McKesson 2005 Annual Report Download - page 81

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
as a result, we increased our provision for doubtful accounts by $30.0 million. On April 21, 2004, we converted a $40.0 million credit facility
guarantee in favor of this customer to a note receivable due from this customer. This secured note bears interest and is repayable in 2007. In
conjunction with this modification, an inventory repurchase guarantee in favor of this customer for approximately $12 million was also
terminated. The amount due under the note receivable from this customer was approximately $36 million at March 31, 2005.
At March 31, 2005, we had commitments of $8.5 million, primarily consisting of the purchase of services from our equity-held investments,
for which no amounts had been accrued.
The expirations of the above noted financial guarantees and commitments are as follows: $27.7 million, $34.8 million, $2.6 million,
$1.6 million and $0.1 million from 2006 through 2010, and $131.5 million thereafter.
In addition, our banks and insurance companies have issued $84.9 million of standby letters of credit and surety bonds on our behalf in
order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, and our workers’ compensation and
automotive liability programs.
Our software license agreements generally include certain provisions for indemnifying customers against liabilities if our software products
infringe on a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification
agreements and have not accrued any liabilities related to such obligations.
In conjunction with certain transactions, primarily divestitures, we may provide routine indemnification agreements (such as retention of
previously existing environmental, tax and employee liabilities) whose terms vary in duration and often are not explicitly defined. Where
appropriate, obligations for such indemnifications are recorded as liabilities. Because the amounts of these indemnification obligations often
are not explicitly stated, the overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded
as liabilities at the time of divestiture, we have historically not made significant payments as a result of these indemnification provisions.
Warranties
In the normal course of business, we provide certain warranties and indemnification protection for our products and services. For example,
we provide warranties that the pharmaceutical and medical-surgical products we distribute are in compliance with the Food, Drug and
Cosmetic Act and other applicable laws and regulations. We have received the same warranties from our suppliers, which customarily are the
manufacturers of the products. In addition, we have indemnity obligations to our customers for these products, which have also been provided
to us from our suppliers, either through express agreement or by operation of law.
We also provide warranties regarding the performance of software and automation products we sell. Our liability under these warranties is
to bring the product into compliance with previously agreed upon specifications. For software products, this may result in additional project
costs, which are reflected in our estimates used for the percentage-of-completion method of accounting for software installation services within
these contracts. In addition, most of our customers who purchase our software and automation products also purchase annual maintenance
agreements. Revenue from these maintenance agreements is recognized on a straight-line basis over the contract period and the cost of
servicing product warranties is charged to expense when claims become estimable. Accrued warranty costs were not material to the
consolidated balance sheets.
19. Other Commitments and Contingent Liabilities
I. Accounting Litigation
Since the announcements by McKesson in April, May and July of 1999 that McKesson had determined that certain software sales
transactions in its Information Solutions segment, formerly HBO & Company (“HBOC”) and now known as McKesson Information Solutions
LLC, were improperly recorded as revenue and reversed, as of March 31, 2005, ninety-one lawsuits have been filed against McKesson, HBOC,
certain of McKesson’s or HBOC’s current or former officers or directors, and other defendants, including Bear Stearns & Co. Inc. and Arthur
Andersen LLP.
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