McKesson 2006 Annual Report Download - page 84

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
18. Other Commitments and Contingent Liabilities
I. Accounting Litigation
Following 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 and now known as McKesson Information Solutions LLC, were
improperly recorded as revenue and reversed, as of March 31, 2006, ninety-two lawsuits were 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. (“Bear Stearns”) and
Arthur Andersen LLP (“Andersen”). On January 12, 2005, we announced that we reached an agreement to settle the previously-reported action
in the Northern District of California captioned: In re McKesson HBOC, Inc. Securities Litigation, (No. C-99-20743 RMW) (the “Consolidated
Action”). In general, under the agreement to settle the Consolidated Action, we agreed to pay the settlement class a total of $960 million in
cash. The settlement agreement was subject to various conditions, including, but not limited to, preliminary approval by the court, notice to the
Class, and final approval by the court after a hearing. Other than the Consolidated Action, none of the previously reported Securities Litigation
was resolved by the settlement date. As a result, during the third quarter of 2005, we recorded a $1,200 million pre-tax ($810 million after-tax)
charge with respect to the Company’s Securities Litigation. The charge consisted of $960 million for the Consolidated Action and $240 million
for other Securities Litigation proceedings.
During 2006, we settled many of the other Securities Litigation proceedings and paid $243 million pursuant to those settlements. Based on
the payments made in the Consolidated Action and the other Securities Litigation proceedings, settlements reached in certain of the other
Securities Litigation proceedings and our assessment of the remaining cases, the estimated reserves were increased by $52 million and
$1 million in pre-tax charges during the first and third quarters of 2006 and decreased by an $8 million pre-tax credit during the fourth quarter
of 2006, for a total net pre-tax charge of $45 million for 2006. As of March 31, 2006 and 2005, the Securities Litigation accrual was
$1,014 million and $1,214 million. Additionally, on February 24, 2006, the court gave final approval to the settlement of the Consolidated
Action, and as a result, we paid approximately $960 million into an escrow account established by the lead plaintiff in connection with the
settlement of the Consolidated Action.
We believe this accrual is adequate to address our remaining potential exposure with respect to all of the Securities Litigation matters.
However, in view of the number of remaining cases, the uncertainties of the timing and outcome of this type of litigation, and the substantial
amounts involved, it is possible that the ultimate costs of these matters could impact our earnings, either negatively or positively, in the quarter
of their resolution. We do not believe that the resolution of these matters will have a material adverse effect on our results of operations,
liquidity or financial position taken as a whole.
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