10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarter ended December 31, 2001

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 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
(State or other jurisdiction of incorporation or organization) 94-3207296
(IRS Employer Identification No.)

One Post Street, San Francisco, California
(Address of principal executive offices) 94104
(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 the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

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

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

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. CONDENSED FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		FINANCIAL NOTES
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
SIGNATURES
Exhibit 3.1

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

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

McKESSON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
(Unaudited)

			December 31,			March 31,
			2001			2001
ASSETS
Current Assets
	Cash and equivalents		$	284.9		$	433.7
	Marketable securities			5.3			11.9
	Receivables			3,604.2			3,443.4
	Inventories			6,259.3			5,116.4
	Prepaid expenses and other			160.7			158.6
		Total		10,314.4			9,164.0
Property, Plant and Equipment, net				579.8			595.3
Capitalized Software				118.8			103.7
Notes Receivable				225.4			131.3
Goodwill				969.6			963.3
Other Assets				580.9			572.3
		Total Assets	$	12,788.9		$	11,529.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
	Drafts and accounts payable		$	6,249.1		$	5,361.9
	Deferred revenue			427.6			378.5
	Short-term borrowings			15.0			—
	Current portion of long-term debt			318.4			194.1
	Other liabilities			633.7			615.2
		Total		7,643.8			6,549.7
Postretirement Obligations and Other Noncurrent Liabilities				272.5			255.8
Long-Term Debt				893.4			1,035.6
McKesson Corporation — Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary Grantor Trust Whose Sole Assets are Junior Subordinated Debentures of McKesson Corporation				196.1			195.9
Other Commitments and Contingent Liabilities
Stockholders’ 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			1,828.7
	Other capital			(101.9	)		(108.4	)
	Retained earnings			2,248.9			2,006.6
	Accumulated 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’ Equity		3,783.1			3,492.9
		Total Liabilities and Stockholders’ Equity	$	12,788.9		$	11,529.9

See Financial Notes.

3

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share amounts)
(Unaudited)

					Quarter Ended						Nine Months Ended
					December 31,						December 31,
					2001			2000			2001			2000
Revenues					$	13,196.7		$	11,017.8		$	37,009.9		$	30,600.9
Cost of Sales						12,511.3			10,416.3			34,997.0			28,860.9
	Gross Profit					685.4			601.5			2,012.9			1,740.0
Selling, Distribution, Research and Development and Administration Expenses						497.7			471.2			1,518.1			1,369.4
Operating Income						187.7			130.3			494.8			370.6
Interest 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			31.5
Income Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust						169.8			14.4			417.8			226.6
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 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

See Financial Notes.

4

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

					Nine Months Ended
					December 31,
					2001			2000
Operating Activities
	Income from continuing operations				$	293.2		$	132.8
	Adjustments to reconcile to net cash provided (used) by operating activities
			Depreciation			87.4			85.4
			Amortization			66.1			92.4
			Provision for bad debts			40.0			37.3
			Deferred taxes on income			9.5			40.7
			Loss on sale of businesses			18.4			—
			Other non-cash items			19.0			60.5
				Total		533.6			449.1
	Effects of changes in:
			Receivables			(323.1	)		(566.6	)
			Inventories			(1,151.1	)		(780.9	)
			Drafts and accounts payable			891.8			1,136.4
			Deferred revenue			52.9			36.4
			Taxes			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 Activities
	Property 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 Activities
	Proceeds from issuance of debt					18.9			5.6
	Repayment 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			34.2
			Share repurchases			(44.2	)		(25.7	)
			Dividends paid			(51.4	)		(51.3	)
			ESOP notes and guarantees			14.5			10.9
			Other			—			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			548.9
Cash and equivalents at end of period					$	284.9		$	333.2

See Financial Notes.

5

McKESSON CORPORATION
FINANCIAL NOTES
(Unaudited)

1. Interim Financial Statements

     In our opinion, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial position as of December 31, 2001, the results of operations for the quarter and nine months 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 that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our fiscal 2001 consolidated financial statements previously filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current period presentation.

2. New Accounting Pronouncements

     On April 1, 2001, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended in June 2000 by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” which establishes accounting and reporting standards for derivative instruments and for hedging activities. These statements require that we recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The adoption of this accounting standard did 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 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. We adopted 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 financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. We adopted SFAS No. 142 on April 1, 2001 and, as required by this pronouncement, during the quarter ended September 30, 2001, we completed a transitional impairment test and we did not record any impairments of goodwill.

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

	Quarter Ended				Nine Months Ended
	December 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
Goodwill amortization, net of tax		—		0.04		—		0.12
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
Goodwill amortization, net of tax		—		0.04		—		0.12
Adjusted basic earnings per common share	$	0.38	$	0.05	$	1.03	$	0.57

6

McKESSON CORPORATION
FINANCIAL NOTES — (Continued)
(Unaudited)

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible 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 Be Disposed Of.” SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 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, nine acquisitions were for our Supply Solutions segment and two acquisitions were for our Information Solutions segment. As a result 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 fair values at the date of acquisition, and may be subject to change. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to our consolidated financial statements on either an individual or aggregate basis.

     During the first half of fiscal 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 these businesses 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.

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

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):

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
	2001			2000			2001			2000
Loss 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			3.8
Asset impairments relating to restructuring activities (Financial Note 5)		—			0.7			3.4			0.7
Other, net		0.3			1.1			5.1			3.9
Total pre-tax special charges		4.5			101.7			53.7			99.5
Tax benefit		(1.6	)		(39.7	)		(49.6	)		(38.0	)
Total after-tax special charges	$	2.9		$	62.0		$	4.1		$	61.5

7

McKESSON CORPORATION
FINANCIAL NOTES — (Continued)
(Unaudited)

     The quarter and nine months ended December 31, 2000 include charges of $98.9 million and $91.1 million for impairments of certain equity investments. The impairment charge for the quarter primarily consists of a $92.2 million impairment loss due to the other-than-temporary decline in value of our WebMD, Inc., warrants, which we received in fiscal 2000 as a result of a merger between Healtheon Corporation and WebMD, Inc., and an impairment loss of $6.7 million 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 claims with 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 nine months ended December 31, 2001. In the first half of fiscal 2002, following a review of our Medical-Surgical business, we developed and communicated a plan to close 23 and open four new distribution centers. In connection with this plan, we recorded severance charges of $10.0 million relating to the termination of approximately 650 employees primarily in distribution, delivery and associated back-office functions, exit-related charges of $14.0 million for costs to prepare facilities for disposal, and lease costs and property taxes required subsequent to termination of operations, and asset impairment charges 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 year restructuring 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 fiscal 2002 (in millions):

		Supply						Information
		Solutions						Solutions						Corporate
		Severance			Exit-Related			Severance			Exit-Related			Severance			Exit-Related			Total
Balance, March 31, 2001		$	10.0		$	7.5		$	3.5		$	9.0		$	24.7		$	0.3		$	55.0
Expenses incurred during the period			10.0			14.0			—			—			—			—			24.0
Adjustments to prior years’ expenses			(2.0	)		(2.3	)		—			—			(2.8	)		—			(7.1	)
	Net expense for the period		8.0			11.7			—			—			(2.8	)		—			16.9
Cash 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 were included in “other liabilities” in the accompanying condensed consolidated balance sheets. The remaining balances at December 31, 2001 for our Supply Solutions business relate primarily to our Medical-Surgical restructuring program incurred in the first half of fiscal 2002 including severance, costs for preparing facilities for disposal, lease costs and property taxes required subsequent to termination of operations. Exit-related costs for our Information Solutions business primarily relates to accrued contract liabilities and Corporate severance primarily pertains to retirement costs. With the exception of the retirement costs, which are anticipated to be paid in several years, substantially all other accrued restructuring amounts are anticipated to be paid by the end of fiscal 2003.

8

McKESSON CORPORATION
FINANCIAL NOTES — (Continued)
(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):

	Supply			Information
	Solutions			Solutions			Total
Balance, March 31, 2001	$	934.5		$	28.8		$	963.3
Goodwill acquired during the period		6.9			—			6.9
Translation 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, 2001
		Carrying		Accumulated					Carrying		Accumulated
		Amount		Amortization			Net		Amount		Amortization			Net
Customer lists		$	85.1	$	(38.0	)	$	47.1	$	80.8	$	(31.1	)	$	49.7
Technology			44.1		(14.2	)		29.9		42.9		(11.6	)		31.3
Trademarks			13.3		(1.1	)		12.2		13.3		(0.8	)		12.5
Other			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 million and $12.6 million in the nine months ended December 31, 2001 and 2000. At December 31, 2001, estimated future amortization expense of other intangible assets is as follows: $3.7 million for the remaining quarter of 2002 and $14.7 million, $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 billion under 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 our outstanding $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 preferred securities to the public and 123,720 common securities to McKesson Corporation, which are convertible at the holder’s option into our common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregate principal amount of our 5% Convertible Junior Subordinated Debentures due in 2027 (the “Debentures”). The Debentures represent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payable quarterly, 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 of the Debentures, and are callable at 103.0% of the liquidation amount.

9

McKESSON CORPORATION
FINANCIAL NOTES — (Continued)
(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 indenture pursuant to which the Debentures were issued, and our obligations under the Amended and Restated Declaration of Trust governing 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 preferred securities 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):

		Quarter Ended					Nine Months Ended
		December 31,					December 31,
		2001			2000		2001			2000
Net income		$	108.8		$	1.7	$	293.2		$	127.2
Unrealized gain (loss) on marketable securities and investments			(0.5	)		39.5		(5.7	)		30.4
Net 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 shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

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

			Quarter Ended				Nine Months Ended
			December 31,				December 31,
			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		4.6
Income from continuing operations — diluted			$	110.3	$	8.8	$	297.8	$	137.4
Weighted average common shares outstanding:
Basic				285.6		283.4		284.9		283.0
Effect 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		0.3
Diluted				299.2		295.1		299.0		292.3
Earnings per share from continuing operations:
		Basic	$	0.38	$	0.03	$	1.03	$	0.47
		Diluted	$	0.37	$	0.03	$	1.00	$	0.47

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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 Technology Business unit (now referred to as the Information Solutions segment), formerly HBO & Company (“HBOC”), were improperly recorded as revenue and reversed, as of January 15, 2002, eighty-seven lawsuits have been filed against McKesson, HBOC, certain of McKesson’s or HBOC’s current or former officers or directors, and other defendants, including Bear Stearns & Co. Inc. and Arthur Andersen LLP.

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 voluntarily dismissed without prejudice, one in the Northern District of Georgia, which has been transferred to the Northern District of California, one in the Eastern District of Pennsylvania, which has been transferred to the Northern District of California, two in the Western District of Louisiana, which have been transferred to the Northern District of California, and one in the District 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 order consolidating fifty-three of these actions into one consolidated action entitled In re McKesson HBOC, Inc. Securities Litigation (Case No. C-99-20743 RMW) (the “Consolidated Action”). By order dated December 22, 1999, Judge Whyte appointed the New York State Common Retirement Fund as lead plaintiff (“Lead Plaintiff”) and approved Lead Plaintiff’s choice of counsel. Judge Whyte’s November 2, 1999, order also provided that related cases transferred to the Northern District of California shall be consolidated with the Consolidated Action. Judge Whyte’s December 22 order also consolidated 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 entitled Jacobs v. HBO & Company (Case No. C-00-20974 RMW), which has been consolidated with the Consolidated Action and which purports to state claims under Sections 11 and 12(2) of the Securities Act, Section 10(b) of the Exchange Act and various state law causes of action.

     By order dated February 7, 2000, Judge Whyte coordinated a class action alleging claims under the Employee Retirement Income 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 Cohen action. 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. The ACCAC generally alleged that defendants violated the federal securities laws in connection with the events leading to McKesson’s announcements in April, May and July 1999. On September 28, 2000, Judge Whyte dismissed all of the ACCAC claims against McKesson under Section 11 of the Securities Act with prejudice, dismissed a claim under Section 14(a) of the Exchange Act with leave to amend and declined to dismiss a claim against McKesson under Section 10(b) of the Exchange Act.

     On November 14, 2000, Lead Plaintiff filed its Second Amended and Consolidated Class Action Complaint (“SAC”). As with its ACCAC, Lead Plaintiff’s SAC generally alleges that the defendants named therein violated the federal securities laws in connection with the events leading to McKesson’s announcements in April, May and July 1999. The SAC names McKesson, HBOC, certain of McKesson’s or HBOC’s current or former officers or directors, Arthur Andersen and Bear Stearns as defendants. The SAC purports to state claims against McKesson and HBOC under Sections 10(b) and 14(a) of the Exchange Act.

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     On January 7, 2002, Judge Whyte dismissed the claim against McKesson under Section 10(b) to the extent that claim was based on any pre-merger conduct or statements by McKesson, and also dismissed the claim against McKesson under Section 14(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. Section 10(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 against the Lead Plaintiff in the Consolidated Action individually, and as a representative of a defendant class of former HBOC shareholders who exchanged HBOC shares for McKesson shares in the HBOC transaction, McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. et al. (Case No. C01-20021 RMW) (the “Complaint and Counterclaim”). In the Complaint and Counterclaim, McKesson alleges that the exchanged HBOC shares were artificially inflated due to undisclosed accounting improprieties, and that the exchange ratio therefore provided more shares to former HBOC shareholders 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. McKesson does not allege any wrongdoing by these shareholders. On January 9, 2002, Judge Whyte dismissed the Complaint and Counterclaim with prejudice.

     Two other individual actions, Bea v. McKesson HBOC, Inc., et al. (Case No. C-0020072 RMW), and Cater v. McKesson Corporation 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’s motions 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 to the Northern District of California, together with a parallel state court action, Baker v. McKesson HBOC, Inc. et al., (filed as Case No. 199018; Case No. CV-00-0522 after removal), which had been removed to federal court. Both of the Baker cases have 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 Georgia and subsequently transferred to the Northern District of California, but that action names only two former officers and does not name McKesson or HBOC. On July 24, 2000, an action captioned Hess v. McKesson HBOC, Inc. et al., was filed in state court 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 January 1999. On August 24, 2000, McKesson removed the Hess action to the United States District Court for the District of Arizona, and on March 28, 2001, the District Court in Arizona granted McKesson’s motion to transfer the case to the Northern District of California. On April 20, 2001, the Hess plaintiffs filed an objection to consolidation of the Hess action with the Consolidated Action which McKesson opposed. By order dated November 1, 2001, Judge Whyte overruled the Hess plaintiffs’ objection to consolidation and ordered Hess consolidated with the Consolidated Action for pretrial purposes. Judge Whyte also stayed all further proceedings in Hess except for the filing of an amended complaint. The Hess plaintiffs filed their amended complaint on or about December 15, 2001 (the “Hess Amended Complaint”). The Hess Amended Complaint generally incorporated the allegations and claims asserted in Lead Plaintiff’s SAC in the Consolidated Action and also included various common law causes of action relating to McKesson’s acquisition of Ephrata. The Company is not currently required to respond to the Hess Amended Complaint.

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

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     Finally, on July 27, 2001, an action was filed in the United States District Court for the Northern District of California captioned Pacha, et al., v. McKesson HBOC, Inc., et al., (No. C01-20713 PVT) (“Pacha”). The Pacha plaintiffs allege that they were individual shareholders of McKesson stock on November 27, 1998, and assert that McKesson and HBOC violated Section 14(a) of the Exchange Act and SEC Rule 14a-9, and that McKesson, aided by HBOC, breached its fiduciary duties to plaintiffs by issuing a joint proxy statement in connection with the McKesson-HBOC merger which allegedly contained false and misleading statements or omissions. Plaintiffs name as defendants McKesson, HBOC, certain current or former officers or directors of McKesson or HBOC, Arthur Andersen and Bear Stearns. The action has been assigned to the Honorable Ronald M. Whyte, the judge overseeing the Consolidated Action. On September 25, 2001, the Pacha plaintiffs filed an application with the Court requesting that their action not be consolidated with the Consolidated Action. McKesson and HBOC filed an opposition to that application on October 3, 2001, and on November 13, 2001, Judge Whyte ordered Pacha consolidated 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 and Pennsylvania (the “State Actions”). Like the Consolidated Action, the State Actions generally allege misconduct by the defendants 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 Delaware Chancery Court and Mitchell v. McCall et al., (Case. No. 304415), filed in California Superior Court, City and County of San Francisco. McKesson moved to dismiss both of these actions and to stay the Mitchell action in favor of the earlier filed Ash and Cohen derivative actions. Plaintiffs in Mitchell agreed to defer any action by the court on McKesson’s motions pending resolution of McKesson’s dismissal motion in Ash. On September 15, 2000, the Ash court dismissed all causes of action with leave to replead certain of the dismissed claims, and on January 22, 2001, the Ash plaintiffs filed a Third Amended 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 et al., (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 actions have been voluntarily dismissed without prejudice. McKesson has removed Edmondson to Federal Court in Delaware where plaintiffs have filed a motion to remand, which is pending. McKesson’s motions to stay the Derdiger and Caravetta actions in favor of proceedings in the federal Consolidated Action have been granted. The plaintiff in the Derdiger action has filed a motion 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 filed in 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. et al., (Case No. 307619), Utah State Retirement Board v. McKesson HBOC, Inc. et al., (Case No. 311269), and Minnesota State Board of Investment v. McKesson HBOC, Inc. et al., (Case No. 311747). In Yurick, the trial court sustained McKesson’s demurrer to the original complaint without leave to amend with respect to all causes of action, except the claims for common law fraud and negligent misrepresentation as to which amendment was allowed. The Court also stayed Yurick pending the commencement of discovery in the Consolidated Action, but allowed the filing of an amended complaint. On May 23, 2001, the California Court of Appeals affirmed the Yurick trial court’s order dismissing claims against certain of the individual defendants in the action without leave to amend. On July 31, 2001, McKesson’s demurrer to the Second Amended Complaint was overruled and McKesson’s alternative motion to strike was denied.

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McKESSON CORPORATION
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     The Oregon, Utah and Minnesota actions referenced above are individual securities actions filed in the California Superior Court for the City and County of San Francisco by out-of-state pension funds. On April 20, 2001, plaintiffs in Utah and Minnesota filed amended complaints against McKesson, HBOC, certain current or former officers or directors of McKesson or HBOC, Arthur Andersen and Bear Stearns. The amended complaints in Utah and Minnesota assert claims under California’s and Georgia’s securities laws, claims under Georgia’s RICO statute, and various common law claims under California and Georgia law. On June 22, 2001, McKesson and HBOC demurred to and moved to strike portions of the amended complaints and also moved to stay these actions pending the final resolution of the Consolidated Action. The court held partial hearings on McKesson’s demurrers and motions to strike on November 15, 2001, and on January 29, 2002, and is currently scheduling further hearings. By order dated December 3, 2001, the court denied McKesson’s motion to stay but ordered that all discovery in the Utah and Minnesota actions would be stayed pending the commencement of discovery in the Consolidated Action.

     On May 30, 2001, plaintiffs in Oregon filed a second amended complaint against McKesson, HBOC, certain current or former officers or directors of McKesson or HBOC, and Arthur Andersen. The second amended complaint in Oregon asserts claims under California’s and Georgia’s securities laws, claims under Georgia’s RICO statute, and various common law claims under California and Georgia law. The parties to the Oregon action previously agreed to a stay of all proceedings in that action, other than motions to test the sufficiency of the pleadings, pending the commencement of discovery in the Consolidated Action. On April 4, 2001, the plaintiff in Oregon filed a motion to lift the stipulated stay of discovery, which McKesson and HBOC opposed. McKesson also moved the court for an order modifying the stipulated stay to stay all proceedings in the action pending the final resolution of the Consolidated Action. Also on June 22, 2001, McKesson and HBOC demurred to and moved to strike portions of Oregon’s second amended complaint. The court held partial hearings on McKesson’s demurrers and motions to strike on November 15, 2001, and January 29, 2002, and is currently scheduling further hearings. To our knowledge, the court has not issued a written order on Oregon’s motion to lift the stipulated stay or McKesson 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 the Consolidated Action.

     Several individual actions have been filed in various state courts outside of California. Six of these cases have been filed in Georgia state courts: Moulton v. McKesson HBOC, Inc. et al., (Case No. 98-13176-9), involving a former HBOC employee’s claims for unpaid commissions, claims under Georgia’s securities and racketeering laws, as well as various common law causes of action, has been settled and dismissed with prejudice. Powell v. McKesson HBOC, Inc. et al., (Case No. 2000-CV-27864), involving a former HBOC employee’s claims for unpaid commissions, claims under Georgia’s securities and racketeering laws, as well as various common law causes of action has been settled in principle. On December 12, 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 claims and claims under Georgia’s securities and racketeering laws. The Company’s response to the Drake complaint is due on February 15, 2002. In Adler v. McKesson HBOC, Inc. et al., (Case No. 99-C-7980-3), a former HBOC shareholder asserts a claim for common law fraud. The Georgia Court of Appeals has granted interlocutory review of a discovery order issued in Adler. At this time discovery is underway. There is no currently scheduled trial date. Suffolk Partners Limited Partnership et al. v. McKesson HBOC, Inc. et al., (Case No.00-VS-010469A) and Curran Partners, L.P. v. McKesson HBOC, Inc. et al.,(Case No. 00-VS-010801) are related actions brought on behalf of individual shareholders and assert claims based on Georgia securities and racketeering laws and common law claims. McKesson and HBOC’s motion to stay both the Suffolk and Curran actions in favor of proceedings in the federal Consolidated Action has been granted.

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McKESSON CORPORATION
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     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. The Grant case relates to McKesson’s acquisition of Keystone/Ozone Pure Water Company (“Keystone”). Plaintiffs are former shareholders of Keystone who received McKesson shares in exchange for their shares in Keystone pursuant to a merger agreement between plaintiffs and one of McKesson’s subsidiaries consummated shortly before the HBOC transaction. On March 6, 2001, the Court denied McKesson’s motion to stay and dismissed with prejudice all plaintiffs’ claims except for those based on breach of contract and negligent misrepresentation. A settlement in principle has been reached in Grant which will have no material impact on the Company. On September 28, 1999, an action was filed in Delaware Superior Court under the caption Kelly v. McKesson HBOC, Inc. et al., (C.A. No. 99C-09-265 WCC). Plaintiffs in Kelly are former shareholders of KWS&P/ SFA, which merged into McKesson after the HBOC transaction. Plaintiffs assert claims under the federal securities 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 denying McKesson’s motion to dismiss the complaint for failure to state a claim. On October 19, 1999, an individual action was filed in 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 against McKesson and HBOC by certain former shareholders of Access Health Inc., a company acquired by HBOC in December of 1998. American Healthcare has been settled and was dismissed with prejudice on October 24, 2001, and that resolution had no material impact on the Company.

     The United States Attorneys’ Office and the Securities and Exchange Commission have commenced investigations into the matters leading to the restatement. On May 15, 2000, the United States Attorney’s Office filed a one-count information against former HBOC officer, Dominick DeRosa, charging Mr. DeRosa with aiding and abetting securities fraud, and on May 15, 2000, Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an indictment was unsealed in the Northern 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 filed by the Securities and Exchange Commission against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa (Securities and Exchange Commission v. Gilbertson, et al., Case No. C-00-3570). Mr. DeRosa has settled with the Securities Exchange Commission without admitting or denying the substantive allegations of the complaint. On January 10, 2001, the grand jury returned a superseding indictment in the Northern District of California against Messrs. Gilbertson and Bergonzi (United States v. Bergonzi, et al., Case No. CR-00-0505). On September 27, 2001, the Securities and Exchange Commission filed securities fraud charges against six former HBOC officers and employees. Simultaneous with the filing of the Commission’s civil 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 alleged violations, and agreed to pay civil penalties in various amounts. On January 3, 2002, McKesson was notified in writing by the Staff of the Securities and Exchange Commission that its investigation of McKesson has been terminated, and that no enforcement 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, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against McKesson or HBOC or settlements that could require substantial payments by McKesson or HBOC, 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, other pending and potential legal actions for product liability and other damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. These include:

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     Antitrust Matters

     We are currently a defendant in numerous civil antitrust actions filed since 1993 in federal and state courts by retail pharmacies. The federal cases were coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of approximately 109 actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the “Individual Actions”). In 1999, the court dismissed a related class 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 other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially high, and non-competitive levels, especially as compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. The wholesalers’ 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 on November 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 on essentially the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case (Paradise Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was filed in the Superior Court of the County of Santa Clara and was transferred to the Superior Court for the County of San Francisco. The case is trailing MDL 997. The case in Mississippi (Montgomery Drug Co., et al. v. The Upjohn Co., et al.) is pending in the Chancery Court of Prentiss County Mississippi. The Chancery Court has held that the case may not be maintained 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 the Individual Actions and the California case. We and other wholesalers have entered into a judgment sharing agreement with certain pharmaceutical manufacturer defendants, which provides generally that we, together with the other wholesale distributor defendants, will be held harmless by such pharmaceutical manufacturer defendants and will be indemnified against the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excess of $1 million in the aggregate per wholesale distributor defendant.

     FoxMeyer Litigation

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

     In the Texas Action, Avatex alleged, among other things, that we (1) defrauded Avatex, (2) competed unfairly and tortiously 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 to purchase that business at a distressed price. Avatex sought compensatory damages of at least $400 million, punitive damages, attorneys’ fees and costs. We removed the case to bankruptcy court in Dallas and moved to transfer it to the Delaware court.

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     In March 1997, we and the Manufacturer Defendants intervened in an action filed by the FoxMeyer Unsecured Creditors Committee in the Delaware court to enjoin Avatex from pursuing the Texas Action (the “Delaware Actions”). The complaint in intervention sought declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In May 1997, a trustee (the “Trustee”) was appointed in the FoxMeyer Corporation bankruptcy cases, and he then intervened as a plaintiff in the 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, FoxMeyer Corporation and the Trustee, and third party claims against certain officers and directors of Avatex, asserting various claims of misrepresentation and breach of contract.

     In November 1998, the Delaware court granted our motion for summary judgment to preclude Avatex from pursuing the first three counts asserted in the Texas Action on the ground of judicial estoppel. We filed a renewed motion for summary judgment to preclude the four remaining counts of Avatex’s complaint in the Texas Action which was denied without prejudice by the Delaware court on August 9, 1999. In addition, we filed cross-claims against FoxMeyer Corporation and the Trustee seeking the same relief as sought in our complaint against Avatex. Based on the Delaware court’s order granting summary judgment as to the first three counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action remanded to state court. We and the Manufacturer Defendants appealed the remand ruling, as well as an August 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 the remand order and denied as moot the appeal from the order denying transfer on May 17, 1999, and affirmed the order dismissing the first three counts with prejudice on March 28, 2001. We and several of the other defendants appealed to the federal court of appeals the ruling upholding the order denying transfer but subsequently moved to dismiss the appeal with prejudice, which motion was granted and the appeal was dismissed on October 4, 1999. Avatex appealed to the federal court of appeals the ruling affirming the Texas bankruptcy court’s dismissal with prejudice of the first three counts of Avatex’s complaint.

     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 Delaware litigation and the Texas Action between us and FoxMeyer Corporation. On April 26, 2001, our settlement with the Trustee was approved by the Delaware bankruptcy court. Avatex amended its complaint to add claims for unjust enrichment and constructive trust seeking damages of at least $700 million, and we denied the allegations underlying these claims. We filed two dispositive motions seeking the dismissal of the remaining claims asserted by Avatex. After completing discovery on the merits of the various claims remaining in the Texas Action, we and Avatex settled all claims on December 6, 2001. The Delaware Action and the Texas Action have been dismissed with prejudice, and the settlements will have no material impact on the Company.

     Product Liability Litigation

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

     Certain of our subsidiaries, MGM and RedLine, are two of the defendants in approximately ninety cases in which plaintiffs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including MGM and RedLine. Efforts to resolve tenders 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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     There is one remaining state court class action in South Carolina filed against MGM on behalf of all health care workers in that state who suffered accidental needle sticks that exposed them to potentially contaminated bodily fluids, arising from MGM’s distribution of allegedly defective syringes. MGM’s suppliers of the syringes are also named defendants in this action. The tender of all cases has been accepted by the two major suppliers. By this acceptance, these suppliers are paying for separate distributors’ counsel and have agreed to fully indemnify us for any judgments in these cases arising from its distribution 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 to common 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, the lump sum fee for which would be based upon a fraction of a percent of our overall revenues over the past ten years. Due to the pendency of earlier litigation brought against the Foundation attacking the validity of the patents at issue, the court has stayed 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 are involved in various matters pursuant to environmental laws and regulations. We have received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at five sites where we, or entities acquired by us, formerly conducted operations; and we, by administrative order 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 of approximately $1.5 million which third parties have agreed to pay in settlement or which we expect, based either on agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $13 million is expected to be paid out between April 2001 and March 2029. Our liability for these environmental matters has been accrued in the accompanying condensed consolidated balance sheets.

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

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

     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 and governmental proceedings discussed under “Legal Proceedings” will not have a material adverse effect on our financial position, results of operations or cash flows.

18

McKESSON CORPORATION
FINANCIAL NOTES — (Concluded)
(Unaudited)

12. Segment Information

     Our operating segments include Supply Solutions and Information Solutions. We evaluate the performance of our operating 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 directly attributable to the segment.

     Financial information relating to our reportable segments for the quarter and nine months ended December 31, 2001 and 2000, is presented below (in millions):

				Quarter Ended						Nine Months Ended
				December 31,						December 31,
				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 and dividends on preferred securities of subsidiary trust			$	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. These notes are redeemable at any time, in whole or in part, at our option. Net proceeds of $395.3 million from the issuance of these 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 mail order pharmaceutical prescription services to managed care patients for approximately $62 million in cash.

19

McKESSON CORPORATION
FINANCIAL REVIEW
(Unaudited)

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

Financial Overview

		Quarter Ended				Nine Months Ended
		December 31,				December 31,
(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	$	22,885.2
As 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		0.45
Pro 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 and 2000, 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 amortization was $12.8 million ($12.0 million after-tax), or $0.04 per diluted share. For the nine months ended December 31, 2000, pre-tax goodwill 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 further discussions 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 and 2000. 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 months ended 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 the most informative representation of recurring and non-recurring, non-transactional related operating results. These measures are not 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 third quarter 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 net income before special charges and discontinued operations of $69.3 million or $0.24 per diluted share in the third quarter a year 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 in the nine month period a year ago.

     The improved operating results for the quarter and the nine months ended December 31, 2001, resulted primarily from continued strong revenue growth and operating margin expansion in our Supply Solutions segment, improved operating profit in our Information Solutions segment, discontinuance of goodwill amortization in accordance with SFAS No. 142 and a decrease in the amount of special charges. U.S. pharmaceutical revenues also included an extra selling day in the third quarter this year.

20

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

Results of Operations

     Revenues

					Quarter Ended				Nine Months Ended
					December 31,				December 31,
(In millions, except per share amounts)					2001		2000		2001		2000
Supply Solutions
	Pharmaceutical Distribution & Services U.S. Health Care (1)				$	11,436.3	$	9,390.9	$	31,857.8	$	25,817.6
		International				757.6		691.6		2,184.6		1,967.4
			Total Pharmaceutical Distribution & Services			12,193.9		10,082.5		34,042.4		27,785.0
	Medical-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		29,929.6
Information Solutions
	Software					37.8		28.3		125.4		88.1
	Services					185.2		174.5		543.8		525.1
	Hardware					23.1		21.5		56.0		56.3
				Total 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

(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 in the third quarter of 2001. For the nine months ended December 31, 2001, revenues increased $6.4 billion, or 21%, to $37.0 billion from $30.6 billion for the comparable period in fiscal 2001. The increase in revenue was primarily driven by growth in 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 billion and $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. This increase reflects greater sales to customers’ warehouses, improved growth rates from a number of our largest U.S. retail drug chain customers, the impact of new distribution agreements in the U.S. which took full effect in the prior quarters of fiscal 2002, 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 $2,240.5 million in the nine-month period, reflecting increased revenue growth for our primary and extended care products.

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

21

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

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

Operating Profit:

			Quarter Ended				Nine Months Ended
			December 31,				December 31,
(In millions)			2001		2000		2001		2000
Operating 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	$	481.5
Pro 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 Intangible Assets.” For the quarter and nine months ended December 31, 2000, pre-tax goodwill amortization was $12.8 million and $36.4 million.

     Operating profit, as reported under U.S. GAAP, was $239.0 million for the quarter ended December 31, 2001 compared to $169.3 million for the third quarter of the prior fiscal year. For the nine months ended December 31, 2001, operating profit 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 special charges. 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 $147.5 million or 31% to $621.8 million in the first nine months of fiscal 2002. Operating profit as a percent of revenues (excluding warehouse sales) increased 21 basis points to 2.39% in the third quarter and 22 basis points to 2.36% for the nine months compared 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 the operating margin reflects productivity improvements in both back-office and field operations, expanded product sourcing activities, 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 million to $39.2 million in the first nine months of fiscal 2002. Operating profit as a percent of revenues increased 538 basis points to 6.14% in the third quarter and 445 basis points to 5.41% for the nine months compared to the prior year period. Excluding goodwill amortization, operating profit as a percentage of revenues was 3.48% and 3.38% in the quarter and nine months ended December 31, 2000. Increases over the prior year periods are primarily the result of the increase in higher margin software revenue and operating expense management.

22

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

     Corporate Expenses: Expenses increased to $37.5 million from $27.0 million in the prior year third quarter and to $108.3 million from $70.2 million in the prior year nine-month period. The increase reflects expenses for the sale of receivables associated 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, HealthNexis merged 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, partially offset by an increase in average borrowings to support revenue growth. We also sold more receivables compared to the quarter and nine months of last year in order to meet our financing needs. The costs associated with the sale of receivables are recorded in Corporate expenses.

     Income Taxes: The effective income tax rate excluding special charges for the quarter and nine months ended December 31, 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 goodwill amortization, which is primarily non-tax-deductible. Income taxes on special charges for the nine months ended December 31, 2001 included a $30.0 million tax benefit on the sale of stock of an Information Solutions business. The tax benefit could not 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 ended December 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 the third quarter and to $293.2 million from $127.2 million in the nine months ended December 31, 2001 and 2000. Income from continuing operations, excluding special charges, increased to $111.7 million from $69.3 million in the third quarter and 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 the nine months ended December 31, 2001 and 2000. Diluted earnings per share from continuing operations, excluding special charges, increased to $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. Excluding after-tax goodwill amortization of $34.0 million, net income as adjusted would have been $228.3 million and earnings per diluted 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 net income and earnings per share in 2002 as compared to 2001, primarily reflects revenue growth and operating margin expansion 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 third quarter of fiscal 2002, compared to 295.1 million in the comparable prior year period. On a year-to-date basis, the weighted average number of shares outstanding were 299.0 million and 292.3 million for fiscal 2002 and 2001. The increase in the weighted average number of shares outstanding was primarily due to an increased effect of dilutive securities as a result of an improvement in our stock price, as well as shares issued under employee benefit plans, partially offset by shares repurchased as part of our share repurchase program. See Financial Note 10 on page 10 to the accompanying condensed consolidated financial statements for the calculation of diluted earnings per share.

23

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(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):

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
	2001			2000			2001			2000
Loss 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			3.8
Asset impairments relating to restructuring activities		—			0.7			3.4			0.7
Other, net		0.3			1.1			5.1			3.9
Total pre-tax special charges		4.5			101.7			53.7			99.5
Tax 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 for impairments of certain equity investments. The impairment charge for the quarter primarily consists of a $92.2 million impairment loss due to the other-than-temporary decline in value of our WebMD, Inc., warrants, which we received in fiscal 2000 as a result of a merger between Healtheon Corporation and WebMD, Inc., and an impairment loss of $6.7 million 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.

     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 these businesses 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 nine months ended December 31, 2001. In the first half of fiscal 2002, following a review of our Medical-Surgical business, we developed and communicated a plan to close 23 and open four new distribution centers. In connection with this plan, we recorded severance charges of $10.0 million relating to the termination of approximately 650 employees primarily in distribution, delivery and associated back-office functions, exit-related charges of $14.0 million for costs to prepare facilities for disposal, and lease costs and property taxes required subsequent to termination of operations, and asset impairment charges 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 year restructuring 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.

24

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

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

			Quarter Ended						Nine Months Ended
			December 31,						December 31,
			2001			2000			2001			2000
Total pro forma operating profit			$	239.0		$	171.4		$	661.0		$	480.7
Special charges				—			(2.1	)		(45.7	)		0.8
Operating profit — U.S. GAAP				239.0			169.3			615.3			481.5
Corporate
	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			226.6
Income 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 for further 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 increases in working capital of $452.2 million. The increase in working capital was primarily due to increases in inventories and receivables of $1,151.1 million and $323.1 million, partially offset by an increase in drafts and accounts payable of $891.8 million. The increase in these working capital balances primarily reflects the build up associated with the implementation of new 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 from continuing operations of $132.8 million plus non-cash items of $316.3 million were partially offset by increases in working capital of $397.6 million. The increase in working capital reflects increases in inventories and receivables of $780.9 million and $566.6 million, and a decrease in taxes of $213.9 million. This was partially offset by an increase in drafts and accounts payable of $1,136.4 million. The increase in inventories and payables is primarily the result of purchasing opportunities late in the quarter. The additional increase in payables reflects the timing of vendor payments. Increases in accounts receivable were mainly the result of increased sales growth. Cash flows from operations also reflect the payment of taxes related to a gain 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 $208.6 million, including $74.8 million for capital expenditures, $10.7 million for the acquisition of several businesses in the Supply Solutions 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.

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

25

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

     Financing Activities: Net cash used by financing activities was $21.4 million during the nine months ended December 31, 2001 compared to a use of cash of $70.9 million in the prior year nine-month period. The use of cash primarily reflects capital 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 at March 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 the increase in revenues.

     Working capital requirements are primarily funded by cash, short-term borrowings and our receivables sale facility. We have a 364-day revolving credit agreement that allows for short-term borrowings of up to $1.075 billion (which was renewed in October 2001 under terms substantially similar to those previously in place), and a $400 million five-year revolving credit facility expiring in fiscal 2004. These facilities are primarily intended to support our commercial paper borrowings. We also have a committed revolving receivables sale facility aggregating $850 million, which terminates on June 14, 2002. At December 31, 2001, we had $15.0 million of short-term borrowings, no borrowings under the revolving credit facilities, and $414 million of borrowing equivalents under the revolving receivables sale facility. We anticipate renegotiating our revolving 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. These notes are redeemable at any time, in whole or in part, at our option. Net proceeds of $395.3 million from the issuance of these notes will be used to repay term debt and for other general corporate purposes. As of December 31, 2001, our current portion of long-term debt was $318.4 million, of which $175.0 million and $125.0 million matures in March and November of 2002.

     On January 30, 2002, our Supply Solutions segment acquired a national specialty pharmacy business that provides mail order 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 of shares of our common stock in 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 corporate structure, 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 negative impact on our credit ratings and our ability to finance our operations through our current credit facilities, as well as the issuance 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 to credit sources to meet our funding requirements. Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flow from operations, existing credit sources or other capital market transactions.

26

McKESSON CORPORATION
FINANCIAL REVIEW — (Continued)
(Unaudited)

New Accounting Pronouncements

     In June 2001, the Financial Accountings Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible 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 Be Disposed Of.” SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 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 meaning of Section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. 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 the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. Among the factors that could cause actual results to differ materially are 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 such products 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.

27

McKESSON CORPORATION
FINANCIAL 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 documents filed with the Securities Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Other than required under SEC laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances 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 and foreign currency exchange rates as 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 of this 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:

Exhibit
Number	Description
3.1	Restated Certificate of Incorporation of the Company as filed with the office of the Delaware Secretary of 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 results and updated legal proceedings.

Form 8-K dated January 24, 2002 and filed on January 28, 2002, relating to our issuance of $400 million aggregate principal amount of 7 3/4% notes due 2012.

28

McKESSON CORPORATION

SIGNATURES

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

	McKesson Corporation
Dated: February 14, 2002	By	/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

29 EX-3.1 3 f78929ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF MCKESSON CORPORATION (DULY ADOPTED IN ACCORDANCE WITH SECTION 245 OF THE DELAWARE GENERAL CORPORATION LAW) ORIGINALLY INCORPORATED ON JULY 7, 1994 UNDER 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 2711 Centerville Road, Suite 400, Wilmington 19808, County of New Castle. The name of the registered 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 corporations may 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 is 500,000,000 shares, divided into 100,000,000 shares of Series Preferred Stock, par value $0.01 per 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 all shares having par value is $5,000,000. The Board of Directors of the Corporation is expressly authorized, as shall be stated and expressed in the resolution or resolutions it adopts, subject to limitations prescribed by law and the provisions of this Article IV, to provide for the issuance of the shares of Series Preferred Stock in one or more class or series, in addition to the shares thereof specifically provided for in 1 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 fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, powers, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, including without limitation, the authority to provide that any such class or series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, 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, the Corporation; (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; or (v) subject to the terms and amounts of any sinking fund provided for the purchase or redemption of the shares of 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 (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of 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 required pursuant to the provisions of this Article IV or the certificate or certificates establishing any additional 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 of the Series Preferred Stock from time to time by setting or changing in any one or more respects the 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 the foregoing, the power of the Board of Directors to classify and reclassify any of the shares of Series Preferred Stock shall include, without limitation, subject to the provisions of this Certificate of Incorporation, authority to classify or reclassify any unissued shares of such stock into one or more series of Series Preferred Stock, and to divide and classify shares of any series into one or more series of Series Preferred Stock by determining, fixing or altering one or more of the following: (a) The distinctive designation of such series and the number of shares to constitute such series; provided that, unless otherwise prohibited by the terms of such or any other series, the number of shares of any series may be decreased by the Board of Directors in connection with any classification or reclassification of unissued shares and the number of shares of such series may be increased by the Board of Directors in connection with any such classification or 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 shall remain part of the authorized Series Preferred Stock and be subject to classification and reclassification as provided in this Section. 2 (b) Whether or not and, if so, the rates, amounts and times at which, and the conditions under which, dividends shall be payable on shares of such series, whether any such dividends shall rank senior or junior to or on a parity with the dividends payable on any other series of Series Preferred Stock, and the status of any such dividends as cumulative, cumulative to a limited extent 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 voting rights 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, if so, the terms and conditions thereof, including provision for adjustment of the conversion or exchange 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 terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; and whether or not there shall 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 or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, which rights may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates, and whether such rights shall rank senior or junior to or on a parity with such rights of any other series of Series Preferred Stock. (g) Whether or not there shall be any limitations applicable, while shares of such series are outstanding, upon the payment of dividends or making of distributions on, or the acquisition of, or the use of moneys for purchase or redemption of, any stock of the Corporation, or upon any other action of the Corporation, including action under this Section, and, if so, the terms and conditions thereof. (h) Any other powers, designations, preferences and relative, participating, optional and other rights, if any, and any other qualifications, limitations and restrictions, on the shares of such series, not inconsistent with law and this Certificate of Incorporation. 2. For the purposes hereof and of any certificate providing for the classification or reclassification of any shares of Series Preferred Stock or of any other charter document of the Corporation (unless otherwise provided in any such certificate or document), any class or series of 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 series shall be entitled to the receipt of dividends or of amounts distributable in the event of any liquidation, dissolution or winding up, as the case may be, in preference to or with priority over 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 of such class or classes or series to the receipt of dividends or of amounts distributable in event of any liquidation, dissolution or winding up, as the case may be, shall be neither (i) in preference to, or with priority over, nor (ii) subject or subordinate to, the rights of holders of such particular class or series of stock in respect of the receipt of dividends or of amounts distributable in the event of any liquidation, dissolution or winding up of the Corporation, as the case may be; and 3 (c) Junior to a particular class or series of stock if the rights of the holders of such class or classes or series shall be subject or subordinate to the rights of the holders of such particular class or series of stock in respect of the receipt of dividends or of amounts distributable in the event 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 Junior Participating Preferred Stock" and the number of shares constituting such series shall initially be 10,000,000, par value $0.01 per share, such number of shares to be subject to increase or decrease by action of the Board of Directors as evidenced by a certificate or certificates evidencing such change. 2. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the 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 A Quarterly Dividend Payment Date"), commencing on the first Series A Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the 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 aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Series A Quarterly Dividend Payment Date, or, with respect to the first Series A Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation 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) subdivide the outstanding Common Stock, or (C) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Series A Quarterly Dividend Payment Date and the next subsequent Series A Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless 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 A Junior Participating Preferred Stock from the Series A Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Series A Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Series A Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Series A Quarterly Dividend Payment Date, in either of 4 which events such dividends shall begin to accrue and be cumulative from such Series A Quarterly 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 amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable 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 such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as 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 be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such 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 previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Series Preferred 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, voting as 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 Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(c) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such 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 exercised unless the holders of ten percent (10%) in number of shares of Series Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Series Preferred Stock of such voting right. At any meeting at which the holders of Series Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Series Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the 5 holders of the Series Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Series Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari 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 of series, may request, the calling of a special meeting of the holders of Series Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders 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 of such 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 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by 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. Notwithstanding the provisions of this paragraph (c)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Series Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (A) the Directors so elected by the holders of Series Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (B) any vacancy in the Board of Directors may (except as provided in paragraph (c)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this paragraph (c) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (B) of the preceding sentence. (v) Immediately upon the expiration of a default period, (A) the right of the holders of Series Preferred Stock as a class to elect Directors shall cease, (B) the term of any Directors 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 this Certificate of Incorporation or the By-laws of the Corporation irrespective of any increase made pursuant to the provisions of paragraph (c)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in this Certificate of Incorporation or the By-laws of the Corporation). Any vacancies in the Board of Directors effected by the provisions of clauses (B) and (C) in the preceding sentence 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 A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 6 4. CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking 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 on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking 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 may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series Preferred Stock and may be reissued as part of a new series of Series Preferred Stock to be created by resolution or resolutions of the Board of Directors, 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 the Corporation, 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 Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full 7 amount of the Series A Liquidation Preference, no additional distributions shall be made to the 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 A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with 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 in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity 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 Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (c) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable 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 such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were 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 exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (a) declare any dividend on Common Stock payable in shares of Common Stock, (b) subdivide the outstanding Common Stock, or (c) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock shall not be redeemable. 9. RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Series Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 8 10. AMENDMENT. This Certificate of Incorporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other 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 be paid upon the Common Stock as and when declared by the Board of Directors out of funds legally available for the payment of dividends. B. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, and after the holders of the Series Preferred Stock shall have been paid in full amounts to which they respectively shall be entitled, or an amount sufficient to pay the aggregate amount to which such holders shall be entitled shall have been deposited in trust with a bank or trust company having its principal office in the Borough of Manhattan, City, County and State of New York, having a capital, undivided profits and surplus aggregating at least $5,000,000, for the benefit of the holders of the Series Preferred Stock, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock. C. VOTING RIGHTS. Except as otherwise expressly provided with respect to the Series Preferred Stock and except as otherwise may be required by law, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes and each holder of Common 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 the direction of the Board of Directors. The exact number of directors shall be fixed from time to time by, or in the manner provided in, the By-Laws of the Corporation and may be increased or decreased as therein provided. Directors of the Corporation need not be elected by ballot unless required by the By-Laws. 2. CLASSIFICATION OF BOARD OF DIRECTORS. The directors shall be divided into three classes. Each such class shall consist, as nearly as may be possible, of one-third of the total number of directors, and any remaining directors shall be included within such group or groups as the Board of Directors shall designate. At the annual meeting of stockholders in 1994, a class of directors shall be elected for a one-year term, a class of directors for a two-year term and a class of directors for a three-year term. At each succeeding annual meeting of stockholders, beginning in 1995, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term 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 until the annual meeting for the year in which his term expires and until his successor shall be elected and qualify. No alteration, amendment or repeal of this Article V or the By-Laws of the 9 Corporation shall be effective to shorten the term of any director holding office at the time of such 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 the time of such alteration, amendment or repeal until the expiration of the terms of office of all directors then holding office, unless (i) in the case of this Article V, such alteration, amendment or 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 the holders of all shares entitled to vote thereon or by a vote of a majority of the entire Board of Directors. 3. DIRECTORS APPOINTED BY A SPECIFIC CLASS OF STOCKHOLDERS. To the extent that any holders of any class or series of stock other than Common Stock issued by the Corporation shall have the separate right, voting as a class or series, to elect directors, the directors elected by such class or series shall be deemed to constitute an additional class of directors and shall have a term of office for one year or such other period as may be designated by the provisions of such class or series providing such separate voting right to the holders of such class or series of stock, and any such 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 of defining, limiting and regulating the powers of the Corporation and of its directors and stockholders: 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 of Incorporation, now or hereafter authorized by law, including any amendment which alters the contract 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, alter and repeal the By-Laws of the Corporation in whole or in part at any regular or special meeting of the Board of Directors, by vote of a majority of the entire Board of Directors. Except where this Certificate of Incorporation otherwise requires a higher vote, the By-Laws may also be adopted, altered or repealed in whole or in part at any annual or special meeting of the stockholders by the affirmative vote of three-fourths of the shares of the Corporation outstanding and entitled to vote thereon. 3. NO PREEMPTIVE RIGHTS. No holder of any class of stock of the Corporation, whether now or hereafter authorized or outstanding, shall have any preemptive, preferential or other right to subscribe for or purchase any class of the Corporation's stock, whether now or hereafter authorized or outstanding, which it may at any time issue or sell, or to subscribe for or purchase any notes, debentures, bonds or other securities which it may at any time issue or sell, whether or not the same be convertible into or exchangeable for or carry options or warrants to purchase shares of any class of the Corporation's stock or other securities, or to receive or purchase any warrants or options which may be issued or granted evidencing the right to purchase any such stock or other securities, it being intended by this Section 3 that all preemptive rights of any kind applicable to securities of the Corporation are eliminated. 4. VOTE REQUIRED TO TAKE ACTION; ACTION BY WRITTEN CONSENT. Except as otherwise provided in this Certificate of Incorporation and except as otherwise provided by applicable law, the Corporation may take or authorize any action upon the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter thereof. Action shall be taken by stockholders of the Corporation only at annual or special meetings of stockholders, and stockholders may act in lieu of a meeting only by unanimous written consent. 10 5. COMPENSATION OF DIRECTORS. The Board of Directors may determine from time to time the amount and type of compensation which shall be paid to its members for service on the Board of Directors. The Board of Directors shall also have the power, in its discretion, to provide for and to pay to directors rendering services to the Corporation not ordinarily rendered by directors, as such, special compensation appropriate to the value of such services, as determined by the Board from time to time. 6. INTERESTED TRANSACTIONS. Any director or officer individually, or any partnership of which any director or officer may be a member, or any corporation or association of which any director or officer may be an officer, director, trustee, employee or stockholder, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, and in the absence of fraud no contract or other transaction shall be thereby affected or invalidated. Any director 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 such partnership which is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize any such contract or transaction, and may vote thereat to authorize any such contract or transaction, with like force and effect as if he were not such director, officer, trustee, employee or stockholder of such other corporation 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 is a member, officer, director, trustee or employee is so interested, such fact shall be disclosed or shall have been known to the Board of Directors or a majority thereof. This paragraph shall not be construed to invalidate any such contract or transaction which would otherwise be valid under the common and statutory law applicable thereto. 7. INDEMNIFICATION. The Corporation shall indemnify (a) its directors to the fullest extent permitted by the laws of the State of Delaware now or hereafter in force, including the advancement of expenses under the procedures provided by such laws, (b) all of its officers to the same extent as it shall indemnify its directors, and (c) its officers who are not directors to such 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 hereafter in 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 be deemed to be exclusive of any rights to which those indemnified may be entitled as a matter of law or under any resolution, By-Law provision, or agreement. 8. COURT-ORDERED MEETINGS OF CREDITORS AND/OR STOCKHOLDERS. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as such court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the 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 of stockholders, 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 the Corporation 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. 11 ARTICLE VII. A. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS 1. VOTING REQUIREMENTS. In addition to any vote otherwise required by law or this Certificate of Incorporation, a Business Combination (such term, and certain other capitalized terms referred to in this Article VII, as defined in Section 3 of this Article VII) shall be recommended by the Board 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 the Corporation, 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 voting stock held by an Interested Stockholder who is (or whose Affiliate is) a party to the Business Combination or an Affiliate or Associate of the Interested Stockholder, voting together as a single voting group. 2. WHEN VOTING REQUIREMENTS NOT APPLICABLE. (a) The vote required by Section 1 of this Article VII does not apply to a Business Combination if each of the following conditions is met: (i) The aggregate amount of the cash and the Market Value as of the Valuation Date of consideration other than cash to be received per share by holders of common stock in such Business Combination is at least equal to the highest of the following: (A) The highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock of the same class or series acquired by it: (x) within the 2 year period immediately prior to the Announcement Date of the proposal of the Business Combination; 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 the Announcement 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 the same 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 brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock of the same class or series acquired by it within the 2 year period immediately prior to the Announcement Date, over (y) the Market Value per share of common stock of the same class or series on the first day in such 2 year period on which the Interested Stockholder acquired any shares of common stock. (ii) The aggregate amount of the cash and the Market Value as of the Valuation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding stock other than Common Stock is at least equal to the highest of the following (whether or not the Interested Stockholder has previously acquired any shares of a particular class or series of stock): (A) The highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of stock acquired by it: (x) within the 2 year period immediately prior to the Announcement Date of the proposal of the Business Combination; or (y) in the transaction in which it became an Interested Stockholder, whichever is higher; or 12 (B) The highest preferential amount per share to which the holders of shares of such class 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 or on the Determination Date, whichever is higher; or (D) The price per share equal to the Market Value per share of such class of stock determined pursuant to subparagraph (ii)(B) of this paragraph (a), multiplied by the fraction of: (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of any class of Voting Stock acquired by it within the 2 year period immediately prior to the Announcement Date, over (y) the Market Value per share of the same class of voting stock on the first day in such 2 year period on which the Interested 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 outstanding stock is to be in cash or in the same form as the Interested Stockholder has previously paid for shares of the same class or series of stock. If the Interested Stockholder has paid for shares of any class of stock with varying forms of consideration, the form of consideration for such class of stock shall be either cash or the form used to acquire the largest 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 to the consummation of such Business Combination: (A) There shall have been: (x) no reduction in the annual rate of dividends paid on any class or series of stock of the Corporation that is not preferred stock (except as necessary to reflect any subdivision of the stock); (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the stock; and (z) the Interested Stockholder did not become the beneficial owner of any additional shares of stock of the Corporation except as part of the transaction which resulted in such Interested Stockholder becoming an Interested Stockholder or by virtue of proportionate stock splits or stock dividends. (B) The provisions of subparagraphs (x) and (y) of subparagraph (iv)(A) do not apply if no Interested Stockholder or an Affiliate or Associate of the Interested Stockholder voted as a director of the Corporation in a manner inconsistent with such subsubparagraphs and the Interested Stockholder, within 10 days after any act or failure to act inconsistent with such sub-subparagraphs, notifies the Board of Directors of the Corporation in writing that the Interested Stockholder disapproves thereof and requests 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 Interested Stockholder may not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any of its Subsidiaries, whether in anticipation of or in connection with such Business Combination or otherwise. (b) The requirements of Section 1 of this Article VII do not apply to Business Combinations that, as to specifically identified Interested Stockholders or their Affiliates, have been approved or exempted therefrom by resolution of the Board of Directors of the Corporation at any time prior to the time that the Interested Stockholder first became an Interested Stockholder. If the Board of Directors so provides, the resolution shall be subject to approval of the stockholders in the manner and by the vote specified in the resolution. 13 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, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified person (b) "Announcement Date" means the first general public announcement of the proposal or intention to make a proposal of the Business Combination or its first communication generally to stockholders of the Corporation, whichever is earlier; (c) "Associate," when used to indicate a relationship with any person, means: 14 (i) Any corporation or organization (other than the Corporation or a Subsidiary of the 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 of Equity Securities; (ii) Any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) Any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Corporation or any 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 owns Voting 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 exercisable immediately 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, or understanding; or (iii) That has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of Voting Stock with any other person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such shares of Voting Stock. (e) "Business Combination" means: (i) Unless the merger, consolidation, or share exchange does not alter the contract rights of the stock as expressly set forth in this Certificate of Incorporation or change or convert in whole or in part the outstanding shares of stock of the Corporation, any merger or consolidation of the Corporation or any Subsidiary with (A) any Interested Stockholder or (B) any other corporation (whether or not itself an Interested Stockholder) which is, or after the merger or consolidation, would be, an Affiliate of an Interested Stockholder that was an Interested Stockholder prior to the transaction. (ii) Any sale, lease, transfer or other disposition, other than in the ordinary course of 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 (other than the Corporation or any of its Subsidiaries) of any assets of the Corporation or any Subsidiary having, measured at the time the transaction or transactions are approved by the Board of Directors of the Corporation, an aggregate book value as of the end of the Corporation's most recently ended fiscal quarter of 10 percent or more of the total Market Value of the outstanding stock of the Corporation or of its net worth as of the end of its most recently ended fiscal quarter; 15 (iii) The issuance or transfer by the Corporation, or any Subsidiary, in one transaction or a series of transactions, of any Equity Securities of the Corporation or any Subsidiary which have an aggregate Market Value of 5 percent or more of the total Market Value of the outstanding stock of the Corporation to any Interested Stockholder or any Affiliate of any Interested Stockholder (other than the Corporation or any of its Subsidiaries) except pursuant to the exercise of warrants or rights to purchase securities offered pro rata to all holders of the Corporation's voting stock or any other method affording substantially proportionate treatment to the holders of Voting Stock; (iv) The adoption of any plan or proposal for the liquidation or dissolution of the Corporation in which anything other than cash will be received by an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) Any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation, of the Corporation with any of its Subsidiaries which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by 5 percent or more of the total number of outstanding shares, the proportionate amount of the outstanding shares of any class of Equity Securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any 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 common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise, and the beneficial ownership of 10 percent or more of the votes entitled to be cast by a corporation's voting stock creates a presumption of control. (h) "Determination Date" means the date on which an Interested Stockholder first became an Interested Stockholder; (i) "Equity Security" means: (i) Any stock or similar security, certificate of interest, or participation in any profit sharing agreement, voting trust certificate, or certificate of deposit for an equity security; (ii) Any security convertible, with or without consideration, into an equity security, or any warrant or other security carrying any right to subscribe to or purchase an equity security; or (iii) Any put, call, straddle, or other option or privilege of buying an equity security from or selling an equity security to another without being bound to do so. 16 (j) "Interested Stockholder" means any person (other than the Corporation or any Subsidiary) that: (i)(A) Is the beneficial owner, directly or indirectly, of 10 percent or more of the voting 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 period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10 percent or more of the Voting Power of the then outstanding voting 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 include shares deemed owned by the person through application of subsection (d) of this section but may not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement, or understanding, or upon exercise 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 period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange listed stocks, or, if such stock is not quoted on the composite tape, on the New York Stock Exchange, or if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30 day period preceding the date in question on the National Association of Securities Dealers, Inc. automated quotations system or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board of Directors of the Corporation in good faith; and (ii) In the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors of the Corporation in good faith. (l) "Subsidiary" means any corporation of which voting stock having a majority of the 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 day prior to the date of the stockholders' vote or the day 20 days prior to the consummation of the Business Combination; and (ii) For a Business Combination not voted upon by stockholders, the date of the consummation of the Business Combination. (n) "Voting Stock means shares of capital stock of the Corporation entitled to vote generally in the election of directors. 17 IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be executed and attested to by its duly authorized officers this 8th day of November, 2001. McKESSON CORPORATION By: /s/ Ivan D. Meyerson --------------------------------- Ivan D. Meyerson Senior Vice President, General Counsel and Corporate Secretary Attest: /s/ Glenette E. Babb - ------------------------------------ Glenette E. Babb Assistant Secretary 18 -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.1

                                                                     Exhibit 3.1


                                    RESTATED

                          CERTIFICATE OF INCORPORATION

                                       OF

                              MCKESSON CORPORATION

                 (DULY ADOPTED IN ACCORDANCE WITH SECTION 245 OF

                      THE DELAWARE GENERAL CORPORATION LAW)

                     ORIGINALLY INCORPORATED ON JULY 7, 1994
                        UNDER 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 2711 Centerville Road, Suite 400, Wilmington 19808, County of New
Castle. The name of the registered 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 corporations may 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 is 500,000,000 shares, divided into 100,000,000 shares of
Series Preferred Stock, par value $0.01 per 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 all shares
having par value is $5,000,000.

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



                                       1


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 fix for each such class or series such
voting powers, full or limited, or no voting powers, and such distinctive
designations, powers, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof,
including without limitation, the authority to provide that any such class or
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, 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, the Corporation; (iv)
convertible into, or exchangeable for, shares of any other class or classes of
stock, or of any other series of the same or any other class or classes of
stock, of the Corporation at such price or prices or at such rates of exchange
and with such adjustments; or (v) subject to the terms and amounts of any
sinking fund provided for the purchase or redemption of the shares of 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 (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of 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 required pursuant to the
provisions of this Article IV or the certificate or certificates establishing
any additional 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 of the Series Preferred Stock from time to time by setting or
changing in any one or more respects the 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 the foregoing, the power of the Board of Directors to classify and
reclassify any of the shares of Series Preferred Stock shall include, without
limitation, subject to the provisions of this Certificate of Incorporation,
authority to classify or reclassify any unissued shares of such stock into one
or more series of Series Preferred Stock, and to divide and classify shares of
any series into one or more series of Series Preferred Stock by determining,
fixing or altering one or more of the following:

    (a) The distinctive designation of such series and the number of shares to
    constitute such series; provided that, unless otherwise prohibited by the
    terms of such or any other series, the number of shares of any series may be
    decreased by the Board of Directors in connection with any classification or
    reclassification of unissued shares and the number of shares of such series
    may be increased by the Board of Directors in connection with any such
    classification or 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 shall remain part of the authorized Series
    Preferred Stock and be subject to classification and reclassification as
    provided in this Section.



                                       2


    (b) Whether or not and, if so, the rates, amounts and times at which, and
    the conditions under which, dividends shall be payable on shares of such
    series, whether any such dividends shall rank senior or junior to or on a
    parity with the dividends payable on any other series of Series Preferred
    Stock, and the status of any such dividends as cumulative, cumulative to a
    limited extent 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 voting rights 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, if so, the terms and conditions thereof, including provision
    for adjustment of the conversion or exchange 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 terms and conditions of such redemption, including the date or
    dates upon or after which they shall be redeemable and the amount per share
    payable in case of redemption, which amount may vary under different
    conditions and at different redemption dates; and whether or not there shall
    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 or winding up of the affairs of, or upon any distribution of the
    assets of, the Corporation, which rights may vary depending upon whether
    such liquidation, dissolution or winding up is voluntary or involuntary and,
    if voluntary, may vary at different dates, and whether such rights shall
    rank senior or junior to or on a parity with such rights of any other series
    of Series Preferred Stock.

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

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

2. For the purposes hereof and of any certificate providing for the
classification or reclassification of any shares of Series Preferred Stock or of
any other charter document of the Corporation (unless otherwise provided in any
such certificate or document), any class or series of 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 series shall be entitled to the receipt of dividends or
    of amounts distributable in the event of any liquidation, dissolution or
    winding up, as the case may be, in preference to or with priority over 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 of such class
    or classes or series to the receipt of dividends or of amounts distributable
    in event of any liquidation, dissolution or winding up, as the case may be,
    shall be neither (i) in preference to, or with priority over, nor (ii)
    subject or subordinate to, the rights of holders of such particular class or
    series of stock in respect of the receipt of dividends or of amounts
    distributable in the event of any liquidation, dissolution or winding up of
    the Corporation, as the case may be; and




                                       3


    (c) Junior to a particular class or series of stock if the rights of the
    holders of such class or classes or series shall be subject or subordinate
    to the rights of the holders of such particular class or series of stock in
    respect of the receipt of dividends or of amounts distributable in the event
    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 Junior Participating Preferred Stock" and the number of shares
constituting such series shall initially be 10,000,000, par value $0.01 per
share, such number of shares to be subject to increase or decrease by action of
the Board of Directors as evidenced by a certificate or certificates evidencing
such change.

2. DIVIDENDS AND DISTRIBUTIONS.

    (a) The holders of shares of Series A Junior Participating Preferred Stock
    shall be entitled to receive, when, as and if declared by the Board of
    Directors out of funds legally available for the 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 A Quarterly Dividend Payment Date"), commencing on the first Series
    A Quarterly Dividend Payment Date after the first issuance of a share or
    fraction of a share of Series A Junior Participating Preferred Stock, in an
    amount per share (rounded to the nearest cent) equal to the 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 aggregate per share amount (payable in kind) of all non-cash
    dividends or other distributions other than a dividend payable in shares of
    Common Stock or a subdivision of the outstanding shares of Common Stock (by
    reclassification or otherwise), declared on the Common Stock since the
    immediately preceding Series A Quarterly Dividend Payment Date, or, with
    respect to the first Series A Quarterly Dividend Payment Date, since the
    first issuance of any share or fraction of a share of Series A Junior
    Participating Preferred Stock. In the event the Corporation 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) subdivide
    the outstanding Common Stock, or (C) combine the outstanding Common Stock
    into a smaller number of shares, then in each such case the amount to which
    holders of shares of Series A Junior Participating Preferred Stock were
    entitled immediately prior to such event under clause (ii) of the preceding
    sentence shall be adjusted by multiplying such amount by a fraction the
    numerator of which is the number of shares of Common Stock outstanding
    immediately after such event and the denominator of which is the number of
    shares of Common Stock that were outstanding immediately prior to such
    event.

    (b) The Corporation shall declare a dividend or distribution on the Series A
    Junior Participating Preferred Stock as provided in paragraph (a) above
    immediately after it declares a dividend or distribution on the Common Stock
    (other than a dividend payable in shares of Common Stock); provided that, in
    the event no dividend or distribution shall have been declared on the Common
    Stock during the period between any Series A Quarterly Dividend Payment Date
    and the next subsequent Series A Quarterly Dividend Payment Date, a dividend
    of $10.00 per share on the Series A Junior Participating Preferred Stock
    shall nevertheless 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 A Junior Participating Preferred Stock from the Series A Quarterly
    Dividend Payment Date next preceding the date of issue of such shares of
    Series A Junior Participating Preferred Stock, unless the date of issue of
    such shares is prior to the record date for the first Series A Quarterly
    Dividend Payment Date, in which case dividends on such shares shall begin to
    accrue from the date of issue of such shares, or unless the date of issue is
    a Series A Quarterly Dividend Payment Date or is a date after the record
    date for the determination of holders of shares of Series A Junior
    Participating Preferred Stock entitled to receive a quarterly dividend and
    before such Series A Quarterly Dividend Payment Date, in either of



                                       4


     which events such dividends shall begin to accrue and be cumulative from
     such Series A Quarterly 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 amount less than the total amount of
     such dividends at the time accrued and payable on such shares shall be
     allocated pro rata on a share-by-share basis among all such shares at the
     time outstanding. The Board of Directors may fix a record date for the
     determination of holders of shares of Series A Junior Participating
     Preferred Stock entitled to receive payment of a dividend or distribution
     declared thereon, which record date shall be no more than 30 days prior to
     the date fixed for the payment thereof.

3. VOTING RIGHTS. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:

    (a) Subject to the provision for adjustment hereinafter set forth, each
    share of Series A Junior Participating Preferred Stock shall entitle the
    holder thereof to 100 votes on all matters submitted to a vote of the
    stockholders of the Corporation. In the event the Corporation shall at any
    time after the Rights Declaration Date (i) declare any dividend on Common
    Stock payable 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 such case the number of votes per share to
    which holders of shares of Series A Junior Participating Preferred Stock
    were entitled immediately prior to such event shall be adjusted by
    multiplying such number by a fraction the numerator of which is the number
    of shares of Common Stock outstanding immediately after such event and the
    denominator of which is the number of shares of Common Stock that were
    outstanding immediately prior to such event.

    (b) Except as otherwise provided herein or by law, the holders of shares of
    Series A Junior Participating Preferred Stock and the holders of shares of
    Common Stock shall vote together as 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 be in arrears in an amount equal to six (6)
       quarterly dividends thereon, the occurrence of such 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 previous quarterly dividend periods and for the current quarterly
       dividend period on all shares of Series A Junior Participating Preferred
       Stock then outstanding shall have been declared and paid or set apart for
       payment. During each default period, all holders of Series Preferred
       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, voting as 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 Junior Participating Preferred Stock may be exercised initially
       at a special meeting called pursuant to subparagraph (iii) of this
       Section 3(c) or at any annual meeting of stockholders, and thereafter at
       annual meetings of stockholders, provided that neither such 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 exercised unless the holders of ten percent (10%) in
       number of shares of Series Preferred Stock outstanding shall be present
       in person or by proxy. The absence of a quorum of the holders of Common
       Stock shall not affect the exercise by the holders of Series Preferred
       Stock of such voting right. At any meeting at which the holders of Series
       Preferred Stock shall exercise such voting right initially during an
       existing default period, they shall have the right, voting as a class, to
       elect Directors to fill such vacancies, if any, in the Board of Directors
       as may then exist up to two (2) Directors or, if such right is exercised
       at an annual meeting, to elect two (2) Directors. If the number which may
       be so elected at any special meeting does not amount to the required
       number, the holders of the Series Preferred Stock shall have the right to
       make such increase in the number of Directors as shall be necessary to
       permit the election by them of the required number. After the



                                       5


       holders of the Series Preferred Stock shall have exercised their right to
       elect Directors in any default period and during the continuance of such
       period, the number of Directors shall not be increased or decreased
       except by vote of the holders of Series Preferred Stock as herein
       provided or pursuant to the rights of any equity securities ranking
       senior to or pari 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 of series, may request, the calling of a special meeting of
       the holders of Series Preferred Stock, which meeting shall thereupon be
       called by the President, a Vice-President or the Secretary of the
       Corporation. Notice of such meeting and of any annual meeting at which
       holders 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 of such 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
       days after such order or request or in default of the calling of such
       meeting within 60 days after such order or request, such meeting may be
       called on similar notice by 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. Notwithstanding the provisions of
       this paragraph (c)(iii), no such special meeting shall be called during
       the period within 60 days immediately preceding the date fixed for the
       next annual meeting of the stockholders.

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

       (v) Immediately upon the expiration of a default period, (A) the right of
       the holders of Series Preferred Stock as a class to elect Directors shall
       cease, (B) the term of any Directors 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 this Certificate
       of Incorporation or the By-laws of the Corporation irrespective of any
       increase made pursuant to the provisions of paragraph (c)(ii) of this
       Section 3 (such number being subject, however, to change thereafter in
       any manner provided by law or in this Certificate of Incorporation or the
       By-laws of the Corporation). Any vacancies in the Board of Directors
       effected by the provisions of clauses (B) and (C) in the preceding
       sentence 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 A Junior Participating Preferred Stock shall have no
    special voting rights and their consent shall not be required (except to the
    extent they are entitled to vote with holders of Common Stock as set forth
    herein) for taking any corporate action.



                                       6


4. CERTAIN RESTRICTIONS.

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

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

       (ii) declare or pay dividends on or make any other distributions on any
       shares of stock ranking 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 on the
       Series A Junior Participating Preferred Stock and all such parity stock
       on which dividends are payable or in arrears in proportion to the total
       amounts to which the holders of all such shares are then entitled;

       (iii) redeem or purchase or otherwise acquire for consideration shares of
       any stock ranking 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 may at any
       time redeem, purchase or otherwise acquire shares of any such parity
       stock in exchange for shares of any stock of the Corporation ranking
       junior (either as to dividends or upon dissolution, liquidation or
       winding up) to the Series A Junior Participating Preferred Stock;

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

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

5. REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Series Preferred Stock and may be reissued as part of a new
series of Series Preferred Stock to be created by resolution or resolutions of
the Board of Directors, 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 the Corporation, 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 Junior Participating Preferred
    Stock unless, prior thereto, the holders of shares of Series A Junior
    Participating Preferred Stock shall have received $100 per share, plus an
    amount equal to accrued and unpaid dividends and distributions thereon,
    whether or not declared, to the date of such payment (the "Series A
    Liquidation Preference"). Following the payment of the full



                                       7


    amount of the Series A Liquidation Preference, no additional distributions
    shall be made to the 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 A Liquidation Preference by
    (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to
    reflect such events as stock splits, stock dividends and recapitalizations
    with respect to the Common Stock) (such number in clause (ii), the
    "Adjustment Number"). Following the payment of the full amount of the Series
    A Liquidation Preference and the Common Adjustment in respect of all
    outstanding shares of Series A Junior Participating Preferred Stock and
    Common Stock, respectively, holders of Series A Junior Participating
    Preferred Stock and holders of shares of Common Stock shall receive their
    ratable and proportionate share of the remaining assets to be distributed in
    the ratio of the Adjustment Number to 1 with 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 in full of the Series A Liquidation Preference and the
    liquidation preferences of all other series of preferred stock, if any,
    which rank on a parity with the Series A Junior Participating Preferred
    Stock, then such remaining assets shall be distributed ratably to the
    holders of such parity 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 Common Adjustment, then such
    remaining assets shall be distributed ratably to the holders of Common
    Stock.

    (c) In the event the Corporation shall at any time after the Rights
    Declaration Date (i) declare any dividend on Common Stock payable 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 such case the Adjustment Number in effect immediately prior to such
    event shall be adjusted by multiplying such Adjustment Number by a fraction
    the numerator of which is the number of shares of Common Stock outstanding
    immediately after such event and the denominator of which is the number of
    shares of Common Stock that were 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 exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series A Junior
Participating Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration Date
(a) declare any dividend on Common Stock payable in shares of Common Stock, (b)
subdivide the outstanding Common Stock, or (c) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of shares
of Series A Junior Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

8. NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock
shall not be redeemable.

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



                                       8


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

11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other 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 be paid upon the Common Stock as and when declared by the Board of
Directors out of funds legally available for the payment of dividends.

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

C. VOTING RIGHTS. Except as otherwise expressly provided with respect to the
Series Preferred Stock and except as otherwise may be required by law, the
Common Stock shall have the exclusive right to vote for the election of
directors and for all other purposes and each holder of Common 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 the direction of the Board of Directors. The exact number of
directors shall be fixed from time to time by, or in the manner provided in, the
By-Laws of the Corporation and may be increased or decreased as therein
provided. Directors of the Corporation need not be elected by ballot unless
required by the By-Laws.

2. CLASSIFICATION OF BOARD OF DIRECTORS. The directors shall be divided into
three classes. Each such class shall consist, as nearly as may be possible, of
one-third of the total number of directors, and any remaining directors shall be
included within such group or groups as the Board of Directors shall designate.
At the annual meeting of stockholders in 1994, a class of directors shall be
elected for a one-year term, a class of directors for a two-year term and a
class of directors for a three-year term. At each succeeding annual meeting of
stockholders, beginning in 1995, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, but in no case shall a decrease in the number of
directors shorten the term 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 until the annual meeting for
the year in which his term expires and until his successor shall be elected and
qualify. No alteration, amendment or repeal of this Article V or the By-Laws of
the



                                       9


Corporation shall be effective to shorten the term of any director holding
office at the time of such 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 the time of such alteration,
amendment or repeal until the expiration of the terms of office of all directors
then holding office, unless (i) in the case of this Article V, such alteration,
amendment or 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 the holders of all shares
entitled to vote thereon or by a vote of a majority of the entire Board of
Directors.

3. DIRECTORS APPOINTED BY A SPECIFIC CLASS OF STOCKHOLDERS. To the extent that
any holders of any class or series of stock other than Common Stock issued by
the Corporation shall have the separate right, voting as a class or series, to
elect directors, the directors elected by such class or series shall be deemed
to constitute an additional class of directors and shall have a term of office
for one year or such other period as may be designated by the provisions of such
class or series providing such separate voting right to the holders of such
class or series of stock, and any such 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 of defining, limiting and regulating the powers of the Corporation and
of its directors and stockholders:

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 of Incorporation, now or hereafter authorized by
law, including any amendment which alters the contract 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, alter and repeal the By-Laws of the Corporation in whole or in part at
any regular or special meeting of the Board of Directors, by vote of a majority
of the entire Board of Directors. Except where this Certificate of Incorporation
otherwise requires a higher vote, the By-Laws may also be adopted, altered or
repealed in whole or in part at any annual or special meeting of the
stockholders by the affirmative vote of three-fourths of the shares of the
Corporation outstanding and entitled to vote thereon.

3. NO PREEMPTIVE RIGHTS. No holder of any class of stock of the Corporation,
whether now or hereafter authorized or outstanding, shall have any preemptive,
preferential or other right to subscribe for or purchase any class of the
Corporation's stock, whether now or hereafter authorized or outstanding, which
it may at any time issue or sell, or to subscribe for or purchase any notes,
debentures, bonds or other securities which it may at any time issue or sell,
whether or not the same be convertible into or exchangeable for or carry options
or warrants to purchase shares of any class of the Corporation's stock or other
securities, or to receive or purchase any warrants or options which may be
issued or granted evidencing the right to purchase any such stock or other
securities, it being intended by this Section 3 that all preemptive rights of
any kind applicable to securities of the Corporation are eliminated.

4. VOTE REQUIRED TO TAKE ACTION; ACTION BY WRITTEN CONSENT. Except as otherwise
provided in this Certificate of Incorporation and except as otherwise provided
by applicable law, the Corporation may take or authorize any action upon the
affirmative vote of the majority of shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter thereof. Action
shall be taken by stockholders of the Corporation only at annual or special
meetings of stockholders, and stockholders may act in lieu of a meeting only by
unanimous written consent.



                                       10


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

6. INTERESTED TRANSACTIONS. Any director or officer individually, or any
partnership of which any director or officer may be a member, or any corporation
or association of which any director or officer may be an officer, director,
trustee, employee or stockholder, may be a party to, or may be pecuniarily or
otherwise interested in, any contract or transaction of the Corporation, and in
the absence of fraud no contract or other transaction shall be thereby affected
or invalidated. Any director 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 such partnership which is so
interested, may be counted in determining the existence of a quorum at any
meeting of the Board of Directors of the Corporation which shall authorize any
such contract or transaction, and may vote thereat to authorize any such
contract or transaction, with like force and effect as if he were not such
director, officer, trustee, employee or stockholder of such other corporation 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 is a member, officer, director, trustee or employee is so
interested, such fact shall be disclosed or shall have been known to the Board
of Directors or a majority thereof. This paragraph shall not be construed to
invalidate any such contract or transaction which would otherwise be valid under
the common and statutory law applicable thereto.

7. INDEMNIFICATION. The Corporation shall indemnify (a) its directors to the
fullest extent permitted by the laws of the State of Delaware now or hereafter
in force, including the advancement of expenses under the procedures provided by
such laws, (b) all of its officers to the same extent as it shall indemnify its
directors, and (c) its officers who are not directors to such 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 hereafter in 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 be deemed to be exclusive
of any rights to which those indemnified may be entitled as a matter of law or
under any resolution, By-Law provision, or agreement.

8. COURT-ORDERED MEETINGS OF CREDITORS AND/OR STOCKHOLDERS. Whenever a
compromise or arrangement is proposed between this Corporation and its creditors
or any class of them and/or between this Corporation and its stockholders or any
class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of this Corporation or of any creditor
or stockholder thereof, or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as such court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the 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 of stockholders, 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 the Corporation 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.



                                       11


                                  ARTICLE VII.

A. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS

1. VOTING REQUIREMENTS. In addition to any vote otherwise required by law or
this Certificate of Incorporation, a Business Combination (such term, and
certain other capitalized terms referred to in this Article VII, as defined in
Section 3 of this Article VII) shall be recommended by the Board 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 the Corporation, 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 voting stock held by an Interested Stockholder who is (or whose
    Affiliate is) a party to the Business Combination or an Affiliate or
    Associate of the Interested Stockholder, voting together as a single voting
    group.

2. WHEN VOTING REQUIREMENTS NOT APPLICABLE.

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

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

           (A) The highest per share price (including any brokerage commissions,
           transfer taxes and soliciting dealers' fees) paid by the Interested
           Stockholder for any shares of common stock of the same class or
           series acquired by it: (x) within the 2 year period immediately prior
           to the Announcement Date of the proposal of the Business Combination;
           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 the Announcement 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 the same 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 brokerage commissions,
           transfer taxes and soliciting dealers' fees) paid by the Interested
           Stockholder for any shares of common stock of the same class or
           series acquired by it within the 2 year period immediately prior to
           the Announcement Date, over (y) the Market Value per share of common
           stock of the same class or series on the first day in such 2 year
           period on which the Interested Stockholder acquired any shares of
           common stock.

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

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



                                       12


           (B) The highest preferential amount per share to which the holders of
           shares of such class 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 or on the Determination Date, whichever is higher;
           or

           (D) The price per share equal to the Market Value per share of such
           class of stock determined pursuant to subparagraph (ii)(B) of this
           paragraph (a), multiplied by the fraction of: (x) the highest per
           share price (including any brokerage commissions, transfer taxes and
           soliciting dealers' fees) paid by the Interested Stockholder for any
           shares of any class of Voting Stock acquired by it within the 2 year
           period immediately prior to the Announcement Date, over (y) the
           Market Value per share of the same class of voting stock on the first
           day in such 2 year period on which the Interested 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 outstanding stock is to be in cash or in the same form as the
       Interested Stockholder has previously paid for shares of the same class
       or series of stock. If the Interested Stockholder has paid for shares of
       any class of stock with varying forms of consideration, the form of
       consideration for such class of stock shall be either cash or the form
       used to acquire the largest 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 to the consummation of such Business Combination:

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

           (B) The provisions of subparagraphs (x) and (y) of subparagraph
           (iv)(A) do not apply if no Interested Stockholder or an Affiliate or
           Associate of the Interested Stockholder voted as a director of the
           Corporation in a manner inconsistent with such subsubparagraphs and
           the Interested Stockholder, within 10 days after any act or failure
           to act inconsistent with such sub-subparagraphs, notifies the Board
           of Directors of the Corporation in writing that the Interested
           Stockholder disapproves thereof and requests 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 Interested Stockholder may not have received the
       benefit, directly or indirectly (except proportionately as a
       stockholder), of any loans, advances, guarantees, pledges or other
       financial assistance or any tax credits or other tax advantages provided
       by the Corporation or any of its Subsidiaries, whether in anticipation of
       or in connection with such Business Combination or otherwise.

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



                                       13


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, or indirectly through one or more intermediaries, controls, or is
    controlled by, or is under common control with, a specified person

    (b) "Announcement Date" means the first general public announcement of the
    proposal or intention to make a proposal of the Business Combination or its
    first communication generally to stockholders of the Corporation, whichever
    is earlier;

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



                                       14


       (i) Any corporation or organization (other than the Corporation or a
       Subsidiary of the 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 of Equity Securities;

       (ii) Any trust or other estate in which such person has a substantial
       beneficial interest or as to which such person serves as trustee or in a
       similar fiduciary capacity; and

       (iii) Any relative or spouse of such person, or any relative of such
       spouse, who has the same home as such person or who is a director or
       officer of the Corporation or any 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 owns Voting 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
           exercisable immediately 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, or understanding; or

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

    (e) "Business Combination" means:

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

        (ii) Any sale, lease, transfer or other disposition, other than in the
        ordinary course of 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 (other than the Corporation
        or any of its Subsidiaries) of any assets of the Corporation or any
        Subsidiary having, measured at the time the transaction or transactions
        are approved by the Board of Directors of the Corporation, an aggregate
        book value as of the end of the Corporation's most recently ended fiscal
        quarter of 10 percent or more of the total Market Value of the
        outstanding stock of the Corporation or of its net worth as of the end
        of its most recently ended fiscal quarter;




                                       15


        (iii) The issuance or transfer by the Corporation, or any Subsidiary, in
        one transaction or a series of transactions, of any Equity Securities of
        the Corporation or any Subsidiary which have an aggregate Market Value
        of 5 percent or more of the total Market Value of the outstanding stock
        of the Corporation to any Interested Stockholder or any Affiliate of any
        Interested Stockholder (other than the Corporation or any of its
        Subsidiaries) except pursuant to the exercise of warrants or rights to
        purchase securities offered pro rata to all holders of the Corporation's
        voting stock or any other method affording substantially proportionate
        treatment to the holders of Voting Stock;

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

        (v) Any reclassification of securities (including any reverse stock
        split), or recapitalization of the Corporation, or any merger or
        consolidation, of the Corporation with any of its Subsidiaries which has
        the effect, directly or indirectly, in one transaction or a series of
        transactions, of increasing by 5 percent or more of the total number of
        outstanding shares, the proportionate amount of the outstanding shares
        of any class of Equity Securities of the Corporation or any Subsidiary
        which is directly or indirectly owned by any Interested Stockholder or
        any 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
    common control with," means the possession, directly or indirectly, of the
    power to direct or cause the direction of the management and policies of a
    person, whether through the ownership of voting securities, by contract, or
    otherwise, and the beneficial ownership of 10 percent or more of the votes
    entitled to be cast by a corporation's voting stock creates a presumption of
    control.

    (h) "Determination Date" means the date on which an Interested Stockholder
    first became an Interested Stockholder;

    (i) "Equity Security" means:

        (i) Any stock or similar security, certificate of interest, or
        participation in any profit sharing agreement, voting trust certificate,
        or certificate of deposit for an equity security;

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

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



                                       16


    (j) "Interested Stockholder" means any person (other than the Corporation
    or any Subsidiary) that:

        (i)(A) Is the beneficial owner, directly or indirectly, of 10 percent
           or more of the voting 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 period immediately prior to the date in question was the
           beneficial owner, directly or indirectly, of 10 percent or more of
           the Voting Power of the then outstanding voting 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 include shares deemed owned by the person through
        application of subsection (d) of this section but may not include any
        other shares of Voting Stock which may be issuable pursuant to any
        agreement, arrangement, or understanding, or upon exercise 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 period immediately preceding the date in question of a share of such
        stock on the composite tape for New York Stock Exchange listed stocks,
        or, if such stock is not quoted on the composite tape, on the New York
        Stock Exchange, or if such stock is not listed on such exchange, on the
        principal United States securities exchange registered under the
        Securities Exchange Act of 1934 on which such stock is listed, or, if
        such stock is not listed on any such exchange, the highest closing bid
        quotation with respect to a share of such stock during the 30 day period
        preceding the date in question on the National Association of Securities
        Dealers, Inc. automated quotations system or any system then in use, or
        if no such quotations are available, the fair market value on the date
        in question of a share of such stock as determined by the Board of
        Directors of the Corporation in good faith; and

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

    (l) "Subsidiary" means any corporation of which voting stock having a
    majority of the 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 day prior to the date of the stockholders' vote or the day 20 days
        prior to the consummation of the Business Combination; and

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

    (n) "Voting Stock means shares of capital stock of the Corporation entitled
    to vote generally in the election of directors.



                                       17


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

                                          McKESSON CORPORATION


                                          By: /s/ Ivan D. Meyerson
                                              ---------------------------------
                                              Ivan D. Meyerson
                                              Senior Vice President, General
                                              Counsel and Corporate Secretary

Attest:

/s/ Glenette E. Babb
- ------------------------------------
Glenette E. Babb
Assistant Secretary



                                       18