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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
McKesson HBOC, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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[MCKESSON HBOC LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF MCKESSON HBOC, INC.
The 2001 Annual Meeting of Stockholders of McKesson HBOC, Inc. will be held
on Wednesday, July 25, 2001 at 10:00 a.m. at the Fairmont Hotel, Grand Ballroom,
950 Mason Street, San Francisco, California to:
- Elect three directors to three-year terms
- Approve an Amendment to the 1997 Non-Employee Directors' Equity
Compensation and Deferral Plan
- Approve an Amendment to the Restated Certificate of Incorporation to
change the Company's name to McKesson Corporation
- Ratify the appointment of Deloitte & Touche LLP as independent auditors
for the fiscal year ending March 31, 2002
- Act on three stockholder proposals, if properly presented at the meeting
- Conduct such other business as may properly be brought before the meeting
Stockholders of record at the close of business on May 25, 2001 are
entitled to receive notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof. A list of such stockholders will be
available at the meeting and, for a ten-day period preceding the meeting, at the
Office of the Secretary, One Post Street, San Francisco, California, during
ordinary business hours.
YOUR VOTE IS IMPORTANT. We encourage you to read the proxy statement and
vote your shares as soon as possible. A return envelope for your proxy card is
enclosed for your convenience. You may also vote by telephone or via the
Internet; specific instructions on how to vote using either of these methods are
included on the proxy card.
By Order of the Board of Directors
[SIGNATURE]
Ivan D. Meyerson
Senior Vice President, General Counsel
and Secretary
One Post Street
San Francisco, CA 94104-5296
June 13, 2001
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CONTENTS
PAGE
----
General Information......................................... 1
- Proxies and Voting at the Meeting.................... 1
- Proxy Materials and Annual Report.................... 1
- Attendance at the Meeting............................ 1
- Dividend Reinvestment Plan........................... 2
- Vote Required and Method of Counting Votes........... 2
- Profit-Sharing Investment Plan....................... 2
Principal Stockholders...................................... 3
- Security Ownership of Certain Beneficial Owners...... 3
- Security Ownership of Directors and Executive
Officers............................................. 4
Election of Directors (Item 1).............................. 5
- Nominees for Directors............................... 6
Board Meetings and Committees............................... 8
Committees of the Board..................................... 8
Director Compensation....................................... 9
Indemnity Agreements........................................ 9
Report of the Compensation Committee on Executive
Compensation.............................................. 9
Executive Compensation...................................... 13
- Summary Compensation Table........................... 13
- Option/SAR Grants in the Last Fiscal Year............ 14
- Aggregated Options/SAR Exercises in the Last Fiscal
Year and Fiscal Year-End Option/SAR Values........... 15
- Long-Term Incentive Plan Awards in the Last Fiscal
Year................................................. 15
Proposal to Amend the 1997 Non-Employee Directors' Equity
Compensation and Deferral Plan (Item 2)................... 17
Proposal to Amend the Company's Restated Certificate of
Incorporation to change the Company's name to McKesson
Corporation (Item 3)...................................... 18
Employment Agreements, Executive Severance Policy and
Termination of Employment and Change in Control
Arrangements.............................................. 18
Certain Relationships and Related Transactions.............. 22
Certain Legal Proceedings................................... 22
Indebtedness of Executive Officers.......................... 23
Audit Committee Report...................................... 24
Ratification of Appointment of Deloitte & Touche LLP as
Independent Auditors (Item 4)............................. 25
Stockholder Proposals (Items 5 - 7)......................... 25
Other Matters............................................... 29
Appendix A: Charter of the Audit Committee of the Board of
Directors of McKesson HBOC, Inc. ......................... A-1
Appendix B: 1997 Non-Employee Directors' Equity Compensation
and Deferral Plan......................................... B-1
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PROXY STATEMENT
GENERAL INFORMATION
PROXIES AND VOTING AT THE MEETING
The Company's Board of Directors is soliciting proxies to be voted at the
Annual Meeting of Stockholders to be held July 25, 2001 (the "Meeting"). This
proxy statement includes information about the issues to be voted upon at the
Meeting.
On June 13, 2001, the Company began mailing these proxy materials to all
stockholders of record at the close of business on May 25, 2001. On this date,
there were approximately shares of the Company's common stock
outstanding and entitled to vote. Each share is entitled to one vote on each
matter properly brought before the Meeting.
Shares can be voted only if the stockholder is present at the Meeting in
person or by proxy. Any person giving a proxy may revoke it at any time before
the Meeting by sending in a written revocation or a proxy bearing a later date.
Stockholders may also revoke their proxies by attending the Meeting in person
and casting a ballot.
Stockholders of record and participants in the Company's Profit-Sharing
Investment Plan ("PSIP") can give proxies by calling a toll free number, by
using the Internet, or by mailing their signed proxy cards. Specific
instructions for voting by means of the telephone or Internet are set forth on
the enclosed proxy card. All shares represented by valid proxies will be voted
as specified. If no specification is made, the proxies will be voted "FOR:"
1. The election of three directors;
2. Approving an amendment to the Company's Restated Certificate of
Incorporation to change the Company's name to "McKesson Corporation;"
3. Approving an amendment to the 1997 Non-Employee Directors' Equity
Compensation and Deferral Plan to increase the number of shares
available under the Plan;
4. Ratifying the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending March 31, 2002;
and "AGAINST:"
5. The stockholder proposal regarding performance-based options;
6. The stockholder proposal regarding a limitation on severance payments;
7. The stockholder proposal regarding the sale of the Company.
If other matters properly come before the Meeting, all shares validly
represented by proxies will be voted in accordance with the recommendations of
the Board.
PROXY MATERIALS AND ANNUAL REPORT
The Company's Notice of Annual Meeting and Proxy Statement is available on
the Company's website under the Investor Resource tab on the Internet at
www.mckhboc.com.
The Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2001 ("FY 2001") accompanies these proxy materials and can also be found on
the Company's website.
ATTENDANCE AT THE MEETING
If you plan to attend the Meeting, you will need to bring your admission
ticket. You will find an admission ticket attached to the proxy card if you are
a registered holder or PSIP participant. If your shares are held in the name of
a bank, broker or other holder of record and you plan to attend the Meeting in
person,
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you may obtain an admission ticket in advance by sending a request, along with
proof of ownership, such as a bank or brokerage account statement, to the
Company's transfer agent, First Chicago Trust Company of New York, a division of
EquiServe, P.O. Box 2500, Jersey City, New Jersey 07303. Stockholders who do not
have an admission ticket will only be admitted upon verification of ownership at
the door.
DIVIDEND REINVESTMENT PLAN
For those stockholders who participate in the Company's Automatic Dividend
Reinvestment Plan, the enclosed proxy includes all full shares of common stock
held in the stockholder's dividend reinvestment plan account on the record date
for the Meeting, as well as shares held of record by the stockholder.
VOTE REQUIRED AND METHOD OF COUNTING VOTES
The presence in person or by proxy of holders of a majority of the
outstanding shares of common stock entitled to vote will constitute a quorum for
the transaction of business at the Meeting. Provided a quorum is present,
directors will be elected by a plurality of the votes cast by the holders of the
Company's shares of common stock voting in person or by proxy at the Meeting.
The affirmative vote of the holders of the majority of the shares present or
represented by proxy is required for the approval of the Amendment to the 1997
Non-Employee Directors' Equity Compensation and Deferral Plan, the ratification
of the appointment of Deloitte & Touche LLP and each of the stockholder
proposals. Abstentions for these matters will be treated as votes cast on a
particular matter as well as shares present and represented for purposes of
establishing a quorum. Broker nonvotes (i.e., when a broker does not have the
authority to vote on a specific issue) will not be treated as votes cast on any
of these matters, but will be treated as shares present or represented for
purposes of establishing a quorum. The affirmative vote of the holders of a
majority of the outstanding shares of common stock is required to approve the
proposal to amend the Company's Certificate of Incorporation to change the
Company's name to McKesson Corporation. Accordingly, abstentions and broker
nonvotes will have the same effect as a negative vote.
PROFIT-SHARING INVESTMENT PLAN
Participants in the Company's PSIP have the right to instruct the PSIP
Trustee, on a confidential basis, how the shares allocated to their accounts are
to be voted and will receive a separate PSIP voting instruction card for that
purpose. Shares that have been allocated to PSIP participants' PAYSOP accounts
for which no voting instructions are received will not be voted. The PSIP
provides that all other shares for which no voting instructions are received
from participants and unallocated shares of common stock held in the leveraged
employee stock ownership plan established as part of the PSIP, will be voted by
the Trustee in the same proportion as shares as to which voting instructions are
received.
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PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of December 31, 2000, unless otherwise
noted, information regarding ownership of the Company's outstanding common
stock, by any entity or person known by the Company to be the beneficial owner
of more than five percent of the outstanding shares of common stock.
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- ----------
FMR Corp.
82 Devonshire Street
Boston, MA 02109............................. 33,875,293(1) 11.9
Wellington Management Company, LLP
75 State Street
Boston, MA 02109............................. 23,495,736(2) 8.27
ESL Partners, L.P.(3).......................... 16,323,816(4) 5.73
The Chase Manhattan Bank, N.A.
As Trustee for the McKesson HBOC, Inc.
Profit-Sharing Investment Plan
1 Chase Manhattan Plaza
New York, NY 10081........................... 16,110,354(5) 5.69
Legg Mason, Inc.
100 Light Street
Baltimore, MD 21202.......................... 15,126,969(6) 5.33
Vanguard Specialized Funds --
Vanguard Health Care Fund
P.O. Box 2600
Valley Forge, PA 19482....................... 14,209,350(7) 5.0
---------------
(1) This information is based upon a Schedule 13G filed with the Securities and
Exchange Commission ("SEC") by FMR Corp. and reports voting and dispositive
power as of December 31, 2000 as follows: Fidelity Management Research
Company, a wholly owned subsidiary of FMR Corp. ("Fidelity") is the
beneficial owner of 30,797,249 shares; Fidelity Management Trust Company, a
wholly-owned subsidiary of FMR Corp. is the beneficial owner of 2,583,695
shares. Edward C. Johnson 3d, and FMR Corp. through its control of Fidelity
and the Fidelity Funds, each has sole dispositive power with respect to
30,797,249 shares, and sole voting power with respect to such shares resides
with the Fidelity Funds' Boards of Trustees. Edward C. Johnson 3d and FMR
Corp., through its control of Fidelity Management Trust Company, each has
sole dispositive power with respect to 2,583,695 shares and sole voting
power with respect to 2,462,895 shares and no voting power with respect to
120,800 shares. Fidelity International Limited, Pembroke Hall, 42 Crowe
Lane, Hamilton, Bermuda is the beneficial owner of 494,349 shares.
(2) This information is based on a Schedule 13G filed with the SEC by Wellington
Management Company LLP ("WMC"), as investment adviser, and reports shared
voting power with respect to 8,702,200 shares and shared dispositive power
with respect to 21,495,783 shares. Vanguard Health Care Fund, a client of
WMC, is the record holder of more than five percent of the shares reported
by WMC. See Footnote 7.
(3) This information is based upon a Schedule 13G/A filed with the Securities
and Exchange Commission ("SEC") by: ESL Partners, L.P., ESL Institutional
Partners, L.P., ESL Investors, LLC, and CBL Partners, L.P., One Lafayette
Place, Greenwich Connecticut 06830; ESL Limited, Hemisphere House, 9 Church
Street, Hamilton, Bermuda; Ziff Asset Management, L.P.: c/o PBK Holdings,
Inc., 283 Greenwich Avenue, Third Floor, Greenwich, Connecticut 06830.
(4) The above described beneficial owners report voting and dispositive power as
of March 20, 2001 as follows: ESL Partners reports sole voting and
dispositive power with respect to 5,864,118 shares; ESL Limited reports sole
voting and dispositive power with respect to 1,299,162 shares; ESL
Institutional Partners reports sole voting and dispositive power with
respect to 213,700 shares; ESL Investors, LLC,
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CBL Partners, L.P. reports sole voting and dispositive power with respect to
6,606,527 shares; reports sole voting and dispositive power with respect to
1,589,520 shares; Triple Marlin Investments, LLC reports no voting or
dispositive power and disclaims beneficial ownership of all shares
beneficially owned by ESL, Limited, Institutional, CBL and Ziff; Michael
Dell Personal Income Trust reports sole voting and dispositive power with
respect to 50,000 shares and disclaims beneficial ownership of all shares
beneficially owned by ESL, Limited, Institutional, CBL and Ziff; Ziff Asset
Management, L.P. reports sole voting and dispositive power with respect to
750,789 shares and disclaims beneficial ownership of all shares beneficially
owned by ESL, Limited, Institutional, Investors and CBL, ESL, Limited,
Institutional, Investors and CBL each disclaim beneficial ownership of all
shares beneficially owned by Ziff.
(5) This information is based on a Schedule 13G filed with the SEC and reports
shares held in trust for the benefit of participants in the McKesson HBOC,
Inc. Profit-Sharing Investment Plan, for which the Chase Manhattan Bank,
N.A. is a Trustee.
(6) This information is based on a Schedule 13G filed with the SEC by Legg
Mason, Inc. and reports sole voting power with respect to 10,554,945 shares,
shared voting power with respect to 4,170,079 shares and shared dispositive
power with respect to 14,920,093 shares.
(7) This information is based on a Schedule 13G filed with the SEC by Vanguard
Specialized Funds -- Vanguard Health Care Fund and reports sole voting power
with respect 4,572,024 shares and shared dispositive power with respect to
209,350 shares. See Footnote 2.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of May 15, 2001, except as otherwise
noted, information regarding ownership of the Company's outstanding common stock
by (i) each Named Executive Officer, as defined on page , (ii) each director
and (iii) all executive officers and directors as a group. The table also
includes the number of shares subject to outstanding options to purchase common
stock of the Company which are currently exercisable within 60 days of May 15,
2001.
PERCENT
SHARES OF COMMON STOCK OF
NAME OF INDIVIDUAL BENEFICIALLY OWNED(1) CLASS
------------------ ---------------------- -------
Alfred C. Eckert III..................... 93,348(2)(6) *
Tully M. Friedman........................ 72,194(3)(4)(6)(7) *
William R. Graber........................ 3,000 *
John H. Hammergren....................... 1,387,696(6)(8) *
Alton F. Irby III........................ 109,691(6) *
M. Christine Jacobs...................... 39,741(3)(6) *
Paul C. Julian........................... 318,722(6)(8) *
Graham O. King........................... 202,028(6)(8) *
Martin M. Koffel......................... 17,612(3)(6) *
David L. Mahoney......................... 1,693,984(5)(6)(8) *
Gerald E. Mayo........................... 139,811(6) *
James V. Napier.......................... 138,862(3)(6) *
David S. Pottruck........................ 48,344(3)(6) *
Carl E. Reichardt........................ 60,766(3)(6)(7) *
Alan Seelenfreund........................ 2,398,497(3)(6)(8) *
Jane E. Shaw............................. 70,777(3)(4)(6)(7) *
All Directors and Executive Officers as a
group (19 Persons)..................... 7,773,696(6)(7)(8)(9) 2.74%
---------------
* Less than 1%
(1) Represents shares held as of May 15, 2001 directly and with sole voting and
investment power (or with voting and investment power shared with a spouse)
unless otherwise indicated. The number of shares of
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common stock owned by each director, or executive officer represents less
than 1% of the outstanding shares of such class. All directors and executive
officers as a group own 2.43% of the outstanding shares of common stock.
(2) Includes 49,900 shares held by Mr. Eckert in an Individual Retirement
Account. Also, includes 740 shares held by Mr. Eckert's spouse in an
Individual Retirement Account, for which beneficial ownership is disclaimed.
(3) Includes restricted stock units and share units accrued under the 1997
Non-Employee Directors' Equity Compensation and Deferral Plan, and the 1994
Stock Option and Restricted Stock Plan as follows: Mr. Friedman, 6,350
units; Ms. Jacobs, 2,341 units; Mr. Koffel, 112 units; Mr. Napier, 1,413
units; Mr. Pottruck, 2,825 units; Mr. Reichardt, 4,560 units; Mr.
Seelenfreund 508 units and Dr. Shaw, 5,939 units and all non-employee
directors as a group, 24,048 units. Directors have neither voting nor
investment power in respect of such units.
(4) Includes common stock units accrued under the Directors' Deferred
Compensation Plan, as follows: Mr. Friedman, 638 units; Dr. Shaw, 5,159
units; and those directors as a group, 5,797 units. Participating directors
have neither voting nor investment power in respect of such units.
(5) Includes 6,000 shares held jointly with spouse.
(6) Includes shares that may be acquired by exercise of stock options within 60
days of May 15, 2001 as follows: Mr. Eckert, 42,708; Mr. Friedman, 49,206;
Mr. Hammergren, 1,020,675; Mr. Irby, 105,251; Ms. Jacobs, 37,400; Mr.
Julian, 245,000; Mr. King, 164,094; Mr. Koffel, 17,500; Mr. Mahoney,
1,334,815; Mr. Mayo, 137,811; Mr. Napier, 119,069; Mr. Pottruck, 40,519; Mr.
Reichardt, 46,206; Mr. Seelenfreund, 2,259,920; Dr. Shaw, 49,206; and all
directors and executive officers as a group, 5,615,788.
(7) Includes shares held by family trusts as to which each of the following
named directors and their respective spouses have shared voting and
investment power: Mr. Reichardt, 10,000 shares; and Dr. Shaw, 10,473 shares;
and those directors as a group, 20,473 shares. Also includes 16,000 shares
held in a revocable trust established by and for the benefit of Mr. Friedman
who is the sole trustee of such trust.
(8) Includes shares held under the Company's PSIP as of March 31, 2001, as to
which the participants have sole voting but no investment power, as follows:
Mr. Hammergren, 1,649 shares; Mr. Julian, 1,575 shares; Mr. King, 301
shares; Mr. Graber, 166 shares; Mr. Mahoney, 6,870 shares; Mr. Seelenfreund,
20,050 shares: and all directors and executive officers as a group, 47,910
shares.
(9) Includes 1,400 shares held by a member of the group as custodian for his
minor child and for which beneficial ownership is disclaimed.
PROPOSALS TO BE VOTED ON
ITEM 1. ELECTION OF DIRECTORS
The Board is divided into three classes for purposes of election. One class
is elected at each annual meeting of stockholders to serve for a three-year
term. Directors hold office until the end of their terms and until their
successors have been elected and qualified, or until their earlier death,
resignation, or removal. If a nominee is unavailable for election, your proxy
authorizes the persons named in the proxy to vote for a replacement nominee if
the Board names one. As an alternative, the Board may reduce the number of
directors to be elected at the meeting. The Board is not aware that any nominee
named in the proxy statement will be unwilling or unable to serve as a director.
David S. Pottruck, a director of the Company since 1997, is not standing for
re-election and effective upon the expiration of his term, the Board of
Directors has amended the Company's Restated By-Laws to provide that the
authorized number of directors shall be eleven.
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The following is a brief description of the principal occupation for at
least the past five years, age and major affiliations of each director.
NOMINEES FOR ELECTION FOR TERMS THAT WILL EXPIRE IN 2004
JOHN H. HAMMERGREN
President and Chief Executive Officer
Mr. Hammergren, age 42, was named President and Chief Executive Officer of
the Company effective April 1, 2001. He was Co-President and Co-Chief Executive
Officer of the Company from July 1999 until April 2001. He was Executive Vice
President of the Company and President and Chief Executive Officer of the Supply
Management Business from January 1999 to July 1999; Group President, McKesson
Health Systems from 1997 to 1999 and Vice President of the Company since 1996.
He is a director of HealthNexis LLC. He has been a director of the Company since
1999.
M. CHRISTINE JACOBS
Chairman of the Board, President and Chief Executive Officer, Theragenics
Corporation
Ms. Jacobs, age 50, has been Chairman of the Board, President and Chief
Executive Officer, Theragenics Corporation, a cancer treatment products
manufacturing and distributing company, since 1998. She was Co-Chairman of the
Board from 1997 to 1998 and was elected President in 1992 and Chief Executive
Officer in 1993. Ms. Jacobs has been a director of the Company since 1999, and
she was previously a director of HBO & Company ("HBOC"). She is a director of
Landauer, Inc. She is a member of the Compensation Committee and the Committee
on Directors and Corporate Governance.
MARTIN M. KOFFEL
Chairman of the Board and Chief Executive Officer, URS Corporation
Mr. Koffel, age 62, has been Chairman of the Board and Chief Executive
Officer and a Director of URS Corporation, a global engineering and design
company, since 1989. He is a director of James Hardie Industries Limited. Mr.
Koffel has been a director of the Company since 2000. He is a member of the
Finance Committee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.
DIRECTORS WHOSE TERMS WILL EXPIRE IN 2002
ALFRED C. ECKERT III
Chairman and Chief Executive Officer, GSC Partners
Mr. Eckert, age 53, has been Chairman and Chief Executive Officer of GSC
Partners, a private investment firm, since 1994. He is also a director of
Kensington Group (UK), Moore Corporation Ltd. and Westpoint Stevens Inc. Mr.
Eckert has been a director of the Company since 1999, and was previously a
director of HBOC. He is Chairman of the Compensation Committee of the Board and
a member of the Finance Committee.
GERALD E. MAYO
Chairman of the Board, Retired, Midland Financial Services, Inc.
Mr. Mayo, age 68, has been Chairman of the Board, Retired, Midland
Financial Services, Inc., the holding company for Midland Life Insurance
Company, since 1997. Mr. Mayo is also a director of Dominion Homes, Inc. He has
been a director of the Company since 1999, and was previously a director of
HBOC. He is a member of the Audit Committee and the Committee on Directors and
Corporate Governance.
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ALAN SEELENFREUND
Chairman of the Board
Mr. Seelenfreund, age 64, has been Chairman of the Board since June 1999.
He previously served as Chairman of the Board from 1989 until January 1999. He
was Chief Executive Officer of the Company from 1989 until 1997. Mr.
Seelenfreund is a director of Nadro, S.A. de C.V. (Mexico), World Wildlife Fund
and the Nature Conservancy. He has been a director of the Company since 1988. He
is a member of the Finance Committee.
JANE E. SHAW
Chairman of the Board and Chief Executive Officer, Aerogen, Inc.
Dr. Shaw, age 62, has been Chairman of the Board and Chief Executive
Officer of Aerogen, Inc., a company specializing in development of pulmonary
drug delivery systems, since 1998. She is a director of Boise Cascade
Corporation, Intel Corporation and IntraBiotics Pharmaceuticals, Inc. Dr. Shaw
has been a director of the Company since 1992. She is Chairman of the Audit
Committee and a member of the Committee on Directors and Corporate Governance.
DIRECTORS WHOSE TERMS WILL EXPIRE IN 2003
TULLY M. FRIEDMAN
Chairman and Chief Executive Officer, Friedman Fleischer & Lowe, LLC
Mr. Friedman, age 59, has been Chairman and Chief Executive Officer of
Friedman Fleischer & Lowe, LLC, a private investment firm founded in 1997. He
was founding partner of Hellman & Friedman from 1984 until 1997. He is a
director of CapitalSource Holdings LLC, The Clorox Company, Levi Strauss & Co.
and Mattel, Inc. Mr. Friedman has been a director of the Company since 1992. He
is Chairman of the Finance Committee and a member of the Compensation Committee.
ALTON F. IRBY III
Chairman, Cobalt Media Group
Mr. Irby, age 60, has been Chairman and founder of Cobalt Media Group, a
media finance company, since 1999. He was Chairman, HawkPoint Partners, from
1997 until 2000. He was co-founder of J.O. Hambro Magan Irby Holdings from 1988
until 1997. He is a Partner of Gleacher & Co. He also serves as a director of
City Capital Counseling, Inc., Crown Communications Ltd., and Ciex Ltd. Mr. Irby
has been a director of the Company since 1999, and was previously a director of
HBOC. He is a member of the Compensation Committee.
JAMES V. NAPIER
Chairman of the Board, Retired, Scientific-Atlanta, Inc.
Mr. Napier, age 64, retired as Chairman of the Board, Scientific-Atlanta,
Inc., a cable and telecommunications network company in November 2000. He had
been the Chairman of the Board since 1993. He is also a director of Engelhard
Corporation, Personnel Group of America, Inc., Vulcan Materials Company,
Intelligent Systems, Inc. and WABTEC Corporation. Mr. Napier has been a director
of the Company since 1999, and was previously a director of HBOC. He is a member
of the Audit Committee.
CARL E. REICHARDT
Chairman of the Board, Retired, Wells Fargo & Company
Mr. Reichardt, age 69, has been Chairman of the Board, Retired, Wells Fargo
& Company, a bank holding company, since 1994. He is also a director of HCA-The
Healthcare Company, ConAgra, Inc., Ford Motor Company, Newhall Management
Corporation, PG&E Corporation and HSBC Holdings plc. Mr. Reichardt has been a
director of the Company since 1996. He is Chairman of the Committee on Directors
and Corporate Governance and a member of the Audit and Compensation Committees.
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BOARD MEETINGS AND COMMITTEES
During the fiscal year ended March 31, 2001, the Board of Directors met 9
times. No director attended fewer than 75% of the aggregate number of meetings
of the Board and of all the committees on which he or she served except for Mr.
Pottruck and Mr. Irby who attended 63% and 69% of the meetings, respectively.
Directors meet their responsibilities not only by attending Board and committee
meetings, but also through communication with executive management on matters
affecting the Company.
The members of each standing committee are elected by the Board each year
for a term of one year or until his or her successor is elected.
COMMITTEES OF THE BOARD
The Audit Committee, which consists of Jane E. Shaw, Chair, Gerald E. Mayo,
James V. Napier and Carl E. Reichardt, met 8 times during the year ended March
31, 2001. The Audit Committee is responsible for, among other things, reviewing
the annual audited financial statements with management, including major issues
regarding accounting and auditing principles and practices as well as the
adequacy and effectiveness of internal controls that could significantly affect
the Company's financial statements; reviewing with financial management and the
independent auditor the interim financial statements prior to the filing of the
Company's quarterly reports on Form 10-Q; recommending to the Board the
appointment of the independent auditor; evaluating the performance of the
independent auditor; approving the fees to be paid the independent auditor;
reviewing and accepting the annual audit plan, including the scope of the audit
activities of the independent auditor; at least annually reassessing the
adequacy of the Committee's charter and recommending to the Board any proposed
changes; reviewing major changes to the Company's auditing and accounting
principles and practices; reviewing the appointment, performance, and
replacement of the senior internal audit department executive; advising the
Board with respect to the Company's policies and procedures regarding compliance
with applicable laws and regulations and with the Company's code of conduct;
performing such other activities and considering such other matters, within the
scope of its responsibilities, as the Committee or Board deems necessary or
appropriate. The composition of the Audit Committee, the attributes of its
members, and the responsibilities of the Committee, as reflected in its charter,
are intended to be in accord with the Securities and Exchange Commission and New
York Stock Exchange listing requirements adopted in December of 1999 with regard
to corporate audit committee charters.
The Compensation Committee, which consists of Alfred C. Eckert III,
Chairman, Tully M. Friedman, Alton F. Irby III, M. Christine Jacobs, David S.
Pottruck and Carl E. Reichardt, met 7 times during the year ended March 31,
2001. The Committee has responsibility for administering a compensation program
for managerial level employees; the stock plans and certain incentive plans and
oversight for other incentive plans; approving the selection of trustees and
investment advisors and establishing the overall investment policies for those
funds that are part of the Company's retirement program; reviewing and approving
compensation and other terms and conditions of employment for corporate officers
at the Senior Vice President level and above; evaluating the President's and
Chief Executive Officer's performance with the other non-employee directors of
the Board; making recommendations to the Board regarding the compensation and
terms and conditions of employment of the Chairman of the Board and the
President and Chief Executive Officer and recommending their successors in the
event of a vacancy; and reviewing and monitoring management's succession plans
for officers.
The Finance Committee which consists of Tully M. Friedman, Chairman, Alfred
C. Eckert III, Martin Koffel, David Pottruck and Alan Seelenfreund, met once
during the year ended March 31, 2001. The Finance Committee has responsibility
for reviewing the long-range financial policies of the Company; providing advice
and counsel to management on the financial aspects of significant acquisitions
and divestitures, major capital commitments, proposed financings and other
significant transactions; making recommendations concerning significant changes
in the capital structure of the Company; approving the principal terms and
conditions of the company's securities that may be issued by the Company;
approving the terms and conditions of acquisitions in the Company's core
business areas, including the consideration to be used in such transactions.
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The Committee on Directors and Corporate Governance, which consists of Carl
E. Reichardt, Chairman, M. Christine Jacobs, Gerald E. Mayo and Jane E. Shaw met
once during the year ended March 31, 2001. The Committee has responsibility for
recommending guidelines and criteria to be used to select candidates for Board
membership; reviewing the size and composition of the Board to assure that
proper skills and experience are represented; recommending the slate of nominees
to be proposed for election at the annual meeting of stockholders; recommending
qualified candidates to fill Board vacancies; evaluating the Board's overall
performance; advising the Board on matters of corporate governance, including
directorship practices, committee composition; advising the Board regarding
director compensation and administering the directors' equity plan.
In evaluating candidates for the Board of Directors, the Committee on
Directors and Corporate Governance seeks individuals of proven judgment and
competence that are outstanding in their chosen fields. It also considers
factors such as education, geographic location, background, anticipated
participation in the Board activities and special talents or personal
attributes. Stockholders who wish to suggest qualified candidates to the
Committee should write to the Secretary of the Company, at One Post Street, San
Francisco, CA 94104, stating in detail the candidate's qualifications for
consideration by the Board. A stockholder who wishes to nominate a director must
comply with certain procedures set forth in the Company's Restated By-Laws.
DIRECTOR COMPENSATION
The compensation for each non-employee director of the Company includes an
annual retainer of $27,500. Under the 1997 Non-Employee Directors' Equity
Compensation and Deferral Plan, each director is required to defer 50% of his or
her annual retainer into either Restricted Stock Units ("RSUs") or Nonqualified
Stock Options ("Options"). Each director may also defer the remaining 50% of the
annual retainer into RSUs, Options or into the Company's deferred compensation
plan ("DCAP II"). Directors may also elect to receive cash. Directors also
receive $1,000 for each Board or Committee meeting attended, and Committee
chairs also receive an annual retainer of $3,000. These fees may be deferred
into RSUs or DCAP II or may be paid in cash. Directors are also paid their
reasonable expenses for attending Board and Committee meetings.
Each January, directors are also granted an Option for 10,000 shares of the
Company's common stock. The Options are granted at fair market value, are
immediately exercisable, and have a term of ten years.
Directors who are employees of the Company or its subsidiaries do not
receive any compensation for service on the Board.
INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with each of its
directors and executive officers that provide for indemnification against any
judgment or costs assessed against them in the course of their service. Such
agreements do not permit indemnification for acts or omissions for which
indemnification is not permitted under Delaware law. See Certain Legal
Proceedings at page .
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Corporation's executive compensation program is administered by the
Compensation Committee (the "Committee") of the Board of Directors, which
consists exclusively of nonemployee directors. The Committee uses a nationally
recognized independent compensation consulting firm to assist it in carrying out
its responsibilities and its review and analysis of the executive compensation
program. Using that firm's proprietary database and identifying participants
with revenues between $10 billion and $20 billion as the Company's peer group,
the Committee establishes the parameters for meeting the base salary, short term
cash and long term compensation targets. This peer group includes a broad
cross-section of American companies. The Committee believes that these companies
provide the proper comparator group based on the size and complexity of the
Company's business. This report describes the policies and the criteria used by
the
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Committee in establishing the principal components of, and setting the level of
compensation for, executive officers.
THE COMPANY'S PHILOSOPHY OF EXECUTIVE COMPENSATION
The overall objective of the Company's executive compensation program is to
provide base salary and annual cash bonuses for executive officers at
approximately the median level for executive officers at companies similar in
size, complexity or line of business to McKesson HBOC, Inc. while providing long
term compensation at between the 50th and the 75th percentiles. The program is
designed to enhance shareholder value by linking a large part of executive
officers' compensation directly to the Company's performance.
Many factors enter into the Committee's deliberations on the appropriate
levels of short-and long-term compensation for individual executive officers of
the Company. The factors include the Company's performance as measured against
financial and nonfinancial targets approved by the Committee at the beginning of
each fiscal year; the individual performance of each executive officer; the
overall competitive environment for executives and the level of compensation
needed to attract and retain executive talent. The recommendations of, the
independent compensation consulting firm as well as surveys supplied by other
independent professional compensation consultants provide the quantitative basis
for the Committee's decisions.
COMPONENTS OF COMPENSATION
The Company's executive compensation program consists of base salary, a
short-term incentive plan and long-term incentives (stock options, restricted
stock and cash).
Base Pay
Base salary is reviewed annually. Actual base salary is driven by
individual performance, competitive practices and level of responsibility.
Salary increases for FY 2001 reflect the Committee's determination that base
salary levels should be increased to recognize increased responsibilities and to
remain competitive at the median levels of targeted companies.
Short Term Incentives
Under the Company's short-term incentive plan (the "Management Incentive
Plan" or "MIP"), individual target awards are set as a percentage of the
executive's base salary and vary by level of responsibility. The target awards
are designed to be competitive with those set for executive officers at
companies in the Company's executive compensation comparator group. Annual MIP
awards can range from zero to two times the executives' target awards and are
determined by the Company's and/or individual business unit's performance versus
pre-established objectives. The actual awards may be reduced from the maximums
established by the above procedure by the Committee exercising "negative
discretion" in accordance with regulations under Section 162(m) with respect to
this type of plan.
Long Term Incentives
The Company's long-term incentive program has two components: a stock
option component and a cash component. Under this program:
- participants are granted nonqualified stock options to purchase shares of
the Company's common stock at fair market value;
- the Committee establishes a target cash award for each participant under
the Long-Term Incentive Plan ("LTIP"), the cash component of the long
term incentive program, which cash award may have a service based
component but otherwise is reduced if financial targets are not met.
Restricted stock, another form of long-term incentive, has been used by the
Company with the approval of the Committee on an individual basis for the
purpose of attracting and/or retaining key employees.
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Under the Company's LTIP, target amounts for key senior executives,
including named executives, were established during FY 2001, which target
amounts are reflected in the table "Long-Term Incentive Plan Awards in the Last
Fiscal Year." These target amounts were established to ensure the retention of
key executives and were designed to enhance their focus on two key drivers of
shareholder value -- Earnings Before Interest and Taxes ("EBIT") and Return on
Committed Capital ("ROCC"). These target amounts were granted subject to a three
year performance cycle and payments, if any, will occur after the close of FY
2003.
POLICY REGARDING TAX DEDUCTION FOR COMPENSATION UNDER INTERNAL REVENUE CODE
SECTION 162(M)
Section 162(m) of the Code limits the Company's tax deduction to $1 million
for compensation paid to certain executive officers named in the proxy statement
unless the compensation is "performance-based" within the meaning of Section
162(m). The MIP, previously approved by shareholders, meets the requirement of a
performance based pay program within the meaning of Section 162(m). Proceeds
from stock options granted under the 1994 Stock Option and Restricted Stock
Plan, which was also approved by shareholders, are also "performance based" and
are eligible for an exception to the deduction limitation. In the recent past,
the Company faced unique challenges in retaining key employees and the Committee
concluded that, in certain circumstances, it was appropriate to make grants of
options beyond the limits imposed and outside the structure of the 1994 Plan.
These grants are reflected in the table entitled Aggregate Options/SAR Exercises
in the Last Fiscal Year and Fiscal Year-End Options/SAR Values.
The Committee's intention is and has been to comply with the requirements
of Section 162(m) unless the Committee concludes that the required changes would
not be in the best interest of the Corporation or its stockholders.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In July 1999, John Hammergren and David Mahoney were named Co-Presidents
and Co-Chief Executive Officers. The Board agreed on the specific goals each
would work to achieve for FY 2001. For Mr. Hammergren, specific economic
measures were set including EBIT, ROCC and Earnings Per Share. Other goals
included strategy fulfillment, process improvement and staff development. Mr.
Mahoney's objectives focused on developing and launching the Company's internet
strategy with a goal of bringing new physician and medical management solutions
to market within specified financial parameters.
In February 2001, the internet strategy was reexamined and the assets
previously managed by Mr. Mahoney were integrated into other business units of
the Company. As a result of the reorganization, Mr. Mahoney's position as
Co-President and Co-Chief Executive Officer was eliminated as of March 31, 2001
and he has left the Company. John Hammergren was named President and Chief
Executive Officer effective April 1, 2001.
During FY 2001, under Mr. Hammergren's leadership, McKessonHBOC achieved
strong financial performance across all lines of business. The Pharmaceutical
Supply Business produced strong results driven by substantial margin expansion.
The Information Technology Business stabilized its customer and employee bases
and refined its product mix.
In October 2000 and again in January 2001, Mr. Hammergren was awarded an
option to purchase 225,000 shares of McKesson HBOC Inc. common stock which
awards are reflected in the table "Option/SAR Grants in the Last Fiscal Year."
These grants are consistent with the Committee's guidelines for long-term
compensation and belief that executive compensation should be linked to
increasing shareholder value.
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It is the Committee's view that the total compensation package for the
Chief Executive Officer for FY 2001, as reflected in the Summary Compensation
Table that follows, was based on an appropriate balance of the Corporation's
performance, his own performance and competitive practice.
Compensation Committee of the Board
Alfred C. Eckert III, Chair
Tully M. Friedman
Alton F. Irby III
M. Christine Jacobs
David S. Pottruck
Carl E. Reichardt
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EXECUTIVE COMPENSATION
The following table discloses compensation earned by the President and
Chief Executive Officer and the former Co-President and Co-Chief Executive
Officer, as well as the four other most highly paid executive officers (the
"Named Executive Officers") for the three fiscal years ended March 31, 2001:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ----------------------- ---------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#) ($) ($)(4)
--------------------------- ---- ------- --------- -------- ---------- ---------- --------- ---------
Alan Seelenfreund(5).................... 2001 500,000 1,150,000 86,953 0 0 0 338,043
Chairman of the Board 2000 369,231 0 77,757 0 1,150,000 228,202 347,114
John H. Hammergren...................... 2001 823,556 2,300,000 119,028 0 450,000 0 72,499
President and Chief 2000 692,308 0 108,491 4,200,000 2,300,000 60,970 74,229
Executive Officer 1999 420,000 622,100 76,992 0 1,219,850 1,556,150 1,676,275
Paul C. Julian(5)....................... 2001 447,436 1,000,000 177,972 0 200,000 0 40,222
Senior Vice President and 2000 362,500 315,000 51,992 1,260,000 500,000 0 28,862
President, Supply Management Business
Graham O. King(5)....................... 2001 638,000 800,000 142,533 125,000 0 8,139
Senior Vice President and 2000 515,760 0 48,841 525,000 1,125,000 0 1,254,845
President, Information Technology
Business
William R. Graber(5).................... 2001 450,000 520,000 301,839 0 75,000 0 5,088
Senior Vice President and
Chief Financial Officer
David L. Mahoney(5)..................... 2001 823,558 0 0 0 0 0 43,788
Formerly Co-President and Co-Chief 2000 692,308 0 33,382 4,200,000 2,300,000 48,776 56,776
Executive Officer 1999 400,000 504,990 0 0 1,215,715 1,566,780 1,655,424
---------------
(1) [COPY MISSING]
(2) Other Annual Compensation includes for Mr. Seelenfreund, use of the
Company's aircraft, $29,373; for Mr. Hammergren, an annual housing
assistance payment of $50,000, described under "Indebtedness of Executive
Officers;" for Mr. Julian, a relocation expense reimbursement of $66,094;
for Mr. King, living expense payments of $29,275 and a travel payment of
$30,000 in connection with his principal place of business in Alpharetta,
Georgia; for Mr. Graber, a relocation expense reimbursement of $71,746 and
an annual housing assistance payment of $140,000, also described under
"Indebtedness of Executive Officers."
(3) The number and value of the aggregate restricted stock holdings of the Named
Executive Officers on March 31, 2001 were as follows: Messrs. Hammergren and
Mahoney each have 200,000 shares, with a value for each of $5,350,000; Mr.
Julian, 60,000 shares $1,605,000; and Mr. King, 25,000 shares $668,750.
(4) For FY 2001, includes the aggregate value of (i) the Company's stock
contributions under the PSIP, a plan designed to qualify as an employee
stock ownership plan under the Internal Revenue Code ("Code"), allocated to
the accounts of the Named Executive Officers as follows: Mr. Seelenfreund
$22,850; Mr. Hammergren $10,812; Mr. Julian $13,999; Mr. King $4,550; Mr.
Graber $5,088; Mr. Mahoney $13,028; (ii) employer matching contributions
under the Supplemental PSIP, an unfunded nonqualified plan established
because of limitations on annual contributions contained in the Code, as
follows: Mr. Seelenfreund $6,000; Mr. Hammergren $19,336; Mr. Julian
$13,345; Mr. King $3,589; and Mr. Mahoney $19,907; (iii) above market
interest accrued on deferred compensation as follows: Mr. Seelenfreund
$309,193, Mr. Hammergren $42,351; Mr. Julian $12,878; and Mr. Mahoney
$10,853.
(5) Mr. Seelenfreund became an executive officer of the Company effective July
1, 1999. Messrs. Julian and King each became executive officers of the
Company effective August 25, 1999. William R. Graber became an executive
officer of the Company effective March 25, 2000. Mr. Mahoney's position as
Co-President and Co-Chief Executive Officer of the Company was eliminated
effective March 31, 2001.
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The following table provides information on stock option grants during
fiscal year 2001 to the Named Executive Officers:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#)(1)(2) FISCAL 2001 ($/SH) DATE ($)(3)
---- ---------------- ------------ ----------- ---------- -------------
Alan Seelenfreund................. 0 -- -- -- 0
John H. Hammergren................ 225,000 1.94% $28.25 10/30/10 2,734,762
225,000 1.94% $32.67 1/31/11 3,329,325
Paul C. Julian.................... 125,000 1.08% $28.25 10/30/10 1,519,312
75,000 0.65% $32.67 1/31/11 1,109,775
Graham O. King.................... 75,000 0.65% $28.25 10/30/10 911,587
50,000 0.43% $32.67 1/31/11 739,850
William R. Graber................. 40,000 0.34% $28.25 10/30/10 486,180
35,000 0.30% $32.67 1/31/11 517,895
David L. Mahoney.................. 0 -- -- -- 0
---------------
(1) No options were granted with SARs and no freestanding SARs have ever been
granted. Optionees may satisfy the exercise price by submitting currently
owned shares and/or cash. Income tax withholding obligations may be
satisfied by electing to have the Company withhold shares otherwise issuable
under the option with a fair market value equal to such obligations.
(2) The option exercise price of the indicated options was 100% of the fair
market value on the date of grant. The options become exercisable in
installments of 25% on each of the first, second, third and fourth
anniversaries of the date of grant and expire ten years after the date of
the grant.
(3) In accordance with SEC rules, a modified Black-Scholes option-pricing model
was chosen to estimate the grant date present value for the options set
forth in this table. The assumptions used in calculating the reported value
included: an option term of 5 years and a dividend yield of 0.75%; stock
volatility, 48.5% and risk-free interest rate, 4.7%. The Company does not
believe that the Black-Scholes model, or any other model, can accurately
determine the value of an option. Accordingly, there is no assurance that
the value, if any, realized by an executive, will be at or near this value
estimated by the Black-Scholes model. Future compensation resulting from
option grants is based solely on the performance of the Company's stock
price.
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The following table provides information on the value of each of the Named
Executive Officers' Options at March 31, 2001:
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY OPTIONS/
SHARES OPTIONS/SARS AT SARS AT
ACQUIRED VALUE MARCH 31, 2001(#) MARCH 31, 2001($)(1)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
Alan Seelenfreund........ 0 0 1,759,920/575,000 15,889,762/464,062
John H. Hammergren....... 0 0 1,020,675/3,222,841 604,062/1,392,187
Paul C. Julian........... 0 0 245,000/725,000 576,562/1,392,187
Graham O. King........... 0 0 164,094/1,314,550 431,190/480,078
William R. Graber........ 0 0 0/575,000 0/2,687,500
David L. Mahoney......... 0 0 1,334,815/2,725,000 6,372,324/1,392,187
---------------
(1) Calculated based upon the fair market value share price of $26.75 on March
30, 2001, less the share price to be paid upon exercise. There is no
guarantee that if and when these options are exercised they will have this
value.
LONG-TERM INCENTIVE PLAN AWARDS IN THE LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(1)
OTHER PERIOD -------------------------------------
UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT ($) ($) ($)
---- ---------------- --------- ---------- ----------
John H. Hammergren....................... Three Years $0 $4,125,000 $4,125,000
Paul C. Julian........................... Three Years $0 $1,875,000 $1,875,000
Graham O. King........................... Three Years $0 $1,800,000 $1,800,000
William Graber........................... Three Years $0 $1,350,000 $1,350,000
David L. Mahoney(2)...................... Three Years $0 $4,125,000 $4,125,000
---------------
(1) The table above represents potential payouts of cash awards, if earned, upon
completion of the three year incentive period beginning April 1, 2000 and
ending March 31, 2003. The amounts, if any, paid under the plan will be
determined based on the Company's performance against goals established by
the Compensation Committee for growth in Earnings Before Interest and Taxes
and the 12-month trailing Return on Committed Capital. No awards will be
paid if the specified minimum performance objectives are not met.
(2) Any award payable to Mr. Mahoney will be prorated pursuant to the terms of
his employment agreement with the Company.
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STOCK PRICE PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
MCKESSON HBOC, INC., STANDARD & POORS 500 AND PEER GROUP
(PERFORMANCE RESULTS THROUGH 3/31/01)
Value Line
HealthCare
Period McKesson HBOC S&P 500 Index Sector Index
3/31/98 100.00 100.00 100.00
3/31/97 127.32 119.94 120.25
3/31/98 232 24 177.46 188.86
3/31/99 266.91 209.90 238.32
3/31/00 85.72 245.30 219.10
3/31/01 110.60 189.93 248.84
* Assumes $100 invested in McKesson Common Stock and in each index on March 31,
1996 and that all dividends are reinvested.
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ITEM 2. PROPOSAL TO AMEND THE 1997 NON-EMPLOYEE DIRECTORS' EQUITY COMPENSATION
AND DEFERRAL PLAN
We are asking stockholders to approve an amendment to the 1997 Non-Employee
Directors' Equity Compensation and Deferral Plan (the "Directors' Plan") to
increase the number of authorized shares of the Company's common stock under the
Directors' Plan by 750,000 shares.
The purpose of the Directors' Plan is to further align the interests of the
Company's directors with those of the Company's stockholders by requiring the
non-employee directors to elect to receive a portion of their compensation for
their services as directors in the form of Company securities. Directors who are
employees of the Company do not receive any compensation for service on the
Board. The Directors' Plan was first adopted by the Board and approved by the
stockholders in 1997 and replaced the Company's Retirement Program for
Non-Employee Directors. At the time of its adoption, 250,000 shares were
reserved for issuance under the Directors' Plan (which amount was subsequently
adjusted for a two-for-one stock split in January 1998). There are currently
460,000 shares issued and outstanding under the plan. The Directors' Plan was
further amended in January of this year, and if approved by the stockholders
761,000 shares will be available for grants. If the additional shares are not
approved, the Board will consider reinstating the former Retirement Program or a
similar program and the annual retainer and meeting fees will be paid in cash.
Non-employee directors receive an annual retainer of $27,500 and $1,000 for
each Board or Board committee meeting attended. Committee Chairmen receive an
annual retainer of $3,000. There are currently 10 non-employee directors.
TERMS OF THE PLAN
The Company's non-employee directors are required to defer 50% of their
annual retainer in the form of either Restricted Stock Units ("RSUs") or
Nonqualified Stock Options ("Options"). They may defer the remaining 50% of
their annual retainer in the form of RSUs or Options or to the Company's
Deferred Compensation Plan ("DCAP II"), or directors may elect to receive cash.
Meeting fees may also be deferred in the form of RSUs, DCAP II or the director
may elect to receive cash.
In January of each year, each director is also granted an Option for 10,000
shares of the Company's common stock. The Option vests on the date of grant and
has a term of 10 years.
The number of RSUs granted to each director electing to receive them is
determined by the amount of retainer and fees deferred divided by the fair
market value of the Company's common stock on the last trading day of the
calendar quarter in which those amounts would otherwise be payable. The number
of Options granted to each director so electing is determined by applying the
same conversion table used to determine the number of options granted to
employees in lieu of awards under the Company's Management Incentive Plan. For
2001, the conversion table was 20% of the closing price of the Company's shares
on January 31, 2001 which was divided into the amount to be deferred to
determine the number of options granted as the fair market value on the date of
grant.
Directors may also elect to defer the gain and subsequent taxation of an
exercise of an expiring Option. The shares resulting from an exercise are
credited to the director's account in the form of share units and are
distributed at a future time according to the director's election.
NAME AND POSITION NUMBER OF UNITS
----------------- ---------------
Non-Executive Director Group................................ 141,528*
---------------
* Participants can elect to have a lower number of Restricted Stock Units
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The options granted to each of the current directors under the Directors'
Plan are listed below:
NAME NUMBER OF OPTIONS NAME NUMBER OF OPTIONS
---- ----------------- ---- -----------------
Alfred C. Eckert III......... 37,413 Gerald E. Mayo............... 42,860
Tully M. Friedman............ 50,415 James V. Napier.............. 39,774
Alton F. Irby III............ 42,860 David S. Pottruck............ 46,519
M. Christine Jacobs.......... 34,209 Carl E. Reichardt............ 50,415
Martin M. Koffel............. 26,273 Jane E. Shaw................. 46,206
The summary of the Directors' Plan is qualified in its entirety by
reference to the Plan text found in Appendix B to this Proxy Statement.
ITEM 3. PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION TO
CHANGE THE COMPANY'S NAME TO MCKESSON CORPORATION
The Company seeks to change its corporate name to McKesson Corporation. In
January 1999 as part of the acquisition of HBO & Company, the Company changed
its name from McKesson Corporation to McKesson HBOC, Inc.
The Board of Directors has adopted a resolution declaring it advisable to
amend the Company's Restated Certificate of Incorporation to change the name of
the Company as set forth above. The Board further directed that the name change
be submitted for consideration by the stockholders at the Meeting.
As amended, Article I of the Company's Restated Certificate of
Incorporation would read in its entirety as follows: The name of the Corporation
is "McKesson Corporation."
The Board of Directors believes changing the name of the Company to
McKesson Corporation is in the Company's best interest at this time because the
proposed new corporate name is more streamlined and simple than the current
corporate name, and also embodies both the heritage and mission of the Company.
The new name reflects the Company's unified strategy for improving the
performance of healthcare by delivering solutions that integrate products and
services from across its business to meet the needs of a broad range of
healthcare customers.
If approved, the McKesson name not only would be adopted by the Company,
but also incorporated into the names of all of the Company's subsidiaries and
divisions. A new logo and graphic system that manifests the mission and aligns
the corporate nomenclature and graphics to reinforce the Company's integrated
organization and strategy is being developed. Should the name change be
approved, transition to the new name and graphic identity system will be
implemented on a staged basis, to smooth the impact of the related expense.
In the event the proposed name change is approved by the stockholders, the
Company will thereafter file a Certificate of Amendment to its Restated
Certificate of Incorporation with the Delaware Secretary of State amending
Article 1 which will become effective at the close of business on the date the
Secretary of State accepts that filing.
EMPLOYMENT AGREEMENTS, EXECUTIVE SEVERANCE POLICY AND TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL ARRANGEMENTS
Employment Agreements
The Company has entered into an employment agreement ("Agreement") with
each of Messrs. Seelenfreund, Hammergren, Mahoney, King and Julian that provides
for, among other things, the term of employment, compensation and benefits
payable during the term of the Agreement as well as for specified payments in
case of termination of employment. In each case, the Agreement provides that the
executive will participate in all compensation and fringe benefit programs made
available to all executive officers.
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The Company entered into an Agreement with Alan Seelenfreund, dated as of
August 1, 1999, which by its terms provides for expiration on June 30, 2001. The
Agreement provides for an annual base salary of at least $500,000 and additional
incentive compensation, if any, as may be determined by the Board of Directors;
provided that, any incentive compensation awarded under the MIP will be
calculated using an individual target award of 100% of base salary. The
Agreement also provides Mr. Seelenfreund with options to purchase 1 million
shares of the Company's common stock with an exercise price of $29.8125 per
share. In addition, the Agreement provides that, in the event (i) the Company
terminates Mr. Seelenfreund's employment without "Cause" or (ii) he terminates
his employment for "Good Reason" (each as defined in the Agreement), he will be
entitled to (A) his then base salary and incentive compensation (using an
individual target award of 100% of base salary), for the remainder of the term
of the Agreement; (B) continued monthly automobile allowance for the remainder
of the term of the Agreement; and (C) accelerated vesting of all his stock
options. Under such circumstances, Mr. Seelenfreund's participation in the
Company's tax-qualified profit-sharing plans and stock purchase plans will
terminate as of his date of termination, in accordance with the plans. Under the
Agreement, the Company will pay Mr. Seelenfreund a gross-up payment to cover the
excise taxes and interest imposed on "excess parachute payments" as defined in
Section 280G of the Code.
The Company entered into amended and restated Agreements with each of John
H. Hammergren and David L. Mahoney, respectively, replacing their prior
employment agreements with the Company. The term of the Amended and Restated
Agreements shall expire March 31, 2004, and in the case of Mr. Hammergren,
provides that the term will be automatically extended by one year on March 31,
2004, and each anniversary thereof, unless either party gives notice that such
term will not be so extended. As a result of the restructuring and reorganizing
of the iMcKesson business unit, Mr. Mahoney's position as Co-President and
Co-Chief Executive Officer of the Company was eliminated effective March 31,
2001. Mr. Mahoney is no longer with the Company; however, pursuant to the terms
of his Agreement he will be entitled to receive the compensation and benefits
specified in clauses (A) through (F) below. Each Agreement provides for an
annual base salary of at least $750,000 and such additional incentive
compensation, if any, as may be determined by the Board of Directors; provided
that, any incentive compensation awarded to either executive under the Company's
MIP shall be calculated using an Individual Target Award of 100% of base salary.
In addition, each executive was granted options to purchase 2 million shares of
Company common stock at an exercise price of $29.8125 per share. In addition,
each Amended and Restated Agreement provides that, in the event (i) the Company
terminates the executive without "Cause," (ii) the executive terminates for
"Good Reason" (each as defined in the Agreements) or (iii) the Company elects
not to extend the term of the Agreement, the executive will be entitled to (A)
receive payment of his then base salary and incentive compensation (using an
Individual Target Award of 100% of base salary), for the remainder of the term
of the Agreement, but in no event for less than two years; (B) continued monthly
automobile allowance and participation in the Deferred Compensation
Administration Plan II for the term of the Agreement, (C) continued accrual and
vesting in his rights and benefits under the Executive ESBP and EBRP, calculated
on the basis of his receiving (x) Approved Retirement commencing on the
expiration of the Agreement and (y) with respect to the EBRP, a benefit
calculated on the basis of 60% of Average Final Compensation then specified in
the EBRP without any reduction for early retirement (see "Pension Benefits"),
(D) lifetime coverage under the Company's Executive Medical Plan and financial
counseling program, as well as, lifetime office space and secretarial support;
(E) accelerated vesting of all his stock options and restricted stock; (F) with
respect to Long Term Incentive Plan awards receive such awards on a pro-rata
basis in accordance with the terms and conditions applicable to Approved
Retirement with the exception that the "Service-based Portion of the Target
Award," if any, shall be paid as if executive continued employment throughout
the performance period. In the event such termination occurs within two years
following a Change in Control (as defined in the Amended and Restated
Agreement), executive will be entitled to a gross-up payment to cover the excise
taxes and interest imposed on "excess parachute payments" as defined in Section
280G of the Code.
The Company entered into an Agreement with Graham O. King effective as of
June 21, 1999. The term of the Agreement shall expire the earlier of March 31,
2004 or the date that Mr. King shall have been granted "Approved Retirement"
status under the Company's EBRP. The Agreement provides for an annual base
salary of at least $580,000, a retention payment of $2.5 million, payable in two
installments of $1.25 million, plus such additional incentive compensation, if
any, as may be determined by the Board; provided that, any
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compensation awarded to Mr. King under the Company's MIP shall be calculated
using an Individual Target Award of 75% of base salary. Mr. King was granted a
nonqualified option to purchase 1 million shares of the Company's common stock,
with an exercise price of $29.8125 per share. With respect to Mr. King's
participation in the EBRP and ESBP, the Chief Executive Officer shall recommend
to the Board that he be granted Approved Retirement upon the satisfaction of
certain requirements, and if Mr. King accrues 5 years of actual service credit
pursuant to the EBRP and the ESBP, he shall be granted additional service credit
for prior service with HBOC and a previous employer. The Agreement provides that
in the event the Company terminates the executive without "Cause" or the
executive terminates for "Good Reason," both as defined in the Agreement, the
Company shall (A) continue his then base salary, reduced by any compensation he
receives from a subsequent employer during such term (B) consider him for a
bonus under the Company's MIP for the fiscal year in which termination occurs
(C) continue his automobile allowance, financial planning allowance and
Executive Medical Plan benefits until the expiration of the Agreement, (D)
continue the accrual and vesting of his rights, benefits and existing awards for
purposes of the EBRP, ESBP, and Stock Option and Restricted Stock Plan.
The Company entered into an Agreement with Paul C. Julian, effective as of
August 1, 1999 which Agreement was amended in 2000. The term of the Agreement
shall expire March 31, 2004. The Agreement provides for an annual base salary of
at least $500,000 and such additional compensation, if any, as may be determined
by the Board of Directors; provided that, any incentive compensation awarded to
the executive under the Company's MIP shall be calculated using an Individual
Target Award of 75% of base salary, reduced by any compensation he receives from
a subsequent employer during such term. In addition, Mr. Julian was granted
options to purchase 200,000 shares of Company common stock with an exercise
price of $29.8125 per share. The Agreement provides that, in the event the
Company terminates the executive without "Cause," or the executive terminates
for "Good Reason," both as defined in the Agreement, the Company shall (A)
continue his then base salary, reduced by any compensation he receives from a
subsequent employer during such term (B) consider him for a bonus under the
Company's MIP for the fiscal year in which termination occurs, (C) continue his
automobile allowance and Executive Medical Plan benefits until the expiration
date of the Agreement (D) continue the accrual and vesting of his rights,
benefits and existing awards for the remainder of the term of the Agreement for
purposes of the EBRP, ESBP and the Stock Option and Restricted Stock Plan.
The Company may terminate any of the executives, under the terms of their
respective Agreements, for "cause" (as defined in each Agreement) in which case
the Company's obligations under the Agreements cease.
In the event any executive is prevented from performing his duties under
his respective Agreement due to a disability, the Company shall continue to pay
the current salary during the period of disability, provided however that if the
executive is continuously disabled for more than 12 months, the Company's
obligations under the Agreement cease. In the event of death of the executive
during the term of the Agreement, his salary will continue to be paid to his
surviving spouse for six months following the death and thereafter the Company's
obligations under the Agreement cease.
Executive Severance Policy
The Company has implemented an Executive Severance Policy (the "Policy"),
which applies in the event an executive officer is terminated by the Company for
reasons other than for cause at any time other than within two years following a
change in control (as defined in the Policy) of the Company. The benefit payable
to executive officers under the Policy is equal to 12 months' base salary plus
one month's pay per year of service, up to a maximum of 24 months. Such benefits
would be reduced or eliminated by any income the executive officer receives from
subsequent employers during the severance payment period. Executive officers who
are age 55 or older and have 15 or more years of service with the Company at the
time of such involuntary termination are granted "approved retirement" for
purposes of the EBRP and the ESBP. The Policy also provides that, upon such
involuntary termination, awards under the LTIP are prorated for all cycles then
in progress. In addition, vesting of stock options and lapse of restrictions on
restricted stock awards will cease as of the date of termination, and no
severance benefits will be paid beyond age 62. A terminated executive who
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is receiving payments under the terms of an employment agreement he or she may
have with the Company is not entitled to receive additional payments under the
Policy.
Termination of Employment and Change in Control Arrangements
The Company has entered into termination agreements with all of its
executive officers, including the Named Executive Officers. The agreements
operate independently of the Policy, continue through December 31 of each year,
and are automatically extended in one-year increments until terminated by the
Compensation Committee (or by the Board of Directors in the case of the Chief
Executive Officer). The agreements are automatically extended for a period of
two years following any change in control.
The agreements provide for the payment of certain severance and other
benefits to executive officers whose employment is terminated within two years
of a change in control of the Company. Specifically, if following a change in
control, the executive officer is terminated by the Company for any reason,
other than for "Cause" (as defined in the agreements), or if such executive
officer terminates his or her employment for "Good Reason" (as that term is
defined in the agreements), then the Company will pay to the executive officer,
as severance pay in cash, an amount equal to 2.99 times his or her "base amount"
(as that term is defined in Section 280G of the Code) less any amount which
constitutes a "parachute payment" (as defined in Section 280G). The Company will
also continue the executive officer's coverage in the health and welfare benefit
plans in which he or she was a participant as of the date of termination of
employment, and the executive officer will continue to accrue benefits under the
EBRP, in both such cases for the period of time with respect to which the
executive officer would be entitled to payments under the Policy described above
if the executive officer's termination of employment had been covered by such
Policy. In addition, if the executive officer is age 55 or older and has 15 or
more years of service (as determined under such plan on the date of executive's
termination of employment), then such termination will automatically be deemed
to be an "approved retirement" under the terms of the EBRP. The amount of
severance benefits paid shall be no higher than the amount that is not subject
to disallowance of deduction under Section 280G of the Internal Revenue Code.
Change in Control
For purposes of the termination agreements and as used elsewhere in this
proxy statement, a "change in control" is generally deemed to occur if: (i) any
"person" (as defined in the Securities Exchange Act of 1934, as amended) other
than the Company or any of its subsidiaries or a trustee or any fiduciary
holding securities under an employee benefit plan of the Company or any of its
subsidiaries, acquires securities representing 30% or more of the combined
voting power of the Company's then outstanding securities; (ii) during any
period of not more than two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company and any new
director whose election by the Board of Directors or nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds ( 2/3)
of the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other Company, other than (a) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent, in combination with the ownership of any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, at least 50% of the combined voting power of the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or (b) a merger or consolidation effected to implement
a recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or (iv) the stockholders approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of its assets.
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PENSION BENEFITS
The table below illustrates the estimated combined annual benefits payable
upon retirement at age 62 under the Company's qualified retirement plan and
supplemental EBRP in the specified compensation and years of service
classifications. The benefits are computed as single life annuity amounts.
YEARS OF SERVICE
FIVE YEAR
AVERAGE
COMPENSATION 15 20 25 30 35
------------ -------- ---------- ---------- ---------- ----------
$ 600,000 $279,300 $ 332,400 $ 360,000 $ 360,000 $ 360,000
$ 800,000 372,400 443,200 480,000 480,000 480,000
$1,000,000 465,500 554,000 600,000 600,000 600,000
$1,200,000 558,600 664,800 720,000 720,000 720,000
$1,400,000 651,700 775,600 840,000 840,000 840,000
$1,600,000 744,800 886,400 960,000 960,000 960,000
$1,800,000 837,900 997,200 1,080,000 1,080,000 1,080,000
$2,000,000 931,000 1,108,000 1,200,000 1,200,000 1,200,000
The benefit under the EBRP is a percentage of final average pay based on
years of service or as determined by the Board of Directors. The maximum benefit
is 60% of final average pay. The total paid under the EBRP is not reduced by
Social Security benefits but is reduced by those benefits payable on a single
life basis under the Company's qualified retirement plan and the annuitized
value of the Retirement Share Plan allocations of common stock made to the PSIP
assuming 12% growth in the value of the stock. Messrs. Hammergren and Mahoney
will receive benefits from the EBRP based on 60% of final pay and not reduced by
any early retirement reduction (see "Employment Agreements").
The compensation covered under the plans whose benefits are summarized in
the above table includes the base salary and annual bonus amounts reported in
the Summary Compensation Table plus any annual bonus amounts foregone to
purchase grants of Bonus Options.
The estimated years of service for purposes of the EBRP at March 31, 2001
for certain of the Named Executive Officers are as follows: Mr. Hammergren, 5;
Mr. Mahoney, 9; Mr. King, 2; Mr. Julian, 3 and Mr. Graber, 1.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and its subsidiaries have transactions in the ordinary course
of business with unaffiliated companies of which certain of the Company's
non-employee directors are directors and/or executive officers. The Company does
not consider the amounts involved in such transactions to be material in
relation to the businesses of such other companies or the interests of the
directors involved. The Company anticipates that similar transactions will occur
in fiscal year 2002.
CERTAIN LEGAL PROCEEDINGS
Since the Company's announcements in April, May and July of 1999 that
certain software sales transactions in its Information Technology Business Unit,
formerly HBOC, were improperly recorded as revenue and reversed and, as of April
30, 2001, eighty-five lawsuits have been filed against the Company, certain of
its current or former directors or officers, and other defendants. Sixty-four of
these actions have been filed in Federal Court (the "Federal Actions"); of
these, fifty-nine were filed in the U.S. District Court for the Northern
District of California.
On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District
of California issued an order consolidating fifty-three of the Federal Actions
into one action entitled In re McKesson HBOC, Inc. Securities Litigation, (Case
No. C-99-20743-RMW) (the "Consolidated Action"). On December 22, 1999,
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Judge Whyte appointed the New York State Common Retirement Fund as lead
plaintiff ("Lead Plaintiff") and approved Lead Plaintiff's choice of counsel.
On February 25, 2000, Lead Plaintiff filed an Amended and Consolidated
Class Action Complaint (the "ACCAC"). The ACCAC (as well as the other pending
federal and state actions) generally allege that the defendants violated the
federal securities laws in connection with the events leading to the Company's
decision to restate its financial statements. On September 28, 2000, Judge Whyte
dismissed all of the ACCAC claims against the Company under Section 11 of the
Securities Act of 1933 ("Securities Act") with prejudice, dismissed a claim
under Section 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") with
leave to amend and declined to dismiss a claim against the Company under Section
10(b) of the Exchange Act.
On November 14, 2000, Lead Plaintiff filed its Second Amended and
Consolidated Class Action Complaint ("SAC"). As with its ACCAC, Lead Plaintiff'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 officers or directors of the Company or HBOC, Arthur
Andersen and Bear Stearns as defendants. The SAC purports to state claims
against the Company under Section 10(b) and 14(a) of the Exchange Act. Directors
and former directors Bitterman, Friedman, Pietruski, Pottruck, Reichardt,
Seelenfreund, Shaw and Waterman are named as defendants in the SAC under Section
14(a) of the Exchange Act. On January 18, 2001, the Company and all Directors
and former directors and officers named as defendants, moved to dismiss claims
under Section 14(a) of the Exchange Act in its entirety, and the Company moved
to dismiss the claim under Section 10(b) to the extent it is based on statements
and conduct of the Company prior to the merger. HBOC also filed 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. These motions were heard
on March 23, 2001, and the Court has not yet issued a ruling.
Twenty-one actions have also been filed in various state courts in
California, Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the "State
Actions"). The State Actions are generally based on the same transactions and
events giving rise to the Consolidated Action. Two of the State Actions are
shareholder derivative actions purportedly brought on behalf of the Company:
Ash, et al. v. McCall, et al. (Del C.A. No. 17132), filed in the Delaware
Chancery Court, and Mitchell v. McCall et al. (Case No. 304415), filed in
California Superior Court, City and County of San Francisco. The Company is a
nominal defendant in these actions and the plaintiffs seek to assert claims
against the Directors (other than Mr. Koffel and Mr. Hammergren), certain former
directors and others on behalf of the Company. Directors were named as
defendants in only two additional State Actions: Carroll v. McKesson HBOC, Inc.,
(Case No. 17454), and Kelly v. McKesson HBOC, Inc., et al. (Case No. 17282-NC).
Both of these actions were filed in the Delaware Superior Court and were
voluntarily dismissed without prejudice. Included as defendants in the remaining
seventeen State Actions are the Company, HBOC and certain former officers or
directors. None of the State Actions name Mr. Koffel or Mr. Hammergren as a
defendant.
INDEBTEDNESS OF EXECUTIVE OFFICERS
Under the 1999 Executive Stock Purchase Plan (the "1999 ESPP"), full
recourse unsecured loans for the purchase of Company common stock, having a term
of five years and bearing interest at the rate of 4.7% per annum, were made on
February 5, 1999 (the "Purchase Date") to certain executive officers, including
Messrs. Hammergren and Mahoney. Pursuant to the 1999 ESPP, Messrs. Hammergren
and Mahoney purchased 100,000 shares each, all at a purchase price of $63.8125
per share, which was the fair market value of the common stock on the Purchase
Date. In addition, under the Stock Purchase Plan (the "SPP") full recourse
loans, having a term of five years, bearing interest at the rate of 4.7% per
annum, were made on the Purchase Date to certain executive officers and other
key executives not named in the Summary Compensation Table. Such loans were for
the purchase of common stock at the fair market value on the Purchase Date and
are secured by a pledge of the shares purchased under the SPP. In fiscal years
1998, 1997, and 1995 additional loans to certain executive officers named in the
Summary Compensation Table and other executive officers of the Company were made
under the SPP to purchase common stock at the fair market value on the dates of
purchase, bearing interest from 7.1% to 8% per annum. All shares purchased by
the current executive
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officers under the 1999 ESPP and the SPP are included in the Security Ownership
of Directors and Executive Officers table on page 4.
The table below shows, as to each executive officer who was indebted to the
Company in an amount exceeding $60,000 at any time during the period April 1,
2000 through May 1, 2001, (i) the largest aggregate amount of indebtedness
outstanding during such period, and (ii) the amount of indebtedness outstanding
at May 1, 2001. For each individual listed in the table below, unless additional
loans are described later in this paragraph, the indebtedness shown resulted
from loans previously outstanding or those made on the Purchase Date under the
1999 ESPP or under the SPP. The indebtedness shown for Messrs. Hammergren,
Graber and Kirincic also includes the balance owed on a secured housing loan in
the original principal amount of $500,000 each. The indebtedness shown for Mr.
Julian also includes the balance owed on secured housing loans in the aggregate
amount of $1,750,000. These housing loans are without interest unless and until
the individuals fail to pay any amount under the loans when due and thereafter
at a market rate. See footnote 2 to the Summary Compensation Table on page for
further information regarding the housing loans made to Messrs. Hammergren,
Julian and Graber.
LARGEST AMOUNT OF
AGGREGATE INDEBTEDNESS
AMOUNT OF AT MAY 1,
INDEBTEDNESS 2001
------------ ------------
John H. Hammergren.......................... $9,309,703 $9,309,703
Paul C. Julian.............................. 3,359,228 3,359,228
Graham O. King.............................. 875,939 875,939
Paul E. Kirincic............................ 500,000 500,000
William R. Graber........................... 500,000 500,000
Ivan D. Meyerson............................ 2,757,504 2,757,504
David L. Mahoney............................ 8,875,711 8,875,711
Carmine J. Villani.......................... 2,117,562 2,117,562
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors (the "Audit
Committee") assists the Board in fulfilling its responsibility for oversight of
the quality and integrity of the Company's financial reporting processes. The
functions of the Audit Committee are described in greater detail in the Audit
Committee's written charter, which has been adopted by the Company's Board of
Directors. A copy of the charter is attached to this Proxy Statement as Appendix
A. The Committee is composed exclusively of directors who are independent under
the New York Stock Exchange listing standards. Management has the primary
responsibility for the financial statements and the reporting process, including
the system of internal controls. The Company's independent auditors, Deloitte &
Touche LLP, are responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted auditing
standards and for issuing a report thereon.
The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the year ended March 31, 2001 (the "Audited
Financial Statements") with management. In addition, the Audit Committee has
discussed with Deloitte & Touche LLP, the independent auditors for the Company,
the matters required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees), as amended.
The Audit Committee also has received the written disclosures and the
letter from the independent auditors required by the Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees) and has
discussed with that firm its independence from the Company. The Audit Committee
further considered whether the provision of the non-audit related services by
Deloitte & Touche LLP to the Company is compatible with maintaining the
independence of Deloitte & Touche LLP from the Company. The Audit Committee has
also discussed with management of the Company and Deloitte & Touche LLP such
other matters and received such assurances from them as it deemed appropriate.
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In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors, and the Board has approved,
that the audited financial statements be included in the Company's Annual Report
on Form 10-K for the period ended March 31, 2001 for filing with the Securities
and Exchange Commission. The Committee has also recommended to the Board,
subject to stockholder ratification, the selection of Deloitte & Touche LLP as
the Company's independent auditors for 2002, and the Board concurred in its
recommendation.
Jane E. Shaw, Chairman
Gerald L. Mayo
James V. Napier
Carl E. Reichardt
ITEM 4. RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT
AUDITORS FOR 2002
The Audit Committee of the Board has recommended, and the Board of
Directors has approved Deloitte & Touche LLP as the independent auditor to audit
the consolidated financial statements of the Company and its subsidiaries for
the fiscal year ending March 31, 2002. Deloitte & Touche LLP has acted as the
Company's independent auditors for several years, is knowledgeable about the
Company's operations and accounting practices, and is well qualified to act in
the capacity of independent auditors.
Representatives of Deloitte & Touche LLP are expected to be present at the
Meeting to respond to appropriate questions and to make a statement if they
desire to do so.
The aggregate fees billed by Deloitte & Touche, LLP, the member firms of
Deloitte & Touche Tomatsu, and their respective affiliates (collectively
"Deloitte") for the fiscal year ended March 31, 2001 are as follows:
Audit Fees............................................... $2,600,000
Financial Information System Design and Implementation
Fees................................................... -0-
All Other Fees........................................... 2,600,000
----------
Total.......................................... $5,200,000
==========
ITEMS 5 THROUGH 7. STOCKHOLDER PROPOSALS
We expect the following proposals to be presented by shareholders at the
annual meeting. Following SEC rules, other than minor formatting changes, we are
reprinting the proposals and supporting statements as they were submitted to us.
We take no responsibility for them. FOR THE REASONS SET FORTH AFTER EACH OF
THESE PROPOSALS, THE BOARD RECOMMENDS A VOTE "AGAINST" ITEMS 5 THROUGH 7.
ITEM 5. STOCKHOLDER PROPOSAL REGARDING PERFORMANCE-BASED OPTIONS
The Company has received the following stockholder proposal from the
Amalgamated Bank of New York Longview Collective Investment Fund, 11-15 Union
Square, New York, N.Y. 10003, the beneficial owner of 93,120 shares of common
stock:
"RESOLVED: The shareholders of McKesson HBOC, Inc. ("McKesson") urge
the board of directors to adopt an executive compensation policy that all
future stock option grants to senior executives shall be performance-based.
"Performance-based" stock options are defined here as (1) indexed options,
whose exercise price is linked to an industry index, such as the Value Line
Healthcare Sector Index; (2) premium-priced stock options, whose exercise
price is significantly above the market price on the grant date; or (3)
performance-vesting options, which vest when the market price of the stock
exceed a specific target."
SUPPORTING STATEMENT: McKesson's performance has been disappointing
with the stock trading at less than half its value two years ago. Although
we appreciate the importance of attracting talented managers, we believe
that current compensation policies need to focus more on improved
performance.
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According to compensation expert Graef Crystal, former CEO Mark Pulido's
total pay in 1999 was $135 million, a figure computed by adding salary, bonus,
estimated present value at grant of stock options awarded that year, value at
grant of free shares of stock, payouts made under long-term incentive programs
("LTIPs") and "other annual" and "all annual compensation" as defined by the
SEC. Using a formula designed to correlate performance and executive pay and to
compare an individual CEO's compensation with that of peers in the industry
group, Mr. Crystal calculated that Mr. Pulido was overpaid by 979% compared to
his peers.
Following Mr. Pulido's resignation, John Hammergren and David Mahoney were
appointed co-CEOs. According to McKesson's 2000 proxy materials, their base pay
was $750,000 each. The company's short-term incentive pay is based on
performance; as a result, these executives received no short-term incentive pay,
although they did receive some payment under a 'former' LTIP.
The current pay packages are not as large as Mr. Pulido's, but a review of
the 2000 proxy materials suggests that the Compensation Committee may be more
interested in paying "at the 75th percentile" for long-term compensation than
with actual performance. We note that in August 1999, soon after their
appointment, Messrs. Hammergren and Mahoney were given an option to buy
2,000,000 shares each, with an estimated present value of $25,400,000 each. In
January 2000, they were granted an additional option to purchase 300,000 shares
at fair market value (present value $2,700,000) and they received free grants of
200,000 shares each, valued at the time at $4,200,000 each. In addition, Mr.
Hammergren's employment agreement provides him with several "initial incentive
awards" that are unrelated to performance.
We are concerned by this practice. The fact that McKesson's poor
performance precludes compensation under existing performance-based plans has
not stopped.
YOUR BOARD'S RECOMMENDATION AGAINST THE PROPOSAL REGARDING PERFORMANCE-BASED
OPTIONS
The Board has considered this proposal and believes that its adoption is
unnecessary and would not be in the best interests of the Company or its
stockholders.
As set forth in the Compensation Committee report on page , the Board
recognizes the need to link compensation with performance; and it believes that
its current approach to executive compensation decisions focuses on
performance-based compensation. The Compensation Committee's decisions on
compensation for executive officers are based on an analysis of the executive's
overall performance for the year as well as competitive market practices at the
selected group of comparator companies referenced earlier. In reviewing
individual performances, the Compensation Committee considers such factors as
financial performance of the Corporation, the executive's contribution to
achieving the Corporation's goals and performance of the business units or
functions over which the individuals have responsibility. The financial
performance factors include return on capital, earnings before interest and
taxes, earnings per share, revenue growth, and total stockholder return.
Performance goals are annually reviewed and approved by the Board. In addition,
the Compensation Committee (the members of which are solely non-employee
Directors) considers advice provided by an independent executive compensation
consultant on market compensation and performance in making its recommendations.
The Compensation Committee and the Board believe that they have already
established a process that enables them to fairly determine and properly make
performance-based compensation decisions concerning the Corporation's executive
officers. The Board believes that it should retain the flexibility to make these
decisions based on a review of all relevant information including specific
financial and non-financial performance results without imposing rigid, pre-set
constraints. The constraints recommended in the proposal could put the Company
at a competitive disadvantage in terms of retaining and recruiting executive
talent, inasmuch as the option structure currently used by the Corporation
reflects the most widely used approach among corporations today.
The Company's Stock Option and Restricted Stock Plans are designed to
provide long-term incentives and align the interests of executive officers with
those of all stockholders. Stock options awarded under the
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Plans are designed to motivate the executive to increase the value of the
Corporation, which concurrently benefits not only the executive but the
Corporation's stockholders as a whole.
ITEM 6. STOCKHOLDER PROPOSAL REGARDING SEVERANCE PAYMENTS
The Company has received the following stockholder proposal from the
International Brotherhood of Teamsters, 25 Louisiana Avenue, N.W., Washington,
D.C. 20001, which owns 80 shares of common stock:
RESOLVED: Shareholders urge that the Board of Directors adopt a policy
that executive officer severance pay of over $3 million must be approved by
the shareholders as a separate issue for vote at the annual shareholder
meeting, and no future employment contracts will be entered into which
include severance clauses of more than $3 million, without shareholder's
approval. Such a policy would be phased in and will not affect current
contractual agreements.
SUPPORTING STATEMENT: In 2000, McKesson HBOC paid ousted CEO Mark
Pulido $1.9 million and guaranteed him that salary through the year 2004.
Pulido even received an $853,000 bonus in 2000. Pulido received this
severance package, after he presided as CEO over McKesson's stock debacle
concerning incorrect financial reporting during the merger with HBO
Company. In 1999, he was paid $90.3 million including stock options. Such
excessive compensation and severance pay is a perversion of the sound
corporate practice of paying for performance.
Recent outcry against excessive executive compensation has included
criticism of companies, which have awarded overly generous severance packages.
When Disney awarded Michael Ovitz $70 million in cash and options as severance
for 16 months of service, for example, shareholders expressed outrage.
Union Pacific granted a special $4 million bonus to Drew Lewis upon his
retirement; Electronic Data Systems negotiated a $35 million termination
agreement with Lester Alberthal; and, this year Proctor & Gamble granted $9.5
million to retiring Chairman Dick Jager.
Shareholders should be the ultimate judges of executive performance. The
evaluation of what an executive is worth when not in the employ of the company
should be the decision of shareholders.
WE URGE SHAREHOLDERS TO VOTE FOR THIS PROPOSAL.
YOUR BOARD'S RECOMMENDATION AGAINST THE PROPOSAL REGARDING SEVERANCE PAYMENTS
The Board has considered this proposal and believes that its adoption would
not be in the best interests of the Company or its stockholders.
In order to attract, retain and reward executives in a competitive business
environment, it is critical that the Company maintain the flexibility to design
employment arrangements which address the specific facts and circumstances of
each executive's situation. Because of the market competition for qualified
executives, the Company must have the ability to offer competitive employment
packages to retain its own executives, as well as to motivate other valuable
executives to relocate to the Company. Further, when negotiating potential
business combinations, the Company must provide competitive incentives to ensure
that the key executive team remains with the Company. Adoption of this proposal
would place the Company at a competitive disadvantage because it would
arbitrarily limit the Company's flexibility to design employment arrangements
that can attract and retain qualified executives.
The Compensation Committee determines whether the Company should enter into
employment agreements with the Company's top executive officers. All employment
arrangements with the Chief Executive Officer must be first recommended by the
Compensation Committee and are then subject to further review and approval by
the Board. In the event that the Compensation Committee believes that an
employment agreement is in the best interests of the Company and its
stockholders, it needs the flexibility to offer the agreement without delay.
This flexibility would be substantially undermined by a requirement for
stockholder approval.
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The Corporation cannot afford to impose a condition of shareholder approval
on agreements with those key executives necessary for the operation of the
Corporation's business. The type of executives that the Company seeks are
frequently being pursued by other entities as well, and the Company could lose
these individuals to competitors which are not burdened by the stockholder
approval condition. Adoption of the proposal would require the Company to incur
significant time and expense to either convene a special stockholders' meeting
for the sole purpose of voting on this type of agreement, or delay finalizing
such agreement until after its approval at the annual stockholders' meeting. In
either case, the Company would be at a competitive disadvantage in attracting
qualified executives who do not want to be subject to the delay and uncertainty
created by the stockholder approval provision.
ITEM 7. STOCKHOLDER PROPOSAL REGARDING THE SALE OF THE COMPANY
The Company has received the following stockholder proposal from William
Steiner, 4 Radcliffe Drive, Great Neck, New York, 11024, who owns 1,300 shares
of common stock:
RESOLVED that the shareholders of McKesson HBOC, Inc. urge the
McKesson HBOC, Inc. Board of Directors to arrange for the prompt sale of
McKesson HBOC, Inc. to the highest bidder.
MAXIMIZE VALUE RESOLUTION
The purpose of the Maximize Value Resolution is to give all McKesson
HBOC, Inc. shareholders the opportunity to send a message to the McKesson
HBOC, Inc. Board that they support the prompt sale of McKesson HBOC, Inc.
to the highest bidder. A strong and or majority vote by the shareholders
would indicate to the board the displeasure felt by the shareholders of the
shareholder returns over many years and the drastic action that should be
taken. Even if it is approved by the majority of the McKesson HBOC, Inc.
shares represented and entitled to vote at the annual meeting, the Maximize
Value Resolution will not be binding on the McKesson HBOC, Inc. Board. The
proponent however believes that if this resolution receives substantial
support from the shareholders, the board may choose to carry out the
request set forth in the resolution.
The prompt auction of McKesson HBOC, Inc. should be accomplished by any
appropriate process the board chooses to adopt including a sale to the highest
bidder whether in cash, stock, or a combination of both. It is expected that the
board will uphold its fiduciary duties to the utmost during the process.
The proponent further believes that if the resolution is adopted, the
management and the board will interpret such adoption as a message from the
company's stockholders that it is no longer acceptable for the board to continue
with its current management plan and strategies.
I URGE YOUR SUPPORT, VOTE FOR THIS RESOLUTION
YOUR BOARD'S RECOMMENDATION AGAINST THE PROPOSAL REGARDING THE SALE OF THE
COMPANY
The Board of Directors of the Company has considered this proposal and
believes that its adoption is unnecessary and would not be in the best interests
of the Company or its shareowners.
The proposed resolution calls for the prompt sale of the Company to the
highest bidder without regard to the adequacy of the consideration, or the
relative benefits to shareowners of other alternatives. The implementation of
the proposed resolution would be totally inconsistent with the Board's duty to
maximize shareowner value and protect the interests of all of the Company
shareowners.
Consistent with its fiduciary duty, the Board of Directors seeks to manage
the Company's affairs in a manner it believes to be in the best interests of the
Company and its shareowners. To this end, the Board will carefully consider any
bona fide proposal which it believes has the potential to increase shareowner
value, including a bona fide proposal for the acquisition of the Company.
However, the fiduciary duty of the Board will not permit it to facilitate a bid
that does not reflect the intrinsic value of the Company.
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The initiation of an "auction" in the manner contemplated by the proposed
resolution would, in the opinion of the Board, be completely inconsistent with
the shareowners' interests. In the Board's opinion, the initiation of such an
auction could create a "forced sale" atmosphere which could actually have the
effect of reducing the perceived value of the Company to a "fire sale" level,
thus forcing the Company to negotiate with bidders from a position of weakness.
Moreover, the uncertainty created by a publicly announced auction could
adversely affect the Company's relationships with its lenders, customers,
suppliers, employees and other constituencies, thus potentially lowering rather
than raising the value of the Company.
The Company's Board of Directors regularly analyzes strategic alternatives
consistent with their fiduciary duties. Such analyses require a review of a
broad range of information regarding the Company's business, prospects,
industry, competition and products, as well as countless other factors that a
Board must consider in performing its oversight responsibilities. Decisions to
sell a company do not, as the proponent suggests, arise in a vacuum. Rather,
such a decision is typically only one potential outcome a Board may reach after
it thoroughly analyzes all of its strategic alternatives and concludes that a
sale of the company is the optimal decision.
Management welcomes input from the Company's stockholders and will
carefully consider meaningful suggestions it receives to increase or maximize
stockholders value. However, for the reasons set forth above, the Board of
Directors unanimously urges a vote against the foregoing proposal.
SECTION 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires certain
persons, including the Company's directors and executive officers, to file
reports of ownership and changes in ownership with the SEC. Based on the
Company's review of the reporting forms received by it and written
representations from certain persons that no Form 5 reports were required to be
filed for those persons, the Company believes that all such filing requirements
were satisfied for FY 2001.
SOLICITATION OF PROXIES
The Company is paying the cost of preparing, printing and mailing these
proxy materials. We will reimburse banks, brokerage firms and others for their
reasonable expenses in forwarding proxy materials to beneficial owners and
obtaining their instructions. The Company has engaged Georgeson Shareholder
Communications Inc., a proxy solicitation firm, to assist in the solicitation of
proxies. We expect Georgeson's fee to be approximately $10,000 plus
out-of-pocket expenses. A few officers and employees of the Company may also
participate in the solicitation without additional compensation.
OTHER MATTERS
In addition to voting choices specifically marked, and unless otherwise
indicated by the stockholder, the proxy card confers discretionary authority on
the named proxy holders to vote on any matter that properly comes before the
Meeting which is not described in these proxy materials. At the time this proxy
statement went to press, the Company knew of no other matters which might be
presented for stockholder action at the Meeting.
STOCKHOLDER PROPOSALS FOR THE 2002 ANNUAL MEETING
To be eligible for inclusion in the Company's 2002 Proxy Statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), stockholder proposals must be sent to the Secretary of the
Company at the principal executive offices of the Company, One Post Street, San
Francisco, CA 94104, and must be received no later than February 13, 2002. In
order for stockholder proposals made outside of Rule 14a-8 under the Exchange
act to be considered "timely" within the meaning of Rule 14a-4(c) under the
Exchange Act, such proposals must be sent to the Secretary of the Company at the
address set forth above and must be received no later than April 26, 2002. The
Company's Advance Notice By-Law provisions require that stockholder proposals
made outside of Rule 14a-8 under the Exchange Act must be submitted in
accordance with the requirements of the By-Laws, not later than April 26, 2002
and not earlier than March 27, 2002.
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A copy of the full text of the Company's Advance Notice By-Law provisions
referred to above may be obtained by writing to the Secretary of the Company.
ONLINE ACCESS TO ANNUAL REPORTS ON FORM 10-K AND PROXY STATEMENTS
Most stockholders can elect to view future proxy statements and annual
reports on Form 10-K over the Internet instead of receiving paper copies in the
mail. Those stockholders will be given the opportunity to consent to future
Internet delivery when they vote their proxy. For some stockholders, this option
is only available if you vote on the Internet.
If you are not given an opportunity to consent to Internet delivery when
you vote your proxy, contact the bank, broker or other holder of record through
which you hold your shares and inquire about the availability of such an option
for you.
If you consent, your account will be so noted and when the Company's Annual
Report on Form 10-K for the 2002 and proxy statement for the 2002 annual meeting
become available, you will be notified on how to access them on the Internet.
Stockholders of record may indicate their consent on this year's proxy card, and
will receive a paper proxy card for next year's annual meeting in the mail.
If you elect to receive your materials via the Internet, you can still
request paper copies by leaving a message with Investor Relations at (800)
826-9360 or by e-mail at investors@mckhboc.com
By Order of the Board of Directors
[SIGNATURE]
Ivan D. Meyerson
Senior Vice President, General Counsel
and Secretary
June 13, 2001
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 2001, ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION,
EXCLUDING CERTAIN EXHIBITS, MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO
INVESTOR RELATIONS, BOX K, MCKESSON HBOC, INC., ONE POST STREET, SAN FRANCISCO,
CA 94104.
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APPENDIX A
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF MCKESSON HBOC, INC.
(As adopted by the Board of Directors on June 9, 2000)
I. ORGANIZATION AND AUTHORITY
This Audit Committee is appointed by the Board to assist the Board in
monitoring the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal compliance
and the independence and performance of the Company's independent auditor and
internal audit department.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities and to retain, at the Company's
expense, special legal, accounting, or other consultants or experts it deems
necessary to advise the Audit Committee in the performance of its duties.
II. COMPOSITION AND MEETINGS
The Audit Committee shall consist of from three to five members of the
Board, none of whom is a current or former officer or employee of the
Corporation:
Audit Committee members shall meet the independence and experience
requirements of the New York Stock Exchange. Audit Committee members shall be
appointed by the Board.
The Audit Committee shall meet with such frequency and at such intervals as
it shall deem necessary to carry out its duties and responsibilities. The Audit
Committee Chair shall prepare and/or approve an agenda in advance of each
meeting. The Audit Committee, in its discretion, may request any officer or
employee of the Company or the Company's outside counsel or independent auditor
to attend a meeting of the Audit Committee (or any portion thereof), or to meet
with any members of the Audit Committee and to provide pertinent information as
necessary. The Audit Committee shall make regular reports to the Board.
III. DUTIES AND RESPONSIBILITIES
In carrying out its responsibilities, the Audit Committee's policies and
procedures should remain flexible, so that it may be in a position to best react
to changing circumstances or conditions. The following shall be the principal
recurring processes of the Audit Committee in carrying out its responsibilities.
These processes are set forth as a guide with the understanding that the Audit
Committee may supplement them as appropriate. The Audit Committee shall:
1. Review and reassess the adequacy of the Audit Committee's charter at
least annually and recommend any proposed changes to the Board for
approval.
2. Review the annual audited financial statements with management,
including major issues regarding accounting and auditing principles and
practices, as well as the adequacy and effectiveness of the internal
controls that could significantly affect the Company's financial
statements.
3. Review analyses prepared by management and the independent auditor of
significant financial reporting issues and judgments made in connection
with the preparation of the Company's financial statements.
4. Review with financial management and the independent auditor the
interim financial statements prior to the filing of the Company's
Quarterly Report on Form 10-Q. Discuss the impact of significant
events, transactions, and changes in accounting estimates considered by
the independent auditor and any other items required to be communicated
by the independent auditor in accordance with Statement on Auditing
Standards No. 71. The Chair of the Audit Committee may represent the
entire Audit Committee for purposes of this review.
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5. Recommend to the Board the appointment of the independent auditor,
which firm is ultimately accountable to the Audit Committee and the
Board.
6. Receive periodic reports from the independent auditor regarding the
auditor's independence, discuss such reports with the auditor, and if
so determined by the Audit Committee, recommend that the Board take
appropriate action to satisfy itself of the independence of the
auditor.
7. Evaluate the performance of the independent auditor and, if so
determined by the Audit Committee, recommend that the Board replace the
independent auditor.
8. Approve the fees to be paid to the independent auditor.
9. Review and accept, if appropriate, the independent auditor's annual
audit plan, including the scope of the audit activities, and monitor
such plan's progress and results during the year.
10. Discuss with the independent auditor the matters relating to the
conduct of the audit that are required to be discussed under Statement
on Auditing Standards No. 61.
11. Review with the independent auditor any problems or difficulties the
auditor may have encountered and any management letter provided by the
auditor and the Company's response to that letter. Such review should
cover:
(a) any difficulties encountered in the course of the audit work,
including any restrictions on the scope of the activities or access
to required information.
(b) any changes required in the planned scope of the internal audit; and
(c) the internal audit department responsibilities, budget and staffing.
12. Review major changes to the Company's auditing and accounting
principles and practices as suggested by the independent auditor,
internal audit department or management.
13. Review the budget, plan, changes to the plan, activities,
organizational structure, and qualifications of the internal audit
department, as necessary.
14. Review the appointment, performance, and replacement of the senior
internal audit department executive.
15. Review significant reports to management prepared by the internal audit
department together with management's responses.
16. Meet at least annually with the chief financial officer, the senior
internal audit department executive and the independent auditor in
separate executive sessions.
17. Meet annually with the general counsel and outside counsel, when
appropriate, to review legal and regulatory matters, including any
matters that may have a material impact on the financial statements of
the Company.
18. Review and approve the report required by the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
19. Advise the Board with respect to the Company's policies and procedures
regarding compliance with applicable laws and regulations and with the
Company's Code of Conduct.
20. Obtain from the independent auditor any information pursuant to Section
10A of the Securities Exchange Act of 1934.
21. Review the Company's policies relating to the avoidance of conflicts of
interest and review past or proposed transactions between the Company
and members of management, as well as policies and procedures with
respect to officers' expense accounts and perquisites, including the
use of corporate assets. The Committee shall consider the results of
any review of these policies and procedures by the Company's
independent auditor or Internal Audit Department.
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22. Perform such other activities and consider such other matters, within
the scope of its responsibilities, as the Audit Committee or the Board
deems necessary or appropriate.
* * * * * *
While the Audit Committee has the duties and responsibilities set forth in
this charter, the Audit Committee is not responsible for planning or conducting
the audits or for determining whether the Company's financial statements are
complete and accurate and are in accordance with generally accepted accounting
principles. Similarly, it is not the duty of the Audit Committee to conduct
investigations, to resolve disagreements, if any, between management and the
independent auditor or to ensure that the Company complies with laws and
regulations and its Code of Conduct. Each member of the Audit Committee shall be
entitled to rely on (i) the integrity of those persons and organizations within
and outside the Corporation that it receives information from and (ii) the
accuracy of the financial and other information provided to the Audit Committee
by such persons or organizations absent actual knowledge to the contrary (which
shall be promptly reported to the Board of Directors).
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APPENDIX B
MCKESSON HBOC, INC.
1997 NON-EMPLOYEE DIRECTORS' EQUITY COMPENSATION
AND DEFERRAL PLAN
(As amended through December 18, 2000)
1. Purpose of the Plan. The purpose of the McKesson HBOC, Inc. 1997
Non-Employee Directors' Equity Compensation and Deferral Plan (the "Plan") is to
attract and retain qualified individuals not employed by McKesson HBOC, Inc.
(the "Company") or its subsidiaries to serve on the Board of Directors of the
Company and to further align the interests of such non-employee directors with
those of the stockholders of the Company.
2. Definitions.
(a) "Annual Meeting" shall mean the annual meeting of the stockholders of
the Company.
(b) "Annual Retainer" shall mean any retainer fee paid to a non-employee
director for service on the Board during a Director Year.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Change in Control" of the Company shall mean the occurrence of any of
the following events:
(i) any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act), excluding the Company or any of its affiliates, a
trustee or any fiduciary holding securities under an employee benefit plan
of the Company or any of its affiliates, an underwriter temporarily holding
securities pursuant to an offering of such securities or a corporation
owned, directly or indirectly, by stockholders of the Company in
substantially the same proportions as their ownership of the Company, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 30%
or more of the combined voting power of the Company's then outstanding
securities; or
(ii) during any period of not more than two consecutive years,
individuals who at the beginning of such period constitute the Board and
any new director (other than a director designated by a Person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this paragraph) whose election by
the Board or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity), in combination with the ownership of
any trustee or other fiduciary holding securities under an employee benefit
plan of the Company, at least 50% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
Notwithstanding the foregoing, no Change in Control shall be deemed to have
occurred if there is consummated any transaction or series of integrated
transactions immediately following which the holders of
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the Common Stock immediately prior to such transaction or series of transactions
continue to have the same proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately prior to such
transaction or series of transactions.
(e) Effective January 27, 1999 "Committee" shall mean the Compensation
Committee of the Board of Directors.
(f) "Committee Chairman Retainer" shall mean any fee paid to a
non-employee director for service as the chairman of any committee of the
Board.
(g) "Common Stock" shall mean shares of Common Stock, par value $0.01
per share, of the Company.
(h) "DCAP II" shall mean the McKesson HBOC, Inc. Deferred Compensation
Administration Plan II, as amended from time to time.
(i) "Director Year" shall mean a calendar year.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(k) "Fair Market Value" of a share of Common Stock as of a particular
date shall mean, if the Common Stock is not listed or admitted to trading
on a stock exchange, the average between the lowest reported bid price and
highest reported asked price of the Common Stock on such date in the
over-the-counter market, or, if the Common Stock is then listed or admitted
to trading on any stock exchange, the composite closing price on such date
as reported in The Wall Street Journal.
(l) "Fees" shall mean the sum, for any Director Year, of the Annual
Retainer, Meeting Fees and Committee Chairman Retainer.
(m) "Meeting Fees" shall mean any fees paid to a non-employee director
for attending a meeting of the Board or a committee of the Board, including
any fees paid to a non-employee director for extraordinary or special Board
and/or committee meetings.
(n) "Participant" shall mean a non-employee director of the Company
participating in the Plan.
(o) "Restricted Stock Unit" shall mean a right to receive, in
accordance with the conditions set forth herein, a share of the Common
Stock or, alternatively, a cash payment equal to the Fair Market Value of a
share of Common Stock.
(p) "Retainer Option" shall mean a stock option granted pursuant to
the Plan in lieu of all or a portion of a Participant's Annual Retainer, as
provided in Sections 6(c) and 6(d)(iv).
3. Effective Date, Duration of Plan. This Plan shall become effective as of
January 1, 1997, subject to the approval of the Plan by the stockholders of the
Company; provided, that if the Plan is so approved, any election made hereunder
prior to such approval shall be deemed effective as of the date such election
was made. The Plan will terminate on December 31, 2006 or such earlier date as
determined by the Board; provided that no such termination shall affect rights
earned or accrued under the Plan prior to the date of termination.
4. Participation. Subject to the prior approval of the Committee, each
member of the Board who is not an employee of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
5. Common Stock Subject to the Plan.
(a) Subject to Section 5(b) below, the maximum aggregate number of shares
authorized to be issued under the Plan shall be 500,000. All Restricted Stock
Units issued hereunder, whether or not distributed in the form of Common Stock,
shall count against such maximum. If any options granted hereunder cease to be
exercisable in whole or in part, any shares subject thereto but with respect to
which such option had not been exercised, shall not count against such maximum.
As the Committee shall determine from time to time, the
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Common Stock may consist of either shares of authorized but unissued Common
Stock, or shares of authorized and issued Common Stock reacquired by the Company
and held in its treasury.
(b) In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, stock or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase or share exchange or
other similar corporate transaction or event affects the Common Stock such that
an adjustment is determined by the Committee to be appropriate to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee may, in its sole discretion
and in such manner as it may deem equitable, adjust any or all of (i) the number
of shares of Common Stock subject to the Plan, (ii) the number of shares of
Common Stock subject to outstanding awards under the Plan, and (iii) the grant
or exercise price with respect to any option.
6. Restricted Stock Units; Deferrals.
(a) Transition Grant. As soon as practicable following January 1, 1997,
each Participant shall receive an initial grant (the "Transition Grant") of a
number of Restricted Stock Units in consideration for the termination of such
Participant's accrued benefits and rights under the Company's Director's
Retirement Program (the "Prior Plan"); provided that the Transition Grant shall
be subject to the receipt by the Company of a written release from the
Participant, in the form approved by the Committee, consenting to such
termination. The number of Restricted Stock Units granted to a Participant in
respect of the Transition Grant shall equal the Accrued Benefit (as defined
below), divided by the Fair Market Value of a share of Common Stock as of
December 31, 1996. A Participant's Accrued Benefit shall equal his or her
accrued benefit under the Prior Plan, as of December 31, 1996.
(b) Annual Grant. On the date of each Annual Meeting prior to the
termination or expiration of the Plan, beginning with the 1997 Annual Meeting,
each Participant shall receive a grant of 400 Restricted Stock Units. Effective
January 27, 1999, the annual grants of 400 Restricted Stock Units shall be
discontinued.
(c) Mandatory Deferral. On each date that any portion of the Annual
Retainer would otherwise be payable to a Participant prior to the termination or
expiration of the Plan, each such Participant shall be required to defer the
receipt of an amount equal to 50% of such portion of Annual Retainer, which
amount shall be deferred in the form of Restricted Stock Units or Retainer
Options, as elected by the Participant prior to the end of the calendar year
preceding the year in which the Annual Retainer is payable. In the event that a
participant fails to make such an election with respect to any calendar year in
which he or she receives payment of an Annual Retainer, the Participant shall be
deemed to have elected to receive the Annual Retainer in the form of Restricted
Stock Units. The number of Restricted Stock Units granted to a Participant in
respect of such deferral shall equal the Annual Retainer so deferred, divided by
the Fair Market Value of a share of Common Stock as of the last trading day of
the calendar quarter immediately preceding the date such Annual Retainer would
otherwise be payable. To the extent applicable, Restricted Stock Units granted
pursuant to this paragraph shall be subject to the same terms and conditions
described in Section 6(d)(ii) below. The number of Retainer Option shares
granted to a Participant in respect of such deferral shall be determined using
the same conversion rate as employed in that year for the purpose of determining
the number of stock option shares to be granted to employees in lieu of awards
under the Company's Management Incentive Plan.
(d) Optional Deferral. All Fees (other than the portion of Annual Retainer
subject to Mandatory Deferral described above) earned by a Participant in each
Director Year prior to the termination or expiration of the Plan shall be
subject to the following payment and deferral options. Each Participant may
elect by written notice to the Company, in accordance with the procedures
established by the Company, to participate in such payment and deferral options.
(i) Cash Alternative. Unless a valid election is made in accordance
with the procedures established by the Company, each Participant shall
receive payment of all Fees (other than the portion of Annual Retainer
subject to Mandatory Deferral described above) in the form of cash.
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(ii) Restricted Stock Unit Alternative. Subject to executing a valid
election with the Company (the "RSU Election"), each Participant may elect
to defer all or any portion of his or her Fees (other than the portion of
Annual Retainer subject to Mandatory Deferral described above) in the form
of Restricted Stock Units. The number of Restricted Stock Units granted
shall equal the amount of Fees so deferred, divided by the Fair Market
Value of the Common Stock as of the last trading day of the calendar
quarter immediately preceding the date such Fees would otherwise be
payable. The RSU Election (A) shall be in the form of a document executed
by the Participant and filed with the Secretary of the Company, (B) shall
be made before the first day of the calendar year in which the applicable
Fees are earned and shall become irrevocable on the last day prior to the
beginning of such calendar year, and (C) shall continue until the
Participant ceases to serve as a director of the Company or until he or she
terminates or modifies such election by written notice to the Company in
accordance with the procedures established by the Company, any such
termination or modification to be effective as of the end of the calendar
year in which such notice is given with respect to Fees otherwise payable
in subsequent calendar years. Any person who becomes a Participant during
any Director Year may execute an RSU Election prior to commencing service
on the Board with respect to Fees to be earned for the remainder of such
year and for future Director Years in accordance with the procedures
established by the Company.
Each Restricted Stock Unit shall entitle the holder to, upon
distribution thereof (A) receive a cash payment equal to the Fair Market
Value of one share of Common Stock, or (B) have issued in his or her name
one share of Common Stock. In either case, each such Restricted Stock Unit
shall terminate upon distribution.
The Company shall credit each Participant holding Restricted Stock
Units with a number of additional Restricted Stock Units equal to any
dividends and other distributions paid by the Company on an equivalent
number of shares of Common Stock, as of the date such dividends or
distributions are payable. Such additional Restricted Stock Units shall
thereafter be treated as any other Restricted Stock Units issued under the
Plan. Restricted Stock Units may not be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of until such time as share
certificates for Common Stock are issued.
Each Participant issued Restricted Stock Units shall execute a valid
distribution election in accordance with the procedures established by the
Committee (the "Distribution Election"). The Distribution Election shall
indicate (A) whether distribution shall be made in the form of Common Stock
or cash, (B) whether the distribution shall be made in a single allotment
or in substantially equal annual installments over a period not to exceed
ten (10) years and (C) with respect to Distribution Elections filed on or
after October 28, 1998, the date on which the distribution shall commence
in accordance with the next paragraph. The Distribution Election (D) shall
be in the form of a document executed by the participant and filed with the
Secretary of the Company, (E) shall be made no later than twelve (12)
months prior to the distribution date and (F) shall become irrevocable
twelve (12) months prior to the distribution date.
With respect to a Distribution Election completed on or after October
28, 1998, the Participant shall elect whether distributions shall commence
as soon as practicable after (i) the first business day of January of the
calendar year following the Participant's cessation from service as a
director of the Company; or (ii) the first business day of January of any
calendar year, provided that such calendar year is not later than the
calendar year following the calendar year in which the Participant attains
age 72. All other distributions shall commence as soon as practicable after
the first business day of the January following the Participant's cessation
from service as a director of the Company. If no valid Distribution
Election is made, the Restricted Stock Units shall be distributed in a lump
sum as soon as practicable after the first business day of January of the
calendar year following the Participant's cessation from service as a
director of the Company, in the form of cash. Participants who receive
Restricted Stock Units shall have no rights as stockholders with respect to
such Restricted Stock Units until share certificates for Common Stock are
issued. Notwithstanding any provision to the contrary, any fractional
shares of Common Stock issuable hereunder shall be paid in cash.
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41
Upon the occurrence of a Change in Control, Common Stock to be issued
in respect of all Restricted Stock Units shall be immediately distributed.
(iii) DCAP II Alternative. Subject to executing an election in
accordance with the procedures established by the Company and the terms of
DCAP II, each Participant may elect to defer all or any portion of his or
her Fees (other than the portion of Annual Retainer subject to Mandatory
Deferral described above) under DCAP II.
(iv) Retainer Option Alternative. Subject to executing an election in
accordance with the procedures established by the Company, each Participant
may elect to receive the portion of Annual Retainer not subject to
Mandatory Deferral, as described in Section 6(c) above, in the form of
Retainer Options. The number of Retainer Option shares granted to a
Participant with respect to such deferral shall be determined in the manner
described in Section 6(c) above.
7. Stock Options.
(a) Discretionary Grants. The Committee may, in its sole discretion, grant
options to purchase Common Stock to Participants, pursuant to such terms and
conditions that it may deem advisable, so long as not inconsistent with Section
7(d) below or any other terms of this Plan.
(b) Formula Grants. Each Participant then serving as a non-employee
director of the Company shall automatically receive, on the date of each January
meeting of the Board, an option to purchase 10,000 shares of Common Stock
(subject to adjustment as provided in Section 5(b) above); provided, however,
that a Participant who is elected to the Board after the January meeting of the
Board shall be granted, as of the date of election, a prorated number of options
with respect to the initial year of participation in the Plan, based on the
number of full calendar quarters remaining in the calendar year in which the
Participant is elected to the Board. The options granted pursuant to this
Section 7(b) shall be immediately exercisable in full and have an option term of
ten years.
(c) Retainer Option Grants. At the same time that the Company makes stock
option grants annually to eligible employees, each Participant who has made an
election to receive a Retainer Option pursuant to Section 6(c) or 6(d)(iv) with
respect to all or any portion of the Annual Retainer to be paid in such year
shall be granted an option to purchase that number of shares of Common Stock
determined pursuant to Section 6(c) and/or Section 6(d)(iv), as applicable. The
terms of such Retainer Options shall be as prescribed by the Committee, so long
as such terms are not inconsistent with Section 7(d) below or any other terms of
this Plan.
(d) Terms and Conditions of Options. Except as provided in Section 7(b)
above, the following terms and conditions shall apply to all options granted to
Participants under the Plan.
(i) The exercise price of each option shall not be less than the Fair
Market Value of the Common Stock covered by the option on the date the
option is granted.
(ii) Each option granted pursuant to the Plan shall be evidenced by a
written grant agreement (the "Agreement") executed by the Company and the
person to whom such option is granted which shall provide such terms and
conditions as the Committee may determine, in its sole discretion, so long
as not inconsistent with the terms of this Plan.
(iii) The term of each option shall be for no more than ten years.
(iv) The Agreement may contain such other terms, provisions, and
conditions as may be determined by the Committee (not inconsistent with
this Plan). Unless otherwise provided in the Agreement and excluding
options granted under paragraph (b) above, the Committee may, in its sole
discretion, extend the post-termination exercise period with respect to an
option (but not beyond the original term of such option).
(v) Payment of the purchase price upon exercise of any option shall be
made in cash; provided that the Committee, in its sole discretion, may
permit an option holder to pay the option price by such other method that
it may deem appropriate, including, without limitation, by tendering to the
Company shares
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42
of Common Stock owned by the option holder, and having a Fair Market Value
equal to the option price. Such stock surrender method may permit an
election by the option holder to have the unrealized gain with respect to
the option denominated in stock units (based on the fair market value of a
share of Common Stock on the date of exercise) and paid in shares of Common
Stock at the time specified by the Participant at the time of making the
stock surrender option gain deferral election. During the deferral period
each such stock unit shall be credited with additional stock units equal to
any dividends or other distributions paid by the Company on an equivalent
number of shares of Common Stock, as of the date such dividends or
distributions are payable. Stock units may not be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of until such time as
share certificates for Common Stock are issued.
(vi) All such options shall be designated as stock options which do
not qualify under Section 422 of the Internal Revenue Code of 1986, as
amended.
(vii) Unless otherwise provided in an Agreement, options granted under
the Plan will become immediately and fully vested and exercisable upon the
occurrence of a Change in Control.
8. Administration. The Plan shall be administered by the Committee. The
Committee shall have full power to interpret the Plan and formulate additional
details and regulations for carrying out the Plan. Any decision or
interpretation adopted by the Committee shall be final and conclusive.
9. No Right to Serve. Nothing in the Plan shall confer upon any Participant
the right to remain in service as a member of the Board.
10. Amendment and Termination. The Board at any time may amend or terminate
the Plan; provided that any such amendment or termination does not adversely
affect the rights of any Participant.
11. Governing Law. The validity, construction and effect of the Plan and
any such actions taken under or relating to the Plan shall be determined in
accordance with the laws of the State of California.
12. Notices. All notices under this Plan shall be sent in writing to the
Secretary of the Company. All correspondence to the Participants shall be sent
in writing to the Participant at the address which is their recorded address as
listed on the most recent election form or as specified in the Company's
records.
13. Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. Nothing contained
hereunder shall give any Participant any rights that are greater than those of
an unsecured general creditor of the Company.
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