McKesson 2008 Annual Report Download - page 86

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
79
Our various borrowing facilities and certain long-term debt instruments are subject to covenants. Our principal
debt covenant is our debt to capital ratio, which cannot exceed 56.5%. If we exceed this ratio, repayment of debt
outstanding under the revolving credit facility and $215 million of term debt could be accelerated. At March 31,
2008, this ratio was 22.7% and we were in compliance with all other covenants.
Convertible Junior Subordinated Debentures
In February 1997, we issued 5% Convertible Junior Subordinated Debentures (the “Debentures”) in an
aggregate principal amount of $206 million. The Debentures were purchased by McKesson Financing Trust (the
“Trust”) with proceeds from its issuance of four million shares of preferred securities to the public and 123,720
common securities to us. The Debentures represented the sole assets of the Trust and bore interest at an annual rate
of 5%, payable quarterly. These preferred securities of the Trust were convertible into our common stock at the
holder’ s option.
Holders of the preferred securities were entitled to cumulative cash distributions at an annual rate of 5% of the
liquidation amount of $50 per security. Each preferred security was convertible at the rate of 1.3418 shares of our
common stock, subject to adjustment in certain circumstances. The preferred securities were to be redeemed upon
repayment of the Debentures and were callable by us on or after March 4, 2000, in whole or in part, initially at
103.5% of the liquidation preference per share, and thereafter at prices declining at 0.5% per annum to 100% of the
liquidation preference on and after March 4, 2007 plus, in each case, accumulated, accrued and unpaid distributions,
if any, to the redemption date.
During the first quarter of 2006, we called for the redemption of the Debentures, which resulted in the exchange
of the preferred securities for 5 million shares of our newly issued common stock.
11. Financial Instruments and Hedging Activities
At March 31, 2008 and 2007, the carrying amounts of cash and cash equivalents, restricted cash, marketable
securities, receivables, drafts and accounts payable, and other liabilities approximated their estimated fair values
because of the short maturity of these financial instruments. The carrying amounts and estimated fair values of our
long-term debt were $1,797 million and $1,861 million at March 31, 2008 and $1,958 million and $2,036 million at
March 31, 2007. The estimated fair value of our long-term debt was determined based on quoted market prices and
may not be representative of actual values that could have been realized or that will be realized in the future.
In the normal course of business, we are exposed to interest rate changes and foreign currency fluctuations. We
limit these risks through the use of derivatives such as interest rate swaps and forward contracts. In accordance with
our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative
purposes.
12. Lease Obligations
We lease facilities and equipment under both capital and operating leases. Net assets held under capital leases
included in property, plant and equipment were $4 million and $2 million at March 31, 2008 and 2007. Rental
expense under operating leases was $149 million, $117 million and $106 million in 2008, 2007 and 2006. We
recognize rent expense on a straight-line basis over the term of the lease, taking into account, when applicable,
lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent
payments over the term of the lease. Deferred rent is recognized for the difference between the rent expense
recognized on a straight-line basis and the payments made per the terms of the lease. Most real property leases
contain renewal options and provisions requiring us to pay property taxes and operating expenses in excess of base
period amounts.