McKesson 2006 Annual Report Download - page 91

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The weighted average fair values of the options granted during 2006, 2005 and 2004 were $18.26, $12.79 and $13.83 per share. Fair values
of the options were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
The Company also has an employee stock purchase plan (“ESPP”) under which 11 million shares have been authorized for issuance.
Eligible employees may purchase a limited number of shares of the Company’s common stock at a discount of up to 15% of the market value
at certain plan-defined dates. In 2006, 2005 and 2004, 1 million, 2 million and 1 million shares were issued under the ESPP. At March 31,
2006, 2 million shares were available for issuance under the ESPP.
20. Related Party Balances and Transactions
Notes receivable outstanding from certain of our current and former officers and senior managers totaled $45 million at both March 31,
2006 and 2005. These notes related to purchases of common stock under our various employee stock purchase plans. The notes bear interest at
rates ranging from 4.7% to 7.1% and were due at various dates through February 2004. Interest income on these notes is recognized only to the
extent that cash is received. These notes, which are included in other capital in the consolidated balance sheets, were issued for amounts equal
to the market value of the stock on the date of the purchase and are full recourse to the borrower. At March 31, 2006, the value of the
underlying stock collateral was $33 million. The collectability of these notes is evaluated on an ongoing basis. As a result, in 2004, we recorded
a $21 million charge for notes from the former officers and employees. In 2006 and 2005, we reversed approximately $9 million and $6 million
of this reserve based on an increase in price of the underlying stock collateral. Other receivable balances held with related parties, consisting of
loans made to certain officers and senior managers and an equity-held investment, at March 31, 2006 and 2005 amounted to $1 million and
$2 million.
In 2006, 2005 and 2004 we incurred approximately $7 to $8 million annually of rental expense from an equity-held investment. In addition,
in 2006, 2005 and 2004 we purchased $3 million of services per year from an equity-held investment. At March 31, 2006, we had a $4 million
loan receivable from an equity held investment. The loan bears interest at 7.9% and is repayable in 2007.
21. Segments of Business
Our segments include Pharmaceutical Solutions, Medical-Surgical Solutions and Provider Technologies. We evaluate the performance of
our operating segments based on operating profit before interest expense, income taxes and results from discontinued operations. Our
Corporate segment includes expenses associated with Corporate functions and projects, certain employee benefits, and the results of certain
j
oint venture investments. Corporate expenses are allocated to the operating segments to the extent that these items can be directly attributable
to the segment.
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Years Ended March 31,
2006 2005 2004
Expected stock price volatility 36.3% 28.6%34.3%
Expected dividend yiel
d
0.53% 0.67% 0.59%
Risk-free interest rate 3.9% 4.2%3.8%
Expected life (in years) 6 7 7