Mekesson Quarterly Reports 2002 3rd

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

For quarter ended December 31, 2001

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

For the transition period from to ____________

Commission file number 1-13252

McKESSON CORPORATION(Exact name of Registrant as specified in its charter)

Delaware 94-3207296(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

One Post Street, San Francisco, California 94104(Address of principal executive offices) (Zip Code)

(415) 983-8300(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was requiredto file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicabledate.

Class Outstanding at February 8, 2002Common stock, $0.01 par value 287,453,771 shares

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McKESSON CORPORATION

TABLE OF CONTENTS

Item Page

PART I. FINANCIAL INFORMATION

1. Condensed Financial Statements

Consolidated Balance Sheets at December 31, 2001 and March 31, 2001………………………………. 3

Consolidated Statements of Operations for the quarter and nine months ended December 31, 2001 and 2000………………………………………………………………………… 4

Consolidated Statements of Cash Flows for the nine months ended December 31, 2001 and 2000…….. 5

Financial Notes…………………………………………………………………………………………... 6-19

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations……………. 20-28

3. Quantitative and Qualitative Disclosures about Market Risk…………………………………………… 28

PART II. OTHER INFORMATION

1. Legal Proceedings……………………………………………………………………………………….. 28

6. Exhibit and Reports on Form 8-K……………………………………………………………………… 28

Signatures…………………………………………………………………………………………….… 29

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

McKESSON CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS

(In millions except per share amounts)(Unaudited)

December 31,2001

March 31,2001

ASSETSCurrent Assets

Cash and equivalents $ 284.9 $ 433.7Marketable securities 5.3 11.9Receivables 3,604.2 3,443.4Inventories 6,259.3 5,116.4Prepaid expenses and other 160.7 158.6

Total 10,314.4 9,164.0 Property, Plant and Equipment, net 579.8 595.3Capitalized Software 118.8 103.7Notes Receivable 225.4 131.3Goodwill 969.6 963.3Other Assets 580.9 572.3

Total Assets $ 12,788.9 $ 11,529.9

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities

Drafts and accounts payable $ 6,249.1 $ 5,361.9Deferred revenue 427.6 378.5

Short-term borrowings 15.0 -Current portion of long-term debt 318.4 194.1Other liabilities 633.7 615.2

Total 7,643.8 6,549.7

Postretirement Obligations and Other Noncurrent Liabilities 272.5 255.8Long-Term Debt 893.4 1,035.6McKesson Corporation - Obligated Mandatorily Redeemable Convertible Preferred Securities of

Subsidiary Grantor Trust Whose Sole Assets are Junior Subordinated Debentures ofMcKesson Corporation 196.1 195.9

Other Commitments and Contingent LiabilitiesStockholders’ Equity

Common stock, par value $0.01, 400.0 shares authorized, 287.9 and 286.3 shares issued and outstanding at December 31, 2001 and March 31, 2001 2.9 2.9

Additional paid-in capital 1,830.9 1,828.7Other capital (101.9) (108.4)Retained earnings 2,248.9 2,006.6Accumulated other comprehensive loss (84.5) (75.0)ESOP notes and guarantees (74.5) (89.0)Treasury shares, at cost, 1.1 and 2.3 shares at December 31, 2001 and March 31, 2001 (38.7) (72.9)

Total Stockholders’ Equity3,783.1

3,492.9

Total Liabilities and Stockholders’ Equity $ 12,788.9 $ 11,529.9

See Financial Notes.

4

McKESSON CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions except per share amounts)(Unaudited)

Quarter EndedDecember 31,

Nine Months EndedDecember 31,

2001 2000 2001 2000

Revenues $ 13,196.7 $ 11,017.8 $ 37,009.9 $ 30,600.9Cost of Sales 12,511.3 10,416.3 34,997.0 28,860.9 Gross Profit 685.4 601.5 2,012.9 1,740.0Selling, Distribution, Research and Development and Administration Expenses 497.7 471.2 1,518.1 1,369.4Operating Income 187.7 130.3 494.8 370.6Interest Expense (27.2) (28.3) (81.2) (84.4)Loss on Investments (0.2) (98.9) (5.9) (91.1)Loss on Sale of Businesses, Net - - (18.4) -Other Income, Net 9.5 11.3 28.5 31.5Income Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust 169.8 14.4 417.8 226.6Income Taxes (59.5) (5.6) (120.0) (89.2)Dividends on Preferred Securities of Subsidiary Trust (1.5) (1.5) (4.6) (4.6)Income After Taxes Continuing operations 108.8 7.3 293.2 132.8 Discontinued operations - (5.6) - (5.6) Net Income $ 108.8 $ 1.7 $ 293.2 $ 127.2

Earnings per Common Share Diluted Continuing operations $ 0.37 $ 0.03 $ 1.00 $ 0.47 Discontinued operations - (0.02) - (0.02) Total $ 0.37 $ 0.01 $ 1.00 $ 0.45 Basic Continuing operations $ 0.38 $ 0.03 $ 1.03 $ 0.47 Discontinued operations - (0.02) - (0.02) Total $ 0.38 $ 0.01 $ 1.03 $ 0.45

Dividends Declared per Common Share $ 0.06 $ 0.06 $ 0.18 $ 0.18

Weighted Average Shares Diluted 299.2 295.1 299.0 292.3 Basic 285.6 283.4 284.9 283.0


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McKESSON CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)


2001 2000

Operating ActivitiesIncome from continuing operations $ 293.2 $ 132.8Adjustments to reconcile to net cash provided (used) by operating activities

Depreciation 87.4 85.4Amortization 66.1 92.4Provision for bad debts 40.0 37.3Deferred taxes on income 9.5 40.7Loss on sale of businesses 18.4 -Other non-cash items 19.0 60.5

Total 533.6 449.1Effects of changes in:

Receivables (323.1) (566.6)Inventories (1,151.1) (780.9)Drafts and accounts payable 891.8 1,136.4Deferred revenue 52.9 36.4Taxes 100.0 (213.9)Other (22.7) (9.0)

Total (452.2) (397.6)Net cash provided by continuing operations 81.4 51.5

Discontinued operations (0.2) (6.7)Net cash provided by operating activities 81.2 44.8

Investing ActivitiesProperty acquisitions (74.8) (96.0)Acquisitions of businesses, less cash and short-term investments acquired (10.7) (50.7)Notes receivable issuances, net (46.2) (26.2)Other (76.9) (16.7)

Net cash used by investing activities (208.6) (189.6)

Financing ActivitiesProceeds from issuance of debt 18.9 5.6Repayment of debt (23.6) (38.8)Dividends paid on convertible preferred securities of subsidiary trust (7.5) (7.5)Capital stock transactions:

Issuances 71.9 34.2Share repurchases (44.2) (25.7)Dividends paid (51.4) (51.3)ESOP notes and guarantees 14.5 10.9Other - 1.7

Net cash used by financing activities (21.4) (70.9)Net decrease in cash and equivalents (148.8) (215.7)Cash and equivalents at beginning of period 433.7 548.9Cash and equivalents at end of period $ 284.9 $ 333.2


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McKESSON CORPORATIONFINANCIAL NOTES

(Unaudited)

1. Interim Financial Statements

In our opinion, these unaudited condensed consolidated financial statements include all adjustments necessary for a fairpresentation of the Company’s financial position as of December 31, 2001, the results of operations for the quarter and ninemonths ended December 31, 2001 and 2000 and cash flows for the nine months ended December 31, 2001 and 2000.

The results reported in these condensed consolidated financial statements are not necessarily indicative of the results thatmay be expected for the entire year. These interim financial statements should be read in conjunction with the annual auditedfinancial statements, accounting policies and financial notes included in our fiscal 2001 consolidated financial statementspreviously filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified toconform to the current period presentation.

2. New Accounting Pronouncements

On April 1, 2001, we adopted Statement of Financial Accounting Standards (‘‘SFAS’’) No. 133, ‘‘Accounting forDerivative Instruments and Hedging Activities,’’ as amended in June 2000 by SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities,” which establishes accounting and reporting standards for derivativeinstruments and for hedging activities. These statements require that we recognize all derivatives as either assets or liabilitiesin the statement of financial position and measure these instruments at fair value. The adoption of this accounting standarddid not materially impact our consolidated financial statements.

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,”which eliminated the pooling method of accounting for all business combinations initiated after June 30, 2001 and addressesthe initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Weadopted this accounting standard for business combinations initiated after June 30, 2001.

In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the financialaccounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwilland other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separatelydisclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested forimpairment on a periodic basis. We adopted SFAS No. 142 on April 1, 2001 and, as required by this pronouncement, duringthe quarter ended September 30, 2001, we completed a transitional impairment test and we did not record any impairments ofgoodwill.

In accordance with SFAS No. 142, we discontinued the amortization of goodwill effective April 1, 2001. A reconciliationof previously reported net income and earnings per common share to the amounts adjusted for the exclusion of goodwillamortization net of the related income tax effect follows (in millions except per share amounts):

Quarter Ended Nine Months EndedDecember 31, December 31,

2001 2000 2001 2000

Reported net income

$ 108.8 $ 1.7$

293.2 $

127.2

Goodwill amortization, net of tax - 12.0 - 34.0

Adjusted net income $ 108.8 $

13.7$

293.2 $ 161.2

Diluted earnings per common share $ 0.37 $

0.01$

1.00$

0.45


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Adjusted diluted earnings per common share $ 0.37 $

0.05$

1.00$

0.57

Basic earnings per common share $ 0.38 $

0.01$

1.03$

0.45


Adjusted basic earnings per common share $ 0.38 $

0.05$

1.03$

0.57

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McKESSON CORPORATIONFINANCIAL NOTES - (Continued)

(Unaudited)

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financialaccounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective forour fiscal year 2004.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"that replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of." SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinuedoperations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuingoperations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value orinclude amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting ofdiscontinued operations to include all components of an entity with operations that can be distinguished from the rest of theentity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFASNo. 144 are effective for our fiscal year 2003 and are generally to be applied prospectively.

We are evaluating what impact, if any, SFAS No. 143 and No. 144 may have on the consolidated financial statements.

3. Acquisitions and Divestitures

During the first nine months of fiscal 2002 and 2001, we acquired several businesses having an aggregate cash cost of$10.7 million and $50.7 million. Our Supply Solutions segment acquired six businesses in fiscal 2002. In 2001, nineacquisitions were for our Supply Solutions segment and two acquisitions were for our Information Solutions segment. As aresult of these acquisitions, we recorded approximately $6.9 million in goodwill for the nine months ended December 31,2001 and $56.0 million for the comparable fiscal 2001 period. Purchase prices have been allocated based on estimated fairvalues at the date of acquisition, and may be subject to change. Pro forma results of operations have not been presentedbecause the effects of these acquisitions were not material to our consolidated financial statements on either an individual oraggregate basis.

During the first half of fiscal 2002, we sold two businesses from our Information Solutions segment. We recognized a netpre-tax loss of $18.4 million and an after-tax gain of the same amount. For accounting purposes, the net assets of one ofthese businesses were written down in fiscal 2001 in connection with the restructuring of our former iMcKesson businesssegment. The tax benefit could not be recognized until fiscal 2002, when the sale of the business was completed.

The after-tax loss from discontinued operations for the quarter and nine months ended December 31, 2000 primarilyreflects an adjustment to the gain recorded on the fiscal 2000 sale of the our former subsidiary, McKesson Water ProductsCompany.

4. Special Charges

During the quarter and nine months ended December 31, 2001 and 2000, we had the following special charges to income(in millions):



2001 2000 2001 2000Loss on investments, net $ 0.2

$98.9

$5.9

$91.1

Loss on sale of businesses, net - - 18.4 -Legal settlement 4.0 - 4.0 -Restructuring expense (Financial Note 5) - 1.0 16.9 3.8Asset impairments relating to restructuring activities (Financial Note 5)

-

0.7 3.4 0.7

Other, net 0.3 1.1 5.1 3.9Total pre-tax special charges 4.5 101.7 53.7 99.5

9

Tax benefit (1.6) (39.7) (49.6) (38.0)Total after-tax special charges $ 2.9

$62.0

$4.1

$61.5

10


(Unaudited)

The quarter and nine months ended December 31, 2000 include charges of $98.9 million and $91.1 million forimpairments of certain equity investments. The impairment charge for the quarter primarily consists of a $92.2 millionimpairment loss due to the other-than-temporary decline in value of our WebMD, Inc., warrants, which we received infiscal 2000 as a result of a merger between Healtheon Corporation and WebMD, Inc., and an impairment loss of $6.7million for other equity investments. For the nine months ended December 31, 2000, loss on investments also includes a$7.8 million gain on the liquidation of another investment.

Other items primarily include legal costs incurred in connection with the pending shareholder litigation (see Financial Note 11), the write-off of purchased in-process technology related to an acquisition and settlements of claimswith third parties.

5. Restructuring and Related Asset Impairments

We recorded net charges for restructuring of $16.9 million and related asset impairments of $3.4 million during the ninemonths ended December 31, 2001. In the first half of fiscal 2002, following a review of our Medical-Surgical business, wedeveloped and communicated a plan to close 23 and open four new distribution centers. In connection with this plan, werecorded severance charges of $10.0 million relating to the termination of approximately 650 employees primarily indistribution, delivery and associated back-office functions, exit-related charges of $14.0 million for costs to prepare facilitiesfor disposal, and lease costs and property taxes required subsequent to termination of operations, and asset impairmentcharges of $0.3 million. We anticipate completing this restructuring program by the end of fiscal 2003. As of December 31,2001, 39 employees had been terminated, five distribution centers were closed and two distribution centers were opened.

Also in the first half of fiscal 2002, we reversed $7.1 million of accrued restructuring liabilities relating to prior yearrestructuring plans due to a change in estimated costs to complete these activities. The following table summarizes the activity related to the restructuring liabilities during the first nine months of fiscal2002 (in millions):

SupplySolutions

InformationSolutions Corporate

SeveranceExit-

Related SeveranceExit-

Related SeveranceExit-

Related TotalBalance, March 31, 2001 $ 10.0 $ 7.5 $ 3.5 $ 9.0 $ 24.7 $ 0.3 $ 55.0Expenses incurred during the period 10.0 14.0 - - - - 24.0Adjustments to prior years’expenses (2.0) (2.3) - - (2.8) - (7.1) Net expense for the period 8.0 11.7 - - (2.8) - 16.9Cash expenditures (4.6) (3.0) (1.4) (1.7) (4.9) (0.2) (15.8)Balance, December 31, 2001 $ 13.4 $ 16.2 $ 2.1 $ 7.3 $ 17.0 $ 0.1 $ 56.1

Accrued restructuring liabilities of $56.1 million and $55.0 million as of December 31, 2001 and March 31, 2001 wereincluded in “other liabilities” in the accompanying condensed consolidated balance sheets. The remaining balances atDecember 31, 2001 for our Supply Solutions business relate primarily to our Medical-Surgical restructuring programincurred in the first half of fiscal 2002 including severance, costs for preparing facilities for disposal, lease costs and propertytaxes required subsequent to termination of operations. Exit-related costs for our Information Solutions business primarilyrelates to accrued contract liabilities and Corporate severance primarily pertains to retirement costs. With the exception ofthe retirement costs, which are anticipated to be paid in several years, substantially all other accrued restructuring amountsare anticipated to be paid by the end of fiscal 2003.

11


(Unaudited)

6. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended December 31, 2001 are as follows (in millions):

SupplySolutions

InformationSolutions Total

Balance, March 31, 2001 $ 934.5 $ 28.8 $ 963.3Goodwill acquired during the period 6.9 - 6.9Translation adjustments and other (0.3) (0.3) (0.6)

Balance, December 31, 2001 $ 941.1 $ 28.5 $ 969.6

Information regarding our other intangible assets is as follows (in millions):

December 31, 2001 March 31, 2001CarryingAmount

AccumulatedAmortization Net

CarryingAmount

AccumulatedAmortization Net

Customer lists $ 85.1 $ (38.0) $ 47.1 $ 80.8 $ (31.1) $ 49.7Technology 44.1 (14.2) 29.9 42.9 (11.6) 31.3Trademarks 13.3 (1.1) 12.2 13.3 (0.8) 12.5Other 8.7 (4.2) 4.5 7.8 (4.0) 3.8

Total $ 151.2 $ (57.5) $ 93.7 $ 144.8 $ (47.5) $ 97.3

Amortization expense of other intangible assets was $3.6 million and $4.3 million in the three months and $10.7 millionand $12.6 million in the nine months ended December 31, 2001 and 2000. At December 31, 2001, estimated futureamortization expense of other intangible assets is as follows: $3.7 million for the remaining quarter of 2002 and $14.7million, $14.4 million, $13.9 million, $10.0 million and $8.9 million in 2003, 2004, 2005, 2006 and 2007.

7. Short-Term Borrowings and Long-Term Debt

In October 2001, we renewed a 364-day revolving credit agreement that allows for borrowings of up to $1.075 billionunder terms substantially similar to those previously in place. The December 31, 2001 marketable securities balance includes $3.9 million held in trust as exchange property for ouroutstanding $6.4 million principal amount of 4.5% exchangeable subordinated debentures.

8. Convertible Preferred Securities

In February 1997, a wholly-owned subsidiary trust of McKesson Corporation issued 4 million shares of preferredsecurities to the public and 123,720 common securities to McKesson Corporation, which are convertible at the holder’soption into our common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregateprincipal amount of our 5% Convertible Junior Subordinated Debentures due in 2027 (the ‘‘Debentures’’). The Debenturesrepresent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payablequarterly, and are redeemable beginning in March 2001 at 103.0% of the principal amount thereof.

Holders of the securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of$50 per security. Each preferred security is convertible at the rate of 1.3418 shares of McKesson Corporation common stock,subject to adjustment in certain circumstances. If not converted, the preferred securities will be redeemed upon repayment ofthe Debentures, and are callable at 103.0% of the liquidation amount.

12


(Unaudited)

We have guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the‘‘Guarantee’’). The Guarantee, when taken together with our obligations under the Debentures, and in the indenturepursuant to which the Debentures were issued, and our obligations under the Amended and Restated Declaration of Trustgoverning the subsidiary trust, provides a full and unconditional guarantee of amounts due on the preferred securities.

The Debentures and related trust investment in the Debentures have been eliminated in consolidation and the preferredsecurities are reflected as outstanding in the accompanying condensed consolidated financial statements.

9. Comprehensive Income

Comprehensive income for the quarter and nine months ended December 31, 2001 and 2000 is as follows (in millions):


2001 2000 2001 2000

Net income $ 108.8 $ 1.7 $ 293.2 $ 127.2Unrealized gain (loss) on marketable securities and investments (0.5) 39.5 (5.7) 30.4Net gain (loss) on derivative instruments (0.6) - 0.7 - Foreign currency translation adjustments (0.7) 0.2 (4.5) (8.0) Comprehensive income $ 107.0 $ 41.4 $ 283.7 $ 149.6

10. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common sharesoutstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share exceptthat it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock wereexercised or converted into common stock.

The computations for basic and diluted earnings per share from continuing operations are as follows (in millions exceptper share amounts):


2001 2000 2001 2000

Income from continuing operations$

108.8$

7.3$

293.2$

132.8

Dividends on preferred securities of subsidiary trust 1.5 1.5 4.6 4.6Income from continuing operations – diluted

$110.3

$8.8

$297.8

$137.4

Weighted average common shares outstanding:Basic 285.6 283.4 284.9 283.0Effect of dilutive securities: Options to purchase common stock 7.7 5.9 8.3 3.6 Trust convertible preferred securities 5.4 5.4 5.4 5.4 Restricted stock 0.5 0.4 0.4 0.3Diluted 299.2 295.1 299.0 292.3

Earnings per share from continuing operations:

13

Basic$

0.38$

0.03$

1.03$

0.47

Diluted$

0.37$

0.03$

1.00$

0.47

14


(Unaudited)

11. Litigation

In light of a number of developments since the filing of our annual report on Form 10-K for the year ended March 31,2001, we are including the following comprehensive summary of litigation developments since that time:

Accounting Litigation

Since the announcements by McKesson Corporation, formerly known as McKesson HBOC, Inc. ("McKesson"), in April,May and July of 1999 that McKesson had determined that certain software sales transactions in its Information TechnologyBusiness unit (now referred to as the Information Solutions segment), formerly HBO & Company ("HBOC"), wereimproperly recorded as revenue and reversed, as of January 15, 2002, eighty-seven lawsuits have been filed againstMcKesson, HBOC, certain of McKesson's or HBOC's current or former officers or directors, and other defendants, includingBear Stearns & Co. Inc. and Arthur Andersen LLP.

Federal Actions

Sixty-six of these actions have been filed in Federal Court (the "Federal Actions"). Of these, sixty were filed in the U.S.District Court for the Northern District of California, one in the Northern District of Illinois, which has been voluntarilydismissed without prejudice, one in the Northern District of Georgia, which has been transferred to the Northern District ofCalifornia, one in the Eastern District of Pennsylvania, which has been transferred to the Northern District of California, twoin the Western District of Louisiana, which have been transferred to the Northern District of California, and one in theDistrict of Arizona, which has been transferred to the Northern District of California.

On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District of California issued an orderconsolidating fifty-three of these actions into one consolidated action entitled In re McKesson HBOC, Inc. SecuritiesLitigation (Case No. C-99-20743 RMW) (the "Consolidated Action"). By order dated December 22, 1999, Judge Whyteappointed the New York State Common Retirement Fund as lead plaintiff ("Lead Plaintiff") and approved Lead Plaintiff'schoice of counsel. Judge Whyte's November 2, 1999, order also provided that related cases transferred to the NorthernDistrict of California shall be consolidated with the Consolidated Action. Judge Whyte's December 22 order alsoconsolidated an individual action, Jacobs v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), with the Consolidated Action.On September 21, 2000, the plaintiffs in Jacobs filed an individual action in the Northern District of California entitledJacobs v. HBO & Company (Case No. C-00-20974 RMW), which has been consolidated with the Consolidated Action andwhich purports to state claims under Sections 11 and 12(2) of the Securities Act, Section 10(b) of the Exchange Act andvarious state law causes of action.

By order dated February 7, 2000, Judge Whyte coordinated a class action alleging claims under the Employee RetirementIncome Security Act (commonly known as "ERISA"), Chang v. McKesson HBOC, Inc. et al. (Case No. C-00-20030 RMW),and a shareholder derivative action that had been filed in the Northern District under the caption Cohen v. McCall et. al.,(Case No. C-99-20916 RMW) with the Consolidated Action. There has been no further significant activity in the Cohenaction. Recent developments in the Chang action are discussed below.

Lead Plaintiff filed an Amended and Consolidated Class Action Complaint (the "ACCAC") on February 25, 2000. TheACCAC generally alleged that defendants violated the federal securities laws in connection with the events leading toMcKesson's announcements in April, May and July 1999. On September 28, 2000, Judge Whyte dismissed all of theACCAC claims against McKesson under Section 11 of the Securities Act with prejudice, dismissed a claim under Section14(a) of the Exchange Act with leave to amend and declined to dismiss a claim against McKesson under Section 10(b) of theExchange Act.

On November 14, 2000, Lead Plaintiff filed its Second Amended and Consolidated Class Action Complaint ("SAC"). Aswith its ACCAC, Lead Plaintiff's SAC generally alleges that the defendants named therein violated the federal securitieslaws in connection with the events leading to McKesson's announcements in April, May and July 1999. The SAC namesMcKesson, HBOC, certain of McKesson's or HBOC's current or former officers or directors, Arthur Andersen and BearStearns as defendants. The SAC purports to state claims against McKesson and HBOC under Sections 10(b) and 14(a) of theExchange Act.

15


(Unaudited)

On January 7, 2002, Judge Whyte dismissed the claim against McKesson under Section 10(b) to the extent that claim wasbased on any pre-merger conduct or statements by McKesson, and also dismissed the claim against McKesson under Section14(a) of the Exchange Act, granting Lead Plaintiff thirty (30) days leave "for one last opportunity" to amend those claims.Judge Whyte dismissed the claim against HBOC under Section 14(a) of the Exchange Act without leave to amend. Section10(b) claims based on post-merger statements remain pending against McKesson, and Section 10(b) claims based on pre-merger statements remain pending against HBOC.

On January 11, 2001, McKesson filed an action in the U.S. District Court for the Northern District of California againstthe Lead Plaintiff in the Consolidated Action individually, and as a representative of a defendant class of former HBOCshareholders who exchanged HBOC shares for McKesson shares in the HBOC transaction, McKesson HBOC, Inc. v. NewYork State Common Retirement Fund, Inc. et al. (Case No. C01-20021 RMW) (the "Complaint and Counterclaim"). In theComplaint and Counterclaim, McKesson alleges that the exchanged HBOC shares were artificially inflated due toundisclosed accounting improprieties, and that the exchange ratio therefore provided more shares to former HBOCshareholders than would have otherwise been the case. In this action, McKesson seeks to recover the "unjust enrichment"received by those HBOC shareholders who exchanged more than 20,000 HBOC shares in the HBOC transaction. McKessondoes not allege any wrongdoing by these shareholders. On January 9, 2002, Judge Whyte dismissed the Complaint andCounterclaim with prejudice.

Two other individual actions, Bea v. McKesson HBOC, Inc., et al. (Case No. C-0020072 RMW), and Cater v. McKessonCorporation et al., (Case No. C-00-20327 RMW), have also been filed in the Northern District of California. By stipulation,Bea has been consolidated with the Consolidated Action and Cater has been stayed pending resolution of McKesson'smotions to dismiss the consolidated complaint. One other individual action, Baker v. McKesson HBOC, Inc. et al., (Case No.CV 00-0188) was filed in the U.S. District Court for the Western District of Louisiana. McKesson moved to transfer Baker tothe Northern District of California, together with a parallel state court action, Baker v. McKesson HBOC, Inc. et al., (filed asCase No. 199018; Case No. CV-00-0522 after removal), which had been removed to federal court. Both of the Baker caseshave been transferred to the Northern District of California where they have been consolidated with the Consolidated Action.An additional action, Rosenberg v. McCall et al. (Case No. 1:99-CV-1447 JEC) was filed in the Northern District of Georgiaand subsequently transferred to the Northern District of California, but that action names only two former officers and doesnot name McKesson or HBOC. On July 24, 2000, an action captioned Hess v. McKesson HBOC, Inc. et al., was filed in statecourt in Arizona (Case No. C-20003862) on behalf of former shareholders of Ephrata Diamond Spring Water Company("Ephrata") who acquired McKesson shares in exchange for their Ephrata stock when McKesson acquired Ephrata in January1999. On August 24, 2000, McKesson removed the Hess action to the United States District Court for the District ofArizona, and on March 28, 2001, the District Court in Arizona granted McKesson's motion to transfer the case to theNorthern District of California. On April 20, 2001, the Hess plaintiffs filed an objection to consolidation of the Hess actionwith the Consolidated Action which McKesson opposed. By order dated November 1, 2001, Judge Whyte overruled the Hessplaintiffs' objection to consolidation and ordered Hess consolidated with the Consolidated Action for pretrial purposes. JudgeWhyte also stayed all further proceedings in Hess except for the filing of an amended complaint. The Hess plaintiffs filedtheir amended complaint on or about December 15, 2001 (the "Hess Amended Complaint"). The Hess Amended Complaintgenerally incorporated the allegations and claims asserted in Lead Plaintiff's SAC in the Consolidated Action and alsoincluded various common law causes of action relating to McKesson's acquisition of Ephrata. The Company is not currentlyrequired to respond to the Hess Amended Complaint.

On June 28, 2001, the Chang plaintiffs filed an amended complaint against McKesson, HBOC, certain current or formerofficers or directors of McKesson or HBOC, and The Chase Manhattan Bank. The amended complaint in Chang generallyalleges that the defendants breached their fiduciary duties in connection with administering the McKesson HBOC ProfitSharing Investment Plan (the "PSI Plan") and the HBOC Profit Sharing and Savings Plan (the "HBOC Plan"). The amendedcomplaint adds two new plaintiffs, both of whom are alleged to be former employees of McKesson and participants in thePSI Plan, and purportedly seeks relief under sections 404-405, 409 and 502 of ERISA on behalf of a class defined to includeparticipants in the PSI Plan, including participants under the HBOC Plan, who maintained an account balance under the PSIPlan as of April 27, 1999, and who had not received a distribution from the PSI Plan as of April 27, 1999, and who sufferedlosses as a result of the alleged breaches of duty. On October 12, 2001, McKesson, HBOC and Chase moved to dismiss theChang action. Plaintiffs filed their opposition on December 14, 2001. McKesson's motion to dismiss is currently set forhearing on February 15, 2002, but the parties have agreed to continue the hearing until March 8, 2002, subject to courtapproval.

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(Unaudited)

Finally, on July 27, 2001, an action was filed in the United States District Court for the Northern District of Californiacaptioned Pacha, et al., v. McKesson HBOC, Inc., et al., (No. C01-20713 PVT) ("Pacha"). The Pacha plaintiffs allege thatthey were individual shareholders of McKesson stock on November 27, 1998, and assert that McKesson and HBOC violatedSection 14(a) of the Exchange Act and SEC Rule 14a-9, and that McKesson, aided by HBOC, breached its fiduciary duties toplaintiffs by issuing a joint proxy statement in connection with the McKesson-HBOC merger which allegedly contained falseand misleading statements or omissions. Plaintiffs name as defendants McKesson, HBOC, certain current or former officersor directors of McKesson or HBOC, Arthur Andersen and Bear Stearns. The action has been assigned to the HonorableRonald M. Whyte, the judge overseeing the Consolidated Action. On September 25, 2001, the Pacha plaintiffs filed anapplication with the Court requesting that their action not be consolidated with the Consolidated Action. McKesson andHBOC filed an opposition to that application on October 3, 2001, and on November 13, 2001, Judge Whyte ordered Pachaconsolidated with the Consolidated Action and stayed all further proceedings.

State Actions

Twenty-one actions have also been filed in various state courts in California, Colorado, Delaware, Georgia, Louisiana andPennsylvania (the "State Actions"). Like the Consolidated Action, the State Actions generally allege misconduct by thedefendants in connection with the events leading to McKesson's need to restate HBOC's financial statements.

Two of the State Actions are derivative actions: Ash, et al. v. McCall, et al., (Case No. 17132), filed in the DelawareChancery Court and Mitchell v. McCall et al., (Case. No. 304415), filed in California Superior Court, City and County ofSan Francisco. McKesson moved to dismiss both of these actions and to stay the Mitchell action in favor of the earlier filedAsh and Cohen derivative actions. Plaintiffs in Mitchell agreed to defer any action by the court on McKesson's motionspending resolution of McKesson's dismissal motion in Ash. On September 15, 2000, the Ash court dismissed all causes ofaction with leave to replead certain of the dismissed claims, and on January 22, 2001, the Ash plaintiffs filed a ThirdAmended Complaint which is presently the subject of McKesson's motion to dismiss.

Five of the State Actions are class actions. Three of these were filed in Delaware Chancery Court: Derdiger v. Tallman etal., (Case No. 17276), Carroll v. McKesson HBOC, Inc., (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et al.,(Case No. 17282 NC). Two additional actions were filed in Delaware Superior Court: Edmondson v. McKesson HBOC, Inc.,(Case No. 99-951) and Caravetta v. McKesson HBOC, Inc., (Case No. 00C-04-214 WTQ). The Carroll and Kelly actionshave been voluntarily dismissed without prejudice. McKesson has removed Edmondson to Federal Court in Delaware whereplaintiffs have filed a motion to remand, which is pending. McKesson's motions to stay the Derdiger and Caravetta actions infavor of proceedings in the federal Consolidated Action have been granted. The plaintiff in the Derdiger action has filed amotion to vacate the stay, but the motion has not yet been briefed or heard by the Court.

Fourteen of the State Actions are individual actions which have been filed in various state courts. Four of these were filedin the California Superior Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al.,(Case No.303857), The State of Oregon by and through the Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. etal., (Case No. 307619), Utah State Retirement Board v. McKesson HBOC, Inc. et al., (Case No. 311269), and MinnesotaState Board of Investment v. McKesson HBOC, Inc. et al., (Case No. 311747). In Yurick, the trial court sustainedMcKesson's demurrer to the original complaint without leave to amend with respect to all causes of action, except the claimsfor common law fraud and negligent misrepresentation as to which amendment was allowed. The Court also stayed Yurickpending the commencement of discovery in the Consolidated Action, but allowed the filing of an amended complaint. OnMay 23, 2001, the California Court of Appeals affirmed the Yurick trial court's order dismissing claims against certain of theindividual defendants in the action without leave to amend. On July 31, 2001, McKesson's demurrer to the Second AmendedComplaint was overruled and McKesson's alternative motion to strike was denied.

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The Oregon, Utah and Minnesota actions referenced above are individual securities actions filed in the CaliforniaSuperior Court for the City and County of San Francisco by out-of-state pension funds. On April 20, 2001, plaintiffs in Utahand Minnesota filed amended complaints against McKesson, HBOC, certain current or former officers or directors ofMcKesson or HBOC, Arthur Andersen and Bear Stearns. The amended complaints in Utah and Minnesota assert claimsunder California's and Georgia's securities laws, claims under Georgia's RICO statute, and various common law claims underCalifornia and Georgia law. On June 22, 2001, McKesson and HBOC demurred to and moved to strike portions of theamended complaints and also moved to stay these actions pending the final resolution of the Consolidated Action. The courtheld partial hearings on McKesson's demurrers and motions to strike on November 15, 2001, and on January 29, 2002, and iscurrently scheduling further hearings. By order dated December 3, 2001, the court denied McKesson's motion to stay butordered that all discovery in the Utah and Minnesota actions would be stayed pending the commencement of discovery in theConsolidated Action. On May 30, 2001, plaintiffs in Oregon filed a second amended complaint against McKesson, HBOC, certain current orformer officers or directors of McKesson or HBOC, and Arthur Andersen. The second amended complaint in Oregon assertsclaims under California's and Georgia's securities laws, claims under Georgia's RICO statute, and various common lawclaims under California and Georgia law. The parties to the Oregon action previously agreed to a stay of all proceedings inthat action, other than motions to test the sufficiency of the pleadings, pending the commencement of discovery in theConsolidated Action. On April 4, 2001, the plaintiff in Oregon filed a motion to lift the stipulated stay of discovery, whichMcKesson and HBOC opposed. McKesson also moved the court for an order modifying the stipulated stay to stay allproceedings in the action pending the final resolution of the Consolidated Action. Also on June 22, 2001, McKesson andHBOC demurred to and moved to strike portions of Oregon's second amended complaint. The court held partial hearings onMcKesson's demurrers and motions to strike on November 15, 2001, and January 29, 2002, and is currently schedulingfurther hearings. To our knowledge, the court has not issued a written order on Oregon's motion to lift the stipulated stay orMcKesson and HBOC's motion to modify the stipulated stay. However, it is our understanding that, at the November 15,2001, hearing, the court stayed all discovery in the Oregon action pending the commencement of discovery in theConsolidated Action.

Several individual actions have been filed in various state courts outside of California. Six of these cases have been filedin Georgia state courts: Moulton v. McKesson HBOC, Inc. et al., (Case No. 98-13176-9), involving a former HBOCemployee's claims for unpaid commissions, claims under Georgia's securities and racketeering laws, as well as variouscommon law causes of action, has been settled and dismissed with prejudice. Powell v. McKesson HBOC, Inc. et al., (CaseNo. 2000-CV-27864), involving a former HBOC employee's claims for unpaid commissions, claims under Georgia'ssecurities and racketeering laws, as well as various common law causes of action has been settled in principle. On December12, 2001, an action was filed in Georgia State Court in Fulton County captioned: Drake v. McKesson Corporation et al., (No.01VS026303A). Drake is an action by a former HBOC employee for unpaid commissions and includes common law claimsand claims under Georgia's securities and racketeering laws. The Company's response to the Drake complaint is due onFebruary 15, 2002. In Adler v. McKesson HBOC, Inc. et al., (Case No. 99-C-7980-3), a former HBOC shareholder asserts aclaim for common law fraud. The Georgia Court of Appeals has granted interlocutory review of a discovery order issued inAdler. At this time discovery is underway. There is no currently scheduled trial date. Suffolk Partners Limited Partnership etal. v. McKesson HBOC, Inc. et al., (Case No.00-VS-010469A) and Curran Partners, L.P. v. McKesson HBOC, Inc. etal.,(Case No. 00-VS-010801) are related actions brought on behalf of individual shareholders and assert claims based onGeorgia securities and racketeering laws and common law claims. McKesson and HBOC's motion to stay both the Suffolkand Curran actions in favor of proceedings in the federal Consolidated Action has been granted.

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(Unaudited)

Three individual state court cases have been filed in Delaware, Pennsylvania or Colorado. Grant v. McKesson HBOC,Inc., (C.A. No. 99-03978) was filed on May 12, 1999 in the Pennsylvania Court of Common Pleas, Chester County. TheGrant case relates to McKesson's acquisition of Keystone/Ozone Pure Water Company ("Keystone"). Plaintiffs are formershareholders of Keystone who received McKesson shares in exchange for their shares in Keystone pursuant to a mergeragreement between plaintiffs and one of McKesson's subsidiaries consummated shortly before the HBOC transaction. OnMarch 6, 2001, the Court denied McKesson's motion to stay and dismissed with prejudice all plaintiffs' claims except forthose based on breach of contract and negligent misrepresentation. A settlement in principle has been reached in Grant whichwill have no material impact on the Company. On September 28, 1999, an action was filed in Delaware Superior Court underthe caption Kelly v. McKesson HBOC, Inc. et al., (C.A. No. 99C-09-265 WCC). Plaintiffs in Kelly are former shareholdersof KWS&P/ SFA, which merged into McKesson after the HBOC transaction. Plaintiffs assert claims under the federalsecurities laws, as well as claims for breach of contract and breach of the duty of good faith and fair dealing. On January 17,2002, the court issued a decision in Kelly denying the plaintiffs' motion for partial summary judgment and denyingMcKesson's motion to dismiss the complaint for failure to state a claim. On October 19, 1999, an individual action was filedin Colorado District Court, Boulder County, under the caption American Healthcare Fund II v. HBO & Company et al.,(Case No. 00-CV-1762). American Healthcare involved contract and interference with contract claims brought againstMcKesson and HBOC by certain former shareholders of Access Health Inc., a company acquired by HBOC in December of1998. American Healthcare has been settled and was dismissed with prejudice on October 24, 2001, and that resolution hadno material impact on the Company.

The United States Attorneys' Office and the Securities and Exchange Commission have commenced investigations intothe matters leading to the restatement. On May 15, 2000, the United States Attorney's Office filed a one-count informationagainst former HBOC officer, Dominick DeRosa, charging Mr. DeRosa with aiding and abetting securities fraud, and onMay 15, 2000, Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an indictment was unsealed in theNorthern District of California against former HBOC officer, Jay P. Gilbertson, and former McKesson and HBOC officer,Albert J. Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). On that same date, a civil complaint was filedby the Securities and Exchange Commission against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa (Securities andExchange Commission v. Gilbertson, et al., Case No. C-00-3570). Mr. DeRosa has settled with the Securities ExchangeCommission without admitting or denying the substantive allegations of the complaint. On January 10, 2001, the grand juryreturned a superseding indictment in the Northern District of California against Messrs. Gilbertson and Bergonzi (UnitedStates v. Bergonzi, et al., Case No. CR-00-0505). On September 27, 2001, the Securities and Exchange Commission filedsecurities fraud charges against six former HBOC officers and employees. Simultaneous with the filing of the Commission'scivil complaints, four of the six defendants settled the claims brought against them by, among other things, consenting,without admitting or denying the allegations of the complaints, to entry of permanent injunctions against all of the allegedviolations, and agreed to pay civil penalties in various amounts. On January 3, 2002, McKesson was notified in writing bythe Staff of the Securities and Exchange Commission that its investigation of McKesson has been terminated, and that noenforcement action with respect to McKesson has been recommended to the Commission.

We do not believe it is feasible to predict or determine the outcome or resolution of the accounting litigation proceedings,or to estimate the amounts of, or potential range of, loss with respect to the above-mentioned proceedings. In addition, thetiming of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings couldinclude judgments against McKesson or HBOC or settlements that could require substantial payments by McKesson orHBOC, which could have a material adverse impact on McKesson's financial position, results of operations and cash flows.

Other Litigation and Claims

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, otherpending and potential legal actions for product liability and other damages, investigations relating to governmental laws andregulations and other matters arising out of the normal conduct of our business. These include:

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(Unaudited)

Antitrust Matters

We are currently a defendant in numerous civil antitrust actions filed since 1993 in federal and state courts by retailpharmacies. The federal cases were coordinated for pretrial purposes in the United States District Court in the NorthernDistrict of Illinois and are known as MDL 997. MDL 997 consists of approximately 109 actions brought by approximately3,500 individual retail, chain and supermarket pharmacies (the "Individual Actions"). In 1999, the court dismissed a relatedclass action following a judgment as a matter of law entered in favor of defendants which was unsuccessfully appealed.There are numerous other defendants in these actions including several pharmaceutical manufacturers and several otherwholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to fixthe prices of brand name pharmaceuticals sold to plaintiffs at artificially high, and non-competitive levels, especially ascompared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. Thewholesalers' motion for summary judgment in the Individual Actions has been granted.

Plaintiffs have appealed to the Seventh Circuit. Most of the individual cases brought by chain stores have been settled.The Judicial Panel on Multidistrict Litigation recommended remand of the Sherman Act claims in MDL 997 and onNovember 2, 2001, the court remanded those claims to their original jurisdictions.

State court antitrust cases against us are currently pending in California and Mississippi. The state cases are based onessentially the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrustand/or unfair competition laws. The case (Paradise Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was filedin the Superior Court of the County of Santa Clara and was transferred to the Superior Court for the County of SanFrancisco. The case is trailing MDL 997. The case in Mississippi (Montgomery Drug Co., et al. v. The Upjohn Co., et al.) ispending in the Chancery Court of Prentiss County Mississippi. The Chancery Court has held that the case may not bemaintained as a class action.

In each of the cases, plaintiffs seek remedies in the form of injunctive relief and unquantified monetary damages,attorneys' fees and costs. Plaintiffs in the California cases also seek restitution. In addition, treble damages are sought in theIndividual Actions and the California case. We and other wholesalers have entered into a judgment sharing agreement withcertain pharmaceutical manufacturer defendants, which provides generally that we, together with the other wholesaledistributor defendants, will be held harmless by such pharmaceutical manufacturer defendants and will be indemnifiedagainst the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excessof $1 million in the aggregate per wholesale distributor defendant.

FoxMeyer Litigation

In January 1997, we and twelve pharmaceutical manufacturers (the "Manufacturer Defendants") were named asdefendants in the matter of FoxMeyer Health Corporation vs. McKesson, et al. (Case No. 97 00311) filed in the DistrictCourt in Dallas County, Texas (the "Texas Action"). Plaintiff, now known as Avatex Corporation ("Avatex"), was the parentcorporation of FoxMeyer Drug Company, FoxMeyer Corporation and certain other subsidiaries (collectively "FoxMeyerCorporation") which, in August 1996, filed bankruptcy petitions in the United States Bankruptcy Court for the District ofDelaware (the "Delaware court"). In November 1996, we acquired substantially all of the assets of FoxMeyer Corporation ina sale approved by the Delaware court.

In the Texas Action, Avatex alleged, among other things, that we (1) defrauded Avatex, (2) competed unfairly andtortiously interfered with FoxMeyer Corporation's business operations, and (3) conspired with the Manufacturer Defendants,all in order to destroy FoxMeyer Corporation's business, restrain trade and monopolize the marketplace, and allow us topurchase that business at a distressed price. Avatex sought compensatory damages of at least $400 million, punitivedamages, attorneys' fees and costs. We removed the case to bankruptcy court in Dallas and moved to transfer it to theDelaware court.

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(Unaudited)

In March 1997, we and the Manufacturer Defendants intervened in an action filed by the FoxMeyer Unsecured CreditorsCommittee in the Delaware court to enjoin Avatex from pursuing the Texas Action (the "Delaware Actions"). The complaintin intervention sought declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In May 1997, atrustee (the "Trustee") was appointed in the FoxMeyer Corporation bankruptcy cases, and he then intervened as a plaintiff inthe Texas Action, asserting that if there was any recovery in that action, it belonged to FoxMeyer Corporation, not Avatex.Thereafter, we answered Avatex's complaint, denied the allegations and filed counterclaims against Avatex, FoxMeyerCorporation and the Trustee, and third party claims against certain officers and directors of Avatex, asserting various claimsof misrepresentation and breach of contract.

In November 1998, the Delaware court granted our motion for summary judgment to preclude Avatex from pursuing thefirst three counts asserted in the Texas Action on the ground of judicial estoppel. We filed a renewed motion for summaryjudgment to preclude the four remaining counts of Avatex's complaint in the Texas Action which was denied withoutprejudice by the Delaware court on August 9, 1999. In addition, we filed cross-claims against FoxMeyer Corporation and theTrustee seeking the same relief as sought in our complaint against Avatex. Based on the Delaware court's order grantingsummary judgment as to the first three counts, the Texas bankruptcy court dismissed those counts with prejudice and orderedthe Texas Action remanded to state court. We and the Manufacturer Defendants appealed the remand ruling, as well as anAugust 1997 ruling denying defendants' motion to transfer the Texas Action to Delaware, to the federal district court, and

Avatex cross-appealed the order dismissing the first three counts with prejudice. The federal district court upheld theremand order and denied as moot the appeal from the order denying transfer on May 17, 1999, and affirmed the orderdismissing the first three counts with prejudice on March 28, 2001. We and several of the other defendants appealed to thefederal court of appeals the ruling upholding the order denying transfer but subsequently moved to dismiss the appeal withprejudice, which motion was granted and the appeal was dismissed on October 4, 1999. Avatex appealed to the federal courtof appeals the ruling affirming the Texas bankruptcy court's dismissal with prejudice of the first three counts of Avatex'scomplaint.

As a result, the Texas Action was pending in Texas state court. All of the Manufacturer Defendants settled with Avatex.On February 28, 2001, we settled with the Trustee resulting in a mutual release of all claims asserted in the Delawarelitigation and the Texas Action between us and FoxMeyer Corporation. On April 26, 2001, our settlement with the Trusteewas approved by the Delaware bankruptcy court. Avatex amended its complaint to add claims for unjust enrichment andconstructive trust seeking damages of at least $700 million, and we denied the allegations underlying these claims. We filedtwo dispositive motions seeking the dismissal of the remaining claims asserted by Avatex. After completing discovery on themerits of the various claims remaining in the Texas Action, we and Avatex settled all claims on December 6, 2001. TheDelaware Action and the Texas Action have been dismissed with prejudice, and the settlements will have no material impacton the Company.

Product Liability Litigation

We have been named as a defendant, or have received from customers tenders of defense, in thirteen pending casesalleging injury due to the diet drug combination of fenfluramine or dexfenfluramine and phentermine. All of the cases arepending in the state courts of California and New Jersey. Our tender of the cases to the manufacturers of the drugs has beenaccepted and the manufacturer is paying for counsel and fully indemnifying us for judgments or settlements arising from ourdistribution of the manufacturer's products.

Certain of our subsidiaries, MGM and RedLine, are two of the defendants in approximately ninety cases in whichplaintiffs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured bynumerous manufacturers and distributed by a number of distributors, including MGM and RedLine. Efforts to resolvetenders of defense to their suppliers are continuing and a tentative final agreement has been reached with one major supplier.MGM and RedLine's insurers are providing coverage for these cases, subject to the applicable deductibles.

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(Unaudited)

There is one remaining state court class action in South Carolina filed against MGM on behalf of all health care workersin that state who suffered accidental needle sticks that exposed them to potentially contaminated bodily fluids, arising fromMGM's distribution of allegedly defective syringes. MGM's suppliers of the syringes are also named defendants in thisaction. The tender of all cases has been accepted by the two major suppliers. By this acceptance, these suppliers are payingfor separate distributors' counsel and have agreed to fully indemnify us for any judgments in these cases arising from itsdistribution of their products.

We, along with 134 other companies, have been named in a lawsuit brought by the Lemelson Medical, Educational &Research Foundation ("the Foundation") alleging that we and our subsidiaries are infringing seven U.S. patents relating tocommon bar code scanning technology and its use for the automated management and control of product inventory,warehousing, distribution and point-of-sale transactions. The Foundation seeks to enter into a license agreement with us, thelump sum fee for which would be based upon a fraction of a percent of our overall revenues over the past ten years. Due tothe pendency of earlier litigation brought against the Foundation attacking the validity of the patents at issue, the court hasstayed the action until the conclusion of the earlier case.

Environmental Matters

Primarily as a result of the operation of our former chemical businesses, which were divested in fiscal 1987, we areinvolved in various matters pursuant to environmental laws and regulations. We have received claims and demands fromgovernmental agencies relating to investigative and remedial action purportedly required to address environmental conditionsalleged to exist at five sites where we, or entities acquired by us, formerly conducted operations; and we, by administrativeorder or otherwise, have agreed to take certain actions at those sites, including soil and groundwater remediation.

Based on a determination by our environmental staff, in consultation with outside environmental specialists and counsel,the current estimate of reasonably possible remediation costs for these five sites is approximately $13 million, net ofapproximately $1.5 million which third parties have agreed to pay in settlement or which we expect, based either onagreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $13 million is expectedto be paid out between April 2001 and March 2029. Our liability for these environmental matters has been accrued in theaccompanying condensed consolidated balance sheets.

In addition, we have been designated as a potentially responsible party, or PRP, under the Comprehensive EnvironmentalResponse Compensation and Liability Act of 1980 (as amended, the "Superfund" law or its state law equivalent) forenvironmental assessment and cleanup costs as the result of our alleged disposal of hazardous substances at 21 sites. Withrespect to each of these sites, numerous other PRPs have similarly been designated and, while the current state of the lawpotentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared withother PRPs. Our estimated liability at those 21 PRP sites is approximately $1.5 million. The aggregate settlements and costspaid by us in Superfund matters to date have not been significant. The accompanying condensed consolidated balance sheetsincludes this environmental liability.

The potential costs to us related to environmental matters is uncertain due to such factors as: the unknown magnitude ofpossible pollution and cleanup costs; the complexity and evolving nature of governmental laws and regulations and theirinterpretations; the timing, varying costs and effectiveness of alternative cleanup technologies; the determination of ourliability in proportion to other PRPs; and the extent, if any, to which such costs are recover able from insurance or otherparties.

Except as specifically stated above with respect to the litigation matters summarized under "Accounting Litigation"above, we believe, based on current knowledge and the advice of our counsel, that the outcome of the litigation andgovernmental proceedings discussed under "Legal Proceedings" will not have a material adverse effect on our financialposition, results of operations or cash flows.

22

McKESSON CORPORATIONFINANCIAL NOTES - (Concluded)

(Unaudited)

12. Segment Information

Our operating segments include Supply Solutions and Information Solutions. We evaluate the performance of ouroperating segments based on operating profit before interest expense, income taxes and results from discontinued operations.Corporate revenues and expenses are allocated to the operating segments to the extent that these items can be directlyattributable to the segment.

Financial information relating to our reportable segments for the quarter and nine months ended December 31, 2001 and2000, is presented below (in millions):


2001 2000 2001 2000

Revenues Supply Solutions Revenues excluding sales to customers’ warehouses $ 9,382.3 $ 7,778.0 $ 26,367.2 $ 22,213.9 Revenues to customers’ warehouses 3,567.7 3,015.1 9,915.7 7,715.7 Total 12,950.0 10,793.1 36,282.9 29,929.6 Information Solutions 246.1 224.3 725.2 669.5 Corporate 0.6 0.4 1.8 1.8 Total $ 13,196.7 $ 11,017.8 $ 37,009.9 $ 30,600.9

Operating profit Supply Solutions $ 223.9 $ 168.0 $ 596.7 $ 477.6 Information Solutions 15.1 1.3 18.6 3.9 Total 239.0 169.3 615.3 481.5 Corporate (42.0) (126.6) (116.3) (170.5) Interest expense (27.2) (28.3) (81.2) (84.4) Income from continuing operations before income taxes $ 169.8 $ 14.4 $ 417.8 $ 226.6

Special income (charges) Supply Solutions $ - $ (1.7) $ (25.1) $ 3.3 Information Solutions - (0.4) (20.6) (2.5) Corporate (4.5) (99.6) (8.0) (100.3) Total $ (4.5) $ (101.7) $ (53.7) $ (99.5)

13. Subsequent Events

On January 24, 2002, we completed a public offering of $400.0 million of 7.75 % unsecured notes, due in 2012. Thesenotes are redeemable at any time, in whole or in part, at our option. Net proceeds of $395.3 million from the issuance ofthese notes will be used to repay term debt and for other general corporate purposes.

On January 30, 2002, our Supply Solutions segment acquired a national specialty pharmacy business that provides mailorder pharmaceutical prescription services to managed care patients for approximately $62 million in cash.

23

McKESSON CORPORATION FINANCIAL REVIEW

(Unaudited)

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Financial Overview


(In millions, except per share data) 2001 2000 2001 2000

Revenues, excluding sales to customers warehouses (1) $ 9,629.0 $ 8,002.7 $ 27,094.2 $ 22,885.2As reported – U.S. GAAP (2) Operating profit 239.0 169.3 615.3 481.5 Net income 108.8 1.7 293.2 127.2 Diluted earnings per share 0.37 0.01 1.00 0.45Pro forma (2), (3) Operating profit 239.0 171.4 661.0 480.7 Net income 111.7 69.3 297.3 194.3 Diluted earnings per share 0.38 0.24 1.01 0.68

(1) Excludes sales to customers' warehouses of $3,567.7 million and $3,015.1 million for the quarters ended December 31, 2001 and2000, and $9,915.7 million and $7,715.7 million for the nine months ended December 31, 2001 and 2000.

(2) Fiscal 2002 results exclude goodwill amortization in accordance with our adoption of Statement of Financial Accounting Standards(SFAS) No. 142, "Goodwill and Other Intangible Assets." For the quarter ended December 31, 2000, pre-tax goodwill amortizationwas $12.8 million ($12.0 million after-tax), or $0.04 per diluted share. For the nine months ended December 31, 2000, pre-taxgoodwill amortization was $36.4 million ($34.0 million after-tax), or $0.12 per diluted share.

(3) Pro forma financial data excludes the impact of special charges and discontinued operations. See pages 24 & 25 for furtherdiscussions on these items.

As reported under U.S. generally accepted accounting principles (GAAP), net income increased to $108.8 million from$1.7 million in the third quarter and to $293.2 million from $127.2 million in the nine months ended December 31, 2001 and2000. Diluted earnings per share increased to $0.37 from $0.01 in the third quarter and to $1.00 from $0.45 in the nine monthsended December 31, 2001 and 2000.

We also provide pro forma financial data as an alternative for understanding our results as we believe such discussion is themost informative representation of recurring and non-recurring, non-transactional related operating results. These measures arenot in accordance with, or an alternative for, GAAP and may be different from pro forma measures used by other companies.

Our earnings per diluted share before special charges (pro forma) and discontinued operations increased 58% in the thirdquarter ended December 31, 2001, on a 20% increase in revenues, to $9.6 billion, excluding sales to customers’ warehouses.We had net income before special charges of $111.7 million or $0.38 per diluted share in the quarter, compared to netincome before special charges and discontinued operations of $69.3 million or $0.24 per diluted share in the third quarter ayear ago.

On a year-to-date basis, our earnings per diluted share before special charges and discontinued operations increased 49%for the first nine months of fiscal 2002, on an 18% increase in revenues, to $27.1 billion, excluding sales to customers’warehouses. We had net income before special charges of $297.3 million or $1.01 per diluted share in the nine months,compared to net income before special charges and discontinued operations of $194.3 million or $0.68 per diluted share inthe nine month period a year ago. The improved operating results for the quarter and the nine months ended December 31, 2001, resulted primarily fromcontinued strong revenue growth and operating margin expansion in our Supply Solutions segment, improved operatingprofit in our Information Solutions segment, discontinuance of goodwill amortization in accordance with SFAS No. 142 anda decrease in the amount of special charges. U.S. pharmaceutical revenues also included an extra selling day in the thirdquarter this year.

24

McKESSON CORPORATIONFINANCIAL REVIEW – (Continued)

(Unaudited)

Results of Operations

RevenuesQuarter Ended Nine Months EndedDecember 31, December 31,

(In millions, except per share amounts) 2001 2000 2001 2000Supply Solutions

Pharmaceutical Distribution & ServicesU.S. Health Care (1) $ 11,436.3 $ 9,390.9 $ 31,857.8 $ 25,817.6International 757.6 691.6 2,184.6 1,967.4

Total Pharmaceutical Distribution & Services 12,193.9 10,082.5 34,042.4 27,785.0Medical-Surgical Distribution & Services 756.1 710.6 2,240.5 2,144.6

Total Supply Solutions 12,950.0 10,793.1 36,282.9 29,929.6Information Solutions

Software 37.8 28.3 125.4 88.1Services 185.2 174.5 543.8 525.1Hardware 23.1 21.5 56.0 56.3

Total Information Solutions 246.1 224.3 725.2 669.5Corporate 0.6 0.4 1.8 1.8

Total $ 13,196.7 $ 11,017.8 $ 37,009.9 $ 30,600.9

(1) Includes warehouse sales of $3,567.7 million and $3,015.1 million in the three months ended December 31, 2001 and 2000, and$9,915.7 million and $7,715.7 million in the nine months ended December 31, 2001 and 2000.

Our revenues increased $2.2 billion, or 20%, to $13.2 billion for the third quarter of 2002 as compared to $11.0 billion inthe third quarter of 2001. For the nine months ended December 31, 2001, revenues increased $6.4 billion, or 21%, to $37.0billion from $30.6 billion for the comparable period in fiscal 2001. The increase in revenue was primarily driven by growthin our Supply Solutions segment, which accounts for 98% of our consolidated revenues. As noted earlier, U.S.pharmaceutical revenues also included an extra selling day in the third quarter this year.

For the quarter and nine months ended December 31, 2001, our Supply Solutions segment had revenues of $13.0 billionand $36.3 billion, or increases of 20% and 21% compared to a year ago. Revenues for our Pharmaceutical Distribution &Services business increased by 21% to $12.2 billion in the quarter and 23% to $34.0 billion in the nine-month period. Thisincrease reflects greater sales to customers’ warehouses, improved growth rates from a number of our largest U.S. retail drugchain customers, the impact of new distribution agreements in the U.S. which took full effect in the prior quarters of fiscal2002, and a 10% growth in our Canadian business.

Medical-Surgical Distribution & Services revenues increased 6% to $756.1 million in the quarter and 4% to $2,240.5million in the nine-month period, reflecting increased revenue growth for out primary and extended care products.

Our Information Solutions segment revenues increased 10% to $246.1 million compared to $224.3 million in the prioryear third quarter and 8% to $725.2 million from $669.5 million in the prior year nine-month period. This increase waslargely due to several new contracts for our Horizon Clinicals product, which was launched in July of 2001. Our HorizonClinicals product is designed to provide an integrated clinical repository, common architecture and the advancedfunctionality required to support clinicians in providing high-quality, cost-effective patient care across multiple care settings.

25


(Unaudited)

As of December 31, 2001, this segment’s backlog, which includes firm contracts for maintenance fees, implementationand software contracts, and outsourcing agreements, increased to $2.0 billion from $1.4 billion a year ago. The increase inbacklog resulted primarily from a recently signed ten-year $480 million outsourcing contract to provide a standardized, fullyautomated human resources and payroll system for the National Health Service of England and Wales coveringapproximately one million employees.

Operating Profit: Quarter Ended Nine Months EndedDecember 31, December 31,

(In millions) 2001 2000 2001 2000Operating profit – U.S. GAAP (1)

Supply Solutions $ 223.9 $ 168.0 $ 596.7 $ 477.6 Information Solutions 15.1 1.3 18.6 3.9

Total $ 239.0 $ 169.3 $ 615.3 $ 481.5Pro forma operating profit (1)

Supply Solutions $ 223.9 $ 169.7 $ 621.8 $ 474.3 Information Solutions 15.1 1.7 39.2 6.4

Total $ 239.0 $ 171.4 $ 661.0 $ 480.7

(1) Fiscal 2002 results exclude goodwill amortization in accordance with our adoption of SFAS No. 142, "Goodwill and Other IntangibleAssets." For the quarter and nine months ended December 31, 2000, pre-tax goodwill amortization was $12.8 million and $36.4million.

Operating profit, as reported under U.S. GAAP, was $239.0 million for the quarter ended December 31, 2001 comparedto $169.3 million for the third quarter of the prior fiscal year. For the nine months ended December 31, 2001, operatingprofit was $615.3 million compared to $481.5 million for the comparable prior year period.

The discussion of our operating profits and corporate expenses that follows focuses on our results excluding specialcharges. These charges are discussed in detail commencing on page 24.

Supply Solutions Segment: Operating profit increased $54.2 million or 32% to $223.9 million in the quarter and $147.5million or 31% to $621.8 million in the first nine months of fiscal 2002. Operating profit as a percent of revenues (excludingwarehouse sales) increased 21 basis points to 2.39% in the third quarter and 22 basis points to 2.36% for the nine monthscompared to the prior year period. Excluding goodwill amortization, operating profit as a percentage of revenues was 2.27%and 2.23%, or an increase of 27% and 26%, in the quarter and nine months ended December 31, 2000. The increase in theoperating margin reflects productivity improvements in both back-office and field operations, expanded product sourcingactivities, as well as the benefit from increased penetration of our generic drug offerings.

Information Solutions Segment: Operating profit increased $13.4 million to $15.1 million in the quarter and $32.8 millionto $39.2 million in the first nine months of fiscal 2002. Operating profit as a percent of revenues increased 538 basis pointsto 6.14% in the third quarter and 445 basis points to 5.41% for the nine months compared to the prior year period. Excludinggoodwill amortization, operating profit as a percentage of revenue was 3.48% and 3.38% in the quarter and nine monthsended December 31, 2000. Increases over the prior year periods are primarily the result of the increase in higher marginsoftware revenue and operating expense management.

26


(Unaudited)

Corporate Expenses: Expenses increased to $37.5 million from $27.0 million in the prior year third quarter and to $108.3million from $70.2 million in the prior year nine-month period. The increase reflects expenses for the sale of receivablesassociated with an increase in working capital, higher benefit costs and our share in the losses of HealthNexis, an Internet-based company we formed with other health care companies in fiscal 2001. In the third quarter of fiscal 2002, HealthNexismerged with another entity which significantly diluted our percentage ownership in the combined organization. As a result,we changed from the equity to the cost method of accounting for this investment.

Interest Expense: Interest expense decreased to $27.2 million from $28.3 million in the prior year third quarter and to$81.2 million from $84.4 million in the prior year nine-month period. The decrease is due to lower interest rates, partiallyoffset by an increase in average borrowings to support revenue growth. We also sold more receivables compared to thequarter and nine months of last year in order to meet our financing needs. The costs associated with the sale of receivablesare recorded in Corporate expenses. Income Taxes: The effective income tax rate excluding special charges for the quarter and nine months ended December31, 2001, was 35.1% and 36.0%, compared to 36.5% for the first six months of this fiscal year and 39.0% for fiscal 2001.The decrease in our effective tax rate was the result of tax planning initiatives and the discontinuance of goodwillamortization, which is primarily non-tax-deductible. Income taxes on special charges for the nine months ended December31, 2001 included a $30.0 million tax benefit on the sale of stock of an Information Solutions business. The tax benefit couldnot be recognized until fiscal 2002, when the sale of the business was completed.

Discontinued Operations: The after-tax loss from discontinued operations for the quarter and nine months endedDecember 31, 2000 primarily reflects an adjustment to the gain recorded on the fiscal 2000 sale of our former subsidiary,McKesson Water Products Company.

Net Income and Diluted Earnings per Share: U.S. GAAP net income increased to $108.8 million from $1.7 million in thethird quarter and to $293.2 million from $127.2 million in the nine months ended December 31, 2001 and 2000. Incomefrom continuing operations, excluding special charges, increased to $111.7 million from $69.3 million in the third quarterand to $297.3 million from $194.3 million in the nine months ended December 31, 2001 and 2000.

U.S. GAAP diluted earnings per share increased to $0.37 from $0.01 in the third quarter and to $1.00 from $0.45 in thenine months ended December 31, 2001 and 2000. Income from continuing operations, excluding special charges, increasedto $0.38 from $0.24 in the third quarter and to $1.01 from $0.68 in the nine months ended December 31, 2001 and 2000.

We elected to adopt SFAS No. 142, and accordingly discontinued the amortization of goodwill effective April 1, 2001.On a comparable basis, excluding after-tax goodwill amortization of $12.0 million, net income as adjusted would have been$81.3 million and earnings per diluted share would have been $0.28 in the quarter ended December 31, 2000. Excludingafter-tax goodwill amortization of $34.0 million, net income as adjusted would have been $228.3 million and earnings perdiluted share would have been $0.80 in the nine months ended December 31, 2000.

Excluding the impact of special charges, as well as the discontinuance of goodwill amortization, the increase in netincome and earnings per share in 2002 as compared to 2001, primarily reflects revenue growth and operating marginexpansion in our Supply Solutions segment and improved operating profit in our Information Solutions segment.

Diluted earnings per share was calculated based on an average number of shares outstanding of 299.2 million in the thirdquarter of fiscal 2002, compared to 295.1 million in the comparable prior year period. On a year-to-date basis, the weightedaverage number of shares outstanding were 299.0 million and 292.3 million for fiscal 2002 and 2001. The increase in theweighted average number of shares outstanding was primarily due to an increased effect of dilutive securities as a result of animprovement in our stock price, as well as shares issued under employee benefit plans, partially offset by shares repurchasedas part of our share repurchase program. See Financial Note 10 on page 10 to the accompanying condensed consolidatedfinancial statements for the calculation of diluted earnings per share.

27


(Unaudited)

Special Charges

During the quarter and nine months ended December 31, 2001 and 2000, we had the following special charges to income(in millions):



2001 2000 2001 2000Loss on investments, net $ 0.2

$98.9

$5.9

$91.1

Loss on sale of businesses, net - - 18.4 -Legal settlement 4.0 - 4.0 -Restructuring expense - 1.0 16.9 3.8Asset impairments relating to restructuring activities - 0.7 3.4 0.7Other, net 0.3 1.1 5.1 3.9

Total pre-tax special charges 4.5 101.7 53.7 99.5Tax benefit (1.6) (39.7) (49.6) (38.0)

Total after-tax special charges $ 2.9$

62.0$

4.1$

61.5

The quarter and nine months ended December 31, 2000 include charges of $98.9 million and $91.1 million forimpairments of certain equity investments. The impairment charge for the quarter primarily consists of a $92.2 millionimpairment loss due to the other-than-temporary decline in value of our WebMD, Inc., warrants, which we received in fiscal2000 as a result of a merger between Healtheon Corporation and WebMD, Inc., and an impairment loss of $6.7 million forother equity investments. For the nine months ended December 31, 2000, loss on investments also includes a $7.8 milliongain on the liquidation of another investment.

During the first half of 2002, we sold two businesses from our Information Solutions segment. We recognized a net pre-tax loss of $18.4 million and an after-tax gain of the same amount. For accounting purposes, the net assets of one of thesebusinesses were written down in fiscal 2001 in connection with the restructuring of our former iMcKesson business segment.The tax benefit could not be recognized until fiscal 2002, when the sale of the business was completed.

We recorded net charges for restructuring of $16.9 million and related asset impairments of $3.4 million during the ninemonths ended December 31, 2001. In the first half of fiscal 2002, following a review of our Medical-Surgical business, wedeveloped and communicated a plan to close 23 and open four new distribution centers. In connection with this plan, werecorded severance charges of $10.0 million relating to the termination of approximately 650 employees primarily indistribution, delivery and associated back-office functions, exit-related charges of $14.0 million for costs to prepare facilitiesfor disposal, and lease costs and property taxes required subsequent to termination of operations, and asset impairmentcharges of $0.3 million. We anticipate completing this restructuring program by the end of fiscal 2003. As of December 31,2001, 39 employees had been terminated, five distribution centers were closed, and two distribution centers were opened.

Also in the first half of fiscal 2002, we reversed $7.1 million of accrued restructuring liabilities relating to prior yearrestructuring plans due to a change in estimated costs to complete these activities.

Other special charges primarily include legal costs incurred in connection with the pending shareholder litigation, a write-off of purchased in-process technology related to an acquisition and settlements of claims with third parties.

28


(Unaudited)

A reconciliation of pro forma operating profit to net income from continuing operations is as follows (in millions):


2001 2000 2001 2000

Total pro forma operating profit $ 239.0 $ 171.4 $ 661.0 $ 480.7Special charges - (2.1) (45.7) 0.8Operating profit – U.S. GAAP 239.0 169.3 615.3 481.5Corporate Excluding special charges (37.5) (27.0) (108.3) (70.2) Special charges (4.5) (99.6) (8.0) (100.3) Total Corporate expenses (42.0) (126.6) (116.3) (170.5)

Interest expense (27.2) (28.3) (81.2) (84.4)Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust 169.8 14.4 417.8 226.6Income taxes Before special charges (61.1) (45.3) (169.6) (127.2) Special charges

1.6 39.7 49.6

38.0 Total income taxes (59.5) (5.6) (120.0) (89.2)Dividends on preferred securities of subsidiary trust (1.5) (1.5) (4.6) (4.6)

Income from continuing operations $ 108.8 $ 7.3 $ 293.2 $ 132.8

Refer to Financial Notes 5 and 12 on pages 8 and 19 to the accompanying condensed consolidated financial statements forfurther discussions regarding our special charges.

Liquidity and Capital Resources

Operating Activities: For the nine months ended December 31, 2001, net cash provided by operations was $81.2 million.Income from continuing operations of $293.2 million plus non-cash items of $240.4 million were partially offset by increasesin working capital of $452.2 million. The increase in working capital was primarily due to increases in inventories andreceivables of $1,151.1 million and $323.1 million, partially offset by an increase in drafts and accounts payable of $891.8million. The increase in these working capital balances primarily reflects the build up associated with the implementation ofnew pharmaceutical distribution agreements as well as purchasing opportunities.

For the nine months ended December 31, 2000, net cash provided by operations was $44.8 million. Income fromcontinuing operations of $132.8 million plus non-cash items of $316.3 million were partially offset by increases in workingcapital of $397.6 million. The increase in working capital reflects increases in inventories and receivables of $780.9 millionand $566.6 million, and a decrease in taxes of $213.9 million. This was partially offset by an increase in drafts and accountspayable of $1,136.4 million. The increase in inventories and payables is primarily the result of purchasing opportunities latein the quarter. The additional increase in payables reflects the timing of vendor payments. Increases in accounts receivablewere mainly the result of increased sales growth. Cash flows from operations also reflect the payment of taxes related to again on the fiscal 2000 sale of our former subsidiary, McKesson Water Products Company.

Investing Activities: For the nine months ended December 31, 2001, net cash used by investing activities was $208.6million, including $74.8 million for capital expenditures, $10.7 million for the acquisition of several businesses in the SupplySolutions segment, $46.2 million in notes mainly related to customer financing and $76.9 million of other cash outflows.Other investing cash outflows primarily represent software costs for internal use and sale, and other deferred charges.

29


(Unaudited)

Net cash used by investing activities for the nine months ended December 31, 2000 was $189.6 million, including $96.0million for capital expenditures, $50.7 million related to the acquisition of several businesses in the Supply Solutions andInformation Solutions segments, $26.2 million in notes primarily related to customer financing and $16.7 million of othercash flows.

Financing Activities: Net cash used by financing activities was $21.4 million during the nine months ended December31, 2001 compared to a use of cash of $70.9 million in the prior year nine-month period. The use of cash primarily reflectscapital stock transactions, net repayments of debt and dividends paid on the convertible preferred securities.

As of December 31, 2001, debt, net of cash and marketable securities, was $936.6 million compared to $784.1 million atMarch 31, 2001. The net debt to capital ratio at December 31, 2001 was 19%, up slightly from 18% at March 31, 2001.Return on average committed capital improved to 20.3% as of December 31, 2001 from 17.8% as of December 31, 2000.This improvement reflects a growth in our operating profit in excess of the growth in the working capital required to fund theincrease in revenues.

Working capital requirements are primarily funded by cash, short-term borrowings and our receivables sale facility. Wehave a 364-day revolving credit agreement that allows for short-term borrowings of up to $1.075 billion (which was renewedin October 2001 under terms substantially similar to those previously in place), and a $400 million five-year revolving creditfacility expiring in fiscal 2004. These facilities are primarily intended to support our commercial paper borrowings. We alsohave a committed revolving receivables sale facility aggregating $850 million, which terminates on June 14, 2002. AtDecember 31, 2001, we had $15.0 million of short-term borrowings, no borrowings under the revolving credit facility, and$414 million of borrowing equivalents under the revolving receivables sale facility. We anticipate renegotiating ourrevolving receivables sale facility prior to its expiration.

On January 24, 2002, we completed a public offering of $400.0 million of 7.75 % unsecured notes, due in 2012. Thesenotes are redeemable at any time, in whole or in part, at our option. Net proceeds of $395.3 million from the issuance ofthese notes will be used to repay term debt and for other general corporate purposes. As of December 31, 2001, our currentportion of long-term debt was $318.4 million, of which $175.0 million and $125.0 million matures in March and Novemberof 2002.

On January 30, 2002, our Supply Solutions segment acquired a national specialty pharmacy business that provides mailorder pharmaceutical prescription services to managed care patients for approximately $62 million in cash.

In July 2000, we announced a program to repurchase, from time to time, up to $250 million shares of our common stockin open market or private transactions. As of December 31, 2001, we have repurchased approximately 3.5 million shares for$109.8 million.

Our various borrowing facilities and long-term debt are subject to certain restrictive covenants with regard to corporatestructure, the ratio of total debt to capitalization, allowable debt, allowable secured debt or liens, working capital ratios,earnings ratios and minimum net worth requirements. The lack of compliance with these covenants could have a negativeimpact on our credit ratings and our ability to finance our operations through our current credit facilities, as well as theissuance of additional debt at the interest rates currently available.

We are currently in compliance with these restrictive covenants and we believe that we will continue to have access tocredit sources to meet our funding requirements. Funds necessary for future debt maturities and our other cash requirementsare expected to be met by existing cash balances, cash flow from operations, existing credit sources or other capital markettransactions.

30


(Unaudited)

New Accounting Pronouncements

In June 2001, the Financial Accountings Standards Board (“FASB”) issued SFAS No. 143, "Accounting for AssetRetirement Obligations," which addresses financial accounting requirements for retirement obligations associated withtangible long-lived assets. SFAS No. 143 is effective for our fiscal year 2004.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"that replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of." SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinuedoperations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuingoperations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value orinclude amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting ofdiscontinued operations to include all components of an entity with operations that can be distinguished from the rest of theentity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFASNo. 144 are effective for our fiscal year 2003 and are generally to be applied prospectively.

We are evaluating what impact, if any, SFAS No. 143 and No. 144 may have on the consolidated financial statements.

Factors Affecting Forward-Looking Statements

In addition to historical information, our financial review includes certain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, asamended. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘‘believes’’,‘‘expects’’, ‘‘anticipates’’, ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘seeks’’, ‘‘approximately’’, ‘‘intends’’, ‘‘plans’’, ‘‘estimates’’, or thenegative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentionsmay also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could causeactual results to differ materially from those projected. Among the factors that could cause actual results to differ materiallyare the following:• the resolution or outcome of pending litigation and government investigations relating to our previously announced

financial restatement; • the effect of the events relating to, or arising out of, the financial restatement on our ability to attract and retain

employees and management;• the ability to successfully market both new and existing products domestically and internationally; • the changing U.S. healthcare environment, including potential changes in private and governmental reimbursement for

healthcare products and services; • the method by which such products and services are delivered, legislation or regulations governing such products and

services, or mandated benefits or changes in manufacturer’s pricing or distribution policies;substantial defaults in payment or a material reduction in purchases by large customers;• the ability of McKesson Information Solutions to retain existing customers and to attract new customers in light of rapid

technological advances, challenges in integrating our software products, or the slowing or deferral of demand for suchproducts resulting from the impact of current or pending government regulations;

• the timing and amounts of the ongoing customer settlement process;• our ability to successfully integrate and operate acquired businesses, and manage the risks associated with such

businesses, including the acquisition of the business formerly known as HBO & Co.; and• changes in generally accepted accounting principles.

31

McKESSON CORPORATIONFINANCIAL REVIEW – (Concluded)

(Unaudited)

These and other risks and uncertainties are described herein or in our Forms 10-K, 10-Q, 8-K and other public documentsfiled with the Securities Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof. Other than required under SEC laws, we undertake noobligation to publicly release the result of any revisions to these forward-looking statements to reflect events orcircumstances after this date or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We believe there has been no material change in our exposure to risks associated with fluctuations in interest andforeign currency exchange rates discussed in our 2001 Annual Report on Form 10-K.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Financial Note 11 on page 11 of our unaudited condensed consolidated financial statements contained in Part I ofthis Quarterly Report on Form 10-Q.

Item 6. Exhibit and Reports on Form 8-K

(a) Exhibit

The exhibit identified below is incorporated herein by reference as an exhibit to this report:

ExhibitNumber Description

3.1 Restated Certificate of Incorporation of the Company as filed with the office of the Delaware Secretaryof State on November 9, 2001.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the three months ended December 31, 2001.

The following reports on Form 8-K were filed after December 31, 2001:

Form 8-K dated January 22, 2002 and filed on January 24, 2002, relating to our fiscal 2002 third quarter financial resultsand updated legal proceedings. Form 8-K dated January 24, 2002 and filed on January 28, 2002, relating to our issuance of $400 million aggregateprincipal amount of 7 3/4% notes due 2012.

32


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

McKesson Corporation

Dated: February 14, 2002By /s/ William R. Graber

William R. Graber Senior Vice President and Chief Financial Officer

By /s/ Nigel A. Rees Nigel A. Rees Vice President and Controller

1

Exhibit 3.1

RESTATED

CERTIFICATE OF INCORPORATION

OF


(Duly Adopted in Accordance with Section 245 of

the Delaware General Corporation Law)

Originally Incorporated on July 7, 1994Under the Name SP Ventures, Inc.

(Restates and Integrates Only)

ARTICLE I.

The name of the Corporation is McKesson Corporation.

ARTICLE II.

The address of the registered office of the Corporation within the State of Delaware is 2711Centerville Road, Suite 400, Wilmington 19808, County of New Castle. The name of theregistered agent of the Corporation at such address is The Prentice-Hall Corporation System, Inc.

ARTICLE III.

The purpose of the Corporation is to engage in any lawful act or activity for which corporationsmay be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV.

The total number of shares of stock of all classes which the Corporation has authority to issue is500,000,000 shares, divided into 100,000,000 shares of Series Preferred Stock, par value $0.01per share (herein called the “Series Preferred Stock’), and 400,000,000 shares of Common Stock,par value $.01 per share (herein called the “Common Stock”). The aggregate par value of allshares having par value is $5,000,000.

The Board of Directors of the Corporation is expressly authorized, as shall be stated andexpressed in the resolution or resolutions it adopts, subject to limitations prescribed by law andthe provisions of this Article IV, to provide for the issuance of the shares of Series PreferredStock in one or more class or series, in addition to the shares thereof specifically provided for in

2

this Article IV, and by filing a certificate pursuant to the applicable law of the State of Delaware,to establish from time to time the number of shares to be included in each such series, and to fixfor each such class or series such voting powers, full or limited, or no voting powers, and suchdistinctive designations, powers, preferences and relative, participating, optional or other specialrights and such qualifications, limitations or restrictions thereof, including without limitation, theauthority to provide that any such class or series may be (i) subject to redemption at such time ortimes and at such price or prices; (ii) entitled to receive dividends (which may be cumulative ornon-cumulative) at such rates, on such conditions, and at such times, and payable in preferenceto, or in relation to, the dividends payable on any other class or classes or any other series; (iii)entitled to such rights upon the dissolution of, or upon any distribution of the assets of, theCorporation; (iv) convertible into, or exchangeable for, shares of any other class or classes ofstock, or of any other series of the same or any other class or classes of stock, of the Corporationat such price or prices or at such rates of exchange and with such adjustments; or (v) subject tothe terms and amounts of any sinking fund provided for the purchase or redemption of the sharesof such series; all as may be stated in such resolution or resolutions.

The number of authorized shares of Series Preferred Stock may be increased or decreased (butnot below the number of shares thereof then outstanding) by the affirmative vote of the holdersof a majority of the Common Stock, without a vote of the holders of the Series Preferred Stock,as the case may be, or of any series thereof, unless a vote of any such holders is requiredpursuant to the provisions of this Article IV or the certificate or certificates establishing anyadditional series of such stock.

A description of each class of the Corporation’s stock, with the powers, designations,preferences and relative, participating, optional and other rights, if any, and the qualifications,limitations and restrictions thereof, is as follows:

I. SERIES PREFERRED STOCK

A. General Provisions Relating to All Series

1. The Board of Directors shall have authority to classify and reclassify any unissued shares ofthe Series Preferred Stock from time to time by setting or changing in any one or more respectsthe powers, designations, preferences and relative, participating, optional and other rights, if any,and the qualifications, limitations and restrictions of the Series Preferred Stock. Subject to theforegoing, the power of the Board of Directors to classify and reclassify any of the shares ofSeries Preferred Stock shall include, without limitation, subject to the provisions of thisCertificate of Incorporation, authority to classify or reclassify any unissued shares of such stockinto one or more series of Series Preferred Stock, and to divide and classify shares of any seriesinto one or more series of Series Preferred Stock by determining, fixing or altering one or moreof the following:

(a) The distinctive designation of such series and the number of shares to constitute suchseries; provided that, unless otherwise prohibited by the terms of such or any other series, thenumber of shares of any series may be decreased by the Board of Directors in connectionwith any classification or reclassification of unissued shares and the number of shares of suchseries may be increased by the Board of Directors in connection with any such classificationor reclassification, and any shares of any series which have been redeemed, purchased,otherwise acquired or converted into shares of Common Stock or any other series shallremain part of the authorized Series Preferred Stock and be subject to classification andreclassification as provided in this Section.

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(b) Whether or not and, if so, the rates, amounts and times at which, and the conditions underwhich, dividends shall be payable on shares of such series, whether any such dividends shallrank senior or junior to or on a parity with the dividends payable on any other series of SeriesPreferred Stock, and the status of any such dividends as cumulative, cumulative to a limitedextent or non-cumulative and as participating or non-participating.

(c) Whether or not shares of such series shall have voting rights, in addition to any votingrights provided by law and, if so, the terms of such voting rights.

(d) Whether or not shares of such series shall have conversion or exchange privileges and, ifso, the terms and conditions thereof, including provision for adjustment of the conversion orexchange rate in such events or at such times as the Board of Directors shall determine.

(e) Whether or not shares of such series shall be subject to redemption and, if so, the termsand conditions of such redemption, including the date or dates upon or after which they shallbe redeemable and the amount per share payable in case of redemption, which amount mayvary under different conditions and at different redemption dates; and whether or not thereshall be any sinking fund or purchase account in respect thereof, and if so, the terms thereof.

(f) The rights of the holders of shares of such series upon the liquidation, dissolution orwinding up of the affairs of, or upon any distribution of the assets of, the Corporation, whichrights may vary depending upon whether such liquidation, dissolution or winding up isvoluntary or involuntary and, if voluntary, may vary at different dates, and whether suchrights shall rank senior or junior to or on a parity with such rights of any other series ofSeries Preferred Stock.

(g) Whether or not there shall be any limitations applicable, while shares of such series areoutstanding, upon the payment of dividends or making of distributions on, or the acquisitionof, or the use of moneys for purchase or redemption of, any stock of the Corporation, or uponany other action of the Corporation, including action under this Section, and, if so, the termsand conditions thereof.

(h) Any other powers, designations, preferences and relative, participating, optional and otherrights, if any, and any other qualifications, limitations and restrictions, on the shares of suchseries, not inconsistent with law and this Certificate of Incorporation.

2. For the purposes hereof and of any certificate providing for the classification orreclassification of any shares of Series Preferred Stock or of any other charter document of theCorporation (unless otherwise provided in any such certificate or document), any class or seriesof stock of the Corporation shall be deemed to rank:

(a) Prior to a particular class or series of stock if the holders of such class or classes or seriesshall be entitled to the receipt of dividends or of amounts distributable in the event of anyliquidation, dissolution or winding up, as the case may be, in preference to or with priorityover the holders of such particular class or series of stock;

(b) On a parity with a particular class or series of stock, whether or not the dividend rates,dividend payment dates, voting rights or redemption or liquidation prices per share thereof,be different from those of such particular class or series of stock, if the rights of holders ofsuch class or classes or series to the receipt of dividends or of amounts distributable in eventof any liquidation, dissolution or winding up, as the case may be, shall be neither (i) inpreference to, or with priority over, nor (ii) subject or subordinate to, the rights of holders ofsuch particular class or series of stock in respect of the receipt of dividends or of amountsdistributable in the event of any liquidation, dissolution or winding up of the Corporation, asthe case may be; and

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(c) Junior to a particular class or series of stock if the rights of the holders of such class orclasses or series shall be subject or subordinate to the rights of the holders of such particularclass or series of stock in respect of the receipt of dividends or of amounts distributable in theevent of any liquidation, dissolution or winding up, as the case may be.

B. Series A Junior Participating Preferred Stock

1. Designation and Amount. The shares of this series shall be designated as “Series A JuniorParticipating Preferred Stock” and the number of shares constituting such series shall initially be10,000,000, par value $0.01 per share, such number of shares to be subject to increase ordecrease by action of the Board of Directors as evidenced by a certificate or certificatesevidencing such change.

2. Dividends and Distributions.

(a) The holders of shares of Series A Junior Participating Preferred Stock shall be entitled toreceive, when, as and if declared by the Board of Directors out of funds legally available forthe purpose, quarterly dividends payable in cash on the first business day of January, April,July and October in each year (each such date being referred to herein as a “Series AQuarterly Dividend Payment Date”), commencing on the first Series A Quarterly DividendPayment Date after the first issuance of a share or fraction of a share of Series A JuniorParticipating Preferred Stock, in an amount per share (rounded to the nearest cent) equal tothe greater of (i) $10.00 or (ii) subject to the provision for adjustment hereinafter set forth,100 times the aggregate per share amount of all cash dividends, and 100 times the aggregateper share amount (payable in kind) of all non-cash dividends or other distributions other thana dividend payable in shares of Common Stock or a subdivision of the outstanding shares ofCommon Stock (by reclassification or otherwise), declared on the Common Stock since theimmediately preceding Series A Quarterly Dividend Payment Date, or, with respect to thefirst Series A Quarterly Dividend Payment Date, since the first issuance of any share orfraction of a share of Series A Junior Participating Preferred Stock. In the event theCorporation shall at any time after November 1, 1994 (the “Rights Declaration Date’) (A)declare any dividend on Common Stock payable in shares of Common Stock, (B) subdividethe outstanding Common Stock, or (C) combine the outstanding Common Stock into asmaller number of shares, then in each such case the amount to which holders of shares ofSeries A Junior Participating Preferred Stock were entitled immediately prior to such eventunder clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by afraction the numerator of which is the number of shares of Common Stock outstandingimmediately after such event and the denominator of which is the number of shares ofCommon Stock that were outstanding immediately prior to such event.

(b) The Corporation shall declare a dividend or distribution on the Series A JuniorParticipating Preferred Stock as provided in paragraph (a) above immediately after it declaresa dividend or distribution on the Common Stock (other than a dividend payable in shares ofCommon Stock); provided that, in the event no dividend or distribution shall have beendeclared on the Common Stock during the period between any Series A Quarterly DividendPayment Date and the next subsequent Series A Quarterly Dividend Payment Date, adividend of $10.00 per share on the Series A Junior Participating Preferred Stock shallnevertheless be payable on such subsequent Series A Quarterly Dividend Payment Date.

(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series AJunior Participating Preferred Stock from the Series A Quarterly Dividend Payment Datenext preceding the date of issue of such shares of Series A Junior Participating PreferredStock, unless the date of issue of such shares is prior to the record date for the first Series AQuarterly Dividend Payment Date, in which case dividends on such shares shall begin toaccrue from the date of issue of such shares, or unless the date of issue is a Series AQuarterly Dividend Payment Date or is a date after the record date for the determination ofholders of shares of Series A Junior Participating Preferred Stock entitled to receive aquarterly dividend and before such Series A Quarterly Dividend Payment Date, in either of

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which events such dividends shall begin to accrue and be cumulative from such Series AQuarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest.Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amountless than the total amount of such dividends at the time accrued and payable on such sharesshall be allocated pro rata on a share-by-share basis among all such shares at the timeoutstanding. The Board of Directors may fix a record date for the determination of holders ofshares of Series A Junior Participating Preferred Stock entitled to receive payment of adividend or distribution declared thereon, which record date shall be no more than 30 daysprior to the date fixed for the payment thereof.

3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shallhave the following voting rights:

(a) Subject to the provision for adjustment hereinafter set forth, each share of Series A JuniorParticipating Preferred Stock shall entitle the holder thereof to 100 votes on all matterssubmitted to a vote of the stockholders of the Corporation. In the event the Corporation shallat any time after the Rights Declaration Date (i) declare any dividend on Common Stockpayable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)combine the outstanding Common Stock into a smaller number of shares, then in each suchcase the number of votes per share to which holders of shares of Series A Junior ParticipatingPreferred Stock were entitled immediately prior to such event shall be adjusted bymultiplying such number by a fraction the numerator of which is the number of shares ofCommon Stock outstanding immediately after such event and the denominator of which isthe number of shares of Common Stock that were outstanding immediately prior to suchevent.

(b) Except as otherwise provided herein or by law, the holders of shares of Series A JuniorParticipating Preferred Stock and the holders of shares of Common Stock shall vote togetheras one class on all matters submitted to a vote of stockholders of the Corporation.

(c) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall bein arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence ofsuch contingency shall mark the beginning of a period (herein called a “default period’)which shall extend until such time when all accrued and unpaid dividends for all previousquarterly dividend periods and for the current quarterly dividend period on all shares ofSeries A Junior Participating Preferred Stock then outstanding shall have been declaredand paid or set apart for payment. During each default period, all holders of SeriesPreferred Stock, (including holders of the Series A Junior Participating Preferred Stock)with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, votingas a class, irrespective of series, shall have the right to elect two (2) Directors.

(ii) During any default period, such voting right of the holders of Series A JuniorParticipating Preferred Stock may be exercised initially at a special meeting calledpursuant to subparagraph (iii) of this Section 3(c) or at any annual meeting ofstockholders, and thereafter at annual meetings of stockholders, provided that neithersuch voting right nor the right of the holders of any other series of Series Preferred Stock,if any, to increase, in certain cases, the authorized number of Directors shall be exercisedunless the holders of ten percent (10%) in number of shares of Series Preferred Stockoutstanding shall be present in person or by proxy. The absence of a quorum of theholders of Common Stock shall not affect the exercise by the holders of Series PreferredStock of such voting right. At any meeting at which the holders of Series Preferred Stockshall exercise such voting right initially during an existing default period, they shall havethe right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board ofDirectors as may then exist up to two (2) Directors or, if such right is exercised at anannual meeting, to elect two (2) Directors. If the number which may be so elected at anyspecial meeting does not amount to the required number, the holders of the SeriesPreferred Stock shall have the right to make such increase in the number of Directors asshall be necessary to permit the election by them of the required number. After the

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holders of the Series Preferred Stock shall have exercised their right to elect Directors inany default period and during the continuance of such period, the number of Directorsshall not be increased or decreased except by vote of the holders of Series Preferred Stockas herein provided or pursuant to the rights of any equity securities ranking senior to orpari passu with the Series A Junior Participating Preferred Stock.

(iii) Unless the holders of Series Preferred Stock shall, during an existing default period,have previously exercised their right to elect Directors, the Board of Directors may order,or any stockholder or stockholders owning in the aggregate not less than ten percent(10%) of the total number of shares of Series Preferred Stock outstanding, irrespective ofseries, may request, the calling of a special meeting of the holders of Series PreferredStock, which meeting shall thereupon be called by the President, a Vice-President or theSecretary of the Corporation. Notice of such meeting and of any annual meeting at whichholders of Series Preferred Stock are entitled to vote pursuant to this paragraph (c)(iii)shall be given to each holder of record of Series Preferred Stock by mailing a copy ofsuch notice to him at his last address as the same appears on the books of the Corporation.Such meeting shall be called for a time not earlier than 20 days and not later than 60 daysafter such order or request or in default of the calling of such meeting within 60 days aftersuch order or request, such meeting may be called on similar notice by any stockholder orstockholders owning in the aggregate not less than ten percent (10%) of the total numberof shares of Series Preferred Stock outstanding. Notwithstanding the provisions of thisparagraph (c)(iii), no such special meeting shall be called during the period within 60days immediately preceding the date fixed for the next annual meeting of thestockholders.

(iv) In any default period, the holders of Common Stock, and other classes of stock of theCorporation if applicable, shall continue to be entitled to elect the whole number ofDirectors until the holders of Series Preferred Stock shall have exercised their right toelect two (2) Directors voting as a class, after the exercise of which right (A) theDirectors so elected by the holders of Series Preferred Stock shall continue in office untiltheir successors shall have been elected by such holders or until the expiration of thedefault period, and (B) any vacancy in the Board of Directors may (except as provided inparagraph (c)(ii) of this Section 3) be filled by vote of a majority of the remainingDirectors theretofore elected by the holders of the class of stock which elected theDirector whose office shall have become vacant. References in this paragraph (c) toDirectors elected by the holders of a particular class of stock shall include Directorselected by such Directors to fill vacancies as provided in clause (B) of the precedingsentence.

(v) Immediately upon the expiration of a default period, (A) the right of the holders ofSeries Preferred Stock as a class to elect Directors shall cease, (B) the term of anyDirectors elected by the holders of Series Preferred Stock as a class shall terminate, and(C) the number of Directors shall be such number as may be provided for in thisCertificate of Incorporation or the By-laws of the Corporation irrespective of any increasemade pursuant to the provisions of paragraph (c)(ii) of this Section 3 (such number beingsubject, however, to change thereafter in any manner provided by law or in thisCertificate of Incorporation or the By-laws of the Corporation). Any vacancies in theBoard of Directors effected by the provisions of clauses (B) and (C) in the precedingsentence may be filled by a majority of the remaining Directors.

(d) Except as set forth herein or as otherwise required by applicable law, holders of Series AJunior Participating Preferred Stock shall have no special voting rights and their consentshall not be required (except to the extent they are entitled to vote with holders of CommonStock as set forth herein) for taking any corporate action.

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4. Certain Restrictions.

(a) Whenever quarterly dividends or other dividends or distributions payable on the Series AJunior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter anduntil all accrued and unpaid dividends and distributions, whether or not declared, on sharesof Series A Junior Participating Preferred Stock outstanding shall have been paid in full, theCorporation shall not

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase orotherwise acquire for consideration any shares of stock ranking junior (either as todividends or upon liquidation, dissolution or winding up) to the Series A JuniorParticipating Preferred Stock;

(ii) declare or pay dividends on or make any other distributions on any shares of stockranking on a parity (either as to dividends or upon liquidation, dissolution or winding up)with the Series A Junior Participating Preferred Stock, except dividends paid ratably onthe Series A Junior Participating Preferred Stock and all such parity stock on whichdividends are payable or in arrears in proportion to the total amounts to which the holdersof all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares of any stockranking on a parity (either as to dividends or upon liquidation, dissolution or winding up)with the Series A Junior Participating Preferred Stock, provided that the Corporation mayat any time redeem, purchase or otherwise acquire shares of any such parity stock inexchange for shares of any stock of the Corporation ranking junior (either as to dividendsor upon dissolution, liquidation or winding up) to the Series A Junior ParticipatingPreferred Stock;

(iv) purchase or otherwise acquire for consideration any shares of Series A JuniorParticipating Preferred Stock, or any shares of stock ranking on a parity with the Series AJunior Participating Preferred Stock, except in accordance with a purchase offer made inwriting or by publication (as determined by the Board of Directors) to all holders of suchshares upon such terms as the Board of Directors, after consideration of the respectiveannual dividend rates and other relative rights and preferences of the respective series andclasses, shall determine in good faith will result in fair and equitable treatment among therespective series or classes.

(b) The Corporation shall not permit any subsidiary of the Corporation to purchase orotherwise acquire for consideration any shares of stock of the Corporation unless theCorporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire suchshares at such time and in such manner.

5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased orotherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelledpromptly after the acquisition thereof. All such shares shall upon their cancellation becomeauthorized but unissued shares of Series Preferred Stock and may be reissued as part of a newseries of Series Preferred Stock to be created by resolution or resolutions of the Board ofDirectors, subject to the conditions and restrictions on issuance set forth herein.

6. Liquidation, Dissolution or Winding Up.

(a) Upon any liquidation (voluntary or otherwise), dissolution or winding up of theCorporation, no distribution shall be made to the holders of shares of stock ranking junior(either as to dividends or upon liquidation, dissolution or winding up) to the Series A JuniorParticipating Preferred Stock unless, prior thereto, the holders of shares of Series A JuniorParticipating Preferred Stock shall have received $100 per share, plus an amount equal toaccrued and unpaid dividends and distributions thereon, whether or not declared, to the dateof such payment (the “Series A Liquidation Preference”). Following the payment of the full

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amount of the Series A Liquidation Preference, no additional distributions shall be made tothe holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto,the holders of shares of Common Stock shall have received an amount per share (the“Common Adjustment”) equal to the quotient obtained by dividing (i) the Series ALiquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph Cbelow to reflect such events as stock splits, stock dividends and recapitalizations with respectto the Common Stock) (such number in clause (ii), the “Adjustment Number”). Followingthe payment of the full amount of the Series A Liquidation Preference and the CommonAdjustment in respect of all outstanding shares of Series A Junior Participating PreferredStock and Common Stock, respectively, holders of Series A Junior Participating PreferredStock and holders of shares of Common Stock shall receive their ratable and proportionateshare of the remaining assets to be distributed in the ratio of the Adjustment Number to 1with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

(b) In the event, however, that there are not sufficient assets available to permit payment infull of the Series A Liquidation Preference and the liquidation preferences of all other seriesof preferred stock, if any, which rank on a parity with the Series A Junior ParticipatingPreferred Stock, then such remaining assets shall be distributed ratably to the holders of suchparity shares in proportion to their respective liquidation preferences. In the event, however,that there are not sufficient assets available to permit payment in full of the CommonAdjustment, then such remaining assets shall be distributed ratably to the holders ofCommon Stock.

(c) In the event the Corporation shall at any time after the Rights Declaration Date (i) declareany dividend on Common Stock payable in shares of Common Stock, (ii) subdivide theoutstanding Common Stock, or (iii) combine the outstanding Common Stock into a smallernumber of shares, then in each such case the Adjustment Number in effect immediately priorto such event shall be adjusted by multiplying such Adjustment Number by a fraction thenumerator of which is the number of shares of Common Stock outstanding immediately aftersuch event and the denominator of which is the number of shares of Common Stock thatwere outstanding immediately prior to such event.

7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation,merger, combination or other transaction in which the shares of Common Stock are exchangedfor or changed into other stock or securities, cash and/or any other property, then in any suchcase the shares of Series A Junior Participating Preferred Stock shall at the same time besimilarly exchanged or changed in an amount per share (subject to the provision for adjustmenthereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/orany other property (payable in kind), as the case may be, into which or for which each share ofCommon Stock is changed or exchanged. In the event the Corporation shall at any time after theRights Declaration Date (a) declare any dividend on Common Stock payable in shares ofCommon Stock, (b) subdivide the outstanding Common Stock, or (c) combine the outstandingCommon Stock into a smaller number of shares, then in each such case the amount set forth inthe preceding sentence with respect to the exchange or change of shares of Series A JuniorParticipating Preferred Stock shall be adjusted by multiplying such amount by a fraction thenumerator of which is the number of shares of Common Stock outstanding immediately aftersuch event and the denominator of which is the number of shares of Common Stock that wereoutstanding immediately prior to such event.

8. No Redemption. The shares of Series A Junior Participating Preferred Stock shall not beredeemable.

9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other seriesof the Corporation’s Series Preferred Stock as to the payment of dividends and the distribution ofassets, unless the terms of any such series shall provide otherwise.

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10. Amendment. This Certificate of Incorporation shall not be further amended in any mannerwhich would materially alter or change the powers, preferences or special rights of the Series AJunior Participating Preferred Stock so as to affect them adversely without the affirmative voteof the holders of two-thirds or more of the outstanding shares of Series A Junior ParticipatingPreferred Stock, voting separately as a class.

11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractionsof a share which shall entitle the holder, in proportion to such holder’s fractional shares, toexercise voting rights, receive dividends, participate in distributions and to have the benefit of allother rights of holders of Series A Junior Participating Preferred Stock.

II. COMMON STOCK

A. Dividends. Subject to all of the rights of the Series Preferred Stock, dividends may bepaid upon the Common Stock as and when declared by the Board of Directors out of fundslegally available for the payment of dividends.

B. Liquidation Rights. In the event of any liquidation, dissolution or winding-up of theCorporation, whether voluntary or involuntary, and after the holders of the Series PreferredStock shall have been paid in full amounts to which they respectively shall be entitled, or anamount sufficient to pay the aggregate amount to which such holders shall be entitled shall havebeen deposited in trust with a bank or trust company having its principal office in the Borough ofManhattan, City, County and State of New York, having a capital, undivided profits and surplusaggregating at least $5,000,000, for the benefit of the holders of the Series Preferred Stock, theremaining net assets of the Corporation shall be distributed pro rata to the holders of theCommon Stock.

C. Voting Rights. Except as otherwise expressly provided with respect to the Series PreferredStock and except as otherwise may be required by law, the Common Stock shall have theexclusive right to vote for the election of directors and for all other purposes and each holder ofCommon Stock shall be entitled to one vote for each share held.

ARTICLE V.

A. Board of Directors of the Corporation.

1. General Provisions. The business and affairs of the Corporation shall be managed under thedirection of the Board of Directors. The exact number of directors shall be fixed from time totime by, or in the manner provided in, the By-Laws of the Corporation and may be increased ordecreased as therein provided. Directors of the Corporation need not be elected by ballot unlessrequired by the By-Laws.

2. Classification of Board of Directors. The directors shall be divided into three classes. Eachsuch class shall consist, as nearly as may be possible, of one-third of the total number ofdirectors, and any remaining directors shall be included within such group or groups as theBoard of Directors shall designate. At the annual meeting of stockholders in 1994, a class ofdirectors shall be elected for a one-year term, a class of directors for a two-year term and a classof directors for a three-year term. At each succeeding annual meeting of stockholders, beginningin 1995, successors to the class of directors whose term expires at that annual meeting shall beelected for a three-year term. If the number of directors is changed, any increase or decreaseshall be apportioned among the classes so as to maintain the number of directors in each class asnearly equal as possible, but in no case shall a decrease in the number of directors shorten theterm of any incumbent director. A director may be removed from office for cause only and,subject to such removal, death, resignation, retirement or disqualification, shall hold office untilthe annual meeting for the year in which his term expires and until his successor shall be electedand qualify. No alteration, amendment or repeal of this Article V or the By-Laws of the

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Corporation shall be effective to shorten the term of any director holding office at the time ofsuch alteration, amendment or repeal, to permit any such director to be removed without cause,or to increase the number of directors in any class or in the aggregate from that existing at thetime of such alteration, amendment or repeal until the expiration of the terms of office of alldirectors then holding office, unless (i) in the case of this Article V, such alteration, amendmentor repeal has been approved by the holders of all shares of stock entitled to vote thereon, or (ii)in the case of the By-Laws, such alteration, amendment or repeal has been approved by either theholders of all shares entitled to vote thereon or by a vote of a majority of the entire Board ofDirectors.

3. Directors Appointed by a Specific Class of Stockholders. To the extent that any holders ofany class or series of stock other than Common Stock issued by the Corporation shall have theseparate right, voting as a class or series, to elect directors, the directors elected by such class orseries shall be deemed to constitute an additional class of directors and shall have a term ofoffice for one year or such other period as may be designated by the provisions of such class orseries providing such separate voting right to the holders of such class or series of stock, and anysuch class of directors shall be in addition to the classes designated above.

ARTICLE VI.

A. General Provisions. The following provisions are hereby adopted for the purpose ofdefining, limiting and regulating the powers of the Corporation and of its directors andstockholders:

1. Amendments to the Certificate of Incorporation. Subject to the provisions of applicable law,the Corporation reserves the right from time to time to make any amendment to its Certificate ofIncorporation, now or hereafter authorized by law, including any amendment which alters thecontract rights as expressly set forth therein, of any outstanding stock.

2. Amendments to the By-Laws. The Board of Directors is expressly authorized to adopt, alterand repeal the By-Laws of the Corporation in whole or in part at any regular or special meetingof the Board of Directors, by vote of a majority of the entire Board of Directors. Except wherethis Certificate of Incorporation otherwise requires a higher vote, the By-Laws may also beadopted, altered or repealed in whole or in part at any annual or special meeting of thestockholders by the affirmative vote of three-fourths of the shares of the Corporation outstandingand entitled to vote thereon.

3. No Preemptive Rights. No holder of any class of stock of the Corporation, whether now orhereafter authorized or outstanding, shall have any preemptive, preferential or other right tosubscribe for or purchase any class of the Corporation’s stock, whether now or hereafterauthorized or outstanding, which it may at any time issue or sell, or to subscribe for or purchaseany notes, debentures, bonds or other securities which it may at any time issue or sell, whether ornot the same be convertible into or exchangeable for or carry options or warrants to purchaseshares of any class of the Corporation’s stock or other securities, or to receive or purchase anywarrants or options which may be issued or granted evidencing the right to purchase any suchstock or other securities, it being intended by this Section 3 that all preemptive rights of any kindapplicable to securities of the Corporation are eliminated.

4. Vote Required to Take Action; Action by Written Consent. Except as otherwise provided inthis Certificate of Incorporation and except as otherwise provided by applicable law, theCorporation may take or authorize any action upon the affirmative vote of the majority of sharespresent in person or represented by proxy at the meeting and entitled to vote on the subjectmatter thereof. Action shall be taken by stockholders of the Corporation only at annual or specialmeetings of stockholders, and stockholders may act in lieu of a meeting only by unanimouswritten consent.

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5. Compensation of Directors. The Board of Directors may determine from time to time theamount and type of compensation which shall be paid to its members for service on the Board ofDirectors. The Board of Directors shall also have the power, in its discretion, to provide for andto pay to directors rendering services to the Corporation not ordinarily rendered by directors, assuch, special compensation appropriate to the value of such services, as determined by the Boardfrom time to time.

6. Interested Transactions. Any director or officer individually, or any partnership of which anydirector or officer may be a member, or any corporation or association of which any director orofficer may be an officer, director, trustee, employee or stockholder, may be a party to, or maybe pecuniarily or otherwise interested in, any contract or transaction of the Corporation, and inthe absence of fraud no contract or other transaction shall be thereby affected or invalidated. Anydirector of the Corporation who is so interested, or who is also a director, officer, trustee,employee or stockholder of such other corporation or association or a member of suchpartnership which is so interested, may be counted in determining the existence of a quorum atany meeting of the Board of Directors of the Corporation which shall authorize any such contractor transaction, and may vote thereat to authorize any such contract or transaction, with like forceand effect as if he were not such director, officer, trustee, employee or stockholder of such othercorporation or association or not so interested or a member of a partnership so interested;provided that in case a director, or a partnership, corporation or association of which a director isa member, officer, director, trustee or employee is so interested, such fact shall be disclosed orshall have been known to the Board of Directors or a majority thereof. This paragraph shall notbe construed to invalidate any such contract or transaction which would otherwise be valid underthe common and statutory law applicable thereto.

7. Indemnification. The Corporation shall indemnify (a) its directors to the fullest extentpermitted by the laws of the State of Delaware now or hereafter in force, including theadvancement of expenses under the procedures provided by such laws, (b) all of its officers tothe same extent as it shall indemnify its directors, and (c) its officers who are not directors tosuch further extent as shall be authorized by the Board of Directors and be consistent with law.Subject only to any limitations prescribed by the laws of the State of Delaware now or hereafterin force, the foregoing shall not limit the authority of the Corporation to indemnify the directors,officers and other employees and agents of this Corporation consistent with law and shall not bedeemed to be exclusive of any rights to which those indemnified may be entitled as a matter oflaw or under any resolution, By-Law provision, or agreement.

8. Court-Ordered Meetings of Creditors and/or Stockholders. Whenever a compromise orarrangement is proposed between this Corporation and its creditors or any class of them and/orbetween this Corporation and its stockholders or any class of them, any court of equitablejurisdiction within the State of Delaware may, on the application in a summary way of thisCorporation or of any creditor or stockholder thereof, or on the application of any receiver orreceivers appointed for this Corporation under the provisions of Section 291 of Title 8 of theDelaware Code or on the application of trustees in dissolution or of any receiver or receiversappointed for this Corporation under the provisions of Section 279 of Title 8 of the DelawareCode order a meeting of the creditors or class of creditors, and/or of the stockholders or class ofstockholders of this Corporation, as the case may be, to be summoned in such manner as suchcourt directs. If a majority in number representing three-fourths in value of the creditors or classof creditors, and/or of the stockholders or class of stockholders of this Corporation, as the casemay be, agree to any compromise or arrangement and to any reorganization of this Corporationas a consequence of such compromise or arrangement, the said compromise or arrangement andthe said reorganization shall, if sanctioned by the court to which such application has been made,be binding on all the creditors or class of creditors, and/or on all the stockholders or class ofstockholders, of this Corporation, as the case may be, and also on this Corporation.

9. Liability of Directors. To the fullest extent permitted by Delaware statutory or decisional law,as amended or interpreted, no director of this Corporation shall be personally liable to theCorporation or its stockholders for monetary damages for breach of fiduciary duty as a director.This Section 9 does not affect the availability of equitable remedies for breach of fiduciary duties.

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ARTICLE VII.

A. Vote Required for Certain Business Combinations

1. Voting Requirements. In addition to any vote otherwise required by law or this Certificate ofIncorporation, a Business Combination (such term, and certain other capitalized terms referred toin this Article VII, as defined in Section 3 of this Article VII) shall be recommended by theBoard of Directors and approved by the affirmative vote of at least:

(a) 80 percent of the votes entitled to be cast by outstanding shares of voting stock of theCorporation, voting together as a single voting group; and

(b) Two-thirds of the votes entitled to be cast by holders of voting stock other than votingstock held by an Interested Stockholder who is (or whose Affiliate is) a party to the BusinessCombination or an Affiliate or Associate of the Interested Stockholder, voting together as asingle voting group.

2. When Voting Requirements Not Applicable.

(a) The vote required by Section 1 of this Article VII does not apply to a BusinessCombination if each of the following conditions is met:

(i) The aggregate amount of the cash and the Market Value as of the Valuation Date ofconsideration other than cash to be received per share by holders of common stock insuch Business Combination is at least equal to the highest of the following:

(A) The highest per share price (including any brokerage commissions, transfer taxesand soliciting dealers’ fees) paid by the Interested Stockholder for any shares ofcommon stock of the same class or series acquired by it: (x) within the 2 year periodimmediately prior to the Announcement Date of the proposal of the BusinessCombination; or (y) in the transaction in which it became an Interested Stockholder,whichever is higher; or

(B) The Market Value per share of common stock of the same class or series on theAnnouncement Date or on the Determination Date, whichever is higher; or

(C) The price per share equal to the Market Value per share of common stock of thesame class or series determined pursuant to subparagraph (i)(B) of this paragraph (a),multiplied by the fraction of: (x) the highest per share price (including any brokeragecommissions, transfer taxes and soliciting dealers’ fees) paid by the InterestedStockholder for any shares of common stock of the same class or series acquired by itwithin the 2 year period immediately prior to the Announcement Date, over (y) theMarket Value per share of common stock of the same class or series on the first dayin such 2 year period on which the Interested Stockholder acquired any shares ofcommon stock.

(ii) The aggregate amount of the cash and the Market Value as of the Valuation Date ofconsideration other than cash to be received per share by holders of shares of any class orseries of outstanding stock other than Common Stock is at least equal to the highest of thefollowing (whether or not the Interested Stockholder has previously acquired any sharesof a particular class or series of stock):

(A) The highest per share price (including any brokerage commissions, transfer taxesand soliciting dealers’ fees) paid by the Interested Stockholder for any shares of suchclass of stock acquired by it: (x) within the 2 year period immediately prior to theAnnouncement Date of the proposal of the Business Combination; or (y) in thetransaction in which it became an Interested Stockholder, whichever is higher; or

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(B) The highest preferential amount per share to which the holders of shares of suchclass of stock are entitled in the event of any voluntary or involuntary liquidation,dissolution or winding up of the Corporation; or

(C) The Market Value per share of such class of stock on the Announcement Date oron the Determination Date, whichever is higher; or

(D) The price per share equal to the Market Value per share of such class of stockdetermined pursuant to subparagraph (ii)(B) of this paragraph (a), multiplied by thefraction of: (x) the highest per share price (including any brokerage commissions,transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for anyshares of any class of Voting Stock acquired by it within the 2 year periodimmediately prior to the Announcement Date, over (y) the Market Value per share ofthe same class of voting stock on the first day in such 2 year period on which theInterested Stockholder acquired any shares of the same class of Voting Stock.

(iii) The consideration to be received by holders of any class or series of outstandingstock is to be in cash or in the same form as the Interested Stockholder has previouslypaid for shares of the same class or series of stock. If the Interested Stockholder has paidfor shares of any class of stock with varying forms of consideration, the form ofconsideration for such class of stock shall be either cash or the form used to acquire thelargest number of shares of such class or series of stock previously acquired by it.

(iv) After the Interested Stockholder has become an Interested Stockholder and prior tothe consummation of such Business Combination:

(A) There shall have been: (x) no reduction in the annual rate of dividends paid onany class or series of stock of the Corporation that is not preferred stock (except asnecessary to reflect any subdivision of the stock); (y) an increase in such annual rateof dividends as necessary to reflect any reclassification (including any reverse stocksplit), recapitalization, reorganization or any similar transaction which has the effectof reducing the number of outstanding shares of the stock; and (z) the InterestedStockholder did not become the beneficial owner of any additional shares of stock ofthe Corporation except as part of the transaction which resulted in such InterestedStockholder becoming an Interested Stockholder or by virtue of proportionate stocksplits or stock dividends.

(B) The provisions of subparagraphs (x) and (y) of subparagraph (iv)(A) do not applyif no Interested Stockholder or an Affiliate or Associate of the Interested Stockholdervoted as a director of the Corporation in a manner inconsistent with such sub-subparagraphs and the Interested Stockholder, within 10 days after any act or failureto act inconsistent with such sub-subparagraphs, notifies the Board of Directors of theCorporation in writing that the Interested Stockholder disapproves thereof andrequests in good faith that the Board of Directors rectify such act or failure to act.

(v) After the Interested Stockholder has become an Interested Stockholder, the InterestedStockholder may not have received the benefit, directly or indirectly (exceptproportionately as a stockholder), of any loans, advances, guarantees, pledges or otherfinancial assistance or any tax credits or other tax advantages provided by theCorporation or any of its Subsidiaries, whether in anticipation of or in connection withsuch Business Combination or otherwise.

(b) The requirements of Section 1 of this Article VII do not apply to Business Combinationsthat, as to specifically identified Interested Stockholders or their Affiliates, have beenapproved or exempted therefrom by resolution of the Board of Directors of the Corporationat any time prior to the time that the Interested Stockholder first became an InterestedStockholder. If the Board of Directors so provides, the resolution shall be subject to approvalof the stockholders in the manner and by the vote specified in the resolution.

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3. Definitions. In this Article VII, the following words have the meanings indicated:

(a) “Affiliate,” including the term “affiliated person,” means a person that directly, orindirectly through one or more intermediaries, controls, or is controlled by, or is undercommon control with, a specified person

(b) “Announcement Date” means the first general public announcement of the proposal orintention to make a proposal of the Business Combination or its first communicationgenerally to stockholders of the Corporation, whichever is earlier;

(c) “Associate,” when used to indicate a relationship with any person, means:

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(i) Any corporation or organization (other than the Corporation or a Subsidiary ofthe Corporation) of which such person is an officer, director, or partner or is,directly or indirectly, the beneficial owner of 10 percent or more of any class ofEquity Securities;

(ii) Any trust or other estate in which such person has a substantial beneficialinterest or as to which such person serves as trustee or in a similar fiduciarycapacity; and

(iii) Any relative or spouse of such person, or any relative of such spouse, who hasthe same home as such person or who is a director or officer of the Corporation orany of its Affiliates.

(d) “Beneficial Owner,” when used with respect to any Voting Stock, means a person:

(i) That, individually or with any of its Affiliates or Associates, beneficially ownsVoting

Stock, directly or indirectly; or

(ii) That, individually or with any of its Affiliates or Associates, has:

(A) The right to acquire Voting Stock (whether such right is exercisableimmediately or only after the passage of time), pursuant to any agreement,arrangement, or understanding or upon the exercise of conversion rights,exchange rights, warrants or options, or otherwise; or

(B) The right to vote Voting Stock pursuant to any agreement, arrangement, orunderstanding; or

(iii) That has any agreement, arrangement, or understanding for the purpose ofacquiring, holding, voting or disposing of Voting Stock with any other person thatbeneficially owns, or whose Affiliates or Associates beneficially own, directly orindirectly, such shares of Voting Stock.

(e) “Business Combination” means:

(i) Unless the merger, consolidation, or share exchange does not alter the contractrights of the stock as expressly set forth in this Certificate of Incorporation orchange or convert in whole or in part the outstanding shares of stock of theCorporation, any merger or consolidation of the Corporation or any Subsidiarywith (A) any Interested Stockholder or (B) any other corporation (whether or notitself an Interested Stockholder) which is, or after the merger or consolidation,would be, an Affiliate of an Interested Stockholder that was an InterestedStockholder prior to the transaction.

(ii) Any sale, lease, transfer or other disposition, other than in the ordinary courseof business, in one transaction or a series of transactions in any 1 2-month period,to any Interested Stockholder or any Affiliate of any Interested Stockholder (otherthan the Corporation or any of its Subsidiaries) of any assets of the Corporation orany Subsidiary having, measured at the time the transaction or transactions areapproved by the Board of Directors of the Corporation, an aggregate book valueas of the end of the Corporation’s most recently ended fiscal quarter of 10 percentor more of the total Market Value of the outstanding stock of the Corporation orof its net worth as of the end of its most recently ended fiscal quarter;

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(iii) The issuance or transfer by the Corporation, or any Subsidiary, in onetransaction or a series of transactions, of any Equity Securities of the Corporationor any Subsidiary which have an aggregate Market Value of 5 percent or more ofthe total Market Value of the outstanding stock of the Corporation to anyInterested Stockholder or any Affiliate of any Interested Stockholder (other thanthe Corporation or any of its Subsidiaries) except pursuant to the exercise ofwarrants or rights to purchase securities offered pro rata to all holders of theCorporation’s voting stock or any other method affording substantiallyproportionate treatment to the holders of Voting Stock;

(iv) The adoption of any plan or proposal for the liquidation or dissolution of theCorporation in which anything other than cash will be received by an InterestedStockholder or any Affiliate of any Interested Stockholder; or

(v) Any reclassification of securities (including any reverse stock split), orrecapitalization of the Corporation, or any merger or consolidation, of theCorporation with any of its Subsidiaries which has the effect, directly orindirectly, in one transaction or a series of transactions, of increasing by 5 percentor more of the total number of outstanding shares, the proportionate amount of theoutstanding shares of any class of Equity Securities of the Corporation or anySubsidiary which is directly or indirectly owned by any Interested Stockholder orany Affiliate of any Interested Stockholder.

(f) “Common Stock” means any stock other than preferred or preference stock.

(g) “Control,” including the terms “controlling,” “controlled by” and “under commoncontrol with,” means the possession, directly or indirectly, of the power to direct orcause the direction of the management and policies of a person, whether through theownership of voting securities, by contract, or otherwise, and the beneficialownership of 10 percent or more of the votes entitled to be cast by a corporation’svoting stock creates a presumption of control.

(h) “Determination Date” means the date on which an Interested Stockholder firstbecame an Interested Stockholder;

(i) “Equity Security” means:

(i) Any stock or similar security, certificate of interest, or participation in anyprofit sharing agreement, voting trust certificate, or certificate of deposit for anequity security;

(ii) Any security convertible, with or without consideration, into an equitysecurity, or any warrant or other security carrying any right to subscribe to orpurchase an equity security; or

(iii) Any put, call, straddle, or other option or privilege of buying an equitysecurity from or selling an equity security to another without being bound to doso.

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(j) “Interested Stockholder” means any person (other than the Corporation or anySubsidiary) that:

(i) (A) Is the beneficial owner, directly or indirectly, of 10 percent or more of thevoting power of the outstanding voting stock of the Corporation; or

(B) Is an Affiliate of the Corporation and at any time within the 2 year periodimmediately prior to the date in question was the beneficial owner, directly orindirectly, of 10 percent or more of the Voting Power of the then outstandingvoting stock of the Corporation.

(ii) For the purpose of determining whether a person is an Interested Stockholder,the number of shares of Voting Stock deemed to be outstanding shall includeshares deemed owned by the person through application of subsection (d) of thissection but may not include any other shares of Voting Stock which may beissuable pursuant to any agreement, arrangement, or understanding, or uponexercise of conversion rights, warrants or options, or otherwise.

(k) “Market Value” means:

(i) In the case of stock, the highest closing sale price during the 30 day periodimmediately preceding the date in question of a share of such stock on thecomposite tape for New York Stock Exchange listed stocks, or, if such stock isnot quoted on the composite tape, on the New York Stock Exchange, or if suchstock is not listed on such exchange, on the principal United States securitiesexchange registered under the Securities Exchange Act of 1934 on which suchstock is listed, or, if such stock is not listed on any such exchange, the highestclosing bid quotation with respect to a share of such stock during the 30 dayperiod preceding the date in question on the National Association of SecuritiesDealers, Inc. automated quotations system or any system then in use, or if no suchquotations are available, the fair market value on the date in question of a share ofsuch stock as determined by the Board of Directors of the Corporation in goodfaith; and

(ii) In the case of property other than cash or stock, the fair market value of suchproperty on the date in question as determined by the Board of Directors of theCorporation in good faith.

(l) “Subsidiary” means any corporation of which voting stock having a majority ofthe votes entitled to be cast is owned, directly or indirectly, by the Corporation.

(m) “Valuation Date” means:

(i) For a Business Combination voted upon by stockholders, the later of the dayprior to the date of the stockholders’ vote or the day 20 days prior to theconsummation of the Business Combination; and

(ii) For a Business Combination not voted upon by stockholders, the date of theconsummation of the Business Combination.

(n) “Voting Stock means shares of capital stock of the Corporation entitled to vote

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generally in the election of directors.

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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate ofIncorporation to be executed and attested to by its duly authorized officers this 8th day ofNovember, 2001.


By: /s/ Ivan D. Meyerson Ivan D. MeyersonSenior Vice President, GeneralCounsel and CorporateSecretary

Attest:

/s/ Glenette E. BabbGlenette E. BabbAssistant Secretary

Economy & Finance

Mekesson Quarterly Reports 2002 3rd