in the Health Care Supply Management segment and $181.6 million in the Health Care Information Technology segment, $395.9 million in the aggregate. Following is a description of these items in Ñscal 1999: Transaction Costs Total unusual items include $84.6 million of transaction costs incurred in connection with the acquisitions described above, primarily consisting of professional fees such as investment banking, legal and accounting fees. This amount includes $6.6 million of transaction costs related to terminated transactions of which F-14 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) $5.0 million related to the terminated merger with AmeriSource Health Corporation. Approximately $83.6 million was paid in Ñscal 1999, with a balance of $1.0 million paid in Ñscal 2000. Employee BeneÑts The Company incurred $88.7 million of employee beneÑt costs related to acquisitions, including $39.0 million for restricted stock and stock appreciation rights subject to change of control provisions, $37.0 million of long-term incentive and phantom stock awards subject to change of control provisions, $8.7 million of signing and retention bonuses, and $4.0 million of retirement and employee beneÑt plan costs. Of these amounts, $36.3 million were non-cash charges, primarily related to restricted stock, $44.1 million was paid in Ñscal 1999, $1.6 million was paid in Ñscal 2000 and $3.5 million was paid in Ñscal 2001. Restructuring and Asset Impairments In Ñscal 1999, the Health Care Supply Management segment identiÑed six distribution centers for closure, of which one distribution center was shut down by March 31, 1999. The Company recorded a charge of $25.5 million related to closures of the distribution centers. Of this charge, $21.7 million was required to reduce the carrying value of facility assets to their estimated fair value less disposal costs, and $3.8 million was related to computer hardware and software which will no longer be used at such facilities. Fair value was determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of estimated future cash Öows. Considerable management judgment is necessary to estimate fair values; accordingly, actual results could vary signiÑcantly from such estimates. Also related to such closures, a charge of $17.2 million was recorded for exit-related costs. These primarily consist of costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write- oÅ of costs related to duplicate assets from acquired companies that do not have future use by the Company. Of the above charges, $25.5 million were non-cash asset write-oÅs. $3.9 million was paid in Ñscal 1999, $2.6 million was paid in Ñscal 2000, and $2.9 million was paid in Ñscal 2001. Also, in connection with the previously discussed reassessment of this restructuring plan, the Company reduced previously recorded exit-related reserves by $6.9 million in Ñscal 2000 and by $1.3 million in Ñscal 2001, and recorded charges of $1.5 million for additional asset impairments in Ñscal 2000. The Health Care Supply Management segment also wrote oÅ $23.5 million of computer hardware and software which was abandoned as the result of an acquisition during the year. In connection with acquisitions in the medical management business, the Company terminated royalty agreements at a cost of $12.0 million because products subject to minimum royalty payments to third parties were replaced with acquired products. In addition, the Company recorded charges of $4.3 million primarily for the write-oÅ of capitalized software costs. In connection with acquisitions made by the Health Care Information Technology segment and its acquisition by McKesson, duplicate facilities, products and internal systems were identiÑed for elimination, resulting in charges of $5.9 million, relating principally to the write-oÅ of capitalized costs and lease termination costs. In addition, following the HBOC Transaction, the Company evaluated the performance of a foreign business and elected to shut down its facility. Charges of $11.6 million were recorded, principally related to the write-down of goodwill to fair value based on estimated discounted cash Öows. Revenues and net operating income for this foreign business were not signiÑcant in Ñscal 1999. Certain investments became impaired during Ñscal 1999 and were written down by $4.3 million to their net realizable values based primarily on estimated discounted cash Öows, and other reserves of $4.1 million were recorded to cover customer and other claims arising out of the acquisitions. Substantially all of the above charges were non-cash asset write-oÅs. F-15 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Severance Severance costs totaled $31.9 million (net of a $3.0 million reversal of previously recorded severance obligations which were determined to be in excess), resulting from the consolidation of acquired company operating and corporate functions, the consolidation of existing U.S. Health Care pharmaceutical distribution centers, and other employee terminations. The severance charges relate to the termination of approximately 1,550 employees, primarily in distribution centers, administration and product functions. The Company paid severance of $12.1 million in Ñscal 1999, $14.9 million in Ñscal 2000 and reduced previously recorded reserves by $2.0 million in Ñscal 2000. Severance of $3.2 million was paid in 2001 and the remaining severance will be paid in Ñscal 2002 and thereafter. Other Merger-related Costs The Health Care Information Technology segment incurred costs totaling $13.8 million in Ñscal 1999 due to an acquired company which had receivables outstanding from HBOC competitors that became uncollecti- ble and were written oÅ after the HBOC Transaction. Acquisition-related Integration Costs Acquisition-related integration costs of $32.3 million consist of $1.9 million incurred for salaries and beneÑts of integration and aÇliation team members of the Company and $30.4 million of other direct costs associated with the integration and rationalization of recent acquisitions in the Health Care Supply Management and Health Care Information Technology segments. Other Operating Items Other operating items of $36.2 million consist of losses resulting from the implementation of a contract administration system and expenses incurred for corrective actions associated with that system. Results Of Operations The discussion of the Ñnancial results that follows focuses on the results of continuing operations excluding unusual items, as management believes such discussion is the most informative representation of recurring, non-transactional related operating results. F-16 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Health Care Supply Management The following table identiÑes signiÑcant performance indicators of the Health Care Supply Management segment: Revenues 2001 2000 (dollars in millions) 1999 Excluding Sales to customers' warehouses Pharmaceutical distribution and services U.S. Health Care ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total pharmaceutical ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medical-Surgical distribution and servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sales to customers' warehouses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,853 2,645 27,498 2,849 30,347 10,730 $41,077 $21,994 2,220 24,214 2,706 26,920 8,746 $35,666 $17,612 1,946 19,558 2,292 21,850 6,813 $28,663 Revenue growth Excluding sales to customers' warehouses Pharmaceutical distribution and services U.S. Health Care ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total pharmaceutical ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medical-Surgical distribution and servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total excluding sales to customers' warehouse ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percentage change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt margin(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expense margin(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt as a percent of revenues(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital employed at year-end Committed capital(2) 13% 19 14 5 13 15 $ 686.2 25% 14 24 18 23 24 $ 571.3 20% 6.7 4.4 2.3 76.3 32.1 90.9 $ (0.5)% 7.0 4.9 2.1 72.1 31.1 99.0 $ 21% 20 21 22 21 38 $ 574.1 37% 7.6 5.0 2.6 60.2 25.1 105.0 $ Operating working capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,282 225 3,507 997 $ 4,504 $ 3,328 208 3,536 1,017 $ 4,553 $ 2,661 66 2,727 1,028 $ 3,755 Returns Committed capital(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total capital employed(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.6% 14.6 16.3% 13.8 19.9% 15.6 F-17 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) (1) Excluding sales to customers' warehouses and other income. (2) Capital employed less cash and cash equivalents, marketable securities and goodwill and other intangibles. (3) Receivables and inventories net of related payables. (4) Operating proÑt before amortization of intangibles divided by average committed capital. (5) Operating proÑt divided by average capital employed. Over the most recent three Ñscal years, the Health Care Supply Management business has experienced internal revenue growth and growth as a result of acquisitions. Revenue growth in this segment, excluding sales to customers' warehouses, is as follows: 2001 2000 1999 Pharmaceutical Distribution and Services Existing businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.6% 23.5% 20.1% 0.3 13.6% 23.8% 20.6% 0.5 Medical-Surgical Supply Distribution and Services Existing businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.3% 6.6% 14.4% 11.5 7.6 5.3% 18.1% 22.0% Internal growth in Health Care Supply Management is due primarily to increased sales volume to the retail chain and institutional customer segments. Sales to retail customers have beneÑted from the Company's service oÅerings and programs that focus on broad product selection, service levels, inventory carrying cost reductions, connectivity and automation technologies. Growth with institutional customers has beneÑted from the focus on reducing both product cost and internal labor and logistics costs for the customers. Services available include pharmaceutical distribution, medical-surgical supply distribution, pharmaceutical dispensing automation, pharmacy outsourcing and utilization reviews. These retail chain and institutional capabilities have resulted in the implementation of signiÑcant long-term contracts with major customers. 2001 2000 1999 Customer Mix Ì Pharmaceutical Distribution Revenues(1) Independents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail ChainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.5% 42.4 33.1 25.5% 42.4 32.1 100.0% 100.0% 100.0% 28.7% 38.5 32.8 (1) Excluding sales to customer warehouses. Sales to customers' warehouses are large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of products directly from the manufacturer to the customers' warehouses. The growth in sales to customers' warehouses in Ñscal 2001 was due to the addition of a signiÑcant retail chain customer and to growth from existing customers. The growth in Ñscal 2000 and 1999 was primarily the result of two signiÑcant contracts with retail chains which also provided new direct store sales growth. The operating proÑt margin increased in Ñscal 2001, reÖecting margin expansion in the U.S. pharmaceu- tical distribution and services business due to gross margin initiatives and productivity improvements in both back-oÇce and Ñeld operations and in the Canadian pharmaceutical business reÖecting new customers, sales F-18 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) growth and operational eÇciencies. This impact was partially oÅset by a decline in the medical management business reÖecting the loss of a number of services customers and reduced proÑts from the Company's 22% interest in Nadro, a Mexican pharmaceutical distribution business. The operating proÑt margin declined in Ñscal 2000 from 1999 due to a decline in the gross proÑt margin reÖecting the competitive environment, a shift in the mix of pharmaceutical distribution revenues to a higher proportion of chain business and somewhat lower procurement proÑts as a percentage of revenues in the current year. Procurement proÑts beneÑted in Ñscal 1999 from price increases on inventory expansion associated with new customer agreements. The decline in the gross proÑt margin was oÅset, in part, by a lower operating expense ratio reÖecting continuing productivity improvements. The improvement in the operating expense ratio was achieved despite higher expenses for receivable and transaction processing related charges. Fiscal 1999 operating margins reÖect higher margin businesses resulting from acquisitions in pharmaceutical services for manufacturers, retail and institutional automation and medical-surgical supply distribution. In addition, expanded proÑtability from product procurement, warehouse automation and eÇciency improvements, and Ñxed cost leverage from volume growth contributed to the margin expansion. The Health Care Supply Management segment uses the last-in, Ñrst-out (LIFO) method of accounting for the majority of its inventories which results in cost of sales that more closely reÖect replacement cost than other accounting methods, thereby mitigating the eÅects of inÖation and deÖation on operating proÑt. The practice in the Health Care Supply Management distribution businesses is to pass published price changes from suppliers on to customers. Manufacturers generally provide the Company with price protection, which prevents inventory losses. Price declines on many generic pharmaceutical products in this segment in each of the Ñscal years ended March 31, 2001, 2000 and 1999 have moderated the eÅects of inÖation in other product categories, which resulted in minimal overall price changes in those Ñscal years. Fiscal 2001, 2000 and 1999 capital expenditures include new systems upgrades to distribution facilities and facility consolidations in the pharmaceutical and medical-surgical businesses and growth in the automation and services businesses. The Health Care Supply Management segment requires a substantial investment in operating working capital (customer receivables and inventories net of related trade payables). Operating working capital is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, new customer build-up requirements and the desired level of investment inventory. Operating working capital at March 31, 2001 was Öat relative to 2000. An increase in receivables, reÖecting sales growth, and inventories was oÅset by a signiÑcant increase in vendor payables reÖecting purchases made late in the Ñscal year and the timing of vendor payments. No accounts receivable were sold at March 31, 2001 and 2000. Operating working capital was signiÑcantly higher at March 31, 2000 compared to 1999. The working capital increase primarily reÖects increases in receivables and net Ñnancial inventories (inventories net of accounts and drafts payable) resulting from sales growth, the absence of accounts receivable sales at March 31, 2000 compared to $400.0 million of sales at March 31, 1999 and the timing of vendor payments. F-19 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Health Care Information Technology SigniÑcant performance indicators of the Health Care Information Technology segment are as follows: 2001 2000 (dollars in millions) 1999 Revenues Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hardware ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 134 712 846 84 $ 930 $ 144 782 926 92 $1,018 $ 268 832 1,100 208 $1,308 Revenue growth (decline) Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hardware ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expense margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt as a percent of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of capitalized software held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital employed (7)% (9) (9) (8) (9) $ 0.5 (99)% 42.4 42.3 0.1 $36.1 34.2 25.9 26.5 (46)% (6) (16) (56) (22) $ 82.0 (38)% 40.3 32.3 8.1 $ 41.0 24.4 28.3 43.3 (23)% 23 8 (3) 6 $131.8 (49)% 41.8 31.7 10.1 $ 38.0 15.9 25.9 71.4 Committed capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 198 80 $ 278 $ 259 182 $ 441 $ 234 187 $ 421 Returns Committed capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total capital employed(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.8% 0.1 35.1% 14.8 70.2% 15.4 (1) Capital employed less cash and cash equivalents, marketable securities and goodwill and other intangibles. (2) Operating proÑt before amortization of intangibles divided by average committed capital. (3) Operating proÑt divided by average capital employed. Health Care Information Technology revenues declined 9% to $0.9 billion in Ñscal 2001 and 22% to $1.0 billion in Ñscal 2000. In Ñscal 2001, certain contracts were entered into which the Company is accounting for under the percentage of completion method, which extends the recognition of revenue over a period of time. Services revenues declined, reÖecting the lagging impact of reduced prior period software sales on implementation services revenues. The decline in Ñscal 2000 revenues was attributable to the overall 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 a general weakness in demand for healthcare software. Services revenues associated with software implementation also declined for the same F-20 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) reasons. Also contributing to the decline was the impact to the business caused by the investigation into improper accounting practices and resulting senior management changes made early in the year. In addition, the terms of certain contracts for software and implementation services executed late in the Ñscal year resulted in such contracts being accounted for under the percentage of completion accounting method. Revenues increased 6% to $1.3 billion in Ñscal 1999. The Ñscal 1999 decline in software revenues of 23% reÖects a general industry-wide slowdown in sales of health care information technology products and changes in accounting due to the adoption of Statement of Position 97-2, ""Software Revenue Recognition'', eÅective April 1, 1998. In addition, during Ñscal 1999, the Health Care Information Technology segment experienced delays in current and potential customers' purchasing decisions with respect to its enterprise solutions. Management believes such delays were due to Year 2000 issues, technological innovations, increased competition, greater requirement for integration of products and general market conditions in the computer software industry. Hardware is sold as an accommodation to customers and at a signiÑcantly lower operating margin than software and services. Fiscal 2001, 2000 and 1999 revenues from the sale of hardware reÖect the lower level of software sales, general price declines for hardware and a shift to less costly Microsoft Windows NTTM platforms. Health Care Information Technology segment operating proÑt before unusual items declined 99% to $0.5 million in Ñscal 2001, and 38% to $82.0 million in Ñscal 2000. The decline in Ñscal 2001 reÖects the extended software revenue recognition cycle under the percentage of completion accounting method, lower service and hardware revenues, and an increased level of expenses to enhance customer support and future product introduction. The decline in Ñscal 2000 reÖects the previously discussed decline in overall sales and a lower mix of higher-margin software sales in Ñscal 2000 compared to 2001 and 1999 (14% in Ñscal 2000 as compared to 20% in Ñscal 1999, as a percentage of total Health Care Information Technology revenues). The Ñscal 2000 operating proÑt includes an increased level of expenses to enhance customer support and future product introductions. Fiscal 1999 results included a bad debt provision of $70 million and a termination fee associated with a telecommunications contract. The bad debt provision reÖects, in part, inadequate staÇng of and focus on receivables collections during a portion of Ñscal 1999, implementation issues associated with certain products and contingencies associated with contract disputes. Fiscal 1999 capital expenditures reÖect the acquisition and construction of the segment's new corporate oÇce building in Georgia. The return on committed capital and total capital employed in Ñscal 2001 and 2000 reÖect the previously discussed decline in operating proÑt. International Operations International operations accounted for 6.6%, 6.4% and 6.9%, and 4.2%, 8.7% and 6.6%, of Ñscal 2001, 2000 and 1999 consolidated revenues and operating proÑts before unusual items, respectively, and 5.6%, 5.8% and 5.5% of consolidated assets at March 31, 2001, 2000 and 1999, respectively. International operations are subject to certain opportunities and risks, including currency Öuctuations. The Company monitors its operations and adopts strategies responsive to changes in the economic and political environment in each of the countries in which it operates. Consolidated Working Capital Operating working capital (receivables and inventories net of related payables) as a percent of revenues was 7.6%, 9.0% and 8.4% at March 31, 2001, 2000 and 1999, respectively. Excluding the impact of receivable sales, operating working capital as a percent of revenues was 7.6%, 9.0% and 9.7% at March 31, 2001, 2000 F-21 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) and 1999, respectively. The calculation is based on year-end balances and assumes major purchase acquisitions occurred at the beginning of the year. The improvement in the operating working capital ratio in Ñscal 2001 is due to an increase in days sales outstanding in payables reÖecting purchases made later in the year and the timing of vendor payments. The improvement in the ratio in 2000 (excluding the impact of receivable sales) is due to a reduction in year-end days sales outstanding in both customer receivables and inventory, reÖecting working capital initiatives. In Ñscal 2000, this improvement was oÅset, in part, by lower days sales outstanding in payables at March 31, 2000 compared to March 31, 1999. CASH FLOW AND LIQUIDITY Cash and cash equivalents and marketable securities (primarily U.S. Treasury securities with maturities of one year or less) were $446 million, $606 million and $262 million at March 31, 2001, 2000 and 1999, respectively. The increase in cash and cash equivalents and marketable securities in 2000 reÖects proceeds from the February 2000 sale of the Water Products business and a private placement of term debt (see ""Other Financing Activities'' below). Marketable securities balances include $4 million, $17 million and $23 million at March 31, 2001, 2000 and 1999, respectively, from the Ñscal 1997 sale of Armor All, which securities are restricted and held in trust as exchange property in connection with the Company's exchangeable debentures. Cash Flows from Operations Available for Capital Expenditures The following table summarizes the excess (deÑcit) of cash Öow from operations over capital expenditures: 2001 Years Ended March 31, 2000 (in millions) 1999 Net cash provided (used) by continuing operations: Income (loss) from continuing operations(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of capitalized software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other non-cash charges(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Working capital changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total before receivables sales and capital expenditures ÏÏÏÏ Receivable sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Excess (DeÑcit)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (43) 116 66 65 513 (357) 360 Ì (159) $ 201 $ 185 116 55 51 382 (689) 100 (400) (145) $(445) $ $ 61 104 41 36 361 (445) 158 100 (199) 59 (1) Includes previously discussed ""Unusual Items''. Cash Öows from continuing operations reÖect the cash earnings of the Company's continuing businesses and the eÅects of the changes in working capital. The working capital increase in Ñscal 2001 primarily reÖects the timing of vendor payments in the Health Care Supply Management segment partially oÅset by the payment of income taxes on the gain on sale of the Water Products business that was sold in late Ñscal 2000. The working capital increase in Ñscal 2000 primarily reÖects the timing of vendor payments in the prior year and increases in receivables and inventories associated with sales growth in the Health Care Supply F-22 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Management segment that were oÅset, in part, by improvements in days sales outstanding in both customer receivables and inventories resulting from working capital initiatives. The March 31, 1999 payables balance was approximately $400 million higher than expected based on the historical relationship of payables to sales. The increase in working capital requirements in Ñscal 2000 reÖects the restoration of payables to a more normalized level. Adjusting for the impact of the payables Öuctuation, net cash provided (used) by continuing operations before receivable sales and capital expenditures would have been approximately $500 million and $(242) million in Ñscal 2000 and 1999, respectively. The working capital increase in Ñscal 1999 primarily reÖects increases in receivables and inventories resulting from sales growth in all operating segments oÅset, in part, by the higher payables balance due to the timing of vendor payments in the Health Care Supply Management segment. Fiscal 1999 capital expenditures reÖect the acquisition and construction of the Health Care Information Technology segment's new headquarters oÇce building. Other Financing Activities In July 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. In Ñscal 2001, the Company repurchased 2.2 million shares under this program for $66 million. In October 2000, the Company renewed its 364-day revolving credit agreement which allows for borrowings up to $825 million under terms substantially similar to those previously in place, except that a 364-day term out option was reinstated. In February 2000, the Company completed the sale of its wholly-owned subsidiary McKesson Water Products Company to Groupe Danone for $1.1 billion in cash, which enabled the Company to reduce short-term borrowings and add to its cash and marketable securities. Also in February 2000, the Company completed a private placement of $335 million in term debt, the proceeds of which were used to retire term debt maturing in March 2000 and for other general corporate purposes. $100 million of the debt matures on February 28, 2005, $20 million matures on February 28, 2007 and $215 million is due on February 28, 2010. In May 1998, the Company's Employee Stock Ownership Plan purchased approximately 1.3 million shares of newly issued Company common stock from the Company at a market value of $78.125 per share. Credit Resources The Company currently has $1.225 billion of available credit under committed revolving credit lines: a $400 million Ñve-year facility expiring in Ñscal 2004 and an $825 million facility expiring on October 9, 2001. These revolving credit facilities are primarily intended to support commercial paper borrowings. The Company also has available a committed revolving receivables sale facility aggregating $850 million. The Company anticipates that this facility will be renewed prior to its termination date of June 15, 2001. At March 31, 2001, the Company had no commercial paper or revolving credit borrowings outstanding and its committed receivables sale facility was fully available. The Company's senior debt credit ratings from S&P, Fitch, and Moody's are currently BBB, BBB and Baa2, respectively, and its commercial paper ratings are currently A-2, F-2, and P-2, respectively. The Company's ratings are on negative credit outlook. Management believes that the Company has adequate access to credit sources to meet its funding requirements. Funds necessary for future debt maturities and other cash requirements of the Company are expected to be met by existing cash balances, cash Öow from operations, existing credit sources or other capital market transactions. F-23 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) Market Risk The Company's major risk exposure is changing interest rates, primarily in the United States. The Company manages interest rates through the use of a combination of Ñxed and Öoating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate, based upon market conditions. These contracts are entered into with major Ñnancial institutions thereby minimizing the risk of credit loss. If interest rates on existing variable-rate debt were to change 50 basis points, the Company believes that its results from operations and cash Öows would not be materially aÅected. The Company conducts business in Canada, Mexico, France, the Netherlands, Ireland, Saudi Arabia, Kuwait, Australia, New Zealand and the United Kingdom, and is subject to foreign currency exchange risk on cash Öows related to sales, expenses, Ñnancing and investment transactions. If exchange rates on such currencies were to Öuctuate 10%, the Company believes that its results from operations and cash Öows would not be materially aÅected. Aggregate foreign exchange translation gains and losses included in operations, comprehensive income and in equity are discussed in Financial Note 1 on pages F-35 to F-37 of the accompanying consolidated Ñnancial statements. Capitalization The Company's capitalization was as follows: Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exchangeable debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Convertible preferred securities of subsidiary trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt-to-capital ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net debt-to-net capital ratio(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average interest rates during year Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ Ì 1,223 7 1,230 196 3,493 $4,919 March 31, 2000 (in millions) $ Ì 1,232 28 1,260 196 3,566 $5,022 1999 $ 17 1,097 37 1,151 196 2,882 $4,229 25.0% 17.5% 7.4% 6.6 7.5 25.1% 14.8% 6.4% 5.6 6.9 27.2% 22.4% 6.3% 5.6 6.7 (1) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net capital employed (capital employed less cash and cash equivalents and marketable securities). The increase in the net debt-to-capital ratio at March 31, 2001 primarily reÖects the increase in net debt to fund internal growth. The decline in the net debt-to-capital ratio at March 31, 2000 primarily reÖects the February 2000 proceeds from the sale of the Water Products business. At March 31, 2001, the Company had an $850 million committed receivables sales facility which was fully available. The Company's accounts receivable sales program accommodated the sale by the Company in March 1999 of $400.0 million, of undivided interests in the Company's trade accounts receivable. The program qualiÑes for sale treatment under Statement of Financial Accounting Standards (""SFAS'') No. 125, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' and under SFAS No. 140, ""Accounting For Transfers and Servicing Financial Assets and Extinguishments of Liabili- F-24 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) ties'' which replaces SFAS No. 125 eÅective in the Company's Ñscal year 2002. The sales were recorded at the estimated fair values of the receivables sold, reÖecting discounts for the time value of money based on U.S. commercial paper rates and estimated loss provisions. Average diluted shares were 292.9 million in Ñscal 2001, 289.6 million in Ñscal 2000 and 289.8 million in Ñscal 1999. The increase in the average diluted shares in Ñscal 2001 is due to an increase in the eÅect of dilutive securities resulting from the increase in the Company's stock price, and an increase in common shares outstanding. Common stock outstanding increased to 284.0 million at March 31, 2001, 283.4 million at March 31, 2000, 280.6 million at March 31, 1999, due primarily to the issuance of common stock under employee beneÑt plans and in Ñscal 2001 by the acquisition of MediVation, Inc., partially oÅset by the 2.2 million shares repurchased as part of the previously discussed $250 million share repurchase program. Environmental Matters The Company's continuing operations do not require ongoing material expenditures to comply with federal, state and local environmental laws and regulations. However, in connection with the disposition of its chemical operations in Ñscal 1987, the Company retained responsibility for certain environmental obligations. In addition, the Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as ""Superfund''), and other federal and state environmental statutes primarily involving sites associated with the operation of the Company's former chemical distribution businesses. In Ñscal 2000, a $2.0 million increase to the liability for these environmental matters was recorded within discontinued operations. There were no adjustments made to the reserves in Ñscal 2001 and 1999. Management does not believe that changes in the remediation cost estimates in future periods, or the ultimate resolution of the Company's environmental matter, will have a material impact on the Company's consolidated Ñnancial position or results of operations. See Financial Note 18, ""Other Commitments and Contingent Liabilities'' on pages F-62 to F-69 of the accompanying consolidated Ñnancial statements. Income Taxes The tax rate on income from continuing operations (excluding unusual items) was 39.0% in Ñscal 2001, 38.5% in Ñscal 2000 and 37.5% in Ñscal 1999. The increase in the eÅective rate from Ñscal 1999 to 2001 primarily reÖects the impact of non-deductible goodwill amortization associated with purchase acquisitions made late in Ñscal 1999 and in Ñscal 2000 and 2001. NEW ACCOUNTING PRONOUNCEMENTS See Financial Note 1 ""SigniÑcant Accounting Policies'' on pages F-35 to F-37 of the accompanying consolidated Ñnancial statements. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The following additional factors may aÅect the Company's future results: Adverse resolution of pending litigation regarding the restatement of the Company's historical Ñnancial statements may cause it to incur material losses. Subsequent to the Company's April 28, 1999 restatement of Ñnancial results announcement, and as of April 30, 2001, 85 lawsuits have been Ñled against the Company, certain of the Company's or HBOC's current or former oÇcers or directors, and other defendants (see Financial Note 18, ""Other Commitments and Contingent Liabilities'' on pages F-62 to F-69 of the accompanying consolidated Ñnancial statements.) In addition, the United States Attorney's OÇce for the Northern District of California and the San Francisco F-25 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) District OÇce 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 Ñnal 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 eÅect of the pending litigation and government investigations could impair the Company's ability to attract and retain quality employees and managers. 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 Ñnancing and reimbursement system currently being used in the United States. In recent years, the healthcare industry has changed signiÑcantly in an eÅort to reduce costs. These changes include increased use of managed care, cuts in Medicare reimbursement levels, 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 signiÑcantly 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 privacy of patient information, or the delivery or pricing of pharmaceuticals and healthcare services or mandated beneÑts, 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 signiÑcantly 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 oÅers, such changes may adversely impact the Company while not aÅecting some of the Company's competitors that oÅer a more narrow range of products and services. Substantial defaults in payment or a material reduction in purchases of the Company's products by large customers could have a signiÑcant negative impact on the Company's Ñnancial condition, results of operations and liquidity. The Company's recent strategy has been to build relationships with a limited number of large customers that are achieving rapid growth. During the Ñscal year ended March 31, 2001, sales to the Company's ten largest customers accounted for approximately 57% of the Company's total revenues. Sales to the Company's largest customer, Rite Aid Corporation, represented approximately 16% of the Company's Ñscal 2001 revenues. As a result, the Company's sales and credit concentration have signiÑcantly increased. Any defaults in payment or a material reduction in purchases from the Company by these large customers could have a signiÑcant negative impact on the Company's Ñnancial 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 and technological advances may signiÑcantly reduce the Company's revenues. The Company's Health Care Information Technology business delivers enterprise-wide patient care, clinical, Ñnancial, managed care, payor and strategic management software solutions, as well as networking F-26 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) 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. 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 oÅered 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, pricing pressures and changing business models. 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 signiÑcantly reduce the Company's net income. 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, nondisclo- sure 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 Ñnd 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 signiÑcant and 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. The Company provides products that assist clinical decision-making and relate to patient medical histories and treatment plans. If these products fail to provide accurate and timely information, customers could assert liability claims against the Company. Litigation with respect to liability claims, regardless of the outcome, could result in substantial cost to the Company, divert management's attention from operations and decrease market acceptance of the Company's products. The Company attempts to limit by contract its liability for damages from negligence, errors or mistakes. Despite this precaution, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect the Company from liability for damages. The Company maintains general liability insurance coverage, including coverage for errors and omissions. However, this coverage may not continue to be available on acceptable terms or may not be available in suÇcient amounts to cover one or more large claims against the Company. In addition, the insurer might disclaim coverage as to any future claim. F-27 McKESSON HBOC, INC. FINANCIAL REVIEW (Continued) System errors and warranties in Health Care Information Technology business products could cause unforeseen liabilities. The Company's Health Care Information Technology business' systems are very complex. As with complex systems oÅered by others, the Company's systems may contain errors, especially when Ñrst introduced. The Health Care Information Technology business' systems are intended to provide information for health care providers in providing patient care. 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, obtain refunds of amounts previously paid or assert claims for signiÑcant damages. Potential regulation by the U.S. Food and Drug Administration (""FDA'') of Information Technology products as medical devices could impose increased costs, delay the introduction of new products and hurt the Company's business. The FDA is likely to become increasingly active in regulating computer software intended for use in the health care setting. The FDA has increasingly focused on the regulation of computer products and computer- assisted products as medical devices under the federal Food, Drug and Cosmetic Act. If the FDA chooses to regulate any of the Company's products as medical devices, it can impose extensive requirements upon the Company. If the Company fails to comply with the applicable requirements, the FDA could respond by imposing Ñnes, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance or approval of products, withdrawing clearances and approvals and initiating criminal prosecution. Any Ñnal FDA policy governing computer products, once issued, may increase the cost and time to market of new or existing products or may prevent the Company from marketing its products. New and potential federal regulations relating to patient conÑdentiality could depress the demand for Information Technology products and impose signiÑcant product redesign costs on the Company. State and federal laws regulate the conÑdentiality of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of conÑdential patient medical record information and may require the users of such information to implement speciÑed security measures. Regulations governing electronic health data transmissions are evolving rapidly and are often unclear and diÇcult to apply. The Health Insurance Portability and Accountability Act of 1996 (""HIPAA'') requires national standards for some types of electronic health information transactions and the data elements used in those transactions, standards to ensure the integrity and conÑdentiality of health information and national health data privacy legislation or regulations. In December 2000, Ñnal health data privacy regulations were published which will require health care organizations to be in compliance by April, 2003. These regulations restrict the use and disclosure of personally identiÑable health information without the prior informed consent of the patient. Evolving HIPAA-Related laws or regulations could restrict the ability of the Company's customers to obtain, use or disseminate patient information. This could adversely aÅect demand for the Company's products and force product re-design in order to meet the requirements of any new regulations and protect the privacy and integrity of patient data. The Company may need to expend signiÑcant capital, research and development and other resources to modify its products to address these evolving data security and privacy issues. F-28 McKESSON HBOC, INC. FINANCIAL REVIEW (Concluded) 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 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; ‚ diÇculties in the integration of operations and systems and the realization of potential operating synergies; ‚ diÇculties in the integration of any acquired companies operating in a diÅerent sector of the health care industry; ‚ delays or diÇculties 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 eÅects on operating results. 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 aÅected. The Company's issuance of equity to Ñnance acquisitions could have a potential dilutive eÅect on its stock. The Company anticipates that it will Ñnance acquisitions, at least partly by incurring debt or by the issuance of additional securities. The use of equity Ñnancing, rather than debt, for acquisitions would dilute the ownership of the Company's then current stockholders. F-29 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of McKesson HBOC, Inc: We have audited the accompanying consolidated balance sheets of McKesson HBOC, Inc. and subsidiaries (the ""Company'') as of March 31, 2001, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash Öows for the years then ended. Our audits also included the supplementary consolidated Ñnancial statement schedule listed in Item 14(a). These consolidated Ñnancial statements and supplementary consolidated Ñnancial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated Ñnancial statements and supplementary consolidated Ñnancial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material respects, the Ñnancial position of the Company at March 31, 2001, 2000 and 1999, and the results of their operations and their cash Öows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits, such supplementary consolidated Ñnancial statement schedule, when considered in relation to the basic consolidated Ñnancial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Financial Note 18 to the consolidated Ñnancial statements, the Company is involved in certain shareholder litigation related to HBOC. DELOITTE & TOUCHE LLP San Francisco, California April 30, 2001 F-30 McKESSON HBOC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs and Expenses Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DistributionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain (Loss) on InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Income, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from Continuing Operations Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust ÏÏÏÏÏÏÏÏÏ Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (Loss) from Continuing Operations Before Dividends on Preferred Securities of Subsidiary Trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends on Preferred Securities of Subsidiary Trust, Net of Tax BeneÑt of $4.0, $4.0 and $4.1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (Loss) After Taxes Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations Ì Gain on sale of McKesson Water Products CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (Loss) Per Common Share Basic and Diluted Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations Ì Gain on sale of McKesson Water Products CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Years Ended March 31, 1999 2000 2001 (in millions, except per share amounts) $36,687.0 $42,010.0 $29,970.9 39,579.0 372.4 509.2 147.5 1,193.9 111.6 41,913.6 96.4 (120.9) 40.3 15.8 52.3 (36.5) 34,462.1 356.2 460.7 112.6 1,184.4 114.2 36,690.2 (3.2) 269.1 47.2 313.1 122.3 190.8 (6.2) (6.2) (42.7) (5.6) Ì (48.3) (0.15) (0.02) Ì (0.17) $ $ $ 184.6 23.2 515.9 723.7 0.66 0.08 1.83 2.57 $ $ $ 27,650.4 444.9 503.9 114.7 1,028.6 118.0 29,860.5 110.4 Ì 57.8 168.2 101.4 66.8 (6.2) 60.6 24.3 Ì 84.9 0.22 0.09 Ì 0.31 $ $ $ Shares on Which Earnings Per Common Share Were Based Basic and DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283.1 281.3 275.2 See Financial Notes. F-31 McKESSON HBOC, INC. CONSOLIDATED BALANCE SHEETS 2001 March 31, 2000 (in millions, except par value) 1999 Assets Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Marketable securities available for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalized softwareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill and other intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net assets of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Liabilities Drafts payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable Ì trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Salaries and wages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Postretirement obligations and other noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ McKessonHBOC-obligated mandatorily redeemable preferred securities of subsidiary grantor trust whose sole assets are junior subordinated debentures of McKessonHBOCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Commitments and Contingent Liabilities (Note 18) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' Equity Common stock (400.0 shares authorized, 286.3, 283.9 and 281.1 issued as of March 31, 2001, 2000 and 1999, respectively; par value of $.01) ÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ESOP notes and guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury shares, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 433.7 11.9 3,443.4 5,116.4 158.6 9,164.0 595.3 103.7 131.3 1,064.4 Ì 471.2 $11,529.9 $ 758.6 4,603.3 378.5 Ì 194.1 142.2 79.8 31.0 362.2 6,549.7 255.8 1,035.6 $ 548.9 57.0 3,034.5 4,149.3 175.8 7,965.5 555.4 92.2 100.9 1,185.6 Ì 473.3 $10,372.9 $ 205.6 3,678.3 368.7 Ì 16.2 115.5 354.8 33.9 348.8 5,121.8 245.7 1,243.8 $ 233.7 28.2 2,552.0 3,522.5 116.4 6,452.8 529.6 106.9 73.0 1,200.6 179.4 477.7 $9,020.0 $ 417.7 3,131.7 408.6 16.7 195.3 93.0 90.8 34.7 356.3 4,744.8 258.6 939.2 195.9 Ì 195.8 Ì 195.6 Ì 2.9 1,828.7 (108.4) 2,006.6 (75.0) (89.0) (72.9) 2.8 1,791.1 (126.1) 2,122.3 (97.1) (99.9) (27.3) 2.8 1,725.7 (107.7) 1,465.0 (57.7) (115.5) (30.8) 3,492.9 $11,529.9 3,565.8 $10,372.9 2,881.8 $9,020.0 See Financial Notes. F-32 McKESSON HBOC, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 2001, 2000 and 1999 (shares in thousands, dollars in millions) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Other Capital Retained Comprehensive Earnings Losses ESOP Notes and Guarantees Treasury Common Shares Amount Stockholders' Equity Comprehensive Income (Loss) Balances, March 31, 1998ÏÏÏÏÏÏÏÏÏ 271,162 Issuance of shares under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,454 $2.7 $1,330.9 $ (59.1) $1,462.5 $(54.9) $(115.6) (179) $ (4.8) $2,561.7 0.1 288.3 (48.6) (360) (26.0) 213.8 Employee Stock Ownership Plan (ESOP) note payments ÏÏÏÏÏÏÏÏÏ Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ Additional minimum pension liability, net of tax of $0.2 ÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sale of shares to ESOP ÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared (Note 14) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,346 1,161 105.2 1.3 Balances, March 31, 1999ÏÏÏÏÏÏÏÏÏ 281,123 2.8 1,725.7 (107.7) Issuance of shares under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ESOP note payments ÏÏÏÏÏÏÏÏÏÏÏÏÏ Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ Additional minimum pension liability, net of tax of $(0.1) ÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisition of Abaton.com ÏÏÏÏÏÏÏÏ Unrealized loss on investments, net of tax of $23.8ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared, $0.24 per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,745 61.4 (18.4) 8.1 (4.1) Balances, March 31, 2000ÏÏÏÏÏÏÏÏÏ 283,868 2.8 1,791.1 (126.1) 1,811 0.1 17.6 17.7 625 20.0 Issuance of shares under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ESOP note payments ÏÏÏÏÏÏÏÏÏÏÏÏÏ Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ Additional minimum pension liability, net of tax of $(0.8) ÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisition of MediVation.com ÏÏÏÏ Unrealized gain on investments, net of tax of $(23.3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repurchase of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared, $0.24 per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balances, March 31, 2001ÏÏÏÏÏÏÏÏÏ 286,304 $2.9 $1,828.7 0.1 (2.5) (0.3) (57.7) (115.5) (539) (30.8) (92) (3.0) 15.6 (3.7) 0.3 (36.0) 116 6.5 0.1 (2.5) (0.3) 84.9 105.2 3.8 (84.9) 2,881.8 40.0 15.6 (3.7) 0.3 723.7 8.1 (36.0) 3.5 $ (2.5) (0.3) 84.9 $ 82.1 $ (3.7) 0.3 723.7 (36.0) (97.1) (99.9) (515) (27.3) (67.5) 3,565.8 $684.3 (15.4) 1.1 36.4 429 20.0 10.9 (2,235) (65.6) 55.4 10.9 (15.4) 1.1 (48.3) 20.0 36.4 (65.6) 0.9 $(15.4) 1.1 (48.3) 36.4 84.9 2.5 (84.9) 1,465.0 723.7 1.1 (67.5) 2,122.3 (48.3) 0.9 (68.3) $(108.4) $2,006.6 $(75.0) $ (89.0) (2,321) $(72.9) (68.3) $3,492.9 $(26.2) See Financial Notes. F-33 McKESSON HBOC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 2001 Years Ended March 31, 2000 (in millions) 1999 $ (42.7) $ 184.6 $ 60.6 Operating Activities Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile to net cash provided (used) by operating activities: Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for bad debts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred taxes on income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other noncash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅects of changes in: Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts and drafts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) by continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investing Activities Maturities of marketable securities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Properties sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sales of subsidiaries and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes receivable issuances, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions of businesses, less cash and short-term investments acquired ÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financing Activities Proceeds from issuance of debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayment of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid on convertible preferred securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital stock transactions: Issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ESOP note paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115.6 130.5 239.6 (21.4) 295.1 716.7 (624.3) (985.0) 1,500.7 13.0 (297.3) 36.0 (356.9) 359.8 (6.7) 353.1 13.9 (158.9) 11.6 Ì (30.9) (51.9) (126.6) (342.8) 9.3 (42.1) (10.0) 38.6 (65.6) 10.9 (68.3) 1.7 (125.5) Net Increase (Decrease) in Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115.2) 548.9 $ 433.7 $ See Financial Notes. F-34 116.3 106.3 216.8 26.5 138.4 788.9 (753.0) (629.8) 296.1 14.0 25.8 (42.4) (1,089.3) (300.4) (13.1) (313.5) 1.7 (145.1) 14.9 1,077.9 (36.9) (128.9) (231.3) 552.3 335.0 (222.9) (10.0) 26.2 Ì 15.6 (67.5) Ì 76.4 315.2 233.7 548.9 103.9 76.7 87.2 (33.0) 307.2 602.6 (685.3) (894.2) 1,268.6 126.5 (55.8) (104.7) (344.9) 257.7 (23.6) 234.1 90.0 (199.2) 22.3 Ì (32.9) (277.8) (189.6) (587.2) 82.7 (189.5) (10.0) 224.9 Ì 0.1 (84.9) (0.9) 22.4 (330.7) 564.4 $ 233.7 McKESSON HBOC, INC. FINANCIAL NOTES 1. SigniÑcant Accounting Policies The consolidated Ñnancial statements of McKesson HBOC, Inc. (""McKesson HBOC'' or the ""Com- pany'') include the Ñnancial statements of all majority-owned companies, except those classiÑed as discontin- ued operations. All signiÑcant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassiÑed to conform to the current year presentation. The Company is organized under two operating segments, Health Care Supply Management and Health Care Information Technology. Within the United States and Canada, the Health Care Supply Management segment is a leading wholesale distributor of ethical and proprietary drugs, medical-surgical supplies and health and beauty care products principally to chain and independent drug stores, hospitals, alternate care sites, food stores and mass merchandisers. Health Care Supply Management operations also include the manufacture and sale of automated pharmaceutical dispensing systems for hospitals and retail pharmacists, medical management services and tools for payors and providers, marketing and other support services to pharmaceutical manufacturers, consulting and outsourcing services to pharmacies, and distribution of Ñrst-aid products to industrial and commercial customers. The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, Ñnancial, supply chain, managed care, payor and strategic management software solutions, as well as networking technologies, including wireless capabilities, electronic commerce, outsourcing and other services to health care organizations throughout the United States and certain foreign countries. The preparation of Ñnancial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that aÅect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Ñnancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could diÅer from those estimates. Cash and Cash Equivalents include all highly liquid debt instruments purchased with a maturity of three months or less at the date of acquisition. Marketable Securities Available for Sale are carried at fair value and the net unrealized gains and losses, net of the related tax eÅect, computed in marking these securities to market have been reported within stockholders' equity. The investments mature on various dates through Ñscal 2002. Inventories are stated at the lower of cost or market. Inventories of the Health Care Supply segment consist of merchandise held for resale with the majority of the cost of domestic inventories determined on the last-in Ñrst-out (""LIFO'') method and international inventories stated at average cost. Health Care Information Technology segment inventories consist of computer hardware with cost determined either by the speciÑc identiÑcation or Ñrst-in, Ñrst-out (""FIFO'') method. Property, Plant and Equipment is stated at cost and depreciated on the straight-line method at rates designed to distribute the cost of properties over estimated service lives ranging from one to 50 years. Capitalized Software primarily includes development costs of Health Care Information Technology software products once the project has reached the point of technological feasibility. Management monitors the net realizable value of all software development investments to ensure that the investment will be recovered through future sales. Completed projects are amortized after reaching the point of general availability using the straight-line method based on an estimated useful life of three years. The Company capitalized software development costs of $39.3 million, $54.5 million and $56.3 million in Ñscal 2001, 2000 and 1999, respectively. Amortization of capitalized software held for sale totaled $31.8 mil- lion, $32.2 million and $25.9 million in 2001, 2000, and 1999, respectively. Royalty fees of $17.9 million, $18.2 million and $39.0 million, were expensed in 2001, 2000 and 1999, respectively, for software provided by third-party business partners. F-35 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Goodwill and Other Intangibles are amortized on a straight-line basis over periods estimated to be beneÑted, generally 3 to 40 years. Accumulated amortization balances netted against goodwill and other intangibles were $218.7 million, $178.7 million and $172.3 million at March 31, 2001, 2000 and 1999, respectively. Long-lived Assets. The Company periodically assesses the recoverability of the cost of its long-lived assets, including goodwill. Measurement of impairment losses for long-lived assets, including goodwill, that the Company expects to hold and use is based on estimated fair values of the assets. Estimates of fair values are based on quoted market prices, when available, the results of valuation techniques utilizing discounted cash Öows (using the lowest level of identiÑable cash Öows) or fundamental analysis. Long-lived assets to be disposed of, either by sale or abandonment, are reported at the lower of carrying amount or fair value less costs to sell. Insurance Programs. Under the Company's insurance programs, coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. It is the policy of the Company to retain a signiÑcant portion of certain losses related primarily to workers' compensation, physical loss to property, business interruption resulting from such loss, and comprehensive general, product, and vehicle liability. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions followed in the insurance industry. Revenue Recognition. Revenues of the Health Care Supply Management segment are recognized when products are shipped or services are provided to customers. Included in these revenues are large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of products directly from the manufacturer to the customers' warehouses. These sales totaled $10.7 billion in 2001, $8.7 billion in 2000 and $6.8 billion in 1999. Revenues of the Health Care Information Technology segment are generated primarily by licensing software systems (consisting of software, hardware and maintenance support), and providing outsourcing and professional services. Software systems are marketed under information systems agreements as well as service agreements. Perpetual software arrangements are recognized at the time of delivery or under the percentage of completion contract method in accordance with Statement of Position 97-2 (""SOP 97-2''), ""Software Revenue Recognition'' and SOP 81-1 ""Accounting for Performance of Construction-Type and Certain Product-Type Contracts,'' based on the terms and conditions in the contract. Changes in estimates to complete and revisions in overall proÑt estimates on percentage of completion contracts are recognized in the period in which they are determined. Hardware is generally recognized upon delivery. Multi-year software license agreements are recognized ratably over the term of the agreement. Implementation fees are recognized as the work is performed or under the percentage of completion contract method. Maintenance and support agreements are marketed under annual or multiyear agreements and are recognized ratably over the period covered by the agreements. Remote processing services are recognized monthly as the work is performed. Outsourcing services are recognized as the work is performed. The Company also oÅers its products on an application service provider (""ASP'') basis, making available Company software functionality on a remote processing basis from the Company's data centers. The data centers provide system and administrative support as well as processing services. Revenue on products sold on an ASP basis is recognized on a monthly basis over the term of the contract. In December 1999, the SEC released StaÅ Accounting Bulletin No. 101 (""SAB 101''), which provides the staÅ's views on applying generally accepted accounting principles to selected revenue recognition issues. During the quarter ended December 31, 2000, the Company adopted SAB 101, which did not materially impact the Company's consolidated Ñnancial position, results of operations or cash Öows. F-36 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Other Income, net includes interest income of $29.1 million, $21.7 million and $37.8 million and the Company's share in the net income (loss) from investments accounted for under the equity method of accounting of $5.9 million, $18.2 million and $14.6 million in Ñscal 2001, 2000 and 1999, respectively. Income Taxes. The Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Ñnancial statements. Under this method, deferred tax assets and liabilities are determined based on the diÅerence between the Ñnancial statements and tax bases of assets and liabilities using enacted tax rates in eÅect for the year in which the diÅerences are expected to reverse. Foreign Currency Translation. Assets and liabilities of the Company's foreign aÇliates are translated at current exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments related to the Company's foreign operations are reported as a component of stockholders' equity. Derivative Financial Instruments. The Company's policy generally is to use Ñnancial derivatives only to manage exposure to Öuctuations in interest and foreign currency exchange rates. The Company has entered into interest rate and currency swap agreements to hedge certain interest and currency rate risks which are accounted for using the settlement basis of accounting. Premiums paid on interest rate and currency swap agreements are deferred and amortized to interest expense over the life of the underlying hedged instrument, or immediately if the underlying hedged instrument is settled. No gains or losses are recorded for movements in the swaps' values during the terms of the respective agreements. The interest rate swaps were terminated in February 2000. (See Financial Note 10). Employee Stock Options. The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees''. 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 Ñnancial position and measure these instruments at fair value. In June 1999, the FASB issued SFAS No. 137 ""Accounting for Derivative Instruments and Hedging Activities Ì Deferral of the EÅective Date of FASB Statement No. 133'' which defers the eÅective date of SFAS No. 133 until the Company's Ñscal year 2002. The FASB further amended SFAS No. 133 to address implementation issues by issuing SFAS No. 138, ""Accounting for Certain Derivative Instruments and Certain Hedging Activities Ì an amendment of FASB Statement No. 133'', in June 2000. The Company completed the inventory of potential derivative instruments and adopted SFAS No. 133 as of April 1, 2001. The adoption of this accounting standard did not materially impact the consolidated Ñnancial statements. In September 2000, the FASB issued SFAS No. 140, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,'' which revises the standards for accounting for securitizations and other transfers of Ñnancial assets and collateral and requires entities that have securitized Ñnancial assets to provide speciÑc disclosures. SFAS No. 140 is eÅective for transfers and servicing of Ñnancial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this accounting standard did not materially impact the consolidated Ñnancial statements. F-37 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) 2. Acquisitions, Investments and Divestitures Fiscal 2001 Acquisitions and Investments: In April 2000, the Company and three other health care product distributors announced an agreement to form the New Health Exchange (subsequently renamed ""Health Nexis''). Health Nexis is an Internet-based company focused on information systems and other technology solutions to streamline communication, processing and management of product and contract data across the health care supply chain. The Company accounts for its 34% interest in Health Nexis under the equity method of accounting. In Ñscal 2001, the Company invested $10.8 million in Health Nexis and recorded equity in the losses of Health Nexis of $5.0 million. In July 2000, the Company acquired MediVation, Inc., a provider of an automated web-based system for physicians to communicate with patients online, for approximately $24 million in cash, $14 million in Company common stock and the assumption of $6 million of employee stock incentives. A charge of $2.1 million was recorded to write oÅ the portion of the purchase price allocated to in-process technology for which technological feasibility had not been established as of the acquisition date and for which there were no alternative uses. The Company received an independent valuation that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date. In connection with the restructure of the Company's former iMcKesson business in February, 2001 and based on the utilization of a discounted cash Öow methodology, the Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31, 2001. In Ñscal 2001, the Company also completed a number of smaller acquisitions including two medical- surgical distributors, nine distributors of Ñrst-aid products, a medical management business and an informa- tion technology business. The aggregate cost of these acquisitions, accounted for as purchases, totaled approximately $28.1 million. The aggregate excess of purchase price over the fair value of net assets acquired of $23.5 million is being amortized on a straight-line basis over periods ranging from 3 to 20 years. The results of operations of the acquired businesses have been included in the consolidated Ñnancial statements since their respective acquisition dates. Fiscal 2000 Acquisitions: 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 beneÑt managers, beneÑt payors, laboratories and pharmacies, for approximately $95 million in cash and the assumption of approximately $8 million of employee stock incentives. A charge of $1.5 million was recorded to write oÅ 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 that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date. Goodwill and other intangibles related to the acquisition amounted to $101 million. In connection with the restructure of the Company's former iMcKesson business in February, 2001 and based on the utilization of a discounted cash Öow methodology, the Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31, 2001. In Ñscal 2000, the Company also made a number of smaller acquisitions including eight distributors of Ñrst-aid products, a provider of systems that adjudicate third party prescription claims and three health care information technology businesses. The aggregate cost of these acquisitions, accounted for as purchases, totaled approximately $34.1 million. The aggregate excess of the purchase price over the fair value of net assets acquired of $34.9 million is being amortized on a straight-line basis over periods ranging from 6 to F-38 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) 20 years. The results of operations of the acquired businesses have been included in the consolidated Ñnancial statements since their respective acquisition dates. Fiscal 1999 Acquisitions: HBOC Acquisition 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 shares of common stock of HBOC. Each share of HBOC stock was exchanged for 0.37 of a share of McKesson common stock (the ""Exchange Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was structured as a tax-free reorganization and was accounted for as a pooling of interests. In April 1999, 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 Ñnancial statements related to HBOC (pre-acquisition) in Ñscal 1999, 1998 and 1997. In Ñscal 2000, the Company incurred costs in connection with the investigation and the resulting restatement of the historical consolidated Ñnancial statements, and pending litigation (see Financial Note 18) and recorded charges of $18.9 million for accounting and legal fees and other costs. Other Poolings of Interests In addition to the HBOC acquisition, the following acquisitions were accounted for under the pooling of interests method: In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical supplies primarily to the primary care sector, for approximately 2 million shares of Company common stock. Also in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail, fulÑllment and sales support services, including sample distribution to physician and pharmaceutical company sales representatives, for approximately 300,000 shares of Company common stock. In September 1998, the Company acquired Automated Prescription Systems, Inc., a manufacturer of automated prescription Ñlling and dispensing systems, for approximately 1.4 million shares of Company common stock. In October 1998, the Company acquired US Servis, Inc., a professional management company that provides outsourcing services for physician delivery systems and hospital business oÇces, for the equivalent, after application of the Exchange Ratio, of approximately 700,000 shares of Company common stock. In October 1998, the Company completed the acquisition of IMNET Systems, Inc., a provider of electronic information and document management solutions for the health care industry, for the equivalent, after application of the Exchange Ratio, of approximately 3.6 million shares of Company common stock and 0.6 million Company stock options. In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care management programs and health care information services, for the equivalent, after application of the Exchange Ratio, of approximately 12.7 million shares of Company common stock. In connection with the Ñscal 1999 acquisitions discussed above, the Company incurred transaction costs, primarily consisting of professional fees such as investment banking, legal and accounting fees of $84.6 mil- lion, including $6.6 million of transaction costs associated with various terminated transactions which had been explored by the Company. In addition, the Company incurred acquisition-related employee beneÑt costs F-39 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) of $88.7 million, primarily related to beneÑts received by employees in connection with change of control provisions, signing and retention bonuses and retirement and employee beneÑts. Purchase Transactions The following Ñscal 1999 acquisitions were accounted for under the purchase method and the results of operations of the acquired businesses have been included in the consolidated Ñnancial statements since their respective acquisition dates: In September 1998, the Company acquired MedManagement LLC, a pharmacy management, purchas- ing, consulting and information services company, for approximately $38 million in cash. The acquisition was funded with debt. The excess of the purchase price over the fair value of the net assets acquired of $41 million is being amortized on a straight-line basis over 20 years. In November 1998, the Company acquired RedLine HealthCare Corporation (""RedLine''), a distributor of medical supplies and services to the extended-care industry, including long-term-care and home-care sites for approximately $233 million in cash. The acquisition was funded with debt. The valuation of the RedLine net assets acquired included the recognition of liabilities totaling $5.8 million related to closures of duplicate facilities, and involuntary termination and relocation beneÑts. The excess of the purchase price over the fair value of the net assets acquired of $149 million is being amortized on a straight-line basis over 40 years. In Ñscal 1999, the Company also made a number of smaller acquisitions including six distributors of Ñrst- aid products. The aggregate cost of these acquisitions, accounted for as purchases, totaled approximately $35 million. Divestiture On February 29, 2000, the Company sold its wholly-owned subsidiary, McKesson Water Products Company (the ""Water Products business'') to Groupe Danone for approximately $1.1 billion in cash and recognized an after-tax gain of $515.9 million. The taxes related to this transaction were accrued in Ñscal 2000 and paid in Ñscal 2001. All of the net assets and results of operations of the Water Products business have been classiÑed as discontinued operations and all prior years restated accordingly. 3. Gain (Loss) on Investments In November 1999, the Company received 4.5 million shares of WebMD Corporation common stock and 8.4 million warrants to purchase WebMD Corporation common stock in exchange for its shares and warrants of WebMD, Inc. as a result of the November 11, 1999 merger between Healtheon Corporation and WebMD, Inc. The Company recorded gains on the exchange of the common stock based on the November 11, 1999 closing market price and on the warrants at fair value using the Black-Scholes valuation method. In December 1999, the Company donated 250,000 shares of WebMD common stock to the McKesson HBOC Foundation and sold 2.0 million WebMD common shares. As a result of these events, the Company recognized gains related to the investment in WebMD of $242.8 million. In addition, other equity investments were sold in December 1999 at a gain of $20.3 million, and a $9.8 million charge was recorded in administrative expense to reÖect the donation of the WebMD common stock to the McKesson HBOC Foundation. In January 2000, the Company recognized a gain of $5.9 million on the sale of its remaining investment in WebMD common shares. The estimated fair value of the WebMD warrants declined to $0.3 million as of March 31, 2001. As a result of the continued decline in the value, the Company recorded an other than temporary impairment loss on this investment of $93.1 million during the Ñscal year. The Company also recorded an impairment loss of F-40 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) $35.6 million based upon its review of other equity and venture capital investments during the Ñscal year. The impairment losses were partially oÅset by a gain of $7.8 million on the liquidation of another investment. 4. Restructuring and Asset Impairments In Ñscal 2001, 2000 and 1999, the Company recorded charges and adjustments for restructuring and asset impairments of $355.9 million, $232.7 million and $140.3 million, respectively. The major components of the charges are as follows: Write-down of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other exit-related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Severance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $309.2 10.1 36.6 $355.9 2000 (in millions) $234.2 (5.7) 4.2 $232.7 1999 $ 91.2 17.2 31.9 $140.3 A summary of the activity for severance and exit-related accruals from March 31, 1998 to March 31, 2001, by operating segment, follows: Health Care Supply Management Health Care Information Technology Severance Exit-Related Severance Exit-Related Severance Exit-Related Corporate Balance, March 31, 1998 ÏÏÏÏÏÏÏÏ Fiscal 1999 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Severance paid during the yearÏÏÏÏ Costs paid during the yearÏÏÏÏÏÏÏÏ Balance, March 31, 1999 ÏÏÏÏÏÏÏÏ Fiscal 2000 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Severance paid during the yearÏÏÏÏ Costs paid during the yearÏÏÏÏÏÏÏÏ Balance, March 31, 2000 ÏÏÏÏÏÏÏÏ Fiscal 2001 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Severance paid during the yearÏÏÏÏ Costs paid during the yearÏÏÏÏÏÏÏÏ Balance, March 31, 2001 ÏÏÏÏÏÏÏÏ $ 9.6 22.3 (3.0) (12.1) Ì 16.8 2.3 (1.2) (10.7) Ì 7.2 9.5 (0.9) (5.8) Ì $ 10.0 $ 5.7 17.2 Ì Ì (3.9) 19.0 0.6 (6.9) Ì (2.6) 10.1 2.6 (1.3) Ì (3.9) $ 7.5 (in millions) $ 1.1 Ì Ì Ì (0.5) 0.6 0.6 Ì Ì (0.5) 0.7 8.5 Ì (0.2) $ 9.0 $ 0.5 12.6 Ì (7.1) Ì 6.0 3.9 (0.8) (4.2) Ì 4.9 3.3 Ì (4.7) Ì $ 3.5 $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 24.7 Ì Ì Ì $24.7 $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 0.3 Ì Ì Ì $0.3 Total $ 16.9 52.1 (3.0) (19.2) (4.4) 42.4 7.4 (8.9) (14.9) (3.1) 22.9 48.9 (2.2) (10.5) (4.1) $ 55.0 The remaining balances at March 31, 2001 relate primarily to charges recorded in Ñscal 2001 and 1999. The reserves for exit-related items consist primarily of remaining contract obligations and costs for preparing facilities for disposal, lease costs and property taxes required subsequent to termination of operations. F-41 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) A description of the restructuring and asset impairment charges in Ñscal 2001, 2000 and 1999, by segment, follows: Fiscal 2001 Health Care Supply Management In May 2000, the Company announced the formation of a new business unit, iMcKesson to focus on healthcare applications using the Internet and other emerging technologies. iMcKesson included selected assets from the former e-Health, Health Care Supply Management and Health Care Information Technology segments and acquisitions of strategic investments and businesses. In February 2001, the Company announced the restructuring of the iMcKesson business unit by moving responsibility for iMcKesson's medical management business to the Health Care Supply Management segment and the physician services business to the Health Care Information Technology segment. In connection with an assessment of these businesses, management decided to discontinue a product line and close an oÇce in the United Kingdom. Asset impairment charges totaling $16.9 million were recorded, including $15.9 million for certain strategic investments held by the medical management business that became impaired during the year and $1.0 million primarily for capitalized software. A severance charge of $1.0 million was recorded related to the termination of approximately 70 employees primarily in customer service and administrative functions which will be paid in Ñscal 2002. In addition, the Company recorded exit- related costs of $0.3 million and paid $0.2 million for contract termination fees and lease obligations remaining subsequent to termination of operations. Also during Ñscal 2001, the Company announced its plans to close a call center. The Company recorded severance charges of $2.1 million related to the termination of approximately 114 employees, primarily in customer service functions, and exit-related costs of $0.2 million. During the year, severance of $1.6 million was paid to approximately 95 of those employees and the remainder will be paid in Ñscal 2002. In addition, the Company closed a Health Care Supply Management pharmaceutical distribution center. In connection with this closure, the Company recorded charges of $0.7 million in asset impairments, $0.5 million for severance relating to the termination of 54 employees and $0.5 million for facility closing costs. The Company paid $0.4 million to 43 of those employees and $0.5 million of facility closing costs. The Company also recorded a severance charge of $0.5 million relating to the termination of 25 employees in the Health Care Supply Management pharmacy management business and paid $0.4 million to 20 of those employees. In the fourth quarter of Ñscal 2001, the Company reviewed the operations and cost structure of its pharmaceutical services business resulting in the planned closures of two oÇces. The Company recorded $1.4 million in asset impairments, $2.5 million in severance charges and $1.6 million in exit-related costs. The severance charge relates to the termination of approximately 50 employees in customer service and administrative functions and will be paid in Ñscal 2002. The exit-related costs are associated primarily with lease obligations remaining subsequent to the termination of operations. The Company also announced the consolidation of customer service centers in the medical-surgical business and a workforce reduction. This resulted in the planned termination of approximately 120 employees in customer service functions. The Company recorded severance charges of $2.9 million, of which $1.8 million will be paid in Ñscal 2002, $0.6 million will be paid in Ñscal 2003 and $0.5 million will be paid in Ñscal 2004. The Company also reduced prior year severance reserves that were determined to be in excess by $0.9 million. In conjunction with restructuring plans provided for in prior Ñscal years, during Ñscal 2001, the Company closed two other pharmaceutical distribution centers, eight medical-surgical distribution centers and one medical-surgical sales oÇce in the Health Care Supply Management segment. This resulted in the payment of F-42 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) $1.5 million in severance to approximately 80 terminated pharmaceutical distribution center and administra- tive employees. Also, the Company paid $1.8 million in severance to approximately 220 employees that were terminated in the medical-surgical business. In addition, the Company paid $3.2 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 in the Health Care Supply Management segment and reversed previously recorded exit-related reserves of $1.3 million. The Company plans to continue the previously announced distribution center closures, back-oÇce reductions and workforce reduc- tions in the Health Care Supply Management segment throughout Ñscal 2002. Health Care Information Technology In connection with the restructure of the former iMcKesson business, the Company discontinued certain physician services product oÅerings. This resulted in the recording of impairment charges totaling $120.2 mil- lion including $116.2 million for the write-oÅ of goodwill and intangibles from the acquisitions of Abaton.com and MediVation. In addition, capitalized software costs of $2.9 million and Ñxed assets of $1.1 that are no longer going to be used were written oÅ. Severance charges of $3.3 million relating to the termination of approximately 140 employees in development, customer service and administrative functions, was also recorded. Also, charges totaling $8.5 million for remaining contract obligations and lease liabilities continuing subsequent to termination of business was recorded. In addition, the Company's Health Care Information Technology segment revised estimates for software and services issues associated with pre-July 1999 software contracts and recorded an additional $161.1 million charge for estimated customer settlements (forgiveness of accounts receivable, customer credits and refunds). These customer settlements generally relate to product replacements as well as requirements for certain customers to upgrade computer hardware and software to accommodate new product releases. In the Health Care Information Technology segment, severance of $4.7 million was paid to approxi- mately 240 employees that were terminated in Ñscal 1999 and 2000 but have severance agreements that provide for payments through Ñscal 2002. In addition, $0.2 million in exit-related costs was paid related to closed facilities in the Health Care Information Technology segment. Corporate In connection with the previously discussed restructure of iMcKesson, the Company recorded asset impairment charges totaling $8.9 million. These charges include $7.2 million for investments that were impaired based upon declining market values and $1.7 million for the write-oÅ of internal systems and Ñxed assets that will no longer be utilized. The Company also recorded severance charges of $24.7 million associated with the closure of iMcKesson's headquarters function. The severance charge relates to the termination of 8 employees in administrative functions, including the former CEO of iMcKesson. In addition, the Company recorded $0.3 million in exit-related costs associated with the shut down of iMcKesson's headquarters function. To reÖect the charges discussed above, the Company recorded charges of $1.7 million in distribution expense and $2.1 million in research and development expense and $329.6 million in administrative expense and a $0.6 million reduction in selling expense. In addition, investment impairment charges of $23.1 million have been recorded in gain (loss) on investments. Fiscal 2000 Health Care Supply Management In the fourth quarter of Ñscal 2000, the Company reviewed the operations and cost structure of the Health Care Supply Management's medical-surgical business. This resulted in the planned closure of a sales F-43 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) oÇce and a workforce reduction. The Company recorded a $0.6 million charge for exit-related costs and a severance charge of $2.3 million relating to the termination of approximately 200 employees primarily in warehouse, administrative and sales functions. During Ñscal 2001, severance of $1.2 million was paid to approximately 160 employees under salary continuance agreements. The remaining severance will be paid in Ñscal 2002. The Company also recorded a $0.2 million charge for obsolete equipment associated with certain discontinued products in the medical management business. In addition, the Company reassessed prior years' restructuring plans resulting in the decision to retain one of the six pharmaceutical distribution centers identiÑed for closure in Ñscal 1999, and to reduce the number of medical-surgical distribution center closures. The Company also announced and completed the closure of one additional pharmaceutical distribution center in Ñscal 2000. The Company recorded $6.9 million and $1.2 million for net reductions of prior year-reserves for exit-related activities and severance, respectively, and charges of $1.5 million for additional asset impairments associated with closed distribution centers ($0.7 mil- lion for receivables and $0.8 million for inventories). In Ñscal 2000, the Company completed the closures of three pharmaceutical distribution centers, including the additional distribution center mentioned above. In addition, the realignment of the sales organization was completed and certain back oÇce functions were eliminated. This resulted in the termination of approximately 200 employees and the payment of $3.6 million in severance. The Company also completed the closures of three medical-surgical distribution centers and paid $1.0 million in severance to approximately 100 employees who were terminated in Ñscal 1999 and 2000. In addition, the Company paid $2.6 million in costs incurred in connection with the distribution center closures and also real estate property taxes, rents, utility and other costs for the facilities subsequent to termination of operations. The Company plans to continue these closure activities throughout Ñscal 2002. Health Care Information Technology In the fourth quarter of Ñscal 2000, the Company completed an assessment of the Health Care Information Technology's business and product portfolio. This resulted in the decision to reorganize the business and to discontinue overlapping or non-strategic product oÅerings. The Company recorded charges of $232.5 million for asset impairments. These included charges to write oÅ $49.1 million of capitalized software development costs, $39.3 million of purchased software and $50.7 million of goodwill associated with the discontinued product lines. In addition, a $74.1 million reserve was recorded for customer settlements attributable to the discontinued product lines. The Company also recorded a $9.4 million loss on the disposition of a non-core foreign operation, and a $7.7 million charge for uncollectible unbilled receivables and $2.2 million charge for obsolete equipment associated with the discontinued products. Substantially all of the charges were non-cash asset write-oÅs except for the customer settlements. In addition, a charge of $0.6 million was recorded for costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations and other exit-related activities. In Ñscal 2000, the Company paid $0.5 million in rent costs for oÇce space abandoned in prior years. The Company also recorded a $3.9 million severance charge related to the product streamlining and reorganization. The Ñscal 2000 charge relates to approximately 300 employees, primarily in product development and support and administrative functions who were terminated at the end of Ñscal 2000. Substantially all of the severance was paid in Ñscal 2001. In addition, the Company reduced prior-year severance reserves by $0.8 million, in this segment. F-44 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) To reÖect the items discussed above, charges of $0.8 million have been recorded in cost of sales and $234.8 million have been recorded in administrative expenses. In addition, the Company recorded $0.3 million and $2.6 million as reductions to selling expenses and distribution expenses, respectively. Fiscal 1999 Health Care Supply Management In Ñscal 1999, the Company identiÑed six distribution centers for closure of which one distribution center was shut down by March 31, 1999. The Company recorded a charge of $25.5 million related to such closures. Of this charge, $21.7 million was required to reduce the carrying value of facility assets to their estimated fair value less disposal costs, and $3.8 million was related to computer hardware and software which will no longer be used at such facilities. Fair value was determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of estimated future cash Öows. Also related to such closures, a charge of $17.2 million was recorded for other exit-related costs. These primarily consist of costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write- oÅ of costs related to duplicate assets which do not have future use by the Company. Of the above charges, $25.5 million were non-cash asset write-oÅs. Also, in connection with the previously discussed reassessment of this plan in Ñscal 2000, the Company reduced exit-related reserves by $6.9 million, oÅset in part by additional asset impairments of $1.5 million. As part of this plan, the Company recorded a severance charge of $13.3 million for workforce reductions. The severance charge relates to the termination of approximately 1,000 employees, primarily in distribution centers and associated back-oÇce functions. Severance of $2.7 million was paid during Ñscal 1999 in connection with the termination of approximately 100 distribution center employees and $4.6 million was paid in Ñscal 2000 to approximately 300 employees, primarily in distribution centers, sales and associated back- oÇce functions. In Ñscal 2001, $2.1 million was paid to approximately 150 employees primarily in distribution centers and associated back-oÇce functions. In addition, $1.2 million in severance reserves, primarily associated with a reduction in estimated terminations of approximately 100 employees, was recorded as a reduction of expenses in Ñscal 2000, as a result of the previously discussed reassessment of this restructuring plan. The Company also wrote oÅ $23.5 million (non-cash) of computer hardware and software which were abandoned as the result of an acquisition during the year. In connection with acquisitions in the medical management business, plans for integration of the companies, workforce reductions and consolidation of facilities were completed. The Company recorded charges of $6.0 million (net of a $3.0 million reversal of severance obligations which were determined to be in excess) for severance related to the termination of 230 employees primarily in customer service, development and administrative functions. Severance of $2.8 million was paid in Ñscal 1999, $6.1 million was paid in Ñscal 2000 and $0.1 million was paid in Ñscal 2001. In addition, the Company recorded charges of $12.0 million associated with the termination of royalty agreements because products subject to minimum royalty payments to third parties were replaced with acquired products and $4.3 million primarily for the write-oÅ of capitalized software costs. Health Care Information Technology In Ñscal 1999, the Health Care Information Technology segment completed several acquisitions. In connection with these acquisitions, and the merger of HBOC with McKesson, plans were approved by management to consolidate facilities, reduce workforce and eliminate duplicate products and internal systems. In order to eÅect these plans, the Company identiÑed workforce reductions, including both acquired company and Company personnel, and recorded severance costs of $12.6 million. The severance charge relates to the termination of approximately 320 employees, primarily in development and administrative functions. Severance of $6.6 million, $4.2 million and $1.0 million was paid during Ñscal 1999, 2000 and 2001, F-45 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) respectively, primarily under salary continuance arrangements. Also, $0.8 million of excess severance reserves were reversed in Ñscal 2000. In addition, duplicate facilities, products and internal systems were identiÑed for elimination, resulting in charges of $5.9 million, relating principally to the write-oÅ of capitalized costs and lease termination costs. In addition, following the HBOC Acquisition, the Company evaluated the performance of a foreign business and elected to shut down its facility. Charges of $11.6 million were recorded, principally related to the write-oÅ of goodwill to fair value based on discounted cash Öows. Revenues and net operating income for this foreign business were not signiÑcant in Ñscal 1999. Certain investments became impaired during Ñscal 1999 and were written down by $4.3 million to their net realizable values based primarily on discounted cash Öows, and other reserves of $4.1 million were recorded to cover customer and other claims arising out of the acquisitions. Substantially all of the above charges were non-cash asset write-oÅs. The charges discussed above have been recorded in cost of sales, selling, distribution and administrative expenses. During Ñscal 1999, there were no signiÑcant changes in estimates or recharacterizations of amounts from restructuring reserves recorded in prior years, except for the $3.0 million reversal described above. 5. OÅ-Balance Sheet Risk and Concentrations of Credit Risk Trade receivables subject the Company to a concentration of credit risk with customers in the retail and institutional sectors. A signiÑcant proportion of the Company's increase in sales has been to a limited number of large customers. Consequently, the Company's credit concentration has increased. Accordingly, any defaults in payment by these large customers could have a signiÑcant negative impact on the Company's Ñnancial condition, results of operations and liquidity. At March 31, 2001, receivables from the Company's ten largest customers accounted for approximately 41% of total customer accounts receivable. Fiscal 2001 sales to, and March 31, 2001 receivables from, the Company's largest customer, Rite Aid Corporation, represented approximately 16% of consolidated sales and 10% of consolidated customer accounts receivable, respectively. Receivables from the Company's second largest customer represented approximately 11% of consolidated customer accounts receivable. No other customers represented greater than 10% of consolidated sales or customer accounts receivable. At March 31, 2001, the Company had an $850 million committed receivables sales facility which was fully available. The Company's accounts receivable sales program accommodated the sale by the Company in March, 1999 of $400.0 million of undivided interests in the Company's trade accounts receivable. The program qualiÑes for sale treatment under SFAS No. 125, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' and under SFAS No. 140, ""Accounting For Transfers and Servicing Financial Assets and Extinguishments of Liabilities which replaces SFAS No. 125 eÅective in the Company's Ñscal year 2002. The sales were recorded at the estimated fair values of the receivables sold, reÖecting discounts for the time value of money based on U.S. commercial paper rates and estimated loss provisions. The Company's Canadian subsidiary, Medis, has agreements with certain of its customers' Ñnancial institutions under which Medis has guaranteed the repurchase of certain inventory at a discount in the event the customers are unable to meet certain obligations to the Ñnancial institutions. Medis has also agreed to guarantee credit facilities for certain customers and the payment of a major customer's leases. The amounts related to these guarantees were approximately $22.8 million for credit facilities and $7.6 million for lease obligations at March 31, 2001. The Company's U.S. pharmaceutical distribution business has entered into agreements to provide loans to certain customers, some of which are on a revolving basis. As of March 31, 2001, a total of $94.2 million of these commitments remained outstanding and were reÖected as other receivables and notes receivable on the F-46 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) consolidated balance sheet. Under the terms of the loans, the Company has a security interest in the assets of the customers. In addition, the Company has agreed to guarantee customer loans of $36.6 million. 6. Receivables 2001 Customer accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,298.8 564.3 3,863.1 (419.7) $3,443.4 March 31, 2000 (in millions) $2,847.4 462.0 3,309.4 (274.9) $3,034.5 1999 $2,290.0 442.6 2,732.6 (180.6) $2,552.0 The allowances are for uncollectible accounts, discounts, returns, refunds, customer settlements and other adjustments. 7. Inventories The LIFO method was used to value approximately 90%, 87% and 86% of the inventories at March 31, 2001, 2000 and 1999, respectively. Inventories before the LIFO cost adjustment, which approximates replacement cost, were $5,358.4 million, $4,397.2 million and $3,762.5 million at March 31, 2001, 2000 and 1999, respectively. 8. Property, Plant and Equipment, net 2001 Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Building, machinery and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 33.8 1,225.2 1,259.0 (663.7) $ 595.3 March 31, 2000 (in millions) $ 34.5 1,115.1 1,149.6 (594.2) $ 555.4 1999 $ 37.0 1,029.1 1,066.1 (536.5) $ 529.6 9. Discontinued Operations The net assets (liabilities) of discontinued operations were as follows: Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net assets (liabilities) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.9 (1.3) $(0.4) 2001 March 31, 2000 (in millions) $ 0.9 (2.4) $(1.5) 1999 $242.6 (63.2) $179.4 At March 31, 2001 and 2000, the net liabilities of discontinued operations are included in other current liabilities. Assets consist primarily of land held for sale and investments in aÇliates. Liabilities consist primarily of other accrued liabilities. F-47 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) At March 31, 1999, 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. Results of discontinued operations were as follows: Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì 2001 Years Ended March 31, 2000 (in millions) $366.3 1999 $355.1 Discontinued operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on sale of Water Products business, net of tax of $333.9 ÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(9.2) 3.6 (5.6) Ì $(5.6) $ 38.3 (15.1) 23.2 515.9 $539.1 $ 40.1 (15.8) 24.3 Ì $ 24.3 Discontinued operations in Ñscal 2000 and 1999 include the operations of the Water Products business. 10. Long-Term Debt ESOP related debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.50% Exchangeable subordinated debentures due March, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.91% Series A Senior Notes due February, 2005 ÏÏÏÏÏÏÏÏÏÏ 8.95% Series B Senior Notes due February, 2007 ÏÏÏÏÏÏÏÏÏÏ 9.13% Series C Senior Notes due February, 2010 ÏÏÏÏÏÏÏÏÏÏ 6.60% Notes due March, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.875% Notes due March, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.55% Notes due November, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.30% Notes due March, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.40% Notes due March, 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.65% Debentures due March, 2027 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.375% IDRBs due through December, 2011ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital lease obligations (averaging 8.5%) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, 7.0% to 10.0%, due through March, 2008 ÏÏÏÏÏÏÏÏÏÏÏ Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Long-Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 88.9 6.5 100.0 20.0 215.0 Ì 175.0 125.0 150.0 150.0 175.0 5.5 16.0 2.8 1,229.7 194.1 $1,035.6 March 31, 2000 (in millions) 99.9 $ 28.1 100.0 20.0 215.0 Ì 175.0 125.0 150.0 150.0 175.0 9.0 9.9 3.1 1,260.0 16.2 $1,243.8 1999 $ 115.5 37.3 Ì Ì Ì 175.0 175.0 125.0 150.0 150.0 175.0 9.0 19.0 3.7 1,134.5 195.3 $ 939.2 The Company has a revolving credit agreement with several domestic and international banks whereby the banks commit $400 million borrowing availability at the reference rate (8% at March 31, 2001) or money market-based rates. The agreement expires in Ñscal 2004. The Company has an additional $825 million available for general purposes under a facility with a duration of 364 days or less which is due to expire on October 9, 2001. At March 31, 2001, the Company had $1.225 billion of unused borrowing capacity under these agreements, which are used primarily to support commercial paper borrowings. In addition, the Company has an $850 million committed receivables sales facility, which was fully available as of March 31, 2001. The Company anticipates that this facility will be renewed prior to its termination date of June 15, 2001. F-48 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) In Ñscal 2000, the Company issued Ñxed-rate debt totaling $335.0 million. The 8.91% Series A notes mature on February 28, 2005, the 8.95% Series B notes mature on February 28, 2007 and the 9.13% Series C notes mature on February 28, 2010. Interest only is payable semiannually. Total interest payments were $114.5 million, $115.0 million and $117.8 million in Ñscal 2001, 2000 and 1999, respectively. ESOP related debt (see Note 16) is payable to banks and insurance companies, bears interest at rates ranging from 8.6% Ñxed rate to approximately 89% of LIBOR or LIBOR °0.4% and is due in semi-annual and annual installments through 2009. In connection with the 4.5% exchangeable subordinated debentures, the March 31, 2001 marketable securities balance included $4.0 million held in trust as exchange property for the exchangeable subordinated debentures. Through March 31, 2001, the Company had repurchased $173.5 million of the exchangeable subordinated debentures. In Ñscal 1998, the Company entered into two interest rate swap agreements, each with a notional principal amount of $150 million. The swaps were scheduled to mature in 2005 and 2008 and swap Ñxed interest payments of 6.30% and 6.40%, respectively, for Öoating interest payments based on a LIBOR index. These swaps included an imbedded interest rate cap of 7%. In February 2001, the Company paid $8.2 million to terminate the swaps. The termination fee is being amortized on the straight-line method over the remaining life of the underlying debt. In Ñscal 1998, a subsidiary of the Company entered into a currency swap agreement to convert the $125 million proceeds from the issuance of senior notes to $173 million Canadian currency, which was used to pay down short-term borrowings of the Company's Canadian subsidiary, Medis. This swap matures on November 1, 2002. Certain debt agreements require the Company to maintain certain Ñnancial ratios, including a limitation that the Company's total debt not exceed 56.5% of total capitalization (total debt plus equity). At March 31, 2001, the Company was in compliance with its capitalization covenant and other Ñnancial covenants. Aggregate annual payments on long-term debt and capitalized lease obligations (see Financial Note 12) for the years ending March 31 are: 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-Term Debt $ 187.6 138.0 14.1 259.6 7.9 606.5 $1,213.7 Capital Leases (in millions) $ 6.5 5.8 2.9 0.1 Ì 0.7 $16.0 Total $ 194.1 143.8 17.0 259.7 7.9 607.2 $1,229.7 11. 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 2027 (the ""Debentures''). The Debentures represent the sole assets of the trust. The Debentures mature F-49 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are redeemable by the Company at 103.0% of the principal amount. 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. The preferred securities will be redeemed upon repayment of the Debentures and are callable by the Company at 103.0% of the liquidation amount. 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 reÖected as outstanding in the accompanying consolidated Ñnancial statements. 12. Lease Obligations The Company leases facilities and equipment under both capital and operating leases. Net assets held under capital leases included in property, plant and equipment were $13.7 million, $9.1 million and $4.4 million at March 31, 2001, 2000 and 1999, respectively. Amortization of capital leases is included in depreciation expense. As of March 31, 2001, future minimum lease payments and sublease rentals in years ending March 31 are: Non- cancelable Operating Leases Non- cancelable Sublease Rentals (in millions) 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 83.3 72.0 56.9 46.8 40.1 84.3 $383.4 $ 4.9 3.4 1.5 1.0 0.4 0.7 $11.9 Less amounts representing interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Present value of minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital Leases $ 7.3 6.3 3.1 0.2 0.1 1.0 18.0 2.0 $16.0 Rental expense was $108.7 million, $108.3 million and $110.0 million in Ñscal 2001, 2000 and 1999, respectively. Most real property leases contain renewal options and provisions requiring the Company to pay property taxes and operating expenses in excess of base period amounts. F-50 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) 13. Fair Value of Financial Instruments At March 31, 2001, 2000 and 1999, the carrying amounts of cash and cash equivalents, marketable securities, receivables, drafts payable, accounts payable Ì trade and other liabilities approximate their estimated fair values because of the short maturity of these Ñnancial instruments. The estimated fair values of the Company's remaining Ñnancial instruments, as determined under SFAS No. 107, ""Disclosures about Fair Value of Financial Instruments'', were as follows: 2001 2000 1999 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (in millions) Long-term debt, including current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,229.7 $1,231.1 $1,260.0 $1,180.9 $1,134.5 $1,145.8 Interest rate swaps Ì unrealized gain/(loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign currency rate swap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 17.5 Ì Ì (11.0) 5.6 Ì Ì 3.7 12.6 The estimated fair values of these instruments were determined based on quoted market prices or market comparables. The estimated fair values may not be representative of actual values of the Ñnancial instruments that could have been realized as of March 31, 2001, 2000 or 1999 or that will be realized in the future. 14. Stockholders' Equity Before giving eÅect to the acquisitions accounted for as poolings of interests (see ""Acquisitions, Investments and Divestitures'' Financial Note 2), McKesson declared dividends of $0.435 per share and HBOC declared dividends of $0.04 per share, in Ñscal year 1999. At March 31, 2001, 2000, and 1999, the Company was authorized to issue 100,000,000 shares of series preferred stock ($.01 par value) of which none were outstanding and 400,000,000 shares of common stock ($.01 par value) of which approximately 283,983,000 shares, 283,353,000 shares and 280,584,000 shares, respectively, were outstanding net of treasury stock. In October 1994, the Company's Board of Directors declared a dividend of one right (a ""Right'') for each then outstanding share of common stock and authorized the issuance of one Right for each share subsequently issued to purchase, upon the occurrence of certain speciÑed triggering events, a unit consisting of one hundredth of a share of Series A Junior Participating Preferred Stock. Triggering events include, without limitation, the acquisition by another entity of 15% or more of the Company's common stock without the prior approval of the Company's Board. The Rights have certain anti-takeover eÅects and will cause substantial dilution to the ownership interest of a person or group that attempts to acquire the Company on terms not approved by the Board. The Rights expire in 2004 unless redeemed earlier by the Board. As a result of the two-for-one stock split in Ñscal 1998, each share of common stock now has attached to it one-half of a Right. F-51 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) The following is the calculation of the basic and diluted per-share computations for income (loss) from continuing operations: Income (Loss) Shares (in millions, except per share amounts) Per Share For the year ended March 31, 2001 Basic and Diluted EPS Loss from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(42.7) 283.1(1) $(0.15) For the year ended March 31, 2000 Basic and Diluted EPS Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $184.6 281.3(1) $ 0.66 For the year ended March 31, 1999 Basic and Diluted EPS Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 60.6 275.2(1) $ 0.22 (1) The diluted share base for Ñscal years 2001, 2000 and 1999 excludes 4.1 million shares, 2.9 million shares and 8.9 million shares related to options to purchase common stock, respectively, 5.4 million shares related to trust convertible preferred securities in Ñscal 2001, 2000 and 1999, and 0.4 million shares and 0.3 million shares related to restricted stock in Ñscal 2001 and 1999. Additionally, the income available to common stockholders excludes dividends on convertible preferred securities of $6.2 million in Ñscal 2001, 2000 and 1999. These amounts are excluded due to their antidilutive eÅect. The Company has six stock option plans as of March 31, 2001. The Company has granted options to employees and non-employee directors of the Company as well as restricted stock awards to employees. The Company has also assumed approximately 35 option plans in connection with acquisitions. No new options are granted from these acquired companies' plans. Under the active plans, the Company was authorized to grant up to 77.2 million shares as of March 31, 2001. Options are generally granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant. Under the 1998 Canadian Stock Incentive Plan, the Company granted options at below market value to purchase 20,000 shares, 5,000 shares and 15,000 shares in Ñscal 2001, 2000 and 1999, respectively. Most option grants under the 1997 Non-Employee Director's Equity compensation and Deferral Plan vest immediately. Other options generally vest over four years and all options expire ten years after the grant date. F-52 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) The following is a summary of options outstanding at March 31, 2001: Options Outstanding Options Exercisable Range of Exercise Prices $ 0.01 to $ 13.67 $ 13.68 to $ 27.35 $ 27.36 to $ 41.02 $ 41.03 to $ 54.70 $ 54.71 to $ 68.37 $ 68.38 to $ 82.05 $ 82.06 to $ 95.72 $ 95.73 to $109.39 $109.40 to $123.07 $123.08 to $136.74 Number of Options Outstanding At Year End 3,549,559 13,814,005 24,983,432 2,530,834 1,009,659 13,577,457 519,350 1,341 373,334 373,334 60,732,305 Weighted- Average Remaining Contractual Life (in years) 2.8 7.9 8.3 6.1 6.7 7.6 6.7 5.5 7.2 7.2 7.6 Weighted- Average Exercise Price $ 6.43 21.40 30.46 47.73 58.51 72.95 90.73 101.12 113.50 136.74 39.36 Number of Options Exercisable At Year End 3,449,241 4,859,252 5,037,046 2,400,459 905,904 7,720,628 517,574 1,341 373,334 373,334 25,638,113 Weighted- Average Exercise Price $ 6.60 21.80 31.51 47.86 57.74 72.92 90.76 101.12 113.50 136.74 45.17 Expiration dates range from April 1, 2001 to March 28, 2011. As a result of the change of control of McKesson at the time of the HBOC Transaction on January 12, 1999, most options granted by McKesson which were outstanding on that date vested. The following is a summary of changes in the options for the stock option plans: 2001 2000 1999 Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Shares 56,275,715 11,599,389 (1,149,465) (5,993,334) $42.24 28.50 13.11 50.42 39,472,342 24,650,681 (1,212,262) (6,635,046) $55.11 25.68 14.92 63.23 24,156,651 21,286,922 (3,762,649) (2,208,582) $31.34 75.10 23.79 41.21 Outstanding at beginning of yearÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercised ÏÏÏÏÏÏÏÏÏÏÏÏ Canceled ÏÏÏÏÏÏÏÏÏÏÏÏ Outstanding at year end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,732,305 39.36 56,275,715 42.24 39,472,342 55.11 Pursuant to SFAS No. 123, the Company has elected to account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees.'' Accord- ingly, no compensation cost has been recognized in the consolidated Ñnancial statements for the stock option plans, except an insigniÑcant amount related to the two Canadian grants noted above. Had compensation cost for the stock option plan been recognized based on the fair value at the grant dates for awards under those plans, consistent with the provision of SFAS No. 123, net income (loss) and earnings (loss) per share would have been as indicated in the table below. Since pro forma compensation cost relates to all periods over which the awards vest, the initial impact on pro forma income (loss) from continuing operations may not be F-53 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) representative of compensation cost in subsequent years, when the eÅect of amortization of multiple awards would be reÖected. Years Ended March 31, 2000 2001 (in millions, except per share amounts) 1999 Income(loss) from continuing operations As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (42.7) (179.4) $184.6 82.2 Earnings (loss) per common share Ì basic and diluted As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (0.15) (0.63) $ 0.66 0.29 $60.6 (6.7) $0.22 (0.02) Fair values of the options were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Years Ended March 31, 2000 2001 1999 Expected stock price volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48.5% 0.75% 4.7% 5.0 46.0% 1.50% 6.1% 5.0 32.4% 1.42% 4.8% 5.0 The weighted average grant date fair values of the options granted during 2001, 2000 and 1999 were $13.17, $11.33 and $24.06 per share, respectively. Other Capital included in stockholders' equity, includes notes receivable from certain of the Company's current or former oÇcers and senior managers totaling $90.7 million, $94.5 million and $99.0 million at March 31, 2001, 2000 and 1999, respectively, related to purchases of Company common stock. Such notes were issued for amounts equal to the market value of the stock on the date of the purchase and are full recourse to the borrower. As of March 31, 2001, the value of the underlying stock collateral was $44.7 million. The notes bear interest at rates ranging from 4.7% to 8.0% and are due at various dates through February 2005. 15. Income Taxes The provision for income taxes related to continuing operations consists of the following: 2001 Years Ended March 31, 2000 (in millions) 1999 Current Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total provisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 52.4 8.2 13.1 73.7 (16.2) (6.9) 1.7 (21.4) $ 52.3 $ 62.9 19.8 13.1 95.8 30.5 (5.7) 1.7 26.5 $122.3 $112.8 12.8 8.8 134.4 (24.2) (7.6) (1.2) (33.0) $101.4 F-54 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Foreign pre-tax earnings were $30.8 million, $40.5 million and $24.6 million in Ñscal 2001, 2000 and 1999, respectively. The principal items accounting for the diÅerence in income taxes on income from continuing operations before income taxes computed at the Federal statutory income tax rate and income taxes are as follows: Income taxes at Federal statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local income taxes net of federal tax beneÑt ÏÏÏÏÏÏÏÏÏÏ Nondeductible acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nondeductible amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nondeductible meals and entertainment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nondeductible life insurance policy interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nontaxable income Ì life insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid deduction Ì ESOP allocated shares ÏÏÏÏÏÏÏÏÏÏÏÏ Tax-advantaged debt issuance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends received from foreign investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2001 1999 Years Ended March 31, 2000 (in millions) $109.6 14.5 Ì 9.3 1.7 Ì (2.8) Ì (0.5) (2.5) 0.7 1.2 Ì (8.9) 5.5 0.9 Ì 57.0 1.6 0.8 (2.5) (12.9) (0.5) (2.5) 4.0 1.4 (0.6) 0.1 $ 52.3 $ 58.9 11.9 34.8 10.9 2.0 Ì (2.9) (8.6) (1.0) (2.5) (1.0) 1.0 Ì (2.1) $101.4 $122.3 Income tax payments were $330.5 million, $121.6 million and $175.8 million in Ñscal 2001, 2000 and 1999, respectively. At March 31, 2001, the Company had $51.1 million in cumulative undistributed earnings of certain foreign subsidiaries. The Company's earnings from these foreign subsidiaries are considered to be indeÑnitely reinvested and, accordingly, no provision for federal and state income taxes has been made for these earnings. These earnings could become subject to income tax if they were remitted to the Company as dividends or if a deemed distribution occurs. Determination of the amount of the unrecognized deferred tax liability on these undistributed earnings is not practicable; however, the Company believes that U.S. foreign tax credits would largely eliminate any U.S. tax and oÅset any foreign withholding tax. F-55 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) As of March 31, the deferred tax balances consisted of the following: Assets Receivable allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer related allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation and beneÑt-related accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs associated with duplicate facility closures and workforce reductions related to acquired businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax beneÑt on unrealized loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nondeductible accruals for: Postretirement and postemployment plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs associated with facility closures, surplus properties and asset write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment valuationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss and credit carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NoncurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Liabilities Basis diÅerences for inventory valuation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accelerated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems development costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retirement planÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NoncurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total net current Ì included in prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏ Total net noncurrent Ì included in other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ 16. Postretirement and Postemployment BeneÑts Pension Plans 2001 2000 (in millions) 1999 $ 159.3 40.2 25.9 96.4 $ 104.1 39.9 76.2 38.8 $ 63.6 65.1 17.2 46.6 Ì Ì 28.0 349.8 24.0 39.2 15.4 67.2 39.6 6.9 2.8 195.1 $ 544.9 $(251.0) (10.6) (261.6) (34.3) (93.6) (28.8) (4.2) (160.9) $(422.5) $ $ 88.2 34.2 15.9 23.8 21.8 320.5 87.7 36.9 4.5 84.8 0.6 7.1 11.3 232.9 $ 553.4 $(208.0) (0.6) (208.6) (8.3) (88.7) (30.3) (11.0) (138.3) $(346.9) $ 111.9 $ 94.6 7.5 Ì 36.1 236.1 66.5 33.5 10.0 65.5 0.7 67.0 16.6 259.8 $ 495.9 $(192.3) (1.2) (193.5) (22.9) (83.6) (17.3) (8.9) (132.7) $(326.2) $ 42.6 $ 127.1 Prior to December 31, 1996, substantially all full-time employees of McKesson were covered under either the Company-sponsored deÑned beneÑt retirement plan or by bargaining unit sponsored multi-employer plans. On December 31, 1996, the Company amended the Company-sponsored deÑned beneÑt plan to freeze all plan beneÑts based on each employee's plan compensation and creditable service accrued to that date. Accordingly, employees joining the Company after December 31, 1996, and employees of companies acquired after December 31, 1996, are not eligible for coverage under the Company-sponsored deÑned beneÑt retirement F-56 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) plan. The beneÑts for such Company-sponsored plans are based primarily on age of employees at date of retirement, years of service and employees' pay during the Ñve years prior to retirement. On January 1, 1997, the Company amended the ESOP to provide future additional beneÑts in place of a portion of those beneÑts previously provided by the pension plan. The following tables provide a reconciliation of the changes in the Company-sponsored deÑned beneÑt retirement plan and executive supplemental retirement plans: 2001 2000 (in millions) 1999 Change in beneÑt obligations: BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amendments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial losses (gains) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑt paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in plan assets: Fair value of plan assets at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employer contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expenses paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fair value of plan assets at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $317.7 1.6 23.8 10.6 Ì 8.3 (32.0) $330.0 $395.3 12.9 4.9 (4.9) (32.0) $376.2 Funded status: Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized net actuarial (gain) lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized prior service cost-plan amendments ÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 46.2 (25.0) 6.8 Ì $ 28.0 $349.4 2.0 24.2 5.4 Ì (27.8) (35.5) $317.7 $310.9 110.0 9.9 Ì (35.5) $395.3 $ 77.6 (66.0) 6.1 Ì $ 17.7 $312.0 0.7 21.7 15.0 17.8 11.0 (28.8) $349.4 $294.0 42.5 5.3 (2.1) (28.8) $310.9 $(38.5) 30.1 1.2 23.0 $ 15.8 The following table provides the amounts recognized in the Company's consolidated balance sheet: Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minimum pension liability-net of tax of $5.3, $6.1, and $6.2 ÏÏÏÏÏ Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 70.7 (42.8) 6.8 (8.2) $ 26.5 2000 (in millions) $ 48.2 (30.5) 6.0 (9.3) $ 14.4 1999 $ 38.5 (22.7) 24.2 (9.6) $ 30.4 F-57 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) The following table provides components of the net periodic pension expense (income) for the Company sponsored deÑned beneÑt retirement plan and executive supplemental retirement plans: 2001 2000 (in millions) 1999 Service cost Ì beneÑts earned during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of unrecognized loss and prior service costs ÏÏÏÏÏÏÏÏ Amortization of unrecognized net transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Immediate recognition of pension cost(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net pension expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.6 23.9 (37.4) (3.3) Ì 9.1 $ (6.1) $ $ 2.0 24.2 (29.3) 2.7 Ì 8.3 7.9 $ 0.7 21.7 (27.6) 1.1 (0.3) Ì $ (4.4) (1) Primarily associated with changes in executive management, based on the terms of employment contracts. Assets of the plans are measured on a calendar year basis. The projected unit credit method is utilized for measuring net periodic pension cost over the employees' service life. Costs are funded based on the recommendations of independent actuaries. The projected beneÑt obligations for Company-sponsored plans were determined using discount rates of 7.5% at December 31, 2000, 7.75% at December 31, 1999 and 7% at December 31, 1998 and an assumed increase in future compensation levels of 4.0% for all periods presented. The expected long-term rate of return on assets used to determine pension expense was 9.75% for all periods. The assets of the plan consist primarily of listed common stocks and bonds for which fair value is determined based on quoted market prices. ProÑt-Sharing Investment Plan Retirement beneÑts for employees not covered by collective bargaining arrangements include a supple- mentary contributory proÑt sharing investment plan (""PSIP''). The leveraged ESOP portion of the PSIP has purchased an aggregate of 24.3 million shares of common stock since inception. These purchases have been Ñnanced by 10 to 20-year loans from or guaranteed by the Company. The Company's related receivables from the ESOP have been classiÑed as a reduction of stockholders' equity. The loans will be repaid by the ESOP from common dividends on shares not yet allocated to participants, interest earnings on cash balances not yet allocated to participants, common dividends on certain allocated shares and future Company cash contribu- tions. The ESOP loan maturities and rates are identical to the terms of related Company borrowings (see Financial Note 10). After-tax ESOP expense, including interest expense on ESOP debt, was $10.5 million, $12.4 million and $1.4 million, in Ñscal 2001, 2000 and 1999, respectively. The higher ESOP expense in Ñscal 2001 and 2000 was required to maintain a desired level of beneÑts provided to employees despite a decline in the stock price. Additional tax beneÑts received on dividends paid on unallocated shares of $0.9 million, $1.1 million and $2.2 million in Ñscal 2001, 2000 and 1999, respectively, have been credited directly to retained earnings in accordance with SFAS No. 109. Contribution expense for the PSIP in Ñscal 2001, 2000 and 1999 was all ESOP related and is reÖected in the amounts above. Approximately 1.5 million, 2.6 million and 0.6 million common shares were allocated to plan participants in Ñscal 2001, 2000 and 1999, respectively. Through March 31, 2001, 16.2 million common shares have been allocated to plan participants. At March 31, 2001, 8.1 million common shares in the ESOP Trust had not been allocated to plan participants. F-58 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Health Care and Life Insurance In addition to providing pension beneÑts, the Company provides health care and life insurance beneÑts for certain retired employees. The Company's policy is to fund these beneÑts as claims are paid. In 1989, the Company implemented an ESOP to provide funds at retirement that could be used for medical costs or health care coverage. Expenses for postretirement health care and life insurance beneÑts consisted of the following: Service cost Ì beneÑts earned during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of unrecognized gain and prior service costs ÏÏÏÏÏÏÏÏÏÏ Recognized actuarial loss (gain)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Settlement gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 0.7 9.1 (0.9) 4.0 Ì $12.9 2000 (in millions) $ 1.1 8.1 (0.9) (0.3) Ì $ 8.0 1999 $ 0.9 8.4 (0.9) (4.0) (4.0) $ 0.4 The following table presents a reconciliation of the postretirement health care and life insurance beneÑts obligation at March 31: 2001 2000 (in millions) 1999 Change in beneÑt obligation: BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 123.0 0.7 9.1 14.5 Ì (14.0) $ 133.3 $ 120.7 1.1 8.1 5.4 Ì (12.3) $ 123.0 $ 120.2 0.9 8.4 7.5 (4.0) (12.3) $ 120.7 Funded Status Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued post-retirement beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(133.3) 20.6 (6.1) $(118.8) $(123.0) 10.0 (7.0) $(120.0) $(120.7) 4.4 (8.0) $(124.3) The assumed health care cost trend rates used in measuring the accumulated postretirement beneÑt obligation was 5.0% for all periods presented. The health care cost trend rate assumption has a signiÑcant eÅect on the amounts reported. Increasing the trend rate by one percentage point would increase the accumulated postretirement health care and life insurance obligation as of March 31, 2001 by $7.7 million and the related Ñscal 2001 aggregate service and interest costs by $0.7 million. Decreasing the trend rate by one percentage point would reduce the accumulated postretirement health care and life insurance obligation as of March 31, 2001 by $7.3 million and the related Ñscal 2001 aggregate service and interest cost by $0.6 million. The discount rates used in determining the accumulated postretirement beneÑt obligation were 7.5%, 7.75% and 7% at March 31, 2001, 2000 and 1999, respectively. The Company has an employee discount stock purchase plan for eligible employees. Under the plan, participants may authorize payroll deductions of up to 15% of their total cash compensation to purchase the Company's common stock at a 15% discount. The plan has 24-month oÅering periods with purchases made F-59 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) every 6 months. Purchases are made at the lesser of the closing stock price on the Ñrst day of the oÅering period or each purchase date. 17. Segments of Business The Company's operating segments include Health Care Supply Management and Health Care Information Technology. In evaluating Ñnancial performance, management focuses on operating proÑt as a segment's measure of proÑt or loss. Operating proÑt is income before interest expense, corporate interest income, taxes on income, and allocation of certain corporate revenues and expenses. The Company's Corporate segment is included in the presentation of reportable segment information since certain revenues and expenses of this division are not allocated separately to the operating segments. The Health Care Supply Management segment includes the Company's U.S. pharmaceutical, health care products and medical-surgical supplies distribution businesses. U.S. Health Care Supply Management operations also include the manufacture and sale of automated pharmaceutical dispensing systems for hospitals and retail pharmacies, medical management services and tools to payors and providers, marketing and other support services to pharmaceutical manufacturers, consulting and outsourcing services to pharma- cies, and distribution of Ñrst-aid products to industrial and commercial customers. Health Care Supply Management also includes the Company's international distribution operations (including Canada and an equity interest in a Mexican pharmaceutical distribution business). The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, Ñnancial, supply chain, managed care, payor and strategic management software solutions, as well as networking technologies, including wireless capabilities, electronic commerce, outsourcing and other services to health care organizations throughout the U.S. and certain foreign countries. The Corporate segment includes expenses associated with corporate functions and projects, certain employee beneÑts, the investment in Health Nexis and an inter-segment elimination in Ñscal 1999. During Ñscal 2001, the Company announced the formation of a new business segment, iMcKesson, to focus on healthcare applications using the Internet and other emerging technologies. iMcKesson included selected net assets from the former e-Health, Health Care Supply Management and Health Care Information Technology segments and Ñscal 2001 acquisitions of strategic investments and businesses. Subsequently, in February 2001, the Company announced the restructuring of the iMcKesson business unit by moving responsibility for iMcKesson's medical management business to the Health Care Supply Management segment and the physician services business to the Health Care Information Technology segment. The accounting policies of the segments are the same as those described in the summary of signiÑcant accounting policies. F-60 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Financial information relating to the Company's reportable operating segments as of and for the years ended March 31, is presented below: Revenues Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt Health Care Supply Management(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest Ì net(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before taxes on income and 2001 2000 (in millions) 1999 $41,077.3 930.4 2.3 $42,010.0 $35,666.5 1,018.4 2.1 $36,687.0 $28,662.8 1,308.2 (0.1)(1) $29,970.9 $ 665.1 (295.1) 370.0 (102.7) (251.5) $ 536.5 (214.1) 322.4 (107.3) 98.0 $ 359.8 (49.8) 310.0 (90.4) (51.4) dividends on preferred securities of subsidiary trustÏÏÏÏÏÏÏÏÏÏ $ 15.8 $ 313.1 $ 168.2 Segment assets Ì at year-end Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,067.4 558.9 10,626.3 Corporate Cash, cash equivalents and marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 445.6 458.0 $11,529.9 Depreciation and amortization(4) Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expenditures for long-lived assets Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ $ $ 139.5 101.7 4.9 246.1 90.9 26.5 41.5 158.9 $ 8,644.8 778.8 9,423.6 605.9 343.4 $10,372.9 $ $ $ $ 117.4 101.1 4.1 222.6 99.0 43.3 2.8 145.1 $ 7,052.8 1,040.4 8,093.2 261.9 664.9 $ 9,020.0 $ $ $ $ 90.0 84.8 5.8 180.6 105.0 71.4 22.8 199.2 Revenues by products and services Health Care Supply Management Pharmaceutical Distribution and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medical-Surgical Distribution and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $38,227.8 2,849.5 $32,960.4 2,706.1 $26,371.3 2,291.5 Health Care Information Technology Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hardware ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 133.6 712.2 84.6 2.3 $42,010.0 144.0 782.0 92.4 2.1 $36,687.0 267.7 832.0 208.5 (0.1)(1) $29,970.9 F-61 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) (1) Net of $3.0 million inter-segment elimination related to a Health Care Information Technology segment software sale to the Health Care Supply Management segment for use in that segment's consulting and outsourcing business. (2) Includes $5.9 million, $16.9 million and $13.3 million of net pre-tax earnings from equity investments in Ñscal 2001, 2000 and 1999, respectively. (3) Interest expense is shown net of corporate interest income. (4) Includes amortization of intangibles, capitalized software held for sale and capitalized software for internal use. Revenues, operating proÑt and long-lived assets by geographic areas: Revenues United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating proÑt United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-lived assets, at year end United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 (in millions) 1999 $39,244.1 2,765.9 $42,010.0 $34,324.1 2,362.9 $36,687.0 $27,908.4 2,062.5 $29,970.9 $ $ $ $ 341.4 28.6 370.0 559.0 36.3 595.3 $ $ $ $ 274.8 47.6 322.4 515.6 39.8 555.4 $ $ $ $ 269.2 40.8 310.0 491.1 38.5 529.6 (1) International primarily represents a wholly-owned subsidiary which distributes pharmaceuticals in Canada, an equity investment in a pharmaceutical distributor in Mexico, and an information technology businesses in the United Kingdom and Europe. 18. Other Commitments and Contingent Liabilities I. Accounting Litigation Since the Company's announcements in April, May and July of 1999 that the Company had determined that certain software sales transactions in its Information Technology Business Unit, formerly HBOC, were improperly recorded as revenue and reversed, as of April 30, 2001, eighty-Ñve lawsuits have been Ñled against the Company, certain of the Company's or HBOC's current or former oÇcers or directors, and other defendants including, Bear Stearns & Co., Inc. (""Bear Stearns''), and Arthur Andersen LLP (""Arthur Andersen''). A. Federal Actions Sixty-Ñve of these actions have been Ñled in Federal Court (the ""Federal Actions''). Of these, Ñfty-nine were Ñled in the U.S. District Court for the Northern District of California, one in the Northern District of Illinois (which has been voluntarily dismissed without prejudice), one in the Northern District of Georgia (which has been transferred to the Northern District of California), one in the Eastern District of Pennsylvania (which has been transferred to the Northern District of California), two in the Western District F-62 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) of Louisiana (which have been transferred to the Northern District of California) and one in the District of Arizona (which has been transferred to the Northern District of California). On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District of California issued an order consolidating Ñfty-three of these actions into one action entitled In re McKesson HBOC, Inc. Securities Litigation (Case No. C-99-20743 RMW) (the ""Consolidated Action''), and by order dated December 22, 1999, appointed the New York State Common Retirement Fund as lead plaintiÅ (""Lead PlaintiÅ'') and approved Lead PlaintiÅs' choice of counsel. Judge Whyte's November 2, 1999 order also provided that related cases transferred to the Northern District of California shall be consolidated with the Consolidated Action. Judge Whyte's December 22 order also consolidated an individual action, Jacobs v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), with the Consolidated Action. On September 21, 2000, the plaintiÅs in Jacobs Ñled an individual action in the Northern District of California entitled Jacobs v. HBO & Company (Case No. C-00-20974 RMW), which is to be consolidated with the Consolidated Action and which purports to state claims under Sections 11 and 12(2) of the Securities Act of 1933 (""Securities Act''), Section 10(b) of the Securities Exchange Act of 1934 (""Exchange Act'') and various state law causes of action. By order dated February 7, 2000, Judge Whyte coordinated a class action alleging ERISA claims, Chang v. McKesson HBOC, Inc. et al. (Case No. C-00-20030 RMW) and a shareholder derivative action that had been Ñled in the Northern District under the caption Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the Consolidated Action. Lead PlaintiÅ Ñled an Amended and Consolidated Class Action Complaint (the ""ACCAC'') on February 25, 2000. The ACCAC generally alleged that defendants violated the federal securities laws in connection with the events leading to the Company's announcements in April, May and July, 1999. On September 28, 2000, Judge Whyte dismissed all of the ACCAC claims against McKesson under Section 11 of the Securities Act with prejudice, dismissed a claim under Section 14(a) of the Exchange Act with leave to amend and declined to dismiss a claim against McKesson under Section 10(b) of the Exchange Act. On November 14, 2000, Lead PlaintiÅ Ñled its Second Amended and Consolidated Class Action Complaint (""SAC''). As with its ACCAC, Lead PlaintiÅ's SAC generally alleges that the defendants named therein violated the federal securities laws in connection with the events leading to the Company's announcements in April, May and July, 1999. The SAC names the Company, HBOC, certain current or former oÇcers or directors of the Company or HBOC, Arthur Andersen and Bear Stearns as defendants. The SAC purports to state claims against the Company under Sections 10(b) and 14(a) of the Exchange Act. On January 18, 2001, the Company Ñled a motion to dismiss the claim under Section 14(a) of the Exchange Act in its entirety, and the claim under Section 10(b) of the Exchange Act to the extent it is based on the statements or conduct of the Company prior to the Merger. HBOC also Ñled its own motion to dismiss the claim based on Section 14(a) of the Exchange Act insofar as that claim is asserted on behalf of McKesson shareholders. Those motions were heard on March 23, 2001, and Judge Whyte has not yet issued an order. On January 11, 2001, the Company Ñled an action in the U.S. District Court for the Northern District of California against the Lead PlaintiÅ in the Consolidated Action individually, and as a representative of a defendant class of former HBOC shareholders who exchanged HBOC shares for Company shares in the Merger, McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. et al. (Case No. C01-20021 RMW) (the ""Complaint and Counterclaim''). In the Complaint and Counterclaim, the Company alleges that the exchanged HBOC shares were artiÑcially inÖated due to undisclosed accounting improprieties, and that the exchange ratio therefore provided more shares to former HBOC shareholders than would have otherwise been the case. In this action, the Company seeks to recover the ""unjust enrichment'' received by those HBOC shareholders who exchanged more than 20,000 HBOC shares in the Merger. The Company does not allege any wrongdoing by these shareholders. Lead PlaintiÅ's motion to dismiss the Complaint and Counterclaim was heard on March 23, 2001, and Judge Whyte has not yet issued an order. F-63 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Two other individual actions, Bea v. McKesson HBOC, Inc. et al. (Case No. C-0020072 RMV), and Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW), have also been Ñled in the Northern District of California. By stipulation, Bea has been consolidated with the Consolidated Action and Cater has been stayed pending resolution of the Company's motion to dismiss the Consolidated Complaint. One other individual action, Baker v. McKesson HBOC, Inc. et al. (Case No. CV 00-0188) was Ñled in the U.S. District Court for the Western District of Louisiana. The Company moved to transfer Baker to the Northern District of California, together with a parallel state court action, Baker v. McKesson HBOC, Inc. et al. (Ñled as Case No. 199018; Case No. CV-00-0522 after removal), which had been removed to federal court. Both of the Baker cases have been transferred to the Northern District of California where they have been consolidated with the Consolidated Action. An additional action, Rosenberg v. McCall et al. (Case No. 1:99-CV-1447 JEC) was Ñled in the Northern District of Georgia and subsequently transferred to the Northern District of California, but that action names only two former oÇcers and does not name the Company. Finally, on July 24, 2000, an action captioned Hess v. McKesson HBOC, Inc. et al. was Ñled in state court in Arizona (Case No. C-20003862) on behalf of former shareholders of Ephrata Diamond Spring Water Company (""Ephrata'') who acquired McKesson shares in exchange for their Ephrata stock when McKesson acquired Ephrata in January, 1999. On August 24, 2000, the Company removed the Hess action to the United States District Court for the District of Arizona, and on March 28, 2001, the District Court in Arizona granted the Company's motion to transfer the case to the Northern District of California. B. State Actions Twenty actions have also been Ñled in various state courts in California, Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the ""State Actions''). Like the Consolidated Action, the State Actions generally allege misconduct by the defendants in connection with the events leading to the Company's need to restate its Ñnancial statements. Two of the State Actions are derivative actions: Ash, et al. v. McCall, et al. (Case No. 17132), Ñled in the Delaware Chancery Court and Mitchell v. McCall et al. (Case. No. 304415), Ñled in California Superior Court, City and County of San Francisco. The Company moved to dismiss both of these actions and to stay the Mitchell action in favor of the earlier Ñled Ash and Cohen derivative actions. PlaintiÅs in Mitchell agreed to defer any action by the court on the Company's motions pending resolution of the Company's dismissal motions in Ash. On September 15, 2000, the Ash court dismissed all causes of action with leave to replead certain of the dismissed claims, and on January 22, 2001, the Ash plaintiÅs Ñled a Third Amended Complaint which is presently the subject of the Company's motions to dismiss. Five of the State Actions are class actions. Three of these were Ñled in Delaware Chancery Court: Derdiger v. Tallman et al. (Case No. 17276), Carroll v. McKesson HBOC, Inc. (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et al. (Case No. 17282 NC). Two additional actions were Ñled in Delaware Superior Court: Edmondson v. McKesson HBOC, Inc. (Case No. 99-951) and Caravetta v. McKesson HBOC, Inc. (Case No. 00C-04-214 WTQ). The Carroll and Kelly actions have been voluntarily dismissed without prejudice. The Company has removed Edmondson to Federal Court in Delaware where plaintiÅs have Ñled a motion to remand, which is pending. The Company's motions to stay the Derdiger and Caravetta actions in favor of proceedings in the federal Consolidated Action have been granted. Thirteen of the State Actions are individual actions which have been Ñled in various state courts. Four of these were Ñled in the California Superior Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al. (Case No. 303857), The State of Oregon by and through the Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 307619), Utah State Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 311269), and Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case No. 311747). In Yurick, the trial court sustained the Company's demurrer to the original complaint without leave to amend with respect to all causes of action, except the claims for common F-64 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) law fraud and negligent misrepresentation as to which amendment was allowed. The Court also stayed Yurick pending the commencement of discovery in the Consolidated Action, but allowed the Ñling of an amended complaint. The Company's demurrer to that amended pleading was heard on May 23, 2001 and no order has yet been issued. On May 23, 2001, the California Court of Appeals aÇrmed the Yurick trial court's order dismissing claims against certain of the individual defendants in the action without leave to amend. The Oregon, Utah and Minnesota actions referenced above are individual securities actions Ñled in the California Superior Court for the City and County of San Francisco by out-of-state pension funds. PlaintiÅs in each of those actions are in the process of Ñling amended complaints, and action on the Company's motions seeking stays of those actions and demurrers to the prior complaints has been suspended pending defendants' responses to those amended pleadings. Ten individual actions have been Ñled in various state courts outside of California. Five of these cases have been Ñled in Georgia state courts: Moulton v. McKesson HBOC, Inc. et al. (Case No. 98-13176-9), involving a former HBOC employee's claim for unpaid commissions, claims under Georgia's securities and racketeering laws, as well as various common law causes of action, has been settled and dismissed with prejudice. Powell v. McKesson HBOC, Inc. et al. (Case No. 1999CV-15443), involving a former HBOC employee's claims for unpaid commissions, claims under Georgia's securities and racketeering laws, as well as various common law causes of action, was dismissed by plaintiÅ and reÑled as Case No. 2000-CV-27864 and the Company's motions to dismiss or stay that action are presently pending. In Adler v. McKesson HBOC, Inc. (Case No. 99-C-7980-3), a former HBOC shareholder asserts a claim for common law fraud. The Georgia Court of Appeals has granted interlocutory review of an order issued in Adler and the prior June, 2001, trial date has been vacated. SuÅolk Partners Limited Partnership et al. v. McKesson HBOC, Inc. et al. (Case No.00 VS 010469A) and Curran Partners, L.P. v. McKesson HBOC, Inc. et al. (Case No. 00 VS-010801) are related actions brought on behalf of individual shareholders and are based on Georgia securities, racketeering and common law claims. The Company has moved to stay both the SuÅolk and Curran actions in favor of proceedings in the federal Consolidated Action. Those motions have been heard by the Court and no order has yet been issued. Three individual state court cases have been Ñled outside of California. Grant v. McKesson HBOC, Inc. (C.A. No. 99-03978) was Ñled on May 12, 1999 in the Pennsylvania Court of Common Pleas, Chester County. The Grant case relates to the Company's acquisition of Keystone/Ozone Pure Water Company (""Keystone''). PlaintiÅs are former shareholders of Keystone who received McKesson shares in exchange for their shares in Keystone pursuant to a merger agreement between plaintiÅs, McKesson and a McKesson subsidiary. On March 6, 2001, the Court denied the Company's motion to stay and dismissed with prejudice all plaintiÅs' claims except for those based on breach of contract and negligent misrepresentation. The Company answered the Grant complaint on March 26, 2001. On September 28, 1999, an action was Ñled in Delaware Superior Court under the caption Kelly v. McKesson HBOC, Inc. et al. (C.A. No. 99C-09-265 WCC). PlaintiÅs in Kelly are former shareholders of KWS&P/SFA, Inc., which merged into the Company after the Merger. PlaintiÅs assert claims under the federal securities laws, as well as claims for breach of contract and breach of the duty of good faith and fair dealing. The Company's motion to dismiss and plaintiÅs' motion for summary judgment remain pending before the Court. On October 19, 1999, an individual action was Ñled in Colorado District Court, Boulder County, under the caption American Healthcare Fund II v. HBO & Company et al. (Case No. 00-CV-1762). PlaintiÅs in American Healthcare are former shareholders of Access Health, Inc., a company acquired by HBOC prior to the Merger, and assert claims for breach of the merger contract and related claims. The Company has answered an amended complaint and Ñled a counterclaim against the plaintiÅs alleging that, as HBOC shareholders exchanging HBOC shares for McKesson shares in the Merger, plaintiÅs were unjustly enriched. Discovery has commenced and trial is currently set for September 10, 2001. The previously reported investigations by the United States Attorney's OÇce and the Securities and Exchange Commission are continuing. On May 15, 2000, the United States Attorney's OÇce Ñled a one- F-65 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) count information against former HBOC oÇcer, Dominick DeRosa, charging Mr. DeRosa with aiding and abetting securities fraud, and on May 15, 2000, Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an indictment was unsealed in the Northern District of California against former HBOC oÇcer, Jay P. Gilbertson, and former Company and HBOC OÇcer, Albert J. Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). On that same date, a civil complaint was Ñled by the Securities and Exchange Commission against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa (Securities and Exchange Commission v. Gilbertson, et al., Case No. C-00-3570.) Mr. DeRosa has settled with the Securities Exchange Commission without admitting or denying the substantive allegations of the complaint. On January 10, 2001, the grand jury returned a superseding indictment in the Northern District of California against Messrs. Gilbertson and Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). The Company does not believe it is feasible to predict or determine the outcome or resolution of the Accounting Litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the Ñnal 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 Ñnancial position, results of operations and cash Öows. II. Other Litigation and Claims: In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, other pending and potential legal actions for product liability and other damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of the Company's business. These include: A. Antitrust Matters The Company currently is a defendant in numerous civil antitrust actions Ñled since 1993 in federal and state courts by retail pharmacies. The federal cases have been coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of a consolidated class action (the ""Federal Class Action'') as well as approximately 109 additional actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the ""Individual Actions''). There are numerous other defendants in these actions including several pharmaceutical manufac- turers and several other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to Ñx the prices of brand name pharmaceuticals sold to plaintiÅs at artiÑcially high, and non-competitive levels, especially as compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. On January 19, 1999, the District Court entered its written opinion and judgment granting defendants' motion for a judgment as a matter of law. On July 13, 1999, the Seventh Circuit aÇrmed the District Court's judgment as to the dismissal of the claims against the wholesalers. The wholesalers' motion for summary judgment in the Individual Actions has been granted. PlaintiÅs have appealed to the Seventh Circuit. Most of the individual cases brought by chain stores have been settled. State court antitrust cases against the Company are currently pending in California and Mississippi. The state cases are based on essentially the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case in Superior Court for the State of California, City and County of San Francisco is referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III. The case is trailing MDL 997. A case Ñled in Santa Clara County (Paradise Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was coordinated with the case pending in San Francisco. The case in Mississippi (Montgomery Drug Co., et al. v. The Upjohn Co., et al.) is pending in the F-66 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) Chancery Court of Prentiss County Mississippi. The Chancery Court has held that the case may not be maintained as a class action. In each of the cases, plaintiÅs seek remedies in the form of injunctive relief and unquantiÑed monetary damages, attorneys' fees and costs. PlaintiÅs in the California cases also seek restitution. In addition, treble damages are sought in the Federal Class Action, the Individual Actions and the California case, and statutory penalties of $500 per violation are sought in the Mississippi case. The Company has entered into a judgment sharing agreement with certain pharmaceutical manufacturer defendants, which provides generally that the Company (together with the other wholesale distributor defendants) will be held harmless by such pharmaceutical manufacturer defendants and will be indemniÑed against the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excess of $1 million in the aggregate per wholesale distributor defendant. B. FoxMeyer Litigation In January 1997, the Company and twelve pharmaceutical manufacturers (the ""Manufacturer Defend- ants'') were named as defendants in the matter of FoxMeyer Health Corporation vs. McKesson, et al. (Case No. 97 00311) Ñled in the District Court in Dallas County, Texas (""the Texas Action''). PlaintiÅ (the parent corporation of FoxMeyer Drug Company and FoxMeyer Corporation, collectively ""FoxMeyer Corporation'') has alleged that, among other things, the Company (i) defrauded PlaintiÅ, (ii) competed unfairly and tortiously interfered with FoxMeyer Corporation's business operations, and (iii) conspired with the Manufac- turer Defendants, all in order to destroy FoxMeyer Corporation's business, restrain trade and monopolize the marketplace, and allow the Company to purchase that business at a distressed price. PlaintiÅ seeks relief against all defendants in the form of compensatory damages of at least $400 million, punitive damages, attorneys' fees and costs. The Company answered the complaint, denying the allegations and removed the case to federal bankruptcy court in Dallas. In March 1997, the Company and the Manufacturer Defendants Ñled a complaint in intervention against FoxMeyer Health (now known as Avatex Corporation) in the action Ñled against Avatex by the FoxMeyer Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In November 1998, the Delaware court granted the Company's motion for summary judgment as to the Ñrst three counts asserted in the Texas Action on the ground of judicial estoppel. The Company Ñled a renewed motion for summary judgment on the four remaining counts of Avatex's complaint in the Texas Action which was denied without prejudice by the Delaware court on August 9, 1999. In addition, the Company Ñled cross-claims against the Trustee and debtors seeking the same relief as sought in the Company's complaint against Avatex. Based on the order granting summary judgment as to the Ñrst three counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action remanded to state court. On November 30, 1998, the Company and the other Defendants Ñled a notice of appeal to the District Court from the remand ruling as well as the August 1997 ruling denying defendants' motion to transfer the Texas Action to Delaware. In addition, the Company has Ñled a counter-claim and cross-claim against Avatex and Messrs. Estrin, Butler and Massman in the Texas Action, asserting various claims of misrepresentation and breach of contract. The District Court upheld the remand order and denied as moot the appeal from the order denying transfer. A cross-appeal by Avatex from the order dismissing the Ñrst three counts with prejudice failed, as the District Court aÇrmed the Bankruptcy Court's dismissal by order dated March 28, 2001. The Company and several of the other defendants appealed to the Court of Appeals the ruling upholding the order denying transfer but subsequently moved to dismiss the appeal with prejudice, which motion was granted and the appeal was dismissed on October 4, 1999. As a result, the Texas Action is F-67 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) now pending in Texas state court, and the parties presently are engaged in discovery on the merits of the various claims asserted in the Texas Action. C. Product Liability Litigation The Company has been named as a defendant, or has received from customers tenders of defense, in Ñfteen pending cases alleging injury due to the diet drug combination of fenÖuramine or dexfenÖuramine and phentermine. All of the cases are pending in the state courts of California, Nebraska and New Jersey. The Company's tender of the cases to the manufacturers of the drugs has been accepted and the manufacturer is paying for counsel and fully indemnifying the Company for judgments or settlements arising from its distribution of the manufacturer's products. Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the ""Subsidiaries'') are two of the defendants in approximately ninety cases in which plaintiÅs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including the Subsidiaries. EÅorts to resolve tenders of defense to their suppliers are continuing and a tentative Ñnal agreement has been reached with one major supplier. The Subsidiaries' insurers are providing coverage for these cases, subject to the applicable deductibles. There is one remaining state court class action in South Carolina Ñled against MGM on behalf of all health care workers in that state who suÅered accidental needle sticks that exposed them to potentially contaminated bodily Öuids, arising from MGM's distribution of allegedly defective syringes. MGM's suppliers of the syringes are also named defendants in this action. The tender of all cases has been accepted by the two major suppliers. By this acceptance, these suppliers are paying for separate distributors' counsel and have agreed to fully indemnify the Company for any judgments in these cases arising from its distribution of their products. The Company, along with 134 other companies, has been named in a lawsuit brought by the Lemelson Medical, Educational & Research Foundation (""the Foundation'') alleging that the Company and its subsidiaries are infringing seven (7) U.S. patents relating to common bar code scanning technology and its use for the automated management and control of product inventory, warehousing, distribution and point-of-sale transactions. The Foundation seeks to enter into a license agreement with the Company, the lump sum fee for which would be based upon a fraction of a percent of the Company's overall revenues over the past ten years. Due to the pendency of earlier litigation brought against the Foundation attacking the validity of the patents at issue, the court has stayed the action until the conclusion of the earlier case. The Company is assessing its potential exposure and evaluating the Foundations' claim with the assistance of expert patent counsel, after which it will determine an appropriate course of action. D. Environmental Matters Primarily as a result of the operation of its former chemical businesses, which were divested in Ñscal 1987, the Company is involved in various matters pursuant to environmental laws and regulations: The Company has received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at Ñve sites where the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. The current estimate (determined by the Company's environmental staÅ, in consultation with outside environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible remediation costs for these Ñve sites is approximately $13 million, net of approximately $1.5 million which third parties have agreed to pay in settlement or which the Company expects, based either on agreements or F-68 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) nonrefundable contributions which are ongoing, to be contributed by third parties. The $13 million is expected to be paid out between April 2001 and March 2029 and is included in the Company's recorded environmental liabilities at March 31, 2001. In addition, the Company has been designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the ""Superfund'' law or its state law equivalent) for environmental assessment and cleanup costs as the result of the Company's alleged disposal of hazardous substances at 21 sites. With respect to each of these sites, numerous other PRPs have similarly been designated and, while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. The Company's estimated liability at those 21 PRP sites is approximately $1.5 million. The aggregate settlements and costs paid by the Company in Superfund matters to date has not been signiÑcant. The $1.5 million is included in the Company's recorded environmental liabilities at March 31, 2001. The potential costs to the Company related to environmental matters is uncertain due to such factors as: the unknown magnitude of possible pollution and cleanup costs; the complexity and evolving nature of governmental laws and regulations and their interpretations; the timing, varying costs and eÅectiveness of alternative cleanup technologies; the determination of the Company's liability in proportion to other PRPs; and the extent, if any, to which such costs are recoverable from insurance or other parties. Except as speciÑcally stated above with respect to the litigation matters summarized in ""Accounting Litigation'' (section I, above), management believes, based on current knowledge and the advice of the Company's counsel, that the outcome of the litigation and governmental proceedings discussed above will not have a material adverse eÅect on the Company's Ñnancial position, results of operations or cash Öows. F-69 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) 19. Quarterly Financial Information (unaudited) First Quarter Second Quarter Fourth Quarter (in millions except per share amounts) Third Quarter Fiscal Year HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22.63 16.00 Fiscal 2001 Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) after taxes Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) per common share Diluted Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏ Market prices per common share Fiscal 2000 Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) after taxes Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations Ì Gain on sale of McKesson Water Products Company ÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) per common share Diluted Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations Ì Gain on sale of McKesson Water Products Company ÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations Ì Gain on sale of McKesson Water Products Company ÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏ Market prices per common share $9,717.6 566.9 $9,865.5 571.4 $11,017.8 601.7 $11,409.1 691.0 $42,010.0 2,431.0 63.6 Ì 63.6 0.22 Ì 0.22 0.23 Ì 0.23 0.06 $ $ $ $ $ $ $8,590.0 556.4 61.9(1) Ì 61.9 0.22 Ì 0.22 0.22 Ì 0.22 0.06 $ $ $ $ $ $ $ 31.44 20.69 $8,928.7 546.7 7.3(2) (5.6) 1.7 (175.5)(3) Ì $ (175.5) 0.03 (0.02) 0.01 0.03 (0.02) 0.01 0.06 37.00 23.88 $ $ $ $ $ $ (0.62) Ì (0.62) (0.62) Ì (0.62) 0.06 35.91 23.40 (42.7) (5.6) (48.3) (0.15) (0.02) (0.17) (0.15) (0.02) (0.17) 0.24 37.00 16.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 9,876.9 538.0 $ 9,291.4 583.8 $36,687.0 2,224.9 62.9(4) 7.2 49.3(5) 10.0 160.6(6) 6.2 (88.2)(7) (0.2) Ì 70.1 0.22 0.03 Ì 0.25 0.22 0.03 Ì 0.25 0.06 $ $ $ $ $ $ Ì 59.3 0.18 0.03 Ì 0.21 0.18 0.03 Ì 0.21 0.06 $ $ $ $ $ $ $ $ $ $ $ $ $ Ì 166.8 0.56 0.02 Ì 0.58 0.57 0.02 Ì 0.59 0.06 28.81 18.56 $ $ $ $ $ $ $ 515.9 427.5 (0.31) Ì 1.83 1.52 (0.31) Ì 1.83 1.52 0.06 28.06 18.19 184.6 23.2 515.9 723.7 0.66 0.08 1.83 2.57 0.66 0.08 1.83 2.57 0.24 69.25 18.19 $ $ $ $ $ $ $ HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 69.25 30.75 $ 34.94 27.19 F-70 McKESSON HBOC, INC. FINANCIAL NOTES (Continued) (1) Includes pre-tax charges of $0.5 million for severance associated with staÅ reductions in the pharmacy management business, and $0.7 million for legal costs incurred in connection with the pending litigation resulting from the restatement of prior years' Ñnancial statements. Also includes a pre-tax gain of $7.8 million on the liquidation of an investment, a charge of $2.1 million for write-oÅ of in-process technology related to the July 2000 acquisition of MediVation, Inc. and $2.3 million for severance and facility closing costs associated with staÅ reductions in the medical management business. These items aggregate to $0.5 million in after-tax income. (2) Includes pre-tax charges of $0.7 million for asset impairments, $0.5 million for severance and $0.5 million for facility closing costs associated with the closure of a pharmaceutical distribution center. Also includes charges of $98.9 million for impairments of certain equity investments and $1.1 million for legal costs incurred in connection with the pending securities litigation. These costs aggregate to $62.0 million, after- tax. (3) Includes pre-tax charges of $6.2 million related to closure of facilities in the pharmaceutical services business and consolidation of customer service centers, staÅ reductions and adjustments to prior year restructuring reserves in the medical/surgical business. Also includes charges related to the restructuring of the former iMcKesson business, including the write-oÅ of goodwill and intangibles totaling $116.2 mil- lion, asset impairments of $29.8 million, severance of $29.0 million and exit costs of $9.1 million. In addition, includes charges for reserves of $161.1 million for Information Technology estimated customer settlements (forgiveness of accounts receivable, customer credits and refunds), a $6.7 million loss on investments and a $0.7 million charge for legal costs incurred in connection with the pending securities litigation. The costs aggregate to $264.2 million after-tax. (4) Includes pre-tax charges of $6.3 million incurred in the quarter in connection with the restatement of prior years' Ñnancial results and resulting litigation. Also includes $18.5 million in severance and beneÑt costs resulting from the change in executive management and $1.7 million in retention beneÑts incurred in the quarter, $16.3 million in the aggregate after-tax. (5) Includes pre-tax charges of $8.7 million incurred in connection with the restatement of prior years' Ñnancial statements and resulting litigation, $12.1 million in severance and other costs associated with former employees and $2.9 million in acquisition-related costs, $14.6 million in the aggregate after-tax. (6) Includes pre-tax charges for asset impairments, accounts receivable reserves and customer settlements in the Health Care Supply Management segment totaling $37.0 million related primarily to a prior year implementation of a contract system, partially oÅset by a $5.7 million reduction in prior year restructuring reserves. Also includes charges of $61.8 million for a change in estimate of the Health Care Information Technology segment's requirements for accounts receivable reserves and $1.5 million for the write-oÅ of purchased in-process technology related to the Company's November 1999 acquisition of Abaton.com, partially oÅset by a $2.7 million reduction in prior year accruals for acquisition-related activities. In addition, includes net gains of $253.3 million primarily from the exchange and subsequent sale of equity investments. These gains are oÅset in part, by charges of $2.4 million for accounting and legal fees and other costs incurred in connection with the Company's earlier restatement of prior years' Ñnancial results and resulting litigation and $0.7 million in acquisition-related costs. These aggregate to $100.1 million in after-tax income. F-71 McKESSON HBOC, INC. FINANCIAL NOTES (Concluded) (7) Includes pre-tax charges totaling $239.8 million for Health Care Information Technology segment charges for asset impairments, customer accounts receivable and severance primarily associated with product streamlining and reorganization. These charges are oÅset in part, by a $4.3 million reduction in prior year accruals for acquisition-related activities. In addition, includes pre-tax charges of $1.5 million for asset impairments in the Health Care Supply Management segment related primarily to a prior year implementation of a contract system. Also includes a pre-tax charge of $2.9 million for severance and exit-related charges primarily associated with segment staÅ reductions and a $0.9 million reduction in prior year restructuring reserves. Also includes Corporate segment pre-tax net gains on the sale of equity investments of $5.9 million, partially oÅset by charges of $2.5 million for accounting and legal fees and other costs incurred in connection with the Company's earlier restatement of prior years' Ñnancial results and resulting litigation, costs associated with former employees and other acquisition-related costs. These items total $149.6 million, after-tax. (8) After-tax amounts associated with the items discussed in Notes 1-7 above amounted to $(325.7) million, $(1.15) per share, and $(80.4) million, $(0.29) per share, in Ñscal 2001 and 2000, respectively. F-72 BOARD OF DIRECTORS CORPORATE OFFICERS DIRECTORS AND OFFICERS Alan Seelenfreund Chairman of the Board John H. Hammergren President and Chief Executive OÇcer, McKesson HBOC, Inc. Alfred C. Eckert III Chairman and Chief Executive OÇcer, GSC Partners Tully M. Friedman Chairman and Chief Executive OÇcer, Friedman Fleischer & Lowe, LLC. Alton F. Irby III Chairman, Cobalt Media Group M. Christine Jacobs Chairman, President and Chief Executive OÇcer, Theragenics Corporation Martin M. KoÅel Chairman and Chief Executive OÇcer, URS Corporation Gerald E. Mayo Chairman, Retired, Midland Financial Services, Inc. James V. Napier Chairman, Retired ScientiÑc-Atlanta, Inc. David S. Pottruck President, Co-Chief Executive OÇcer and Chief Operating OÇcer The Charles Schwab Corporation Carl E. Reichardt Chairman, Retired Wells Fargo & Company Jane E. Shaw Chairman and Chief Executive OÇcer, Aerogen, Inc. Alan Seelenfreund Chairman of the Board John H. Hammergren President and Chief Executive OÇcer William A. Armstrong Senior Vice President, Administration William R. Graber Senior Vice President and Chief Financial OÇcer Paul C. Julian Senior Vice President and President, Supply Management Business Graham O. King Senior Vice President and President, Information Technology Business Paul E. Kirincic Senior Vice President, Human Resources Nicholas A. Loiacono Vice President and Treasurer Ivan D. Meyerson Senior Vice President, General Counsel and Secretary Nigel A. Rees Vice President and Controller Carmine J. Villani Senior Vice President and Chief Information OÇcer Heidi E. Yodowitz Senior Vice President and Chief Financial OÇcer, Supply Management Business CORPORATE INFORMATION Common Stock McKesson HBOC, Inc. common stock is listed on the New York Stock Exchange and the PaciÑc Exchange (ticker symbol MCK) and is quoted in the daily stock tables carried by most newspapers. Stockholder Information First Chicago Trust Co. of New York, a division of EquiServe, P.O. Box 2500, Jersey City, N.J. 07303 acts as transfer agent, registrar, dividend-paying agent and dividend reinvestment plan agent for McKesson HBOC, Inc., stock and maintains all registered stockholder records for the Company. For information about McKesson HBOC, Inc. stock or to request replacement of lost dividend checks, stock certiÑcates or 1099's, stockholders may call First Chicago's telephone response center at (800) 756-8200, weekdays 8:30 a.m. to 7:00 p.m., ET. For the hearing impaired call TDD: (201) 222-4955. First Chicago also has a Web site: http://www.equiserve.com Ì that stockholders may use 24 hours a day to request account information. Dividends and Dividend Reinvestment Plan Dividends are generally paid on the Ñrst business day of January, April, July and October to stockholders of record on the Ñrst day of the preceding month. You may have your dividend check deposited directly into your checking or savings account. For more information, or to request an enrollment form, call First Chicago at (800) 756-8200, Monday through Friday, 8:00 a.m. Ó 10:00 p.m., ET, or Saturday, 8:00 a.m. Ó 3:30 p.m., ET. McKesson HBOC, Inc. Dividend Reinvestment Plan oÅers stockholders the opportunity to reinvest dividends in common stock and to purchase additional common stock without paying brokerage commissions or other service fees, and to have their stock certiÑcates held in safekeeping. For more information, or to request an enrollment form, call First Chicago's telephone response center at (800) 414-6280. Annual Meeting The Company's Annual Meeting of Stockholders will be held at 10:00 a.m., PDT, on Wednesday July 25, 2001, at the Fairmont Hotel, 950 Mason Street, San Francisco, California.  EXHIBIT 3.3 RESTATED BY-LAWS OF MCKESSON HBOC, INC. A DELAWARE CORPORATION AS AMENDED THROUGH MARCH 31, 2001 ================================================================================  TABLE OF CONTENTS