McKesson Annual Report 2001

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FY2001 Annual Report · McKesson

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Ñscal year ended March 31, 2001

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-13252

McKESSON HBOC, INC.

A Delaware Corporation

I.R.S. Employer IdentiÑcation Number 94-3207296

McKesson HBOC Plaza,
One Post Street,
San Francisco, CA 94104
Telephone Ì Area Code (415) 983-8300

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

Preferred Stock Purchase Rights

(Title of Each Class)

New York Stock Exchange
PaciÑc Exchange, Inc.
New York Stock Exchange
PaciÑc Exchange, Inc.
(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the Registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for
the past 90 days. Yes ≤ No n

Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's knowledge, in deÑnitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ≤

Aggregate market value of voting stock held by nonaÇliates of the Registrant at April 30, 2001:

$8,783,293,063

Number of shares of common stock outstanding at April 30, 2001: 284,801,980

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on

July 25, 2001 are incorporated by reference into Part III of this report.

Item

TABLE OF CONTENTS

PART I

1. BusinessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PART II

5. Market for the Registrant's Common Stock and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6. Selected Financial DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏ

7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

8. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureÏÏÏÏÏ

PART III

10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

12. Security Ownership of Certain BeneÑcial Owners and ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PART IV

Page

Item 1. Business

General

PART I

McKesson HBOC, Inc. (""McKessonHBOC,'' the ""Company'' or the ""Registrant''), the world's largest
health care service and technology company and a Fortune 35 corporation, delivers unique supply and
information management solutions that reduce costs and improve quality for its health care customers.

Business Segments

The Company is organized under two operating segments: Health Care Supply Management and Health
Care Information Technology. Within the United States and Canada, the Health Care Supply Management
segment is a leading wholesale distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products principally to chain and independent drug stores, hospitals, alternate care
sites, food stores and mass merchandisers. The Health Care Information Technology segment delivers
enterprise-wide patient care, clinical, Ñnancial, managed care, payor and strategic management software
solutions, as well as networking technologies, electronic commerce, information outsourcing and other services
to health care organizations throughout the United States and certain foreign countries.

The Company generated annual sales of $42.0 billion, $36.7 billion, and $30.0 billion in Ñscal years 2001,
2000, and 1999, respectively; approximately $41.1 billion, 98%, $35.7 billion, 97%, and $28.7 billion, 96%,
respectively, in the Health Care Supply Management segment and approximately $0.9 billion, 2%, $1.0 billion,
3% and $1.3 billion, 4%, respectively, in the Health Care Information Technology segment.

Financial information about the Company's business segments for each of the three years in the period
ended March 31, 2001 is included in Financial Note 17 to the consolidated Ñnancial statements, ""Segments of
Business,'' appearing on pages F-60 to F-62 of this Annual Report on Form 10-K.

Health Care Supply Management

Products and Markets

Through its Health Care Supply Management segment, McKessonHBOC is a leading distributor of
ethical and proprietary drugs, medical-surgical supplies and health and beauty care products and provider of
services to the health care industry in North America. The Company's Health Care Supply Management
segment consists of the Pharmaceutical Group, the Medical Group, the Automation Group, the Medical
Management Group, the Pharmaceutical Partners Group, Zee Medical and MedManagement (collectively,
the ""Supply Management Business'').

The Pharmaceutical Group supplies pharmaceuticals and health care related products to three primary
customer segments: retail chains (pharmacies, food stores, and mass merchandisers), retail independent
pharmacies and institutional providers (including hospitals, alternate-site providers, and integrated health
networks) in all 50 states. These three customer categories represented approximately 42.4%, 24.5%, and
33.1%, respectively, of the Pharmaceutical Distribution Group's revenues in Ñscal 2001. Operating under the
trade names EconoMost» and EconoLink» and a number of related service marks, the Company promotes
electronic order entry systems and a wide range of computerized merchandising and asset management
services for pharmaceutical retailers and health care institutions. The Company has developed advanced
marketing programs and information services for retail pharmacies. These initiatives include the Valu-Rite»,
Valu-Rite/CareMax» and Health Mart» retail networks, the OmniLink» centralized pharmacy technology
platform, which oÅers retail network members connectivity with managed care organizations while promoting
compliance with managed care plans, and .com pharmacy solutionsSM, a service initiative that allows
independent pharmacies to set up their own websites for selling OTC products and prescription reÑlls to their
customers. The Company's nationwide network of distribution centers utilizes the Acumax» Plus warehouse
management system which provides real-time inventory statistics and tracks products from the receiving dock
to shipping through scanned bar code information and radio frequency signals with accuracy levels above 99%

to help ensure that the right product arrives at the right time and place for both the Company's customers and
their patients. The Company believes that its Ñnancial strength, purchasing leverage, aÇliation networks,
nationwide network of distribution centers, and advanced logistics and information technologies provide
competitive advantages to its pharmaceutical distribution operations.

The Medical Group oÅers a full range of medical-surgical supplies, equipment, logistics and related
services across the continuum of health care providers: hospitals, physicians' oÇces, long-term care, and
homecare. The Medical Group includes the operations of McKesson General Medical Corporation
(""MGM''), RedLine Extended Care, Hawk Medical Supply and MedPath. The Medical Group is the
nation's third largest distributor of medical-surgical supplies to hospitals (acute care) and a leading supplier of
medical-surgical supplies to the full-range of alternate-site health care facilities, including physicians and
clinics (primary care), long-term care and homecare sites. The Medical Group's Supply Management On-
Line provides an advanced way of ordering medical-surgical products over the Internet and its Optipak
program allows physicians to customize ordering of supplies according to individual surgical procedure
preferences.

The Automation Group manufactures and markets automated pharmacy systems and services to
hospitals and retail pharmacies through its McKesson Automated Healthcare (""MAH'') and McKesson
Automated Prescription Systems (""APS'') units. Key products of MAH include the ROBOT-RxTM system, a
robotic pharmacy dispensing and utilization tracking system that enables hospitals to lower pharmacy costs
while signiÑcantly improving the accuracy of pharmaceutical dispensing, AcuDose-RxTM unit-based cabinets
which automate the storage, dispensing and tracking of commonly used drugs in patient areas, AcuScan-RxTM
which records, automates, and streamlines drug administration and medication information requirements
through bar code scanning at the patient's bedside and SupplyScanSM, a point-of-use supply management
system. APS manufactures a wide range of pharmaceutical dispensing and productivity products including
Baker CellsTM and Baker CassettesTM, modular units that provide pharmacists with quick and accurate
counting capabilities combined with eÇcient space management; AutoscriptTM, a robotic pharmacy dispensing
system that enables retail pharmacies to lower pharmacy costs through high volume dispensing while
improving accuracy through the use of bar code technology; and Pharmacy 2000TM, an interactive workstation
system which combines software and automation to improve productivity throughout the pharmacy prescrip-
tion sales process.

The Medical Management Group brings together a comprehensive platform of medical management
services and tools to help payors and providers better manage the cost and outcomes of medical care. The
Medical Management Group delivers complete solutions through Ñve Care EnhanceSM product and service
families: Care EnhanceSM Services (telephonic nurse advice and disease management), Care EnhanceSM
Clinical Management Software (disease, utilization and case management software), Care EnhanceSM
Clinical Criteria (InterQual» clinical appropriateness, level-of-care and clinically speciÑc decision support
criteria), Care EnhanceSM Resource Management Software (provider proÑling, analytic and HEDIS reporting
software), and Care EnhanceSM Access Center Products (triage and referral management software).

The Pharmaceutical Partners Group combines the Company's pharmaceutical and biotechnology
services in a single group that is focused on helping manufacturers meet their marketing goals. The
Pharmaceutical Partners Group provides sales, marketing and other services to pharmaceutical manufacturers
and biotechnology customers including distribution management and reimbursement services, services in
support of clinical trials and biomedical research, direct mail and fulÑllment services, decision support and
data analysis, business analytics, and integrated contract sales and marketing support services.

Zee Medical, Inc. (""Zee Medical'') is the nation's leading provider of Ñrst-aid and safety products,
training and services. Zee Medical distributes Ñrst-aid products and safety supplies and oÅers safety programs
and materials to assist industrial and commercial customers reduce their exposure to escalating health care
costs associated with on-the-job injuries and illnesses.

McKesson MedManagement, L.L.C. (""MedManagement'') is a leading pharmacy management,
purchasing, consulting and information services company that combines clinical expertise, Ñnancial manage-
ment capabilities, operational tools and technologies and experience to assist health care organizations

optimize care and pharmaceutical resources. MedManagement provides customized solutions that allow its
customer to improve their pharmaceutical distribution, automation and information technology capabilities
and measure quality improvement through proven clinical and operational metrics.

International operations of the Pharmaceutical Group business include Medis Health and Pharmaceuti-
cal Services, Inc. (""Medis''), a wholly-owned subsidiary and the largest pharmaceutical distributor in Canada;
and the Company's 22% equity interest in Nadro, S.A. de C.V., a leading pharmaceutical distributor in
Mexico.

Intellectual Property

The principal trademarks and service marks of the Health Care Supply Management segment include:
ECONOMOST», ECONOLINK», VALU-RITE», Valu-Rite/CareMax», OmniLink», Health Mart»,
ASK-A-NURSE», Credentialer», Episode ProÑler», InterQual», America's Source for Health Care An-
swers», coSource», ROBOT-RxTM, AcuDose-RxTM, AcuScan-RxTM, Pak Plus-RxTM, SelfPaceTM, Baker
CellsTM, Baker CassettesTM, Baker UniversalTM, AutoscriptTM, Pharmacy 2000TM, CRMSTM, Patterns
ProÑlerTM, Care EnhanceSM, Closed Loop DistributionSM, .com Pharmacy SolutionsSM and SupplyScanSM.
The Company also owns other registered and unregistered trademarks and service marks and similar rights
used by the Health Care Supply Management segment. All of the principal marks are registered in the United
States or registration has been applied for with respect to such marks. The United States federal registrations
of these trademarks and service marks have ten or twenty-year terms, depending on date of registration. All
are subject to unlimited renewals. The Company believes this business has taken all necessary steps to
preserve the registration and duration of its trademarks and service marks, although no assurance can be given
that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to
third-party infringement claims. The Company does not consider any particular patent, license, franchise or
concession to be material to the business of the Health Care Supply Management segment.

Competition

In every area of operations, the Company's distribution businesses face strong competition both in price
and service from national, regional and local full-line, short-line and specialty wholesalers, service merchandis-
ers, self-warehousing chains, and from manufacturers engaged in direct distribution. The Health Care Supply
Management segment faces competition from various other service providers and from pharmaceutical and
other health care manufacturers (as well as other potential customers of the Health Care Supply Management
segment) which may from time to time decide to develop, for their own internal needs, supply management
capabilities which are provided by the Health Care Supply Management segment and other competing service
providers. Price, quality of service, and, in some cases, convenience to the customer are generally the principal
competitive elements in the Health Care Supply Management segment.

Health Care Information Technology

Products and Markets

The Company's Health Care Information Technology segment provides patient care, clinical, Ñnancial,
supply chain, managed care and strategic management software solutions for providers and payors in the
health care industry. The segment also provides a full complement of network communications technologies,
including wireless capabilities, as well as outsourcing services in which its staÅ manages and operates data
centers, information systems, organizations and business oÇces of health care institutions of various sizes and
structures. In addition, the segment oÅers a wide range of care management and electronic commerce
services, including electronic medical claims and remittance advice services, and statement processing.

The Health Care Information Technology segment markets its products and services to integrated
delivery networks, hospitals, physicians' oÇces, home health providers, pharmacies, reference laboratories,
managed care providers and payors. The segment also sells its products and services internationally through
subsidiaries and/or distribution agreements in the United Kingdom, France, the Netherlands, Canada,
Ireland, Saudi Arabia, Kuwait, Australia, New Zealand and Puerto Rico.

The Health Care Information Technology segment's product portfolio is organized into eight compo-
nents: acute-care or hospital information systems (""HIS''), infrastructure, clinical management, practice
management, access management, resource management, enterprise management and payor solutions.

Hospital Information Systems. HIS applications automate the operation of individual departments and
their respective functions within the in-patient environment. The Company's HIS systems include applica-
tions for patient care, laboratory, pharmacy, radiology and Ñnance.

Infrastructure. Infrastructure components include local, wide area and value-added networks, wireless
technology, electronic data interchange (EDI) capabilities, an interface manager and a data repository. Other
infrastructure applications include document imaging as well as an enterprise master person index.

Clinical Management. The segment's point-of-care applications are designed to allow physicians and
other clinicians to document patient information, establish and manage guidelines or standards of care, enter
and manage orders, and view all results and clinical information. The Clinical Management product portfolio
includes a clinical suite of products consisting of browser-based software applications which may be purchased
and used separately or collectively to automate internal and external clinical communications including: multi-
laboratory order entry and result reporting, electronic prescribing within formulary and medical guidelines, and
advance task management and medical record documentation including web-based dictation, transcription
and attestation, most of which are done via paper today.

Practice Management. Practice management applications provide a comprehensive solution for medical
groups and physician enterprises, whether they are independent or part of an integrated health network. With
business oÇce management as its cornerstone, the Company's practice management solution also includes risk
management and managed care capabilities, clinical systems for managing patient care, and scheduling, as
well as decision support, computer telephony, data quality analysis and electronic commerce.

Access Management. Access management solutions include indexing applications that organize the vast
amounts of information collected about a person throughout the enterprise, allowing patients to be tracked and
information about them to be accessed wherever they go for care as well as scheduling systems that instantly
register and schedule patients, and the resources needed to serve them, anywhere in the enterprise.

Resource Management. Resource management applications including supply chain and management
decision-making help health care organizations better manage people, facilities, supplies, services and
equipment by integrating materials management, accounts payable/general ledger, surgical services manage-
ment and staÅ scheduling functions.

Enterprise Management. Enterprise management applications focus on providing managers with the
clinical, Ñnancial and other information necessary to contain costs while ensuring high-quality care, including
utilization management, accounts receivable management and managed care contracting and member
management applications.

Payor Solutions. Payor solutions support a range of health insurance and managed care needs. Solutions
include businesswide systems that automate all Ñnancial and administrative operations, as well as clinically
intelligent solutions that monitor quality of care and support provider credentialing and proÑling, claims audit,
care management, utilization and Ñnancial-based analysis.

In addition to the segment's product oÅerings described above, the segment also provides the following

services:

Enterprise Services. Enterprise services include UNIX processing support, remote system monitoring
and single-point issue resolution. In addition, the Health Care Information Technology segment's service path
implementation methodology provides a Öexible suite of implementation services that can include an
enterprise project manager to assist in planning, installing and supporting multiple Company products. Other
service areas include education, enterprise consulting, application-speciÑc services, computer telephony and
care management services.

Connect Technology Group. The Connect Technology Group provides network installation and support,
as well as a suite of information services that extend local area networks outside of the hospital to include
payors, vendors, Ñnancial institutions and the Internet.

Outsourcing Services Group. The Health Care Information Technology segment has been in the
outsourcing business in the United States for more than 20 years and also oÅers outsourcing services in the
United Kingdom. Outsourcing services include managing hospital data processing operations (traditionally
known as facilities management) as well as strategic management services in information systems planning,
receivables management, revenue cycle outsourcing, payroll processing, business oÇce administration and
major system conversions.

Electronic Commerce Group. The Health Care Information Technology segment's e-commerce capabil-
ities in EDI service include claims processing, eligibility veriÑcation and remittance advice as well as
statement printing.

Research and Development

The Health Care Information Technology segment's product development eÅort applies computer
technology and installation methodologies to speciÑc information processing needs of hospitals. Management
believes a substantial and sustained commitment to such research and development (""R&D'') is important to
the long-term success of the business.

Investment in software development includes both R&D expense as well as capitalized software. The
Health Care Information Technology segment expended $152.5 million (16% of revenue) for R&D activities
during Ñscal 2001, compared to $148.4 million (15% of revenue) and $145.8 million (11% of revenue) during
2000 and 1999, respectively. The Health Care Information Technology segment capitalized 20%, 29% and
32% of its R&D expenditures in 2001, 2000 and 1999, respectively.

Information regarding R&D is included in Financial Note 1 to the consolidated Ñnancial statements,

""SigniÑcant Accounting Policies,'' appearing on pages F-35 to F-37 of this Annual Report on Form 10-K.

Intellectual Property

The substantial majority of technical concepts and codes embodied in the Health Care Information
Technology segment's computer programs and program documentation are not protected by patents or
copyrights but constitute trade secrets that are proprietary to the Company. The principal trademarks and
service marks of the Health Care Information Technology segment are: AMISYS», HealthQuest», Paragon»,
Pathways 2000», TRENDSTAR», Horizon WPTM, Series 2000TM, Star 2000TM, Connect 2000SM, Practice-
PointSM. The Company also owns other registered and unregistered trademarks and service marks and similar
rights used by the Health Care Information Technology segment. All of the principal trademarks and service
marks are registered in the United States or registrations have been applied for with respect to such marks, in
addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms
of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. The Company
believes this business has taken all necessary steps to preserve the registration and duration of its trademarks
and service marks, although no assurance can be given that it will be able to successfully enforce or protect its
rights thereunder in the event that they are subject to third-party infringement claims. The Company does not
consider any particular patent, license, franchise or concession to be material to the business of the Health
Care Information Technology segment.

Competition

The Company's Health Care Information Technology segment experiences substantial competition from
many Ñrms, including other computer services Ñrms, consulting Ñrms, shared service vendors, certain hospitals
and hospital groups, hardware vendors and internet-based companies with technology applicable to the health
care industry. Competition varies in size from small to large companies, in geographical coverage, and in scope
and breadth of products and services oÅered.

Recent Acquisitions, Investments and Dispositions

McKessonHBOC has undertaken numerous strategic initiatives in recent years to further focus the
Company on its core health care businesses and enhance its competitive position. These include the following
signiÑcant acquisitions and dispositions:

Acquisitions and Investments

‚ In July 2000, the Company acquired MediVation, Inc., a provider of an automated web-based system
for physicians to communicate with patients online, for approximately $24 million in cash, $14 million
in Company common stock and the assumption of $6 million of employee stock incentives.

‚ In April 2000, the Company and three other health care product distributors announced an agreement
to form the New Health Exchange (subsequently renamed ""Health Nexis''). Health Nexis is an
Internet-based company focused on information systems and other technology solutions to streamline
communication, processing and management of product and contract data across the health care
supply chain. The Company accounts for its 34% interest in Health Nexis under the equity method of
accounting. In Ñscal 2001, the Company invested $10.8 million in Health Nexis.

‚ In November 1999, the Company acquired Abaton.com, a provider of internet-based clinical
applications for use by physician practices, pharmacy beneÑt managers, beneÑt payors, laboratories and
pharmacies, for approximately $95 million in cash and the assumption of $8 million of employee stock
incentives.

‚ In January 1999, McKesson Corporation (""McKesson'') completed the acquisition of HBO &
Company (""HBOC''), a leading health care information technology company, by exchanging 177 mil-
lion shares of McKesson common stock for all of the issued and outstanding shares of common stock of
HBOC. Each share of HBOC common stock was exchanged for 0.37 of a share of McKesson common
stock (the ""Exchange Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was
structured as a tax-free reorganization and was accounted for as a pooling of interests.

‚ In December 1998, the Company acquired Access Health, Inc. (""Access''), a provider of clinically
based care management programs and health care information services, for the equivalent, after
application of the Exchange Ratio, of approximately 12.7 million shares of Company common stock.

‚ In November 1998, the Company acquired RedLine HealthCare Corporation (""RedLine''), a
distributor of medical supplies and services to the extended-care industry, including long-term care and
home-care sites, for approximately $233 million in cash.

‚ In October 1998, the Company acquired IMNET Systems, Inc. (""IMNET''), a provider of electronic
information and document management solutions for the health care industry, for the equivalent, after
application of the Exchange Ratio, of approximately 3.6 million shares of Company common stock and
0.6 million Company stock options.

Disposition

‚ In February 2000, the Company disposed of its last non-health care business, its wholly-owned

subsidiary McKesson Water Products Company, for approximately $1.1 billion in cash.

Other Information About the Business

Customers Ì The Company's recent strategy has been to build relationships with large customers that
are achieving rapid growth. A signiÑcant portion of the Company's increase in sales has been to a limited
number of these large customers. During the Ñscal year ended March 31, 2001, sales to the Company's ten
largest customers accounted for approximately 57% of the Company's revenues; sales to the largest customer,
Rite Aid Corporation, represented approximately 16% of the Company's revenues.

Environmental Legislation Ì The Company sold its chemical distribution operations in Ñscal 1987 and
retained responsibility for certain environmental obligations. Agreements with the Environmental Protection

Agency and certain states may require environmental assessments and cleanups at several closed sites. These
matters are described further in ""Item 3. Legal Proceedings'' on pages 7 to 13 of this report. Other than any
capital expenditures which may be required in connection with those matters, the Company does not
anticipate making substantial capital expenditures for environmental control facilities or to comply with
environmental laws and regulations in the future. The amount of capital expenditures expended by the
Company for environmental compliance was not material in Ñscal 2001 and is not expected to be material in
the next Ñscal year.

Employees Ì At March 31, 2001, the Company employed approximately 23,000 persons.

Financial Information About Foreign and Domestic Operations and Export Sales

Information as to foreign operations is included in Financial Note 17 to the consolidated Ñnancial
statements ""Segments of Business,'' appearing on pages F-60 to F-62 of this Annual Report on Form 10-K.

Item 2. Properties

Because of the nature of the Company's principal businesses, plant, warehousing, oÇce and other
facilities are operated in widely dispersed locations. The warehouses are typically owned or leased on a
long-term basis. The Company considers its operating properties to be in satisfactory condition and adequate
to meet its needs for the next several years without making capital expenditures materially higher than
historical levels. Information as to material lease commitments is included in Financial Note 12 to the
consolidated Ñnancial statements, ""Lease Obligations,'' appearing on page F-50 of this Annual Report on
Form 10-K.

Item 3. Legal Proceedings

I. Accounting Litigation

Since the Company's announcements in April, May and July of 1999 that the Company had determined
that certain software sales transactions in its Information Technology Business unit, formerly HBOC, were
improperly recorded as revenue and reversed, as of April 30, 2001, eighty-Ñve lawsuits have been Ñled against
the Company, certain of the Company's or HBOC's current or former oÇcers or directors, and other
defendants including, Bear Stearns & Co., Inc. (""Bear Stearns''), and Arthur Andersen LLP (""Arthur
Andersen'').

A. Federal Actions

Sixty-Ñve of these actions have been Ñled in Federal Court (the ""Federal Actions''). Of these, Ñfty-nine
were Ñled 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 Ñfty-three of these actions into one action entitled In RE McKesson HBOC, Inc. Securities
Litigation (Case No. C-99-20743 RMW) (the ""Consolidated Action''), and by order dated December 22,
1999, appointed the New York State Common Retirement Fund as lead plaintiÅ (""Lead PlaintiÅ'') and
approved Lead PlaintiÅs' 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 plaintiÅs in Jacobs Ñled
an individual action in the Northern District of California entitled Jacobs v. HBO & Company (Case
No. C-00-20974 RMW), which is to be consolidated with the Consolidated Action and which purports to

state claims under Sections 11 and 12(2) of the Securities Act of 1933 (""Securities Act''), Section 10(b) of
the Securities Exchange Act of 1934 (""Exchange Act'') and various state law causes of action. By order dated
February 7, 2000, Judge Whyte coordinated a class action alleging ERISA claims, Chang v. McKesson HBOC,
Inc. et al. (Case No. C-00-20030 RMW) and a shareholder derivative action that had been Ñled in the
Northern District under the caption Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the
Consolidated Action.

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

On January 18, 2001, the Company Ñled a motion to dismiss the claim under Section 14(a) of the
Exchange Act in its entirety, and the claim under Section 10(b) of the Exchange Act to the extent it is based
on the statements or conduct of the Company prior to the Merger. HBOC also Ñled its own motion to dismiss
the claim based on Section 14(a) of the Exchange Act insofar as that claim is asserted on behalf of McKesson
shareholders. Those motions were heard on March 23, 2001, and Judge Whyte has not yet issued an order.

On January 11, 2001, the Company Ñled an action in the U.S. District Court for the Northern District of
California against the Lead PlaintiÅ in the Consolidated Action individually, and as a representative of a
defendant class of former HBOC shareholders who exchanged HBOC shares for Company shares in the
Merger, 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, the Company
alleges that the exchanged HBOC shares were artiÑcially inÖated 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, the Company seeks to recover the ""unjust enrichment'' received by
those HBOC shareholders who exchanged more than 20,000 HBOC shares in the Merger. The Company does
not allege any wrongdoing by these shareholders. Lead PlaintiÅ's motion to dismiss the Complaint and
Counterclaim was heard on March 23, 2001, and Judge Whyte has not yet issued an order.

Two other individual actions, Bea v. McKesson HBOC, Inc. et al. (Case No. C-0020072 RMV), and
Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW), have also been Ñled in the Northern
District of California. By stipulation, Bea has been consolidated with the Consolidated Action and Cater has
been stayed pending resolution of the Company's motion to dismiss the Consolidated Complaint. One other
individual action, Baker v. McKesson HBOC, Inc. et al. (Case No. CV 00-0188) was Ñled in the U.S. District
Court for the Western District of Louisiana. The Company moved to transfer Baker to the Northern District
of California, together with a parallel state court action, Baker v. McKesson HBOC, Inc. et al. (Ñled 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 Ñled in the Northern District of Georgia and subsequently transferred to the Northern District of
California, but that action names only two former oÇcers and does not name the Company. Finally, on
July 24, 2000, an action captioned Hess v. McKesson HBOC, Inc. et al. was Ñled 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, the Company 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 the
Company's motion to transfer the case to the Northern District of California.

B. State Actions

Twenty actions have also been Ñled 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 the Company's need to restate its
Ñnancial statements.

Two of the State Actions are derivative actions: Ash, et al. v. McCall, et al. (Case No. 17132), Ñled in the
Delaware Chancery Court and Mitchell v. McCall et al. (Case. No. 304415), Ñled in California Superior
Court, City and County of San Francisco. The Company moved to dismiss both of these actions and to stay
the Mitchell action in favor of the earlier Ñled Ash and Cohen derivative actions. PlaintiÅs in Mitchell agreed
to defer any action by the court on the Company's motions pending resolution of the Company's dismissal
motions 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 plaintiÅs Ñled a Third Amended Complaint
which is presently the subject of the Company's motions to dismiss.

Five of the State Actions are class actions. Three of these were Ñled 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 Ñled 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. The Company has removed Edmondson to Federal Court in Delaware where plaintiÅs have Ñled a
motion to remand, which is pending. The Company's motions to stay the Derdiger and Caravetta actions in
favor of proceedings in the federal Consolidated Action have been granted.

Thirteen of the State Actions are individual actions which have been Ñled in various state courts. Four of
these were Ñled 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 the Company'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 Ñling of an amended
complaint. The Company's demurrer to that amended pleading was heard on May 23, 2001 and no order has
yet been issued. On May 23, 2001, the California Court of Appeals aÇrmed the Yurick trial court's order
dismissing claims against certain of the individual defendants in the action without leave to amend. The
Oregon, Utah and Minnesota actions referenced above are individual securities actions Ñled in the California
Superior Court for the City and County of San Francisco by out-of-state pension funds. PlaintiÅs in each of
those actions are in the process of Ñling amended complaints, and action on the Company's motions seeking
stays of those actions and demurrers to the prior complaints has been suspended pending defendants'
responses to those amended pleadings.

Court of Appeals has granted interlocutory review of an order issued in Adler and the prior June, 2001, trial
date has been vacated. SuÅolk 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 are based on Georgia securities, racketeering and
common law claims. The Company has moved to stay both the SuÅolk and Curran actions in favor of
proceedings in the federal Consolidated Action. Those motions have been heard by the Court and no order has
yet been issued.

Three individual state court cases have been Ñled outside of California. Grant v. McKesson HBOC, Inc.
(C.A. No. 99-03978) was Ñled on May 12, 1999 in the Pennsylvania Court of Common Pleas, Chester
County. The Grant case relates to the Company's acquisition of Keystone/Ozone Pure Water Company
(""Keystone''). PlaintiÅs are former shareholders of Keystone who received McKesson shares in exchange for
their shares in Keystone pursuant to a merger agreement between plaintiÅs, McKesson and a McKesson
subsidiary. On March 6, 2001, the Court denied the Company's motion to stay and dismissed with prejudice
all plaintiÅs' claims except for those based on breach of contract and negligent misrepresentation. The
Company answered the Grant complaint on March 26, 2001. On September 28, 1999, an action was Ñled in
Delaware Superior Court under the caption Kelly v. McKesson HBOC, Inc. et al. (C.A. No. 99C-09-265
WCC). PlaintiÅs in Kelly are former shareholders of KWS&P/SFA, Inc., which merged into the Company
after the Merger. PlaintiÅs 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. The Company's motion to dismiss and plaintiÅs'
motion for summary judgment remain pending before the Court. On October 19, 1999, an individual action
was Ñled in Colorado District Court, Boulder County, under the caption American Healthcare Fund II v. HBO
& Company et al. (Case No. 00-CV-1762). PlaintiÅs in American Healthcare are former shareholders of
Access Health, Inc., a company acquired by HBOC prior to the Merger, and assert claims for breach of the
merger contract and related claims. The Company has answered an amended complaint and Ñled a
counterclaim against the plaintiÅs alleging that, as HBOC shareholders exchanging HBOC shares for
McKesson shares in the Merger, plaintiÅs were unjustly enriched. Discovery has commenced and trial is
currently set for September 10, 2001.

The previously reported investigations by the United States Attorney's OÇce and the Securities and
Exchange Commission are continuing. On May 15, 2000, the United States Attorney's OÇce Ñled a
one-count information against former HBOC oÇcer, 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
oÇcer, Jay P. Gilbertson, and former Company and HBOC OÇcer, Albert J. Bergonzi (United States v.
Bergonzi, et al., Case No. CR-00-0505). On that same date, a civil complaint was Ñled 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).

The Company does 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
these proceedings. In addition, the timing of the Ñnal resolution of these proceedings is uncertain. The range of
possible resolutions of these proceedings could include judgments against the Company or settlements that
could require substantial payments by the Company, which could have a material adverse impact on the
Company's Ñnancial position, results of operations and cash Öows.

II. Other Litigation and Claims

relating to governmental laws and regulations and other matters arising out of the normal conduct of the
Company's business. These include:

A. Antitrust Matters

The Company currently is a defendant in numerous civil antitrust actions Ñled since 1993 in federal and
state courts by retail pharmacies. The federal cases have been 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 a
consolidated class action (the ""Federal Class Action'') as well as approximately 109 additional actions
brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the ""Individual
Actions''). There are numerous other defendants in these actions including several pharmaceutical manufac-
turers and several other wholesale distributors. These cases allege, in essence, that the defendants have
violated the Sherman Act by conspiring to Ñx the prices of brand name pharmaceuticals sold to plaintiÅs at
artiÑcially high, and non-competitive levels, especially as compared with the prices charged to mail order
pharmacies, managed care organizations and other institutional buyers. On January 19, 1999, the District
Court entered its written opinion and judgment granting defendants' motion for a judgment as a matter of law.
On July 13, 1999, the Seventh Circuit aÇrmed the District Court's judgment as to the dismissal of the claims
against the wholesalers. The wholesalers' motion for summary judgment in the Individual Actions has been
granted. PlaintiÅs have appealed to the Seventh Circuit. Most of the individual cases brought by chain stores
have been settled.

State court antitrust cases against the Company 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 in Superior Court for the State
of California, City and County of San Francisco is referred to as Coordinated Special Proceeding,
Pharmaceutical Cases I, II & III. The case is trailing MDL 997. A case Ñled in Santa Clara County (Paradise
Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was coordinated with the case pending in San
Francisco. 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, plaintiÅs seek remedies in the form of injunctive relief and unquantiÑed monetary
damages, attorneys' fees and costs. PlaintiÅs in the California cases also seek restitution. In addition, treble
damages are sought in the Federal Class Action, the Individual Actions and the California case, and statutory
penalties of $500 per violation are sought in the Mississippi case. The Company has entered into a judgment
sharing agreement with certain pharmaceutical manufacturer defendants, which provides generally that the
Company (together with the other wholesale distributor defendants) will be held harmless by such
pharmaceutical manufacturer defendants and will be indemniÑed 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.

B. FoxMeyer Litigation

In January 1997, the Company and twelve pharmaceutical manufacturers (the ""Manufacturer Defend-
ants'') were named as defendants in the matter of FoxMeyer Health Corporation vs. McKesson, et al. (Case
No. 97 00311) Ñled in the District Court in Dallas County, Texas (""the Texas Action''). PlaintiÅ (the parent
corporation of FoxMeyer Drug Company and FoxMeyer Corporation, collectively ""FoxMeyer Corporation'')
has alleged that, among other things, the Company (i) defrauded PlaintiÅ, (ii) competed unfairly and
tortiously interfered with FoxMeyer Corporation's business operations, and (iii) conspired with the Manufac-
turer Defendants, all in order to destroy FoxMeyer Corporation's business, restrain trade and monopolize the
marketplace, and allow the Company to purchase that business at a distressed price. PlaintiÅ seeks relief
against all defendants in the form of compensatory damages of at least $400 million, punitive damages,
attorneys' fees and costs. The Company answered the complaint, denying the allegations and removed the case
to federal bankruptcy court in Dallas.

In March 1997, the Company and the Manufacturer Defendants Ñled a complaint in intervention against
FoxMeyer Health (now known as Avatex Corporation) in the action Ñled against Avatex by the FoxMeyer
Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The
complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the Texas
Action.

In November 1998, the Delaware court granted the Company's motion for summary judgment as to the
Ñrst three counts asserted in the Texas Action on the ground of judicial estoppel. The Company Ñled a
renewed motion for summary judgment on 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, the
Company Ñled cross-claims against the Trustee and debtors seeking the same relief as sought in the
Company's complaint against Avatex. Based on the order granting summary judgment as to the Ñrst three
counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action
remanded to state court. On November 30, 1998, the Company and the other Defendants Ñled a notice of
appeal to the District Court from the remand ruling as well as the August 1997 ruling denying defendants'
motion to transfer the Texas Action to Delaware. In addition, the Company has Ñled a counter-claim and
cross-claim against Avatex and Messrs. Estrin, Butler and Massman in the Texas Action, asserting various
claims of misrepresentation and breach of contract. The District Court upheld the remand order and denied as
moot the appeal from the order denying transfer. A cross-appeal by Avatex from the order dismissing the Ñrst
three counts with prejudice failed, as the District Court aÇrmed the Bankruptcy Court's dismissal by order
dated March 28, 2001. The Company and several of the other defendants appealed to the 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. As a result, the Texas Action is
now pending in Texas state court, and the parties presently are engaged in discovery on the merits of the
various claims asserted in the Texas Action.

C. Product Liability Litigation

The Company has been named as a defendant, or has received from customers tenders of defense, in
Ñfteen pending cases alleging injury due to the diet drug combination of fenÖuramine or dexfenÖuramine and
phentermine. All of the cases are pending in the state courts of California, Nebraska and New Jersey. The
Company's tender of the cases to the manufacturers of the drugs has been accepted and the manufacturer is
paying for counsel and fully indemnifying the Company for judgments or settlements arising from its
distribution of the manufacturer's products.

Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the ""Subsidiaries'') are two of
the defendants in approximately ninety cases in which plaintiÅs 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 the Subsidiaries. EÅorts to resolve tenders of defense to their suppliers are
continuing and a tentative Ñnal agreement has been reached with one major supplier. The Subsidiaries'
insurers are providing coverage for these cases, subject to the applicable deductibles.

There is one remaining state court class action in South Carolina Ñled against MGM on behalf of all
health care workers in that state who suÅered accidental needle sticks that exposed them to potentially
contaminated bodily Öuids, 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 the Company for any judgments in these cases arising from its distribution of their
products.

which would be based upon a fraction of a percent of the Company's 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. The Company is assessing its
potential exposure and evaluating the Foundations' claim with the assistance of expert patent counsel, after
which it will determine an appropriate course of action.

D. Environmental Matters

Primarily as a result of the operation of its former chemical businesses, which were divested in Ñscal

1987, the Company is involved in various matters pursuant to environmental laws and regulations:

The Company has received claims and demands from governmental agencies relating to investigative and
remedial action purportedly required to address environmental conditions alleged to exist at Ñve sites where
the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by
administrative order or otherwise, has agreed to take certain actions at those sites, including soil and
groundwater remediation.

The current estimate (determined by the Company's environmental staÅ, in consultation with outside
environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible
remediation costs for these Ñve sites is approximately $13 million, net of approximately $1.5 million which
third parties have agreed to pay in settlement or which the Company expects, 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 and is included in the Company's recorded environmental
liabilities at March 31, 2001.

In addition, the Company has been designated as a potentially responsible party (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
the Company's 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. The Company's estimated liability at those 21 PRP sites is approximately $1.5 million. The
aggregate settlements and costs paid by the Company in Superfund matters to date has not been signiÑcant.
The $1.5 million is included in the Company's recorded environmental liabilities at March 31, 2001.

The potential costs to the Company 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 eÅectiveness of
alternative cleanup technologies; the determination of the Company's liability in proportion to other PRPs;
and the extent, if any, to which such costs are recoverable from insurance or other parties.

Except as speciÑcally stated above with respect to the litigation matters summarized under ""Accounting
Litigation'' (section I, above), management believes, based on current knowledge and the advice of the
Company's counsel, that the outcome of the litigation and governmental proceedings discussed in this Item 3
will not have a material adverse eÅect on the Company's Ñnancial position, results of operations or cash Öows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise,

during the three months ended March 31, 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding the executive oÇcers of the Company, including
their principal occupations during the past Ñve years. The number of years of service with the Company
includes service with predecessor companies (including McKesson).

There are no family relationships between any of the executive oÇcers or directors of the Company. The
executive oÇcers are chosen annually to serve until the Ñrst meeting of the Board of Directors following the
next annual meeting of stockholders and until their successors are elected and have qualiÑed, or until death,
resignation or removal, whichever is sooner.

Name

Age

Position with Registrant and Business Experience

Alan SeelenfreundÏÏÏÏÏÏÏÏÏÏÏÏÏ

64 Chairman of the Board since June 1999; Chairman of the Board

John H. HammergrenÏÏÏÏÏÏÏÏÏÏ

William R. Graber ÏÏÏÏÏÏÏÏÏÏÏÏ

(1989 Ó January 1999) and Chief Executive OÇcer
(1989 Ó 1997). Service with the Company Ì 26 years.
42 President and Chief Executive OÇcer since April 1, 2001,

Co-President and Co-Chief Executive OÇcer from July 1999 to
April 1, 2001 and a director since July 1999; Executive Vice
President, President and Chief Executive OÇcer of the Supply
Management Business (January Ó July 1999); Group President,
McKesson Health Systems (1997 Ó 1999) and Vice President of
the Company since 1996. Service with the Company Ì 5 years.
58 Senior Vice President and Chief Financial OÇcer since March

2000; Vice President and Chief Financial OÇcer, The Mead
Corporation (1993 Ó 1999). Service with the Company Ì 1 year,
3 months.

Paul C. Julian ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

45 Senior Vice President since August 1999, and President of

Supply Management Business since March 2000; Group
President, McKesson General Medical (1997 Ó 2000); Executive
Vice President, McKesson Health Systems (1996 Ó 1997); Group
Vice President and Corporate OÇcer, Owens & Minor
(1994 Ó 1996). Service with the Company Ì 5 years.

Graham O. King ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

61 Senior Vice President and President, Information Technology

Paul E. KirincicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ivan D. Meyerson ÏÏÏÏÏÏÏÏÏÏÏÏÏ

Business since October 1999; Group President, Outsourcing
Services, HBOC (1998 Ó 1999); Chairman and Chief Executive
OÇcer, U.S. Servis, Inc. (1994 Ó 1998). Service with the
Company Ì 2 years, 6 months.

50 Senior Vice President Ì Human Resources since January 2001;
Vice President, Human Resources, Consumer Health Sector,
Warner Lambert (1998 Ó 2001); Vice President, Human
Resources, Whirlpool Europe, Whirlpool Corporation
(1975 Ó 1998). Service with the Company 3 months.
56 Corporate Secretary since April 1, 1999, and Senior Vice
President and General Counsel since January 1999; Vice
President and General Counsel (1987 Ó January 1999). Service
with the Company Ì 23 years.

Carmine J. VillaniÏÏÏÏÏÏÏÏÏÏÏÏÏ

58 Senior Vice President and Chief Information OÇcer since

January 1999; Vice President and Chief Information OÇcer
(1997 Ó January 1999) and Vice President, Information
Management, McKesson Drug Company (1994 Ó 1997). Service
with the Company Ì 9 years.

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

(a) Market Information

The principal market on which the Company's common stock is traded is the New York Stock Exchange.
The Company's common stock is also traded on the PaciÑc Exchange, Inc. High and low prices for the
common stock by quarter are included in Financial Note 19 to the consolidated Ñnancial statements,
""Quarterly Financial Information (Unaudited),'' appearing on pages F-70 to F-72 of this Annual Report on
Form 10-K.

(b) Holders

The number of record holders of the Company's common stock at March 31, 2001 was approximately

16,000.

Dividend information is included in Financial Note 19 to the consolidated Ñnancial statements,
""Quarterly Financial Information (Unaudited),'' appearing on pages F-70 to F-72 of this Annual Report on
Form 10-K.

Item 6. Selected Financial Data

Selected Ñnancial data is presented in the Five-Year Highlights on pages F-2 to F-5 of this Annual

Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of the Company's Ñnancial condition and results of operations is

presented in the Financial Review on pages F-6 to F-29 of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Information required by this item is included in the Financial Review on page F-24 of this Annual Report

on Form 10-K.

Item 8. Financial Statements and Supplementary Data

Financial Statements and Supplementary Data appear on pages F-31 to F-72 of this Annual Report on

Form 10-K.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 10. Directors and Executive OÇcers of the Registrant

PART III

Information with respect to Directors of the Company is incorporated by reference from the Company's
2001 Proxy Statement (the ""Proxy Statement''). Certain information relating to Executive OÇcers of the
Company appears on page 14 of this Annual Report on Form 10-K. The information with respect to this item
required by Item 405 of Regulation S-K is incorporated herein by reference from the Proxy Statement.

Item 11. Executive Compensation

Information with respect to this item is incorporated herein by reference from the Proxy Statement.

Item 12. Security Ownership of Certain BeneÑcial Owners and Management

Information with respect to this item is incorporated herein by reference from the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

Information with respect to certain transactions with management is incorporated by reference from the

Proxy Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K

(a) Financial Statements, Financial Statement Schedule and Exhibits

Page

(1) Consolidated Financial Statements and Independent Auditors' Report:

See ""Index to Consolidated Financial Statements'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

F-1

(2) Supplementary Consolidated Financial Statement Schedule Ì Valuation

and Qualifying Accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial statements and schedules not included have been omitted
because of the absence of conditions under which they are required or
because the required information, where material, is shown in the
Ñnancial statements, Ñnancial notes or supplementary Ñnancial
information

(3) Exhibits:

Exhibits submitted with this Annual Report on Form 10-K as Ñled with
the SEC and those incorporated by reference to other Ñlings are listed on
the Exhibit Index ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(b) Reports on Form 8-K

The following reports on Form 8-K were Ñled during the three months ended March 31, 2001:

1. Form 8-K

Date of Report: January 11, 2001
Date Filed: January 11, 2001

Item 9. Regulation FD Disclosure

The Company announced it had Ñled an action against the New York State Common
Retirement Fund, Inc., individually, and as a representative of a class of former HBO &
Company (""HBOC'') shareholders who exchanged their HBOC shares for McKesson shares in
the 1999 acquisition of HBOC.

2. Form 8-K

Date of Report: February 26, 2001
Date Filed: March 1, 2001

Item 5. Other Events

McKesson HBOC, Inc. (the ""Company'') announced that John H. Hammergren, Co-
President and Co-CEO of the Company, will become President and CEO of the Company
eÅective April 1, 2001. The Company further announced the restructuring of its iMcKesson
business unit. David L. Mahoney, currently Co-CEO of the Company will leave the Company
and resign from its Board of Directors.

Pursuant to the requirements of Section 13 of 15(d) 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.

SIGNATURES

MCKESSON HBOC, INC.

Dated: May 31, 2001

/s/ WILLIAM R. GRABER

William R. Graber
Senior Vice President and Chief
Financial OÇcer

Pursuant on behalf of the Registrant and to the requirements of the Securities Act of 1934, this report

has been signed below by the following persons in the capacities and on the date indicated:

*
John H. Hammergren
President and Chief Executive OÇcer and Director
(Principal Executive OÇcer)

*
William R. Graber
Senior Vice President and Chief Financial OÇcer
(Principal Financial OÇcer)

*
Nigel A. Rees
Vice President and Controller
(Principal Accounting OÇcer)

*
Alfred C. Eckert III,
Director

*
Tully M. Friedman,
Director

*
Alton F. Irby III,
Director

Dated: May 31, 2001

*
M. Christine Jacobs,
Director

*
Martin M. KoÅel,
Director

*
Gerald E. Mayo,
Director

*
James V. Napier,
Director

*
David S. Pottruck,
Director

*
Carl E. Reichardt,
Director

*
Alan Seelenfreund,
Chairman of the Board

*
Jane E. Shaw,
Director

/s/

IVAN D. MEYERSON
Ivan D. Meyerson
*Attorney-in-Fact

SCHEDULE II

McKESSON HBOC, INC.

SUPPLEMENTARY CONSOLIDATED FINANCIAL SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2001, 2000 and 1999
(in millions)

Column A

Column B

Column C
Additions

Column D

Column E

Description

Amounts deducted from assets to which

they apply:

Year Ended March 31, 2001
Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ
Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Year Ended March 31, 2000
Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ
Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Year Ended March 31, 1999
Allowances for doubtful accounts ÏÏÏÏÏÏÏÏÏ
Other allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Balance at
Beginning of
Period

Charged to
Costs and
Expenses

Charged to
Other
Accounts

Deductions(1)

Balance at
End of
Period(2)

$236.5
39.0
$275.5

$140.4
40.8
$181.2

$ 54.0
29.8
$ 83.8

$239.6(3)
8.4
$248.0

$216.8(4)
0.5
$217.3

$ 87.2(5)
11.1
$ 98.3

$ 9.1
Ì
$ 9.1

$ Ì
Ì
$ Ì

$16.2
Ì
$16.2

$(101.5)
(10.8)
$(112.3)

$(120.7)
(2.3)
$(123.0)

$ (17.0)
(0.1)
$ (17.1)

$383.7
36.6
$420.3

$236.5
39.0
$275.5

$140.4
40.8
$181.2

2001

2000

1999

(1) Deductions:

Written oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credited to other accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$108.7
3.6
$112.3

(2) Amounts shown as deductions from:

Current receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$419.7
0.6
$420.3

$120.4
2.6
$123.0

$274.9
0.6
$275.5

$ 17.1
Ì
$ 17.1

$180.6
0.6
$181.2

(3) Includes charges of $161.1 million for customer settlements (forgiveness of accounts receivable,
customer credits and refunds) resulting from software and services issues associated with pre-July 1999
Health Care Information Technology contracts.

(4) Includes charges of $68.5 million for a change in estimate of receivable allowance requirements,
$72.6 million for customer settlements (forgiveness of accounts receivable, customer credits and refunds)
associated with discontinued product lines and $7.7 million for uncollectible unbilled receivables
primarily in the Health Care Information Technology segment.

(5) Includes charges of $70.0 million for Health Care Information segment bad debts, disputed amounts and

customer allowances.

Exhibit
Number

2.1

2.2

2.3

3.1

3.2

3.3
4.1

4.2
4.3

4.4

EXHIBIT INDEX

Description

Agreement and Plan of Merger, dated as of October 17, 1998, by and among McKesson Corporation
(""the Company''), McKesson Merger Sub, Inc. (""Merger Sub'') and HBO & Company
(""HBOC'') (Exhibit 2.1(1)).
Amendment Agreement to Agreement and Plan of Merger, dated as of November 9, 1998, by and
among the Company, Merger Sub and HBOC (Exhibit 2.2(1)).
Second Amendment Agreement to that certain Agreement and Plan of Merger dated October 17,
1998, as amended by an Amendment Agreement dated as of November 9, 1998 (Exhibit 2.1(2)).
Restated CertiÑcate of Incorporation of the Company as Ñled with the oÇce of the Delaware
Secretary of State on July 30, 1998 (Exhibit 3.2(3)).
CertiÑcate of Amendment to the Restated CertiÑcate of Incorporation of Registrant as Ñled with the
oÇce of the Delaware Secretary of State on January 12, 1999 (Exhibit 4.3(4)).
Amended and Restated By-Laws of the Company dated as of March 31, 2001.
Rights Agreement dated as of October 21, 1994 between the Company and First Chicago Trust
Company of New York, as Rights Agent (the ""Rights Agreement'') (Exhibit 4.1(6)).
Amendment No. 1 to the Rights Agreement dated as of October 19, 1998 (Exhibit 99.1(7)).
Indenture, dated as of March 11, 1997, by and between the Company, as Issuer, and The First
National Bank of Chicago, as Trustee (Exhibit 4.4(8)).
Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20,
1997, among the Company, as Sponsor, The First National Bank of Chicago, as Institutional Trustee,
First Chicago Delaware, Inc., as Delaware Trustee and William A. Armstrong, Ivan D. Meyerson
and Nancy A. Miller, as Regular Trustees (Exhibit 4.2(9)).

4.6

4.5 McKesson Corporation Preferred Securities Guarantee Agreement, dated as of February 20, 1997,
between the Company, as Guarantor, and The First National Bank of Chicago, as Preferred
Guarantor (Exhibit 4.7(10)).
Registrant agrees to furnish to the Commission upon request a copy of each instrument deÑning the
rights of security holders with respect to issues of long-term debt of the Registrant, the authorized
principal amount of which does not exceed 10% of the total assets of the Registrant.
Employment Agreement, dated as of August 1, 1999, by and between the Company and the
Chairman of the Board(16).
Amended and Restated Employment Agreement, dated as of June 21, 1999, by and between the
Company and its President and Chief Executive OÇcer(16).
Form of Termination Agreement by and between the Company and certain designated Corporate
OÇcers (Exhibit 10.23(11)).

10.1

10.2

10.3

10.4 McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan, as amended through

January 27, 1999 (Exhibit 10.5(14)).

10.5 McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity Compensation and Deferral Plan, as

amended through January 27, 1999 (Exhibit 10.6(14)).
10.6 McKesson HBOC, Inc. Supplemental PSIP (Exhibit 10.7(14)).
10.7 McKesson HBOC, Inc. Deferred Compensation Administration Plan, amended as of January 27,

1999 (Exhibit 10.8(14)).

10.8 McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as amended eÅective

January 27, 1999 (Exhibit 10.9(14)).

10.9 McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as amended eÅective January 27, 1999

(Exhibit 10.10(14)).

10.10 McKesson HBOC, Inc. Directors' Deferred Compensation Plan, as amended eÅective January 27,

1999 (Exhibit 10.11(14)).

10.11 McKesson HBOC, Inc. 1985 Executives' Elective Deferred Compensation Plan, amended as of

January 27, 1999 (Exhibit 10.12(14)).

Exhibit
Number

Description

10.12 McKesson HBOC, Inc. Management Deferred Compensation Plan, amended as of January 27, 1999

(Exhibit 10.13(14)).

10.13 McKesson HBOC, Inc. 1984 Executive BeneÑt Retirement Plan, as amended through January 27,

1999 (Exhibit 10.14(14)).

10.14 McKesson HBOC, Inc. 1988 Executive Survivor BeneÑts Plan, as amended eÅective January 27,

1999 (Exhibit 10.15(14)).

10.15 McKesson HBOC, Inc. Executive Medical Plan Summary (Exhibit 10.16(14)).
10.16 McKesson HBOC, Inc. Severance Policy for Executive Employees, as amended through January 27,

1999 (Exhibit 10.17(14)).

10.17 McKesson HBOC, Inc. Management Incentive Plan, as amended through January 27, 1999

(Exhibit 10.18(14)).

10.18 McKesson HBOC, Inc. Long-Term Incentive Plan, as amended through January 27, 1999

(Exhibit 10.19(14)).

10.19 McKesson HBOC, Inc. Stock Purchase Plan, as amended through January 27, 1999 (Exhibit

10.20(14)).

10.20 McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan (Exhibit 99.1(12)).
10.21

Stock Purchase Agreement, dated as of January 10, 2000, by and among the Company, Danone
International Brands, Inc. and Groupe Danone SA (Exhibit 99.1(15)).

10.22 Amendment No. 1 to January 10, 2000 Stock Purchase Agreement, dated as of February 28, 2000

(Exhibit 10.23(16)).
10.23
First Amendment to October 22, 1999 Credit Agreement dated as of October 10, 2000.
10.24 HBO & Company 1993 Stock Option Plan for Nonemployee Directors (Exhibit 4(13)).
10.25 Amendment and Restated Employment Agreement, dated as of June 21, 1999, by and between the
Company and its former Co-President and Co-Chief Executive OÇcer (Exhibit 10.26(16)).

10.26 Third Amendment to June 25, 1999 Receivables Purchase Agreement dated as of June 16, 2000.
10.27

Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27,
1999 (Exhibit 10.28(14)).

10.28 Credit Agreement dated as of November 10, 1998 among the Company, Medis Health and
Pharmaceutical Services Inc., Bank of America National Trust and Savings Association, as Agent,
Bank of America Canada, as Canadian Administrative Agent, The Chase Manhattan Bank, as
documentation agent, First Union National Bank, as documentation agent, The First National Bank
of Chicago, as documentation agent, and the other Ñnancial institutions party thereto
(Exhibit 10.29(14)).
Stock Option Agreement, dated October 17, 1998, between McKesson and HBOC
(Exhibit 99.1(1)).
Stock Option Agreement, dated October 17, 1998, between HBOC and McKesson
(Exhibit 99.2(1)).

10.30

10.29

10.31 Credit Agreement dated as of October 22, 1999 among the Company and the several Ñnancial
institutions from time to time party to the Agreement (""Banks''), The Chase Manhattan Bank, First
Union National Bank, Morgan Guaranty Trust Company as documentation agents for Banks and
Bank of America N.A. as administrative agent for Banks (Exhibit 10.32(16)).
First Amendment to November 10, 1998 Credit Agreement, dated as of June 28, 1999
(Exhibit 10.33(16)).
Second Amendment to November 10, 1998 Credit Agreement, dated as of December 1, 1999
(Exhibit 10.34(16)).

10.33

10.32

10.34 Receivables Purchase Agreement dated as of June 25, 1999 among the Company, as servicer, CGSF
Funding Corporation, as seller, Preferred Receivables Funding Corporation, Falcon Asset
Securitization Corporation and Blue Ridge Asset Funding Corporation, as conduits, The First
National Bank of Chicago and Wachovia Bank, N.A., as managing agents, the several Ñnancial
institutions from time to time party to the Agreement, and The First National Bank of Chicago, as
collateral agent (Exhibit 10.35(16)).

Exhibit
Number

10.35

10.36

10.37

10.38

10.39

Description

First Amendment to June 25, 1999 Receivables Purchase Agreement, dated as of September 29,
1999 (Exhibit 10.36(16)).
Second Amendment to June 25, 1999 Receivables Purchase Agreement, dated as of December 6,
1999 (Exhibit 10.37(16)).
Statement of Terms and Conditions Applicable to certain Stock Options granted on August 16, 1999
(Exhibit 10.38(16)).
Statement of Terms and Conditions Applicable to certain Restricted Stock grants on January 31,
2000 (Exhibit 10.39(16)).
Syndicated Revolving Promissory Note dated as of May 28, 1999 among the Company, Bank of
America National Trust and Savings Association, as Agent, and the other noteholders' signatures to
the Note, Banc of America LLC as Sole Lead Arranger (Exhibit 10.40(16)).

10.40 Employment Agreement, dated as of June 21, 1999 by and between the Company and its Senior Vice

President, President, Information Technology Business (Exhibit 10.41(16)).

10.41 Employment Agreement, dated as of August 1, 1999 by and between the Company and its Senior

Vice President, President, Supply Management Business (Exhibit 10.42(16)).
List of Subsidiaries of the Company.

Consent of Deloitte & Touche LLP.

Power of Attorney.

23.1

Footnotes to Exhibit Index:

(1) Incorporated by reference to designated exhibit to Amendment No. 1 to McKesson's Form S-4

Registration Statement No. 333-67299 Ñled on November 27, 1998.

(2) Incorporated by reference to designated exhibit to the Company's Current Report on Form 8-K dated

January 14, 1999.

(3) Incorporated by reference to designated exhibit to the Company's Quarterly Report on Form 10-Q for

the quarter ended June 30, 1998.

(4) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement

No. 333-70501 Ñled on January 12, 1999.

(5) Incorporated by reference to designated exhibit to the Company's Quarterly Report on for 10-Q for the

quarter ended June 30, 1999.

(6) Incorporated by reference to designated exhibit to Amendment No. 3 to the Company's Registration

Statement on Form 10 Ñled on October 27, 1994.

(7) Incorporated by reference to designated exhibit to the Company's Quarterly Report on Form 10-Q for

the quarter ended September 30, 1998.

(8) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the

Ñscal year ended March 31, 1997.

(9) Incorporated by reference to designated exhibit to Amendment No. 1 to the Company's Form S-3

Registration Statement No. 333-26433 Ñled on June 18, 1997.

(10) Incorporated by reference to designated exhibit to the Company's Form S-3 Registration Statement

No. 333-26433 Ñled on May 2, 1997.

(11) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the

Ñscal year ended March 31, 1995.

(12) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement

No. 333-71917 Ñled on February 5, 1999.

(13) Incorporated by reference to designated exhibit to HBOC's Form S-8 Registration Statement No. 33-

67300 Ñled on August 12, 1993.

(14) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the

Ñscal year ended March 31, 1999.

(15) Incorporated by reference to designated exhibit to the Company's Current Report on Form 8-K dated

February 1, 2000.

(16) Incorporated by reference to designated exhibit to the Company's Annual Report on Form 10-K for the

Ñscal year ended March 31, 2000.

CONSOLIDATED FINANCIAL INFORMATION

CONTENTS

Five-Year Highlights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Financial Review ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Page

F-2

F-6

Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-30

Consolidated Financial Statements

Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999 ÏÏÏÏÏ F-31

Consolidated Balance Sheets as of March 31, 2001, 2000 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-32

Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2000

and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-33

Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999 ÏÏÏÏ F-34

Financial Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-35

F-1

FIVE-YEAR HIGHLIGHTS

CONSOLIDATED OPERATIONS

Revenues(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense-net of corporate interest
income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from continuing operations

before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred securities of

subsidiary trust, net of tax beneÑt ÏÏÏÏ

Income (loss) after taxes

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average stockholders' equityÏÏÏÏÏÏÏÏÏÏÏ
Return on equity(15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common dividends declared ÏÏÏÏÏÏÏÏÏÏÏ
Shares on which diluted earnings per

common share were based
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted earnings (loss) per common

share(16)
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

$42,010.0

14.5%

2,431.0

5.8%
370.0(4)
0.9%

2000

Years Ended March 31,
1999
(dollars in millions, except per share amounts)
$22,041.8
$29,970.9
$36,687.0

1998

22.4%

2,224.9

6.1%
322.4(5)
0.9%

36.0%

2,320.5

7.7%
310.0(6)
1.0%

33.1%

2,094.8

9.5%
579.8(7)
2.6%

1997(1)

$16,559.3

23.2%

1,426.1

8.6%
216.0(8)
1.3%

102.7

107.3

90.4

72.7

35.6

15.8(4,9)
52.3
331.0%

313.1(5,10)
122.3
39.1%

168.2(6)
101.4
60.3%

459.3(7)
177.9(11)
38.7%

135.0(8)
73.3
54.3%

6.2

0.7

(42.7)(4,9)
(5.6)(12)

(48.3)
Ì
3,655.5

(1.3)%
68.3

184.6(5,10)
539.1(13)
723.7
752.4%

60.6(6)
24.3
84.9
(72.1)%

275.2(7,11)

29.4
304.6
43.6%

61.0(8)
151.1(14)
212.1
94.4%

3,082.9

2,772.0

2,273.8

1,690.9

23.5%
67.5

3.1%
84.9

13.4%
62.0

12.5%
52.1

283.1
283.1

281.3
281.3

275.2
275.2

282.1
266.2

265.2
253.9

(0.15)
(0.02)
(0.17)

0.66
1.91
2.57

0.22
0.09
0.31

1.00
0.10
1.10

0.23
0.57
0.80

(1) Includes the results of the FoxMeyer Corporation pharmaceutical distribution business (""FoxMeyer'')
from the acquisition date of November 8, 1996 and of McKesson General Medical Corporation
(""MGM'') from the acquisition date of February 21, 1997.

(2) Excludes other income.

(3) Revenues less cost of sales; Ñscal 2000 and 1999 include $0.8 million and $1.2 million, respectively, of
Health Care Supply Management segment charges for restructuring, asset impairments and other
operating items representing 0.002% and 0.004% of Ñscal 2000 and 1999 revenues, respectively.

(4) Includes Health Care Supply Management segment charges for asset impairments, severance and
facility closing costs of $28.9 million (including $18.2 million for the restructure of the former
iMcKesson segment), partially oÅset by a $7.8 million gain of the liquidation of an investment and
Health Care Information Technology segment charges of $161.1 million for customer settlements and
$134.5 million for asset impairments, severance and exit-related costs primarily related to the
restructure of the former iMcKesson business, 0.8% of revenues in the aggregate, $239.4 million after-
tax.

F-2

(5) Includes Health Care Supply Management segment charges of $40.0 million for asset impairments,
accounts receivable reserves and customer settlements primarily related to a prior year implementation
of a contract system, and $2.9 million in severance and exit-related charges primarily associated with
segment staÅ reductions, partially oÅset by income of $8.1 million related to reductions in prior year
restructuring accruals. Also includes Health Care Information Technology segment charges of
$239.8 million for asset impairments, customer accounts receivable, severance and exit costs primarily
associated with product streamlining and reorganization, $61.8 million for accounts receivable and
customer settlements, $1.5 million for the write-oÅ of purchased in-process technology, partially oÅset
by income of $7.0 million related to a reduction in prior year accruals for acquisition-related activities,
0.9% of revenues in the aggregate, $198.7 million after-tax.

(6) Includes $214.3 million of Health Care Supply Management and $181.6 million of Health Care
Information Technology segment charges for transaction costs, costs associated with employee beneÑts,
primarily related to change of control provisions, employee severance, asset impairment write-downs,
restructuring, integration and aÇliation costs incurred, and system installation costs associated primarily
with acquisitions, 1.3% of revenues in the aggregate, $285.8 million after-tax.

(7) Includes $16.7 million of Health Care Supply Management segment charges for the terminated merger
with AmeriSource Health Corporation (""AmeriSource'') and $44.1 million in costs associated primarily
with the integration and rationalization of acquisitions; and, $35.3 million of Health Care Information
Technology segment charges related to the acquisitions of AMISYS Managed Care Systems, Inc. and
Enterprise Systems, Inc., 0.4% of revenues in the aggregate, $65.3 million after-tax.

(8) Includes Health Care Supply Management segment charges of $98.8 million for restructuring, asset
impairment and other operating items, $48.2 million for the write-oÅ of purchased in-process technology
related to the acquisition of Automated Healthcare, Inc., and $6.4 million related to the merger of
Access Health, Inc. and Informed Access Systems Inc. and Health Care Information Technology
segment charges of $68.1 million related to the acquisition of CyCare Systems, Inc., Management
Software, Inc. and GMIS Inc., 1.3% of revenues in the aggregate, $156.9 million after-tax.

(9) In addition to the items discussed in Note 4 above, includes Corporate segment charges of $33.9 million
for asset impairments, severance and facility closing costs related to the restructure of the iMcKesson
business, $105.2 million for asset impairments of investments and $2.5 million in legal fees incurred in
connection with the Company's earlier restatement of prior years' Ñnancial results and resulting pending
litigation. These items represent 0.3% of revenues in the aggregate, $86.3 million after-tax.

(10) In addition to items described in Note 5 above, includes Corporate segment net gains of $259.2 from the
exchange and subsequent sale and donation of equity investments, partially oÅset by charges of
$55.8 million for accounting, legal and other costs incurred in connection with the Company's earlier
restatement of prior years' Ñnancial results and resulting pending litigation, costs associated with former
employees and other acquisition related costs. These items represent 0.6% of revenues in the aggregate,
$118.3 million after-tax.

(11) Includes a $4.6 million tax settlement.

(12) Includes an after-tax loss reÖecting an adjustment to the gain recorded on the Ñscal 2000 sale of

McKesson Water Products Company (""Water Products business'').

(13) Includes after-tax income from the Water Products business of $24.4 million, an after-tax charge of
$1.2 million for increases in environmental costs for sites associated with the discontinued chemical
operations and a $515.9 million after-tax gain on sale of the Water Products business.

(14) Includes after-tax gain on sale of Armor All Products Corporation (""Armor All'') of $120.2 million.

(15) Based on net income.

(16) Dilutive securities are excluded in the computation of diluted earnings per share in Ñscal 2001, 2000,

and 1999 due to their antidilutive eÅect.

F-3

FIVE-YEAR HIGHLIGHTS

CONSOLIDATED FINANCIAL POSITION

2001

2000

1999

1998

1997(1)

Years Ended March 31,

Customer receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Drafts and accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏ
Days of sales(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent of revenues(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property, plant and equipment-netÏÏÏÏÏÏÏ
Percent of revenues(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Convertible preferred securities ÏÏÏÏÏÏÏÏÏ
Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital employed(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratio of net debt to net capital

employed(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common shares outstanding at March 31 ÏÏ
Dividends per common share(6) ÏÏÏÏÏÏÏÏ
Book value per common share(7) ÏÏÏÏÏÏÏ
Market price

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
At year endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 3,298.8
28.3
5,116.4
46.6
5,361.9
48.8
9,164.0
6,549.7
2,614.3

(dollars in millions, except per share amounts)
$1,774.0
29.0
2,603.1
47.0
2,186.1
39.5
5,318.1
3,083.8
2,234.3

$ 2,847.4
27.9
4,149.3
43.4
3,883.9
40.6
7,965.5
5,121.8
2,843.7

$2,290.0
27.5
3,522.5
45.9
3,549.4
46.3
6,452.8
4,744.8
1,708.0

6.2%

595.3

1.4%

7.8%

555.4

1.5%

5.7%

529.6

1.8%

10.1%
448.6

2.0%

158.9
11,529.9
1,229.7
195.9
3,492.9
4,918.5

145.1
10,372.9
1,260.0
195.8
3,565.8
5,021.6

199.2
9,020.0
1,151.2
195.6
2,881.8
4,228.6

166.4
7,291.8
1,318.4
195.4
2,561.7
4,075.5

$1,452.6
25.9
2,271.1
44.5
2,102.7
41.2
4,571.7
3,031.9
1,539.8

7.6%

372.2

1.8%
91.4
6,413.4
1,032.0
194.8
2,081.8
3,308.6

17.5%

14.8%

22.4%

18.8%

16.2%

284.0
0.24
12.30

37.00
16.00
26.75

283.4
0.24
12.58

69.25
18.19
21.00

280.6
0.44
10.27

96.25
52.25
66.00

271.0
0.50
9.45

61.75
31.50
57.75

259.0
0.50
8.04

34.13
20.56
32.00

(1) Includes the results of FoxMeyer from the acquisition date of November 8, 1996 and of MGM from the

acquisition date of February 21, 1997.

(2) Based on year-end balances and sales or cost of sales assuming major acquisitions occurred at beginning

of year and a 360-day year.

(3) Total debt includes all interest-bearing debt and capitalized lease obligations.

(4) Capital employed consists of total debt, convertible preferred securities of subsidiary trust and stockhold-

ers' equity.

(5) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net

capital employed (capital employed less cash and cash equivalents and marketable securities).

(6) Dividends per common share amounts do not reÖect the eÅects of poolings of interest transactions.

(7) Stockholders' equity divided by year-end common shares outstanding.

F-4

FIVE-YEAR HIGHLIGHTSÌSUPPLEMENTAL DATA

CONSOLIDATED OPERATIONS

EBIT(2,7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EBIT excluding unusual items(2,3,7) ÏÏÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EBITA(4,7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EBITA excluding unusual items(3,4,7) ÏÏÏÏ
Percent of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average committed capital(5) ÏÏÏÏÏÏÏÏÏÏÏÏ
Return on committed capital(6) ÏÏÏÏÏÏÏÏÏÏ
Return on committed capital(6) excluding

unusual items(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

2000

1998

1997(1)

Years Ended March 31,
1999
(dollars in millions)
$ 258.6

$ 420.4

$ 532.0

1.1%

547.9

1.5%
55.5
475.9

1.3%

603.4

1.6%

0.9%

654.5

2.2%
41.0
299.6

1.0%

695.5

2.3%

2.4%

628.1

2.8%
34.7
566.7

2.6%

662.8

3.0%

$ 118.5

0.3%

576.8

1.4%
66.2
184.7

0.4%

643.0

1.5%

$ 170.6

1.0%

392.1

2.4%
24.1
194.7

1.2%

416.2

2.5%

3,565.8

3,420.2

3,026.8

2,230.7

1,520.3

5.2%

15.4%

11.5%

27.8%

16.8%

18.0%

19.1%

24.9%

32.1%

31.8%

(1) Includes the results of FoxMeyer from the acquisition date of November 8, 1996 and of MGM from the

acquisition date of February 21, 1997.

(2) Income (loss) from continuing operations before interest expense-net of corporate interest income, taxes

and dividends on preferred securities of subsidiary trust.

(3) Unusual items include those which management believes are either one-time occurrences and/or events
which are not related to normal, on-going operations or represent charges that are in excess of normal/
historical amounts. See Notes 3 to 11 on pages F-2 and F-3.

(4) Income (loss) from continuing operations before interest expense-net of corporate interest income,

income taxes and amortization of intangibles.

(5) Capital employed less cash and cash equivalents, marketable securities and intangibles (including

accounts associated with discontinued operations).

(6) Earnings (including income from discontinued operations) before interest expense-net of corporate
interest income, income taxes and amortization of intangibles divided by average committed capital
(capital employed less cash and cash equivalents, marketable securities and intangibles).

(7) EBITA and EBIT are not intended to represent cash Öow from operations, or alternatives to net income,
each as deÑned by accounting principles generally accepted in the United States of America. In addition,
the measures of EBITA and EBIT presented herein may not be comparable to other similarly titled
measures used by other companies. The Company believes that EBITA and EBIT are standard measures
commonly reported and widely used by analysts, investors and other interested parties operating in the
Company's industries. Accordingly, this information has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance relative to other companies in similar
industries.

F-5

McKESSON HBOC, INC.

FINANCIAL REVIEW

GENERAL

Management's discussion and analysis, referred to as the Financial Review, is intended to assist in the
understanding and assessment of signiÑcant changes and trends related to the results of operations and
Ñnancial position of McKesson HBOC, Inc. (""McKesson HBOC'' or the ""Company''), together with its
subsidiaries. This discussion and analysis should be read in conjunction with the Company's consolidated
Ñnancial statements and accompanying Financial Notes.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

In addition to historical information, management's discussion and analysis includes certain forward-
looking statements within the meaning of section 27A of the Securities Act of 1933, as amended (the
""Securities Act'') and section 21E of the Securities Exchange Act of 1934, as amended (the ""Exchange
Act''). Some of the forward-looking statements can be identiÑed by use of forward-looking words such as
""believes'', ""expects'', ""anticipates'', ""may'', ""will'', ""should'', ""seeks'', ""approximately'', ""intends'', ""plans'',
or ""estimates'', or the negative of these words or other comparable terminology. The discussion of Ñnancial
trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements
involve risks and uncertainties that could cause actual results to diÅer materially from those projected. These
include, but are not limited to, the factors discussed under ""Additional Factors That May AÅect Future
Results'' of this ""Financial Review.''

These and other risks and uncertainties are described herein or in the Company's other public documents.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these
forward-looking statements to reÖect events or circumstances after the date hereof or to reÖect the occurrence
of unanticipated events.

BUSINESS SEGMENTS

The Company conducts its operations through two operating business segments: Health Care Supply
Management and Health Care Information Technology. The Health Care Supply Management segment
includes the Company's U.S. pharmaceutical, health care products and medical-surgical supplies distribution
businesses. U.S. Health Care Supply Management operations also include the manufacture and sale of
automated pharmaceutical dispensing systems for hospitals and retail pharmacists, medical management
services and tools to payors and providers, marketing and other support services to pharmaceutical manufac-
turers, consulting and outsourcing services to pharmacies, and distribution of Ñrst-aid products to industrial
and commercial customers. In addition, Health Care Supply Management includes the Company's interna-
tional distribution operations (including operations in Canada and an equity interest in a Mexican distribution
business). The Health Care Information Technology segment delivers enterprise-wide patient care, clinical,
Ñnancial, supply chain, managed care and strategic management software solutions, as well as networking
technologies, including wireless capabilities, electronic commerce, outsourcing and other services to health
care organizations throughout the U.S. and certain foreign countries.

Acquisitions

Fiscal Year 2001 Acquisitions and Investments

In April 2000, the Company and three other health care product distributors announced an agreement to
form the New Health Exchange (subsequently renamed ""Health Nexis''). Health Nexis is an Internet-based
company focused on information systems and other technology solutions to streamline communication,
processing and management of product and contract data across the health care supply chain. The Company
accounts for its 34% interest in Health Nexis under the equity method of accounting. In Ñscal 2001, the

F-6

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Company invested $10.8 million in Health Nexis and recorded equity in the losses of Health Nexis of
$5.0 million.

In July 2000, the Company completed the acquisition of MediVation, Inc., a provider of an automated
web-based system for physicians to communicate with patients online, for approximately $24 million in cash,
$14 million in Company common stock and the assumption of $6 million of employee stock incentives. A
charge of $2.1 million was recorded in the second quarter to write oÅ the portion of the purchase price
allocated to in-process technology for which technological feasibility had not been established as of the
acquisition date and for which there were no alternative uses. The Company received an independent valuation
that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing
technologies as of the acquisition date. In connection with the restructure of the Company's former
iMcKesson business in February, 2001 and based on the utilization of a discounted cash Öow methodology, the
Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31,
2001.

In Ñscal 2001, the Company also completed a number of smaller acquisitions in the Health Care Supply

Management and Health Care Information Technology segments.

Fiscal Year 2000 Acquisitions

In November 1999, the Company acquired Abaton.com, a provider of internet-based clinical applications
for use by physician practices, pharmacy beneÑt managers, beneÑt payors, laboratories and pharmacies, for
approximately $95 million in cash and the assumption of approximately $8 million of employee stock
incentives. A charge of $1.5 million was recorded to write oÅ the portion of the purchase price of Abaton.com
allocated to in-process technology for which technological feasibility had not been established as of the
acquisition date and for which there were no alternative uses. The Company received an independent valuation
that utilized a discounted cash Öow methodology by product line to assist in valuing in-process and existing
technologies as of the acquisition date. In connection with the restructure of the Company's former
iMcKesson business in February, 2001 and based on the utilization of a current discounted cash Öow
methodology, the Company recorded an impairment loss for the unamortized goodwill and intangibles balance
as of March 31, 2001.

In Ñscal 2000, the Company also made several smaller acquisitions and investments in the Health Care

Supply Management and Health Care Information Technology segments.

Fiscal Year 1999 Acquisitions

On January 12, 1999, McKesson Corporation (""McKesson''), completed the acquisition of HBO &
Company (""HBOC''), a leading health care information technology company, by exchanging 177 million
shares of McKesson common stock for all of the issued and outstanding shares of common stock of HBOC.
Each share of HBOC common stock was exchanged for 0.37 of a share of McKesson common stock (the
""Exchange Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was structured as a tax-
free reorganization and was accounted for as a pooling of interests.

In addition, the Company completed several acquisitions in Ñscal 1999 in the Health Care Supply
Management and Health Care Information Technology segments that were accounted for under the pooling of
interests method as follows:

In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical

supplies, for approximately 2 million shares of Company common stock.

F-7

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Also, in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail,
fulÑllment and sales support services, including sample distribution to physician and pharmaceutical company
sales representatives, for approximately 300,000 shares of Company common stock.

In September 1998, the Company acquired Automated Prescription Systems, Inc., a manufacturer of
automated prescription Ñlling and dispensing systems, for approximately 1.4 million shares of Company
common stock.

In October 1998, the Company acquired US Servis, Inc., a professional management company that
provides outsourcing services for physician delivery systems and hospital business oÇces, for the equivalent,
after application of the Exchange Ratio, of approximately 700,000 shares of Company common stock.

Also in October 1998, the Company completed the acquisition of IMNET Systems, Inc., a provider of
electronic information and document management solutions for the health care industry, for the equivalent of
approximately 3.6 million shares of Company common stock and 0.6 million Company stock options.

In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care
management programs and health care information services, for the equivalent of approximately 12.7 million
shares of Company common stock

In Ñscal 1999, the Company completed the acquisitions of the following companies in its Health Care

Supply Management segment, each accounted for under the purchase method of accounting:

In September 1998, the Company acquired MedManagement, a pharmacy management, purchasing,
consulting and information services company, for approximately $38 million in cash. The acquisition was
funded with short-term borrowings. The excess of the purchase price over the fair value of the net assets
acquired of $41 million is being amortized on a straight-line basis over 20 years.

In November 1998, the Company acquired RedLine Health Care Corporation (""RedLine'') a distributor
of medical supplies and services to the extended-care industry, including long-term-care and home-care sites
for approximately $233 million in cash. The acquisition was funded with short-term borrowings. The excess of
the purchase price over the fair value of the net assets acquired of $149 million is being amortized on a
straight-line basis over 40 years.

Divestiture

In February 2000, the Company sold its wholly-owned subsidiary, McKesson Water Products Company
for approximately $1.1 billion and recognized an after-tax gain of $515.9 million. The Water Products business
has been classiÑed as a discontinued operation for all periods presented.

F-8

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Financial Results

The results of continuing operations include the following:

Income from Continuing Operations

Before unusual items and dividends on
convertible preferred securities of
subsidiary trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on convertible preferred securities
of subsidiary trustÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Before unusual items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Unusual items by segment

2001

Years Ended March 31,
2000

1999

Pre-tax

After-tax

Pre-tax

After-tax

Pre-tax

After-tax

(in millions)

$ 474.1

$ 289.2

$ 440.6

$ 271.2

$ 564.1

$ 352.6

Ì
474.1

(6.2)
283.0

Ì
440.6

(6.2)
265.0

Ì
564.1

(6.2)
346.4

Health Care Supply Management ÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (Loss) from Continuing Operations ÏÏ

(21.1)
(295.6)
(141.6)
15.8

(12.9)
(226.5)
(86.3)

(34.8)
(296.1)
203.4
$ (42.7) $ 313.1

(20.8)
(177.9)
118.3
$ 184.6

(214.3)
(181.6)
Ì
$ 168.2

(133.3)
(152.5)
Ì
60.6

Fiscal 2001

Fiscal 2001 after-tax income from continuing operations before unusual items was $283.0 million, a
7% increase over the prior year's income from continuing operations of $265.0 million. Fiscal 2001 results
reÖect revenue and operating margin growth in the Health Care Supply Management segment partially oÅset
by declines in revenues and operating proÑts in the Health Care Information Technology segment.

Fiscal 2000

Fiscal 2000 after-tax income from continuing operations before unusual items was $265.0 million, a
23% decline from the prior year's income from continuing operations before unusual items of $346.4 million.
Fiscal 2000 results reÖect revenue and operating proÑt declines in the Health Care Information Technology
segment, modest operating proÑt growth in the Health Care Supply Management segment, and higher
Ñnancing costs to support revenue growth in the Health Care Supply Management segment.

Fiscal 1999

Fiscal 1999 after-tax income from continuing operations before unusual items was $346.4 million, a
3% increase over the prior year's income from continuing operations before unusual items of $335.9 million.
Fiscal 1999 results reÖect revenue and operating margin growth and the positive impact of acquisitions in the
Health Care Supply Management segment oÅset, in part, by a decline in Health Care Information
Technology segment operating results.

Unusual Items

In Ñscal 2001, the Company incurred charges for asset impairments, severance and exit costs primarily
associated with the restructure of the Company's former iMcKesson business segment. In Ñscal 2001 and
2000, the Company incurred charges associated with product streamlining and reorganization in its Health
Care Information Technology segment including, provision for customer settlements in 2001, and asset
impairments, customer settlements and severance in 2000. In both years, the Company recorded gains and
losses for certain equity investments and costs incurred in connection with the Investigation (as deÑned

F-9

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

below), the restatement of historical (pre-acquisition) consolidated Ñnancial statements and the resulting
pending securities litigation. In Ñscal 2000 and 1999, the Company incurred charges for acquisition-related
activities including transaction costs, employee beneÑt costs, severance, as well as costs for consolidation of
facilities and administrative processes and certain operating charges.

For the purposes of discussing the results of operations, the items described above are referred to as
""unusual items'' in the Financial Review. The results of operations excluding ""unusual items'' are not
intended to represent income from operations, or alternatives to net income, each as deÑned by accounting
principles generally accepted in the United States of America. In addition, the charges included as ""unusual
items'' presented herein may not be comparable to other similarly titled measures used by other companies.
Management believes, however, that the discussion of the results of operations excluding such unusual items is
the most informative representation of recurring, non-transactional operating results. Management believes
that these items either represent one-time occurrences and/or events which are not related to normal, ongoing
operations or represent charges that are in excess of normal/historical operating amounts.

The unusual items in Ñscal 2001, 2000 and 1999 are as follows:

Restatement-related costs incurred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net losses (gains) on the exchange and sale of equity

investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transaction costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs associated with the terminated merger transaction with

AmeriSource Health Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Costs associated with employee beneÑts, primarily related to

change in control provisionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring, asset impairments and customer settlements ÏÏÏÏÏ
Employee severance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other merger-related costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs associated with former employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition-related integration costs incurred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other operating items:

Accounts receivable allowancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contract system costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total pre-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total after-tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$325.7

2001

Years Ended March 31,
2000
(in millions)

1999

2.5

18.9

97.8

(259.2)

$ 79.6

5.0

88.7
108.4
31.9
13.8

32.3

36.2

$395.9

$285.8

319.3
36.6
2.1

228.5
4.2
(0.4)
23.8

68.5
31.5
11.7
$ 127.5

80.4

$458.3

Fiscal 2001 Unusual Items

In Ñscal 2001, the Company recorded net pre-tax charges for unusual items totaling $458.3 million
including $21.1 million in the Health Care Supply Management segment, $295.6 million in the Health Care
Information Technology segment and $141.6 million in the Corporate segment. Following is a description of
these items in Ñscal 2001:

Restatement-Related Costs Incurred

In April 1999, following the January 1999 acquisition of HBOC, the Company discovered improper
accounting practices at HBOC. In July 1999, the Audit Committee of the Company's Board of Directors

F-10

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

completed an investigation into such matters (the ""Investigation''), which resulted in the previously reported
restatement of the Company's historical consolidated Ñnancial statements related to HBOC (pre-acquisition)
in Ñscal 1999, 1998 and 1997. In Ñscal 2001, the Company incurred legal fees totaling $2.5 million, in
connection with the pending securities litigation arising out of the restatement.

(Gain) Loss on Investments

The Company recorded an other than temporary impairment loss of $105.6 million on its WebMD
warrants and other equity and venture capital investments as a result of signiÑcant declines in the market
values of these investments. The Company also recorded a $7.8 million gain on the liquidation of another
investment.

Restructuring, Asset Impairments and Customer Settlements

In May 2000, the Company announced the formation of a new business unit, iMcKesson, to focus on
healthcare applications using the Internet and other emerging technologies. iMcKesson included selected net
assets from the former e-Health, Health Care Supply Management and Health Care Information Technology
segments and Ñscal 2001 acquisitions of strategic investments and businesses.

In February 2001, the Company announced the restructuring of the iMcKesson business unit by moving
responsibility for iMcKesson's medical management business to the Health Care Supply Management
segment and the physician services business to the Health Care Information Technology segment. In
connection with the assessment of these businesses, management shut down certain iMcKesson operations.
The Company wrote down goodwill and intangibles totaling $116.2 million arising from the acquisitions of
Abaton.com and MediVation, Inc., based upon an updated analysis of discounted cash Öows. The Company
also recorded $29.8 million in non-cash asset impairments including $23.1 million for the write-down of equity
investments whose market values had signiÑcantly declined, $5.2 million in capitalized software costs and
$1.5 million in other Ñxed assets. In addition, the Company recorded $9.1 million in exit-related costs
including $6.0 million for non-cancelable services directly related to discontinued products, $1.5 million for
estimated claims resulting from the abandonment of products no longer core to its business and $1.6 million in
other exit-related costs.

In the second quarter of Ñscal 2001, the Company reviewed the operations and cost structure of its
medical management business resulting in the planned closure of a call center and a workforce reduction and
recorded $0.2 million in charges for exit-related activities.

In the third quarter of Ñscal 2001, the Company closed a pharmaceutical distribution center and recorded

$0.7 million in asset impairments and $0.5 million in charges for exit-related activities.

The Company also reduced prior year reserves for exit-related activities by $1.3 million.

In addition, the Company's Health Care Information Technology segment recorded a $161.1 million
charge for customer settlements (forgiveness of accounts receivable, customer credits and refunds) associated
with pre-July 1999 software contracts. These customer settlements generally relate to product replacements as
well as requirements for certain customers to upgrade hardware and software to accommodate new product
releases.

F-11

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Severance

The Company recorded severance costs totaling $29.0 million related to the restructure of the former
iMcKesson business, $1.0 million in the Health Care Supply Management segment, $3.3 million in the Health
Care Information Technology segment and $24.7 million in the Corporate segment. The severance charges
relate to the termination of approximately 220 employees, primarily in sales, service and administration
functions.

The Company also recorded severance costs totaling $8.5 million in the aggregate related to workforce
reductions in the Health Care Supply Management segment associated with the closure of a pharmaceutical
distribution center, closure of a medical management call center, consolidation of medical-surgical customer
service centers, closures of facilities in the pharmaceutical services business and staÅ reductions in the
pharmaceutical management business. The Ñscal 2001 severance charges relate to the termination of
approximately 360 employees, primarily in sales, service, administration and distribution center functions. In
addition, the Company reduced prior year severance reserves by $0.9 million.

In connection with the severance charges described above, $3.2 million was a non-cash charge, severance
of $2.4 million was paid in Ñscal 2001, $12.4 million will be paid in Ñscal 2002 and the balance of
$19.5 million, primarily pension beneÑts, will be paid in Ñscal 2003 and thereafter.

As a result of the previously discussed restructuring activities, future operating results and cash Öows will
be impacted. Development and support activities for certain discontinued products associated with the former
iMcKesson business will be phased out within twelve months. Although future revenues associated with the
discontinued products will be reduced or eliminated, the Company does not anticipate they will materially
impact the company's future operating results or cash Öows. The Company anticipates that goodwill
amortization expense will be approximately $20 million lower in Ñscal 2002 as a result of the Abaton.com and
MediVation, Inc. goodwill and intangibles write downs. In addition, the Company anticipates reduced product
development expenses as a result of terminating certain product licensing agreements and gradual reductions
in payroll expenses and occupancy costs as the former iMcKesson operations wind down. Closure of the
medical management call center is not anticipated to signiÑcantly impact future revenues (customers will be
serviced out of the remaining call centers) but payroll cost savings are anticipated. Closure of the
pharmaceutical distribution center, pharmaceutical services facilities and consolidations of the medical-
surgical customer service centers are not expected to have a material impact on the Company's Ñscal 2002
operating results.

Other Merger-Related Items

The Company recorded a charge of $2.1 million in the Information Technology segment to write oÅ the
portion of the purchase price of MediVation, Inc. allocated to purchased in-process technology for which
feasibility had not been established as of the acquisition date.

Fiscal 2000 Unusual Items

In Ñscal 2000, the Company recorded net pre-tax charges for unusual items totaling $127.5 million
including $34.8 million in the Health Care Supply Management segment, $296.1 million in the Health Care
Information Technology segment, and $203.4 million income in Corporate. Following is a description of these
items in Ñscal 2000:

Restatement-Related Costs Incurred

In Ñscal 2000, the Company incurred costs in connection with the previously discussed Investigation, the
restatement of the historical consolidated Ñnancial statements and the resulting pending litigation, and
recorded charges of $18.9 million for accounting and legal fees and other costs.

F-12

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Net Gains on the Exchange and Sale of Equity Investments

The Company recorded gains on the exchange of the Company's WebMD common shares and warrants
for Healtheon/WebMD (subsequently renamed WebMD) common shares and warrants that were recognized
upon the November 11, 1999 merger of the two companies. Subsequently in Ñscal 2000, the Company donated
250,000 WebMD shares to the McKesson HBOC Foundation and sold the remaining common shares. As a
result of these transactions, the Company recognized gains related to the investment in WebMD of
$248.7 million of which $155.3 million was realized. The remaining gain of $93.4 million which resulted from
the November 11, 1999 exchange of warrants, had not been realized as of March 31, 2000. The estimated fair
value of the warrants declined from $93.4 million as of November 11, 1999 to $32.3 million as of March 31,
2000, resulting in an unrealized loss of $61.1 million. In Ñscal 2001, the estimated fair value of the warrants
declined further and the Company recognized a loss (see Fiscal 2001 Unusual Items). In addition, other
equity investments were sold during the year at a gain of $20.3 million, and a $9.8 million charge was recorded
to reÖect the donation of the WebMD shares to the McKesson HBOC Foundation.

Restructuring, Asset Impairments and Customer Settlements

In the fourth quarter of Ñscal 2000, the Company completed an assessment of the Health Care
Information Technology's business and product portfolio. This resulted in the decision to reorganize the
business and to discontinue overlapping or nonstrategic product oÅerings. The Company recorded asset
impairments of $232.5 million. These included charges to write oÅ $49.1 million of capitalized product
development costs, $39.3 million of purchased software and $50.7 million of goodwill associated with
discontinued product lines based upon an analysis of discounted cash Öows. In addition, a $74.1 million reserve
was recorded for customer settlements attributable to the discontinued product lines. The Company also
recorded a $9.4 million loss on the disposition of a non-core foreign operation, a $7.7 million charge for
uncollectible unbilled receivables and a $2.2 million charge for obsolete equipment associated with the
discontinued products. Substantially all of these charges were non-cash asset write-oÅs except for the
customer settlements.

In addition, a charge of $0.6 million was recorded for costs to prepare facilities for disposal, lease costs

and property taxes required subsequent to termination of operations and other exit-related activities.

In the fourth quarter of Ñscal 2000, the Company reviewed the operations and cost structure of the
Health Care Supply Management's medical-surgical business. This resulted in the planned closure of a sales
oÇce and a workforce reduction. The Company recorded $0.6 million in charges for exit-related activities.
Also in Ñscal 2000, the Company reassessed prior years' restructuring plans resulting in the decision to retain
one of the six pharmaceutical distribution centers identiÑed for closure in Ñscal 1999 and to reduce the
number of medical-surgical distribution center closures. In addition, the Company announced and completed
the closure of one additional pharmaceutical distribution center in Ñscal 2000. The Company recorded income
of $6.9 million as a result of reducing prior year accruals for exit-related costs, oÅset in part, by additional
asset impairments of $1.5 million. The Company also recorded asset impairments for its medical-management
business of $0.2 million for obsolete equipment associated with discontinued products.

Severance

In Ñscal 2000, the Company completed the closures of three pharmaceutical distribution centers,
including the additional distribution center mentioned above. In addition, the realignment of the sales
organization was completed and certain back oÇce functions were eliminated. This resulted in the termination
of approximately 200 employees and the payment of $3.6 million in severance. Also, the Company completed
the closures of three medical-surgical distribution centers and paid $1.0 million in severance to approximately
100 employees who were terminated in Ñscal 1999 and 2000. The Company plans to continue these closure
activities throughout Ñscal 2002.

F-13

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

The Company recorded severance costs totaling $6.2 million in the aggregate related to workforce reductions
in the Health Care Information Technology segment associated with product streamlining and reorganization and
in the Health Care Supply Management segment associated with distribution facility consolidations. This charge
was offset, in part, by a $2.0 million reduction in prior year severance reserves. The fiscal 2000 severance charges
relate to the termination of approximately 500 employees, primarily in product development and support,
administration and distribution center functions. In fiscal 2001, the Company paid severance of $4.9 million and
reduced previously recorded reserves by $0.9 million. The remaining balance will be paid in fiscal 2002.

Other Merger-Related Items

The Company recorded a charge of $1.5 million to write oÅ the portion of the purchase price of
Abaton.com allocated to purchased in-process technology for which feasibility had not been established as of
the acquisition date. The Company also recorded a $1.3 million charge for the impairment of a note receivable
from a former stockholder of an acquired company and reversed $6.9 million of accruals booked in prior years
for estimated merger-related costs.

Corporate and other includes a charge of $3.7 million related to additional costs incurred and paid

associated with the acquisition of HBOC.

Costs Associated With Former Employees

In Ñscal 2000, the Company recorded charges of $23.8 million for severance and beneÑt costs resulting
from changes in executive management made in the Ñrst quarter. The charges were based on the terms of
employment contracts in place with these executives. $2.8 million was paid in Ñscal 2000 and $2.1 million was
paid in Ñscal 2001. The Company estimates that $3.7 million will be paid in Ñscal 2002 and the balance,
primarily pension beneÑts, will be paid thereafter.

Other Operating Items

Other operating items include charges of $61.8 million in the Health Care Information Technology
segment for accounts receivable and customer settlements, a $1.1 million non-cash charge for the write-oÅ of
internal-use computer software that was abandoned and a $1.2 million charge related to the settlement of a
software patent infringement claim that was paid during the year.

The Health Care Supply Management segment recorded a charge of $31.5 million for asset impairments
and receivables related primarily to a prior year implementation of a contract system, and a $6.7 million
charge for customer accounts receivable in the medical management business.

Corporate includes non-cash charges of $7.7 million for impairment of notes receivable from former
employees and $1.7 million for costs associated with employee-retention following the announcement of the
Investigation.

Fiscal 1999 Unusual Items

In Ñscal 1999, the Company recorded pre-tax charges for unusual items of $214.3 million in the Health
Care Supply Management segment and $181.6 million in the Health Care Information Technology segment,
$395.9 million in the aggregate. Following is a description of these items in Ñscal 1999:

Transaction Costs

Total unusual items include $84.6 million of transaction costs incurred in connection with the acquisitions
described above, primarily consisting of professional fees such as investment banking, legal and accounting
fees. This amount includes $6.6 million of transaction costs related to terminated transactions of which

F-14

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

$5.0 million related to the terminated merger with AmeriSource Health Corporation. Approximately
$83.6 million was paid in Ñscal 1999, with a balance of $1.0 million paid in Ñscal 2000.

Employee BeneÑts

The Company incurred $88.7 million of employee beneÑt costs related to acquisitions, including
$39.0 million for restricted stock and stock appreciation rights subject to change of control provisions,
$37.0 million of long-term incentive and phantom stock awards subject to change of control provisions,
$8.7 million of signing and retention bonuses, and $4.0 million of retirement and employee beneÑt plan costs.
Of these amounts, $36.3 million were non-cash charges, primarily related to restricted stock, $44.1 million was
paid in Ñscal 1999, $1.6 million was paid in Ñscal 2000 and $3.5 million was paid in Ñscal 2001.

Restructuring and Asset Impairments

In Ñscal 1999, the Health Care Supply Management segment identiÑed six distribution centers for
closure, of which one distribution center was shut down by March 31, 1999. The Company recorded a charge
of $25.5 million related to closures of the distribution centers. Of this charge, $21.7 million was required to
reduce the carrying value of facility assets to their estimated fair value less disposal costs, and $3.8 million was
related to computer hardware and software which will no longer be used at such facilities. Fair value was
determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of
estimated future cash Öows. Considerable management judgment is necessary to estimate fair values;
accordingly, actual results could vary signiÑcantly from such estimates. Also related to such closures, a charge
of $17.2 million was recorded for exit-related costs. These primarily consist of costs to prepare facilities for
disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write-
oÅ of costs related to duplicate assets from acquired companies that do not have future use by the Company.
Of the above charges, $25.5 million were non-cash asset write-oÅs. $3.9 million was paid in Ñscal 1999,
$2.6 million was paid in Ñscal 2000, and $2.9 million was paid in Ñscal 2001. Also, in connection with the
previously discussed reassessment of this restructuring plan, the Company reduced previously recorded
exit-related reserves by $6.9 million in Ñscal 2000 and by $1.3 million in Ñscal 2001, and recorded charges of
$1.5 million for additional asset impairments in Ñscal 2000.

The Health Care Supply Management segment also wrote oÅ $23.5 million of computer hardware and

software which was abandoned as the result of an acquisition during the year.

In connection with acquisitions in the medical management business, the Company terminated royalty
agreements at a cost of $12.0 million because products subject to minimum royalty payments to third parties
were replaced with acquired products. In addition, the Company recorded charges of $4.3 million primarily for
the write-oÅ of capitalized software costs.

In connection with acquisitions made by the Health Care Information Technology segment and its
acquisition by McKesson, duplicate facilities, products and internal systems were identiÑed for elimination,
resulting in charges of $5.9 million, relating principally to the write-oÅ of capitalized costs and lease
termination costs. In addition, following the HBOC Transaction, the Company evaluated the performance of a
foreign business and elected to shut down its facility. Charges of $11.6 million were recorded, principally
related to the write-down of goodwill to fair value based on estimated discounted cash Öows. Revenues and net
operating income for this foreign business were not signiÑcant in Ñscal 1999. Certain investments became
impaired during Ñscal 1999 and were written down by $4.3 million to their net realizable values based
primarily on estimated discounted cash Öows, and other reserves of $4.1 million were recorded to cover
customer and other claims arising out of the acquisitions. Substantially all of the above charges were non-cash
asset write-oÅs.

F-15

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Severance

Severance costs totaled $31.9 million (net of a $3.0 million reversal of previously recorded severance
obligations which were determined to be in excess), resulting from the consolidation of acquired company
operating and corporate functions, the consolidation of existing U.S. Health Care pharmaceutical distribution
centers, and other employee terminations. The severance charges relate to the termination of approximately
1,550 employees, primarily in distribution centers, administration and product functions. The Company paid
severance of $12.1 million in Ñscal 1999, $14.9 million in Ñscal 2000 and reduced previously recorded reserves
by $2.0 million in Ñscal 2000. Severance of $3.2 million was paid in 2001 and the remaining severance will be
paid in Ñscal 2002 and thereafter.

Other Merger-related Costs

The Health Care Information Technology segment incurred costs totaling $13.8 million in Ñscal 1999 due
to an acquired company which had receivables outstanding from HBOC competitors that became uncollecti-
ble and were written oÅ after the HBOC Transaction.

Acquisition-related Integration Costs

Acquisition-related integration costs of $32.3 million consist of $1.9 million incurred for salaries and
beneÑts of integration and aÇliation team members of the Company and $30.4 million of other direct costs
associated with the integration and rationalization of recent acquisitions in the Health Care Supply
Management and Health Care Information Technology segments.

Other Operating Items

Other operating items of $36.2 million consist of losses resulting from the implementation of a contract

administration system and expenses incurred for corrective actions associated with that system.

Results Of Operations

The discussion of the Ñnancial results that follows focuses on the results of continuing operations
excluding unusual items, as management believes such discussion is the most informative representation of
recurring, non-transactional related operating results.

F-16

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Health Care Supply Management

The following table identiÑes signiÑcant performance indicators of the Health Care Supply Management

segment:

Revenues

2001

2000
(dollars in millions)

1999

Excluding Sales to customers' warehouses
Pharmaceutical distribution and services

$24,853
2,645
27,498
2,849
30,347
10,730
$41,077

$21,994
2,220
24,214
2,706
26,920
8,746
$35,666

$17,612
1,946
19,558
2,292
21,850
6,813
$28,663

Revenue growth

Excluding sales to customers' warehouses
Pharmaceutical distribution and services

U.S. Health Care ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total pharmaceutical ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical-Surgical distribution and servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total excluding sales to customers' warehouse ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentage change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt margin(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expense margin(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating proÑt as a percent of revenues(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital employed at year-end

Committed capital(2)

13%
19
14
5
13
15
$ 686.2

25%
14
24
18
23
24
$ 571.3

20%
6.7
4.4
2.3
76.3
32.1
90.9

(0.5)%
7.0
4.9
2.1
72.1
31.1
99.0

21%
20
21
22
21
38
$ 574.1

37%
7.6
5.0
2.6
60.2
25.1
105.0

Operating working capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 3,282
225
3,507
997
$ 4,504

$ 3,328
208
3,536
1,017
$ 4,553

$ 2,661
66
2,727
1,028
$ 3,755

Returns

Committed capital(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital employed(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

19.6%
14.6

16.3%
13.8

19.9%
15.6

F-17

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

(1) Excluding sales to customers' warehouses and other income.

(2) Capital employed less cash and cash equivalents, marketable securities and goodwill and other

intangibles.

(3) Receivables and inventories net of related payables.

(4) Operating proÑt before amortization of intangibles divided by average committed capital.

(5) Operating proÑt divided by average capital employed.

Over the most recent three Ñscal years, the Health Care Supply Management business has experienced
internal revenue growth and growth as a result of acquisitions. Revenue growth in this segment, excluding
sales to customers' warehouses, is as follows:

2001

2000

1999

Pharmaceutical Distribution and Services

Existing businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

13.6% 23.5% 20.1%
0.3
13.6% 23.8% 20.6%

0.5

Medical-Surgical Supply Distribution and Services

5.3%

6.6% 14.4%
11.5

7.6

5.3% 18.1% 22.0%

Internal growth in Health Care Supply Management is due primarily to increased sales volume to the
retail chain and institutional customer segments. Sales to retail customers have beneÑted from the Company's
service oÅerings and programs that focus on broad product selection, service levels, inventory carrying cost
reductions, connectivity and automation technologies. Growth with institutional customers has beneÑted from
the focus on reducing both product cost and internal labor and logistics costs for the customers. Services
available include pharmaceutical distribution, medical-surgical supply distribution, pharmaceutical dispensing
automation, pharmacy outsourcing and utilization reviews. These retail chain and institutional capabilities
have resulted in the implementation of signiÑcant long-term contracts with major customers.

2001

2000

1999

Customer Mix Ì Pharmaceutical Distribution Revenues(1)

Independents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retail ChainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

24.5%
42.4
33.1

25.5%
42.4
32.1
100.0% 100.0% 100.0%

28.7%
38.5
32.8

(1) Excluding sales to customer warehouses.

Sales to customers' warehouses are large volume sales of pharmaceuticals to major self-warehousing
drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of
products directly from the manufacturer to the customers' warehouses. The growth in sales to customers'
warehouses in Ñscal 2001 was due to the addition of a signiÑcant retail chain customer and to growth from
existing customers. The growth in Ñscal 2000 and 1999 was primarily the result of two signiÑcant contracts
with retail chains which also provided new direct store sales growth.

The operating proÑt margin increased in Ñscal 2001, reÖecting margin expansion in the U.S. pharmaceu-
tical distribution and services business due to gross margin initiatives and productivity improvements in both
back-oÇce and Ñeld operations and in the Canadian pharmaceutical business reÖecting new customers, sales

F-18

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

growth and operational eÇciencies. This impact was partially oÅset by a decline in the medical management
business reÖecting the loss of a number of services customers and reduced proÑts from the Company's 22%
interest in Nadro, a Mexican pharmaceutical distribution business. The operating proÑt margin declined in
Ñscal 2000 from 1999 due to a decline in the gross proÑt margin reÖecting the competitive environment, a shift
in the mix of pharmaceutical distribution revenues to a higher proportion of chain business and somewhat
lower procurement proÑts as a percentage of revenues in the current year. Procurement proÑts beneÑted in
Ñscal 1999 from price increases on inventory expansion associated with new customer agreements. The decline
in the gross proÑt margin was oÅset, in part, by a lower operating expense ratio reÖecting continuing
productivity improvements. The improvement in the operating expense ratio was achieved despite higher
expenses for receivable and transaction processing related charges. Fiscal 1999 operating margins reÖect
higher margin businesses resulting from acquisitions in pharmaceutical services for manufacturers, retail and
institutional automation and medical-surgical supply distribution. In addition, expanded proÑtability from
product procurement, warehouse automation and eÇciency improvements, and Ñxed cost leverage from
volume growth contributed to the margin expansion.

The Health Care Supply Management segment uses the last-in, Ñrst-out (LIFO) method of accounting
for the majority of its inventories which results in cost of sales that more closely reÖect replacement cost than
other accounting methods, thereby mitigating the eÅects of inÖation and deÖation on operating proÑt. The
practice in the Health Care Supply Management distribution businesses is to pass published price changes
from suppliers on to customers. Manufacturers generally provide the Company with price protection, which
prevents inventory losses. Price declines on many generic pharmaceutical products in this segment in each of
the Ñscal years ended March 31, 2001, 2000 and 1999 have moderated the eÅects of inÖation in other product
categories, which resulted in minimal overall price changes in those Ñscal years.

Fiscal 2001, 2000 and 1999 capital expenditures include new systems upgrades to distribution facilities
and facility consolidations in the pharmaceutical and medical-surgical businesses and growth in the
automation and services businesses.

The Health Care Supply Management segment requires a substantial investment in operating working
capital (customer receivables and inventories net of related trade payables). Operating working capital is
susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of sales activity, new customer build-up requirements and the desired
level of investment inventory. Operating working capital at March 31, 2001 was Öat relative to 2000. An
increase in receivables, reÖecting sales growth, and inventories was oÅset by a signiÑcant increase in vendor
payables reÖecting purchases made late in the Ñscal year and the timing of vendor payments. No accounts
receivable were sold at March 31, 2001 and 2000. Operating working capital was signiÑcantly higher at
March 31, 2000 compared to 1999. The working capital increase primarily reÖects increases in receivables and
net Ñnancial inventories (inventories net of accounts and drafts payable) resulting from sales growth, the
absence of accounts receivable sales at March 31, 2000 compared to $400.0 million of sales at March 31, 1999
and the timing of vendor payments.

F-19

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Health Care Information Technology

SigniÑcant performance indicators of the Health Care Information Technology segment are as follows:

2001

2000
(dollars in millions)

1999

Revenues

$ 134
712
846
84
$ 930

$ 144
782
926
92
$1,018

$ 268
832
1,100
208
$1,308

Revenue growth (decline)

Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hardware ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percent change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expense margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating proÑt as a percent of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of capitalized software held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital employed

(7)%
(9)
(9)
(8)
(9)
$ 0.5

(99)%
42.4
42.3
0.1
$36.1
34.2
25.9
26.5

(46)%
(6)
(16)
(56)
(22)
$ 82.0

(38)%
40.3
32.3
8.1
$ 41.0
24.4
28.3
43.3

(23)%
23
8
(3)
6
$131.8

(49)%
41.8
31.7
10.1
$ 38.0
15.9
25.9
71.4

Committed capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 198
80
$ 278

$ 259
182
$ 441

$ 234
187
$ 421

Returns

Committed capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capital employed(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

21.8%
0.1

35.1%
14.8

70.2%
15.4

(1) Capital employed less cash and cash equivalents, marketable securities and goodwill and other

intangibles.

(2) Operating proÑt before amortization of intangibles divided by average committed capital.

(3) Operating proÑt divided by average capital employed.

Health Care Information Technology revenues declined 9% to $0.9 billion in Ñscal 2001 and 22% to
$1.0 billion in Ñscal 2000. In Ñscal 2001, certain contracts were entered into which the Company is accounting
for under the percentage of completion method, which extends the recognition of revenue over a period of
time. Services revenues declined, reÖecting the lagging impact of reduced prior period software sales on
implementation services revenues. The decline in Ñscal 2000 revenues was attributable to the overall industry-
wide slowdown in sales of health care information technology software and hardware products resulting from
delays in purchasing decisions that are attributed both to Year 2000 issues and a general weakness in demand
for healthcare software. Services revenues associated with software implementation also declined for the same

F-20

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

reasons. Also contributing to the decline was the impact to the business caused by the investigation into
improper accounting practices and resulting senior management changes made early in the year. In addition,
the terms of certain contracts for software and implementation services executed late in the Ñscal year resulted
in such contracts being accounted for under the percentage of completion accounting method. Revenues
increased 6% to $1.3 billion in Ñscal 1999. The Ñscal 1999 decline in software revenues of 23% reÖects a
general industry-wide slowdown in sales of health care information technology products and changes in
accounting due to the adoption of Statement of Position 97-2, ""Software Revenue Recognition'', eÅective
April 1, 1998. In addition, during Ñscal 1999, the Health Care Information Technology segment experienced
delays in current and potential customers' purchasing decisions with respect to its enterprise solutions.
Management believes such delays were due to Year 2000 issues, technological innovations, increased
competition, greater requirement for integration of products and general market conditions in the computer
software industry.

Hardware is sold as an accommodation to customers and at a signiÑcantly lower operating margin than
software and services. Fiscal 2001, 2000 and 1999 revenues from the sale of hardware reÖect the lower level of
software sales, general price declines for hardware and a shift to less costly Microsoft Windows NTTM
platforms.

Health Care Information Technology segment operating proÑt before unusual items declined 99% to
$0.5 million in Ñscal 2001, and 38% to $82.0 million in Ñscal 2000. The decline in Ñscal 2001 reÖects the
extended software revenue recognition cycle under the percentage of completion accounting method, lower
service and hardware revenues, and an increased level of expenses to enhance customer support and future
product introduction. The decline in Ñscal 2000 reÖects the previously discussed decline in overall sales and a
lower mix of higher-margin software sales in Ñscal 2000 compared to 2001 and 1999 (14% in Ñscal 2000 as
compared to 20% in Ñscal 1999, as a percentage of total Health Care Information Technology revenues). The
Ñscal 2000 operating proÑt includes an increased level of expenses to enhance customer support and future
product introductions. Fiscal 1999 results included a bad debt provision of $70 million and a termination fee
associated with a telecommunications contract. The bad debt provision reÖects, in part, inadequate staÇng of
and focus on receivables collections during a portion of Ñscal 1999, implementation issues associated with
certain products and contingencies associated with contract disputes.

Fiscal 1999 capital expenditures reÖect the acquisition and construction of the segment's new corporate

oÇce building in Georgia.

The return on committed capital and total capital employed in Ñscal 2001 and 2000 reÖect the previously

discussed decline in operating proÑt.

International Operations

International operations accounted for 6.6%, 6.4% and 6.9%, and 4.2%, 8.7% and 6.6%, of Ñscal 2001,
2000 and 1999 consolidated revenues and operating proÑts before unusual items, respectively, and
5.6%, 5.8% and 5.5% of consolidated assets at March 31, 2001, 2000 and 1999, respectively. International
operations are subject to certain opportunities and risks, including currency Öuctuations. The Company
monitors its operations and adopts strategies responsive to changes in the economic and political environment
in each of the countries in which it operates.

Consolidated Working Capital

Operating working capital (receivables and inventories net of related payables) as a percent of revenues
was 7.6%, 9.0% and 8.4% at March 31, 2001, 2000 and 1999, respectively. Excluding the impact of receivable
sales, operating working capital as a percent of revenues was 7.6%, 9.0% and 9.7% at March 31, 2001, 2000

F-21

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

and 1999, respectively. The calculation is based on year-end balances and assumes major purchase
acquisitions occurred at the beginning of the year.

The improvement in the operating working capital ratio in Ñscal 2001 is due to an increase in days sales
outstanding in payables reÖecting purchases made later in the year and the timing of vendor payments. The
improvement in the ratio in 2000 (excluding the impact of receivable sales) is due to a reduction in year-end
days sales outstanding in both customer receivables and inventory, reÖecting working capital initiatives. In
Ñscal 2000, this improvement was oÅset, in part, by lower days sales outstanding in payables at March 31,
2000 compared to March 31, 1999.

CASH FLOW AND LIQUIDITY

Cash and cash equivalents and marketable securities (primarily U.S. Treasury securities with maturities
of one year or less) were $446 million, $606 million and $262 million at March 31, 2001, 2000 and 1999,
respectively.

The increase in cash and cash equivalents and marketable securities in 2000 reÖects proceeds from the
February 2000 sale of the Water Products business and a private placement of term debt (see ""Other
Financing Activities'' below).

Marketable securities balances include $4 million, $17 million and $23 million at March 31, 2001, 2000
and 1999, respectively, from the Ñscal 1997 sale of Armor All, which securities are restricted and held in trust
as exchange property in connection with the Company's exchangeable debentures.

Cash Flows from Operations Available for Capital Expenditures

The following table summarizes the excess (deÑcit) of cash Öow from operations over capital

expenditures:

2001

Years Ended March 31,
2000
(in millions)

1999

Net cash provided (used) by continuing operations:

Income (loss) from continuing operations(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of capitalized software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-cash charges(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Working capital changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total before receivables sales and capital expenditures ÏÏÏÏ
Receivable sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Excess (DeÑcit)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ (43)
116
66
65
513
(357)
360
Ì
(159)

$ 201

$ 185
116
55
51
382
(689)
100
(400)
(145)
$(445)

61
104
41
36
361
(445)
158
100
(199)
59

(1) Includes previously discussed ""Unusual Items''.

Cash Öows from continuing operations reÖect the cash earnings of the Company's continuing businesses
and the eÅects of the changes in working capital. The working capital increase in Ñscal 2001 primarily reÖects
the timing of vendor payments in the Health Care Supply Management segment partially oÅset by the
payment of income taxes on the gain on sale of the Water Products business that was sold in late Ñscal 2000.
The working capital increase in Ñscal 2000 primarily reÖects the timing of vendor payments in the prior year
and increases in receivables and inventories associated with sales growth in the Health Care Supply

F-22

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Management segment that were oÅset, in part, by improvements in days sales outstanding in both customer
receivables and inventories resulting from working capital initiatives. The March 31, 1999 payables balance
was approximately $400 million higher than expected based on the historical relationship of payables to sales.
The increase in working capital requirements in Ñscal 2000 reÖects the restoration of payables to a more
normalized level. Adjusting for the impact of the payables Öuctuation, net cash provided (used) by continuing
operations before receivable sales and capital expenditures would have been approximately $500 million and
$(242) million in Ñscal 2000 and 1999, respectively. The working capital increase in Ñscal 1999 primarily
reÖects increases in receivables and inventories resulting from sales growth in all operating segments oÅset, in
part, by the higher payables balance due to the timing of vendor payments in the Health Care Supply
Management segment.

Fiscal 1999 capital expenditures reÖect the acquisition and construction of the Health Care Information

Technology segment's new headquarters oÇce building.

Other Financing Activities

In July 2000, the Company announced a program to repurchase from time to time up to $250 million of
the Company's shares of common stock in open market or private transactions. In Ñscal 2001, the Company
repurchased 2.2 million shares under this program for $66 million.

In October 2000, the Company renewed its 364-day revolving credit agreement which allows for
borrowings up to $825 million under terms substantially similar to those previously in place, except that a
364-day term out option was reinstated.

In February 2000, the Company completed the sale of its wholly-owned subsidiary McKesson Water
Products Company to Groupe Danone for $1.1 billion in cash, which enabled the Company to reduce
short-term borrowings and add to its cash and marketable securities.

Also in February 2000, the Company completed a private placement of $335 million in term debt, the
proceeds of which were used to retire term debt maturing in March 2000 and for other general corporate
purposes. $100 million of the debt matures on February 28, 2005, $20 million matures on February 28, 2007
and $215 million is due on February 28, 2010.

In May 1998, the Company's Employee Stock Ownership Plan purchased approximately 1.3 million
shares of newly issued Company common stock from the Company at a market value of $78.125 per share.

Credit Resources

The Company currently has $1.225 billion of available credit under committed revolving credit lines: a
$400 million Ñve-year facility expiring in Ñscal 2004 and an $825 million facility expiring on October 9, 2001.
These revolving credit facilities are primarily intended to support commercial paper borrowings. The Company
also has available a committed revolving receivables sale facility aggregating $850 million. The Company
anticipates that this facility will be renewed prior to its termination date of June 15, 2001. At March 31, 2001,
the Company had no commercial paper or revolving credit borrowings outstanding and its committed
receivables sale facility was fully available.

The Company's senior debt credit ratings from S&P, Fitch, and Moody's are currently BBB, BBB and
Baa2, respectively, and its commercial paper ratings are currently A-2, F-2, and P-2, respectively. The
Company's ratings are on negative credit outlook.

Management believes that the Company has adequate access to credit sources to meet its funding
requirements. Funds necessary for future debt maturities and other cash requirements of the Company are
expected to be met by existing cash balances, cash Öow from operations, existing credit sources or other capital
market transactions.

F-23

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

Market Risk

The Company's major risk exposure is changing interest rates, primarily in the United States. The
Company manages interest rates through the use of a combination of Ñxed and Öoating rate debt. Interest rate
swaps may be used to adjust interest rate exposures when appropriate, based upon market conditions. These
contracts are entered into with major Ñnancial institutions thereby minimizing the risk of credit loss.

If interest rates on existing variable-rate debt were to change 50 basis points, the Company believes that

its results from operations and cash Öows would not be materially aÅected.

The Company conducts business in Canada, Mexico, France, the Netherlands, Ireland, Saudi Arabia,
Kuwait, Australia, New Zealand and the United Kingdom, and is subject to foreign currency exchange risk on
cash Öows related to sales, expenses, Ñnancing and investment transactions. If exchange rates on such
currencies were to Öuctuate 10%, the Company believes that its results from operations and cash Öows would
not be materially aÅected. Aggregate foreign exchange translation gains and losses included in operations,
comprehensive income and in equity are discussed in Financial Note 1 on pages F-35 to F-37 of the
accompanying consolidated Ñnancial statements.

Capitalization

The Company's capitalization was as follows:

Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exchangeable debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Convertible preferred securities of subsidiary trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Debt-to-capital ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net debt-to-net capital ratio(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average interest rates during year

Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

$ Ì
1,223
7
1,230
196
3,493
$4,919

March 31,
2000
(in millions)
$ Ì
1,232
28
1,260
196
3,566
$5,022

1999

17
1,097
37
1,151
196
2,882
$4,229

25.0%
17.5%

7.4%
6.6
7.5

25.1%
14.8%

6.4%
5.6
6.9

27.2%
22.4%

6.3%
5.6
6.7

(1) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net

capital employed (capital employed less cash and cash equivalents and marketable securities).

The increase in the net debt-to-capital ratio at March 31, 2001 primarily reÖects the increase in net debt
to fund internal growth. The decline in the net debt-to-capital ratio at March 31, 2000 primarily reÖects the
February 2000 proceeds from the sale of the Water Products business.

At March 31, 2001, the Company had an $850 million committed receivables sales facility which was
fully available. The Company's accounts receivable sales program accommodated the sale by the Company in
March 1999 of $400.0 million, of undivided interests in the Company's trade accounts receivable. The
program qualiÑes for sale treatment under Statement of Financial Accounting Standards (""SFAS'') No. 125,
""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' and under
SFAS No. 140, ""Accounting For Transfers and Servicing Financial Assets and Extinguishments of Liabili-

F-24

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

ties'' which replaces SFAS No. 125 eÅective in the Company's Ñscal year 2002. The sales were recorded at
the estimated fair values of the receivables sold, reÖecting discounts for the time value of money based on U.S.
commercial paper rates and estimated loss provisions.

Average diluted shares were 292.9 million in Ñscal 2001, 289.6 million in Ñscal 2000 and 289.8 million in
Ñscal 1999. The increase in the average diluted shares in Ñscal 2001 is due to an increase in the eÅect of
dilutive securities resulting from the increase in the Company's stock price, and an increase in common shares
outstanding. Common stock outstanding increased to 284.0 million at March 31, 2001, 283.4 million at
March 31, 2000, 280.6 million at March 31, 1999, due primarily to the issuance of common stock under
employee beneÑt plans and in Ñscal 2001 by the acquisition of MediVation, Inc., partially oÅset by the
2.2 million shares repurchased as part of the previously discussed $250 million share repurchase program.

Environmental Matters

The Company's continuing operations do not require ongoing material expenditures to comply with
federal, state and local environmental laws and regulations. However, in connection with the disposition of its
chemical operations in Ñscal 1987, the Company retained responsibility for certain environmental obligations.
In addition, the Company is a party to a number of proceedings brought under the Comprehensive
Environmental Response, Compensation and Liability Act (commonly known as ""Superfund''), and other
federal and state environmental statutes primarily involving sites associated with the operation of the
Company's former chemical distribution businesses. In Ñscal 2000, a $2.0 million increase to the liability for
these environmental matters was recorded within discontinued operations. There were no adjustments made to
the reserves in Ñscal 2001 and 1999. Management does not believe that changes in the remediation cost
estimates in future periods, or the ultimate resolution of the Company's environmental matter, will have a
material impact on the Company's consolidated Ñnancial position or results of operations. See Financial
Note 18, ""Other Commitments and Contingent Liabilities'' on pages F-62 to F-69 of the accompanying
consolidated Ñnancial statements.

Income Taxes

The tax rate on income from continuing operations (excluding unusual items) was 39.0% in Ñscal 2001,
38.5% in Ñscal 2000 and 37.5% in Ñscal 1999. The increase in the eÅective rate from Ñscal 1999 to 2001
primarily reÖects the impact of non-deductible goodwill amortization associated with purchase acquisitions
made late in Ñscal 1999 and in Ñscal 2000 and 2001.

NEW ACCOUNTING PRONOUNCEMENTS

See Financial Note 1 ""SigniÑcant Accounting Policies'' on pages F-35 to F-37 of the accompanying

consolidated Ñnancial statements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

The following additional factors may aÅect the Company's future results:

Adverse resolution of pending litigation regarding the restatement of the Company's historical Ñnancial
statements may cause it to incur material losses.

Subsequent to the Company's April 28, 1999 restatement of Ñnancial results announcement, and as of
April 30, 2001, 85 lawsuits have been Ñled against the Company, certain of the Company's or HBOC's current
or former oÇcers or directors, and other defendants (see Financial Note 18, ""Other Commitments and
Contingent Liabilities'' on pages F-62 to F-69 of the accompanying consolidated Ñnancial statements.) In
addition, the United States Attorney's OÇce for the Northern District of California and the San Francisco

F-25

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

District OÇce of the SEC have also commenced investigations in connection with the matters relating to the
restatement of previously reported amounts.

The Company does not believe it is feasible to predict or determine the outcome or resolution of these
proceedings, or to estimate the amount of, or potential range of, loss with respect to these proceedings. In
addition, the timing of the Ñnal resolution of these proceedings is uncertain. The range of possible resolutions
of these proceedings could include judgments against the Company or settlements that could require
substantial payments by the Company which could cause it to incur material losses.

The restatement of the Company's earnings may negatively impact the management of the Company's
business.

The eÅect of the pending litigation and government investigations could impair the Company's ability to

attract and retain quality employees and managers.

Changes in the United States healthcare environment could have a material negative impact on the
Company's revenues.

The Company's products and services are intended to function within the structure of the healthcare
Ñnancing and reimbursement system currently being used in the United States. In recent years, the healthcare
industry has changed signiÑcantly in an eÅort to reduce costs. These changes include increased use of
managed care, cuts in Medicare reimbursement levels, consolidation of pharmaceutical and medical-surgical
supply distributors, and the development of large, sophisticated purchasing groups. The Company expects the
healthcare industry to continue to change signiÑcantly in the future. Some of these changes, such as a
reduction in governmental support of healthcare services or adverse changes in legislation or regulations
governing the privacy of patient information, or the delivery or pricing of pharmaceuticals and healthcare
services or mandated beneÑts, may cause healthcare industry participants to greatly reduce the amount of the
Company's products and services they purchase or the price they are willing to pay for the Company's
products and services. Changes in pharmaceutical manufacturers' pricing or distribution policies could also
signiÑcantly reduce the Company's income. Due to the diverse range of health care supply management and
health care information technology products and services the Company oÅers, such changes may adversely
impact the Company while not aÅecting some of the Company's competitors that oÅer a more narrow range of
products and services.

Substantial defaults in payment or a material reduction in purchases of the Company's products by large
customers could have a signiÑcant negative impact on the Company's Ñnancial condition, results of
operations and liquidity.

The Company's recent strategy has been to build relationships with a limited number of large customers
that are achieving rapid growth. During the Ñscal year ended March 31, 2001, sales to the Company's ten
largest customers accounted for approximately 57% of the Company's total revenues. Sales to the Company's
largest customer, Rite Aid Corporation, represented approximately 16% of the Company's Ñscal 2001
revenues. As a result, the Company's sales and credit concentration have signiÑcantly increased. Any defaults
in payment or a material reduction in purchases from the Company by these large customers could have a
signiÑcant negative impact on the Company's Ñnancial condition, results of operations and liquidity.

The ability of the Health Care Information Technology business to attract and retain customers due to
challenges in integrating software products and technological advances may signiÑcantly reduce the
Company's revenues.

The Company's Health Care Information Technology business delivers enterprise-wide patient care,
clinical, Ñnancial, managed care, payor and strategic management software solutions, as well as networking

F-26

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

technologies, electronic commerce, outsourcing and other services to health care organizations throughout the
United States and certain foreign countries. Challenges in integrating software products used by the Health
Care Information Technology business with those of its customers could impair the Company's ability to
attract and retain customers and may reduce its revenues or increase its expenses.

Future advances in the health care information systems industry could lead to new technologies, products
or services that are competitive with the products and services oÅered by the Health Care Information
Technology business. Such technological advances could also lower the cost of such products and services or
otherwise result in competitive pricing pressure. The success of the Health Care Information Technology
business will depend, in part, on its ability to be responsive to technological developments, pricing pressures
and changing business models. To remain competitive in the evolving health care information systems
marketplace, the Health Care Information Technology business must develop new products on a timely basis.
The failure to develop competitive products and to introduce new products on a timely basis could curtail the
ability of the Health Care Information Technology business to attract and retain customers and thereby
signiÑcantly reduce the Company's net income.

Proprietary technology protections may not be adequate and proprietary rights may infringe on rights of
third parties.

The Company relies on a combination of trade secret, patent, copyright and trademark laws, nondisclo-
sure and other contractual provisions and technical measures to protect its proprietary rights in its products.
There can be no assurance that these protections will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior to the Company's technology.
Although the Company believes that its products and other proprietary rights do not infringe upon the
proprietary rights of third parties, from time to time third parties have asserted infringement claims against the
Company and there can be no assurance that third parties will not assert infringement claims against the
Company in the future. Additionally, the Company may Ñnd it necessary to initiate litigation to protect the
Company's trade secrets, to enforce its patent, copyright and trademark rights, and to determine the scope and
validity of the proprietary rights of others. These types of litigation can be costly and time consuming. These
litigation expenses or any damage payments resulting from adverse determinations of third party claims could
be signiÑcant and result in material losses to the Company.

Potential product liability claims arising from Health Care Information Technology business products could
result in material losses to the Company.

The Company provides products that assist clinical decision-making and relate to patient medical
histories and treatment plans. If these products fail to provide accurate and timely information, customers
could assert liability claims against the Company. Litigation with respect to liability claims, regardless of the
outcome, could result in substantial cost to the Company, divert management's attention from operations and
decrease market acceptance of the Company's products. The Company attempts to limit by contract its
liability for damages from negligence, errors or mistakes. Despite this precaution, the limitations of liability set
forth in the contracts may not be enforceable or may not otherwise protect the Company from liability for
damages. The Company maintains general liability insurance coverage, including coverage for errors and
omissions. However, this coverage may not continue to be available on acceptable terms or may not be
available in suÇcient amounts to cover one or more large claims against the Company. In addition, the insurer
might disclaim coverage as to any future claim.

F-27

McKESSON HBOC, INC.

FINANCIAL REVIEW (Continued)

System errors and warranties in Health Care Information Technology business products could cause
unforeseen liabilities.

The Company's Health Care Information Technology business' systems are very complex. As with
complex systems oÅered by others, the Company's systems may contain errors, especially when Ñrst
introduced. The Health Care Information Technology business' systems are intended to provide information
for health care providers in providing patient care. Therefore, users of its products have a greater sensitivity to
system errors than the market for software products generally. Failure of a client's system to perform in
accordance with its documentation could constitute a breach of warranty and could require the Company to
incur additional expense in order to make the system comply with the documentation. If such failure is not
timely remedied, it could constitute a material breach under a contract allowing the client to cancel the
contract, obtain refunds of amounts previously paid or assert claims for signiÑcant damages.

Potential regulation by the U.S. Food and Drug Administration (""FDA'') of Information Technology
products as medical devices could impose increased costs, delay the introduction of new products and hurt
the Company's business.

The FDA is likely to become increasingly active in regulating computer software intended for use in the
health care setting. The FDA has increasingly focused on the regulation of computer products and computer-
assisted products as medical devices under the federal Food, Drug and Cosmetic Act. If the FDA chooses to
regulate any of the Company's products as medical devices, it can impose extensive requirements upon the
Company. If the Company fails to comply with the applicable requirements, the FDA could respond by
imposing Ñnes, injunctions or civil penalties, requiring recalls or product corrections, suspending production,
refusing to grant pre-market clearance or approval of products, withdrawing clearances and approvals and
initiating criminal prosecution. Any Ñnal FDA policy governing computer products, once issued, may increase
the cost and time to market of new or existing products or may prevent the Company from marketing its
products.

New and potential federal regulations relating to patient conÑdentiality could depress the demand for
Information Technology products and impose signiÑcant product redesign costs on the Company.

State and federal laws regulate the conÑdentiality of patient records and the circumstances under which
those records may be released. These regulations govern both the disclosure and use of conÑdential patient
medical record information and may require the users of such information to implement speciÑed security
measures. Regulations governing electronic health data transmissions are evolving rapidly and are often
unclear and diÇcult to apply.

The Health Insurance Portability and Accountability Act of 1996 (""HIPAA'') requires national
standards for some types of electronic health information transactions and the data elements used in those
transactions, standards to ensure the integrity and conÑdentiality of health information and national health
data privacy legislation or regulations. In December 2000, Ñnal health data privacy regulations were published
which will require health care organizations to be in compliance by April, 2003. These regulations restrict the
use and disclosure of personally identiÑable health information without the prior informed consent of the
patient.

Evolving HIPAA-Related laws or regulations could restrict the ability of the Company's customers to
obtain, use or disseminate patient information. This could adversely aÅect demand for the Company's
products and force product re-design in order to meet the requirements of any new regulations and protect the
privacy and integrity of patient data. The Company may need to expend signiÑcant capital, research and
development and other resources to modify its products to address these evolving data security and privacy
issues.

F-28

McKESSON HBOC, INC.

FINANCIAL REVIEW (Concluded)

The Company's business could be hindered if it is unable to complete and integrate acquisitions successfully.

An element of the Company's business is to pursue strategic acquisitions that either expand or
complement its business. The Company routinely reviews such potential acquisition opportunities and has
historically engaged in numerous acquisitions. Integration of acquisitions involves a number of special risks.
Such risks include:

‚ the diversion of management's attention to the assimilation of the operations of businesses the

Company has acquired;

‚ diÇculties in the integration of operations and systems and the realization of potential operating

synergies;

‚ diÇculties in the integration of any acquired companies operating in a diÅerent sector of the health

care industry;

‚ delays or diÇculties in opening and operating larger distribution centers in a larger and more complex

distribution network;

‚ the assimilation and retention of the personnel of the acquired companies;

‚ challenges in retaining the customers of the combined businesses; and

‚ potential adverse eÅects on operating results.

If the Company is unable to successfully complete and integrate strategic acquisitions in a timely manner,

its business and the Company's growth strategies could be negatively aÅected.

The Company's issuance of equity to Ñnance acquisitions could have a potential dilutive eÅect on its stock.

The Company anticipates that it will Ñnance acquisitions, at least partly by incurring debt or by the
issuance of additional securities. The use of equity Ñnancing, rather than debt, for acquisitions would dilute the
ownership of the Company's then current stockholders.

F-29

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors of
McKesson HBOC, Inc:

We have audited the accompanying consolidated balance sheets of McKesson HBOC, Inc. and
subsidiaries (the ""Company'') as of March 31, 2001, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity and cash Öows for the years then ended. Our audits also included the
supplementary consolidated Ñnancial statement schedule listed in Item 14(a). These consolidated Ñnancial
statements and supplementary consolidated Ñnancial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated Ñnancial statements
and supplementary consolidated Ñnancial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes
assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating
the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material
respects, the Ñnancial position of the Company at March 31, 2001, 2000 and 1999, and the results of their
operations and their cash Öows for the years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, based on our audits, such supplementary
consolidated Ñnancial statement schedule, when considered in relation to the basic consolidated Ñnancial
statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Financial Note 18 to the consolidated Ñnancial statements, the Company is involved in

certain shareholder litigation related to HBOC.

DELOITTE & TOUCHE LLP

San Francisco, California
April 30, 2001

F-30

McKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs and Expenses

Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DistributionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain (Loss) on InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Income, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from Continuing Operations Before Income Taxes and

Dividends on Preferred Securities of Subsidiary Trust ÏÏÏÏÏÏÏÏÏ
Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (Loss) from Continuing Operations Before Dividends on

Preferred Securities of Subsidiary Trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Dividends on Preferred Securities of Subsidiary Trust, Net of Tax

BeneÑt of $4.0, $4.0 and $4.1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (Loss) After Taxes

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations Ì Gain on sale of McKesson Water

Products CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Earnings (Loss) Per Common Share
Basic and Diluted

Products CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Years Ended March 31,
1999
2000
2001
(in millions, except per share amounts)
$36,687.0

$42,010.0

$29,970.9

39,579.0
372.4
509.2
147.5
1,193.9
111.6
41,913.6
96.4
(120.9)
40.3

15.8
52.3

(36.5)

34,462.1
356.2
460.7
112.6
1,184.4
114.2
36,690.2

(3.2)
269.1
47.2

313.1
122.3

190.8

(6.2)

(42.7)
(5.6)

Ì
(48.3)

(0.15)
(0.02)

Ì
(0.17)

184.6
23.2

515.9
723.7

0.66
0.08

1.83
2.57

27,650.4
444.9
503.9
114.7
1,028.6
118.0
29,860.5
110.4
Ì
57.8

168.2
101.4

66.8

(6.2)

60.6
24.3

Ì
84.9

0.22
0.09

Ì
0.31

Shares on Which Earnings Per Common Share Were Based

Basic and DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

283.1

281.3

275.2

See Financial Notes.

F-31

McKESSON HBOC, INC.

CONSOLIDATED BALANCE SHEETS

2001

March 31,
2000
(in millions, except par value)

1999

Assets
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketable securities available for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized softwareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill and other intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Liabilities
Drafts payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable Ì trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Salaries and wages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Postretirement obligations and other noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
McKessonHBOC-obligated mandatorily redeemable preferred securities of

subsidiary grantor trust whose sole assets are junior subordinated debentures
of McKessonHBOCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Commitments and Contingent Liabilities (Note 18) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Stockholders' Equity
Common stock (400.0 shares authorized, 286.3, 283.9 and 281.1 issued as of

March 31, 2001, 2000 and 1999, respectively; par value of $.01) ÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ESOP notes and guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury shares, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

433.7
11.9
3,443.4
5,116.4
158.6
9,164.0
595.3
103.7
131.3
1,064.4
Ì
471.2
$11,529.9

758.6
4,603.3
378.5
Ì
194.1
142.2
79.8
31.0
362.2
6,549.7
255.8
1,035.6

548.9
57.0
3,034.5
4,149.3
175.8
7,965.5
555.4
92.2
100.9
1,185.6
Ì
473.3
$10,372.9

205.6
3,678.3
368.7
Ì
16.2
115.5
354.8
33.9
348.8
5,121.8
245.7
1,243.8

$ 233.7
28.2
2,552.0
3,522.5
116.4
6,452.8
529.6
106.9
73.0
1,200.6
179.4
477.7
$9,020.0

$ 417.7
3,131.7
408.6
16.7
195.3
93.0
90.8
34.7
356.3
4,744.8
258.6
939.2

195.9
Ì

195.8
Ì

195.6
Ì

2.9
1,828.7
(108.4)
2,006.6

(75.0)
(89.0)
(72.9)

2.8
1,791.1
(126.1)
2,122.3

(97.1)
(99.9)
(27.3)

2.8
1,725.7
(107.7)
1,465.0

(57.7)
(115.5)
(30.8)

3,492.9
$11,529.9

3,565.8
$10,372.9

2,881.8
$9,020.0

See Financial Notes.

F-32

McKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 2001, 2000 and 1999
(shares in thousands, dollars in millions)

Common
Stock

Amount

Additional
Paid-in
Capital

Accumulated
Other

Other
Capital

Retained Comprehensive
Earnings

Losses

ESOP
Notes
and
Guarantees

Treasury

Common
Shares Amount

Stockholders'
Equity

Comprehensive
Income
(Loss)

Balances, March 31, 1998ÏÏÏÏÏÏÏÏÏ 271,162
Issuance of shares under employee

plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

7,454

$2.7

$1,330.9

$ (59.1) $1,462.5

$(54.9)

$(115.6)

(179) $ (4.8)

$2,561.7

0.1

288.3

(48.6)

(360)

(26.0)

213.8

Employee Stock Ownership Plan

(ESOP) note payments ÏÏÏÏÏÏÏÏÏ
Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ
Additional minimum pension

liability, net of tax of $0.2 ÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of shares to ESOP ÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared

(Note 14) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,346
1,161

105.2
1.3

Balances, March 31, 1999ÏÏÏÏÏÏÏÏÏ 281,123

2.8

1,725.7

(107.7)

Issuance of shares under employee

plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ESOP note payments ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ
Additional minimum pension

liability, net of tax of $(0.1) ÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of Abaton.com ÏÏÏÏÏÏÏÏ
Unrealized loss on investments, net

of tax of $23.8ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared, $0.24 per

common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,745

61.4

(18.4)

8.1

(4.1)

Balances, March 31, 2000ÏÏÏÏÏÏÏÏÏ 283,868

2.8

1,791.1

(126.1)

1,811

0.1

17.6

17.7

625

20.0

Issuance of shares under employee

plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ESOP note payments ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏ
Additional minimum pension

liability, net of tax of $(0.8) ÏÏÏÏÏ
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of MediVation.com ÏÏÏÏ
Unrealized gain on investments, net

of tax of $(23.3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repurchase of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared, $0.24 per

common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Balances, March 31, 2001ÏÏÏÏÏÏÏÏÏ 286,304

$2.9

$1,828.7

0.1

(2.5)

(0.3)

(57.7)

(115.5)

(539)

(30.8)

(92)

(3.0)

15.6

(3.7)

0.3

(36.0)

116

6.5

0.1
(2.5)

(0.3)
84.9
105.2
3.8

(84.9)
2,881.8

40.0
15.6
(3.7)

0.3
723.7
8.1

(36.0)
3.5

$ (2.5)

(0.3)
84.9

$ 82.1

$ (3.7)

0.3
723.7

(36.0)

(97.1)

(99.9)

(515)

(27.3)

(67.5)
3,565.8

$684.3

(15.4)

1.1

36.4

429

20.0

10.9

(2,235)

(65.6)

55.4
10.9
(15.4)

1.1
(48.3)
20.0

36.4
(65.6)
0.9

$(15.4)

1.1
(48.3)

36.4

84.9

2.5

(84.9)
1,465.0

723.7

1.1

(67.5)
2,122.3

(48.3)

0.9

(68.3)
$(108.4) $2,006.6

$(75.0)

$ (89.0) (2,321) $(72.9)

(68.3)
$3,492.9

$(26.2)

See Financial Notes.

F-33

McKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

2001

Years Ended March 31,
2000
(in millions)

1999

$ (42.7)

184.6

60.6

Operating Activities
Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile to net cash provided (used) by operating activities:

Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for bad debts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred taxes on income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other noncash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

EÅects of changes in:

Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and drafts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided (used) by continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided (used) by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Investing Activities
Maturities of marketable securities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of subsidiaries and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes receivable issuances, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions of businesses, less cash and short-term investments acquired ÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided (used) by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Financing Activities
Proceeds from issuance of debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayment of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid on convertible preferred securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital stock transactions:

Issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ESOP note paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided (used) by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

115.6
130.5
239.6
(21.4)
295.1
716.7

(624.3)
(985.0)
1,500.7
13.0
(297.3)
36.0
(356.9)
359.8

(6.7)

353.1

13.9
(158.9)
11.6
Ì
(30.9)
(51.9)
(126.6)
(342.8)

9.3
(42.1)
(10.0)

38.6
(65.6)
10.9
(68.3)
1.7
(125.5)

Net Increase (Decrease) in Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and Cash Equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and Cash Equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(115.2)
548.9
$ 433.7

See Financial Notes.

F-34

116.3
106.3
216.8
26.5
138.4
788.9

(753.0)
(629.8)
296.1
14.0
25.8
(42.4)
(1,089.3)
(300.4)
(13.1)
(313.5)

1.7
(145.1)
14.9
1,077.9

(36.9)
(128.9)
(231.3)
552.3

335.0
(222.9)
(10.0)

26.2
Ì
15.6
(67.5)
Ì
76.4

315.2
233.7
548.9

103.9
76.7
87.2
(33.0)
307.2
602.6

(685.3)
(894.2)
1,268.6
126.5
(55.8)
(104.7)
(344.9)
257.7
(23.6)
234.1

90.0
(199.2)
22.3
Ì
(32.9)
(277.8)
(189.6)
(587.2)

82.7
(189.5)
(10.0)

224.9
Ì
0.1
(84.9)
(0.9)
22.4

(330.7)
564.4
$ 233.7

McKESSON HBOC, INC.

FINANCIAL NOTES

1. SigniÑcant Accounting Policies

The consolidated Ñnancial statements of McKesson HBOC, Inc. (""McKesson HBOC'' or the ""Com-
pany'') include the Ñnancial statements of all majority-owned companies, except those classiÑed as discontin-
ued operations. All signiÑcant intercompany transactions and balances have been eliminated. Certain prior
year amounts have been reclassiÑed to conform to the current year presentation.

The Company is organized under two operating segments, Health Care Supply Management and Health
Care Information Technology. Within the United States and Canada, the Health Care Supply Management
segment is a leading wholesale distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products principally to chain and independent drug stores, hospitals, alternate care
sites, food stores and mass merchandisers. Health Care Supply Management operations also include the
manufacture and sale of automated pharmaceutical dispensing systems for hospitals and retail pharmacists,
medical management services and tools for payors and providers, marketing and other support services to
pharmaceutical manufacturers, consulting and outsourcing services to pharmacies, and distribution of Ñrst-aid
products to industrial and commercial customers. The Health Care Information Technology segment delivers
enterprise-wide patient care, clinical, Ñnancial, supply chain, managed care, payor and strategic management
software solutions, as well as networking technologies, including wireless capabilities, electronic commerce,
outsourcing and other services to health care organizations throughout the United States and certain foreign
countries.

The preparation of Ñnancial statements in conformity with accounting principles generally accepted in the
United States of America requires that management make estimates and assumptions that aÅect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Ñnancial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could diÅer from those estimates.

Cash and Cash Equivalents include all highly liquid debt instruments purchased with a maturity of three

months or less at the date of acquisition.

Marketable Securities Available for Sale are carried at fair value and the net unrealized gains and losses,
net of the related tax eÅect, computed in marking these securities to market have been reported within
stockholders' equity. The investments mature on various dates through Ñscal 2002.

Inventories are stated at the lower of cost or market. Inventories of the Health Care Supply segment
consist of merchandise held for resale with the majority of the cost of domestic inventories determined on the
last-in Ñrst-out (""LIFO'') method and international inventories stated at average cost. Health Care
Information Technology segment inventories consist of computer hardware with cost determined either by the
speciÑc identiÑcation or Ñrst-in, Ñrst-out (""FIFO'') method.

Property, Plant and Equipment is stated at cost and depreciated on the straight-line method at rates

designed to distribute the cost of properties over estimated service lives ranging from one to 50 years.

Capitalized Software primarily includes development costs of Health Care Information Technology
software products once the project has reached the point of technological feasibility. Management monitors
the net realizable value of all software development investments to ensure that the investment will be
recovered through future sales. Completed projects are amortized after reaching the point of general
availability using the straight-line method based on an estimated useful life of three years.

The Company capitalized software development costs of $39.3 million, $54.5 million and $56.3 million in
Ñscal 2001, 2000 and 1999, respectively. Amortization of capitalized software held for sale totaled $31.8 mil-
lion, $32.2 million and $25.9 million in 2001, 2000, and 1999, respectively. Royalty fees of $17.9 million,
$18.2 million and $39.0 million, were expensed in 2001, 2000 and 1999, respectively, for software provided by
third-party business partners.

F-35

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Goodwill and Other Intangibles are amortized on a straight-line basis over periods estimated to be
beneÑted, generally 3 to 40 years. Accumulated amortization balances netted against goodwill and other
intangibles were $218.7 million, $178.7 million and $172.3 million at March 31, 2001, 2000 and 1999,
respectively.

Long-lived Assets. The Company periodically assesses the recoverability of the cost of its long-lived
assets, including goodwill. Measurement of impairment losses for long-lived assets, including goodwill, that
the Company expects to hold and use is based on estimated fair values of the assets. Estimates of fair values
are based on quoted market prices, when available, the results of valuation techniques utilizing discounted
cash Öows (using the lowest level of identiÑable cash Öows) or fundamental analysis. Long-lived assets to be
disposed of, either by sale or abandonment, are reported at the lower of carrying amount or fair value less costs
to sell.

Insurance Programs. Under the Company's insurance programs, coverage is obtained for catastrophic
exposures as well as those risks required to be insured by law or contract. It is the policy of the Company to
retain a signiÑcant portion of certain losses related primarily to workers' compensation, physical loss to
property, business interruption resulting from such loss, and comprehensive general, product, and vehicle
liability. Provisions for losses expected under these programs are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions
followed in the insurance industry.

Revenue Recognition. Revenues of the Health Care Supply Management segment are recognized when
products are shipped or services are provided to customers. Included in these revenues are large volume sales
of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary
in the order and subsequent delivery of products directly from the manufacturer to the customers' warehouses.
These sales totaled $10.7 billion in 2001, $8.7 billion in 2000 and $6.8 billion in 1999.

Revenues of the Health Care Information Technology segment are generated primarily by licensing
software systems (consisting of software, hardware and maintenance support), and providing outsourcing and
professional services. Software systems are marketed under information systems agreements as well as service
agreements. Perpetual software arrangements are recognized at the time of delivery or under the percentage of
completion contract method in accordance with Statement of Position 97-2 (""SOP 97-2''), ""Software
Revenue Recognition'' and SOP 81-1 ""Accounting for Performance of Construction-Type and Certain
Product-Type Contracts,'' based on the terms and conditions in the contract. Changes in estimates to
complete and revisions in overall proÑt estimates on percentage of completion contracts are recognized in the
period in which they are determined. Hardware is generally recognized upon delivery. Multi-year software
license agreements are recognized ratably over the term of the agreement. Implementation fees are recognized
as the work is performed or under the percentage of completion contract method. Maintenance and support
agreements are marketed under annual or multiyear agreements and are recognized ratably over the period
covered by the agreements. Remote processing services are recognized monthly as the work is performed.
Outsourcing services are recognized as the work is performed.

The Company also oÅers its products on an application service provider (""ASP'') basis, making available
Company software functionality on a remote processing basis from the Company's data centers. The data
centers provide system and administrative support as well as processing services. Revenue on products sold on
an ASP basis is recognized on a monthly basis over the term of the contract.

In December 1999, the SEC released StaÅ Accounting Bulletin No. 101 (""SAB 101''), which provides
the staÅ's views on applying generally accepted accounting principles to selected revenue recognition issues.
During the quarter ended December 31, 2000, the Company adopted SAB 101, which did not materially
impact the Company's consolidated Ñnancial position, results of operations or cash Öows.

F-36

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Other Income, net includes interest income of $29.1 million, $21.7 million and $37.8 million and the
Company's share in the net income (loss) from investments accounted for under the equity method of
accounting of $5.9 million, $18.2 million and $14.6 million in Ñscal 2001, 2000 and 1999, respectively.

Income Taxes. The Company accounts for income taxes under the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in the Ñnancial statements. Under this method, deferred tax assets and liabilities are determined
based on the diÅerence between the Ñnancial statements and tax bases of assets and liabilities using enacted
tax rates in eÅect for the year in which the diÅerences are expected to reverse.

Foreign Currency Translation. Assets and liabilities of the Company's foreign aÇliates are translated at
current exchange rates, while revenue and expenses are translated at average rates prevailing during the year.
Translation adjustments related to the Company's foreign operations are reported as a component of
stockholders' equity.

Derivative Financial Instruments. The Company's policy generally is to use Ñnancial derivatives only to
manage exposure to Öuctuations in interest and foreign currency exchange rates. The Company has entered
into interest rate and currency swap agreements to hedge certain interest and currency rate risks which are
accounted for using the settlement basis of accounting. Premiums paid on interest rate and currency swap
agreements are deferred and amortized to interest expense over the life of the underlying hedged instrument,
or immediately if the underlying hedged instrument is settled. No gains or losses are recorded for movements
in the swaps' values during the terms of the respective agreements. The interest rate swaps were terminated in
February 2000. (See Financial Note 10).

Employee Stock Options. The Company uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued
to Employees''.

New Accounting Pronouncements. In 1998, the Financial Accounting Standards Board (""FASB'')
issued Statement of Financial Accounting Standards (""SFAS'') No. 133, ""Accounting for Derivative
Instruments and Hedging Activities'', which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as
""derivatives'') and for hedging activities. It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of Ñnancial position and measure these instruments at fair value. In June 1999, the
FASB issued SFAS No. 137 ""Accounting for Derivative Instruments and Hedging Activities Ì Deferral of
the EÅective Date of FASB Statement No. 133'' which defers the eÅective date of SFAS No. 133 until the
Company's Ñscal year 2002. The FASB further amended SFAS No. 133 to address implementation issues by
issuing SFAS No. 138, ""Accounting for Certain Derivative Instruments and Certain Hedging Activities Ì an
amendment of FASB Statement No. 133'', in June 2000. The Company completed the inventory of potential
derivative instruments and adopted SFAS No. 133 as of April 1, 2001. The adoption of this accounting
standard did not materially impact the consolidated Ñnancial statements.

In September 2000, the FASB issued SFAS No. 140, ""Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,'' which revises the standards for accounting for
securitizations and other transfers of Ñnancial assets and collateral and requires entities that have securitized
Ñnancial assets to provide speciÑc disclosures. SFAS No. 140 is eÅective for transfers and servicing of
Ñnancial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this
accounting standard did not materially impact the consolidated Ñnancial statements.

F-37

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

2. Acquisitions, Investments and Divestitures

Fiscal 2001 Acquisitions and Investments:

In July 2000, the Company acquired MediVation, Inc., a provider of an automated web-based system for
physicians to communicate with patients online, for approximately $24 million in cash, $14 million in
Company common stock and the assumption of $6 million of employee stock incentives. A charge of
$2.1 million was recorded to write oÅ the portion of the purchase price allocated to in-process technology for
which technological feasibility had not been established as of the acquisition date and for which there were no
alternative uses. The Company received an independent valuation that utilized a discounted cash Öow
methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date.
In connection with the restructure of the Company's former iMcKesson business in February, 2001 and based
on the utilization of a discounted cash Öow methodology, the Company recorded an impairment loss for the
unamortized goodwill and intangibles balance as of March 31, 2001.

In Ñscal 2001, the Company also completed a number of smaller acquisitions including two medical-
surgical distributors, nine distributors of Ñrst-aid products, a medical management business and an informa-
tion technology business. The aggregate cost of these acquisitions, accounted for as purchases, totaled
approximately $28.1 million. The aggregate excess of purchase price over the fair value of net assets acquired
of $23.5 million is being amortized on a straight-line basis over periods ranging from 3 to 20 years. The results
of operations of the acquired businesses have been included in the consolidated Ñnancial statements since their
respective acquisition dates.

Fiscal 2000 Acquisitions:

On November 2, 1999, the Company completed the acquisition of Abaton.com, a provider of internet-
based clinical applications for use by physician practices, pharmacy beneÑt managers, beneÑt payors,
laboratories and pharmacies, for approximately $95 million in cash and the assumption of approximately
$8 million of employee stock incentives. A charge of $1.5 million was recorded to write oÅ the portion of the
purchase price of Abaton.com allocated to in-process technology for which technological feasibility had not
been established as of the acquisition date and for which there were no alternative uses. The Company
received an independent valuation that utilized a discounted cash Öow methodology by product line to assist in
valuing in-process and existing technologies as of the acquisition date. Goodwill and other intangibles related
to the acquisition amounted to $101 million. In connection with the restructure of the Company's former
iMcKesson business in February, 2001 and based on the utilization of a discounted cash Öow methodology, the
Company recorded an impairment loss for the unamortized goodwill and intangibles balance as of March 31,
2001.

In Ñscal 2000, the Company also made a number of smaller acquisitions including eight distributors of
Ñrst-aid products, a provider of systems that adjudicate third party prescription claims and three health care
information technology businesses. The aggregate cost of these acquisitions, accounted for as purchases,
totaled approximately $34.1 million. The aggregate excess of the purchase price over the fair value of net
assets acquired of $34.9 million is being amortized on a straight-line basis over periods ranging from 6 to

F-38

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

20 years. The results of operations of the acquired businesses have been included in the consolidated Ñnancial
statements since their respective acquisition dates.

Fiscal 1999 Acquisitions:

HBOC Acquisition

On January 12, 1999, McKesson Corporation (""McKesson'') completed the acquisition of HBO &
Company (""HBOC''), a leading health care information technology company, by exchanging 177 million
shares of McKesson common stock for all of the issued and outstanding shares of common stock of HBOC.
Each share of HBOC stock was exchanged for 0.37 of a share of McKesson common stock (the ""Exchange
Ratio''). McKesson was renamed McKesson HBOC, Inc. The transaction was structured as a tax-free
reorganization and was accounted for as a pooling of interests.

In April 1999, the Company discovered improper accounting practices at HBOC. In July, 1999, the
Audit Committee of the Company's Board of Directors completed an investigation into such matters which
resulted in the previously reported restatement of the Company's historical consolidated Ñnancial statements
related to HBOC (pre-acquisition) in Ñscal 1999, 1998 and 1997. In Ñscal 2000, the Company incurred costs
in connection with the investigation and the resulting restatement of the historical consolidated Ñnancial
statements, and pending litigation (see Financial Note 18) and recorded charges of $18.9 million for
accounting and legal fees and other costs.

Other Poolings of Interests

In addition to the HBOC acquisition, the following acquisitions were accounted for under the pooling of

interests method:

In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical
supplies primarily to the primary care sector, for approximately 2 million shares of Company common stock.

Also in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail,
fulÑllment and sales support services, including sample distribution to physician and pharmaceutical company
sales representatives, for approximately 300,000 shares of Company common stock.

In October 1998, the Company completed the acquisition of IMNET Systems, Inc., a provider of
electronic information and document management solutions for the health care industry, for the equivalent,
after application of the Exchange Ratio, of approximately 3.6 million shares of Company common stock and
0.6 million Company stock options.

In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care
management programs and health care information services, for the equivalent, after application of the
Exchange Ratio, of approximately 12.7 million shares of Company common stock.

In connection with the Ñscal 1999 acquisitions discussed above, the Company incurred transaction costs,
primarily consisting of professional fees such as investment banking, legal and accounting fees of $84.6 mil-
lion, including $6.6 million of transaction costs associated with various terminated transactions which had
been explored by the Company. In addition, the Company incurred acquisition-related employee beneÑt costs

F-39

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

of $88.7 million, primarily related to beneÑts received by employees in connection with change of control
provisions, signing and retention bonuses and retirement and employee beneÑts.

Purchase Transactions

The following Ñscal 1999 acquisitions were accounted for under the purchase method and the results of
operations of the acquired businesses have been included in the consolidated Ñnancial statements since their
respective acquisition dates:

In September 1998, the Company acquired MedManagement LLC, a pharmacy management, purchas-
ing, consulting and information services company, for approximately $38 million in cash. The acquisition was
funded with debt. The excess of the purchase price over the fair value of the net assets acquired of $41 million
is being amortized on a straight-line basis over 20 years.

In November 1998, the Company acquired RedLine HealthCare Corporation (""RedLine''), a distributor
of medical supplies and services to the extended-care industry, including long-term-care and home-care sites
for approximately $233 million in cash. The acquisition was funded with debt. The valuation of the RedLine
net assets acquired included the recognition of liabilities totaling $5.8 million related to closures of duplicate
facilities, and involuntary termination and relocation beneÑts. The excess of the purchase price over the fair
value of the net assets acquired of $149 million is being amortized on a straight-line basis over 40 years.

In Ñscal 1999, the Company also made a number of smaller acquisitions including six distributors of Ñrst-
aid products. The aggregate cost of these acquisitions, accounted for as purchases, totaled approximately
$35 million.

Divestiture

On February 29, 2000, the Company sold its wholly-owned subsidiary, McKesson Water Products
Company (the ""Water Products business'') to Groupe Danone for approximately $1.1 billion in cash and
recognized an after-tax gain of $515.9 million. The taxes related to this transaction were accrued in Ñscal 2000
and paid in Ñscal 2001. All of the net assets and results of operations of the Water Products business have been
classiÑed as discontinued operations and all prior years restated accordingly.

3. Gain (Loss) on Investments

In November 1999, the Company received 4.5 million shares of WebMD Corporation common stock and
8.4 million warrants to purchase WebMD Corporation common stock in exchange for its shares and warrants
of WebMD, Inc. as a result of the November 11, 1999 merger between Healtheon Corporation and WebMD,
Inc. The Company recorded gains on the exchange of the common stock based on the November 11, 1999
closing market price and on the warrants at fair value using the Black-Scholes valuation method.

In December 1999, the Company donated 250,000 shares of WebMD common stock to the McKesson
HBOC Foundation and sold 2.0 million WebMD common shares. As a result of these events, the Company
recognized gains related to the investment in WebMD of $242.8 million. In addition, other equity investments
were sold in December 1999 at a gain of $20.3 million, and a $9.8 million charge was recorded in
administrative expense to reÖect the donation of the WebMD common stock to the McKesson HBOC
Foundation. In January 2000, the Company recognized a gain of $5.9 million on the sale of its remaining
investment in WebMD common shares.

The estimated fair value of the WebMD warrants declined to $0.3 million as of March 31, 2001. As a
result of the continued decline in the value, the Company recorded an other than temporary impairment loss
on this investment of $93.1 million during the Ñscal year. The Company also recorded an impairment loss of

F-40

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

$35.6 million based upon its review of other equity and venture capital investments during the Ñscal year. The
impairment losses were partially oÅset by a gain of $7.8 million on the liquidation of another investment.

4. Restructuring and Asset Impairments

In Ñscal 2001, 2000 and 1999, the Company recorded charges and adjustments for restructuring and asset
impairments of $355.9 million, $232.7 million and $140.3 million, respectively. The major components of the
charges are as follows:

Write-down of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit-related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Severance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

$309.2
10.1
36.6
$355.9

2000
(in millions)
$234.2
(5.7)
4.2
$232.7

1999

$ 91.2
17.2
31.9
$140.3

A summary of the activity for severance and exit-related accruals from March 31, 1998 to March 31,

2001, by operating segment, follows:

Health Care
Supply Management

Health Care
Information Technology
Severance Exit-Related Severance Exit-Related Severance Exit-Related

Corporate

Balance, March 31, 1998 ÏÏÏÏÏÏÏÏ
Fiscal 1999 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Severance paid during the yearÏÏÏÏ
Costs paid during the yearÏÏÏÏÏÏÏÏ
Balance, March 31, 1999 ÏÏÏÏÏÏÏÏ
Fiscal 2000 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Severance paid during the yearÏÏÏÏ
Costs paid during the yearÏÏÏÏÏÏÏÏ
Balance, March 31, 2000 ÏÏÏÏÏÏÏÏ
Fiscal 2001 Charges ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Severance paid during the yearÏÏÏÏ
Costs paid during the yearÏÏÏÏÏÏÏÏ
Balance, March 31, 2001 ÏÏÏÏÏÏÏÏ

9.6
22.3
(3.0)
(12.1)
Ì
16.8
2.3
(1.2)
(10.7)
Ì
7.2
9.5
(0.9)
(5.8)
Ì
$ 10.0

$ 5.7
17.2
Ì
Ì
(3.9)
19.0
0.6
(6.9)
Ì
(2.6)
10.1
2.6
(1.3)
Ì
(3.9)
$ 7.5

(in millions)
$ 1.1
Ì
Ì
Ì
(0.5)
0.6
0.6
Ì
Ì
(0.5)
0.7
8.5

Ì
(0.2)
$ 9.0

$ 0.5
12.6
Ì
(7.1)
Ì
6.0
3.9
(0.8)
(4.2)
Ì
4.9
3.3
Ì
(4.7)
Ì
$ 3.5

$ Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
24.7
Ì
Ì
Ì
$24.7

$ Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
0.3
Ì
Ì
Ì
$0.3

Total

$ 16.9
52.1
(3.0)
(19.2)
(4.4)
42.4
7.4
(8.9)
(14.9)
(3.1)
22.9
48.9
(2.2)
(10.5)
(4.1)
$ 55.0

The remaining balances at March 31, 2001 relate primarily to charges recorded in Ñscal 2001 and 1999.
The reserves for exit-related items consist primarily of remaining contract obligations and costs for preparing
facilities for disposal, lease costs and property taxes required subsequent to termination of operations.

F-41

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

A description of the restructuring and asset impairment charges in Ñscal 2001, 2000 and 1999, by

segment, follows:

Fiscal 2001

Health Care Supply Management

In May 2000, the Company announced the formation of a new business unit, iMcKesson to focus on
healthcare applications using the Internet and other emerging technologies. iMcKesson included selected
assets from the former e-Health, Health Care Supply Management and Health Care Information Technology
segments and acquisitions of strategic investments and businesses.

In connection with an assessment of these businesses, management decided to discontinue a product line
and close an oÇce in the United Kingdom. Asset impairment charges totaling $16.9 million were recorded,
including $15.9 million for certain strategic investments held by the medical management business that
became impaired during the year and $1.0 million primarily for capitalized software. A severance charge of
$1.0 million was recorded related to the termination of approximately 70 employees primarily in customer
service and administrative functions which will be paid in Ñscal 2002. In addition, the Company recorded exit-
related costs of $0.3 million and paid $0.2 million for contract termination fees and lease obligations remaining
subsequent to termination of operations.

Also during Ñscal 2001, the Company announced its plans to close a call center. The Company recorded
severance charges of $2.1 million related to the termination of approximately 114 employees, primarily in
customer service functions, and exit-related costs of $0.2 million. During the year, severance of $1.6 million
was paid to approximately 95 of those employees and the remainder will be paid in Ñscal 2002.

In addition, the Company closed a Health Care Supply Management pharmaceutical distribution center.
In connection with this closure, the Company recorded charges of $0.7 million in asset impairments,
$0.5 million for severance relating to the termination of 54 employees and $0.5 million for facility closing
costs. The Company paid $0.4 million to 43 of those employees and $0.5 million of facility closing costs. The
Company also recorded a severance charge of $0.5 million relating to the termination of 25 employees in the
Health Care Supply Management pharmacy management business and paid $0.4 million to 20 of those
employees.

In the fourth quarter of Ñscal 2001, the Company reviewed the operations and cost structure of its
pharmaceutical services business resulting in the planned closures of two oÇces. The Company recorded
$1.4 million in asset impairments, $2.5 million in severance charges and $1.6 million in exit-related costs. The
severance charge relates to the termination of approximately 50 employees in customer service and
administrative functions and will be paid in Ñscal 2002. The exit-related costs are associated primarily with
lease obligations remaining subsequent to the termination of operations. The Company also announced the
consolidation of customer service centers in the medical-surgical business and a workforce reduction. This
resulted in the planned termination of approximately 120 employees in customer service functions. The
Company recorded severance charges of $2.9 million, of which $1.8 million will be paid in Ñscal 2002,
$0.6 million will be paid in Ñscal 2003 and $0.5 million will be paid in Ñscal 2004. The Company also reduced
prior year severance reserves that were determined to be in excess by $0.9 million.

In conjunction with restructuring plans provided for in prior Ñscal years, during Ñscal 2001, the Company
closed two other pharmaceutical distribution centers, eight medical-surgical distribution centers and one
medical-surgical sales oÇce in the Health Care Supply Management segment. This resulted in the payment of

F-42

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

$1.5 million in severance to approximately 80 terminated pharmaceutical distribution center and administra-
tive employees. Also, the Company paid $1.8 million in severance to approximately 220 employees that were
terminated in the medical-surgical business. In addition, the Company paid $3.2 million for costs incurred in
connection with the distribution center closures and associated real estate property taxes, rents, utility and
other costs for facilities subsequent to termination of operations in the Health Care Supply Management
segment and reversed previously recorded exit-related reserves of $1.3 million. The Company plans to
continue the previously announced distribution center closures, back-oÇce reductions and workforce reduc-
tions in the Health Care Supply Management segment throughout Ñscal 2002.

Health Care Information Technology

In connection with the restructure of the former iMcKesson business, the Company discontinued certain
physician services product oÅerings. This resulted in the recording of impairment charges totaling $120.2 mil-
lion including $116.2 million for the write-oÅ of goodwill and intangibles from the acquisitions of Abaton.com
and MediVation. In addition, capitalized software costs of $2.9 million and Ñxed assets of $1.1 that are no
longer going to be used were written oÅ. Severance charges of $3.3 million relating to the termination of
approximately 140 employees in development, customer service and administrative functions, was also
recorded. Also, charges totaling $8.5 million for remaining contract obligations and lease liabilities continuing
subsequent to termination of business was recorded.

In addition, the Company's Health Care Information Technology segment revised estimates for software
and services issues associated with pre-July 1999 software contracts and recorded an additional $161.1 million
charge for estimated customer settlements (forgiveness of accounts receivable, customer credits and refunds).
These customer settlements generally relate to product replacements as well as requirements for certain
customers to upgrade computer hardware and software to accommodate new product releases.

In the Health Care Information Technology segment, severance of $4.7 million was paid to approxi-
mately 240 employees that were terminated in Ñscal 1999 and 2000 but have severance agreements that
provide for payments through Ñscal 2002. In addition, $0.2 million in exit-related costs was paid related to
closed facilities in the Health Care Information Technology segment.

Corporate

In connection with the previously discussed restructure of iMcKesson, the Company recorded asset
impairment charges totaling $8.9 million. These charges include $7.2 million for investments that were
impaired based upon declining market values and $1.7 million for the write-oÅ of internal systems and Ñxed
assets that will no longer be utilized. The Company also recorded severance charges of $24.7 million
associated with the closure of iMcKesson's headquarters function. The severance charge relates to the
termination of 8 employees in administrative functions, including the former CEO of iMcKesson. In addition,
the Company recorded $0.3 million in exit-related costs associated with the shut down of iMcKesson's
headquarters function.

To reÖect the charges discussed above, the Company recorded charges of $1.7 million in distribution
expense and $2.1 million in research and development expense and $329.6 million in administrative expense
and a $0.6 million reduction in selling expense. In addition, investment impairment charges of $23.1 million
have been recorded in gain (loss) on investments.

Fiscal 2000

Health Care Supply Management

F-43

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

oÇce and a workforce reduction. The Company recorded a $0.6 million charge for exit-related costs and a
severance charge of $2.3 million relating to the termination of approximately 200 employees primarily in
warehouse, administrative and sales functions. During Ñscal 2001, severance of $1.2 million was paid to
approximately 160 employees under salary continuance agreements. The remaining severance will be paid in
Ñscal 2002.

The Company also recorded a $0.2 million charge for obsolete equipment associated with certain

discontinued products in the medical management business.

In addition, the Company reassessed prior years' restructuring plans resulting in the decision to retain one
of the six pharmaceutical distribution centers identiÑed for closure in Ñscal 1999, and to reduce the number of
medical-surgical distribution center closures. The Company also announced and completed the closure of one
additional pharmaceutical distribution center in Ñscal 2000. The Company recorded $6.9 million and
$1.2 million for net reductions of prior year-reserves for exit-related activities and severance, respectively, and
charges of $1.5 million for additional asset impairments associated with closed distribution centers ($0.7 mil-
lion for receivables and $0.8 million for inventories).

In Ñscal 2000, the Company completed the closures of three pharmaceutical distribution centers,
including the additional distribution center mentioned above. In addition, the realignment of the sales
organization was completed and certain back oÇce functions were eliminated. This resulted in the termination
of approximately 200 employees and the payment of $3.6 million in severance. The Company also completed
the closures of three medical-surgical distribution centers and paid $1.0 million in severance to approximately
100 employees who were terminated in Ñscal 1999 and 2000. In addition, the Company paid $2.6 million in
costs incurred in connection with the distribution center closures and also real estate property taxes, rents,
utility and other costs for the facilities subsequent to termination of operations. The Company plans to
continue these closure activities throughout Ñscal 2002.

Health Care Information Technology

In the fourth quarter of Ñscal 2000, the Company completed an assessment of the Health Care
Information Technology's business and product portfolio. This resulted in the decision to reorganize the
business and to discontinue overlapping or non-strategic product oÅerings. The Company recorded charges of
$232.5 million for asset impairments. These included charges to write oÅ $49.1 million of capitalized software
development costs, $39.3 million of purchased software and $50.7 million of goodwill associated with the
discontinued product lines. In addition, a $74.1 million reserve was recorded for customer settlements
attributable to the discontinued product lines. The Company also recorded a $9.4 million loss on the
disposition of a non-core foreign operation, and a $7.7 million charge for uncollectible unbilled receivables and
$2.2 million charge for obsolete equipment associated with the discontinued products. Substantially all of the
charges were non-cash asset write-oÅs except for the customer settlements. In addition, a charge of
$0.6 million was recorded for costs to prepare facilities for disposal, lease costs and property taxes required
subsequent to termination of operations and other exit-related activities. In Ñscal 2000, the Company paid
$0.5 million in rent costs for oÇce space abandoned in prior years.

The Company also recorded a $3.9 million severance charge related to the product streamlining and
reorganization. The Ñscal 2000 charge relates to approximately 300 employees, primarily in product
development and support and administrative functions who were terminated at the end of Ñscal 2000.
Substantially all of the severance was paid in Ñscal 2001. In addition, the Company reduced prior-year
severance reserves by $0.8 million, in this segment.

F-44

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

To reÖect the items discussed above, charges of $0.8 million have been recorded in cost of sales and
$234.8 million have been recorded in administrative expenses. In addition, the Company recorded $0.3 million
and $2.6 million as reductions to selling expenses and distribution expenses, respectively.

Fiscal 1999

Health Care Supply Management

In Ñscal 1999, the Company identiÑed six distribution centers for closure of which one distribution center
was shut down by March 31, 1999. The Company recorded a charge of $25.5 million related to such closures.
Of this charge, $21.7 million was required to reduce the carrying value of facility assets to their estimated fair
value less disposal costs, and $3.8 million was related to computer hardware and software which will no longer
be used at such facilities. Fair value was determined based on sales of similar assets, appraisals, and/or other
estimates such as discounting of estimated future cash Öows. Also related to such closures, a charge of
$17.2 million was recorded for other exit-related costs. These primarily consist of costs to prepare facilities for
disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write-
oÅ of costs related to duplicate assets which do not have future use by the Company. Of the above charges,
$25.5 million were non-cash asset write-oÅs. Also, in connection with the previously discussed reassessment of
this plan in Ñscal 2000, the Company reduced exit-related reserves by $6.9 million, oÅset in part by additional
asset impairments of $1.5 million.

As part of this plan, the Company recorded a severance charge of $13.3 million for workforce reductions.
The severance charge relates to the termination of approximately 1,000 employees, primarily in distribution
centers and associated back-oÇce functions. Severance of $2.7 million was paid during Ñscal 1999 in
connection with the termination of approximately 100 distribution center employees and $4.6 million was paid
in Ñscal 2000 to approximately 300 employees, primarily in distribution centers, sales and associated back-
oÇce functions. In Ñscal 2001, $2.1 million was paid to approximately 150 employees primarily in distribution
centers and associated back-oÇce functions. In addition, $1.2 million in severance reserves, primarily
associated with a reduction in estimated terminations of approximately 100 employees, was recorded as a
reduction of expenses in Ñscal 2000, as a result of the previously discussed reassessment of this restructuring
plan. The Company also wrote oÅ $23.5 million (non-cash) of computer hardware and software which were
abandoned as the result of an acquisition during the year.

In connection with acquisitions in the medical management business, plans for integration of the
companies, workforce reductions and consolidation of facilities were completed. The Company recorded
charges of $6.0 million (net of a $3.0 million reversal of severance obligations which were determined to be in
excess) for severance related to the termination of 230 employees primarily in customer service, development
and administrative functions. Severance of $2.8 million was paid in Ñscal 1999, $6.1 million was paid in Ñscal
2000 and $0.1 million was paid in Ñscal 2001. In addition, the Company recorded charges of $12.0 million
associated with the termination of royalty agreements because products subject to minimum royalty payments
to third parties were replaced with acquired products and $4.3 million primarily for the write-oÅ of capitalized
software costs.

Health Care Information Technology

In Ñscal 1999, the Health Care Information Technology segment completed several acquisitions. In
connection with these acquisitions, and the merger of HBOC with McKesson, plans were approved by
management to consolidate facilities, reduce workforce and eliminate duplicate products and internal systems.

In order to eÅect these plans, the Company identiÑed workforce reductions, including both acquired
company and Company personnel, and recorded severance costs of $12.6 million. The severance charge relates
to the termination of approximately 320 employees, primarily in development and administrative functions.
Severance of $6.6 million, $4.2 million and $1.0 million was paid during Ñscal 1999, 2000 and 2001,

F-45

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

respectively, primarily under salary continuance arrangements. Also, $0.8 million of excess severance reserves
were reversed in Ñscal 2000.

In addition, duplicate facilities, products and internal systems were identiÑed for elimination, resulting in
charges of $5.9 million, relating principally to the write-oÅ of capitalized costs and lease termination costs. In
addition, following the HBOC Acquisition, the Company evaluated the performance of a foreign business and
elected to shut down its facility. Charges of $11.6 million were recorded, principally related to the write-oÅ of
goodwill to fair value based on discounted cash Öows. Revenues and net operating income for this foreign
business were not signiÑcant in Ñscal 1999. Certain investments became impaired during Ñscal 1999 and were
written down by $4.3 million to their net realizable values based primarily on discounted cash Öows, and other
reserves of $4.1 million were recorded to cover customer and other claims arising out of the acquisitions.
Substantially all of the above charges were non-cash asset write-oÅs.

The charges discussed above have been recorded in cost of sales, selling, distribution and administrative
expenses. During Ñscal 1999, there were no signiÑcant changes in estimates or recharacterizations of amounts
from restructuring reserves recorded in prior years, except for the $3.0 million reversal described above.

5. OÅ-Balance Sheet Risk and Concentrations of Credit Risk

Trade receivables subject the Company to a concentration of credit risk with customers in the retail and
institutional sectors. A signiÑcant proportion of the Company's increase in sales has been to a limited number
of large customers. Consequently, the Company's credit concentration has increased. Accordingly, any
defaults in payment by these large customers could have a signiÑcant negative impact on the Company's
Ñnancial condition, results of operations and liquidity. At March 31, 2001, receivables from the Company's ten
largest customers accounted for approximately 41% of total customer accounts receivable. Fiscal 2001 sales to,
and March 31, 2001 receivables from, the Company's largest customer, Rite Aid Corporation, represented
approximately 16% of consolidated sales and 10% of consolidated customer accounts receivable, respectively.
Receivables from the Company's second largest customer represented approximately 11% of consolidated
customer accounts receivable. No other customers represented greater than 10% of consolidated sales or
customer accounts receivable.

At March 31, 2001, the Company had an $850 million committed receivables sales facility which was
fully available. The Company's accounts receivable sales program accommodated the sale by the Company in
March, 1999 of $400.0 million of undivided interests in the Company's trade accounts receivable. The
program qualiÑes for sale treatment under SFAS No. 125, ""Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities'' and under SFAS No. 140, ""Accounting For Transfers
and Servicing Financial Assets and Extinguishments of Liabilities which replaces SFAS No. 125 eÅective in
the Company's Ñscal year 2002. The sales were recorded at the estimated fair values of the receivables sold,
reÖecting discounts for the time value of money based on U.S. commercial paper rates and estimated loss
provisions.

The Company's Canadian subsidiary, Medis, has agreements with certain of its customers' Ñnancial
institutions under which Medis has guaranteed the repurchase of certain inventory at a discount in the event
the customers are unable to meet certain obligations to the Ñnancial institutions. Medis has also agreed to
guarantee credit facilities for certain customers and the payment of a major customer's leases. The amounts
related to these guarantees were approximately $22.8 million for credit facilities and $7.6 million for lease
obligations at March 31, 2001.

The Company's U.S. pharmaceutical distribution business has entered into agreements to provide loans
to certain customers, some of which are on a revolving basis. As of March 31, 2001, a total of $94.2 million of
these commitments remained outstanding and were reÖected as other receivables and notes receivable on the

F-46

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

consolidated balance sheet. Under the terms of the loans, the Company has a security interest in the assets of
the customers. In addition, the Company has agreed to guarantee customer loans of $36.6 million.

6. Receivables

2001

Customer accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,298.8
564.3
3,863.1
(419.7)

$3,443.4

March 31,
2000
(in millions)
$2,847.4
462.0
3,309.4
(274.9)
$3,034.5

1999

$2,290.0
442.6
2,732.6
(180.6)
$2,552.0

The allowances are for uncollectible accounts, discounts, returns, refunds, customer settlements and other

adjustments.

Inventories

The LIFO method was used to value approximately 90%, 87% and 86% of the inventories at March 31,
2001, 2000 and 1999, respectively. Inventories before the LIFO cost adjustment, which approximates
replacement cost, were $5,358.4 million, $4,397.2 million and $3,762.5 million at March 31, 2001, 2000 and
1999, respectively.

8. Property, Plant and Equipment, net

2001

Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building, machinery and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$
33.8
1,225.2
1,259.0
(663.7)

$ 595.3

March 31,
2000
(in millions)
$
34.5
1,115.1
1,149.6
(594.2)

$ 555.4

1999

$
37.0
1,029.1
1,066.1
(536.5)
$ 529.6

9. Discontinued Operations

The net assets (liabilities) of discontinued operations were as follows:

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets (liabilities) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 0.9
(1.3)
$(0.4)

2001

March 31,
2000
(in millions)
$ 0.9
(2.4)
$(1.5)

1999

$242.6
(63.2)

$179.4

At March 31, 2001 and 2000, the net liabilities of discontinued operations are included in other current
liabilities. Assets consist primarily of land held for sale and investments in aÇliates. Liabilities consist
primarily of other accrued liabilities.

F-47

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

At March 31, 1999, assets of discontinued operations consist primarily of receivables, inventory, property,
plant and equipment and goodwill of the Water Products business. Liabilities of discontinued operations
consist primarily of accounts payable and other accrued liabilities of the Water Products business.

Results of discontinued operations were as follows:

Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ Ì

2001

Years Ended March 31,
2000
(in millions)
$366.3

1999

$355.1

Discontinued operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of Water Products business, net of tax of $333.9 ÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(9.2)
3.6
(5.6)
Ì
$(5.6)

$ 38.3

(15.1)
23.2
515.9
$539.1

$ 40.1

(15.8)
24.3
Ì
$ 24.3

Discontinued operations in Ñscal 2000 and 1999 include the operations of the Water Products business.

10. Long-Term Debt

ESOP related debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.50% Exchangeable subordinated debentures due

March, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.91% Series A Senior Notes due February, 2005 ÏÏÏÏÏÏÏÏÏÏ
8.95% Series B Senior Notes due February, 2007 ÏÏÏÏÏÏÏÏÏÏ
9.13% Series C Senior Notes due February, 2010 ÏÏÏÏÏÏÏÏÏÏ
6.60% Notes due March, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.875% Notes due March, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.55% Notes due November, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.30% Notes due March, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.40% Notes due March, 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.65% Debentures due March, 2027 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.375% IDRBs due through December, 2011ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital lease obligations (averaging 8.5%) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, 7.0% to 10.0%, due through March, 2008 ÏÏÏÏÏÏÏÏÏÏÏ
Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Long-Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

88.9

6.5
100.0
20.0
215.0
Ì
175.0
125.0
150.0
150.0
175.0
5.5
16.0
2.8
1,229.7
194.1
$1,035.6

March 31,
2000
(in millions)
99.9
$

28.1
100.0
20.0
215.0
Ì
175.0
125.0
150.0
150.0
175.0
9.0
9.9
3.1
1,260.0
16.2
$1,243.8

1999

$ 115.5

37.3
Ì
Ì
Ì
175.0
175.0
125.0
150.0
150.0
175.0
9.0
19.0
3.7
1,134.5
195.3
$ 939.2

The Company has a revolving credit agreement with several domestic and international banks whereby
the banks commit $400 million borrowing availability at the reference rate (8% at March 31, 2001) or money
market-based rates. The agreement expires in Ñscal 2004. The Company has an additional $825 million
available for general purposes under a facility with a duration of 364 days or less which is due to expire on
October 9, 2001. At March 31, 2001, the Company had $1.225 billion of unused borrowing capacity under
these agreements, which are used primarily to support commercial paper borrowings. In addition, the
Company has an $850 million committed receivables sales facility, which was fully available as of March 31,
2001. The Company anticipates that this facility will be renewed prior to its termination date of June 15, 2001.

F-48

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

In Ñscal 2000, the Company issued Ñxed-rate debt totaling $335.0 million. The 8.91% Series A notes
mature on February 28, 2005, the 8.95% Series B notes mature on February 28, 2007 and the 9.13% Series C
notes mature on February 28, 2010. Interest only is payable semiannually.

Total interest payments were $114.5 million, $115.0 million and $117.8 million in Ñscal 2001, 2000 and

1999, respectively.

ESOP related debt (see Note 16) is payable to banks and insurance companies, bears interest at rates
ranging from 8.6% Ñxed rate to approximately 89% of LIBOR or LIBOR °0.4% and is due in semi-annual and
annual installments through 2009.

In connection with the 4.5% exchangeable subordinated debentures, the March 31, 2001 marketable
securities balance included $4.0 million held in trust as exchange property for the exchangeable subordinated
debentures. Through March 31, 2001, the Company had repurchased $173.5 million of the exchangeable
subordinated debentures.

In Ñscal 1998, the Company entered into two interest rate swap agreements, each with a notional
principal amount of $150 million. The swaps were scheduled to mature in 2005 and 2008 and swap Ñxed
interest payments of 6.30% and 6.40%, respectively, for Öoating interest payments based on a LIBOR index.
These swaps included an imbedded interest rate cap of 7%. In February 2001, the Company paid $8.2 million
to terminate the swaps. The termination fee is being amortized on the straight-line method over the remaining
life of the underlying debt.

In Ñscal 1998, a subsidiary of the Company entered into a currency swap agreement to convert the
$125 million proceeds from the issuance of senior notes to $173 million Canadian currency, which was used to
pay down short-term borrowings of the Company's Canadian subsidiary, Medis. This swap matures on
November 1, 2002.

Certain debt agreements require the Company to maintain certain Ñnancial ratios, including a limitation
that the Company's total debt not exceed 56.5% of total capitalization (total debt plus equity). At March 31,
2001, the Company was in compliance with its capitalization covenant and other Ñnancial covenants.

Aggregate annual payments on long-term debt and capitalized lease obligations (see Financial Note 12)

for the years ending March 31 are:

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Long-Term
Debt

$ 187.6
138.0
14.1
259.6
7.9
606.5
$1,213.7

Capital
Leases
(in millions)
$ 6.5
5.8
2.9
0.1
Ì
0.7
$16.0

Total

$ 194.1
143.8
17.0
259.7
7.9
607.2
$1,229.7

11. Convertible Preferred Securities

In February 1997, a wholly-owned subsidiary trust of the Company issued 4 million shares of preferred
securities to the public and 123,720 common securities to the Company, which are convertible at the holder's
option into McKesson HBOC common stock. The proceeds of such issuances were invested by the trust in
$206,186,000 aggregate principal amount of the Company's 5% Convertible Junior Subordinated Debentures
due 2027 (the ""Debentures''). The Debentures represent the sole assets of the trust. The Debentures mature

F-49

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are redeemable by the Company at
103.0% of the principal amount.

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 HBOC common stock, subject to adjustment in certain circumstances. The preferred securities
will be redeemed upon repayment of the Debentures and are callable by the Company at 103.0% of the
liquidation amount.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the
preferred securities (the ""Guarantee''). The Guarantee, when taken together with the Company's obligations
under the Debentures, and in the indenture pursuant to which the Debentures were issued, and the Company's
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 reÖected as outstanding in the accompanying consolidated Ñnancial statements.

12. Lease Obligations

The Company leases facilities and equipment under both capital and operating leases. Net assets held
under capital leases included in property, plant and equipment were $13.7 million, $9.1 million and
$4.4 million at March 31, 2001, 2000 and 1999, respectively. Amortization of capital leases is included in
depreciation expense.

As of March 31, 2001, future minimum lease payments and sublease rentals in years ending March 31

are:

Non-
cancelable
Operating
Leases

Non-
cancelable
Sublease
Rentals

(in millions)

2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 83.3
72.0
56.9
46.8
40.1
84.3
$383.4

$ 4.9
3.4
1.5
1.0
0.4
0.7
$11.9

Less amounts representing interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Present value of minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Capital
Leases

$ 7.3
6.3
3.1
0.2
0.1
1.0
18.0

2.0
$16.0

Rental expense was $108.7 million, $108.3 million and $110.0 million in Ñscal 2001, 2000 and 1999,

respectively.

Most real property leases contain renewal options and provisions requiring the Company to pay property

taxes and operating expenses in excess of base period amounts.

F-50

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

13. Fair Value of Financial Instruments

At March 31, 2001, 2000 and 1999, the carrying amounts of cash and cash equivalents, marketable
securities, receivables, drafts payable, accounts payable Ì trade and other liabilities approximate their
estimated fair values because of the short maturity of these Ñnancial instruments. The estimated fair values of
the Company's remaining Ñnancial instruments, as determined under SFAS No. 107, ""Disclosures about Fair
Value of Financial Instruments'', were as follows:

2001

2000

1999

Carrying
Amount

Estimated
Fair
Value

Carrying
Amount

Estimated
Fair
Value

Carrying
Amount

Estimated
Fair
Value

(in millions)

Long-term debt, including current

portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,229.7

$1,231.1

$1,260.0

$1,180.9

$1,134.5

$1,145.8

Interest rate swaps Ì unrealized

gain/(loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency rate swap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì
Ì

Ì
17.5

Ì
Ì

(11.0)
5.6

Ì
Ì

3.7
12.6

The estimated fair values of these instruments were determined based on quoted market prices or market

comparables.

The estimated fair values may not be representative of actual values of the Ñnancial instruments that

could have been realized as of March 31, 2001, 2000 or 1999 or that will be realized in the future.

14. Stockholders' Equity

Before giving eÅect to the acquisitions accounted for as poolings of interests (see ""Acquisitions,
Investments and Divestitures'' Financial Note 2), McKesson declared dividends of $0.435 per share and
HBOC declared dividends of $0.04 per share, in Ñscal year 1999.

At March 31, 2001, 2000, and 1999, the Company was authorized to issue 100,000,000 shares of series
preferred stock ($.01 par value) of which none were outstanding and 400,000,000 shares of common stock
($.01 par value) of which approximately 283,983,000 shares, 283,353,000 shares and 280,584,000 shares,
respectively, were outstanding net of treasury stock.

In October 1994, the Company's Board of Directors declared a dividend of one right (a ""Right'') for each
then outstanding share of common stock and authorized the issuance of one Right for each share subsequently
issued to purchase, upon the occurrence of certain speciÑed triggering events, a unit consisting of one
hundredth of a share of Series A Junior Participating Preferred Stock. Triggering events include, without
limitation, the acquisition by another entity of 15% or more of the Company's common stock without the prior
approval of the Company's Board. The Rights have certain anti-takeover eÅects and will cause substantial
dilution to the ownership interest of a person or group that attempts to acquire the Company on terms not
approved by the Board. The Rights expire in 2004 unless redeemed earlier by the Board. As a result of the
two-for-one stock split in Ñscal 1998, each share of common stock now has attached to it one-half of a Right.

F-51

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

The following is the calculation of the basic and diluted per-share computations for income (loss) from

continuing operations:

Income
(Loss)

Shares
(in millions, except per share
amounts)

Per Share

For the year ended March 31, 2001
Basic and Diluted EPS

Loss from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(42.7)

283.1(1) $(0.15)

For the year ended March 31, 2000
Basic and Diluted EPS

Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$184.6

281.3(1) $ 0.66

For the year ended March 31, 1999
Basic and Diluted EPS

Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 60.6

275.2(1) $ 0.22

(1) The diluted share base for Ñscal years 2001, 2000 and 1999 excludes 4.1 million shares, 2.9 million shares
and 8.9 million shares related to options to purchase common stock, respectively, 5.4 million shares
related to trust convertible preferred securities in Ñscal 2001, 2000 and 1999, and 0.4 million shares and
0.3 million shares related to restricted stock in Ñscal 2001 and 1999. Additionally, the income available to
common stockholders excludes dividends on convertible preferred securities of $6.2 million in Ñscal 2001,
2000 and 1999. These amounts are excluded due to their antidilutive eÅect.

The Company has six stock option plans as of March 31, 2001. The Company has granted options to
employees and non-employee directors of the Company as well as restricted stock awards to employees. The
Company has also assumed approximately 35 option plans in connection with acquisitions. No new options are
granted from these acquired companies' plans. Under the active plans, the Company was authorized to grant
up to 77.2 million shares as of March 31, 2001.

Options are generally granted for the purchase of shares of common stock at an exercise price not less
than market value on the date of grant. Under the 1998 Canadian Stock Incentive Plan, the Company granted
options at below market value to purchase 20,000 shares, 5,000 shares and 15,000 shares in Ñscal 2001, 2000
and 1999, respectively. Most option grants under the 1997 Non-Employee Director's Equity compensation and
Deferral Plan vest immediately. Other options generally vest over four years and all options expire ten years
after the grant date.

F-52

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

The following is a summary of options outstanding at March 31, 2001:

Options Outstanding

Options Exercisable

Range of
Exercise Prices

$
0.01 to $ 13.67
$ 13.68 to $ 27.35
$ 27.36 to $ 41.02
$ 41.03 to $ 54.70
$ 54.71 to $ 68.37
$ 68.38 to $ 82.05
$ 82.06 to $ 95.72
$ 95.73 to $109.39
$109.40 to $123.07
$123.08 to $136.74

Number of
Options
Outstanding
At Year End

3,549,559
13,814,005
24,983,432
2,530,834
1,009,659
13,577,457
519,350
1,341
373,334
373,334
60,732,305

Weighted-
Average
Remaining
Contractual
Life
(in years)
2.8
7.9
8.3
6.1
6.7
7.6
6.7
5.5
7.2
7.2
7.6

Weighted-
Average
Exercise
Price

6.43
21.40
30.46
47.73
58.51
72.95
90.73
101.12
113.50
136.74
39.36

Number
of Options
Exercisable
At Year
End

3,449,241
4,859,252
5,037,046
2,400,459
905,904
7,720,628
517,574
1,341
373,334
373,334
25,638,113

Weighted-
Average
Exercise
Price

6.60
21.80
31.51
47.86
57.74
72.92
90.76
101.12
113.50
136.74
45.17

Expiration dates range from April 1, 2001 to March 28, 2011.

As a result of the change of control of McKesson at the time of the HBOC Transaction on January 12,

1999, most options granted by McKesson which were outstanding on that date vested.

The following is a summary of changes in the options for the stock option plans:

2001

2000

1999

Weighted-
Average
Exercise
Price

56,275,715
11,599,389
(1,149,465)
(5,993,334)

$42.24
28.50
13.11
50.42

39,472,342
24,650,681
(1,212,262)
(6,635,046)

$55.11
25.68
14.92
63.23

24,156,651
21,286,922
(3,762,649)
(2,208,582)

$31.34
75.10
23.79
41.21

Outstanding at

beginning of yearÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at year

end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

60,732,305

39.36

56,275,715

42.24

39,472,342

55.11

Pursuant to SFAS No. 123, the Company has elected to account for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees.'' Accord-
ingly, no compensation cost has been recognized in the consolidated Ñnancial statements for the stock option
plans, except an insigniÑcant amount related to the two Canadian grants noted above. Had compensation cost
for the stock option plan been recognized based on the fair value at the grant dates for awards under those
plans, consistent with the provision of SFAS No. 123, net income (loss) and earnings (loss) per share would
have been as indicated in the table below. Since pro forma compensation cost relates to all periods over which
the awards vest, the initial impact on pro forma income (loss) from continuing operations may not be

F-53

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

representative of compensation cost in subsequent years, when the eÅect of amortization of multiple awards
would be reÖected.

Years Ended March 31,

2000

2001
(in millions, except per share
amounts)

1999

Income(loss) from continuing operations

As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ (42.7)
(179.4)

$184.6
82.2

Earnings (loss) per common share Ì basic and diluted

$ (0.15)
(0.63)

$ 0.66
0.29

$60.6

(6.7)

$0.22
(0.02)

Fair values of the options were estimated at the date of grant using the Black-Scholes option-pricing

model with the following weighted-average assumptions:

Years Ended March 31,
2000

2001

1999

Expected stock price volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

48.5%
0.75%
4.7%
5.0

46.0%
1.50%
6.1%
5.0

32.4%
1.42%
4.8%
5.0

The weighted average grant date fair values of the options granted during 2001, 2000 and 1999 were

$13.17, $11.33 and $24.06 per share, respectively.

Other Capital included in stockholders' equity, includes notes receivable from certain of the Company's
current or former oÇcers and senior managers totaling $90.7 million, $94.5 million and $99.0 million at
March 31, 2001, 2000 and 1999, respectively, related to purchases of Company common stock. Such notes
were issued for amounts equal to the market value of the stock on the date of the purchase and are full
recourse to the borrower. As of March 31, 2001, the value of the underlying stock collateral was $44.7 million.
The notes bear interest at rates ranging from 4.7% to 8.0% and are due at various dates through February 2005.

15.

Income Taxes

The provision for income taxes related to continuing operations consists of the following:

2001

Years Ended March 31,
2000
(in millions)

1999

Current
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Deferred
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total provisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 52.4
8.2
13.1
73.7

(16.2)
(6.9)
1.7
(21.4)
$ 52.3

$ 62.9
19.8
13.1
95.8

30.5
(5.7)
1.7
26.5
$122.3

$112.8
12.8
8.8
134.4

(24.2)
(7.6)
(1.2)
(33.0)
$101.4

F-54

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Foreign pre-tax earnings were $30.8 million, $40.5 million and $24.6 million in Ñscal 2001, 2000 and

1999, respectively.

The principal items accounting for the diÅerence in income taxes on income from continuing operations

before income taxes computed at the Federal statutory income tax rate and income taxes are as follows:

Income taxes at Federal statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and local income taxes net of federal tax beneÑt ÏÏÏÏÏÏÏÏÏÏ
Nondeductible acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Nondeductible amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Nondeductible meals and entertainment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Nondeductible life insurance policy interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Nontaxable income Ì life insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid deduction Ì ESOP allocated shares ÏÏÏÏÏÏÏÏÏÏÏÏ
Tax-advantaged debt issuance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign tax (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends received from foreign investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign tax credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

1999

Years Ended March 31,
2000
(in millions)
$109.6
14.5
Ì
9.3
1.7
Ì
(2.8)
Ì
(0.5)
(2.5)
0.7
1.2
Ì
(8.9)

5.5
0.9
Ì
57.0
1.6
0.8
(2.5)
(12.9)
(0.5)
(2.5)
4.0
1.4
(0.6)
0.1
$ 52.3

$ 58.9
11.9
34.8
10.9
2.0
Ì
(2.9)
(8.6)
(1.0)
(2.5)
(1.0)
1.0
Ì
(2.1)
$101.4

$122.3

Income tax payments were $330.5 million, $121.6 million and $175.8 million in Ñscal 2001, 2000 and

1999, respectively.

At March 31, 2001, the Company had $51.1 million in cumulative undistributed earnings of certain
foreign subsidiaries. The Company's earnings from these foreign subsidiaries are considered to be indeÑnitely
reinvested and, accordingly, no provision for federal and state income taxes has been made for these earnings.
These earnings could become subject to income tax if they were remitted to the Company as dividends or if a
deemed distribution occurs. Determination of the amount of the unrecognized deferred tax liability on these
undistributed earnings is not practicable; however, the Company believes that U.S. foreign tax credits would
largely eliminate any U.S. tax and oÅset any foreign withholding tax.

F-55

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

As of March 31, the deferred tax balances consisted of the following:

Assets
Receivable allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Customer related allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation and beneÑt-related accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs associated with duplicate facility closures and workforce

reductions related to acquired businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax beneÑt on unrealized loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Nondeductible accruals for:

Postretirement and postemployment plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs associated with facility closures, surplus properties and asset

write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment valuationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss and credit carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NoncurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Liabilities
Basis diÅerences for inventory valuation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accelerated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Systems development costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement planÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NoncurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total net current Ì included in prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏ

Total net noncurrent Ì included in other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ

16. Postretirement and Postemployment BeneÑts

Pension Plans

2001

2000
(in millions)

1999

$ 159.3
40.2
25.9
96.4

$ 104.1
39.9
76.2
38.8

$ 63.6
65.1
17.2
46.6

Ì
Ì
28.0
349.8

24.0
39.2

15.4
67.2
39.6
6.9
2.8
195.1
$ 544.9

$(251.0)
(10.6)
(261.6)
(34.3)
(93.6)
(28.8)
(4.2)
(160.9)
$(422.5)

88.2

34.2

15.9
23.8
21.8
320.5

87.7
36.9

4.5
84.8
0.6
7.1
11.3
232.9
$ 553.4

$(208.0)
(0.6)
(208.6)
(8.3)
(88.7)
(30.3)
(11.0)
(138.3)
$(346.9)

$ 111.9

94.6

7.5
Ì
36.1
236.1

66.5
33.5

10.0
65.5
0.7
67.0
16.6
259.8
$ 495.9

$(192.3)
(1.2)
(193.5)
(22.9)
(83.6)
(17.3)
(8.9)
(132.7)
$(326.2)

42.6

$ 127.1

Prior to December 31, 1996, substantially all full-time employees of McKesson were covered under either
the Company-sponsored deÑned beneÑt retirement plan or by bargaining unit sponsored multi-employer plans.
On December 31, 1996, the Company amended the Company-sponsored deÑned beneÑt plan to freeze all plan
beneÑts based on each employee's plan compensation and creditable service accrued to that date. Accordingly,
employees joining the Company after December 31, 1996, and employees of companies acquired after
December 31, 1996, are not eligible for coverage under the Company-sponsored deÑned beneÑt retirement

F-56

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

plan. The beneÑts for such Company-sponsored plans are based primarily on age of employees at date of
retirement, years of service and employees' pay during the Ñve years prior to retirement. On January 1, 1997,
the Company amended the ESOP to provide future additional beneÑts in place of a portion of those beneÑts
previously provided by the pension plan.

The following tables provide a reconciliation of the changes in the Company-sponsored deÑned beneÑt

retirement plan and executive supplemental retirement plans:

2001

2000
(in millions)

1999

Change in beneÑt obligations:

BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amendments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial losses (gains) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Change in plan assets:

Fair value of plan assets at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenses paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$317.7
1.6
23.8
10.6
Ì
8.3
(32.0)

$330.0

$395.3
12.9
4.9
(4.9)
(32.0)

$376.2

Funded status:

Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial (gain) lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service cost-plan amendments ÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 46.2
(25.0)
6.8
Ì
$ 28.0

$349.4
2.0
24.2
5.4
Ì
(27.8)
(35.5)
$317.7

$310.9
110.0
9.9
Ì
(35.5)

$395.3

$ 77.6
(66.0)
6.1
Ì
$ 17.7

$312.0
0.7
21.7
15.0
17.8
11.0
(28.8)
$349.4

$294.0
42.5
5.3
(2.1)
(28.8)
$310.9

$(38.5)
30.1
1.2
23.0
$ 15.8

The following table provides the amounts recognized in the Company's consolidated balance sheet:

Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability-net of tax of $5.3, $6.1, and $6.2 ÏÏÏÏÏ
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

$ 70.7

(42.8)
6.8
(8.2)
$ 26.5

2000
(in millions)
$ 48.2
(30.5)
6.0
(9.3)
$ 14.4

1999

$ 38.5
(22.7)
24.2
(9.6)
$ 30.4

F-57

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

The following table provides components of the net periodic pension expense (income) for the Company

sponsored deÑned beneÑt retirement plan and executive supplemental retirement plans:

2001

2000
(in millions)

1999

Service cost Ì beneÑts earned during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of unrecognized loss and prior service costs ÏÏÏÏÏÏÏÏ
Amortization of unrecognized net transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Immediate recognition of pension cost(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net pension expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1.6
23.9
(37.4)
(3.3)
Ì
9.1
$ (6.1)

2.0
24.2
(29.3)
2.7
Ì
8.3
7.9

0.7
21.7
(27.6)
1.1
(0.3)
Ì
$ (4.4)

(1) Primarily associated with changes in executive management, based on the terms of employment

contracts.

Assets of the plans are measured on a calendar year basis.

The projected unit credit method is utilized for measuring net periodic pension cost over the employees'
service life. Costs are funded based on the recommendations of independent actuaries. The projected beneÑt
obligations for Company-sponsored plans were determined using discount rates of 7.5% at December 31, 2000,
7.75% at December 31, 1999 and 7% at December 31, 1998 and an assumed increase in future compensation
levels of 4.0% for all periods presented. The expected long-term rate of return on assets used to determine
pension expense was 9.75% for all periods.

The assets of the plan consist primarily of listed common stocks and bonds for which fair value is

determined based on quoted market prices.

ProÑt-Sharing Investment Plan

Retirement beneÑts for employees not covered by collective bargaining arrangements include a supple-
mentary contributory proÑt sharing investment plan (""PSIP''). The leveraged ESOP portion of the PSIP has
purchased an aggregate of 24.3 million shares of common stock since inception. These purchases have been
Ñnanced by 10 to 20-year loans from or guaranteed by the Company. The Company's related receivables from
the ESOP have been classiÑed as a reduction of stockholders' equity. The loans will be repaid by the ESOP
from common dividends on shares not yet allocated to participants, interest earnings on cash balances not yet
allocated to participants, common dividends on certain allocated shares and future Company cash contribu-
tions. The ESOP loan maturities and rates are identical to the terms of related Company borrowings (see
Financial Note 10).

After-tax ESOP expense, including interest expense on ESOP debt, was $10.5 million, $12.4 million and
$1.4 million, in Ñscal 2001, 2000 and 1999, respectively. The higher ESOP expense in Ñscal 2001 and 2000
was required to maintain a desired level of beneÑts provided to employees despite a decline in the stock price.
Additional tax beneÑts received on dividends paid on unallocated shares of $0.9 million, $1.1 million and
$2.2 million in Ñscal 2001, 2000 and 1999, respectively, have been credited directly to retained earnings in
accordance with SFAS No. 109. Contribution expense for the PSIP in Ñscal 2001, 2000 and 1999 was all
ESOP related and is reÖected in the amounts above. Approximately 1.5 million, 2.6 million and 0.6 million
common shares were allocated to plan participants in Ñscal 2001, 2000 and 1999, respectively.

Through March 31, 2001, 16.2 million common shares have been allocated to plan participants. At
March 31, 2001, 8.1 million common shares in the ESOP Trust had not been allocated to plan participants.

F-58

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Health Care and Life Insurance

In addition to providing pension beneÑts, the Company provides health care and life insurance beneÑts
for certain retired employees. The Company's policy is to fund these beneÑts as claims are paid. In 1989, the
Company implemented an ESOP to provide funds at retirement that could be used for medical costs or health
care coverage.

Expenses for postretirement health care and life insurance beneÑts consisted of the following:

Service cost Ì beneÑts earned during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of unrecognized gain and prior service costs ÏÏÏÏÏÏÏÏÏÏ
Recognized actuarial loss (gain)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlement gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

$ 0.7
9.1
(0.9)
4.0
Ì
$12.9

2000
(in millions)
$ 1.1
8.1
(0.9)
(0.3)
Ì
$ 8.0

1999

$ 0.9
8.4
(0.9)
(4.0)
(4.0)

$ 0.4

The following table presents a reconciliation of the postretirement health care and life insurance beneÑts

obligation at March 31:

2001

2000
(in millions)

1999

Change in beneÑt obligation:

BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 123.0
0.7
9.1
14.5
Ì
(14.0)

$ 133.3

$ 120.7
1.1
8.1
5.4
Ì
(12.3)
$ 123.0

$ 120.2
0.9
8.4
7.5
(4.0)
(12.3)
$ 120.7

Funded Status

Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued post-retirement beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(133.3)
20.6
(6.1)
$(118.8)

$(123.0)
10.0
(7.0)
$(120.0)

$(120.7)
4.4
(8.0)
$(124.3)

The assumed health care cost trend rates used in measuring the accumulated postretirement beneÑt
obligation was 5.0% for all periods presented. The health care cost trend rate assumption has a signiÑcant
eÅect on the amounts reported. Increasing the trend rate by one percentage point would increase the
accumulated postretirement health care and life insurance obligation as of March 31, 2001 by $7.7 million and
the related Ñscal 2001 aggregate service and interest costs by $0.7 million. Decreasing the trend rate by one
percentage point would reduce the accumulated postretirement health care and life insurance obligation as of
March 31, 2001 by $7.3 million and the related Ñscal 2001 aggregate service and interest cost by $0.6 million.
The discount rates used in determining the accumulated postretirement beneÑt obligation were 7.5%, 7.75%
and 7% at March 31, 2001, 2000 and 1999, respectively.

The Company has an employee discount stock purchase plan for eligible employees. Under the plan,
participants may authorize payroll deductions of up to 15% of their total cash compensation to purchase the
Company's common stock at a 15% discount. The plan has 24-month oÅering periods with purchases made

F-59

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

every 6 months. Purchases are made at the lesser of the closing stock price on the Ñrst day of the oÅering
period or each purchase date.

17. Segments of Business

The Company's operating segments include Health Care Supply Management and Health Care
Information Technology. In evaluating Ñnancial performance, management focuses on operating proÑt as a
segment's measure of proÑt or loss. Operating proÑt is income before interest expense, corporate interest
income, taxes on income, and allocation of certain corporate revenues and expenses. The Company's
Corporate segment is included in the presentation of reportable segment information since certain revenues
and expenses of this division are not allocated separately to the operating segments.

The Health Care Supply Management segment includes the Company's U.S. pharmaceutical, health
care products and medical-surgical supplies distribution businesses. U.S. Health Care Supply Management
operations also include the manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacies, medical management services and tools to payors and providers, marketing
and other support services to pharmaceutical manufacturers, consulting and outsourcing services to pharma-
cies, and distribution of Ñrst-aid products to industrial and commercial customers. Health Care Supply
Management also includes the Company's international distribution operations (including Canada and an
equity interest in a Mexican pharmaceutical distribution business).

The Health Care Information Technology segment delivers enterprise-wide patient care, clinical,
Ñnancial, supply chain, managed care, payor and strategic management software solutions, as well as
networking technologies, including wireless capabilities, electronic commerce, outsourcing and other services
to health care organizations throughout the U.S. and certain foreign countries.

The Corporate segment includes expenses associated with corporate functions and projects, certain

employee beneÑts, the investment in Health Nexis and an inter-segment elimination in Ñscal 1999.

During Ñscal 2001, the Company announced the formation of a new business segment, iMcKesson, to
focus on healthcare applications using the Internet and other emerging technologies. iMcKesson included
selected net assets from the former e-Health, Health Care Supply Management and Health Care Information
Technology segments and Ñscal 2001 acquisitions of strategic investments and businesses. Subsequently, in
February 2001, the Company announced the restructuring of the iMcKesson business unit by moving
responsibility for iMcKesson's medical management business to the Health Care Supply Management
segment and the physician services business to the Health Care Information Technology segment.

The accounting policies of the segments are the same as those described in the summary of signiÑcant

accounting policies.

F-60

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Financial information relating to the Company's reportable operating segments as of and for the years

ended March 31, is presented below:

Revenues
Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Operating proÑt
Health Care Supply Management(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Ì net(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from continuing operations before taxes on income and

2001

2000
(in millions)

1999

$41,077.3
930.4
2.3
$42,010.0

$35,666.5
1,018.4
2.1
$36,687.0

$28,662.8
1,308.2

(0.1)(1)

$29,970.9

665.1
(295.1)
370.0
(102.7)
(251.5)

536.5
(214.1)
322.4
(107.3)
98.0

359.8
(49.8)
310.0
(90.4)
(51.4)

dividends on preferred securities of subsidiary trustÏÏÏÏÏÏÏÏÏÏ

15.8

313.1

168.2

Segment assets Ì at year-end
Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$10,067.4
558.9
10,626.3

Corporate

Cash, cash equivalents and marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

445.6
458.0
$11,529.9

Depreciation and amortization(4)
Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Expenditures for long-lived assets
Health Care Supply Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health Care Information Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

139.5
101.7
4.9
246.1

90.9
26.5
41.5
158.9

$ 8,644.8
778.8
9,423.6

605.9
343.4
$10,372.9

117.4
101.1
4.1
222.6

99.0
43.3
2.8
145.1

$ 7,052.8
1,040.4
8,093.2

261.9
664.9
$ 9,020.0

90.0
84.8
5.8
180.6

105.0
71.4
22.8
199.2

Revenues by products and services
Health Care Supply Management

Pharmaceutical Distribution and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical-Surgical Distribution and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$38,227.8
2,849.5

$32,960.4
2,706.1

$26,371.3
2,291.5

Health Care Information Technology

Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hardware ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

133.6
712.2
84.6
2.3
$42,010.0

144.0
782.0
92.4
2.1
$36,687.0

267.7
832.0
208.5
(0.1)(1)

$29,970.9

F-61

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

(1) Net of $3.0 million inter-segment elimination related to a Health Care Information Technology segment
software sale to the Health Care Supply Management segment for use in that segment's consulting and
outsourcing business.

(2) Includes $5.9 million, $16.9 million and $13.3 million of net pre-tax earnings from equity investments in

Ñscal 2001, 2000 and 1999, respectively.

(3) Interest expense is shown net of corporate interest income.

(4) Includes amortization of intangibles, capitalized software held for sale and capitalized software for

internal use.

Revenues, operating proÑt and long-lived assets by geographic areas:

Revenues
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Operating proÑt
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Long-lived assets, at year end
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2001

2000
(in millions)

1999

$39,244.1
2,765.9
$42,010.0

$34,324.1
2,362.9
$36,687.0

$27,908.4
2,062.5
$29,970.9

341.4
28.6
370.0

559.0
36.3
595.3

274.8
47.6
322.4

515.6
39.8
555.4

269.2
40.8
310.0

491.1
38.5
529.6

(1) International primarily represents a wholly-owned subsidiary which distributes pharmaceuticals in
Canada, an equity investment in a pharmaceutical distributor in Mexico, and an information technology
businesses in the United Kingdom and Europe.

18. Other Commitments and Contingent Liabilities

I. Accounting Litigation

Since the Company's announcements in April, May and July of 1999 that the Company had determined
that certain software sales transactions in its Information Technology Business Unit, formerly HBOC, were
improperly recorded as revenue and reversed, as of April 30, 2001, eighty-Ñve lawsuits have been Ñled against
the Company, certain of the Company's or HBOC's current or former oÇcers or directors, and other
defendants including, Bear Stearns & Co., Inc. (""Bear Stearns''), and Arthur Andersen LLP (""Arthur
Andersen'').

A. Federal Actions

F-62

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

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 Ñfty-three of these actions into one action entitled In re McKesson HBOC, Inc. Securities
Litigation (Case No. C-99-20743 RMW) (the ""Consolidated Action''), and by order dated December 22,
1999, appointed the New York State Common Retirement Fund as lead plaintiÅ (""Lead PlaintiÅ'') and
approved Lead PlaintiÅs' 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 plaintiÅs in Jacobs Ñled
an individual action in the Northern District of California entitled Jacobs v. HBO & Company (Case
No. C-00-20974 RMW), which is to be consolidated with the Consolidated Action and which purports to
state claims under Sections 11 and 12(2) of the Securities Act of 1933 (""Securities Act''), Section 10(b) of
the Securities Exchange Act of 1934 (""Exchange Act'') and various state law causes of action. By order dated
February 7, 2000, Judge Whyte coordinated a class action alleging ERISA claims, Chang v. McKesson HBOC,
Inc. et al. (Case No. C-00-20030 RMW) and a shareholder derivative action that had been Ñled in the
Northern District under the caption Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the
Consolidated Action.

On January 11, 2001, the Company Ñled an action in the U.S. District Court for the Northern District of
California against the Lead PlaintiÅ in the Consolidated Action individually, and as a representative of a
defendant class of former HBOC shareholders who exchanged HBOC shares for Company shares in the
Merger, 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, the
Company alleges that the exchanged HBOC shares were artiÑcially inÖated 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, the Company seeks to recover the ""unjust enrichment''
received by those HBOC shareholders who exchanged more than 20,000 HBOC shares in the Merger. The
Company does not allege any wrongdoing by these shareholders. Lead PlaintiÅ's motion to dismiss the
Complaint and Counterclaim was heard on March 23, 2001, and Judge Whyte has not yet issued an order.

F-63

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

B. State Actions

Five of the State Actions are class actions. Three of these were Ñled 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 Ñled 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. The Company has removed Edmondson to Federal Court in Delaware where plaintiÅs have Ñled a
motion to remand, which is pending. The Company's motions to stay the Derdiger and Caravetta actions in
favor of proceedings in the federal Consolidated Action have been granted.

F-64

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

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 Ñling of an amended
complaint. The Company's demurrer to that amended pleading was heard on May 23, 2001 and no order has
yet been issued. On May 23, 2001, the California Court of Appeals aÇrmed the Yurick trial court's order
dismissing claims against certain of the individual defendants in the action without leave to amend. The
Oregon, Utah and Minnesota actions referenced above are individual securities actions Ñled in the California
Superior Court for the City and County of San Francisco by out-of-state pension funds. PlaintiÅs in each of
those actions are in the process of Ñling amended complaints, and action on the Company's motions seeking
stays of those actions and demurrers to the prior complaints has been suspended pending defendants'
responses to those amended pleadings.

Ten individual actions have been Ñled in various state courts outside of California. Five of these cases
have been Ñled in Georgia state courts: Moulton v. McKesson HBOC, Inc. et al. (Case No. 98-13176-9),
involving a former HBOC employee's claim 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. 1999CV-15443), 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, was dismissed by plaintiÅ and reÑled as Case No. 2000-CV-27864 and
the Company's motions to dismiss or stay that action are presently pending. In Adler v. McKesson HBOC, Inc.
(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 an order issued in Adler and the prior June, 2001, trial
date has been vacated. SuÅolk 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 are based on Georgia
securities, racketeering and common law claims. The Company has moved to stay both the SuÅolk and
Curran actions in favor of proceedings in the federal Consolidated Action. Those motions have been heard by
the Court and no order has yet been issued.

Three individual state court cases have been Ñled outside of California. Grant v. McKesson HBOC, Inc.
(C.A. No. 99-03978) was Ñled on May 12, 1999 in the Pennsylvania Court of Common Pleas, Chester
County. The Grant case relates to the Company's acquisition of Keystone/Ozone Pure Water Company
(""Keystone''). PlaintiÅs are former shareholders of Keystone who received McKesson shares in exchange for
their shares in Keystone pursuant to a merger agreement between plaintiÅs, McKesson and a McKesson
subsidiary. On March 6, 2001, the Court denied the Company's motion to stay and dismissed with prejudice
all plaintiÅs' claims except for those based on breach of contract and negligent misrepresentation. The
Company answered the Grant complaint on March 26, 2001. On September 28, 1999, an action was Ñled in
Delaware Superior Court under the caption Kelly v. McKesson HBOC, Inc. et al. (C.A. No. 99C-09-265
WCC). PlaintiÅs in Kelly are former shareholders of KWS&P/SFA, Inc., which merged into the Company
after the Merger. PlaintiÅs 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. The Company's motion to dismiss and plaintiÅs'
motion for summary judgment remain pending before the Court. On October 19, 1999, an individual action
was Ñled in Colorado District Court, Boulder County, under the caption American Healthcare Fund II v.
HBO & Company et al. (Case No. 00-CV-1762). PlaintiÅs in American Healthcare are former shareholders
of Access Health, Inc., a company acquired by HBOC prior to the Merger, and assert claims for breach of the
merger contract and related claims. The Company has answered an amended complaint and Ñled a
counterclaim against the plaintiÅs alleging that, as HBOC shareholders exchanging HBOC shares for
McKesson shares in the Merger, plaintiÅs were unjustly enriched. Discovery has commenced and trial is
currently set for September 10, 2001.

F-65

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

count information against former HBOC oÇcer, 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
oÇcer, Jay P. Gilbertson, and former Company and HBOC OÇcer, Albert J. Bergonzi (United States v.
Bergonzi, et al., Case No. CR-00-0505). On that same date, a civil complaint was Ñled 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).

II. Other Litigation and Claims:

In addition to commitments and obligations in the ordinary course of business, the Company is 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 the
Company's business. These include:

A. Antitrust Matters

F-66

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

Chancery Court of Prentiss County Mississippi. The Chancery Court has held that the case may not be
maintained as a class action.

B. FoxMeyer Litigation

F-67

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

now pending in Texas state court, and the parties presently are engaged in discovery on the merits of the
various claims asserted in the Texas Action.

C. Product Liability Litigation

The Company, along with 134 other companies, has been named in a lawsuit brought by the Lemelson
Medical, Educational & Research Foundation (""the Foundation'') alleging that the Company and its
subsidiaries are infringing seven (7) 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 the Company, the lump sum fee for
which would be based upon a fraction of a percent of the Company's 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. The Company is assessing its
potential exposure and evaluating the Foundations' claim with the assistance of expert patent counsel, after
which it will determine an appropriate course of action.

D. Environmental Matters

Primarily as a result of the operation of its former chemical businesses, which were divested in Ñscal

1987, the Company is involved in various matters pursuant to environmental laws and regulations:

F-68

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

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 and is included in the Company's recorded environmental
liabilities at March 31, 2001.

Except as speciÑcally stated above with respect to the litigation matters summarized in ""Accounting
Litigation'' (section I, above), management believes, based on current knowledge and the advice of the
Company's counsel, that the outcome of the litigation and governmental proceedings discussed above will not
have a material adverse eÅect on the Company's Ñnancial position, results of operations or cash Öows.

F-69

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

19. Quarterly Financial Information (unaudited)

First
Quarter

Second
Quarter

Fourth
Quarter
(in millions except per share amounts)

Third
Quarter

Fiscal
Year

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 22.63
16.00

Fiscal 2001
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) after taxes

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Earnings (loss) per common share

Diluted

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Basic

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏ

Market prices per common share

Fiscal 2000
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) after taxes

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations Ì Gain on sale of

McKesson Water Products Company ÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Earnings (loss) per common share

Diluted

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations Ì Gain on sale of

McKesson Water Products Company ÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Basic

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations Ì Gain on sale of

McKesson Water Products Company ÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏ

Market prices per common share

$9,717.6
566.9

$9,865.5
571.4

$11,017.8
601.7

$11,409.1
691.0

$42,010.0
2,431.0

63.6
Ì
63.6

0.22
Ì
0.22

0.23
Ì
0.23

0.06

$8,590.0
556.4

61.9(1)
Ì
61.9

0.22
Ì
0.22

0.06

$ 31.44
20.69

$8,928.7
546.7

7.3(2)
(5.6)
1.7

(175.5)(3)
Ì
$ (175.5)

0.03
(0.02)
0.01

0.06

37.00
23.88

(0.62)
Ì
(0.62)

0.06

35.91
23.40

(42.7)
(5.6)
(48.3)

(0.15)
(0.02)
(0.17)

0.24

37.00
16.00

$ 9,876.9
538.0

$ 9,291.4
583.8

$36,687.0
2,224.9

62.9(4)
7.2

49.3(5)
10.0

160.6(6)
6.2

(88.2)(7)
(0.2)

Ì
70.1

0.22
0.03

Ì
0.25

0.22
0.03

Ì
0.25

0.06

Ì
59.3

0.18
0.03

Ì
0.21

0.18
0.03

Ì
0.21

0.06

Ì
166.8

0.56
0.02

Ì
0.58

0.57
0.02

Ì
0.59

0.06

28.81
18.56

515.9
427.5

(0.31)
Ì

1.83
1.52

(0.31)
Ì

1.83
1.52

0.06

28.06
18.19

184.6
23.2

515.9
723.7

0.66
0.08

1.83
2.57

0.66
0.08

1.83
2.57

0.24

69.25
18.19

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 69.25
30.75

$ 34.94
27.19

F-70

McKESSON HBOC, INC.

FINANCIAL NOTES (Continued)

(1) Includes pre-tax charges of $0.5 million for severance associated with staÅ reductions in the pharmacy
management business, and $0.7 million for legal costs incurred in connection with the pending litigation
resulting from the restatement of prior years' Ñnancial statements. Also includes a pre-tax gain of
$7.8 million on the liquidation of an investment, a charge of $2.1 million for write-oÅ of in-process
technology related to the July 2000 acquisition of MediVation, Inc. and $2.3 million for severance and
facility closing costs associated with staÅ reductions in the medical management business. These items
aggregate to $0.5 million in after-tax income.

(2) Includes pre-tax charges of $0.7 million for asset impairments, $0.5 million for severance and $0.5 million
for facility closing costs associated with the closure of a pharmaceutical distribution center. Also includes
charges of $98.9 million for impairments of certain equity investments and $1.1 million for legal costs
incurred in connection with the pending securities litigation. These costs aggregate to $62.0 million, after-
tax.

(3) Includes pre-tax charges of $6.2 million related to closure of facilities in the pharmaceutical services
business and consolidation of customer service centers, staÅ reductions and adjustments to prior year
restructuring reserves in the medical/surgical business. Also includes charges related to the restructuring
of the former iMcKesson business, including the write-oÅ of goodwill and intangibles totaling $116.2 mil-
lion, asset impairments of $29.8 million, severance of $29.0 million and exit costs of $9.1 million. In
addition, includes charges for reserves of $161.1 million for Information Technology estimated customer
settlements (forgiveness of accounts receivable, customer credits and refunds), a $6.7 million loss on
investments and a $0.7 million charge for legal costs incurred in connection with the pending securities
litigation. The costs aggregate to $264.2 million after-tax.

(4) Includes pre-tax charges of $6.3 million incurred in the quarter in connection with the restatement of
prior years' Ñnancial results and resulting litigation. Also includes $18.5 million in severance and beneÑt
costs resulting from the change in executive management and $1.7 million in retention beneÑts incurred
in the quarter, $16.3 million in the aggregate after-tax.

(5) Includes pre-tax charges of $8.7 million incurred in connection with the restatement of prior years'
Ñnancial statements and resulting litigation, $12.1 million in severance and other costs associated with
former employees and $2.9 million in acquisition-related costs, $14.6 million in the aggregate after-tax.

(6) Includes pre-tax charges for asset impairments, accounts receivable reserves and customer settlements in
the Health Care Supply Management segment totaling $37.0 million related primarily to a prior year
implementation of a contract system, partially oÅset by a $5.7 million reduction in prior year restructuring
reserves. Also includes charges of $61.8 million for a change in estimate of the Health Care Information
Technology segment's requirements for accounts receivable reserves and $1.5 million for the write-oÅ of
purchased in-process technology related to the Company's November 1999 acquisition of Abaton.com,
partially oÅset by a $2.7 million reduction in prior year accruals for acquisition-related activities. In
addition, includes net gains of $253.3 million primarily from the exchange and subsequent sale of equity
investments. These gains are oÅset in part, by charges of $2.4 million for accounting and legal fees and
other costs incurred in connection with the Company's earlier restatement of prior years' Ñnancial results
and resulting litigation and $0.7 million in acquisition-related costs. These aggregate to $100.1 million in
after-tax income.

F-71

McKESSON HBOC, INC.
FINANCIAL NOTES (Concluded)

(7) Includes pre-tax charges totaling $239.8 million for Health Care Information Technology segment
charges for asset impairments, customer accounts receivable and severance primarily associated with
product streamlining and reorganization. These charges are oÅset in part, by a $4.3 million reduction in
prior year accruals for acquisition-related activities. In addition, includes pre-tax charges of $1.5 million
for asset impairments in the Health Care Supply Management segment related primarily to a prior year
implementation of a contract system. Also includes a pre-tax charge of $2.9 million for severance and
exit-related charges primarily associated with segment staÅ reductions and a $0.9 million reduction in
prior year restructuring reserves. Also includes Corporate segment pre-tax net gains on the sale of equity
investments of $5.9 million, partially oÅset by charges of $2.5 million for accounting and legal fees and
other costs incurred in connection with the Company's earlier restatement of prior years' Ñnancial results
and resulting litigation, costs associated with former employees and other acquisition-related costs. These
items total $149.6 million, after-tax.

(8) After-tax amounts associated with the items discussed in Notes 1-7 above amounted to $(325.7) million,
$(1.15) per share, and $(80.4) million, $(0.29) per share, in Ñscal 2001 and 2000, respectively.

F-72

BOARD OF DIRECTORS

CORPORATE OFFICERS

DIRECTORS AND OFFICERS

Alan Seelenfreund
Chairman of the Board

John H. Hammergren
President and Chief Executive OÇcer,
McKesson HBOC, Inc.

Alfred C. Eckert III
Chairman and Chief Executive OÇcer,
GSC Partners

Tully M. Friedman
Chairman and Chief Executive OÇcer,
Friedman Fleischer & Lowe, LLC.

Alton F. Irby III
Chairman,
Cobalt Media Group

M. Christine Jacobs
Chairman, President and Chief Executive OÇcer,
Theragenics Corporation

Martin M. KoÅel
Chairman and Chief Executive OÇcer,
URS Corporation

Gerald E. Mayo
Chairman, Retired,
Midland Financial Services, Inc.

James V. Napier
Chairman, Retired
ScientiÑc-Atlanta, Inc.

David S. Pottruck
President, Co-Chief Executive OÇcer and
Chief Operating OÇcer
The Charles Schwab Corporation

Carl E. Reichardt
Chairman, Retired
Wells Fargo & Company

Jane E. Shaw
Chairman and Chief Executive OÇcer,
Aerogen, Inc.

Alan Seelenfreund
Chairman of the Board

John H. Hammergren
President and Chief Executive
OÇcer

William A. Armstrong
Senior Vice President,
Administration

William R. Graber
Senior Vice President and
Chief Financial OÇcer

Paul C. Julian
Senior Vice President and President,
Supply Management Business

Graham O. King
Senior Vice President and President,
Information Technology Business

Paul E. Kirincic
Senior Vice President,
Human Resources

Nicholas A. Loiacono
Vice President and Treasurer

Ivan D. Meyerson
Senior Vice President,
General Counsel and Secretary

Nigel A. Rees
Vice President and Controller

Carmine J. Villani
Senior Vice President and
Chief Information OÇcer

Heidi E. Yodowitz
Senior Vice President and
Chief Financial OÇcer,
Supply Management Business

CORPORATE INFORMATION

Common Stock

McKesson HBOC, Inc. common stock is listed on the New York Stock Exchange and the PaciÑc

Exchange (ticker symbol MCK) and is quoted in the daily stock tables carried by most newspapers.

Stockholder Information

First Chicago Trust Co. of New York, a division of EquiServe, P.O. Box 2500, Jersey City, N.J. 07303
acts as transfer agent, registrar, dividend-paying agent and dividend reinvestment plan agent for McKesson
HBOC, Inc., stock and maintains all registered stockholder records for the Company. For information about
McKesson HBOC, Inc. stock or to request replacement of lost dividend checks, stock certiÑcates or 1099's,
stockholders may call First Chicago's telephone response center at (800) 756-8200, weekdays 8:30 a.m. to
7:00 p.m., ET. For the hearing impaired call TDD: (201) 222-4955. First Chicago also has a Web site:
http://www.equiserve.com Ì that stockholders may use 24 hours a day to request account information.

Dividends and Dividend Reinvestment Plan

Dividends are generally paid on the Ñrst business day of January, April, July and October to stockholders
of record on the Ñrst day of the preceding month. You may have your dividend check deposited directly into
your checking or savings account. For more information, or to request an enrollment form, call First Chicago
at (800) 756-8200, Monday through Friday, 8:00 a.m. Ó 10:00 p.m., ET, or Saturday, 8:00 a.m. Ó 3:30 p.m.,
ET. McKesson HBOC, Inc. Dividend Reinvestment Plan oÅers stockholders the opportunity to reinvest
dividends in common stock and to purchase additional common stock without paying brokerage commissions
or other service fees, and to have their stock certiÑcates held in safekeeping. For more information, or to
request an enrollment form, call First Chicago's telephone response center at (800) 414-6280.

Annual Meeting

The Company's Annual Meeting of Stockholders will be held at 10:00 a.m., PDT, on Wednesday July 25,

2001, at the Fairmont Hotel, 950 Mason Street, San Francisco, California.

EXHIBIT 3.3

RESTATED

BY-LAWS

MCKESSON HBOC, INC.

A DELAWARE CORPORATION

AS AMENDED THROUGH MARCH 31, 2001

================================================================================

TABLE OF CONTENTS

Page
----

ARTICLE I OFFICES........................................................1
Section 1 REGISTERED OFFICE..............................................1
Section 2 OTHER OFFICES..................................................1

ARTICLE II STOCKHOLDERS’ MEETINGS.........................................1
Section 1 PLACE OF MEETINGS..............................................1
Section 2 ANNUAL MEETINGS................................................1
Section 3 SPECIAL MEETINGS...............................................1
Section 4 NOTICE OF MEETINGS.............................................2
Section 5 QUORUM.........................................................2
Section 6 VOTING RIGHTS..................................................3
Section 7 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS..................3
Section 8 LIST OF STOCKHOLDERS...........................................4
Section 9 STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS.......................4
Section 10 NOMINATIONS OF PERSONS FOR ELECTION TO THE
BOARD OF DIRECTORS...........................................5

ARTICLE III DIRECTORS......................................................6
Section 1 GENERAL POWERS.................................................6
Section 2 NUMBER AND TERM OF OFFICE; REMOVAL.............................6
Section 3 ELECTION OF DIRECTORS..........................................7
Section 4 VACANCIES......................................................7
Section 5 RESIGNATIONS...................................................7
Section 6 ANNUAL MEETINGS................................................7
Section 7 REGULAR MEETINGS...............................................7
Section 8 SPECIAL MEETINGS; NOTICE.......................................7
Section 9 QUORUM AND MANNER OF ACTING....................................8
Section 10 CONSENT IN WRITING.............................................8
Section 11 COMMITTEES.....................................................8
Section 12 TELEPHONE MEETINGS.............................................9
Section 13 COMPENSATION...................................................9
Section 14 INTERESTED DIRECTORS...........................................9
Section 15 DIRECTORS ELECTED BY SPECIAL CLASS OR SERIES..................10

ARTICLE IV OFFICERS......................................................10
Section 1 DESIGNATION OF OFFICERS.......................................10
Section 2 TERM OF OFFICE; RESIGNATION; REMOVAL..........................10
Section 3 VACANCIES.....................................................10
Section 4 AUTHORITY OF OFFICERS.........................................11
Section 5 DIVISIONAL TITLES.............................................11
Section 6 SALARIES......................................................11

ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES
OWNED BY THE CORPORATION....................................11
Section 1 EXECUTION OF INSTRUMENTS......................................11
Section 2 VOTING OF SECURITIES OWNED BY THE CORPORATION.................11

ARTICLE VI SHARES OF STOCK AND OTHER SECURITIES..........................12
Section 1 FORM AND EXECUTION OF CERTIFICATES............................12
Section 2 LOST CERTIFICATES.............................................12
Section 3 TRANSFERS.....................................................12
Section 4 FIXING RECORD DATES...........................................12
Section 5 REGISTERED STOCKHOLDERS.......................................13
Section 6 REGULATIONS...................................................13
Section 7 OTHER SECURITIES OF THE CORPORATION...........................13

ARTICLE VII CORPORATE SEAL................................................14

ARTICLE VIII INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES
AND AGENTS..................................................14
Section 1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER
THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION...........14
Section 2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY
OR IN THE RIGHT OF THE CORPORATION .........................14
Section 3 AUTHORIZATION OF INDEMNIFICATION .............................15
Section 4 GOOD FAITH DEFINED ...........................................15
Section 5 INDEMNIFICATION BY A COURT ...................................15
Section 6 EXPENSES PAYABLE IN ADVANCE ..................................15
Section 7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT
OF EXPENSES ................................................16
Section 8 INSURANCE.....................................................16
Section 9 CERTAIN DEFINITIONS...........................................16
Section 10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES ......16
Section 11 LIMITATION ON INDEMNIFICATION ................................17
Section 12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.......................17
Section 13 EFFECT OF AMENDMENT ..........................................17
Section 14 AUTHORITY TO ENTER INTO INDEMNIFICATION AGREEMENTS ...........17

ARTICLE IX NOTICES.......................................................17

ARTICLE X AMENDMENTS....................................................18

RESTATED

BY-LAWS

MCKESSON HBOC, INC.

A DELAWARE CORPORATION

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The address of the registered office of McKesson
HBOC, Inc. (the "Corporation") within the State of Delaware is 1013 Centre Road,
City of Wilmington 19805-1297, County of New Castle. The name of the registered
agent of the Corporation at such address is The Prentice-Hall Corporation
System, Inc.

SECTION 2. OTHER OFFICES. The Corporation shall also have and maintain an office
or principal place of business at One Post Street, San Francisco, California and
may also have offices at such other places, both within and without the State of
Delaware, as the Board of Directors may from time to time determine or the
business of the Corporation may require.

ARTICLE II

STOCKHOLDERS’ MEETINGS

SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders of the Corporation
shall be held at such place, either within or without the State of Delaware, as
may be designated from time to time by the Board of Directors, or, if not so
designated, then at the office of the Corporation required to be maintained
pursuant to Section 2 of ARTICLE I hereof.

SECTION 2. ANNUAL MEETINGS. The annual meetings of stockholders of the
Corporation for the purpose of election of directors and for such other business
as may lawfully come before it, shall be held on such date and at such time as
may be designated from time to time by the Board of Directors, or, if not so
designated, then at 10:00 a.m. on the last Wednesday in July in each year if not
a legal holiday, and, if a legal holiday, at the same hour and place on the next
succeeding day not a holiday.

SECTION 3. SPECIAL MEETINGS. Special Meetings of the stockholders of the
Corporation may be called, for any purpose or purposes, by the Chairman of the
Board or the President or the Board of Directors at any time. Stockholders may
not call Special Meetings of the stockholders of the Corporation.

SECTION 4. NOTICE OF MEETINGS.

(a) Except as otherwise provided by law or the Certificate of Incorporation,
written notice of each meeting of stockholders, specifying the place, date and
hour and purpose or purposes of the meeting, shall be given not less than 10 nor
more than 60 days before the date of the meeting to each stockholder entitled to
vote thereat, directed to his address as it appears upon the books of the
Corporation; except that where the matter to be acted on is a merger or
consolidation of the Corporation or a sale, lease or exchange of all or
substantially all of its assets, such notice shall be given not less than 20 nor
more than 60 days prior to such meeting.

(b) If at any meeting action is proposed to be taken which, if taken, would
entitle stockholders fulfilling the requirements of Section 262(d) of the
Delaware General Corporation Law to an appraisal of the fair value of their
shares, the notice of such meeting shall contain a statement of that purpose and
to that effect and shall be accompanied by a copy of that statutory section.

(c) When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken unless the adjournment is for more
than thirty days, or unless after the adjournment a new record date is fixed for
the adjourned meeting, in which event a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

(d) Notice of the time, place and purpose of any meeting of stockholders may be
waived in writing, either before or after such meeting, and to the extent
permitted by law, will be waived by any stockholder by his attendance thereat,
in person or by proxy. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.

(e) Unless and until voted, every proxy shall be revocable at the pleasure of
the person who executed it or of his legal representatives or assigns, except in
those cases where an irrevocable proxy permitted by statute has been given.

SECTION 5. QUORUM. At all meetings of stockholders, except where otherwise
provided by law, the Certificate of Incorporation, or these By-Laws, the
presence, in person or by proxy duly authorized, of the holders of a majority of
the outstanding shares of stock entitled to vote shall constitute a quorum for
the transaction of business. Shares, the voting of which at said meeting has
been enjoined, or which for any reason cannot be lawfully voted at such meeting,
shall not be counted to determine a quorum at said meeting.

In the absence of a quorum any meeting of stockholders may be adjourned, from
time to time, by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. At such
adjourned meeting at which a quorum is present or represented any business may
be transacted which might have been transacted at the original meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these By-Laws,
all action taken by the holders of a majority of the voting power represented at
any meeting at which a quorum is present shall be valid and binding upon the
Corporation.

In the event that at any meeting at which the holders of more than one class or
series of the Corporation’s capital stock are entitled to vote as a class, a
quorum of any such class or series is lacking, the holders of any class or
series represented by a quorum may proceed with the transaction of the business
to be

transacted by that class or series, and if such business is the election of
directors, the director whose successors shall not have been elected shall
continue in office until their successors shall have been duly elected and shall
have qualified.

SECTION 6. VOTING RIGHTS.

(a) Except as otherwise provided by law, only persons in whose names shares
entitled to vote stand on the stock records of the Corporation on the record
date for determining the stockholders entitled to vote at said meeting shall be
entitled to vote at such meeting. Shares standing in the names of two or more
persons shall be voted or represented in accordance with the determination of
the majority of such persons, or, if only one of such persons is present in
person or represented by proxy, such person shall have the right to vote such
shares and such shares shall be deemed to be represented for the purpose of
determining a quorum.

(b) Every person entitled to vote or execute consents shall have the right to do
so either in person or by an agent or agents authorized by a written proxy
executed by such person or his duly authorized agent, which proxy shall be filed
with the Secretary of the Corporation at or before the meeting at which it is to
be used. Said proxy so appointed need not be a stockholder. No proxy shall be
voted on after three years from its date unless the proxy provides for a longer
period.

(c) Without limiting the manner in which a stockholder may authorize another
person or persons to act for him as proxy pursuant to subsection (b) of this
Section, the following shall constitute a valid means by which a stockholder may
grant such authority:

(1) A stockholder may execute a writing authorizing another person or
persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing
by any reasonable means including, but not limited to, by facsimile
signature.

(2) A stockholder may authorize another person or persons to act for him
as proxy by transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the person
who will be the holder of the proxy to receive such transmission, provided
that any such telegram, cablegram or other means of electronic
transmission must either set forth or be submitted with information from
which it can be determined that the telegram, cablegram or other
electronic transmission was authorized by the stockholder. If it is
determined that such telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors,
such other persons making that determination shall specify the information
upon which they relied.

(d) Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to subsection (c) of this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile telecommunication or other reproduction shall
be a complete reproduction of the entire original writing or transmission.

SECTION 7. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.

(a) The Corporation shall, in advance of any meeting of stockholders, appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is

able to act at a meeting of stockholders, the person presiding at the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.

(b) The inspectors shall (i) ascertain the number of shares outstanding and the
voting power of each, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.

(c) The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting. No ballot, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a stockholder shall determine
otherwise.

(d) In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware General Corporation Law, ballots and the
regular books and records of the Corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time they make their
certification pursuant to subsection (b)(v) of this Section shall specify the
precise information considered by them including the person or persons from whom
they obtained the information, when the information was obtained, the means by
which the information was obtained and the basis for the inspectors’ belief that
such information is accurate and reliable.

(e) The provisions of this Section 7 shall not apply to any annual meeting of
stockholders held prior to the annual meeting of stockholders to be held in
1995.

SECTION 8. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least 10 days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held and
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where said meeting is to be held, and the list shall be
produced and kept at the time and place of meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

SECTION 9. STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, otherwise properly
brought before the meeting by or at the direction of the Board of Directors or
otherwise properly

brought before the meeting by a stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 9 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 9. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder’s notice to the
Secretary must be delivered to or mailed and received at the principal executive
offices of the Corporation, not less than 90 days nor more than 120 days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs. A stockholder’s
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting, (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the stockholder proposing such business, (iii) the class or series and number
of shares of capital stock of the Corporation which are owned beneficially or of
record by the stockholder, (iv) a description of all arrangements or
understandings between the stockholder and any other person or persons
(including their names) in connection with the proposal of such business by the
stockholder and any material interest of the stockholder in such business, and
(v) a representation that the stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.

Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at the annual meeting except in accordance with the procedures set
forth in this Section 9, provided, however, that nothing in this Section 9 shall
be deemed to preclude discussion by any stockholder of any business properly
brought before the annual meeting in accordance with said procedure.

The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 9, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.

SECTION 10. NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In
addition to any other applicable requirements, only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 10 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 10. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder’s notice to the Secretary must be delivered to or mailed and
received at the principal executive offices of the Corporation not less than 90
days nor more than 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not within 30 days before
or after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs. Such stockholder’s notice shall set forth (a)

as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by the person and (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice, (i) the name and
record address of the stockholder, (ii) the class or series and number of shares
of capital stock of the Corporation which are owned beneficially or of record by
the stockholder, (iii) a description of all arrangements or understandings
between the stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by the stockholder, (iv) a representation that such stockholder intends to
appear in person or by proxy at the meeting to nominate the persons named in
such notice and (v) any other information relating to the stockholder that would
be required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for the election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee being named as a nominee and to serve as a director if
elected. The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of the Corporation.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth herein. These provisions
shall not apply to nomination of any persons entitled to be separately elected
by holders of preferred stock.

The Chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.

ARTICLE III

DIRECTORS

SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation
shall be managed under the direction of its Board of Directors, which may
exercise all of the powers of the Corporation, except such as are by law or by
the Certificate of Incorporation or by these By-Laws expressly conferred upon or
reserved to the stockholders.

SECTION 2. NUMBER AND TERM OF OFFICE; REMOVAL. The number of directors of the
Corporation shall be fixed from time to time by these By-Laws but in no event
shall be less than three (3). Until these By-Laws are further amended, the
number of directors shall be twelve (12). 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 initial 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 these By-Laws 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 such alteration, amendment or repeal has been approved by either
the holders of all shares of stock entitled to vote thereon or by a vote of a
majority of the entire Board of Directors. The provisions of this Section 2
shall not apply to directors governed by Section 15 of this ARTICLE III.

SECTION 3. ELECTION OF DIRECTORS. At each meeting of the stockholders for the
election of directors, the directors to be elected at such meeting shall be
elected by a plurality of votes given at such election.

SECTION 4. VACANCIES. Any vacancy occurring in the Board of Directors for any
cause other than by reason of an increase in the number of directors may be
filled by a majority of the remaining members of the Board of Directors,
although such majority is less than a quorum, or by the stockholders. Any
vacancy occurring by reason of an increase in the number of directors may be
filled by action of a majority of the entire Board of Directors or by the
stockholders. A director elected by the Board of Directors to fill a vacancy
shall be elected to hold office until the expiration of the term for which he
was elected and until his successor shall have been elected and shall have
qualified. A director elected by the stockholders to fill a vacancy shall be
elected to hold office until the expiration of the term for which he was elected
and until his successor shall have been elected and shall have qualified. The
provisions of this Section 4 shall not apply to directors governed by Section 15
of this ARTICLE III.

SECTION 5. RESIGNATIONS. A director may resign at any time by giving written
notice to the Board of Directors or to the Secretary. Such resignation shall
take effect at the time specified therein and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.

SECTION 6. ANNUAL MEETINGS. The Board of Directors, as constituted following the
vote of stockholders at any meeting of the stockholders for the election of
directors, may hold its first meeting for the purpose of organization and the
transaction of business, if a quorum be present, immediately after such meeting
and at the same place, and notice of such meeting need not be given. Such first
meeting may be held at any other time and place specified in a notice given as
hereinafter provided for special meetings of the Board of Directors or in a
consent and waiver of notice thereof signed by all the directors.

SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such places and times as may be fixed from time to time
by resolution of the Board.

SECTION 8. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board or the President and
shall be called by the Secretary upon the written request of any three directors
and each special meeting shall be held at such place and time as shall be
specified in the notice thereof. At least twenty-four (24) hours’ notice of each
such special meeting shall be given to each director personally or sent to him
addressed to his residence or usual place

of business by telephone, telegram or facsimile transmission, or at least 120
hours’ notice of each such special meeting shall be given to each director by
letter sent to him addressed as aforesaid or on such shorter notice and by such
means as the person or persons calling such meeting may deem reasonably
necessary or appropriate in light of the circumstances. Any notice by letter or
telegram shall be deemed to be given when deposited in the United States mail so
addressed or when duly deposited at an appropriate office for transmission by
telegram, as the case may be. Such notice need not state the business to be
transacted at or the purpose or purposes of such special meeting. No notice of
any such special meeting of the Board of Directors need be given to any director
who attends in person or who, in writing executed and filed with the records of
the meeting, either before or after the holding thereof, waives such notice. No
notice need be given of an adjourned meeting of the Board of Directors.

SECTION 9. QUORUM AND MANNER OF ACTING. A majority of the total number of
directors, but in no event less than two directors, shall constitute a quorum
for the transaction of business at any annual, regular or special meeting of the
Board of Directors. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, the act of a majority of the directors
present at any meeting, at which a quorum is present, shall be the act of the
Board of Directors. In the absence of a quorum, a majority of the directors
present may adjourn the meeting from time to time until a quorum be had.

SECTION 10. CONSENT IN WRITING. Any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board or of such committee, as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or such committee.

SECTION 11. COMMITTEES.

(a) Executive Committee. The Board of Directors may, by resolution passed by a
majority of a quorum of the Board, appoint an Executive Committee of not less
than three members, each of whom shall be a director. The Executive Committee,
to the extent permitted by law, shall have and may exercise when the Board of
Directors is not in session all powers of the Board in the management of the
business and affairs of the Corporation, including, without limitation, the
power and authority to declare a dividend or to authorize the issuance of stock,
except such Committee shall not have the power or authority (i) to approve,
adopt, or recommend to stockholders any action or matter required by the
Delaware General Corporation Law to be submitted for stockholder approval; or
(ii) to adopt, amend, or repeal any By-Law of the Corporation.

(b) Other Committees. The Board of Directors may, by resolution passed by a
majority of a quorum of the Board, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committee, but in no
event shall any such committee have the powers denied to the Executive Committee
in these By-Laws.

(c) Term. The members of all committees of the Board of Directors shall serve a
term coexistent with that of the Board of Directors which shall have appointed
such committee. The Board, subject to the provisions of subsections (a) or (b)
of this Section 11, may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee; provided, that no
committee shall consist of less than one member. The membership of a committee
member shall terminate on the date of his death or voluntary resignation, but
the Board may at any time for any reason remove any individual

committee member and the Board may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.

(d) Meetings. Unless the Board of Directors shall otherwise provide, regular
meetings of the Executive Committee or any other committee appointed pursuant to
this Section 11 shall be held at such times and places as are determined by the
Board of Directors, or by any such committee, and when notice thereof has been
given to each member of such committee, no further notice of such regular
meetings need be given thereafter; special meetings of any such committee may be
held at the principal office of the Corporation required to be maintained
pursuant to Section 2 of ARTICLE I hereof; or at any place which has been
designated from time to time by resolution of such committee or by written
consent of all members thereof, and may be called by any director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time after the meeting
and will be waived by any director by attendance thereat. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.

SECTION 12. TELEPHONE MEETINGS. The Board of Directors or any committee thereof
may participate in a meeting by means of a conference telephone or similar
communications equipment if all members of the Board or of such committee, as
the case may be, participating in the meeting can hear each other at the same
time. Participation in a meeting by these means shall constitute presence in
person at the meeting.

SECTION 13. COMPENSATION. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors and/or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

SECTION 14. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or committee, and the Board of Directors or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.

SECTION 15. DIRECTORS ELECTED BY SPECIAL CLASS OR SERIES. 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 referred to in Section 2 of this ARTICLE III. Any directors so
elected shall be subject to removal in such manner as may be provided by law or
by the Certificate of Incorporation of this Corporation. The provisions of
Sections 2 and 4 of this ARTICLE III do not apply to directors governed by this
Section 15.

ARTICLE IV

OFFICERS

SECTION 1. DESIGNATION OF OFFICERS. The officers of the Corporation, who shall
be chosen by the Board of Directors at its first meeting after each annual
meeting of stockholders, shall be a Chairman of the Board, a President, one or
more Vice Presidents, a Treasurer, a Secretary and a Controller. The Board of
Directors from time to time may choose such other officers as it shall deem
appropriate. Any one person may hold any number of offices of the Corporation at
any one time unless specifically prohibited therefrom by law. The Chairman of
the Board and the President shall be chosen from among the directors; the other
officers need not be directors.

SECTION 2. TERM OF OFFICE; RESIGNATION; REMOVAL. The term of office of each
officer shall be until the first meeting of the Board of Directors following the
next annual meeting of stockholders and until his successor is elected and shall
have qualified, or until his death, resignation or removal, whichever is sooner.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Secretary. Such resignation shall take effect at the time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective. Any officer may be
removed at any time either with or without cause by the Board of Directors.
Notwithstanding anything in these By-Laws to the contrary, for a period of one
year following January 12, 1999, the requisite vote or approval of the Board of
Directors necessary to terminate or replace, or fill a vacancy in respect of,
Charles W. McCall as Chairman of the Board or Mark A. Pulido as President and
Chief Executive Officer shall be no less than seventy-five percent (75%) of the
members of the Board of Directors.

SECTION 3. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause, may be filled for the unexpired
portion of the term by the Board of Directors.

SECTION 4. AUTHORITY OF OFFICERS. Subject to the power of the Board of Directors
in its discretion to change and redefine the duties of the officers of the
Corporation by resolution in such manner as it may from time to time determine,
the duties of the officers of the Corporation shall be as follows:

(a) Chairman of the Board. The Chairman of the Board shall preside at meetings
of the stockholders and the Board of Directors. Subject to the direction of the
Board of Directors, he shall generally manage the affairs of the Board and
perform such other duties as are assigned by the Board.

(b) President. The President shall be the Chief Executive Officer of the
Corporation, and shall execute all the powers and perform all the duties usual
to such office. Subject to the direction of the Board of Directors, he shall
have the responsibility for the general management of the affairs of the
Corporation. The President shall perform such other duties as may be prescribed
or assigned to him from time to time by the Board of Directors.

(c) Other Officers. The other officers of the Corporation shall have such powers
and shall perform such duties as generally pertain to their respective offices,
as well as such powers and duties as the Board of Directors, the Executive
Committee or the Chief Executive Officer may prescribe.

SECTION 5. DIVISIONAL TITLES. Any one of the Chief Executive Officer, President,
or Vice President Human Resources and Administration (each one an "Appointing
Person"), may from time to time confer upon any employee of a division of the
Corporation the title of President, Vice President, Treasurer or Secretary of
such division or any other divisional title or titles deemed appropriate. Any
such titles so conferred may be discontinued and withdrawn at any time by any
one Appointing Person. Any employee of a division designated by such a
divisional title shall have the powers and duties with respect to such division
as shall be prescribed by the Appointing Person. The conferring, withdrawal or
discontinuance of divisional titles shall be in writing and shall be filed with
the Secretary of the Corporation.

SECTION 6. SALARIES. The salaries and other compensation of the principal
officers of the Corporation shall be fixed from time to time by the Board of
Directors.

ARTICLE V

EXECUTION OF CORPORATE INSTRUMENTS
AND VOTING OF SECURITIES OWNED BY THE CORPORATION

SECTION 1. EXECUTION OF INSTRUMENTS. The Board of Directors may in its
discretion determine the method and designate the signatory officer or officers
or other person or persons, to execute any corporate instrument or document, or
to sign the corporate name without limitation, except where otherwise provided
by law, and such execution or signature shall be binding upon the Corporation.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the Corporation or in special accounts of the Corporation, shall be
signed by such person or persons as the Treasurer or such other person
designated by the Board of Directors for that purpose shall authorize so to do.

SECTION 2. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other
securities of other corporations and business entities owned or held by the
Corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person authorized
to do so by resolution of the Board of Directors.

ARTICLE VI

SHARES OF STOCK AND OTHER SECURITIES

SECTION 1. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of
stock of the Corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by, the Chairman of the Board (if there be such an officer
appointed), or by the President or any Vice President and by the Treasurer or
Assistant Treasurer or the Secretary or Assistant Secretary, certifying the
number of shares owned by him in the Corporation. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.

SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
indemnify the Corporation in such manner as it shall require and/or to give the
Corporation a surety bond in such form and amount as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.

SECTION 3. TRANSFERS. Transfers of record of shares of stock of the Corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a certificate or
certificates for a like number of shares, properly endorsed.

SECTION 4. FIXING RECORD DATES. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change,

conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed; (3) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.

SECTION 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.

SECTION 6. REGULATIONS. The Board of Directors may make such rules and
regulations as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of the stock and other securities of the
Corporation, and may appoint transfer agents and registrars of any class of
stock or other securities of the Corporation.

SECTION 7. OTHER SECURITIES OF THE CORPORATION. All bonds, debentures and other
corporate securities of the Corporation, other than stock certificates, may be
signed by the Chairman of the Board (if there be such an officer appointed), or
the President or any Vice President or such other person as may be authorized by
the Board of Directors and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided,
however, that where any such bond, debenture or other corporate security shall
be authenticated by the manual signature of a trustee under an indenture
pursuant to which such bond, debenture or other corporate security shall be
issued, the signature of the persons signing and attesting the corporate seal on
such bond, debenture or other corporate security may be the imprinted facsimile
of the signatures of such persons. Interest coupons appertaining to any such
bond, debenture or other corporate security, authenticated by a trustee as
aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the
Corporation, or such other person as may be authorized by the Board of
Directors, or bear imprinted thereon the facsimile signature of such person. In
case any officer who shall have signed or attested any bond, debenture or other
corporate security or whose facsimile signature shall appear thereon shall have
ceased to be such officer before the bond, debenture or other corporate security
so signed or attested shall have been delivered, such bond, debenture or other
corporate security nevertheless may be adopted by the Corporation and issued and
delivered as though the person who signed the same or whose facsimile signature
shall have been used thereon had not ceased to be such officer of the
Corporation.

ARTICLE VII

CORPORATE SEAL

The corporate seal shall consist of a die bearing the name of the
Corporation and the state and date of its incorporation. Said seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.

ARTICLE VIII

INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS

SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE
BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this ARTICLE
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director or officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. The right to
indemnification conferred in this ARTICLE VIII shall be a contract right.

SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION. Subject to Section 3 of this ARTICLE VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys’ fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.

SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under this
ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1 or Section 2 of this
ARTICLE VIII, as the case may be. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys’
fees) actually and reasonably incurred by him in connection therewith, without
the necessity of authorization in the specific case.

SECTION 4. GOOD FAITH DEFINED. For purposes of any determination under Section 3
of this ARTICLE VIII, a person shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal action or proceeding, to
have had no reasonable cause to believe his conduct was unlawful, if his action
is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the officers of the Corporation
or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this Section 4 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Sections 1 or 2 of this ARTICLE VIII, as the case may be.

SECTION 5. INDEMNIFICATION BY A COURT. Notwithstanding any contrary
determination in the specific case under Section 3 of this ARTICLE VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this ARTICLE VIII. The basis of such indemnification by a court shall
be a determination by such court that indemnification of the director or officer
is proper in the circumstances because he has met the applicable standards of
conduct set forth in Sections 1 or 2 of this ARTICLE VIII, as the case may be.
Neither a contrary determination in the specific case under Section 3 of this
ARTICLE VIII nor the absence of any determination thereunder shall be a defense
to such application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.

SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses incurred by a director or
officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this ARTICLE VIII.

SECTION 7. NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by or granted pursuant to
this ARTICLE VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any By-Law, agreement, contract, vote of stockholders or disinterested directors
or pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Sections 1 and 2 of
this ARTICLE VIII shall be made to the fullest extent permitted by law. The
provisions of this ARTICLE VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
ARTICLE VIII but whom the Corporation has the power or obligation to indemnify
under the provisions of the General Corporation Law of the State of Delaware, or
otherwise.

SECTION 8. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Corporation, or
is or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power or the obligation to indemnify him against such liability
under the provisions of this ARTICLE VIII.

SECTION 9. CERTAIN DEFINITIONS. For purposes of this ARTICLE VIII, references to
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that any
person who is or was a director or officer of such constituent corporation, or
is or was a director or officer of such constituent corporation serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this ARTICLE VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this ARTICLE VIII, references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this ARTICLE
VIII.

SECTION 10. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this ARTICLE VIII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.

SECTION 11. LIMITATION ON INDEMNIFICATION. Notwithstanding anything contained in
this ARTICLE VIII to the contrary, except for proceedings to enforce rights to
indemnification (which shall be governed by Section 5 hereof), the Corporation
shall not be obligated to indemnify any director or officer in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding (or
part thereof) was authorized or consented to by the Board of Directors of the
Corporation.

SECTION 12. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation may, to the
extent authorized from time to time by the Board of Directors, provide rights to
indemnification and to the advancement of expenses to employees and agents of
the Corporation similar to those conferred in this ARTICLE VIII to directors and
officers of the Corporation.

SECTION 13. EFFECT OF AMENDMENT. Any amendment, repeal or modification of this
ARTICLE VIII shall not (a) adversely affect any right or protection of any
director or officer existing at the time of such amendment, repeal or
modification, or (b) apply to the indemnification of any such person for
liability, expense, or loss stemming from actions or omissions occurring prior
to such amendment, repeal, or modification.

SECTION 14. AUTHORITY TO ENTER INTO INDEMNIFICATION AGREEMENTS. The Corporation
may enter into indemnification agreements with the directors and officers of the
Corporation, including, without limitation, any indemnification agreement in
substantially the form set forth in Exhibit 1 attached to these By-Laws.

ARTICLE IX

NOTICES

Whenever, under any provisions of these By-Laws, notice is required to be given
to any stockholder, the same shall be given in writing, timely and duly
deposited in the United States Mail, postage prepaid, and addressed to his last
known post office address as shown by the stock record of the Corporation or its
transfer agent. Any notice required to be given to any director may be given by
any of the methods stated in Section 8 of ARTICLE III hereof, except that such
notice other than one which is delivered personally, shall be sent to such
address or (in the case of facsimile telecommunication) facsimile telephone
number as such director shall have disclosed in writing to the Secretary of the
Corporation, or, in the absence of such filing, to the last known post office
address of such director. If no address of a stockholder or director be known,
such notice may be sent to the office of the Corporation required to be
maintained pursuant to Section 2 of ARTICLE I hereof. An affidavit of mailing,
executed by a duly authorized and competent employee of the Corporation or its
transfer agent appointed with respect to the class of stock affected, specifying
the name and address or the names and addresses of the stockholder or
stockholders, director or directors, to whom any such notice or notices was or
were given, and the time and method of giving the same, shall be conclusive
evidence of the statements therein contained. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing and
all notices given by telegram or other means of electronic transmission shall be
deemed to have been given as at the sending time recorded by the telegraph
company or other electronic transmission equipment operator transmitting the
same. It shall not be necessary that the same method of giving be employed in
respect of all directors, but one permissible method may be employed in respect
of any one or more, and any other permissible method or methods may be employed
in respect of any other or others. The period or limitation of time within which
any stockholder may exercise any option or right, or enjoy any privilege or
benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be

affected or extended in any manner by the failure of such a stockholder or such
director to receive such notice. Whenever any notice is required to be given
under the provisions of this statutes or of the Certificate of Incorporation, or
of these By-Laws, a waiver thereof in writing signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Whenever notice is required to be given, under any
provision of law or of the Certificate of Incorporation or By-Laws of the
Corporation, to any person with whom communication is unlawful, the giving of
such notice to such person shall not be required and there shall be no duty to
apply to any governmental authority or agency for a license or permit to give
such notice to such person. Any action or meeting which shall be taken or held
without notice to any such person with whom communication is unlawful shall have
the same force and effect as if such notice had been duly given. In the event
that the action taken by the Corporation is such as to require the filing of a
certificate under any provision of the Delaware General Corporation Law, the
certificate shall state, if such is the fact and if notice is required, that
notice was given to all persons entitled to receive notice except such persons
with whom communication is unlawful.

ARTICLE X

AMENDMENTS

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 ARTICLE V of the Certificate of Incorporation of the
Corporation 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.

CERTIFICATE OF SECRETARY

The undersigned, Senior Vice President, General Counsel and Secretary of
McKesson HBOC, Inc., a Delaware corporation, hereby certifies that the foregoing
is a full, true and correct copy of the By-Laws of said Corporation, with all
amendments to date of this Certificate.

WITNESS the signature of the undersigned and the seal of the Corporation this
31st day of March, 2001.

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

EXHIBIT 1

INDEMNIFICATION AGREEMENT

AGREEMENT, effective as of ______, 19__, between McKesson HBOC, Inc., a Delaware
corporation (the "Company"), and ______________ (the "Indemnitee").

WHEREAS, it is essential to the Company to retain and attract as directors and
officers the most capable persons available.

WHEREAS, Indemnitee is a director/officer of the Company;

WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors of public companies
in today’s environment;

WHEREAS, the Certificate of Incorporation and the By-laws of the Company require
the Company to indemnify and advance expenses to its directors to the fullest
extent permitted by law and the Indemnitee has been serving and continues to
serve as a director or officer of the Company in part in reliance on such
Certificate of Incorporation and By-laws;

WHEREAS, in recognition of Indemnitee’s need for substantial protection against
personal liability in order to enhance Indemnitee’s continued service to the
Company in an effective manner and Indemnitee’s reliance on the aforesaid
Certificate of Incorporation and By-laws, and in part to provide Indemnitee with
specific contractual assurance that the protection promised by such Certificate
of Incorporation and By-laws will be available to Indemnitee (regardless of,
among other things, any amendment to or revocation of such Certificate of
Incorporation and By-laws or any change in the composition of the Company’s
Board of Directors or acquisition transaction relating to the Company), and in
order to induce Indemnitee to continue to provide services to the Company as a
director or officer thereof, the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to Indemnitee to the
fullest extent (whether partial or complete) permitted by law and as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company’s directors’ and officers’ liability
insurance policies.

NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to
serve the Company directly or, at its request, with another enterprise, and
intending to be legally bound hereby, the parties hereto agree as follows:

1. CERTAIN DEFINITIONS.

(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company’s then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company’s stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election

was previously so approved, cease for any reason to constitute a majority
thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the Company’s assets.

(b) Expense: include attorneys’ fees and all other costs, expenses and
obligations paid or incurred in connection with investigating, defending, being
a witness in or participating in (including on appeal), or preparing to defend,
be a witness in or participate in any Proceeding relating to any Indemnifiable
Event.

(c) Indemnifiable Event: any event or occurrence that takes place either
prior to or after the execution of this Agreement, related to the fact that
Indemnitee is or was a director or an officer of the Company, or while a
director or officer is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.

(d) Potential Change in Control: shall be deemed to have occurred if (i)
the Company enters into an agreement or arrangement, the consummation of which
would result in the occurrence of Change in Control; (ii) any person (including
the Company) publicly announces an intention to take or to consider taking
actions which if consummated would constitute Change in Control; (iii) any
person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
who is or becomes the beneficial owner, directly or indirectly, of securities of
the Company representing 10% or more of the combined voting power of the
Company’s then outstanding Voting Securities, increases his beneficial ownership
of such securities by 5% or more over the percentage so owned by such person on
the date hereof; or (iv) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.

(e) Proceeding: any threatened, pending or completed action, suit or
proceeding, or any inquiry, hearing or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit or proceeding, whether civil, criminal,
administrative, investigative or other.

(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company’s Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Proceeding with respect to
which Indemnitee is seeking indemnification.

(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.

2. AGREEMENT TO INDEMNIFY.

(a) In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Proceeding by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law, as soon as practicable but in any event no later than
thirty days after written demand is presented to the Company, against any and
all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Proceeding and any federal, state, local or
foreign taxes imposed on the Indemnitee as a result of the actual or deemed
receipt of any payments under this Agreement (including the creation of the
Trust). Notwithstanding anything in this Agreement to the contrary and except as
provided in Section 5, prior to a Change in Control Indemnitee shall not be
entitled to indemnification pursuant to this Agreement in connection with any
Proceeding initiated by Indemnitee against the Company or any director or
officer of the Company unless the Company has joined in or consented to the
initiation of such Proceeding. If so requested by Indemnitee, the Company shall
advance (within ten business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").

(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). Indemnitee’s obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon. If there has not been a Change in Control the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company’s Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of California or Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.

3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company’s Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or under applicable law or
the Company’s Certificate of Incorporation

or By-Laws now or hereafter in effect relating to indemnification for
Indemnifiable Events, the Company shall seek legal advice only from special,
independent counsel selected by Indemnitee and approved by the Company (which
approval shall not be unreasonably withheld), and who has not otherwise
performed services for the Company or the Indemnitee (other than in connection
with such matters) within the last five years. Such independent counsel shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee’s rights
under this Agreement. Such counsel, among other things, shall render its written
opinion to the Company and Indemnitee as to whether and to what extent the
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to pay the reasonable fees of the special, independent counsel
referred to above and to indemnify fully such counsel against any and all
expenses (including attorneys’ fees), claims, liabilities and damages arising
out of or relating to this Agreement or the engagement of special, independent
counsel pursuant hereto.

4. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control,
the Company shall, upon written request by Indemnitee, create a Trust for the
benefit of the Indemnitee and from time to time upon written request of
Indemnitee shall fund such Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for and defending any Proceeding
relating to an Indemnifiable event, and any and all judgments, fines, penalties
and settlement amounts of any and all Proceedings relating to an Indemnifiable
Event from time to time actually paid or claimed, reasonably anticipated or
proposed to be paid. The amount or amounts to be deposited in the Trust pursuant
to the foregoing funding obligation shall be determined by the Reviewing Party,
in any case in which the special, independent counsel referred to above is
involved. The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded, without the
written consent of the Indemnitee, (ii) the Trustee shall advance, within ten
business days of a request by the Indemnitee, any and all Expenses to the
Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the
circumstances under which the Indemnitee would be required to reimburse the
Company under Section 2(b) of this Agreement), (iii) the Trust shall continue to
be funded by the Company in accordance with the funding obligation set forth
above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for
which the Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in such Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that the Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
the Indemnitee. Nothing in this Section 4 shall relieve the Company of any of
its obligations under this Agreement. All income earned on the assets held in
the Trust shall be reported as income by the Company for federal, state, local
and foreign tax purposes.

5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING THIS AGREEMENT. The
Company shall indemnify Indemnitee against any and all expenses (including
attorneys’ fees), and, if requested by Indemnitee, shall (within ten business
days of such request) advance such expenses to Indemnitee, which are incurred by
Indemnitee in connection with any claim asserted against or action brought by
Indemnitee for (i) indemnification or advance payment of Expenses by the Company
under this Agreement or any other agreement or under applicable law or the
Company’s Certificate of Incorporation or By-laws now or hereafter in effect
relating to indemnification for Indemnifiable Events and/or (ii) recovery under
any directors’ and officers’ liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.

6. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a
Proceeding but not, however, for all of the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Proceedings relating in whole or in part to
an Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.

7. DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF AND PRESUMPTIONS. It shall be
a defense to any action brought by the Indemnitee against the Company to enforce
this Agreement (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the Company) that the Indemnitee has
not met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the Company to indemnify the Indemnitee for the
amount claimed. In connection with any determination by the Reviewing Party or
otherwise as to whether the Indemnitee is entitled to be indemnified hereunder,
the burden of proving such a defense shall be on the Company. Neither the
failure of the Company (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action by the Indemnitee that indemnification of the
claimant is proper under the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the Indemnitee
had not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Indemnitee has not met the applicable
standard of conduct. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.

8. NON-EXCLUSIVITY. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company’s Certificate
of Incorporation or By-laws or the Delaware General Corporation Law or
otherwise. To the extent that a change in the Delaware General Corporation Law
(whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company’s Certificate of
Incorporation and By-laws and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change.

9. LIABILITY INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors’ and officers’ liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.

10. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of
action shall be asserted by or on behalf of the Company or any affiliate of the
Company against Indemnitee, Indemnitee’s spouse, heirs, executors or personal or
legal representatives after the expiration of two years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances, and any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided,

however, that if any shorter period of limitations is otherwise applicable to
any such cause of action such shorter period shall govern.

11. AMENDMENT OF THIS AGREEMENT. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.

12. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.

13. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.

14. SETTLEMENT OF CLAIMS. The Company shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any action
or claim effected without the Company’s written consent. The Company shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Indemnitee without Indemnitee’s written consent. Neither the
Company nor the Indemnitee will unreasonably withhold their consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement with regard to any judicial award if the Company was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.

15. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to the
Indemnitee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director or officer of
the Company or of any other enterprise at the Company’s request.

16. SEVERABILITY. The provisions of this Agreement shall be severable in the
event that any of the provisions hereof (including any provision within a single
section, paragraph or sentence) is held by a court of competent jurisdiction to
be invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.

17. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such State without giving effect to the
principles of conflicts of laws.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the _______________ day of __________________, 19___.

McKESSON HBOC, INC.

By: ________________________________
Name:
Title:

________________________________
[Indemnitee]

EXHIBIT 10.23

MCKESSON HBOC, INC.
FIRST AMENDMENT
TO CREDIT AGREEMENT

(364 DAY FACILITY)

This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of October 10, 2000 and entered into by and among McKesson HBOC, Inc.,
a Delaware corporation (the "COMPANY"), the financial institutions listed on the
signature pages hereof (the "BANKS"), The Chase Manhattan Bank, as a
documentation agent for the Banks, First Union National Bank, as a documentation
agent for the Banks, Bank One, N.A., as a documentation agent for the Banks,
Morgan Guaranty Trust Company, as a documentation agent for the Banks and Bank
of America, N.A. as administrative agent for the Banks (the "ADMINISTRATIVE
AGENT"), and is made with reference to that certain Credit Agreement dated as of
October 22, 1999 (the "CREDIT AGREEMENT"), by and among the parties thereto.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.

RECITALS

WHEREAS, the Company and the Banks desire to amend the Credit
Agreement (a) to extend the Revolving Facility Termination Date for an
additional 364 day period, (b) to provide for a term loan option, and (c) to
modify certain other provisions;

NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:

SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT

1.1 AMENDMENTS TO ARTICLE I: DEFINITIONS

A. Section 1.1 of the Credit Agreement is hereby amended by
adding thereto the following definitions, which shall be inserted in proper
alphabetical order:

"Term Loans" has the meaning specified in Section 2.16.

"Term Loan Maturity Date" means October 8, 2002.

B. Section 1.1 of the Credit Agreement is hereby further amended
by deleting in the definition of the term "Applicable Margin", the paragraph
below the table which begins "The margin set forth...." and substituting in
place of such paragraph the following:

"The margin set forth above for any Applicable Rating
Level on a given date shall be increased by fifteen (15.0) basis points
if, on such date, either (a) the sum of (x) the Total Utilization of
Facility A Commitments (as such term is defined in the November 1998
Credit Agreement) existing on such date and (y) the principal amount of
Loans (as defined herein) made pursuant to Section 2.1 outstanding on
such date, exceeds 30% of the sum of (A) the aggregate of the Facility A
Commitments (as such term is defined in the November 1998 Credit
Agreement) existing on such date and (B) the aggregate of the
Commitments (as defined herein) existing on such date, or (b) any Term
Loans are outstanding."

C. Section 1.1 of the Credit Agreement is hereby further amended
by adding, in the definition of "Commitment," the following phrase immediately
before the period at the end thereof: "provided that if the Term Loans are made,
"Commitments" means the aggregate principal amount of Term Loans outstanding on
such date".

D. Section 1.1 of the Credit Agreement is hereby further amended
by deleting, in the definition of "Interest Period," clause (3) in its entirety
and substituting in lieu thereof the following:

"(3) no Interest Period for any Loan shall extend beyond
(i) in the case of Loans made pursuant to Section 2.1, until a Notice of
Borrowing has been received by the Agent in accordance with subsection
2.16(b), the Revolving Facility Termination Date; provided that once
such Notice of Borrowing has been received by the Agent in accordance
with subsection 2.16(b), the limitation in subpart (ii) of this
paragraph shall apply to Loans made pursuant to Section 2.1 and (ii) the
Term Loan Maturity Date, in the case of the Term Loans."

E. Section 1.1 of the Credit Agreement is hereby further amended
by deleting, in the definition of "Revolving Facility Termination Date," the
date "October 19, 2000" and substituting in lieu thereof the date "October 9,
2001".

1.2 AMENDMENT TO ARTICLE II: THE CREDITS

A. Section 2.1 of the Credit Agreement is hereby amended by
deleting the reference to "$850,000,000" and substituting in lieu thereof the
amount "$825,000,000."

B. Section 2.7(a) of the Credit Agreement is hereby amended by
adding the phrase "Except as provided in Section 2.16," to the beginning of the
sentence.

C. Section 2.9(a) of the Credit Agreement is hereby amended by
deleting the date "September 17, 1999" and substituting in lieu thereof the date
"September 8, 2000".

D. Section 2.9(b) of the Credit Agreement is hereby amended by
deleting in the first sentence of the second paragraph thereof the portion of
such sentence preceding the semicolon and substituting in lieu thereof the
following:

"Such facility fee shall accrue from the Closing Date to
the Revolving Facility Termination Date or, if the Term Loans are made,
the Term Loan Maturity Date, and shall be due and payable quarterly in
arrears on each date specified above following the end of each calendar
quarter through such termination date or maturity date, as applicable,
with the final payment to be made on such termination date or maturity
date, as applicable"

E. Article II of the Credit Agreement is hereby further amended
by adding a new Section 2.16 at the end thereof to read as follows:

"2.16 Conversion of Loans to Term Loans.

(a) Each Bank severally agrees on the terms and conditions set
forth in this Agreement to advance to the Company (upon request of the Company
pursuant to this Agreement) on the Revolving Facility Termination Date an amount
up to the sum of (i) the outstanding principal amount of the Loans made by such
Bank pursuant to Section 2.1 and outstanding as of the opening of business on
the Revolving Facility Termination Date plus (ii) the amount available to be
borrowed from such Bank as of the opening of business on the Revolving Facility
Termination Date. The aggregate of such advances is collectively called the
"Term Loans" and shall be made by each Bank in accordance with its Pro Rata
Share. The Term Loans will mature and are due and payable on the Term Loan
Maturity Date. Amounts borrowed under this Section 2.16 and subsequently repaid
or prepaid may not be reborrowed.

(b) The Term Loans shall be made upon the irrevocable written
notice (including notice via facsimile confirmed immediately by a telephone
call) of the Company in the form of a Notice of Borrowing (which notice must be
received by the Agent not later than 12:00 noon (San Francisco time) not less
than three Business Days prior to the Revolving Facility Termination Date),
specifying: (A) the amount of the Term Loans which shall be in a principal
amount not more than the sum of (i) the aggregate principal amount of the Loans
which will be outstanding as of the opening of business on the Revolving
Facility Termination Date, plus (ii) the amount available to be borrowed from
the Banks as of the opening of business on the Revolving Facility Termination
Date; (B) whether the Term Loans shall be comprised of Base Rate Loans or
Offshore Rate Loans; and (C) the Interest Period applicable to any Offshore Rate
Loans included in such notice.

(c) The proceeds of the Term Loans will first be used to pay the
principal amount of the Loans made pursuant to Section 2.1 which are outstanding
at the time the Term Loans are made and then in accordance with Sections 6.9 and
7.3."

1.3 AMENDMENT TO ARTICLE V: REPRESENTATION AND WARRANTIES

A. Article V of the Credit Agreement is hereby amended by
deleting Section 5.12, entitled "Year 2000 Compliance", in its entirety.

1.4 SUBSTITUTION OF SCHEDULE

A. Schedule 2.1 to the Credit Agreement is hereby amended by
deleting said Schedule 2.1 in its entirety and substituting in place thereof a
new Schedule 2.1 in the form of Annex I to this Amendment.

SECTION 2. CONDITIONS TO EFFECTIVENESS

This Amendment shall become effective upon receipt by the
Administrative Agent of all of the following, in form and substance satisfactory
to the Administrative Agent and each Bank (the date of satisfaction of such
condition being referred to herein as the "FIRST AMENDMENT EFFECTIVE DATE"):

A. Amendment. This Amendment executed by each party hereto;

B. Resolutions; Incumbency.

(i) Copies of the resolutions of the board of directors of
the Company authorizing the transactions contemplated hereby, certified
as of the First Amendment Effective Date by the Secretary or an
Assistant Secretary of the Company; and

(ii) A certificate of the Secretary or Assistant Secretary
of the Company, certifying the names and true signatures of the officers
of the Company authorized to execute, deliver and perform, as applicable,
this Amendment, and all other Loan Documents to be delivered by it
hereunder;

C. Legal Opinion. An opinion of Ivan D. Meyerson, Senior Vice
President, General Counsel and Secretary of the Company, addressed to the
Administrative Agent and the Banks, substantially in the form of Exhibit A;

D. Payment of Fees. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the First Amendment Effective Date, together with Attorney Costs of Bank of
America to the extent invoiced prior to or on the First Amendment Effective
Date, including any such costs, fees and expenses arising under or referenced in
Sections 2.9 and 10.4 of the Credit Agreement; provided that, notwithstanding
the above, such payment by the Company shall include all accrued and unpaid
facility fees through the First Amendment Effective Date;

E. Company Certificate. A certificate signed by a Responsible
Officer of the Company, dated as of the First Amendment Effective Date, stating
that:

(i) the representations and warranties contained in Section 3
hereof and in Article V of the Credit Agreement are true and correct on
and as of such date, as though made on and as of such date;

(ii) no Default or Event of Default exists;

(iii) there has occurred since March 31, 2000, no event or
circumstance that has resulted or could reasonably be expected to result
in a Material Adverse Effect.

SECTION 3. COMPANY’S REPRESENTATIONS AND WARRANTIES

In order to induce the Banks to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, the Company represents
and warrants to each Bank that the following statements are true, correct and
complete:

A. DUE INCORPORATION, VALID EXISTENCE AND GOOD STANDING;
CORPORATE POWER AND AUTHORITY. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
The Company has all requisite corporate power and authority to enter into this
Amendment and to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as amended by this Amendment (the
"AMENDED AGREEMENT").

B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of the Company.

C. NO CONFLICT. The execution and delivery by the Company of this
Amendment and the performance by the Company of the Amended Agreement do not and
will not (i) violate any provision of any law or any governmental rule or
regulation applicable to the Company or any of its Subsidiaries, the Certificate
or Articles of Incorporation or Bylaws of the Company or any of its Subsidiaries
or any order, judgment or decree of any court or other agency of government
binding on the Company or any of its Subsidiaries (ii) conflict with, result in
a breach of or constitute (with due notice or lapse of time or both) a default
under any Contractual Obligation of the Company or any of its Subsidiaries,
(iii) result in or require the creation or imposition of any Lien upon any of
the properties or assets of the Company or any of its Subsidiaries (other than
Liens created under any of the Loan Documents in favor of Administrative Agent
on behalf of Banks), or (iv) require any approval of stockholders or any
approval or consent of any Person under any Contractual Obligation of the
Company or any of its Subsidiaries.

D. GOVERNMENTAL CONSENTS. The execution and delivery by the
Company of this Amendment and the performance by the Company of the Amended
Agreement do not and will not require any registration with; consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.

E. BINDING OBLIGATION. This Amendment has been duly executed and
delivered by the Company and this Amendment and the Amended Agreement are the
legally valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors’ rights generally or by equitable principles relating to
enforceability.

F. ABSENCE OF DEFAULT. No event has occurred and is continuing or
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Default.

SECTION 4. MISCELLANEOUS

A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS.

(i) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the "Credit
Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement shall mean and be a reference to the Amended
Agreement.

(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force
and effect and are hereby ratified and confirmed.

(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Administrative Agent or any Bank under, the Credit
Agreement or any of the other Loan Documents.

B. FEES AND EXPENSES. The Company acknowledges that all costs,
fees and expenses as described in Section 10.4 of the Credit Agreement
incurred by the Administrative Agent and its counsel with respect to
this Amendment and the documents and transactions contemplated hereby
shall be for the account of the Company.

C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given
any substantive effect.

D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA (INCLUDING WITHOUT LIMITATION SECTION 1646.5 OF THE CIVIL
CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.

E. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.

MCKESSON HBOC, INC.

By: _________________________________
Name: William R. Graber
Title: Senior Vice President and Chief Financial
Officer

By: _________________________________
Name: Nicholas A. Loiacono
Title: Vice President, Finance and Treasurer

BANK OF AMERICA, N.A., as Administrative Agent

By: _________________________________
Name: Jonathan H. Hudson
Title: Associate

BANK OF AMERICA, N.A., as a Bank

By: _________________________________
Name: Jonathan H. Hudson
Title: Associate

MORGAN GUARANTY TRUST COMPANY, as a
documentation agent and as a Bank

By: _________________________________
Name: Robert Bottamedi
Title: Vice President

THE CHASE MANHATTAN BANK, as
documentation agent and as a Bank

By: _________________________________
Name: William P. Rindfuss
Title: Vice President

BANK ONE, NA, as documentation agent and as a Bank

By: _________________________________
Name: Joseph Perdenza
Title: Assistant Vice President

FIRST UNION NATIONAL BANK, as documentation
agent and as a Bank

By: _________________________________
Name: Joyce L. Barry
Title: Senior Vice President & Managing Director

MELLON BANK, N.A.

By: _________________________________
Name: Lawrence C. Ivey
Title: First Vice President

TORONTO DOMINION (TEXAS), INC.

By: _________________________________
Name: Alva J. Jones
Title: Vice President

WACHOVIA BANK, N.A.

By: _________________________________
Name: Jillian Richardson
Title: Assistant Vice President

WELLS FARGO BANK, N.A.

By: _________________________________
Name: Catherine M. Wallace
Title: Vice President

By: _________________________________
Name: J. Gregory Seibly
Title: Senior Vice President

THE BANK OF NEW YORK

By: _________________________________
Name: Rebecca K. Levine
Title: Vice President

U.S. BANK NATIONAL ASSOCIATION

By: _________________________________
Name: Aaron J. Gordon
Title: Vice President

THE BANK OF NOVA SCOTIA

By: _________________________________
Name: R. P. Reynolds
Title: Director

PNC BANK, NATIONAL ASSOCIATION

By: _________________________________
Name: Douglas S. King
Title: Vice President

ALLFIRST BANK

By: _________________________________
Name: Jennifer G. Erickson
Title: Vice President

FIFTH THIRD BANK

By: _________________________________
Name: Megan S. Heisel
Title: Corporate Banking Officer

EXHIBIT 10.26

THIRD AMENDMENT
AND SECOND WAIVER
TO
RECEIVABLES PURCHASE AGREEMENT

THIS THIRD AMENDMENT AND SECOND WAIVER TO RECEIVABLES PURCHASE
AGREEMENT ("Amendment"), dated as of June 16, 2000, is among CGSF Funding
Corporation, a Delaware corporation ("Seller"), McKesson HBOC, Inc., a Delaware
corporation (the "Servicer"; the Servicer together with the Seller, the "Seller
Parties" and each a "Seller Party"), the funding entities parties hereto (the
"Financial Institutions"), Preferred Receivables Funding Corporation ("PREFCO"),
Falcon Asset Securitization Corporation ("Falcon"), Blue Ridge Asset Funding
Corporation ("Blue Ridge") and Liberty Street Funding Corp. ("Liberty Street"),
(PREFCO, Falcon, Blue Ridge and Liberty Street being referred to collectively as
the "Conduits", and together with the Financial Institutions, the "Purchasers"),
Bank One, NA (formerly known as The First National Bank of Chicago, "Bank One"),
Wachovia Bank, N.A. and The Bank of Nova Scotia (collectively, the "Managing
Agents") and Bank One, as the collateral agent (the "Collateral Agent"). Defined
terms used herein and not otherwise defined herein shall have the meaning given
to them in the "Receivables Purchase Agreement" (as hereinafter defined).

WHEREAS, the Seller, the Servicer, the Financial Institutions,
the Conduits, the Managing Agents and the Collateral Agent are parties to the
Receivables Purchase Agreement dated as of June 25, 1999, as amended by the
First Amendment thereto dated as of September 29, 1999 and the Second Amended
thereto dated as of December 6, 1999 (the "Receivables Purchase Agreement");

WHEREAS, the Seller and the Servicer have requested that the
Financial Institutions, the Conduits, the Managing Agents and the Collateral
Agent waive the "Specified Default" (as defined below) under the Receivables
Purchase Agreement; and

WHEREAS, the parties hereto have agreed to amend the Receivables
Purchase Agreement and waive the Specified Default on the terms and conditions
set forth herein;

NOW, THEREFORE, in consideration of the premises set forth above,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

1. Amendment to the Receivables Purchase Agreement. Effective as
of the date first above written and subject to the execution of this Amendment
by the parties hereto and the satisfaction of the conditions precedent set forth
in Section 3 below, the Receivables Purchase Agreement shall be and hereby is
amended as follows:

a. Section 4.1 of the Receivables Purchase Agreement is hereby
amended to add, at the conclusion of the first sentence thereof, the following:
"provided, however, that each Purchaser Interest of a Conduit which is funded
through Pooled Commercial Paper shall accrue

Yield at the applicable CP Rate for each day during each Accrual Period that any
Capital in respect of such Purchaser Interest is outstanding."

b. Section 4.3(a) of the Receivables Purchase Agreement is hereby
amended to delete the first sentence thereof in its entirety and to substitute
therefor the following: "With consultation from each related Managing Agent,
Seller shall from time to time request Tranche Periods for the Purchaser
Interests (other than Purchaser Interests which are funded through Pooled
Commercial Paper, the Tranche Periods for which shall be the same as the Accrual
Period); provided, however, that no more than fifteen (15) Tranche Periods shall
be outstanding at any one time.

c. Exhibit I of the Receivables Purchase Agreement is hereby
amended to add the following new definition in the appropriate alphabetical
locations:

"Pooled Commercial Paper" means Commercial Paper notes of a
Conduit subject to any particular pooling arrangement by such Conduit but
excluding Commercial Paper issued by a Conduit for a tenor and in an amount
specifically requested by any Person in connection with any agreement effected
by such Conduit; provided, however, that if and to the extent that the Seller
requests a Conduit to issue Commercial Paper notes with particular tranche
periods and the related Managing Agent agrees to such request, such Commercial
Paper notes shall not constitute Pooled Commercial Paper."

d. The definition of "Broken Funding Costs" in Exhibit I of the
Receivables Purchase Agreement is hereby amended to insert, after the phrase
"remainder of the Tranche Periods", the following parenthetical: "(or, in the
case of Purchaser Interests funded through Pooled Commercial Paper, the tranche
periods for such Pooled Commercial Paper)".

e. The definition of "CP Tranche Period" in Exhibit I of the
Receivables Purchase Agreement is hereby amended to provide, at the conclusion
thereof, the following: "provided, however, that the CP Tranche Period for any
Purchaser Interest funded through Pooled Commercial Paper shall be (i) the date
from which such Purchaser Interest ceases to be allocated to a CP Tranche Period
pursuant to Section 1.2 until the last Business Day of the Accrual Period in
which such CP Tranche Period ended and (ii) thereafter each Accrual Period."

f. The definition of "CP Rate" in Exhibit I of the Receivables
Purchase Agreement is hereby amended by inserting the following at the
conclusion thereof:

"Notwithstanding the foregoing, with respect to Purchaser Interests
funded through Pooled Commercial Paper, the CP Rate for any CP Tranche
Period means:

(i) in the case of Liberty Street, the per annum rate equivalent to the
weighted average cost (as determined by its Managing Agent and which
shall include commissions of placement agents and dealers, incremental
carrying costs incurred with respect to Pooled Commercial Paper maturing
on dates other than those on which corresponding funds are received by
Liberty Street, other borrowings by Liberty Street (other than under any
commercial paper program support agreement) and any other costs
associated with the issuance of Pooled Commercial Paper) of or related
to the issuance of Pooled Commercial Paper that are allocated, in whole
or in part, by Liberty Street or its

Managing Agent to fund or maintain its Purchaser Interests (and which
may be also allocated in part to the funding of other assets of Liberty
Street) during such CP Tranche Period; provided, however, that if any
component of such rate is a discount rate, in calculating the "CP Rate"
for Liberty Street for such Purchaser Interest for such CP Tranche
Period, Liberty Street shall for such component use the rate resulting
from converting such discount rate to an interest-bearing equivalent
rate per annum; and

(ii) in the case of PREFCO and Falcon, for each day during the
related CP Tranche Period, the sum of (a) discount accrued on Pooled
Commercial Paper of such Conduit on such day, plus (b) any and all
accrued commissions in respect of placement agents and Commercial Paper
dealers, and issuing and paying agent fees incurred, in respect of such
Pooled Commercial Paper for such day, plus (iii) other costs associated
with funding small or odd-lot amounts with respect to all receivable
purchase facilities which are funded by Pooled Commercial Paper of such
Conduit for such day, minus (iv) any accrual of income net of expenses
received on such day from investment of collections received under all
receivable purchase facilities funded substantially with Pooled
Commercial Paper, minus (v) any payment received on such day net of
expenses in respect of Broken Funding Costs related to the prepayment of
any receivables interest of such Conduit pursuant to the terms of any
receivable purchase facilities funded substantially with Pooled
Commercial Paper, as calculated by its Managing Agent on the tenth
(10th) Business Day immediately preceding each Settlement Date based on
the aggregate amount of such costs for the applicable CP Tranche Period
and the number of days during which Capital was outstanding during such
period and notified to the Seller for each of PREFCO and Falcon, without
the need to express such CP Rate as a per annum rate. In addition to the
foregoing costs, if Seller shall request any Incremental Purchase during
any period of time determined by the Agent in its sole discretion to
result in incrementally higher costs of Pooled Commercial Paper
applicable to such Incremental Purchase, the Capital of the Purchaser
Interest associated with any such Incremental Purchase shall, during
such period, be deemed to be funded by PREFCO and/or Falcon, as
applicable, in a special pool (which may include capital associated with
other receivable purchase facilities) for purposes of determining the CP
Rate applicable only to such special pool and charged each day during
such period against such Capital; and

(iii) with respect to any other Conduit which elects to fund
Purchaser Interests through Pooled Commercial Paper, such rate as may be
mutually agreed upon in writing by the Seller, such Conduit and such
Conduit’s Managing Agent and notified in writing to the other parties
hereto."

g. The definition of "Designated Obligor" in Exhibit I of the
Receivables Purchase Agreement is hereby deleted in its entirety and the
following new definition is substituted therefor:

"Designated Obligor" means Rite Aid or an Obligor indicated by
the Collateral Agent to Seller in writing.(1)

h. The definition of "Liquidity Termination Date" in Exhibit I of
the Receivables Purchase Agreement is hereby amended to delete the words "June
23, 2000" and to substitute therefor the words "June 15, 2001".

i. The definition of "Special Concentration Limit" in Exhibit I
of the Receivables Purchase Agreement is hereby amended to add the following
language immediately before the period at the end thereof:

"; provided, further, that notwithstanding the foregoing, the
Special Concentration Limit for Albertson’s (American Stores and Osco Drug) and
for Wal-Mart shall be the lesser of (i) the applicable percentage set forth
above multiplied by the aggregate Outstanding Balance of Eligible Receivables
(net of all Earned Discounts and quarterly volume rebates) at such time and (ii)
$175,000,000."

j. The definition of "Special Obligor" in Exhibit I of the
Receivables Purchase Agreement is hereby deleted in its entirety and the
following definition is substituted therefor:

"Special Obligor" means Albertson’s (American Stores and Osco
Drug), CVS Corp., Wal-Mart and such other Special Obligors as may be designated
by the managing Agents from time to time.

k. Exhibit IV of the Receivables Purchase Agreement is hereby
deleted in its entirety and the Exhibit IV attached as Schedule 1 hereto is
substituted therefor.(2)

2. Waiver. Effective as of the date first above written and
subject to the execution of this Amendment by the parties hereto and the
satisfaction of the conditions precedent set forth in Section 3 below, the
parties hereby agree to waive at all times prior to and including July 17, 2000,
the Seller’s failure to obtain a Collection Account Agreement with respect to
the Collection Account at Bank of America, N.A. identified on Schedule 1 to this
Amendment, as required by Sections 5.1(1), 7.1(j), 7.2(b) and 8.2(b) of the
Receivables Purchase Agreement (the "Specified Default").

3. Conditional Precedent. This Amendment shall become effective
as of the date above written if and only if the Managing Agents have received:

a. duly executed originals of this Amendment from each of the
parties listed on the signature pages hereto; and

--------
(1) Please note that the effect of this change is to remove Receivables of Rite
Aid from the definition of "Eligible Receivable" by operation of clause (i)(c)
thereof.

(2) Please note that Exhibit IV has been revised to delete the reference to the
lock-box at Am South Bank and to include a reference to the new blocked account
at Bank of America, N.A.

b. a duly executed Amended and Restated Fee Letter providing an
increase to the Administration Fee set forth therein.

4. Representations and Warranties of the Seller Parties. Each of
the Seller Parties hereby represents and warrants as follows:

a. This Amendment and the Receivables Purchase Agreement, as
amended hereby, constitute legal, valid and binding obligations of such Seller
Party and are enforceable against such Seller Party in accordance with their
terms.

b. Upon the effectiveness of this Amendment, each Seller Party
hereby reaffirms all representations and warranties made in the Receivables
Purchase Agreement, and to the extent the same are not amended hereby, agrees
that all such representations and warranties shall be deemed to have been remade
as of the date of delivery of this Amendment, unless and to the extent that any
such representation and warranty is stated to relate solely to an earlier date,
in which case such representation and warranty shall be true and correct as of
such earlier date.

5. Reference to and Effect on the Receivables Purchase Agreement

a. Upon the effectiveness of Section 1 hereof, on and after the
date hereof, each reference in the Receivables Purchase Agreement to "this
Receivables Purchase Agreement," "hereunder," "hereof," "herein" or words of
like import shall mean and be a reference to the Receivables Purchase Agreement
as amended hereby.

b. The Receivables Purchase Agreement, as amended hereby, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.

c. Except as expressly provided herein, the execution, delivery
and effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of the Managing Agents, the Financial Institutions or the
Collateral Agent, nor constitute a waiver of any provision of the Receivables
Purchase Agreement or any other documents, instruments and agreements executed
and/or delivered in connection therewith.

6. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflict of
law provisions) of the State of New York.

7. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.

8. Counterparts. This Amendment may be executed by one or more of
the parties to the Amendment on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.

IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered on the date first above written.

CGSF FUNDING CORPORATION, as the Seller

By:_____________________________________
Name:
Title:

McKESSON HBOC, INC., as the Servicer

By:_____________________________________
Name:
Title:

PREFERRED RECEIVABLES FUNDING
CORPORATION, as a Conduit

By:_____________________________________
Authorized Signatory

FALCON ASSET SECURITIZATION
CORPORATION, as a Conduit

By:_____________________________________
Authorized Signatory

BLUE RIDGE ASSET FUNDING CORPORATION, as a
Conduit

By: Wachovia Bank, N.A. as Attorney-In-Fact

By:_____________________________________
Name:
Title:

Signature Page to Third Amendment and Second Waiver
to McKesson RPA

LIBERTY STREET FUNDING CORP., as a Conduit

By:_____________________________________
Name:
Title:

BANK ONE, NA (Main Office Chicago) (formerly
known as The First National Bank of
Chicago), as a Committed Purchaser for
PREFCO and Falcon, a Financial Institution,
a Managing Agent and as Collateral Agent

By:_____________________________________
Name:
Title:

WACHOVIA BANK, N.A., as a Committed
Purchaser for Blue Ridge, a Financial
Institution and a Managing Agent

By:_____________________________________
Name:
Title:

THE BANK OF NOVA SCOTIA, as a Committed
Purchaser for Liberty Street, a Financial
Institution and a Managing Agent

By:_____________________________________
Name:
Title:

Signature Page to Third Amendment and Second Waiver
to McKesson RPA

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

There is no parent of the Company. The following is a listing of the
significant subsidiaries of the Company, or if indented, subsidiaries of the
Company under which they are listed:

JURISDICTION OF
ORGANIZATION
---------------

HBO & Company............................................... Delaware
McKesson Canada Inc......................................... Canada
Medis Health and Pharmaceutical Services Inc.............. Canada
GM Holdings, Inc............................................ Delaware
McKesson General Medical Corp............................. Virginia

EXHIBIT 23.1

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in McKesson HBOC, Inc.
Registration Statement Nos. 33-86536, 333-00611, 333-02871, 333-21931,
333-30104, 333-30216, 333-30218, 333-30220, 333-30222, 333-20224, 333-30226,
333-32643, 333-32645, 333-43101, 333-43079, 333-48337, 333-43068, 333-48339,
333-48859, 333-50261, 333-70501, 333-71917, 333-85965, 333-39952 and 333-39954,
on Form S-8, Registration Statement Nos. 333-26443, and Amendment No. 1 thereto,
333-85973, 333-50985 and 333-66359 on Form S-3 and Registration Statement Nos.
333-49119, and Amendment No. 1 thereto, and 333-56623 on Form S-4 of our report
dated April 30, 2001 (which report refers to certain shareholder litigation as
discussed in Financial Note 18 to the consolidated financial statements),
appearing in this Annual Report on Form 10-K of McKesson HBOC, Inc., for the
year ended March 31, 2001.

DELOITTE & TOUCHE LLP

San Francisco, California
May 31, 2001

EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS THAT the undersigned directors and
officers of McKesson HBOC, Inc., a Delaware corporation (the "Company"), do
hereby constitute and appoint Ivan D. Meyerson and Kristina Veaco his or her
true and lawful attorney and agent, each with full power and authority (acting
alone and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, under the Securities Act of 1934,
as amended, an annual report on Form 10-K, and thereafter to execute and file
any and all amendments to such Form, whether filed prior or subsequent to the
time such Form becomes effective. The undersigned hereby grants unto such
attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.

/s/ Alfred C. Eckert III /s/ Gerald E. Mayo
-------------------------------------------- ---------------------------------------
Alfred C. Eckert III, Director Gerald E. Mayo, Director

/s/ Tully M. Friedman /s/ James V. Napier
-------------------------------------------- ---------------------------------------
Tully M. Friedman, Director James V. Napier, Director

/s/ William R. Graber /s/ David S. Pottruck
-------------------------------------------- ---------------------------------------
William R. Graber, Senior Vice President David S. Pottruck, Director
And Chief Financial Officer

/s/ John H. Hammergren /s/ Carl E. Reichardt
-------------------------------------------- ---------------------------------------
John H. Hammergren, President and Carl E. Reichardt, Director
Chief Executive Officer and Director

/s/ Alton F. Irby, III /s/ Alan Seelenfreund
-------------------------------------------- ---------------------------------------
Alton F. Irby III, Director Alan Seelenfreund
Chairman of the Board

/s/ M. Christine Jacobs /s/ Jane E. Shaw
-------------------------------------------- ---------------------------------------
M. Christine Jacobs, Director Jane E. Shaw, Director

/s/ Martin M. Koffel /s/ Nigel A. Rees
-------------------------------------------- ---------------------------------------
Martin M. Koffel, Director Nigel A. Rees
Vice President and Controller

Dated: May 25, 2001

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