McKesson HBOC restates results for last three years
By KAREN PIHL-CAREY
HHBR Staff Writer
Restated results for McKesson HBOC (San Francisco) released last week finally put an end to the company’s most recent audit and discovery of accounting improprieties. And although the company must swallow about $327.4 million in revenues originally reported for the past three fiscal years, now perhaps it can move forward, said its co-CEOs, John Hammergren and David Mahoney.
"We’re certainly not going to focus on the restatement," Hammergren said Wednesday at a meeting with the financial community in New York. "We had a lot of resources focus on that restatement. We’re going to put that chapter of our lives behind us; put it behind us for our customers, our investors, and our employees, and begin focusing on operating the company."
In a form 10-K filing with the Securities and Exchange Commission (SEC; Washington), the company revised downward its revenues by $245.8 million for FY99 ended March 31, by $48.4 million for FY98 ended March 31, 1998, and by $33.2 million for FY97 ended March 31, 1997. The company also revised downward its income from operations by $152.2 million, 53 cents per share, for FY99; $25.8 million, 9 cents per share, for FY98; and $13.5 million, 5 cents per share, for FY97.
With the restatement, FY99 earnings were 31 cents per share, compared with 84 cents per share in the original filing; FY98 earnings were $1.10 per share, compared with $1.19; and FY97 earnings were 80 cents per share, compared with the 85 cents per share initially reported.
The restatements are the result of improperly recognized revenues in the Information Technology Business (ITB) unit, formerly HBO & Co. before McKesson acquired it in January. The problems were discovered during an audit. Following the analysis of this audit, four top officials of ITB were dismissed in June, as was the chairman of the board, who was also an employee. In turn, CEO Mark Pulido and CFO Richard Hawkins both resigned reportedly because the improprieties had occurred under their watch, a company spokesman told HHBR. Pulido, investors found out last week, will receive his annual base salary of $850,000 through March 31, 2004, as outlined in his contract.
"It is important to emphasize that there are absolutely no adjustments outside of ITB, no adjustments in supply management, no corporate adjustments," Mahoney said at Wednesday’s meeting, referring to the restatement.
Of the $327.4 million in downward revenues, McKesson HBOC will still recognize $160 million of it over the next few years and possibly a little more than half of that in FY2000, Mahoney said.
"That means there was a valid contract there," he said. "That means the customer went through a selection process. As a result of that selection process, they selected ITB’s products. As a result of that, they signed a contract to buy and have those products installed. And out of that restatement, only $50 million looks to have contingencies attached to it that won’t clear in a reasonable period of time."
Company officials are still investigating ways to realize the remaining $115 million. There’s no guarantee the company will ever see that money either. "We don’t like the uncertainty around the $115 (million) anymore than you do," Mahoney told investors.
During the audit process, the company discovered that the former HBO & Co. had been recording sales that were contingent on a future event and had not occurred. McKesson HBOC moved those revenues into subsequent periods. It also moved the revenues of certain products because they were not Year 2000 compliant, despite a warranty saying they were. The former company also had a tendency of reporting up front the revenues of five-year contracts, Mahoney said. Now, McKesson HBOC will change to subscription accounting for those revenues. The company does not have to change its policies. The policies were already in place, but were not being followed, Mahoney said.
McKesson’s audit committee also retrieved deleted computer files that suggested certain executives intentionally concealed efforts to accelerate revenues.
Charles McCall, HBO’s chairman/CEO, who was dismissed by McKesson from his duties in June, told the Wall Street Journal that there was "no scheme to accelerate revenues. I was certainly CEO, and they worked for me and reported to me, and so there is some accountability there," he said. "But I know of no secret files or erased documents."
Now, Hammergren and Mahoney will work on restoring the company’s credibility and training its employees on how to follow its policies and procedures. It also must resolve more than 50 shareholder lawsuits, and it faces investigations by the United States Attorney’s Office for the Northern District of California, as well as the SEC. The company has rescheduled its annual meeting of stockholders for Aug. 25 in San Francisco.
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